TaxTMI 
TaxTMI 
2010 (9) TMI 891
X X X X Extracts X X X X
X X X X Extracts X X X X
....Naidu's two sons, G. T. K. Sivasubramaniam and G. T. K. Shanmugasundaram, came to own all the family's shares in the company. After the death of Sivasubramaniam on December 10, 1984, his adopted son Vijaykrishna, the second respondent, became the managing director of the company. Shanmugasundaram continued as a director till his death on November 6, 2000. The second respondent owns 51 per cent. of the company's paid-up capital. The petitioners who are daughters of Shanmugasundaram jointly own 31 per cent. of the shares. On March 12, 2007, they filed this company petition saying they are being excluded by the second respondent from participating in the day-to-day management of the company. 2. In 1974, the paid-up capital was Rs. 7,50,000, divided into 7,500 shares of Rs. 100 each, out of which Krishnaswamy Naidu held 2,000 shares, his wife Vijayammal held 1,000 shares and their children, Rajasekaran, Sivasubramaniam, Parthasarathy and Shanmugasundaram held 1,000 shares each. Asher was allotted 500 shares. Thus, the entire paid-up capital except 500 shares was held by the family members. The shares held by Rajasekaran was transmitted in the name of his son (Ranganathan), following....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ather and the second respondent's father were alone associated with the management of the company as directors from the family. The other directors were nominees of these two families and they had no say in the management of the affairs of the company. Since the petitioner's father had no male issues, the second respondent has been avoiding the petitioners and ignoring the demand to spin off one out of the three undertakings to the petitioners. The second respondent who is the majority shareholder is having absolute control of the affairs of the company, and enjoying the movable and immovable properties of the company. The company does not declare more than 15 per cent. dividend even though it had a reserve of Rs. 9,64,50,354 as on March 31, 2006. During the past nine years the company has expanded the business by replacing the old plant and machinery with modern, sophisticated and high productive machinery. The company has implemented voluntary retirement scheme by spending substantial amount. Nine wind mills were installed at a cost of Rs. 1,840 lakhs and plant and machinery worth Rs. 2,628 lakhs was imported. Besides, Rs. 63 lakhs has been incurred towards voluntary retirement s....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ent No. 1. After the introduction of section 43A, the company became a public limited company with effect from April 1, 1976. The second respondent purchased the shares of respondent No. 8 and respondent No. 9 companies at a very nominal value and deprived the company of actual market price. These two companies along with other group companies are entering into various contracts with the company, which are detrimental to the interest of the company and minority shareholders. The eighth and ninth respondents were profit making companies even while they were subsidiaries of the company. It is not known how these two companies ceased to be the subsidiaries of the company. The entire plant and machinery, land and building of the three units are mortgaged to Andhra Bank, Tirupur and charges have been created in respect of the loan sanctioned from time to time. The petitioners did not interfere in this matter because they were awaiting a settlement by way of an exit from the company. 5. The company has been incorporated for the benefit of G. T. K. family, and as on today the family is in management of the company. The following are the seven shareholders : 1. S. Vijayakris....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... of the company ; (e) To appoint an auditor to investigate the books and records of the company with respect to intercompany transactions ; (f) To restrain the respondents from encumbering the immovable assets of the company ; and (g) To appoint an administrator by superseding the existing Board. 9. Respondent No. 1 and respondent No. 2 filed a counter denying all the averments alleged against them. The contents of the counter affidavit are briefly extracted as below : The company petition is not maintainable either in law or on facts. Most of the allegations are raised just to malign these respondents. Immediately after obtaining an ex parte interim order against encumbering the properties forming part of the second unit of the company, the petitioners advertised the order in all the newspapers having circulation in Coimbatore without the leave of the Bench. They were aware that those properties were already charged to Andhra Bank and that the company had no intention to sell any of its properties. When the company was incorporated (1956) Shanmugasundaram (father of petition....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ad and the second petitioner at Coimbatore, without showing any inclination to take part in the management of the company. It is denied that the husband of the first petitioner had approached the second respondent with any proposal. By the time the petitioners became owners of 27,600 equity shares during the year 2001, the company was being managed by professionals and independent directors who had little or no stakes in the company. The company progressed under the leadership of the second respondent who has been the managing director since 1985. The father of the petitioners had no objection in appointing the second respondent as the managing director and he had raised no complaints against respondent No.2 till his death. The shareholding pattern has remained unchanged since June, 2001. The plea for participation in the management is inconsistent with the plea for exit. Till the filing of the company petition no communication was sent to the managing director, nor they took any remedies available to them under the Companies Act. The second respondent has been permitted by the members of the company to use the office car, as per the extraordinary general meeting held on February 2....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... expect that the managing director and executive directors should work without remuneration. Respondent No. 6 (the executive director) is a professional with 50 years experience in Textile business. The inter co-transactions are transparently disclosed in the accounts and the secretarial compliances are duly certified by a practising company secretary, whose report is annexed to the director's report. There is no basis for the allegations that the respondents are diverting the profits of the company to his group concerns and that section 297 of the Act is not complied with. The petitioners are incapable of understanding the balance-sheet, when they allege that the net profit for the year 2005-06 is Rs. 47.88 lakhs. They omitted to refer to the aggregate free reserves amounting to Rs. 9 crores. The actual cash profits earned during the end of March 31, 2000, is Rs. 12.58 crores and not Rs. 48 lakhs after considering an amount of Rs. 12.10 crores provided for depreciation. The disinvestment of the shares held by the company in its erstwhile subsidiaries (respondent No. 8 and respondent No. 9) took place three decades ago (1977), when the second respondent was just a thirteen year old....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... came up with any claim of proportional representation in the management. The grievance of the petitioners is merely personal and has nothing to do with oppression of the minority shareholders which had never taken place. The petitioners want to pierce the corporate veil to treat the entity as a mere partnership. It is an after thought borne out of misguided advice and personal animosity. The so called legitimate expectations were never projected by the petitioners. The petitioners have failed to establish any oppression of the minority and mismanagement of the affairs of respondent No. 1 company by respondent No. 2. Conflicting statements are made by seeking an exit from the company, while pleading for management participation. There is no prima facie case made out by the petitioners. Balance of convenience is not in their favour. 13. Respondent No. 3 filed a counter affidavit adopting the counter affidavit of respondent No. 1 and respondent No. 2. She is the mother of the second respondent. She says that the second respondent, who, had taken over the management of the company at the age of 20, could lead the company to success by hard work and professional efficiency. The dema....
X X X X Extracts X X X X
X X X X Extracts X X X X
....counter alleging that the attempt of the petitioners is to ruin the company. He adopts most of the averments in the counter of respondent No. 1 and respondent No. 2. It is alleged that the allegations regarding mismanagement relate to past acts which even relate to the year 1977, when the petitioners' father was alive. Neither respondents Nos. 2 to 6 nor their group diverted profits at the expense of the company. None of the transactions referred to in the petition are detrimental to the interest of the company and its shareholders. Respondents Nos. 8 and 9 filed a counter stating that they ceased to be the subsidiaries of the first respondent-company nearly three decades ago, during 1977, when the first respondent-company took a strategic decision to disinvest the shares held in them and that they are totally independent companies having a business of their own. 17. The petitioner filed a rejoinder to the counter, reiterating the averments in the company petition, as well as denying the averments in the counter. As shareholders, the petitioners have certain rights. After the death of their father, except one annual general meeting held on February 23, 2001, the petitioners did ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he rejoinder and produced annexures A to E to prove that (1) notices of annual general meeting/extraordinary general meeting had been regularly sent to the petitioners ; (2) the second petitioner had on September 23, 2004, acknowledged the receipt of annual report and encashed the dividend; (3) Respondent No. 2, respondent No.4 and respondent No. 6 had brought in about Rs. 614 lakhs by way of fixed deposit, besides their personal guarantee ; and (4) that respondent No. 6 had been re-appointed as executive director in the extraordinary general meeting held on April 12, 2002, considering his association with the company (40 years) and vast experience in the industry. It is stated that respondent No. 5 is in the board since February 11, 1989, considering his vast experience in banking and finance. The respondents have denied all the averments made in the rejoinder filed by the petitioners. 19. On the basis of the above pleadings the following issues arise for consideration : (i) Whether the first respondent is a family company to which principles of quasi partnership applies (ii) Whether the petitioners have establ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Karn) Chandrakant Kantilal Shah v. National Refinery P. Ltd. [2004] 51 SCL 387 (CLB - New Delhi) Jagjit Singh Chawla v. Tirath Ram Ahuja Ltd. [2004] 119 Comp Cas 385/36 SCL 606 (CLB - New Delhi) Gurmit Singh v. Polymer Papers Ltd. [2005] 123 Comp Cas 486/[2003] 45 SCL 251 (CLB) Mrs. Shyamali Dey v. Homco Engg. Works (P.) Ltd. [2003] 41 SCL 223 (CLB - New Delhi) Cine & Supply Corpn. (P.) Ltd., In re. [2003] 115 Comp Cas 481 (CLB - New Delhi) Navin R. Shah v. Simshah Estates & Trading Co. P. Ltd.. [2007] 136 Comp Cas 411/[2002] 35 SCL 683 (CLB - New Delhi) Preetam C. Kelkar v. Alcot Slugs (P.) Ltd. [2007] 140 Comp Cas 950 (CLB) M.S.D. Chandrasekar Raja v. Shree Bhaarathi Cotton Mills P. Ltd. [2007] 138 Comp. Cas. 881/[2005] 57 SCL 72 (CLB-Chennai) M.S.D.C. Radharamanan v. M.S.D. Chandrasekara Raja [2007] 138 Comp. Cas 897 (Mad.) M.S.D.C. Radharamanan v. M.S.D. Chandrasekara Raja [2008] 143 Comp Cas 97 (SC) ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 146 Comp Cas 211 at 227-228, 230, 231 (CLB) Hind Overseas (P.) Ltd. v. Raghunath Prasad Jhunjhunwalla [1976] 46 Comp Cas 91. S.B.P. Anand Mohan v. Graphic Impressions (Mad.) Ltd. [2004] 120 Comp Cas 265/41 SCL 166, 270 (CLB - Chennai) M.S.D.C. Radha Ramanan v. Shree Bhaarathi Cotton Mills P. Ltd. [2006] 130 Comp Cas 414/[2005] 63 SCL 21 (CLB - Chennai) at 426 (CLB) Mrs. Bacha F. Guzdar v. CIT [1955] 25 Comp. Cas. 1 (at paragraph 7) Mrs. Archana Bansal v. NEPC India Ltd. [2007] 6 MLJ 648 (paragraph 27 at page 656). Ravi Raj Gupta v. Hans Raj Gupta & Co. (P.) Ltd. [2009] 151 Comp Cas 502, 505-506 (Delhi) Delstar Commercial & Financial Ltd. v. Sarvottam Vinijaya Ltd. [2003] 113 Comp. Cas. 642/[2001] 32 SCL 413 (CLB - New Delhi) Smt. Hetal Alpesh Muchhala v. Adityesh Educational Institute (P.) Ltd. [2009] 149 Comp. Cas. 241/[2010] 1 CL online 123 (CLB - New Delhi) 257-258 (CLB) Northern Projects Ltd. v. Blue Coast Hotels & Resorts Ltd. [....
X X X X Extracts X X X X
X X X X Extracts X X X X
....eld by the three brothers, and the remaining 500 and 1,000 shares were held by Asher and Ranganathan, respectively. These three brothers were having 2,000 shares each in another company (Palani Andavar Mills) and Sivasubramaniam (father of respondent No. 2) sold his 2,000 shares to Parthasarathy and in turn purchased 2,000 shares of respondent No. 1 company from Parthasarathy, and thus he became a majority shareholder of respondent No. 1. Later, Ranganathan sold his 1,000 shares among Sivasubramaniam and Shanmugasundaram proportionately. Sivasubramaniam was the managing director till his death on December 10, 1984. Respondent No. 2 is the adopted son of Sivasubramaniam, and he was made the director on October 11, 1984, and managing director on January 7, 1985. The bio-logical father of respondent No. 2 is Parthasarathy. P. Asher died on October 4, 1973, following which his shares were transmitted to his son (respondent No. 4), and made a director, and continuing as director. The petitioners are the daughters of Shanmugasundaram, and jointly they hold 31 per cent. shares in the company. Their father was a minor at the time of incorporation of the company and he was made a director i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....held by the family, and that all the family members were directors till their life time. Relying on the averments at page 35 of the reply to rejoinder filed by the second respondent, it is pointed out that the second respondent has impliedly admitted that the company has been promoted by a family. 26. According to the respondents, a perusal of the history of the company will show how the petitioner as well as the second respondent came to acquire their shares and how the board of directors was constituted from time to time. It is pointed out that the company was originally formed by four technocrats, namely, G.T.K. Naidu (who was the managing agent of M/s. Palani Andavar Mills Ltd.), Shri P.D. Asher (a leading cotton merchant and managing agent of M/s. Asher Textiles Ltd.), T.N. Rajasekaran (managing agent of M/s. Kumaran Mills Ltd.) and Shri Sivasubramaniam (son of G.T.K. Naidu and a textiles technologist from M/s. Volton University in UK) (vide articles of association). It is urged that the second respondent happened to hold a majority of the shares not by any design, but that the shares devolved upon him from his grandparents, biological father (Parthasarathy) and adopted fat....
X X X X Extracts X X X X
X X X X Extracts X X X X
....me of his son (Ranganathan). Later, shares were allotted to Vijayammal, Parthasarathy and Shanmugamundaram who are the wife and other sons of G. T. K. Naidu at 1,000 shares each. Following the death of G. T. K. Naidu and his wife their shares were transmitted among Sivasubramaniam, Parthasarathy and Shanmugasundaram at 1,000 shares each. Sivasubramaniam purchased Parthasarathy's share (2,000) in exchange for his 2000 shares in another company. Ranganathan also sold his shares to Sivasubramaniam and Shanmugasundaram in proportion to their holdings in the company, i.e., 1,400 shares to Sivasubramaniam and 600 shares to Shanmugasundaram. Thus, in the course of time, the entire family shares are now being held by the petitioners' group and the second respondent's group out of which respondent No. 2 is having majority shares. Besides, 6,000 shares are held by P. Asher (respondent No. 4) and nominal shares held by respondent No. 3, respondent No. 5 and respondent No. 6 who hold beneficial interest in such shares through respondent No. 2. 28. On a perusal of the history of the family, in relation to the functioning of the company it is difficult to find that a right was impliedly reser....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... (1) the delay in transmitting the shares held by their deceased father, (2) non-receipt of notice of the annual general meeting, (3) respondent No. 2 is using a bungalow constructed by the company, (4) the land on which the second respondent's house is located was sold to him by the company at a price lower than the market value, (5) the company sold the old machinery much below market value, (6) the company's profit is less than similarly situated spinning mills, (7) non-compliance of section 297 regarding contracts entered into with the company in which the second respondent is interested, (8) the shares held by the company in the two subsidiary companies (respondent No. 8 and respondent No. 9) were transferred to the father of respondent No. 2 and his family in 1977 without any necessity, (9) the company has been selling yarn to some of the companies in which respondent No. 6 and ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... were on the board even during the life time of the petitioners' father. Respondent No. 6 was made a director in the year 2002 in recognition of his contribution to the company. The respondents alleged that the allegations regarding oppression are absolutely false. They point out that the petitioners had, during the year 1996, withdrawn the fixed deposits (Rs. 10,32,000) kept with the company, and thereafter never contributed anything towards the growth of the company which reached its present glory by the sweat and toil of respondent No. 2 and other respondents. They point out the inconsistency in claiming at the same time, representation in the board, and beneficial interest on proportionate basis, without showing any willingness to share the burden. My attention is invited to annexure C attached to the reply to the rejoinder, to argue that respondent No. 2, respondent No. 4 and respondent No. 6 have collectively placed fixed deposits to the tune of Rs.614.36 lakhs (as on March 31, 2007), besides the personal guarantee (over Rs. 100 crores-annexure D) as security by respondent No. 2. It is pointed out that the intention from the very beginning was that the company should be run b....
X X X X Extracts X X X X
X X X X Extracts X X X X
....st them in the petition. According to them the general allegation that they are acting as "Yes men" to respondent No. 2 is without any basis. Similar allegations were levelled against respondent No. 4 also. Currently, after the filing of the company petition the petitioners have given up their case against the fourth respondent. Since the complaint against the fourth respondent is given up, it has to be presumed that the petitioners have given up their case against these respondents also. Several alleged acts of oppression and mismanagement pleaded in the company petition, have occurred during the life time of the petitioners' father, or rather the petitioners were not even shareholders at that time. It is pointed out that no continuing acts of oppression and mismanagement have been proved against these respondents. According to them, the petitioners failed to establish that the facts complained of are grounds for winding up of the company. It is also argued that no relief under section 402 is allowable since the oppression or mismanagement is not established. According to them the application filed by the fourth respondent seeking similar reliefs in the company petition is not all....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... basis for the averment that the other directors were nominees of these two families. As rightly pointed out by the respondents, respondent No. 5 and respondent No. 6 are persons with 50 to 60 years experience in textile industry. The petitioner's father died on November 6, 2000. The petitioners have no case that their father had made any request to make the petitioners or their nominee as a director in the company. There is also no material to hold that the board seat was provided on the basis of the shareholding pattern. There is also no material on record to hold that there was a tacit consent or understanding in the family that the petitioners' branch would be given directorship permanently. Hence the decision in Vijay Krishan Jaidka's case (supra), is not applicable to the facts of this case. As already observed, the articles of association does not provide that each branch should be represented in the board of directors. 34. As per the articles, the transfer of shares in the company shall be in the discretion of the directors and the number of members (excluding persons who are in employment) shall be limited to fifty. Even the initial allotment of shares has not been made....
X X X X Extracts X X X X
X X X X Extracts X X X X
....any, the facts of this case do not warrant adjudication on directorial complaints. For the reasons stated above, I hold that the petitioners have failed to prove the alleged oppression by the majority shareholders (respondent No. 2). 35. The next issue relates to allegations of mismanagement by respondent No. 2, which in my opinion is not established by the petitioners. The necessary particulars of mismanagement are not forthcoming. The modernisation of the plant at the instance of the second respondent and the disposal of the old machinery at book value are alleged as an act of mismanagement. The respondents have produced the books of account commencing from 2000-01 up to 2005-06 to show that the company had shown profit on sale of assets aggregating to Rs. 425.18 lakhs which has been credited to the profit and loss accounts. This Bench cannot act upon general and vague allegations of mismanagement of the affairs of the company. Even then, the respondents have successfully countered the allegations that several inter company transactions are detrimental to the interest of the company and that the company is not disclosing the actual income in its books and that the net profit d....
X X X X Extracts X X X X
X X X X Extracts X X X X
....father was a director and he approved all the transactions referred to in the company petition, including the sale of 3 acres of agricultural land in 1977 to the second respondent's father. The respondents have produced copies of the minutes of the board meeting during the relevant time. The alleged reduction of investment in subsidiary companies is also with the approval of the board which included the petitioners' father. Regarding the inter company contracts, the respondents pointed out with details, that the volume and value of transactions entered into with the companies in which the directors are interested are insignificant, when compared to the total volume and value of the business of respondent No. 1 company as well as the other companies. The register of contracts with company's and firms for the period 2003-04 in which the directors are interested is produced to substantiate the contentions that the provisions of section 297 of the Act had been duly complied with. The register shows due compliance of section 297 of the Act. The respondents have shown that the company is filing its income and sales tax returns periodically (vide annexure 4 to the counter statement to the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ompany will be unfairly affected, (vii) there is no dead lock in the company, (viii) the board is not vindictive towards the petitioners, (ix) there is collusion between the petitioners and fourth respondent, (x) that the company is maintaining absolute transparency and fair dealing in all matters, and (xi) the petitioners did not contribute any amount whereas respondent No. 2 has invested substantial amount in the company besides his personal guarantees. According to respondent No. 2, if the petitioners need an exit, they can invoke the provisions in the articles (clauses 23, 24, 25 and 26) and get their shares transferred. Respondent No. 4's move is opposed on the ground that no relief could be granted to respondent No. 4 in view of the observation of the hon'ble High Court. 38. After having held that the petitioners have failed to make out a case of oppression and mismanagement justifying a winding up, the final issue to be decided is whether the petitioners are entitled to an order from this Bench directing the company or second respondent to purchase the shares of the petitioners, or to spin off any one of the three units to them. In their evaluation the valuation comes aro....
X X X X Extracts X X X X
X X X X Extracts X X X X
....een respondent No. 2 and the petitioners is not enough, unless lack of confidence arises from oppression of the minority in the management of the affairs of the company. The petitioners have failed to show that the conduct of respondent No. 2 is burdensome, harsh and wrongful, and it is not just to wind up the company. As pointed out by the respondents, it is the settled position in law that the petitioners/shareholders cannot have any interest in the property of the company, but only a right to participate in the profits of the company. Respondent No. 2 and others have discharged their duty in the fiduciary capacity as directors in a just and fair manner. In the facts and circumstances of the case, there is no justification for a division of the assets of the company, which in my view will be against the interest of the company. Learned counsel for the petitioners invited my attention to several decisions and argued that equitable considerations had to outweigh legal considerations. The decision in K.N. Bhargava's case (supra), is not applicable to the facts of this case. It was a case where wrongs have been committed by both sides and the two groups were in management, and both g....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Bench, without permission reflects that the petition is a mala fide one. In the facts and circumstances of the case, after having failed to make out a case under sections 397 and 398 of the Act, they also failed to make out a case of equity, to compel the company or respondent No. 2 to purchase their shares, in order to bring to an end any matters complained of in the company petition. In coming to the above conclusion, I am supported by the decisions in Jaladhar Chakrabotry's case (supra), Vardhaman Dye-Stuff Industries (P.) Ltd.'s case (supra), and Srihari Rao's case (supra). For the reasons discussed above, I decline to pass an order on the prayer of the petitioners for an exit from the company. 40. Respondent No. 4 filed C. A. No. 213 of 2007, seeking permission to withdraw the counter statement, or in the alternative to transpose him as the third petitioner. He says that he is not happy, since his suggestion to settle the issue with the petitioners was not acceptable to respondent No.2. By order dated May 23, 2008, C. A. No. 213 of 2007 (Chandra Kumar P. Asher v. Tirupur Textiles (P.) Ltd. [2009] 152 Comp Cas 356), was dismissed by this Bench. Thereafter, the petitioners fi....