TaxTMI 
TaxTMI 
2014 (4) TMI 1191
X X X X Extracts X X X X
X X X X Extracts X X X X
.... The respondent No. 1 Jijamata Sugars (P.) Ltd., is a company incorporated under the Act, since 1st March, 2006, and its registered office is situated at the factory premises of the respondent No. 2, i.e., c/o. Kothari Udhyog, BhokerdaN Road, Near Dhawleshwar Temple, Jalna, State of Maharashtra. 1.2 The respondent No. 2 Vinay Kumar Rijkhab Kothari is also a founder director of the company and originally subscriber of the memorandum holding 5,000 shares of Rs. 10 each and presently working as chairman of the company. Respondent No. 3 is the son of the respondent No. 2 of the director. Respondent No. 4 is the wife of the respondent No. 2. Respondent No. 5 is brother-in-law of the respondent No. 2. All the said respondents are presently directors on the Board of directors of the respondent No. 1-company. 1.3 It appears that some dispute arose between the parties in the middle of 2011. According to the petitioner, he came to know certain oppressive actions taken by the respondent No. 2 in collusion with respondent Nos. 3 to 5 at his back and without notice to Turn which according to the petitioner fall within the definition of section 397/398 of the Act. 1.4 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....h respect to the alleged acts of oppression and mismanagement against the answering respondents. Justifying their actions, the respondents have sought dismissal of the petition. To the reply, rejoinder has been filed. Thereafter, a supplementary affidavit was filed by the petitioner to which the respondents have been filed an affidavit in reply. I have heard the learned PCS appearing for the respective parties and perused the record. I have also gone through the written submissions filed by the respective parties. The first question that arises for my consideration is as to whether the petitioner himself voluntarily resigned from the office of director of the respondent No. 1-company Or the respondents fabricated his resignation and filed the same in the office of the Registrar of Companies ('RoC'), thereby showing his cessation as a director of the respondent No. 1-company. It is the case of the petitioner that after incorporation of the company in the year 2006, the company submitted a tender for purchase of Jijamata Sahakari Shakkar Karkhana situated at Dusarbid, Taluka, Sindkhedraja, District Buldhana, by auction with the Government of Maharashtra. It is fur....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... purportedly under section 284 of the Act, in utter violation of the said provision and, hence, the said act of the respondents also amounts to an act of oppression Within the definition of section 397 of the Act. Next point argued by the learned PCS for the petitioner is that assuming for the sake of arguments that the petitioner was served with the statutory notice under section 284 read with section 190 of the Act and the procedure for his removal as a director of the company was adopted in accordance with the provisions of the Act, yet his removal as a director is bad in law for the following reasons and, thus, liable to be set aside and he deserves to be re-instated as a director: (i) Because, the company was in the guise of quasi-partnership. The petitioner and the respondent No. 2 each were originally holding equal number of shares and they are original subscriber to the memorandum and articles of association of the company since its inception and were also founder directors. The rights, duties and the obligations between two of them were well defined. It is, therefore, the respondents cannot throw the petitioner in an arbitrary manner without any cogent reason. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ice of the director of the respondent No. 1-company by following the ' due process of law. He, therefore, contended that the said complaint of the petitioner is false and liable to be rejected. I have considered the submissions and examined the documents carefully. I do not deem it necessary to adjudicate the issue as to the removal of the petitioner as a director of the company on the Basis of his alleged resignation letter which according to the petitioner was fabricated by the respondent No. 2. The reason is that admittedly the said removal of the petitioner as a director was revoked by the company and he was reinducted on its Board. I am, therefore, of the view as that insofar as this complaint is concerned, since, it was already brought to an end by inclusion of the petitioner as a director on the Board of the company, and, therefore, this issue is now irrelevant for the purpose of this petition. The next controversial issue which needs consideration by this Board is the removal of the petitioner under section 284 of the Act. In this regard, I am required to examine the facts of the case in hand as to whether the company was in the guise of quasi-partnership. To exam....
X X X X Extracts X X X X
X X X X Extracts X X X X
....an v. Hymatic Agro Equipments (P.) Ltd. [1999] 34 CLA 333 : [1999] 4 Comp LJ 369 (CLB) where the company being a family company wherein implied agreement relating to participation of all the shareholders in the management was established. The Company Law Board ('CLB') held that ouster of one of them as director was an act of oppression warranting winding up of the company on just and equitable grounds. As a matter of fact there is nothing on record to show that the company invited any outsider to become a shareholder. The composition of Board of directors shows that one member from each groups has been taken on the Board as director and, thus, ensuring joint petitioner and the respondents would prima facie establish that the company has been incorporated with mutual trust and confidence among shareholders with a view to run it in the form of a quasi-partnership and, therefore, the petitioner is at liberty to challenge his ouster from the management in this petition under section 397." In the case of Ebrahimi v. Westbourn Galleries Ltd. [1972] 2 WLR it has been held as under: "....While no doubt the petitioner was lawfully removed, in the sense that he ceased in ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rves to be set aside. Per contra, it is the case of the respondents that the impugned notice issued under section 190 of the Act was duly served upon the petitioner through registered post and it was delivered to him. However, the learned PCS appearing for the respondents admitted that except the said notice, the other notices for holding the Board meetings and the EGM were duly despatched to the petitioner's address available on the record of the company through postal certificate as provided in section 53(b) of the Act for service of a notice upon a director/shareholder of the company. Referring in the decision in the case of Westfort H-Tech Hospital Ltd. v. V.S. Krishnan [2007] 78 CLA 255 (Ker.) it is submitted that where a service of notice is required by law through postal certificate in that case the fact of posting has to be proved by the sender. Further, the court can rely upon the same if it is proved that the document was duly posted under postal certificate ('UPC') at the correct address of the notice. Once it is so proved, onus rests on the addressee to show that the document referred to in the certificate of posting was not received by him. In this regar....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the company or to appellant No. 2. If the Board meeting had been convened without proper service of notice on the appellant by the respondent No. 2 then such Board meeting cannot be said to be valid." Referring the aforesaid decisions, the learned PCS appearing for the petitioner on his behalf denied the service of notice in respect of the meeting purportedly held on 7th July, 2011 allegedly sent by the speed post and submitted that although the envelope sent by the speed post by the respondents on 9th June, 2011 along with an acknowledgement was received by the petitioner, but it did not contain the special notice for holding the EGM, as contended by the respondents. According to the learned PCS for the petitioner, in the captioned envelope a reply to the complaint made by the petitioner alleging certain facts was received and not the special notice. The learned PCS, therefore, submits that the respondents have created a false evidence to prove that a special notice under section 190 read with section 284 was served upon the petitioner. On the other side, the learned PCS for the respondents submits that the notices as required by law for removal of a director of a company a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....eneral practice of the company and also without giving information to the company. * The amount which was realised from the sale of scrap was not credited in the books of account of the company and was transferred in his personal account. * Transferred funds from the company's account to his own account through net banking. I have examined the answers/explanation submitted by the petitioner in regard to the above charges. According to him, the allegations as regard to purchase of diesel and sugarcane above the market price, it is pertinent to note here that admittedly, the cheques were issued for such payments under joint signatures including that of the respondent No. 2 himself. Furthermore, as regard to the allegations for sale of molasses, it may be noted from the material available on record that the respondent No. 2 himself had taken advances for the sale of the same at the rate of Rs. 3,500 per ton whereas the petitioner has sold the same at the rate of Rs. 3,700 per ton. In addition to above, the respondents have failed to substantiate the other charges mentioned above by any cogent and reliable evidence. I am, therefore, satisfied with the explanati....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ash Tulsidas Bhandari, who happens to be his brother-in-law as an additional director on 26th July, 2011, with back-date from 6th March, 2006. Further, the appointment of Mr. Subhash Tulsidas Bhandari, the respondent No. 5 herein was regularised by appointing him as a regular director on 26th July, 2011, with back date from 15th June, 2007. In addition, 100 shares of the respondent No. 2 were shown transferred to the respondent No. 5 to make more number of shareholders. It is the case of the petitioner that he was never aware of the above changes and did not receive any notice from the respondent Nos. 1 and 2 for holding a Board meeting whereat the appointment of the respondent No. 5 was considered and decided. According to him, the signature of the petitioner on the alleged attendance sheet filed to show his presence in the impugned meeting is forged and fabricated. To prove the fact, that the appointment of respondent No. 5 is ante-dated, it was pointed out by the learned PCS for the petitioner that if the respondent No. 5 was a director on 6th March, 2006, then why his name did not appear in the notice of Board meeting dated 31st March, 2011. Besides, in the statement of the Sta....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tioner and respondent No. 2 were operating the bank account. Therefore, the names of the respondent Nos. 3 to 5 were not required to be mentioned in the said letter. The learned PCS further submits that as regard to resolution dated 17th January, 2009 for opening of the account with the HDFC Bank, the said resolution can be certified by any director and the signature of all the directors for certifying the resolution by all the directors was not required. Lastly, it is submitted that insofar as transfer of 100 shares belonging to respondent Nos. 2 to 5 with effect from 8th June, 2006, the said transfer was duly approved by the Board at the meeting held on 8th July, 2006, a copy of notice for the said meeting for proof of service is also available on record. It is therefore, contended that he, respondent No. 5, was duly appointed with the consent of the petitioner in a valid Board meeting and all the contentions raised to the contrary are frivolous and baseless. I have considered the rival submissions. I am not inclined to agree with the version put-forth by the respondents. I find force in the submission of the petitioner that had the respondent No. 5 been appointed as an additi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ore particularly the Annexure 23(1) filed by the respondents along with their reply. Admittedly, the notice upon the petitioner is stated to be served UPC which has been disputed and denied by the petitioner saying that he was never served with such notice nor did he attend meeting. As described hereinabove, the service of notice through UPC, if denied cannot be presumed as a sufficient service unless there is enough corroborative evidence available on record. Admittedly, the respondent-company has not produced any despatch register or books of account showing the expenses incurred by the sender towards the posting of notice. Therefore, no reliance whatsoever can be placed on the certificates of posting under which notices were allegedly served to the shareholders. Furthermore, the relations of the petitioner and the respondent No. 2 had become sour since 2009. Therefore, sending the notice through UPC for holding AGM where the appointment of new directors, who are the wife and son of the respondent No. 2 was to take place cannot be said an act done in bona fide. I am, therefore, of the view that the said AGM purportedly held on 15th June, 2010, in the absence of the petitioner ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t is held as follows: "After having held that the petitioners are fully justified in questioning the validity of the EGM and also the decisions taken thereat, the question that arises for our consideration is whether the allotment of 2,000 shares to the 3rd respondent should be declared as null and void as being not in accordance with legal provisions. The settled law is that an illegal act need not be oppressive and vice versa. It is on record that except the petitioners' group, all other shareholders had attended that meeting and from the minutes we find that the members were conscious of the financial crunch faced by the company and, therefore, has decided to allot the shares to the 3rd respondent who had been looking after the company as a licensee from the year 1995 onwards. In other words, the members had taken decision to allot the shares in the interest of the company. Even though the provisions of section 81(1A) of the Act are not applicable to the company, nor there is any provision in the articles for proportionate allotment, yet substantive majority of the shareholders had approved allotment of the entire 2,000 shares to the 3rd respondent. Since the shareh....
X X X X Extracts X X X X
X X X X Extracts X X X X
....pital by a company does not apply to private limited companies, the directors in a private limited company are expected to make a disclosure to the shareholders of such a company when further shares are being issued. This requirement flows from their duty to act in good faith and make full disclosure to the shareholders regarding affairs of a company. The acts of directors in a private limited company are required to be tested on a much finer scale in order to rule out any misuse of power for personal gains or ulterior motives. Non-applicability of section 81 of the Companies Act in case of private limited companies casts a heavier burden on its directors. Private limited companies are normally closely held, i.e., the share capital is held within members of a family or within a close knit group of friends. This brings in considerations akin to those applied in cases of partnership where the partners owe a duty to act with utmost good faith towards each other. Non-applicability of section 81 of the Act to private companies does not mean that the" directors have absolute freedom in the matter of management of affairs of the company." The hon'ble Supreme Court further hel....
X X X X Extracts X X X X
X X X X Extracts X X X X
....estion whether the right has been exercised bona fide and in the interests of the company has to be considered in facts of each case and if it is found that it is not so', such allotment is liable to be set aside." (emphasis supplied) The hon'ble Supreme Court further held that: "In the present case we are concerned with the propriety of issue of additional share capital by the managing director in his own favour. The facts of the case do not pose any difficulty particularly for the reason that the managing director has neither placed on record anything to justify issue of further share capital nor it has been shown that proper procedure was followed in allotting the additional share capital. Conclusion is inevitable that neither the allotment of additional shares in favour of Ramanujam was bona fide nor it was in the interest of the company nor a proper and legal procedure was followed to make the allotment. The motive for the allotment was mala fide, the only motive being to gain control of the company. Therefore, in our view, the entire allotment of shares to Ramanujam has to be set aside." (iii) In the case of Tea Brokers (supra), it ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....0,000 shares of Rs. 10 each was filed on 26th July, 2011, of which no intimation/information was given to the petitioner. It is contended by the learned PCS of the petitioner that the motive of the respondent for the increase in the share capital and then allotment to themselves was to make the petitioner a minority shareholder. Refuting the said allegations, the learned PCS appearing for the respondents submitted that on 4th July, 2011, a notice was sent to the petitioner informing him for convening and holding an EGM to be held on 25th July, 2011, at which the resolutions were passed for increase in the authorised share capital from Rs. 5 lakh to Rs. 25 lakh, according to the learned PCS the allotment of 2,10,000 shares was made on 26th July, 2011, pursuant to the resolution passed in the EGM which took place on the said date. Further, a letter of offer was issued on 1st July, 2011 for allotment of 2,10,000 shares as rights shares. The learned PCS pointed out that a notice dated 1st July, 2011, was issued to the petitioner for informing him the date of the Board meeting which was to be held on 26th July, 2011. The learned PCS submits that since the petitioner did not prefer to....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ore, the facts of the decisions cited on their behalf of the petitioner in the cases of Palak Kumar Mondal and Srichand Bajaj (supra) do not apply to the fact of the present case. Contrary to the above, it is well proved that the sole purpose of the respondents Was to increase their shareholding in order to get full control over the management and affairs of the company and oust the petitioner altogether from his participation in the management. In my view, the alleged EGM and the Board meetings under challenge are illegal, non est and liable to be set aside. I, therefore, hold that the allotment of further shares to the respondent No. 2 himself and his family members, i.e., respondent Nos. 3 and 4 are illegal, ultra vires, null and void and liable to be cancelled. The petitioner has also made serious allegations on the respondents saying that upon being insisted by the petitioner for filing of annual accounts and the balance sheets by holding the AGM, by getting the accounts audited from a chartered accountant, in spite of his insistence, the respondent No. 2, neither appointed the statutory auditor of the company officially nor completed the audit of the accounts for the la....
X X X X Extracts X X X X
X X X X Extracts X X X X
....isclosed in Annexure R-42. The respondents have also tried to establish that the petitioner has also siphoned of a sum of Rs. 70,00,000 taken from Hedda Chemicals (P.) Ltd. for supply of molasses to them but without the consent of the respondents, he then sold out the molasses of the respondent No. 1 to Radico Envy Distilleries. Consequently, Hedda Chemicals (P.) Ltd. filed a criminal complaint in the criminal court at Aurangabad in which the respondents were also involved, had to agree to return the amount of Rs. 70,00,000 to the said party in their individual and personal capacity in addition to Rs. 5,00,000 by way of compensation. Having considered the rival submissions and upon careful analysis of the documents filed by the parties in support of their respective allegations and counter-allegations, I have come to the conclusion that there appear financial irregularities in the company and such financial mismanagement is prejudicial to the interest of the company as defined under section 398 of the Act. However, all the loss to the company on account of financial irregularities can be ascertained by an appointment of an independent auditor who may conduct the audit of the com....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tection, the making of a winding of order, on the ground that it is just and equitable would be justified. Therefore, having regard to the facts of the case in hand, the necessary ingredients of the provision contained in section 397 which provides that: "to wind up the company would unfairly prejudice such member or members, but that otherwise the facts would justify the making of a winding up order on the ground that it was just a equitable that the company should be wound up; also stands proved". For the reason discussed hereinabove, I have come to the conclusion that the acts complained of and the conduct of the respondents towards the petitioner narrated hereinabove are unfair, prejudicial, wrong, harsh and burdensome and there is an element of lack of probity and fair dealing and they are containing till date. The petitioner has succeeded to make out a case under sections 397 and 398 of the Act. Therefore, in order to bring an end to the acts of complained off. The petition is therefore, disposed off with the following directions: (i) It is declared that the purported EGM held on 7th July, 2011 is non est illegal and ultra vires and the resolution passed ....