TaxTMI 
TaxTMI 
TaxTMI 
2015 (4) TMI 1183
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....Petitioner No. l is the shareholder of the Respondent No.5 Company holding 2 crores fully paid up equity shares of Rs. 10/- each, which constitute 44% of the total paid up equity share capital of the Company. 2.2 The Petitioner No.2 holds 4,50,000 fully paid up equity shares of Rs. 10/- each, which constitute 1% of the total paid up equity share capital of the Company. The Petitioner No.2, in addition to being a shareholder in the Company, is also the Chairman and Director of the Petitioner No. 1 Company and has been duly authorized by the Petitioner No. 1 Company to initiate the present action on its behalf including on behalf of himself. The Petitioners therefore, collectively hold 2,04,50,000 equity shares in the Company representing 45% of the total paid up share capital and thus they are competent to file the petition in terms of the provisions contained under Section 399 of the Act. 2.3 Respondent No. l is a promoter and a Director on the Board of Directors of the Company. He also claims to be the Chairman of the Company and responsible for the day to day management of the Company. He holds 1,50,05,000 fully paid up equity shares of Rs. 10/- each, which constitute 33% of ....
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.... was held in the first week of April, 2012 at the Respondent No. 1's office in Goregaon. 2.8 Thereafter, in the last week of April, 2012, the Respondent No. 1 initiated discussions with the Petitioner No.2 for becoming a business partner and requested him to invest in the Company, offering him a 50% equity shareholding in the Company. The Respondent No.1 represented to the Petitioner No. 2, in several meetings between the parties, that the Company was planning to construct a plant which would be able to produce approximately 40 million meters of fabric per annum of a quality acceptable in international markets. The Respondent No. 1 further represented that for the purpose of the above production capacity, the Company was in the process of installing a state of the art plant, with new technology and high quality machines. The Respondent No.1 further represented that for the above purpose, the Company had availed a considerable loan from banks, securing the same with assets and shares of the Respondent No. 1 and its related entities. The Respondent No. 1 Later also provided the Petitioner No. 2 with the business proposal made to the various banks for the purpose of availing the....
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....loans, that may have caused delay in execution of the SHA, The Respondent No. 1, however, represented that he would do all necessary acts and seek all required approvals and permissions from the Company and from various banks in order to give effect to the understanding between the parties. The Respondent No. 1 further represented that he would, at his instance, get all acts done by the Company, and pass all resolutions required by the Company, in order to give effect to the terms of the SHA and to protect the rights of the Petitioners. 2.13 It is the case of the Petitioners that although the cause of action in the present petition does not entirely arise out of the SHA, the Petitioners, with the sole intention of bringing out the understanding between the parties, are providing the rights provided there under to the Petitioners, which Inter alia include immediate participation in the management of the Company and immediate information to the banks wherein the Petitioners have invested money, which fact the Respondent No. 1 ensured the Petitioners that it has been approved by the Company. 2.14 It appears that disputes and differences arose between the two groups relating to the....
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....eliefs in respect thereto, including as prayed for herein; (b) to pass order(s) under Sections 397, 398, 402 and 403 of the Companies Act, 1956 to bring an end to the aforesaid acts of mismanagement perpetrated by Respondent Nos. 1, 2 and 3 and for necessary orders and reliefs in respect thereto including as prayed for herein; (c) to pass an order under Sections 397, 398, 402 and 403 of the Companies Act, 1956, quashing the resolutions passed by the Respondent No. 5 Company at the instance of Respondent Nos. 1 to 4, without following the due process of law and specifically without giving due notice to the Petitioners of such meetings where the resolutions have been passed, including but not limited to: (i) Resolutions permitting increase in the authorized share capital of the Company passed in the Extra Ordinary General meeting held on September 20, 2013; (ii) Resolutions permitting amendment of the Memorandum of Association and the Articles of Association of the Company; (iii) Resolutions passed in the Annual General Meetings of the Company, of which due notice has not been provided to the Petitioners; and (iv) Resolutions passed at any other meetings of the shareholde....
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.... by the Respondent Nos. 1 to 4 pursuant to relief sought in (f) herein above; etc.; in addition to the financial records of the Company; and (iii) Directing that the Respondent Nos. 1 to 4 to bear the cost of the entire process of evaluation; (j) to pass an order under Sections 397, 398, 402 and 403 of the Companies Act, 1956, directing that due to the breakdown of trust and confidence between the RS Group and the TT Group, it is just and equitable to wind up the Respondent No. 5 Company; (k) That in the alternative to (i) herein above, to pass art order under Sections 397, 398, 399, 402 and 403 of the Companies Act, 1956, directing that the RS Group be bound to buy-out the shares of the TT Group, at the price ascertained pursuant to the above evaluation; 3. The Respondents Nos. 1, 4 and 5 appeared and filed their reply to the Petition. The Respondents In their reply denied all the alleged acts of oppression and mismanagement pleaded by the Petitioners and pointed out various misconducts committed by the Petitioners in breach of the provisions of the SHA. They also denied that the Respondent No.5 is in the nature of quasi partnership between the Petitioners group and the Res....
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....That the association was thus formed on the basis of mutual trust and confidence, on the basis of which the Petitioner No.2 has directly and indirectly also advanced unsecured loans to the Company to the extent of Rs. 24.38 Crores. e. That there are, in fact, for all purposes, only 2 partners in this quasi partnership viz. the Petitioner No.2 (and his concerns) and the Respondent No. 1 (and his concerns). f. Further, the SHA grants several management rights to the Petitioners including:- i. the right of the Petitioner No.2 to be appointed as a Director and Vice Chairman; ii. the right to take joint decisions on all important matters; iii. the right to require unanimous Director Resolutions for matters stated therein; iv. the right to obtain information about the financial position of the Company. v. Apart from the above, the SHA provides for a lock in period of five years, during which period none of the parties to the SHA are allowed to sell their shares or terminate the SHA. In addition, the SHA also imposes certain restrictions on the transfer of shares. 7. Based on the above, it was argued that the Company is in the nature of quasi partnership between the Petitio....
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....pr.39), and (ii) Vijay Krishna Jaidka v. Jaidka Motor Co. Ltd. [1977] Comp LJ 268 on the issue of legitimate expectation/indicating to his right to participate in a partnership Company being a shareholder in the management and affairs of the Company in the nature of quasi-partnership. a. In the case of Gurmit Singh (supra) (pg.507, pr.39) it is held as follows; ". . . . . the petitioners have also invoked the principles of legitimate expectations. In cases of legitimate expectations, the denial of the same could be considered to be an act of oppression. For the authority on the principles of legitimate expectations reference could be made to Boyle & Birds' Company Law III Edition wherein it is stated that in a quasi-partnership type Company, the Court may take account of legitimate expectations of members. "In Re Elgindata Ltd.: [1991] BCLC 959 it has been held that " In general members of a Company have no legitimate expectations going beyond the legal rights conferred on them by the constitution of the Company, i.e., to say its Memorandum and Articles of Association. Nonetheless legitimate expectations super imposed on a member's legal rights may arise from agreements ....
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....cant issue. This required piercing the corporate veil to understand the real nature of relationship." 10. Next point argued by the Ld. Counsel appearing for the Petitioners is that the Petitioners have been denied notice of important meetings, including notices to AGMs and EOGMs of the Company to which they are entitled to in law and this amounts to an act of oppression as has been held consistently by various courts in their decisions. Further, the failure on part of the Respondents to appoint the Petitioner No.2 on the Board of the Company as a Director amount to an act of oppression, which renders the Resolutions passed in the AGMs and EOGMs of the Company invalid and illegal for want of service of notice. 11. Answering the Petitioners' contentions as to the Application of principles of quasi-partnership in respect of the subject Company, it was argued on behalf of the Respondents that the Honourable Supreme Court and various High Courts have laid down certain basic requirements upon the fulfillment of which only, on the existence of a quasi partnership, can be inferred. According to the Ld. Counsel pre-existence of a family arrangement like a partnership or a family busin....
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....e Ld. Sr. Counsel for the Respondents referred to and relied upon the decision in the case of Kilpest (P.) Ltd. v. Shekhar Mehra [1996] 10 SCL 233 (SC) to support his contentions. 15. In addition to the above, it is the contention of the Ld. Sr. Counsel appearing for the Respondents that from the averments made in the, Petition, it is clear that the grievances of the Petitioners i.e. non compliance of the provisions of the SHA are essentially only of contractual nature, According to him, on a plain reading of the Petition and other supporting pleadings thereto, it will be clear that the Petitioners have set out various acts therein and contended that the Respondent No. 1 has not done the acts which were allegedly required to be done under the provisions of the SHA. The Ld. Sr. Counsel for the Respondents invited my attention to the following contents of the Petition and the clauses of the SHA to support the aforesaid contentions, such that - (a) The Petitioners allege that they were forced to accept only a 45% equity stake in the Respondent No.5 as per the terms of the SHA. The Petitioners further allege that they were desirous of a 50% equity stake in Respondent No.5. The above....
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....nces of oppression and mismanagement. Mr. Seervai, taking me through the Petition, pointed out that the grievances of the Petitioners are essentially only contractual in nature. Referring to the provisions of the SHA, he asserted that the Petitioners have set out various acts that the Respondent No. 1 has not done which were allegedly required to be done under the provisions of the SHA. He further pointed out that as per averments made in the Petition, the Petitioners were forced to accept only 45% of equity stake in the Respondent No.5 in the terms of the SHA, although they were desirous of 50% equity stake in the Company as per discussions between them. He, further pointed out that the Petitioners' allegation to the effect that the Petitioner No. 2 was not appointed as a Director of the Respondent No. 5 Company in terms of Clause 3.1 of the SHA. He next pointed out that the Petitioners have alleged that the Respondent Nos. 1 and 4 failed to designate the Petitioner No. 2 as a Vice Chairman of the Respondent No. 5 Company as provided in Clause 2.1 of the SHA and that the Respondent Nos. 1 and 4 did not pay a monthly remuneration of Rs. 2,75,000/- to the Petitioner No. 2 as pro....
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....he said contentions of the Respondents are untenable and liable to be rejected in limine. He further made a successful attempt to distinguish the decisions in the case of Chatterjee Petrochem, Incable Net (supra) etc. cited by the Respondents' Counsel. 20. I have considered the rival submissions and perused the record. In my view, the first issue that arises for my consideration is as to whether this Petition is not maintainable for the reasons assigned by the Respondents referred to in the preceding paras. 21. Having critically examined the pleadings of the parties and the terms of SHA, in my opinion, the controversies of the present case do not pertain to enforcement of any contract but enforcement of rights of the Petitioners as a shareholder of the Company. To my mind, the grievances of the Petitioners are Independent of the Shareholders' Agreement-in-question. I find enough force in the contention of the Petitioners' Counsel that although there was a private agreement entered into between the parties for subscription of shares, but the Petitioners have approached this Board in the capacity of they being the shareholders of the Company for enforcement of their rig....
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.... case was that the contractual obligations under the EPC contract did not fall within the scope of Section 397 and the Hon'ble Supreme Court held that the EPC contract was a commercial contract and stands outside the ambit of Sections 397. In the present case, the reliefs prayed for pertain to the denial of shareholder rights by the Company and failure to honour the quasi partnership between the Petitioners and Respondent Nos. 1 and 4. b. In the case of Aslam Ali (supra), it was held that he did not hold l/10th of the shares and further the Agreement in the Aslam case was for allotment of shares without compliance of which the Petitioners would not have become a shareholder in the Company, This obligation arose out of a private contract, the breach of which was sought to be remedied. The Petitioners in the Aslam Ali case, had not made any payment for purchasing the shares under the contract and as time was of the essence (Section 55, Contract Act, 1872), the shares were not allotted. c. The facts of the case R. Balakrishnan v. Vijay Dairy Farm & Products (P.) Ltd. [2005] 59 SCL 667 (CLB) are also distinguishable for the reason that the said case pertains to a settlement agr....
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....e Case of Kilpest (P.) Ltd. (supra), the Hon'ble Supreme Court held that analogy of the partnership is to be confined to a rare case for invoking the jurisdiction under Section 433, for winding up a small private Company where the Company has broken up because of inability of the pending fractions, the distribution of business and assets as in the case of dissolution of Partnership is permissible, the fact whether partnership principles are applicable or not depended upon factors like equal shareholding possession of Commercial Success and state of dead lock. In the present case, having closely examined the facts, I do not find force in the submissions of the Petitioner's Counsel. As stated above, undisputedly, in the present case, the Company was incorporated on 21/4/2005, and at all material times the Respondent Nos. 1 and 4 had held the entire issue and paid up share capital of the Company and only in 2012, the Petitioners showed their interest in becoming shareholders of the Company and according to them they were persuaded to purchase 45% of the issued and paid up share capital of the Company by the Respondents making certain representations as indicated herein before.....
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....ssed hereinabove. 28. Having held that the Company is not a quasi-partnership, the petitioners' grievances as to his non appointment as the Director of the Company and refusal to designate him as its Vice Chairman, in terms of Clause 3.1 and 2.1 respectively of the SHA, can never be made the basis of this Petition for oppression and mismanagement. The law on this point is very clear as held in the cases of Re Laundie Bros Ltd., In re [1965] 2 All E.R. 692 and Re: Bellador Silk Ltd. [1965] 1 All E.R. 667 that to show oppression and mismanagement, the Petitioners would have to show that the affairs of the Company were being conducted in a manner oppressive to him in his capacity as a member shareholder of such Company. In addition, it is also a settled taw that except In the cases where a Company is a closely held family Company and is in the nature of quasi-partnership the directorial complaint cannot be a subject matter of a petition under Section 397 and 398 of the Act. 29. Apart from the above, on a close scrutiny on the averments made in the Petition and other pleadings, filed by the Petitioners, it is amply clear that the Petitioner No.2 prior to filing of this Petition n....
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.... shareholding. The Petitioners' Counsel submitted that the Respondents have increased the authorized share capital only to dilute the shareholding of the Petitioners and to increase the shareholding of Respondent Nos. 1 and 4 to over 75% of the total paid up capital of the Company, through the alleged Rights Issue. 33. Mr. Zal Andhyarujina further submitted that the Respondents have admitted that no notices were issued for the aforementioned EOGMs held on 14/3/2013, to increase the authorized share capital of the Company from Rs. 60 Crores to Rs. 75 Crores and 20/11/2013, to increase the authorized share capital of the Company from Rs. 75 Crores to Rs. 95 Crores. According to Mr. Zal Andhyarujina, it is the case of the Respondents that they assumed that the Petitioners were aware of this as they purportedly were participating in the day to day management of the Company and that the son of Petitioner No. 2, who is not even a shareholder in the Company or party to these proceedings, was aware of this fact. The Ld. Counsel submitted that this does not absolve the Respondents from the fact that special resolutions were passed at these EOGMs without the approval of the Petitioners,....
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....s contention, the Ld. Counsel relied upon a decision in the case or Dale & Carrington invt. (P) Ltd. v. P.K. Prathapan [2004] 54 SCL 601 (SC), the Hon'ble Supreme Court discussed the Director's role in the issue of shares. In this case the Court observed as under:- "As agents of the Company they must act within the scope of their authority and must disclose that they are acting on behalf of the Company. The fiduciary capacity within which the Directors have to act enjoins upon them a duty to act on behalf of a Company with utmost good faith, utmost care and skill and due diligence and in the interest of the Company they represent. " " . . . . This requirement flows from their duty to act in good faith and make full disclosure to the shareholders regarding the affairs of the Company." 39. Apart from above the Ld. Counsel also cited the decision in the case of Needle Industries India Ltd. v. Needle Industries Newey (India) Holiding Ltd. [1981] 3 SCC 333, in which the case of Nanalal Zaver v. Bombay Life Assurance Co. Ltd. [1950] 20 Comp Cas 179 (SC), is referred. The decision laid down the following principle:- "It is well established that directors of a Company are in....
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....be issued only for the benefit/interest of the Company and not with a view to create a new majority to reduce a majority into minority even if the powers to issue shares is vested in the board. If the purpose of issue/allotment of shares is for upsetting the existing shareholding to the detriment of one group, then such an allotment of shares is to be held an act of oppression whether or not partnership principles are applied." 43. Referring to the said decision, it was argued by Mr. Zal Andhyarujina that the Respondent No. 1, directly or indirectly holds the entire shareholding of the Company except the shares held by the Petitioners, The Respondent No. 1 is also in control of the Company as its Director and Chairman. It is clear that the Respondent No. 1 has acted only for personal gains ignoring the benefit of the Company. 44. The Ld. Counsel for the Petitioners added that even after the Issue was subscribed to, the Respondents have failed to make calls in a manner either consistent with the application or in a manner to show any need for funds by the Company. 45. It is further submitted on behalf of the Petitioners that the malafides of the Respondents with respect to the Is....
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....t there were two distinct calls made by the Company. According to the Petitioners' Counsel, this shows that the said argument was merely an afterthought and a feeble attempt to justify the continuous oppression and mismanagement by the Respondents. 49. In light of the above, it was contended on behalf of the Petitioners that the alleged Rights issue was carried on with the intent to dilute the shareholding of the Petitioners in the Company and bring the same below 25%. The purported reason for the issue was the financial strain on the Company and the likelihood of the Company turning into an NPA. It is submitted that however, the Company has, at the instance of Respondent No. 1, deliberately failed to call the entire amount on the shares issued, which was required to allegedly stave off the Company from turning into an NPA. The calls have been made on terms contrary to the terms set out in the Letter of Offer and the Respondents have failed to produce even a single document evidencing proof of payment of call money by Respondent Nos. 1 and 4 and the receipt of the same by the Company. According to the Ld. Counsel, this proves that the Issue was orchestrated, not for the benefi....
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....y refused to disclose relevant information and provided incorrect information to the Petitioners as well as this Board. The Petitioners verily believed that the Respondents have done so to hide the true and correct manner in which the Respondent No. 5 Company is being managed by the Respondents. 53. The Ld, Counsel referred to and relied upon a decision in the case of Dale & Carrington Investment (P.) Ltd. (supra),wherein the Hon'ble Supreme Court discussed the fiduciary duty of a Director to make disclosure in the issue of shares and observed as under :- " . . . . The fiduciary capacity within which the Directors have to act enjoins upon them a duty to act on behalf of a Company with utmost good faith, utmost care and skill and due diligence and in the interest of the Company they represent. They have a duty to make full and hones disclosure to the shareholders regarding all important matters relating to the Company." [Emphasis supplied]. 54. Relying upon the said observations, the Petitioners' Counsel submits that in addition to the act of not providing inspection and information to the Petitioners, the Respondents have acted in a complete disregard of the process of ....
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....spondent Nos. 1 and 4; (ii) that the Company had not been declared as a NPA by the banks; and (iii) that the Respondents have not provided complete information to this Board. He, therefore, contended that no evidence of the money being brought in on First Call and Second Call was provided to the Petitioners and, further, no details of the utilization of funds were provided. 56. It was, therefore, argued on behalf of the Petitioners that this Board ought to draw an adverse inference against the Respondents and must only conclude that the Respondents have not made payment whatsoever in connection with the alleged rights issue. 57. Rebutting the Petitioners' allegations that the Rights Issue is an act of oppression, Mr. Seervai, Ld. Sr. Counsel appearing for the Respondents, cited the circumstances which led the Company to go for the Rights Issue. In this connection, the Ld. Sr. Counsel submitted that the Petitioners refused to purchase the denim produced by the Respondent No.5 as per the SHA. In addition, the Petitioners wrote letters to the consortium banks making false allegations against the Respondents and that resulted in reduction of the Respondent No. 5's working cap....
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....Seervai, the Respondents initially subscribed to the extent of Rs. 2/- per share on their behalf as well as on behalf of the Petitioners and this enabled the Company to meet its urgent loan repayment commitments and save itself from being declared as non performing assets. The Ld. Sr. Counsel then submitted that subsequently, the Respondent Nos. 1 and 4 subscribed to a further extent of Rs. 3/- per share on behalf of themselves as also the Petitioners. 59. Describing the chain of events in this regard and pointing out the relevant documents, Mr. Seervai submitted that the Rights Issue was in the best interest of the Company, as it staved off the labeling of the Company's Account as Non Performing Asset. Furthermore, the same did not result in the personal aggrandizement of any Individual. The same was done openly with full and adequate notice to the Petitioners. Referring to and relying upon the decision in the cases of Nannalal Zaver (supra), Needle industries (India) Ltd. (supra), Sangramsinh P. Gaekwad (supra), the Ld. Sr. Counsel submitted that the Rights Issue if issued in the best interest of the Company bonafidely, even if it leads to dilution of shareholding of any par....
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.... no legal requirement therefore. Duty of disclosure to shareholders in that case had a strong nexus with the affairs of the Company. Dale & Carrington is not an authority for the proposition that the purported fiduciary duty of a Director towards the shareholder is absolute although the transaction in question may not have a direct co-relationship with the affairs of the Company 62. Moreover, the Bench did not have the advantage of considering the for-judge Bench decision of this Court in Nanalal Zaver. It furthermore did not have the advantage of noticing the decisions of other jurisdictions which had been noticed hereinbefore. 63. The Court, it is interesting to note, noticed Needle Industries as regards the power of the Company to issue new shares but the legal effect thereof was not considered in detail. The Directors have the power to issue additional capital shares and in the process may obtain some pecuniary gain but only when such pecuniary gain is obtained through ulterior motive, they would be answerable to the shareholders, 64. It Is also interesting to note that while applying the "extraneous purpose test" or "ulterior motive test", the Court noticed Piercy v. S. Mil....
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....s will act for the paramount interest of the Company and for the general interest of the shareholders because the Directors are in a fiduciary position both towards the Company and towards every shareholder. The Directors are therefore required to act bona fide and not arbitrarily and not for any collateral motive." 69. This Court therein also applied the bona fide test of the Director and for the benefit of the Company as a whole. In that case, the Directors assigned reasons which were tested from three angles viz. (i) whether the Directors acted in the interest of the Company, (ii) whether they acted on a wrong principle; and (iii) whether they acted with an ablique motive or for a collateral purpose. It was observed in Harinagar Sugar Mills Ltd. v. Shyam Sunder Jhunjhunwala that the action of the Directors must be set aside if the same was done oppressively, capriciously, corruptly or in some other way mala fide. In this case, this Court is not faced with such situation. 70. In Coleman v. Myers the gist of the Complaint made by the appellants against the first respondent was that he planned to acquire total control of the Company at virtually no cost to himself by means of sel....
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....it to the issue of rights shares in order to comply with the statutory requirements of FERA and the Reserve Bank's directives. Having chosen not to disinvest, an option which was open to them, they did not any longer possess the legal right to insist that the Directors shall not issue the rights shares. What the Directors did was clearly in the larger interests of the Company and in obedience to their duty to comply with the law of the land. The fact that while discharging that duty they incidentally trenched upon the interests of the majority cannot invalidate their action. The conversion of the existing majority into a minority was a consequence of what the Directors were lawfully obliged to do. Such conversion was not the motive force of their action." 76. No argument in this case was advanced as regards the purported breach of fiduciary duty on the part of Appellant 1 in the matters of increase of shares during the lifetime of FRG before the learned Single Judge; on the other hand it was admitted that FRG during his lifetime was controlling the Company, and, thus, the appellants herein in no way can be held to have any Fiduciary liability towards other shareholder in respe....
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.... of a power whenever such abuse is held proved, but it is equally settled that where directors have a discretion and a bona fide acting in the exercise of it, it is not the habit of the Court to Interfere with them. When the Company is in no need of further Capital, directors are not entitled to use their power of issuing shares merely for the purpose of maintaining themselves and their friends in management over the affairs of the Company, or merely for the purpose of defaulting the wishes of the existing majority of shareholders. It appears to me that the learned Judges in the Court below approached the decision of the question in the light of the principles stated above and the contention of the learned counsel therefore does not seem right. Where the directors are hot chargeable for breach of trust so far as the Company is concerned and where their action is for the benefit of the Company, them merely because in promoting the interests it cannot be held that they have not acted bona fide. As it has been said in Hirsche v. Sims, if the true effect of the whole evidence is that the defendants truly and reasonably believed at the time that they did was for the interest of the Co....
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....t in the interest of the Company, will be invalid even though the allotment may result incidentally in some benefit to the Company. 66. On the submissions advanced by the Ld. Counsels for rival parties, and the law discussed above, the next question that arises for consideration is as to whether the allotment of shares under the Rights Issue was for the best interests of the Company and for proper purpose or it is a deliberate attempt to sideline the Petitioners by reducing their shareholding from 45% to below 25%. 67. In this regard, I have carefully examined the documents. On perusal of the SHA, it appears that the fundamental obligations of the Petitioners, under the said SHA was to purchase the entire denim fabric produced by the Respondent No.5 upto 40 million meters per annum at the price to be determined in the formula by the SHA. It seems that the object was to ensure that the Company would make the profit from the time itcommences its operations. On a close scrutiny of the correspondences exchanged between the parties, it is evident that the Petitioners were under an obligation to sign all the loan documents, necessary to secure the loan taken by the Company from its con....
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....duce these details in the shape of a chart here as under:- I. Details of Application and allotment money paid by Ramesh D. Shah (Respondent No. 1) for shares forfeited by Tushar D. Thakkar (Petitioner No. 1) and Tushar Clothing Pvt. Ltd. (Petitioner No. 2) in the Right Issue. 1. May 7, 2014 Copy of duly filled Application Form by Ramesh D. Shah (Respondent No. 1) for subscription of shares forfeited by Tushar D. Thakkar (Petitioner No. 1) in the Right Issue. 2. May 7, 2014 Copy of cheque bearing No. 001350 dated May 7, 2014 drawn in favour of ETCO Denim Pvt. Ltd. by Ramesh D. Shah (the Respondent No. 1) instructing Kotak Mahindra Bank to remit funds of Rs. 89,15,201/- by RTGS towards application money for shares forfeited by Tushare D. Thakkar and subscribed by Ramesh D. Shah (Respondent No. 1) in the Right Issue. RTGS/NEFT Form bearing acknowledgement dated May 7, 2014 evidencing transfer of funds from Ramesh D. Shah's (Respondent No. 1) account to ETCO Denim Pvt. Ltd. for application money for shares forfeited by Tushar D. Thakkar (Petitioner No. 1) in the Right Issue. 3. May 12, 2014 Copy of cheque bearing No. 001356 dated May 12, 2014 drawn in favour of ETCO Deni....
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....bed by Ramesh D. Shah Family Trust (Respondent No. 4) in the Rights Issue. RTGS/NEFT Form bearing acknowledgement dated May 12, 2014 evidencing transfer of funds from Ramesh D. Shah Family Trust (Respondent No. 4) account to ETCO Denim Pvt. Ltd for allotment money for shares forfeited by Tushar D. Thakkar (Petitioner No. 2) in the Rights Issue. 4. February, 25, 2015 Statement of accounts as maintained by Corporation Bank evidencing transfer of funds by RTGS from the account of Ramesh D. Shah (Respondent No. 1) held in Kotak Mahindra Bank. The UTR No. KKBKH14128624251 and UTR No. KKBKH14132690060 confirming the receipt of payment is also reflected in the said statement of accounts. (Cross Reference: To be read with Item Nos. 2 and 3 of this Index respectively). 68. It is a matter of record, that after payment of the amount referred to above, the consortium of banks has issued letters to the Company certifying that the account has become standard. In the backdrop of the aforesaid events, I, hold that the Rights Issue was in the Interests of the Company to meet out the urgent requirement of funds. It is further pertinent to mention here that the Petitioners have also been offered....
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....jina, Ld. Counsel has taken me through various documents on record and submitted that the Respondents had intentionally neither informed the Petitioners of the functioning of the Company nor had they made the Petitioners a part of the management, so that the Petitioners cannot find out the mismanagement and siphoning off funds being carried on in the Company. According to Mr. Zal Andhyarujina, when the Petitioners became aware of the mismanagement and siphoning off funds, they were constrained and forced to approach the banks in order to inform them of the situation. Accordingly, the Petitioners wrote various letters to the banks to inform the banks of the mismanagement being carried on in the Company at the instance of Respondent No. 1. Taking me through the Letters Exh.7 and 16, the Ld. Counsel pointed out that a bare perusal of the aforesaid letters sent by the Petitioners to the Banks clearly spell out that the Petitioners had acted in the interests of the Company. According to him, the Petitioners informed the banks, inter alia, of the mismanagement and siphoning off funds in the Company. The Petitioner's Counsel submitted that even the LIE Report, which brings out various....
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....t it fails to consider the market value and comparative cost of such machinery. 74. In addition to the above, it was submitted that in the given facts and circumstances of this case, the Respondents may also be directed to return with interest the amounts of the unsecured loans advanced to the Company. The Ld. Counsel submitted that the Respondents' contention to file appropriate proceedings in a civil court for refund of a loan amount is without substance, keeping in view the wide powers conferred upon this Board by virtue of the provisions contained under Section 402 of the Act. He also referred to the provisions contained in Section 237(b) of the Act to contend that as creditors of the Company, the Petitioners are entitled to pray for an investigation into its affairs. The Ld. Counsel contended that there are circumstances suggesting that the business of the Company is being conducted with an intent to defraud the creditors and, hence, an order of investigation is required to be passed. 75. it is submitted that, based on the factual circumstances, it is essential that an investigation and forensic audit be conducted in the affairs of the Company in order to bring out the c....
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....only verified the invoice value and did not enter into the investigation as to the correct market value of the machineries. I also agree that no Bank would invite any adverse report to their own project report prepared by their officers during the time, they decide to advance loans to a Company. However, in absence of any corroborative material, the onus of which was on the Petitioners, there is no reason to disbelieve that reports of independent persons which are in favour of the Respondents. 78. It is to be borne in mind that the object of an investigation under Section 237(b) of the Act is to discover something which is not apparent to the naked eye of a person. Atleast prima facie evidence should exist suggesting circumstances which could lead to a conclusion that an investigation is necessary. Unless there are circumstances suggesting that the business of the Company is being conducted with an intent to defraud the creditors, members, or any other person or otherwise, for fraudulent or unlawful purpose, or in a manner oppressive of its members or that the Company was formed for any fraudulent or unlawful purpose, it would not be just and appropriate to pass an order for inves....
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....ined by an independent valuer. 80. Opposing the said prayer, it was argued on behalf of the Respondents that the present Petition is not a genuine petition filed by the Petitioners under Section 397 and 398 of the Act. According to the Ld. Sr. Counsel, the present Petition is part of a designed scheme of the Petitioners to bring the business of the Company to a standstill, resulting in the Petitioners not having to comply with their obligations under the SHA and pressurizing the Respondent Nos. 1 and 4 to purchase the shareholding of the Petitioners in the Respondent No.5 Company, Apart from the above, the Ld. Sr. Counsel for the Respondents asserted that in the present case, there has never been a situation of dead lock qua the Respondent No.5. The Petitioners had never any representations on the Board of Directors, although they had been involved in the management of the Company. The Ld. Sr. Counsel distinguished the decisions referred to and relied upon by the Petitioners viz. for sell out/buy-out the shares in the cases of (a) Bhupinder Kumar Sekhri v. Vijay Kumar Sekhri Co. A (SB) No. 40 of 2012, 2-7-2012, (b) M.S.D.C. Radharamanan v. M.S.D. Chandrasekara Raja [2008] 6 SCC 75....
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....by the Petitioners. 82. 1 have also taken into consideration the contention advanced by Mr. Seervai relying on the decision of the Bombay High Court In the case of Rajeev Kapoor (supra) wherein the Hon'ble High Court of Bombay has held that in every case it is not necessary for the CLB to pass an order for buy out and sell out of the shares of the Company. In facts of that case, the Hon'ble Bombay High Court, having found that the direction to sell the shares to a party, who is guilty of misconduct, would amount to a premium to his dishonesty, set aside the impugned direction for sell out/buy out of the shares. However, the facts of the said case and the case in hand are totally different. In the present case, making communications to the Banks by the Respondents cannot be held as an act of misconduct on the part of the Petitioners. As discussed above, based on his bona fide suspicion, the Petitioner No. 2 wrote such letters to the Banks. 83. Now looking at this point from a different angle. It goes without saying that no prudent businessman would like to invest a sum of Rs. 50 crores approx, knowing that his amount could be stuck up and/or he could not be able to get the....
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....e fitness of things and just and proper that the Respondent Nos. 1 and 4 who are admittedly majority shareholders and in control of the affairs of the Company be directed to buyout the shares held by the Petitioners in the Company at a fair price to be determined by an Independent Valuer. This point is answered accordingly. The C.P., therefore, stands disposed of with the following order:- ORDER a. M/s Khandelwal Jain & Co., having address at 6-B, Pil Court, 6th Floor, 111 M. Karve Road, Above Bangkok Airways Office, Opp. Churchgate Stn., Churchgate, Mumbai 400 020 Tel. No. 022 43115000, is appointed as an Independent Valuer for a fair value of the shares held by the Petitioner of the Company. The Cut-off date for determining the valuation of the shares will be 31/3/2014. b. The date of filing the petition is 23/4/2014. Hence, the said Valuer will find out the fair value of the shares of the Company as on the date of 31/3/2014 on the basis of going concern by all recognized methods and applicable rules and regulations as applicable on the said date in this regard. c. The parties are directed to extend every co-operation to the said valuer. The Company shall submit all the ne....