| SooperKanoon Citation | sooperkanoon.com/47924 |
| Court | Company Law Board CLB |
| Decided On | Nov-18-2004 |
| Judge | K Balu |
| Reported in | (2005)125CompCas661 |
| Appellant | R. Balakrishnan and ors. |
| Respondent | Vijay Dairy and Farm Products |
o The main grievances of the petitioners are (i) removal of the first petitioner as the Managing Director of the Company (ii) removal of the second petitioner as a director of the Company and (iii) nonpayment of the balance of amounts under the settlement agreement. These grievances of the petitioners in relation to the affairs of the Company have been resolved and mutually settled by means of an agreement entered into between the petitioners and respondents on the following terms and conditions: i. The petitioners shall exit from the Company both as shareholders and as directors; ii. The, petitioners shall sell their shares in the Company on or before 31.10.2003; iii. The respondents shall pay the petitioners a sum of Rs,135 lakhs towards sale consideration of the shares of the petitioners in four instalments, the last of which shall be payable on or before 24.03.2004; iv. The petitioners shall not act against interest of the Company; and v. The petitioners shall not start any business relating to dairy and milk products till 24.04.2004.
o The first petitioner had not only accepted his removal as the Managing Director but also resigned from the Board of the Company on 28.10.2003 pursuant to the agreement reached between the parties.
The respondents made payments aggregating Rs. 50 lakhs to the petitioners within the stipulated period. While the petitioners are claiming the balance of Rs. 85,00,000/-, they have committed breach of the settlement agreement by refusing to transfer their shares in favour of the respondents and the second petitioner refusing to resign from the Board which led to his removal from the post of director by the respondents in accordance with the agreement.
o The petitioners further started acting detrimental to the interest of the Company by commencing similar business carried on by the Company in violation of the terms of the settlement agreement, thereby liable to pay damages to the respondents, which would be appropriated from the balance amount of Rs. 85,00,000/- due under the settlement agreement.
o The respondents have already taken necessary. steps to release the personal guarantee given by the first petitioner for the various loans availed by the Company from its banker in terms of the settlement agreement.
o The settlement agreement was accepted in full, but acted upon partly by the parties. The disputes in relation to the implementation of the settlement deed cannot constitute acts of oppression or mismanagement in the Company's affairs and the remedy for the petitioners is to approach a civil court for specific performance of the settlement deed claiming damages on account of the breach, if any and the reliefs claimed in the company petition do not fall within the purview of Section 397/398.
o By virtue of Sections 397 and 398, any member of a company may complain before the CLB provided the affairs of the Company are being conducted in a manner oppressive to any member or members or prejudicial to public interest or to the interests of the Company.
The acts complained of in the company petition have come to an end with the execution of the settlement agreement between the parties and do not satisfy the fundamental requirement of exercise of jurisdiction Under Section 397 and 398, by which the CLB could take cognisance of only the continuing acts of oppression or mismanagement as held in Shanti Prasad Jain v. Kalinga Tubes Ltd. - (1965) XXXV CC 351 and C.B. Pardhanani v. M.B. Pardhanani- (1990) Vol. 69 CC 106.
o The provisions of Section 397 and 398 are preventive in nature and cannot remedy any past act as held in Palghat Exports Private Ltd. v. T.V. Chandran - (1994) 79 CC 213 and Raghunath Swarup Mathur v. Har Swarup Mathur o Regulation 44 of the Company Law Board Regulations, 1991 is analogous to the provisions of Section 151 of the Code of Civil Procedure, 1908, Section 482 of the Code of Criminal Procedure and Rule 41 of Customs, Excise & Gold (Control) Appellate Tribunal (Procedure) Rules, 1982 envisaging the inherent power of the Civil Court, High Court and the Tribunal respectively, to make such orders as may be necessary for the ends of justice or to prevent abuse of the process of the court. The CLB in exercise of the inherent power as well as under Regulation 44 of the Company Law Board Regulations, 1991 is empowered to dismiss the company petition to secure the ends of justice or to prevent abuse of process of this Bench, in support of which reference has been made to the following decisions:- G. Jayapandian v. P.C. Manickam - (1996) The Madras Law Journal Reports 350 - to show that a tribunal is more or less a court and is discharging judicial functions. Though a tribunal is a creature of a Statute, unless it is specifically prohibited, the tribunal will have the same powers as a court and it can discharge those functions as well.J.K. Synthetics Ltd. v. Collector of Central Excise - 1996 (6) Supreme 632 - to show that every tribunal has the inherent power to pass such order as is necessary to secure the ends of justice.
o The petitioners are seeking (CA No. 97/2004) to appoint a director of their choice on the Board of the Company for joint operation of the bank account on account of the purported siphoning of the Company's funds by the respondents. When the company petition is silent on the alleged misappropriation of funds, no such averments could be made in this application. Moreover, while the company petition itself is not maintainable, the petitioners cannot claim any interim relief by resorting to any such application.
o The petitioners cannot have any grievance on account of their removal from the post of director, especially when no directorial complaints could be the subject of a petition Under Section 397/398, as held in V.M. Rao v. Rajeswari Ramakrishnan - V.M. Rao v. V.L.
Dutt- (1987) 61 CC 20, wherein the Madras High Court held that to maintain a petition it must be established that the oppression complained of affected a person in his capacity or character as a member of the company as harsh and unfair treatment in any other capacity such as a director or a creditor is outside the purview of Sections 397 and 398.
2. Shri Karthik Seshadri, learned Counsel, while urging for the interim reliefs, opposed the application (C.A. No. 1 10/2004) on the following among other grounds:- The company petition came up for hearing before this Bench from time to time, but the respondents have been taking adjournments to file their objections, but at the same time indulged in siphoning of the Company's funds, compelling the petitioners to seek directions for induction of anyone director from the petitioners group on the Board of the Company to operate jointly the bank account, safeguarding the interests of the petitioners. However, the respondents have adopted delaying tactics by taking an untenable plea that the company petition does not meet the requirements of Sections 397 and 398, which is nothing but a sheer abuse of process of law and the CLB. By virtue of Section 10E(1A), the Company Law Board shall exercise and discharge such powers and functions as may be conferred on it by or under the Act or any other law and regulate its own procedure and shall be guided by the principles of natural justice and act in its discretion as envisaged in sub-sections (5) and (6) of Section 10E. Every Bench constituted by the CLB is vested with the powers of a Civil Court, while trying a suit under the Code of Civil Procedure, 1908 in respect of the matters specified in sub-section (4C) of Section 10E. The CLB having trappings of a civil court has to do substantial justice with regard to the alleged acts of oppression and mismanagement Under Sections 397 and 398. Whether the grievances set out in the company petition are oppressive of the petitioners or prejudicial to their interest or the interest of the Company must be adjudicated by the CLB. It is for the CLB to consider whether the matters complained of in the company petition can be brought to an end with the reliefs claimed by the petitioners which are as under: - (a) to amend the Articles of Association of the Company to ensure that the petitioners would be entitled to proportionate voting rights in the General Meeting of the Company and to have proportionate representation in the Board of directors of the Company so long as the petitioners remain shareholders in the Company; (b) to direct the respondents to purchase the shares of the petitioners as agreed by the respondents in the agreement dated 24.10.2003 or such other value to be determined by an independent valuer; (c) to direct the respondents to relieve the petitioners and their relatives from the guarantees given to the banks and financial institutions in terms of the agreement dated 24.10.2003.
The prayers made in the company petition are capable of being granted only by the CLB in exercise of the powers Under Section 402, however, after going into the merits of the various acts of oppression and mismanagement morefully set out in the company petition. If the petitioners have the right to apply Under Section 399 and complain that the affairs of the Company are being conducted in a manner as specified in Section 397, the CLB cannot summarily dismiss the company petition, which would have disastrous consequences. All the case laws cited on behalf of the respondents culminated pursuant to trial conducted by the respective courts and, therefore, not applicable to the facts and circumstances of the present case.
The respondents resorted to the company application No. 110/2004, invoking the regulation 44 for striking off the company petition, which is not permissible under law. By virtue of Section 151 of the CPC, which is similar to regulation 44, any defendant cannot pray for striking off a plaint before a civil court. Such a prayer could be made under Order 7 Rule 11 of the CPC, which envisages a definite parameters. The apex court in State of Orissa v. Klockner & Co. AIR 1996 SC 2140, set aside the order passed by the trial Judge rejecting the plaint under Order 7, Rule 11 of the CPC on the ground that the trial Judge failed to maintain the distinction between the plea that there was no cause of action for the suit and the plea that the plaint does not disclose a cause of action. In the present case, none of those parameters are either pleaded or established by the respondents to strike off the company petition. Regulation 44 enables the CLB to do substantial justice between the parties and cannot be abused to file a frivolous application by any litigant.
The Company is a family owned private limited company, wherein the petitioners have put forth all their efforts and investments to achieve the enormous growth presently gained by the Company. The settlement agreement has not been implemented entitling the petitioners to agitate their rights Under Sections 397 and 398, so long as the petitioners remain members of the Company holding 40% of the shares and having financial stake by way of personal guarantee to secure the bank loans taken by the Company. Under the guise of the settlement agreement, the petitioners have been completely excluded from the management of the Company, which is harsh and burdensome of the petitioners as well as the Company and this oppressive act continues till date which shall be remedied by the intervention of the CLB. The alleged oppressive acts are questions of fact which must be adjudicated in the present proceedings and not to be summarily dismissed as sought by the respondents.
3. After considering the elaborate arguments of learned Counsel, the issue arising for my consideration is whether the present company petition satisfies the ingredients of sections 397 & 398, which takes me to examine the material provisions of the Act.
A plain reading of section 397 reveals that on an application made by any members of a company having the right Under Section 399, complains that the affairs of the Company are being conducted in a manner prejudicial to public interest or in a manner oppressive to any member or members, the Company Law Board may with a view to bringing to an end the matters complained of, make appropriate order, if the CLB is of opinion- (i) that the company's affairs are being conducted in a manner prejudicial to public interest or in a manner oppressive of any member or members; (ii) that the facts would justify the making of a winding up order on the ground that it was just and equitable that the company should be wound up; and (iii) that the winding up order would unfairly prejudice the members.
It is, therefore, clear that it is for the CLB to form an opinion on the facts alleged in the petition whether the requirements of Section 397(2)(a) and (b) have been duly met before making such orders as it thinks fit Under Section 397. Section 398 can be invoked in either of the following two circumstances:- (1) that the affairs of the company are being conducted in a manner which is - (a) prejudicial to public interest; or (b) prejudicial to the interest of the company (2) it is likely that the affairs of the company will be conducted in a manner (a) prejudicial to public interest; or (b) prejudicial to the interests of the company due to a material change that has taken place in the management or control of the company. Such change may take place due to alteration in the Company's Board of Directors or manager or in ownership of its shares or membership or in any other manner whatsoever.Shanti Prasad Jain v. Kalinga Tubes, Limited, cited by Shri Ramakrishnan, learned Counsel, while considering the provisions of section 397 expressed the position: "In a petition under Section 397 of the Companies Act, 1956, it is not enough to show that there is just and equitable cause for winding up the Company, though that must be shown as preliminary to the application of Section 397. It must further be shown that the conduct of the majority shareholders was oppressive to the minority as members and this requires that events have to be considered not in isolation but as a part of a consecutive story. There must be continuous acts on the part of the majority shareholders, continuing upto the date of petition, showing that the affairs of the company were being conducted in a Manner oppressive to some part of the members. The conduct must be burdensome, harsh and wrongful and mere lack of confidence between the majority shareholders and the minority shareholders would not be enough unless the lack of confidence springs from oppression of a minority by a majority in the management of a company's affairs and such oppression must involve at least an element of lack of probity or fair dealing to a member in the matter of his proprietary rights as a shareholder." The Kerala High Court in Palghat Exports Private Limited v. T.V.Chandran (supra) - while considering the court's jurisdiction under Section 397 categorically held that "past acts which have come to an end would not be taken for the purpose of invoking the court's jurisdiction under Section 397'. The Kerala High Court further on the object of Section 397 expressed that "it is to terminate or prevent an existing, present, state of prejudicial, oppressive, harsh, unfair conduct and so obviously past conduct or closed affairs are not encompassed in the section. If the affairs which are complained of are not being conducted in praesenti as at the time of filing the petition, they are matters of the past. They have no present existence and so there are no complaints to bring to an end by an order of the court.
Naturally, in such a state of affairs, there are no affairs which are present or future to be prevented". The Karnataka High Court in C.B.Pradhanani v. M.B. Pardhanani (supra), while dealing the scope of section 398 providing for application to the court for relief in cases of mismanagement came to the conclusion that "The subject of complaint is to be that the affairs of the company are being conducted in a manner prejudicial to public interest, etc. It is in the present tense.
At the time of the application, the affairs of the company are to be conducted in a manner prejudicial to public interest, etc. It does not say that, ''the affairs of the company are or were being conducted... " and further held that "The order of the court is to bring to an end or prevent the matters complained of. To bring to an end a thing or matter, that thing or matter should be in existence, at least on the date of the application for such a belief". While enunciating the powers vested in the court under Section 398, the Karnataka High Court concluded that "they are not only discretionary; they are designed to remove an existing oppressive or prejudicial course of conduct of the affairs of the company and are not concerned with the past management except where the past projects itself as a continuing wrong and pervades the present conduct of the company's affairs." It is clear that "There must be continuous acts on the part of the majority shareholders, continuing up to the date of petition, showing that the affairs of the company were being conducted in a manner oppressive to some part of the members. The crucial words in the opening sentences of the Sections 397 and 398 are substantially similar, i.e., any members of a company who complain that the affairs of the company "are being conducted", etc., and it is this structure of the sentence that gave rise to the above observation of the Supreme Court". The remedy provided by these sections is of "a preventive nature so as to bring to an end oppression or mismanagement on the part of controlling shareholders and not to allow its continuance to the detriment of the aggrieved shareholders or the company. The remedy is not intended to enable the aggrieved shareholders to set at naught what has already been done by controlling shareholders in the management of the affairs of the company. If such were the intention of the Legislature, which as I will presently show it could never have been, the language of Sections 397 and 398 would have been different and the Legislature would not have confined the power of the court by limiting the purpose for which it can be exercised under the sections." The Allahabad High Court while considering the powers of the court under Sections 397 & 398 in Raghunath Swarup Mathur v. Har Swarup Mathur (supra) categorically held that "The powers of the court under the two sections are designed for removal of an existing and not past oppressive or prejudicial course of conduct of the affairs of the company. They are primarily intended for preventive purposes. The object of the exercise of those powers is either to prevent a winding up or to remove the continuation of harm or reasonable probability of injury to the interests of the company or to the wider public interest. Past acts and transactions may either afford evidence of what may be reasonably apprehended in further or may have to be undone only to prevent or remove what had wrongfully originated in the past but continues to exist and provides a sustainable cause of action at the time when the petition is filed". The Madras High Court in V.M. Rao v. V.L. Dutt (supra) for maintaining a petition under Sections 397 and 398 held that "(a) it must be established that the oppression complained of affected a person in his capacity or character as a member of the company as harsh and unfair treatment in any other capacity such as a director or a creditor is outside the purview of the Section; (b) there must be continuous acts constituting oppression up to the date of the petition; (c) the events have to be considered not in isolation but as part of a continuous story; (d) it must be shown as a preliminary to the application of Section 397 that there are just and equitable grounds for winding up the company; (e) the conduct complained of can be said to be oppression only if it can be said that it is burdensome, harsh and wrongful and the oppression involves at least an element of lack of probity and fairdealing to a member in matters of proprietary right as a shareholder." Against the above legal background as borne out by the provisions of Sections 397 & 398 and various decisions cited supra, it shall be seen whether the present company petition does satisfy the requirements of Sections 397 and 398. The various averments forming part of the company petition are summarized here below: The petitioners and the respondents 2 to 7, being members of the different families became relatives through marriage of the third petitioner, being daughter of the respondents 5 & 6, with the first petitioner. The petitioners 3 & 4 along with the respondents 2 & 6 constituted a partnership firm in September 1992 to carry on business in manufacturing cement under name and style of Vijay Cements'. While the Cement unit was entirely looked after by the petitioners. 1 & 2, the Company was incorporated in the year 1994 to establish a Dairy Farm at the instance of the petitioners 1 & 2 with participation of the respondents 5 & 7, with paid-up capital of Rs. 15,000/- consisting 150 shares of Rs. 100/-each held equally among the second petitioner and the respondents 5 & 7. As at 31.03.1996 the Company had received share application money to the extent of Rs. 20 lakhs of which the petitioner family contributed 25%, the second respondent family 35% and the seventh respondent family contributed the balance of 40%. In due course of time, the second respondent took over the cement unit and the first petitioner became the Managing Director of the Company in January 1997 looking after its day to day management. As at 31.03,2000, the petitioners collectively came to hold 40% of the shares of the Company, the second respondent family 40% and the balance of 20% of the shares by the seventh respondent. The Company is nothing but a partnership run based on the principles of partnership. The Company could achieve a phenomenal growth under the stewardship of the first petitioner, who is solely instrumental in developing the business, thereby wiping out the entire accumulated loss, reducing the term loan and other liabilities of the Company, achieving a turnover of Rs. 25.32 crores as at 31,03.2003, a cash profit of Rs. 1.28 crores, with the bank cash balance of 1.3 crores at any point of time and increasing the production capacity to 75,000 liters of milk per day. At the same time 'Vijay Cements' under the management of the second respondent registered a steady decline in operations and profits and further defaulted payments to its lenders, which are secured by the personal guarantees of the respondents Nos. 2, 5 & 6. The respondents 2, 5 & 6 apprehending any severe action at the instance of the lenders transferred their shares in the Company in favour of the respondents 3 & 4, who are the minor sons of the second respondent. The second respondent realising the progressive growth of the Company started interfering with the day-to-day management by the first petitioner, which resulted in removal of the first petitioner from the office of Managing Director of the Company at a Board meeting allegedly held on 22.10.2003. However, through the intervention of certain well-wishers of the two families, an agreement came to be entered into on 24.10.2003 by the first petitioner with the fifth respondent being his father-in-law in the presence of among others the respondents 2 & 7 as directors of the Company with the following salient features:- (i) The petitioners would transfer their entire 40 per cent of the shares of the Company in favour of the second/fifth respondent family for a total consideration of Rs. 135 lakhs to be paid in four instalments, the last of which must be paid on or before 24.03.2004; (ii) The shares belonging to the petitioners group must be transferred on or before 31.10.2003. The first petitioner should be relieved of his financial and other responsibilities in the Company inclusive of his personal guarantee offered in favour of the bank before 31.10.2003; (iii) The first petitioner should not act in detriment of the interest of the Company and not to start any business relating to dairy and milk products till 24.04.2004; (iv) The two properties belonging to the family of the petitioners offered as collateral security in the course of business of 'Vijay Cements' must be released on or before 24.03.2004; The first petitioner had on 28.10.2003, pursuant to the agreement resigned from the Board of Directors of the Company and handed over all the share certificates together with the signed transfer deeds to K.Rangarajan, one of the mediators, who must hold them in trust until the amounts due under the agreement are fully paid by the respondents to the petitioners. Though the respondents have paid an aggregate sum of Rs. 50 lakhs to the petitioners, failed to settle the balance amount of Rs. 85 lakhs in terms of the agreement entered into between the parties. At the same time, the respondents have removed the second petitioner from the post of director under section 284 of the Act, at the extraordinary general meeting purportedly held on 05.03.2004, during his absence in India between 02.03.2004 and 31.03.2004, without serving any notice preceding his removal. Furthermore, the respondents have filed form-32 with the Registrar of Companies on 24.03.2004 as if the first petitioner had resigned from the Board of directors on 07.02.2004 and that the second respondent was appointed as the Managing Director on 08.03.2004. Though the first petitioner along with his father and other relatives has incorporated a new company on 22.12.2003, yet never commenced any business in competition with the Company in tune with the agreement dated 24.10.2003. The second respondent refused to settle the balance of consideration of Rs. 85 lakhs and excluded the petitioners group on the pretext that the first petitioner should not commence any business in dairy and milk products for a further period of one year from 24.04.2004 and further insisted that the personal guarantee of the petitioner would be extended for a further period of one year. The overall family settlement includes the matters relating to 'Vijay Cements' and discharge of the securities offered by the petitioners group by way of mortgage of their immovable properties and personal guarantees. A very careful consideration of these allegations forming part of the company petition would culminate into the following grievances of the petitioners:- (i) removal of the first petitioner from the office of Managing Director of the Company; (iii) exclusion of the petitioners from carrying on day-to-day affairs of the Company; (iv) non-payment of the balance amount of Rs. 85 lakhs outstanding under agreement dated 24.10.2003 by the respondents group in favour of the petitioners; (v) failure to release the first petitioner from his personal guarantee and discharge his mortgaged properties from the bank loans.
It may be observed that the grievances of the petitioners are as a result of the alleged breach of the contractual obligations arising out of the agreement dated 24.10.2003 which cannot constitute acts of oppression and mismanagement in the affairs of the Company. At this juncture, the sum and substance of the grievances of the petitioners as revealed from para (xxxiv) of the company petition assumes importance, which reads as under: "On an overall analysis of the facts it can clearly be seen that the 1^st Petitioner was instrumental in developing the business of the Company. The Company had grown phenomenally under his guidance and on account of his efforts and the monies invested by him and the Petitioners group from time to time. When the Cement business went into difficult times, the 2^nd Respondent with the aid of the other shareholder wanted to grab the Company from the 1^st Petitioner. The relationship between the parties compelled the 1^st Petitioner to enter into an agreement on 24.10.2003 even though the terms were not entirely in his favour. The 1^st Petitioner on account of the relationship believed that the 2^nd/5^th Respondents' family would at least pay him off for the years of effort put in by him for making this business grow. Instead of ensuring that matters are amicably resolved, the 2^nd Respondent and the 5^th Respondent have now grabbed the Company and have refused to perform their obligations under the Agreement." The above grievances independent of the agreement reached between the parties would, perhaps, satisfy the requirements of section 397/398.
The releifs sought by the petitioners seeking directions against the respondents (a) to purchase the shares of the petitioners in terms of the agreement dated 24.10.2003 or at a value which may be determined by an independent valuer; and (b) to discharge the petitioners group from the personal guarantees furnished in favour of the bank are directly arising out of the alleged breach of the agreement dated 24.10.2003 on the part of the respondents group. The prayer for amending the Articles of Association of the Company entitling the petitioners group for the proportionate voting rights in a general meeting of the Company and for the proportionate representation in the Board of the Company is incidental to the main reliefs claimed in the company petition. The grievances and reliefs undoubtedly flowing from the agreement dated 24.10.2003, in my considered view, must be agitated in a competent civil court having jurisdiction over the matter. Any remedy for the alleged breach of the agreement and consequential reliefs do not lie before the CLB. Since the alleged acts of oppression and mismanagement do not make out any cause of action under the provisions of sections 397 & 398, neither the inherent power of the CLB nor the decision in State of Orissa v. Klockner & Co. (supra) would go to the aid of the petitioners. These past acts, forming part of the agreement reached between the disputed parties and the remedy under section 397/398 being of a preventive nature, as borne out by several decisions cited supra, the CLB cannot take cognisance of such acts under the provisions of sections 397 and 398. The company petition, to my mind, is intended for the purpose of recovering the money due by the respondents under the settlement agreement, which is not an object contemplated in section 397. In view of my foregoing conclusions, the company petition is dismissed, without going into the merits and the interim reliefs are declined, however, with liberty for the petitioners to enforce the agreement dated 24.10.2003 in a competent court of law. With these directions, the company petition and the company applications (CA 97/2004 and CA 110/2004) stand disposed of.