1. In the company petition filed by the petitioners under Sections 397 and 398 read with Section 235 of the Companies Act, 1956 ("the Act") alleging that the affairs of M/s Monarch Steels (India) Ltd. ("the Company") are being conducted by the respondents 2 to 4, in a manner prejudicial to the interests of the Company, the petitioners have made these applications (CA 91/2004) and (CA 135/2004) seeking certain amendments to the company petition and interim directions against the respondents, in support of which, Shri T.K.S. Bhaskar, learned Counsel submitted: The respondents 2 to 4, being directors committed various acts of oppression and mismanagement and collected a large sums of money from the investors including the petitioners for putting up a factory to manufacture sponge iron and other steel products. However, no factory was ever constructed or commissioned by the respondents 2 to 4. At the same time, the respondents siphoned of the funds collected from the shareholders and presently only an amount of Rs. 4,517.58 is available to the credit of the bank account maintained by the Company.
The respondents failed to convene any general meeting or board meeting periodically and the shareholders were kept in dark about the affairs of the Company. The second respondent filed the fabricated accounts with the Registrar of Companies, as if the accounts were duly adopted and approved by the Company from time to time. The auditor's report dated 30.04.1995 and the balance sheet as at 31.03.1995 alone are found to be signed by M/s. R. Chandrasekar & Co, Chartered Accountants, represented by Shri K. Rajaram. The auditor's reports dated 15.04.1997; 15.04.1998 and 15.04.1999 forming part of the balance sheets for the year ended 31.03.1997; 31.03.1998 and 31.03.1999 do not bear the signature of the auditor of the Company. Shri K. Rajaram, by a communication dated 18.05.2004 reported that the accounts of the Company for the year ended 31.03.1997 have not been audited by him. The communication dated 14.10.2004 of Shri K. Rajaram indicates that he did not audit or sign the annual accounts of the Company for years 1994 - 1995 onwards. In these circumstances, this Bench may appoint an independent Chartered Accountant a) to take possession of the statutory records, books of account and other records of the Company; and b) to conduct the affairs of the Company; verify the books of account and affairs of the Company, and submit a report before this Bench for appropriate directions. Now it is claimed that the respondents 5 to 8 have been inducted as directors on 28.11.2003 and that the respondents 2 to 4 have resigned from the office of directors as early as on 02.12.2003. However, the respondents 5 to 8 are not even shareholders of the Company and they are strangers, but inducted on the board so as to relieve respondents 2-4 from the various acts of gross mismanagement committed by them. These developments have come to notice of the petitioners after filing of the company petition and, therefore, the petitioners are now constrained to seek amendment of the company petition setting forth these developments and claim the reliefs against the respondents 5 to 8 restraining them from acting as directors of the Company. Accordingly, Shri Bhaskar, learned counsel prayed for the relilefs as claimed in the applications (C.A. No. 91/2004 & C.A. No.135/2004).
2. Shri R. Shankaranarayanan, learned Counsel appearing for the second respondent submitted that this Bench may give appropriate directions on the applications filed by the applicants. Shri B. Mani, learned Counsel representing the fourth respondent made similar submissions.
3. Shri V.V. Stephen, learned counsel representing the respondents, 1, 3, 5 to 8 submitted : The petitioners neither have the minimum shareholding nor do they have adequate numbers to qualify under Section 399 to file the company petition before the CLB and, therefore, they do not have any locus standi to come out with the present applications.
The petitioners 9 & 12 are not shareholders of the Company. The equity shares issued by the Company in the name of the petitioner No. 12 were forfeited long back since no consideration was received by the Company for the shares allotted in her favour. The ninth petitioner is also not a shareholder of the Company. He does not hold the share certificates of the Company. The various documents relating to the Company are at the Company's godown which is now in possession of the Authorized Officer, Indian Bank, Pondicherry who seized and took possession of the godown premises under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. In these circumstances, the learned Counsel submitted that the Authorized Officer of the Indian Bank may be directed as sought in CA 44/2005, to produce the relevant records in his custody in order to substantiate his submissions in relation to the forfeiture of shares of the petitioner No. 12. The respondents 5 to 8 validly acquired by way of transfer in their favour the qualification shares in the Company, and, they have been properly appointed by a valid decision of the majority of board of directors, which cannot be challenged in the present proceedings. The proposed amendments and the interim reliefs thereof will change the very substratum of the disputes involved in the company petition. The learned Counsel contended that unless adequate opportunity is given as sought by the respondents, they will not be in a position to resist the applications filed by the applicants.
4. Shri T.K.S. Bhaskar, learned Counsel in his rejoinder submitted that the annual return of the Company for the period made up to 26.12.1996 is on record before this Bench, which indicates that the petitioners 9 & 12 are shareholders of the Company. The Company failed to produce the register of members revealing particulars of the shareholders of the Company. The burden is on the Company to show that the shares of petitioner No. 12 were forfeited by the Company in accordance with the relevant applicable articles of association of the Company. There is no document to show that the Company followed the procedure prescribed under regulations 29 to 35 of Table 'A' which are applicable to the Company, in the absence of which forfeiture cannot be valid in law as held in Smt. Sulochana Nathany v. Hindustan Malleables and Forgings Ltd. - (2001) 1 Camp LJ 159 & Karachi Oil Products Ltd., v. Kumar Shree Narendrasinghji-.
5. I have considered the oral submissions of the learned Counsel.
Before going into the contentious issues, I shall consider the maintainability of the company applications. According to the respondents, the applicants 9 & 12 are not shareholders of the Company.
The equity shares issued by the Company in the name of the applicant No. 12 stand forfeited for nonpayment of consideration towards allotment of shares in her name. The burden is cast on the Company to establish that the provisions contained in the articles of association relating to forfeiture have been strictly complied with, in absence of which there cannot be any valid forfeiture of shares held in the name of the applicant No. 12. Any forfeiture of shares not in compliance with the requirements of articles of association of a company is invalid as held in Smt. Sulochana Nathany v. Hindustan Malleables and Forgings Ltd. and Karachi Oil Products Ltd., v. Kumar Shree Narendrasinghji (supra). The articles of association of the Company do not contain any provision governing the forfeiture of shares. However, the regulations contained in Table A of Schedule 1 to the Act shall be applicable to the Company. Regulations 29 to 35 of Table A prescribe the procedure for forfeiture of shares in a company. There is no record to evidence any such forfeiture of shares held by the applicant No. 12 and, therefore, the plea of the respondents that the applicant No. 12 is not a shareholder must fail. It shall be borne in mind that the annual return made up to 20.09.1995 on record reflects the names of the applicants 9 & 12 as shareholders of the Company holding 500 and 10,000 shares respectively. This annual return is not being disputed by the Company. At the same lime, the Company has not chosen to produce any annual return for the subsequent period to show whether the applicants 9 and 12 are deleted from the list of members of the Company. The persons shown in the annual returns are prima facie entitled to file a petition under Sections 397 and 198, in support of which beneficial reference is invited to Radhey Shyam Gupta v. Kamal Gil and Allied Industries Limited - (2001) vol. 103 CC 337. I, therefore, do not hesitate to conclude that the applicants satisfying the requirements of Section 399 are entitled to maintain the company applications. The plea of respondents that the documents relating to the forfeiture of shares are available at the godown of the Company, which is now in possession of the Authorized Officer, Indian Hank, Pondicherry who has seized and taken possession of the godown under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, in my view, has no relevance in the light of the public notice caused in the New Sunday Express on 09.01.2005 by Indian Bank according to which it is beyond doubt that they have taken possession of the immovable property situated at Kambali Swami Madam Street, Pakkamudayanpet for the dues of M/s Srivari Mutual Benefit Finance Limited. The respondents neither pleaded nor established that the records of the Company were kept in the said premises seized by Indian bank. There is no record to suggest that the Company made any application with the Authorised Officer, Indian Bank, Pondicherry at any point of time claiming the records of the Company purportedly under the custody of Indian Bank. At this juncture, I may point out that the advocate-commissioner appointed by this Bench to authenticate the statutory records of the Company categorically observed in his report dated 25.06.2004 that there is no company by name M/s Monarch Steels (India) Ltd. running in the premises viz., 20, Kambali Swami Madam street, Pakkamudayanpet, Pondicherry - 8 and that there is no name board or any other indication of the functioning of the company in the said premises. Under these circumstances, the claim of forfeiture of shares pressed into service by the respondents 5 to 8, without support of any documentary proof, cannot be entertained. It is observed from the commissioner's report that the respondents did not choose to be present at the time of his visit for authentication of the statutory records of the Company, in spite of the notice given by him. The notice sent to the Company was returned undelivered with postal remark "unclaimed". The Company is not functioning at its registered office, viz., Door No. 12, 2nd Cross Street, Rajiv Gandhi Nagar, Pondicherry-11. It is further reported that the Company vacated from the said premises more than four years back. Ultimately, the commissioner could not authenticate the statutory records of the Company in terms of the order of this Bench. The respondents have neither chosen to produce the statutory records nor offered any explanation for non-production of the statutory records, which must be seriously viewed. In the context of the unexplained delay, there is no merit in the application (C.A.44/2005) of the respondents seeking directions against among others the Authorised Officer, Indian Bank and the Income Tax officer, Pondicherry for production of the documents claimed therein and the same is declined. The company petition came to be filed in June, 2004 alleging several acts of oppression and mismanagement in the affairs of the Company, upon which, the respondents 2 to 4 took the stand that they had resigned from the office of directors as early as on 02.12.2003 and further that the respondents 5 to 8 were inducted as directors on 28.1 1.2003. According to the applicants, the respondents 5 to 8 are strangers to the Company and the respondents 2 to 4 having committed various acts of gross mismanagement and after siphoning of funds of the Company are attempting to wriggle out of the Company. Moreover, the applicants are apprehending that the respondents 5 to 8 are abusing the position as directors of the Company and, therefore, the applicants have come out with the applications (CA 91/2004 and 135/2004) seeking amendment of the company petition, incorporating, on account of the above developments, the requisite averments against these respondents and seeking reliefs against them. When the acquisition of shares of the Company by the respondents 5 to 8 and their appointment as directors are under serious dispute, they failed to produce any material in original substantiating their shareholding and induction as directors on the board of the company. In these circumstances, I am inclined to permit the petitioners to amend the company petition as claimed by them and the respondents are at liberty to file their additional counter in regard to the charges leveled against them, by which, in my view, no prejudice can be caused to the respondents.
It is not under dispute that the main object of the Company is to put up a factory for manufacturing of sponge iron and other steel products.
But the factory has not been so far put up by the Company and the respondents are answerable for the funds collected by them from shareholders of the Company. It is observed that the balance sheet for the year ended 31.03.1997, 31.03.1998 & 31.03.1999 and the auditor's reports forming part of these balance sheets on record do not bear the signature of the Company's auditor. The Company's auditor categorically reported that he has not audited the accounts of the Company for the years 1994-1995 onwards. There has been no explanation whatsoever from the respondents in this behalf. The averments made by the fourth respondent in his counter statement shows that the Company has not been convening either the board meetings or general meetings from time to lime and that he never resigned from the office of director of the Company. In these circumstances, I am firmly of the view that the applicants made out a prime-facie case for granting the interim reliefs urged by them. The Company is admittedly not carrying on any business and therefore, no prejudice will be caused by virtue of granting any interim order against the respondents. On the contrary, the interim relief proposed by me would protect the interest of every shareholder, especially when the Company is in the process of disposing of its fixed assets and it is in the midst of other litigations in relation to its affairs including the proceedings under Section 560, apart from its statutory obligations under the Act. Accordingly, I order as under:- (i) The respondents 5 to 8 are restrained with immediate effect from functioning as directors of the Company; (ii) The respondents are directed to produce the statutory records, books of account and other records or the Company for verification by Shri S. Swaminathan (M/s Ganesan and Company), Chartered Accountant, Pondicherry (Tel. No. 0413-2336884), who will alter verifying all these records submit his report on the affairs of the Company. The petitioners and respondents are at liberty to make their submissions before the Chartered Accountant, who will consider the same and submit his report by 11.07.2005; (iii) The affairs of the Company will henceforth be looked after by a committee of management consisting of the nominees from both the sides, viz., one nominee by the petitioner group and the other by the respondent group which shall be done forthwith. This committee of management will function under the chairmanship of Shri S. Swaminathan, Chartered Accountant; (iv) The above arrangement shall remain in force until further orders. The parties are at liberty to apply, in the event of any difficulty in implementation of the order; (v) The remuneration payable to Shri S. Swaminathan, Chartered Accountant must be negotiated by the contesting parties to be borne by them in equal proportion; (vi) The Bench Officer will forward a copy of the order to the Registrar of Companies, Pondicherry; (vii) The petitioners will file the amended company petition by 20.06.2005. The respondents will file the counter statement by 13.07.2005 and rejoinder, if any, by 25.07.2005. The company petition will be heard on 05.08.2005 at 02:30 P.M.With the above directions all the applications (C.A.91/2004. C.A.135/2004 and C.A. 44/2005) stand disposed of.