ORDER
S. Balasubramanian, Chairman
1. The petitioners collectively claiming to hold 25% shares in Malpani Food Products Private Limited have filed this petition under Sections 397/398 of the Companies Act, 1956 (the Act) alleging that the respondents, more particularly, the 4th respondent is guilty of siphoning of the funds of the company, that the respondents have issued additional shares to themselves and that the respondents have illegally removed the petitioners as directors of the company. On the basis of these allegations, the petitioners have sought for various reliefs inter alia including direction to the respondents to deposit the money siphoned of by the, cancellation of allotment made to them and restoration of the petitioners as directors and investigation into the affairs of the company.
2. The facts of the case are that the company was incorporated in 1997 and was carrying on the business of millers. In addition, it also carries on the business of weigh bridge. The petitioners and the respondents 2 to 5 are real brothers and were the first directors of the company. The flour mill business of the company was closed in 1998 and presently the income of the company is from collection of weigh bridge charges and also rentals from two tenants- FCI which occupies the godowns and the Deputy Commissioner, Sivasagar for the occupation of the mill premises by para military forces. The tenants were not paying the rent regularly which resulted in initiation of proceedings against FCI by the company before Gauhati High Court and constant correspondence with the Dy. Commissioner. Over a period of time from 2001, the Deputy Commissioner paid a sum of Rs. 38,22,959/-as rental to the 4th respondent by way, of cash and FCI has also started making payments as per the orders of Gauhati High Court. According to the petitioners, the 4th respondent has collected the rentals by cash from the Deputy Commissioner without any authority of the Board and has misappropriated the same. The company had allotted 12,800 shares on 15th March, 2004 to the 4lh respondent’s group which according to the petitioners had been done without any offers to other shareholders and with the view to create a new majority. In a Board Meeting held on 1.10.2004 attended by respondents 2 to 5, the Board had recorded that the petitioners had ceased to be directors by virtue of the provisions of Section 283(1)(g) of the Act as they had not attended the Board Meetings held on 3rd July, 2004, 24th August, 2004 and 1st September, 2004 without obtaining the leave of absence. This, according to the petitioners, was done with the view to exclude the petitioners from the management of the company.
3. Shri Ganda, Advocate appearing for the petitioners submitted: The company is a family company. Even though the petitioners by themselves held 25% of the shares before the issue of additional shares in 2004, their father holding 8% shares is supporting the petitioners. In addition, their other family members of the petitioners also hold shares in the company. Thus, before the allotment made in 2004, the collective shareholdings of the petitioners’ group was 50.57% as against the holdings of the respondents of 37.09%. After the allotment, the respondents’ group hold 52.50% resulting in conversion of the majority into a minority. There is absolutely no justification to make any allotment in 2004 as the company was not doing any business. Even the minutes of the Board Meeting on 15th March, 2004 in which 12800 shares were allotted, do not indicate the reasons for allotment of shares. All these shares were allotted to the 4th respondent, his wife and the HUF managed by him. Right from 1999, the company has been collecting share application money from the shareholders and the total share application money of the petitioners was Rs. 9.5 lacs. In making the allotment in 2004, the share application money of Rs. 7, 5 lacs by the 4th respondent and Rs. 2 lacs of his wife had been adjusted against the allotment. But no shares were allotted against the share application money of the petitioners. 1300 shares have been allotted to the HUF against the alleged cash payment. When the petitioners had also paid share application money as early as in 1999, no offer was made to them. The exclusive allotment to the 4th respondent and his group was only with a view to gain a new majority in the company. Therefore, this allotment requires to be cancelled.
4. All the three petitioners were the first directors along with respondents 2 to 5. Actually, the company was incorporated to take over the business of a partnership firm in which all the brothers were partners. The flour mill was closed in 1998 and the flour mill premises have been requisitioned by CRPF on a monthly rent of Rs. 98000/-. The company has a warehouse which is on lease to FC1 and determination of fair rent is pending before Gauhati High Court. The only business income is from the weigh bridge operated by the company. The 4th respondent, without any authority from the Board, started collecting the rent due for the flour mill premises from the Deputy Commissioner in cash and has been misappropriating the same without bringing it in to the accounts of the company. The total amount so collected exceeds Rs. 38 lacs. In spite of discussion in the family to account for this amount, the 4th respondent has not brought this amount into the books of accounts of the company. After the petition was filed, the respondents have prepared the Annual Accounts of the company for the past years and have shown the rental amount as receipts in the books of accounts of the company but at the same time, they have also shown inflated expenditures on various head to make up the amount siphoned off. A perusal of the various heads of expenses would indicate that they are all highly inflated. During the year 2001-2002, a sum of Rs. 4.53 lacs is shown as expenses on boundary wall repairing. As against the total income of Rs. 11.25 lacs, a sum of Rs. 1.3 lacs is shown as compensation without any details.As against an income of Rs. 1.46 lacs from weigh bridge, the salary is shown as Rs. 1.52 lacs. Likewise, for the year 2002-2003, as against an income of Rs. 20.8 lacs, a sum of Rs. 3.31 lacs is shown as wall repairing expenses and a sum of Rs. 6.51 lacs as repairs and maintenance. The salary expenses has gone up to Rs. 2.88 lacs and directors’ traveling expenses is shown as Rs. 1.46 lacs. During the year 2003-2004, as against an income Rs. 18.08 lacs, Rs. 4.91 lacs shown as repairs and maintenance, salary as Rs. 2.95 lacs and directors’ traveling expenses as Rs. 1.57 lacs. However, during the year 2004-2005, since there was no cash payment from the Deputy Commissioner, the repairs and maintenance expenses has come down to Rs. 13000/-. This would indicate that the cash collected from the Deputy commissioner in the previous years had been misappropriated by showing inflated expenses. Therefore, an investigation should be ordered into the affairs of the company and the respondents be directed to bring back the money siphoned off.
5. The learned counsel further submitted: Since the petitioners were agitating this issue, the respondents had, with the malafide intention, removed the petitioners as directors. None of the petitioners received any notice for any of the alleged Board Meetings held on 3rd July, 2004, 24th August, 2004 and 1st September, 2004 to claim that they had absented themselves without obtaining leave of absence. In terms of Section 284, it is mandatory that notices should be given to the directors for Board Meetings. The respondents have admitted in their reply that no notices had been issued except that the directors were informed about the Board Meetings either telephonically or in person. None of the petitioners was informed of these alleged meetings. In a family company, especially when the petitioners have been directors right from incorporation, their removal is a grave act of oppression and therefore, they should be restored as directors.
6. Shri Ganda further submitted: The respondents had also shifted the registered office effective from 1st October, 2004, with the view to ensure that the petitioners do not have any access to the registered office of the company. The petitioners had not been given notices for the general meetings of the company and as such they are in dark about the affairs of the company. The company had failed to file relevant documents like annual return etc. in time as is evident from the letter from the Registrar of Companies at Annexure P-13. This would indicate that the affairs of the company are grossly being mismanaged. All the documents filed in the reply are anti dated and filed with the ROC after the petition was filed with a view to cover up the misdeeds of the respondents. The earlier statutory auditor was changed and no details are available as to why he was changed or whether he had resigned. Perhaps, the earlier auditor was not prepared to cover up the misdeeds of the respondents. Similarly, the Company Secretary for issuing Secretariat Compliance Certificate was also changed on the ground that the earlier Company Secretary declined to issue the said certificate===for the year The very fact that the earlier Company Secretary had declined to issue the certificate would indicate that the company is not maintaining proper records. The compliance reports by the new Company Secretary for the past years are obviously are anti dated as is evident from the fact that the Compliance Certificate dated 4th September, 2002 indicates the mobile number of the Company Secretary. The petitioners have ascertained that this mobile phone was activated only on 28.12.2003. Further in the Certificates, the Company Secretary has not covered all matters.
7. Summing up his arguments, Shri Ganda submitted that by allotment of further shares and by removing the petitioners as directors, the respondents have not only gained majority share holdings but also have taken over the total control of the company. Therefore, the petitioners should be restored as directors and the allotment made in 2004 should be cancelled and an investigation should be ordered to determine the quantum of the funds siphoned of by the 4th respondent. In the alternative, he submitted that the petitioners are either willing to sell their shares to the respondents or purchase the shares held by them on a fair value to be determined by an independent valuer. Alternatively, the assets may be split between the petitioners and the respondents according to their shareholdings.
8. Shri Dholakia, Advocate appearing for the respondents submitted: The petitioners have not come with clean hands and they are guilty of misappropriation of funds of the company. The Board of the company had decided to deposit a sum of Rs. 19 lacs as fixed deposit and the 2nd petitioner had been authorized to do the needful. On the basis of this authority he made 4 fixed deposits on 24th May, 2004 for a period of 12 months for and on behalf of the company. However, on 4th Nov. 2004, he prematurely encashed these deposits and withdrew a sum of Rs. 19.75 lacs (inclusive of interest) and has not brought the same into the books of accounts of the company. This material fact has not been disclosed in the petition while alleging that the 4th respondent has misappropriated the funds of the company. In this regard, the company has already filed a criminal case against the 2nd petitioner. While the petitioners have questioned the various expenses incurred by the company on the ground that the company is not doing any business, in the rejoinder, the petitioners have averred that the amount of Rs. 19.75 lacs would be credited into the account of the company after accounting for expenses incurred by them on behalf of the company. When they are not in the management of the company, the question of their incurring any expenses on behalf of the company does not arise. The petitioners have always been acting against the interest of the company by writing to the tenants not to pay the rentals. It is the 4th respondent who had been authorized by the Board on 6th August 2001, took effective steps to recover the rentals due from the Deputy Commissioner and the FCI as is evident from the various correspondences that he had entered into with the Deputy Commissioner and the case filed by him in Gauhati High Court against FCI. Therefore, the Board decided to reward him for the services rendered by him by making allotments in 2004. The allotment was not made with any intention of creating a new majority. The claim of the petitioners that their group constituted majority before the allotment of shares in 2004 is not supported by any affidavit by the shareholders allegedly belonging to the petitioners’ group. The petitioners among themselves held only 25% shares in the company before allotment in 2004. Therefore, the allegations of the petitioners that they have been reduced to a minority has no basis.
9. The learned counsel further submitted: As far as receipt of rentals from the Deputy Commissioner in cash is concerned, all the money received was brought into the book of the company as and when received. This amount was not received in lump sum but over a period of years from 2001 onwards. It is wrong to allege that expenses had been inflated. The warehouses leased to FCI are huge and situate on an extensive land. It is the responsibility of the company, being the owner, to maintain the warehouses and the land and therefore repair and maintenance expenses had to be incurred periodically. Quite often, damages to the warehouse premises occur at the time of loading and Unloading and the company has to repair the damages. As far as salary expenses are concerned, in addition to employees in weigh bridge, there are company employees in the warehouses also. The expenses relating to directors travel expenses relate to the frequent visits to Gauhati to prosecute the case pending before the High Court. In other words, the allegation that by inflating expenses, the money received from the Deputy Commissioner is being siphoned of has no basis. All the expenses incurred were genuine and in the interest of the company.
10.The learned counsel further submitted: As far as directorship of the petitioners is concerned, it is a fact that the company, as a practice was not issuing notices for Board Meetings to any director right from incorporation of the company. The dates of meetings have always been conveyed either telephonically or in person. The petitioners were always informed of all the board meetings but many a times, they did not attend nor sought leave of absence. Since they did not attend 3 consecutive meetings, they automatically vacated their office by operation of law in terms of Section 283(1)(g) of the Act and the respondents had not removed them. As far the allegation that the accounts of the company have been manipulated is concerned, it is a fact that the annual reports were filed late even though the accounts had been prepared on time. Late filing does not mean manipulation. Since no allegation against the respondents has been established, the petition should be dismissed.
11. In rejoinder, Shri Ganda submitted that the 2nd petitioner withdrew the fixed deposits only after the disputes started as he was apprehending that the. respondents would misappropriate this money also. The 2nd petitioner is willing to deposit this money provided the respondents account for the amount received from the Deputy Commissioner in cash.
12. I have considered the pleadings and arguments of the counsel. At the time when the petition was mentioned, considering the facts and circumstances of the case, I passed an interim order on 17.3.2005 directing that all rental income should be deposited in the company’s bank account and should be utilized only for the day to day expenses of the company. I also directed maintenance of status quo in regard to the immovable assets and shareholding in the company. Thereafter, disputes arose as to in which bank account of the company, the rentals due from FCI should be deposited. To avoid any controversy, by an order dated 18.7.2005, I directed FCI to withhold payment of rent till further orders. The respondents filed CA 228 of 2005 seeking for modification of this order on which no decision has been taken.
13. There are three main grievances in this petition- two relating to oppression and one relating to mismanagement/misappropriation. The respondents have, in turn alleged that the 2nd petitioner who has misappropriated the fixed deposit amount has no locus standi to make any complaint of mismanagement against the respondents. I do agree that the 2nd petitioner, whatever may be the justification, had no authority or right to take control of the money of the company and as such he should credit the entire amount into the accounts of the company on or before 31st December 2005.
14. As far as the allegation relating to vacation of the office of directors is concerned, the admitted fact is that no written notices had been issued for the Board Meetings on 31st July, 24th August and 1st September 2004. According to the respondents, as a practice no written notices had ever been issued for any Board meeting right from incorporation of the company and only oral information was being given. As far as the impugned Board meetings are concerned, the petitioners deny that any oral communication was given. The company is admittedly a family company and the petitioners had been directors right from incorporation. Even assuming that, in view of the past practice of giving information about the meetings orally, the provisions of Section 286 cannot be invoked, yet, when their non attendance in 3 consecutive Board meetings were to result in their vacation of office, in all fairness, the company should have cautioned the petitioners in writing. Such a written notice is all the more necessary as the disputes among the parties, who are family members, had started even before the said meetings. Therefore, considering the fact the Article 18 of the Articles of Association of the company provides for proportional representation on the Board and that the petitioners had been directors right from incorporation, invoking the provisions of Section 283(1)(g) without proper notice is an act of oppression against the petitioners and as such they deserve to be put back on the Board.
15.In so far as the allotment of shares to the 4th respondents and his group is concerned, the company has admitted that the allotment was made as a reward for the services rendered by him in collecting the rentals and no other justification has been given. In a family company, if any one is to be rewarded with additional shares, the same should have been done with the concurrence of all the members, in the present case, the petitioners, who hold substantial shares, had not been consulted and in the process, the shareholding pattern has been affected. It is immaterial whether, before the issue of additional shares, the petitioners were in the majority as claimed by them or in the minority as contended by the respondents. In a family company, if the allotment of shares to one group without the consent of the other group changes the percentage holding of the parties, then, such an allotment has to be considered to be an act of oppression against the affected group. In the present case, substantial shares had been allotted against the share application money deposited by the 4th respondent and his wife ignoring the share application money deposited by the petitioners. Therefore, to maintain the preexisting shareholding percentage, the petitioners should also be given proportionate additional shares, either by way of fresh allotment or by way of transfer of shares from the 4th respondent and his wife or the impugned allotment should be cancelled.
16. In so far as alleged siphoning of funds is concerned, the allegation of the petitioners in the petition is that the 4th respondent, who had not been authorized, had collected rentals in cash and had not brought the collections into the accounts of the company. However, when the respondents had enclosed the annual accounts of the company in the reply which reflected that the rentals had been accounted for, the petitioners have claimed that that money has been siphoned of by inflating expenditures under various heads. They have alleged that all the accounts have been predated. I find from the minutes of the annual general meeting annexed with the reply (Annexure R-10) that all the 3 petitioners are shown to have attended the AGM on 30.9.2003. It is also seen from the minutes that annual accounts for the year ended 31st March, 2003 had been approved by the shareholders and in that meeting all the 3 petitioners were re-appointed as directors. In the rejoinder, the petitioners have not expressly denied their attendance in that AGM. Further, it is also seen the petitioners had attended the Board meeting on 24.5.2004 wherein the 2nd petitioner was authorized to make fixed deposit and if no AGM had been held for the 2003-2004, there is nothing in the Minutes of that Board meeting that the petitioners had raised any query about the same. If the annual accounts for 2002-2003 had been approved in the AGM on 30.9.2003 with the attendance of the petitioners, the allegations of the petitioners that these accounts had been predated or that the rental collected in cash had not been brought into account or that by inflating the expenditure, money has been siphoned of, merit no consideration. In other words, the petitioners have not been able to establish that the respondents are guilty of siphoning of funds of the company. Therefore, the question of ordering of an investigation into the affairs of the company does not arise. However, it is directed that in future all the rentals should be collected only by ways of cheques which should be deposited in the bank within a day of receipt. Should for any reason, the rentals have to be collected in cash, the same should be deposited in the bank account of the company on the day of receipt itself.
17. In view of my findings that the respondents had acted in a manner oppressive to the petitioners both by recording that the petitioners had vacated office in terms of Section 283(1)(g) of the Act without proper notice and by allotment of shares exclusively to the 4th respondent and his group, I direct that on the 2nd petitioner crediting the amount withdrawn by him by foreclosing the fixed deposit into the bank account of the company, the petitioners will be deemed to have been restored as directors effective from the date of credit of that amount and that all notices to the Board meetings thereafter should be given them by registered post Ack due atleast one week priori to the meetings. As far as the impugned allotment of shares in concerned, it is an admitted fact that the company was not in need of funds and the allotment had been made only against the share application money standing in the name of the 4th respondent and his wife for over years. Only a sum of Rs. 1,30,000 had come as further funds from the HUF of the 4th respondent and a sum of Rs. 2,00,000 from the 4th respondent. Since the company is not in need of funds, the company will not be prejudiced if the allotment were to be cancelled. Accordingly, I direct that the impugned allotment will stand cancelled as soon as the amount taken by the 2nd petitioner is credited into the bank accounts of the company. On cancellation of the shares, the company will refund the amount paid by the HUF and the 4th respondent and the share application money account in respect of the 4th respondent and his wife will be restored as it stood before allotment of the impugned shares to them. Any allotment in future should be proportionate to the existing holding of the share holders, more so in view of the fact that the company has adopted proportional representation for directorship. I make it abundantly clear that in case the 2nd petitioner fails to crdit the amount withdrawn by him from the fixed deposit into the accounts of company by 31st December 2005, the directions relating to directorship and cancellation of the allotment of the impugned shares will lapse and the petition will be deemed to have been dismissed.
18. The learned counsel for the petitioners submitted that the petitioners are either willing to sell their shares or to purchase the shares of the respondents on a fair valuation by an independent valuer. I leave this to be decided by the Board of directors of the company.
19. The petition is disposed of in the above terms. No order as to cost.
