TaxTMI 
TaxTMI 
1999 (11) TMI 893
X X X X Extracts X X X X
X X X X Extracts X X X X
..... Bhargava 24 per cent, Prem Bhargava 12 per cent, others 40 per cent. There are presently four groups of shareholders, all brothers/their family members controlling among themselves about 80 per cent, shares in the company. They are known as H. N. Bhargava group (HNB), K. N. Bhargava group (KNB), B. N. Bhargava group (BNB) and M.N. Bhargava group (MNB). Presently, KNB and BNB are on one side and HNB and MNB are on the other side--the former being the petitioners and the latter being the respondents. On the demise of HNB and MNB, their groups are headed by Shri Dilip Bhargava, son of HNB and Mrs. Veena Bhargava, the wife of MNB. Now the HNB group is referred as the DB group. KNB is the first petitioner and BNB is the second petitioner. DB is the second respondent and Smt. Veena Bhargava is the third respondent. At the time of the incorporation of the company, HNB was the chairman and the MD of the company and after his demise in 1979, KNB and BNB became the chairman and managing director and joint managing director respectively. This company had about 46 per cent, shares in another company known as EMA India Limited. From 1983 onwards the DB group had been controlling the affairs o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....y 1,49,948 shares compared to the holding of the respondent group of 2,07,759 shares. After the respondent came on the board, he had been acting in an autocratic manner resulting in many of the senior executives leaving the company. In the year 1994, the respondent forced the board to approve the setting up of a plastic division at Mumbai after giving a very rosy picture of the fortunes of this business, involving an investment of ₹ 14.93 crores with a projected annual turnover of about ₹ 20 crores. With a view to maintain the family harmony, the board approved the proposal and left the plastic division completely under the sole control of the respondent. The board also appointed him as the deputy managing director and vice-chairman with effect from October 1, 1996. Even though originally the respondent assured the board that no assistance to set up and run the plastic division would be needed from Kanpur, yet, over a sum of ₹ 8 crores was transferred from the Kanpur division to the plastic division. However, the performance of the plastic division had been dismal right from the beginning and the accumulated loss stood at about ₹ 8.3 crores as on December 31....
X X X X Extracts X X X X
X X X X Extracts X X X X
...., including the removal of the respondent as a director, for a declaration that the board meeting allegedly held by the respondent on June 13, 1998, is null and void, for restraining the respondents from holding the extraordinary general meeting as requisitioned by them, for ordering an investigation into the affairs of the plastic division, for permitting the petitioners to increase their shareholding to bring it on par with that of the respondents as per the family agreement, for freezing of voting rights of the respondents, etc. 4. Respondents Nos. 2 and 4 have filed their counters to the petition. The reply of the second respondent, in a nutshell, is as follows : the first petitioner is the managing director and another a joint managing director and as such they have no locus standi to file this petition alleging oppression and mismanagement in the affairs of the company. This petition has been filed with an oblique motive of retaining the control of the company even though the petitioners are in minority. Since the entire petition is founded on the family agreement which itself provides for arbitration in case of disputes, the petitioners cannot file this petition for executi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....spondent a whole time director. Even though the Kanpur divisions were supporting the plastic division till the fourth petitioner was in charge of the plastic division, after the respondent took control of the plastic division, no financial support was forthcoming from the Kanpur unit. The petitioners did not take any interest in the affairs of the plastic division. In view of the liquidity problem, the financial institutions urged the company to go for a rights issue of ₹ 8 crores and at the initiative of the respondent, VSL Finance Limited agreed to sponsor the rights issue. However, the petitioner was not interested in the rights issue being made and as such this rights issue did not materialise even though the respondent and his family members had contributed ₹ 1.5 crores towards the rights issue. Even though the plastic division was not doing well, yet, the petitioner wanted remittances from this division to Kanpur. Instead of assisting the plastic division, the petitioner, with a view to oust the respondent from the company, suggested closing of this division, sale of the division or in the alternative advised forming of a separate entity for this division, even th....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... of the petition. The petitioners also filed an amendment application C. A. No. 198 of 1998, seeking to bring on record the board meeting held on July 8, 1998, three more directors were inducted and that one director had resigned. The main allegations of the petitioners were that, through a circular resolution, the respondents claim that the petitioner was removed as the managing director and the second petitioner as the joint managing director with effect from December 30, 1998 ; that the respondent had forcibly taken over the Kanpur division of the company, on December 28, 1998 ; that the petitioners were not allowed entry into the factory premises. The allegations of the respondents were that without notice to his group of shareholders, the petitioner allegedly held the annual general meeting for 1997-98 on December 28, 1998, whereat far reaching decisions were taken ; that the registered office of the company was shifted to the residence of the petitioner ; that all the records of the company had been removed from the registered office ; that clandestinely; and without the approval of a duly constituted share transfer committee, a number of shares held by the respondents which ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....or the other divisions and also for supply of raw materials by the forge division to the track part division and also for maintenance of status quo in regard to the shareholding in the company. Even though, later, the respondents complained of non-supply of raw material by the forge division and the petitioners took the stand that the respondents were not making payment for the supplies already made, in the hearing held on May 28, 1999, the parties agreed that the disputes could be resolved by division of the assets of the company by which the Forge division would vest in the petitioners and the other two divisions in the respondents. Accordingly, an order was passed on May 31, 1999, giving certain directions for conducting the affairs of the company in the interim period till the modalities of the divisions of the assets of the company were worked out. In the same order, in view of the settlement between the parties, the interim board was dissolved. However, neither of the parties complied with the interim directions given in the order dated May 31, 1999, and later the respondents withdrew their offer of amicable settlement by division of the assets of the company, even though the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ue to non-supply of accounting details by the respondent relating to the plastic division for 1997-98. Further, there have been instances of siphoning off of funds of the plastic division and that is the reason why the respondent has not been furnishing the accounting details. In spite of repeated advice to the respondent either to sell off the plastic division or to close the same or to form a separate company, he did not take any action. In addition, the respondent is also guilty of attempting to remove the petitioner directors from their managerial positions through a special resolution on December 50, 1998. Further, without taking into consideration the interests of the company, his action also resulted in stoppage of the operation of the bank accounts and with a view to increase his majority on the board, he also tried to induct four more directors from his group. He also pointed out that the respondent illegally took, control of the track component division on December 28, 1998, even though the petitioners were managing that division for over 20 years. Thus, he submitted that the respondent, in view of his majority shareholding, has tried to oppress the petitioners by ousting....
X X X X Extracts X X X X
X X X X Extracts X X X X
....p which is controlling the management of the company, as the principle of law is that persons in management cannot allege acts of oppression and mismanagement. The entire allegations in the petition relate to the affairs of the plastic division which is one of the divisions of the company. All the decisions relating to this division were taken by the board of directors and as such the petitioners cannot absolve themselves of their responsibilities in this regard. The main reason for inadequate finance for the plastic division was that the projected public issue could not materialise due to adverse capital market conditions and due to the reluctance of the petitioner to agree to rights issue of shares. Just because the plastic division suffered losses under the alleged management of the respondent, it cannot give rise to a cause of action for the petitioners to file this petition. The board was fully aware of the status of this division as is evident from the approval of the accounts by the board for the year 1996-97 and also the unaudited accounts up to September 30, 1997. As a matter of fact it is the petitioner with minority shareholding who has been trying to take over the compa....
X X X X Extracts X X X X
X X X X Extracts X X X X
...., as claimed by the petitioners as they did not mention this fact either in their application C. A. No. 221 filed on September 4, 1998 or C. A. No. 291 filed on November 27, 1998, nor in the meeting held with the ICICI in December, 1998. Further, the transfer is in violation of the SEBI Take Over Code and as per law, VLS Finance should have given a notice before foreclosing the pledge. By approving the transfer by which the majority of the respondents had been reduced to minority, the petitioners have acted in a manner oppressive to the respondents and as such this transfer should be set aside as held in Clemens v. Clemens Bros. [1976] 2 All ER 268 (Ch. D.) and Dipak G. Mehta v. Anupar Chemicals (India) Pvt. Ltd. [1999] 98 Comp Cas 575 (CLB). He further pointed out that with a view to prevent the respondent to have access to the statutory records of the company and with a view to carry out the manipulation, the petitioners shifted the registered office to the residence of the petitioner without any authority of the board and as such the registered office should be shifted back to its original location. 12. Countering the arguments of Shri Subramanian that the company is a family c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ior advocate for VLS Finance, submitted that his client had advanced a sum of ₹ 240 lakhs to the company for which the family shareholders of all the groups executed deeds of pledge, agreement cum pledge and irrevocable power of attorney in favour of VLS Finance together with share certificates constituting 36.60 per cent, shares in the company along with blank transfer forms duly signed and executed. As per the agreement, all accruals to the shares by way of bonus, dividend, rights, etc., would be deemed to be pledged with VLS Finance. However, even though bonus shares were issued and dividends declared, nothing came to VLS Finance. There was consistent and regular failure on the part of the company to pay back the principal as well as interest in spite of repeated reminders except that a small amount of ₹ 44 lakhs towards principal and an amount of ₹ 38.18 lakhs towards interest was received by VLS Finance. As of date, a sum of ₹ 325 lakhs was outstanding towards the principal and interest. Even though VLS Finance insisted on 40 per cent, of the shares to be pledged at the time of sanctioning the loan, yet, in view of non-handing over of the bonus shares, ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....has no powers to do. We do agree with him in this regard and other than taking cognizance of the fact that there was a family settlement, we do not propose to adjudicate on the claims arising out of the same. 16. One other aspect that we would like to record, as it would have a bearing on the examination of the allegations and the reliefs to be granted, is that, there are sufficient materials to show that this company is a family company in the guise of a partnership, notwithstanding the fact that it is a listed company. The first is that the company took over the partnership firm, initial allotment of shares was in the same proportion to the shares in the partnership, it is the family members who decide about the composition of the board as is evident from the family settlement in 1991, it is the family shareholders who pledged their shares for raising finance for the company, etc. 17. It is evident from the pleadings that the genesis of the present disputes between the parties is in relation to the affairs of the plastic division. It is an admitted fact that the performance of the plastic division has resulted in dire financial difficulties for the company as a whole. While it ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....pledged the shares and on non-repayment of the loans, VLS Finance had the right to get the shares registered in its name. In the present proceedings, we are dealing with acts of oppression and mismanagement in the affairs of the company and not on the legality or otherwise of VLS Finance getting the shares registered. If there is any illegality in registration of shares, the concerned shareholders have to initiate separate proceedings and we do not consider it proper, to adjudicate on this issue in the present proceedings especially in view of the stand of VLS Finance that they would not exercise any voting rights in respect of these shares. 18. It is very unfortunate that the family shareholders who had carried on the business of the company for nearly 30 years successfully have brought the affairs of the company to the present stage wherein its existence itself is in state of flux. In the recent past, both the groups have tried to outwit each other by adopting various measures unmindful of whether they fall within the four corners of law. That is why, without entering into the controversies, we advised the parties to amicably settle the matter and with a view to assist them in t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ny and has been the chairman-cum-managing director of the company for nearly a period of 20 years. Admittedly, DB came into the management, notwithstanding the fact that he was the majority shareholder, irrespective of the fact whether the status was acquired rightly or wrongly, only in the year 1991. The Company Law Board, being a court of equity, has to keep these aspects in mind while moulding appropriate relief. It is on record that bath the groups agreed for the division of assets and as a matter of fact, there has been a de facto division by which the petitioners are managing the forge division and the respondents other two divisions for nearly a year. It is at the last minute that the respondent resiled from this stand. According to us, the most appropriate direction that we could give, with a view to put an end to the disputes between the parties is that there should be division of assets of the company by which the petitioners will continue to control and manage the forge division and the respondents the other two divisions. This would be in line with our decision in Jaidka Motor's case [1997] 1 Comp LJ 268 (CLB) wherein also, even though the company was a public compa....