Judgment:
1. The petitioners holding 12.5 per cent shares in Flavours and Essences (P.) Ltd. ('the Company') have filed this petition under section 397/398 of the Companies Act, 1956 ('the Act') alleging various acts of oppression and mismanagement in the affairs of the company and seeking the following reliefs :-- (i) to nullify the sale deeds dated 26-3-1997 (Annexures 'C, 'D' & 'E'); (ii) to declare that the company is the owner of the apartments covered by the sale deeds dated 26-10-1997; (iii) to direct the respondents 2 to 5 to hand over peaceful and vacant possession of the apartments; (iv) to appoint petitioners 1 & 2 as directors on the Board of the Company; and (v) to restrain the second respondent from acting as managing director of the Company.
2. The main act of oppression and mismanagement relates to the utilisation of funds of the company by acquiring the apartments in the name of respondent Nos. 2 to 5.
3. Shri Raghavan, the Senior Advocate appearing for the petitioners while initiating his arguments submitted that the company incorporated as a Private Limited Company in November, 1973 has been in the business of manufacture of spices, oleoresins and other allied products. The company is closely-held by the Coelho family comprising of the petitioners (husband and wife), respondent Nos. 2 to 5 (brother and sisters) and other members related cither by blood or marriage. The respondent Nos. 2 to 4 are both the shareholders as well as directors in the company and the fifth respondent is a shareholder. He submitted that the second respondent had entered into a joint development agreement on behalf of the company for development of a land belonging to one Mr. Augustine J.F. D'Souza and Mrs. Therese ('the Vendors') situated in Bangalore. The monies utilised for the construction of the joint development project were taken from the company and debited to an account designated as 'Bangalore Building Advance'. Accordingly, the land belonging to the Vendors was developed with two apartments given to the owners of the land and the remaining apartments retained as property of the Company. However, it transpired that the apartments obtained under the joint development agreement were found to have been registered in the individual names of respondents 2 to 5. These transactions were without the authority of the Board of Directors of the company. The petitioners being minority shareholders have been oppressed by the acts of respondent Nos. 2 to 4 by registering the apartments belonging to the company in the names of respondents 2 to 5.
Thus, the affairs of the company arc being conducted in a manner prejudicial to the interest of the minority shareholders and amounting to mismanagement and oppression. The respondents 2 to 5 have failed to act as trustees of the company. In this connection, Shri Raghavan invited our attention to the balance sheet of the company for the year 1993-94 showing a sum of Rs. 53,84,956.32 as an advance under the heading 'Bangalore Building Advance' and also the balance sheet for the year 1994-95 showing Rs. 16,10,847.37 outstanding under the heading 'Bangalore Building Advance'. However, the balance sheet for the aforesaid years did now show any addition to the value of fixed assets in the form of land and/or buildings. The respondents 2 to 5 had executed the sale deeds in respect of the apartments in their own personal names and not in the name of the company. He further submitted that respondent Nos. 2 to 5 had used funds of the company illegally for their personal use or benefits and committed a fraud on the company by utilising funds of the company and usurping the properties belonging to the company by getting sale deeds executed in their own personal names.
The respondents 2 to 5 are guilty of frittering away the valuable funds of the company and as such they amount to a clear case of mismanagement of the affairs of the company. The respondents 2 to 4, being directors of the company, they have by misusing their fiduciary responsibility enriched themselves at the cost of the company. Shri Raghavan, therefore, prayed that the CLB should declare that the company is the owner of the apartments or in the alternative, the respondents should pay to the company the present market value of the apartments. Shri Raghavan also suggested that the Bench could direct the statutory auditor of the company to examine the accounts relating to 'Bangalore Building Advance' Account to elicit the correct position.
4. Shri Vidhya Shankar appearing for the respondents submitted that a joint development agreement dated 10-9-1988 was entered into by the second respondent in his personal capacity with the erstwhile owners of the land and that the company is not a party to the joint development agreement. No rights have been conferred on the company under the agreement. The funds shown as debited in the balance sheet of the Company designated as 'Bangalore Building Advance' represents advances to the shareholders and directors of the company in the normal course of business. The advances were written off against the credit balance of the respondent Nos. 2 to 5 available in the books of the company or subsequently paid by them. The apartments were not intended to be acquired for the company, but intended to be acquired by respondents 2 to 5 and accordingly, they were registered in their personal names. No reliefs under section 397/398 could be granted in respect of the properties not vested with the company. Therefore, the company petition is beyond the scope of section 397/398 and liable to be dismissed. Shri Vidhya Shankar further pointed out that the Vendors of the apartments are necessary parties to the petition. The petition deserves to be dismissed for non-joinder of necessary parties. According to Shri Vidhya Shankar, the account 'Bangalore building advance' does not represent any payment made by the company towards purchase of the apartments. The respondent Nos. 2 to 5 were also partners of various firms and major shareholders in private limited companies in the group.
Large sums of money remained due by the company to these firms and private companies and also to the respondent Nos. 2 to 5. The respondent Nos. 2 to 5 had requested the company to advance money on their account towards consideration for these buildings to be adjusted finally towards the liability of the company to various firms, companies and to the respondents directly. The respondent Nos. 2 to 5 had taken loans from the company under single head of account 'Bangalore Advance Account'. The payment reflected in this head of account docs not reflect any payment by the company to the Vendors.
These disbursements were advances and not consideration for purchase of the apartments and such disbursement was made as requested by the respondent Nos. 2 to 5. In this connection, he invited the credit balance of Rs. 57,62,360 available in the books of the company in the name of respondent Nos. 2 to 5 and other relatives. These credit entries were in existence for a very long lime and was utilised by the company without charging any interest. The aforesaid credit balance was adjusted towards liability of the respondent Nos. 2 to 5 under 'Bangalore Building Advance' which has been fully squared off by settling of the liabilities of the company to the firms and companies in which the respondent Nos. 2 to 5 had substantial interest. The entire amount availed by the respondent Nos. 2 to 5 as loans and advances from the company under the heading 'Bangalore Building Advance' had corresponding credits during the relevant period. The entire advances were fully squared off from the outstanding credit balance standing against the name of respondent Nos. 2 to 5. Shri Vidhya Shankar relied upon the report of the statutory auditors disclosing the entries under 'Bangalore building advance' as well as the credit balance out of which the advances were duly squared off from the credit balance. He further submitted that the respondents are also entitled for interest on their credit balances and that they arc willing to pay interest on the amount availed by them under 'Bangalore Building Advance'. He, therefore, prayed for suitable directions in this behalf.
5. We have considered the pleadings and arguments of both the counsels.
The question for our consideration is whether the acquisition of the apartments in the personal name of the respondent Nos. 2 to 5 out of funds of the company amounts to an act of oppression and mismanagement of the affairs of the company 6. The facts not in dispute are that during the year 1993-94, Rs. 53,84,956.32 was outstanding under the 'Bangalore Building Advance'.
Similarly, a sum of Rs. 16,10,847.37 was shown as out standing during the year 1994-95 under 'Bangalore Building Advance'. There was also a credit balance of Rs. 57,63,360 available in the books of the company in the name of respondents 2 to 5 and their relatives. The company is a closely-held company of the family of Coehlo. The shareholders, directors and various firms in which they are partners have credit as well as debit balances in the company, Shri Vidhya Shankar submitted that the amounts were advanced on behalf of the respondent directors which were later adjusted against the credit/debit in their names and in the name of the partnership firms. While admitting that this amount ought to have been shown as advances to the respondent directors, he contended that wrong classification under 'Bangalore Building Advance' cannot empower the company to claim ownership of the property. Shri Vidhya Shankar agreed for scrutiny of the books of account of the company by the company's statutory auditors, as sought for by the counsel for the petitioners to arrive at a fair conclusion by this Bench. Accordingly, Shri S. Ramasubramaniam, the Chartered Accountant, the statutory auditors of the company was advised to examine in detail and furnish a report as to how, when and the manner in which the amount shown under 'Bangalore Building Advance' was paid and how the same was adjusted later. The statutory auditor after perusing the books of account of the company from the period commencing from 1-4-1990 has given his report. He has furnished the total debits and credits during each of the years commencing from 1-4-1990 and until 1-4-1997, when the 'Bangalore Building Advance Account' was fully squared up. It is observed that the aggregate debits in 'Bangalore Building Advance Account' made over the years comes to Rs. 71,88,497.07. This debit is found to be squared up and adjusted against the accounts each of the respondent Nos. 2 to 5 at Rs. 17,97,124.26. Thus, the entire advance is found to have been squared up as on 1-4-1997 from and out of the balances available to the credit of respondent Nos. 2 to 5.
7. Thus, taking into consideration that there is no sale agreement between the erstwhile land owners and the company and that the company is not a party to the joint development agreement, we are inclined to agree with the learned counsel for the respondents that his clients have not usurped the properties of the company and that the company had wrongly debited the advances given for construction under the head 'Building Advance Account' instead of debiting the same in the personal account of the respondents or setting the same against the credit entries standing in the name of the respondents, as and when payments were made. With a view to ensure that the respondents have not derived any undue benefit by advances paid by the company towards the building, we stipulate that the respondents should pay interest of 15 per cent to the company on all the advances made by the company in this regard. The respondents will also be entitled for the same rate of interest on the credit balance standing in their names. We direct the statutory auditor of the company to workout the interest payable as per the above directions. If the interest receivable by the company is more than the one payable by the company, the respondents should pay the dues within 30 days of furnishing of the report by the auditors. In the same way, if the amount receivable by the respondents is more than the one payable to the company, the company will pay the dues within 30 days as above.