ORDER
Balu, Member
1. The petitioners constituting more than one-tenth of the total members of Shyamala Pictures & Hotels (P.) Ltd. (‘the company’) as well as holding more than 10 per cent of the shares have filed this petition
under section 397/398 of the Companies Act, 1956 (‘the Act’) alleging oppression and mismanagement in the affairs of the company.
2. The main acts of oppression and mismanagement relate to enhancement of the shares capital and allotment of shares to the respondents in exclusion of the petitioners, suppression of the income from the business of the company and siphoning of funds by the respondents.
3. Shri Harikrishnan, senior advocate appearing for the petitioners, while initiating his arguments has submitted that the company was incorporated in the year 1939 by Shri A.RM.AN. Annamalai Chettiar and A.RM.S. Sockalingam Chettiar, both brothers to engage in the production of films. The petitioners and the second respondent are sons of A.RM.S. Sockalingam Chettiar. However, the second respondent was given in adoption in 1949 to A.RM.AN. Annamalai Chettiar. The business of the company was run as a family business. Annamalai Chettiar, being elder was holding the bulk of shares and Sockalingam Chettiar, the balance’ shares. As the company was an asset of both families, Annamalai Chettiar as well as Sockalingam Chettiar having equal rights in the profits and properties, the business was carried on mutual trust and confidence for the benefit of all members. Annamalai Chettiar was managing the company as karta of the family. In this connection, Shri Harikrishnan invited our attention to the peculiar nature of the articles of association of the company, the relevant portion of which reads as under:
“3. The company shall forthwith purchase from Sri A.RM.A.N. Annamalai Chettiar, the distribution business carried on by him under the name of Shyamala Pictures on the terms set out in the Memorandum of Association, and the directors shall fully carry out and complete the said purchase.
The basis on which the company is established is that the company shall acquire the property specified in the memorandum of association on the terms set forth therein and that Sri A.RM. A.N. Annamalai Chetliar shall be one of the first Directors and the Managing Director of the company and accordingly, it shall be no objection to the said purchase that Sri A.RM.A.N. Annamalai Chettiar as a Promoter and Director stands in a fiduciary position towards the company and that the directors do not in the circumstances constitute an independent Board and every member of the company present and future is to be deemed to join the company on this basis.”
The said article shows the family nature of the company and the company is only for the family members. There is no scope for the outsiders to lake part in the company. The company having been run as a family company, the requirements of the provisions of the Act have not been strictly complied with. No notices were used to be sent for any of the meetings of the company. It transpired subsequently that the company increased its share capital on 25-6-1971 from Rs. 3.5 lakhs to Rs. 5.5 lakhs. When the petitioners requisitioned an extraordinary general body meeting on 13-10-1999, they came to know that the respondents’ group is holding 19,550 shares and the petitioners’ group only 3,010 shares. It further
transpired that the company had allotted the shares in favour of the respondents on various occasions in exclusion of the petitioners and without their knowledge. These allotments are contrary to the understanding that the petitioners’ group as well as respondents’ group should have equal holding in the company. The allotments are not in the interest of the company and are mala f idem nature, which should be set aside. Shri Harikrishnan further pointed out that the respondents were not maintaining accounts in a true and correct manner. The income has been shown less and the expenditure was boosted up. The respondents have been making unaccounted and secrete money from the business of the company. The respondents have siphoned of the funds enriching themselves. The affairs of the company are carried on oppressing the petitioners’ group and for the sole benefit of the respondents. The company has been leasing out the studio at a very nominal rate, while the prevailing market rate has been much higher. Shri Harikrishnan pointed out the rates at which the company’s properties have been given on rent which are much lower than the rent generated by the neighbouring studios carrying on the similar nature of business. Similarly, the company has been leasing out the properties of the company and dubbing theatre at a lower rental. The company is adopting various unfair practices, thereby the actual income is being suppressed resulting in huge loss to the petitioners. The various acts of mismanagement can be unearthed only by conducting investigation of the affairs of the company. Shri Harikrishnan, therefore, sought for the reliefs made in the petition.
4. Shri A.K. Mylsamy, Advocate appearing for the respondents, while refuting the charges levelled by the petitioners has reiterated that the business of the company is not a family business. The company is not a joint family property and its governed by the provisions of the Act. When the company was incorporated in the year 1939, the paid-up capital of the company was Rs. 26,000 consisting of 260 equity shares of Rs. 100 each out of which 250 shares were owned by Shri Annamalai Chettiar and 10 shares by Sockalingam Chettiar. Annamalai Chettiar was the promoter of the company as borne out from the memorandum of articles of association of the company. Annamalai Chettiar was never the karta. There was a partition among Annamalai Chettiar, Sockalingam Chettiar and their brothers after the death of their father and thereafter they were carrying on their respective business. The business of the company was never the joint family business. After the death of Sockalingam, there was a partition in the year 1973 among the sons of Sockalingam, wherein the shares in the company were also divided among themselves. The partition deed does not indicate that the petitioners would have equal participation and equal shares in the properties of the company. Shri Mylsamy further pointed out that the properties of the company have been let out to third parties at a proper and reasonable rent. The rent will vary from property to property depending upon the facilities made available. He urged that the properties of the company with the existing facilities can fetch only the
rent which are being received by the company. There has been no mismanagement or siphoning of funds as alleged by the petitioners. Shri Mylsamy pointed out that the petitioners were never interested in the management of the company in all these years and now make a claim on account of the increase in value of the properties of the company. The petitioners cannot seek for partition of the properties in 397/398 proceedings and claim remedies before the CLB. He, therefore, prayed for dismissal of the petition.
5. We have considered the pleadings and arguments of the counsel. The only substantive relief sought for in the petition is for a declaration that the petitioners’ families and the respondents’ families have equal rights of management and share in the properties of the company. This prayer is based on the claim of the petitioners that the company is a joint family property and that by allotment of further shares periodically the second respondent has reduced the petitioners’ group into a minority. It is on record that even at the time when the company was incorporated, the father of the petitioners held 10 shares as against 250 shares held by the adopted father of the second respondent. Therefore, right from the incorporation of the company, the petitioners’ group was holding only 1/25th of that of the respondents’ group. It is further seen that after the death of the father of the petitioners in 1958, there was no representation from the petitioners’ group on the Board of the company except for a short period of two years during the year 1976-78 when the second petitioner functioned as the finance director of the company. Thereafter, there was no representation from the petitioners’ group on the Board. Thus, at no time, there had been equal shareholding or joint management in the company by the petitioners’ group.
6. We also find from Annexure R-3 of the reply that there had been a partition in the family of the petitioners, wherein there is a mention about distribution of the shares of the company, among the members of the petitioners’ group. We also note that during Ihelifc time of Shri Annamalai Chettiar till 1995, the petitioners never claimed equality in the shares or in the management. Further, we also note that the further allotment of shares had not been made in a single instance, but over a period of time, in 1965, 1971, 1972, 1987, 1990, 1992 and 1993. We also find that while the shareholding of the respondents’ group went up from 250 to 19,550, simultaneously the shareholding of the petitioners group had also gone up from 10 to 3010. Therefore, the petitioners cannot claim ignorance of the allotment of shares in the company. Therefore, we find that there has been unexplained and inordinate delay in challenging these allotments.
7. In regard to the plea of rental income, we are not in a position to agree with the plea of the petitioners in view of the fact that the rental income depends upon the facilities made available at the demised premises. Merely because the neighbouring properties fetch higher rate of rent, it does not mean that the respondents have mismanaged the company by
letting out the properties of the company at a lower rate. The plea of the petitioner is not convincing. We are, therefore, of the view that the petitioners have not made out any act of oppression or mismanagement in the affairs of the company and that the petition must fail. Accordingly, the petition is dismissed. There is no order as to cost.