TaxTMI 
TaxTMI 
2015 (7) TMI 298
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.... Bagaria and members of his family promoted 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 A....
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....d and was able to formalise a family arrangement (FA) between RKK and MKK on 10th June, 1996. The said FS was reduced to writing (Annexure A-3) by VKK and 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....
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....tored possession of all the share-scrips in HCM and HF to MMK. This goes to show that in HCM and HF, being a family company, the share-scrips were always in the possession of the patriarch, 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....
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....tors of HCM, RKK convinced MMK to induct ANK on the Board and filed Form No. 32 also signed by MMK with RoC West Bengal on 23rd February, 2004 showing induction of ANK on the Board of HCM. 18. It was also 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 l....
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....tement" issued pursuant to section 173 (2) of the Act shows that the aforesaid equity shares in the capital of the said company were issued on the basis of the allegation that HCM had expansion plans without elaborating 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 ....
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.... of the extraordinary general meeting as also the purported Explanatory Statement have been annexed as Annexure A5. 26. Further, on or about 19th September, 2005, the said company alleged to nave held an extraordinary general meeting, 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 ....
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....r the provisions of the Act on 7th September, 2005 that the respondent No.6 consented to act as a director without having any qualifying shares in the capital of HCM. In the premises, it is clear that the respondent No.2 appointed the respondent No.6 only to discharge his otherwise 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. (....
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....FA steps were taken by RKK against ING Vysya Bank Ltd. so as to settle all the dues and thereby relieve MKK from his personal guarantee. During the course of arguments Shri Mukherjee, learned senior counsel appearing for the respondents also demonstrated from the documents that at the relevant time, 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 subst....
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....y cheque by the allottees. 37. To support their contention that HCM has been carrying on business in foundry since the time the Kejriwal family has taken over the company the business of HCM was in respect of Foundry and that HCM formed part of the family assets and properties which were to be looked after 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 partne....
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....y Division and Machinery division. Shri Ramesh Kr. Kejriwal chose to take the Foundry Division which he had been managing so far and Shri Mahesh Kr. Kejriwal chose the Machinery division which he had been looking after. 8. Both the brothers Shri Ramesh Kr. Kejriwal and Shri Mahesh Kr. Kejriwal had been given complete authority 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 t....
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....t any reference to the petitioner. Regarding the appointment of ANS on the Board of HCM it is stated that he was appointed in the Board meeting held on 25th August, 2005 and had subsequently acquired qualification shares as per the AoA on 18th October, 2005. 44. In sum and substance, the respondents case is that MKK had ceased to have 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 becau....
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....ent responsibilities of the respective Divisions run by the Kejriwal family between the two brothers and the separation of MKK from HCM was essential. It has been stated in para 6.23 of the petition that RKK was in charge of the management of HCM at the time of family arrangement and was responsible for the failure to settle its dues. Therefore, clause 2 of 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 diff....
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....e the above. However, as I have already pointed out, for coming to a correct interpretation of the family arrangement arrived between MKK and RKK in June 1996, the situation prevailing then would have to be taken into consideration. From the documents Annexures R10 to R13, it is clearly borne out that HCM was carrying on foundry business at the time of the family 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 Vinay....
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.... of his 1,025 shares to RKK in 1999 were reciprocal obligations to be performed by MKK. 50. Admittedly in view of the irreconcilable disputes and differences, MKK would have in no manner and under no circumstances signed the annual statement of HCM for 1999 blank. A conjoint reading of the pleadings by the parties show that all the share certificates of HCM were, on 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 ....
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....dingly and direct HCM to rectify its register of members and to register transfer of 1,025 shares held by MKK under folio 96 in favour of RKK. 52. In view of the above findings the petition by MKK is, in my considered opinion, actuated by his greed in view of the fact that the value of the land owned by HCM had shot up over the years. No relief, therefore, deserves to be 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 sho....
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....even on this ground apart from there already being a lack of quorum as required by the Articles of Association of HCM the resolution passed at such Board meeting fails to satisfy the test required by law. I therefore, hold that the appointment of ANK as an Additional Director in HCM on 10th February, 2004 and the purported transfer of 60 shares by Shakuntala Kejriwal to ANK are bad 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 ....
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....ry statement to the notice for the general meeting as required by section 173 of the Companies Act, 1956 shall contain the following particulars : (a) the price or price band at which the allotment is proposed ; (b) the relevant date on the basis of which price has been arrived at ; (c) the object/s of the issue through preferential offer ; (d) the class or classes of persons to whom the 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 ....
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....hares in favour of RKK under Folio No. 100. (6) The appointment of ANK as Additional Director in HCM and the transfer of 60 shares by Shakuntala Kejriwal to ANK are bad in law and accordingly set aside. (7) The resolutions passed at the Board meetings held on 7th March, 2005, 8th April, 2005 and 25th August, 2005 are bad in law and set aside. (8) The resolutions passed at the EGM held on 17th May, 2005 and 19th September, 2005 relating 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....