Company Law Board,
Delhi
Ved Kapoor
v.
Kalima Plastics (P) Ltd.
S. BALASUBRAMANIAN, CHAIRMAN
CP NO. 10 OF 2006
CA Nos. 67 139 & 200 of 2006
March, 15, 2007
Section 397/398 of the Companies Act, 1956 - Oppression and mismanagement Petitioners, claiming to hold twenty per cent shares in company, alleged that second respondent, being MD of company was guilty of transferring business of company to firm K owned by his company, leasing out various portions of land belonging company to said firm at very low rent, selling land belonging to company to a benami of respondents at very low price, and transferring certain shares in his name Whether since company had ceased to be doing any business and transfer of business, if any, had taken place more than five years ago, allegation of diversion of business of company to firm K could not be made Held yes Whether in view of facts that rent charged on portion of land leased to firm K was very low in comparison to rent charged from others, board of directors was to be directed to fix rental on a realistic basis Held yes Whether once need for sale of portion of land was established, it was for board of directors to decide portion of land to be sold and no one could challenge such decision Held, yes Whether once features of release of advertisement for sale of land was established, no one could complain that enough offers had not been received or land was sold at low price Held yes Whether when there was an admitted liability in form of bank loan, which could be reduced by availing OTS, it was for board of directors to decide timing of availing of same and no shareholder can claim that company should have waited till last date, Held yes - Whether as regards transfer of shares in name of second respondent, since none of transferors of impugned shares had questioned factum of transfer and since percentage holding of petitioners of 20 per cent as claimed by them in petition had not in any way been affected, petitioners could not impugn said transfers Held, yes - Whether on facts, petitioners had failed to establish any of allegations; however, since there was complete loss of mutual trust and confidence among parties, petitioners were to be given an option to go out of company on receipt of consideration for their shares Held yes
The petitioners, claiming
to held twenty per cent shares in the company, filed petition under section
397/398 alleging that the second respondent, being MD of the company, was
guilty of leasing out various portions of the land belonging to the company to
firm K owned by his wife and other firms related to him without any authority
and at very low rent which was unfavourable to the company; that he had
transferred business of the company to said firm K; that a part of the land of
the company had been sold to benami of the respondent at very low rate and in
breach of the interim orders of the CLB; and that certain shares had been
transferred by the second respondent in his name.
The respondents denied all the allegation and contended that neither the company nor the respondents had violated the order of the CLB in terms of which once the company accepted the best price, it had to only inform the CLB of its decision and did not require prior approval of the CLB; was not required that company had a debt of over Rs. 9 crores and the property had been mortgaged with State Bank of Patiala which had initiated recovery proceedings before DRT and had also initiated proceedings under Securitization Act for sale of the immovable property of the company and in terms of one time settlement scheme of RBI, the company could save a lot of money by payment of Rs. 1.04 crores as against outstanding liability of Rs. 9 crores and in those circumstances, board of directors of the company decided to sell a part of the land. As regards the allegation that the business of the company had been transferred to firm K, the respondents contended that over a period of time, the business of the company had come down and it had actually become a defunct company and only income of the company had, for a long period, been the rental income and, therefore, such allegations of petitioners were baseless.
HELD
In so far as the allegations relating to transfer of the business of the company to firm K was concerned, there were contradictions in the stand of the petitioners. From the petition, it appeared that the allegation of the petitioners related to recent transfer of business. However, in the rejoinder, they had admitted that the company had ceased to be doing any business and the transfer of business of the company took place before the year 2000. If it was so, the petitioners could not make any allegation in that regard after expiry of over 5 years. Therefore, there was no merit in the allegation of diversion of business of the company to firm K. Similar was the position in regard to the allegation against the second respondent that he had siphoned off the funds of the company, as the nature of expenditure incurred had been explained by the second respondent in his reply. [Para 14]
In so far as leasing of a portion of the land to firm K was concerned, there appeared to be some justification in the allegation of the petitioners that a low rental of Rs. 1 per sq. ft. had been fixed only because the firm K belonged to the wife of the second respondent. Even though the respondent had contended that earlier firm K was occupying the land without payment of any rent and by charging some rent now, they had protected the interest of the company it was found that on the same day four lease agreements were entered into with differential rates of rent. While the rentals could be different, in view of the structure of the building, location etc., yet, when they were charging over Rs. 10 sq ft. for others charging of such a low rent of Rs. per sq. ft. for firm K, was not justified at all. Therefore, the board of directors of the company it was to be directed to fix the rentals for all those leases on a realistic basis, after getting the same assessed by an independent valuer. As regards the respondents contention that without those entities being parties to the proceedings, no order could be passed against them, it was found that all those entities were in one way or the other connected with the directors of the company and, therefore, non impleadment of those entities was of no consequence. Proper rent should be fixed within a period of three months with prospective effect. The petitioners had further alleged that the second respondent had no authority to enter into any lease agreement and the board resolution relied on by him authorizing him to enter into lease agreements was a fabricated one. Considering the fact that in a board meeting held on 24-3-2005, the board had unanimously ratified the action of the second respondent entering into the lease agreement, the issue whether the resolution was fabricated or not became irrelevant. [Para 15]
In so far as the transfer of shares was to second respondent concerned, it was not the case of the petitioners that any of the shares held by them had been transferred. Since none of the transferors of the impugned shares had questioned the factum of transfer and since the percentage holding of the petitioners of 20 per cent as claimed by them in the petition, had not in any way been affected, the petitioners could not impugn the transfer, that too when the transfers had taken place way back in 1977, 1985 and 1997. [Para 16]
The substantive allegation was related to the sale of land. It was on record and the petitioners were aware that there was a loan outstanding and the bank had initiated proceedings before the DRT as well as under the Securitization Act. It was also on record that by availing the OTS, the company could save substantial amount. Further, it was also on record that the respondents had taken up with all the shareholders asking them to contribute towards payment to the bank. Thus, the need for funds to the company had been fully established. Even the petitioners conceded that a portion of the land had to be sold, but, according to them instead of selling a part of the land, which had encumbrance, the portion of the land without encumbrance could have been sold so that the company could get a higher consideration. Once the need for the sale a portion of the land was established, it was for the board of directors to decide which portion of the land was to be sold. It was found from the minutes of the board meeting, that the matter had been discussed extensively and the board decided to sell the impugned portion of the land. [Para 17]
From the sequence of events, it was clear that in regard to the sale of land, every thing had been done in a transparent manner including giving an opportunity to the first petitioner to place his offer before the board. [Para 18]
As regards the sale of land to the benami of the respondents as long as the factum of release of the advertisement was established, no one could complain that enough offers had not been received. The apprehension of the petitioners had been that the land was likely to be sold at a low price. When the first petitioner had offered to purchase the land for himself at Rs. 5300 per sq. mtr.(yards), he could not demand/contend that the respondent should not purchase the land for themselves, as long as the right price was paid. Any way, it was noted that none of the respondents was connected with the buyer. [Para 19]
When there was an admitted liability, which could be reduced substantially by availing of the OTS, it was for the board of the company to decide the timing of availing of the same and no shareholder could claim that the company should have waited till the last date. [Para 20]
Thus, on an over all appreciation of the case it was found that the petitioners had failed to establish any of the allegations. However, the petitioners had a long association with the company and, therefore, it was essential that in case of all future sale of land or leasing of properties of the company, every such proposal was placed before the general body for approval after giving due notices to all the shareholders giving full details of the proposals so that there is complete transparency. [Para 22]
Conscious of the fact that there was complete loss of mutual trust and confidence among the parties and that their relationship could not continue for long, the petitioners were given an option, if they so desired, to go out of the company on receipt of consideration for their shares on a fair value determined by an independent valuer. [Para 23]