Decided on November 30,2007

Rajinder Sehrawat Appellant
Noida Fabricators and Engineers P. Ltd. Respondents


A.K. Sikri, J. - (1.) ALLEGING oppression and mismanagement on the part of the respondents, the petitioners have filed this petition under Section 397/398 and Section 433 of the Companies Act, 1956 (for short, "the Act"). The petition substantially proceeds on the premise that petitioner No. 1 and respondent No. 2 were partners in the firm carrying on business activities on partnership under the name and style of M/s. Engineers and Technocrats. Thereafter, respondent No. 1 company, with the name M/s. Noida Fabricators and Engineers P. Ltd. (hereinafter referred to as "the company"), was incorporated with the funds of petitioner No. 1, his relations and friends. Petitioner No. 2 is the wife of petitioner No. 1 and is a shareholder in the company. Respondent No. 3, who is a chartered accountant of the company, is the brother of respondent No. 2. The purpose of floating this company was to expand and diversify the business activities in the field other than the business of the partnership firm. In so far as the partnership business is concerned, it was considered that the same be carried and continued as it is. It is alleged that respondent No. 2 was controlling all accounts and finances, as well as records, etc., of the company. It was realised after some time that respondent No. 3, in collusion with respondent No. 2, had been manipulating the accounts, etc., and conducting the affairs of the company in a manner oppressive to the petitioners. 2 Mainly, two types of grievances are mentioned in the petition, namely: (i) the petitioners had not been getting intimation of the board meetings, business activities and annual general meetings at least since 1983. Likewise, no minutes had been maintained of the working of the company and they are manipulated and created as per the conveniences of the respondents ; and (ii) the shareholding of the company had been increased from time to time without any notice to the petitioners or giving them the right to purchase those shares. Such decisions were taken in the meetings of the board, for which the petitioners were not given any intimation and without the knowledge of the petitioners, the shares were allotted by respondents Nos. 2 and 3 to themselves and their family members. In this manner, though at the time of incorporation of the company the petitioners were holding 41 percent, shares, the same got reduced to less than 10 per cent. It is mentioned that initial authorised capital of the company was Rs. 1 lakh, in which the petitioners were holding 41 percent, shares. This was enhanced to Rs. 2.50 lakhs in the meeting of the board allegedly convened on March 9, 1983. In the alleged meeting of June 29, 1983, shares have been allocated to persons mentioned at S. Nos. 4 to 13, who belonged to the group of respondents Nos. 2 and 3. As per this meeting, 1155 shares are allotted to them at Rs. 100 per share, i.e., against the total amount of Rs. 1,15,500. The petitioners further state that in the meeting of March 26, 1984, the authorised share capital was enhanced from Rs. 2.50 lakhs to Rs. 4.50 lakhs and these shares were allotted entirely to the family members of respondent No. 2. Genuineness of these minutes is challenged on various grounds, including that the petitioners were not given the notice of the said meetings. 3. Learned Counsel for the petitioners also endeavoured to demonstrate various irregularities in the minutes and the accounts on the basis of which it was sought to be contended that these are false and created afterwards just to cover the lapses committed by respondent No. 2. 4. It is stated that this was done solely with a view to throw the petitioners out of the company thereby reducing them into a minority. Some other accounts of mismanagement are also highlighted in the petition. However, the main thrust is upon the aforesaid twin aspects. 5. During the pendency of this petition, respondents Nos. 2 and 3 transferred their shareholdings. It was in these circumstances, those persons were subsequently added as respondents Nos. 4 to 8. 6. I may also point out at this stage itself that on the directions of the court, the respondents had placed on record copies of the annual general meetings of various years, including balance -sheets, etc., copies of the ledger and also the minutes of various board meetings purportedly convened from time to time. It may also be stated at this stage that though in the petition specific instances of mismanagement and oppression, etc., are not given, learned Counsel for the petitioners made submissions on the basis of the aforesaid accounts and records filed by the respondents, to which I shall advert to at the appropriate stage. 7. Respondent No. 2 has contested the petition by filing reply, inter alia, stating that the company was not floated with the funds of the petitioners and his relations and friends, as alleged. His explanation is to the following effect: in the year 1980, respondent No. 2, who is an engineering graduate from IIT, Kanpur and has experience as structural engineer, having worked at TEXMACO Ltd., Belgharia, Calcutta, started a proprietary firm by the name and style of Noida Fabricators and Engineers at D -16, Sector -7, Noida, for manufacturing of structural and process plants. He also held a plot bearing No. B -8, Sector -7, Noida, on which he built a shed for expanding this business. Later on, he floated a company by the same name, i.e., Noida Fabricators and Engineers P. Ltd., simply because "company" and "director" was thought to be more fanciful as compared to the "firm" and "proprietor". Petitioner No. 1 was neither a technical person nor a financier, but was taken as a director to help respondent No. 2 to run the company. The proprietary plot of respondent No. 2 and the structure on this plot was transferred to the company by respondent No. 2 against shares in the year 1982 for starting a factory for manufacturing of structural and process plants. In fact, respondent No. 2, as founder -chairman of the Noida Entrepreneurs' Association, is a popular figure in Noida and committed to public cause. Petitioner No. 1 looked after commercial and account matters in the company as well as the partnership firm, having experience as a commercial assistant, before being sacked for financial fraud in the year 1975 at M/s. Frick India Ltd., where respondent No. 2 was also working as senior design engineer and technical assistant to the managing director. The services of respondent No. 3 were sought only when statutory requirement for verification by a chartered accountant arose. He was always an angry and unwilling signatory on company's half -baked papers prepared by petitioner No. 1. 8. Respondent No. 2 has further stated that the alleged grievances raised in the petition are all cooked up stories. The allegation that no intimation of the board meetings, business activities and annual general meetings was given to the petitioners since 1983 or that no minutes were maintained or that the minutes are manipulated is denied. It is submitted that petitioner No. 1 was a partner with respondent No. 2 in the partnership firm and both were actively involved in the working of the company as well. In fact, both were practically together at the same place throughout the day. It is not possible that the petitioner was well informed from 1980 to 1983 but suddenly stopped getting information in the year 1983. 9. In so far as increase in the authorised capital of the company from time to time and allotment of the shares is concerned, version of respondent No. 2 is that the petitioners and their family members were, in fact, holding shares worth Rs. 51,000 and not Rs. 41,000, which would show that they do not even know the worth of their shares and it is a clear proof that they did not pay for these shares from their pocket. As per respondent No. 2, at the time of incorporation of the company in 1980, the authorised capital was Rs. 1 lakh and petitioner No. 1 held 10 shares out of 40 allotted shares. So, in the year 1980, the petitioner's share was 25 per cent. Respondent No. 2 wanted a helping hand to look after day -to -day working of the company and in 1982 financed the petitioner to purchase 110 shares out of 465 allotted on February 24, 1982. So, petitioner No. 1's share became 120 shares out of 505 paid -up, i.e., 24 per cent. The authorised capital was Rs. 1 lakh and the paid -up was Rs. 50,500 as on February 24, 1982 : the same period in which the petitioner agreed that he was kept informed. This shows that petitioner No. 1's holding was not more than 24 per cent. In 1983, the company decided to implement the project of mustard oil, instead of structural engineering, and to implement the same the authorised capital was raised from Rs. 1 lakh to Rs. 2.50 lakhs on April 3,1983, as per the requirements of financial institutions and on June 29, 1983, the company allotted 1495 shares out of which 390 were allotted, again financed by respondent No. 2 to the petitioners' relatives and his holding became 510 shares out of 2000 paid -up shares, i.e., 25 per cent. On March 26, 1984, the company again raised the authorised capital from Rs. 2.50 lakhs to Rs. 4.50 lakhs and allotted another 1,000 shares on June 27, 1984, but petitioner No. 1 still held 510 shares out of 3,000 allotted, i.e., 17 per cent, and not less than 10 per cent., as alleged. 10. Respondent No. 2 further submits that this reduction of about 7 per cent, in the holding of petitioner No. 1 came about because respondent No. 2 could not finance him further to purchase more shares of the company as he himself was in deep financial trouble due to ever increasing capital requirements of the expanding project to finance the setting up of about 50 kolhus (slow speed mechanised wooden grinders needed to get the pungent aroma so peculiar to mustard oil, without which mustard oil of the company was considered to be of inferior quality), expansion of building to house these kolhus, testing laboratory for agmark (the mark of quality for edible products) and creation and launching of a new "PARIWAR" brand, a marketing challenge. To finance the above, respondent No. 2 had to dispose of his running unit which was the original Noida Fabricators and Engineers at D -16, Sector -7, Noida. Surely, it is not the case of petitioner No. 1 that all this activity was unnecessary or without any cost. 11. Respondent No. 2 further states that the authorised capital of the company was raised from Rs. 1 lakh to Rs. 2.50 lakhs and further to Rs. 4.50 lakhs as it was mandatory to increase the share capital in order to raise loans from UPFC and SBI. Petitioner No. 1 very well knows this fact and agreed on page 6 of the petition that he signed the loan documents in 1982 and 1983 with UPFC and in 1983 and 1984 with SBI. He, therefore, knows that the authorised capital was raised from Rs. 1 lakh to Rs. 4.50 lakhs in stages as per requirements of the financial institutions. The allotment of shares to persons mentioned at S. Nos. 4 to 13 at page 155 of the petition is also denied on the ground that the person mentioned at S. No. 8 is the father of petitioner No. 1. It is also denied that 1155 shares were allotted in the meeting of June 29, 1993. In fact, 1495 shares were allotted, out of which 390 were allotted to petitioner No. 1's group and 1105 to that of respondent No. 2. It is stated that above 390 shares to petitioner No. 1 were again financed by respondent No. 2. Further allotment was done on June 27, 1984. By that time, petitioner No. 1 had already hatched the conspiracy with the detractors of respondent No. 2 of Noida Entrepreneurs' Association and had abandoned the company terming it as a "sinking ship" and focused all his efforts and energies for ousting respondent No. 2 from the partnership firm by fudging the accounts while respondent No. 2 was busy keeping the company afloat and hence could not give any time to the accounting matters and the partnership firm. 12. Respondent No. 2 has denied any misappropriation of funds and has stated that the company was still in implementation stage and in continuous requirement of capital to make the project a success. It is a known fact that every new project of every first generation entrepreneur, who is always short of capital, has to overcome innumerable hurdles - -financial, technical and commercial or marketing - -before it can stabilise. And the entrepreneur has to beg, borrow or steal and play various roles single handedly to make the project a success. Respondent No. 2 did not even take salary for his labour and the question of misappropriation does not arise. Had misappropriation taken place, respondent No. 2 could not have sold his shares and those of his family and friends at face value when company's unit was closed, in loss and under litigation, and would have been disgraced amongst those who stood by him in the implementation of the project. The company could not have set up a most successful project, meet all its financial obligations and progressed to an enviable stage. Petitioner No. 1 has produced certain bills and transactions, about which he seems to have more knowledge than respondent No. 2, to allege misappropriation. He submits that all these allegations are false, out of context and at best half truths. It is also stated that since the shareholding has already been sold, the averments of oppression and mismanagement of the company, allegedly at the behest of respondent No. 2, would not survive and the petition had become in fructuous. Objection is also taken to the employment of respondent No. 3 on the ground that he was never a director or shareholder of the company. It is mentioned that before selling the shares to respondents Nos. 4 to 8, respondent No. 2 had offered the same to the petitioners, who did not wish to purchase the same. 13. In respect of irregularities in the minutes and accounts pointed out by the petitioners, explanation of respondent No. 2 is that certain typographical errors have crept in, which are highlighted, and undue advantage whereof is sought to be taken by the petitioners though these errors have not altered the results in the balance -sheets. 14. Respondents Nos. 4 to 8 submit, in addition to the submission that the petition had become in fructuous since allegations of mismanagement are against respondent No. 2, who left the company, that the relevant consideration of Sections 397 and 398 of the Act no longer exists. These respondents have also taken preliminary objection to the effect that with respect to allotment of shares, there are no pleadings in the petition, except some vague attempt to refer to further allotment of shares in paragraph 21 wherein no specific facts are mentioned. The petitioners have also not shown any loss to them either. It is further stated that, in any case, the petitioners not only had the knowledge of the meetings but were also a party to the decision. 15. I have considered the aforesaid submissions with reference to the pleadings and the evidence/material brought on record. I am of the opinion that this petition needs to be dismissed and the petitioners have not been able to make out any case of oppression and/or mismanagement warranting interference. My reasons for coming to this conclusion are as under: (a) The petition does not contain any specific instances of alleged acts of oppression and mismanagement. The allegations are of general nature. No doubt, the respondents filed certain documents, like minutes of the board of directors as well as copies of the ledger, etc., and the petitioners tried to project their case on the basis of these documents. However, the petitioners never chose to amend the petition or lead any evidence in this behalf. If certain discrepancies are sought to be pointed out, in the absence of pleadings and evidence, no proper opportunity is given to the respondents to explain the same. It may be added here itself that during the arguments the respondents have, otherwise, given their clarifications to the points raised. The fact which is emphasized is that the petition suffers from proper pleadings. (b) The first allegation of the petitioners is that petitioner No. 1 was not given notice of the meetings. In this behalf, it is also contended that in two alleged meetings decision was taken to increase the authorised capital and shares were allotted by respondent No. 2 to his own people. The record shows that extraordinary meeting of the shareholders of the company was held on April 3, 1983, at the registered office of the company, which at that time was D -9, Pomposh Enclave, New Delhi -110 048. It is the residential address of the petitioners. On the basis of this decision, other meeting was held on June 29, 1983, at the factory premises of the company when decision to allot the shares as per the increased capital was taken. In both the meetings, petitioner No. 1 is shown to be present. This fact is not denied by petitioner No. 1 in his pleadings though the petitioners and their counsel had inspected the record on July 18, 1986, after orders dated May 21, 1986, were passed by this Court permitting this inspection. Even otherwise, meetings where decision was taken to increase the authorised capital further from Rs. 2.50 lakhs to Rs. 4.50 lakhs, are shown to have taken place at the residence of the petitioners and this is also not denied by any specific pleadings. (c) In any case, it seems that when these resolutions were acted upon, the petitioners had the knowledge thereof. The respondents have shown that the resolutions passed in these meetings were submitted to the bank as financial assistance was to be obtained from the bank and the documents with the bank were signed by petitioner No. 1. Petitioner No. 1 had signed the loan documents with the bank on behalf of the company in 1982, 1983 and 1984. He was apprised to sign these documents on behalf of the company by virtue of board resolutions. Thus, he cannot feign ignorance of these resolutions vide which he was given the authority to sign as well and acting on that authority he signed those documents. In view thereof, the petitioners cannot pretend ignorance about these resolutions. It also appears from the record that offer was made to the petitioners to purchase the shares, which was not availed of. This assertion of the respondents further supported the fact that even when respondent No. 2 wanted to sell the shares he had made the offer thereof to the petitioners. Only after the petitioners refused to buy the same because of lack of funds or otherwise, respondent No. 2 sold the shareholdings held by him to his family members, i.e., respondents Nos. 4 to 8. This lends credence to the allegation of respondent No. 2 that since the company was at the stage of implementation of its project and the petitioners were not very hopeful about the success thereof, they did not show any interest in buying those shares. (d) Material placed on record also shows that petitioner No. 1 had been participating in financial transactions and was signing the cheques and, therefore, he cannot say that he was not aware of the functioning of the company which was allegedly managed by respondent No. 2 alone and his brother, who was a chartered accountant. From this, one can also draw further inference, coupled with the aforesaid evidence, that the petitioners were having the knowledge of the meetings as well as the decision about increase in the authorised capital. (e) There are certain other discrepancies pointed out by the petitioners in the accounts filed by the respondents, which are explained. Respondent No. 2 has stated that in the balance -sheet dated June 30, 1983, the authorised capital has been shown as 20,000 shares of Rs. 10 each instead of 2500 shares of Rs. 100 each. This could be a clerical/typographical error. However, the subscribed capital is given correctly as Rs. 2,00,000. Thus, the result of the balance -sheet is not altered. The increase in authorised capital from Rs. 1 lakh to Rs. 2.50 lakhs was approved on March 9, 1983, by the board, on April 3, 1983, by the extraordinary general meeting, and balance -sheet dated June 30, 1983, correctly shows the subscribed capital as Rs. 2,00,000. It does not show that entire story is false, frivolous or created one. It is submitted that petitioner No. 1 is trying to confuse by deliberately mixing up the authorised capital with the subscribed capital. (f) Though the petitioners have alleged that the minutes filed are created by respondent No. 2 at the time of filing reply to the petition, pages 130 to 163 of the minutes are of the period about which the petitioners have not raised any grievance and have no problem. These are the minutes when shares were allotted to petitioner No. 1 and his relations and proprietary rights in the plot of respondent No. 2 were transferred in the name of the company. Therefore, for their own convenience, the petitioners are raising such allegations qua other part of the minutes. Merely because there are some blanks left on page 153 in the resolution dated June 11, 1983, would not mean that the minutes are manipulated. On the contrary, it goes to show that the minutes are filed as it is. Had there been manipulations, respondent No. 2 would have filled those blanks and only then filed the same. (g) The petition is also vague to the extent that it is not alleged as to when oppression started : whether it was in the year 1981 -82 or 1984. Even if it is taken as 1984, as the petitioners have alleged that since 1984 they did not get notices of the meetings, etc., no grievance is made by petitioner No. 1 for over 8 months till about April 1985, when the petition is filed. At that time, the company was incurring heavy losses and its factory was closed and, therefore, there could not have been any act of oppression or mismanagement at that time. Respondent No. 2 had sold his shareholdings to respondents Nos. 4 to 8 many years ago. Respondents Nos. 4 to 8 are in control of the business. It is not denied that the company is doing good business. It is manufacturing and marketing mustard oil with brand name "Pariwar" and is running successfully. 16. In taking the aforesaid view, I am guided by the principles laid down by the apex court dealing with the scope of Sections 397 and 398 of the Companies Act. In Shanti Prasad Jain v. : [1965]2SCR720 , the court expressed the legal position in the following terms: It is not enough to show that there is just and equitable cause for winding up the company though that must be shown as preliminary to the application of Section 397. It must further be shown that the conduct of the majority shareholders was oppressive to the minority as members and this requires that events have to be considered not in isolation but as part of a consecutive story. There must be continuous acts on the part of the majority shareholders, continuing up to the date of the petition, showing that the affairs of the company were being conducted in a manner oppressive to some part of the members. 17. In order that the court may make an order under Section 397 of the Act, the court must be satisfied, firstly, that the company's affairs are being conducted in a manner oppressive to any member or members, secondly, 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, thirdly, that a winding up order would unfairly prejudice the applicant or applicants. 18. On an analysis of the judgments of Indian and English Courts, it was observed in V.M. Rao v. : These decisions are, therefore, clear authority for the position: (1) that the oppression complained of must affect a person in his capacity or character as a member of the company ; harsh or unfair treatment in any other capacity, e.g., as a director or a creditor is outside the purview of the Section (2) there must be continuous acts Constituting oppression up to the date of the petition ; (3) the events have to be considered not in isolation but as a part of a continuous story; (4) it must be shown as a preliminary to the application of Section 397 that there is just and equitable ground for winding up of the company ; and (5) the conduct complained of can be said to be 'oppression' only when it could be said that it is burdensome, harsh and wrongful; oppression involves at least an element of lack of probity and fair dealing to a member in matters of his proprietary right as a shareholder. 19. Thus, it was imperative on the part of the petitioner to show that the circumstances were such which would show that there is just and equitable cause for winding up of the company. This is not so in the present case. On the contrary, as noted above, at the relevant time the petitioner stopped taking interest in the affairs of the company thinking it to be a "sinking ship". Today the company is leading healthy life and is very much alive and kicking. Furthermore, when the entire events are taken "as a part of a consecutive story", the phrase used by the Supreme Court, the facts of this case would warrant that no interference is called for. As a result of the aforesaid discussion, this petition, along with the pending miscellaneous application, stands dismissed.;

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