ORDER
S. Balasubramanian, Chairman
1. The petitioners claiming to hold 317 shares collectively in M/S Nitin Dyeing & Bleaching Mills Private Ltd. (the company) have filed this petition alleging oppression and mismanagement in the affairs of the company.
2. The facts of the case are that in 1971, a partnership firm in the name of National Dying & Bleaching Works was established by the families of Ved, Marda and Vohra. In Feb. 1975, the company was incorporated with the main object of taking over of the business of the above said partnership firm with the 1st petitioner and Shri M.M. Vohra as the subscribers to the Memorandum. The subscribers to the memorandum and the 2nd respondent were the first directors of the company. During 1991-92, both Vohra and Marda retired from the business by transferring shares held by them in favour of the 1st petitioner and the 2nd respondent, some shares in their own name and some shares in the name of the HUF formed by them separately. Thus, the company became a family company of Veds. The petitioner and the 2nd respondent are brothers, the petitioner being the elder. From September, 1992 to September, 2001, the Board of Directors consisted of the 1st petitioner, 2nd respondent, 3rd respondent and one Nitish Hans Raj Ved. As in September, 2001, the issued and paid up share capital of the company consisted of 602 shares of Rs. 1000/- each of which the petitioners held 317 (as claimed by them) shares constituting 52.66% share in the company. The petitioners have complained that further shares to the extent of 426 shares of Rs. 1000/- each were issued to the son of the 2nd respondent i.e. the 4th respondent without the knowledge and consent of the petitioners and that he had also been inducted into the Board as a whole time director and that the petitioners are alleged to have vacated their office in terms of Section 283(1)(g) of the Act effective from 5th April, 2002. These acts, according to the petitioners, constitute acts of oppression against the petitioners as they have been reduced to a minority and excluded from the management. They have also alleged various instances of mismanagement including siphoning of funds by the respondents.
3. Shri Athavale, appearing for the petitioners submitted: The company was being run in the nature of a quasi partnership between the 1st petitioner and the 2nd respondent, The share capital of the company consisting of 602 shares of Rs 1000 each, continued to be Rs. 6.2 lacs for a number of years. The petitioners were holding 317 shares while the respondents were holding 285 shares indicating clearly that the petitioners were in the majority with 52.66% shares. Both the petitioners had been directors from 1992 onwards. However, without the consent and knowledge of the petitioners, the 2nd respondent had issued 422 additional shares on 5th October 2001 to the 4th respondent being the son of the 2nd respondent. There was no need to issue any further shares since the factory of the company remained closed right from April, 1999. Even assuming that the company needed funds, considering the quasi partnership nature of the company, offers should have been made to the petitioners also. Without making any offer to the petitioners and allotting all the shares to the 4th respondent, the petitioners have been converted into minority with 30.83% shares and a new majority has been created in favour of the respondents. The directors of a company are in fiduciary position and therefore cannot issue shares to benefit one group of shareholders. Issue of shares with the intention of creating a new majority would constitute oppression. Not satisfied with the conversion of the petitioners into a minority, the 2nd respondent has also inducted his own son and another brother as director of the company and has also declared that the petitioners had ceased to be directors in terms of Section 283(1) (g) of the Act on the ground that they had failed to attend three consecutive meetings. The petitioners never received any notice for any Board Meeting and therefore the question of their absenting from the Board Meetings did not arise. The respondents, with a view to deny the petitioners the right to participate in the affairs of the company have not been sending notices for any annual general meetings and they are also not providing any information about the company in spite of repeated requests. For instance the company has filed annual returns for the year 200-2001 stating that the AGM for that year was held on 30th September, 2001 for which the petitioners did not receive any notice. Further, that day being a Sunday, the meeting could not have been held on that day. It is in that meeting that the 4th respondent was allegedly appointed as a whole time director. By these acts, the respondents have acted in a manner oppressive to the petitioners.
4. Continuing his arguments, Shri Athavale submitted; There has been a gross financial mismanagement in the company. Even though the factory of the company remained closed and no business was being conducted by the company, the 2nd respondent unilaterally increased his remuneration as a director as is evident from annual report for the year 2000-2001. The 2nd respondent had leased out the property in the form of premises owned by the company to one M/S Neha Synthetics in 1993. Even though the company is entitled to receive the lease rentals, respondents 2 to 4 have been directly receiving the lease rentals and have been misappropriating the same. A perusal of the bank statement of the company at Annexure A-11 would reveal that substantial funds had been withdrawn by the 2nd respondent for his own benefit. Further, the said Neha Synthetics had defaulted in payment of excise duty due to which the Excise Department has issued a show cause notice cautioning M/S Neha Synthetics either to clear the excise dues or else the property would be confiscated. The thoughtless act for the 2 respondent in leasing out the property to M/S Neha Synthetics has exposed the property of the company to confiscation. Even though the manufacturing activities of the company were shut down effective from 1st April, 1999, the annual reports for the year 1999-2000, 2000-2001 etc. show substantial expenses on material consumption, expenses on Power and fuel including purchase of raw material. These annual reports also indicate purchase of certain fixed assets like machinery etc. When the factory of the company remained closed, the question of incurring expenses for running the factory or addition of machinery does not arise other than establishing that all these amounts have been siphoned of by the respondents. In the recent past, the company has leased out various portions of the property to certain individuals and whatever lease rentals were received, they have all been siphoned of. To prevent the respondents from siphoning of the funds, the petitioners have written letters to all the lessees asking them to make the lease rentals only by way of cheques.
5. Summing up his arguments, Shri Athavale submitted that the acts complained of would clearly indicate that the respondents have acted oppressively against the petitioners and that the respondents are also guilty of siphoning of funds of the company. In a family company, these acts would justify the winding up of the company on just and equitable grounds. In Naresh Trehan v. Hymatic Agro Equipments (P) Ltd (1999 2 CLA 333), CLB has held in a family company wherein there had been more or less equal shareholding and representation for all groups in the management, any disturbance in the arrangement would constitute oppression. Therefore the allotment of 426 shares be cancelled and the status quo of the Board be restored as it was. There should also be an investigation into the affairs of the company to unearth the amount of money siphoned of by the respondents.
6. Shri Chitnis appearing for the respondents submitted: All the allegations of the petitioners are baseless. There was a family arrangement by which various entities between the family were divided between the 1st petitioner and the 2nd respondent. The company that is being managed by the petitioners is heavily losing and that is the reason why the petitioners are aggrieved against the respondents and filed this petition. They have not come with clean hands. The petitioners were not in majority as claimed by them. They held/hold only 273 shares and not 317 shares as claimed by them. The 1st petitioner holds 10 shares in his personal capacity and 148 shares as Karta of H.G. Ved HUF. The 2nd petitioner holds 115 shares. The 1st petitioner claims additional 44 shares held by S.G. Ved HUF purportedly transferred to him on 10th May, 2001. The purported transfer is non est and fraudulent because from the records of the company it is seen that no Board Meeting was held on 10th May, 2001 and that no transfer deeds regarding the purported transfer are available with the company nor the fact of transfer is recorded in the register of members. Therefore, it is a fraudulent transfer. The 3rd respondent in his capacity as a karta of SG HUF has already filed a criminal complaint against the 1st petitioner in this regard. Therefore, it is the respondents who by holding 329 shares, constituted the majority even before the issue of further shares. In a Board Meeting held on 25th August, 2001 in which the petitioner was present, a resolution was passed to the effect that future Board Meetings would be held on 5th day of first month of each quarter of a calendar year or as and when a requisition is made by any director by a letter addressed to the Chairman of the company. In view of this resolution, there was no need to issue notices for Board Meetings. Yet the company issued notices for Board Meetings on 5th October, 2001, 5th January, 2002 and 5th April. 2002 but the petitioners did not attend any of the above meetings and therefore in terms of Section 283(1)(g) of the Act, they ceased to be directors effective from 1st April, 2003. Therefore, in the meeting held on 22nd June, 2002, it was resolved that w.e.f. 5th April, 2002, the petitioners had vacated their offices. Relevant Form No. 32 was filed with the Registrar. Even though the company filed Form No. 32 with the words “Vacated office”, since the filing clerk refused to accept Form No. 32 without the words “Resigned”, the word “Resigned” was added in ink and therefore it appears in the Form “Resigned and vacated office”. As far as appointment of the 4th respondent as a whole time director is concerned, in a Board Meeting held on 25th August, 2001 in which the petitioner was present, the appointment of the 4th respondent was considered and accordingly he was appointed as a whole time director in the AGM held on 30th September, 2001 which was attended by the petitioner. Relevant form No. 32 was filed on 5th October, 2001. Having consented to the appointment of 4th respondent, the petitioner cannot complain now. 7. The learned counsel further submitted: The petitioners are guilty of suppression of material facts. As the company had entered into lease agreement with others, it had also entered into a lease agreement with Gopal H. Ved, the son of the petitioner on 15th Feb. 2001 for a period upto 31st March, 2002. Gopal H. Ved had failed and neglected to pay the lease rental. Yet, on 24th July, 2002, the 1st petitioner purportedly acting on behalf of the company, executed a registered lease deed in favour of his son for a further period of 3 years for a monthly rental of Rs. 15000/- as against Rs. 50,000/- as per the earlier lease deed. It was done by the 1st petitioner when he had ceased to be a director of the company. In regard to the allegation regarding remuneration to the 2nd respondent, he was drawing a remuneration of Rs. 54000/- per annum from the year 1991. After a lapse of about 10 years, his remuneration was increased to Rs. 72000/- taking into consideration the increase in cost of living and as such no undue benefit has been extended to the 2nd respondent. All the allegations relating to siphoning of funds are baseless. The rentals from M/S Neha Synthetics were either received by cheques and duly deposited in the bank account or have been adjusted against the deposits given by M/S Neha Synthetics. The cash withdrawal from the bank account related to payment to various parties and for payment of gratuity to workers on their termination at the time of closure of the factory and these facts were always known to the petitioners. The apprehension that due to failure of Neha Synthetics to clear the excise duty dues, the premises of the company would be confiscated, no longer survives as on an application made by the company, the excise authorities have already ordered that the assets belonging to the company leased out to M/S Neha Synthetics shall not be liable for confiscation. As far as the allegation relating to the accounts are concerned, the petitioners have suppressed the information that all the balance sheets have been signed by the 1st petitioner and as such they cannot question the genuineness or otherwise of these accounts. Regarding the allegation of the petitioners that notices for general meetings were not given to them more particularly the one relating to the AGM on 30th September, 2001, not only the notices were sent, the 1st petitioner also attended, the meeting on 30th September, 2001. It is true that when the petitioners sought for some details from the company, that information was not furnished only because of the apprehension that the 1st petitioner would utilize the same in other litigations. As far as allotment of 426 shares to the 4th respondent is concerned, the same was done in a Board Meeting held on 5th October, 2001. The petitioner did not attend the meeting in spite of notice. This allotment was not made with an intention of acquiring substantial voting rights in the company, but for mobilizing funds for the company. The petitioners have been noting against the interest of the company. The 1st petitioner with a view to hold the company to ransom has frozen the bank account. Therefore it is the petitioners who are acting against the interest of the company. Since the petitioners have not made out either oppression or mismanagement in the affairs of the company, the petition should be dismissed.
7. Shri Athavale submitted in rejoinder: There was never any family arrangement nor the petitioners are controlling any family company. Even in the reply, the respondents have not established as to why the need for allotment for further shares arose and whether the company was in need of funds. Even if the company needed funds, offers could have been made to the petitioners especially when the 1st petitioner had a deposit of Rs. 8 lacs lying with the company. Therefore, the allotment was made only with a view to take absolute control of the company which was in fact a quasi partnership. Since the company was refusing to give any information and since, the respondents were siphoning of funds, the 1st petitioner had no option but to freeze the bank accounts. In spite of the allegations made by the petitioners regarding cash withdrawals, the respondents have not furnished any details justifying such huge withdrawals which according to the petitioners is of the order of Rs. 55 lacs. It is true that the lease rentals in respect of the lease given to the son of the 1st petitioner was reduced from Rs. 50,000/- to Rs. 15000/-. It was done only because the company was not giving any power supply which had to be arranged separately by the lessee. The minutes of Board Meetings produced by the respondents are all fabricated. The petitioners have not produced copies of the entire minutes of, the meeting on 25th August, 2001. The part minutes of that meeting enclosed with the reply, is purportedly signed by the 2nd respondent as the Chairman of the meeting. However, the Directors’ report dated 25th August, 2001 has been signed by the 1st petitioner as the Chairman. This itself would show fabrication of Board minutes. No decision that future Board Meetings would be held on 5th of the 1st month of every quarter was taken in that meeting. Even otherwise, issue of notices for Board Meetings is statutorily required in terms of Section 286(1) of the Act. Even though the respondents have contended that in spite of such a decision, notices were issued to the 1st petitioner for later meetings, they have not produced any proof of having sent those notices. The minutes of these Board Meetings are fabricated only to create records to show that Board Meetings were held and the petitioners did not attend the same. Therefore, no credence should be given to any of these minutes. The appointment of the 4th respondent as a whole time director allegedly in the AGM held on 30.9.2001 is another act of oppression against the petitioners in as much as by doing so the balance in the Board has been upset. As far as transfer of 44 shares S.G. Ved (HUF) to the 1st petitioner is concerned, the shares were transferred by share transfer forms dated 10th March, 2001 by the 2nd respondent as is evident from Annexure RJ-2 which is a copy of the transfer form. The 1st petitioner paid an amount of Rs. 44000/- as evidenced by the Bank Statement at Annexure RJ-2. The transfer was registered by the company on 10.5.2001. The share certificates relating to all these 44 shares are with the 1st petitioner with endorsement of transfer. Therefore, the 2nd respondent cannot contend that he had not transferred the shares to the 1st petitioner.
8. I have considered the pleadings and arguments of the counsel. Considering the family nature of the company, in the order dated 5th December, 2001, this Bench had advised the parties to settle the disputes amicably. To facilitate the settlement, the petitioners were asked to give their proposal in writing to the respondents within 15 days and the respondents were to react to the same within further 15 days. It was also recorded in that order that in case there was no settlement, the matter would be heard on merits. In terms of that order, by a letter dated 16th December, 2002, the petitioners had given 3 options to the respondents. As per the first option, the share value was to be determined on the basis of the original share capital of 602 shares and the petitioners were to have the choice of either selling their shares or purchasing the shares of the respondents at the value determined. The second option was to divide the factory premises of the company in the ratio of 55:45 so that both the groups could carry on their business separately and they could pay a fixed monthly rent to the company. The third option was that there could be a physical division of the company in the ratio of 55:45. In response to that letter, the respondents sought for certain information from the petitioners indicating therein that the said information was necessary to determine the value of the shares. Accordingly, by another letter dated 27th December, 2002, the petitioners had furnished the required information. However, nothing came out of this exercise. Thereafter a few hearings had to be adjourned at the request of the respondents. In the hearing held on 27.11.2003, the 4th respondent who was present in person made a statement that the respondents were interested in a global settlement and not in an isolated settlement in regard to the company alone. However, the petitioners were not agreeable for a global settlement and as such the matter was heard on merits.
9. The main complaint of the petitioners relate to the allotment of further shares. Normally, further shares are allotted either for mobilizing funds for the company or for meeting either statutory requirements or requirements of financial institutions. In allotment of shares, the directors are in a fiduciary position and as such cannot issue/allot shares with any ulterior motive like creation of a new majority or conversion of a majority into minority. There is a dispute as to who constituted the majority before the issue of impugned shares. In a family company, even disturbance in the existing percentage shareholding is an act of oppression. In the present case, the directors have allotted 426 shares to the 4th respondent in exclusion of the petitioners and thus the status of the percentage shareholding has been affected. A perusal of the minutes of the Board Meeting on 5th Oct. 2001 in which the allotment was made reads ” Chairman informed the Board that the company had received application for 426 equity shares from Shri Harish Lakshmi Kant Ved along with full application money and placed before the Board the share application form. He also informed the Board that the company is in need of finance and hence the shares applied for be allotted “. Thereafter, the Board passed a resolution allotting the shares. Other than stating that the company needed a finance, there is nothing on record to indicate the quantum of money needed, how the 4th respondent on his own applied for the shares, why no offers were made to other shareholders including the petitioners etc. Therefore, as contended by the petitioners the allotment had been made solely with the purpose of increasing the shareholding of the respondents. By this allotment, 4th respondent has become the largest shareholder in the company. The respondents have taken a stand at the time of arguments that there was a family settlement by which there was a division of family companies between the two group and the respondent company has come under the control of the respondents. There is no averment in the reply filed by the respondents to this effect and no details as to which of the companies went to the petitioners. Therefore, in the absence of full particulars, this stand of the respondents cannot be accepted. It is an admitted fact that there has been no change in the shareholding right from 1992 and this allotment that too after excluding the petitioner from the Board clearly indicates that this allotment has been made for an ulterior motive and not for the benefit of the company and therefore deserves to be cancelled.
11. The claim of the respondents that the petitioners had ceased to be directors in terms of Section 283(1)(g) of the Act does not stand on a strong footing. In the reply, they have enclosed a part of the minutes of the meeting held on 25th August, 2001 in which the alleged decision to fix the date of Board Meeting on 5th of the first month of every quarter was taken. These minutes are found to have been signed by the 2nd respondent as Chairman. The petitioners have relevantly pointed out that on the same day, the annual report has been signed by the 1st petitioner as Chairman. This aspect has not been clarified by the respondents giving a rise to a doubt about the genuineness of the minutes. Further, in terms of Section 264(1) of the Act, notices have to be issued for the Board Meetings, which according to the respondents, were issued in spite of the decision taken on 25.8.2001. They have not given any proof of dispatch of notices to the petitioners. If, as decided the Board Meetings are to be held only on the 5th of the first month of every quarter, it has not been explained as to how a Board Meeting was held on 26th June, 2002 wherein the Board had recorded about the vacation of office by the two petitioners effective from 5th April, 2002. In the Board Meeting held on 5th January, 2002, as per the minutes, the Board had noted the absence of these two petitioners and had also noted the application of the provisions of Section 283(1)(g) of the Act. Having noted this, in all fairness, the Board should have cautioned the petitioners that in case they do not attend the next meeting, they would cease to be directors. This was not done. Therefore, I am of the view that if really the impugned meetings had been held, the company had not issued notice to the petitioners willfully so as to attract the provisions of Section 283(1)(g) of the Act. It is an admitted fact that these two petitioners have been on the Board right from 1992 and excluding them from the management is highly oppressive. Therefore, it would be in order to reinstate them on the Board.
12. Regarding the appointment of the 4th respondent as a whole time director in the AGM held on 30.9.2001, the grievance of the petitioners is that they did not receive notice for this meeting which was also held on Sunday. Other than claiming that the petitioners attended this meeting, the respondents have not produced either the attendance sheet containing the signatures of the petitioners nor any other material to prove their attendance. If the petitioners had received the notice with the agenda item regarding appointment of the 4th respondent, as a whole time director, they would not have kept quiet and would have attended that meeting. While a single shareholder alleging that he has not received notice for an AGM cannot challenge an AGM, in the present case, the petitioners hold substantial shares and failure to notice to them, being oppressive, warrants a declaration that the resolutions passed in that meeting were invalid. Accordingly, I declare so.
13. The petitioners have alleged siphoning of funds by the respondents on the basis of the bank statement and also the annual reports for 1999-2000 and 2000-2001. According to them, all the cash withdrawals have been misappropriated and by overstating the expenditure under different heads, when the factory of the company had been closed, the respondents have misappropriated the funds of the company. I find from the annual reports of these two years that the 1st petitioner has signed the accounts for the year 1999-2000 on 31st August, 2000 and the annual accounts for the year 2000-2001 on 25th August, 2001. Having approved the accounts, the petitioners cannot allege that the respondents had overstated the expenditure and thus have siphoned of the funds. In a number of cases, this Board has held that a party to a decision cannot, later on challenge the same either as oppressive or acts of mismanagement. The assertion of the petitioners that the respondents have siphoned of above 55 lakhs is not supported by any, details. From the Annual accounts for the years 1999-2000 and 2000-2001, I find that the company has earned an income by way of processing charges of about Rs 8.18 lakhs during the first year and about 1.45 lakhs during the second year. If it so, there has to be some expenditure and the same is reflected in the accounts. Therefore the petitioners cannot allege that by showing expenditure, the respondents have siphoned of funds of the company.
14. There is a dispute about the shareholding of the 1st petitioner with regard to 44 shares claimed to have been transferred by S.G. Ved HUF to the 1st petitioner. The respondents have taken a stand that the transfer was not approved in any Board Meeting and the share transfer forms are also not available with the company. IN the rejoinder, the petitioners have furnished a copy of the transfer instrument and also have furnished a copy of the bank statement indicating a payment of Rs. 44000/- to the 2nd respondent. Along with the petition, they have also enclosed copies of share certificates relating to these 44 shares wherein there are endorsements of transfer of the shares to the 1st petitioner. The respondents have not countered these documents either by filing a sur rejoinder or during the hearing. This being the case, since the share certificates are in possession of the 1st petitioner endorsed in his name, the presumption in terms of Section 84 of the Act arises in favour of the 1st petitioner that he is the registered shareholder in respect of these shares. Any way, since, the respondents have filed a criminal case against the 1st petitioner in this regard, I am not giving any finding, more so, since there is no prayer in this regard in the petition.
15. In view of the above findings, I direct as follows: (a) 426 shares allotted on 5.10.2001 to the 4th respondent shall stand cancelled with immediate effect. The company shall pay the face value of the shares to the 4th respondent and reduce the issued and paid up capital to that extent. The petitioners are inducted as directors on the Board with immediate effect. As far as the appointment of the 4th respondent as a whole time director is concerned, since his appointment was made in the AGM on 30.9.2001 without notice to the petitioners holding substantial shares, his appointment will also stand cancelled with immediate effect. In other words, the status quo ante in regard to the shareholdings and the Board is restored.
16. While doing so, I am conscious, of the fact that, the restoration of the status quo ante is not likely to bring about the preexisting atmosphere of cordiality among the parties and continued animosity would not be in the interest of the company. As advised by this Bench, the parties must try to part ways amicably. The petitioners have already given three options to the respondents. In case, they desire to choose any of the options, they must indicate the same in writing to the petitioners within a month of this order and once they do so, the same will be binding on the petitioners, not withstanding the order of status quo ante. Simultaneously, the respondents should also file an application before this Bench seeking for an order approving the option chosen by the respondents. Thereafter, this Bench will give further directions to facilitate complete settlement among the parties. In case, the respondents fail to do so within a month, the petition will be deemed to have been disposed of finally by this order.