TaxTMI 
TaxTMI 
2022 (1) TMI 518
X X X X Extracts X X X X
X X X X Extracts X X X X
....hat the Board of Directors of the 1st Respondent Company be reconstituted by the shareholders at a meeting of the shareholders of the Company to be convened by and conducted under the supervision of this Tribunal. ii. Direct the 2nd and 3rd Respondents to place for consideration of the shareholders all related party transactions for the year 2015-2016, 2016-2017 and 2017-2018 in a meeting of the shareholders of the company to be convened by and conducted under the supervision of this Tribunal. iii. Direct the 2nd and 3rd Respondents to refund to the company all amounts in related party transactions which do not obtain the approval of the shareholders in a meeting of the shareholders of the Company to be convened by and conducted under the supervision of this Tribunal. iv. Direct the 2nd and 3rd Respondents to remit to the accounts of the Company an amount of INR 1,92,00,000/- (one crore and ninety-two lakhs); or such amount as may be determined by the auditor to be appointed by the shareholders in a meeting of the shareholders of the Company to be convened by and conducted under the supervision of this Tribunal; being the rental income due from 'Sri R....
X X X X Extracts X X X X
X X X X Extracts X X X X
....this Tribunal. xii. Issue a direction to the Registrar of the Companies, Kochi to initiate appropriate action against the 2nd Respondent under Section 99 of the Companies Act, 2013 for not complying with the provisions of Section 96 of the Companies Act, 2013. xiii. Issue a direction to the Registrar of the Companies, Kochi to initiate appropriate action against the 2nd and 3rd Respondents, and all other persons as may be necessary, under Section 448 of the Companies Act, 2013 for submission of false statements and reports for the years 2015-16, 2016-17 & 2017-18. xiv. Issue a direction to the Registrar of the Companies, Kochi to initiate appropriate action against the 2nd and 3rd Respondents for failure to disclose interests as contemplated under Section 184 of the Companies Act, 2013. xv. Issue a direction to the Registrar of the Companies, Kochi to initiate appropriate action against the 2nd and 3rd Respondents under Section 185 of the Companies Act, 2013, for failure to report to shareholders the related party transactions during the years 2015-16, 2016-17 & 2017-18. 3. The Company Petition No. 119/KOB/2019 has been filed by Smt. Minakshi ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ain the 2nd and 3rd Respondents from claiming any benefit or exercising any rights under the MOU dated 15.09.2016 pending disposal of the Petition. ix. Issue direction to the 1st Respondent Company to appoint a new internal auditor in a meeting of the shareholders of the Company to be convened by and conducted under the supervision of this Tribunal. x. Issue direction to the 1st Respondent Company to select a Company Secretary to render advice on statutory compliances as prescribed under the Companies Act, 2013 in a meeting of the shareholders of the Company to be convened by and conducted under the supervision of this Tribunal. xi. Issue a direction to the 1st Respondent Company to cancel all agreements, guarantees entered into with or on behalf of related parties which do not obtain the approval of the shareholders in a meeting of the shareholders of the Company to be convened by and conducted under the supervision of this Tribunal. xii. Issue a direction to the Registrar of the Companies, Kochi to initiate appropriate action against the 2nd Respondent under Section 99 of the Companies Act, 2013 for not complying with the provisions of Section ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... vi. Issue a direction to the 1st Respondent Company to appoint a new auditor in a meeting of the shareholders of the Company to be convened by and conducted under the supervision of this Tribunal to scrutinize all transactions and to audit the accounts of the Company for the years 2015-16, 2016-17 & 2017-18; and to finalize the accounts for the years 2015-16, 2016-17 & 2017-18 within a period stipulated by this Tribunal. vii. Issue direction to the 1st Respondent Company to appoint new internal auditor in a meeting of the shareholders of the Company to be convened by and conducted under the supervision of this Tribunal. viii. Issue direction to the 1 Respondent Company to select a Company Secretary to render advice on statutory compliances as prescribed under the Companies Act, 2013 in a meeting of the shareholders of the Company to be convened by and conducted under the supervision of this Tribunal. ix. That the 1st Respondent Company be directed to cancel all agreements, guarantees entered into with or on behalf of related parties which do not obtain the approval of the shareholders in a meeting of the shareholders of the Company to be convened ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r holding 1900 equity shares of INR 1000/- each constituting 9.55% of the total paid up capital of the Company. The main objects of the Company as stated in the Memorandum of Association are: "to carry on the business as traders, commission agents, brokers, wholesalers, retailers, blenders, storers, exporters and importers of all kind of agri and non-agri commodities including metals, herbs, medicines, healthcare products, petroleum energy products, building materials, textiles, oils, precious stones, home appliances, machinery and other securities in spot market, futures market and all kind of derivatives of the above commodities and securities permitted under the law of India." The authorised share capital of the Company is Rs. 5,25,00,000/- divided into 52500 equity shares of Rs. 1000/- each. The present issued, subscribed and fully paid-up capital of the Company is Rs. 1,99,00,000/- divided into 19,900 equity shares of Rs. 1000/- each. 7. CP/125/KOB/2019 The Petitioners are shareholders of M/s. RBG Retail Pvt. Ltd. The 1st Petitioner holding 2200 equity shares of Rs. 1000/- each constituting 6.88% of the total paid up capital of the Company and the 2nd Petitioner holding ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....oval of the Petitioners in doing so. The profits before taxes earned by M/s. RBG Enterprises Private Limited in 2015-2016, 2016-2017 and 2017-2018 are Rs. 2,26,47,537.92, Rs. 2,35,90,104.15 and, Rs. 2,79,38,762.36 respectively. The profits before taxes earned by M/s. RBG Trading Corporation in 2015-2016, 2016-2017, 2017-2018 & 2018-2019 are Rs. 9,42,674.56, Rs. 8,95,133.57, Rs. 10,30,615.97 and Rs. 9,21,962.55 respectively. The profits before taxes earned by the M/s. RBG Retail Pvt. Ltd. in 2015-2016, 2016-2017, 2017-2018 & 2018-2019 are Rs. 37,550.82, Rs. 4,37,630.30 and Rs. 5,22,039.09 respectively. 10. It is stated that the financial statements filed before the Registrar of Companies, Kerala for the years 2015-2016, 2016-2017 and 2017-2018 disclose related party transactions in contravention of Section 188 of the Companies Act, 2013. The 2nd and 3rd Respondents have siphoned huge amounts from the Respondent Companies in the guise of remuneration to themselves and to their spouses without the approval of the majority of the shareholders. This fact is evident from the fact that they have occupied space in the warehouse of the M/s. RBG Enterprises Private Limited without payment....
X X X X Extracts X X X X
X X X X Extracts X X X X
....and with 'RBG Trading Corporation Pvt. Ltd., and most importantly, re-opening of the Books of Accounts under Section 130 of the Companies Act, 2013 and a forensic audit of the Books of Accounts by an Independent Auditor. 12. It is stated that the Petitioners, therefore, sent a communication on 17.07.2019 to the Respondent Companies addressed to the 2nd Respondent, the Managing Director, to convene the Annual General Meetings for the purpose of considering the financial results of the Company for the years 2015-16, 2016-17, 2017-18 and 2018-19. However, that the Respondent Companies through its Managing Director (the 2nd Respondent) has declined to accede to the Petitioners' request to convene the meeting to discuss the financial statements. He has sought refuge in a Memorandum of Understanding (MOU) dated 15.09.2016 among the family members on partition of the wealth of the family. The MOU has stipulated the time schedule for completion of the obligation by different parties. It is not in controversy that, none of the parties to the MOU have demonstrated any interest or commitment to the fulfilment of the terms of the MOU. 13. It is stated that the 2nd Respondent info....
X X X X Extracts X X X X
X X X X Extracts X X X X
....19 and connected cases. The notice is in violation of Section 173 (3) of the Companies Act, 2013. The Petitioners state that the said notice has been issued to the 4th Respondent with the full knowledge of the fact that he would not be in a position to attend the meeting as he is out of the country. The agenda confirms the Petitioners' contentions that the 2nd and 3rd Respondents are displaying their violation of the Articles of Association of the Respondent Companies, the Companies Act, 2013, and persist in oppression of the majority of the shareholders. It is stated that the 4th Respondent has urged the 2nd Respondent to desist from the conduct of the meeting. It is further stated that the Smt. Sulochana Gupta on her part, and also on behalf of shareholders, Radha Ballabh Gupta, Radha Ballabh Gupta (HUF) and Smt. Minakshi Gupta and the 4th Respondent on his part and on behalf of the shareholder Mahesh Kumar Gupta (HUF), as shareholders, have filed their protest on the conduct of the proposed meeting of the Board of Directors of the 1st Respondent Company and the decisions contemplated at the meeting. 16. It is further stated that there was an AGM of M/s. RBG Trading Corpor....
X X X X Extracts X X X X
X X X X Extracts X X X X
....KOB/2019, 3. CP/100/KOB/2019, 4. CP/101/KOB/2019, 5. CP/102/KOB/2019 and 6. CP/103/KOB/2019 filed by the same set of Petitioners and/or their family members. The allegations have arisen out of family dispute, which started during the year 2011, till then they were under the umbrella of an HUF arrangement and all the family members were staying under one roof and followed all rituals under the HUF including common mess, worship and acting in unison. During the year 2012 due to severe disputes among family members the 2nd and 3rd Respondents were forced to leave the joint family house and started living separately and from that period onwards efforts were going on for a family partition of assets so that each of the coparceners can proceed with their individual choices and businesses. After several rounds of discussions and deliberations and intervention of friends and associates on the subject, finally, a Memorandum of Understanding (MOU) was signed on 15th September 2016. The essence of the MOU is that business entities are to be partitioned and those that are presently controlled and managed by the family members will in so far as possible be retained by the same person. 20. It....
X X X X Extracts X X X X
X X X X Extracts X X X X
....lam. The Company benefitted by such arrangement; as such vacant spaces, especially open spaces cannot be let out to outsiders. Instead of finding that this was to the benefit of the Company it is now being used as a handle against these respondents. 21. In M/s. RBG Trading Corporation Private Limited the related party transactions are grouped as follows:- i. Interest paid to the related parties. ii. Loans accepted/refunded by the Related parties. iii. Remuneration drawn by the Whole Time Director Mr. Vishnukant Gupta. iv. Commission Paid. i. Loans/Interest received: The Respondents submit that the loans accepted and repaid from/to related parties are outside the scope of Section 188 and are not governed by Section 188. In any case all such loan transactions referred by the Petitioners carried interest @ between 9% to 12% which therefore comes under commercial transactions, which are done on arm's length basis and are fully exempted under the 3rd proviso of Section 188 (1). The Statutory auditors of the Company have not made any adverse comments on the above transactions which are also fully disclosed in the respective Balance Sheets ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....l such loan transactions referred by the Petitioners carried interest @ between 9% to 12% which therefore comes under commercial transactions, which are done on arm's length basis and are fully exempted under the 3rd proviso of Section 188 (1). The statutory auditors of the Company have not made any adverse comments on the above transactions which are also fully disclosed in the respective Balance Sheets of each year. 26. It is stated that the payment of remuneration is a normal routine business matter decided by the Board considering the workload of each individual. Petitioners have made false allegations against another group Company and submit that the Respondent Company's financial statements do not reflect the true nature of all transactions. 27. It is further stated that all the loan transactions with related parties carried interest and, therefore are commercial transactions outside the scope of Section 188. The statutory auditors of the Company have not commented on the said transactions and therefore such transactions which were in the normal course of business have only benefitted the Company. 28. It is stated that the allegations of siphoning of huge amo....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d all the related party transactions are disclosed in the respective Balance Sheets in the relevant years. The loan amount of Rs. 1.03 crore given by M/s. RBG Enterprises Private Limited to M/s. Abad Builders Pvt. Ltd., on 21.07.2016 which was repaid to the Company with interest of Rs. 24,00,750/- during July 2017. This was a pure and simple commercial transaction as the directors of M/s. Abad Builders Pvt. Ltd. are known trustworthy people. It is stated that M/s. RBG Enterprises Private Limited has given a short-term loan to M/s. Bala Trading Company on various dates during the year 2016-17 on payment of interest @ 18%. As on the date of Balance sheet of 31.03.2017 the balance outstanding was Rs. 45 lakh. The interest received during the year was Rs. 3,99,354/- which has been credited to Profit and Loss Account. This was a pure and simple commercial transaction as the partners of M/s. Bala Trading Company are known trustworthy people. It is stated that the short-term loans given by M/s. RBG Enterprises Private Limited to M/s. RBG Trading Corporation Pvt. Ltd. during the relevant years are fully disclosed in the respective Balance Sheets which are commercial transactions carrying i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....en Companies promoted by the family. If the Petitioners and their Members are ready and willing to abide by the MOU as agreed and signed by them the Respondents are only willing to co-operate and implement the MOU. It is stated that the appointment of Managing Director is in full compliance of the provisions of the Articles and in compliance of the provisions of the Companies Act. The reference of section 203 in the Company Petition is not applicable to the Respondent Company. 33. It is stated that the Board Meeting of M/s. RBG Enterprises Private Limited and M/s. RBG Trading Corporation Pvt. Ltd. held on 10.10.2019 on account of the fact that the Annual General Meeting of the company was necessarily to be convened before October 2019 as the Registrar of Companies gave extension of time of only one month even though request made was for three months. It is further stated that the Petitioners have admitted the contribution of the 2nd Respondent in consistently conducting the affairs of the Companies as if they were his own affairs for the larger interest of the family members. The audited Balance Sheet of the Respondent Company since inception, is the proof for the same. The sala....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... The Petitioners have not made any case that the Accounts of the Companies are prepared in a fraudulent manner. The word 'fraud' is explained in Section 447 of the Companies Act, 2013, which includes "any act, omission, concealment of any fact or abuse of any position committed by any person or any other person with the connivance in any manner, with intent to deceive, to gain undue gain advantage from, or to injure the interests of, the company or its shareholders or its creditors or any other person, whether or not there is any wrongful gain or wrongful loss." Petitioners have failed to prove that the Financial Statements of the Company are prepared in a fraudulent manner or the affairs of the Company were mis-managed during the relevant period, casting a doubt on the reliability of financial statements. Here, there are only allegations of Related Party Transactions which the Respondents have explained as commercial transactions and routine salary payments which in the context of the family dispute the Petitioners are making a hue and cry. There is no fraud or siphoning of funds and, therefore invoking of Section 130 is uncalled for. Further, the Petitioners have to speci....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed the related party transactions of each Company, which have already been submitted by the Respondents 1 and 2. Hence, we are not repeating the same here. Submissions by Respondent No. 4 39. Respondent No. 4 filed a counter statement admitting the contentions raised by the petitioners in all the aforesaid three cases. Hence, no repetition is made here. FINDINGS 40. We have heard the learned counsel for both the parties at length and perused the entire case records/documents. We have also gone through the evidences on record. In order to arrive at a decision in the matter, we have framed the following issues: i. Whether the Company Petition is maintainable? ii. Whether the 2nd Respondent violated the provisions of the Articles of Association of the 1st Respondent Company? iii. Whether there is related party transactions in the company? 41. Issue number (i):-To arrive at a definitive conclusion, with regard to this issue we have gone through Notification No. 464(E) of MCA dated 05.06.2015. The Respondents in this matter have averred that the Companies are eligible for certain limited exemption under Section 185, 188 of the Companies Act, 201....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n and management of the company. All the powers of directors and other officials and also all the rights and obligations are prescribed under the Articles of Association. All the provisions regarding the shares are also mentioned under the Articles of Association. So, the Articles of Association hold key importance in any company or organisation as whole internal management is done in accordance with it. 43. In this respect we had gone through the decision of the Hon'ble Company Law Board in Mrs. Senthmarai Munuswamy Vs. Microparticle Engineers Private Limited and Ors. and S. Munusamy Vs. Micromeritics Engineers Private Limited and Ors. (2001) Volume 105 CC 526, wherein the Hon'ble Company Law Board has held that: "when the convening of the disputed board meeting was not substantiated by proof of notice, the allotment of shares purportedly made at such board meetings was invalid." 44. We have also gone through the Judgment of the Hon'ble Supreme Court in Naresh Chandra Sanyal vs. Calcutta Stock Exchange ( (1971) 1 Supreme Court Cases 50) wherein the Hon'ble Supreme Court held that:- "14. Subject to the provisions of the Companies Act the Comp....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... a character analogous to that of a trustee, in respect of the trust and confidence involved in it; and the scrupulous good faith and candour which it requires. Thus, a person is a fiduciary who is invested with rights and powers to be exercised for the benefit of another" 47. It is found that the Annual General Meetings of the Respondent Companies have not been convened for the years 2015-2016 to 2018-2019. In terms of Section 96 of the Companies Act, 2013, it is a mandatory prescription that every company shall ensure holding of the Annual General Meeting in accordance with the timelines and subject to the requirements contained therein. 48. Company is a separate legal entity different from its members. So, its affairs are generally carried on by Board of Directors. The Board of Directors provides a road map within its limited power for the progress of a Company. Certain powers are controlled by the Board after getting consent of the company at their general meeting. The shareholders as the owner of the shares of the company control the proceedings of the meeting. The Annual General Meeting gives them opportunity to know the condition of the company and also make suggestion....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ompany to which it is also a subsidiary; (ix) such other person as may be prescribed; 2 (77) 'relative', with reference to any person, means anyone who is related to another, if--(i) they are members of a Hindu Undivided Family; (ii) they are husband and wife; or (iii) one person is related to the other in such manner as may be prescribed; 50. We have also gone through Section 188 of the Companies Act, 2013 regarding Related Party Transactions, which states:- Section 188-Related party transactions.-- (1) Except with the consent of the Board of Directors given by a resolution at a meeting of the Board and subject to such conditions as may be prescribed, no company shall enter into any contract or arrangement with a related party with respect to-- (a) sale, purchase or supply of any goods or materials; (b) selling or otherwise disposing of, or buying, property of any kind; (c) leasing of property of any kind; (d) availing or rendering of any services; (e) appointment of any agent for purchase or sale of goods, materials, services or property; (f) such related party's appo....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r entering into such contract or arrangement. (3) Where any contract or arrangement is entered into by a director or any other employee, without obtaining the consent of the Board or approval by a [resolution] in the general meeting under sub-section (1) and if it is not ratified by the Board or, as the case may be, by the shareholders at a meeting within three months from the date on which such contract or arrangement was entered into, such contract or arrangement shall be voidable at the option of the Board and if the contract or arrangement is with a related party to any director, or is authorised by any other director, the directors concerned shall indemnify the company against any loss incurred by it. (4) Without prejudice to anything contained in sub-section (3), it shall be open to the company to proceed against a director or any other employee who had entered into such contract or arrangement in contravention of the provisions of this section for recovery of any loss sustained by it as a result of such contract or arrangement. (5) Any director or any other employee of a company, who had entered into or authorised the contract or arrangement in vio....