TaxTMI 
TaxTMI 
TaxTMI 
2015 (7) TMI 298
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....d HCM on 12th July, 1952 and continued to run the affairs of HCM till 1989. HCM owned a valuable asset, i.e., approx. 24 acres of land situated at Railway Station Road, Fuleswar, P.O. Uluberia, Distt, Howrah. The said land was, at all material times used by Shree Hanuman Foundry & Engineering Co. Ltd. (HF) a sister company of HCM on a monthly rent of Rs. 30,000 payable to HCM. 3. It is not disputed that the Kejriwal Family had carried out five registered partnership firms as under : (a) Subhadra Trading Co. (b) Murari Mohan Agarwalla (c) Subhadra Exports (d) Subhadra Scrap Flow, and (e) Vinay Steels Between 1975-76 and 1989-90 all the above partnership firms had made considerable profits and since most of the buyers/consumers in aforesaid firms were foundry works the Kejriwal family decided to take over both HCM and HF as a measure of forward integration of the family business. This resulted in the takeover of HCM and HF by the Kejriwal family in December 1989. In or about March 1990 the Government of India changed their policy with regard to the distribution and/or sale of scrap, arising out of the slag dump of Steel Authority' of India Ltd. As a result whereof, the bus....
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.... signed by VKK, MMK, MKK and RKK on 29th September, 2002 and read as under : (i) The foundry work will be looked after by Mr. RKK independently and he will be owning and accepting all liabilities of the same. Make proper admission before the people if they make MKK responsible. - (ii) RKK will provide necessary paper for MKK to resign from the company. (iii) Machine work with all liabilities will be tackled by MKK, he will own and accept all the liabilities. (iv) Both are free to sell their properties to augment in business and for liquidation of debts. (v) They are supposed to provide monthly account to Sri MMK. (vi) The house and office expenses will be joint and would be paid 50 : 50 from September 2002 onwards. Any of them can pay and subsequent accounting will be done, any less contribution from either will be made good. (vii) Indian Bank and Punjab National Bank will be tackled jointly and liability will be paid on 50 : 50 basis including legal and other charges. (viii) Godown, office property will be sold and would be apportioned towards payment of Indian bank and Punjab National Bank. (ix) Mr. MKK has put forward his apprehension about personal guarantee he has giv....
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....i.e., MMK. It was also noticed by the petitioners that 700 equity shares of Rs. 100 each held by HF in the capital of HCM had been wrongfully and/or illegally and or fraudulently transferred to ANK on 22nd February, 2005 without the consent of MMK and MKK who were the Directors and shareholders of HCM. 12. On 8th June, 2005, MMK and MKK were surprised to receive at their office copies of Form 2 and Form 23, notice of general meeting under section 81A of the Act, Explanatory Statement under section 173(2) of the Act and the extract of the EGM of HCM held on 17th May, 2005. Upon making enquiry as to the correctness of the statutory forms and the extract of the EGM, etc., RKK assured not to take any decision or file the aforesaid documents with the Registrar or Companies ('RoC'), West Bengal and to hold further discussions after the first anniversary of "Shraadh" of his mother Smt. Savitri Devi. After waiting till 25th November, 2005 MKK and MMK made enquiries from the office of RoC West Bengal on 13th and 16th January, 2006 and were shocked to find that RKK had wrongfully/illegally/fraudulently transferred 1,025 shares held by MKK in HCM held under folio 96 in his favour. 1....
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....lso discovered that 700 shares held by HF in HCM were illegally transferred to ANK on 22nd February, 2005. No Board meeting is alleged to have been convened to effect the change. It is also alleged that on such date there was no quorum for holding a Board meeting. RKK being father of ANK and being an interested director could not have participated in such Board meeting and no notice of such Board meeting was served on MKK. 19. It is also alleged that ANK could not have continued as director since he failed to acquire the qualification share in HCM within 2 months from the date of his appointment as required by clause 88 of the AoA. 20. During inspection of the records of RoC on 13th and 16th June, 2006 further shocking revelations were made to the petitioners that the respondents' group fraudulently and/or and/of in violation of the provisions of the Act as also the AoA of the said company enhanced the subscribed share-capital of the company from Rs. 7 lakh to Rs. 49.50 lakh with a view to reducing the petitioners' group from the status of majority to minority both in the company as well as the Board of directors in order to defeat the indefeasible right of the petitioner....
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....orating what the alleged expansion was under contemplation at the time of issuance of the said Explanatory Statement. Since HCM had no industrial base or activity ever since the "Kejriwal group" took over and was only engaged in trading of the products being bought from Hanuman Foundry - the sister concern. Further, since the year 1997-11. 2005 HCM has been running at a loss. The said Explanatory Statement is therefore vague, ambiguous and/or tricky made with a view to deceiving the shareholders and hence being voidable the petitioners avoid the same. 23. In violation of rule 6 of the Unlisted Public companies (Preferential allotment) Rules 2003, the "Explanatory Statement" as required under section 173 of the Act did not provide inter alia, the intention of the promoters/ directors, etc., to subscribe to the offer or the shareholders' pattern of promoters and other classes of share before and after the offer or whether a change in the control was and is intended or expected, as a result whereof, the aforesaid "explanatory statement" is illegal and void. 24. By and under rule 3(1) of the Companies (issue of Share Capital with Differential Voting Right) Rules, 2003, there has ....
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....eeting, inter alia, for enhancement of the share capital of the said company under section 81(1A) of the Act read with Unlisted Public Companies (Preferential Allotment) Rules 2003, increasing the equity share of Rs. 10 each for an aggregate sum of Rs. 30 lakh on preferential basis, inter alia, stipulating that the aforesaid 3 lakh shares of Rs. 10 each shall rank pari passu with the existing shareholders of the company in all respects except that they shall be eligible for pro rata dividend. The Explanatory Statement issued under section 173(2) of the Act, inter alia, shows that finance was, and is, required for the alleged expansion plan of the business of the company. No notice whatsoever was served on the petitioner No. 1 with regard to the decision taken in the Board of directors of the said company; nor was the petitioner No. 1 present in the alleged Board meeting. Further, the respondent No.2 himself was an interested director within the meaning of section 290 of the Act, inasmuch as the said shares were allotted to himself, his wife and his own family company, respondent No. 5, In the premises, the Board meeting of the company - if at all held - is illegal, a nullity and vo....
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....erwise illegal job to grab the said company by hook or crook. Further, it is curious to note, that, although, RNS was appointed director on 7th September, 2005, as aforesaid, and yet, while filing the return on 29th September, 2005 - after a lapse of 22 days - although RNS had signed as director in the annual return, but did not include his own name while filing the names of directors in HCM. It is clear that the said respondent No.6 is, virtually, making a mockery out of and stultifying the provisions of the Act. 30. To summarise the petitioners have made the following allegations : (a) The petitioner No.3 was illegally denuded of his shares numbering 1025 in the capital of HCM. (b) MKK was wrongfully and/or illegally ousted from the Board of directors of HCM. (c) ANK was illegally inducted on the Board of directors of HCM, and thereafter, shares of HF were illegally transferred in his favour. (d) The articles of association of the company was illegally amended in order to achieve RKK's diabolical design to oust the petitioners' group of their valuable right. (e) The respondents' group fraudulently and/or illegally and/or wrongfully issued 1.25 lakh shares of Rs.....
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....e, i.e., year 1996 the value of the land owned by HCM as projected in its balance sheet was in fact less than the value of the machines in the Machine Division which were taken and transferred by MKK to Parijat Vyapar (P.) Ltd., i.e., his own company thereby arguing that the FA contemplated putting RKK in complete charge of HCM and HF to the exclusion of MKK and to put MKK in complete charge of the four Machinery Division. It was further pointed out that all the legal proceedings initiated by HF were looked after and conducted by RKK and not by MKK. Even the proceedings filed by HCM before the High Court of Calcutta against ING Vysya Bank Ltd. being CS No.260 of 2004 is being conducted by RKK. Proceedings against IF before the Debts Recovery Tribunal were also solely conducted by RKK. Copy of the minutes of meeting held on 7th January, 2005 with ING Vysya Bank Ltd. have been filed to substantiate that not MKK but the Patriarch MMK and RKK were the only persons present at the said meeting. MKK having resigned as director of HCM in June, 2004 was neither noticed nor appeared in the said meeting. 34. Regarding the alleged fraudulent transfer of 1025 shares held by MKK under folio No.....
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....fter by RKK under the FA of 1996 and recorded on 29th September, 2002, the respondents have filed the following documents : (i) Several invoices raised by HCM on the railway authorities for supply of foundry items signed by MMK and MKK Annexure R10. (ii) Several letters issued by the company as well as the other two companies of Shree Hanuman Foundry & Engg Co. Ltd and Shree Venkatesh Steel Industry evidencing business of foundry being carried on by the company Annexure R11. (iii) Balance sheets for the years 1996 and 1998 of HCM evidencing sale from the foundry items Annexure R12. (iv) Copies of some of the contracts executed by HCM with regard to supply of foundry items to the railways Annexure R13. 38. It is alleged by the respondents that MKK had, in terms of the FA. taken complete charge of the machineries valued in excess of Rs. 5 crore owned by the five partnership firms, namely, Vinayak Steel, M.M. Agarwala, Scrap Flow, Subhadra Trading Co. and Subhadra Exports (family partnership firms where the petitioners and the respondents all had shares) and transferred such valuable machineries to Parijat Vyapaar (P.) Ltd. and Bhagwati Construction Company which were companies o....
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....ority over their respective Divisions and were entitled-to deal with the same independently as absolute owners without any sort of hindrances or obstruction from the other and with a categorically mentioned right to sell their properties. 9. At the insistence of Shri Mahesh Kr. Kejriwal who was apprehensive of his personal guarantees and liability on account of Foundry Division loans it was decided that Shri Ramesh Kr. Kejriwal would do the needful documentation and legal paperwork for Shri Mahesh Kr. Kejriwal's complete withdrawal/resignation from the Foundry Division. 10. However, since the residence offices and godown were mortgaged with Indian Bank and Punjab national bank and could not be partitioned/ separated immediately, the present arrangement of the same was decided to continue until the liability of such banks are fully liquidated. In such time an interim arrangement between Shri Ramesh Kr. Kejriwal and Shri Mahesh Kr. Kejriwal to share all common expenses on an equal ratio, i.e., 50 : 50 basis was agreed upon. After liquidation of such liability, the said properties would be partitioned and the interim arrangement would cease to exist. 11. Inasmuch as Shri Mahesh....
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....any right in the management and control of HCM which was entrusted under the FA solely to RKK. All other allegations by the petitioners have been specifically denied by the respondents who pray for dismissal of the petition with cost. 45. I have considered the arguments advanced by the learned counsel for the parties, have perused the records with utmost circumspection and have also gone through the case law cited by both the parties. I would now consider the points as they arise in this petition in seriatim. The purport of the family arrangement of 1996 46. It is a well-settled rule of interpretation that a document required to be interpreted must be read as a whole. While interpreting the family arrangement it must be borne in mind that the situation as prevailing in June, 1996 and not in September, 2002 would have to be considered because the need for family arrangement arose in June, 1996 on account of irreconcilable disputes and differences arising between the two brothers, i.e., RKK and MKK. 47. Bearing in mind the above, the theory that the family arrangement arrived on 10th June, 1996 to settle the disputes arising between MKK and RKK was a complete family partition is ....
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....the family arrangement, under which RKK was to provide necessary papers for MKK to resign from the company must be held to mean that MKK was to resign from the Board of directors of the company, i.e., HCM and also to transfer his shares therein to RKK. Although the petitioners have tried to place an interpretation of clause 2 of the family arrangement that MKK was to resign only from HF and in para 6.24 of the petition it is stated that he did resign from the Board of directors of HF, yet the petitioners have not placed any documents to substantiate this. In para 6.24 MKK did not state when did he resign from the Board of HF. It is also not shown if MKK held shares in HF or was a director in HF. On the other hand it has been admitted by MKK that the annual return of HCM for the year 1999 was signed by him. If irreconcilable differences and disputes had arisen between MKK and RKK in the year 1996 and a family arrangement had taken place on 10th June 1996, it was most unlikely that MKK would have signed blank the annual return of HCM or without verifying the contents thereof. It is not in dispute that MKK stood surety for loans advanced by Vyasya Bank to HF and under the family arran....
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....ily arrangement. I, therefore, have no hesitation in arriving at a conclusion that in the family arrangement arrived between the parties on 10th June, 1996, the foundry work which included HF as well as HCM was to be looked after solely by RKK independently, MKK was to resign from HCM, transfer his shares in HCM to RKK and the entire machine work with all its liabilities was to be handled by MKK. The respondents have also filed colour photographs of huge machinery taken in charge by MKK after the family arrangement and transferred to his company, i.e., Parijat Vyapar (P.) Ltd. (viii) At the relevant time, i.e., in 1996 the value of the machinery, received by MKK under the family arrangement was more than the value of the land owned by HCM. This is reflected clearly by the balance sheets of Parijat Vyapar (P.) Ltd. and Vinayak Steels for the relevant years and the valuation of the land owned by HCM as reflected in the balance sheets for the relevant years. Therefore, considering the intent and purpose of the family arrangement and the scenario that prevailed between the two brothers in June, 1996 it can be said with absolute certainty that under clause 2 of the family arrangement M....
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....the date of the petition, in possession of the patriarch MMK. Therefore, irrespective of the legal formalities for transfer of shares to be completed and as agreed, under the family arrangement 1,025 shares held by MKK under Folio No. 96 began to be reflected from the year 1999 in the annual returns as owned by RKK. The annual return for 1999 was signed by MKK and the annual return for the subsequent years reiterating the above position of shareholding in HCM were also signed by MMK. The irresistible inference that under the family arrangement MKK had agreed and did transfer his 1025 shares held under Folio No. 96 to RKK must therefore be drawn. 51. Courts have, over the years given absolute credence to the terms agreed under the family arrangement and have enforced such terms. Therefore, irrespective of the fact that 1,025 shares held by MKK under Folio No. 96 continued to be in possession of the patriarch, i.e., MMK and no valid transfer deed has been executed and such shares under the same folio 96 were reflected repeatedly from 1999 in the annual return as held by RKK it must be held that while accepting the machinery division to the complete exclusion of RKK, and transferring....
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.... granted to MKK since on the date of the petition he had no locus to file a petition under section 397 of the Act having divested himself of his entire shares in HCM in favour of RKK. Appointment of Ankit Kejriwal (ANK) as an additional director in the Board meeting held on 10th February, 2004 53. Annexure R20 shows that the Board meeting held on 10th February, 2004 was attended only by RKK and MMK as ANK was only an invitee. This was perhaps the last Board meeting in HCM attended by MMK and for which he (MMK) had notice. Under article 107 of the AoA of HCM the quorum required for a Board meeting of the directors is three dsirectors. Apparently in the Board meeting held on 10th February, 2004 there was no such quorum, ANK being only an invitee. Further there is no material produced by the respondents to show that MKK, who admittedly continued as a director of HCM till 7th June, 2004 had notice of such Board meeting. As held in Permeshwari Prasad Gupta v. Union of lndia AIR 1973 SC 2381 any resolution passed at such Board meeting held on 10th February, 2004 is bad in law for want of notice of such Board meeting to MKK. Besides, there being no quorum available in the Board meeting ....
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.... in law. Board meeting on 7th March, 2005 to resolve holding of EGM on 31st match, 2005 of the shareholders of HCM for sub-division of the authorised and unissued share capital 56. The said Board meeting was attended only by RKK and his son ANK. The resolutions passed at such Board meeting are also vitiated by law since there was no proper quorum for the said Board meeting. Appointment of ANK as additional director being not in conformity with law and void ab initio RKK could not have singly convened such Board meeting. Apart from this there is no evidence of notice of such Board meeting to MMK who continued as director on the Board of HCM. For want of legal notice as required by section 286 of the Act the resolutions passed at such Board meeting held on 7th March, 2005 are bad in law and liable to be set aside. Therefore, any subsequent EGM held on 17th May, 2005 is bad in law and the resolutions passed therein are also liable to be set aside. Allotment of 1,25,000 equity shares of Rs. 10 each for cash at par on preferential basis in the EGM held on 17th May, 2005 and further allotment, in the EGM held on 19th September, 2005 57. A perusal of the notice dated 8th April, 2005 s....
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.... allotment is proposed to be made ; (e) intention of promoters/directors/key management persons to subscribe to the offer ; (f) shareholding pattern of promoters and others classes of shares before and after the offer ; (g) proposed time within which the allotment shall be completed ; (h) whether a change in control is intended or expected." For the above reasons I hold that the resolutions passed at the EGM held on 17th May, 2005 and 19th September, 2005 are harsh, burdensome and per se oppressive in character and bad in law as : (a) they do not comply with the mandatory requirement of the Unlisted Public Companies (Preferential Allotment) Rules, 2003 (b) for want of legal notice to MMK a shareholder in HCM and lastly (c) being with an intention solely to reduce patriarch MMK and other shareholders not belonging to the group of RKK to an abject minority and to gain complete control over the assets of HCM in a mala fide manner. Board meeting held on 25th August, 2005 and 8th April, 2005 58. The resolutions passed at the Board meeting held on 25th August, 2005 and 8th April, 2005 are also bad in law since no legal notice, as required under section 286 of the Act, was given....
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....ting to allotment of equity shares of Rs. 10 each at par on preferential basis are bad in law and set aside. (9) The appointment of R N Sen as an additional director of HCM on 25th August, 2005 is set aside. 61. During the pendency of the petition, CA No. 337/2009 was mentioned by the petitioners on 13th July, 2009. CA No. 337/2009 prayed for an injunction against the respondent Nos. 1 to 4 from creating any mortgage/charge/lien/ encumbrance/lease on the land belonging to HCM. The Board on 13th July, 2009 ordered maintenance of status quo as on date with regard to the fixed assets of both companies. Thereafter CA No. 301/2010 was filed by the petitioners and mentioned on 25th May, 2010. It was stated therein that in breach of the status quo order dated 13th July, 2009 and in connivance with RKK the name plate of HCM has been removed from the premises of HCM and the name plate of WC, i.e., a family company of RKK has been affixed. It was also stated that a huge chimney and a shed has been built by WC in the premises belonging to HCM. Photographs to demonstrate the above were also filed. On 9th June, 20i0 all the respondents gave an undertaking that in the event it is held that con....