Shri D. Ramkishore And Ors. vs Vijayawada Share Brokers Limited … on 10 November, 2006

ORDER

K.K. Balu, Vice-Chairman

1. The petitioners collectively holding in excess of one-tenth of the total issued capital and constituting more than one-tenth of the total number of members of M/s. Vijayawada Share Brokers Limited (“the Company”), aggrieved on account of certain alleged acts of oppression and mismanagement, at the instance of the second respondent, in the affairs of the Company namely, (a) non-commencement of any activity of the Company; (b) debiting personal and fictitious expenditure to the profit and loss account of the Company; (c) misappropriating funds of the Company by not accounting the rentals and other income in the books of account of the Company; (d) illegal sale of the Company’s landed property at a low price and utilising the difference of the unaccounted amount for acquiring shares of other members in order to increase the voting power; (e) illegal removal of the directors and usurpation of the power of management by appointing his kith and kin on the board of directors of the Company; (f) misuse of the office equipments for the benefit of his personal business; (g) illegal writing off the assets of the Company by debiting the profit and loss account; (h) illegal forfeiture and re-issue of shares for personal gains; (i) non-maintenance of any minutes book of the meeting of the board of directors; and (j) non-delivery of the share certificates of the majority shareholders of the Company, have invoked in the present petition, the provisions of Section 397 and 398 of the Companies Act, 1956 (“the Act”) seeking the following reliefs:

(i) to supersede the board of directors and appoint an administrator to take charge of the affairs of the Company;

(ii) to restrain the respondents from entering into or handing over possession of the Company’s landed property to third parties;

(iii) to set aside the shares acquired by the second respondent and his relatives during the period between September 2001 and September 2002;

(iv) to restrain the second respondent and his relatives from conducting the affairs of the Company

(v) to direct the second respondent to reimburse the personal expenditure incurred by him and debited to the books of account of the Company; and

(vi) to direct the second respondent to render accounts in respect of the rentals collected from M/s. Kakatiya Educational Institution.

2. Shri V.S. Raju, learned Counsel, while initiating his arguments submitted:

* The Company was incorporated in June 1995 with the main object of undertaking and pursuing the business as share and stock brokers. The authorised share capital is Rs. 3 crores divided into 300 equity shares of Rs. 1 lakhs each. The issued, subscribed and paid up capital is Rs. 2.16 crores divided into 216 equity shares of Rs. 1 lakh each. There are 216 equity shareholders each holding one share of Rs. 1 lakh. The second respondent as Chairman and Managing Director was looking after the day to day affairs of the Company since September, 2000 for a period of three years under the control of the board of directors of the Company. The annual general meeting was held during the pendency of the company petition wherein, while the accounts were not adopted by the members, the agenda relating to appointment of the auditor as well as directors was transacted. The respondents 3 & 6 were not re-elected as directors of the Company. The members belonging to the respondents group did not participate at the annual general meeting. At the same time, the second respondent’s uncle filed a civil suit seeking an order of injunction restraining the Company from holding the annual general meeting. The third respondent filed a civil suit against the Company represented by the second respondent against alienation of any of the assets of the Company. However, no order has been passed in both the civil suits, which are pending.

* The Company acquired the landed property measuring 6,222.75 sq.yards for establishing a Stock Exchange in the year 1995-1996. Due to denial of permission by Securities and Exchange Board of India for establishment of Stock Exchange, the proposal for construction of any building was given up by the Company. The present valuation of the landed property, as per the valuation report of an approved valuer at the value of Rs. 7,000/- per sq. yard comes to Rs. 4.36 crores. The second respondent sold a part of the landed property in April/August 2002 at the rate of Rs. 2,200/- per sq.yard, even though the Company received an offer for Rs. 3079/- per sq.yard in the year 1999 and the petitioners by their letter dated 16.09.2002, offered to buy the land at Rs. 3200/- per sq.yard thereby causing losses to the Company. The second respondent, in fact had sold the property at the rate of Rs. 5800/- per sq.yard, but accounted only an amount of Rs. 2200/- per sq.yard in the books of account of the Company. The second respondent herein has been acquiring shares including forfeited shares in the Company from the unaccounted money received on account of sale of the land. During the period between 23.06.1995 and 26.09.2002, the second respondent’s share holding has been increased from five shares to sixty one shares. The respondents claim that the Company is in possession of 5216 sq.yards as against 6,222.75 sq.yards, but failed to account for the shortage of land to the extent of 1,006 sq.yards.

* The Company forfeited 18 partly paid shares of Rs. 70,000/- each during the year 1997-98. The second respondent paid the balance amount of Rs. 30,000/- for each of the forfeited shares and got those shares re-issued to himself, his friends and relatives, without making any offer to other members of the Company and without following the procedure prescribed under articles 29 to 35 of the Company. The re-issue of forfeited shares was one of the items of agenda at the board meetings held on 23.03.2000 and 23.06.2000, but the petitioner No. 21 was never served any notice of these board meetings. There was no need to raise funds by re-issue of the forfeited shares. The Company had sufficient liquidity as on the date of forfeiture of the shares and the Company did not require the money that way raised by the forfeiture of shares. The balance sheet for the year ended 31.03.2001 shows a cash balance of Rs. 7.17 lakhs available with the Company and therefore, there is no need for re-issue of the forfeited shares by the Company. The justification put forth by the respondents that the shares were re-issued to meet the guarantee liability devolved upon the Company is contrary to the stand taken at the board meeting held on 24.12.1999 that funds were required to meet the requirements on account of routine maintenance and stock exchange. The forfeited shares have been re-issued in favour of the second respondent and his relatives only with a view to gain control of the management of the Company. Further the Company re-issued four forfeited shares on 23.03.2000 to Shri K. Rajeshwar, the internal auditor of the Company. When the re-issue of these shares was questioned by the petitioners at the seventh annual general meeting, the second respondent got those shares transferred in the name of his son-in-law.

* The second respondent has removed six of the elected directors including the petitioner No. 21 on the pretext that they have not attended three consecutive board meetings and filled up those vacancies by appointing as directors the respondent Nos. 5 & 6, who are the daughter and brother of the second respondent respectively, with a view to gain majority in the board of directors of the Company. The petitioner No. 21 never received any notice of the three consecutive board meetings, and did not attract the disqualification under Section 283(1)(g) of the Act. The second respondeni played the same trick in respect of the other directors usurping the control of the board, thereby turning the Company formed by the stock brokers into a family affairs of the second respondent. The respondents have not produced any material to show the despatch of notice for any of the board meetings of the Company. Though Form 32 notifying the vacation of office of director by B. Jagan Mohan Rao, with effect from 10.03.2001 has been filed, it does not contain any date of filing of such return. At the same time, the fourth respondent has not been disqualified, inspite of his absence continuously for more than three consecutive board meetings of the Company. Similarly, GSLV Prasad and MA Rama Rao appointed as directors in October, 2000 never attended any of the board meetings but they continued to be directors till their resignation. The second respondent’s daughter was reportedly appointed as director at the board meeting held on 02.02.2002, wherein there were only two directors out of whom the second respondent was an interested director and the meeting was held without a valid quorum. Therefore, the appointment of the second respondent’s daughter as director is not valid.

* The second respondent as Chairman and Managing Director never maintained any minutes book of the board of directors from the beginning, but fabricated the minutes after filing the company petition. The second respondent, in response to a communication dated 23.09.2002 of the petitioners 1 & 2 advised them that he is not maintaining any minutes of the board meetings from its inception. The minutes of the board meeting and general meeting are not serially numbered and are undated. They do not confirm to the provisions of Section 193. The board never passed any resolution for appointment of the directors or removal of the directors or allotment of the forfeited shares, as claimed by the second respondent. The minutes of the board meeting held on 28.02.1998, in the list of directors, it is marked P4, P3 and P2 against the names of the respondents 4, 3 & 2 respectively, which clearly establishes that the minutes have been prepared only after filing of this petition. While the attendance sheets in respect of the board meetings held on 02,01.1999 and 17.03.1999 contain signatures of certain number of directors, the minutes of the board meetings show the presence of lesser number of directors. Similarly, the attendance sheet pertaining to the board meeting held on 29.05.1999 does not mark the presence of the second respondent, but from the minutes of the board meeting, it appears as though he chaired the proceedings of the board meeting. The signatures of the directors who have attended the purported board meeting held on 29.06.2002 have not been obtained from them. The CLB shall not take cognizance of the minutes now produced by the respondents. The shareholders list as furnished by the second respondent in his communication dated 08,10.2002 contains the name of one P.V.S. Gangadhara Rao, but the list produced by the respondents indicates that Gangadhara Rao transferred his shares on 12.09.2002 to Y. Sambasiva Rao. This shows that the statutory registers of the Company are being manipulated to suit the requirement of the second respondent.

* The second respondent is the proprietrix of M/s Fortune Shares & Investments (FSI) a share broking concern operating from the same premises as that of the first respondent Company. The second respondent is its chief executive officer. It is evident from the balance sheet that the Company is not having any other business save the interest earned on the bank deposits from the year 2000 onwards and subserves the interest of FSI. All the expenses of FSI and the personal expenses of the second respondent have been debited to the Company and diverted the income of the Company by not accounting in the Company’s books of account, thereby causing dimunition in the value of the Company’s shares. The rents, salaries, electricity and telephone charges, office expenses, legal fees, repair and maintenance etc., incurred during the management of the respondents, as borne out by the balance sheet for the relevant years exorbitantly increased, despite the fact that the Company has not been carrying on any of the activities which resulted in an accumulated loss of Rs. 62 lakhs as at the end of March 2002. The second respondent further misused the Company’s funds in the year 2001-2002 by purchasing inter-alia, computer, computer peripherals, NSE software, furniture and fitting for Rs. 62 lakhs and other office equipments for the use of FSI. Thus, funds and intrastructure facilities of the Company were grossly misused by the second respondent’s wife.

* The Company’s landed property is being used by M/s Kakatiya Public School for parking their vehicles and also as a play ground for a consideration of Rs. 20,000/- per month, as borne out by the photographs and third party affidavits filed in this behalf and the amounts received for such use in the last five years to the tune of Rs. 12 lakhs are not accounted for in the books of account of the Company, but misappropriated by the second respondent. The school is not paying now any rent for parking its buses against the will of the Company.

* The respondents have booked fictitious loss of Rs. 26.85 lakhs on the sale of computer system and screen based trading systems without furnishing the details to the shareholders at the relevant annual general meeting. The entire hardware acquired by the Company was sold off at a throw away price, without inviting bids from the prospective buyers at the board meeting held on 23.12.2000. The second respondent is overstating the loss in order to compel the members to sell off their shares at a low price. Though many members of the Company are actively involved in share broking, the second respondent has not provided any facilities to these members for trading despite acquiring memberships in stock exchanges. The Company while writing off its assets in the year as at 31.3.2001 failed to furnish the particulars of the assets.

* The Company became (i) a member of Bhubaneshwar Stock Exchange Limited by investing Rs. 10 lakhs in the year 1996; and (ii) a dealer in Inter connected Stock Exchange India Limited by investing Rs. 6.5 lakhs, but the second respondent neither commenced any business in the stock exchange nor did any business in either of the stock exchanges. Thus, the Company has till date not commenced any of the activities for which the Company has been incorporated, in terms of the statutory auditor’s reports thereby the substratum of the Company has been lost. These investments have been made without obtaining the statutory approvals from the competent authorities. The mismanagement in the company’s affairs is a ground for winding up order under just and equitable grounds. However, any order of winding up would unfairly prejudice the interest of the petitioners and other members.

* Shri V.S. Raju, learned Counsel pointed out that the petitioner have satisfied as specified in N.R. Murthy v. Industrial Development Corporation of Orissa Limited (1977) Vol. 47 CC 389 (i) that the Company’s affairs are being conducted in a manner oppressive to the members; (ii) that to wind up the company would unfairly prejudice the members and (iii) that otherwise the facts would justify the making of a winding up order under the “just and equitable” clause. This Board as held in Sanjeev Joy and Ors. v. Pererira & Roche Private Limited and Ors. (2002) CLC 1598 has wide powers to direct the petitioners to go out of the Company by selling their holdings to the respondents vice-versa when the parties are not getting on well in pursuing the objects of the company. It is held in Harikumar Rajah v. Sovereign Dairy Industries Limited (1998) 4 CLJ 252 that the Court having vast powers under Sections 397 and 398 is vested with the power to make “such order as it thinks lit” to bring to an end the matters complained of. Section 402 of the Act specifies some of the powers which can be exercised by the Court on application under Section 397 and 398 of the Act. The Supreme Court in Needle Industries (India) Limited and Ors. v. Needle Industries Newey (India) Holding Limited and Ors. held that the Court is empowered to grant relief, to do substantial justice between the parties even when no case of oppression is made out by the aggrieved shareholders. It has been held in Yashovardhan Suboo v. Groz-Bedert Saboo Limited and Ors. (1995) Vol. 83 CC 371 to show that even if a case of oppression is not established, the CLB is powered to give relief to do substantial justice between the parties. The Court as held in Synchron Machine Tools Private Limited and Ors. v. V.M. Suresh Rao (1994) Vol. 79 CC 868 has vast discretion in moulding the relief, even in a case where, technically, the petitioner fails to make out a case of oppression or mis-management. The power of the Court is essentially an equitable power, to be exercised in the interest of the shareholders and the Company.

* Shri Raju, learned Counsel, while concluding his arguments submitted that the petitioners group constituting 130 members is either willing to sell the shares at Rs. 2.10 lakhs per share to the respondents group or purchase the shares of the respondents group at Rs. 2.10 lakhs per share. In the alternative, the CLB may appoint a Receiver to value the landed property, sell the same and distribute the sale proceeds to all the members which will bring to an end the matters complained of in the company petition.

3. Shri T.K. Seshadri, learned Senior Counsel, while opposing the company petition submitted:

* The undated valuation report in respect of the landed property, with material inaccuracies submitted by the petitioners has been procured for the purpose of the present case. The basis of valuation is not disclosed. It is not known as to when the valuer inspected the landed property and no third party could undertake any inspection, without permission of the second respondent. The landed property of the Company stands in the name of fifteen individuals, out of whom thirteen persons have executed in the year 1999 a sale agreement-cum-irrevocable power of attorney in favour of the Company and out of the remaining two persons, one person is deceased and the other person failed to co-operate in executing the sale agreement-cum-irrevocable power of attorney, against whom civil suits have been filed and are pending. Therefore, the title in respect of the property of the Company does not become perfect for sale and delivery. The petitioners 2 & 4 have illegally withdrawn the power of attorney given to the Company. The petitioners have issued a paper publication cautioning the public about dealing with the Company’s property adversely affecting its marketability. At the annual general meeting held on 30.09.1998, attended by, among others, the second petitioner, the board of directors was authorised to sell a part or whole of the land owned by the Company. The Company had purchased a total extent of 6000 sq.yards of the landed property in the court auction proceedings, as disclosed by the agreement dated 25.10.1997 executed between the Company and M/s Merlin (India) Limited and not 6222 sq.yards as claimed by the petitioners. An extent of 350 sq.yards is in illegal occupation of a mechanic, affecting the saleability of the property. A number of matters relating to his eviction apart from a criminal complaint with local police are pending before the courts, The Company has received an amount of Rs. 8.24 lakhs towards compensation for loss of the Company’s property to the extent of 400 sq.yards for laying a municipal road. The Company sold in the year 570 sq.yards to various persons in the year 2002. The Company has lost an extent of 175 sq.yards on account of widening of the road. As a result, the Company is left with the remaining extent of 4470 sq.yards of the landed property, a portion of which has four roads, while the rest of the property has only one approach road of 24 ft. wide. There are huge hills occupied by slum dwellers on the southern side of the landed property. The respondents issued paper publication in the local Telugu daily on three occasions in April 1998 and February, 1999 for sale of the property, which evoked no response. At the Board meeting held on 24.12.1999, where the petitioner No. 21 was present, the offer for purchase of a portion of the landed property at the rate of Rs. 2,000/- per sq.yard was deliberated, thereby the petitioner No. 21 is aware of the poor response for sale of the landed property and never objected at the board meting. During June, 2000 there was one bid made for 700 sq.yards at Rs. 2500/- per sq.yards subject to certain conditions regarding approach road, which however came to be withdrawn by the bidder. The Company entered into an agreement with Vijayawada Share Brokers Welfare Association (VSBWA) for sale of 4/15th undivided share of the land property at the rate of Rs. 3000/- per sq.yard. VSBWA could not fulfil the terms of the agreement, which resulted in termination of the sale agreement and refund of the advance money of Rs. 18 lakhs by the Company, as borne out by the minutes of the board meeting held on 23.12.2000. In terms of the authority approved at the board meeting held in September, 1998, the Company has taken steps for sale of the landed property and accordingly entered into an agreement in June 2001 with the purchaser for sale of 570 sq. yards for a consideration of Rs. 13,20,000 which works out at the rate of Rs. 2200/- per sq.yard, as against the purchase price of Rs. 1950/- per sq.yard. The petitioners have not chosen to produce any material establishing valuation of the neighbouring land. After obtaining the permission of the Competent Authority under the Urban Land (Ceiling and Regulation) Act, 1976, the Company executed and registered four sale deeds in April 2002 and September 2002 in respect of an extent of 500 sq.yards and sale deed in respect of the remaining extent of 74 sq.yards, was registered with leave of this Bench. In the light of various negative features, the valuation of Rs. 7000/- per sq.yard arrived at the valuation report produced by the petitioner is not realistic. The petitioners have not produced any evidence to show that the second respondent unlawfully gained on account of sale of a portion of the landed property. The first petitioner and the second petitioner by letters dated 07.09.2002 and 16.09.2002 expressed their willingness to purchase the property at the rate of Rs. 3000/- and Rs. 3200/- per sq.yard respectively, while the valuation certificate produced by them puts the valuation at Rs. 7000/- per sq.yard. This amply establishes the conduct of the petitioners 1 & 2. These letters are proximate to the date of the company petition and therefore, no reliance can be placed on such motivated letters.

* At the board meeting held on 02.01.1999 the board of directors unanimously resolved to forfeit 18 partly paid shares and further authorised the Chairman to allot the shares to any person or persons who may be willing to pay the call moneys without interest to meet the urgent needs of the Company. By virtue of Article 33 any forfeited share shall be deemed to be the property of the Company and the board of directors may sell, re-allot or otherwise dispose off the same in such manner as they think fit. The report of directors to the fourth annual general meeting dated 31.07.1999 clearly states that during the course of the year ended 31.03.1999 all the eighteen partly paid shares were forfeited after giving due notice to the concerned members. The members at the annual general meeting held on 16.09.1999 unanimously adopted the accounts and the report of the directors for the year ended 31.03.1999. The board of directors at the meeting held on 24.12.1999 including the petitioner No. 2, authorised the Chairman to re-issue the forfeited shares of the Company to any willing person or persons. The reissue of four forfeited shares in favour of one K. Rajeswar for a total consideration of Rs. 1,26,700/- and the re-issue of nine forfeited shares have been reported to the board of directors by the Chairman at the board meeting held on 23.06.2000. At the board meeting held on 13.10.2000, the Managing Director was authorised to re-issue the balance forfeited shares to meet various expenditure which may be incurred by the Company. The petitioner No. 21 is a party to the resolution authorising the Managing Director for re-issue of the balance forfeited shares, The re-issue of forfeited shares exercised in terms of Article 33 are reflected in the annual accounts approved unanimously at the fifth (four shares) and sixth (fourteen shares) annual general meetings held on 28.08.2000 and 30.08.2001 respectively The amounts realised through the re-issue of shares are reflected in the respective audited accounts for the years 1999-2000 and 2000-2001. The petitioner No. 21 was present at the board meeting while approving the accounts for the year ended 31.03.2000, which contained and showed the reissue of four shares. The transactions have already been concluded and completed. The balance sheet of the Company for the year ended 31.03.2000 shows the current liabilities at Rs. 59.38 lakhs and further more, the Company was in need of the funds to make payment in favour of Exchange for membership which necessitated the re-issue of forfeited shares by the Company. With sale proceeds of the land to the extent of 570 sq.yards and the amount realised on account of re-issue of forfeited shares the current liabilities as on 31.03.2001 were reduced to Rs. 2.87 lakhs. The re-issue of forfeited shares was for the benefit of the Company and not burdensome. There is no illegality in forfeiture and re-issue of the forfeited shares. The petitioners have not questioned the value of. forfeited shares. The shareholders have no right to ask for re-issue of the forfeited shares in their favour. None of the shares was re-issued to the second respondent and his wife jointly. The said shares were bought in the market alongwith some other shares in the market. Therefore, the petitioners are estopped from challenging the forfeiture and re-issue of shares. The petitioners have neither sought any relief in respect of the forfeited shares. The Company did not suffer any loss on account of forfeiture of the shares. The person in whose favour, the shares were re-issued have not been impleaded as parties to the company petition. There is no restriction on any of the members of the Company for purchasing the shares from one another under the Memorandum and Articles of the Company. In a public company, shares are freely transferable and any one can acquire shares in the open market. The Calcutta High Court held in Mohta Brothers Private Limited v. Calcutta Landing and Shipping Company Limited (1970) Vol.40 CC 119 that there is nothing illegal, not even improper, in a person acquiring the shares of a joint stock company in the market unless such transactions in shares are proved to have been effected by unfair manipulation of the share prices. Mr. K. Vishnuvardhan bought four shares and got them transferred in his favour on 29.11.2001, while he married the second respondent’s daughter much later on 05.06.2002. The petitioners 1 & 9 have jointly purchased one fully paid up share at Rs. 20,000/- on 22.09.2000, during the period when the forfeited shares were re-issued by the Company, as evident from the share transfer form on record, which has been witnessed by the fourth petitioner. Similarly, the first petitioner was a witness to the share transfer forms dated 01.10.2002 and 04.10.2002, evidencing sale of one share each at the rate of Rs. 50,000/- per share.- In fact, the petitioner No. 13 had purchased the shares of the Company, which were transferred in his name in May 1997, even before any additional shares were purchased by the second respondent or his relatives. Similarly, the petitioners 1 & 11 jointly bought shares of the Company and got transferred in their names in September 2001 for a consideration of Rs. 20,000/-. There were as many as 83 transfers upto the seventh Annual General Meeting of the Company held on 26.09.2002, out of which only 30 transfers were in favour of directors or some of their relatives. The requirements of Section 81 need not be complied with for re-issue of the forfeited shares. The directors have no fiduciary duty to the shareholders. The re-issue of forfeited shares does not amount to allotment of shares and therefore, it is not required to file any return in respect of such re-issued shares under Section 75 of the Act, as held in Sri Gopul Jalan and Co., v. Calcutta Stock Exchange Association Limited .

* The petitioner No. 21 attended all the board meetings held between 29.01.1998 and 24.12.1999 except the meeting held on 04.07.1998. However, the minutes of the board meeting held on 04.07.1998 were approved at the next board meeting held on 01.09.1998, to which the petitioner No. 21 is a party. The copies of notices dated 15.03.2000 and 14.06.2000 of the board meetings held on 23.03.2000 and 23.06.2000 are on record. The notice dated 17.06.2000 was sent by post and further the petitioner No. 21 was telephonically informed. The notice dated 27.07.2000 of the board meeting held on 11.08.2000 was sent by post to the petitioner No. 21. The notice dated 21.08.2000 of the board meeting held on 25.08.2000 was sent by courier service. The petitioner No. 21 was present at the board meeting held on 25.08.2000 as evidenced from the attendance sheet, which is on record. The notice dated 06.10.2000 of the board meeting held on 13.10.2000 circulated to directors does not contain the name of the petitioner No. 21, yet he attended the board meeting held on 13.10.2000. The petitioner No. 21 last attended the board meeting of the Company held on 09.03.2001 and failed to attend the subsequent three board meetings, inspite of service of the notices of the board meetings. His vacation of office has been recorded at the board meeting held on 02.02.2002. At the board meeting held on 09.03.2001, wherein the petitioner No. 21 was present, the vacation of office of director by B. Jaganmohan Rao by virtue of Section 283(1)(g) was recorded. This has not been objected to by the petitioner No. 21. The vacation of the office of director by Shri G. Suresh Babu was recorded at the board meeting held on 17.03.1999, wherein the petitioner No. 21 participated and therefore, aware of the vacation of office by G. Suresh Babu. Similarly, K.V. Siva Sudhakar, N. Srinivasa Rao and Jagan Mohan Reddy neither attended three consecutive board meetings nor took leave of absence of the board and thereby the disqualification under Section 283 (1)(g) was attracted and they automatically vacated their office which was minuted at the board meeting held on 13.10.2000. The petitioner No. 21 who was present at the board meeting held on 13.10.2000, recording the vacation of office of K.V. Siva Sudhakar and N. Srinivasa Rao and appointing two additional directors never raised any objection, procedural or otherwise in regard to the vacation of office of director. The petitioner No. 21 was also present at the subsequent board meeting held on 23.12.2000 approving the minutes of 13.10.2000. The Company used to serve notice of the board meeting either by ordinary post or by hand delivery. The petitioner No. 21 or any other director never objected to the mode of sending notices for the board meetings. K.V. Siva Sudhakar, N. Srinivasa Rao or Jagan Mohan Reddy never raised any grievances on account of vacation of the office of director. The petitioner No. 21 has not filed any affidavit, but only his power of attorney holder has questioned the removal of his principal namely, the petitioner No. 21, from the office of director. The vacation of office as director under Section 283(1)(g) is by operation of law and automatic upon not attending the three consecutive board meetings. The second respondent’s daughter and brother were duly appointed by the members at the seventh annual general meeting held on 26.09.2002 and it is not open to the petitioners to raise the issue of election of directors at this stage, which is outside the scope of the provisions of Sections 397 & 398 of the Act. Any directorial complaint in respect of a public listed company will not be entertained. The Supreme Court in Hanuman Prasad Bagri v. Bagress Cereals Private Limited (2001)Vol.105 CC 493 any grievance concerning illegal termination of directorship cannot be brought in a Section 397/398 proceeding.

* The Company has been maintaining the minutes book and other statutory records from its inception. In the minutes of the board or general meetings no page numbers were either marked or dated by any Chairman including the fourth petitioner during his tenure. All the appointments and disqualifications were properly recorded at the respective board meetings. No minutes were prepared for the sake of and after filing of the present company petition. The petitioner No. 21 has signed the attendance register maintained by the Company, whenever he attended the board meetings and the fourth petitioner presided over the board meetings during the year 1997 and the minutes were recorded under his Chairmanship in the same book which were maintained since inception of the Company. The statement of accounts for the year ended 31.03.1999 was adopted at the board meeting held on 31.07.1999. All administrative expenses of the Company furnished in schedule 3 forming part of the balance sheet were approved by the board of directors, to which the petitioner No. 21 was a party, as borne out by the minutes of the meeting. All administrative expenses incurred by the Company, which are disclosed in annexure-K. forming part of the balance sheet for the year ended 31.03.1988 were approved at the board meeting held on 01.09.1998. Article 110 provides that two directors or one-third of the total strength of directors whichever is higher shall be the quorum. As on 02.02.2002 the total strength of the board consisted of only five directors and therefore, the board meeting held on 02.02.2002 with two directors present was perfectly in order. The markings like P2, P4 etc. were made by the respondents on the minutes pages of the board meeting for the benefit of the counsel which cannot imply that the records have been fabricated by the respondents.

* The board of directors including the first petitioner No. 21 resolved at the board meeting held on 20.03.1998 to renew the lease and pay the enhanced rent for the registered office occupied by the Company to the owners namely, Shri V. Venkata Ramaiah and M.S.C. Bose. The petitioner No. 21 never suggested at the board meeting that the registered office should be shifted to the room located in the landed property owned by the Company, as alleged in the company petition. The Company, with a view to avoid the burden of enhanced rent, shifted its registered office, to the ground floor of the building belonging to the second respondent’s wife at a nominal rent of Rs. 5000/- per month. The Chairman was authorised at the board meeting held on 08.06.2001 to shift the premises of the Company. The premises owned by the second respondent’s wife was taken on lease at the board meeting held on 22.12.2001 after making full disclosure of the relation of the owner to the second respondent. The rent of Rs. 5000/- per month fixed for the premises was much less than the rent paid in respect of the old premises. The audit report annexed to the seventh and eighth annual general meetings clearly state that “no personal expenses have been charged to revenue account except those payable under contractual obligations and as per prevailing trade practices”. There is no share broking entity namely, FSI, functioning from the said premises, as contended by the petitioners. The allegation in relation to the registered office has been raised for the first time in the present company petition. The second respondent never charged any personal expenses to the Company. The respondents have not adopted the strategy of booking fictitious expenses to the profit and loss account and diverting the income of the Company by not accounting the same in the Company’s books of account. The respondents never debited any third party expenses or expenses of any firm belonging to the second respondent to the account of the Company. The allegations are vague and bald. The petitioners are misleading this Bench by quoting several wrong figures from the audited statement of accounts of the Company. The petitioners have deliberately understated all items of expenditure pertaining to the year 1996-97 in order to compare unfavourably with the corresponding figures of the year 2001-2002. The petitioners have ignored the steep upward revision of the electricity and postal charges during 2001-02. There would bound to be increase in salary over a period of five years. The steps taken by the respondents to reduce the expenditure under several heads have been elaborated at the seventh annual general meeting. The Company, with a view to implement its main objects, had taken the membership of Bhuvaneswar Stock Exchange Limited and Interconnected Stock Exchange of India Limited and registered itself as a stock broker. Therefore, the Company was forced to purchase computer and other office equipments. The investments in Bhubaneswar Stock Exchange and Interconnected Stock Exchange India Limited are bonafide investments made in the year 1996 and are past and concluded transactions. Though the Company secured membership in Bhubaneswar Stock Exchange Limited and Interconnected Stock Exchange of India Limited, yet, due to the fast changing dynamics of the Regional Stock Exchange, the business through Bhubaneswar Stock Exchange suffered and therefore, the Company was unable to generate revenues in the absence of any business. This cannot be construed as an act of mismanagement. During the year 1995-96, the Company awarded a turnkey work to M/s CMC Limited, a Govt. of India Undertaking, for screen based trading system. However, due to collapse of the Regional Stock Markets, the installed equipments could not be put to use by the Company. In view of the advanced technology, the infrastructure facilities of the Company became obsolete and had to be written off, as borne out by the report of the Directors for the year ended 31.03.2001. These facts were clearly stated in the Director’s report for the year ended 31.03.2001 and the accounts were unanimously passed by the members. The petitioners are commenting on a failed commercial investment decision after a lapse of seven years for the first time in the company petition. The sale of computer was unanimously approved at the board meeting held on 23.12.2000. The petitioner No. 21 had not raised any objection in this regard either at the said board meeting or at any other subsequent board meeting, as claimed by the petitioners.

* The Company has not let out any portion of the landed property to M/s Kakatiya Public School for a consideration of Rs. 20,000/- per month at any point of time. The respondents never received any amount from the school and therefore, the question of misappropriation of funds of the Company does not arise. The photographs filed by the petitioners are misleading and no inference can be drawn from those photographs that the respondents have been receiving any money for permitting the school to park their vehicles within the premises belonging to the Company. The school authorities have filed an affidavit affirming that the Company has not let out the landed property to them and further that no lease rentals have been paid by the school. The petitioners while claiming to be in the management have categorically reported that they are not receiving any lease rentals from the schools.

* Shri Seshadri, learned Senior Counsel while tracing the genesis of the introduction of Section 397 pointed out that this provision came for the First time in the Indian Companies Act, 1913, as Section 153C. This was based on Section 210 of the English Companies Act, 1948. The purpose of introducing Section 210 of the English Act was to give an alternative remedy to winding up in case of oppression or mismanagement, where it was felt, though a case has been made out on the ground of just and equitable clause to wind up a company, it was not in the interest of the shareholders that the company should be wound up and that it would be better if the Company was allowed to continue under such directions as the Court may consider proper to give. Section 153C of the Indian Companies Act, 1913 came to be substituted in the present form of Sections 397, 398, 402, 403, 404, 405 and 407 of the Indian Companies Act, 1956. If the acts complained of are not established, the CLB can not pass any order as it thinks fit, either under Section 397 or Section 398 to bring the matters complained of by the aggrieved shareholders. Section 402 is an illustrative and self contained but not substantive provision. The CLB may in exercise of the powers under Section 402(g) may provide for any other matter on just and equitable grounds only when the requirements of Section 397/398 are duly satisfied by the aggrieved shareholders.

* Section 397(2) provides that an order could be made, to bring to an end the matters complained of. on an application made under Sub-section (1) if the Court is of the opinion – (i) that the company’s affairs are being conducted in a manner prejudicial to public interest or in a manner oppressive of any member or members and (ii) that the facts would justify the making of a winding up order on the ground that it was just and equitable that the company should be wound up, and (iii) that the winding up order would unfairly prejudice the applicants.

* By virtue of Section 10E(1A), the CLB, being creature of law, shall exercise and discharge such powers and functions as may be conferred on it under the Act or any other law. The CLB, in exercise of the inherent powers under Regulation 44, not being a substantive provision, cannot go beyond Section 10E(1A) and consequently no order can be made providing for any matter on just and equitable ground under Section 402(g), in the event of not making out any case of Section 397/398.

* The Supreme Court in AIR 1956 S.C. 213, while considering the true scope of Section 153C (‘Act, 1913’) categorically held that where the facts proved do not make out a case for winding up under Section 162, no order could be passed under Section 153C and that prior to its enactment, the Court had no option but to pass an order for winding up, when the conditions mentioned in Section 162 were satisfied, but it could now in exercise of the powers conferred by Section 153C make an order for its being ultimately salvaged. The Supreme Court held in Shanti Prasad Jain v. Kalinga Tubes Limited (1965) Vol. 35 CC 351 that no relief can be granted to the aggrieved shareholders, when no case has been made out under Section 397/398 and consequently, the company petition came to be dismissed. If there was no oppression within the meaning of Section 397, the petition under Section 397 must be dismissed as held by the Supreme Court in Cosmosteels Private Limited v. Jairam Das Gupta (1978) Vol. 48 CC 312. The Orissa High Court in N.R. Murthy v. Industrial Development Corporation of Orissa (1977) Vol.47 CC 389 held that under Section 397, unless facts justify the making of winding-up order, jurisdiction cannot be exercised. Under Section 398, if the affairs of the company are conducted in a manner prejudicial to the interests of the company or in manner prejudicial to the public interest, the Court is vested with the power to make an order in terms of the statutory provisions. The Calcutta High Court in Maharani Lalita Rajya Lakshmi v. Indian Motor Co. held that under Section 397, it is imperative that the Court’s opinion on both the points enumerated in Clauses (a) and (b) of Sub-section (2) must be formed in the affirmative before any order could be made under that section. If the Court is not satisfied on any of these points no further questions can arise under Section 397. If the Court is satisfied, it may make such order as it thinks fit with a view to bringing to an end the matters complained of. The Supreme Court, however held in Needle Industries (India) v. Needle Industries Newey (India) Holding Limited (1982) Vol.I CC 1 that even where a petition under Section 397 of the Act is found not maintainable and oppression is not proved, the Court is not powerless to do substantial justice between the parties and place them as nearly as it may, in the same position in which they would have been, had the act complained of not taken place. The Court, the Supreme Court meant in that decision the Supreme Court and accordingly the Supreme Court in exercise of its constitutional power under articles 140, 141 and 142 of the Constitution of India, gave relief even though no case was made out under Section 397 of the Act. The power of the Supreme Court cannot be usurped by the CLB and can never grant any relief assuming constitutional power under Section 402(g), if no case is made out under Section 397/398. There must be series of oppressive acts, but not mere isolated acts would constitute oppressive acts. The Supreme Court in Kilpest Private Limited v. Shekhur Mehra (1996) Vol. 87 CC 615 held that Sections 397 and 398 provide relief to shareholders against oppression and mismanagement and the powers exercisable in such petitions by the Courts and now by the Company Law Board, have been set out in Section 402. The Calcutta High Court in Bagree Cereals Private Limited v. Hanuman Prasad Bagri (2001) Vol. 105 CC 465 held that a petitioner to be successful under Section 397, must make out a case that the company’s affairs are being conducted in a manner oppressive to any member or members; that the facts would justify the making of winding up order against the company under just and equitable clause and also establish that such winding up would unfairly prejudice him. It is imperative that the Court’s opinion on these points must be formed in the affirmative before any order could be made under Section 397 of the Act. Otherwise, the application under Section 397 is liable to be dismissed. The Supreme Court in Haniimcin Prasad Bagri v. Bagress Cereals Private Limited (2001) Vol.105 CC 493 without considering the principles enunciated in Needles Case that the Court is not powerless, even if no case is made out under Section 397/398, to grant relief in favour of aggrieved shareholders, dismissed the company petition preferred under Section 397/398 and held that the petitioners must prove that the requirements of Section 397/398, failing which no relief can be granted by the Court. The Supreme Court further rejected the relief of sale of shares of the petitioners to the respondents at a value to be determined by a valuer.

* No case has been made out by the petitioners establishing the requirements of Section 397. There are no pleadings to the effect that the facts of the present case would justify the making of winding up order against the Company on just and equitable grounds. The petitioners have not established as envisaged in Section 398( 1 )(a) that the affairs of the Company are being conducted in a manner prejudicial to public interest or to the interests of the Company. There has been no material change taken place, in the management or control of the Company as contemplated in Section 398(1)(b). These must be independently pleaded and proved. The Supreme Court in Sangramsinh P. Guekwad v. Shantudevi P. Gaikwad (2005) Vol. 123 CC 566, held that unless a case is made out in the petition itself under Section 397/398, no relief can be granted by the Court and the defects contained therein cannot be curved nor the lacuna filled up by other evidence oral or documentary.

* The petitioners now have become majority shareholders, upon which oppression ceased to exist. Nevertheless, the petitioners are seeking the reliefs, with a view to gain advantage in the pending civil suits, which cannot be permitted by the Bench. The present proceedings are summary proceedings, whereas the civil suits which are pending in relation to the affairs of the Company are comprehensive proceedings. The petitioners must work out their remedies in the civil suits. There are 216 members and therefore, it is not feasible to divide the landed property among these shareholders. The petitioners are at liberty to sell their shares at a fair value, thereby remedying their grievances. The CLB may direct convening of a meeting of the members of the Company under Chairmanship of an independent person taking police protection to elect their directors and the board of directors so constituted may carry on the day to day affairs of the Company.

4. I have considered the pleadings and arguments of learned Counsel. The issues which arise for consideration are whether the matters complained of by the petitioners warrant interference of this Bench and if so, whether the petitioners are entitled for the reliefs claimed in the company petition.

The main grievances of the petitioners are in relation to (a) illegal sale of a part of the Company’s landed property; (b) incurring and debiting of personal and fictitious expenditure to the profit and loss account of the Company; (c) illegal forfeiture and re-issue of the forfeited shares for personal gains; (d) misappropriation of funds of the Company; (e) illegal removal of the directors; (f) non-maintenance of any minutes book of the meeting of board of directors etc. It is on record that the Company was incorporated in June 1995 with the main object of undertaking and pursuing the business as share and stock brokers. The landed property in question was acquired for establishing a Regional Stock Exchange. However, the proposal for construction of any building to establish Stock Exchange could not be materialised due to denial of permission by Securities and Exchange Board of India for establishment of Stock Exchange. The landed property was acquired in the name of 15 individuals, out of whom 13 persons have executed sale agreement-cum-irrevocable power of attorneys in favour of the Company and out of the remaining two persons who have failed to execute such an agreement, one person is deceased and the other person is not co-operative in executing any sale agreement-cum-irrevocable power of attorney, which forced the Company to take necessary civil action to perfect its title. It is reported that the petitioners 2 & 4 have withdrawn the power of attorney executed in favour of the Company by them and that the petitioners have caused a paper publication cautioning the public about the dealing with the Company’s property, which would dissuade any prospective buyer to offer any better price for the property. There is an encroachment on one side of the property to an extent of 350 sq.yards in the form of mechanic shed, in respect of which civil and criminal proceedings are pending before the competent Courts. At the annual general meeting held on 30.09.1998, the board of directors was authorised to “sell a part or full of the land owned or to be owned by the Company”. At the board meeting held on 29.09.1999, the board of directors including the petitioner No. 21 authorised the second respondent and the director finance to enter into an agreement with M/s. Vijayawada Share Brokers Limited (VSBL) for sale of the 4/15th undivided share of the landed property for a consideration of Rs. 51 lakhs, which, however, came to be terminated on account of non-fulfilment of the terms of the agreement by VSBL, as borne out by the minutes of the board meeting dated 23.12.2000. The petitioner No. 21 is a party to the resolution cancelling the sale transaction with VSBL. It is observed from the minutes that VSBL could not arrange further payments in terms of the agreement and the Company could not resolve certain legal issues, forcing the Company to return the advance amount of Rs. 18 lakhs paid by VSBL. At the board meeting held on 24.12.1999 the board of directors .including the petitioner No. 21 while deliberating the issue relating to sale of the landed property recorded the hurdles faced by the Company in the following words:

The Chairman Informs the Board of lukewarm and poor enquiries for purchase of a portion of the site inspite of sounding and engaging several real estate brokers in the city. The rates that are quoted are around Rs. 2,000/- per sq.yard of the bit on the southern side. However, since some more legal hurdles have to be removed and some more Power of Attorney are to be registered we are also not ready to deliver the property.

The board of directors at the meeting held on 23.03.2000 recorded that ‘there have no serious enquiries for the Company’s vacant property”. The minutes of the board meeting held on 23.06.2000 reveal the futile attempts of the Company in identifying the prospective purchasers inspite of engaging various property brokers and the periodical offers made to its members on account of the elaborated legal complications and ultimately got a purchaser for 700 sq.yards at Rs. 2500/- per sq.yard, but subject to certain conditions regarding the approach road which ultimately came to be withdrawn by the purchaser. The .Company failed to attract any purchase offers despite the advertisement in the local newspapers caused on more than one occasion in April 1998 and February 1999. At the annual general meeting held on 26.09.2002, while the second respondent as Chairman of the meeting detailing the problems faced by the Company on account of withdrawal of the power of attorney given by the petitioners 2 & 4 in favour of the Company and the encroachment of a part of the landed property to the extent of 350 sq.yards by Peddireddy Peddiraju gave details of a proposal for sale of 570 sq.yards of the landed property situated adjacent to the encroached property. It is observed that the sale of 570 sq.yards of the land was reportedly intended to create a buffer between the illegal occupant and the Company’s remaining landed property. The report of the directors to members dated 30.08.2001 for the year ended 31.03.2001 shows that the Company was pursuing the legal issues concerning the land purchased by the Company. In the above background, market value of the property as disclosed in the valuation certificate produced by the petitioners at the rate of Rs. 7000/- per sq.yard cannot be realistic. The market value and saleable value of any property cannot be one and the same. It shall be borne in mind that the petitioners 1 & 2 in their letters dated 07.09.2002 and 16.09.2002 offered to purchase the landed property at the rate of Rs. 3000/- and Rs. 3200/- per sq.yard respectively which would indicate, in my opinion, that the market rate cannot be Rs. 7000/- per sq.yard as reported in the valuation certificate. In the circumstances, I am not inclined to interfere with the management decision of the board of directors of the Company for having sold 570 sq.yards of the landed property at Rs. 2200/- per sq.yard. Accordingly the purchasers shall derive valid title to the property acquired from the Company. According to the petitioners the second respondent failed to account for the shortage of the landed property owned by the Company, Nevertheless there is no documentary evidence to show the extent of landed property acquired for purpose of the Company. At the same time, the agreement dated 25.10.1997 executed between the Company and M/s Merfin (India) Limited, clearly shows that the Company offered an extent of 6000 sq.yards of the landed property by way of security in favour of M/s Merfin (India) Limited on behalf of its members. There is no reason for the Company to give security of only 6000 sq.yards of the landed property when it reportedly acquired, as per version of the petitioners, 6222.75 sq.yards. The petitioners are neither disputing the acquisition, sale, encroachment of a part of the landed property, etc. as claimed by the respondents. There is, therefore, no force in the plea on the part of the petitioners’ on account of the shortage of the property of the Company.

Article 29 provides that if any member fails to pay any call or instalment on or before the day appointed for payment thereof, the directors may serve a notice on him to pay the same with interest, and expenses if any incurred by the Company on account of such non-repayment within 14 days from the date of service of such notice. If any member fails to comply with the demand made by the Company in terms of the notice, the shares will be liable to be forfeited by a resolution of the board of directors as envisaged in Article 30. Articles 3 1 & 32 deal with effect and consequence of forfeiture of such shares. Article 33 contemplates that any share so forfeited shall be deemed to be the property of the Company and the board of directors may sell, reallot or otherwise dispose of the same in such manner as they think fit. Article 34 deals with the power of directors to annul the forfeiture of shares. The minutes of the board meeting dated 02.01.1999 disclose the decision of the board of directors of the Company to forfeit 18 partly paid shares. It is observed that the board during 1997 itself decided to forfeit the partly paid shares. However, as could be seen from the minutes, the defaulters were given further opportunity to pay the calls but only three of them came forward and paid calls. After thorough discussions the board unanimously decided to forfeit all the partly paid shares in respect of (1) KV Suresh Kumar; (2) T. Subba Rao, (3) Shiv Kumar Agarwal, (4) K. Madan Mohan, (5) Ramana Swarny Y, (6) SN Malleswara Rao, (7) B Madhusudana Reddy, (8) Namburi Sekhar, (9) Sarada Singhal, (10) Ch Gandhi Raja, (11) M Lakshmi Sai Prasad, (12) K. Srinivas and (13) G.Eswar and further authorised the Chairman to allot these shares to any person or persons who may be willing to pay the call moneys due without interest. At this juncture, it shall be borne in mind that none of these persons whose shares have been forfeited has ever complained of any irregularity regarding forfeiture of partly paid shares. No affidavit has either been filed by any of such shareholders, ventilating any grievance in this behalf. The report of directors dated 31.07.1999 to the fourth annual general meeting categorically states that during the course of the year all the eighteen partly paid shares were forfeited after giving due notice to the concerned members. The report of the directors was discussed and adopted at the board meeting held on 31.07.1999 and the petitioner No. 21 was a party to such discussion and adoption of the report of the directors to the fourth annual general meeting of the Company. The board of directors at the board meeting held on 24.12.1999 including the petitioner No. 21 authorised the Chairman and director finance to raise the resources in whatever best possible manner including re-issue of the forfeited shares of the Company to any person or persons willing to take at such terms as are permissible. The balance sheet as at 31.03.1999 and 31.03.2000 discloses the amounts realised by the Company by way of re-issue of forfeited shares to the tune of Rs. 12.06 lakhs and Rs. 9.80 lakhs respectively. It is observed from Schedule-(A) forming part of the balance sheet for the year ended 31.03.2000 that during the year four equity shares were re-issued out of the shares forfeited in earlier years. Similarly, Schedule-(A) forming part of the balance sheet for the year ended 31.03.2001 discloses that during the year four equity shares were re-issued out of the shares forfeited in earlier years. The Chairman at the board meeting held on 23.06.2000 informed the board of directors that pursuant to the decision taken by the board, a total of nine forfeited shares of the Company were allotted to various individuals to meet the financial requirements. Against this background, I am not inclined to appreciate the plea of the petitioners that the petitioner No. 21 neither received any notice of the board meetings held on 23.03.2000 and 23.06.2000 nor attended any of these board meetings, wherein the agenda relating to the re-issue of forfeited shares came to be deliberated. Furthermore, the accounts for the financial years 1999-2000 and 2000-2001 containing the re-issue of forfeited shares were approved by the members at the respective annual general meetings. The shares were forfeited in year 1999 and the forfeited shares were reissued during the years 1999 and 2000, which are past and concluded transactions which cannot give rise to any cause of action for a petition under Section 397/398. Therefore, it is not open to the petitioners at this belated stage to question either the forfeiture of shares or re-issue of such forfeited shares, on the ground that the Company failed to follow the procedure prescribed in the relevant articles or there was no need to re-issue the forfeited shares. Consequently, the charges of the petitioners that the second respondent and his family members illegally acquired the forfeited shares in order to gain control of the Company do not survive. It is not the case of the petitioners that the second respondent or his family members acquired any shares by unfair manipulation of the prices, in which case, as held in Mohtu Brothers Private Limited v. Calcutta Landing and Shipping Company Limited (supra) the acquisition of shares by the second respondent or his family members in the Company cannot be questioned.

The minutes of the board meeting dated 02.02.2002 reveal that the petitioner No. 21 was continuously absent for the board meeting held on 08.06.2001, 29.08.2001 and 22.12.2001 without obtaining any leave of absence of the board. It is observed from copies of the notice dated 01.06.2001 and 20.08.2001 of the board meetings held on 08.06.2001 and 29.08.2001 that notices have been reportedly sent by post to the petitioner No. 21. There is no material to show that any notice was served on the petitioner No. 21 for the board meetings held on 08.06.2001 and 29.08.2001. Mere production of copies of the notices with endorsement that notices have been sent by post will not establish service of any notice. The notice dated 12.12.2001 of the board meeting held on 22.12.2001 is silent as to the mode of despatch of notice to the petitioner No. 21. It is. therefore, far from doubt that the Company failed to establish proper and due service of notice of the board meetings held on 08.06.2001. 29.08.2001 and 22.12.2001, which is an essential requirement to invoke the provisions of Section 283( 1 )(g). It is on record that the vacation of the office of director by G. Suresh Babu and B. Jaganmohan Rao was recorded at the board meeting held on 17.03.1999 and 09.03.2001 respectively, wherein the petitioner No. 21 was present at the time of recording vacation of the office of these directors. At the board meeting held on 13.10.2000 including the petitioner No. 21 recorded the vacancies which arose on account of vacation of the office of director by KV Shiva Sudhakar and N Srinivasa Rao due to their failure to attend the three consecutive board meetings without leave of the board. The report of the directors forming part of the annual report for the year ended 31.03.2001 shows that KV Shiva Sudhakar and N Srinivasa Rao vacated the office of director during the year ended 31.03.2001. It shall further be borne in mind that the directors who reportedly vacated their office over a period of time never made any grievance of any irregularity in vacation of the office of director. Furthermore the petitioner No. 21 is a party to the various board resolutions regarding the vacation of office of director and therefore, the petitioners cannot now complain of non-sending of notices of the board meetings to those directors. The second respondent’s daughter was appointed as director at the board meeting held on 02.02.2002, wherein there were only two directors including the second respondent and therefore, the second respondent cannot said to be a non-interested director, as eighth pointed out by the petitioners. Consequently the resolution appointing the second respondent’s daughter as director at the board meeting held on 02.02.2002 cannot be valid for want of a valid quorum. The decision in Kamal Kumar Gupta v. Ruby General Hospital 2006 70 SCL 222 would indicate that even directorial complaints can be entertained in a petition under Section 397/398, if the circumstances so warrant.

The grievances of the petitioners that the minutes of the general or board meetings of the Company do not confirm to the requirements of Section 193 and that the minutes are fabricated must be examined with reference to the original minutes produced before the Bench, It is on record that there are minutes of the annual general meetings maintained before filing the company petition with effect from 07.06.1996. While the minutes dated 07.06.1996; 21.12.1996, 03.09.1998, 18.09.1999, 29.09.2000, 28.09.2001 and 29.09.2002 are signed by the second respondent as Chairman of the meetings, the minutes dated 02.01.1998 are signed by the fourth petitioner. Similarly, the original minutes of the board meetings have been produced since July 1995. There are as many as 67 minutes of the board meetings held between 05.07.1995 and 14.10.2003. All those minutes save the minutes of 10 board meetings held between 23.12.1996 and 09.01.1998 which are signed by the fourth petitioner, have been signed by the second respondent. All these minutes of the board meetings and general meetings are not numbered. The Chairman has initialled each page and signed at the last page of the minutes of the board and general meetings, however, without putting the date. This practice has been uniformly adopted by the Company since its inception under the Chairmanship of the second respondent as well as the fourth petitioner. However, the minutes of the board meetings dated 31.07.1999 and 11.08.2000 are left unsigned by the fourth petitioner. In view of the present peculiar circumstances, the minutes produced by the Company though do not confirm to the requirements of Section 193 cannot be invalidated. Otherwise every decision taken at every board or general meeting from the year 1995-96 will have to be declared invalid causing chaos in the affairs of the Company. Mere markings against the names of certain directors in any of the minutes of the board meetings cannot affect its validity, in the absence of any proof that such minutes are fabricated. The minutes of the board meeting dated 28.02.1998, containing such markings, to which specific reference has been made by Shri Raju, learned Counsel, do not have any bearing on the contentious issues raised before me. Similarly, the discrepancies pointed out in certain board minutes in the light of the list of directors present, in my view, do not go in aid of the petitioners, especially when the petitioners failed to establish any prejudices suffered by the Company on account of such discrepancies. The petitioners 4, 21 and other directors belonging to the petitioners group are parties to several of the resolutions and cannot simply be ignored as fabricated ones. I am, therefore, inclined to reject the plea of the petitioners regarding the validity of the various minutes of the board and general meetings.

The charges of the petitioners that the respondents misappropriated an amount of Rs. 12 lakhs being the rental amount received from M/s Kakatiya Public School for parking their vehicles are supported by the photographs and affidavits filed by third parties. The purported misappropriated amount represents the rent for a portion of the landed property for a period of five years. Nevertheless, the petitioners never raised any grievance for not having accounted for in the books of account of the Company, despite the fact that the petitioners’ representative was on the board of the Company. Furthermore, the respondents cannot be mulct with any liability on account of the rent, on the strength of the mere photographs and affidavits filed by certain persons who are unconnected with the school and more so in the light of an affidavit filed by the school authorities, denying any lease arrangement with the Company and payment of rental by the school. There is no concrete evidence in support of misappropriation of the rentals collected from the school by the respondents. It may be observed that the petitioners now claim to be in the management of the Company, but there is no material to establish that any demand has been made on account of future rentals or any action taken by the Company for non-payment of the rent by the school for parking its vehicles.

In regard to the charges regarding fictitious losses and writing off the Company’s assets, it may be observed that the board of directors including the petitioner No. 21 at the meeting held on 23.12.2000 deliberated the proposal for sale of the computer systems available with the Company, the relevant portion of which runs thus:

The Chairman then informs that a proposal for purchasing of the Computer System available in the Company was received from the management of VSBWA. This Computer system was supplied by CMC Ltd., as part of the overall Screen Based Trading project implemented by the Company but due to completely changed circumstances the same is idle now. After an exhaustive bargaining the consideration was agreed to be Rs. 48 Lac for the system and the associated software. In the discussion that followed Directors unanimously approved the bargain as being in the interest of the Company and ratify the Memorandum of understanding reached with VSBWA….

The board of directors unanimously took a conscious decision to sell the computer system for a sum of Rs. 48 lakhs. The petitioner No. 21 is a willing party to the decision taken by the board of directors of the Company. It is noticed that the names of GSLV Prasad and M.R. Ramarao contained in the minutes dated 23.12.2000 are not reflected in the list of director present at the board meeting held on 23.12.2000. This irregularly, cannot vitiate the minutes, especially when the petitioner No. 21 never denied his participation in the board meeting and there was a valid quorum for the board meeting held on 23.12.2000 as provided in Article 110, with participation of four directors, including the petitioner No. 21. At the board meeting held on 29.08.2001, an amount of Rs. 26.85 lakhs and Rs. 24,270/-, being the value of the balance obsolete equipments and the unserviceable stores respectively were written off. The report of directors dated 30.08.2001 forming part of the annul report for the year ended 31.03.2001 explicitly states that “During the year an amount of Rs. 26,85,000/- was written off the books, being the value of the remaining obsolete equipment installed in 1966 by C.M.C. Limited, as part of the Screen based Trading System “. The members at the annual general meeting held on 28.09.2001 approved and adopted the audited accounts for the financial year ended on 31.03.2001, together with the Auditors’ and Directors’ reports thereon, which speak of the written off amount of Rs. 26.85 lakhs. The petitioners without raising any objection on the alleged fictitious loss and writing off the assets of the Company at appropriate time, have chosen to agitate belatedly these grievances in the present company petition.

In regard to the grievances on account of the inflated administrative expenses of the Company for personal gains of the second respondent, it is found that the audited accounts of the Company for the financial years ended 31.08.1996, 31.08.1997, 31.03.1998, 31.03.1999, 31.03.2000, 31.03.2001 and 31.03.2002 were approved and adopted by the members at the first, second, third, fourth, fifth, sixth and seventh annual general meetings respectively. The profit and loss account for all these financial years sets out the administrative expenses, which shall include rent and amenities, electricity charges, postage & telephones, traveling & conveyance, repairs & maintenance, legal fees etc. The petitioner No. 21 was on the board of the Company till 02.02.2002 and hence he cannot plead ignorance of the fictitious expenses, if any, booked in the books of account of the Company during the relevant point of time. The fourth petitioner was Chairman of the second annual general meeting held on 24.01.1998, when the balance sheet of the Company as on 31.08.1997 and profit and loss statement for the period from 01.10.1996 to 31.09.1997 were adopted and approved by the members. It is observed that the Company had incurred an amount of Rs. 4.47 lakhs towards administrative expenses, though the Company had not commenced its main service activities during the relevant, as borne out by the Auditor’s report dated 17.12.1997. The auditor’s reports dated 05.11.1996, 17.12.1997, 01.09.1998, 02.08.1999, 28.08.2000, 30.08.2001 and 28.08.2002 forming part of the annual report for the years ended between 31.08.1996 and 31.03.2002 clearly state that no personal expenses have been charged to revenue account except those payable under contractual obligations and as per prevailing trade practices. The reports of the auditor are not under challenge by the petitioners. Against this background, the assertion of the petitioners that all the expenses of FSI and personal expenses of the second respondent have been debited to the Company, without any material whatsoever cannot be sustained. The exorbitant expenses which remained unquestioned for several years are being questioned for the first time by the petitioners in the present proceedings. Similarly, the purchase of office equipments is sought to be disputed at this belated stage. Furthermore, the collective wisdom of the board of directors in purchase of the office equipments cannot be interfered by the CLB. The other acts of mismanagement complained of by the petitioners namely, misuse of funds and infrastructure facilities of the Company by the second respondent’s wife remain without being established. The petitioners pointed out that the respondents ought to have made use of the premises located in the landed property belonging to the Company for the use of its registered office. This proposal never came from the petitioners even when the lease in respect of the registered office of the Company came to be renewed at the enhanced rent in March 1998. It may be observed that the board of directors including the petitioner No. 21 at the board meeting held on 20.03.1998 approved the renewal of lease at the enhanced rent for the registered office of the Company, wherein no suggestion was made to locate the registered office in the Company’s premises. Moreover, the registered office of the Company was shifted to the premises belonging to the second respondent’s wife on account of economic reasons, in terms of the decision taken by the board of directors at the meeting held on 22.12.2001, wherein full disclosure of the relationship of the owner of the premises to the second respondent is found to be made. Therefore, the grievances of the petitioners do not merit any consideration.

While Shri V.S. Raju, learned Counsel asserted that the Court, in the light of the decision of the Supreme Court in Needle Industries (India) Limited and Ors. v. Needle Industries Newey (India) Holding Limited and Ors. (supra), is empowered to grant relief, even when no case of oppression is made out by the aggrieved shareholders, Shri Seshadri, learned Senior Counsel contended that “the Court” in the said decision means the “Supreme Court”, which can grant remedies in exercise of its constitutional power and therefore, the CLB cannot usurp the power of the Supreme Court to grant any relief in favour of the petitioners, since no case has been made out under Sections 397/398. The very same issue came before this Board in Delstur Commercial & Financial Limited v. V. Sarvottum Vinijaya Limited (2001) Vol.3 CLJ 442, wherein after exhaustively considering the contentious issue, the following conclusions have been reached:

The appeals by special ‘leave considered by the apex court in Needle Industries (India) Ltd.’s case (1982) 1 Comp LJ I (SC), supra, arose out of the judgment of the Division Bench of the Madras High Court in Section 397/398 petition and both the sides submitted to the court that the petition was essentially one under Section 397 and the court proceeded to consider the appeals as one arising out of [section] 397 petition. In para 39 of the judgment, the court examined as to whether the appellant (holding company) was entitled to relief under Section 397 and it has also referred the same in para 43. In paragraphs 44 to 52, the court had examined the meaning and scope of the work ‘oppression ‘. After examining various issues raised in the appeal, the court came to the conclusion in para 170 that the charge of oppression arising out of the central accusation of non-allotment of the right shares to the holding company had failed. Thereafter, in para 172. the court observed:

Even though the company petition fails and the appeals succeed on the finding that the holding company has failed to make out a case of oppression, the court is not powerless to do substantial justice between the parties to place them, as nearly as it may, in the same position in which they would have been, if the meeting of 2nd May were held in accordance with law.

From the above, we are not in a position to view, as contended by Shri Sen, that this observation has been made in exercise of powers under Article 142. The fact that these appeals arose out of a petition under Section 397 and that the court had extensively dealt with the provisions of this section in the judgment and made the above observation, we are of the view that the observation of the apex court that the court is not powerless to do substantial justice between the parties even when acts of oppression are not established, is a proposition made with reference to the powers of a court in dealing with Section 397 petition. This view gets strengthened from para 171, wherein, when it was argued that Coats and Newey who were two of the three main partners were not of one mind and that Newey never complained of oppression, the Supreme Court observed:

They may or they may not. That is beside the point. Such technicalities cannot be permitted to defeat the exercise of the equitable jurisdiction conferred by Section 397 of the Companies Act.

Further, it is to be noted that the term used by the Supreme Court in para 172 is not ‘this court’ but ‘the court’, further indicating that the Supreme Court was not referring to its own power, but to the power of the court dealing with Section 397 petition. Further, we are also of the view, that if a liberal and beneficial interpretation of the observation of the Supreme Court could advance the cause of justice, then such an interpretation should be preferred to a limited legalistic interpretation. Thus, we do not accept the interpretation of Shri Sen in this regard. Now that the jurisdiction relating to this section is with the Company Law Board, it does have, in exercise of its equitable jurisdiction, the discretionary power to do justice between the parties in the manner it considers fit with a view to protect the interest of the shareholders and the company….

Further, the decision in Needle Industries (India) Ltd. ‘s case (1982) 1 Comp LJ I (SC), supra, has been repeatedly applied not only by this Board, but also by various High Courts that even when acts of oppression are not established, in facts of a case, appropriate relief/directions could be given. We would not like to deviate from this general proposition applied in various cases on the basis of interpretation given by Shri Sen. Therefore, we are of the view that, depending on the facts of a case, even in cases where oppression is not established, with the view to protect the interest of the Company and the shareholders, suitable order could be passed in exercise of the equitable jurisdiction conferred by Section 397.’ For instance, in Yashovardhan Saboo ‘s case (1993) I Comp LJ 20 (CLB), supra, the dismissal of the petition on the ground that the acts of oppression had not been established would have only continued the deadlock in the management resulting in the winding up of the Company. This was prevented by directing the petitioners to sell his shares to the respondents at a fair value. Likewise, in a number of case, this Board has, irrespective of the fact whether acts of oppression have been established or not, either approved compromise proposals or impressed upon the parties to amicably settle the disputes, once it felt that such a course alone would be in the interest of the Company and the shareholders. In the same way. purchase and sale of shares or division of assets had also been directed with the view to safeguard the interest of the Company and the shareholders. The Board has also, in cases where it has felt such a course of action was not warranted, had not done so. Therefore, each case has to be decided on the facts of that case and no single readymade formula can be applied in all cases.

The above principle has been followed in Yashovardhan Saboo v. Groz-Beclert Saboo Limited and Ors. & Synchron Machine Tools Private Limited and Ors. v. V.M. Suresh Rao (supra). The Supreme Court in Sangramsinh P. Gaekwud v. Shantadevi P. Gaikwad (supra) held that “in a given case the Court despite, holding that no case of oppression has been made out may grant such relief so as to do substantial justice between the parties” (para 207). In the light of this legal proposition many of the decisions cited by Shri Seshadri, learned Senior Counsel, now assume only academic interest. In this background, it is immaterial whether the petitioners have made out a case under Section 397/398 to grant any relief to bring to an end the acts complained of by the petitioners. The minutes of eighth annual general meeting of the Company reportedly held on 30.09.2003 reveal that the meeting could not be completed in a peaceful manner. The Company could not either give effect to any of the resolutions passed at the eighth annual general meeting, on account of a restraint order obtained by one of the shareholders in a petition (Miscellaneous Petition No. 22569 of 2003) filed before the High Court of Andhra Pradesh, which is now pending before the Court of Additional Senior Civil Judge at Vijayawada as O.S. No. 827 of 2003. However, according to the petitioners, at the eighth annual general meeting the members belonging to the respondents group did not participate and the respondents 3 & 6 were not re-elected as directors of the Company. These developments have resulted in a deadlock situation in the affairs of the Company. It is already found that the relationship between the shareholders is not reconcilable in view of several of the litigations and that the parties have lost mutual trust and confidence. It is on record that the Company became a member of Bhubaneshwar Stock Exchange Limited and of Interconnected Stock Exchange India Limited as early as in the year 1996, but never carried on, since inception, its main activity, as disclosed in the audit reports forming part of the annual report for the periods between 1995-96 and 2001-02. The landed property belonging to the Company cannot be divided among the 216 existing members and is being exposed to various inevitable risks. The petitioners group consisting of 130 members is willing to sell its entire stake in Company to the respondents, but the latter are willing to purchase the shares of the petitioners only and not the petitioners group in entirety and further they are not willing to sell their shares to the petitioners. The facts set out hereinabove would justify the making of a winding up order on just and equitable grounds, which would however unfairly prejudice the members. The most equitable relief, in removing the existing impasse, in my view, will be to sever the relationship by disposing the landed property and apportioning the sale proceeds among the shareholders, especially when the purpose for which the land was acquired could not be accomplished.

In view of my foregoing conclusions and in exercise of the powers under Section 402 as recognised in Harikumar Rajah v. Sovereign Dairy Industries Limited (supra ) and with a view to bring to an end the mattes complained of, it is directed as under:

i) The Company will convene and hold a meeting of its members to elect directors not exceeding five in number, upon which the board so constituted will appoint one of its directors to be a Managing Director. Hon’ble Justice Mr. P. Ramakrishnam Raju (Retd.) Hyderabad-500 034 (Telephone No. 040 2354 7977/2360 0359) will preside over the meeting convened in terms of this order. He is at liberty to take the services of any Practicing Company Secretary of his choice, in discharge of his functions.

ii) The Chairman will workout the entire modalities of convening and holding of the general meeting in consultation with the Company;

iii) The Chairman of the meeting will forward a report on the proceedings of the general meeting within ten days of conclusion of the meeting;

iv) The board of directors constituted in terms of this order shall forthwith replace the existing board and shall –

(a) manage the day to day affairs of the Company as per the memorandum and articles of association of the Company;

(b) take necessary steps for due and proper sale of the landed property belonging to the Company under supervision of the Chairman appointed by this Bench for the best possible price and distribute the sale proceeds among all the shareholders according to their holding in the Company;

(c) deliver share certificates to the members in respect of their holding in the Company.

v) The sale of 570 sq.yards of the landed property already effected and registered by the Company in favour of third party purchasers is confirmed.

vi) The remuneration of the Chairman and the Practicing Company Secretary fixed in consultation with the Company shall be borne by the latter.

With the above directions, the company petition and the connected applications stand disposed of. All interim orders are vacated. Liberty to apply, in case of any difficulty in implementation of this order. No order as to costs.