1. The substantive allegations in this petition filed under Sections 397 and 398 of the Companies Act, 1956 ("the Act") in relation to the affairs of M/s. National Refinery Private Limited ("the Company") are that the petitioners' group collectively holding 24.55 per cent shares in the Company have been completely excluded from the management of the Company in spite of having been a part of the management since the inception of the Company and that the respondents' group have indulged in large scale financial mismanagement; diversion of business of the Company and improper management of the affairs of the Company in gross violation of the statutory requirements.
2. Shri S.S. Shah, Advocate appearing for the Petitioners, while initiating his arguments submitted that in the year 1900, one Mr.
Manilal Chunilal Sonawala (MCS) and his brother Mr. Chimanlal Chunilal Sonawala (CCS) had commenced a partnership firm under the name and style of M/s. Manilal Chimanlal & Co. to carry on bullion trading business. The partnership firm made huge profits and earned good reputation in the bullion and precious metal market. Upon the demise of both MCS and CCS, five sons of the late MCS (Manilal Group) and four sons of the late CCS (Chimanlal Group) became and remained as partners of the family firm of M/s. Manilal Chimanlal & Co. Thereafter, in the year 1945 Manilal group and Chimanlal group had incorporated a partnership firm for the purpose of refining and processing gold and silver under the name and style of M/s. National Refinery, with all the members of Manilal group and Chimanlal group as partners of the firm.
In the meanwhile the first respondent Company was incorporated in the year 1955 with main objects of, inter-alia, to acquire and takeover the business of the partnership firm, M/s. National Refinery with all its assets, liabilities and goodwill. Accordingly the entire business of the firm, M/s. National Refinery was taken over and managed by the Company. Manilal group and Chimanlal group had incorporated in the year 1955 yet another company by name Manilal Chimanlal & Co. Private Limited (MCCPL), with members of both the groups appointed as directors. MCCPL was appointed as Managing Agents for the first respondent Company. Thus both the Company and MCCPL are closely held family owned and managed companies. In due course of time, both Manilal group and Chimanlal group separated in business and effected partition between the two groups thereby Manilal group took over the control and management of the Company, while Chimanlal group took over the control and management of MCCPL. At present shareholders of the Company consist of four groups belonging to Manilal group. They are- a) Bhogilal Group consisting of respondents 2 to 5 and 10 to 15 and other members with 24.96% of paid up equity capital of the Company.
b) Keshavlal Group with respondents 6 to 8 and 16 to 19 and other members holding 25.04% of paid up equity capital of the Company.
c) Panalal Group with respondents 9 and 20 to 23 and other members holding 24.96% of paid up equity capital of the Company.
d) Kantilal Group with Petitioners and other members with 24.55% of paid up equity capital of the Company.
The ninth respondent, representing Panalal Group, is the executive director and Chairman of Board of Directors of the Company in-charge of Bullion market, purchase of Gold and Silver. The second respondent representing Bhogilal Group is Director and re-designated as the executive director managing day-to-day affairs of the Company's factory at Jogeshwari. The sixth respondent representing the Keshavlal Group is recently reported to have been appointed as an executive director incharge of finance, accounts, and Banking. The first Petitioner representing Kantilal Group on the Board of the Company was the executive director, subsequently designated as Technical Director, looking after development, production, marketing and sales till 1st July 2000, when he was removed from the office of executive director at the meeting of the Board of Director of the Company. Thus the Company has been managed by the family members of these four groups, with each group having equal control, participation, management and representation on the Board of Directors of the Company. Moreover, various members of each group have been given gainful employment in the Company. With passage of time and family differences among family members of the different groups for the past over six years, the principles adopted and practice followed by them in regard to equal control and management affairs of the Company were completely ignored by Panalal group, Bhogilal group and Keshavlal group, who acting in collusion as majority indulged in various acts of oppression and mismanagement in the affairs of the Company. The conduct of the majority shareholders is oppressive to the minority shareholders, burdensome, harsh, wrongful and continuous, causing prejudice to the petitioners and other members which resulted in infringement of their legal and proprietary rights as shareholders, warranting remedial measures as held by the apex court in Needle Industries (India) Ltd. v.Needle Industries Newey (India) Holding Ltd.-[1981] 51 CC 743. Shri Shah, learned Counsel pointed out that the Company though incorporated as a private limited company is in reality a glorified partnership working for the interests and welfare of all the four groups, as their members. This has been breached with induction of the fourth respondent, belonging to Bhogilal Group as a director and illegal removal of the first petitioner as an executive director which would justify winding up of the Company on just and equitable grounds. In this connection, learned Counsel referred to Ebrahimi v. Westbourne Galleries Ltd. - (1973) II.L.360 to show that when there is an understanding that the parties would participate in the management of the Company, removal of one party as a Director is a breach of good faith and as such a company should be wound up on just and equitable ground. Shri Shah further in support of his claim that the Company in the instant case being a de facto partnership, the principles of dissolution would be applicable, made reference to the following cases:-Hand Overseas P. Ltd. v. Raghunath Prasad Jhunjhunwalla - [1976] 46 CC 91 - to show that in a given case the principles of dissolution of partnership will apply if the apparent structure of the company is not the real structure and on piercing the veil it is found that in reality it is a partnership.
* In re YENIDJE TOBACCO COMPANY, LIMITED.-[1916] 2 Ch 426 - to show that in a case of partnership there would clearly be grounds for a dissolution, and that the same principle ought to be applied where there is in substance a partnership in the guise of a private company. The position amounted to a complete deadlock and its just and equitable that the company should be wound up.
Shri Shah, learned Counsel further submitted that the petitioners are refused full and complete access to the records and accounts of the Company and denied active participation in the general and Board meetings. There has been manipulation of the accounts; gross misappropriation of funds as well as stock of the Company and mismanagement of the affairs of the Company. there are irreconcilable differences between the shareholders. Thus, there is complete lack of probity in the affairs of the Company. These acts of the respondents' group are not isolated acts, but are in the continuous nature, unless they are restrained by appropriate orders. These circumstances justify the winding up of the Company in the interests of the petitioners and other shareholders of the Company, as held in the following cases:-Rajahmundry Electric Supply Corporation Ltd. v. A. Nageshwara Rao - AIR 1956 SC 213 - to show that wherever it is established that the directors have misappropriated the funds of the company and the lack of confidence is on account of lack of probity in the conduct of the company's affairs, then it is just and equitable that the company be wound up.
* In re DAVIS AND COLLETT, LIMITED - [1935] 1 Ch 693 - to show that a company may be wound up by the court if the court is of the opinion that it is just and equitable that the company should be wound up. Where the capital of a private company is so owned as to make the company in substance a partnership and one director has purported by means of irregularities to acquire complete control of the company and to exclude the other director or directors from the management of it, it may be just and equitable to wind up the company.
* Re Zinotty Properties Ltd. - [1984] 3 All ER 754 - to show that where a company has been established on basis of trust and confidence of corporators and there is breakdown of trust and confidence among them, then it is just and equitable to order winding up of company.
The learned Counsel pointed out the Company having a very good reputation in the precious metal business, would lose the permissions and licenses to carry on the business, in the event of winding up of the Company. Therefore, it would be just and equitable to pass appropriate orders arresting the continuous acts of oppression and mismanagement resorted to by the respondents group instead of winding up the Company. Shri Shah, learned Counsel relying on K.N. Bhargava v.Trackparts of India Limited - (2000) 2 Comp LJ 275 submitted that in a proceeding in Section 397/398, even if the allegations are not established, in a family company, the CLB has issued appropriate directions to protect the interest of the shareholders and the company, especially when there are irreconcilable differences between majority groups of shareholders.
The learned Counsel while concluding his submissions, pointed out that the CLB cannot take cognizance of the orders dated 25.02.2003 and 30.06.2003 of Commissioner of Income Tax (Appeals), passed pursuant to the income tax raid on the Company, resulting in its exoneration, especially when the petitioners are not parties to the proceedings before C.I.T. The Income Tax Department has already preferred an appeal against the orders of C.I.T. which have been admitted and are pending.
The orders of C.I.T. are post litem orders as they are passed after filing of the Company Petition and therefore, not admissible in evidence as held in Dasondhi v. Milkhi Ram - AIR 1939 Lahore 152. The orders are not admissible and not relevant by virtue of the provisions of Section 43 of the Evidence Act, 1872, in support of which learned counsel referred to the following decisions:- Benode Lal Chakravrty v. Secy. Of State for India in Council - XXXIV Calcutta Weekly Notes 1113.State of Bihar v. Sri Radha Krishna Singh Shri Shah, the learned Counsel therefore, urged for the reliefs claimed in the Company Petition irrespective of the orders of C.I.T. (Appeals).
3. Shri Navroz Seervai, Advocate appearing for the respondents submitted: By virtue of Sections 397(1) it is only members of a company who can complain before the Company Law board that the affairs of the Company are being conducted in a manner prejudicial to the public interest or in a manner oppressive to any member or members. The petitioners are bound to prove that the conduct of the affairs of the company by the majority shareholders is oppressive to the minority shareholders. There must be continuous acts on the part of the majority shareholders, continuing up to the date of petition, which are oppressive to some part of the members. The conduct must be burdensome, harsh and wrongful and mere lack of confidence between the majority shareholders and the minority shareholders is not enough unless the lack of confidence springs from oppression of the minority by the majority in the management of the company affairs, and such oppression must involve at least an element of lack of probity or fair dealing to a member in the matter in his proprietary rights as a shareholder, in support of which Shri Seervai, learned Counsel relied on Shanti Prasad Jain v. Kalinga Tubes Ltd. XXXV cc Page 351. The oppression complained of in any other capacity namely as a director or a creditor is outside the purview of Sub-section (2) of Section 397, for which reliance was placed on the following decisions:- * Needle Industries cited supra - to show that the person complaining of oppression must show that he has constrained to submit to a conduct, which lacks in probity, conduct which is unfair to him and which causes a prejudice to him in exercise of his legal and proprietary rights as shareholder.
* V.M. Rao v. Rajeswari Ramakrishnan - [1987] 61 CC 20 - to show that the oppression complained of must affect a person in his capacity or character as a member of the company, harsh and unfair treatment in any capacity, namely as a director or a creditor is outside the purview of Section 397.
* Suresh Chandra Marwaha v. Lauls Private Limited - [1978] 48 CC 110 - to show that oppression only in the character of a member has to be complained of and not in any other capacity. A shareholder has two accounts of rights - individual rights and corporate rights.
Every shareholder can enforce his individual rights singly, but corporate bodies have to be enforced by the majority. Any removal from directorship in a general meeting held in accordance with Section 284 cannot amount to an act of oppression by the management.
* Elder v. Elder Watson Limited - 1952 SLT 112; 1952 SC 49 - to show that any lack of confidence between the two shareholders in a company cannot be an act of oppression. The acts of oppression must involve oppression of members in their character as members. Mere changes effected in the Board of Directors or the dismissal of officers cannot be an act of oppression.Hanuman Prasad Bagri v. Bagress Cereals Pvt. Ltd.- (2001) 4 SCC 420 - to show that if a director is illegally terminated he cannot bring his grievance as to termination to winding up the company for the single and isolated act, even if it was doing good business and even if the director could obtain each and every adequate relief in a suit in a court.Vinod Kumar Mittal v. Kaveri Lime Industries Ltd.-(2000) 100 CC 66- to show that any directorial complaint cannot be considered in Section 397/398 petition. The principle is not strictly applied in respect of family companies, but any such removal amounts to an act of oppression, if the same was done with a malafide intention or some ulterior motive.
Shri Seervai, learned Counsel emphasized that the Court while dealing with a petition with a petition for relief from oppression or mismanagement made under Sections 397 and 398 must confine itself to the case as made out in the petition and to the allegations made therein and reply to the contentions urged in the petition but not look at the evidence with regard to events that might have happened subsequent to the petition. All material facts must be set out in the petition itself and allegations of fraud, coercion, malafides, misappropriation, misapplication of funds, mismanagement or other improper conduct in the management of the Company's affairs, if any, must be supported by particulars. Vague and uncertain allegations of oppression or mismanagement, although they may constitute grounds for suspicion, do not entitle a petition to ask the court to embark upon an investigation into the affairs of a company in the hope that, in consequence of such investigation, something will turn up which will enable the court to grant relief to the petitioner. The matters which transpire after the application made under Sections 397 and 398 cannot be taken into account. The ground of challenge not to be found in the petition, but evolved during the course of arguments will have to be ignored. The learned Counsel, in support of these propositions referred to Mohta Bros. (P) Ltd. v. Calcutta Landing And Shipping Co. Ltd. - [1970] 40 CC 119; Shanty Prasad Jain v. Kalinga Tubes Ltd.-[1965] XXXV 351; P.S. Offshore Inter Land Services Pvt. Ltd. v. Bombay Offshore Suppliers and Services Ltd.- Vol.75 (1992) CC 583 and In re Clive Mills Ltd. [1964] XXXIV CC 731.
According to Shri Seervai, learned Counsel the provisions of Section 397 further contemplate that the facts would justify the making of a winding up order, on the ground that it is just and equitable that the company must be wound up, but a winding up order would unfairly prejudice the members. If the facts fall short of the case set out for winding up on just and equitable grounds no relief can be granted to the petitioners as held in Hanuman Prasad Bagri v. Bagress Cereals Pvt.
Ltd.-(2001) 4 SCC 420; Thakur Hotel (Simla) Company Private Limited In.
Re.- Vol. XXXIII (1963) CC page 1029 and Maharani Lalita Rajya Lakshmi v. Indian Motor Co. (Hazaribagh) Ltd.-(1962) XXXII CC 207. The learned Counsel pointed out that in the present case the Board Meetings and Annual General Meetings are regularly being held. The Company is carrying on its business with the existing 100 employees for the past more 50 years. There is no complaint from any creditor. Seventy-five percentage of members do not want to wind up the Company. The petitioners have failed to make out a case for winding-up of the Company on just and equitable grounds, disentitling them for any relief. When the Company is a profitable and thriving company, there is not the slightest justification to wind up such a company. There has been no deadlock in the management of the Company. Nor is there any pleading to that effect. The existence of factions amongst shareholders, pickering between one group and another group, vague allegations against the quality of management by persons incharge of the Company and mere exclusion from management neither justify the making of a winding up order on just and equitable grounds nor remediable under Sections 397 and 398.
Shri Seervai learned Counsel further submitted that the remedy under Section 397 is an equitable remedy bestowing discretionary power upon the CLB and mere proof of acts of oppression and mismanagement would not entitle the petitioners to the reliefs under Sections 397 and 398 especially when these discretionary reliefs will be granted only to persons who approached the court in good faith. Any party who approaches the court for equitable reliefs must come with a clean record and in good faith as held in Needle Industries (India) Limited - AIR 1981 Supreme Court 1298. The question of good faith has to be tested by the conduct of the petitioner as reflected not only in the proceedings before this court, but also in the parallel proceedings in the civil courts and in other civil litigations in other courts in support of which learned counsel referred to Srikanta Datta Narasimharaja Wadiyar v. Sri Venkateswara Real Estate Enterprises (Private) Limited - 1991 72 CC 211. When a petition is not bonafide but filed obviously for an ulterior purpose with an oblique and malafide motive, the Court is bound to reject it as held in Palghat Exports Private Limited v. T.V. Chandran - 1994 79 CC 213 and Smt. Apnash Kaur v. Lord Krishna Sugar Mills Limited - Vol.44 91975) Company Cases 390.
Moreover, petitioner Nos. 1, 2, 5 & 7 have been in active management and party to the alleged acts of oppression and mismanagement in the affairs of the Company and the first petitioner having signed the cheques in relation to the transactions of the Company at the relevant point of time cannot claim any relief on account of the principles of "in pari delicto conditio defedentis".
Shri Seervai, learned Counsel further pointed out that though M/s.
National Refinery, the partnership business was converted into the Company with the family members representing the four groups, yet with the participation of M/s. Oriental Chemindus Private Limited a corporate body controlled by some of the family members belonging to petitioners group, the Company ceased to be a domestic concern, as held in Shrimati Abnash Kaur v. Lord Krishna Sugar Mills Ltd., - Vol. 44 (1974) CC page 390. The principles of quasi partnership cannot apply to a corporate entity. A company on incorporation becomes an entity different from partnership. The promoters of the Company though originally constituted partners, elected to avail of the advantages of forming a limited company, they voluntarily and knowingly bind themselves by the provisions of the Act. In these circumstances the Company cannot be a glorified partnership, as held in Kilpest P. Ltd. v. Shekhar Mehra - Vol. 87 (1996) CC page 615. The learned Counsel contended that the facts involved in Ebrahimi's case relied by the petitioners are entirely different from the facts of the present case.
In Ebrahimi's case two persons who are not related to each other were carrying on business as partners in equal shares. After transferring the business to the company, one of the partners was removed from directorship. Whereas in the present case, there are more than two partners and all are related to each other and none of the partners after transferring the business to the Company was removed from directorship. There is no deadlock in the Company either pleaded or proved in the present case. Moreover, the shareholding among the petitioners and respondents cannot said to be equal, in which case there is no case for winding up the company on just and equitable grounds. In this connection, learned counsel referred to Hind Overseas P. Ltd. v. Raghunath Prasad Jhunjhunwalla - Vol. 46 (1976) CC page 91, wherein it has been held that when more than one family or several friends and relations together form a company and there is no right as such agreed upon for active participation of members who are sought to be excluded from management, the principles of dissolution of partnership cannot be liberally invoked. Besides, it is only when shareholding is more or less equal and there is a case of complete deadlock in the Company on account of lack of probity in the management of the Company and there is no hope or possibility of smooth and efficient continuance of the Company as a commercial concern, there may arise a case for winding up on the just and equitable ground.
therefore, the principles enunciated in Ebrahimi's case will not be applicable, to the present case. The petitioners have neither proved the reported understanding and practice of members representing the four groups having equal representation on the Board of the Company nor is binding on the Company in the absence of any such clause incorporated in the articles of the company. Any private agreement between shareholders without being incorporated in the articles of association, cannot bind the company as held in V.B. Rangaraj v. V.B.Gopalakrishnan - A.I.R. 1992 SC 543. During the period from 20.12.1965 to 31.12.1969, the Board of Directors consisted of only Kantilal, Mulchand and the ninth respondent. There was no representation from Bhogilal and Keshavlal groups on the Board for a long time though they had equal shareholding in the Company. When Shri Mulchand M. Shah died in the year 1979, the Company was managed only by the members belonging to other three groups. Similarly, there was no nominee from Keshavlal group and Bhogilal group on the Board for the period from 30.08.1986 to 18.10.1986 and 27.11.1986 to 22.03.1987 respectively. When the respondents have denied these allegations, the petitioners have not chosen to enter into the witness box at all, nor produced any document substantiating these allegations made in the petition, in which case the petition must fail as held in Asoka Betelnut Co. Pvt. Ltd. v. M.K.Chandrakanth - Vol. 88 (1997) CC Page 274.
Shri Seervai, learned Counsel pin pointed the following acts of commission and omission on the part of the petitioners, which speak of their conduct and behaviour disentitling them for any reliefs under Sections 397 & 398 :- * The first and ninth petitioners had engineered an Income Tax raid in the year 1999 on the Company and made false statement before the Income Tax Authorities against the Company.
* The Company has filed a summary suit before the High Court of Bombay against inter-alia petitioner Nos. 1, 3, 5, 7 & 9 for recovery of more than Rs. 50 lakhs payable to the Company for goods purchased by M/s. National Jewelleries, a partnership firm in which these petitioners are partners. This claim remains unsettled.
* The Company has paid full consideration to petitioner Nos. 1, 3, 5, 7 & 9 for conveying 20 acres of land at Khari District of Thane, but they have not so far conveyed the property causing financial loss to the Company and its shareholders.
* The ninth petitioner had stolen 500 grams of gold from a client of the Company, as confessed by him in his letter dated 21.06.1999, addressed to the directors of the Company, which was subsequently returned by him.
* The petitioner Nos. 1 & 3 as well as M/s. Kamlesh Metal Corporation ("KMC") attempted to defraud the Company by showing a fictitious transaction of purchase of copper in the books of accounts of the Company.
* The petitioner Nos. 1 to 3, 5, 7, 9 and 13 owe huge sums of money to the Company for a long time which remain unpaid in spite of repeated demands made by it.
* the first petitioner has taken temporary loans aggregating Rs. 2.13 lakhs from the Company for personal use.
* The seventh petitioner misusing his position as director in M/s.
Vin Vish Corporation Private Limited ("VVCPL") had issued instructions to its Banker, viz. Bank of India of VVCPL to debit the Company account for the amount of over draft extended to him for his personal use.
* The ninth petitioner by a letter dated 15.02.2002 (Page 325 of vol.1 of counter) resisted the claim of the Company for non-settlement of his claims as an employee are settled by the Company.
* The ninth petitioner by a letter dated 20.02.2001 (Page 327 of vol.1 of counter) the claim of the Company as barred by limitation and insisted that the Company should settle the amount due to KMC for supply of materials.
* The fifth petitioner by a letter dated 28.02.2001 (page 331 vol.1 of counter) instead of settling the dues of the Company, insisted for settlement of his claim due to him as an employee of the Company.
* The seventh petitioner by a letter dated 17.04.2001 (Page 334 of vol.1 of counter) while pleading that the claim of the Company is barred by limitation, demanded the legitimate dues due to him from the Company as an analyst during the year 1997-98.
* One Mrs. Amita V. Sonawala, belonging to the petitioners' group by a letter dated 30.04.2001 (Page 338 of vol.1 of counter) refused to repay the loan amount due to the Company on the ground that the claim is bared by limitation.
* The first petitioner assumed the responsibility in February 1999 for returning 225 grams of gold taken on approval by the third petitioner which is unreturned till date either by either of them.
These acts of commission and omission of various petitioners would not have come to light had the first petitioner continued to be the chairman of the Company.
The learned Counsel, while referring to the income tax assessment orders contended that they are admissible in evidence if they are produced by the assessee, as held in by the apex court in Tulsiram Sanganaria v. Srimati Anni Rai - 1971 (1) SCC 284. In the present case, the Company, which is the assessee has produced the said orders and hence admissible in evidence. Moreover, the Evidence Act, 1872 does not apply to the proceeding before the CLB and therefore, the provisions of Section 43 of that Act are not binding on the CLB. Learned Counsel further pointed out that in the present case some of the petitioners gave statement before the income tax authorities, being subject matter of the orders. Further the petitioners are shareholders of the Company which is the assessee under the said orders. Therefore, the petitioners are parties to the income tax proceedings in which the said orders are passed. Shri Seervai further contended that the decision of the apex court in AIR 1983 SC 684 relied by the petitioners substantiating the applicability of Section 43 of the Evidence Act, 1872 holds that even a judgment which is not inter-parties is admissible in evidence (a) to show as to what was the decree passed in the matter, (b) to show as to who the parties were and (c) to show as to what properties were the subject matter of the suit. According to learned Counsel for the respondents, the orders of the Commissioner of Income Tax are admissible for the purposes of certain allegations made in relation to purchase of fraudulent bills from M/s. Silver Gems and M/s. Shree Pal Jain, bogus purchases from Kamlesh Metal Corporation and undisclosed from treated metal dross, which were unfounded by the income tax authorities.
Shri Seervai, learned Counsel while concluding his submissions vociferously reiterated that the petition is motivated one with ulterior motive, arising out of pickering between one group and another group resulting in removal of the first petitioner from the office of executive director, protecting the interest of the Company, removal of some of the petitioners from services of the Company for their misconduct and lawful induction of the fourth respondent as director; that the petition does satisfy any of the requirements of Section 397 and 398 and that the petitioners have approached the CLB nt with clean hands disentitling them from claiming any reliefs. When the respondents have denied all allegations made against them, the petitioners have not chosen to enter into the witness box at all, nor any other witness or produced any documentary evidence, deserving dismissal of the company petition. The learned Counsel emphasized that the general interests of the shareholders should not be sacrificed at the alter of squabbles of directors for power to manage the company as held in Kilpest P. Ltd. 4. In the light of the contentions urged on both sides, I shall now consider the legal position on the point as to whether this is a case to which the principles of partnership are attracted. It is the contention of Shri Shah, learned Counsel for the petitioners that the fats and circumstances of the present case attract the principles laid down in Ebrahimi v. Westbourne Galleries Limited - (1972) 2 All ER 492, whereas it is contended by Shri Seervai, learned Counsel appearing for the respondents that the principles of quasi partnership cannot apply to a corporate entity. Whether an incorporated company could be considered to be a quasi partnership or not for the purpose of petition under Sections 397 and 398 would depend upon the acts of a particular case. According to Shri Seervai, learned Counsel there is no equality in the shareholdings, there is no deadlock in the management, there is no written agreement among the family members belonging to various group sin regard to the joint management of the Company and there is no appropriate clause in the Articles of Association of the Company for joint management and therefore, the principles of partnership are not attracted. In this connection, it is worthwhile referring to the cases of (i) Vijay Krishna Jaidka v. Jaidka Motor Co. Ltd. - (1997) 1 CLJ 268 and (ii) Gurmit Singh v. Polymer Papers Ltd. - 2003 (Vol 45) SCL 251, wherein, after discussing various decided cases, practically, all the objections as in this case were examined by this Board and it concluded that to treat a company as a partnership, it was not necessary to have equal shareholdings, no need for deadlock; no need for pre=existing partnership etc. Therefore, if the facts reveal some basic understanding between shareholders that the company would be managed on partnership principles, then the same could be applied in a petition under Sections 397 and 398. Eventhough, in Kilpest (P) Ltd.'s case (supra), the apex court has held that only in rare cases the principles of partnership should be applied, the Court has not completely barred application of the principles of partnership to a company. In Hind Overseas (P) Ltd.'s case (supra), the apex court has only cautioned that the principles of partnership cannot be liberally invoked.
Therefore, once the facts and circumstances of a case indicate that on piercing the corporate veil, the real structure is found to be not that of a company, equitable consideration applicable to a partnership could be applied to that company. In Dipak G. Mehta v. Sree Anupar Chemicals (India) (P) Ltd.-(1999) 21 SCL 107, the foundation of that petition was that company was to be run on the principles of partnership and it was claimed that there was an agreement for equal shareholding and directorship. Eventhough the Bench found that there was no agreement as claimed, considering that, in reality there was equal shareholding and that there was joint management, it held that the principles of partnership could be applied. In this connection beneficial reference is invited to the decision in Jagjit Singh Chawla v. Tirth Ram - (2002) Vol.36 SCL 610, wherein this Board has held that if the facts and circumstances of a case clearly reveal some basic understanding between parties that fruits of the company would be shared and that the company would be managed on partnership principles, then the said principle could be applied in a Section 397/398 petition. It is on record that the late Manilal Chunilal Sonawala's five sons (Manilal group) and late Chimanlal Chunilal Sonawala's four sons (Chimanlal group) had incorporated a partnership firm in the year 1945 for the purpose of refining and processing gold and silver under the name and style of M/s. National Refinery, with all the members of Manilal group and Chimanlal group as partners of the firm. Thereafter, in the year 1955 the first respondent Company was incorporated with main objects of, inter alia, to acquire and take over the business of the partnership firm, M/s. National Refinery. With passage of time when Manilal group and Chimanlal group separated in business, Manilal group took over the control and management of the Company. At present, the shareholding of Manilal group in the Company came to be vested in Shri Bhogilal group with 24.96 per cent of shares, Keshavlal group holding 25.05 per cent, Pannalal groups with 24.96 per cent and Kantilal groups, representing the petitioners, with 24.55 per cent of shares in the Company. Apart from the family members of these different groups, M/s. Oriental Chemindus Private Limited, a corporate body is holding 167 shares of the Company. Admittedly, this corporate body is wholly owned by the family members belonging to the petitioners' group. There is, therefore, no doubt that the entire shares of the Company are held by the family members belonging to Bhogilal group; Keshavlal group; Pannalal group and Kantilal group and not by any outsider. The Company is confined to close relations of these groups. Moreover, various members of each group have been in gainful employment of the Company.
Thus the Company is nothing but a family company closely held by the petitioners' group as well as the respondents' group and cannot cease to be a domestic concern with equity participation of M/s. Oriental Chemindus Private Limited and therefore, the decision in Shrimati Abnash Kaur v. Lord Krishna Sugar Mills Ltd., cited by Shri. Seervai, learned Counsel is not applicable to the facts of this case. The admitted position in the case before me is that there is no written agreement nor is there any provisions in the articles to this effect that the company would be jointly managed by the four families. In Smt.
Nupur Mitra v. Basubani (Pvt.) Ltd.- (2001) 41 CLA 306, this Board after going into the facts of that case where the company was run by a family consisted of several brothers concluded that the course of conduct of the parties would raise a presumption of a unwritten agreement for joint holding and management among the brothers.
Similarly, in the present case, it has to be seen, in the absence of any written agreement and provisions in the Articles, whether circumstances exist to draw a presumption of a unwritten agreement relating to joint management giving rise to the principles of partnership. Admittedly, in the present case the Company was started out of the partnership existing among the predecessors of the petitioners' group and the respondents' groups; the entire shares of the Company are held by the family members belonging to various groups; shared profits of the company and there has been joint representation on the Board in the management of the Company over a period of over 45 years except during the period between December 1965 and December 1969; during the year 1979 when Shri Moolchand M. Shah died; during the period between August 1986 and October 1986 and November 1986 to 22.03.1987, when the Board was not represented from all the four groups. Thus, it is seen that out of a total period of 45 years of management of the Company by the Board, only for a span of over five years, there was no representation from all the groups on the Board of Directors of the company. At no point of tie this joint management has been objected to by any of the groups. There is, therefore, a presumption of unwritten agreement for joint holding and management among family members of various groups. Thus, on an over all assessment of the facts of the instant case, I am convinced that the Company is in the nature of partnership with the understanding of joint holding and management by the family members of various groups and that the principles of partnership are attracted to the case on hand. It is not, therefore, possible to agree with the contentions of learned Counsel for the respondents.
5. The acts of oppression and mismanagement enumerated by Shri S.S.Shah and replies of Shri Seervai made at the time of oral submissions together with allegation-wise findings of this Bench are as under: Removal of the first petitioner from the office of executive director Wrongful termination of services of members of the Petitioners' Group Shri S.S. Shah: The respondents constituting the majority had at the Board Meeting held on 01.07.2000, while stripping of the powers of the first petitioner as the Executive Director curtailed his rights and responsibilities, withdrew his powers to attend to day-to-day affairs of the Company, disentitled him to represent the Company, withdrew cheque signing powers etc. empowered the respondents 2 to 4, 6 & 9 to sign the cheques, bills of exchanges and operate the bank accounts of the Company. The removal of the (SIC) petitioner from the office of Executive Director constitutes an act of oppression, in support of which reference was made to Mrs.
Senthamarai Munusamy v. Microparticle Engineers Pvt. Ltd.-[2001] 105 CC 526. This act of the majority is wrongful and burdensome preventing the minority group from participating in the affairs and administration of the Company.
The respondents have illegally removed several of the members belonging to the Petitioners' group employed by the Company or its subsidiary. The third Petitioner was removed for the false statement said to have been made before the Income Tax Authorities in regard to the bogus bills procured by the Company and for the alleged unauthorized taking of gold. When the fifth respondent appraised the management of the discrepancies in sale of the dross to a third party and the fact that monies belonging to the Company were being collected in cash, but not accounted for in the books of account of the Company, the respondents' group instead of taking appropriate remedial measures dismissed the fifth respondent from the services of the Company. Similarly petitioner Nos. 7 and 9 were wrongfully removed from services of the Company.
Shri Navroz Seervai: The petitioners 1 & 3 though made statements under Section 132(4) of the Income Tax Act before the Income Tax authorities at the time of raid on the Company, they refused to disclose particulars of such statements made by them, in spite of repeated requests made by the Board of Directors of the Company.
Learned Counsel referred to the statement made by the first petitioner on 29.11.1999 (pages 354-364 of vol.I of reply) and also by the third petitioner on 15.12.1999 (pages 376 & 377 of vol.I of reply), in regard to the alleged purchase of bogus bills by the Company, misappropriation of stock in the course of refining process etc., which are absolutely false but made with intention to prejudice the Company as well as its members. When the other directors furnished particulars of the statement made by them in compliance with the decision of the Board of Directors, petitioner Nos. 1 & 3 did not and acted against the interest of the Company compelling the Board of Directors to re-designate the first petitioner at the Board meeting held on 01.07.2000 as a non-executive director without, however, touching the salary and perquisite enjoyed by him and further suspended the third petitioner from his part-time employment in the Company. The same was not done either with a malafide intention or with some ulterior motive, in which case such removal is not an act of oppression. The first petitioner was at no point of time removed from the office of director, but he was not elected as director at the extraordinary general meeting held on 31.03.2003. The exercise of inherent right of the shareholders to elect their directors cannot constitute an act of oppression. There is also no restriction in the Articles of the Company in electing directors of the Company. The grievances of the petitioners must be as of shareholders and the grievances as directors of the Company do not fall within the realm of Sections 397 and 398. No directorial complaints can be considered in Section 397/398 petition. Shri Seervai, in support of his claim referred to a number of decisions already cited by him and accordingly justified the removal of the first petitioner from the office of executive director.
In regard to the termination of services of the members belonging to the petitioners' group, Shri Seervai pointed out that the third petitioner had unauthorisedly taken 225 gms of standard gold on the personnel guarantee of first petitioner, which was not returned and further made false statement before the Income Tax authorities in regard affairs of the company upon which after due domestic enquire he was suspended. The Company had retained the fifth petitioner on professional basis and he was not in the employment of the Company.
The Company was forced to dispense with his consultancy services on account of his unauthorised interference in the working and function of the Company. The seventh petitioner was not removed but he was not reappointed as director of M/s. VIN-VISH CORPORATION by the members at the Annual General Meeting held on 27.11.1999. The Company had removed the ninth petitioner from the employment as he committed theft of 500 gms of gold. After proper domestic enquiry, which was unsuccessfully challenged by the ninth petitioner before, inter-alia, Labour Court etc. he was removed from the services.
While members are given dividend and participating in general meetings, they cannot seek redressal for any of their personal grievances on account of termination from services of the Company under Section 397.
FINDINGS: It is on record that the Income Tax Department had in November, 1999 conducted an action of search and seizure at the various premises of the Company as well as the residential premises of the directors of the Company and recorded the statement made by the directors, including the first petitioner under Section 132(4) of the Income Tax Act. The final statement made on 29.11.1999 by the first petitioner is found at Pages 354-364 of vol.I of reply in the form of answer to as many as 19 questions put by the Deputy Inspector of Income Tax. This statement relates to a locker kept at Tardeo Branch in the name of the Company, Bank Accounts of S.C. Shah; J.C. Shah and M.C. Shah; detailed description of the Company and nature of its business; constitution of M/s. Vin Vish Corporation Pvt. Ltd., held by the Company and members of the four groups and its nature of business; refining process of precious metals carried out by the Company; suppression of income to the tune of Rs. 54 lakhs by the Company on account of recoveries made from metal dross during the years 1994-95; 1995-96 and 1996-97, diversion of business of the company to M/s. Bhagawati Enterprises, owned by the ninth respondent; misappropriation of the undisclosed income by the Company; shortage of non-ferrous metals at the factory premises of the Company etc. It is pertinent to observe that most of these allegations do form part of the acts of mismanagement arrayed in the Company Petition. The Board of Directors, its meeting held on 16.12.1999 resolved that, every director on the Board was required to furnish particulars of the statement made before the Income Tax authorities in form of disclosure (pages 365-367 of vol.I of reply) prescribed by the Board, containing queries regarding search made by the Income Tax authorities on the Company. In spite of the request made by the ninth petitioner in his letters dated 24.12.1999 and 29.12.1999 (pages 368, 369 & 371-374 of vol.I of reply), the first petitioner never divulged the details of his statement made before the Income Tax authorities. While other directors submitted the form of disclosure giving particulars of the statement made by them before the Income Tax authorities, the first petitioner declined on the pretext that they pertained to his personal affairs. A perusal of the statement made by the first petitioner unequivocally reveals that the information does not relate to his personal affairs. At this juncture it is relevant to point out that the first petitioner opposed the resolution of the Board of Directors passed at its meeting held on 12.05.2000 revoking its earlier unanimous resolution dated 07.01.2000, to which he is a party, declaring additional income, to my mind, on account of his above statement made before the Income Tax Authorities. The chain of events show that the first petitioner concealed particulars of his statement without any justification, but came out with the Company petition alleging, among others, the very same allegations of mismanagement. A director in discharge of his fiduciary duties has to act for the benefit of the Company. On the other hand if a director breaches his fiduciary responsibilities, due to which his executive powers are removed, then, he cannot complain of the same. In the present case, since the first petitioner failed to act in the interest of the Company, there is no scope to find fault with the decision of the Board of Directors to strip of all executive powers of the first petitioner.
While doing so, the first petitioner's salary and other perquisites were not curtailed. Moreover, there is nothing on record to show that the same was done by the Company with a malafide intention or some ulterior motive, in which case, such removal of powers of the first petitioner would not amount to an act of oppression as held in Vinod Kumar Mittal v. Kaveri Lime Industries Ltd. Admittedly, the first petitioner was not removed from the office of director.
However, it is on record that when the term of the first petitioner as director came to an end he was not re-appointed on the Board at the Board meeting held on 13.03.2003, subsequent to filing of the petition. When the Company Petition was heard on 26.03.2003, this Bench on the representation made by the petitioners directorate the Company to consider name of the first petitioner for being reappointed as director at the extraordinary general body meeting proposed on 31.03.2003. At the said meeting held on 31.03.2003, the resolution to reappoint the first petitioner as a director was defeated by the majority shareholders. Having held that the principles of partnership could be applied in the present case, whether non-appointment of the first petitioner as a director could be considered to be an act of oppression in view of the allegations of the respondents as already enumerated against him, has to be considered. The allegation in regard to the suit claim of the Company against M/s. National Refinery Private Limited, a partnership firm, wherein the first petitioner is one of the partners, is under dispute before the High Court of Bombay and as such in my view, there is no need to deal with the same. The complaint of the respondents in relation to the landed property at Khari District of Thane and the disputed transaction with M/s.
Kamalesh Metal Corporation are nothing to do with the conduct of affairs of the Company and cannot be oppressive of the minority shareholders. The other charges against the first petitioner are that huge sums of money due to the Company remain unpaid and that the first petitioner failed to ensure return of gold taken on his responsibility by the third petitioner on approval basis are to my mind are the commercial transactions of the first petitioner with the Company, for which the Company is at liberty to enforce its lawful claim against the first petitioner. Similarly, there are lawful ways and means to realise the amounts due to the Company from Petitioner Nos. 2, 3, 5, 7, 9 and 13. The grievance of the petitioners on account of the alleged theft of gold by the ninth respondent does not serve any move, in view of the return of gold by him. The plea that petitioner Nos. 1 & 3 had engineered the raid on the company is not supported by any material excepting the statement of petitioner Nos. 1 & 3 before the Income Tax Authorities. These acts of the commission or omission attributed to the petitioners cannot cause any impediment in appointing the first petitioner or any other petitioner or shareholder belonging to the petitioners' group without any charge, on the Board of directors of the Company, especially when the principles of partnership have been applied in this case. Against this background, the claim of the respondents that the inherent right of the shareholders in electing a director of their choice cannot constitute an act of oppression that directorial complaints cannot be the subject of a Section 397/398 proceeding and that the minority shareholders are bound by the decision of the majority shareholders do not hold good and the decisions cited by Shri Seerai, learned Counsel in support of these proportions have no application to the facts of the case on hand.
Anyway this issue becomes irrelevant in view of the final order that I propose to pass.
The admitted position is that there is neither written agreement nor is there any provision in the Articles of Association of the Company providing employment to the family members of various groups.
Nevertheless, the practice of engaging the services-of the family members by the Company is evident from removal of petitioner Nos. 3, 5, 7 & 9 from gainful employment. Any removal of the family members from employment of the Company, being wholly held by a family attracting the principles of partnership, would constitute an act of oppression. Admittedly, the ninth petitioner challenged his removal before the Labour Court and Industrial Court, which ultimately ended against his favour. Similarly, the Company has given justification for removal of the other petitioners. Whether, their removal is lawful or justified or not cannot be adjudicated by the CLB, irrespective of merits of their claim. Therefore, petitioner Nos. 3, 5, 7 & 9 cannot agitate before the CLB these grievances under Section 397/398 proceedings.
Shri S.S. Shah: The Company has made a claim against M/s. National Refinery Private Limited (NRPL) for a sum of Rs. 40,44,679.86 towards the outstanding principal amount together with interest as of 30.9.2000, said to be due and payable in respect of goods supplied and delivered by the Company. NRPL is a partnership firm, consisting of among others Petitioner Nos. 1, 3, 5 7 & 9, as partners. Though the liabilities of M/s. NRPL are completely settled and the respondents' groups are paid Rs. 16 Lacs, each as per the Memorandum of Understanding dated 29.3.1981, the Company has falsely made the claim at the behest of the respondents' group.
Shri Navroz Seerai: The Company has filed a summary suit against NRPL and its partners, being petitioner Nos. 1, 2, 5, 7 and 9 and one Shri Bharat Malabari in the High Court of Bombay for recovery of the amount due and payable in respect of goods supplied and delivered to NRPL. The civil suit is pending adjudication. The suit claim remains undischarged and no payment has been made by the petitioners pursuant to the alleged MOU dated 29.03.1981, which is under serious dispute among the parties.
FINDINGS: The claim of the Company against NRPL is under dispute in a civil suit before the High Court of Bombay, which is contested by the parties to the suit. It is not under dispute that NRPL is a partnership firm constituted among others petitioner Nos. 1, 3, 5, 7 and 9. the disputes in regard to the suit claim and the MOU dated 29.03.1981, in my view, are nothing to do with the conduct of affairs of the Company. The grievances of the petitioners as partners of NRPL, being personal grievances which in no way cause prejudice to them in the matter of their legal and proprietory rights as shareholders cannot fall within the realm of Sections 397 as held in Shanti Prasad Jain v. Kalinga Tubes Ltd. Any grievance in any character other than a member is outside the purview of Sub-section (2) of Section 397, as held in V.M. Rao v. Rajeswari Ramakrishnan. Therefore, the act of oppression on account of the claim of NRPL is not well founded.
Irregularities while convening Annual General Meetings & Board Meetings:- Shri S.S. Shah: The Company failed to furnish copies of the Chairman's speech in respect of the Annual General Meeting of the Company held on 28.11.1998 and 27.11.1999, in spite of repeated demands made by the Petitioners. The speeches made by the Chairman at the aforesaid meetings were rude and derogatory of the minority group of shareholders. The Chairman failed to clarify various issues in regard to the accounts, administration and other affairs of the Company, raised by the petitioners at the time of Annual General Meetings of the Company. In this connection learned Counsel relied on the letters dated 19.11.1998, 18.11.1999 and 21.9.2000 of the Petitioners containing in-toto 64 queries sent to the respondents well before the Annual General Meeting for the years ended 31.3.1998, 31.3.1999 and 31.3.2000 respectively, which were not satisfactorily answered at such meetings. The Chairman's speech furnished subsequent to the Annual General Meetings did not contain satisfactory answer to all the queries raised by the petitioners.
The respondents with absolute majority brushing aside the queries of the petitioners had adopted the accounts and approved the resolutions at the above Annual General Meetings. Though the annual Accounts of the Company for the year ended 30.09.2000 had several irregularities and discrepancies, as pointed out in the auditor's report dated 13.09.2000, the accounts were passed without offering any explanation to the auditor's report by reason of the brutal majority held by the respondents. M/s. Lakhani & Co., the statutory auditors of the company for over a period of 30 years, were removed at the said Annual General Meeting for having pointed out the irregularities in the accounts of the Company, without offering them an opportunity to answer the charges levelled against them. The respondents had succeeded in having passed all the resolutions preventing the petitioners' group from participation in the management of affairs of the Company. Though the Board of Directors had initially recommended a dividend of 10%, the respondents, forming the majority had declined to declare dividend and the petitioners were helpless spectators at the Annual General Meeting.
The Board Meetings were conducted in an improper and irregular manner. The agenda was deliberately circulated at the last minute, without incorporating the issues proposed by the Petitioner. The meetings were not convened at the appointed time, but at belated hours thereby avoiding discussions and deliberations on various issues. The notice for the Board Meeting held on 14.9.2000 was given only on the very same date at 5.45 P.M. with the agenda in relation to consideration of the auditor's report dated 13.9.2000. However, the respondents did not circulate copies of the Balance sheet and Profit and Loss account and auditor's report. The petitioner was not served with a copy of minutes of the Board Meeting held on 14.9.2000 in spite of the written request made by him. The agenda containing 17 items for the Board Meeting held on 28.9.2000 at 4.00 P.M. was given to the first petitioner only on the previous day at 11.45 A.M. Similarly the first petitioner was belatedly served with a notice dated 20.10.2000 together with agenda for the Board Meeting held on 21.10.2000 at 2.30 P.M. Thus, the petitioners' group was prevented from active participation in the Board Meetings and never given permissions to peruse the minutes of Board Meetings from time to time. Many a time the issues proposed by the first petitioner were neither included in the agenda for the Board Meetings nor recorded the objections of the first petitioner, in spite of the written protest made by the first petitioner. The respondents further brought before the Board Meeting held on 21.20.2000 the mater relating to the landed property at Khari, Thane District, which was amicably settled longtime back in accordance with the Memorandum of Understating dated 16.9.1997 which was executed by the directors and main shareholders of the Company in the presence of a family mediator. Accordingly respondent Nos. 2, 6 & 9 were paid each a sum of Rs. 16 lacs in lieu of the landed property at Khari, Thane District, given back to the petitioners group. The agenda in regard to the said landed property which came up for discussion at the Board Meeting held on 21-10.2000 was totally unnecessary and irrelevant as there was no necessity to reopen a closed issue. The minutes on Board Meetings were neither properly recorded nor circulated at appropriate time. The respondents never maintained decorum and transparency, while conducting the Board Meetings, but used derogatory and rude language in conduct of the Board Meetings.
The fourth respondent, belonging to Bhogilal group was wrongfully appointed as an additional director, without prior notice in spite of the opposition made by the petitioners and even while the second respondent from the Bhogilal group is already representing the said group. Therefore, appointment of the fourth respondent as an additional director is in breach of the understanding among various groups of the shareholders, which would constitute an act of oppression. In this connection, learned Counsel referred to :-T.V. Prasadachandran Nair v. Anandamandiram Hotels Pct. Ltd.- [2002] 100 CC 394 - to show that the chain of events, by which the petitioner group has been excluded from management, the first petitioner removed from the office of director and the fifth respondent co-opted as director would constitute the acts of oppression.
* V.G. Balasundaram Vs. New Theatres Carnatic Talkies Pvt. Ltd. - [1993] 77 CC 324 - to show that the appointment of director with a view to gaining majority would amount to an act of oppression.
Shri Navroz Seervai: The grievances of the petitioners in regard to the Annual General Meeting for the years 1998, 1999 and 2000 are untrue, The Company had furnished copied of the Chairman's speech made in the Annual General Meeting for the years ended 31.03.1998 and 31.03.2000 to all the shareholders who were present at the meeting including several of the petitioners. The Chairman's speech was not rude or insulting or derogatory towards the petitioners. All the quarries raised by the petitioners in respect of the accounts, administration and affairs of the company were satisfactorily answered by the Chairman. The respondent never suppressed or ignored the rights of the petitioners in relation to conduct of the affairs of the Company. Thought the first petitioner had approved and signed the Annual Accounts of the company in the Board Meeting, the first petitioner along with petitioner Nos. 3, 5 & 9 voted against passing the annual accounts for the year ended 31.3.1998. The Company had furnished copy of the minutes of the Annual General Meeting held on 28.11.1998 to the petitioners on their request made by them. It is true that the Company did not furnish a copy of the Chairman's speech made in Annual General Meeting held on 28.11.1999 to any of the shareholders in view of the raid conducted by the income Tax authorities on the Company but the Chairman's speech was nevertheless read out to the members who were present at the said Annual General Meeting of the company. As there was no request from the petitioners for copies of minutes of the Annual General Meeting held on 30.09.2000, the Company had no occasion to send a copy to them. M/s Lakhani & Co., in spite of the special notice of Annual General Meeting sent by the Company, did not deliberately choose to attend the Annual General Meeting held on 30.09.2000 though the audit report contained several qualifications. The annual accounts of the Company for the year ended 31.03.2000 were duly passed after detailed discussions by the shareholders present on 30.09.2000. The general body of shareholders was compelled to appoint a new firm of auditors namely M/s Hiten & Jiten due to the negligent and behest auditing conduct by M/s Lakhani & Co. Though the Board of Directors had earlier recommended a dividend of 10%; the petitioners instead of voting in favour of the proposal for declaration of dividend, abstained from voting on the resolution proposing a dividend of 10%.
The fourth respondent was appointed as director by the general body of shareholders at the Annual as General Meeting of the Company held on 30.09.2000 for a period of 5 years with effect from 1.10.2000.
The action of the majority shareholders in lawful exercise of their power to elect directors and auditors in the best interest of the Company as well as in their own interest cannot be impugned by the minority shareholders.
The conduct of the Board Meetings cannot constitute an act of oppression in affairs of the company. The Board Meetings were duly conducted in accordance with procedure prescribed in the Act. The Company used to send notice well before the date of Board meeting and not at the last moment. The agenda was circulated among all the directors sufficiently in advance and meetings were conducted in accordance with agenda. Whereas, the first petitioner was in the habit of forwarding his points for the agenda only after circulation of the agenda. The minutes of the previous Board Meeting were used to be approved at the immediately succeeding Board Meetings. During the Board Meetings all the directors were given equal opportunity to participate and discuss the issues taken up for consideration. The minutes of the Board Meeting were correctly and diligently prepared and recorded within the specified time, without giving any scope for distortion of facts. The minutes were never fraudulently altered in the minutes book maintained by the Company. The respondents never used abusive or derogatory language at the Board meetings but always maintained decorum in the conduct of the Board Meetings. The Company always maintained transparency at even stage of the meeting. The fourth respondent was duly appointed as an additional director of the Company at the Board Meeting held on 14.02.2000 though opposed by the first petitioner. As there is no restriction in the Article of the Company, in electing directors, the petitioner cannot have any grievance on this account and much less cannot constitute an act of oppression.
FINDINGS: There is no doubt that the shareholders are entitled for copies of the Chairman's speech made at the annual general meetings of the Company and of the annual accounts adopted at such meeting.
The Company is bound to discharge its statutory duties towards its shareholders. While it is the contention of the petitioners that the respondents have not complied with any of these requirements, it is stoutly denied by the respondents. In the event of failure of the Company to comply with the statutory requirements, it is always open for the regulatory authority to initiate appropriate action for the such non-compliance. The grievance of the petitioners on account of non-supply of copies of the balance sheet, profit and loss account with Auditor's Report and Directors Report can be remedied by invoking the provisions of the section 219. It is observed from the letter dated 19.11.1998 of petitioner Nos. 5, 7 & 9 that they had raised 23 queries arising out of the accounts of the Company for the year 1997-98. Though these queries were admittedly explained in writing, the complaint of petitioners that the explanation offered by the Company at the annual general meeting was not satisfactory is bald and uncertain. Though vague and uncertain allegations may constitute grounds for suspicion, they do not entitle the petitioners to ask for an investigation into the affairs of the Company as held in Mohta Brothers (P) Ltd. v. Calcutta Landing And Shipping Co. Ltd. and P.S. Offshore Suppliers and Services Pvt. Ltd. v. Bombay Offshore Suppliers and Services Ltd. Similarly by a letter dated 21.09.2000 petitioners Nos. 5, 7 & 9, raised as many as 16 queries arising out of the accounts of the Company for the year 1999-2000, calling for the details of material purchased miscellaneous expenses; legal and professional fees incurred by the Company; non-closure of secured loan; details of insurance account; Bank charges and commission paid, use of the Company's premises and vehicles by certain directors and employees for their personal use, unused plant and machinery, foreign trip undertaken by ninth respondent; actual recovery made from metal dross in the refining process; change of the statutory auditors, appointment of the fourth respondent as director and purchase of car for the Company. Most of the queries neither appear to be serious in nature nor substantiated. The letter dated 18.11.1999 of petitioner Nos. 3, 5, 7 and 9 raising as many as 25 queries in regard to the accounts of the company for the year 1998-99 addressed to the Company is not on record. There is neither any material to show that the Company suffered to show that the Company suffered any loss on this account.
Whether the Chairman did clarify or not the queries raised by the petitioners at the time of the annual general meetings held for the years 1998, 1999 and 2000, being matters of fact cannot be proved by either of the parties. In regard to the claim of the petitioners that the respondents with absolute majority brushing aside the queries of the petitioners had adopted the accounts and passed the resolutions in such meetings preventing the petitioners' group from participation in the management of the affairs of the Company, the petitioners have not made out any case of loss sustained by the Company on account of such conduct of affairs of the company. In regard to removal of the statutory auditors, the petitioners could not be aggrieved, instead only the statutory auditors. It is not appropriate for me to interfere with the collective wisdom exercised by the members at the annual general body meetings of the Company, in the absence of anything contrary to Articles of Association of the Company.
The entire grievances of the petitioners in regard to the convening of Board meetings are procedural in nature. The reliefs under Sections 397 and 398 being preventive in character, the past acts of the respondents do not fall within the ambit of these sections, as held in Sheth Mohanlal Ganpatram v. Shri Sayagi Jubilee Cotton And Jute Mills Co. Ltd. and Shanti Prasad Jain v. Kalinga Tubes Ltd. However, the claim and counter claim made by the parties in the conduct of the Board meetings are matters of record, the truth or otherwise of which cannot be gone into at this stage. At the same time directors do have right to receive notice of Board meetings, copy of minutes of Board meetings; inspect Books of Accounts of the Company and right to be re-elected as directors. Any director being a shareholder has right to receive notice of general meetings; attend meetings and participate in the proceedings thereon, receive copy of balance sheet, profit and loss account, inspect register of members; register of investments etc. The directors are entitled to enforce their rights bestowed on them by the Statute in ensuring proper and regular conduct of the Board meetings. The grievance of the petitioners that the matter relating to the landed property at Khari, Thane District, a completed transaction was discussed at the Board meeting held on 21.10.2000, in my view, is of no consequence.
Merely because the second respondent representing Bhogilal group is already on the Board, induction of the fourth respondent belonging to the same group on the Board cannot be irregular, provided the petitioners' group is represented on the Board. Through the shareholders have inherent right to elect any director of their choice, yet, the respondents ought to have ensured the induction of the petitioners' group on the Board for the reasons already recorded elsewhere.
Shri S.S. Shah: There was inordinate delay in delivering the original share certificates to the shareholders belonging to petitioners' group. The Company was in possession and custody of these share certificates, in spite of repeated demands made by the share holders form time to time, in support of which learned Counsel referred to a large number of communications sent by the petitioners, upon which the Company delivered the share certificates to the respective share holders belonging to petitioners' group.
Shri Navroz Seervai: The Company was keeping the original share certificate of shareholders in safe custody at trade premises over the past 40 years, which is within the knowledge of the petitioners.
The shareholders' demand made for the original share certificates for the first time in November 1999, when the Company faced the Income Tax raid. Consequently the Board of Directors of the Company at its meeting held on 14.02.2000 resolved that the share certificates would be held in future by the individual share holder, upon which the Company by a circular dated 27.03.2000 requested all the shareholder to take back of the share certificate from the Company. Accordingly, the original share certificates were delivered to the respective shareholders.
FINDINGS: It is on record that the Company was in possession of the original share certificates of the shareholders till the Board of Directors at its Board meeting held on 14.02.2000, resolved to return the share certificates to the respective shareholders, as borne by a circular dated 27.03.2000 issued by the Company (page 1229 of vol. II of reply) requesting the shareholders to collect the share certificates. The said circular speaks of the certificates of the shareholders of the Company and not only of the petitioners' group. There is no material to show that the shareholders made any request for return of the share certificates prior the November 1999. All the correspondence referred to in the petition demanding the share certificates pertain to the period from 17.11.1999 to 03.03.2000, when the Company was facing income tax raid and the consequent proceedings. The complaint of the petitioners made for the first time in November 1999 was remedied in March 2000 prior to filing of the Company Petition and therefore, this grievance cannot now be the subject matter before the CLB. Shri S.S. Shah: The respondents refused and delayed complete inspection of the books of accounts and copies of the books of accounts on frivolous excuses, imposed conditions; afforded shorter period and prevented the first petitioner to inspect the records of the Company in spite of the written demands and the lawyer's notice caused by the petitioners. The first petitioner was receiving copies of the accounts just prior to commencement of the meeting of Board of Directors of the Company on account of which he could not ascertain the true financial position and affairs of the Company.
Though the first petitioner had called for details of the expenses debited to the accounts of the Company, books of accounts and records of the Company for inspection, they were not furnished in full and that too belatedly. The first petitioner was denied since January, 2000 access to the minutes of the various meetings of the Board of Directors of the Company, books of accounts for the year ended 31.03.2000 register of fixed assets and register of contracts in which directors are interested. Though the Company had disclosed Rs. 1.21 crores by way of undisclosed income such income was not reflected in the balance sheet of the Company for the year ended 2000. Thus, the petitioners have been excluded from participating in the day-to-day affairs and management of the Company. All the negotiations made by the petitioners through intervention of the mediators for any amicable solution have failed. In this connection, learned Counsel referred to the communications and legal notices exchanged between the petitioners and respondents (A-F to A-X).
Shri Navroz Seervai: The Company made available its books of accounts minutes of the Board of Directors and the general meetings for inspection by the first petitioner took full inspection of the books of accounts of the Company and the minutes of meetings of board and general meeting between 4.10.2000 and 12.10.2000. The first petitioner was given access to minutes of various meetings of the Board of Director of the Company, books of accounts and other statutory records. The first petitioner was never denied inspection as contended by him.
FINDINGS: According to the petitioners, they were refused and denied complete inspection of books of account; register of fixed assets; register of contract, in which directors are interested etc. The correspondence exchanged between the parties, which are on record show that Company by a letter dated 26.09.2000 (Exhibit A-G) permitted the seventh petitioner to take inspection of books of account on 29.09.2000 at 4.00 p.m. As the inspection was not taken, the Company permitted inspection of books of account by its letter dated 28.09.2000 (Exhibit A-I) on 04.10.2000, on which date the Company made available books of accounts numbering 13-14 for inspection, as borne out by the letter dated 04.10.2000 (Exhibit A-M) of the first petitioner. As the inspection of books of account could not be completed on 04.10.2000, further opportunity was given to complete inspection on 12.10.2000 by the Company in terms of its letter dated 05.10.2000 (Exhibit A-N). Thus it is beyond doubt that the Company at no point of time refused inspection of its books of account for the petitioners. It is only the petitioners who have failed to make use of the opportunity offered by the Company on more than one occasion to complete inspection of its books of account and other statutory records sought by them. However, in the event of any further necessity to inspect the books of accounts of the Company and other statutory records, a director is entitled to invoke the inherent and statutory rights, remedying his grievances.
Shri S.S. Shah: The Company had purchased from M/s Kamalesh Metal Corporation ("KMC") through the third petitioner 1105 kgs of copper for a sum of Rs. 1,27,861.20, as borne out by the bill dated 05.02.1999 issued by KMC. Through the Company utilized the said copper for production, failed to settle the claim of KMC in full save a total sum of Rs. 25,000/- in spite of repeated demands. In this connection, Shri Shah referred to a letter dated 22.10.1999 of KMC issued by way of notice under Section 434 threatening to initiate action to wind up the Company in the event of non-payment of the outstanding amount towards purchase of copper by the Company.
However, the claim of KMC remains unsettled by the Company.
Shri Navroz Seervai: The Company never purchased 1105 kgs of copper from KMC through the third petitioner. The third petitioner, an employee of the Company on part-time basis was never authorized by the Board to purchase copper from KMC. The petitioners 1 & 3 fraudulently indulged in the said transaction, at the cost of reputation of the Company. Through KMC issued delivery challans on 05.02.1999 for Rs. 1,27,861.20, copper was said to be delivered only on 05.12.1999. KMC never delivered 1105 kgs of copper on 05.12.1999.
Learned Counsel further pointed out the discrepancies reflected in delivery challans dated 05.02.1999 (pages 1011 and 1012 of vol. II of counter), wherein dates below the receiver's signature are found to be corrected. The payment of Rs. 25,000 made by the first petitioner to KMC towards purchase of copper was not authorized by the Directors of the Company. When KMC demanded balance of the payment towards the alleged supply of copper threatening winding up action against the Company by its letter dated 22.10.1999 (pages 1017 to 1019 of vol. II of counter), the Company sent a detailed letter on 15.11.1999 (pages 1024-1027) calling for several particulars as many as 23, which KMC neither replied nor took any action for winding up the Company. This shows that the claim made by KMC is false. Moreover, non-payment of money by the Company to a third party cannot be a grievance of any shareholder constituting an act of oppression in the affairs of the Company. Learned Counsel further pointed out that the fraudulent transaction with KMC raised before the income Tax authorities was also rejected by the Appellate authorities.
FINDINGS: The transaction of purchase of copper by the Company from KMC is under dispute. Though KMC issued delivery challans on 05.02.1999 for Rs. 1,27,861.20 and copper was said to be delivered to the Company the date as furnished in the delivery challans dated 05.02.1999 (pages 1011 and 1012 of vol. II of reply) below the receiver's signature is found to be corrected/struck off. There is no explanation for these discrepancies. When KMC demanded balance of the payment towards supply of copper by its letter dated 22.10.1999 (pages 1017 to 1019 of vol. II of reply), the Company wrote a detailed letter on 15.11.1999 (pages 1024-1027) calling for several particulars as many as 23. Though KMC has caused a statutory notice to initiate winding up proceedings against the Company as early as on 22.10.1999, there is no record made available to show that any such action was taken by KMC against the Company for recovery of any amount towards supply of copper, nor replied the letter dated 15.11.1999 of the Company in spite of lapse of more than three years. This shows doubtful nature of the claim made by KMC, especially when the supply of copper was said to be made on the verbal order placed by the Company through the third petitioner, as borne out by the letter dated 22.10.1999 of KMC. Moreover, non-payment of money by the Company to a third party even if it is true cannot be a grievance of any shareholder constituting an act of oppression in the affairs of the Company.
Shri S.S. Shah: The Income Tax Department had in the year 1989 raided the Company and residence of its directors for suppression and non disclosure of the true income of the Company resulting in payment of additional income tax and penalty by the Company to the tune of Rs. 40 lacs. The Company was again raided by the Income tax authorities in the year 1999 resulting in an undisclosed income of the Company of about Rs. 1.21 crores and payment of additional taxes, penalties, interest etc. of Rs. 76 lacs. At the time of income tax raid during the year 1999 respondents 6 & 9 were in-charge, among other areas, of finance, accounts and administration. Pursuant to the raid, the Board of Directors including the first petitioner at a meeting held on 07.01.2000 had declared an additional income of Rs. 1.21 crores as block assessment for the period of past 10 years. This was on account of the acts of mismanagement and misconduct of the majority group in affairs and conduct of the Company resulting in suppression of income from the minority group and diversion to the majority group at the cost of the Company.
Shri Navroz Seervai: At the time when the Income Tax Department raided the Company in the year 1989, petitioner Nos. 1 & 3 were integral part of the management of the Company. Upon the income tax raid, the management of the Company including the first petitioner had approached the Settlement Commission for a full and final resolution of the matter. When the Settlement Commission determined the amount of tax payable by the Company, it was accepted by the Company and accordingly the amount of tax was paid by the Company.
The decision of the management to settle the disputes with the Income Tax Department was approved by all the shareholders including the petitioner. The petitioners cannot now reopen the closed issue, after a lapse of a decade. The past acts of the respondents do not fall within the ambit of Sections 397 and 398 of the Act as held in Shanti Prasad Jain v. Kalinga Tubes Ltd.- (1965) XXXV CC 351. The remedy under Sections 397 and 398 is preventive in character intended to put an end to a continued state of affairs which is oppressive to members and prejudicial to the interests of the Company and not to afford compensation to the aggrieved shareholders in respect of the acts already done which were no longer continuing wrongs. The remedy can only be invoked when the affairs of the Company are being conducted in a manner oppressive to shareholders and also when the affairs of the Company are being conducted in a manner prejudicial to the interests of the Company as held in Sheth Mohanlal Ganpatram v. Shri Sayaji Jubilee Cotton And Jute Mills Co.
Ltd.- (1964) XXXIV CC 777. Any misappropriation of money in the past is not a continuing wrong as held in Stadmed Private Limited v. Kshetra Mohan Saha - 1969 39 CC 741. At the time of income tax raid during the year 1999, the first petitioner was in charge of development, production, marketing and sales. Pursuant to the raid, the Board of Directors, including the first petitioner at its meeting held on 07.01.2000 unanimously resolved declaring an additional income of Rs. 1.21 crores for the block assessment of the Company for the period of the last 10 years. Later, the Board of Directors at its Board meeting held on 12.05.2000 revoked its earlier resolution dated 07.01.2000, which was opposed by the first petitioner, but for his fear that the statement made before the Income Tax authorities regarding undisclosed income would become false. The income tax raid during the year 1999 was engineered by petitioner Nos. 1 & 3 as a result of the action initiated by the respondents against the ninth respondent, a relative of petitioner Nos. 1 and 3 for having stolen 500 grams of gold. Learned Counsel for the respondents referred to the statement of the first petitioner made on 29.11.1999, before the Income Tax authorities (pages 354-364), wherein the first petitioner affirmed hat there was suppression of income amounting to Rs. 54 lakhs for three years recovered during refining process of the precious metals. The intention of the first petitioner is to destroy the Company by making false statement to the income tax authorities with ulterior motive. If the petition is not bonafide, the Court is bound to reject it, as held in 1. Palghat Exports Private Limited, 2. P. Ram Kumar v. T.V. Chandran and Ors., 1994 79 CC 213. The income tax raids would not by themselves constitute acts of oppression and mismanagement in the affairs of the Company, more so, when the assessment order made by the Income Tax Department pursuant to the raid, has been set aside by C.I.T. (Appeals) disproving concealment of undisclosed income.
FINDING: The income tax raid took place on the Company on two occasions during the years 1989 and 1999. When the Company was raided in the year 1989, the management of the Company including the first petitioner approached the Settlement Commission for resolving the matter. The amount of tax determined by the Settlement Commission was accordingly paid by the Company. The first petitioner consciously acknowledged the order of the Settlement Commission dated 24.10.1995, in his letter dated 31.07.1997 addressed to the Commissioner of Income Tax, relevant portion of which reads as under: "We further would like to bring to the attention of your honour that in view of the order of Honorable Settlement Commission, dated 24.10.95, Company has already paid a sum of Rs. 25,76,222/-as payment of taxes. Already this has severally affected normal operations". (page 352 & 353 of vol. 1 of reply.) The claim of the petitioners (para 35 at page 69 of rejoinder) that they being minority shareholders in the Company would not have been in a position to influence the decision of the majority to settle the dispute with the Income Tax Department is belated and merits no consideration. The matter which was closed a decade ago, being a past act does not fall within the ambit of Sections 397 and 398, as held in Shanti Prasad Jain v. Kalinga Tubes Ltd. The remedy provided by Sections. 397 and 398 is essentially preventive in character and is not intended to enable the aggrieved shareholders to set at naught what has already been done by controlling shareholders in the management of affairs of the Company as held in Sheth Mohanlal Ganpatram v. Shri Sayaji Jubilee Cotton And Jute Mills Co. Ltd. When the Company was raided during the year 1999, the Board of Directors of the Company including the first petitioner at its meeting held on 07.01.2000 unanimously resolved to declare an additional income of Rs. 1.21 crores for the block assessment of the Company for the period of last 10 years. However, the Board of Directors subsequently at its Board meeting held on 12.05.2000 declaring additional income, which was opposed by the first petitioner. In the mean while, the first petitioner had made the statement before the Income Tax authorities as early as on 29.11.1999 about, inter-alia, suppression of income to the tune of Rs. 54 lakhs during refining process of the precious metals, particulars of which were not disclosed, to the Board of Directors, without any justification. At the relevant point of time, the first petitioner was looking after the work of development, production, marketing and sales as seen from para 7 at page 12 of the petition. The plea of the petitioners that respondent Nos. 2, 4 and 9 were in charge of finance, accounts, sales, marketing, commerce and administration at the time of the second raid conducted by the Income Tax authorities in the year 1999 is contradictory to the work allocation in favour of various directors as seen from para 7 at page 12 of the petition, according to which, the second respondent was looking after and managing the day-to-day working of the company's factory at Jogeshwari and the sixth respondent was looking after the Company's finance. Therefore, the respondents cannot wholly be held responsible for the income tax raid made on the Company, in the year 1999. Moreover, the income tax raids by themselves cannot constitute acts of oppression and mismanagement in the affairs of the Company.
Shri S.S. Shah: The third respondent had fraudulently removed 305.39 Kgs. of silver between September 1998 and November 1998, sold them for cash and siphoned of the sale process without entering into the books of accounts and manipulated the stock statement. The respondents' group had fraudulently removed the silver stock under the guise of sending them for the purpose of weighing. In this connection learned Counsel referred to the communications dated 3.9.1998 and 13.11.1998 bearing signature of the third respondent (pages 150-152 of Petition), wherein silver stock was purported to be sent for weighing. It is not feasible to remove such huge quantity of silver from the factory premises. Moreover, the Company ought to have made arrangement for a weighing machine at the factory premises itself to weigh silver stock.
Shri Navroz Seervai: The petitioners have not substantiated any fraudulent removal of 305.39 kgs of silver by respondent No. 3 from the Jogeshwari factory during the period from September to November 1999. They never complained of such removal till filling of the Company Petition, nor was reported to the Board of Directors of the Company. At the relevant point of time, petitioner Nos. 1, 3, 5 and 9 were directly and actively involved in the administration of the Company. The guard log book (pages 379 and 380 of vol. 1 of reply) maintained at the factory reveals that petitioner Nos. 1 and 5 were physically present in the factory premises on 03.09.1998, when silver was allegedly removed by the third respondent. The stock verification at Jogeshwari factory for the year 1998-99 conducted by the first petitioner and the auditors as well as report of the auditors for the yea 1998-99 do not reveal any fraudulent removal of silver at the factory premises, without being reflected in the books of accounts of the Company. Silver was taken from the factory to Dharm-Kanta for the purpose of weighing as borne out by the letters dated 03.09.1998 and 13.11.1998 (pages 150 to 152 of petition), but ultimately weighed at Dhanji Street premises of the Company. Silver after weighment at Dhanji Street were dispatched to the factory at Jogeshwari which was recorded in the Company's records. The claim of the petitioners that these letters are by way of safeguard, in the event of any enquiry by Excise or Sales Tax authorities during the course of transportation of silver is far from truth. Learned Counsel pointed out that the Company used to send anodes and silver bars from Jogeshwari factory to Dharm Kanta for weighing, in support of which he referred to various letters of the first petitioner and vouchers at pages 93 to 108 of surjoinder.
FINDING: Though 305.95 kgs of silver was said to fraudulently removed by the third respondent during the year 1998, there is no material to show that either the Board was apprises or any complaint given before the police authorities. It is not the case of the petitioners that they came to know of the fraudulent removal of silver only at the time of filing the Company Petition. The extract from guard log book (pages 397-380 of vol. 1 of reply) dated 03.09.1998, 13.11.1998 and 14.11.1988 maintained at Jogeshwari factory contain signature of petitioner Nos. 1 and 5. Silver was reported to be removed on 03.09.1998 and 13.11.1998 by the third respondent. These extracts show that petitioner Nos. 1 and 5 were physically present at Jogeshwari factory on 03.09.1998 and that the fifth petitioner was present on 13.11.1998, when silver was said to be removed by the third respondent. Though the presence of petitioners 1 and 5 was denied at Jogeshwari factory on the relevant dates, genuineness of the extracts from the guard log book is not disputed in the rejoinder ( Page 91) filed by the petitioner.
Admittedly, the stock verification at Jogeshwari factory conducted during the year 1998-99 and the report of the auditors for the said period (pages 971-972 of vol. II of reply) do not speak of any such fraudulent removal of silver from the Jogeshwari factory. The plea of the petitioners in the rejoinder (page 91) that the auditors were misled into believing that there was no discrepancy in the stock of silver and that the first petitioner was never in charge of physical verification of stock for the year 1998-99 at Jogeshwari factory strengthen the case of the respondents. Though the petitioners drew support from the letters dated 03.09.1998 and 13.11.1998 bearing signature of the third respondent used while removing silver, they failed to establish that these letters are by way of safeguard in the event of any enquiry by Excise or Sales Tax authorities during the course of transportation of silver. When the petitioners contend that these letters are meant for a specific purpose, burden is on them to establish the same. The letters dated 19.12.1992, 20.06.1998, 13.07.1999 of the Company addressed to M/s. Hindustan Zinc Ltd. and Telecom factory ( pages 93-96 and 108 of sur-rejoinder) establish the practice of weighing silver anodes/plates of huge quantity at Dharm Kanta in case of any difference in weight. This enhances the probability of weighment of silver stock of the Company at Dharm Kanta.
Shri S.S. Shah: The Company was carrying out, inter-alia, refining and processing of precious materials supplied by the outsiders.
While processing such materials, the Company had fixed 0.15 per cent per Kg. by way of refining loss uniformly, which was passed on to the account of the suppliers. The per-fixed refining loss of 0.15 per cent being on higher side represents the industry standard, but the difference between the actual loss and the determined 0.15 percentage is not reflected in the stock register and books of accounts of the Company. The Company process every year materials weighing around 3 tonnes. The sale proceeds of such stock recovered during the refining process by way of surplus were misappropriated and distributed among members of the majority causing huge losses to the Company and the minority shareholders.
Shri Navroz Seervai: The Company had fixed 0.15 per cent per kg by way of refining loss uniformly in lines with the industry standard as a whole including Government of India enterprises such as Bharat Gold Mines Limited (BGML), in support of which learned Counsel referred to the work order dated 21.05.1993 (pages 382 - 385 of vol.
I of reply) of BGML awarded in favour of the Company for conversion of gold into 100 grams standard gold coins, wherein the refining loss has been fixed at 0.15 per cent per kg. The work order given by BGML was executed by the first petitioner. Therefore, the pre fixed loss of 0.15 per cent is not on higher side. Moreover the petitioners failed to establish that the refining loss was at any time below the pre fixed loss of 0.15 per cent. The first petitioner who was till 01.07.2000 looking after inter-alia, production, marketing and sales now contends that the actual refining loss was below the pre determined 0.15 per cent. The fifth petitioner, younger brother of the first petitioner was until July 1999 in-charge of recovery of precious metals. The fourth respondent cannot be accused for the alleged misappropriation, more so when he was nothing to do with the Company till his employment for the first time in the year 1998 and thereafter when he become an additional director in February 2000. Similarly the ninth respondent can neither be blamed. There is no document to show either the first fifth petitioner was able to reduce the pre-determined loss of 0.15 per cent per kg. Neither the first nor fifth petitioner ever credited or given detailed accounts of recovery of gold in the course of refining process credited to the books of accounts of the Company. Similarly these petitioners never gave actual gold recovered from per cent loss below 0.15 per Kg of refined gold either to the Board of Directors or to the Company. The first petitioner, a whole time director for more than years has not given a single instant wherein he has advised the Board that he could achieve the refining loss below 0.15 per cent. Though the petition refers to a table of calculations in respect of the refining loss, no such tabulated form has been furnished. Nevertheless, the first petitioner furnished such a table of calculations to the Income Tax authorities. The respondents are in no way responsible for misappropriation of stock in the course of refining process, which a allegedly took place prior to July and therefore, cannot be the subject matter of the petition.
FINDINGS: The Company undisputedly while carrying out refining and processing of the precious metals had fixed 0.15 per cent per kg by way of refining loss, uniformly in lines with the industry standard.
The grievance of the petitioners is that this pre fixed refining loss of 0.15 per cent is on higher side and the difference between the actual loss and pre fixed 0.15 per cent is not reflected in the stock register as well as books of account, but misappropriated by the respondents. In this connection, the statement made by the first petitioner before the Income Tax authorities (pages 354-364 of vol.
I of reply) assumes relevance. Accordingly, every 100 kgs of gold refined from metal dross, the metal the metal dross, the metals recoverable. The value of such metals comprising of silver, copper and gold valued at Rs. 60,000 are recoverable . The value of such metals recovered during the refining process comes to Rs. 18 lakhs per annum for the years 1994-95, 1995-96 and 1996-97. These amounts were not recorded in the books of accounts of the Company. During the years 1997-98 and 1998-99, there was no recovery of metal dross on account of break down of crushing machine at Jogeshwari factory.
There is no material establishing the actual recovery made by the Company at any point of time while processing the precious materials. Admittedly, the first petitioner was looking after, inter-alia, development, production, marketing and sales till July 2000 as seen from para 7 at page 12 of petition. The plea that the fifth petitioner was incharge of recovery of precious metals until the year 1999 taken in reply is not categorically denied by the petitioners in rejoinder (para 51 at page 96) The first petitioner or the fifth petitioner had at no point of time achieved the refining loss below 0.15 per cent in the course of refining process.
The plea of the first petitioner (page 31 of petition) that "due to his technical knowledge and expertise he was able to ensure that refining losses were below the prefixed/pre-determined 0.15 per cent refining loss mark" remain unsubstantiated and runs contradictory to his own statement made in para 53 at page 99 of rejoinder that he being a technical director was only advising on technical aspects of recovery of refining loss in gold but the actual day-to-day accounting of the precious metals was the sole responsibility of the second respondent. The first petitioner has categorically stated in rejoinder (para 51 at page 96) that he never reported to the Board that he was able to reduce the refining loss below 0.15 per cent.
There is nothing to show that whether the Company could achieve at any point of time the refining loss below 0.15 per cent.
Therefore, the claim of misappropriation of stock in the course of refining process in devoid of merits. The offer made by the first petitioner during the course of oral submission that even today he could achieve the refining loss below 0.15 per cent by making use of the existing crushing machine at Jogeshwari factory does not serve any purpose at this stage, for want of any proof of refining loss below 0.15 per cent, achieved by the first petitioner prior to the Company Petition.
Shri S.S.Shah: The respondents are periodically indulging in sale of dross and other stock belonging to the Company for paltry sum and misappropriating at he difference in the actual amount for value of goods and the amount recovered by way of sale proceeds of such stock. In this connection, learned Counsel referred to the following documents: (a) A Bill dated 27.03.1999 issued by the Company under the signature of the sixth respondent in favour of Mr. Zahid Hussian for Rs. 3,277/- in respect of sale of 1,250 Kgs of dross; (b) A delivery note date 24.03.1999 and an invoice date 24.03.1999 issued by the Company in favour of Mr. Zahid Hussian in respect of sale of 1,250 Kgs. Of dross; and (c) A hand-written note of the second respondent disclosing receipt of cash of Rs. 98,250/-.
According to the petitioners, the above are only a few instances and the respondents resorted to such fraudulent practices periodically without entering into the books of accounts of the Company and misappropriate funds of the Company, causing loss to the minority shareholders.
Shri Navroz Seervai: The respondents sold 1,250 Kgs of dross only for Rs. 3,227/- as borne out by the Bill, delivery note and invoice at pages 157 to 160 of the petition. The hand written note (page 161 of the petition) is a fabricated document. This hand-written note does not bear any date signature, name of the customer, the Company or the second respondent. It is neither addressed to anyone nor received by anybody. The said not is a piece of paper with certain scribblings without any proof that it was written by the second respondent. Learned Counsel reiterated that 1,250 Kgs. Of dross could fetch only Rs. 3,227/-. In this connection, he pointed out that the first petitioner himself sold 18,465 Kgs. Of dross during the period from 30.06.1994 to 31.01.1998 or behalf of the Company at the rates varying between Rs. 1 per Kg and Rs. 3 per Kg and the special Dross at the rate of Rs. 7 per Kg, for which he referred to the various invoices signed by the first petitioner. According to the respondents, the first petitioner misappropriated the difference of sale proceeds of the dross sold from time to time and, there fore, not entitled for any relief on account of the principles of "in pari delito conditio defendentis" FINDINGS: The bill, delivery note and invoice (page 157 to 160 of petition) produced by the petitioners in respect sale of 1,250 kgs of dross show that they were sold for Rs. 3277/-, which according to the petitioners is far below the market price. There is no material establishing market value of the dross sold by the Company. The hand written note said to be written by the second respondent does not bear any date, signature, name of the customer, Company or the second respondent. The second respondent, in my view, cannot be mulct with liability by virtue of such a hand-written note without any proof that it was written by the second respondent. Though Counsel for the petitioners offered to send the hand-written note for an expert's opinion for establishing the hand-writing of the second respondent contained in the hand-written note, this Bench has not acceded to the said request at this belated stage. Moreover, there are records to show that 18,465 Kgs of dross were sold by the first petitioner during the period from 30.06.1994 to 31.01.1998, at rates varying between Rs. 1 per kg and Rs. 3 per kg, and special dross at the rate of Rs. 7 per kg, as borne out by the invoices raised by the first petitioner (pages 386 to 392 of vol. I of reply). These invoices mention the quality of dross, but do not mention as to whether dross is treated or normal dross. These documents mention merely dross. Therefore, there is no merit in the plea of under-invoicing sale of the Company's stock by the respondents.
Shri S.S.Shah: The Company had purchase through the ninth respondent 80 silver coins weighing 993.120 grams for a sum of Rs. 8,800/- These coins are in personal custody of the ninth respondent, who had failed and neglected to hand over them in spite of demands made by the petitioners.
Shri Navroz Seervai: The Company did not purchase silver coins either from or through respondent No. 9 but from Smt. Surekhaben S. Shah, as borne by the invoice dated 13.05.1999 (Page 162 of Petition). The coins so purchased have always been held in the custody of the Company and not of respondent No. 9.
FINDINGS: The Company purchased silver coins from Smt. Surekhaben S.Shah as seen from the invoice dated 13.09.1999. The contentions of the petitioners in the rejoinder (Para 59 at page 107) that silver coins should have been bought by the Company through the ninth respondent is belied by the invoice dated 13.09.1999. Thus the petitioners have neither proved that the Company purchased silver coins from or through the ninth respondent nor in the custody with the ninth respondent and therefore, must fail.
Shri S.S.Shah: The respondents are parties to the practice of bogus bills of purchase being issued to the Company by various third parties without actually effecting sale of the materials, thereby, diverted and sold the materials for their personal gain. The third parties provided bills to the Company without the materials on the basis of incentives given to them by the Company, in support of which reference has been made to the fraudulent bills issued by M/s K.K. Gems and M/s Shree Pal Jain aggregating Rs. 4.27 crores and the statements made by the representatives of these suppliers before the Income Tax officials in the course of the investigation conducted by them.
Shri Navroz Seervai: All purchases made by the Company are supported by genuine bills and never indulged in bogus or fraudulent bills.
The first petitioner forming integral part of the entire system of the Company and being in charge of purchases and sales has singed a large number of cheques on behalf of the Company and made payment to the suppliers of precious metal on behalf of the Company. These cheques include payments made to M/s K.K. Gems and M/s Shree Pal Jain; for the purchases made from them. Learned Counsel referred to the various purchase bills singed by among other directors, the first petitioner. According to the respondents, the statements made in regard to the purported bogus bills by the representatives of M/s K.K. Gems and M/s Shree Pal Jain were obtained by the officials of Income Tax Department through pressure and coercion exhorted on them as revealed from the affidavits sworn by the respective deponents.
The theory of bogus bills has been outrightly rejected by C.I.T. (Appeals).
FINDINGS: The claim of the petitioners that respondent Nos. 3 & 9 are parties to the practice of bogus bills of purchase issued to the Company by M/s K.K. Gems and M/s Shree Pal Jain, without supply of materials on the basic of incentive given by these suppliers is solely sustained on the strength of the statement made by the representatives of M/s K.K. Gems and M/s Shree Pal Jain as well as the third petitioner before the Income Tax Authorities at the time of the raid made on the Company. The statement made before the Income Tax Authorities has been subsequently retracted by means of an affidavit duly affirmed by the respective representatives of M/s K.K. Gems and M/s Shree Pal Jain before Notary (pages 867-871 of vol. II of reply). The affidavits reveal that the statement before the Income Tax Authorities was made under pressure, threat and coercion and that none of the statements made before them relating to the bills issued to the Company by M/s K.K. Gems and M/s Shree Pal Jain are true. These affidavits categorically disown the earlier statements made by the representatives of the suppliers in regard to the practice of bogus bills resorted to by the company. In view of this, no conclusive reliance can be placed on the statement of the representatives of the suppliers to sustain the theory of bogus purchase bills issued to the Company. Either the statement of the third petitioner before the Income Tax Authorities is of any evidenciary value without any independent evidence proving the practice of bogus bills. There are a large number of purchase gills issued by among others M/s K.K. Gems and Shree Pal Jain to the Company (pages 683-866 of vol. II of reply) signed by the first petitioner as well as other directors. Similarly, the first petitioner being in-charge of purchase and sales had signed a large of number of cheques on behalf of the Company (pages 393-682 of vol.
I of reply) and made payment to the suppliers of precious metal on behalf of the Company which include payments to M/s K.K. Gems and M/s Shri Pal Jain for the purchases made from them. These innumerable purchase bills and cheques are admitted to be true by the petitioners. Against this background, the theory of bogus bills of purchase procured by the Company is not supported by any concrete evidence.
Shri S.S.Shah: The ninth respondent had visited Africa in January 1998 incurring expenses to the tune of Rs. 2,10,000/- at the cost of Company. Though the foreign trip was reported to be for official business of the Company, the ninth respondent failed to submit any report or account on account of his trip before the Board of Directors of the Company. The undated and unwritten note given by the ninth respondent (Page 179 of petition) gives a vague and sketchy account of the foreign trip and does not give the details of business undertaken by the ninth respondent. The Company did not gain anything on account of the foreign trip undertaken by the ninth respondent.
Shri Navroz Seervai: The foreign visit undertaken by the ninth respondent to Africa was discussed and approved by all the directors. The first petitioner was a signatory to the cheque issued by the Company in favour of M/s Orient Travel and Tours Limited for a sum of Rs. 87,772/- in connection with the said visit. The ninth respondent undertook the visit on behalf of the Company for the official purpose to broaden scope of the Company upon which accounts were duly submitted and details of the visit furnished as seen from the written notes given by the ninth respondent. However, the Company could not get any new business on account of the civil war in Libia. The past event occurred in the year 1998 cannot not now constitute an act of mismanagement under Sections 398 of the Act.
FINDINGS: It is on record that the first petitioner was a signatory to the cheque issued by the Company for meeting the travel expenses in connection with the Africa trip undertaken by the ninth respondent, as admitted in rejoinder (para 69 at page 119). The plea of the petitioners that the undated written note of the ninth respondent (Page 179 of the petition) gives a vague account of the foreign trip, but does not give the details of business undertaken by him establishes the fact that the ninth respondent undertook the trip to Africa on behalf of the Company for official purpose. While it is true that the said hand written note is quite vague and lacks full particulars, yet it cannot be denied that the hand written note pertains to the Africa trip undertaken by the ninth respondent for official business of the Company. The grievance of the petitioners that the ninth respondent's foreign trip did not bring any new business cannot be the subject matter of the Company Petition.
Moreover, the trip undertaken in the year 1988, which is a past and closed act does not constitute an act of mismanagement in the affairs of the Company.
Shri S.S. Shah: The ninth respondent is conducting identical business pursued by the Company under the name and style of M/s.
Bhagawati Enterprises, of which he is the sole proprietor. The ninth respondent has not only been diverting and transferring the business of the Company to his proprietary concern, but also making use of services of the staff and establishment facilities of the Company for his personal gain, thereby acting in a manner which is in direct conflict with the business of the Company and is in violation of his fiduciary duty to the Company. The statement of Bank account of M/s.
Bhagawati Enterprises shows that the business address and telephone number therein are the same of the ninth respondent. The supply of goods made by the Company was diverted to one Shri Ram Mandir at Wadala through M/s. Bhagawati Enterprises. Similarly, the order placed by M/s. Adissons Jewelleries Private Limited, a valued customer of the Company, to the tune of Rs. 6,50,000/- was diverted by the ninth respondent to his proprietary concern resulting in loss of Rs. 65,000/- sustained by the Company.
Shri Navroz Seervai: M/s. Bhagwati Enterprises is not dealing in gold or silver refining. It does not have a factory to do refining of precious metals or a stamping plant to manufacture silver coins or silver catalysts. The letter dated 02.10.19997 of Shri Ram Mandir at Wadala (Page 182 of petition) shows that M/s. Bhagwati Enterprises delivered Kalash, but the Company does not deal with Kalash. The ninth respondent never diverted any order or business from M/s. Addison Jewellery Private Limited to M/s. Bhagwati Enterprises. The Company by its invoice dated 12.04.1996 had sold to M/s. Addison Jewellery Private Limited 958.80 grams of palladium.
The supply of palladium to M/s. Addison Jewellery Private Limited was not diverted to M/s. Bhagwati Enterprises. As the Company executed the said order, there is no scope for the Company to suffer any loss on this account. In this connection, learned Counsel listed out several businesses in which the petitioners are directly or indirectly interested.
FINDINGS: It is clear from the letter dated 02.10.1997 of the ninth respondent that M/s. Bhagawati Enterprises supplied Kalash to Shri Ram Mandir at Wadala. There is no material to show that M/s.
Bhagawati Enterprises is dealing in gold or silver refining or whether the Company is dealing in kalash, in the absence of which the grievance of the petitioners that the ninth respondent diverted the business of the Company to M/s. Bhagawati Enterprises is not well founded. The plea of the first petitioner in rejoinder (para 72 at page 124) that kalash used to be a business of the Company shows that the Company did not deal in kalash at the relevant point of time, when M/s. Bhagawati Enterprises supplied kalash to Shri Ram Mandir at Wadala. It is observed from the bills dated 12.04.1996 and 21.05.1996 (pages 185 & 187 of petition) and the letter dated 21.06.1996 of M/s. Addisons Jewellery Private Limited (Page 183 of petition) that the Company supplied palladium to M/s. Addisons Jewellery Private Limited. Prior permission of the Development Commissioner appears to be necessary for sale of palladium, as borne out by the letter dated 21.05.1996 (page 184 of petition) of the office of the Development Commission permitting M/s. Addisson Jewellery Pvt. Ltd. to purchase palladium from the Company. No such permission for purchase of palladium by M/s. Addisson Jewellery Pvt.
Ltd. from M/s. Bhagawati Enterprises is on record. There is no material to suggest that the ninth respondent diverted any order for purchase of palladium by M/s. Addisons Jewellery Private Limited to M/s. Bhagawati Enterprises. There is not even a scrap of paper to show that the Company had sustained a loss of Rs. 65,000/- on account of diversion of business of the Company to M/s. Bhagawati Enterprises, out of which an amount of Rs. 38,000/- was paid to the Company by the ninth respondent. Similarly the claim of the petitioners that the ninth respondent made use of services of the staff and establishment facilities of the Company for his personal gain is in no way established. I, therefore, do not find any merit in the plea of the petitioners in regard to diversion of business of the Company to M/s. Bhagawati Enterprises. As a result, the plea of losses sustained by the Company on this account must fail.
Shri S.S. Shah: The ninth respondent made use of the cash balances of the Company from time to time without either informing or obtaining prior permission of the Board of Directors of the Company, in violation of the decision taken at the Board meeting held on 12.03.1999, according to which joint consent of any two directors is mandatory, while giving any of the Company's products on approval basis or otherwise to any employee or director or customer of the Company or dealing with funds of the Company by cheque or cash.
Between 15th July and 16th July 1999, the ninth respondent had wrongfully taken away and misappropriated funds of the Company aggregating Rs. 1,10,000/- which was subsequently returned by the ninth respondent. The first petitioner had found two packets containing cash on Rs. 15,000/- and Rs. 3,75,000/- in the safe at Dhanji Street premises of the Company without the knowledge or consent of the directors of the Company. The ninth respondent had deliberately suppressed from the Company and its other directors of such huge cash at the Dhanji Street premises of the Company. The ninth respondent never took permission of the other directors to keep such huge cash at the premises of the Company which is in gross violation of the decision of the board of Directors of the Company.
In this connection, learned Counsel referred to the daily cash balances at Dhanji Street branch, reconciled in the form of hand-written statements (Exhibits N-1 to N-8). The ninth respondent has withdrawn an aggregate sum of Rs. 60,000/- of the Company for personal use without obtaining permission of the Board. The ninth respondent fraudulently encashed a cheque in March 1998 issued in favour of a Trust and made use of the proceeds of Rs. 1,25,000/- for personal enrichment of the respondent.
Shri Navroz Seervai: The ninth respondent did not misappropriate the amount of Rs. 1,10,000/-. The amount was in fact physically available in Dhanji Street premises. The first petitioner did not search the entire office premises, but only the locker at Dhanji and therefore, failed to prove that the funds were misappropriated from the Dhanji Street premises. The hand-written statements (Exhibit N-1 to N-8 at page 209 of the petition) containing certain scribblings do not prove misappropriation of funds on the part of the ninth respondent. The first petitioner misusing his position as director of the Company forced certain employees to give written notes abusing the ninth respondent with misappropriation of funds of the Company. Nevertheless, this amount of Rs 1,10,000 was already reimbursed by the ninth respondent, causing no loss to the Company.
This complaint according to the respondents is pursuant to suspension of the ninth petitioner from his services on account of the theft of 500 grams of gold in the month of June 1999. Learned Counsel further pointed out that the Company is trading in bullion business which involves huge cash transactions. It is not abnormal to maintain amounts in cash. The amount of Rs. 15,000 and Rs. 3,75,000 kept in cash at Dhanji Street premises represented the advance received from a customer in connection with dealings in precious metals. Moreover, the second respondent is usually looking after business at the Jogeshwari factory who is not expected to be aware of daily inflows and outflows of transactions at Dhanji Street premises. Similarly, the sixth respondent confining to Tardeo Road premises cannot be aware of the transactions at Dhanji Street premises. According to the respondents, the first petitioner unauthorisedly withdrew a sum Rs. 25,000 in cash from the Jogeshwari factory, in violation of the resolution of the Board of Directors of the Company passed at the meeting held on 27.03.1999, which requires approval of two directors for authorizing, inter-alia, any cash withdrawal. Similarly, the third petitioner took 225 grams of standard gold valued at Rs. 1,03,000 on approval basis under the responsibility of the first petitioner which was never returned to the Company.
FINDINGS: The charges of misappropriation of funds of the Company by the ninth respondent are many fold, out of which an amount of Rs. 1,10,000 said to be misappropriated from Dhanji Street premises was admittedly returned by him. There is no loss on this account sustained by the Company, in which case, it would not amount to an act of mismanagement. Moreover, the past acts do not fall within the ambit of Sections 397 and 398, as held in Shanti Prasad Jain v. Kalinga Tubes Ltd. There is, therefore, no need to go into this contentious issue. The other act of misappropriation pertains to maintenance of huge cash of Rs. 15,000 and Rs. 3,30,000 kept at Dhanji Street premises without consent of any two directors is in violation of the decision of the Board of Directors taken on 12.03.1999. Though the trading in precious metals would involve huge cash transactions, yet this act of the ninth respondent no doubt is in breach of the understanding reached among the directors. However, it is not the case of the petitioners that these cash sere misappropriated by the ninth respondent or any loss was sustained by the Company on this account. The other charges in regard to cash withdrawals of Rs. 60,000/- fraudulent encashment of a cheque of Rs. 1,25,000/- in March 1998 by the ninth respondent and utilization of these amounts for personal enrichment of the respondents are not supported by any material, in the absence of which would not constitute grounds for mismanagement, as held in P.S. Offshore Inter Land Services Pvt. Ltd. v. Bombay Offshore Suppliers and Services Ltd. as well as In re: Clive Mills Co. Ltd. Therefore, the petitioners have no cause to complain before the CLB. Shri S.S. Shah: During physical verification of the stock of raw-materials and finished products of the Company undertaken by the Company's auditors at the end of accounting year as at 31.03.1999 several items purchased by the Company were not available. There was misappropriation, wrongful use and conversion of the properties of the Company by members of the majority group, for which reference was made to exhibits Order-1 to Order-10.
Shri Navroz Seervai: The Board of Directors at its meeting held on 02.04.1999 resolved (a) that the first petitioner & sixth respondent would be in-charge of the physical verification of cash and stock at Tardeo Road premises; (b) that the ninth respondent would be in-charge of the physical verification of cash and stock at Dhanji Street premises; and (c) that the first petitioner and second respondent would be in-charge of the physical verification of cash and stock at Jogeshwari factory premises. Accordingly, the physical verification of cash and stock at Tardeo and Dhanji Street premises were conducted by the first petitioner and sixth respondent as wellas the ninth respondent respectively along with the auditors.
The physical verification of cash at Jogeshwari factory was conducted in the presence of the first petitioner and the second respondent. The signed, authenticated copies of the physical verification of cash and stock both at the Tardeo premises and Dhanji Street premises and of cash at Jogeshwari factory were submitted by the respective parties. However, before the physical verification of stock at Jogeshwari factory could commence, wife of the second respondent was hospitalized on account of her serious illness. Consequently, the second respondent was not in a position to attend the Jogeshwari factory and was not present during the physical verification of stock at Jogeshwari factory. In view of this, the physical verification of stock at Jogeshwari factory was conducted by the first petitioner alone in the presence of the auditors. Nevertheless, the first petitioner did not submit to the Board of Directors the signed and authenticated copy of the physical verification of stock at the Jogeshwari factory, in spite of repeated demands made at the board meeting held on 21.08.1999, 24.08.1999 and 20.09.1999. The claim of shortage of stock of raw-materials and finished products is not established.
FINDINGS: While according to the petitioners, at the time of physical verification of the stock of raw-materials and finished products of the Company as of 31.03.1999, second items purchased by the Company were not available, which were misappropriated by the respondents, these are stoutly denied by the latter. The entire correspondence exchanged between the parties, viz., Exhibits Order-1 to Order-10 of petition and Exhibits 62-66 of vol. II of reply throw blame against each other, as to whether the first petitioner or the second respondent was responsible for the physical verification of stock at Jogeshwari factory premises. Nevertheless the correspondence referred to by the petitioners, at any rate, do not evidence any shortage of the stock at Jogeshwari factory. At this juncture, averments contained in rejoinder assumes importance, relevant portion of which read as under:- "I say that I was appointed along with Respondent No. 6 to be incharge of the physical verification of the cash and stock at the Tardeo Road premises and also in charge of physical verification of cash and stock at the Jogeshwari Factory premises along with the Respondent No. 2 only to assist them both. I say that I was never solely in charge for the physical verification either at Tardeo or Jogeshwari factory. I also say that I was appointed only because of my technical knowledge. As regards physical verification of cash and stock at Jogeshwari factory even when Respondent No. 2 was not present at that time, for a considerable period of time yet the auditors were always present. I was merely assisting the auditors in the technical aspects'. I therefore, deny that I was responsible for submitting to the Board of the 1st Respondent Company a copy of the physical verification of stock at Jogeshwari Factory. I say that though Respondent No. 2 was not there, yet it was his primary responsibility to submit the said statement to the Board. I deny that I deliberately kept the Board in the dark about the discrepancies in the stocks of the low value non-ferrous metals owned by the 1st Respondent Company as alleged at all." There is, therefore, no doubt that the first petitioner was in charge of physical verification of cash and stock at Jogeshwari factory along with the second respondent to assist him. At the time of physical verification of stock at Jogeshwari factory, the auditors were present but not the second respondent. The reasons for his absence on account of hospitalization of his wife pursuant to her serious illness are not in dispute. Even if the first petitioner was only to assist the second respondent in physical verification of stock in the absence of the second respondent for valid reasons, it is expected of the first petitioner to ensure submission of the stock verification statement prepared in the presence of the auditors to the Board of Directors. But no effects are found to be taken in this behalf by the first petitioner. It is on record that the Board of Directors at its meeting held on 21.08.1999, 24.08.1999, 20.09.1999, 08.10.1999 and 16.10.1999 urged the first petitioner to submit the signed papers of the physical verification of stock conducted by him along with the auditors at Jogeshwari factory in the month of April 1999 and that the first petitioner promised to submit the report on physical verification of stock in the Board meetings held on 21.08.1999 and 20.09.1999 (pages 893-904 of vol. II of reply). There is no denial of these facts by the first petitioner that he was merely assisting the auditors in technical aspects and that he was not responsible to submit physical verification of stock at Jogeshwari factory premises is wholly unjustified. The statutory auditors in their report dated 06.11.1999 for the year ended 31.03.1999 (page 971 of vol. II of reply) have reported that " the Company has taken physical verification of stock on 31.03.1999 which includes material (gold) valued at Rs. 5.72 lacs was observed which has not been provided for in the books of account. In the opinion of the management the said 1352 gms. of gold is lying technical in nature, we are unable to comment thereon." The Directors in their report dated 11.11.1999 (page 967 of vol. II of reply), while offering their explanation stated that "there is no shortfall of 1352 grams of gold as has been stated in the Auditor's Report. The auditors were explained that the said 1352 grams of gold concerned parties after refining. Thus there is no shortfall of 1352 grams of gold as has been stated in the Author's Report." Apart from this qualification I do not find any other serious adverse remarks in the auditors' report (page 972 of vol. II of reply) in regard to physical verification of raw materials, work in progress and finished good. In these circumstances, the plea of the petitioners regarding shortage of raw materials and finished goods at Jogeshwari factory is not found to be acceptable.
Shri S.S. Shah: The Company's production and quantum of sales since the year 1999 have substantially decreased on account of the mismanagement in the affairs of the Company and diversion of the Company's business to the private business being carried on by the majority group of shareholders. The increase of sales and turnover shown reflected in the balance sheet for these years is on account of the escalation in the value of the price of the products of the Company. The work order placed by the State Bank of India with the Company for conversion of silver bars into smaller denominations was withdrawn on account of willful non-compliance with the requirements of the SBI. Similarly, medallion business of the Company was declined from 1.25 lakh pieces of medallions to 25,000 pieces during the festive seasons. The Company has lost its business to its competitors on account of lack of proper management by the respondents.
The respondents by virtue of their majority on the Board of Directors of the Company have removed many of the loyal workers of the Company so as to suppress the misdeeds indulged by the majority group and terminated the consultancy services rendered by certain members of the petitioners' group on false and frivolous grounds.
The respondents, being inactive failed to protect the interests of the Company and exercise proper control on account of process metals at the Jogeshwari factory resulting in thefts, producing sub-standard products and decreased production.
Shri Navroz Seervai : During the years 1999 and 2000, the Company's production and quantum of sales were not decreased. The Balance Sheet of the Company for these years would show the increase in sales and turnover, in spite of the depressed market condition and the consequent fall in silver prices. The Company did not divert its business to the private business of the respondents. It is true that the work order placed by the State Bank of India was withdrawn, as the first petitioner being in-charge of production at the Jogeshwari factory was unable to meet the schedule of delivery fixed by the State Bank of India. The respondents cannot be accused for the decline in the medallion business especially when the first petitioner is wholly responsible for production at the factory.
The respondents did not indulge in removing any loyal, workers of the company. However, the company was constrained to take appropriate action against some of the petitioners for their misdeeds. The allegations that the respondents failed to proper control on account process medals at Jogeshwari factory resulting in thefts producing sub-standard products and decreased production or quite sweeping and remain unsubstantiated.
FINDINGS: The grievance of the petitioners that the Company's production and quantum of sales were decreased since the year 1999 on account of diversion of the Company's business to private business being carried on by majority group of shareholders lacks details and is not supported by any materials, disentitling them for any relief, as held in Mohta Bros. (P) Ltd. v. Calcutta Landing and Shipping Co. Ltd. and Shanti Prasad Jain v. Kalinga Tubes Ltd. The Chartered Accountant's report produced at the time of hearing by the petitioners show an increase in the turn over and business of the Company during the tears 1999-2000; 2000-2001 and 2001-2002, belying the petitioners' stand. The petitioners admit that there was increase of sales and turn over, but the increase was attributed to escalation in value of the price of the products of the Company.
This plea of escalation in value of the price of the products remains unsubstantiated, without furnishing the facts and figures in regard to the value of the price of the products of the Company at the relevant point of time. Admittedly, at the relevant point of time the first petitioner is solely responsible for production till July 2000, in which case the petitioners cannot throw the blame for reduction in production, sales, cancellation of the order placed by the SBI, decline in medallion business of the Company and for losing its business to the Company's competitor wholly on the respondents, in the absence of any concrete proof.
In regard to the plea that the respondents removed loyal workers of the Company which resulted in thefts at the Jogeshwari factory, production of sub-standard products and decreased production is not only vague for want of full particulars but also not proved. There is no record to show whether the petitioners have made any complaint before the Board or the police authorities for such theft at Jogeshwari factory. In a petition under Sections 397 and 398, all material facts must be set out and supported by evidence, as held in a number of cases cited supra. The issue regarding termination of consultancy services of some of the petitioners is already found in the negative elsewhere. Therefore, these allegations do not warrant interference of this Bench.
hri S.S. Shah: The petitioners had raised various queries relating to mismanagement of funds and irregularities in the stock of the Company such as sale of goods not reflected in the books of accounts, under invoicing, lack of control over the stock, advancing of interest free loans to certain directors, cash expenses without debiting the account of the Company, incurring personal expenses at the cost of the Company etc. during the account year 1998-1999 and 1999-2000 compelling the petitioners to make a request with the auditors of the Company to exercise due diligence before finalizing the audited accounts for the year ended 31st March 2000. The auditors in their report had pointed out several discrepancies in relation to the various irregularities in the affairs of the Company for the year ended 31st March 2000. However, M/s Lakhani & Co., being the statutory auditors of the Company for the last 30 years were removed by the majority group at the annual general meeting held on 30.09.2000 on account of the adverse remarks made by the auditors, which formed part of the auditor's report in respect of the accounts of the Company for the year ended 31st March 2000.
Similarly M/s U.G. Devi & Company, the internal auditors of the Company for the past 30 years were removed by the majority of the directors for no fault of them at the Board meeting held on 27.09.2000.
Shri Seervai: M/s Lakhani & Co., the statutory auditors were not removed by the respondents. However, the shareholders at the annual general meeting held on 30.09.2000 did not reappoint them as statutory auditors. The Company has duly complied with the procedure prescribed under Section 284 of the Act while appointing the new auditors. Similarly, the Board of Directors did not reappoint M/s U.G. Devi & Co., the internal auditors. Learned Counsel complained of the behavior and conduct of M/s Lakhani & Co. by referring to various correspondence exchanged between the Company and the auditor (Pages 905-915 of Vol. II of reply). When M/s Lakhani & Co. called for certain details before completing audit for the year ended 31.03.2000 the Company furnished the requirements from time to time without any delay. When the balance sheet, profit and loss account for the year ended 31.03.2000 were approved and adopted at the Board meeting held on 06.09.2000, the Company forwarded the same for the auditors report and signature in view of the impending annual general meeting on 30.09.2000. The auditors did not forward their report, in spite of repeated requests made by the Company but subsequently asked for the management representation list, which was never asked at any earlier point of time. In the meanwhile, the auditors without considering the management representation list furnished by the Company forwarded the auditors report on 13.09.2000 with quite a number of qualifications. The management representation letter wantonly ignored by the auditors adequately deals with the qualifications made in the auditors report. Though the auditors report discloses a loss of Rs. 1,45,697, as against profits of Rs. 8.89 lakhs the detailed workings have not been furnished by M/s Lakhani & Co. Though the auditors had received letters from the petitioners prior to 13.09.2000 pointing out certain irregularities in the Company's affairs, they were forwarded to the Company for their comments very late. The auditors wantonly remained absent at the annual general meeting to sustain their audit report and deprived the shareholders of any clarification on the auditors report. Though the respondents had subsequently forwarded a detailed set of questions based on the audit report seeking clarifications, in view of the absence of any representative of Lakhani & Co. at the annual general meeting, the auditors deliberately failed to give any proper reply clarifying the issues raised by the respondents. When majority shareholder/Directors in exercise of their inherent right and wisdom resolved to remove the statutory/internal auditors, the respondents cannot be blamed. Mere, non-appointment of M/s Lakhani & Co. and M/s U.G. Devi & Company as the statutory and internal auditors respectively by the shareholders/Directors cannot constitute acts of mismanagement.
FINDINGS: The admitted position is the M/s Lakhani and Co., the statutory auditors were not reappointed by the shareholders at the annual general meeting held on 30.09.2000, but appointed M/s Hiten & Jiten as the statutory auditors. It is not the case of the petitioners that M/s Hiten & Jiten was appointed in the place of M/s Lakhani & Co, as the statutory auditors of the company in violation of the relevant provisions of the Act. The shareholders' inherent rights to elect their auditors cannot constitute an act of mismanagement. If it is a lawful exercise of power by the majority, the minority shareholders are bound by the same as held in V.M. Rao v. Rajeswari Ramakrishnan . Similarly, non-appointment of M/s U.G. Devi & Co. as the internal auditors well within the powers of the management can neither amount to an act of mismanagement in the affairs of the Company. The allegations made against M/s Lakhani & Co., in my view, fall outside the scope of the present proceeding.
The auditor's report dated 13.09.2000 for the year ended 31.03.2000 containing a number of qualifications in regard to non-provisioning for doubtful debts and shortage of stock; outstanding from directors/others; shortfall of gold and silver received on job work basis, shortage of materials, cash on hand, search made by the Income Tax Department on the Company are explained in the Director's Report dated 14.09.2000. With adoption of the annual accounts by the majority shareholders at the annual general meeting held on 30.09.2000, the petitioners are bound by the same. For statutory violations, if any, the Regulatory authority is at liberty to proceed against the Company as well as the officers in default and take such actions as may be deemed fit.
6. A careful analysis of the allegations would show that a number of acts of oppression and mismanagement are not falling within the ambit of Sections 397 and 398; certain acts complained of the not in the character of shareholders which are outside the purview of Sub-section (2) of Section 397; quite a few acts lack full particulars without supported by evidence not entitling for any reliefs. The grievances in relation to improper holding of Annual General meetings or Board meetings and denial of inspection to the books of accounts and statutory records, the petitioners have ample power to exercise their inherent and statutory rights invoking the relevant provisions of the Act. For violations, if any, of the provisions of the Act, the Regulatory Authority will initiate appropriate action. Further, from my findings of each of the allegations, it is apparently clear that the petitioners are not entitled for any of the reliefs claimed in the petition, excepting for a representation on the Board of Directors of the Company, which is found to be in the nature of partnership. In these circumstances, there is no need to draw any support from the orders of C.I.T. (Appeal) to reach my conclusions on the various acts of oppression and mismanagement in the affairs of the Company. The act of the respondents in having denied an opportunity in favour of petitioners for a representation on the Board of Directors of the Company could be a just and equitable ground for dissolution of a partnership and therefore the company could be would up on just and equitable grounds. As the Company is in the business for the past over 45 years with a large number of employees, it would not be in interest of the Company or the shareholders to wind up the Company. However, the parties before me have developed such animosity between them that it will be impracticable and impossible for them to carry on any business together. Various affidavits and statements filed by the parties before this Bench conclusively establish that trust and confidence between them no more exist The family differences and disputes admittedly stared taking place since the last sis years as claimed in the Company petition (para 9(m) at page 20 of petition). As a matter of fact, when I sought to ascertain, during the hearing whether both the parties can go hand in hand to carry on the Company's business, the response from the first petitioner as well as the ninth respondent was in the negative, leaving no scope for a representation from the petitioners' group on the Board of the Company. The Company cannot function properly if these warring groups continue to hold the shares. In an effort to destroy each other, they will not only destroy themselves, but also the Company. The only course which is open to me under these circumstances is to direct the sale of the shares by one group to the other. While the petitioners' group is in minority, the respondents' group holds about 75% of shares of the Company. Therefore, I am of the firm view that the Company can continue to function smoothly only by the exit of the petitioner' group. Considering the facts of the case and a accordance with the provisions of Section 402, it is hereby directed that the shares held by the petitioners' group should be purchased either by the Company or the respondents' group on a fair value to be determined on the basis of the Balance Sheet as on 31.03.2001 being the proximate date to the date of the petition . In case the Company purchases the shares, it is authorised to reduce its share capital to the extent of the face value of the shares. Both the parties will appear before this Bench on 01.12.2003 at 2:30 P.M. to suggest a mutually acceptable name of a valuer to value the shares. In case the parties do not agree on the valuer, this Bench will appoint a valuer and give consequential directions. Accordingly the petition is disposed of in these lines reserving the right to appoint a valuer and issue consequential directions. All the interim orders are vacated. No order as to costs.