ORDER
1. The petitioners holding 950 equity shares of Rs. 100 each representing 31.67 per cent, of the total paid up capital of M/s. Picksonic Electronics Private Limited (the company) have filed this petition under section 397/398/ 402 and 403 of the Companies Act, 1956, alleging acts of oppression and mismanagement in the affairs of the company. The petitioners have also the consent of two other shareholders holding 100 equity shares each. The summary of the petition is that the company was promoted by Shri B. S. Chowdhary one of the petitioners, respondent No. 1 and one Mr. P. C. Gupta and was incorporated on January 7, 1985. They were the first directors of the company. Subsequently, respondent No. 1 was appointed as managing director and she continues to hold that position till date. Immediately after incorporation, the company got an industrial plot allotted by the NOIDA authorities at a cost of Rs. 3.2 lakhs. The company also got a sanction of term loan of Rs. 8 lakhs from the UPFC for which the fixed assets of the company were given as first charge by mortgage and Shri B. S. Chowdhary, one of the petitioners, gave a personal guarantee. The company availed of a sum of Rs. 5.03 lakhs only against this sanction. Further, the Syndicate Bank sanctioned working capital of Rs. 5 lakhs against hypothecation of stocks as well as personal guarantee of the petitioners and certain respondents. Even though the company started commercial activities in the year 1985-86, it started incurring losses right from the beginning and after August, 1987, the petitioners did not involve themselves with the day-to-day business of the company. Since the petitioners were not involved in the business, respondent No. 2, being the front person of the M. D. (respondent No. 1), started managing the affairs of the company and has given a lot of advances to one M/s. Cina Electronics, a proprietary concern of respondent No. 1 without any approval from the board. In view of her own proprietary concern, respondent No. 1 did not take any interest in the affairs of the company resulting in heavy accumulated losses. In view of this, Shri B. S. Chowdhary requested the respondents to allow him to look after the day-to-day functions of the company. But it was not agreed to and the petitioners were asked to leave the company. The petitioners agreed to do so provided their personal guarantees were released and shares were purchased at a reasonable price. An MOU was also signed on August 23, 1987. Due to some problem in the purchase of shares of one of the parties, i.e., Shri Gupta, the petitioners did not sell their shares. In view of the purchase of these shares from Shri Gupta, respondent No. 1 who became a majority shareholder was not allowing the petitioners to take part in the business of the company even though the petitioners were on the board of directors of the company. The petitioners have also been removed from the board of directors with effect from August 1, 1994, without assigning any reason. This matter was
complained of to the Registrar of Companies and on his advice this petition has been filed.
2. A summary of the allegations in the petition is :
(i) Even though in the board meeting on January 2, 1987, it was resolved not to pay any salary to the MD till the financial position of the company improved, respondent No. 1 has been drawing a salary of Rs. 36,000 per year with effect from April 1, 1990.
Without passing any board resolution, in contravention of Section 297 of the Companies Act, the company has taken on rent a car from M/s. Cina Electronics (proprietary firm of respondent No. 1) on payment of Rs. 36,000 per year as hire charges. In addition, personal expenses incurred on the car are also booked in the accounts of the company . . .
(iii) Even though the company has no dealings in any foreign country, respondent No. 2 has been undertaking foreign tours on behalf of M/s. Cina Electronics, and debiting the expenses in the accounts of the company.
(iv) Even though certain loans have been taken from the petitioner
and their supporters which were also shown in the accounts of the company, they have all been squared in subsequent years without actual re
payment.
(v) On the contrary certain amounts paid by petitioner No. 2 for purchase of a plot of land from NOIDA, have been fraudulently shown as loans from her to the company with a view to show as if the property is the property of the company while actually the property belongs to petitioner No. 2.
(vi) The Syndicate Bank realised substantial amounts from LIC against the policies of some of the supporters of the petitioners for adjusting the same against the dues from the company. But the same has not been reflected in the accounts of the company.
(vii) Certain assets of the company like equipment, machinery, etc. have been sold by respondents Nos. 1 and 2 without proper authority and in contravention of Section 293 of the Act and without permission from the financial institutions.
(viii) In regard to the plot in NOIDA for which petitioner No. 2 has paid the money directly which has been shown as loan from her to the company as already mentioned, when she entered into an agreement for sale of the plot, respondent No. 2 lodged a false complaint with the police that she had illegally entered into the said agreement.
(ix) The Syndicate Bank from whom the company had taken loans has filed a recovery suit against the respondents as well as the petitioners in view of their having stood as the guarantors and since the industrial plot owned by the company being the only asset could be sold for adjusting the bank liability, when the petitioner obtained the original title deeds
from the NOIDA authorities and deposited the same with the Civil Judge, Ghaziabad, in a suit filed for injunction from disposing of the said plot. However, it was later learnt, during the proceedings, that this industrial plot had already been sold to respondent No. 5.
3. On the basis of the above allegations, the various reliefs have been sought like ordering investigation into the affairs of the company; supply of copies of the minutes of the board of directors, restraining respondent No. 5 from disposing of the industrial plot till the suit in Ghaziabad is decided ; freezing the bank accounts till the dues of Syndicate Bank are cleared, etc.
4. The reply of the respondent to the various allegations is as follows :
The plot alleged to have been purchased by petitioner No. 2 was actually purchased on behalf of the company as resolved in the board meeting held on March 5, 1987. This plot was allotted to the company on December 17, 1987, and the company paid the consideration in instalments including the registration expenses, etc. It is petitioner No. 2 who ceased to be a director on August 1, 1994, took, clandestinely the title deed from the company and sold the plot for a consideration of Rs. 2.75 lakhs as against the market value of Rs. 8 lakhs. This was done by obtaining “no dues” from the NOIDA authorities by forging the signature of respondent No. 1 as MD of the company. By submitting the forged documents, she obtained permission from the NOIDA authorities for transfer of this plot and thus committed breach of trust. Even though the amount of consideration was received by a cheque in the name of the company, the petitioner opened an account in the name of the company and deposited the money. Even though the consideration for the said plot was paid by petitioner No. 2, yet it was by way of loan to the company and the same has been accounted for in the books of the company as loan from her and corresponding amount was credited to the assets account. Right from 1989-89 to 1995-96 this plot has been shown as the property of the company. The company has filed a suit against petitioner No. 2 in the court of the Civil Judge, Ghaziabad, against the unauthorised sale of the property of the company. It is further stated in the reply, that, right from the beginning, the company started incurring losses, and, therefore, it was decided to concentrate on manufacture of quartz clock movements. After some initial success, this was also stopped due to lack of funds and from June, 1998, onwards, the factory remained closed when the accumulated loss was more than Rs. 10 lakhs. Because of the sustained losses, the petitioners and a few of their supporters lost complete interest in the company and the petitioners did not attend any board meeting after 1988-89. In view of this, the petitioners ceased to be the directors in 1989-90 by the operation of law. The respondents, on their own, raised personal loans from friends and relatives and cleared nearly Rs. 10.5 lakhs of the
liabilities of the company. Since there was a lot of pressure from the creditors, the industrial plot was sold at Rs. 1.2 lakhs in 1995-96 and this amount was utilised for payment to the creditors. However, the petitioners have filed a civil suit against sale of this unit. The Syndicate Bank has filed a suit in the High Court of Delhi in this regard against the petitioners selling the company’s plot and misappropriating the amount. The company would not be in a position to clear the liabilities. As of today, the company does not have any assets and has got liabilities of about Rs. 8.6 lakhs.
5. As per the allegation relating to Cina Electronics it is stated that this firm was established in 1982 much before the company was incorporated and that the company has been borrowing money from this firm. The debt balance in Cina Electronics in the books of the company remained only for a very short period during 1987-88 and the petitioners were fully aware of this position.
6. As far as, payment of salary to respondent No. 2 is concerned, a sum of Rs. 3,000 per month was approved in the board meetings held on April 2, 1990, and September 4, 1990, and was also approved in the annual general meeting held on September 20, 1990. This amount was paid when the company was doing good business. Even taking on hire of the car of Cina Electronics was approved in the board meeting held on April 2, 1990, in accord ance with the provisions of Section 297 of the Companies Act and this car was hired from April 1, 1990, to March 31, 1993, and at that time the sales of the company were at the highest. As far as the foreign trip is concerned, respondent No. 2 had visited Hong Kong to facilitate the import of raw material used in the product of the company. The amount taken as loan from Mr. P. C. Gupta and his family members was repaid and the last payment was made in 1989-90 and all the loans and repayment thereof have been properly accounted for in the books of account of the company.
7. Regarding the adjustment of the amount of insurance policies, it is stated that even though the company sought details from petitioner No. 1 and Mr. Gupta regarding details in this regard, they chose not to furnish any details.
8. In the rejoinder filed by the petitioners they have relied on a few case laws for certain propositions as indicated, below :
9. Even if the business of a company has come to a standstill, a petition under Section 397/398 can be considered to bring to an end the matters complained of (Hindustan Co-operative Insurance Society Ltd., In re [1961] 31 Comp Cas 193 ; AIR 1961 Cal 443). When the right of a shareholder to appoint a director is infringed or his right quo is effected, the same can be a basis for a petition under Section 397/398 (Albert David Ltd. v. Union of India [1964] 68 CWN 163). Where in a petition under Section 397/398, the charges are raised in public interest, the court has the power under sections 402 and 406 to investigate such charges even though the petition has
contained no specific prayer for any relief (Syed Mahomed All v. Sundara-murthy [1958] 28 Comp Cas 554 ; AIR 1958 Mad 587). They have reiterated, in the rejoinder, their pleadings regarding the residential plot at NOIDA and have further averred that the flat has been shown as the asset of the company only after 1988-89 clandestinely. They have also questioned the expenditure the company has been incurring from 1992-93 onwards when the company has stopped commercial activity. According to the rejoinder these expenses have been incurred for and on behalf of Cina Electronics and have been charged to the accounts of the company. They have also questioned the claim of the respondents that the petitioners had vacated the office during 1989-90 inasmuch as the Form No. 32 filed with the Registrar of Companies indicates that the petitioner had vacated the office only with effect from August 1, 1994. Further they have pointed out certain discrepancies in the statement of accounts furnished to them as per our order as also certain discrepancies noticed by them in the annual accounts for the year ending March 31, 1996.
10. The matter was finally heard on March 13, 1997, when Shri Anil Sharma, chartered accountant appearing for the petitioners reiterated the submissions made in the pleadings and pressed for the reliefs relating to freezing of bank account of the company as well as restraining respondent No. 5 from disposing of the property illegally purchased from the company. Shri U. P. Mathur appearing for the respondents submitted that since the company is not functioning and that the only two properties of the company both of which have been sold and which are also under challenge in civil courts, the petition itself is not maintainable against the company. He sought for dismissal of the petition.
11. We have considered the pleadings and arguments. It is an admitted position that other than certain liabilities, the company does not have any assets nor is conducting any business. Even though there are lot of allegations in the petition, the reliefs sought for related to the appointment of an officer to inspect the books of account and investigate the affairs of the company ; supply of copies of the minutes of the meetings of the board of directors and members to the petitioners; restraining respondent No. 5 from further selling the industrial plot purchased by him and freezing of the bank account. When the matter was mentioned on June 20, 1997, we had passed an order that the company should furnish all annual reports of the company from 1992 onwards to the petitioners and also a statement of utilisation of the money realised from the sale of the company’s properties. While the petitioners have made allegations against the respondents and the respondents have made allegations against petitioner No. 2 regarding the sale of the company’s plot of land, it appears to us that the main dispute between the parties relates to the sale of the company’s properties which are under litigation in the civil courts. We had even suggested to the parties that both of them
should withdraw the civil suits filed by them against each other so that there is no pending litigation between the parties and both of them should work together in discharging the liabilities so that the company should go in for voluntary winding up. However, the parties were reluctant to accept our suggestion. Under these circumstances, we have to see whether the petitioners have made out a case for grant of the reliefs sought for, which we have narrated in the earlier paragraphs. The only substantive relief that could be considered, in the facts of the case, is ordering investigation into the affairs of the company for such an order, the material placed before us, in, the form of allegations, mostly relate to certain alleged financial excesses, like hiring of car, payment of salary to managing director, foreign travel by managing director, etc. We find that hiring of car as well as payment of salary have been approved by the directors and later by the general body also. Regarding foreign trip, the petitioners have not made out a case as to how the associate concern Cina Electronics has been benefited or that the company has not been benefited. It is on record that the foreign trip was made at the initial stages of the company entering into the business of manufacturing quartz movements and we have nothing to doubt the averments of the respondents in this regard. Other matters like non-refund of advance and non-adjustment of insurance claim, etc. do not relate to the rights and privileges of members of a company and as such do not come under the purview of Section 397/398.
12. Taking into consideration the allegations, counter allegations and the present status of the company as also the pending civil suits, we are of the view that the petitioners have not made out a case for any relief and as such we dismiss this petition without any order as to costs.