TaxTMI 
TaxTMI 
TaxTMI 
2006 (8) TMI 586
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....t 29/2, Ground Floor, East Patel Nagar, Delhi. The initial capital of the company was Rs. 1 lakh divided into 10,000 shares of Rs. 10/- each. The company was jointly promoted by P-2 and R-2 by subscribing 2,100 equity shares of Rs. 10/- each. As per the records of the Registrar of Companies the authorized share capital of the company at present is Rs. 7,45,00,000/- divided into 74,50,000 equity shares of Rs. 10/- each and the issued and subscribed capital of the company is Rs. 7,36,15,000/- divided into 73,61,500 equity shares of Rs. 10/- each. Petitioner No. 1 holds Rs. 5,93,300/- of Rs. 10/- each (fully paid) and petitioner No. 2 holds 24,100 equity shares (fully paid) including holding 2,100 equity shares by subscribing to the Memorandum and Articles of Association of the company. The petitioners jointly hold 6,48,300 equity shares of Rs. 10/- each. Respondent No. 2 and Petitioners No. 2 were the first directors of the company w.e.f. 23.10.2000. Petitioner No. 1 was appointed as Director and Managing Director of Respondent No. 1 company vide Board's resolution dated 23.7.2002. The Respondent Company is engaged, interlaid, in the business of dehydration, irradiation process, ....
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....arily or intentionally. It was averred in rejoinder affidavit that petitioner No. 2 was allegedly removed on 3.2.2004 when no Board Meeting/General Meeting was possible, as per the certificate at Annexure E at page 29 because R-2 was already hospitalized Saroj Hospital & Heart Institute, Rohini, Delhi for operation on 4.2.2004 and was discharged only on 14.2.2004. Such cessation of office of director of petitioner No. 2 amounted to oppression to the petitioners. Further, it was averred that in the annual return as on 30.9.2003 filed with the Registrar of Companies the respondent NO. 2 incorrectly showed the shareholding of Petitioner No. 1 as 59,330 equity shares instead of 5,93,300 equity shares thus fraudulently reducing the Petitioner No. 1's shareholding to 10% of his actual shareholding. The Respondent No. 2, it was pointed out, had tactfully used the above mistake to make unreasonable gain and cause damage to the petitioners by representing the shareholding of Petitioner No. 2 to a nominal amount and representing virtually the total shareholding of the company to his name. Further, it was pointed out that the petitioner No. 1 and 2 are not being paid their agreed manageri....
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.... and using his past relations and position as he retired from the post of Dy. Director of CBI. Despite the bankers' letter out to the respondent No. 2 that he had misled them and despite the petitioners complaint to the Bank about the irregularities in the utilization of the funds and request to the bank that they should not release the funds in the best interest of the company, the bank continued releasing the funds. Furthermore, it was pointed out that Respondent No. 2 shifted the bank account of the company to the bank of his choice stating himself and respondent Nos. 3, 4 ,5 and 6 as authorized signatories without mentioning the names of the petitioners with the clear objective of isolating and ruining the petitioners. Further, it was pointed out that on the basis of mutual consensus and understanding between petitioners and the respondents it was decided in the Board Meeting dated 23.7.2002 that petitioners and respondents will have 50% of the equity capital of the company. That resolution had not been adhered to till date and no shares have been allotted to the petitioners except the following: Name of the shareholding No. of shares allotted Date of allotment ....
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.... accounts. The suit is still pending. Refuting the charge of forum shopping the counsel argued vehemently that they were in no way pursuing various legal proceedings against the respondents. In fact, the petitioners have been running from pillar to post to bring an end to the mismanagement and oppressive conduct of the respondent NO. 2. The petitioners had tried their level best to inform and seek help of the bankers, other Govt. authorities and the Registrar of Companies before approaching the Hon'ble Company Law Board in the best interest of the company and have approached the CLB only after getting disappointment from every side because of the respondent No. 2 being a very influential person. The Registrar of Companies had not taken any action on their complaint dated 1.3.2004. However, after several reminders the ROC sent the matter to the Regional Director, Kanpur. It was pointed out that nothing has been done even by the RD, Kanpur till date. Refuting the allegation of siphoning off Rs. 150 lakhs the counsel for the petitioners pointed out that the same had been duly accounted for at that time itself and the same had also been duly admitted by the respondent No. 2 at vari....
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....lowing of petitioners further equity shares against their share application money permitting to invest in 50% of the equity capital of the company; taking away of the control and management of the company from respondent Nos. 2 to 6; and removal of petitioners from directorship of the company to be declared as null and void. 4. Shri M. Dutta, counsel for the respondents argued that the petition is not maintainable as the shareholding of the petitioners comprises of 8.81% only, their shareholding being Rs. 6,48,300/- equity shares of Rs. 10/- each. It was pointed out that as per the Annual Return dated 29.9.2004 (Annexure R-4) the total authorized share capital of the company is Rs. 7.45,00,000/- consisting of 74,50,000 equity shares of Rs. 10 each and R-1's issued/subscribed and fully paid up capital is Rs. 7,36,15,000/- comprising 7,36,500 equity shares of Rs. 10 each, and hence, invocation under Sections 397/398 fails due to an ineligibility under Section 399 of the Companies Act. The respondents denied that the authorized share capital of the company is Rs. 4,95,00,000/- divided into 4,95,000 equity shares of Rs. 10/- each as deemed by the petitioners. The respondents admit....
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....pointed out that the petitioners have indulged in forum shopping and have not disclosed the facts of initiating other proceedings in the petition which is a mandatory requirement under the Company Law Board Regulations 1991. It was pointed out that the petitioners vilification campaigns in the form of complaints not only tarnished the image of the company but also affected its growth, working and profitability. Knowing the conduct of the petitioners the Chairman and Managing Director of R-1 company namely, Shri Dwaraka Nath (R-2) wrote a letter dated 4,2.2003 to the Registrar of Companies requesting the Registrar to keep the respondent company's file in safe custody and not to take on record any documents pertaining to the respondent company which does not bear the signature of the Chairman and Managing Director of the company. However, despite such letter dated 4.2.2003 Petitioner No. 1 managed to file Form No. 32 with the Registrar of Companies. It was further pointed out that the petitioners forced the respondent No. 2 and 3 to sign on the papers of Board Meetings dated 23.7.2002. However, the said resolution has never been passed and given effect to. It was not made part of....
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....ions 397/398 of the Companies Act. Shri Dutta further argued that the petitioners invoking Sections 397/398 of the Act have failed to meet requirements of the said Sections. It was pointed put that for all purposes the complaint has failed to allege any instance/incident that can be termed even remotely to be an act or instance prejudicial to the interest of the company or a member. Furthermore, Board's attention was drawn to the so called Board Meeting dated 23.7.2002 on which the petitioners relied on the basis of mutual consensus and understanding that petitioners and respondents will have 50% of the equity capital of the company. It was pointed out that this document cannot be relied upon. It has not been adhered to till date and no shares have been allotted to the petitioners in compliance with the so called resolution dated 23.7.2002 as the said documents, have been sought to be cancelled in the proceedings, registered as Civil Suit, 85/2005 pending before the Hon'ble High Court of Delhi. The petitioners filed this Civil Suit on 25.10.2004 for rendition of accounts. In the said Suit, the respondent No. 2, by way of his written statement and Counter Claim, has categori....
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....ation to the petitioner as till date no director has taken any remuneration from the company as the directors have been working on honorary basis. In, fact, the petitioner No. 1 during his tenure as managing director had been wrongfully withdrawing money as salary from the account unilaterally without the permission of the Board. Shri Dutta further argued that no reliance can be placed on the petitioners' affidavit dated 20.3.2006 alleging certain incorrect and wrong conduct as the petitioners did not seek permission to remove certain defects in his case by seeking permission to file certain affidavits/interim applications including affidavit dated 20.3.2006. Even otherwise it was argued by way of abundant precaution by Shri Dutta that all averments/allegations made in the said affidavit are wrong, incorrect and illegal. The counsel vehemently and emphatically denied these averments/allegations both individually and specifically. The counsel argued that it would be ridiculous and absurd to even remotely consider or accept the bogus and absurd pleas of the petitioner as raised in the affidavit dated 20.3.2006. Shri N. Dutta vehemently argued that the petition is without merit, i....
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....% on account of further issue of shares and if the issue of further shares is also challenged in the petition, then, the petition will not be dismissed as not maintainable in terms of Section 399. Instead, the allegations relating to the issue of further shares would be examined first as to whether the same is an oppressive act and if it is found to be to then only other allegations in the petition would be examined. In the present case, the petitioners' plea is that the respondents had very cleverly proceeded to make a malafide and intentional change in the shareholding. It has been alleged that the respondents started with their nefarious design when the petitioner No. 1 was illegally removed and that before the illegal removal of the petitioners on 30.9.2002 and 3.2.2004 the total paid up capital of the respondent company was Rs. 2.7 crores as per the annual return filed with the Registrar of Companies on 19.1.2004 and not Rs. 7.45 crores as claimed by the respondents. The illegal increase in share capital and allotments made on 16,2.2004 were done without justification to cause prejudice to the petitioners and to reduce them into a hopeless minority so that the petitioners ....
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....stablished any act of oppression or mismanagement in the affairs of the company further observed (para 3 at page 394 of Comp LJ). Therefore, we have to pay our attention only to the aspect that the winding up of the company would unfairly prejudice the members of the company who have the grievance and are the applicants before the court and that otherwise, the facts would justify the making of a winding up order on the ground that it was just and equitable that the company should be wound up. In order to be successful on this ground, the petitioners have to make out a case of winding up of the company on just and equitable grounds. If the facts fall short of the case set out far winding up petition on just and equitable grounds, no relief could be granted to the petitioners. It found that the only substantive allegation relating to the removal of the petitioner as a director could be agitated in a suit, and this would not justify winding up on just and equitable grounds. As a principle, directorial complaints cannot be a ground in a petition under Section 397/398 as the complaints in such a petition should be relating to the rights qua a member. While, as a proposition, it is so....
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..../398, proceedings are alternative to a winding up proceedings, it is not that only those which are considered to be just and equitable in a winding up proceedings to be the grounds in a Sections 397/398 petition. In the Bombay proceedings, the court held that since there was no dead lock in the management, the company could not be wound up on just and equitable grounds. It did not examine whether allegations of oppression had been established. That is why the court itself suggested that the petitioners may initiate the present proceeding under Section 397/398. It is worthwhile referring to George Meyer v. Scottish Cooperative Wholesale Society (1954) Scottish Case 381 - referred to in Needle Industries (India) Ltd. V Needle Industries Newey (India) Holding Ltd. (1982) 1 Comp LJ 1 (SC) : (1981) 51 Comp Case 743 (SC), wherein it was held- Although the words, 'oppressive' is not defined, it is possible, by way of illustration, to figure a situation in which majority shareholders, by an abuse of their predominant voting power, are treating the company and its affairs as if they were their own property to the prejudice of the minority shareholders and in which just and equitab....
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.... into equity must come with clean hands...." There have been allegations and counter allegations. In view of contradictory positions and acquiescence of respondents as is evident in the ensuing paragraphs the petition cannot be dismissed at the threshold. 9. It is settled law that in a case of oppression, a member has to specifically plead on five facts - (a) what is the alleged act of oppression; (b) who committed the act of oppression; (c) how it is oppressive; (d) whether it is in the affairs of the company; (e) and, whether the company is a party to the commission of the act of oppression. On considering the present case on merits, I find that all the five aspects of oppression stand proved. The acts of oppression in the affairs of the company have been listed in detail highlighting how these are oppressive. There is specific averment as to who committed the act of oppression and how the company is a party to the oppression. It is a well settled proposition that the provision of Sections 397 and 398 are to be invoked to get the grievances of oppression and mismanagement redressed. As per Board's resolution dated 23.7.2002 annexed to the petition at p. 19 petitioner No. 1 h....
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....Dinesh Sharma or any other person shall not be entitled to any shares in the company whatsoever form. 8. It is decided that the resolution passed by Mr. Dwarka Nath for appointment/removal of Mrs Indira Sharma and Mr. Dinesh Sharma respectively are null and void as the quorum of Board will not be fulfilled neither any notices were issued. As per the Board's resolution dated 23.7.2002 petitioner No. 1 is to be the permanent MD of the company. Respondents claimed his removal as per Board's resolution dated 30.9.2003 and pointed out that resolution dated 23.7.2002 was got signed under coercion and fraud and the same has been challenged in the counter claim filed before the High Court. But the respondents are silent about the Board's meeting held on 15.12.2002 recording the minutes (as produced above) that petitioner No. 1, 2' and R-2 are the only three Directors. The Respondents' claim of appointment of R-3 and R-4 till 15.12.2002 is not borne out from the records. As per para 8 of these minutes the resolution passed by R-2 for appointment of additional directors and removal of petitioner No. 1 and petitioner No. 2 have been declared as null and void as the quor....
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....eater number of shares by obtaining a majority of voting power, they ought to be restrained from holding the meeting at which the votes of the new shareholders were to have been used. Piercy v. S. Mills and Co. Ltd. applied the same principle while holding: (All ER p.316 E-E). The basis of both cases is, as I understand, that Directors are not, entitled to use their powers of issuing shares merely for the purpose of maintaining their control or the control of themselves and their friends over the affairs of the company, or merely for the purpose of defeating the wishes of the existing majority of shareholding. The principle deduced from these cases is that when powers are used merely for an extraneous purpose like maintenance or acquisition of control over the affairs of the company, the same cannot be upheld. In the present case the conclusion is inevitable that neither was the allotment of additional shares in favour of respondents bonafide nor was it in the interest of the company nor was a proper and legal procedure followed to make the allotment. The motive for the allotment was malafide. On facts, impugned allotment of additional shares was done with the sole object of ....
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....e petitioners as directors without following proper procedure were wholly unauthorized and invalid and hence have to be set aside. 12. All the above go to show that the conduct of the respondents is burdensome and oppressive to the petitioners and prejudicial to the interest of the company. From the narration of the events as above, the only conclusion that I can come to is that the respondents have not been able to refute the charges of oppression and mismanagement in the affairs of the company, and, therefore, the petition deserves to be allowed. Relief to be granted depends on the facts of a particular case. The facts of the present case are so manifestly against respondents that two opinions are not possible on the aspect of relief. Relief has to be granted in the present case to undo the advantage gained by the respondents through their manipulations. To safeguard the interest of the financial institutions who chose to fund such a prestigious project in the interest of the country and to do substantial justice between the parties, I order as follows: I. The resolutions of the R-1 company removing the P-1 and the P-2 from directorship and appointing R-3, R-4, R-5 and R-6 as ....