ORDER
K.K. Balu, Member
1. The petitioner holding more than 10 per cent of the paid-up capital in M/s Logics Electronics Private Limited (“the Company”) has filed this petition under Section 397/398 of the Companies, 1956 (“the Act”) alleging various acts of oppression and mismanagement in the affairs of the Company.
2. The main acts of oppression and mismanagement in the affairs of the Company, agitated in the petition relate to the following:-
(a) diversion of the funds of the Company to its supplier by the first respondent in connivance with respondents 3 & 4;
(b) diversion of the business of the Company by the first respondent to his firm;
(c) illegal removal of stocks of the Company by the first respondent;
(d) prevention of the petitioner from entering the registered office as well as the factory premises by the first respondent; (e) diversion of funds of the Company; and (f) non-compliance with statutory requirements by the first respondent.
3. Shri V.Balasubramanian, Advocate for the petitoner while initiating arguments has submitted that the Company was incorporated in the year 1995 with the main objects to manufacture and trade in micro processor based process control instruments, industrial automation etc. The petitioner and his wife hold 50 per cent of the equity shares and the first respondent together with his wife hold the remaining 50 per cent of the equity shares of the Company. The petitioner and the first respondent are directors of the Company. In the normal course of business, the Bombay Municipal Corporation have placed an order with the fourth respondent for modernization of pumping stations at Bombay and the fourth respondent sub-contracted the instrumentation portion of the contract in favour of the Company. The Company in turn has placed order with M/s Schneider Electronic India Limited (“SCIL”) for supply of components to implement the project on the understanding that all the payments from the fourth respondent would be made to the Company account with the third respondent, being its Banker. In this connection, Shri Balasubramanian referred to a Power of Attorney dated 09.03.2000 (page 17 of typed set of documents by R-1) executed by the Company, relating to supply of bills on the fourth respondent, empowering the third respondent to obtain cheques for sums payable to the Company directly in its own name from the fourth respondent and to cash the same and to receive the amount thereof and appropriate such receipts towards the dues of the Company. By virtue of this Power of Attorney, the third respondent is entitled to realize the amount of this bills direct from the fourth respondent and the remittance of such bills would be made direct by the fourth respondent to and in the name of the fourth respondent. However, at the instance of the first respondent the third respondent had advised the fourth respondent to pay Rs. 32 lakhs directly tot he SCIL, in pursuance of which, the fourth respondent remitted Rs. 32 lakhs to SCIL on 29.10.2000. According to Shri Balasubramanianm, the Company has been deprived of Rs. 32 lakhs on account of the direct payment by the fourth respondent to the SCIL, in contravention of the Power of Attorney dated 09.03.2000, which amounts to misappropriation of funds of the Company by the first respondent. He pointed out that the first respondent in collusion with respondents 3 & 4 defrauded the Company by parting a sum of Rs. 32 lakhs in favour of the SCIL. In spite of the objection raised by the petitioner in his letter dated 27.09.2000 (A-2) the third respondent advised the fourth respondent to make direct payment in favour of the supplier. Moreover, the fourth respondent disregarded the stop payment instructions of the third respondent enabling the SCIL to encash the cheque of Rs. 30,10,000/-. These developments clearly shows that the fourth respondent colluded with the first respondent in making direct payment in favour of the supplier instead of routing the payment through the third respondent. He further pointed out that quantities supplied by SCIL to the fourth respondent are in excess of quantity required in execution of the contract resulting in a loss of Rs. 11.50 lakhs to the Company. The first respondent arranged to cancel the order placed with the Company by the fourth respondent unilaterally and diverted the said order to his new firm, viz., Sun Industrial Automation and Solutions, in which the second respondent is the managing partner, thereby the Company has incurred a loss of Rs. 20 lakhs. The first respondent had removed the stocks and assets belonging to the Company worth about Rs. 51.73 lakhs, which have been hypothecated in favour of the third respondent and in order to safeguard the remaining hypothecated assets, the petitioner took custody of the assets under intimation to the third respondent. In this connection, he referred to the correspondence exchanged between the parties. The first respondent has prevent the petitioner from entering the factory premises as also the registered office and removed statutory records and books of accounts of the Company. The first respondent is neither holding the Board and annual general meetings, nor filing statutory returns and income tax returns. He further pointed out that the Company had advanced Rs. 1.2 lakhs to M/s Enclotee Panels, Bangalore (“EP”) towards purchase of panels for the Bombay Municipal Corporation project. The order placed with EP has been diverted by the first respondent to his firm and failed to take steps to recover the advance amount paid by the Company to EP, thereby misappropriated the funds of the Company to the tune of Rs. 1.2 lakhs. Shri Balasubramanian concluded his submissions seeking the following reliefs:-
(i) to direct the first respondent to deposit Rs. 104.94 lakhs with the third respondent towards the losses suffered on account of the conduct of first respondent;
(ii) to direct the first respondent to comply with statutory formalities with various authorities and finalise the accounts of the Company;
(iii) to direct the first respondent to take over the bank liabilities; (iv) to investigate the affairs of the Company; and (v) to direct the fourth respondent to deposit a sum of Rs. 32 lakhs with the third respondent; and
(vi) to direct the third respondent to withdraw the recovery proceedings initiated before the Debts Recovery Tribunal.
4. Shri V.Ramasubramanian, Advocate for the first respondent while denying the charges levelled by the petitioner has raised the following preliminary objections:-
a. The petitioner and his wife together hold 50 per cent of the equity shares and the first respondent with his wife hold the remaining 50 per cent of the equity shares. The petitioner is not in minority and cannot invoke the provisions of Section 397 and 398.
b. The third respondent has already initiated recovery proceedings against the Company under the Recovery of Debts due to Banks and Financial Institutions Act, 1993 for recovery of the outstanding amount. The prayer or the petitioner for a direction against the third respondent to withdraw the DRT proceedings is barred by virtue of the provisions of Section 18 of the said Act.
According to Shri Ramasubramanian the petitioner was not cooperating with the first, respondent for timely completion of the contract entered with the fourth respondent for supply of telemetry system for the Bombay Municipal Corporation. He pointed out that the contract consisted of two parts, namely, (a) programming, supplying of telemetry system for the Bombay Municipal Corporation. He pointed out that the contract consisted of two parts, namely, (a) programming, supplying and commissions of RTU and associated system and (b) supply of standard products. While the first part of the work was taken care of by the first respondent, the second part was attended to by the petitioner. However, the petitioner failed to execute his portion of the order both in terms of time schedule and of quality. In this connection, Shri Ramasubramanian referred to a letter dated 08.09.2000 (Annexure-1 enclosed to counter) of the fourth respondent addressed to the Company, wherein the fourth respondent expressed its total dissatisfaction at the lack of coordination on the part of the petitioner and the failure of the petitioner even to respond the phone calls. However, the petitioner without executing the order within the committed schedule, closed the operations in the factory on 08.09.2000 by forcing technical personnel to resign and taking awary the materials. In the circumstances, the fourth respondent was constrained to accept the materials from the Company’s supplier SCIL, who has insisted that payment should be made by the fourth respondent directly on behalf of the Company, as borne out by a letter dated 30.08.2000 (Annexure-2 of the Counter by R-1) of SCIL addressed to the Company, wherein SCIL expressed its willingness of dispatch the materials based on the direct assurance from fourth respondent that the payment would be made directly to SCIL. In the meanwhile, the third respondent by its letter 31.08.2000 (page 23 of counter of R-3) at the instance of the first respondent permitted the fourth respondent to pay 80 per cent of invoice value to SCIL and the balance of 20 per cent in favour of the third respondent. In this connection Shri Ramasubramanian pointed out that the petitioner had given such instructions singularly to the third respondent to make direct payment to suppliers, in support of which he referred to the instructions of the petitioner at Annexure (vi) enclosed to counter of R-1. Moreover, the Company has not suffered any losses by direct payment made in favour of its supplier especially when the Company still owes money to the supplier. The first respondent was compelled to float a new firm in the month of June 2000 with the knowledge of the petitioner on the account of the utter non-cooperation by the petitioner to execute the order entered into by the Company. the first respondent’s new firm never took up the project, which were intended for the Company and never compete with the Company to bag any contract. The contract made with the fourth respondent in relation to BMC project ought to have been completed by March 2000, which was unduly delayed at the instance of the petitoner, resulting in cancellation of the contract by the fourth respondent. The first respondent cannot be held responsible for cancellation of the contract by the fourth respondent. The petitoner failed to extend his cooperation in timely completion of projects in spite of the efforts made by the first respondent. However, the petitioner stealthily removed away all the valuable items, assets and stock of the Company on 08.09.2000 worth about Rs. 76.73 lakhs, made many employees to resign, thereby the Company could not execute any work. The petitoner failed to settle the claim of EP for the panels supplied by them, which forced EP to take away the panels transferred by them. The second respondent cannot be held responsible for non refund of deposit amount by EP for which the Company should initiate steps for recovery of the same. According to Shri Ramasubramanian, the first respondent never removed the stocks and assets as claimed by the petitioner. The petitioner did not cooperate with the first respondent for compliance of the statutory requirements. The first respondent cannot be blamed for such non-compliance even after the disputes between the parties, the first respondent took every effort in realization of the receivables due to the Company and in fact realized a sum of Rs. 6,58,015/- due to the Company and remitted the same to the third respondent. Shri Ramasubramanian, while concluding his arguments, has submitted that it is only on account of the independent attitude of the petitioner and his non-cooperation,t he Company was forced to close its business and that the first respondent is in no way responsible for the present state of affairs of the Company. He, therefore, sought for dismissal of the petition.
5. Shri K.S. Sundar, Advocate for the third respondent has while denying the charges levelled against the third respondent has submitted that the Company obtained sub-contracts for instrumentation from the fourth respondent and that the Company placed consequential order on SCIL and that the finished products were to be supplied by SCIL directly to Bombay Municipal Corporation. As per the arrangement between the parties, the Company would get payment from the fourth respondent any pay SCIL to enable them to supply the materials to the Bombay Municipal Corporation. The Company is enjoying credit facilities with the third respondent while enjoying the facilities, the Company had executed a power of attorney empowering he third respondent to collect the payments due from the fourth respondent. However, at the request of the first respondent in his letter dated 25.08.2000 (Annexure-6 enclosed to counter filed by R-3), the third respondent permitted the fourth respondent to make the payment due to the Company directly to SCIL. This was conceded to by the fourth respondent in order to avoid the delay in lifting the materials by the fourth respondent from SCIL and accordingly the third respondent by its letter dated 31.08.2000 (Annexure-14 of Counter filed by R-3) permitted the fourth respondent to make payment of 80 per cent of the invoice value to SCIl and the balance in his favour on account of the Company. When the petitoner requested the third respondent on 27.09.2000 (Annexure 10 of counter by R-3) not to permit direct payment in favour of the SCIL, the third respondent immediately advised the fourth respondent to stop direct payment. However, it transpired that the fourth respondent had already released the payment and the SCIL realized the amount, for which the third respondent cannot be in any way found fault. As the Petitioner and the first respondent removed the stock and assets hypothecated to the third respondent, the third respondent initiated proceedings before the Debt Recovery Tribunal for recovery of the outstanding amount due to the third respondent. The petitioner has approached the CLB in order to thwart the DRT proceedings already initiated by the third respondent. The petitioner cannot claim any relief against the third respondent and the petition is liable to be dismissed.
6. Shri R. Murari, Advocate for the fourth respondent while denying the plea of collusion against the fourth respondent has submitted that the relief sought in the petition against this respondent is beyond the scope of the Section 397 and 398. Shri Murari pointed out that the fourth respondent had already made payment to SCIL on the advice of the third respondent and that the fourth respondent cannot be any way liable for the inter-se dispute between the petitioner and the first respondent. He further pointed out that the Company ought to have executed and complete the contract in March, 2000, but failed to execute the same within the agreed time, forcing the fourth respondent to cancel the contract in terms of Clause 22 of the agreement entered between the Company and the fourth respondent (page 13 of Typed set of documents by R-1) to avoid the damages which may be levied by the Bombay Municipal Corporation against the fourth respondent. The fourth respondent on the authority of the third respondent made payment of a sum of Rs. 30,10,000/- on 28.09.2000 to SCIL which cannot be questioned by the petitioner at this stage. Though the third respondent later stopped direct payment in favour of SCIL, the fourth respondent could not comply with the instruction, by the time payment had already been made, in favour of SCIL. In these circumstances, the fourth respondent cannot in any way made liable to pay any sum to the petitioner and that no relief can be granted. Shri Murari, therefore, prayed for dismissal of the petition.
7. We have considered the pleadings and arguments of learned Counsel for the petitioner as well respondents. The question that arises for our consideration is whether the alleged acts of oppression and mismanagement in the affairs of the Company against the respondents would warrant our interference to grant reliefs sought in the petition. A careful perusal of the records made available before us reveal that the fourth respondent in the regular course of business had placed purchase orders from time to time on the Company for supply of certain instrument in execution of the Bombay Municipal Corporation project, Mumbai and one such purchase order for supply of digital panel meters was placed by the fourth respondent on 08.12.1999 as borne out by the purchase order dated 08.12.1999 of the fourth respondent (page 1 of typed set of documents by R-1). The purchase order was to be completed by March, 2000. The annexure to the purchase order (pages 4 to 14 of typed set of documents by R-1) contains detailed terms and conditions for supply of digital panel meters by the Company. SCIL was to supply components to the Company for completion of the purchase order by the latter. In the course of execution of the purchase order, the Company had executed a Power of Attorney dated 09.03.2000 (pages 17 & 18 of typed set of documents by R-1) authorizing the third respondent to realize the amount of bills directly from the buyers and the remittance of such bills would be made direct by the fourth respondent in favour of the third respondent. The Company could not supply the materials to the fourth respondent within the stipulated time on account of the disputes which arose between the petitioner and the first respondent. SCIL had insisted payment before supply of the components in view of the delayed payment on the part of the Company and it is on record that SCIL in its letter dated 28.07.2000 (page 10 of counter by R-3) advised the Company that it would not dispatch any materials until the Company honours all the pending post-dated cheques given to it aggregating over Rs. 30 lakhs. SCIl by its letter dated 24.8.2000 (page 11 of counter by R-3) reiterated it stand and demanded the payment from the Company. SCIL by its letter dated 30.08.2000 (page 12 of counter by R-3) further advised the Company that it would dispatch the materials provided the fourth respondent makes payment directly in its favour. The first respondent by its letter dated 25.08.2000 (page 8 of counter by R-3) made a request to the third respondent to permit the fourth respondent to pay directly a sum of Rs. 30,08.746 to SCIl representing 80 per cent of the invoice value and the balance of the invoice amount in favour of the third respondent. Considering the request of the Company, the third respondent by its letter dated 31.08.2000 (page 23 of counter by R-3) advised the fourth respondent to pay 80 per cent of the invoice value directly to SCIL and balance payment of 20 per cent in favour of the third respondent, upon which the fourth respondent by its letter dated 12.09.2000 (page 13 of counter of R-3) conveyed its acceptance to pay a sum of Rs. 30,10,000 in favour of SCIL on receipt of the materials and endorsed a copy of its letter to the Company. The flow of events clearly indicate the SCIL was insisting payment by the Company before supply of the materials, driving the first respondent to approach the third respondent to authorize the fourth respondent to make direct payment in favour of SCIL which was ultimately conceded to by the fourth respondent. Accordingly, the fourth respondent while according its consent to make direct payment, has kept informed the Company, but the petitioner has not objected to this arrangement till 27.09.2000. Admittedly the petitioner was having access to the registered office of the Company till just before 25.09.2000, as seen from Annexure-12 (Counter by R-3), but failed to explain the reason for his delay. At this juncture, it is relevant to observe that after the direct payment made by the fourth respondent on 28.09.2000 in favour of SCIL, a cheque dated 29.10.2000 for Rs. 9,47,928 was said to have been issued jointly by the petitioner and the first respondent in favour of SCIL, as revealed from the letter dated 18.11.2000 (Annexure-11) of the third respondent, which has not been dispatched by the petitioner. It is further observed from the letters dated 06.03.2000 (page 31), 23.05.2000 (page 34) dated 06.06.2000 (page 37) 06.07.2000 (Page 40) and 27.07.2000 (page 43) at Annexure (vi) series of counter by R-1, petitioner was authorizing the third respondent from time to time singularly to debit the current account of the Company in order to make payment to the suppliers. We are, therefore, convinced that the fourth respondent made the payment of Rs. 30,10,000/- directly in favour of SCIL in the usual course of business. Moreover, by virtue of this direct payment, the petitioner has failed to establish whether the Company has incurred any loss, in the absence of which it cannot amount to an act of oppression on the part of the respondents.
8. In regard to the plea of diversion of business of the Company to the new firm floated by the first respondent, it is on record that the first respondent has floated a partnership firm in June, 2000. The purchase order awarded by the fourth respondent was to be execute by March, 2000 which was not duly completed by the Company within the stipulated time. In view of breach of the terms and conditions of the contract between the parties, the fourth respondent had terminated the purchase order placed with the Company by its letter dated 15.09.2000 (page 20 of typed set of documents by R-1). Though the petitioner had knowledge of the first respondent’s new business even in June 2000, he objected for the same only in October 2000 (Annexure-9), when the disputes arose between the parties. Admittedly, the Company ceased to carry on business since first week of September, 2000 and all the employees have also left the Company. In these circumstances, the plea that the first respondent has diverted the business of the Company to his new firm has to force. Mere failure to recover the outstanding amount due from EP can neither amount to misappropriation of the funds of the Company nor diversion of business on the part of the first respondent.
9. While, according to the petitioner the respondents have removed stealthily the stock and assets of the Company to the tune of Rs. 51.73 lakhs, it is contended by the first respondent that the petitoner has unlawfully remove the stocks worth about Rs. 76.73 lakhs. Admittedly, both the petitioner and first respondent took away the stocks and assets of the Company by entering the particulars in a common register (Annexure-2 in rejoinder), which according to the petitioner is in the custody of the respondent, but which according to the first respondent is with the petitioner. The clam and counter claim of the parties in regard to removal of the stock and assets of the Company, neither of the parties has substantiated the same, in the absence of which we will not be able to adjudicate the issue. In regard to the other allegations that the first respondent has not complied with the statutory obligations and failed to call for annual general meeting and board meeting of the Company, it may be observed that the Company is already closed and is not functioning. The statutory authority will take appropriate steps for such non- compliance. On our over-all assessment of the facts of this case, it is apparent that both the shareholders had decided to close down the business of the Company by taking away the assets as seen from page 24 (Annexure-5) of Petition and page 44 (Annexure VII) of Counter of R-1. This happened in September, 2000. However this petition was filed only in March, 2002 with a specific prayer to stop DRT proceedings. Thus, this petition appears to be a motivated one and as such deserves to be dismissed and accordingly it is dismissed. No order as to costs.
