K.K.Balu, Vice -Chairman - (1.) THE petitioners together with consentor collectively holding 60% of the issued and subscribed paid -up capital of M/s Mysore Lighting Works Private Limited ("the Company"), prior to the impugned allotment of shares and constituting one -tenth of the total number of members, aggrieved on account of certain alleged acts of oppression and mismanagement, at the instance of the respondents 2 to 5 in the affairs of the Company, namely (i) no convening of any meetings of the Company; (ii) non -filing of statutory returns with the Registrar of Companies; (iii) illegal allotment of shares; (iv) falsification of statement of accounts filed with the Income Tax Authorities; (v) interference with functioning of the newly elected board of directors; (vi) depriving the petitioners of their right to information of the affairs of the Company; (vii) carrying on business of the Company as if a partnership business; and (viii) non -issue of share certificates, have invoked the provisions of Sections 397 and 398, seeking the following reliefs: (a) to set aside the impugned allotment of shares; (b) to direct the Company for issue of the share certificates; (c) to remove the respondents 2 to 8 from the post of director; (d) to appoint an administrator for management and administration of the Company; (e) to order investigation into the affairs of the Company; (f) to appoint an investigative auditor for auditing the accounts and affairs of the Company; and (g) to convene the annual general meeting, file the annual accounts, returns and comply with the statutory formalities under the Act.
(2.) SHRI B.C. Thiruvengadam, learned Counsel while initiating his arguments submitted as under: • The Company has been promoted as a private limited Company in December, 2003 by among others, the petitioners, consentor and respondents 2 to 5 with the main object of acquiring the brand name "Mysore Lamps" from the Mysore Lamp Works Limited (MLWL), a state public sector company, which is now closed. The Company is engaged in the business of trading in electrical goods for the benefit and in the interest of the ancillary manufacturers of the MLWL. However, the interests of dealers are spelt out for the first time in Memorandum of Understanding dated 04.03.2004 which came to be reached between the MLWL and the Company, governing the terms of licence to use the trade name "Mysore Lamps" by the Company and the Trade -Name License Agreement dated 06.03.2004 entered between the MLWL and the Company, which are not contemplated in the memorandum of association of the Company. The petitioners, consentor and respondents 4 & 5 are owners of ancillary units and consequently competitors to each other. The respondents 2 & 3, erstwhile employees of the MLWL, became co -promoters, without any investment of their own and represent the employee segment. The respondents 2 to 5 are the first directors of the Company. The fourth respondent appointed as the Managing Director is based at Hyderabad looking after his business and fifth respondent is concerned with his ancillary unit at Kolar, leaving the day -to -day business and affairs of the Company in the hands of the respondents 2 and 3, being the whole time directors. A Memorandum of Understanding was signed on 19.04.2004 by the fifth respondent representing the MLW Ancillary Units Association ("Association") and also on behalf of the Company, whereas the Company was incorporated at least three months prior to signing of the MOU and the fifth respondent is already a permanent director in his own right and individual capacity. The fifth respondent being a permanent director, there is no need for him to be a nominee of the Association on the board of the Company on rotation basis. Similarly, if the fifth respondent is a nominee of the petitioners on rotation basis, there is no requirement of being a permanent director of the Company. The fifth respondent is not, therefore, a representative of the Association or petitioners. The fifth respondent's role in the Association is that of a partner representing a partnership by name Pragati Lamps. • The petitioners, since incorporation of the Company, are kept in total darkness about its affairs. The respondents 6 to 8 are claiming to be directors, despite the fact that they have not been appointed by the shareholders. The illegal induction of the respondents 6 to 8 on the board is violative of Article 24 stipulating that the maximum of directors shall not be more than five and therefore, they have no locus standi to act as directors of the Company. The petitioners have produced the original memorandum of association signed by all the promoters namely, petitioners, consentor and respondents 2 to 5, which does not speak of any increase in the number of directors, unlike as in the case certified copy of the memorandum of association obtained from the Registrar of Companies (ROC) and produced by the respondents 2 and 3. Any such change to the memorandum of association filed with the ROC is without consent or knowledge of the petitioners. The respondents 4 and 5 could not exercise control over the affairs of the Company and presently colluded with the respondents 2 and 3, causing immense prejudice to the petitioners and other shareholders. The respondents are hand in glove appearing to quarrel among themselves in order to keep the petitioners out of the Company and deprived them of the rights as shareholders. The respondents are also indulging in selective purchases from the suppliers, thereby excluding the petitioners in supply of the materials to the Company. They are guilty of allowing the licence for the brand "Mysore Lamps" to be revoked and failed to take any steps for its restoration. • The Company is statutorily bound to issue share certificates to the petitioners and other shareholders, which has not been adhered to till date, attracting penal provisions of the Act. The compliance certificate relied on by the respondents 2 and 3 indicates that there is no proof available with regard to the issue and delivery of share certificates. The Companies (Issue of Share Certificates) Rules, 1960 provide that share certificates must be despatched by registered post, which has not been complied with by the respondents 2 and 3. The respondents 2 and 3 have not produced any material for having despatched to the petitioners any share certificates, as claimed by them. The original share certificates issued in favour of the respondents 2 and 3 and produced in the course of hearing contain several adhesive stamps, remaining uncancelled, are found affixed to sheets of papers attached thereon, which are not in accordance with the provisions of the Karnataka Stamp Act, 1957. The respondents 2 and 3 are guilty of fabricating evidence. • The Company having been incorporated on 18.12.2003, ought to have conducted two annual general meetings, the first one, for the period ended 31.03.2004 and second meeting for the period ended on 31.03.2005. It is claimed that the respondents 2 and 3 had consolidated accounts of the Company and held one annual general meeting for the extended period from 18.12.2003 till 31.03.2005 after a period of 15 months on 30.05.2005, without consent of the Registrar of Companies under Section 210(4) of the Act and without any notice of ten days said to have been given to the petitioners and deprived them of copies of the audited accounts of the Company. Article 21 specifies seven days notice before calling the annual general meeting, which is ultra vires the provisions of Section 171(2). No consent of the members has been obtained for the meeting with a shorter notice. Thus, the purported notice is bad in law rendering the annual general meeting invalid. The managing director and directors appointed on 20.05.2005 did not attend the annual general meeting and it is not prudent on their part in absenting themselves from attending the meeting. The minutes of the annual general meeting have not been drawn up in accordance with the requirements of Section 193 of the Act and therefore, no presumption can be drawn can be drawn under Section 195, with regard to validity of the minutes. The Chairman has not initialled or signed each page of the minutes. The minutes of the last board meeting held on 20.05.2005 were not signed by Chairman of the meeting at all. According to the respondents 2 and 3, the second petitioner attended the annual general meeting purportedly convened by the respondents 2 and 3, but they have not chosen to produce the attendance register of the annual general meeting containing the signature of the second petitioner along with statement of objections filed on 21.02.2006 or the additional reply on 08.02.2006. The attendance sheet along with certificate of posting for having sent the notice of annual general meeting was produced for the first time only on 28.02.2006. There was no pleading in the replies that the second petitioner was present at the annual general meeting and signed the attendance register. The certificates of posting are fabricated and introduced at later point of time during the proceedings. The respondents 2 and 3 have not so far filed copies of the notice of the annual general meeting sent to other shareholders including the petitioners. There was no need to send the notice by certificate of posting, when there is no requirement under law and there was no dispute between the parties at the relevant point of time. Furthermore, the certificates of posting do not admit the contents of the same. When the fourth respondent is on the board, there was no need to appoint his relatives as directors of the Company, compelling the petitioners to move a special a notice to convene an extraordinary general meeting for removing the respondents 2 & 3 so as to ensure compliance with the statutory requirements. The Company failed to convene the extraordinary meeting as requisitioned and consequently, the petitioners themselves convened the meeting at Hotel Mayura, since the respondents 2 and 3 denied access to the registered office, in accordance with Section 169 on 21.12.2005, serving notices on all the shareholders. The fourth respondent presided over the extraordinary general meeting, which was attended by 11 of 15 shareholders, wherein the respondents 2 & 3 were removed from the office of directors and three new directors got appointed, as borne out by copy of minutes of the extraordinary general meeting and Form -32 filed with the Registrar of Companies. However, the respondents 2 & 3 are preventing the validly constituted board of directors from carrying on the day -to -day affairs of the Company. At the same time, the respondents 2 and 3 filed a civil suit and obtained an order of injunction staying the operation of the resolution dated 21.12.2005 and removing them from the office of director of the Company. • The first impugned allotment of 90,000 shares approved on 12.05.2004 (second respondent - 25000 shares; third respondent -25000 shares; and fourth respondent - 40000 shares) is a mere book entry and not supported by any sanction of the majority shareholders. The purported allotment just after commencement of the commercial operations is neither justified nor was there any need for such allotment in recognition of services rendered by the respondents 2 to 4. Further, no such allotment is permissible, within one year of incorporation of the Company in view of the prohibition contained in Section 79A(1)(c). The minutes of the board meeting dated 29.03.2005 shows that the board of directors decided to implement the decision taken at the board meeting held on 12.05.2004 by allotting shares in consideration other than cash. At the same time, the board of directors at the board meeting held on 29.03.2005 expressed concern about the continued absence of the fourth respondent from attending the board meeting and not showing any interest in the day -to -day activities of the Company, but at the same time rewarded him by allotting 40,000 equity shares in consideration of his services rendered during the last two years. The board meeting of 29.03.2005 was not chaired by A.K. Sommanna, since by then the Government of Karnataka had already revoked the licence for the brand. The records produced by the respondents 2 and 3 would reveal that there was no board meeting held on 12.05.2004, which is yet another existence of fabrication of records by the respondents 2 and 3. The second allotment of 8500 shares (fifth respondent - 900 shares; sixth respondent - 2950 shares and ninth respondent - 4650 shares) in exclusion of the promoters is in no way for benefit of the Company. The board resolution dated 29.03.2005 approving the allotment of 8500 equity shares in favour of respondents 5, 6 & 9 merely records that pursuant to the undertaking given to the suppliers/small scale manufacturers and dealers of the Company, the Company received applications together with application monies for subscribing towards the share capital of the Company, without giving any requisite details on subscription of shares. The respondents 6 and 9 are only dealers and not shareholders, whereas there is no provision in the memorandum of association for allotment of shares to any dealers. Moreover, contribution of the ninth respondent towards the total turn over of the Company of Rs. 374 lakh, as at 31.03.2005, accounted for a mere 4.27% and therefore, the allotment of shares is for his personal gains. By virtue of the impugned allotments, the petitioners with 60% of the shareholding has been reduced to 0.9%, which is wholly unjustified and illegal. The Supreme Court in Needle Industries (India) Ltd. and Ors. v. Needle Industries Newey (India) Holdings Ltd. , while reiterating the fiduciary responsibilities of the directors emphasized that they should not abuse their powers, which has been followed by this Board in Kobian Pte Limited v. Kohian India Private Limited and Ors. (2005) Vol. 126 CC 675 and held that the directors are in a fiduciary position vis -a -vis the company and must exercise their power with utmost good faith for the benefit as well as interest of the company and ensure fair play in action in corporate management and further must act bonafide in exercise of their fiduciary responsibilities in further allotment of shares. The respondents have not filed the requisite return of allotment with the ROC, in support of the impugned allotments made in favour of the respondents 2 to 4. The respondents 2 and 3 have misused their fiduciary position as directors of the Company and grossly mismanaged its affairs by not rendering any accounts and misappropriated huge funds of the Company. The ninth respondent was impleaded after filing of the company petition and inspite of service of notice of the impleading application, he has not chosen to participate in the present proceedings. • The fourth respondent, at the insistence of respondents 2 and 3, mobilized an amount of Rs. 6 lakh 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, as acknowledged by the Company. The fifth respondent made further payment of Rs. 10,000/ - by way of a cheque, with the same consequence. The Company's action in reportedly returning the loan amount of Rs. 6 lakh by cash taken from the fourth respondent is hit by the provisions of Income Tax Act. • The respondents 2 and 3 caused production of innumerable documents in piece meal over a period of time, from January, 2006 to December, 2006 even after commencement of the arguments, without supported by any pleading or affidavit and therefore, no credentials could be attached to such documents. The Company is reportedly maintaining Section 301 register, as borne out by the audit report dated 20.05.2005 of the Statutory Auditor for the period ended 31.03.2005, while the compliance certificate dated 20.05.2005 of a Practicing Company Secretary, indicates that no register is maintained under Section 301, by the Company. The minutes of the board meeting dated 16.03.2004 and 12.05.2004 differently describe the place of registered office, which has not been explained by the respondents 2 and 3. This Bench appointed a Commissioner to authenticate the statutory records of the Company. However, no records were made available at the time of first visit of the Commissioner, in terms of the directions of this Bench and the explanation offered by the respondents 2 and 3 for non -production of the records for authentication by the Commissioner is only to gain time to fabricate the records. The respondents 2 and 3 brought pressure tactics on the Commissioner, which resulted in authentication of the statutory records without notice to the petitioners and in their absence as borne out by an affidavit of Shri H.M. Sudheer, Advocate, representing Counsel for the petitioners and ultimately the authentication process of the records could be completed only after manipulation of the records carried out by the respondents 2 and 3. The respondents 2 and 3 tampered the last page of the minutes of the board meeting dated 20.05.2005, after completion of the authentication of records by the Commissioner, by changing the day of annual general meeting from Tuesday to Monday, which must be seriously viewed by the Bench. • The respondents 2 and 3 are indulging in sales, which are not brought into the accounts by under invoicing and preparing false vouchers. The Company is regularly supplying materials without any supporting bill, as borne out by a communication dated 21.11.2005 of the Company's employee addressed to the third respondent, from wherein it is clear that the Company indulged in unethical practice of bribing the officials to secure the consignment transported without any bill. The fourth respondent ransacked the Company's Hyderabad office, forcibly took possession of cheques and withdrew money from the bank account, which led to criminal complaints filed against him. However, the police report filed by the jurisdictional police after investigation before the Magistrate indicates that the complaint of the third respondent is false. The report of the police has not been stayed by any court of competent jurisdiction, the fact of which can be taken judicial note by this Bench. • The second petitioner, apart from swearing an affidavit on 03.01.2006 after filing the petition affirming that (a) he was forced by the respondents 2 & 3 to sign denial statements in the form of mere letters regarding execution of vakalath and petition; and (b) he was threatened that payments due to him would be stopped, was also present before this Board for cross examination, thereby the respondents 2 and 3 interfered with administration of justice, which itself is an act of continuation of oppression and mismanagement in the affairs of the Company. At the board meeting heid on 12.05.2004, two of the relatives of the fourth respondent were appointed as additional directors of the Company. Section 215(3) stipulates that every balance sheet and profit and loss account of a company must be signed by among others, its managing director, which has not been satisfied, in respect of the balance sheet of the Company for the year ended 31.03.2005. • The respondents are conducting the affairs of the Company in a manner oppressive to the petitioners, which would warrant the winding up of the Company on just and equitable grounds. Any such winding up order would unfairly cause prejudice to the Company and its shareholders and therefore, the petitioners have invoked the equitable jurisdiction of this Board to regulate the conduct of the Company's affairs, thereby, bringing to an end the matters complained of in the petition. Shri B, Venugopal, learned Counsel and Shri L. Sridhar, learned Authorised Representative representing the respondents 4 & 5 submitted: • The respondents 4 and 5 are not colluding with respondents 2 and 3, but are victims of the fraud played on them. The respondents 4 and 5, being the first directors were appointed as managing director and whole time director respectively but engaged in their respective business at Hyderabad and Kolar, without devoting any time towards the affairs of the Company. The respondents 2 and 3 have been carrying on the day -to -day operations of the Company without involvement of the respondents 4 and 5 or other shareholders. The fourth respondent attended five board meetings out of the nine and was never invited to the rest of board meetings. The fifth respondent, though a local resident in Bangalore has never been intimated of the board meetings and the third respondent often indulged in forging the signature of the fifth respondent on several occasions. The Company apart from the first board meeting neither convened any subsequent board meetings nor circulated any notice of the board meetings. The respondents 2 and 3, at no point of time made available copies of the minutes of the board meetings to the respondents 4 and 5. The minutes of the board meetings disclose the fact that the fifth respondent never participated actively in any of the board meetings. The fifth respondent merely placed his signatures in the attendance sheets in good faith and trust believing that only matters relating to supply, price, delivery terms etc. are being recorded. He has no knowledge of the contents of various minutes. No accounts of the Company were either approved by the Board or placed before the members under the pretext that the respondents 2 and 3 were preoccupied with the litigation on revocation of the license by the Government of Karnataka. • The fifth respondent is one of the first directors of the Company, but not a nominee director of MLW Ancillary Units Association. The fifth respondent being a permanent director has been director of the Company ever since its incorporation on 18.12.2003, whereas the MOU was signed between the Company and the MLW Ancillary Units Association as late as on 19.04.2004, agreeing for a representative of the Association on the board of the Company. No annual general meeting was held in May 2005, and there is no explanation for having filed the accounts and annual returns with the Registrar of Companies, after a delay seven months in January 2006. The annual return for the period made upto 30.05.2005 reflects the names of, among others, A Harikumar and A. Shravan kumar, as directors and also found entered in the register of directors maintained by the Company which establishes the fact that they have not been removed from the office of director at the annual general meeting. The entries in the register relating to their cessation from directorship with effect from 30.05.2005 have been entered only after authentication of the records by the Commissioner. • The entire annual general meting records are fabricated and the signature of the second petitioner, evidencing his attendance at the meeting is an after thought brought out by coercive techniques. There is no truth in the attendance register produced by the respondents 2 and 3 as borne out by an affidavit filed by the second petitioner affirming that he was coerced to sign certain documents, by the respondents 2 and 3. The purported notice of annual general meeting empowers a member to appoint his nominee, who need not be a member. This is however, contrary to Article 22. • The fourth respondent and other shareholders upon failure of the respondents 2 and 3 to comply with the statutory requirements requested them to convene an extra ordinary meeting and moved a special notice on 07.11.2005. When the respondents 2 and 3 failed to convene any meeting, the requisitionists themselves caused a notice dated 28.11.2005 under certificate of posting convening the extra ordinary general meeting on 21.12.2005. In the meanwhile, when the fourth respondent visited the Hyderabad office on 20.12.2005 and found that neither stocks nor proper accounts were maintained, suspended the third respondent from his executive position. As a consequence, the third respondent lodged a police complaint against fourth respondent, which was found to be false and followed by 'B' report filed by the police authorities summarizing the complaint as "mistake of fact". The affidavits filed by some of the employees of the Hyderabad office narrating the incidents which occurred in the Hyderabad office, categorically show that the third respondent resorted to false police complaint against the fourth respondent. The fourth respondent came across several incriminating documents at the time of his visit to the Hyderabad Office and took possession of such documents, which include copies of the unsigned minutes of certain board meetings. Item No. 4 of the unsigned board minutes dated 12.05.2004 speaks of the allotment of shares in favour of A. Harikumar and A. Shravankumar and does not whisper about the allotment of 90,000 shares to the respondents 2 to 4 by way of reward for the services rendered by them to the Company and audited accounts authenticated by the directors other than the managing director, of which he had no knowledge at all. These minutes and accounts found in the Hyderabad office are concocted by the third respondent. The fourth respondent is not in custody of any other records of the Company and no adverse inference be drawn on the basis of a communication dated 27.06.2006, evidencing delivery of certain documents by the fourth respondent to the Excise Intelligence Department. The respondents have produced copies of certain invoices showing supply of materials by the fourth respondent to the Company, but the original invoices will bear the official seal of the concerned authorities. The petitioners and respondents, when denied access to the registered office, they were constrained to convene the extra ordinary general meeting on 21.12.2005 at Hotel Maurya, Bangalore -560 009, wherein the respondents 2 and 3, were removed. The second respondent, instead of attending the extra ordinary general meeting lodged a frivolous police complaint claiming that the fourth respondent attempted to ransack the office of the Company at Bangalore, which came to be closed on the ground that the dispute being a civil matter must be resolved before the appropriate legal forum. The notice of the extra ordinary general meeting was sent to the shareholders by certificate of posting. Nine of the members attended in person the extra ordinary general meeting held on 21.12.2005 and another member was represented by a proxy. These nine members, who were present, had signed the attendance register. Any clerical error reflected in the minutes and inconsistencies in the documents relating to extra ordinary general meeting including the hotel bill cannot invalidate the proceedings of the meeting held on 21.12.2005. Accordingly the meeting was held and properly minuted. The minutes of the extra ordinary general meeting have been recorded in a separate minutes book, as the original minutes books and other statutory records are in custody of the respondents 2 and 3. The date of the meeting contained in the minutes, on account of typographical error, was wrongly stated as 22.12.2005, instead of 21.12.2005. These are procedural lapses and in no way invalidate the meeting held on 21.12.2005. However, the respondents 2 and 3 subsequently obtained an order of injunction in O.S.No.10663 of 2005 before the City Civil Court, Bangalore, from implementing the resolution passed by the members, removing them from the office of director. • The respondents 4 and 5 not being parties to the allotment of 90,000 shares made for consideration other than cash and 8,500 shares made in favour of the strangers, without knowledge of the majority shareholders are liable to be annulled. No share application has been made by any of the allottees and the share application register does not contain any such entry in this regard. The respondents 2 and 3 are full time executives of the Company and are drawing managerial remuneration with adequate compensation. They do not deserve any further compensation and they have abused the fiduciary responsibilities to the Company by allotting themselves the impugned shares for consideration other than cash. The allotment of 90,000 shares was purportedly made on 29.03.2005, but no Form 2 has so far been filed by the Company. The allotment of 8,500 shares was made on 29.03.2005, but Form 2 has been filed only on 09.01.2006, after removal of the respondents 2 and 3 from the office of director. Similarly, the annual return for the year ended 31.03.2005 was filed on 16.01.2006, after a lapse of seven months of holding the general meeting. The income -tax return filed by the respondents 2 and 3 reveal that the Company has reported a loss of Rs. 2,52,538/ -, but they are claiming shares by way of reward for their dismal performance. • The compliance certificate issued by a Practising Company Secretary, on which heavy reliance has been placed by the respondents 2 and 3 demonstrates a series of statutory non compliances, and confirms the careless attitude and lack of responsibility of the respondents 2 and 3. The respondents 2 and 3 failed to file Form 18 with the Registrar of Companies, despite the fact that the existing registered office of the Company was surrendered on 20.09.2005, which is not supported by any material. The recitals in the Director's report for the year ended 31.03.2005, dealing with the purported refusal of the managing director to sign the balance, not supported by any other document is a self serving document. There has been no prior complaint on account of the alleged non -cooperation of the managing director. The board resolution authorizing the respondents 2 and 3 to sign the director's report and audited accounts is in direct contravention of Section 215 of the Act. • At the request of the respondents 2 and 3, the fourth respondent mobilized Rs. 6 lakhs by way of demand drafts, from his relatives, namely, A. Harikumar and A. Shravankumar towards share application money on the understanding that they will be taken on the board of the Company as evidenced from the hand written notes of the third respondent, collected by the fourth respondent from the Hyderabd office during his visit on 20.12.2005. The respondents 2 and 3, recognizing the financial support extended by A. Harikumar and A. Shravankumar were appointed as additional directors of the Company. The proceeds of demand drafts were credited to the bank account of the Company on 10.05.2004, and subsequently withdrawn by means of two self cheques - one drawn on 11.05.2004 for Rs. 1 lakh and the other self cheque was drawn on 13.05.2004 for Rs. 5 lakh - to meet the Company's expenses. These two self cheques were signed by the respondents 2 and 4 as joint signatories. The reverse of the cheques were signed by these joint signatories to establish that cash was withdrawn for the Company and not towards payment of the fourth respondent, as falsely claimed by the respondents 2 and 3. Thus, neither any amount has been returned to A.Harikumar and A.Shravankumar, nor allotted shares in their favour. The respondents accounted these transactions in the books of account of the Company as hand loans obtained from A.Harikumar and A.Shravankumar and the loan repayment in their favour. However, the Tax Audit Report of M/s H.P. Pai & Associates, Chartered Accountants filed in terms of Section 269T of the Income Tax Act containing details regarding repayment of loans only to three of directors and does not speak of the loans under dispute. This would show that the accounting records are not in agreement with the tax audit report. In view of this discrepancy, either the tax audit report is blatantly wrong or else the accounting records are subsequently manipulated, putting forth a false claim of repayment of monies in cash to A. Harikumar and A. Shravankumar. The certificates of the bank produced by the respondents 2 and 3 are certifying the factual details relating to deposit and withdrawal of Rs. 6 lakh, taken place two and half years ago of which the present Manager could not have any knowledge and therefore, these certificates are solicited certificates. Any return of loan above Rs. 25,000/ - in cash attracts penal provisions of Section 269SS of the Income Tax Act. • The materials are being sent to customers by the third respondent without bills in order to avoid payment of taxes and enrich himself unlawfully. The movement of goods without documents caught at the sales tax check post and subsequent release of the goods on payment of illegal gratification are evidenced by a communication of the marketing executive of the Company on record and some of the materials described in the hand written noting of the third respondent, have been sold without bills. A few of the bills of M/s Madras Lamps (P) Ltd. are not accounted in the stock records maintained at Hyderabad Branch and purchase values are not accounted in the books of account. These bills do not carry any stamp of the check post authorities. • The original share certificates produced by the respondents 2 and 3 are stamped with adhesive stamps, contrary to the provisions of Section 11 of the Karnataka Stamp Act, 1957 and the stamps having been affixed very recently have not been cancelled. Article 16 of the Schedule provides 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. Rule 6 -A envisaging the procedure for issue of paper bearing impressed stamp have not been followed in payment of stamp duty in respect of the impugned share certificates. The share certificate dated 16.03.2004 issued in favour of K.O. Abraham bears the registered office of the Company as at Dollars Colony, Bangalore -560 094, whereas, the registered office was shifted to this place only on 17.05.2004, in terms of the board resolution dated 12.05.2004. It shows that no certificates were issued at the relevant point of time, as claimed by the respondents. The respondents 2 and 3 admittedly vacated and surrendered vacant possession of the registered office to the lessor as early as on 20.09.2005 and the present location of the registered office is till now not known to its shareholders. • The board of directors reportedly approved the accounts of the Company for the year ended 31.03.2005 on 20.05.2005, which have been signed and authenticated on 20.05.2005. The auditor's report, secretarial compliance report and directors report are all dated 20.05.2005. The fourth respondent admittedly did not attend the board meeting on 20.05.2005, in which case he could not have refused to authenticate the accounts, as reflected in the minutes of the board meeting. The balance sheet for the year ended 31.03.2005 shows that the Company has incurred preliminary expenses of Rs. 17.23 lakh, of which Rs. 1,73,200 has been written off as charge to the profit and loss account, leaving behind a sum of Rs. 15,50,700/ - in the balance sheet to be written off next nine years, whereas the preliminary expenses account for Rs. 8.23 lakh as per the first board meeting held on 19.12.2003, the difference of which comes to Rs. 9,00,000/ - (17,23,000 - 8,23,000). The Company could not adopt Rs. 8.23 lakh towards preliminary expenses on 19.12.2003 and again on 29.03.2005 Rs. 9,00,000/ - as preliminary expenses.
(3.) SHRI George Joseph and Shri Promod Nair, learned Counsel, while opposing the company petition and the stand taken by the respondents 4 and 5 submitted: • The petitioners, setup by respondents 4 and 5 in an attempt to take control of the affairs of the Company, have approached the CLB with malafide intention of coercing these respondents to accede to their unreasonable demands. The petitioners do not have any genuine grievances before the Bench, but are merely acting in collusion with the respondents 4 and 5. The Company, pursuant to the Trade -Name License Agreement, commenced in April 2004 its business in marketing the products and acquired market presence, achieved good progress, made gross profits and earned goodwill on account of the efforts of essentially these respondents. When the Trade -Name License Agreement came to be terminated by the MLWL, for no fault of the respondents 2 & 3, the Company challenged the same, through their appropriate action, by approaching the High Court of Karnataka. However, the Company suffered a meager net loss, due to cancellation of the Trade Name License, consequent litigation, high cost of procurement etc. At no point of time the Company refused to procure materials from any of the petitioners or other ancillary units, whereas the petitioners and other units could not meet the demand of the Company for supply of materials. The license subsequently came to be issued on 24.06.2006 due to the efforts of these respondents. In view of this, the Company's Chairman can be appointed only by Government of Karnataka and therefore, the petitioners' efforts to get control of the board is nothing but an abuse of process of law. The fourth respondent, instead of contributing towards the day -to -day management of the Company and its affairs, started demanding huge sums of money out of the Company's funds for his personal purposes. While so, the fourth respondent ransacked on 20.12.2005 the Hyderabad office of the Company and took away cheques, files and other several other records maintained at the Hyderabad office and subsequently withdrew an amount of Rs. 2 lakh from the bank account of the Company, compelling the third respondent to lodge a complaint with the jurisdictional police station and Metropolitan Magistrate at Hyderabad. Similarly, when the second respondent was receiving threatening calls at Bangalore on 21.12.2005, he was forced to seek police protection for the office premises of the Company. It later transpired that these respondents were removed from the office of director at an extra ordinary general meeting allegedly held on 21.12.2005. No special notice was ever moved on the Company for convening any extra ordinary general meeting and therefore, the petitioners cannot convene any meeting by themselves in exercise of the powers under Section 169 of the Act. These respondents and other shareholders did not receive any notice of the extra ordinary general meeting as borne out by the communications dated 29.12.2005 issued by several shareholders of the Company. The alleged special notice dated 07.11.2005 requesting the Company to convene the extra ordinary general meeting does not contain any charges of misappropriation of funds of the Company against the respondents 2 and 3 but speaks only of non -compliance with the statutory requirements. The charges of the petitioners and respondents 4 and 5 that they were denied access to the registered office, forcing them to hold the extra ordinary general meeting on 21.12.2005 at Hotel Mayura is falsified by the notice dated 28.11.2005, convening the extra -ordinary general meeting at the registered office of the Company. The fourth respondent's communication addressed to the Company's banker on 2l.12.2005 does not make any mention either of the alleged extra ordinary general meeting held on 21.12.2005 or removal of these respondents as directors of the Company. The resolution passed at the alleged extra ordinary general meeting speaks of only the removal of the respondents 2 and 3 from the office of director and makes no reference to the induction of any new director in terms of Form No. 32 filed on 21.12.2005 with the Registrar of Companies. The registered office of the Company taken on lease from the MLWL, was surrendered with effect from 20.09.2005 and therefore no, meeting could be held at the registered office of the Company on 21.12.2005. The minutes of the extra ordinary general meeting reportedly conducted at Hotel Mayura, at 3.00 PM are not recorded in the minutes book maintained by the Company, whereas the acknowledgement receipt dated 21.12.2005 issued by the Hotel authorities indicate the time of arrival as at 15.40 hrs. There are number of blank spaces in the copy of minutes produced before the Bench. The venue of the meeting originally disclosed in the minutes as at the registered office is subsequently found to be changed to Hotel Mayura. Thus, it is evident that no meeting was held either at the registered office of the Company or at Hotel Mayura, removing the respondents 2 and 3 from the office of director. Thus, the minutes are found to be fabricated. It is therefore, clear that any resolution allegedly passed by the Company removing these respondents from the office of director is inoperative. Nevertheless, these respondents have obtained an order of stay in O.S. No. 10663 of 2005 on the file of City Civil Court, Bangalore, restraining the fourth respondent herein, from acting upon the resolution passed at the extra ordinary general meeting. The undated minutes of the board meeting discloses that the board of directors purportedly approved the only appointment of Mr. O. Dilip Kumar, as additional director, whereas Form No. 32 filed with the Registrar of Companies shows that three directors came to be appointed with effect from 21.12.2005. • The petitioners are suppliers of materials, dealing periodically with the Company, and are apprised of its affairs. The fifth respondent, a nominee from the MLW Ancillary Units Association has been on the board of directors of the Company, pursuant to the MOU entered between the Company and the MLW Ancillary Units Association and participated in as many as nine of the board meetings, while the fourth respondent in five board meetings and are parties to various decisions taken at such board meetings. The fact that the fifth respondent has been nominated by the MLW Ancillary Units Association to be its representative on the board of directors of the Company is acknowledged by the fourth respondent in his communication addressed to Mr. A.N. Bhat, Company Secretary. The petitioners, therefore, cannot have any legitimate grievance of having been excluded from the management of the Company and plead ignorance of the Company's affairs. The petitioners at no prior point of time have made any grievances in the affairs of the Company. • The respondents have not committed any act of oppression and mismanagement as claimed by the petitioners. The Supreme Court held in Sangramsinh P. Gaekwad and Ors. v. Shantadevi P. Gaekwad (dead) by LRs and Ors. at 843 that if the pleadings and/or the evidence adduced in a proceeding remains unsatisfactory to arrive at a definite conclusion of oppression or mismanagement, the petition must be rejected. In a petition under Section 397, as held in Shanti Prasad Jain v. Kalinga Tubes Ltd. (1965) Vol. 35 CC 351, it must be shown, inter -alia that the conduct of the majority shareholders is continuously oppressive to the minority as members, continuing upto the date of the petition which must be burdensome, harsh and wrongful and mere lack of confidence between the majority shareholders and the minority shareholders would not be enough unless the lack of confidence springs from oppression of a minority by a majority in the management of a company's affairs, and such oppression must involve at least an element of lack of probity or fair dealing to a member in the matter of his proprietary rights as a shareholder. The Company, on the other hand has complied with all the statutory requirements, as certified in the Compliance Certificate dated 20.05.2005, issued by a Practicing Company Secretary. The Company has duly convened the first annual general meeting in May, 2005 and filed the annual return, inspite of the obstructive attitude adopted by the fourth respondent, refusing to sign the annual return, in discharge of his responsibilities towards the Company. The notice of the annual general meeting duly held on 30.05.2005 was sent to all the members under certificate of posting on 21.05.2005, which form part of the records of the Bench. Article 21 contemplates notice of seven clear days. The requirement of giving not less than twenty -one days' notice under Section 171 is not applicable to private limited companies and therefore, the annual general meeting duly convened after proper notice in terms of Article 21 cannot be challenged. The second petitioner was present and participated in the annual general meeting, as evidenced from copies of the attendance sheet and the minutes of the meeting. The second petitioner in fact, proposed a resolution for appointment of the seventh respondent as director, who was retiring at the annual general meeting and the resolution was passed unanimously by the members. These facts remain uncontroverted, except contending in the rejoinder that reference to the second petitioner's signature in the attendance sheet is meaningless. The second petitioner voluntarily issued a letter, which is produced by these respondents along with their reply shows that he had not consented to the filing of the petition and no pressure has been brought on him, as claimed by the petitioners. The second petitioner, who has confirmed in his letter addressed to the respondents that he has not signed any vakalat and affidavit filed before the Bench, was coerced by the petitioners to file an affidavit retracting his communication produced in the present proceedings. The affidavit of the second petitioner affirming that the respondents 2 and 3 pressurised him to sign a denial statement execution of the documents in connection with filing of the company petition lacks details and the alleged threat that the payments due to him were withheld is far from truth in view of the fact that the dues of the second respondent were settled by way of the demand draft as early as on 16.01.2006. Clause 24 of the Articles of Association of the Company, produced by these respondents show that the number of directors of the Company shall not be less than two and not more than twelve and therefore, the appointment of additional directors within the limit specified therein cannot be challenged by the petitioners. • The petitioners at no point of time made any grievance on account of non -receipt of the share certificates. The register of members and share ledger, authenticated by the Commissioner contains, inter -alia distinctive numbers of the share certificates issued in favour of the respondents 2 & 3 and other shareholders. • The fourth respondent had not brought in Rs. 6 lakh, but only attempted to deposit certain money into the Company's bank account, forcing these respondents to insist the fourth respondent to take back the same amount, in terms of the cheques dated 11.05.2004 and 13.05.2004, as certified by the bank. The fourth respondent neither contributed an amount of Rs. 6 lakn towards equity share capital nor was acknowledged any such receipt of money by the Company. • The respondents 4 and 5 have produced while filing their additional counter, fabricated certificates of posting evidencing dispatch of notice of the extra ordinary general meeting, contrary to their stand taken in the course of the present proceedings that the notices were sent by ordinary post. The list of members disclosed in the attendance register does not tally with the names furnished in the minutes of the extra ordinary general meeting of the Company. • The issue of 90,000 shares in favour of the respondents 2 to 4, for their services to the Company, was approved at the board meeting held on 12.05.2004 under the chairmanship of Shri A.K. Somanna and the allotment was made at the subsequent board meeting held on 29.03.2005 in the presence of, among others, the fourth respondent, for consideration other than cash. The Company has been incorporated for the benefit of not only ancillary units of MLWL but also its suppliers, dealers and employees. The ninth respondent is a dealer of lamps and lighting equipments who contributed towards welfare of the Company. The sixth respondent was responsible for obtaining of Mysore Lamps name and huge business orders for the Company. Thus, the allotment of 8500 shares have been made on account of their contribution towards growth and in the interest of the Company. The Supreme Court in Needle Industries (India) Ltd. and Ors. v. Needle Industries Newey (India) Holdings Ltd. held that if the shares issued in the larger interest of the Company, the decision to issue shares cannot be struck down on the ground that it has incidentally benefited the directors in their capacity as shareholders. A mere circumstance that the directors derived benefit, as shareholders by reason of the exercise of the fiduciary power to issue shares, will not vitiate the exercise of that power. • These respondents never sent materials to customers without bills so as to avoid payment of sales tax, income -tax, etc. M/s Mahita Electro Tech, one of the suppliers consigned materials, supported by the bills, to the Company through a transporter, who, however, misplaced the bill while carrying materials, leading to imposition of penalty on the Company and the amount of penalty was also recovered from the supplier concerned. The Company never supplied materials without the relevant bills. All allegations of misappropriation are neither detailed nor proved by the petitioners. • When the Commissioner came to the office of the Company, the respondents 2 & 3 were not available in the premises of the Company. While the third respondent was based in Hyderabad, the second respondent had gone to Kerala to attend his mother's death anniversary, as borne out by the advertisement appearing in the local newspapers. These respondents have kept the statutory and other records in safe custody, in view of the threat posed to the Bangalore office at the instance of the fourth respondent. However, the second respondent, on his coming back to Bangalore, invited the Commissioner to authenticate the statutory records of the Company and thus extended all his co -operation in execution of the warrant by the Commissioner. The Commissioner was not pressurized by these respondents and he has authenticated the statutory records in terms of the order the Bench.;