clb

companies act

[2008] 81 scl 62 (clb - chennai)

Company Law Board, additional Principal Bench, Chennai

P. Muniswamappa Sonnegowda

v.

Mysore Lighting Works (P.) Ltd.

K.K. Balu, Vice Chairman

C.P. No. 4 of 2006

April 19, 2007

Section 113 of the Companies Act, 1956 - Share certificate - Limitation of time for issue of - Whether right to get share certificates within three months of allotment is an irrevocable right vested in every allottee of shares and is enforceable through an order of CLB under section 113(3) - Held, yes

Section 397, read with section 81, of the Companies Act, 1956 - Oppression and mismanagement - Whether if directors of a company exercise their power to issue further shares not for benefit of company, but simply and solely for their personal aggrandizement and to detriment of company, CLB will interfere and prevent them from doing so - Held, yes - Whether if a member is deprived of his privilege and right, it will be undoubtedly harsh, burdensome and wrongful and will necessarily be an act of oppression to member concerned - Held, yes - Whether further issuance of shares, which resulted in conversion of petitioners into minority, was nothing but an act of oppression and, therefore, was liable to be set aside - Held, yes

Section 171 of the Companies Act, 1956 - Meetings and proceedings - Length of notice for calling meeting - Whether requirement of giving not less than twenty one days notice under section 171 is inapplicable to private limited companies - Held, yes

Section 397, read with section 398, of the Companies Act, 1956 - Oppression and mismanagement - Whether petitioner having participated in annual general meeting could challenge minutes of meeting as invalid and unenforceable - Held, no - Whether grievances arising out of contractual obligations between respective contesting parties can be agitated in a section 397/398 proceeding - Held, no - Whether mere non-filing of statutory returns would attract provisions of section 397 - Held, no

Facts

The petitioners, holding majority shares in respondent No. 1-company, filed petition under section 397/398 claiming various reliefs against the alleged acts of oppression and mismanagement perpetrated by the respondent Nos. 2 to 5 in the company’s affairs. It was their case that the company was promoted as a private limited company by the petitioners and the respondents with the main object of acquiring the brand name of ‘M’ lamps from the ‘MLWL’ a state public sector company, which was then closed; that the respondent Nos. 2 and 3 became the company’s co-promoters without any investment of their own and the respondent Nos. 4 and 5 were appointed as the managing director and the whole-time director respectively; that they colluded with one another to cause immense prejudice to the petitioners and other shareholders by not issuing the share certificates to them till date; that the original share certificates issued in favour of the respondent Nos. 2 and 3 were not in accordance with the provisions of the Karnataka Stamp Act, 1957, inasmuch as the same contained several adhesive stamps which remained uncancelled; that the company having been incorporated on 18-12-2003, instead of conducting two annual general meetings (AGMs) for the period ended on 31-3-2005, held one AGM on 30-5-2005 without any notice as contemplated under section 171(2) to the petitioners thereby depriving the petitioners of copies of the audited accounts of the company; that the company having failed to convene the extraordinary meeting as requisitioned by the petitioners, the petitioners themselves convened the same at hotel ‘M’ on 21-12-2005 wherein the respondent Nos. 2 and 3 were removed from the office of directors and three new directors were appointed in their place and requisite Form 32 was filed with the competent authority, as the respondents were preventing the validly constituted board of directors from carrying on their day-to-day affairs of the company; that allotment of shares to the respondent Nos. 2 to 4 allegedly in recognition of services rendered by them was a mere book entry and not supported by any sanction of the majority shareholders and by virtue of the impugned allotments, the petitioner’s majority shareholding was reduced to minority; that the respondent Nos. 2 and 3 had misused their fiduciary position as the directors of the company and grossly mismanaged its affairs by not rendering any accounts and misappropriating huge funds of the company; and that the respondent No. 4 mobilized Rs. 6 lakhs by himself and through his family and friends towards equity share capital of the company, but no shares were allotted despite the receipt of money.

Held

The original share certificates obtained in favour of the respondent Nos. 2 and 3 were found to be stamped with adhesive stamps, which were not in consonance with the requirement of section 11 of the Karnataka Stamp Act. The stamps so affixed had neither been cancelled. Article 16 of the Schedule forming part of the said Act, stipulated that shares should carry a stamp duty of one rupee for every one thousand rupees or part thereof of the value of the shares, scrip or stock, which had not been duly satisfied in case of the shares issued in favour of the respondent Nos. 2 and 3. Furthermore, the procedure for issuance of paper bearing impressed stamp had not been followed in payment of stamp duty in respect of the share certificates issued in the name of the respondent Nos. 2 and 3. The share certificates carrying the names of the respondent Nos. 2 and 3 described the registered office of the company at new address, whereas, the registered office of the company was admittedly shifted to that place only on 17-5-2004, as borne out by the board resolution dated 12-5-2004. Those discrepancies remained unexplained by the respondent Nos. 2 and 3. The register of members and share ledger though contained the particulars regarding the date of allotment of shares, distinctive numbers of certificates and number of shares acquired, etc., by the shareholders, yet the company had not chosen to produce any material showing dispatch of the original share certificates to the petitioners. The right to get share certificates within three months of allotment is an irrevocable right vested in every allottee of shares and is enforceable through an order of the CLB under section 113(3). In the light of section 113 providing a statutory remedy for delivery of share certificates and in the absence of any material evidencing the dispatch of original share certificates in favour of the petitioners, the company was under an obligation to ensure proper and due delivery of the share certificates to every one of the allottees.

It was on record that the board of directors, at the meeting held on 29-3-2005 under the chairmanship of ‘A’, approved the following:—

(i) Salary to the respondent No. 4 of Rs. 20,000 per month and telephone charges not exceeding Rs. 1,000 per month with effect from 1-5-2004 up to 31-5-2005, and

(ii) Salary to the respondent Nos. 2 and 3 of Rs. 20,000 each per month, commission of ½ per cent on the turnover of the company, reimbursement of mobile, telephone, entertainment, petrol, travel and lodging expenses on actual basis and Rs. 500 per day during travelling to cover miscellaneous expenses.

It was far from doubt that the respondent Nos. 2 to 4 had been adequately compensated for the services rendered by them. Any reward by the board of directors in appreciation of the purported efforts of the respondent Nos. 2 to 4, without the consent or knowledge of the members of the company, was not appropriate. Therefore, the decision of the board of directors at the meeting held on 29-3-2005 to allot 25,000 equity shares of Rs. 10 each in favour of each of the respondent Nos. 2 and 3 and 40,000 equity shares of Rs. 10 each in favour of the respondent No. 4 in terms of the decision taken at the board of meeting held on 12-5-2004 in consideration of their services rendered during the last two years to obtain the approval of the MLWL for the brand name of ‘Lamps’ to the company and with a view to revive the brand name in the market, without the approval of members in a general body meeting of the company, was not sustainable.

When the impugned allotment of shares was made in favour of the respondent Nos. 2 to 4 on 29-3-2005 in consideration of their services rendered to the company, ‘A’ already ceased to be the chairman of the company. It was rather strange that while the board of directors allotted 40,000 equity shares to the respondent No. 4 in consideration of his services rendered to the company, it placed on record its deep concern about the continued absence of the respondent No. 4 from attending the board meetings as the managing director and for not involving in the day-to-day business activities of the company. The directors’ report dated 20-5-2005 forming part of the first annual report of the company for the period from 18-12-2003 to 31-3-2005 indicated that the respondent No. 4 being the managing director refused to sign the audited profit and loss account for the year ended on 31-3-2005 and balance sheet as on 31-3-2005, which was, however, stoutly denied by the respondent No. 4. It was beyond doubt that the balance sheet at the relevant point of time was not signed by the managing director. At the same time, the board of directors thought it fit to reward the managing director by allotting shares in consideration of his services rendered to the company. No Form No. 2 had so far been filed with the Registrar of Companies, evidencing the allotment of 90,000 equity shares of the company in favour of the respondent Nos. 2 to 4. It is well-settled that the directors of a company are in a fiduciary position vis-a-vis the company, and that the relationship between the directors and the company is of trustee and cestui que trust. Therefore, the directors must exercise their power for the benefit of the company and if the power to issue further shares is exercised by them not for the benefit of the company but simply and solely for their personnel aggrandizement and to the detriment of the company, the CLB will interfere and prevent them from doing so. If a member is deprived of his privilege and right, it will ordinarily be an act of oppression on such member, which will be undoubtedly harsh, burdensome and wrongful and will necessarily be an act of oppression to the member concerned. The board of directors, at the meeting held on 29-3-2005, further allotted in favour of respondent No. 5 (900 equity shares), respondent No. 6 (2,950 equity shares) and respondent No. 9 (4,650 equity shares), in exclusion of the petitioners. The board resolution dated 29-3-2005, while approving the allotment of 8,500 equity shares in favour of the respondent Nos. 5, 6 and 9, baldly recorded that pursuant to the undertaking given to the suppliers/small scale manufacturers, dealers of the company, the company received applications together with application monies for subscribing to the share capital of the company. The resolution, however, did not furnish any other requisite information such as the understanding for allotment of shares in favour of the suppliers and dealers of the company, names of the allottees applied for shares, etc. It was not under dispute that the company, having been promoted with the main object of acquiring the brand name ‘M’ Lamps from the MLWL, was engaged in the business of mainly trading in electrical goods for the benefit and in the interest of the ancillary manufacturers of the MLWL, whereas respondent Nos. 6 and 9, being only dealers and not shareholders, had been allotted shares, without, however, allotting any shares whatsoever in favour of the petitioners. The impugned allotment of shares in favour of the respondent Nos. 6 and 9 under the guise of the MOU dated 4-3-2004 and the Trade Name License Agreement dated 6-3-2004 was not justified. The contribution of the respondent No. 9 towards the total turnover of the company as on 31-3-2005 reportedly did not even exceed 5 per cent and the benefit derived by the company on account of the impugned allotment in favour of the respondent No. 6 was not made out, in which case, the impugned allotment of shares could not be in any way beneficial to the interests of the company. The further issuance of shares resulted in conversion of the petitioners into minority and such further issuance of shares was nothing, but an act of oppression. Therefore, the impugned allotments in complete exclusion of the petitioners must be set aside. Even though the grievances of the petitioners that the company having been incorporated in December, 2003 ought to have convened two annual general meetings but consolidated the accounts of the company and held only one annual general meeting for the period from 18-12-2003 to 31-3-2005 after a period of 15 months on 30-5-2005, without consent of the Registrar of Companies under section 210(4), were justified, yet convening of such annual general meeting on 30-5-2005 could not outrightly be rejected, in the light of the records produced before the CLB, of course belatedly by the respondent Nos. 2 and 3. It was to be seen from the copy of the attendance sheet for the annual general meeting held on 30-5-2005 that among other shareholders, petitioner No. 2 and the respondent Nos. 2, 3 and 9 had signed for having attended the annual general meeting. The attendance sheet contained the authentication of the Commissioner appointed by the CLB. It was not the case of the petitioner No. 2 that the attendance sheet did not contain his signature. Similarly, the respondent No. 9, in spite of the opportunity afforded to him, had not chosen to deny his participation in the annual general meeting reportedly held on 30-5-2005. The minutes of the first annual general meeting revealed that the petitioner No. 2 proposed the reappointment of the respondent No. 7 as the director of the company, which was seconded by the respondent No. 3. That resolution was carried unanimously by show of hands. The petitioner No. 2 had not controverted the resolution reportedly proposed by him for the reappointment of the respondent No. 7 as the director of the company. Though mere certificates of posting does not amount to conclusive proof of service of notice of the annual general meeting on the addressee concerned, yet the attendance sheet would categorically indicate that the annual general meeting was held in terms of the notice dated 21-5-2005, in due compliance with article 21 which contemplated notice of seven clear days. The requirement of giving not less than twenty one days notice under section 171 is inapplicable to private limited companies, in which case, it could not be contended that the annual general meeting was convened without proper notice of not less than twenty one days. The plea of the petitioners that minutes of the annual general meeting were not drawn in accordance with section 193 did not merit any consideration, more so, in the light of the fact that none of the minutes of the board meeting relied upon by the petitioners did confirm to the requirements of section 193. It could not, therefore, be argued that none of the minutes of the meeting could be valid and enforceable, especially when the petitioner No. 2’s participation in the annual general meeting had not been explicitly repudiated by him. The appointment of respondent No. 7 in fact was proposed by the petitioner No. 2 at the annual general meeting held on 30-5-2005. Therefore, the plea of the petitioners that any change to the memorandum of association filed with the Registrar of Companies without consent or knowledge of the petitioners was not sustainable. The board of directors, at the board meeting held on 20-5-2005, approved the profit and loss account of the company for the period ended on 31-3-2005 and the balance sheet as on 31-3-2005 together with the relevant schedules and further authorized the respondent Nos. 2, 3 and 5 to sign the annual accounts of the company. The respondent Nos. 2, 3, 5 and 6 were parties to the board resolution dated 20-5-2005 and, therefore, it was far from doubt that the annual accounts for the period ended on 31-3-2005 had been unanimously approved by the board of directors, who were present and participated at the said board meeting. The minutes of the board meeting dated 20-5-2005 did not at all indicate that the respondent No. 4 refused to sign the audited profit and loss account of the company for the year ended on 31-3-2005 and the balance sheet as on 31-3-2005. There was no other material other than the directors’ report dated 20-5-2005, to show that the respondent No. 4 refused to sign the annual accounts for the period ended on 31-3-2005. Mere production of the directors’ report without any other concrete evidence for such refusal on the part of the respondent No. 4 to sign the annual accounts would not go in their aid. Section 215 requires that every balance sheet and profit and loss account of a company shall be signed on behalf of the board by its manager or secretary, if any, and by not less than two directors, of whom one shall be the managing director, where there is one. In the instant case, there was, admittedly, a managing director being respondent No. 4 who had not signed the annual accounts as per the requirement of section 215. It was, therefore, irregular but not necessarily oppressive of the petitioners. Moreover, it was apparent from the conduct of the respondent No. 4 that he had not been showing any interest in the affairs of the company and, therefore, he could not make out any grievances on that account. It was on record that the board of directors, at the board meeting held on 19-12-2003 participated by the respondent Nos. 2 to 5, approved the preliminary expenses amounting to Rs. 8,23,000 only incurred by the promoters, whereas the balance sheet for the period ended on 31-3-2005 disclosed the preliminary expenses of Rs. 15,50,700 after writing off an amount of Rs. 1,72,300. That resulted in a difference of Rs. 9 lakh towards the preliminary expenses, namely Rs. 17,23,000 minus Rs. 8,23,000 which had not at all either been explained or approved at any of the subsequent board meetings. In view of that, the difference of Rs. 9 lakh in the preliminary expenses as borne out by the balance sheet as on 31-3-2005 should be disregarded and any liability arising in that behalf should be met by the respondent Nos. 2, 3, 5 and 6 who approved the annual accounts of the company for the period ended on 31-5-2005. The balance-sheet for the period ended on 31-3-2005 should accordingly be revised and filed with the Registrar of Companies.

It was on record that the respondent No. 4 attended five board meetings held on 19-12-2003, 12-5-2004, 26-7-2004, 6-8-2004 and 22-9-2004 and the respondent No. 5 participated in all the nine board meetings held on 19-12-2003, 16-3-2004, 12-5-2004, 26-7-2004, 6-8-2004, 22-9-2004, 1-11-2004, 29-3-2005 and 20-5-2005. Thus, the respondent No. 4 or respondent No. 5 was always a party to the decisions taken at various board meetings held from time to time and, therefore, they were estopped from pointing out the purported irregularities in the affairs of the company. They were guilty of acquiescence and could not plead belatedly of the alleged grievances. The plea that the respondent No. 5 did not actively participate in the board meetings and merely placed his signature in the attendance sheets in good faith and trust, believing that only matters relating to supply, price, delivery terms were being recorded, was neither acceptable nor believable. The respondent Nos. 4 and 5 had been only passive spectators, without taking any serious interest in the affairs of the company. In that background, continuance of the respondent Nos. 4 and 5 as the directors of the company was not in the interest of the company and its shareholders. The controversy as to whether the respondent No. 5 was a nominee of the MLW Ancillary Units Association raised by the petitioners did not assume any significance in view of the categorical admission made by the respondent No. 5 in the course of the instant proceedings that he was a nominee of MLW Ancillary Units Association on the board of the company. The MOU dated 19-4-2004 executed between the company and the MLW Ancillary Units Association had been signed by among others the respondent No. 5 representing the company as well as the MLW Ancillary Units Association. Furthermore, the respondent No. 4, in his communication addressed to the company secretary, categorically acknowledged that the respondent No. 5 had been nominated by the MLW Ancillary Units Association to be its representative on the board of directors of the company. However, it was immaterial whether the respondent No. 5 was a nominee of the MLW Ancillary Units Association on the board of directors of the company in view of the fact that he never showed any interest in the affairs of the company. In view of that, adequate safeguard was being proposed to ensure proper representation of the petitioners in future on the board of directors of the company. The assertion of the petitioners regarding removal of the respondent Nos. 2 and 3 from the office of director at the extraordinary general meeting purportedly held on 21-12-2005 was shrouded with several inconsistencies, which remained unexplained. When the relationship between the parties became strained as borne out by a number of police complaints and further when the respondent Nos. 2 and 3 were sought to be removed from the office of the director, sending of notices by certificates of posting as claimed by the petitioners was quite improbable, especially when the Courts never placed reliance upon the certificates of posting alone at a time when no cordial relationship had been maintained between the contesting parties. The minutes of extraordinary general meeting reportedly conducted at Hotel ‘M’ were not recorded in the minutes book maintained by the company. There were several blank spaces in copy of the minutes produced before the CLB. The venue of the extraordinary general meeting originally disclosed in the minutes as at the registered office was found to be subsequently changed to Hotel ‘M’. The respondent No. 4, while addressing a communication to the company’s bank on 21-12-2005, did not mention about the extraordinary general meeting held on 21-12-2005 for removal of the respondent Nos. 2 and 3 from the office of director of the company or their removal from the directorship of the company. The resolution made available before the CLB did not speak about the appointment of any new director in terms of Form No. 32 filed with the Registrar of Companies on 21-12-2005. Moreover, the special notice dated 7-11-2005 requisitioning the company, service of which remained unestablished, to convene an extra-ordinary general meeting spoke only of non-compliance with the statutory requirements but not of any charges of misappropriation of funds by the respondent Nos. 2 and 3. Furthermore, the notice dated 28-11-2005 convening extraordinary general meeting mentioning the venue of the meeting as at the registered office of the company, whereas the registered office of the company taken on lease from MLWL was admittedly surrendered as early as on 20-9-2005. In view of those discrepancies, the strong assertion of the petitioners on the removal of the respondent Nos. 2 and 3 from the office of director at the extraordinary general meeting held on 21-12-2005, did not merit any consideration.

The grievances in relation to mobilization of Rs. 6 lakh by the respondent No. 4 through his family and friends towards share capital of the company raised for the first time before the CLB and the counter-claim made in that behalf by the respondent Nos. 2 and 3 arising out of contractual obligations between the respective contesting parties could not be agitated in a section 397/398 proceeding. Similarly, mere non-filing of statutory returns does not attract the provisions of section 397. The alleged ransacking of the company’s office at the instance of the respondent No. 4 and the consequent police complaint lodged against the respondent No. 4 which, however, subsequently came to be closed as ‘mistake of fact’ could not be reagitated in the proceedings. The genuine apprehension of the petitioners on account of authentication of the statutory records by the Commissioner had become true by virtue of the fact that the Commissioner carried out authentication of the statutory records without the presence of the petitioners and other contesting parties. In such a situation, the Commissioner, despite his communication dated 27-1-2006 addressed to the petitioners and respondent Nos. 2 to 5 on his proposed visit for authentication of the statutory records, ought to have sought appropriate directions from the CLB before completing the authentication process in the absence of the contesting parties. Therefore, the respondent Nos. 2 and 3 tampered with the statutory records after carrying out the authentication by the Commissioner, apart from inflating the preliminary expenses, which did not justify their continuance as the directors of the company. The charges against the respondent Nos. 2 and 3 regarding regular supply of materials without any supporting bills, could not be sustained by mere production of copies of the bills. Nevertheless, the respondent Nos. 2 and 3 had not chosen to repudiate the unethical practice resorted to by the company’s employee in terms of his communication dated 21-11-2005 addressed to the respondent No. 3 while securing the consignment seized by the competent authorities for want of any supporting bills. Those oppressive acts of the respondent Nos. 2 and 3 warrant winding up of the company which would, however, unfairly cause prejudice to the company and its shareholders and, therefore, it was deemed fit to regulate the conduct of the company’s affairs in future by providing adequate alternative reliefs, safeguarding the interest of the company.

Therefore, (i) in exercise of the powers under section 397/398, read with section 402 (ii) to make appropriate orders with a view to bringing to an end the acts complained of and (iii) to regulate the conduct of the future affairs of the company, it was inter alia ordered that the impugned allotment of shares made in favour of the respondent Nos. 2 to 6 and 9 was illegal and, therefore, set aside. The balance sheet as on 31-5-2005 and the relevant profit and loss account of the company would be revised and the revised balance sheet would be filed with the Registrar of Companies, within thirty days.

The company would convene and hold the second annual general meeting in accordance with the articles of association of the company to transact, inter alia, the following business:

(i) consideration of accounts, balance sheet and reports of the board of directors and auditors for the year 2005-06;

(ii) appointment of directors in the place of respondent Nos. 2 to 5;

(iii) appointment of and the fixing of remuneration of the auditors.

The board of directors would issue further shares to meet the statutory requirement and the business needs of the company in favour of the existing shareholders and if needed to others in accordance with the articles of association of the company and carry on the regular business as contemplated in the articles of association of the company; and the company would issue share certificates to the petitioners and other shareholders within thirty days in respect of shares held by them. [Para 5]