1. The petitioners together with their group of shareholders claiming to be majority shareholders in Sutlej Service Station Private Limited ("the company"), have filed this petition under Section 398 of the Companies Act, 1956 ("the Act"), alleging various acts of mismanagement in the affairs of the company more particularly alleging fabrication of documents and illegal issue of further shares.
2. The business of the company is running a petrol pump at Nawanshahar (Punjab). According to the petitioners, the first petitioner has been the chairman of the company since 1988 and the second petitioner as the managing director from 1969. However, the first respondent has manipulated the records of the company by dubious means as elaborated in the petition to show as if the petitioners no longer hold the managerial positions and has also engineered to illegally allot further shares in the company to his own group by which the petitioners have been reduced to a minority. With these allegations, the petitioners have sought for various reliefs, inter alia, including restraining the first and second respondents from claiming themselves to be the managing director and chairman respectively, restraining them from interfering with the control and management of the company by the petitioner, taking action against the respondents under Section 628 of the Act and for directing the respondents to account for all the money collected by them in the business of the petrol pump. The control of the petrol pumps was also taken over by the first respondent. The petitioners initiated proceedings under Sections 145/ 146 of the Criminal Procedure Code in which the court appointed a receiver to take possession of the petrol pump and later on closed the case by directing the receiver to restore possession of the petrol pump to the first respondent. The dropping of the proceedings was challenged by the petitioners before the Punjab and Haryana High Court which upheld the decision of the lower court. Thus, the first respondent is in control of the petrol pump. The petitioners have filed a civil suit challenging the genuineness of various board meetings as well as the general body meetings and the same is pending.
3. Girdhar Govind, advocate for the petitioners initiating his arguments, submitted that the petitioners' group held 3,062 shares out of 4,637 shares in the company and both the petitioners were holding managerial positions as chairman and managing director respectively for a long time. The first respondent was appointed as director in 1988 and he also functioned as the accountant of the company. In 1997, the company had 11 directors of which two of them resigned and the resignations were accepted in a board meeting held on January 51, 1997 (annexure A-1). The company was functioning smoothly and on January 1, 1998, the balance-sheet of the company for the year ending March 31, 1998, was signed by the petitioners as the chairman and managing director and also by the first respondent as accountant (annexure A-3).
As per the articles, one-third of the directors were to retire in the next general meeting and since the first respondent was one of the directors liable to retire by rotation, he, apprehending that he might not be elected as a director due to his misconduct, secreted all the documents of the company which were in his possession as the accountant. In view of this, the annual general meeting for 1997-1998 could not be convened by the due date, viz., September 30, 1998. The fact of non-cooperation by the first respondent was noted by the board in the board meeting held on October 14, 1998, as well as in the board meetings held on November 11, 1998, November 27, 1998. In the board meeting held on November 11, 1998, the board constituted a subcommittee to look into the accounts of the company. In the next board meeting on November 27, 1998, the board noted that the first respondent was not cooperating with the sub-committee and directed the subcommittee to finalise its report. In the meeting held on December 24, 1998, the board discussed the report of the committee and decided to call for an explanation from the first respondent. It also resolved to initiate suitable proceedings against the first respondent in competent courts.
While the management of the company was being carried on by the first and second petitioners along with the board of directors as late as November, 1998, the respondents' claim, through fabricated documents, that both have ceased to be directors of the company. Referring to annexure A-9 which is a notice dated September 1, 1998, for the annual general meeting to be held on September 30, 1998, learned counsel pointed out that the same had been signed by the second respondent as the chairman of the company while in fact the board had noted in the board meeting dated October 14, 1998, that the annual general meeting could not be convened due to the non-availability of the accounting records. He pointed out that on September 1, 1998, the first petitioner continued as the chairman of the company. He further pointed out, referring to alleged minutes of the annual general meeting held on September 30, 1998 (annexure A-10), wherein it is shown that four directors including the first petitioner were not re-elected as nobody proposed their names. He submitted that not only the notice issued by the second respondent is invalid, no such meeting could have taken place without notice to all the shareholders. He also pointed out that as per the notice, three directors were to retire by rotation, in the minutes it is noted as if four directors were liable to retire by rotation and none of them was elected. The pro visions of Section 256(4) of the Act have not been followed according" to which in case retiring directors are not re-elected and the vacancy is not filled up, then, the meeting should have been adjourned. As per Section 256(4)(b) of the Act, if in the adjourned meeting also, no one is appointed in the vacancy caused and if the general body does not decide not to fill up the post, then, the retiring director would automatically be reappointed. This itself he submitted would show that the minutes are fabricated. Referring to annexure A-11 which contains a copy of the alleged meeting of the board held on November 30, 1998, in which the alleged resignation of the second petitioner as managing director was accepted by the board, he pointed out that even though it is shown in the minutes as if the second petitioner was present in that meeting, he never attended the said meeting and the signature on the minutes is fabricated. Referring to annexure A-15, he pointed out that even the Citizens Urban Cooperative Bank Limited has given a certificate that cheques had been issued against the company's bank account under the joint signatures of the petitioners. Therefore, it is inconceivable, he argued that both of them would have ceased to be in office as indicated in the fabricated minutes of the board meeting. Referring to Article 61, he submitted that notice of all meetings has to be issued only by the managing director, and since the second petitioner, as per the respondents themselves, ceased to be the managing director only on November 30, 1998, all notices for the earlier meetings should have been issued by him. Since he had not issued any of the notices for the alleged board meetings and general body meet ings, it itself would show that all the notices and the minutes are fabri cated.
4. He further submitted that not having been satisfied with fabrication of documents to show that the petitioners had ceased to be holding any managerial positions, the respondents have manipulated the records to show as if 810 shares and 1,900 shares were allotted to the respondents' group in the alleged board meetings held on November 30, 1998 and December 12, 1998, respectively. This manipulation was done only with a view to reduce the petitioners to minority. He also pointed out that Form No. 2--return of allotment--was filed only on January 4, 1999, after the proceedings under Sections 145/146 of the Criminal Procedure Code were initiated.
5. Summing up his arguments, learned counsel submitted that the civil suit filed by the petitioners is not a bar to proceed with this petition inasmuch as the reliefs under Section 402 of the Act cannot be granted by a civil court. In the present petition, what is alleged is mismanagement in the affairs of the company and falsification and fabrication of various documents. Further, this petition is maintainable under Section 398 inasmuch as by the fraudulent activities of the respondents, material change in control of the shares as well as the management have been brought about which would not he in the interest of the company in view of the conduct of the respondents in indulging in fabrication and the way in which the respondents have taken control of the company not only by removing the petitioners illegally by fabricating the records from their managerial position, but also by reducing them to minority. With these manipulations, substantial changes have been brought in the management and control of the company, which is against the interest of the company and the shareholders. All these acts constitute gross mismanagement in the affairs of the company and as such the reliefs sought for should be granted.
6. Ved Vyas, counsel for the respondents submitted that this petition has been filed only under Section 398. Therefore, the ingredients of Section 398 have to be fulfilled. He submitted that since the company is a closely held family company, no public interest is involved and as such the provisions of Section 398 are not attracted. Further, he submitted that only after the change in the management, the company has declared dividend for the first time and as such as the continuation of the present management is in the interest of the company and the members. Further, he also pointed out that the petitioners have already filed a civil suit with the same allegations relating to the alleged fabrication of notices for the meetings as well as the minutes of the said meetings. The reliefs sought in the civil suit are similar to the ones sought in the present petition. Since the civil suit was filed prior in time and since the petitioners have already chosen a forum, they should not be allowed the liberty of forum shopping and as such this petition should be dismissed. He also pointed out that the control of the company being with the first respondent, has already been confirmed by the High Court and as such the petitioners cannot seek any relief from the Company Law Board challenging the control of the company by the respondents. Accordingly, he prayed for dismissal of the petition.
7. We have considered the pleadings and arguments of counsel. Other than raising objections on the maintainability of the petition under Section 398 and also in view of the pending civil proceedings, counsel for the respondents did not argue on the various allegations made in the petition. As far as the maintainability of the petition under Section 398 of the Act is concerned, since the allegations pertain to the control of the shares and the management, the same is covered under Section 398(1)(b) of the Act and as such the petition is maintainable.
In regard to the proceedings before the civil court, we have gone through a copy of the plaint enclosed with the reply of the respondents. All the allegations in the present petition except the one relating to additional issue of 1,900 shares are found to have been included in the plaint. The various reliefs that the petitioners have sought in the present petition also find a place in the relief portion of the civil suit. The Company Law Board has been taking a consistent stand that to avoid conflicting decisions on common issues, if any proceedings are found to have been initiated prior in time to the filing of the petition before the Company Law Board on issues covered in the petition, the Company Law Board would either stay the proceedings before it or dismiss the petition unless otherwise the earlier proceedings are withdrawn. Since we find that the matters covered in the petition are already before the civil court and since the proceedings are pending and the petitioners have not chosen to withdraw the earlier proceedings, without going into the merits of this case, we stay our proceedings.
8. Petition is stayed. The petitioners are at liberty to revive the petition through an application after the completion of the proceedings in the civil court, if they are so advised.