ORDER
1. This is a petition under Sections 398 and 402 of the Companies Act, 1956, filed by four petitioners, namely, 1. Banford Investment Limited,
Calcutta ; 2. Sanchetti Food Products Limited, Calcutta ; 3. Shri Mohan Lal Sanchetti, Calcutta ; and 4. Shri Rohit Sanchetti, Calcutta, on March 11, 1995. The respondents in this petition apart from Magadh Spun Pipes Limited (hereinafter called “the company”), include the Bihar State Industrial Development Corporation Limited (BSIDC), Patna, and Industrial Reconstruction Bank of India (IRBI), Calcutta. The registered office of the company according to the petition is located at B-229, Srikrishna Puri, Patna.
2. The petitioners claim to hold more than 10 per cent. of the equity share capital of the company and also state that they have made full payment for purchase of those shares through account payee cheques on scheduled commercial banks and holding those shares since at least five years or more. Apart from undertaking to produce the original certificates the petitioners have also annexed a copy of a certificate of the statutory auditors of the company which certifies the shareholding of the petitioners.
3. The facts as stated in the petition are as follows :
(a) In 1982 pursuant to the winding up of a company named Gayday Iron and Steel Company Limited under orders of the Calcutta High Court and subsequent to the directives of the Supreme Court of India on December 17, 1982, the BSIDC was declared the highest bidder for several lots of the assets of that company. Thereafter, the BSIDC was looking for a financial partner and ultimately, invited one Shri Pradeep Sanchetti as its partner. Pursuant to an agreement between them, the company was incorporated and to revive the factory fresh investment was to be made by Shri Pradeep Sanchetti and/or his associates whereas the investment of BSIDC was to be represented by the plant, building and land obtained from the official liquidator, Calcutta High Court, as stated above. The company made applications for long-term funds to the IDBI and the IRBI which were rejected resulting in the failure of the objective to revive the factory. Therefore, even the winding up of the company was discussed initially at board meetings. Despite this with the efforts of the private promoters the plant was fully prepared and even trial production was carried out in 1986. Thereafter, the private promoters through their persistent efforts were able to get a commitment in principle from the IRBI to support. The IRBI, thereafter sanctioned a sum of Rs. 1.22 crores and disbursed a sum of Rs. 1.07 crores in 1988-89. The working capital loans were also sanctioned by a consortium consisting of UCO Bank and Allahabad Bank, respectively. At this point of time, the State Electricity Board disconnected the power lines and hence commercial production could not be started because of the added factor of non-release of working capital limits. Yet the private promoters did everything possible to complete
the trial production twice successfully. In all these efforts little help was available from the BSIDC with the non-fulfilment of several commitments from the joint sector partner. Ultimately, during the year 1989-90 with the poor law and order situation at the factory, with several assaults, thefts and dacoities and consequent to non-payment of wages and salaries of employees the then managing director handed over the charge to the BSIDC. According to the petition, the BSIDC failed to comply with their obligations and in order to cover up their misdeeds has indulged in victimisation of the promoters including initiating unwarranted criminal proceedings. The petition lists out at least 10 litigations within their knowledge. It is the contention of the petitioners that due to disputes amongst the promoters, the shareholders should not suffer and even though the petitioners invested at the behest and request of the promoter, Shri P. Sanchetti, their rights are distinctly different and have to be protected.
4. The petition also sets out the various grounds by which the members are aggrieved :
(a) Due to failure of the project, the investments are at peril as no balance-sheet has been prepared and it is the apprehension that the BSIDC having physical control of the properties may destroy, alter or disburse the assets.
(b) The petitioners have come to know that scrap pig iron and cake worth more than Rs, 50 lakhs have been systematically sold away by staff and employees of the company in association with the BSIDC nominated persons.
(c) The past track record of the BSIDC is poor and its own net worth is negative.
(d) The liabilities of the company are going up to the detriment of the shareholders.
(e) It has come to the knowledge of the petitioners that attempts are being made to take out the properties from the ownership of the company by stating that they do not belong to the company but belong to the BSIDC. Since shares have been already allotted against these assets the BSIDC cannot claim these properties.
(f) The IRBI has already recalled the disbursed loan which has not been paid.
5. The petitioners have prayed for :
(a) freezing the liabilities of the company,
(b) declaring that the properties and assets belong to the company,
(c) freezing payment and further accrual of interest to the IRBI,
(d) recommend winding up of the company,
(e) recommend for settlement of disputes between the promoters.
6. Reply to the petition has been filed by the BSIDC and no reply filed by the IRBI. The BSIDC in its reply filed on August 1, 1995, has stated that the names of the petitioners do not find a place in the register of members maintained by the company and as such they are not shareholders and not entitled to maintain the petition. The petitioners are stated to be associates of Shri Pradeep Sanchetti, the private promoter of the company with whom a joint venture agreement was entered into by the BSIDC in October, 1984. As per the agreement, it was mandatory for the private promoter to contribute 25 per cent. of the equity shares and the petitioners now claim to hold along with the said Shri Pradeep Sanchetti 25 per cent. and more equity shares of the company. These petitioners, however, have no independent existence excepting as associates of the said Shri Pradeep Sanchetti. According to the reply on a special audit by a firm of chartered accountants, it is established that the private promoters have not contributed to the equity shares as required in the joint venture agreement and false fictitious and imaginary credit entries were made in favour of these persons even before the issue of the prospectus by the company. The BSIDC, therefore, has prayed that before considering any other question it will be just and proper to first determine the genuineness of the claim of the petitioners of holding more than 10 per cent. of the equity shares of the company.
7. In the rejoinder, the petitioners have asserted that they are holding the equity shares as stated in the petition. They have also stated that the entire share application money has been paid by account payee cheques and the names of the petitioners do appear in the share allotment register filed with the Registrar of Companies. A copy of the return of allotment has been produced from the registrars and computer agent, Data-matics, Bombay, before the Company Law Board. It is further stated that the secretary of the BSIDC together with one Shri P. K. Sharma has destroyed all the statutory records and possibly built up fresh share registers without the names of the petitioners and their associates. It is also denied that the special audit report which is a preliminary report nowhere states that the contribution to the equity shares are false, fictitious and imaginary. The Company Law Board has during the preliminary hearings already directed the petitioner to produce the original share certificates and the same has been produced. In addition to covering the preliminary objection on maintainability both the reply and the rejoinder cover other grounds on the merits which are not being dealt with as at present.
8. A reply also came to be filed subsequently on behalf of the company in December, 1995, affirming the reply of the BSIDC. It is stated therein that
although the private promoter declared that 25 per cent. shares in terms of the joint venture agreement have been contributed by him and his associates but after the receipt of the special audit report, the company found that in fact the private promoter by making false and incorrect entries had shown payment/contribution towards shares reserved for the private promoter. After the receipt of the special audit report the company at its board meeting wherein the representative of the private promoter was also present constituted a three-man committee to scrutinise the report and list out the irregularities and the charges for issuing show-cause notice to the private promoters. In view of this the private promoters left the company without handing over charge. It is further stated that the IRBI had disbursed Rs. 107 lakhs, a substantial amount out of which was misappropriated by the private promoters. After having found that crores of rupees received from the general public and from the BSIDC as well as the State Government as unsecured loan and subsidy respectively have been defalcated and having found the explanations by the then representative of the private promoter unsatisfactory, criminal proceedings were initiated. The respondents have also raised a number of preliminary objections based on the conduct of the petitioners including the filing of a winding up petition by them. It is also reiterated that the petitioners’ names do not find a place in the members’ register.
9. A second rejoinder was filed on behalf of the petitioners in May, 1996. In this rejoinder many of the contentions with regard to the report of the special audit report and the purported findings of a committee of the board are challenged. It is further stated that the allegation of misappropriation of the amounts disbursed by the IRBI are factually incorrect since the IRBI already impleaded has not chosen to file any reply to the petition. The three-man committee of the board as stated in the reply is also challenged since the reply does not mention the name of the IRBI nominee in the so-called committee. There was no such committee and there is no report as stated in the reply. In the counter to this second rejoinder the BSIDC listed out various commissions and omissions by the promoter’s group. As regards the three-man committee it was confirmed that a written report was submitted though the IRBI did not nominate any member.
10. The matter was initially heard at Delhi but subsequently looking to the convenience of both the parties we decided to hear the matter at Calcutta. At the preliminary hearing on May, 14, 1993, we observed that the petitioners have not submitted any evidence with regard to their being members of the company excepting a letter dated October 24, 1989, of Shri Pradeep Sanchetti, wherein the auditors have certified the shareholding of various persons including the petitioners. We, therefore, felt that the petitioners should produce the share certificates in the original to
establish that the petition is maintainable. Thereafter, time was taken to file replies and rejoinders. In 1994, it was also intimated to the Bench that the winding up petition filed by the petitioner’s group has been withdrawn. The petition also was once dismissed for non-pursuit and subsequently revived after being satisfied with the revival application filed by the petitioners. Thereafter, adjournments had to be granted due to the non-availability of the respondents’ counsel on February 3, 1997. In March, 1997, the petitioners’ advocate also sought adjournment. On objection, the respondents’ advocate was allowed to argue on maintainability which he did. In June, 1997, the petitioners’ proxy advocate again sought adjournment due to the petitioner being out of India. Effectively, the petitioners could argue the case on maintainability in November, 1997, and March, 1998.
11. Shri P. K. Sharma, advocate, appearing for respondents Nos. 1 and 2 submitted that :
The petitioners’ names are not borne on the register of members maintained by the company and they are front men of Shri P. Sanchetti, co-promoter of the joint venture and its executive director as well as his nominee managing director. Therefore, the petitioners have no locus standi to file this petition. In this connection, he referred to a decision of the Supreme Court in Balakrishna Gupta v. Swadeshi Polytex Ltd, [1985] 58 Comp Cas 563 as well as of the Kerala High Court in Lalitamba Bai v. Harissons Malayalam Ltd. [1988] 63 Comp Cas 662. From the Supreme Court case, Shri Sharma quoted to say “the privileges of a member of a company can be exercised only by that person whose name is entered in the register of members”. From the Kerala High Court judgment, it was emphasised that “under Section 41 of the Companies Act, 1956, two essential conditions have to be satisfied to constitute a member of a company other than subscriber to the memorandum of association, namely, (a) an agreement in writing to become a member, and (b) an entry in the register of members”. Since the petitioners have not satisfied these conditions they cannot claim to be members and hence the petition is not maintainable.
12. Secondly, Shri Sharma submitted that the petitioners are in reality the front personalities of Shri P. Sanchetti, the co-promoter of the joint venture. As alleged the co-promoter in collusion with their associates have cheated the BSIDC, the IRBI, nationalised banks and the investing public as well as employees of the company. They have to account for receipts of more than rupees three crores. He narrated the various litigations pending in this regard. In the circumstances, he stated that the petitioners due to their conduct are not entitled to any relief. In support of this contention, he cited Srikanta Datta Narasimharaja Wadiyar v.
Venkateswara Real Estate Enterprises (Pvt.) Ltd. [1990] 68 Comp Cas 216 (Kar).
13. Thirdly, it was contended that the substantive points in this matter have all been raised by the petitioners as respondents in C. P. No. 61 of 1992, before the Company Law Board in which the BSIDC was the petitioner. The findings in that petition operate as res judicata in this petition as well.
14. Any proceedings under Sections 397 and 398 must be in public interest or in the interest of the company and not for the private interest of any party. Further the petition cannot be admitted since the membership of the petitioners is in dispute.
15. Shri Sharma further contended that the object of the petitioners is to obstruct the commissioning of the factory of the company. It is on the other hand in the interest of the shareholders, creditors, employees, etc., as well as in the public interest that the factory should be commissioned for which attempts are being made by the present management. Shri Sharma, therefore, insisted on our passing the orders on maintainability before proceeding to the merits of the matter.
16. Arguments were advanced by Shri H. M. Dutta, senior advocate, on behalf of the petitioners. On maintainability, Shri Dutta stated that the burden of the petitioners is only to prove that he is the holder of the shares and he cannct be turned out for the non-maintenance of the relevant registers by the company. The right of a member cannot be denied since the company has not maintained its registers in order. The petitioners have come to the Company Law Board under Section 398 in their capacity as members of the company and not as co-promoters. With regard to the question of the entry in the register of members he cited a decision of the Andhra Pradesh High Court in Satyaprasad Rao (N.) v. V.L N. Sastry [1988] 64 Comp Cas 492 to state that even if the name of the shareholder is not found in the register the shareholder in whose favour share certificates are issued can exercise rights as member of the company notwithstanding the omission in the prescribed register. He further cited a Division Bench decision of the Karnataka High Court in Sri Balaji Textile Mills Pvt. Ltd. v. Ashok Kavle [1989] 66 Comp Cas 654 to state that if a person is treated as a shareholder of a company his right of membership cannot be questioned by the company on the ground that he has not complied with Section 41(2) of the Act. According to him if a shareholder who claims a relief under Section 397/398 satisfies the court that he is a shareholder of the company by virtue of allotment of shares in his favour which is evidenced not only by the register of members maintained by the company but also by the statutory returns and documents maintained and filed by the company it is not open to contend
that a shareholder must comply with the conditions stipulated in Section 41(2) of the Act. To substantiate his case, Shri Dutta produced the originals of all the share certificates of the petitioners as well as the allotment details as prepared by the registrars for the issue. Further, in order to establish that the petitioners were treated as shareholders even in December, 1991, and 1992, when the management was taken over by the BSIDC he produced copies of notices for the seventh and eighth annual general meeting as received by some of the petitioners. He reinforced his argument that when a person has been treated as a member by the company he cannot be thrown out on the sole ground that the petitioner’s name is not found in the register of members. He cited the Karnataka High Court decision in Srikanta Datta Narasimharaja Wadiyar v. Venkateswara Real Estate Enterprises (Pvt.) Ltd. [1990] 68 Comp Cas 216 in support of the maintainability question which was specifically dealt with by that court. He, therefore, prayed that the petitioners cannot be thrown out on the ground of maintainability.
17. We have carefully considered the pleadings and arguments with regard to maintainability of this petition. The case of the respondent is that the petitioners are not qualified under Section 399 of the Act, to apply to the Company Law Board. According to them, the petitioners have no locus standi as they are not the members of the company inasmuch as their names are not in the register of members of the company. In this connection they also relied on the proceedings in C. P. No. 61 of 1992, wherein according to the respondents the register of members was scrutinised by the Company Law Board and it has been established that the present petitioners are not members. Another ground for non-maintainability is that the petitioners are in reality the front personalities of the co-promoter of the BSIDC in the project who are guilty of defalcating more than Rs. 3 crores and against whom a number of litigations are pending. Therefore, the petitioners have not come with clean hands.
18. Out of the above two objections on maintainability the second in our opinion is really in the nature of a preliminary objection which may have to be dealt with along with the merits of the case and cannot be a valid objection with regard to maintainability as such. The only valid ground for challenge to maintainability is that the names of the petitioners are not found in the register of members and since non-members cannot maintain the petition without fulfilling the requirements of Section 399 of the Act the petition has to be dismissed in limine as not maintainable. We have seen the proceedings of C. P. No. 61 of 1992, and we do not find any reference to the present petitioners’ names being found in the register of members or not. As per the order, no entries were found in the register of members except the names of the original promoters. It was also noted that efforts were on by the present respondents to reconstruct
the register. At this stage, we may also correct a factual error inasmuch as out of the four petitioners, namely, two corporate bodies and two individuals, at least the names of two petitioners are found in the annual returns filed by the respondents themselves as well as in the other records filed by them. This relates to Shri Mohan Lal Sanchetti and Rohit Sanchetti, petitioners Nos. 3 and 4, whose shareholding is reflected as 11,000 shares and 25,000 shares, respectively, whereas in the petition it is claimed that they hold 20,978 shares and 20,000 shares, respectively. However, this does not mean that on this ground alone the petition can be said to be maintainable because in this company there is a large shareholding and hence the test of one-tenth of the paid-up capital of the company or one-tenth of the number of members cannot be passed with this fact alone. The rival contentions between the petitioners and respondents is that whereas the petitioners state that they have the original share certificates issued by the company and it is for the company to maintain its register of members and on this ground they cannot be shut out from the court, the respondents’ contention is that under Section 41(2) of the Act, a person can be recognised as a member only if he agrees in writing to become a member and his name is found in the register of members. The case law submitted on behalf of the respondents relates to the definition of a “member” as decided by the Supreme Court in Balakrishna Gupta v. Swadeshi Polytex Ltd. [1985] 58 Comp Gas 563. This case is not relevant to Section 397/398 but is confined to the exercise of voting rights and issue of notice, requisitioning extraordinary general meeting, etc. This case does not deal with the rival claim of whether one is a member or not of the company for the purpose of filing a petition under Section 397/398. On the other hand the petitioners have produced a Division Bench judgment of the Andhra Pradesh High Court which is strictly on the question of the rival claims in a petition under sections 397 and 398 of the Act with the company holding that a person’s name is not in the register of members and, therefore, cannot file a petition under Section 397/398 on the basis of their holding the share certificates and their names being found only in the returns filed with the Registrar of Companies. The petitioners have also referred to another case which has direct relevance, namely, Srikanta Datta Narasimharaja Wadiyar v. Venkateswara Real Estate Enterprises (Pot.) Ltd. [1990] 68 Comp Cas 216 (Kar) in which the preliminary issue in similar circumstances was decided by the Karnataka High Court under Section 397/398 of the Act, wherein it is observed that (page 238) “If, in a given case, it is shown that though the name of a person is not shown in the register of members, if he had been treated as a member of the company, the company court can always exercise its equity jurisdiction. This court should not decline to exercise its equity jurisdiction on the ground of mere technicality.” In fact, Balakrishna Gupta v. Swadeshi Polytex Ltd.
[1985] 58 Comp Cas 563 (SC) itself was dealt with by the Karnataka High Court and it was observed as follows (page 229) :
“This decision, in my view, is not an authority on the question touching on the maintainability of a petition on the ground that the person who claims to be a member, is not a member within the meaning of Section 399 of the Act or Section 41(2) of the Act.”
19. The petitioners have also cited another Division Bench judgment of the Karnataka High Court in Sri Balaji Textile Mills Pvt. Ltd. v. Ashok Kavle [1989] 66 Comp Cas 654. In this case, again it has been emphasised that “if a person is treated as a shareholder of a company his right of membership cannot be questioned by the company on the ground that he has not complied with Section 41(2) of the Act”. It is further explained in this judgment that the limited purpose of Section 41(2) is to protect innocent persons from the demands of companies on the verge of going into liquidation.
20. From a combined reading of all the decisions referred to above the tests that we have to apply in this case are (1) whether the petitioners are in possession of relevant share certificates to claim the membership ; (2) whether there are independent records to establish that they are the members of the company ; (3) whether the company has treated the petitioners as members of the company in the past. As regards the first test the petitioners have produced before us the complete bunch of share certificates issued in their names and held in their possession to show that they are the holders of the shares claimed by them in the petition. To this the respondents’ contention is only to this effect that they were in the management of the company at the relevant point of time and the certificates are not valid. The respondents, however, did not avail of the opportunity to examine the certificates produced. This argument of the respondents is not appropriate. They should have at least established as to how the share certificates are invalid.
21. As regards the existence of independent records we attempted to obtained the records from the Registrar of Companies as well as from the Stock Exchange. Though we could not get sufficient assistance from these records it could at least be established that petitioners Nos. 3 and 4 are reflected as members in one of the annual returns filed by the respondents themselves after taking over the management of the company. Further, from the prospectus copy and the balance-sheets filed after take over by the respondents which are all on record it is found that the total share capital of the company is reflected as Rs. 2.50 crores which according to prospectus was to consist of subscription of Rs. 62.50 lakhs by the co-promoters group and Rs. 65 lakhs by the BSIDC and the rest by the public. Thus, if the total capital as certified by the auditors is shown to have been
contributed by all the concerned parties there is no gainsaying that the petitioners though admittedly part of the co-promoters group did not contribute and have not taken up the capital. The fact remains that the capital has been subscribed in full and respective subscriptions of promoters and the BSIDC as stated in the prospectus are taken up, otherwise no allotment to the public is possible. If at all, the respondents should have established, that though the subscription was there, it was not from the petitioners but from some other parties. There is no such averment from respondents in this regard. In addition yet another factor which is relevant is a certificate dated October 24, 1989, issued by the auditors of the company (much after the public issue) evidencing the fact that the co-promoters including the petitioners named specifically therein have contributed towards the share capital the amounts stated therein after verifying from the records of the company. It is also necessary to record here that the BSIDC by its subsequent letter dated December 13, 1989 (found in page 48 of the petition), has confirmed that the co-promoters as specified in the auditors’ certificate have contributed their share of the capital and reconciliation of share issue stands clarified. A perusal of all these documents establish that the petitioners have subscribed to the shares as claimed by them. In this connection even though the petitioners have produced the allotment register prepared by a private registrar to the issue to establish their claim we have chosen not to accept the same as evidence of this fact.
22. The third test to be applied based on the decisions cited by the petitioners is whether the company has treated the petitioners as members in the past. In this connection, the petitioners have produced copies of notices of annual general meetings sent to the petitioners in this case in respect of the annual general meeting relating to the year ended March 31, 1991, and March 31, 1992. The notices clearly bear the names of the petitioners in an inextricable manner to indicate that they were posted to them. These notices were issued after the respondents took over the management of the company. This clearly establishes that the petitioners were treated as members of the company irrefutably. There has been no reply to this evidence produced by the petitioners. Though this evidence has not been specifically found in the petition, the respondents were given adequate liberty to reply to this contention but the respondents have chosen not to rebut. In the circumstances, it has to be taken that the respondents admit that the petitioners were in fact treated as members of the company even as late as December, 1991, and December, 1992, when the annual general meetings were scheduled.
23. In the above circumstances, we have no hesitation in coming to the conclusion that the petitioners are well within their right to maintain the petition under Section 399 and the petition is maintainable. Since the
pleadings in this case are already completed, the final hearing will be fixed at Calcutta, for which notices will be sent in due course of time.