TaxTMI 
TaxTMI 
2004 (12) TMI 714
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....of the case are that the company was incorporated sometime in November 1994, with the 3rd and 4th respondents as subscribers to the Memorandum with one share of Rs. 10/- each. They were the first directors of the company. The business of the company was to run a hospital in the name of Dr. Bais Hospital which was later on named as Ekvira Heart Institute. The building owned by the 2nd respondent has been given on lease to the hospital at Rs. l000 per month for a period of 9 years effective from 1st April, 1998. The company had nil turnover up to March, 1998 but had a liability of about Rs. 4.3 crores at that time. 3. The case of the petitioner in brief is; In view of the grave financial difficulties faced by the company, the respondents, more particularly, the second respondent Dr Bais, approached the petitioner who was in the business of dealing in hospital equipments through his firm-Ekvira Surgical Company, for joining the company with financial participation. According to him, it was also agreed that he would have equal equity participation with the respondents and accordingly he had invested a sum of Rs. 148 lacs in share capital of the company and in addition he had also co....
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....Director is a grave act of oppression against him especially when he holds 49% shares in the company. Further, non delivery of shares scripts is also oppressive to him and as such the reliefs sought for should be granted. 4. In brief, the reply filed by the respondents states: The petitioner is not a shareholder of the company as no shares were allotted to him. Presently, the share capital of the company consists of only two shares allotted to the 3rd and 4th respondents at the time of incorporation of the company. No Board Meeting was held on 15.7.1999 and therefore the question of allotting any shares to the petitioner in that alleged meeting does not arise. Therefore there is no compliance with the provisions of Section 399 of the Act according to which only a shareholder can file a petition under Sections 397/398 of the Act. It is true that the petitioner had invested a sum of Rs. 148 lacs but the same was only as share application money as is evident from the Balance Sheet as on 31st March, 2000 which also reflects the paid up capital as Rs. 20/-, Therefore, this petition deserves to be dismissed. As far as withdrawal of funds from the company by the 3rd and 4th respondents....
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....8.2.2001, this Bench suggested that, to put an end to the disputes, that the investment made by the petitioner could be paid back to him but in the hearing held on 27,2.2001, the respondents reported that they were not agreeable to the said suggestion. However, in the hearing held on 3.8.2001, both the sides submitted that they would attempt at an amicable settlement and the same was repeated in the hearings held on 15.10.2001, 9.8.2002 and 20.1.2004. However, in the hearing held on 17.5.2004, the counsel reported that the compromise efforts had failed. Accordingly, the matter was fixed for hearing on merits on 31.8.2004. In the meanwhile, the petitioner filed CA 171 of 2004 complaining that the respondents, in breach of the order dated 31.1.200, had handed over the land, building and management of the company to M/S Wockhardt Hospital Limited by a Memorandum of Agreement dated 22.4.2004. In terms of the Agreement, Wockhardt has already taken over the management. The respondents were proposing to launch Wockhardt Hospital on 10.7.2004. Since such handing over of the hospital was in violation of the interim order passed by this Bench, the respondents should be restrained from implem....
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....agreed that the petitioner was entitled to 30% shares in the company and therefore now they cannot claim that petitioner is not a shareholder and as such the petition is not maintainable. Further, since in terms of the minutes of the Conciliation meeting, the petitioner is to be the Managing Director of the company, the respondents could not have removed him as such. Therefore, the reliefs sought for in the petition should be granted. He further submitted that before any order is passed on the merits of the case, the contempt applications filed by the petitioner should be decided. 7. Shri Uday Lalit, Sr. Advocate appearing for the respondents submitted: The petitioner has no locus standi to file this petition as he is not a shareholder. There was no Board Meeting on 15.7.99 and therefore the question of allotment of any shares to the petitioner on that day does not arise. There are .only two shareholders in the company each holding one share. Even as late as on 31.3.2000, the investment of Rs. 148 lacs made by the petitioner is shown as share application money in the Balance Sheet. As a matter of fact, during the pendency of the present petition, the petitioner has filed a civil....
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....ts, one cannot seek two remedies through different fora. Therefore, not only the petitioner had no locus to file this petition as he was not a member, but, assuming that his investment was kept as share application money and therefore he could claim to have locus, after his notice for refund of the share application, money, he has definitely no locus now to continue with the petition. As far as his position as MD is concerned, the same cannot be agitated in a proceeding under Sections 397/398 of the Act. Even otherwise, in terms of the Minutes of Conciliation, he was only to be a director and not as MD. He was removed as MD/Director only because of his siphoning of funds of the company by way of supply of unwanted/outdated equipments to the company at inflated cost. The petitioner was to supply equipments to the hospital through his partnership firm Ekvira Surgical Company on "no profit no loss basis". However, he has supplied equipments at exorbitant prices. For instance, he supplied one Intra Aortic Balloon Pump which was imported by his firm to one Dr. K.G, Deshpande Memorial Center. This Center rejected the same as being outdated. Even though, he imported this equipment for Rs.....
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.... it cannot be termed as dealing with the assets of the company. In terms of the management contract, Wochardt has been given the right to use the premises including the land and building and equipments and furniture thereat. It was specifically provided that the agreement was not to be understood to be one of lease or tenancy. It also provides that if the company were to sell its immovable and movable property in the hospital, Wochardt would have the right of pre-emption to purchase the same at market value. All these terms would indicate that Wochardt had been permitted to manage the hospital and such arrangement cannot be considered to be dealing with the assets of the company. The terms of the restraint order would only apply in case of sale or mortgage of the assets of the company and not a case of handing over the management. This agreement does not confer any right on Wochardt in respect of the assets of the company. The order dated 31.1.2001 was an ex-parte order and since the company never intended to deal with the assets of the company, it did not seek for either vacation or modification of the said order. Since the company was in serious financial difficulties, it decided....
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.... the Company Law Board has prescribed certain tests to determine whether a person is a member of a company or not. One of the tests prescribed is whether the company has treated a person as a member. In the present case, the petitioner had always been treated as a member of the company and had also been appointed not only as a director but also as the MD. The plea of the respondents that there are only two shareholders holding one share each of Rs. 10/- each is fallacious. When over Rs. 7 crores have been invested in the company by the petitioner and the 2nd respondent, to claim that the company is having a capital of Rs. 20 defies any logic and common sense and therefore should be rejected. It is evident from the Memo of Conciliation that the petitioner was not only to invest but also to participate in the project as the leader of the institution and was to have 50% shares in the company. It is not denied by the respondents that the petitioner had in fact invested Rs. 148 lacs towards the shares. This amount was invested in 1997. Showing this amount as the share application money for debt equity ratio purposes, the company has taken loans from the banks. Having taken the benefit o....
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.... Having said so in the civil suit, the respondents cannot rely on the said telegram. It was sent only because of the abnormal delay in the allotment of shares. The respondents are approbating and reprobating. In the civil suit, the petitioner applied for attachment of properties of the company,. While dismissing the application, the civil court has observed in its order "The learned counsel for the defendant point out that the plaintiff' has mentioned in para (6.6) that shares were issued and allotted to the petitioner/plaintiff in the Board Meeting dated 15. 7.1999. In view of this assertion and admitted fact such demanding of the amount of share money of Rs. 14,95,998 is irrelevant and the said deal is irreversible. The plaintiff cannot be permitted to ask for share money rather sell it to the prospective purchaser. In the background of this situation, the suit claim for refund of share application money is not sustainable. Once the plaintiff issued an allotted shares, he cannot get money back and the remedy is not available to the plaintiff as claimed in the suit". Having asserted in the civil suit that shares were allotted and that the money invested in the shares cannot be....
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.... was to join the project of the company. Therefore in consultation with the 2nd respondent, this equipment was purchased for the hospital. It is not correct to say that this equipment was rejected by Dr. Deshpande. The 2nd respondent was fully aware of the circumstances in. which this equipment was purchased. Originally, the petitioner's firm gave a quotation for Rs. 15 lacs. It was only an estimated price and in the quotation itself it was specifically mentioned that taxes and other charges would be extra. The invoice price of Rs. 17.5 lacs included all the taxes and other charges. Therefore, it cannot be said that the difference between the quotation and the invoice has been pocketed by the petitioner. The respondents have alleged that as against the imported price of about Rs. 8.7 lacs, the petitioner has charged Rs. 17.5 lacs and thus over priced the equipment. The price of Rs. 8.7 lacs was a concessional price on the understanding that the purchaser would purchase certain minimum number of balloons. When no commitment could be given for a minimum number of balloons for the hospital, the price of Rs. 8.7 lacs was not applicable. Therefore, it is wrong to contend that the pe....
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.... of the hospital was to vest in Wochardt for a period of 10 years. This agreement was to be executed after certain conditions precedent are completed. One of the conditions precedent is that either the present proceeding before this Board is disposed of or the permission of this Board is obtained for entering into this agreement. Since, this condition precedent had not been completed, the parties entered into an MOU on 22nd April, 2004 effective for a period of 6 months extendable by another 3 months at the option of Wockhardt. According to the petitioner, since the terms of the draft agreement practically vests all the assets of the company with Wockhardt, and this MOU being a prelude to the same, the respondents have acted in breach of the interim order of this Bench. It is to be noted that the draft agreement has not been implemented yet and therefore, my consideration would be limited to the MOU as to whether, by entering into the MOU and giving away of the management control to Wockhardt, the respondents have acted in violation of the interim order. The main purpose of the said interim order was to ensure that during the pendency of the petition, the assets of the company are ....
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....espondents, the company has only two shareholders each holding one share of Rs. 10/- each and for this contention they rely on the balance sheet as on 31.3.1000 wherein the money invested by the petitioner and the 2nd respondent is shown as share application money. But at the same time, in the Chartered Accountants certificate at dated 30.8.1998 (Annexure G) the 2nd respondent is shown to hold shares worth Rs. 123.4 lakhs and his wife Rs. 30 lakhs worth of shares. Only in respect of the petitioner, it is shown that an amount of Rs. 143.35 lakhs as pending allotment. If this certificate is correct, then the paid up capital of the company cannot be Rs. 20 as shown in the Balance Sheet as on 31.3.2000. According to the petitioner he was allotted shares worth Rs. 148 lacs in a Board Meeting held on 15.7.1999 while according to the respondents there was no Board Meeting on that day and no shares were allotted to the petitioner. On this contention, they have also questioned the maintainability of the petition in terms of Section 399 of the Act. It is a fact that other than asserting that he had been allotted shares, the petitioner has not been able to substantiate the same with any docum....
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....ication money. The name of the hospital was changed to a name similar to that of his firm "Ekvira" indicating very clearly the intention of the parties that the petitioner was to be closely associated with the company. He was appointed as a director/MD with substantial powers. It is on record that the building in which the hospital is housed belongs to the 2nd respondent and as a matter of fact it was he who initially started the hospital. The fact that the 2nd respondent is the prime mover of the company is evident from the averment of the 3rd respondent in his reply to the petition wherein he has averred "It is for the reason that when the company was incorporated in the year 1994, respondent No. 3 and 4 were made promoter directors of the company and respondent No. 2 in his name was allotted no shares". The 2nd respondent has claimed the petitioner as the co-owner of the hospital in his letter dated 13.2.1998 to Dr. Naresh Trehan (Annexure T). On 10.3.98, the authorized capital of the company was increased from Rs. 1 crore to Rs. 3 crores, the purpose (sic) shares against, the pending application money. (sic) of some one having given loans and claiming shares a (sic) The petitio....
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....s of Section 399 has to be seen on the day of filing of the petition and subsequent changes in the shareholding is of no relevance. Further, when the respondents have taken a stand before the Civil Court that "Under the circumstances, there is no question of any delay and there is 110 question of any offer being revoked. The telegram dated 6.6.2003 does not even deserve a place in the waste paper basket", they cannot low take the stand that having revoked his offer for shares, the petitioner cannot ask for shares now. He also advanced the argument that after adjustment of ail t dues against the investment made by the petitioner, it is the petitioner who has to pay substantial amount to the company and as such the question of allotment of any shares to him does not arise. This argument has to be straightway rejected. Share application money can be adjusted only in two ways - one by way of allotment of shares and second- by way of refund of the amount, The question of adjusting the share application money against any other dues is not permissible. Even lien can be kept only on partly paid shares, that too, only relating to called up and unpaid money on the shares. It is surprising th....
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....ng outdated equipment at an inflated price has enriched himself to the tune of Rs. 8 lakhs. Even assuming that the petitioner has defrauded the company, yet, the alleged defrauded money cannot be adjusted against the application money and the respondents have to pursue appropriate legal remedies, if so advised. In this connection, I may refer to para 4 of the sur-rejoinder filed by the respondents wherein they have averred " The petitioner has stated in para 26 of the rejoinder on page 54 that he is agreeable to abide by the conciliation settlement and that the respondents are seeking to wriggle out of the said conciliation settlement. I say that this is false. The respondents were always ready and willing and even today ready and willing to abide by the conciliation settlement subject to the petitioner himself abiding by the conciliation settlement and constituting proportionately to the project along with Dr. Bais group. It was he who was supposed to give the names of persons in whose name he wanted shares of the value of his 30% to be allotted and that he did not give the names is evident from the communication of one of the conciliators dated 23.7.2000". From this averment it a....
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..... For this also, no Board authority has been produced. Finally, by a letter dated 16th Dec. 2000, the 4th respondent has informed the petitioner that "You are aware that you are no more managing director or even director of Dr. Bais Surgical & Medical Institute Private, Ltd., Nagpur", How, when and in what manner, he ceased to be the MD or director has not been stated in. that communication. Even though the respondents have claimed that due to the fraudulent activities of the petitioner he was removed as a director/the MD, there is nothing on record to show when the respondents had realized/found out about the alleged fraudulent activities. When a person is induced to invest substantial funds with the assurance of participation in the management and having been appointed as a director and MD, his removal could definitely be considered to be an act of oppression. The learned counsel for the respondents relied on the decision of Supreme Court in Bagress Cereals case to contend that removal of a director cannot be agitated in a petition under Sections 397/398. In that case, the Court found that the removal of the petitioner was the only sustainable allegation and as such held that bei....