Ashok Kumar Tripathi, (Judicial Member):— The petitioner has filed the above captioned company petition by invoking the provisions contained in sections 397, 398 read with sections 402, 403 and 408 of the Companies Act, 1956 (hereinafter referred to as “the said Act”) complaining various acts of oppression and mismanagement purportedly committed by respondents Nos. 2 to 4 in the affairs of respondent No. 1 company (hereinafter referred to as the “company”). The petitioner has sought various reliefs as contained in the petition.
2. The facts in brief leading to filing the present petition may be summarised as hereunder:
That the petitioner is engaged in the business of manufacturing, repairing and servicing of air conditioners and air conditioner plants since 1987. Though, the petitioner is not well educated yet on the basis of his experience, he has acquired expertise and sound knowledge in this field.
That in and around 1997, the petitioner set up a proprietary concern in the name and style of M/s. Vigneshwar Air-conditioning and on account of his dedicated work and honesty, the said proprietary business flourished and the petitioner earned goodwill in the air-conditioning market. In 1999, respondent No. 2 who happens to be his sister's husband approached the petitioner and requested to induct him into the business. Considering respondent No. 2 as a family member, the petitioner agreed to convert the proprietary concern into a partnership firm and inducted respondent No. 2 as fifty per cent, partner thereof. A partnership deed accordingly came to be executed on December 19, 2000, through which a partnership firm, viz., M/s. Vigneshwar Air-conditioning between the petitioner and respondent No. 2 was formed. Looking into the growth of the business, in and around 2003–04, respondent No. 2 desired to convert the partnership into a private limited company for further development of the business and to avail tax benefit. He further represented that in order to establish a company, at least four persons would be required, though this representation was incorrect and false. However, the petitioner relying upon the representation and assurance of respondent No. 2, looking into his relation with him, agreed to formation of a private limited company by including respondents Nos. 3 and 4 therein.
Accordingly, on January 29, 2004, respondent No. 1 company was incorporated with four shareholders, viz., the petitioner holding 45 per cent, shares, respondent No. 2 holding 35 per cent, shares and respondents Nos. 3 and 4 holding 10 per cent, shares each. In the circumstances, the petitioner was the single largest shareholder in the said company. Initially, the minimum paid-up capital of the company was Rs. 1,00,000 which in or around 2005 was increased to Rs. 5,00,000.
It appears that thereafter relations between the petitioner and the respondents did not go well, and finally their disputes came to surface in the year 2007, when the petitioner filed the present petition before the Company Law Board, Principal Bench, Delhi, alleging therein the following acts of oppression and mismanagement in the affairs of the company purportedly committed by respondents Nos. 2 to 4:
(a) An illegal allotment of additional 1,000 equity shares of Rs. 100 each by the respondent without the knowledge of the petitioner, in violation of the provisions of the Companies Act, 1956, and the articles of association of the company, with oblique motive, thereby increasing the shareholding of respondent No. 2 from 35 per cent, to 40 per cent, and correspondingly reducing/diluting the shareholding of the petitioner from 45 per cent, to 40 per cent.
(b) Illegal removal of the petitioner as a director without following the due course of law.
(c) Change of bank mandate.
(d) Mis-appropriation of the assets of the company and diversion of its funds by the respondents for their personal benefit, thereby causing wrongful loss to the company and its minority shareholders.
(e) Illegal advances to the directors in contravention of the provisions of the Companies Act, 1956.
Based on the aforesaid allegations, in order to bring an end the acts complained hereinabove, the petitioner has sought various reliefs as contained in the company petition.
3. The respondents appeared. They filed their reply to the petition denying all the allegations, relating to the alleged acts of oppression and mismanagement. However, they did not dispute the sequence of events that happened from joining of respondent No. 2 as a partner in the partnership firm until the formation of the company. In the reply, the respondents have further alleged that the petitioner has not come forward with clean hands and has not disclosed the material facts and has also suppressed vital documents and therefore, he being guilty of approaching the court with unclean hands is not entitled to any reliefs sought for and therefore, the petition is liable to be dismissed. On merits also, the respondents prayed to dismiss the petition. For the sake of brevity and to avoid the repetitions, their submissions in this regard for the sake of brevity shall be dealt with hereinafter.
4. Thereafter, the petitioner filed a rejoinder to the reply on August 5, 2011.
5. I have heard learned counsel for the parties at length and perused the record.
6. From the perusal of the records, it is seen that initially the petition was filed before the Company Law Board, Principal Bench, Delhi on October 25, 2007. It is matter of record that the company petition was transferred by the Principal Delhi Bench to the Mumbai Bench for hearing and disposal. It appears that the record was misplaced during transit. However, the record was reconstructed on the basis of the duplicate copy of the petition filed by the respondents.
7. It is further pertinent to note here that the Principal Bench, Delhi at the time of admission of the petition passed an order on October 25, 2010, which is as follows:
“Petition mentioned and interim injunction sought ex parte.
In view of the urgency, as extraordinary general meeting has been conveyed on January 27, 2007, to remove the petitioner, who hold 40 per cent, of the director, I am granting the prayers ex parte.
While extraordinary general meeting may go on, the resolution to remove the petitioner, if carried through shall not be implemented without leave of this Board. There shall be no change in the composition of the Board. Status quo with regard to the shareholding and fixed assets to be maintained as of date. The petitioner be given inspection of all statutory records on receipt of requisition in writing by the petitioner.”
8. Thereafter few other orders were passed on November 28, 2007 and November 29, 2007, which are as follows:
“I have suggested to counsel that both sides to bid for the shares and the higher bidder shall purchase the shares at that price. The petitioner is agreeable. The respondent seeks time to consider this suggestion.
Both sides have agreed for the transfer of this matter to Bombay- Date of hearing will be notified when the respondents' counsel indicates whether they are willing for bidding.
Undertaken before me today, statutory records will be given for inspection to the petitioner on November 28 and 29, 2007.”
9. Though, on the basis of the above, learned counsel for the respondents has made an attempt to contend that it was the game-plan of the petitioner, who in fact, in order to get undue advantage of the interim order was responsible for loss of the records and therefore, looking into the misconduct on his part, the petition is liable to be dismissed in limine. I have considered the same. Considering that the record has been reconstructed and arguments have been concluded on merits, I do not deem it appropriate to reject the petition. On this ground, I therefore, proceed to consider the rival claims on the merits.
10. The first issue which I propose to deal with is as to whether the respondents have illegally reduced the shareholding of the petitioner with oblique motive to oust him from the participation in the management of the company. It is submitted by learned counsel for the petitioner, that in and around December, 2005, the share capital of respondent No. 1 company was increased to Rs. 5,00,000 by making false representation to the petitioner. According to him, the requisite form for increase in shareholding although signed by the petitioner was obtained without making the petitioner aware of the true purport of the said form. Learned counsel submits that respondents Nos. 2 to 4 in collusion and connivance with each other issued further additional shares to the tune of 1,000 shares of Rs. 100 each in the joint names, thereby increasing their shareholding up to sixty per cent, and correspondingly diluting the shareholding of the petitioner from 45 per cent, to 40 per cent. Learned counsel appearing for the petitioner has pointed out that article 9 of the articles of association of the company which pertains to further issue of share capital, provides that additional shares can only be allotted to the other shareholders if the existing equity shareholders decline to accept the shares offered to the board of directors in writing and the board of directors dispose of them in such manner as they think fit. Learned counsel submits that issuance of the additional shares is illegal, bad in law and in contravention of the provisions of the Companies Act and as also the articles of association of the company for the following reasons, and the same is liable to be set aside:
(a) Because, no notice was ever issued to the petitioner for holding a board meeting for the purpose of increase of its additional share capital.
(b) Because, no board meeting was actually held nor any board resolution was ever passed.
(c) Because, the increase is in contravention of clause 9 of the articles of association which provides that in case of further allotment of shares, the existing shareholders will be offered proportionate shares. However, the petitioner was neither offered the shares nor has the petitioner been issued shares in proportion to his existing shareholding.
(d) Because, it is ridiculous to imagine that the petitioner has volunteered to lose his majority shareholding and has refused to get his shares in proportion to his existing shareholding in the company.
(e) Because, the additional shares acquired by respondents Nos. 2 to 4 are without consideration which is apparent from the perusal of the balance-sheet.
(f) Because, the unilateral increase of the shareholding of respondents Nos. 2 to 4 is with intent to defeat and deny the rights of the petitioner and to oust him from his active participation from management of the company.
11. To support his contention, learned counsel for the petitioner has relied upon a decision in the case of Akbarali A. Kalvert v. Konkan Chemicals P. Ltd., [1997] 88 Comp Cas 245 (CLB), wherein it has been held that a meeting without notice and allotment of shares without offering shares to the existing shareholder is bad-in-law.
12. Refuting the aforesaid charge of the illegal dilution of the shareholding of the petitioner, it is argued by learned counsel of the respondents that pursuant to the resolution of the company dated December 21, 2005, the authorised share capital of the company was increased from Rs. 1,00,000 to Rs. 5,00,000 and paid-up capital was increased from Rs. 1,00,000 to Rs. 2,00,000 and the additional capital of Rs. 1,00,000 comprising of 1,000 increased shares of Rs. 100 per equity share, were allotted in the following manner:
(i) Respondent No. 2 450 shares - 40% (ii) Petitioner 350 shares - 40% (iii) Respondent No. 3 100 shares - 10% (iv) Respondent No. 4 100 shares - 10%
13. Learned counsel for the respondents pointed out that such increase in the number of shares is required to be notified to the Registrar of Companies by filing requisite Form 2 being Notice of Consolidation/increase in capital, etc., under sections 95 and 97 of the Companies Act. According to him, returns of allotment was admittedly filed under the signature of the petitioner. He, therefore, contends that the petitioner had full knowledge of allotment of shares on the said date. According to him, it is quite surprising that the petitioner has chosen to keep quiet for two long years and raised this issue for the purpose of filing this petition after such inordinate and unexplained delay. He thus, pointed out that the petitioner himself is signatory to the return filed with the Registrar of Companies and therefore, he is now estopped from challenging any allotment on the ground of want of notice or any other ground. Learned counsel submits that in fact the exercise of further allotment of shares was undertaken with the consent of all the directors, otherwise, respondents Nos. 3 and 4 also could have made grievances of being left out of the equal distribution of the issue of capital, which is not the case. It is, therefore, contended that the allegation of the petitioner on the purported illegal allotment is without substance and hence liable to be rejected.
14. I have considered the rival submissions and perused the record. In my view, there is enough force in the submissions advanced by learned counsel for the respondent that the allotment of further shares under challenge was made with the consent of the petitioner, which is confirmed by the evidence, i.e, Form 2 which undisputedly was duly signed and filed under the petitioner's signature. The petitioner has failed to explain any good reason as to why he did not object to such allotment for a period of two years after filing of the said return, complaining that the allotment of further shares is unilateral action of the respondents. In the light of the above, it was contended that there was no material available on record that the petitioner at any point of time declined to accept the shares offered to the board of directors in writing and hence, in the absence of compliance of the article, the allotment cannot be held valid. I have considered this aspect. In my opinion, the knowledge of the petitioner to the allotment of additional shares under challenge is not denied by him. He himself has signed the relevant form filed with the Registrar of Companies to show the impugned allotment of shares and therefore, it can safely be presumed that he has given his consent to the allotment of shares in favour of respondent No. 2. In other words, it can be assumed that he had declined to accept the shares offered to him and thus the said article stands complied with. In my view, it proves the statement of the respondents that the allotment of additional shares was validly made with the consent of the petitioner. I do not find any reason to disbelieve the statement of the respondents. I, therefore, hold that the charge levelled by the petitioner of unilateral allotment of shares by respondent No. 2 in his favour for the oblique motive to gain entire control over the affairs of the company is devoid of merits and rejected accordingly.
15. Now, coming to the next charge levelled by the petitioner, i.e, his illegal removal as a director. It is contended by learned counsel appearing for the petitioner, that the company although incorporated as a private limited company, it is in the nature of a glorified partnership. Learned counsel submits that the said company is being run and managed as a partnership. Taking me through the averments made in the company petition, which according to learned counsel for the petitioner is not disputed. It has been submitted that prior to the incorporation of the company, the petitioner and respondent No. 2 were running the business on 50: 50 per cent, partnership basis under the name and style of M/s. Vigneshwar Air-conditioning since 2000 and the partnership deed was also executed between them in this regard. Subsequently, after the growth of the business, they decided to form a company and as such in the year 2004 the company came to be incorporated. According to learned counsel, no dividend whatsoever at any point of time has been paid to the shareholders of the company. According to him, the directors of the company have been taking their respective shares in the profit of the company by way of salary and perks, etc. Learned counsel submits that in the said circumstances, the company being in the form of glorified partnership, it is the legitimate expectation of each shareholder to take part in the business of the company. According to learned counsel, the petitioner too has the legitimate expectation of being part of the management and business of the company. It is, therefore, contended that the removal of the petitioner as a director in fact takes away the legitimate expectation of the petitioner to participate in the business of the company and also deprived the petitioner from having a share in the profits of the said company.
16. Learned counsel further pointed out that the removal of the petitioner was originally sought to be done by and under a notice dated October 1, 2007, received by the petitioner on October 3, 2007, for a meeting to be held on the same day. Learned counsel submits that due to the complaints of the petitioner no such meeting however was conducted on the said date.
17. Learned counsel for the petitioner then submitted that a second notice was issued for a meeting sought to be held on October 27, 2007. According to him, the said notice also lacked in many material particulars and is in contravention of the provisions contained in section 169(2) and section 284(2) to (4) of the Companies Act, 1956. According to learned counsel, the purported notice was sought to be given for removal of the petitioner as a director of the said company. However, no show-cause notice was issued to the petitioner before his removal nor any opportunity of hearing and/or making representation was given to the petitioner before his removal, in terms of the provisions contained in section 284(2) of the said Act. In fact, the purported notice does not even indicate as to the action against which of the four directors was sought to be taken. He, therefore, contends that his removal as a director is in violation of statutory provisions as well as against the settled principles of natural justice.
18. Inviting my attention to clause 10 of the articles of association, the provisions contained in section 190 of the Act and the law cited in the case of Queens Kuries and Loans P. Ltd. v. Sheena Jose, [1993] 76 Comp Cas 821 (Ker), it was argued by learned counsel of the petitioner that the purported notice issued for his removal in an extraordinary general meeting is in contravention of the aforesaid settled law and therefore, his removal as a director is bad in law and is liable to be set aside.
19. On the other side, learned counsel representing the respondents denied that the company is in the guise of quasi-partnership. Learned counsel for the respondents submits that the company had all time four members/shareholders since its incorporation and four directors until the removal of the petitioner as a director. According to him, two of the four directors are non-family members and nor were they associated in any manner whatsoever to its earlier venture of which business has been taken over by respondent No. 1 company. Learned counsel submits that in order to contend the principles of quasi partnership, the essential ingredients or parameters as upheld by judicial decisions are namely:
(a) Earlier venture carried forward by the newly formed company should be essentially between family members, which is absolutely nonexistent in the given case much more to qualify to assert to rely upon the principles of quasi-partnership, the participation should be in equal proportion, before and after incorporation;
(b) Since the entity which is newly formed is a private limited company, necessarily, it will have restriction on transfer of shares so that such criteria may not have any weightage in applying the principles of quasipartnership;
(c) There should be a dead-lock, which is vital to apply for the principle of quasi-partnership, are totally lacking in the present case inasmuch as the petitioner is in minority. However, it will not be open for him to contend and resort to the principles of quasi-partnership nevertheless, their right to independently establish grievances as minority shareholder is in no way affected.
20. In addition to the above, learned counsel submits that removal of the director of the company cannot be agitated in the proceedings under section 397 of the Act, as held in the case of Hanuman Prasad Bagri v. Bagress Cereals P. Ltd., [2001] 105 Comp Cas 493 (SC).
21. In continuation of his arguments, learned counsel for the respondents however, admitted that the notice of the board of directors to be held on October 3, was given at a short notice but having regard to the grave situations came to light on account of misdemeanour of the petitioner, it is justifiable, morally as well as in equity. Learned counsel for the respondents also admitted that there are slight variations in observing the modality of service of notice for the purpose of convening extraordinary general meeting for considering removal of the petitioner, in accordance with section 256 of the Act. According to him, the notice dated October 11, 2007, was attempted to be delivered by hand on the next day which was clearly avoided by the petitioner and was received only on October 13, 2007, permitting him to raise technical plea of insufficiency of the notice. Learned counsel contends that despite few infirmities, the removal of the petitioner as a director cannot be said as an act of oppression having regard to the entire facts of the case in hand.
22. Referring to the decisions in the case of Ruby General Hospital Ltd. v. Dr. Kamal Kumar Dutta, [2006] 129 Comp Cas 1 (Cal), it was argued by learned counsel that while considering the issue of removal of a director, the emphasis is required to be put on the background of events, which lead to the decision of removal of such director, rather than the technical procedure of removal. Learned counsel pointing out the conduct of the petitioner submits that the petitioner in December 2006 did set up a rival business in breach of the secrecy clause of the articles of association of the company and floated a new company in violation of clause of article/memorandum of association with identical name under the name and style of M/s. Shree Vigneshwar Air-conditioning (I) P. Ltd., and started to snatch business of respondent No. 1 company to his own rival company. Referring to the documents filed and relied upon by the respondents to prove the said facts, learned counsel submits that respondent No. 2 has to apply for rejection of the name of the said company to the competent authority on the ground that the original company has not given any consent or permission for incorporation of the company with such identical name. It is further submitted that since the petitioner was in charge of the original company at that point of time and was having custody of its record, he by playing fraud enforced a resolution, by keeping the respondents in dark and unilaterally got issued “no objection”, addressed to the Registrar of Companies for registration of a new company and got the rival company registered in the said name.
23. Learned counsel further submitted that the petitioner thereafter mala fide diverted the business of respondent No. 1 company to the said rival company and took advantage of his delicate personal relations with respondent No. 2 with the hope that in light of such sensitive relationship no harsh action would be taken against him. Learned counsel further submits that the presence of the petitioner in the company, in view of establishing rival business and diverting the business of the company to the rival company, warranted forthwith removal of the petitioner as a director of the said company. Learned counsel submits that no prudent person would like to retain a person in the company who has started working against the interest of the company and therefore, the removal of the petitioner was imminent and the company had to act immediately.
24. Answering the plea for non-payment of salary, it is submitted by learned counsel for the respondents that the purported claim for the salary is not tenable for the reasons firstly, because the petitioner did not work for the company during the relevant period, secondly his actions were against the interest of the company and thirdly, on account of his acts of misfeasance, the company has huge claims against the petitioner, and lastly the claim of the director for salary, squarely does not fall within the ambit of sections 397 and 398 of the Act. It is, therefore, contended that no much significance can be attributed to the objection which is not only trivial but technical in nature.
25. I have considered the rival submissions and perused the record.
26. As held in the case of Sangramsinh P. Gaekwad v. Shantadevi P. Gaekwad, [2005] 123 Comp Cas 566 (SC); (2005) 11 SCC 314, it is now well-settled that (page 641 of 123 Comp Cas): “… principles of quasi-partnership are not foreign to the concept of the Companies Act…. However, it was observed that when more than one family or several friends and relatives together form a company and there is no right as such agreed upon for active participation of members who were sought to be excluded from management, the principles of dissolution of partnership cannot be liberally invoked”. In the case of Kilpest P. Ltd. v. Shekhar Mehra, [1996] 87 Comp Cas 615 (SC); (1996) 10 SCC 696, it has been held that (page 622 of 87 Comp Cas): “The promoters of the company, whether or not they were hitherto partners, elect to avail of the advantages of forming a limited company. They voluntarily and knowingly bind themselves by the provisions of the Companies Act. The submission that a limited company should be treated as a quasi-partnership should, therefore, not be easily accepted”.
27. There is no yardstick to determine as to when an incorporated company could be considered to be quasi-partnership. Therefore, if the facts reveal some basic understanding between the parties that the company would be managed on partnership principles, the same could be applied in a petition under section 397/398 of the Act. Thus, the company is a glorified partnership or not, depends upon facts of a given case.
28. In light of the principles of the law enunciated in various decisions, with this regard I have examined the facts of the case in hand. Firstly, I may point out here that in the petition, the petitioner has not pleaded any facts regarding the application of the principles of quasi-partnership. Therefore, I have analysed the facts of the case on the basis of material available on record. The facts of the present case are that, at the time of incorporation of the company, in addition to petitioner No. 1 and respondent No. 2, there are two other shareholders who are not even distinctly and/or remotely related to the petitioner and respondent No. 2. The other two shareholders only hold 10 per cent, each shareholding in the total paid-up capital of the company. Undisputedly respondents Nos. 2 to 4 are the technically qualified engineers and due to their profound experience and exposure in the field, they were entrusted in the work of installation, direction, servicing and extension to the task of making respondent No. 1 company an outstanding entity in the field of air-conditioning and refrigeration. The participation of all the shareholders-directors therefore cannot be said in equal proportion either before or after incorporation of the company. Admittedly, there is no dead-lock situation in the affairs of the company. I therefore, hold that respondent No. 1 company is hot a glorified partnership as contended by learned counsel for the petitioner.
29. I have examined the validity of the removal of the petitioner as a director. The copy of the notice of extraordinary general meeting to the shareholders filed by the petitioner for removal of the director per se is illegal. The contents of the said notice are follows:
Date: 11th October, 2007
Notice of extraordinary general meeting of shareholder
This is to inform to all of the shareholder/members of M/s. Vighneshwar Air-conditioning P. Ltd., that extraordinary meeting of shareholders is decided to be held on 27th October, 2007 at 11.00 a.m at 3, Om Krupa Apartment, New Station Road, Kalyan (W) to discuss the issue regarding the removal of director. Therefore all of you are required to keep yourself present at 3, Om Krupa Apartment, New Station Road, Kalyan (W).
If quorum is not complete in time, meeting will be adjourned for half an hour and after half an hour the meeting will be start as is the quorum is completed.
Thanking you,
For Vighneshwar Air-conditioning P. Ltd.
Authorised signatory.
30. Admittedly this prima facie notice is wrong not in accordance with the provisions contained in sections 169, 190 and 284 of the Act.
31. In so far as the removal of the petitioner as a director from the board of directors of the company is concerned, though, it is found that the provision of law relating for removal of a director have not been strictly complied with yet, in my opinion, it cannot be said that the removal of the petitioner as a director is oppressive, having regard to the facts of the case in hand. There is lot of evidence available on record which has not been even disputed by the petitioner himself that the actions of the petitioner were against the interest of the company. He had opened a competitive business in contravention of the breach of the secrecy clause of the articles of association of the company and there is material available on record to show that the petitioner diverted the business of respondent No. 1 company to his own rival company. Therefore, his removal as a director of the company cannot be said as an act of oppression.
32. I may like to add here that the jurisdiction under section 397/398 of the Act is based on the equity akin to the administration of justice in England. Needless to say, that the provisions were lifted from the English Companies Act giving a breathing space to see the conduct of the parties in the prospective of business wisdom, instead of getting lost in holding the validity of the acts solely in legal prospective. In the case of Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd., [1981] 51 Comp Cas 743 (SC); (1981) 3 SCC 333 : AIR 1981 SC 1298, the hon'ble apex court has held that the conduct which is technically legal and correct, thus, may justify grant of relief on the application of the just and equitable jurisdiction and conversely that conduct involving illegality and contravention of the Act, may not suffice to warrant grant of any remedy. Further, an isolated act of oppression may not be sufficient to grant any relief but there should be a continued oppression. Therefore, the Company Law Board whenever invokes this jurisdiction it will always go beyond the validity of the acts to scout out to see as to whether any oppression has been caused to the aggrieved, causing prejudice to them. Moreover, in the case of Hanuman Prasad Bagri v. Bagress Cereals P. Ltd., [2001] 105 Comp Cas 493 (SC) referred to and relied upon by learned counsel for the respondents, it has been categorically held that removal of a director of the company cannot be agitated in the proceedings under section 397 of the Act. Similarly, in the case of Ruby General Hospital Ltd. v. Dr. Kamal Kumar Dutta, [2006] 129 Comp Cas 1 (Cal) it is held that when a issue of removal of a director is involved, the emphasis is required to be put on the background of events, which lead to the decision of removal of such director, rather than the technical procedure of removal.
33. For the reasons discussed hereinabove, I am therefore of the view that the removal of the petitioner as a director of the company cannot be said as an oppressive act.
34. I have examined the decisions referred to and relied upon by learned counsel for the petitioner. In my view, the decisions referred to and relied by the petitioner counsel in the case of Smt. Abha Puri v. Amethi Hume Pipes P. Ltd., [2009] 150 Comp Cas 850 (CLB); [2010] 1 Comp LJ 107 (CLB) and in the case of Akbarali A. Kalvert v. Konkan Chemicals P. Ltd., [1997] 88 Comp Cas 245 (CLB) and Queens Kuries and Loans P. Ltd. v. Sheena Jose, [1993] 76 Comp Cas 821 (Ker) do not apply having regard to the fact of the case in hand. In the case of Smt. Abha Puri v. Amethi Hume Pipes P. Ltd., [2009] 150 Comp Cas 850 (CLB); [2010] 1 Comp LJ 107 (CLB) the removal of the director was in relation to a family company in which the principles of quasi-partnership were found applicable. Contrary to this, in the present case the principles of quasi-partnership are not found applicable as discussed hereinabove, in view of the fact that out of the four directors, two directors are not the family members and they each hold 10 per cent, of the total shareholding. The decision in the case of Akbarali A. Kalvert v. Konkan Chemicals P. Ltd., [1997] 88 Comp Cas 245 (CLB) is also not applicable, because of the fact that the removal of a director was found bad in law, having regard to the facts of that case, whereas in the present case the facts are different. Similarly in the case of Queens Kuries and Loans P. Ltd. v. Sheena Jose, [1993] 76 Comp Cas 821 (Ker) cited by the petitioner's counsel is also not helpful to the petitioner.
35. The next allegations made by the petitioner against the respondents claiming the same as act of oppression is the change of bank mandate. It is argued by learned counsel for the petitioner that until 2006, the petitioner was the sole signatory in all the bank accounts of respondent No. 1. However, by using a purported resolution dated April 4, 2007, respondents Nos. 2 to 4 have sought to change the bank mandate to have the bank accounts controlled and/or operated by any of the directors. According to learned counsel, no notice of any board meeting was ever given in which the purported resolution dated April 4, 2007, was passed. He submits that in fact, no resolution has been passed, in any, purported meeting, thereby changing the bank mandate. According to learned counsel, the petitioner became aware of the change of the bank mandate only on October 8, 2007, through Saraswat Bank's letter.
36. In reply to the above contentions, learned counsel for the respondents submitted that the petitioner was a sole signatory to the bank account of respondent No. 1 company and also a co-signatory to the statutory returns filed by the company to the various statutory authorities including the Registrar of Companies, Maharashtra. He submits that from the inception of the company till beginning of October 2007, he was the sole signatory. However, when the petitioner misdeeds and gross acts of irregularities came to be knowledge of the respondents, all the financial powers were taken away from him with his approval. Learned counsel submits that the petitioner's contention that he has no knowledge is absolutely unfounded.
37. I have considered the rival submissions. In my opinion, taking away the right of the petitioner as a signatory to the bank account cannot be said to be an act of oppression. Further, the petitioner has failed to substantiate his allegations that by doing so, how his rights, in the capacity of a shareholder of the company have been prejudicial. I, therefore/hold that the petitioner has failed to prove this complaint as well;
38. Now, I proceed to consider the allegations of siphoning off of funds and misappropriation of the assets of the company by the respondents as contended by the petitioner. Learned counsel appearing for the petitioner has made allegations against the respondents' that respondents Nos. 2 to 4 have siphoned of, the funds of the company and misappropriated its assets. According to learned counsel, monies of the company have been siphoned away by respondents Nos. 2 to 4, in collusion with each other, to purchase the properties in their personal names: Learned counsel has given a list of properties to prove that these properties which according to the petitioner have been purchased by the respondents in their own name from the funds of the company. It is further submitted that it is ridiculous to imagine that the petitioner would consent to purchase of the property in the individual name of respondents Nos. 2 to 4, as sought to be contended by the respondents. According to him, it is also unbelievable that the petitioner, who was a majority shareholder at the relevant time would allow the company's money to be used for purchasing the property in the personal names of respondents Nos. 2 to 4. According to him, the properties are in their personal occupation and no rent is being paid to the company. Learned counsel further pointed out that the consideration paid out of the company's fund to purchase the said properties has been shown as loan in the accounts of the company. However, respondents Nos. 2 to 4 has never paid the loan back, nor are they paying any interest to the company. It is further alleged that despite directions passed by the Bench vide its order dated October 10, 2010, the respondents did not file the documents in respect of the properties nor furnished particulars of accounts. It is, therefore, contended that adverse inference ought to be drawn against the respondents and it ought to be presumed that respondents Nos. 2 to 4 are guilty of mismanaging the affairs of the company by way of siphoning of its funds.
39. Refuting the said allegations, learned counsel for the respondents submitted that the properties were purchased in the names of the individual directors, without any ulterior motives and within the knowledge and consent of the petitioner, inasmuch as the payments in respect of such properties purchased in the names of the individual directors have been authorised by the company and payments were made by account payees cheques under the signatures of the petitioner as a sole signatory on behalf of the company. According to learned counsel, the petitioner has suppressed all these material information in the petition and twisted the fact to his own advantage and with an intention to prejudice the respondents. It is, therefore, contended that the petitioner's claim against the respondents having purchased the property in their own name is frivolous and baseless.
40. I have considered the rival submission and perused the record. It is a settled proposition of law that where the allegations in respect of siphoning off of funds, diversions of funds and misappropriation of funds of the company against a director of a company are made, the same should be based on certain and definite informations giving full particulars. Here vague and sweeping charges made by the petitioner against the respondents for siphoning of funds, etc., cannot be accepted. Further, the Board is not supposed to embark upon a rambling enquiry into indefinite charges of mismanagement. From the perusal of the petition, it is apparent that the pleas in this regard are very vague. In paragraph No. IV(m) of the petition, it is stated as follows:
(m) It is submitted that respondents Nos. 2 to 4 have been illegally siphoning off of the funds of respondent No. 1 company for their own use. It is submitted that respondents Nos. 2 to 4 have out of the funds of respondent No. 1 company purchased three premises in their personal names, which are as follows:
(i) Premises at Kalyan: 3, Om Krupa Apartment, Shivaji Path, Kalyan (West)-421 301.
(ii) Premises at Nasik: 1, Herambh Residency, Canada Comer, Nasik-422 002.
(iii) Premises at Pune: The address of the premises situated at Pune is not known.
41. It is thus, seen that the allegations are without full particulars, no entries have been shown by the petitioner which could reveal that the said properties were purchased in the name of the respondents from the company's funds. Further, without making any amendments in the petition and/or filing such affidavit to prove this fact, the petitioners have added more properties in his written submission which are as follows:
(a) Vighneshwar Office (Elephiston) (Main H.O) Add: B-103, Padmavti Darshan, N.M Joshi Marg, Elephiston (W), Mumbai-400 013.
(b) Kalyan Office Add: 3, Om Krupa Apartment, Shivaji Path, Kalyan (West)-421 301.
(c) Pune Office Add: 106, Mahalaxmi Vihar, 1st Floor, Alandi Road, Vishrantwadi, Pune-15.
(d) Pune Office Godown Add: Gate No. 306, Kanswadi Chakan, Pune.
(e) Farm house at Kolad Add: M/s. Vadkar Dairy Farm, Mukaam- Pathersheth, Post Jamgaon, Taluka Roha, State Raigad.
(f) Sion Office Godown Add: Gala Nos. 16 to 22, Basant Court Co. Op. Hsg. Soc., 24th Road, Shri Vallabhdas Marg, Sion (East), Mumbai-400 022.
(g) Nasik Office Add: 1, Herambh Residency, above Indian Qassic Opp. Kalayatan Courier, Trimbak Link Road, Canada Comer, Nasik-422 002.
(h) New Nasik Office (Vighneshwar AC plot) Add: 39, 40, Besides Mahindra Guest House, Ashwin Nagar, CIDCO, Nasik-422 009.
(i) Goa Office Add: Om Dutt Niwas, 2nd Floor, Old Goa, Near Church, Goa-403 402.
42. Furthermore, in the present case, the respondents in their reply have categorically denied the petitioner's allegations with respect to the property purchased in the names of the individual directors. There is no reason to disbelieve that the statement of the respondents that the properties shown to have been purchased in the names of the individual directors were authorised by the company and payments were made through account payee cheques under the signature of the petitioner as a sole signatory on behalf of the company.
43. In view of the above, I find that the petitioner has also failed to prove that the respondents have misappropriated the funds and/or diverted its funds to their personal benefits and created assets in their personal names out of the company's funds as alleged. The petitioner, therefore, has failed to substantiate this charge by any cogent and reliable evidence and therefore this charge also fails.
44. Lastly, learned counsel for the respondents assailing the maintainability of the petition submitted that the petitioner is guilty of suggestio falsi and suppressio veri. Learned counsel for the respondents submitted that the petitioner in the year 2006 did set up a rival business in contravention of the breach of secrecy clause of the articles of association of the company by floating a new company in the name of M/s. Shree Vigneshwar Air-con-ditioning (I) P. Ltd. Co. in violation thereof. Learned counsel further alleged that the petitioner thereafter diverted the business of respondent No. 1 company to his own rival company. He also applied to the Registrar of Companies for registration of his company in the identical name by violating the rules in this regard. It is, further, submitted that since the petitioner was in charge of the company and having custody of the documents/records, he by playing fraud passed a forged resolution keeping the respondents in dark thereby purportedly giving no objection to the petitioner's new company and got the rival company registered vide certificate of incorporation. It is, therefore, submitted that looking into the fraudulent conduct of the petitioner, he is not entitled to the equitable reliefs in this petition. In support of his submission, learned counsel for the respondents relied upon a decision rendered by the hon'ble apex court in the case of S.P Chengalvaraya Naidu v. Jagannath, (1994) 1 SCC 1 : AIR 1994 SC 853. Learned counsel for the respondents further submitted that the petitioner has not only suppressed the vital information but also has made deliberate false statement on oath and such gross misconduct on the part of the petitioner entails the dismissal of the petition. To support the said view learned counsel has further relied on a decision in the case of Shah Pulp and Paper Mills Ltd. v. Pravinchandra Hirji Shah, [2013] 179 Comp Cas 36 (Bom); [2012] 3 Comp LJ 402 (Bom).
45. Retaliating the said contentions learned counsel for the petitioner argues that the said allegations are unfounded and baseless. According to him, the petitioner had set up a company under the name and style of M/s. Shree Vigneshwar Air-conditioning (I) P. Ltd., in the same building on or about December 12, 2006 and respondents Nos. 2 to 4 did not make any objection to the petitioner starting a second company until 2007. Learned counsel submits that since the only business known to the petitioner is that of air-conditioning, the petitioner had set up the same business. According to him, the petitioner was ousted from the business of the said company and was neither allowed to participate in the management and was not given any share in the profits, therefore, in these circumstances, the petitioner was constrained to start a separate business. According to him, the objection of the company to the petitioner's second business was raised for the first time on October 12, 2007, i.e, after more than ten months after incorporation of the said company, only as a counter blast on the failure of conducting the first extraordinary general meeting on October 3, 2007. Learned counsel further submits that the complaint against the petitioner by the respondents as to his alleged business is not bona fide and is in fact mischievous and a farce. According to him, the petitioner is dealing with different air-conditioning companies and dealers and is in no way in competition with respondent No. 1 company. It is therefore urged that the allegation made by the respondents against the petitioner to approach the Board with unclean hands is without any merit and hence liable to be rejected.
46. I have considered this aspect. Admittedly, the petitioner is running a rival business in the identical name, to the name of respondent No. 1 company. There are serious allegations against him that he has diverted the business of respondent No. 1 company thereby causing a huge loss to respondent No. 1 company. Several clients of respondent No. 1 company are the customer of his company. The petitioner is entity located in a very close proximity of respondent No. 1 company. Time and again, it has been held in various decisions, that even the allegation of the petitioner, if proved, do make out a case of oppression and mismanagement within the scope under section 397/398 of the Act, mere proof of those allegations would not entitle the petitioner to the reliefs sought that they will be granted only to the person who approaches the court in a good faith. In other words, the parties who approach the court for equitable relief must come with a clean record. Having examined the entire facts, I am satisfied that the petitioner's conduct borders on recklessness as he is prepared to disown his own obligations for the sake of obtaining some advantage against his adversary. Therefore, such a person should not be entitled to reliefs under section 397/398 of the Act. I am, therefore, of the view that the petitioner is not entitled to any relief on account of his proved misconduct.
47. Lastly, on a perusal of the pleadings in the company petition and the materials placed before the Board, it is at a loss to find out that there are no pleading at all to show that it is just and equitable to order winding up of the company nor any ground has been made out to order winding up the company as just and equitable. In a petition under section 397/398, this kind of averments is of primary importance. A prima facie case has to be made out before the Board who can take any action in the matter. Since, the petitioner has failed to make out a case to order winding up of the company as just and equitable as required by the provisions contained in section 397 of the Act, therefore, on this ground the petitioner is not entitled to the reliefs sought for.
48. Having held that no case under section 397/398 is made out and the petitioner is not entitled to the reliefs sought for, now I propose to deal with the company application being C. A No. 220 of 2012 filed by the respondents, inter alia, praying therein to pass an order thereby appointing any eminent chartered accountant as an independent impartial valuer to undertake the valuation of the share of the petitioner in applicant No. 1 company.
49. From the perusal of record, it is noted that the said application came be considered by this Bench. In the course of hearing, learned counsel appearing for the petitioner submitted that the properties in the name of respondents Nos. 2 to 4 as described in his written submission are the company's assets and therefore he asserted that at the time of carrying out the valuation process to ascertain the fair price of the shares, all these properties are also required to be taken into consideration: The aforesaid claim of the petitioner was strongly refuted by the respondents. In view of the serious conflicts between the petitioner and the respondents on this issue, the Company Law Board thought it proper to proceed with the adjudication of the case on merits and kept this application pending for decision along with the final order.
50. It is settled law as held in the cases of Sangramsinh P. Gaekwad v. Shantadevi P. Gaekwad, [2005] 123 Comp Cas 566 (SC); (2005) 11 SCC 314 and Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd., [1981] 51 Comp Cas 743 (SC); (1981) 3 SCC 333 : AIR 1981 SC 1298 that even if the Company Law Board comes to the conclusion that the company petition has no merit, yet the Company Law Board can pass an order directing one party to part away with the company by selling his shareholdings to the other group. Upon a critical analysis of the facts and circumstances of the present case, it is established that both the groups cannot jointly participate in the management of the company. It is further evident that the two groups of shareholders, lack confidence and mutual trust in each other. It is also clear the two groups cannot run the management of the company together and the company cannot function smoothly by these two rival groups, if they continue to hold shares. It would be, therefore, in the fitness of thing that a party may buy out the other group. Yet, in my opinion it would not be fair, just and proper to force the petitioner to sell his shares. However, if the petitioner is willing to sell the shares at a fair price, he may sell it to the respondents.
51. The next question that arises for my consideration is as to how the fair price of the shares of the company can be arrived at. For this purpose, I have examined the articles of association of the company which prescribe here as under:
4. Save as hereby, otherwise provided, no share can be transferred to any person who is not a member of the company, so long as any member, or any member of the family of the member, or any person selected by the Board or its directors as one, desirable in the interest of the company, to be admitted to the membership and is willing to purchase the same at the fair value.
5. In case any difference arises between the retiring member and the purchasing member as to the fair value of the share, the value shall be that which the auditors of the company or any arbitrator mutually appointed by both, the retiring and purchasing member and is approved by the board of directors shall certify in writing to be fair value of the shares.
6. The directors may in their absolute and uncontrolled discretion refuse to register any transfer or transmission of a share whatsoever without assigning any reason for such refusal. But this clause shall not apply where the proposed transferee is already a member.
52. In my considered view, the said articles contained in the memorandum and articles of association enables a person/party who wants to sell the shares held by him in the company in the manner provided therein. Therefore, the parties should follow the recourse as provided in the said articles of association of the company. In case, they still fail to find a solution, in that eventuality, the petitioner may apply to the Company Law Board for appointment of an independent valuer to undertake the valuation of the shares in respondent No. 1 company. Further, in case, any party is aggrieved from the report of the independent valuer, such party may get the price determined by the Company Law Board. Therefore, the parties are granted liberty to mention the matter, if required.
53. On the basis of the discussions made hereinabove, the company petition is disposed off here as under:
(1) The reliefs sought for by the petitioner are hereby declined.
(2) In case, the petitioner is willing to sell his shares held by him in the company, he shall inform the company in writing and in that eventuality, the respondents shall be bound to purchase his shares on a fair price, to be determined in the manner observed hereinabove. In case, the respondents refuse/fail to purchase the shares, within a period of 90 days, the petitioner shall be entitled to sell the same to a third party on a price as agreed between them.
(3) Interim order, if any, stands vacated.
(4) No order as to costs.
(5) Company petition along with the company application stands disposed of in the above terms.
54. Let copy of order be circulated to all concerned.
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