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Rohit Churamani v. Disha Research & Marketing Services Pvt. Ltd. And Others

Company Law Board

Jul 15, 2004

Judgment

Subsequent
References

CaseIQ

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Structured Summary of the Opinion — K.C. Ganjwal, Member

Factual and Procedural Background

This company petition was filed by Shri Rohit Chudamani (the petitioner) against M/s. Disha Research and Marketing Services Pvt. Ltd. (the company / respondent).

Key factual allegations and events recorded in the opinion:

The company was incorporated on January 10, 2000, originally with registered office at Faiz Road, Karol Bagh, New Delhi; the registered office was subsequently shifted by respondent No. 2 to Vasundhra Enclave, Delhi.
The first three directors named in Article 23 of the articles were the petitioner, respondent No. 2, and Mr. Pandey; Mr. Pandey resigned on October 4, 2000, leaving the petitioner and respondent No. 2 as the only two directors.
Each of the two remaining directors held 10,000 equity shares of Rs. 10 each (50% each of the subscribed and paid-up capital) and drew a salary of Rs. 24,500 per month. Both had advanced loans to the company (petitioner’s loan approximately Rs. 75,000 as on March 31, 2001).
Differences arose between the directors in August 2001. The petitioner alleges that respondent No. 2, who handled accounts, refused to render accounts, attempted to appropriate an income-tax refund of Rs. 2.55 lakhs, and shifted the registered office.
The petitioner learned via the company’s banker (ICICI Bank) on May 11, 2002, that he had been removed from directorship at an extraordinary general meeting (EGM) allegedly held on February 11, 2002, and respondent No. 3 (father of respondent No. 2) was appointed as director.
The petitioner contends that no notice of board meetings or EGM was received by him and that in a two-director company a meeting cannot be validly held without his presence. He alleges removal under section 284 of the Companies Act, 1956, but says sub-sections (2)–(5) of section 284 were not complied with.
The petitioner also alleges forged postal stamps/registered post receipts, meetings held without requisite quorum, minutes not filed, non-compliance with section 283(1)(g) as multiple board meetings were held in under three months, diversion of company business to a sole proprietary concern of respondent No. 2, failure to render accounts for 2001–02 and subsequent years, and retention of company books by respondent No. 2.
The petitioner prayed for setting aside his removal and the appointment of respondent No. 3 and for audit of the company’s accounts for the year ended March 31, 2002, by a named firm.
Respondents deny the petitioner’s allegations, asserting that notices were sent by registered post/UPC on specified dates, that the petitioner was negligent and acted against the company’s interest (including alleged diversion of cheques and client work), and that the petitioner was removed for non-attendance at three consecutive board meetings after due notice.

Legal Issues Presented

Whether the extraordinary general meeting of February 11, 2002, and the board meetings held in December 2001–January 2002 were validly convened and whether the petitioner’s removal as director under section 284 of the Companies Act, 1956, is valid.
Whether notices of the relevant meetings were properly served on the petitioner (the issue of registered/UPC notices and alleged fabrication of postal stamps).
Whether the meetings complied with the quorum requirement in the company’s articles (Article 26) read with section 287 of the Companies Act (i.e., whether a meeting could be held in the absence of the petitioner when only two directors remained).
Whether the income-tax/TDS refund of Rs. 2,55,276 in the petitioner’s possession should be deposited into the company’s bank account.
What relief, if any, should be given to the petitioner (restoration as director, direction for audit, or an option to exit the company on return of his investment and valuation process).

Arguments of the Parties

Petitioner's Arguments

Respondent No. 2 refused to render accounts and attempted to appropriate an income-tax refund of Rs. 2.55 lakhs; the petitioner intervened to prevent misappropriation and kept the refund safely in the bank under this Board’s intervention.
The EGM on February 11, 2002, was illegal and void because the petitioner (a director and shareholder) did not receive notice and, in a company with only two directors, no meeting can validly be held without his presence.
The prescribed procedure under sub-sections (2)–(5) of section 284 (for removal of a director) was not complied with.
Notices said to be sent by registered/UPC were fabricated and not received; postal stamps and receipts are alleged to be forged, including a registered letter allegedly posted on a public holiday (December 17, 2001) when the post office was closed.
Meetings held without the petitioner lacked quorum; minutes of such meetings have not been filed; respondent No. 2 diverted company business and withheld books/accounts; no annual general meeting held after petitioner’s removal.
Prayer: set aside removal and appointment of respondent No. 3; order audit of accounts for year ended March 31, 2002.

Respondents' Arguments

Respondent No. 2 founded and primarily funded the company and alleges the petitioner was a junior who joined later and failed to provide expected effort, often absent from office and competing with the company through side activities.
Respondents assert that notices for meetings were sent by registered post/UPC on specified dates (December 3, 2001; December 17, 2001; January 2, 2002; January 9, 2002) and that the petitioner failed to attend meetings despite due notice.
They allege the petitioner colluded with the chartered accountant (Mr. Praveen Kumar) to manipulate shareholding, delay books, and divert funds (including an allegation that the petitioner caused a client cheque to be reissued in the name of his sole proprietorship).
Respondents maintain that the petitioner was removed lawfully for not attending three consecutive board meetings for which due notice was given and that respondent No. 3 was validly appointed as director.
Respondents say auditors M/s. Kumar Parveen and Associates were not reappointed because of activities incompatible with professional status and detrimental to the company.
Prayed that the petition be dismissed as false.

Table of Precedents Cited

No precedents were cited in the provided opinion.

Court's Reasoning and Analysis

The court’s analysis proceeds from the documentary record and textual provisions of the company's articles and relevant statutory provisions cited in the opinion. The court identifies and applies the following facts and legal provisions as the basis for its reasoning:

The court noted the petitioner’s shareholding: 10,000 fully paid-up equity shares of Rs. 10 each, constituting 50% of the subscribed and paid-up capital.
Article 23 of the articles named the first directors (including the petitioner) who were to hold office for life or until resignation; Mr. Tarakeshwar Pandey's resignation is an admitted fact, leaving only two directors — the petitioner and respondent No. 2.
Article 26 of the articles (in the opinion) prescribes the quorum for board meetings as one-third of total strength or at least two, whichever is higher; the opinion also references section 287 of the Companies Act in this context.
Given that only two directors remained after Pandey’s resignation, the court reasoned that, in the absence of the petitioner, a valid board meeting could not be held: with only two directors, the quorum requirement effectively necessitated the petitioner’s presence for a valid meeting.
Accordingly, all board meetings and the extraordinary general meeting held without the petitioner were deemed illegal and were set aside by the court.
The court restored the petitioner to his directorship position that he held prior to the alleged EGM of February 11, 2002, on the ground that the meetings purporting to remove him were invalid for want of quorum and proper procedure.
Regarding the income-tax refund (Rs. 2,55,276) found in the petitioner’s possession, the court directed that it should be deposited within three days into the company’s account if not already deposited, mentioning compliance with an earlier order dated May 28, 2002.
The court acknowledged allegations against the company’s auditor (M/s. Kumar Parveen and Associates) and parallel disputes between the petitioner and others, and recognized that the petitioner, as a founder director with substantial investment, felt oppressed.
To address the petitioner’s position and the company’s continuing dispute, the court granted the petitioner an option to exit the company by returning his shares in exchange for repayment of his investment. The process for exit includes purchase of shares by the company on valuation by an independent valuer, with valuation to be based on the balance-sheet as on March 31, 2000 (described in the opinion as the approximate date of removal). If the petitioner applies to exit, the Board will appoint a valuer in consultation with both parties.
Finally, the court allowed the petition and made the directions above, with no order as to costs.

Holding and Implications

Holding:

The petition is allowed; the board meetings and the extraordinary general meeting held without the petitioner are set aside, and the petitioner is restored as a director of the company.

Immediate consequences and implications for the parties:

Direct effect: The petitioner is restored to his former directorship status that he held prior to the alleged EGM of February 11, 2002.
Monetary direction: The income-tax refund of Rs. 2,55,276 in the petitioner’s possession is to be deposited into the company’s account within three days (if not already deposited), pursuant to an earlier order dated May 28, 2002.
Option to exit: The petitioner is given an option to leave the company on return of his investment in the shares; if he elects to exit, the company/respondent must purchase the shares on the basis of valuation by an independent valuer (valuation based on the balance-sheet as on March 31, 2000, per the opinion). On application, the Board will appoint a valuer in consultation with both parties.
Accountability and audit: The opinion notes disputes and allegations against the auditors and respondent No. 2’s handling of accounts; the petitioner had sought audit for year ended March 31, 2002. The court’s directions require deposit of the refund and restore the petitioner but do not, in this order, specify a mandatory appointment of a particular auditor (the petition sought audit by M/s. Kumar Parveen and Associates, but the opinion records disputes regarding that firm).
Costs: There are no orders as to costs.

The opinion does not cite any judicial precedents; it grounds its decision on the company's articles (Article 23 and Article 26) and statutory provisions referenced in the opinion (section 284, sub-sections (2)–(5), section 283(1)(g), and section 287 of the Companies Act, 1956) as they bear on quorum and the validity of meetings and removal of directors.

Show all summary ...

K.C Ganjwal, Member:— This company petition is filed by Shri Rohit Chudamani against M/s. Disha Research and Marketing Services Pvt. Ltd. 24, Vasundhra Enclave, Delhi 96. M/s. Disha Research and Marketing Ltd. was incorporated as a private limited company on January 10, 2000, with the registered office at Faiz Road, Karol Bagh, New Delhi, and which was subsequently shifted by respondent No. 2 to Vasundhra Enclave, Delhi. There were three first directors of the company the petitioner, respondent No. 2 and Mr. Pandey and they were to hold office till their lifetime or till they resign as per article 23 of the articles of association of the company. One of the directors Mr. Pandey resigned on October 4, 2000, and both the petitioner and respondent No. 2 remained the only two directors with equal shareholding holding 10,000 equity shares of Rs. 10 each. Both the directors were drawing a salary of Rs. 24,500 per month. Both had also advanced loans to the company. The petitioner had advanced loan to the tune of approximately Rs. 75,000 as on March 31, 2001. The company was carrying on the business of market research.

2. Learned counsel for the petitioner submitted that differences arose in August, 2001, between the directors when respondent No. 2 who was exclusively handling the accounts refused to render the accounts. They tried to settle the issues amicably but failed to do so. The main allegation in the petition is that respondent No. 2 wanted to grab the income-tax refund order of Rs. 2.55 lakhs and siphon off the same but due to timely intervention of the petitioner the refund order could not reach in the hands of respondent No. 2 and has been kept safely in the bank with the intervention of this Board. The respondent shifted the registered office of the company from Karol Bagh to Vasundhra Enclave, Delhi. The petitioner became suspicious of the actions of respondent No. 2 from his letter dated May 1, 2002, showing a different address other than the Karol Bagh address. The petitioner then approached ICICI Bank, the company's bankers when he was informed on May 11, 2002, that the petitioner was removed from the directorship of the company in the extraordinary general meeting on February 11, 2002, and respondent No. 3 who happens to be the father of respondent No. 2 has been appointed as director. The petitioner submits that the extraordinary general meeting held on February 11, 2002, was illegal and null and void as no notice of any board meeting or extraordinary general meeting was received by the petitioner as a director or shareholder. In a two-member company like this there cannot be any meeting without the presence of the petitioner. It is alleged that the petitioner has been removed under section 284 of the Companies Act, 1956, but the procedure prescribed in sub-sections (2), (3), (4) and (5) of section 284 of the Companies Act has not been complied with. As per the respondents the notices were sent under UPC on December 3, 2001, December 17, 2001, January 2, 2002, and January 9, 2002. The petitioner has submitted that regd./UPC are fabricated and never received by the petitioner.

3. The post office stamps affixed on the alleged notices are not genuine. The stamps indicate some extra words which has led to the false postal receipts, the alleged regd. letter has been posted on December 17, 2001, which happens to be the closed public holiday on account of Idul-Fitur and the said post office was closed on that day. There are only two shareholders and there are the only two directors. The petitioner has not attended any board meetings and accordingly in his absence, the quorum of at least two directors for the board meeting and at least two shareholders for the extraordinary general meeting was not fulfilled thus the meetings convened were illegal. The minutes of these meetings have also not been filed by the respondents. The three board meetings were allegedly held on December 10, 2001, December 24, 2001, and January 10, 2002, within a period of one month which is not in compliance with the provisions of section 283(1)(g), being less than 3 months' period in holding these meetings. Respondent No. 2 has allegedly sent notice by registered post as also by UPC. The need for sending notice twice indicates that the respondent got the postal stamp made and he did not mind using it time and again. Respondent No. 2 also diverted the main business of the company with Hindustan Lever Ltd. to his own sole proprietary firm. Respondent No. 2 has also not rendered accounts for the year ending March 31, 2002, and for subsequent years. All the books of account and statutory record are in the custody of respondent No. 2 who was dealing with accounting matters from the very beginning. No annual general meeting has been held after the removal of the petitioner as a director. The petitioner has prayed that removal of the petitioner as a director on February 11, 2002, and appointment of respondent No. 3 be set aside. The accounts of the company for the year ended March 31, 2002, be ordered to be audited by the statutory auditors namely, M/s. Kumar Parveen and Associates.

4. Learned counsel for the respondents submitted: The respondent-company was started by respondent No. 2 who is a research professional and had held senior responsible position in top ranking research companies in India and abroad. While working as a research professional, respondent No. 2 came in contact with the petitioner who was a junior to him. Respondent No. 2 started his own venture in 1999 and the petitioner approached him that he was unsatisfied with his job and wanted a change. Respondent No. 2 treated the petitioner as a good friend, and he offered the petitioner to join him to start a new company. The petitioner did not have the funds to contribute in setting up the proposed company. Respondent No. 2 offered to make the total investment required for setting up the company. Hence the respondent-company was set up on January 1, 2000, to offer market research and consultancy services. It is a knowledge based service organisation and its credibility is based on the reputation and credibility of its directors, researchers and consultants. The respondent-company was doing job mostly for M/s. Hindustan Lever Ltd. At the instance of the petitioner the work of incorporation of the company was given to Mr. Parveen Kumar of M/s. Kumar Parveen and Associates, chartered accountant who is a close friend of the petitioner and the registered office of the company was also shown at the premises of M/s. Parveen and Associates situated at Karol Bagh, New Delhi. The authorised share capita] of the company at the time of incorporation of the company was Rs. 2 lakhs consisting of 20,000 equity shares of Rs. 10 each. Initially 2, 150 shares only were shown as issued even though respondent No. 2 had already invested almost Rs. 2 lakhs in the company on the advice of Mr. Parveen Kumar. The petitioner was expected to work full time for developing and managing the projects acquired. However, the petitioner was tardy and seldom attended the office. The petitioner in the meanwhile indulged in undercutting clients of the company for his personal gains and working side by side independently in competition with the company. In furtherance to his ulterior motives, the petitioner issued instructions to the bankers of the company to stop honouring any cheques unless signed by both the directors knowing fully well that the same would lead to chaos in the company as approximately 20-30 cheques were issued for clearance every day. The petitioner in collusion and connivance with Mr. Praveen Kumar increased the percentage holding of the petitioner and delayed the completion of books of account, changed the return which was signed jointly to another return signed by the petitioner alone and filed the same. In this manner, the petitioner along with the chartered accountant of his choice has colluded to hijack and manipulate the functioning of the company to his own interest. In one instance which respondent No. 2 was able to find out that after the work for one of the client was completed by the company, M/s. Vaishnavi Advertising, had issued a cheque No. 126959 dated December 13, 2001, from HSBC Bank to the company in which the TDS worth Rs. 3,060 was deducted and the petitioner malafidely got the same cancelled and got it issued in the name of his sole proprietorship firm called M/s. Progressive Consultants vide cheque No. 068508. In such circumstances extraordinary general meeting was held on February 11, 2002, for which notice was given to him but he failed to attend the same and he was removed from the directorship of the company for not attending three consecutive board meetings for which due notice was given to the petitioner and respondent No. 3 was appointed as director. Mr. Praveen Kumar, CA was hampering the work of the company and was passing all the letters to the petitioner. Therefore, the registered office of the company was shifted. The petitioner connived with Mr. Praveen Kumar who collected the cheque of Rs. 2,55,276 of the refund of TDS from the Income-tax Department, took away this cheque and instead of handing over the same to the respondent-company handed over the same to the petitioner. It was further submitted that the accounts of the company for the year 2001-2002 are being prepared by Mr. Amarjeet Sahni, FCA through Alka EDP Centre, but work on the same has also come to a standstill as the company is unable to pay remuneration to the chartered accountants. It is also submitted that M/s. Kumar Parveen and Company were not reappointed as auditors of the company for the year 2001-2002 due to their indulgence, in activities, incompatible with their professional status and detrimental to the interest of the company.

5. Learned counsel for the respondent prayed that the petition as filed by the petitioner is false and thus deserves to be dismissed.

6. I have considered the arguments of learned counsel on both the sides, it is seen from the records that the petitioner holds 10,000 equity shares of Rs. 10 each fully paid up aggregating to Rs. 1 lakh which constituted 50 per cent, of the subscribed and paid up capital of the company. article 23 of the articles of association of the company mentions that the first directors of the company who shall subscribe to the memorandum and articles of association of the company and who shall hold office till their lifetime or till they resign are namely; Shri Mr. Jayant Jain, Mr. Rohit Churamani and Mr. Tarakeshwar K. Pandey. Shri Tarakeshwar Pandey subsequently resigned as director of the company and only two directors were left, out of which the petitioner is one of the directors. Article 26 of the articles of association of the company indicates that the quorum necessary for the transaction of the business of the board meeting, subject to section 287 of the Companies Act shall be one-third of the total strength or at least two whichever is higher.

7. After the resignation of Mr. Pandey which is an admitted position, only two directors were left and without the presence of the petitioner, no board meeting was valid. Accordingly, all board meetings/extraordinary general meeting held by the company without the petitioner are illegal and set aside. The petitioner is restored as director of the company which position he held before the alleged extraordinary general meeting held on February 11, 2002.

8. The refund order received by the petitioner and kept with him of Rs. 2,55,276 should be immediately deposited within three days in the accounts of the company, if not already deposited as per order dated May 28, 2002. There is a dispute and some allegations have been levelled against the company's auditor M/s. Kumar Parveen and Associates for working against the interest of the company in connivance with the petitioner. The petitioner being a founder director and having invested a substantial amount in the company feels oppressed, I am of the view that the petitioner should be given an option in case he desires to go out of the company on return of his investment in shares of the company. In case the petitioner is willing to part with his shares, the company/respondent should purchase the shares on valuation to be made by an independent valuer. The valuation will be based on the balance-sheet as on March 31, 2000, being the approximate date of removal of the petitioner from directorship. In case the petitioner decides to go out of the company then on an application made by him, a valuer will be appointed by this Board in consultation with both the parties.

9. With the above directions, the petition is allowed. There are no orders as to costs.