ORDER
A.K. Banerji, J. (Chairman)
1. By means of this petition filed under Section 397 and 398 of the Companies Act 1956 (the Act) the petitioner has alleged various acts of oppression and mismanagement in the affairs of the respondent No. 1 namely Rapti Supertronics Pvt. Ltd. (respondent company) and has sought certain reliefs specified therein.
2. Briefly stated the petitioner’s case is that the respondent No. 2 and the petitioner who were close friends joined hands to promote the respondent company for developing and manufacturing a wide range of electronic products. The company was incorporated on 24.9.1997 with an authorized share capital of Rs. 15 lakhs and the paid up share capital of Rs. 200 only. The shareholders and the two directors being the petitioner and the respondent No. 2 who held 10 equity shares of Rs. 10 each. Prior to the incorporation of the respondent company the respondent No. 2 was already running a proprietary concern under the name and style of M/s Supertronics with similar objects as the respondent company. On 27.4.1998 the said Supertronics and the respondent company entered into a Memorandum of Understanding (MOU) by which the entire business of Supertronics was completely taken over by the company with effect from 1.4.98. On the same day another MOU was signed between the petitioner and the respondent No. 2 by which the petitioner was appointed as the marketing director stationed at Bombay to market the products of the company and the respondent No. 2 was responsible for management and accounts and general administration of the Company. According to the petitioner the respondent company functioned for about three months. However the respondent No. 2 completely sidetracked the petitioner from the management, did not submit any accounts when called for and it came to the knowledge of the petitioner that the business of the company was being channelled to Supertronics and money from the company was being siphoned off by the respondent No. 2. The petitioner had invested Rs. 1.5 lakhs as equity in the respondent company and had also given a loan of Rs. 3.2 lakhs to the said company and Rs. 2 lakhs to Supertronics but neither the share certificates were issued to the petitioner nor the loan amount and interest thereon was paid to him. During the course of the running of the company, the petitioner had incurred substantial amount of expenses on behalf of the company which remained outstanding and was not paid or reimbursed to him. No Board Meetings were called by the respondent No. 2 and only short notice of the Annual General Meeting were sent to the petitioner knowing fully well that the petitioner would not be able to attend the said meeting due to short notice. Further behind the back of the petitioner and without calling a meeting of the Board or AGM, another director was inducted on 12.9.1998. The oppression and mismanagement by respondent No. 2 has resulted in a deadlock in the management of the company and consequently on those allegations the petitioner has inter-alia prayed for appointment of an Administrator with a directive to convene the AGM of the company to appoint auditors and further restraining respondent No. 2 from alienating the assets of the company including stocks without the consent of the petitioner and to produce further verification of all the statutory records including the account books of the respondent company as well as Supertronics. In the alternative he has prayed that the company be wound up on just an equitable grounds.
3. The respondent No. 2 in its reply to the petition has interalia stated that the petitioner and the respondent No. 2 having equal shareholding and each being a director the petitioner cannot allege acts of mismanagement and oppression on the respondent No. 2 as the petitioner is equally responsible for the alleged acts. It has been further stated that no reliefs can be granted on vague allegations of oppression and mismanagement without providing any specific instance or any details thereof. The business of the company which ran for a total period of five months has come to a grinding halt due to the non cooperation of the petitioner who himself has siphoned off the money from the bank accounts of the company by getting a duplicate cheque book issued withdrawing substantial amounts and thereafter making a complaint to the bank against respondent No. 2 by which the operation of the company’s account was frozen by the bank and the credit facilities had been called off. Consequently it is not a case of oppression and mismanagement but a clear case of deadlock in the management of the company and winding up of the company on just and equitable ground was the only alternative.
4. The petitioner has filed a rejoinder reiterating the allegations made in the petition and has stated that despite the deadlock in the management the company could not be wound up till the respondent No. 2 renders accounts of the respondent company and bring back the amount misappropriated from the company. It has been further stated that the deadlock in the management of the company is a result of the mismanagement and oppression of the respondent No. 2 who has siphoned off the earnings of the company for the benefit of his personal business run in the name of M/s Supertronics.
5. Before hearing this petition finally taking into consideration the nature of the company and the facts of the case we had suggested to the learned counsel for the parties to settle the matter amicably. The counsel had taken time to consult their respective clients and to report. However, it appears the effort failed and we have heard the petition on merits.
6. Shri Dave, learned counsel for the petitioner has contended that the petitioner had paid Rs. 1.5 lakhs for equity of the respondent company and also gave a short term loan to the tune of Rs. 3.2 lakhs. The respondent No. 2 who was looking after the administration of the company and was the managing director had not issued the share certificates to the petitioner neither has he submitted the accounts of the company to the petitioner who was one of the directors, despite repeated demands. Earlier also the petitioner had given a loan of Rs. 2 lakhs to M/s Supertronics and it was agreed that the said sum will either be returned to the petitioner with interest or equity for the said amount in the respondent No. 1 company will be given to the petitioner. The petitioner had also incurred actual expenses for promotion of the business of the respondent company which despite request have not been reimbursed to the petitioner. The respondent company was showing losses but from the bank’s statement submitted by the respondent No. 2 as per directions of this Board, it appears that the respondent No. 2 was siphoning of the funds through the proprietary concern namely the Supertronics despite the fact that as per the terms of the MOU the said firm had to cease doing business after being taken over by the respondent company. It has been further contended that the respondent No. 2 was not holding any meeting of the Board of Directors nor the Annual General Meeting thus violating the provisions of the Act. The three notices given for holding the AGM of the respondent company were not in accordance with Section 171(i) of the Act as they were less than 21 days and deliberately done so that he petitioner would not be able to attend the said meeting. Further the accounts of the company were neither prepared nor given to the petitioner despite requests. The statutory auditor of the company was not appointed. The respondent No. 2 had also inducted one Harshad Bhai Patel as a Director of the company on 27.8.98 behind the back of the petitioner without holding any Board Meeting or AGM and has submitted form No. 32 which was taken on record by the ROC on 12.9.98. The said appointment was absolutely illegal and no such appointment could be made in the absence of the petitioner as there were only two shareholders and the board also comprised only of the petitioner and respondent No. 2. It was therefore contended that a clear case of oppression and mismanagement was made out and the reliefs prayed for in the petition be granted.
7. Learned Counsel for the respondent has on the other hand contended that the present petition alleging oppression and mismanagement is misconceived in as much as the petitioner being a 50% shareholder and a director of the company cannot allege oppression and mismanagement as he is equally responsible for any alleged acts of omission or commission of the company. Besides the petitioner was under obligation to provide specific instances of oppression and mismanagement which he has failed to give and has mainly pointed out certain alleged isolated acts. That apart it has been contended that in the petition the petitioner has primarily raised a grievance regarding the return of loan and also claimed his remuneration from the respondent company which cannot be agitated in a petition under Section 397/398 of the Act. So far as siphoning away of funds the allegation has been made in air without any basis or evidence in support thereof. The statement of account and the bank statement copies of which have been filed by the respondent No. 2 establishes the falsity of the said allegation. So far as the appointment of a third director is concerned it is in accordance with the MOU dated 27.4.1998 and after calling a Board Meeting notice for which was given to the petitioner who deliberately did not attend the meeting nor sent any communication, consequently cannot raise a grievance in respect thereof. So far as the holding of AGM is concerned this being a closely held private limited company in the nature of quasi partnership the Articles itself provides for seven days notice. However, the said meetings could not be held as the petitioner did not attend and there was no quorum for the meeting. Besides the company only functioned for about 5 months therefore also there was no illegality or irregularity in respect of the calling of the said meeting. As regards not furnishing of the accounts it is submitted that the petitioner had withdrawn substantial amount from the bank account of the company by getting a duplicate cheque book issued and despite repeated letters by the respondent No. 2 to submit information as to how the said amount withdrawn by the petitioner from the company’s account was spent, no information was given neither the petitioner attended the meetings called by the respondent No. 2 to discuss the said matter. Therefore the quarterly accounts could not be prepared and the petitioner being in fault cannot take any advantage or make any grievance in respect thereof. Lastly it has been submitted that the company has ceased to function and had perforce to surrender its office to Baroda Municipal Corporation which sold the stocks of the company in realization of its dues, the respondent company had hardly and assets, and in view of the deadlock it is just an equitable that the company be wound up. It is the petitioner who is responsible for the deadlock like situation in the company and has not cooperated at all, has failed to bring business in accordance with the MOU, has got the Bank account of the company frozen and credit facilities withdrawn and due to his conduct and action the company also suffered heavy losses and had to close down business for which the petitioner is liable to compensate the company. Consequently orders in respect thereof be passed against the petitioner, while dismissing the petition or ordering winding up.
8. We have considered the respective submissions made by the learned counsel for the parties. As noticed above one of the main grievance of the petitioner is that he had paid Rs. 1.5 lacs towards equity whereas no share certificates were issued and further he had given short term loan to the company which was not returned nor any interest paid thereon.
9. As regards the refund of the short term loan given by the petitioner to the respondent company we find that besides the petitioner the respondent No. 2 and some other parties had also given unsecured loans. The company however, during the period of five months during which it operated incurred operating losses to the tune of more than 1.79 lakhs as evident from the statement of account filed before us. In view of the precarious financial position of the company it cannot be faulted if the loan amount has not been repaid. Besides remedy for the same does not lie in these proceedings before us. It was held by the Division Bench of Calcutta High Court in the case of Bagrees Cereals (P) Ltd v. H.P. Bagri (2001) 105 Com. Cases 465 that if debt remained outstanding from the company it would be unreasonable to ask for just and equitable winding up of the company, filing a suit or an application on the ground of company’s liability to pay debts after service of statutory notice would be proper. That apart we do not find any correspondence from the side of the petitioner demanding the refund of the amount of the term loan or calling for share certificates. It may be noted that the petitioner was not a minority shareholder but was a 50% shareholder of the company and one of the directors as well. In case the Managing Director was not calling the Board Meetings the petitioner as the other director could himself convene the Board Meeting with notice to the respondent No. 2 and discuss the pending issues. So far as the submission with regard to the loan of Rs. 2 lakhs given to M/s Supertronics was concerned, in these proceedings the same cannot be considered as Supertronics is not a party before us besides no agreement has been placed to show that any amount advanced as loan to Supertronics would be converted as equity in the respondent company. As regards the contention that the respondent no.2 was siphoning of the funds of the company through the proprietary concern M/s Supertronics and also channeling the business of the respondent company to the said proprietary concern, we do not find the said allegation substantiated from the materials on record. The respondents have filed copies of the provisional balance sheet for the period 1.4.98 to 31.8.98 the Bank Book, Bank statement, Petty cash book and a statement of account of respondent company from 1.4.99 to 31.3.2001 and of M/s Supertronic from 1.4.99 to 31.3.2001. We have perused the same but have been unable to find the allegation of siphoning of funds by the respondent No.2 substantiated therefrom. Counsel for the petitioner has however, pointed out from the bank book and bank statements that there were four transactions between Apr. 1, 1998 to August 31, 1998 which shows a sum of Rs. 1,25.000 was transferred from Respondent company to Supertronics and Rs.25,000 was received by the respondent company from Supertronics, this according to the concerned counsel could not have happened if Supertronics had merged with respondent company. As far as this submission is concerned we find from the MOU dated 1.4.98 between Supertronics and respondent company that a sum of Rs. 17.5 lacs were to be transferred by the respondent company as consideration for the fixed assets, and the current assets would be listed as raw material as on 31.3.98 and the respondent company will pay the entire cost of current assets to Supertronics in suitable instalments within one year. Further the receivables of Supertronics as on 31.3.98 shall be transferred to the Bank account of the respondent company s soon as they are received. In view of the aforesaid agreement between the parties if the Bank statement shows transfer of any amount to Supertronics from respondent company or vice versa it cannot be leveled as siphoning of funds. Besides in the petition except alleging that respondent no.2 is siphoning of the funds of the company and channelling the business of the company to Supertronics no other details have been furnished to substantiate the allegation, on the basis of the bald allegation therefore we cannot as held in the case of Mohta Brothers v. Calcutta Shipping (1969) 2 CLJ 157, adjudicate this allegation without some concrete materials.
10. As regards the allegation that the petitioner has incurred expenses on behalf of the company but has not been reimbursed we find that despite repeated letters from respondent NO.2 the petitioner has neither submitted the details nor the vouchers to substantiate the allegations. Counsel for the petitioner submitted that the expenses were incurred for promotion of business and payment to Bombay Staff and for that reason money was withdrawn from the Bank account of the company. However In the absence of the vouchers and other details the submission cannot be accepted.
11. As regards the holding of the AGM of the respondent company the respondents have along with their reply to the petition filed the copies of the notices sent to the petitioner intimating the date of the meetings. The petitioner has admitted receipt of the notices but had not attended the same as minimum 21 days notice have not been given. We find from Article 25 of the Articles of the Company that a general meeting could be called on seven days notice. Assuming that the same was not in accordance with Section 171(1) of the Act, the petitioner being a director a director himself could call a meeting of the Board and fix a date for the annual general meeting instead of making a grievance of the same.
12. It has been strongly urged on behalf of the petitioner that the respondent no.2 was holding back the accounts from the petitioner and had not got the trial balance prepared for the relevant period nor permitted inspection when as a director petitioner had every right to look into the accounts of the respondent company. So far as this submission is concerned we find that the petitioner had got a duplicate cheque book issued from the bank in which the company had its account and between the period March to Aug 1998 had issued cheques amounting to Rs. 2.64,000. Along with its reply the respondent have annexed copies of the letters dated 25.7.98, 3.9.98, 3.10.98 and 26.12.98 calling upon the petitioner to given details of the various transactions made by him in the company’s current account with Bank of Baorda so that the trial balance for the quarter ending June, 98 could be prepared. The letter dated 30.7.98 was handed over personally to the petitioner at Bombay and the other letters were sent by Regd. A.D. post. However, none of the letters were acknowledged or responded by the petitioner nor were the details of the cash transactions carried out by the petitioner submitted to the respondent for preparation of the balance sheet of the respondent company. Consequently in our view the respondents cannot be held responsible for non preparation of the trial balance for the relevant year. So far as inspection of the accounts of the respondent company by the petitioner is concerned the stand of the respondent is that the petitioner was never denied inspection and as a matter of fact he did inspect the accounts in the office of the company’s Chartered Accountant which stands corroborated by respondents letter dated 26.12.98 (annexed as Annexure F to the respondents reply) which letter was replied by the petitioner.
13. Learned counsel for the petitioner has strongly urged that the respondent no.2 had inducted one Harshad Bhai Patel as Director of the company on 27.8.98 behind the back of the petitioner and without holding any AGM or Board meeting. As regards this submission it is true that the respondent no.2 could not singly appoint the said director as the company had only two shareholders and the Board consisted of the petitioner and the respondent no.2 and there would be no quorum in case the petitioner was absent. Provisions relating to quorum for meetings are mandatory and consequently the resolution if any passed in the meeting where there was no quorum would be ipso-facto void. However, neither there was any allegation nor anything pointed out from the record to show that after the appointment of the said Patel any Board meetings were held or any resolution was passed or decision taken therein to the detriment of the petitioner or the respondent company. In view of the same as held in the case of Maharani in Yogeshwari Kumari v. Lake Shore Palace Hotel (1995) 3 CLJ 418 (RAJ) that the decision and resolution passed though nonest and void it cannot ifso facto be said that they are oppressive to the petitioners or prejudicial to public interest.
14. An an overall assessment of the facts of the present cases to us this appears to be an interse dispute between the two directors of the company where each is accusing the other of siphoning funds, non cooperation and breach of trust. The relations are so much strained that they cannot work together and both have sought the winding up of the respondent company.
15. We are conscious of the fact that under Sections 397/398 we are exercising an equitable jurisdiction and remedy under these sections are an alternative to winding up, which means that interest of the company is paramount in moulding the relief. Under Section 397(2) we have been empowered to pass such orders as deemed fit with the purpose of bringing to an end the matters complained of. In this connection it will be apt to quote the following sentence from the judgment of the Division Bench in the case of Maharani Lalita Rajya Lakshmi v. Indian Motor Co (1962 Cal 127) which still holds the field and followed subsequently in numerous cases.
“It is also proper to emphasis that the power of the court to make such order, as it thinks fit, under Section 397(2) of the Act is expressly stamped with the purpose of “bringing to amend the matters complained of”. Therefore wide as the power of the court is following from the words of the expression “such order as it thinks fit” it is nevertheless controlled by the overall objective of this section which must be kept strictly in view that the order must be directed “to bringing to an end the matters complained of”.
16. We are equally conscious of the fact that without prejudice to the generality of the powers under Section 397/398 under Section 402 of the Act very wide powers have been given to us (CLB) for regulating the conduct of the companies affairs in future and to pass upon such terms and conditions, any order which may be just and equitable in all the circumstances of the case.
17. The Supreme Court in the Needle Industries case (1981 SC 1298) even while holding that the charge of oppression was not made out had held that technicalities cannot be permitted to defeat the exercise of equitable jurisdiction conferred by Section 397 of the Act and further that the court is not powerless to do substantial justice between the parties, therefore ordered sale and purchase of shares.
18. Normally in a closely held private limited company in the nature of quasi partnership or a family company where promoters are also permanent directors holding equal shares, once mutual trust and confidence between them is lost, we (CLB) in many such cases despite holding oppression has not been proved, have taken the view one of them going out of the company is the only way, which would protect the interest of the company and directed one of the parties to sell his shares on the payment of reasonable and appropriate value of his shares and go out of the company. However, in the present case before us, the petitioner as well as the respondent on account of their difficult financial position have expressed their inability to purchase. The petitioner had even offered to sell his shares to the respondent for Rs. 1/-only provided the loans given by him to the company along with interest total amounting to rs. 14,46,161.00 is paid to the petitioner. To this offer the respondent No.2 was not agreeable as the company was lying closed since Sep 1998 had hardly any assets, its substratum was lost and had heavy debts. The fact that the company had hardly any assets and lying close since September 98 was stated in the reply to the petition and also highlighted during the hearing. The petitioner has not replied to the same in the rejoinder neither rebutted the same at the time of hearing. Therefore in view of the admitted fact that the company has ceased doing business after 5 months and lying closed and further as alleged by the respondent, the stocks and the office of the company was taken over by the Baroda Municipal Corporation the company is in debt having failed to return its loan and further the Bank has called off the credit facilities, it cannot be doubted that the substratum of the company is lost. In this scenario, we are of the view that it would not be proper to direct the parties either to buy or sell the shares to one of them by exercising jurisdiction either under Section 397(2) or Section 402 of the Act. As already noted above in the case of Maharani Lalita Rajya Lakshmi (Supra) it has been held that he purpose of exercising jurisdiction under Section 397(2) is for “bringing to amend the matters complained of”. Here in view of the loss of mutual trust and the infighting of the two promoter directors two are the only shareholders of the company holding equal number of shares, dead lock like situation is ceased where both the parties have prayed for winding up of the company and sought realization of their investments. It is well settled that proceedings under Section 397/398 are beneficial provisions to get grievances redressed without recourse to winding up of the company since such winding up would be prejudicial to the interest of the members. The petitioner cannot on one hand file a petition under Section 397/398 and on the other hand seek for a direction to wind up the company.
19. Therefore to conclude, taking into consideration the facts of the case where the company has ceased to do any business since September 1998 has hardly any assets left and its substratum is lost, where both the promoters who are the only shareholders and directors are admitting a deadlock in running the company and mutual trust and confidence is lost where allegations of oppression and mismanagement has not been found to be proved we are of the view that no relief can be granted to the petitioner in these proceedings. However if so advised the petitioner can take suitable action for winding up of the company. This petition under Section 397/398 of the Act is accordingly dismissed. Costs on parties.