P. Muniswamappa Sonnegowda and Vs. Mysore Lighting Works Pvt. Ltd. - Court Judgment

Excerpt:
1. the petitioners and the consentor herein collectively holding 60% of the undisputed issued and subscribed paid-up capital of m/s mysore lighting works private limited ("the company") and constituting one-tenth of the total number of members aggrieved by the acts of oppression and mismanagement in the affairs of the company have invoked the jurisdiction of the clb under sections 397 and 398 of the companies act, 1956 ("the act") and urged for certain interim reliefs ex-parte.this bench on, prima-facie, considering the apprehension expressed on behalf of the petitioners, by an order dated 18.01.2006 authorised a practicing company secretary to authenticate the statutory records of the company and further directed the respondents 2 & 3 to furnish every fortnight the particulars of bank operations in favour of the petitioners. thereafter, when the respondents entered appearance, advancing elaborate arguments, the company was permitted to operate the bank account maintained with oriental bank of commerce at bangalore and hyderabad in terms of the mandate given by the company, towards payment of the statutory dues and other commercial transactions of the company.further the respondents were directed to give a statement of all receipts and payments and bank transactions on account of the company to the petitioners in terms of the earlier order made by the bench.against this background, the petitioners claim that the respondents 2 & 3, apart from ignoring the directions of the bench both in letter and spirit, have been systematically acting in a manner oppressive to the petitioners and committing acts of mismanagement, causing unfair prejudice to the interests of the company. these grievances can be remedied by appointing an independent,chairman to take control, of the company, thereby regulating the conduct of the company's affairs, in support of which shri b.c. thiruvengadam, learned counsel submitted as under: o the first respondent company has been promoted by the petitioners, consentor and the respondents 4 & 5 essentially to support the erstwhile ancillary units of mysore lamps works limited ("mlwl"), a state public sector company, which is now sick and closed. while the petitioners, consentor and the respondents 4 & 5 are owners of ancillary units, the respondents 2 & 3, erstwhile employees of mlwl became the co-promoters, without any investment of their own, so as to represent the employee segment. the respondents 2 to 5 are directors of the company. while the fourth respondent based at hyderabad is concerned with his business, the fifth respondent is preoccupied with his ancillary unit in kolar. consequently, the respondents 2 & 3 are running the company for all practical purposes. the petitioners, after incorporation of the company, are kept in total darkness about its affairs. o the company ought to have held two annual general meetings, one for the period from 18.12.2003 to 31.03.2004 by 17.06.2005 and the other from 01.04.2004 to 31.03.2005. however, the company reportedly held the first annual general meeting, after a period of 15 months, on 30.05.2005, without consent of the registrar of companies under the provisions of section 210(4) of the act and without even giving ten days notice. article 21 specifies seven days notice before calling the annual general meeting, which is ultra vires the provisions of section 171(2). the petitioners did not receive any notice for the annual general meeting held on 30.05.2005. thus, the purported notice is bad in law and the annual general meeting is void. o the petitioners and other shareholders, aggrieved by the acts of the respondents 2 & 3 moved a special notice to convene an extraordinary general meeting for removing the respondents 2 & 3. the company failed to convene the extraordinary meeting as requested forcing the petitioners themselves to convene the meeting, in accordance with section 169 on 21.12.2005, by serving notices on all the shareholders. the fourth respondent presided over the extraordinary general meeting, which was attended by 11 of 15 shareholders, wherein the respondents 2 & 3 were removed from the board of directors and three new directors got appointed, as borne out by copy of minutes of the extraordinary general meeting and form-32 filed with the registrar of companies. however, the respondents 2 & 3 are preventing the validly constituted board of directors of the company from carrying on the day-to-day affairs of the company. o the respondents 2 & 3 have misappropriated huge funds of the company and on account of their mismanagement, government of karnataka has revoked the licence of assignment of the brand "mysore lamps", jeopardizing the interests of the company and its shareholders. o the company had allotted illegally a total of 90,000 shares of rs.10/-each during may 2004 and march 2005 in favour of the respondents 2 to 6, in complete exclusion of the petitioners, thereby converting them to a minority. the allotment made in may 2004 was for consideration other than cash and, therefore, the company did not receive any cash consideration at all. the company started its operations only in april 2004. hence, there is no justification or need for the impugned allotments. further, no such allotment is permissible, within one year of incorporation of the company in view of the prohibition contained in section 79a(1)(c). the respondents have not filed the requisite return of allotment with the roc, in support of the impugned allotments. o the respondents 6 to 8 are holding themselves to be directors of the company as indicated in the compliance certificate dated 20.05.2005, despite the fact that they have not been appointed by the shareholders. with the illegal induction of the respondents 6 to 8 on the board of directors of the company, article 24 stipulating the maximum of five directors, stands violated. the respondents 6 to 8 have no locus standi to represent as directors. o the commissioner appointed by the bench visited the office of the company, without any notice to the petitioners and when he could not execute the warrant for want of co-operation from the respondents 2 & 3, submitted his report dated 23.01.2005 before the bench, without serving copy on the petitioners, by which the purpose of taking out; an ex-parte commission could not be achieved. when mr.h.m. sudheer, counsel representing the petitioner visited the office of the commissioner on 27.01.2006 to serve a copy of the order dated 25.01.2006, together with a cheque representing his remuneration, the commissioner reported that "people are trying to fix me". these facts have been affirmed by mr. sudheer in his affidavit sworn on 07.02.2006. the commissioner in his communication dated 27.01.2006 reported that he would be authenticating the records at the office of the company on 31.01.2006, yet he failed to indicate the exact time of authentication. the first petitioner and his representing counsel on getting the information visited the office premises, but they were refused entry, while the commissioner remained a silent spectator and, however, reportedly authenticated the records, in the absence of the petitioners on account of the pressure exerted by the respondents 2 & 3 and without providing copy of the report to the petitioners. this conduct of the commissioner is highly improper. o the petitioners 1, 3 & 8 have been threatened by the respondents 2 & 3 with dire consequences, if the company petition is not withdrawn by them, which led to the complaints dated 30.01.2006 lodged with the police at kolar. the respondents 2 & 3 have obtained from the second petitioner written statements by force to the effect that he neither signed the company petition nor participated in filing any such petition. nevertheless, the second petitioner has now filed an affidavit, in support of prosecuting the company petition. the letter dated 29.12.2005 produced by the respondent reporting that the second petitioner never received any notice for the extraordinary general meeting held on 21.12.2005 has been obtained from him by duress and must be ignored. o the compliance certificate dated 20.05.2005 issued under section 383a(1) by a practicing company secretary, categorically certified that "the company has not made any entries in the register maintained under section 301 of the act", though the respondents 4 & 5, being directors are suppliers of electrical materials to the company. the report dated 06.02.2006 of the commissioner confirms that the register required to be maintained by the company under section 301 is blank. at the same time, the auditor's report dated 20.05.2005 forming part of the annual report for the period from 18.12.2003 to 31.03.2005 explicitly reports that "in respect of loans, secured or unsecured, granted or accepted by the company to/from companies, firms or other parties covered in the register maintained under section 301 of the companies act, 1956: o the company has not granted any loans to parties referred to in register maintained under section 301 of the companies act, 1956. o however company has accepted unsecured loans from " 3 parties" covered in the register maintained under section 301 of the companies act, 1956 aggregating to rs. 4,34,268 (year end balance) during the year.these serious contradictions in maintenance of the statutory records and the correction made in the minutes of the board meeting dated 20.05.2005, after authentication by the commissioner throw light, on the conduct of the respondents 2 & 3. o it is rather unusual for the company to conduct the audit and adopt the accounts on the same day, viz., 20.05.2005. the directors report and the auditor's report are found prepared on 20.05.2005 itself. the compliance certificate has been issued by the practicing company secretary is dated 20.05.2005. everything has taken done hurriedly on 20.05.2005 fabricating the annual report and accounts of the company, but the respondents 2 & 3 failed to file form no. 2 and form no. 3 for the impugned allotment. similarly, the certificates of posting produced by the respondents 2 & 3 to show service of notice for the purported agm are fabricated ones. o shri thiruvengadam, learned counsel, while concluding his submissions, reiterated that the present exigencies warrant the appointment of a retired high court judge or bureaucrat as chairman of the company to carry on its operations, drawing the assistance from nominees of both the groups appointed by the bench and further that the accounts of the company be verified to find out the financial affairs of the company. the nominees so appointed shall not enjoy any executive powers.2. shri promod nair, learned counsel opposed the prayer for the appointment of an independent chairman, superceding the validly constituted board of directors to run the affairs of the company on the following among other reasons: o at no prior point of time, the petitioners have ever complained of any of the grievances, raised before the clb. the petitioners have no legitimate grievances to invoke the jurisdiction of sections 397 & 398. the fourth respondent acting in concert with the fifth respondent to take control of the company has set up the petitioners to file the present company petition. o the petitioners and the respondents 4 & 5 are owning ancillary units. the petitioners, being suppliers of electrical materials thereby beneficiaries are dealing with the company on daily basis and they are always kept informed about the affairs of the company. the fifth petitioner, being a member of mlw ancillary units association has been inducted on the board of directors of the company, as borne out by a memorandum of understanding entered into between the company and mlw ancillary units association, thereby the petitioners can make no complaint of having been excluded from the management of the company. o the fourth respondent many a time demanded monies from and out of the funds of the company for his personal purpose. when the fourth respondent's demands were not met, he started acting against the interests of the company. further, the respondents 4 & 5 had proposed to sell the company to one pratap kumar for a hefty price and inducted him illegally on the board, despite the fact that he is not a shareholder in the company and not involved in the lighting business at any point of time. the fourth respondent ransacked the hyderabad office of the company and unlawfully removed files, cheque books, letter heads of the company etc., compelling the third respondent to file a police complaint on 20.12.2005 which was followed by a complaint before the chief metropolitan magistrate, hyderabad. thereafter, the fourth respondent came down to bangalore on 21.12.2005 and made threatening calls to the second respondent, who sought police protection to himself and his family in terms of his communications dated 21.12.2005 & 31.12.2005. o the fourth respondent advised the company's banker in his communication dated 21.12.2005 to freeze the bank account on account of certain disputes among the directors, but this communication is silent on the alleged removal of the third respondent from the office of director. the company was not served with any special notice to call for an extraordinary general meeting to remove the respondents 2 & 3 from the board of directors of the company and, therefore, there could be no occasion for the petitioners to convene any meeting invoking section 169. the company functioning from the rented premises vacated its registered office as early as on 20.09.2005, as could be seen from the correspondence between the company and the lessor. the minutes of the meeting reveal that the meeting was held at hotel maurya, whereas the letter addressed to the bank indicates that the meeting was held at the registered office. the minutes of the board meeting but not the extraordinary general meeting produced before the bench indicate that, they were not recorded in the minutes book maintained by the company. the minutes with a number of corrections and blank spaces do not speak about the appointment of new directors at the alleged extraordinary general meeting. apart from these respondents, as many as six other shareholders did not receive any notice for the alleged extraordinary general meeting, as affirmed in their letter dated 29.12.2005 produced before the bench. it is, therefore, clear that neither extraordinary general meeting nor board meeting was held on 21.12.2005 either at the registered office or at hotel maurya removing the respondents 2 & 3 from the office of directors and appointing new directors as claimed by the petitioners. the commissioner has not found any such minutes of the meeting for his authentication. o article 24 provides for a maximum of twelve directors and thus, the respondents 6 to 8 are validly appointed directors of the company. the respondents 4 & 5 in collusion with the petitioners fabricated some evidence to show as if such extraordinary general meeting had been held. o the respondents 4 & 5 attended invariably the board meetings from time to time and are parties to the decisions taken at such meetings. the share capital has been increased to meet the statutory requirement of section 3(1)(iii). the provisions of section 81(1a) are inapplicable to private limited companies. the company could achieve an impressive turnover in the first year of operation, due to the strenuous marketing efforts of the respondents 2 & 3. the board of directors recognizing the services rendered by the respondents 2 & 3 allotted the impugned shares to them and further allotted shares to one of the dealers of the company. these allotments have been made in the presence of the fifth respondent. the amount invested by the fourth respondent towards share capital has been returned to him by the company. o the company has complied with the statutory requirements, as certified in the compliance certificate issued by the practicing company secretary, which is on record. the annual general meeting has been duly convened on 30.05.2005, which was attended by the second petitioner. by virtue of section 170(1)(ii), the company can lawfully prescribe seven days notice for convening the annual general meeting. proviso to section 166 provides that a company may hold its first annual general meeting within a period of not more than eighteen months from the date of its incorporation, which is duly complied with by the company. o at the time of first visit of the commissioner, the third respondent was in hyderabad and the second respondent had gone to kerala to attend his mother's death ceremony. the second respondent, on his return to bangalore, co-operated with the commissioner in authentication of the records maintained by the company.the charges leveled against the commissioner by the petitioners, are wholly untrue and unfair. neither the first petitioner nor mr. h.m. sudheer, advocate came to the office of the company at the time of authentication of records, as affirmed in the affidavit of mr. h.m. sudheer, advocate, bangalore. there was, therefore, no occasion to deny entry, as falsely contended by them. the respondents never pressurized the commissioner or any of the petitioners and the second petitioner gave his letter out of free will affirming the fact that he had not intended to file the present company petition. o the respondents 2 &3, with a view to prevent the fourth respondent from implementing the illegal resolution purportedly passed at the extraordinary general meeting, filed a civil suit for a declaration that the resolution dated 21.12.2005 is null and void and for a permanent injunction restraining the fourth respondent from acting on the said resolution and obtained an order of status quo in terms of its order dated 30.12.2005. the stay order is in force. o shri promod nair, learned counsel pointed out that any order appointing an independent chairman, will interfere with internal democracy of the board of directors and unfairly prejudice the shareholders as well as the dealers. this bench already passed orders safeguarding the interests of the petitioners so as to regulate the affairs of the company in future, which are complied with by furnishing to the petitioners statement of accounts, copies of statutory records etc.3. shri b.venugopal, learned counsel for the respondents 4 & 5 submitted: these respondents have not colluded with the respondents 2 & 3 and neither set up the petitioners to file the present company petition. the respondents 2 & 3 have not convened any board meeting or general meeting subsequent to the first board meeting and these respondents were not in receipt of copies of the minutes of the board meetings. the fourth respondent is a resident of hyderabad, having his own industry manufacturing lighting equipments. the fifth respondent is running a small scale industry in kolar district. the respondents 2 & 3 are in-charge of the day-to-day affairs of the company. the fourth respondent went for inspection of the hyderabad office on 20.12.2005 and found that the office was not in order and no one co-operated to carry out the inspection, which led to suspension of the third respondent from the office of director, in terms of the communication dated 20,12.2005. however, the third respondent lodged a false police complaint against the fourth respondent. the charges leveled against the fourth respondent have been categorically denied in the affidavit filed by some of the employees of hyderabad office. the fourth respondent contributed rs.6 lakhs towards share capital of the company by way of demand drafts, but no shares have been allotted in his favour. therefore, the fourth respondent was constrained to issue a requisition notice for convening an extraordinary general meeting in accordance with law. the respondents 4 & 5 and petitioners were denied access to the registered office to hold the extraordinary general meeting and, therefore, the meeting was held at hotel maurya, bangalore and the respondents 2 & 3 failed to attend the meeting, wherein, they were removed from the office of director.4. i have considered the elaborate arguments of learned counsel for the parties. the issue before me is whether the claim for appointment of an independent chairman to run day-to-day operations of the company is justifiable in the facts and circumstances of the present case. it is on record that the company has been promoted mainly for marketing and selling the products supplied by the ancillary units of mlwl. among others, the petitioners, consentor herein and the respondents 4 & 5, apart from promoting the company are independently running ancillary units and supplying the materials to the company. thus, the petitioners are the shareholders as well as the suppliers. by virtue of article 26, the respondents 2 to 5 shall be permanent directors and none of the permanent directors shall be liable to retire by rotation subject to the provisions of section 284 of the act. it is reported that the respondents 2 & 3 have been managing the company's affairs, while the respondents 4 & 5 are, preoccupied with their own business in hyderabad and kolar respectively, which led to the present sorry state of affairs.according to the petitioners, the respondents 2 & 3 failed - (a) to convene duly the annual general meeting or any meeting of the company; (b) to file any statutory returns with the registrar of companies; (c) to keep true and correct accounts; (d) to maintain the statutory registers including the register under section 301; (e) to allot shares in favour of the petitioners, despite illegally allotting shares to themselves without any consideration etc. the petitioners are challenging both the validity of the notice and the annual general meeting said to have been held on 30.05.2005. the annual report and the accounts for the period ended 31.03.2005 reportedly carry the concocted facts and figures, the genuineness of certificates of posting produced by the respondents 2 & 3 to show service of notice on the shareholders for the annual general meeting is under serious dispute. the respondents 2 & 3 are held to be responsible for revocation of the license assignment of the brand "mysore lamps". the appointment of respondents 6 to 8 as directors of the company is questioned, inter-alia, as violative of article 24.the respondents 4 & 5 categorically contend that the respondents 2 & 3 failed to convene board meetings or general meetings of the company from time to time, compelling the fourth respondent to take steps for convening an extraordinary general meeting on 21.12.2005 in accordance with law, wherein the respondents 2 & 3 were removed from the office of directors, apart from inducting new directors on the board of the company. these acts are seriously challenged by the respondents 2 & 3.the fourth respondent remitted rs.6 lakhs by way of demand drafts, but no shares have been allotted to them by the respondents 2 & 3. while the respondents 2 & 3 are asserting the validity of the first annual general meeting held in may, 2005, the extraordinary general meeting convened on 21.12.2005 and the decisions taken therein are challenged in the present proceedings, in the light of the various discrepancies pointed out in the minutes of the board meeting produced before the bench and place of the meeting.it shall be borne in mind that the various conflicting issues agitated by the parties cannot be resolved at the interim stage, but must necessarily be dealt with only when the company petition is disposed on merits. the clb, no doubt enjoys wide powers under section 403 to make any interim order which it thinks fit for regulating the conduct of the company's affairs, yet the prayer for appointment of an independent chairman must be viewed in the light of the exigencies made out by the parties. shri thiruvengadam, learned counsel strongly contended that the respondents 4 & 5 are acting in concert with the respondents 2 & 3, keeping the petitioners in dark in regard to the affairs of the company. there is nothing on record to show that the petitioners have at any prior point of time, ever since the incorporation of the company, ventilated their grievances in the affairs of the company, on account of the alleged acts of oppression and mismanagement indulged by the respondents 2 & 3. by virtue of the memorandum of understanding entered into between the company and mlw ancillary units association, it has been agreed that one of the members of the association would be nominated on the board of the company on rotation. the petitioners 1 & 3 and the fifth respondent are admittedly parties to the memorandum of understanding. though this arrangement has been denied in the course of the arguments on behalf of the petitioners, i do not find any pleading denying any such arrangement. it cannot, therefore, be said that the fifth respondent on the board is not the representative of mlw ancillary units. association. against this background, the plea that the petitioners have been excluded from the management of the company does not merit any consideration. the specific averments that the fifth respondent had attended the board meetings held on 19.12.2003, 16.03.2004, 12.05.2004, 26.07.2004, 06.08.2004, 22.09.2004, 01.11.2004, 29.03.2005, 20.05.2005, remaining undisputed and supported by copies of minutes of the respective board meetings and the certification made in the compliance certificate dated 20.05.2005 will show that the fifth respondent, a representative of mlw ancillary units association, has been involved in the affairs of the company. against this background, the plea of the respondents 4 & 5 raised for the first time that no board meetings, subsequent to the first board meeting have been convened is rather improbable. the petitioners 1 & 3, being members of mlw ancillary units association, cannot plead ignorance of the affairs of the company. similarly, the belated plea that the respondents 4 & 5 are colluding with the respondents 2 & 3 not having been substantiated cannot be pressed into service. during the course of hearing, the respondents 2 & 3, pursuant to the directions of the bench, have provided to the petitioners, among other things, copies of -the statement of bank account; minutes of the board meetings; minutes of the annual general meeting; statutory registers; returns; forms etc.the respondents have also made a categorical statement that they are ready and willing to provide any other information as may be required by the petitioners. this bench by earlier orders directed the respondents 2 & 3 to furnish periodically, in favour of the petitioners, a statement of all receipts and payments on account of the company. thus, the petitioners' interests, in. my view, are adequately safeguarded and they cannot complain that they are not kept informed of the affairs of the company. the company is merely engaged in marketing and selling the products supplied by the ancillary units of mlwl. the profit and loss account for the period from 18.12.2003 to 31.03.2005, though disputed, reveal that the company has incurred a loss of rs.2.63 lakhs. there is an arnount of rs.15.50 lakhs remaining by way of preliminary expenses yet to be written off by the company. the company cannot afford to have an independent chairman on account of financial burden, which may be forced on the company and it will not be commercially viable. further, adequate safeguards are already provided to ensure proper functioning of the company, which must be ensured by the respondents 2 & 3 from time to time, without any exception. the bench will consider the contentious issues and other serious allegations in regard to the alleged pressure exercised upon the petitioners and the commissioner by the respondents 2 & 3, after calling for a report from the commissioner at the time of disposing the company petition on merits and till such time - (a) respondents 6 to 8 and other persons purportedly appointed as directors at the extraordinary general meeting shall not function as directors of the company; and (b) voting rights in respect of the impugned shares are frozen. for these reasons, i am not inclined to appoint an independent chairman to carry on the company's affairs. however, the respondents 2 & 3 shall continue to comply with the directions already issued by the bench. the petitioners are at liberty to apply, in the event of any prejudices apprehended by them in the company's affairs during pendency of the company petition. ordered accordingly. in the meanwhile, the respondents will file counter to the company petition by 07.04.2006 and rejoinder to be filed by 20.04.2006. the company petition will be heard on 25.04.2006 at 2.30 p.m.

Judgment:
1. The petitioners and the consentor herein collectively holding 60% of the undisputed issued and subscribed paid-up capital of M/s Mysore Lighting Works Private Limited ("the Company") and constituting one-tenth of the total number of members aggrieved by the acts of oppression and mismanagement in the affairs of the Company have invoked the jurisdiction of the CLB under Sections 397 and 398 of the Companies Act, 1956 ("the Act") and urged for certain interim reliefs ex-parte.

This Bench on, prima-facie, considering the apprehension expressed on behalf of the petitioners, by an order dated 18.01.2006 authorised a Practicing Company Secretary to authenticate the statutory records of the Company and further directed the respondents 2 & 3 to furnish every fortnight the particulars of bank operations in favour of the petitioners. Thereafter, when the respondents entered appearance, advancing elaborate arguments, the Company was permitted to operate the bank account maintained with Oriental Bank of Commerce at Bangalore and Hyderabad in terms of the mandate given by the Company, towards payment of the statutory dues and other commercial transactions of the Company.

Further the respondents were directed to give a statement of all receipts and payments and bank transactions on account of the Company to the petitioners in terms of the earlier order made by the Bench.

Against this background, the petitioners claim that the respondents 2 & 3, apart from ignoring the directions of the Bench both in letter and spirit, have been systematically acting in a manner oppressive to the petitioners and committing acts of mismanagement, causing unfair prejudice to the interests of the Company. These grievances can be remedied by appointing an independent,Chairman to take control, of the Company, thereby regulating the conduct of the Company's affairs, in support of which Shri B.C. Thiruvengadam, learned Counsel submitted as under: o The first respondent Company has been promoted by the petitioners, consentor and the respondents 4 & 5 essentially to support the erstwhile ancillary units of Mysore Lamps Works Limited ("MLWL"), a state public sector company, which is now sick and closed. While the petitioners, consentor and the respondents 4 & 5 are owners of ancillary units, the respondents 2 & 3, erstwhile employees of MLWL became the co-promoters, without any investment of their own, so as to represent the employee segment. The respondents 2 to 5 are directors of the Company. While the fourth respondent based at Hyderabad is concerned with his business, the fifth respondent is preoccupied with his ancillary unit in Kolar. Consequently, the respondents 2 & 3 are running the Company for all practical purposes. The petitioners, after incorporation of the Company, are kept in total darkness about its affairs.

o The Company ought to have held two annual general meetings, one for the period from 18.12.2003 to 31.03.2004 by 17.06.2005 and the other from 01.04.2004 to 31.03.2005. However, the Company reportedly held the first annual general meeting, after a period of 15 months, on 30.05.2005, without consent of the Registrar of Companies under the provisions of Section 210(4) of the Act and without even giving ten days notice. Article 21 specifies seven days notice before calling the annual general meeting, which is ultra vires the provisions of Section 171(2). The petitioners did not receive any notice for the annual general meeting held on 30.05.2005. Thus, the purported notice is bad in law and the annual general meeting is void.

o The petitioners and other shareholders, aggrieved by the acts of the respondents 2 & 3 moved a special notice to convene an extraordinary general meeting for removing the respondents 2 & 3.

The Company failed to convene the extraordinary meeting as requested forcing the petitioners themselves to convene the meeting, in accordance with Section 169 on 21.12.2005, by serving notices on all the shareholders. The fourth respondent presided over the extraordinary general meeting, which was attended by 11 of 15 shareholders, wherein the respondents 2 & 3 were removed from the board of directors and three new directors got appointed, as borne out by copy of minutes of the extraordinary general meeting and form-32 filed with the Registrar of Companies. However, the respondents 2 & 3 are preventing the validly constituted board of directors of the Company from carrying on the day-to-day affairs of the Company.

o The respondents 2 & 3 have misappropriated huge funds of the Company and on account of their mismanagement, Government of Karnataka has revoked the licence of assignment of the brand "Mysore Lamps", jeopardizing the interests of the Company and its shareholders.

o The Company had allotted illegally a total of 90,000 shares of Rs.10/-each during May 2004 and March 2005 in favour of the respondents 2 to 6, in complete exclusion of the petitioners, thereby converting them to a minority. The allotment made in May 2004 was for consideration other than cash and, therefore, the Company did not receive any cash consideration at all. The Company started its operations only in April 2004. Hence, there is no justification or need for the impugned allotments. Further, no such allotment is permissible, within one year of incorporation of the Company in view of the prohibition contained in Section 79A(1)(c).

The respondents have not filed the requisite return of allotment with the ROC, in support of the impugned allotments.

o The respondents 6 to 8 are holding themselves to be directors of the Company as indicated in the compliance certificate dated 20.05.2005, despite the fact that they have not been appointed by the shareholders. With the illegal induction of the respondents 6 to 8 on the board of directors of the Company, Article 24 stipulating the maximum of five directors, stands violated. The respondents 6 to 8 have no locus standi to represent as directors.

o The Commissioner appointed by the Bench visited the office of the Company, without any notice to the petitioners and when he could not execute the warrant for want of co-operation from the respondents 2 & 3, submitted his report dated 23.01.2005 before the Bench, without serving copy on the petitioners, by which the purpose of taking out; an ex-parte commission could not be achieved. When Mr.H.M. Sudheer, Counsel representing the petitioner visited the office of the Commissioner on 27.01.2006 to serve a copy of the order dated 25.01.2006, together with a cheque representing his remuneration, the Commissioner reported that "people are trying to fix me". These facts have been affirmed by Mr. Sudheer in his affidavit sworn on 07.02.2006. The Commissioner in his communication dated 27.01.2006 reported that he would be authenticating the records at the office of the Company on 31.01.2006, yet he failed to indicate the exact time of authentication. The first petitioner and his representing Counsel on getting the information visited the office premises, but they were refused entry, while the Commissioner remained a silent spectator and, however, reportedly authenticated the records, in the absence of the petitioners on account of the pressure exerted by the respondents 2 & 3 and without providing copy of the report to the petitioners. This conduct of the Commissioner is highly improper.

o The petitioners 1, 3 & 8 have been threatened by the respondents 2 & 3 with dire consequences, if the company petition is not withdrawn by them, which led to the complaints dated 30.01.2006 lodged with the police at Kolar. The respondents 2 & 3 have obtained from the second petitioner written statements by force to the effect that he neither signed the company petition nor participated in filing any such petition. Nevertheless, the second petitioner has now filed an affidavit, in support of prosecuting the company petition. The letter dated 29.12.2005 produced by the respondent reporting that the second petitioner never received any notice for the extraordinary general meeting held on 21.12.2005 has been obtained from him by duress and must be ignored.

o The compliance certificate dated 20.05.2005 issued under Section 383A(1) by a Practicing Company Secretary, categorically certified that "the Company has not made any entries in the register maintained under Section 301 of the Act", though the respondents 4 & 5, being directors are suppliers of electrical materials to the Company. The report dated 06.02.2006 of the Commissioner confirms that the register required to be maintained by the Company under Section 301 is blank. At the same time, the Auditor's Report dated 20.05.2005 forming part of the annual report for the period from 18.12.2003 to 31.03.2005 explicitly reports that "in respect of loans, Secured or unsecured, granted or accepted by the Company to/from companies, firms or other parties covered in the register maintained under Section 301 of the Companies Act, 1956: o The Company has not granted any Loans to parties referred to in register maintained under Section 301 of the Companies Act, 1956.

o However Company has accepted Unsecured Loans from " 3 parties" covered in the Register maintained Under Section 301 of the Companies Act, 1956 aggregating to Rs. 4,34,268 (year end balance) during the year.

These serious contradictions in maintenance of the statutory records and the correction made in the minutes of the board meeting dated 20.05.2005, after authentication by the Commissioner throw light, on the conduct of the respondents 2 & 3.

o It is rather unusual for the Company to conduct the audit and adopt the accounts on the same day, viz., 20.05.2005. The Directors report and the Auditor's report are found prepared on 20.05.2005 itself. The compliance certificate has been issued by the Practicing Company Secretary is dated 20.05.2005. Everything has taken done hurriedly on 20.05.2005 fabricating the annual report and accounts of the Company, but the respondents 2 & 3 failed to file Form No. 2 and Form No. 3 for the impugned allotment. Similarly, the certificates of posting produced by the respondents 2 & 3 to show service of notice for the purported AGM are fabricated ones.

o Shri Thiruvengadam, learned Counsel, while concluding his submissions, reiterated that the present exigencies warrant the appointment of a retired High Court Judge or bureaucrat as Chairman of the Company to carry on its operations, drawing the assistance from nominees of both the groups appointed by the Bench and further that the accounts of the Company be verified to find out the financial affairs of the Company. The nominees so appointed shall not enjoy any executive powers.

2. Shri Promod Nair, learned Counsel opposed the prayer for the appointment of an independent Chairman, superceding the validly constituted board of directors to run the affairs of the Company on the following among other reasons: o At no prior point of time, the petitioners have ever complained of any of the grievances, raised before the CLB. The petitioners have no legitimate grievances to invoke the jurisdiction of Sections 397 & 398. The fourth respondent acting in concert with the fifth respondent to take control of the Company has set up the petitioners to file the present company petition.

o The petitioners and the respondents 4 & 5 are owning ancillary units. The petitioners, being suppliers of electrical materials thereby beneficiaries are dealing with the Company on daily basis and they are always kept informed about the affairs of the Company.

The fifth petitioner, being a member of MLW Ancillary Units Association has been inducted on the board of directors of the Company, as borne out by a memorandum of understanding entered into between the Company and MLW Ancillary Units Association, thereby the petitioners can make no complaint of having been excluded from the management of the Company.

o The fourth respondent many a time demanded monies from and out of the funds of the Company for his personal purpose. When the fourth respondent's demands were not met, he started acting against the interests of the Company. Further, the respondents 4 & 5 had proposed to sell the Company to one Pratap Kumar for a hefty price and inducted him illegally on the board, despite the fact that he is not a shareholder in the Company and not involved in the lighting business at any point of time. The fourth respondent ransacked the Hyderabad office of the Company and unlawfully removed files, cheque books, letter heads of the Company etc., compelling the third respondent to file a police complaint on 20.12.2005 which was followed by a complaint before the Chief Metropolitan Magistrate, Hyderabad. Thereafter, the fourth respondent came down to Bangalore on 21.12.2005 and made threatening calls to the second respondent, who sought police protection to himself and his family in terms of his communications dated 21.12.2005 & 31.12.2005.

o The fourth respondent advised the Company's banker in his communication dated 21.12.2005 to freeze the bank account on account of certain disputes among the directors, but this communication is silent on the alleged removal of the third respondent from the office of director. The Company was not served with any special notice to call for an extraordinary general meeting to remove the respondents 2 & 3 from the board of directors of the Company and, therefore, there could be no occasion for the petitioners to convene any meeting invoking Section 169. The Company functioning from the rented premises vacated its registered office as early as on 20.09.2005, as could be seen from the correspondence between the Company and the lessor. The minutes of the meeting reveal that the meeting was held at Hotel Maurya, whereas the letter addressed to the bank indicates that the meeting was held at the registered office. The minutes of the board meeting but not the extraordinary general meeting produced before the Bench indicate that, they were not recorded in the minutes book maintained by the Company. The minutes with a number of corrections and blank spaces do not speak about the appointment of new directors at the alleged extraordinary general meeting. Apart from these respondents, as many as six other shareholders did not receive any notice for the alleged extraordinary general meeting, as affirmed in their letter dated 29.12.2005 produced before the Bench. It is, therefore, clear that neither extraordinary general meeting nor board meeting was held on 21.12.2005 either at the registered office or at Hotel Maurya removing the respondents 2 & 3 from the office of directors and appointing new directors as claimed by the petitioners. The Commissioner has not found any such minutes of the meeting for his authentication.

o Article 24 provides for a maximum of twelve directors and thus, the respondents 6 to 8 are validly appointed directors of the Company. The respondents 4 & 5 in collusion with the petitioners fabricated some evidence to show as if such extraordinary general meeting had been held. o The respondents 4 & 5 attended invariably the board meetings from time to time and are parties to the decisions taken at such meetings. The share capital has been increased to meet the statutory requirement of Section 3(1)(iii). The provisions of Section 81(1A) are inapplicable to private limited companies. The Company could achieve an impressive turnover in the first year of operation, due to the strenuous marketing efforts of the respondents 2 & 3. The board of directors recognizing the services rendered by the respondents 2 & 3 allotted the impugned shares to them and further allotted shares to one of the dealers of the Company. These allotments have been made in the presence of the fifth respondent.

The amount invested by the fourth respondent towards share capital has been returned to him by the Company.

o The Company has complied with the statutory requirements, as certified in the compliance certificate issued by the Practicing Company Secretary, which is on record. The annual general meeting has been duly convened on 30.05.2005, which was attended by the second petitioner. By virtue of Section 170(1)(ii), the Company can lawfully prescribe seven days notice for convening the annual general meeting. Proviso to Section 166 provides that a company may hold its first annual general meeting within a period of not more than eighteen months from the date of its incorporation, which is duly complied with by the Company.

o At the time of first visit of the Commissioner, the third respondent was in Hyderabad and the second respondent had gone to Kerala to attend his mother's death ceremony. The second respondent, on his return to Bangalore, co-operated with the Commissioner in authentication of the records maintained by the Company.The charges leveled against the Commissioner by the petitioners, are wholly untrue and unfair. Neither the first petitioner nor Mr. H.M. Sudheer, Advocate came to the office of the Company at the time of authentication of records, as affirmed in the affidavit of Mr. H.M. Sudheer, Advocate, Bangalore. There was, therefore, no occasion to deny entry, as falsely contended by them. The respondents never pressurized the Commissioner or any of the petitioners and the second petitioner gave his letter out of free will affirming the fact that he had not intended to file the present company petition.

o The respondents 2 &3, with a view to prevent the fourth respondent from implementing the illegal resolution purportedly passed at the extraordinary general meeting, filed a civil suit for a declaration that the resolution dated 21.12.2005 is null and void and for a permanent injunction restraining the fourth respondent from acting on the said resolution and obtained an order of status quo in terms of its order dated 30.12.2005. The stay order is in force.

o Shri Promod Nair, learned Counsel pointed out that any order appointing an independent Chairman, will interfere with internal democracy of the board of directors and unfairly prejudice the shareholders as well as the dealers. This Bench already passed orders safeguarding the interests of the petitioners so as to regulate the affairs of the Company in future, which are complied with by furnishing to the petitioners statement of accounts, copies of statutory records etc.

3. Shri B.Venugopal, learned Counsel for the respondents 4 & 5 submitted: These respondents have not colluded with the respondents 2 & 3 and neither set up the petitioners to file the present company petition. The respondents 2 & 3 have not convened any board meeting or general meeting subsequent to the first board meeting and these respondents were not in receipt of copies of the minutes of the board meetings. The fourth respondent is a resident of Hyderabad, having his own industry manufacturing lighting equipments. The fifth respondent is running a small scale industry in Kolar District. The respondents 2 & 3 are in-charge of the day-to-day affairs of the Company. The fourth respondent went for inspection of the Hyderabad office on 20.12.2005 and found that the office was not in order and no one co-operated to carry out the inspection, which led to suspension of the third respondent from the office of director, in terms of the communication dated 20,12.2005. However, the third respondent lodged a false police complaint against the fourth respondent. The charges leveled against the fourth respondent have been categorically denied in the affidavit filed by some of the employees of Hyderabad office. The fourth respondent contributed Rs.6 lakhs towards share capital of the Company by way of demand drafts, but no shares have been allotted in his favour. Therefore, the fourth respondent was constrained to issue a requisition notice for convening an extraordinary general meeting in accordance with law. The respondents 4 & 5 and petitioners were denied access to the registered office to hold the extraordinary general meeting and, therefore, the meeting was held at Hotel Maurya, Bangalore and the respondents 2 & 3 failed to attend the meeting, wherein, they were removed from the office of director.

4. I have considered the elaborate arguments of learned Counsel for the parties. The issue before me is whether the claim for appointment of an independent Chairman to run day-to-day operations of the Company is justifiable in the facts and circumstances of the present case. It is on record that the Company has been promoted mainly for marketing and selling the products supplied by the ancillary units of MLWL. Among others, the petitioners, consentor herein and the respondents 4 & 5, apart from promoting the Company are independently running ancillary units and supplying the materials to the Company. Thus, the petitioners are the shareholders as well as the suppliers. By virtue of Article 26, the respondents 2 to 5 shall be permanent directors and none of the permanent directors shall be liable to retire by rotation subject to the provisions of Section 284 of the Act. It is reported that the respondents 2 & 3 have been managing the Company's affairs, while the respondents 4 & 5 are, preoccupied with their own business in Hyderabad and Kolar respectively, which led to the present sorry state of affairs.

According to the petitioners, the respondents 2 & 3 failed - (a) to convene duly the annual general meeting or any meeting of the Company; (b) to file any statutory returns with the Registrar of Companies; (c) to keep true and correct accounts; (d) to maintain the statutory registers including the register under Section 301; (e) to allot shares in favour of the petitioners, despite illegally allotting shares to themselves without any consideration etc. The petitioners are challenging both the validity of the notice and the annual general meeting said to have been held on 30.05.2005. The annual report and the accounts for the period ended 31.03.2005 reportedly carry the concocted facts and figures, The genuineness of certificates of posting produced by the respondents 2 & 3 to show service of notice on the shareholders for the annual general meeting is under serious dispute. The respondents 2 & 3 are held to be responsible for revocation of the license assignment of the brand "Mysore Lamps". The appointment of respondents 6 to 8 as directors of the Company is questioned, inter-alia, as violative of Article 24.

The respondents 4 & 5 categorically contend that the respondents 2 & 3 failed to convene board meetings or general meetings of the Company from time to time, compelling the fourth respondent to take steps for convening an extraordinary general meeting on 21.12.2005 in accordance with law, wherein the respondents 2 & 3 were removed from the office of directors, apart from inducting new directors on the Board of the Company. These acts are seriously challenged by the respondents 2 & 3.

The fourth respondent remitted Rs.6 lakhs by way of demand drafts, but no shares have been allotted to them by the respondents 2 & 3. While the respondents 2 & 3 are asserting the validity of the first annual general meeting held in May, 2005, the extraordinary general meeting convened on 21.12.2005 and the decisions taken therein are challenged in the present proceedings, in the light of the various discrepancies pointed out in the minutes of the board meeting produced before the Bench and place of the meeting.

It shall be borne in mind that the various conflicting issues agitated by the parties cannot be resolved at the interim stage, but must necessarily be dealt with only when the company petition is disposed on merits. The CLB, no doubt enjoys wide powers under Section 403 to make any interim order which it thinks fit for regulating the conduct of the Company's affairs, yet the prayer for appointment of an independent Chairman must be viewed in the light of the exigencies made out by the parties. Shri Thiruvengadam, learned Counsel strongly contended that the respondents 4 & 5 are acting in concert with the respondents 2 & 3, keeping the petitioners in dark in regard to the affairs of the Company. There is nothing on record to show that the petitioners have at any prior point of time, ever since the incorporation of the Company, ventilated their grievances in the affairs of the Company, on account of the alleged acts of oppression and mismanagement indulged by the respondents 2 & 3. By virtue of the memorandum of understanding entered into between the Company and MLW Ancillary Units Association, it has been agreed that one of the members of the association would be nominated on the board of the Company on rotation. The petitioners 1 & 3 and the fifth respondent are admittedly parties to the memorandum of understanding. Though this arrangement has been denied in the course of the arguments on behalf of the petitioners, I do not find any pleading denying any such arrangement. It cannot, therefore, be said that the fifth respondent on the board is not the representative of MLW Ancillary Units. Association. Against this background, the plea that the petitioners have been excluded from the management of the Company does not merit any consideration. The specific averments that the fifth respondent had attended the board meetings held on 19.12.2003, 16.03.2004, 12.05.2004, 26.07.2004, 06.08.2004, 22.09.2004, 01.11.2004, 29.03.2005, 20.05.2005, remaining undisputed and supported by copies of minutes of the respective board meetings and the certification made in the compliance certificate dated 20.05.2005 will show that the fifth respondent, a representative of MLW Ancillary Units Association, has been involved in the affairs of the Company. Against this background, the plea of the respondents 4 & 5 raised for the first time that no board meetings, subsequent to the first board meeting have been convened is rather improbable. The petitioners 1 & 3, being members of MLW Ancillary Units Association, cannot plead ignorance of the affairs of the Company. Similarly, the belated plea that the respondents 4 & 5 are colluding with the respondents 2 & 3 not having been substantiated cannot be pressed into service. During the course of hearing, the respondents 2 & 3, pursuant to the directions of the Bench, have provided to the petitioners, among other things, copies of -the statement of bank account; minutes of the board meetings; minutes of the annual general meeting; statutory registers; returns; forms etc.

The respondents have also made a categorical statement that they are ready and willing to provide any other information as may be required by the petitioners. This Bench by earlier orders directed the respondents 2 & 3 to furnish periodically, in favour of the petitioners, a statement of all receipts and payments on account of the Company. Thus, the petitioners' interests, in. my view, are adequately safeguarded and they cannot complain that they are not kept informed of the affairs of the Company. The Company is merely engaged in marketing and selling the products supplied by the ancillary units of MLWL. The profit and loss account for the period from 18.12.2003 to 31.03.2005, though disputed, reveal that the Company has incurred a loss of Rs.2.63 lakhs. There is an arnount of Rs.15.50 lakhs remaining by way of preliminary expenses yet to be written off by the Company. The Company cannot afford to have an independent Chairman on account of financial burden, which may be forced on the Company and it will not be commercially viable. Further, adequate safeguards are already provided to ensure proper functioning of the Company, which must be ensured by the respondents 2 & 3 from time to time, without any exception. The Bench will consider the contentious issues and other serious allegations in regard to the alleged pressure exercised upon the petitioners and the Commissioner by the respondents 2 & 3, after calling for a report from the Commissioner at the time of disposing the company petition on merits and till such time - (a) respondents 6 to 8 and other persons purportedly appointed as directors at the extraordinary general meeting shall not function as directors of the Company; and (b) voting rights in respect of the impugned shares are frozen. For these reasons, I am not inclined to appoint an independent Chairman to carry on the Company's affairs. However, the respondents 2 & 3 shall continue to comply with the directions already issued by the Bench. The petitioners are at liberty to apply, in the event of any prejudices apprehended by them in the Company's affairs during pendency of the company petition. Ordered accordingly. In the meanwhile, the respondents will file counter to the Company petition by 07.04.2006 and rejoinder to be filed by 20.04.2006. The company petition will be heard on 25.04.2006 at 2.30 p.m.