| SooperKanoon Citation | sooperkanoon.com/47905 |
| Court | Company Law Board CLB |
| Decided On | Sep-06-2004 |
| Judge | K Balu |
| Reported in | (2004)4CompLJ519 |
| Appellant | B.V. Thirumalai and ors. |
| Respondent | Best Vestures Trading (P) Ltd. |
2. Shri T.K. Seshadri, learned counsel, while initiating his arguments submitted that the first petitioner was originally carrying on a sole proprietary concern since the year 1972, dealing in threads and garment accessories, which was converted into the present company on 27.03.1997 for the benefit of his sons, being the second petitioner and second respondent. The petitioners and second respondent are subscribers to the memorandum of association of the company. The authorised share capital is Rs. 2,00,000 divided into 20,000 equity shares of Rs. 10 each. The issued, subscribed and paid-up capital is Rs. 1,62,000 divided into 16,200 equity shares of Rs. 10 each. The petitioners and second respondent are the only shareholders and they have been the directors since the very inception of the company. The second respondent has been appointed as the first managing director. The articles of association contemplates that the equity shares of the company must be held in equal proportion between the petitioners and second respondent. The managing director vested with the management of the business of the company, illegally allotted 5,900 equity shares in his favour and 3,800 shares to the second petitioner on 30.03.1998 and 6,100 equity shares on 20.03.2000 in his favour, without issue of any shares in favour of the petitioners. No Board meeting was held either in December 1998 or in March 2000 allotting the impugned shares. The petitioners were neither aware of the allotments nor consented to the impugned allotments. The issue of shares being contrary to the articles and not supported by any consideration-must be set aside. Shri Seshadri, learned counsel, pointed out that the second respondent never made a request for convening any extraordinary general meeting to remove the second petitioner from the office of director of the company. The second respondent, did not choose to produce any notice in regard to the Board meeting allegedly held on 25.04.2002 or any minutes of such meeting before this Bench. According to the petitioners, no Board meeting was held on 25.04.2.002 and the second respondent alone could not constitute a valid quorum for the meeting. The Board of directors did not call for any extraordinary general meeting on 17.05.2002. Moreover, a special notice as contemplated under Section 284 read with Section 190 is mandatory for removal of any director.
This requirement has not been satisfied in the light of the fact that no notice was served on the second petitioner, who was sought to be removed from the post of director. The second respondent by making use of certain signatures of the first petitioner obtained in blank papers fabricated the records of the company as if an extraordinary general meeting of the company was convened on 17.05.2002, removing the second petitioner from the office of director and co-opting the third respondent as a director of the company. Shri Seshadri, learned counsel, pointed out that the first petitioner was away to Thiruvannamalai on 17.05.2002 and that he neither presided over the meeting nor signed any minutes and in fact, no such meeting was ever held on 17.05.2002. The minutes of the purported extraordinary general meeting held on 17.05.2002 is a concocted document. Therefore, the removal of the second petitioner and the appointment of the third respondent as a director of the company are illegal and void ab initio.
In the meantime, the second respondent had sent a legal notice on 29.05.2002 informing the first petitioner that he ceased to be a director of the company with effect from 14.05.2002. At no point of time, the first petitioner submitted any letter of resignation. It is a fabricated document, as borne out by the fact that the said letter of resignation was neither filed along with the main counter statement or counter statement filed in the company application. No. 69 of 20.02.
Any unlawful exclusion of the petitioners from the management of the company would constitute an action of oppression in the affairs of the company. According to the petitioners, the second respondent misappropriated funds of the company from and out of the receivables realised from Dust Hakars, Prakash Garments and others and also cash withdrawals from the bank account to the tune of Rs. 17.84 lakhs out of which a sum of Rs. 10.32 lakhs was utilised and adjusted towards purchase of a flat in the name of the second respondent and the remaining balance amount of Rs. 7.53 lakhs standing to the credit of the company was transferred to his personal account. The cash withdrawals and cash transfers from the company's account to the tune of several lakhs of rupees were not towards the conduct of business of the company. The statement of accounts filed by the second respondent indicates cash withdrawals, utilisation of which has not been established by the second respondent. While the first petitioner was paid a salary of Rs. 6,000 per month and the second petitioner, Rs. 5,000 per month, the second respondent recorded in the books of account, as if the first petitioner was paid a sum of Rs. 1,30,000 and the second petitioner Rs. 1,39,000 per annum, thereby making unlawful gain aggregating Rs. 1,37,000 per annum. However, the petitioners are not paid their remuneration since the month of April 2002. The second respondent had filed in the name of the company the income tax return for the year ended 31.03.2001, exaggerating the salaries paid to the petitioners and the third respondent, when the third respondent was neither a manager nor a director of the company, of which the petitioners have already complained before the Income-tax Authorities.
While the first petitioner did not continue any business in his name, after the incorporation of the company, the second respondent created records as if the first petitioner continued to carry on his proprietary business and accordingly manipulated the signatures obtained in blank income tax return forms and other documents and filed false income tax returns before the Income-tax Authorities. The second respondent diverted the business of the company to Texfab, a partnership firm started by him and Trims India Co., a proprietary concern, run in the name of the third respondent, as borne out by copies of the statement of accounts of Indian Bank and the visiting cards in the name of Trims India Co. Both these entities are carrying the business in the same registered office premises of the company. The second respondent recently purchased a flat for an amount of Rs. 22 lakhs by deceiving the petitioners and shareholders of the company. The separate business carried on by the second petitioner independently under the name and style of Bee Vee Traders, a sole proprietary concern, does not have any relevance either to the company or to company petition. The communication, dated, 10.09.1998, addressed by Prakash Garments in favour of Bee Vee Traders was in fact addressed to the attention of the second respondent, which clearly shows that the second respondent was doing business for the second petitioner.
Similarly, the second respondent was corresponding under the name of Bee Vee Traders in favour of customers like Vishnu Wears (P) Ltd. as borne out by the communications produced before this Bench. The transactions carried on under the sole proprietary business would not appear in the books of account and cannot be reflected in the balance sheet of the company. In these circumstances, the Company Law Board may appoint an independent auditor to inspect the books of account of the company to find out diversion of the business to the business concerns of the second respondent and misappropriation of funds and receivables of the company and the proprietary concern of the petitioners and surcharge him for such misappropriation. Shri Seshadri, learned counsel, while concluding his submissions pointed out that the second respondent was directed by an order dated 16.07.2002 of this Bench to furnish a statement of purchases and sales made on account of the company, as on the last date of every month, which was totally disobeyed by the second respondent, entitling the petitioners for the prayers made in the company petition.
3. According to Shri S. Elambharathi, learned counsel, the company was incorporated by the second respondent for his sole benefit with involvement of the petitioners to carry on the business in threads and accessories. Though the company was to lake over the proprietary business of the first petitioner, the company never took over the said business. However, the first petitioner continued to carry on his sole proprietary concern dealing in threads and accessories, as borne out by copies of the tax returns for the assessment years 1998-1999 and 1999-2000 of the first petitioner. Similarly, the second petitioner has been carrying on his proprietary concern in the name of Bee Vee Traders dealing in threads and accessories. The second respondent improved the business of the company and enlarged the business clientele resulting in the increase of the authorised share capital in the year 1998 from Rs. 1 lakh to Rs. 2 lakhs and the allotment of shares impugned in the company petition. These allotments were made with the knowledge and consent of the petitioners. The annual returns of the company signed by the second petitioner till the financial year 2000-2001 disclose the issue of shares made in favour of the second petitioner and second respondent. This respondent by a letter dated 05.04.2002 requested the company to call for an extraordinary general meeting for removing the second petitioner from the post of director on account of his interference in the affairs of the company, upon which the Board of directors at the meeting held on 25.04.2002 resolved to convene the extraordinary general meeting on 17.05.2002. A notice, dated 25.04.2002, was sent to the petitioners convening the extraordinary general meeting on 17.05.2002. Though the second petitioner had received the notice, he is now contending that only a blank paper with a note 'CONTACT' was sent to him, which is absolutely false. While the first petitioner and the second respondent attended the extraordinary general meeting, the second petitioner failed to attend the said meeting, wherein it was unanimously resolved to remove the second petitioner from the office of director and co-opt the third respondent as a director of the company. Accordingly, Form No. 32 was filed before the Registrar of Companies. In the meanwhile, the first petitioner, on account of his old age and ill health submitted his letter of resignation, dated 14.05.2002, resigning from the office of director, which came to be accepted on 21.05.2002. The dealings of Prakash Garments are only with Dee Vee Traders, being the sole proprietary concern of the second petitioner and any receivable due and payable by Prakash Garments can neither be accounted for in the books of accounts of the company nor claimed by the company. The second respondent never dealt with any money received from Prakash Garments, Dust Hakars, etc., due to the proprietary concerns carried on by the petitioners and did not misappropriate the same towards purchase of a flat in his name. The amounts and figures shown as receivables in the company petition are not receivables of the company, but they are all due to the sole proprietary concerns carried on by the petitioners. The second respondent denies any diversion of business and funds of the company for his personal benefits. All money transactions inclusive of receipts and payments on account of the company are towards business transactions of the company and are properly accounted for in the books of account of the company, duly audited and approved by members of the company, as seen from the audited balance sheets duly approved by the petitioners from time to time and filed with the Registrar of Companies. The first petitioner was paid a sum of Rs. 1,30,000 per annum and the second petitioner Rs. 1,39,000 per annum towards their remuneration as revealed from the tax returns filed before the Income tax Authorities and reflected in the audited profit and loss account of the company. The third respondent who was the Manager of the company was paid a salary of Rs. 97,500 who was later inducted on the Board of the company at the extraordinary general meeting of the company on 17.05.2002. The plea of the first petitioner that he did not attend the meeting on 17.05.2002, as he was away to Thiruvannamalai, is absolutely false and the cash bill produced by the first petitioner in support of his stay in a hotel at Thiruvannamalai on 17.05.2002 is a concocted document. The signature of the first petitioner was never obtained in blank papers or tax return forms and never made use of such signed blank papers/forms to create minutes of the meeting held on 17.05.2002 or income tax returns filed before the Income-tax Authorities. The petitioners have never raised such allegations at the time of exchange of legal notices between the parties. The allegations of obtaining signature of the first petitioner in blank paper is an after thought in order to overcome the minutes of the meeting held on 17.05.2002. The resignation submitted by the first petitioner was accepted at the Board meeting held on 21.05.2002 with effect from 14.05.2002, as borne out by Form No. 32 filed before the Registrar of Companies. The petitioners, not being interested in the affairs of the company, are interfering with the affairs of the company and unnecessarily writing letters to the banks and Income tax Department, with a view to harass the second respondent. The claim of the petitioners to set aside the impugned allotments suffers from laches. The second respondent is not a partner in any of the firms, as made out by the petitioners. The second respondent has not purchased any properly from and out of the funds of the company, but only from his own funds. The petitioners have not made out any acts of oppression and mismanagement in the affairs of the company. For these reasons, the company petition is liable to be dismissed.
4. I have considered the pleadings and arguments advanced by learned counsel. Before considering the company petition on merits, it is necessary to observe that a number of attempts have been made for an amicable settlement of disputes between the parties. The parties have exchanged certain terms of compromise on more than one occasion. In fact, even at the conclusion of hearing, the second respondent expressed his willingness to pay Rs. 1,00,000 to the first petitioner and second petitioner a sum of Rs. 2,00,000 towards their shareholdings in the company or in the alternative, the second respondent was agreeable to transfer his entire shares to the petitioners for a total consideration of Rs. 3,00,000. The petitioners were reluctant about the proposal for paucity of doubtful creditworthiness of the company on account of the purported misappropriation of funds of the company and as such, the compromise efforts failed. I shall, therefore, now consider the rival contentions of the parties. The facts as revealed from the materials placed before me show that the company was incorporated on 27.03.1997 with the main objects to acquire the business of dealing in threads and garment accessories carried on by the first petitioner and to manufacture and deal in all kinds of threads and garment accessories. The petitioners and second respondent are subscribers to the memorandum of association and articles of association of the company, each subscribing to 100 shares of Rs. 10 each and the first directors of the company. The entire shareholding of the company is held among the petitioners and the second respondent.
Article 3 prohibits any invitation to the public to subscribe for any shares in or debentures of the company, Article 5 stipulates that any issue of shares shall be offered to the existing shareholders in proportion to their holdings. It is beyond doubt that the company is a family company; and therefore, the principles of partnership are attracted. Against this background, the alleged acts of oppression and mismanagement in the affairs of the company shall be considered. While according to the petitioners, the allotment of 5,900 equity shares in favour of the second respondent, 3,800 shares to the second petitioner in December 1998 and the allotment of 6,100 equity shares in favour of the second respondent in March 2000 are in violation of the articles of association of the company, it is, contended by the second respondent that the allotments impugned in company petition were made with the knowledge and consent of the petitioners. It is on record that the petitioners and the second respondent are equal shareholders till the allotment of impugned shares made by the second respondent. By virtue of articles 14 and 15, the management of the company shall vest in the managing director, having powers to do all such acts within the framework of the Act. Article 5(a) envisages that the shares are under the control of the directors. Any issue of shares shall be offered to the existing shareholders in proportion to their holdings as on the date of issue of shares by the directors. There is no material show that the second respondent made any such offer to the petitioners in proportion to their holdings in accordance with article 5(a), before the allotment of impugned shares in favour of second petitioner and himself. The articles of association are the internal regulation of the company, according to which the directors are bound to act, regulating the internal management of the company and any act outside the articles is irregular unless ratified by the members. This wrongful act is such that its effect would be a continuous act of oppression and therefore, cannot suffer from laches, as contended by the second respondent. The plea of the second respondent that the shares were not issued as per the articles of association in view of the fact that the company was incorporated for his sole benefit and further that the sole proprietary concern of the first petitioner was not taken over by the company are not only contrary to the materials on record, but also remain unsubstantiated. Moreover, the managing director is in a fiduciary position vis-a-vis the company and must act bona fide in the exercise of Ms fiduciary responsibilities for the benefit of the company in further allotment of shares, there exists a relationship of a trustee and cestui que trust as between the directors and company. If this trust is found to be violated, the action of managing director is liable to be intervened by the Company Law Board. The responsibility of the managing director towards members becomes more onerous in a private company and, therefore, the courts have applied the quasi-partnership theory in such cases in the past and have granted appropriate relief if the parity is sought to be disturbed. It is settled proposition of law that further shares could be issued only for the benefit of the company and not with a view to create a new majority, even if the powers to issue shares is vested in the Board. If the purpose of allotment of shares is for upsetting the existing shareholding to the detriment of one group, then such an allotment of shares is to be held an act of oppression, whether or not partnership principles are applied.
4.1 The removal of the second petitioner from the post of director must be considered in the light of the provisions of Section 284, prescribing the procedure for removal of directors by the shareholders.
Section 284(1) and (2) provide as under: (1) A company may, by ordinary resolution, remove a director (not being a director appointed by the Central Government in pursuance of Section 408) before the expiry of his period of office: Provided that this sub section shall not, in the case of a private company, authorise the removal of a director holding office for life on the 1st day of April, 1952, whether or not he is subject to retirement under an age limit by virtue of the articles or otherwise: Proved further that nothing containing in this sub section shall apply where the company has availed itself of the option given to it under Section 265 to appoint not less than two thirds of the total number of directors" according to the principle of proportional representation.
(2) Special notice shall be required of any resolution to remove a director under this section, or to appoint somebody instead of a director so removed at the meeting at which is removed.
4.2 A plain reading of Sub-section (1) of Section 284 reveals that a company may, by ordinary resolution, remove a director, not being a director appointed by the Central Government, before the expiry of his period of office. Sub Section (2) of Section 284 stipulates that special notice shall be required of any resolution to remove a director. Furthermore, Section 190 specifies that every special notice requires resolution, which is rather mandatory. While according to the second respondent, notices were sent to the petitioners on 25.04.2002 convening the extraordinary general meeting on 17.05.2002, the petitioners by their letter dated 29.04.2002 sent by registered post with acknowledgement due (page 101 of company petition) specifically contended that they had received only a white sheet of paper with a word 'Contact' without any signature and date. I do not see any response to this communication from the second respondent. At the same time, the second respondent by a letter dated 02.05.2002 (page 107 of company petition), while complaining of the receipt of an empty cover addressed to the company by registered post, advised the second petitioner about the extraordinary general meeting proposed on 17.05.2002. Though the sequence of events show that the petitioners were informed about the extraordinary general meeting proposed on 17.05.2002, there is no material substantiating the fulfilment of the requirements of Section 284(1) and (2) before removing the second petitioner from the post of director. The second respondent did not even choose to produce copy of the special notice containing the agenda and the special resolution in relation to the removal of the second petitioner from the post of director. Any omission to serve a special notice to the director sought to be removed constitutes denial of his statutory right of reply and in the absence of a notice to the director, any resolution for his removal will be vitiated by such gross omission. The second petitioner through a legal notice dated 09.05.2002 (page 117 of company petition) warned the second respondent, before convening the extraordinary general meeting in the following words: "You purport to inform that there was a notice that a company hold extraordinary general meeting on 17.5.2002. I am instructed to inform you that there was no Board meeting notice received by my client for you to hold extraordinary general meeting of members on 17.5.2002. An extraordinary, general meeting cannot be conducted without a board meeting. An extraordinary general meeting purported to be convened on 17.5.2002 is invalid and is not binding on company. Your mala fide action is evident by your conduct to use all sorts of things to create records which is again against the law.
Since there is no Board meeting convened, the question of attending the extraordinary meeting does not arise ".
4.3 The first petitioner by a letter, dated 09.05.2002 (page 119 of company petition) categorically advised the second respondent that, 'there, was no Board meeting held with clue notice to me and no extraordinary general meeting was ever called. The second respondent, instead of properly answering the complaint of the petitioners that 'an extraordinary general meeting cannot be conducted without a Board meeting', simply conveyed in his communication dated 14.05.2002 sent to the second petitioner's advocate (page 121 of company petition) that he as the managing director was quite competent to call for a general meeting, thereby failing to establish the legal requirement of the meeting of the Board of directors of the company before convening the extraordinary general meeting on 17.05.2002, for removal of the second petitioner from the post of director and co-opting the third respondent as a director of the company. In the absence of any such Board meeting, the proceedings of the extraordinary general meeting purportedly held on 17.05.2002 cannot be valid. There is absolutely no material on record to show that any board meeting was held for convening the extraordinary general meeting of the company held on 17.05.2002. Under these circumstances it would be a futile exercise to go into the legality or otherwise of the minutes of the extraordinary general meeting. While, the extraordinary general meeting was purportedly held on 17.05.2002 and the minutes of the said meeting were said to be signed by the first petitioner, as Chairman of the meeting on 17.05.2002, the first petitioner could not cease to be a director of the company as made by the second respondent with effect from 14.05.2002, vitiating the proceedings of the general body meeting on 17.05.2002. There is no explanation for this conflicting situation. The removal of any director in a private company, even if it is found to be lawful, may in certain circumstances constitute an act of oppression in reference to the aggrieved director. Similarly, even if the extraordinary general meeting is perfectly valid, yet may be oppressive, as held in Needle Industries (India) Ltd v. Needle Industries Newey (India) Holding Ltd. (1982) 1 Comp LJ 1 (SC): (1981) 51 Comp Cas 743 (SC). In the present case, admittedly, the company being wholly held by the petitioners and the second respondent, belonging to the same family, is nothing but a family company. The second petitioner has been a director since the very inception of the company and, therefore, in my view, the removal of second petitioner is oppressive, as held by this Board in a number of decisions, involving family companies and companies in the guise of quasi-partnership and further on equitable consideration depending upon the facts of a case and granting appropriate relief under Section 397 read with 402 so as to put an end to the matter complained of.
4.4 According to the second respondent, the first petitioner vacated the office of director, by virtue of his letter of resignation, dated 14.05.2002, which is seriously under dispute. Even otherwise, the letter of resignation clearly indicates that the first petitioner wanted to resign with immediate effect. The second respondent in his counter statement categorically contended that first petitioner had given his letter of resignation on 14.05.2002, but his resignation was not accepted till 17.5.2002. However, the resignation of first petitioner was accepted at the Board meeting held on 21.05.2002 with effect from 14.05.2002. These are mere pleadings, which arc under dispute and not corroborated by any supporting documents. At this junction [juncture?] it shall be borne in mind that the letter of resignation of first petitioner has not been produced at the earliest available opportunity, but 'was filed only along with sur-rejoinder by the second respondent. Notwithstanding the genuineness of this letter of resignation, the claim of second respondent that the first petitioner ceased to be the director of the company, in my view, would be an act of oppression, more so, when the company is a family company and the first petitioner is one of the promoter directors of the company.
4.5 The petitioner's claim in regard to the receivables realised from Prakash Garments, Vishnu Wears, etc, it shall be borne in mind that Bee Vee Traders, BV ThiruMalai and Vishnu Wears are legally entitled for these receivables. The petitioners cannot have any grievance on account of [the] fact that these receivables were not accounted for in the books of account of the company. In the event of any misappropriation of the receivables of these proprietary concerns, for personal benefits of the second respondent and towards purchase of property in his name or on any other reason, the petitioners are at liberty to enforce their claim against second respondent, if so advised, but cannot be agitated in the present proceedings. However, it is seen from copy of the extract from the ledger for the period between 01.04.2002 and 30.06.2002, produced by, the second respondent that huge cash withdrawals and funds transfer aggregating several lakhs of rupees were made by the second respondent from time to time, but, failed to Justify such cash withdrawals either in his counter statement or at the time of arguments. Furthermore, the bank statement for the period between 02.05.2002 and 20.05.2002 reflects several entries aggregating Rs. 14,60,000 to the credit and a sum of Rs. 4,38,000 to the debt of current account of the company, which are not found in the ledger maintained by the company, copies of which are forming part of the records before this Bench. Similarly, the bank statement reveals withdrawal of Rs. 1,00,000 on 20.05.2002, as against only a sum of Rs. 60,000 recorded on 21.05.2002 in the ledger of the company. There is no explanation for any of these discrepancies, which arc bound to be probed in the interest of the company, to rule out any misappropriation by the second respondent for his personal benefit or business. The bald plea of the respondents that cash was withdrawn for the business purpose and to meet day-to-day affairs of the company is neither convincing nor proved beyond doubt. The allegation of diversion of the company's business by the second respondent in favour of his purported business concerns, merely supported by photographs, produced at the time of hearing, lacks details and remains unsupported without any corroborative evidence. It is not under dispute that the balance sheet and profit and loss account of the company were approved and adopted since the very incorporation of the company by the members and the Board of directors, including either of the petitioners, till their exclusion from the management of the company in May 2002. Nevertheless, the petitioners having failed to exercise due diligence before approving the accounts at the relevant point of time and having found that the petitioners are found guilty of negligence and acquiescence of the alleged wrongful acts prior to their removal from the post of director cannot be favoured by way of granting any relief in this behalf. The claim of the petitioners towards their remuneration since April 2002 not being disputed is justified. On account of the foregoing conclusions, the following directions are given: (i) The second respondent shall, out of 12,000 equity shares held in his name, transfer 5,267 shares in favour of the first petitioner and 1,466 shares in favour of the second petitioner maintaining parity in tune with article 5(a) of the articles of association of the company.
(ii) The Board of directors of the company shall be reconstituted by the petitioners and the second respondent with immediate effect, while the third respondent simultaneously shall cease to be a director of the company.
(iii) The management of the business of the company shall vest in the Board of directors who may exercise all such powers and company all things within the framework of the Act. The articles of association of the company shall suitably be amended.
(iv) The company shall pay the remuneration of the petitioners since April 2002 at the rate of Rs. 1,30,000 per annum for the first petitioner and at Rs. 1,39,000 per annum for the second petitioner.
(v) Rao and Gopal, Chartered Accountants, Chennai, are appointed to scrutinise all payments and receipts on account of the company with reference to the books of account, financial statements, bank statements, vouchers and any other records of the company which may be found necessary, for the period between 01.04.2002 and 31.08.2004 and also take into account the submissions of the petitioners and the second respondent so as to ascertain whether any money of the company has been misappropriated by the second respondent. If so, the second respondent shall reimburse the misappropriated amount with interest at the rate of 10% simple in favour of the company, within 30 days of receipt of the report from Rao and Gopal, whose remuneration shall be borne by the company. While all the interim orders are vacated, the Board of directors will decide about use of the Maruti car now in possession of the first petitioner. With these directions, the company petition is disposed of. No order as to costs.