ORDER
K.K. Balu, Member.
1. The petition in CP No. 17/2002 (“the first petition”) is filed under Section 397/398 06 the Companies Act, 1956 (“the Act”) alleging acts of oppression and mismanagement in the affairs of the M/s. Supra Hi Tech Electro Equipments Private Limited (“SHEEPL”).
2. The petition in CP No. 18/2002 (“the second petition”) is filed under Section 397/398 of the Act alleging acts of oppression and mismanagement in the affairs of M/s. Supratronics Private Limited (“SPL”). SHEEPL and SPL are referred to as “the Companies”.
3. The petitioner and respondents 2 and 3 in both the petitions are common. The alleged acts of oppression and mismanagement in the affairs of the Companies as well as the reliefs sought in both the petitions are substantially the same. In view of this, both these petitions were heard together with concurrence of Counsel for both the sides and as such are being disposed of by this common order.
4. Shri Dinesh R. Shenoy, Counsel appearing for the petitioner, while initiating his arguments has traced history of the Companies, nature of business carried by the Companies as well as the promoters of the Companies. SPL (CP 18/2002) was incorporated in the year 1988 with the main objects to carry on business as dealers and suppliers of electronic instruments, appliances, electronic components etc. The authorized capital of the Company is Rs. 1,50,000 divided into 150 equity shares of Rs. 1,000 each, of which the petitioner and the second respondent hold 70 shares each. The third respondent and one Mr. Paul are holding 5 shares each. As per the articles of Association of SPL, the petitioner and the second respondent are the first directors, who will hold the office till they resign on their will. During the year 1992, the petitioner and respondents 2 and 3 had incorporated SHEEPL (CP No. 17/2002) with the main objects to carry on business of manufacture and dealing in electrical and electronic testing and measuring instruments and equipments. In SHEEPL, the petitioner is holding 16.2 per cent of equity shares, the third respondent 52 per cent of the shares, second respondent 18.3 per cent of the shares and balance of 13.5 per cent is held by one Mr. Sasi. The second respondent is looking after the affairs of both the Companies. M/s. SHEEPL has been manufacturing the equipments, which are marketed by SPL, under its own established brand name, “Supra” registered with the Registrar of Trade Marks, Mumbai in the name of SPL. The second respondent in the course of promotion of the business, brought out pamphlets and brochures, wherein SHEEPL is shown as manufacturing division, SPL as marketing division and Supra Power Research Centre (“SPRC”) as R&D division. SPRC is the proprietary concern of the second respondent. Both the Companies and SPRC are being treated as part and parcel of the same group, SHEEPL has no staff to deal with sales or its marketing functions, which are being done through SPL and its staff. SPRC is only a paper company. It is neither engaged in research nor in any other development or marketing activities. The Companies were functioning well and acquired goodwill over a period of time in the market. Thereafter, respondents 2 and 3 unilaterally effected changes in the functioning of the Companies by diverting the orders taken by the staff of SPL to SHEEPL and SHEEPL executing the orders without SPL playing any role as an intermediary. Shri Shenoy pointed out that though the products were marketed and orders were taken by the staff belonging to SPL, who were paid out of the funds of SPL and on the strength of the goodwill and image of SPL, the benefit of the orders was being transferred to SHEEPL by second and third respondents. In October 1999, respondents 2 and 3 clandestinely established a new company under the name and style of M/s. Line On Power Private Limited (“LOPPL”) with the very same objects of SHEEPL without the knowledge of the petitioner, upon which the business and orders received by SPL were diverted by respondents 2 and 3 to LOPPL for their own benefit, causing prejudice to the interests of the members of SPL and causing losses to them. When the petitioner questioned respondents 2 and 3 on such diversion of the orders from SPL, the latter secreted the books of account of SPL and started excluding the petitioner from the day-to-day affairs of the Companies. According to Shri Shenoy huge purchases were recorded to have been made from LOPPL by SPL even when LOPPL had not even set up its manufacturing unit or employed any staff member for manufacturing the products. The products manufactured from SHEEPL were stamped with the seal of LOPPL and sold through SPL by respondents 2 and 3 clandestinely and the entire amount was misappropriated by them, thereby causing losses to the tune of Rs. 60 to 70 lakhs for the last 3 to 4 years to SPL and SHEEPL. Similarly, the products of SHEEPL were fraudulently diverted and sold by respondents 2 and 3 to third parties including M/s. Connect and Control, Trivandrum (“C&C”), a company owned by a cousin of the second respondent and M/s. Power Link Technologies Private Limited (PLTPL) promoted by brothers-in-law of second respondent. The respondents 2 and 3 were also rendering the servicing and installation of the equipments sold by SHEEPL, LOPPL and PLTPL using staff and materials from SPL, free of charge, misusing the control over the staff of SPL, causing huge losses to SPL. In this connection, Shri Shenoy relied on photocopies of the bills and dispatch forms of SPL (Annexure A series) and other records (Annexure A-16 series) in CP 18/2002, The publicity, marketing and servicing activities of SPL were carried on utilizing its own funds, but the benefits were taken away by the respondents 2 and 3 through SHEEPL, LOPPL etc. Now SPL is reduced to a shell company. The second respondent used to purchase electronic goods from PLTPL at a grossly inflated and exaggerated price to make unlawful gain to himself at the expense of SPL, for which he referred to the notice dated 20-8-2001 issued by PLTPL demanding an amount of Rs. 14,93,753.25 said to be due from SPL to PLTPL (Annexure A-12). He also invited our attention to the advertisement Annexures A-4, A-5 & A-6 (CP. 18/2002) series caused by the Companies promoted by the second respondent and his relatives which made use of the brand name “Supra”. The respondents 2 and 3 were misusing the funds of the Companies without any proper authorization of the Board of Directors and purchased a property in the name of LOPPL, utilizing such diverted funds from the Companies. In view of the misappropriation committed by respondents 2 and 3, the petitioner was constrained to file a civil suit in OS No. 1604/2001 before Munsif Court, Ernakulam for a decree of permanent prohibitory injunction restraining respondents 2 and 3 from preventing the petitioner from acting as whole-time director of SHEEPL; restraining respondents 2 and 3 from operating the bank accounts of SHEEPL without participation of the petitioner and restraining the respondents 2 and 3 from removing the books of account and other documents or records from the office of SHEEPL. Similarly, the petitioner had filed a civil suit in OS 1608/2001 before Munsif Court, Ernakulam for similar reliefs against the respondents in order to protect the interests of shareholders of SPL. Accordingly, the respondents 2 and 3 were restrained from removing the books and records from the Companies. The Court had appointed an Advocate Commissioner to inspect the offices of the Companies and to prepare an inventory of the books, documents and papers found therein. The petitioner was compelled to resort to this remedy to safeguard the assets and records of the Companies till he could move the CLB for appropriate directions. He further pointed out that though the Commissioner appointed by the Court took inventory, the respondents failed to provide all the documents as required by the Commissioner. The documents called for by the Commissioner from the second respondent would establish large scale diversion of orders and funds indulged by respondents 2 and 3. Shri Shenoy referred to the report of Shri Jomon George, (Page 262 of Paper-Book in C.P. No. 18/2002) substantiating the diversion of business and materials on the part of LOPPL. From the report of the auditor, it is clear that the staff strength and the sale effected by LOPPL do not reflect the correct position. LOPPL does not possess the requisite equipment for production of materials. The Muster Rolls (Pages 125 to 136 of Paper Book in CP 18/2002) have a lot of infirmities which cannot be relied on by the Bench. The statements, which are produced by the respondents 2 and 3 pursuant to the order of the CLB merely, give particulars of payments made and nothing else which does not serve any purpose. Shri Shenoy, therefore, sought for the reliefs claimed in the petitions.
5. Shri R. Murari, Advocate appearing for the respondents while denying any of the acts of oppression and mismanagement in the affairs of the Companies had pointed out that the petitioner had already filed civil suits in regard to the very same irregularities alleged in the present Company Petitions and that the civil suits were withdrawn only in December, 2002. Thus, the petitioners are engaged in forum shopping and cannot claim any relief before the CLB. Shri Murari further submitted that the alleged acts of oppression and mismanagement lack particulars of such acts in the affairs of the Company and that the petitioner has failed to place on record material in support of the allegations relating to diversion of funds of the Companies by the respondents, in which case no relief under Sections 397 and 398 can be granted, as held in MM. Dua v. Indian Diary & Allied Services (P.) Ltd. [1996] 86 Comp. Cas. 657. According to the respondents, the petitioner was not extending his co-operation to conduct the affairs of the Companies, convene board meetings, complete statutory formalities and give personal guarantee to secure the loans required for the purposes of the business. The petitioner was always desirous of extracting money and there are no bona fides on his part. SPL is a marketing company, marketing the products manufactured by SHEEPL and several other companies. Though, according to the petitioner, the respondents had diverted the materials and products of SHEEPL in the name of LOPPL, PLTPL and their other companies to the tune more than of Rs. 60 lakhs, the same has not been substantiated. LOPPL was incorporated in the year 1999 with the knowledge of the petitioner. The respondents 2 and 3 never transferred the sales canvassed by SPL for the benefit of LOPPL and PLTPL. These companies are independent entities and all the dealings of these companies are bona fide transactions, which are reflected in the accounts of SPL. SPL has only gained on account of its marketing of products of other companies including LOPPL and PLTPL. The petitioner, instead of proving the alleged diversion of the materials and orders of the Companies by the respondents, moved this Bench for production of books of account and other records of the Companies, but failed to establish his claim. The report of Mr. Jomon George, appointed by this Bench to go into the accounts of the LOPPL and SHEEPL does also establish any diversion of funds by the respondents. Shri Murari pointed out that it is only the petitioner who was acting against the interest of the Companies by actively involved in day-to-day affairs of M/s. Schottky Electronics Private Limited (“SEPL”), a company substantially held by his wife and sister and diverting the materials and business of SHEEPL to SEPL. The petitioner had used the trade mark “SUPRA” in the advertisement of SEPL (Page 179 of Paper Book in CP 18/ 2002). The petitioner had indulged in removing the statutory records and books of account of SPL and promoting products similar to the products of SPL and spreading rumours about closure of SPL, which were questioned by the respondents resulting in the present Company Petitions. Shri Murari, to substantiate these allegations specifically referred to among others, the documents placed at pages 137, 143 to 146, 178 and 179 (Paper Book in CP 18 of 2002) and the letter dated 25-1-2003 of one M/s. Modern Graphics, the printers. According to Shri Murari, LOPPL is dealing in solar and other different products and not the products dealt by SHEEPL. The advertisement was effected on behalf of SPL, SHEEPL and LOPPL (pages 99, 100, 192 & 193 of Paper Book in CP 18/2002) in order to minimize the costs. The petitioner, if aggrieved by virtue of such an advertisement is entitled to enforce his right before the Trade Mark Authority. LOPPL has its own employees to carry on its business, in support of which he referred to copies of the Muster Roll of LOPPL at pages 125 to 136 of Paper Book (CP 18 of 2002). Shri Murari denied that the products of SHEEPL were sold under the name and stamp of LOPPL. While concluding his submissions, Shri Murari urged that the petitioner is solely responsible for the present state of affairs of the Companies and therefore, not entitled for any of the reliefs made in the petitions.
6. Shri Shenoy, in his reply pointed that the petitioner failed to produce all the records and books of account as directed by this Bench including the manufacturing accounts and the relevant statutory forms, like RG-23 for excisable goods and Profit and Loss Account of LOPPL which would establish the large scale diversion of business indulged by the respondents 2 and 3. The books of account and records produced by respondents 2 and 3 pursuant to the order of this Bench in CA 38/2002 clearly establish the manipulations indulged by the respondents 2 and 3, particularly in regard to purchase of certain components from M/s. Allied Industries, Bangalore, M/s. Mafab Engineering etc. Unless the accounts of SPL, SHEEPL, LOPPL, SPRC & PLTPL are thoroughly audited, Shri Shenoy urged that the diversion of funds by the respondents 2 and 3 will not come to light.
7. We have considered the pleadings and arguments of learned counsel for the petitioner as well as respondents. The main acts of oppression and mismanagement alleged in both the petitions are in relation to the fraudulent diversion of the orders procured by SPL to SHEEPL, LOPPL, PLTPL and other group companies of the respondents 2 and 3 as well as the fraudulent diversion of the products manufactured from SHEEPL in the name of LOPPL and other group companies of the respondents 2 and 3. A perusal of the available records reveals that the main objects of SPL are to carry on the business as dealers and suppliers of electronic instruments, components etc. The petitioner and the second respondent hold 70 shares each in SPL. The main objects of SHEEPL are to carry on the business of manufacture and dealing in electrical and electronic testing and measuring instruments and equipments. In SHEEPL, the petitioner is holding 16.2 per cent of equity shares, the third respondent 52 per cent, and second respondent 18.3 per cent of the equity shares and the remaining balance is held by a third party. While SHEEPL has been manufacturing the equipments, SPL is marketing the equipments under its own brand name, namely, “Supra”, registered with the Registrar of Trade Marks, Mumbai. SPRC is a Proprietary concern of the second respondent engaged in research and development of the electrical and electronic equipments. LOPPL was established in October, 1999 by the respondents 2 and 3 to carry on the business of manufacturing power controlling and power generating equipments, solar based power generating systems and other power controlling equipments and also other electronic and electrical equipments. The pamphlets issued on behalf of SPL and LOPPL (pages 99, 100, 192 & 193 of Paper Book in CP 18/2002) show that SPL is dealing in Supra Power Control Products and LOPPL dealing in solar energy products. C&C, a company owned by a cousin of the second respondent and PLTPL owned by brothers-in-law of the second respondent are dealing in similar products. The advertisements (pages 38 & 42 of Paper Book in CP 18 of 2002) brought out under the name of “Supra” shows that SHEEPL is manufacturing division, SPL Marketing Division and SPRC is research and development division, SPL, SHEEPL and SPRC were treated as belonging to the same group. The billing and dispatch forms of SPL (pages 46, 47, 48 & 51 of Paper Book in CP No. 18 of 2002) show that the products were billed from SHEEPL. The billing and dispatch form (page 49) shows that the products were billed from SPL. The billing and dispatch forms (pages 52 and 54) clearly show that the billing was done from PLTPL. The pamphlet issued on behalf of SEPL (page 179 of Paper Book in CP 18 of 2002) reveals that SEPL made use of the brand name of “Supra” admittedly registered in the name of SPL, The service bills (pages 86-95, 97 & 98 of Paper Book in CP 18/2002) of SPL show that service activities were carried on, on behalf of LOPPL and PLTPL. The grievances of the petitioner against the second respondent as seen from his letters dated 17-1-2000, 12-2-2001 & 19-3-2001 (pages 56-63 of Paper Book in CP 18/2002) are enumerated herebelow :–
* Offered undue support to PLTPL and SHEEPL causing losses to SPL;
* Incorporated LOPPL against the business interest of SPL;
* Use of the brand name “Supra” by PLTPL for its products without any authority from SPL;
* Diversion of the orders of SPL to PLTPL, causing losses to SPL;
* Misuse of the infrastructure and service of the sales/service staff of SPL for the benefits of PLTPL;
* Functioning of Coimbatore Branch of SPL as branch of PLTPL & SHEEPL.
* Non-finalisation of the accounts of SPL and SHEEPL.
Though the petitioner claims losses to the tune of Rs. 60-70 lakhs on account of the fraudulent diversion of products by the respondents 2 and 3, there is no material on record substantiating such losses. At the same time, the report of Mr. Jomon George, Chartered Accountant categorically states that during the period ended 31-3-2000, the turnover of LOPPL accounted for Rs. 32.83 lakhs and for the period 1-4-2000 to 30-9-2000, Rs. 37.72 lakhs, when LOPPL does not have the basic equipments required for production and inspection of the products. The purchases made by LOPPL are said to be not genuine. LOPPL neither had the infrastructure facilities and the requisite staff to achieve the level of production made out by them. LOPPL having been established in the year 1999 claimed that the ratio of materials consumed is nearly 100 per cent. However, as per the report of Mr. Jomon George, the ratio of raw materials consumed by SHEEPL is only 69.73 per cent. The petitioner on scrutiny of the books of account and records produced by the respondents 2 and 3 pursuant to the order of the Bench, has pointed out the irregularities on the part of the respondents, which are, however, stoutly denied by the latter and made counter claim against the petitioner. Moreover, in the absence of the manufacturing accounts and also the mandatory registers required to be maintained by the Companies in regard to excisable goods purchases and profit and loss account and balance sheet of LOPPL without which, it is not possible to come to any conclusion that there had been diversion or that these two companies had lost benefits due to such diversion. We are, therefore, of the opinion unless accounts of SPL, SHEEPL, LOPPL, SPRC and PLTPL are scrutinized by a Chartered Accountant, the extent of diversion of the products of SHEEPL in the name of LOPPL, SPRC and PLTPL, if any, cannot be measured. We, accordingly, appoint Shri Jomon K. George, Chartered Accountant to scrutinize the accounts of SPL, SHEEPL, LOPPL, SPRC and PLTPL from the years 1998-1999 onwards to find out the extent of manipulations, if any on the part of respondents 2 and 3 and whether these two companies were lost benefits due to such manipulations. In case it is established that these companies have suffered due to diversion then the amount of loss so quantified must be reimbursed by the respondents 2 and 3 to SPL and SHEEPL within one month of the report of the Auditor, and the accounts of both the companies should be recast thereafter. During the hearing, considering the fact that the relationship between the petitioner and the second respondent has become irreconciliable, we suggested to the parties that one of them should go out of the Companies. The petitioner was willing to go out of the Companies to which the second and third respondents had no objections but they could not agree on a proper consideration to be paid for the shares held by the petitioners in both the companies. The petitioner was claiming a higher consideration on the basis that there had been diversion of business/products of these two companies by the second respondent, which was denied by the second respondent. Now that we have appointed a Chartered Accountant to verify the accounts of all the companies involved in these transactions and quantify the losses, if any, occasioned to these two respondent companies, we are of the view that on the basis of the recasting accounts thereafter, the fair price of the shares of these two companies could be determined so that the petitioner can go out of the Company on receipt of consideration for his snares on the basis of the fair value so computed. Accordingly we direct Shri Jomon K. George, Chartered Accountant to determine the fair value of the shares of these companies within two months from the date of recasting the accounts as already directed and the second respondent or his nominee should purchase the shares held by the petitioner in these two companies at the fair value so determined. The Companies will negotiate the fees payable to Shri Jomon K, George for undertaking the entire assignment and pay the same. This should be done within a period of 15 days of receipt of this order. All the companies involved in the transaction will render necessary assistance to the Chartered Accountant including producing all information required by him. His findings on the verification of accounts, recasting of accounts and computation of the fair value shall be final. Both the sides are at liberty to make both oral and written submissions before the Chartered Accountant who will take into consideration these submissions.
The petitions are disposed of in the above terms. No order as to cost.