- (1.) THESE appeals are preferred against the order passed by the Company Law Board, Southern Region Bench, Chennai ('clb') on 23rd september, 1998, in Company Petition. No. 16 of 1997 {1999 32 CLA 120 ). The respondent Nos. 1 to 4 hold 15. 5 per cent shares in anugraha Jewellers Ltd. They filed the petition under sections 397, 398, 402 and 403 of the Companies Act, 1956 ('the Act') alleging certain acts of oppression and mismanagement in the affairs of the company.
(2.) THE gist of the case THEre has been irregularity in the allotment of shares to the petitioners. Funds from the company have been siphoned off in the form of loans and advances to certain companies. THE appointment of the managing director is neither legal nor proper. THE petitioners were removed from the board in a irregular manner. THEre is defalcation of stock. Mainly on the basis of the above allegations, which have been stated above broadly, the application was filed by the respondents herein as petitioners before the CLB. THE averments made by the petitioners were replied by the respondents by filing a detailed reply and denying the various allegations. It is seen from the proceedings of the CLB that on behalf of the appellants herein, an objection was also raised to the maintainability of the petition on the ground that already a complaint has been registered, alleging certain irregularities and therefore, a parallel proceeding cannot be permitted under law. It was also put forward by the appellants that the respondents herein have also moved the civil court, viz. , the Subordinate Judge, Coimbatore. THErefore, as there is already a complaint, alleging certain irregularities, which is pending investigation, and as on identical grounds, the respondents have also filed a suit before the sub court, the present application is not maintainable in lawthe CLB held that it was appropriate that the management of the company should be entrusted for some time to an independent person so that the inter se disputes between the promoters do not affect the business of the company any further and, therefore, the Board appointed one Aghoramurthy, former regional director of the Department of Company Affairs, as the administrator. Aggrieved by the said order, the present appeal is preferred, challenging the said decision of the CLB. Anugraha Jewellers was incorporated as a public limited company on 8th December, 1994. The company was promoted by the sons of K. Ramakrishna Pillai, who started and established jewellery business in the name and style of K. R. & Sons Jewellery. The main object of the company is to carry on business of gold-smiths, silver-smiths, jewellers, gem and diamond merchants and to do all manufacturing of and dealing in jewellery, their components and accessories. The inauguration of the company was on 8th december, 1994 and by public issue, a sum of Rs. 2. 5 crore was raised. The paid-up capital of the company is Rs. 5 crore and the capital is Rs. 5 crore. The petitioners before the CLB held 15. 5 per cent of shares. The appellants herein hold 18 per cent of shares. About 67. 5 per cent of the shares are held by the public. Before we take up the issues for consideration, it will be appropriate to state the law on this point. A Single Judge of this court held in the decision Vivek Goenka v. Manoj Sonthalia 1995 18 CLA 302/1993 II mlj 163 that it is the duty of the court to recognise the corporate democracy of a company in managing its affairs, and that it is not for the court to restrict the powers of the Board of directors. It further held that it will not be open to this court to interdict the functions of the Board managed company and the court shall not interfere with the day-to-day functions, management and administration of a company, unless it is established that the decisions taken by the Board are ultra vires the Act or the articles of association of the company. Further, it held that it is not for the court to dictate to the Board as to how it should function. When the matter comes before the court, the court is not concerned with inter se relationship of the parties. But, it has to keep in mind the corporate democratic principlesin yet another decision of this court G. Kasturi v. N. Murali 1991 5 CLA 269 it has been held that the principle of quasi-partnership is applied to a small private company founded on a personal relationship involving mutual confidence as between the members. Interests of the shareholders and that of the company must always be preferred over the interests of any one else irrespective of the position occupied by him it further held that prejudice to company's interest is to be shown only under section 398. While referring to the demand by minority shareholders for additional shares and the refusal of such request, the court observed that it is not a case of oppression and that the refusal by the managing director of a company to allow publication of certain news items will not affect public interest. In Nurcombe v. Nurcombe, it was held that a minority shareholder's action in form, is nothing more than a procedural device for enabling the court to do justice to a company controlled by miscreant directors or shareholders. Since the procedural device was evolved so that justice can be done for the benefit of the company. Whoever comes forward to start the proceedings, must be doing so for the benefit of the company, and not for some other purpose. It follows that the court has to satisfy itself that the person coming forward is a proper person to do so. The court is entitled to look at the conduct of the plaintiff in a minority shareholder's action to satisfy itself that he is a proper person to bring the action on behalf of the company; and that the company itself will benefit. A particular plaintiff may not be proper person, because his conduct is tainted in some way which under the rules of equity may bar relief. He may not have come with'clean hands'or he may have been guilty of delayit is relevant in this context to refer to a passage, from Gower's Principles of Modern Company Law, where it is observed as follows: "the right to bring a derivative action is afforded to the individual member as a matter of grace. Hence, the conduct of shareholder may be regarded by a court of equity as disqualifying him from appearing as plaintiff on the company's behalf. This will be the case, for example if he participated in the wrong of which he complains. " Vaughan Williams, LJ, has observed in Towers African Tug & Co. 1904 (1) Ch 558 (CA) at p. 567 as follows: "i think that an action cannot be brought by an individual shareholder complaining of an act which is ultra vires, if he himself has in his pocket, at the time he brings the action, some of the proceeds of that very ultra vires act. Nor in my opinion, does it alter matters that he represents himself as suing on behalf of himself and others. " It was held in the decision in V. M. Rao v. Rajeswari ramakrishnan 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, for example, as a director or creditor, is outside the purview of the section. There midst be continuous acts constituting oppression up to the date of the petition. The events have to be considered not in isolation but as a part of a continuous story. It must be shown as a preliminary to the application of section 397 that there is just and equitable ground for winding up the company. The conduct complained of can be said to be oppression only when it could be said that it is burdensome, harsh and wrongful oppression and involves at least an element of lack of probity and fair dealing to a member in matters of his proprietary right as a shareholder. The exercise of the inherent right of shareholders, in such circumstances, to elect their directors cannot be contended as constituting oppression. The majority shareholders are not bound to accept the view of the minority shareholders. If it is a lawful exercise of power by the majority, the minority shareholder is bound by the samenow, in the background of the pronouncements, of law as reported in the decisions referred to above, it would be appropriate to deal with the case of the parties on hand. The main grounds on which the petition was filed are : irregularity in the allotment of shares to the petitioners; siphoning off funds of the company in the form of alleged loans; irregular removal of petitioner-directors from the Board; invalidity in the appointment of the managing director. The last accusation is that there is a defalcation. The Commissioner has actually noted excess stock as regards gold ornaments. It is not in dispute that K. R. S. Mani, who is the 1st respondent herein, lodged a complaint on 22nd September, 1996, which was registered in Cr. No. 28 of 1996 in City Crime Branch, under section 477 of indian Penal Code, 1860. The complaint against K. R. Loganathan and his two sons is regarding is appropriation of Rs. 3 crore. It appears that after consulting the legal advisor to the Commissioner of Police and after satisfying that a prima facie case under sections 406 and 477a of the Indian Penal Code has been made out against K. R. Loganathan, the managing director of the company and two others, the case was registered in Cr. No. 28 of 1996 in City crime Branch, under sections 406 and 477a. This complaint was laid on 22nd September, 1996 and the case was registered on 22nd September, 1996. While so, a suit was filed on the file of the sub-court, coimbatore, in No. 945 of 1996 by K. R. S. Mani, K. R. S. Anand Kumar, K. R. S. Suresh and L. Prakash as plaintiffs against Anugraha Jewellers Ltd. and K. R. Loganathan, as defendant Nos. 1 and 2 respectively. The reliefs asked for are that the resolution purported to be passed at the second annual general meeting of the company on 4th September, 1996 (i) removing the 1st plaintiff from the office of wholetime director is illegal, invalid and not binding on the 1st plaintiff, (ii) a permanent injunction restraining the defendants, any officers and agents of the 1st defendant-company from interfering in any manner with the discharge of duties by the 1st plaintiff as wholetime director; (iii)declaration that the resolution passed on 4th September, 1996 removing the 2nd plaintiff from the office of the vice president is illegal and for consequential injunction; (iv) declaration that the resolution passed on 4th september, 1996 removing the 3rd plaintiff from the office of vice-president is illegal and for permanent injunction restraining the defendants in that regard; and (v) for declaring that the 4th plaintiff upon retirement as a director at the annual general meeting held on 4th September, 1996 has been re-elected as a director of the 1st defendant company and for consequential injunction with reference to the samethe plaint proceeds on the footing that the 2nd defendant completely withheld information whatever sought by the plaintiffs and they were kept in dark and no Board meeting was convened by the defendants in spite of the requisition of the plaintiffs. There was gross discrepancy between the account as was circulated to the directors and the auditor report submitted in news papers publication (Economic Times ). The plaintiffs raised detailed clarifications regarding such discrepancies and misappropriation of funds and that at the time of meeting on 4th September, 1996, number of goondas were present outside the meeting hall. An atmosphere of threat and intimidation was built up by the 2nd defendant to confront the plaintiffs and cow them down. Resolutions were not properly proposed or seconded. There was no proper poll taken and the procedure required under law was not followed, and, thus, the resolutions are invalid in law.
(3.) IT, is to be pointed out that the respondents herein has filed this petition before the Board on identical grounds. IT is also to be pointed out that there was yet another suit filed with reference to the affairs of the company. Thus, we find that there were proceedings already initiated and pending with reference to the dispute between the parties, vis-a-vis, the company of which they were directors and shareholders. A complaint was laid which was registered under sections 406 and 477a. Apparently, the investigation on the said complaint is pending. There was also the suit filed with reference to the, resolution dated 4th September, 1996. There was other proceeding by way of another suit between the parties with reference to the affairs of the company. When proceedings have been already initiated, it is really understandable as to why petition was filed before the CLB. IT may be that after the initiation of this proceeding, the plaintiffs in the suit might have withdrawn the suit. But that will not erase the effect of action taken by them. This only will indicate the absence of bona fide in the proceedings initiated by the respondents before, the CLB. This has to be viewed further in the context of the participation of the respondents herein some of the very activities which are now questioned by them. Having been a party to certain decisions or actions, the respondents would now file an application before the Board accusing the appellants herein of those acts. This would only underline the oblique motive in filing the applicationi have already referred to the ruling in Nurcombe's case (supra), where it has been pointed out that the court has to satisfy itself that the person who comes forward is a proper person to do so. If it is shown that the person, who has come forward, has a conduct tainted in some way, then the court will not be justified in allowing the person to maintain such an application. In other words, as field in Gower's Principles of modern Company Law (4th edn. , 1979) if he had participated in the wrong of which he complains, he cannot maintain an action. Here, the actions of the respondents filing an application before the Board has to be viewed from that angle. Rightly or wrongly, they have already initiated steps under law. They have not only set the ball rolling by initiating criminal action, but also by resorting to civil action. They are parties to the transaction, which now they question. In such circumstances, one has to hold that the actions of the respondents in filing application before the Board is a mala fide one. They ought not to have been allowed to maintain such an application. Therefore, in this view of the matter, to begin with, it has to be held that the application filed by the respondent before the CLB is, but one born of mala fide intention and has been initiated only with a view to harass the appellants further. A person cannot be allowed to take different stand at different points of time. He cannot be allowed to question certain actions to which he was a party. Such an attitude should not only be deprecated, and if it is permitted, it will affect the smooth administration and would only encourage people to resort to such proceeding at slightest provocation and without any rhyme or reason. Hence, the respondents are not proper persons. They cannot maintain such an action. By their conduct, they have demonstrated that they are not entitled to maintain an actionwith regard to the allegations of discrepancy in the stools, the Commissioner's report reads as follows: "physical verification of the jewels jointly conducted by both parties in my presence tallied with the stock statement with negligible difference. No other stock of raw-gold, silver, precious stones, etc. , was reported in the Coimbatore show room. No stock of any kind was also reported in company's factory at Coimbatore which is housed behind the showroom in the same building. A quantity of 575. 490 grains of gold was reported to be with the following artisans as on 16th November, 1998 as work-in-progress for making jewels. I called upon Hari Logatiathan, director of the company to arrange for production of the above quantities of gold for my verification on 18th November, 1998 at Coimbatore. The artisans at S. Nos. 1 and 2 above turned up. The gold stock brought by the artisan at S. No. 2 above, Nandu was verified jointly by Hari Loganathan and KRS. Anand Kumar in my presence with reference to the carbon copy of the relevant issue voucher. Finally, in view of the extreme positions taken by the parties, the matter could not be, proceeded further and had to be left at that. Though the quantity is not, material, the stocks to remain with the Artisans since May, July and September 1998 is prima facie for too long a time. " The Commissioner has referred to in para, 2 (4), the stock position as per the computer stock statement and physical stock. He has stated as follows: Gold Stock as per computer statement - 2130. 510 gms. Stock as per physical verification - 2188. 375 gms. Difference - 57. 865 gms. (excess) Silver articles as per computer statement - 8219. 830 gms. Stock as per physical verifications - 2281. 34 gms. Difference - 352. 350 gms. (excess)Precious stones as per computer statement - 2396. 75 gms. Stock as per physical verifications - 2281. 34 gms. Difference - (-115. 41 gms.)The reasons for the difference as above have been explained in the company's letter dated 23rd december, 1998. From the report of the Commissioner, we find that there was no discrepancy in the stock. In fact, the stock on hand as regards gold and silver was found to be in excess. Regarding precious stones, they were with the artisans and of course they were with the artisans for considerable time. It is stated that artisans would require minimum six months to make certain types of gem-studded jewels, though the respondents would say that it cannot take more than a month. One of the artisans also appeared before the Commissioner and has stated about it. Therefore, the Commissioner report shows clearly that the allegations made by the respondents are patently false. The report of the commissioner does not support any prima facie case in favour of the respondents. ;