1. The petitioners collectively holding in excess of 10% of the issued share capital of M/s Panchamy Pack (Kerala) Private Limited ("the Company"), aggrieved on account of a series of acts of oppression and mismanagement in the affairs of the Company namely, (a) non-convening of annual general or board meetings; (b) irregular and non-filing of annual accounts; (c) diversion and misuse of the Company's funds for meeting personal acquisitions, debts and expenses of the respondents 2 to 5; (d) non-declaration of dividend, thereby denying the petitioners their legitimate rights; (e) non-closure of debts due to banks, suppliers and other creditors; (f) bleak chances of settlement of debts during the currency of operations of the Company; (g) non-production of accounts and realization of huge sums of money through unauthorized bank accounts; (h) unexplained cash withdrawals from the bank account; and (i) denial of shareholding of the petitioners 5 to 8, have invoked in the present company petition, the provisions of Section 397, 398 and 402 of the Companies Act, 1956 ("the Act"), seeking the following reliefs: i) to restrain the respondents 2 to 5 from interfering with the affairs of the Company and replace them by the petitioners 1 and 5 to manage and conduct the affairs of the Company; ii) to appoint an administrator for the management, regulation and administration of the affairs of the Company; (C.A. No. 82 of 2006); iii) to surcharge the respondents 2 to 5 for misapplication and misappropriation of funds of the Company; and iv) to make appropriate orders for the management, regulation and conduct of the Company.
2. Shri R. Varadharajan, learned Counsel, while initiating his arguments submitted: The Company has been incorporated in March, 1999 mainly to carry on the business of manufacturing, processing, procuring and selling of packing materials for perishable as well as non-perishable commodities and dealing in packing activities of consumable food products. The respondents 2 & 3 are the subscribers to the memorandum and articles of association of the Company as well as first directors. At present the petitioners 1 to 5 and respondents 2 to 5 are directors and second respondent is the managing director.
The present authorised capital of the Company is Rs. 1 crore consisting of ten lakh equity shares of Rs. 10/- each, as borne out by the annual return made upto 30.09.2002. While the petitioners 1 to 4 are holding 1.40 lakh shares in the Company, petitioners 5 to 8 acquired in November, 2002 from respondents 2 to 4, two lakh shares for valuable consideration, which was duly approved by the board of directors on 13.11.2002, thereby satisfying the requirements of Section 399 of the Act.
The Company had obtained a contract for processing and filling of aravana prasadam in composite cans using modern technologies at Sri Ayappa Temple, Sabarimala which is under governance of the sixth respondent and accordingly entered into an agreement with the latter in April 1999, for supply of aravana prasadam to the devotees at Sabarimala, with prior approval of the High Court of Kerala, consequent upon several complaints filed before the High Court of Kerala against the sixth respondent due to poor supply of the aravana prasadam in quality and consistency, to the devotees by the sixth respondent. The Company is required, under the said agreement, to fill the prepared aravana prasadam in cans and supply for a period of eight years at the rates specified therein which shall be payable by the sixth respondent. The Company incurred capital expenditure of Rs. 275 lakhs for the project of supplying the aravana prasadam as per the requirement of the sixth respondent and was to transfer, after expiry of the contract period of eight years, the machineries and other capital investments in favour of the sixth respondent free of cost, which will become the property of the sixth respondent. The entire focus of operations of the Company is predominant during the period between 15^th November and 15^th January of every year and all the receipts from the sixth respondent are received during the same period.
The first petitioner based on the representations made by the second respondent arranged financial facilities in favour of the Company through Sree Gokulam Chit and Finance Company Private Limited, to the tune of Rs. 250 lakh during the period between May, 1999 and October, 2000 and thereafter. The first petitioner further brought in sum of Rs. 20 lakh in cash towards equity of the Company and became its Chairman in September, 1999, while the respondents never invested any money towards their holding in the Company. The Company had also availed loans from Kerala Financial Corporation and Dena Bank to pursue the project of supplying the aravana prasadam. The respondents were settling the outstanding dues every year from and out of the outside borrowings. The accumulated past liabilities amounting to Rs. 5.78 crore, as admitted by the second respondent, are reflected in the funds flow statement for the period from October 2002 to January 2003.
The respondents 2 to 5 were desperately looking for funds during the 2002-2003 season and at that point of time approached the petitioners 5 to 8 and without disclosing the actual financial position of the Company divested their shares in favour of the petitioners 5 to 8 for an amount in excess of Rs. 20 lakh made in favour of M/s A-Majestic Containers, a major supplier of cans, under instructions from the respondents, as borne out by a copy of the statement of accounts dated 06.01.2003 of the supplier. This amount of Rs. 20 lakhs represents the consideration for sale of the shares by the respondents 2 to 5 in favour of the petitioners 5 to 8.
Article 10 provides that any member desiring to transfer his shares to non-members shall first offer to the members of the Company, to be purchased at the fair value and it is only in the event of refusal by all the members to purchase the shares, the said shares can be transferred to non-members. In the instant matter, apart from the respondents 2 to 5, petitioners 1 to 4 were the only remaining members and therefore, the transfer in favour of the petitioners 5 to 8 cannot be challenged. The Company is showing negative growth and therefore, the sale of shares at face value is justified, satisfying the requirements of article 10. At the board meeting held on 30.09.2002 the fifth petitioner was co-opted as director of the Company to look after the day-to-day activities and administration the Company. The resolutions passed at the board meetings held on 11.11.2002 and 30.11.2002 establish the transfer of shares belonging to the respondents 2 to 5 in favour of the petitioners 5 to 8. While the resolution dated 01.09.2003 approving the split up of the impugned shares has been signed by the second respondent, the resolution dated 02.09.2003 approving the transfer of shares has been signed by the respondents 2 to 5. in view of this, the respondents are estopped from denying the sale of shares by them in favour of the petitioners 5 to 8.
The Company was in nascent stage, but the respondents 2 to 5 indulged in extravagant expenses forcing the Company to end up with a huge financial crisis from which it is yet to recover even as of today. The due diligence of the operations of the Company for the years 1999-2000 and 2000-2001 conducted by an external financial agency showed the following deficiencies: The respondents 2 to 5 withdrew high emoluments to an extent of Rs. 40 lakh even when the Company faced lower income.
There was steep increase in salaries, allowances of workers over the previous year 1999-2000 by Rs. 10 lakh.
The Company incurred additional expenses accounting for Rs. 28 lakh on account of higher purchase price to the suppliers and by way of luxury cars each costing Rs. 30 lakh.
The foreign tours and mobile expenses of directors stood at Rs. 38 lakh.
The directors availed benefits from the Company's income to the extent of 55% of the total fixed cost.
Several irregularities are noticed in the books of account of the Company maintained for the years 1999-2000 and 2000-2001.
A number of payments routed through directors are not supported by supporting documents.
The various payments made to directors by way of remuneration are subsequently transferred to loading and unloading expenses.
The statutory records are not kept in the registered office. Annual returns and annual accounts have not been filed for several years.
The main reasons as per the due diligence audit report, for high breakeven point are on account of managerial remuneration, negative economics of relatively small scale operations, higher depreciation cost, higher rate of interest, seasonal nature of sales and full year expenses incurred against seasonal revenue.
The respondents 2 to 5 in charge of the management affairs of the Company cheated various suppliers, creditors without making payments and committed default in settlement of the bank dues to an extent of over Rs. 600 lakh, which adversely affected the proper distribution of aravana prasadam, credibility of the Company and reputation of the first petitioner and his companies, as borne out by copies of the legal notice dated 20.06.2002, communication dated 22.07.2002 issued by Canara Bank, seeking the intervention of the first petitioner, being Chairman of the Company to settle its dues, so as to avoid publication of names of the directors of the defaulting companies, letters of demand from creditors/suppliers of the Company and fax sent in December, 2002 by the sixth respondent complaining of improper supply of the prasadam as agreed by the Company.
The directors at the board meeting held on 07.10.2002 authorised Sree Gokulam Chits and Finance Company Private Limited to collect the receivables by way of cheques from the sixth respondent towards discharge of the loans borrowed by the Company and further resolved on 01.08.2004 (i) to appropriate 25% of the receivables payable by the sixth respondent in discharge of the liabilities of Sree Gokulam Chits and Finance Company Private Limited (ii) utilise the balance receivables to meet the working capital requirements of the Company and (iii) close the entire loan account of Sree Gokulam Chits and Finance Company Private Limited by 31.12.2004. However, the Company failed to act in terms of the decisions taken at the aforesaid board meetings, but on the other hand siphoned off the funds, thereby causing enormous loss to the Company. The gross mismanagement and mishandled supply of aravana prasadam on the part of the respondents 2 to 5 during the first four years forced the first petitioner to arrange through Sree Gokulam Chits and Finance Company Private Limited the working capital facilities for the 2002-2003 season and streamline the operations for the season 2002-2003, thereby successfully completing the supply of prasadam as well as its distribution to lakhs of devotees to the satisfaction of the sixth respondent and devotees, apartfrom meeting a part of the demand of the creditors for supplies made by them. The Company, under the control and management of the respondents 2 to 5 suffered huge losses to the tune of Rs. 1.34 crore for the year ended 31.03.2002, while at the same time earned substantial profits during the year 2003-2004 under the management of the petitioners, indicating a large scale misappropriation of funds resorted to by the respondents 2 to 5. However, the affairs of the Company for the subsequent season onwards were handed over to the respondents on the understanding that (a) the bank accounts will be jointly operated along with the first petitioner; (b) all the receipts from the sixth respondent will be duly acknowledged and accounted for by the respondents 2 to 5 and (c) all the payments to can suppliers, creditors and others will be made from the bank account operated by the first petitioner. Despite the understanding reached with the first petitioner, the huge liabilities remained unpaid to Dena Bank and other financial institutions. When Dena Bank approached the Debt Recovery Tribunal, for recovery of dues from the Company, the petitioners exercised their good offices to arrive at onetime settlement, whereby an amount of Rs. 202 lakh became payable in a number of instalments, the first instalment of which amounting to Rs. 50 lakh was forced to be remitted by the first petitioner to avoid the default on the part of the Company. The respondents 2 to 5 further, instead of remitting any amount to Dena Bank, in terms of the OTS sanctioned by the bank, diverted the funds to the tune of Rs. 83 lakh by opening an account with ICCI Bank without any authority and depositing the receipts collected from the sixth respondent, as borne out by the statement of accounts for the period between 01.01.2005 and 26.02.2005, thereby leaving the Company and its creditors in lurch. This act of the respondents 2 to 5 in not discharging the outstanding dues as agreed to by the Company constitutes a serious act of mismanagement in the affairs of the Company. The respondents 2 to 5 in breach of their fiduciary duty towards the Company and its shareholders deprived the Company of any chance to execute the contract to the satisfaction of the sixth respondent.
The first petitioner, his family members, petitioners 5 to 8, Dena Bank, J&K Bank, Sree Gokulam Chit and Finance Company Private Limited, suppliers and other creditors have been denied of their rights as shareholders or creditors as the case may be on account of gross mismanagement in the affairs of the Company at the hands of the respondents 2 to 5. The Company owes a sum of Rs. 1.76 crore to Sree Gokulam Chit and Finance Company Private Limited in terms of the statement of account for the period between 20.05.1999 and 30.06.2005 produced before the Bench. The total turnover of the Company over these years based on the supplies effected by it will be around a sum of Rs. 144.80 crore, in which case an amount of Rs. 36.20 crore will accrue to the coffers of the Company. Nevertheless, the Company failed to repay its debts and give any return on investment to its shareholders, including the petitioners by way of dividend. The respondents 2 to 5 on the other hand have misappropriated the Company's funds on account of salaries, tour advances to directors etc. for their personal benefits as could be seen from the balance sheet of the Company for the years ended 31.03.2001. 31.03.2002. and 31.03.2003. The receivables due to the Company as reflected in the funds flow statement not having been reflected in the books of account have been siphoned off by the respondents 2 to 5. The respondents are not interested in running the affairs of the Company, but only in misappropriating the funds to the prejudice of the creditors and shareholders. Thus, the respondents 2 to 5 are mismanaging the affairs of the Company, which are prejudicial to the interest of the shareholders and creditors of the Company.
This Bench, with a view to ensure that no personal withdrawals by the respondents 2 to 5 are permitted from the bank account, by an order dated 04.04.2005, imposed several conditions for compliance by the respondents, which were neglected to be carried out by them. The respondents suffered yet another order on 11.07.1005. Accordingly the bank account was directed to be operated jointly in respect of every transaction of Rs. 5 lakh and above, but the Company had sought to open a bank account clandestinely in total violation of the order and without notice, with Indus Ind Bank in order to withdraw the funds by the respondents 2 to 5 for their own benefits, and to the detriment of the Company, its shareholders and creditors including suppliers. The bank statements reveal that the amounts have been deposited in the bank account in excess of Rs. 5 lakh reportedly received from the six respondent and that the amounts have been withdrawn in cash on several occasions supposedly below Rs. 5 lakh without the joint signature of the first petitioner camouflaging the transactions above Rs. 5 lakh, thereby evidencing the violation of the order of this Bench. The transactions have been deliberately manipulated by the respondents 2 to 5 to some how or other make the transactions below Rs. 5 lakh, thereby avoiding the approval of the petitioners for such transactions, in gross violation of the order of this Bench. The respondents 2 to 5 merely furnished copies of the bank statements but not any statement of accounts furnishing the particulars of receipts and payments of the Company, which is clearly in breach of the order of the Bench. By these acts of the respondents 2 to 5, the order of the CLB has become nugatory and redundant. Thus the respondents 2 to 5 have been consistently collecting sums from the sixth respondent and siphoning off funds to the detriment of the Company and for their personal benefits. Further, with a view to avoid financial monitoring, the respondents have been constantly changing the bankers of the Company from time to time. This act of the respondents landed the Company in deep financial crisis, denied the shareholders of their returns on investment and the creditors of their entitlement for the sums lent by them to the Company.
The respondents have not convened any general or board meetings, thereby violating the statutory obligations as envisaged in the Act.
The respondents have neither filed the annual returns, including balance sheets, subsequent to the year ended 31.03.2002 nor filed any income tax returns with income tax authorities. The respondents 2 to 5 have not closed the books of account after the financial year 2002-2003 though they are in management of the affairs of the Company. The acts of oppression and mismanagement set out in the rejoinder are even now persisting and must be remedied by the CLB. The respondents consistently refrained from producing the books of account, statutory and other records for inspection before the independent auditor appointed by this Bench. All the books of account including for the period between 01.04.2003 and 31.12.2004 are under custody of the respondents and not with the petitioners.
Therefore, the independent auditor could not even commence the scrutiny of books of account and other records. The respondents falsely claim that the books of account of the Company for the period 2002-2003 are in custody of the petitioners, but at the same time at no prior point of time any demand has been made by the respondents against the petitioners for production of the books of account.
The sixth respondent neither appeared nor filed counter, but produced certificates through the respondents, as if there has been uninterrupted supply of aravana prasadam by the respondents. In view of this, no reliance should be placed on the certificates of the sixth respondent produced by the respondents 2 to 5. The sixth respondent accounts for 95% of the revenues of the Company and the agreement entered with the sixth respondent for the supply of aravana prasadam will come to an end by April 2007, which warrants strict financial control in the affairs of the Company in order to repay its creditors and shareholders or at least return a portion of the equity invested by them. In view of the huge liabilities and in the absence of any scope for any revenue generation from the sixth respondent, the Company is facing the threat of complete closure, on account of which the petitioners as shareholders will be put to grave monetary loss. The parties can no longer have any confidence in each other and consequently cannot any more work together.
Further, the Company is facing serious financial crisis and is not in a position to execute the contract with the sixth respondent for the remaining period, which is the substratum of the Company and therefore, it is just and necessary that the Company be ordered to be wound up, which will prejudice the interests of the Company, its shareholders and the general public. Therefore, the CLB has to interfere under Sections 397, 398 and 402 of the Act. Sree Gokulam Chits and Finance Company Private Limited initiated winding up proceedings against the Company on account of its inability to repay the outstanding dues, which however does not come in the way of granting appropriate remedies by the CLB, in the light of the order dated 31.01.2006 of the High Court of Kerala, whereby Sree Gokulam Chits and Finance Company Private Limited was not precluded from seeking any orders from the CLB. It is, therefore, just and necessary to appoint an administrator to manage the day-to-day affairs of the Company. The respondents 2 to 5 should be excluded from the management of the Company and the administrator be directed to take possession of all the assets, books and records of the Company, failing which the respondents 2 to 5 will alienate the properties of the Company reducing it to a shell Company.
Furthermore, the Company must be directed to credit 20% of receivables, which may be received from the sixth respondent in a separate non-operative escrow account to ensure the interest of the petitioners, which will be in line with the understanding originally reached between the parties.
3. Shri P.H. Aravindh Pandian, learned Counsel opposed the company petition on the following among other grounds: The petitioners 5 to 8 are non-existent shareholders of the Company.
The respondents 2 to 5 neither sold their shares in November 2002 to the petitioners 5 to 8 nor received any consideration for the shares. Articles 9, 10, 11 prescribe the procedure in the event of sale of shares by a member in the Company. These articles have not been complied with before the sale of impugned shares in favour of the petitioners 5 to 8. The share certificates purportedly held by the petitioners 5 to 8 do not confirm to rule 6 of Companies (Issue of Share Certificates) Rules, 1960 and neither bear the signature of the authorised signatory of the Company nor is the common seal affixed. The share certificates do not disclose the transfer number thereon. None of the names of the petitioners 5 to 8 appears in the records of the Registrar of Companies. The transfer of shares reportedly approved by the board resolutions dated 11.11.2002 and 13.11.2002 are fabricated ones. The petitioners 5 to 8 have produced yet another set of resolutions dated 01.09.2003 and 02.09.2003 in connection with the transfer of shares in their favour, which are forged resolutions. The minutes book of the board of directors maintained by the Company do not reflect any of such board resolutions as claimed by the petitioners. There was no need to approve the very same transfer of shares twice on different dates, in favour of the petitioners 5 to 8. This conclusively proves the fabrication of records resorted to by the petitioners 5 to 8. In both these documents the signature of the fifth respondent was obtained in blank at the same place, while he had obtained a personal loan from Sree Gokulam Chits and Finance Company Private Limited and these blank papers with the signature of the fifth respondent are being misused by the petitioners. The petitioners have not produced any proof of payment made to the respondents 2 to 4 for the purported sale of shares. The fifth petitioner allegedly paid Rs. 20 lakh to a supplier on account of the Company and not to the respondents 2 to 5 towards the transfer of shares. Thus, the transfer of shares is not supported by any valid consideration.
Though the respondents 2 to 5 categorically denied the transfer of shares in favour of the petitioners 5 to 8, the petitioners have not chosen to claim any relief in regard to title to the shares said to have been purchased by them.
No due diligence of the operations of the Company was conducted by any external agency for the years 1999-2000 and 2000-2001. The Company never authorised any external financial agency to conduct such a due diligence. The due diligence report produced before this Bench does not bear any date. Furthermore, the various averments of financial irregularities are vague and not established by any documentary evidence. The due diligence report merely concluded that "the Company's position with regard to profitability/liquidity/solvency seems to be at low ebb; that steps must be taken to recover the amount already advanced and that there is no point in throwing good money after bad money". The undated due diligence report lacks credibility and cannot be relied for any purpose whatsoever. In spite of the adverse comments of the auditor, the petitioners chose to extend additional financial support in favour of the Company, which would amount to acquiescence of the purported irregularities. The company petition is based on the due diligent audit report, which pertain to past and concluded acts and not amenable to the provisions of Section 397/398 as held in Palghat Exports Pvt. Ltd. v. T.V. Chandran and Ors. (1994) Vol. 79 CC 213.
Nevertheless the petitioners are agitating belatedly the very same past acts in the present proceedings. Thus, the petitioners are guilty of laches. The Company is regularly supplying the prasadam to the pilgrims as borne out by the certificates issued by the sixth respondent from time to time and there has been no complaint, in this behalf. The petitioners are concerned only with recovery of the purported amount due to Sree Gokulam Chits and Finance Company Private Limited by the Company but not the interest of the shareholders.
There has been increase in salaries and allowances to workers on account of many fold increase in the production at the relevant point of time. The equipments for packaging of the prasadam have imported components and to source these components foreign travel was necessitated. The petitioners are accusing the respondents of a large sums due to the banks and other creditors, which pertained to the period ended with 31.03.2002. However, the Company could as on date settle the entire liabilities due to Dena Bank, Jammu & Kashmir Bank, KFCL, Muthoot Finance, A-Majestic Containers and other suppliers. The Company is to pay only the interest component of Rs. 10 lakh to Dena Bank, which is under negotiation and an amount of Rs. 8 lakhs to the sundry creditors, which will be discharged in the normal course of business of the Company. The Company has been operating the bank accounts as per its financial needs and in terms of the orders of this Bench. The respondents opened an account with ICICI Bank and became operative since 23.06.2004, with approval of the board of directors in terms of a resolution dated 20.06.2004 and is used mostly to settle expenses incurred at Sabarimala and not to defraud the petitioners. The Company opened an account with Indus Ind Bank, only after filing a memo before this Bench and the respondents never withdrew any amount from the bank for their personal use.
The respondents 2 to 5 by their communication dated 14.12.2005 advised the auditor appointed by this Bench that they have kept ready the books of account for his verification in terms of the order dated 11.07.2005. The first petitioner was in charge of the accounts and operations in supply of the prasadam during the season 2002-2003 and executed the project for the season commencing from November 2002 to January 2003 operations. Nevertheless, the first petitioner did not choose to part with the books of account of the Company for the year 2002-2003 in their custody for verification by the auditor. Consequently, the auditor appointed by this Bench could not take up the verification process at all and therefore, the respondents 2 to 5 cannot be blamed on this account by the petitioners. The Company could not finalise the accounts for the subsequent period due to the refusal of the petitioners to hand over the books of account for the year 2002-2003. Mere non-filing of statutory returns do not attract the provisions of Section 397 as held in Anupamarani Satpal Sharma v. Anand Steel Works Private Limited The Company does not owe any money to Sree Gokulam Chits and Finance Company Private Limited, but on the other hand the latter is indebted to the Company in excess of Rs. 1.50 crore, for recovery of which the Company will take appropriate steps against Sree Gokulam Chits and Finance Company Private Limited at relevant point of time.
The petitioners have not established any act of oppression or mismanagement and none of the acts complained of in the company petition falls within the ambit of the provisions of Section 397/398. No acts of oppression or mismanagement are inforce on the date of the company petition. The affairs of the Company are not being conducted in a manner prejudicial to public interest or in a manner oppressive of any member or members. There is no just and equitable ground made out by the petitioners for winding up the Company and, therefore, the petition is liable to be dismissed.
The grievances of the creditors on account of non settlement of the dues cannot be agitated before the CLB. The only object of the petitioners is to realize the amount purportedly due to Sree Gokulam Chits and Finance Company Private Limited and do not show any interest in the affairs of the Company. The petitioners abusing the process of the Court have come out with the present petition for a collateral purpose, which cannot be maintained before the CLB. It has been held in (a) Re Bellador Silk Ltd. (1965) 1 ALL ER.667 that if the petition is not a bona fide attempt to obtain relief under Section 210 (English Companies Act, 1948) and the real object is to achieve a collateral purpose, namely, to get some satisfaction in regard to repayment of the debts, the petitioner must fail; and (b) In re Bengal Luxmi Cotton Mills Ltd. - (1965) Vol.35 CC 187 that when an alternate remedy is available, no orders under Section 397 or 398 can be issued. The petitioners failed to prove that the conduct of the respondents was oppressive, continuous and continuing up to the date of the petition showing that the affairs of the Company are being conducted in a manner oppressive to some part of the members. They further failed to show they have been constrained to submit to the conduct which lacks in probity, conduct which is unfair to them causing prejudice to them in exercise of their legal and proprietary rights of the shareholders. These requirements as enunciated by the Supreme Court in Needle Industries (India) Ltd. and Ors. v. Needle Industries Newey (India) Holding Ltd. and Ors.
1981 Vol.51 CC 743 are not satisfied by the petitioners.
4. I have considered the pleadings and arguments of learned Counsel.
The issue before me is whether the acts of oppression and mismanagement set out in the company petition as well as rejoinder have been established by the petitioners, entitling them for any reliefs, by virtue of Sections 397 and 398 read with Section 402 of the Act. Before I shall proceed to weigh the claim and counter claim involved herein, the peculiar circumstances in which the contesting parties are placed deserve my consideration. It is on record that the Company has been incorporated for undertaking the work of aravana prasadam preparation and packing at Sannidhanam and accordingly entered into an arrangement with the sixth respondent in April 1999, whereby it was agreed, inter-alia, to process and fill aravana prasadam in composite cans using modern technologies at Shri Ayappa Temple, Sabarimala, with prior approval of High Court of Kerala. In terms of the agreement, the Company is obliged to prepare, pack and supply in cans the aravana prasadam for a period of eight years on the terms and at the rates agreed between the parties. The contract period for the production of aravana every year will cover the Mandala Pooja -Makaravilakku Season, Vishu festival season, Monthly Pooja season. The entire focus of operations of the Company is predominant during the period between 15^th November and 15^th January of every year and the sixth respondent reportedly accounts for 95% of the revenues of the Company. The agreement for supply of the prasadam will come to an end by the year 2007. The Company had incurred the capital expenditure of Rs. 275 lakh, for the project of supplying the aravana prasadam. After expiry of the contract period of eight years the machinery, equipments and all other assets of the project at Sannidhanam will become the assets of the sixth respondent and shall vest in them. The Company will on expiry of the contract period, if so required by the sixth respondent, arrange for the annual maintenance of the machinery and equipment. The Company had availed financial facilities from, among others, the banks, financial institutions and Sree Gokulam Chits and Finance Company Private Limited to implement the project of supplying the aravana prasadam. The Company owed large sums of money as on the date of the company petition, to Dena Bank, Kerala Financial Corporation and suppliers of the Company. The claim of Sree Gokulam Chit and Finance Company Private Limited, since seriously disputed is not taken into consideration for the purpose of adjudicating the contentious issues raised in the present company petition, which however, will not prejudice the rights of either of the parties, claimed in this behalf.
The Company never showed any profits in any of the years, enabling the shareholders to enjoy the benefits, which is one of their basic rights.
While the petitioners 5 to 8 asserted that the respondents 2 to 5 divested their shares, the respondents 2 to 5 forcibly contended that they neither sold their shares nor received any consideration from the petitioners 2 to 5. Articles 9, 10 & 11 deal with the transfer of shares in the Company. By virtue of article 10, any member desiring to transfer (transferor) his shares to a person other than his wife or her husband or to close relatives shall first offer them to the existing members at the fair value and it is only in the event of refusal by all the members to purchase, the said shares at the fair vale, such transferor is entitled to transfer the shares to non-members. Article 11 describes the mode of fixation of the fair value of the shares of the Company. The petitioners 1 to 4 are the only shareholders, who are entitled to receive the offer, in terms of article 10, from the respondents 2 to 5, before the purported sale of shares in favour of the petitioners 5 to 8, There is no material either to indicate that any such offer was ever received by the petitioners 1 to 4 before the transfer of shares by the respondents 2 to 4, as envisaged in article 10, or that the petitioners 1 to 4 waived their rights under article 10. The arguments of Shri R. Varadarajan, learned Counsel that the petitioners 1 to 4 were the only shareholders and, therefore, the impugned transfer cannot be challenged do not meet the requirement of article 10, in the absence of which any fulfillment of the requirement of article 11 as claimed by the petitioners will be of little consequence. The petitioners have produced copies of four resolutions dated 11.11.2002, 13.11.2002, 01.09.2003 and 02.09.2003, of which the resolutions dated 11.11.2002 & 01.09.2003 bear the approval for split up of the shares held by the respondents 2 to 4 and the resolutions dated 13.11.2002 and 02.09.2003 accepted the transfer of shares of the respondents 2 to 4 in favour of the fifth petitioner. These resolutions are found in the letter heads of the Company and without the original resolutions, no support can be drawn from copies of such resolutions, especially when they are seriously disputed by the respondents 2 to 5.
When the original minutes of the board meetings dated 11.11.2002, 13.11.2002, 01.09.2003 & 02.09.2003 falling short of the requirements of Section 193 are not forthcoming, no presumption under Section 195 with regard to the validity of such board resolutions could be drawn, despite the fact that copies of those resolutions do contain the signature of the respondents 2 to 5. The petitioners have not offered any explanation for approving the impugned transfer of shares on two different occasions, namely, 13.11.2002 & 02.09.2003. The minutes book containing the board resolutions maintained by the Company does not contain any of the resolutions relied on by the petitioners. The Memorandum of transfer of shares on the reverse of the share certificates bearing certificate Nos. 23 to 25, 27, 28 & 30 in the name of the petitioners 5 to 8 do not contain either the transfer numbers or signature of the authorised signatory and the relevant columns in the memorandum of transfers are left blank. These discrepancies remain unexplained by the petitioners. The payment of Rs. 20 lakh by the fifth petitioner made on 02.11.2002 (Rs. 10 lakh) and 06.11.2002 (Rs.10 lakh) in favour of M/s A-Majestic Containers on account of the Company, in the absence of any concrete evidence, will neither constitute valid consideration for the disputed transfer of shares belonging to the respondents 2 to 4, nor justify his claim against the shares of the respondents 2 to 4. Furthermore, the payments were made in November 2002, but the transfers were reportedly effected only on 02.09.2003, as borne out by the Memorandum of transfers contained on the reverse of the certificates. I am, therefore, prima facie, of the view that the purported acquisition of two lakh shares by the petitioners 5 to 8 from the respondents 2 to 4 has not been adequately established, which will not however, in any way prejudice their rights to prove title to the disputed shares in an appropriate proceeding. Nevertheless, the petitioners 1 to 4 with the shareholding in excess of 10% of the issued share capital of the Company can by themselves maintain the present company petition under Section 397/398. In this background, the denial of shareholding of the petitioners 5 to 8 will not constitute an act of oppression on the part of the respondents 2 to 5.
The petitioners are placing strong reliance, to sustain their charges, on a report of due diligence audit of the operations of the Company, which relates to the years 1999-2000 and 2000-2001. The source of authority for carrying out due diligence audit of the operations of the Company is neither apparent from the relevant records produced before the Bench nor established by the petitioners. I do not also see any opportunity afforded to the Company, through its directors before drawing the report original of which has not been produced, despite the fact that it is seriously disputed by the respondents. The auditors from their analysis concluded that (a) profitability/liquidity/solvency of the Company appears to be at low ebb; (b) steps may be taken to recover the amount already advanced and (c) no more money be lent to the Company. It is absolutely clear from the recommendations of the auditors that due diligence audit has not been piloted by any authority of the board of directors of the Company, but engineered at the instance of certain lenders, with a view to safeguard their interest as creditors. Moreover, past and concluded acts, as reiterated in Palghat Exports Private Limited v. T.V. Chandran (supra), would not be taken for the purpose of invoking the court's jurisdiction under Section 397.
The petitioners, therefore, cannot at this belated stage press into service for claiming reliefs, the due diligence report obtained by the creditors, whose object is to recover money from the Company and especially when the object of Section 397 is not to rake up the past but to redeem the future and the power of the Court (now the CLB) under Section 397/398 is primarily intended for preventive purposes.
Nevertheless, appropriate remedial measures are required to be provided, in the light of alleged financial irregularities, in order to safeguard the interests of the Company and its shareholders.
The main grievance of the petitioners is that the respondents 2 to 5 mismanaged the affairs of the Company and misappropriated the receivables realized from the sixth respondent for their personal benefit without however settling the dues of the banks, financial institutions, suppliers and other creditors, which has been stoutly denied by the respondents 2 to 5. The Company, as on the date of the company petition, was indebted to Dena Bank, KFCL, Muthoot Finance, A-Majestic Containers and other suppliers, apart from the disputed claim of Sree Gokulam Chits and Finance Company Private Limited, aggregating crores of rupees. Nevertheless, it is now reported that the Company has settled the huge liabilities of the banks, financial institutions and suppliers, excepting the interest component of Rs. 10 lakh to Dena Bank and an amount of Rs. 8 lakh due to the suppliers. The respondents 2 to 5 did not liquidate its huge outstandings for the past several years, but could close all its overdues, during the pendency of the company petition, which are however not borne out by any of the bank statements on record before the Bench. When the petitioners came out with an application (C.A. No. 62 of 2005) for the appointment of an interim-administrator to take charge of the affairs of the Company, on account of disobeying the order made on 04.04.2005, by the respondents 2 to 5, this Bench by an order dated 11.07.2005, directed, inter-alia the following: (ii) The bank accounts of the Company shall, henceforth, be jointly operated by the nominees from both sides, viz., one nominee appointed by the petitioners group and the other one by the respondents group. The bank accounts shall strictly be operated to carry on the Company's day-to-day operations. The joint operation shall be in respect of every transaction involving a sum of Rs. 5 lakhs and above only.
(iii) The respondents 2 to 5 shall on daily basis continue to furnish the petitioners a statement of receipts and payments on account of the financial transactions of the Company, which shall disclose the purpose of cash withdrawals, if any.
It is observed from copies of the statement maintained with (a) ICICI Bank for the period from 20.06.2004 to 31.03.2005, 01-05-2005 to 16.09.2005 and 01.07.2006 to 27.07.2006 and (b) Indus Ind Bank Limited for the period from 19.09.2005 to 06.06.2006; 01.07.2006 to 27.07.2006; 03.08.2006 to 30.09.2006 on record that there are huge cash withdrawals made after 11.07.2005 aggregating over Rs. 1.50 crores, which include open cheques issued in favour of several persons. Nevertheless, the purpose of cash withdrawals, despite the order dated 11.07.2005, has not been disclosed by the respondents 2 to 5. This warrants immediate interference for arresting such cash withdrawals, moreso when the arrangement for supply of the aravana prasadam is coming to an end by April 2007. There are quite a few debit entries on the same date nearing an amount of Rs. 5 lakh per transaction in the name of same parties, as in the case of Shri K.G. Purushothaman [(i) Cheque No.377969 for Rs. 4,80,000/- and (ii) Cheque No. 377970 for Rs. 4,90,000/- both cheques cleared on 02.02.2006] and M/s Sastha Electrical and Mechanical Enterprises [(i) Cheque No. 377962 for Rs. 4,75,000/- and (ii) Cheque No. 377964 for Rs. 4,75,000/- both cheques cleared on 20.01.2006], which are, in my view, to circumvent the order dated 11.07.2005. At the same time, it has to be borne in mind that the joint operation, in terms of the order dated 11.07.2005, going by its spirit shall apply only to the debit entries in the accounts of the Company and not in respect of the credit entries, as these entries do not involve outflow of funds. However, the respondents have not produced copies of the statements in respect of (a) ICICI Bank for the period from 01.04.2005 to 30.04.2005; 17.09.2005 to 30.09.2005 and for the months of October, November, December 2005 and January 2006 to June 2006; and (b) Indus Ind Bank for the period 07.06.2006 to 30.06.2006 and 28.07.2006 to 02.08.2006, to establish that the operation of the bank accounts has been in strict compliance with the order 11.07.2005.
When the respondents 2 to 5 chose to obtain and produce certificates on supply of the aravana prasadam, from the sixth respondent, which remained throughout absent during the course of the hearings, failed to produce the bank statements for the missing period, at least after the order made on 11.07.2005 in C.A. No. 62 of 2005 to substantiate that there has been no violation of the order dated 11.07.2005, by the respondents 2 to 5. The huge liabilities of the banks, financial institutions and suppliers have been reportedly cleared by the respondent 2 to 5 as affirmed in sur-rejoinder filed in July, 2006, but without furnishing the details of payments and dates on which payments have been made towards settlement of the various liabilities. There are no corresponding debit entries in the bank statements produced before the Bench in relation to those payments effected by the respondents 2 to 5. I, am, therefore, convinced that the respondents have not chosen to operate jointly the bank account, by the nominees from both sides, namely, one nominee appointed by the petitioners group and the other one by the respondents group even when the transactions, in each case, exceeded a sum of Rs. 5 lakh during the period for which no bank statements have been produced by the respondents. The second respondent has sworn to an affidavit on 07.06.2005 to the effect that a minimum of more than Rs. 12 crore is guaranteed from the contract with the sixth respondent, which will be in force till 12.04.2007 and that the current receivables from the sixth respondent as on date are more than Rs. 50 lakhs. Whereas, the application dated 29.04.2005 filed by the respondents indicates that the Company was to receive about Rs. 60 lakhs from the sixth respondent. Apart from these averments, of course, with the discrepancies thereon, the respondents have not furnished any particulars regarding the actual receivable and utilization of such receivable excepting a bald statement that the liabilities of the banks, financial institutions and suppliers have been settled from and out of the receivables realized from the sixth respondent.
The above sequence of events would reveal that the respondents 2 to 5 failed to maintain any transparency with regard to the financial position of the Company, including the details of receivables collected from the sixth respondent and utilisation thereon since its incorporation till date. The contract entered with the sixth respondent will come to an end in the middle of April 2007. This conduct of the respondents 2 to 5 lacks in probity, which is unfair to the petitioners causing prejudice in exercise of their legal and proprietary rights of the shareholders, as enunciated by the apex court in Needle Industries (India) Ltd. and Ors. v. Needle Industries Newey (India) Holding Ltd. and Ors. (supra). Every shareholder is entitled to enjoy the profits of the Company in the shape of dividend, which could never be accomplished by the shareholders herein, who are unaware of even the financial position of the Company subsequent to the period ended 31.03.2002 and resulted in justifiable loss of confidence between the parties before the CLB, thereby adversely affecting smooth functioning of the Company and jeopardizing the interests of the shareholders, which would justify the making of a winding up order against the Company on just and equitable grounds. Any such order of winding up of the Company, without any doubt will unfairly prejudice its shareholders and pilgrims, being public in large, on account of non-supply of the aravana prasadam, which, therefore, warrant alternate remedial measures so as to safeguard the interests of the Company and its shareholders.
The order dated 11.07.2005, on the application made out by the petitioners for the appointment of an administrator to take over the management of the Company, came to be passed on the strength of, inter-alia, a number of cash withdrawals aggregating Rs. 44 lakh during the period between 01.01.2005 and 26.02.2005, which are neither reflected in the statement of receipts and payments furnished by the respondents in terms of the order dated 04.04.2005. Consequently, M/s K.S. Madhu, Chartered Accountants, were appointed to scrutinise and verify the books of account, vouchers and other records of the Company, since its incorporation till 30.06.2005, and submit his report by 20.09.2005 on the financial transactions of the Company. However, the Chartered Accountants could not even commence the verification process on account of non-production of the books of account and other records from 01.04.2003 to 31.12.2004, for which the contesting parties are throwing blame against each other. If the records were in custody of the petitioners, for the period between 01.04.2003 and 31.12.2004, the respondents ought to have demanded production of such records for the purpose of finalising the accounts for the subsequent years, but chose to remain silent even at the time of filing of the company petition.
This cannot be the justification either for not closing the books of account or for not filing the statutory returns after the financial year 2002-2003 which has caused immense prejudice to the Company and its shareholders. The respondents cannot take shelter under the decision in Smt. A.S. Sharma v. Anand Steel Works Private Limited (supra), wherein it has been held that non-filing of the statutory return could not be a ground under Section 397/398 of the Act, in view of the fact that the respondents 2 to 5 indisputably stand in a fiduciary capacity vis-a-vis the Company and that they must act for the paramount interest of the Company.
The rival contentions in relation to the claim of Sree Gokulam Chits and Finance Company Private Limited and the Company against each other in respect of the purported outstandings, being in the nature of civil dispute are not amenable to the jurisdiction of the CLB and therefore, the respective parties are at liberty to work out their remedies, in a competent Court of law for realization of any such dues and the question of directing the Company to open a non-operative escrow account for crediting a part of its receivable to satisfy the claim of the creditors does not merit any consideration. In this context, the decisions in In re Bengal Luxmi Cotton Mills Limited (supra) holding that when an alternate remedy is available, no orders under Section 397/398 can be issued; and In re Bellador Silk Limited (supra) to the effect that if the real object is to achieve a collateral purpose, it must fail, will be of little assistance to the respondents.
In view of my foregoing conclusions and (i) in exercise of the powers under Section 397/398 read with Section 402; (ii) to make appropriate orders with a view to bringing to an end the acts complained of and (iii) to regulate the conduct of the future affairs of the Company, it is ordered as under: (a) Shri L.U. Krishnan of M/s L.U. Krishnan & Co., Chartered Accountants, Chennai - 600 030 (Phone Nos. 044-26209415 and 044-26209657) is hereby authorised to scrutinize and verify the books of account, vouchers and other connected records of the Company, since its inception till 31.12.2006 and submit his report on the financial transactions, which shall include all the receipts, payments, expenses incurred on account of the Company, utilization of the receivable realised from the sixth respondent and financial irregularities, if any. The Chartered Accountant is at liberty to reconstruct the books of account of the Company, with assistance of the contenting parties, for the period from 01.04.2003 to 31.12.2004. The parties shall produce all the records in their custody and make their submissions, if any, before the Chartered Accountant, who will after necessary verification in terms of this order, circulate a draft report among them. The parties will offer their comments, if any, upon which, the Chartered Accountant, will submit his final report, serving copies on the parties. The entire verification process shall be completed by 31.03.2007. The final report is binding on the petitioners and respondents 2 to 5. The Company will negotiate and pay remuneration of the Chartered Accountant.
(b) The respondents 2 to 5 shall reimburse, in favour of the Company, the moneys, if any, found diverted, on verification by the Chartered Accountant, from the receivables realized from the sixth respondent, within 30 days of receipt of the final report of the Chartered Accountant, failure of which will attract interest at the rate of 10% per annum compounded quarterly till the date of payment in full.
(c) The bank accounts of the Company shall henceforth, be jointly operated by the nominees from both sides, namely, one nominee appointed by the petitioners group and the other one by the respondents group. The joint operation shall be in respect of every expenditure and cash withdrawal involving an amount of Rs. 25,000/- and above.
(d) The respondents shall within three months finalise the accounts for the period subsequent to the period ended 31.03.2002, carry out all the statutory obligations under the Act and file necessary returns with the Registrar of Companies, Kerala.
With the above directions, the company petition and connected applications stand disposed of. In view of this, all the interim orders are vacated. No order as to costs.