S.Balasubramanian, - (1.) THE petitioners claiming to hold 317 shares collectively in M/S Nitin Dyeing & Bleaching Mills Private Ltd. (the company) have filed this petition alleging oppression and mismanagement in the affairs of the company.
(2.) The facts of the case are that in 1971, a partnership firm in the name of National Dying & Bleaching Works was established by the families of Ved, Marda and Vohra. In Feb. 1975, the company was incorporated with the main object of taking over of the business of the above said partnership firm with the 1st petitioner and Shri M.M. Vohra as the subscribers to the Memorandum. The subscribers to the memorandum and the 2nd respondent were the first directors of the company. During 1991-92, both Vohra and Marda retired from the business by transferring shares held by them in favour of the 1st petitioner and the 2nd respondent, some shares in their own name and some shares in the name of the HUF formed by them separately. Thus, the company became a family company of Veds. The petitioner and the 2nd respondent are brothers, the petitioner being the elder. From September, 1992 to September, 2001, the Board of Directors consisted of the 1st petitioner, 2nd respondent, 3rd respondent and one Nitish Hans Raj Ved. As in September, 2001, the issued and paid up share capital of the company consisted of 602 shares of Rs. 1000/- each of which the petitioners held 317 (as claimed by them) shares constituting 52.66% share in the company. The petitioners have complained that further shares to the extent of 426 shares of Rs. 1000/- each were issued to the son of the 2nd respondent i.e. the 4th respondent without the knowledge and consent of the petitioners and that he had also been inducted into the Board as a whole time director and that the petitioners are alleged to have vacated their office in terms of Section 283(1)(g) of the Act effective from 5th April, 2002. These acts, according to the petitioners, constitute acts of oppression against the petitioners as they have been reduced to a minority and excluded from the management. They have also alleged various instances of mismanagement including siphoning of funds by the respondents. Shri Athavale, appearing for the petitioners submitted: The company was being run in the nature of a quasi partnership between the 1st petitioner and the 2nd respondent, The share capital of the company consisting of 602 shares of Rs 1000 each, continued to be Rs. 6.2 lacs for a number of years. The petitioners were holding 317 shares while the respondents were holding 285 shares indicating clearly that the petitioners were in the majority with 52.66% shares. Both the petitioners had been directors from 1992 onwards. However, without the consent and knowledge of the petitioners, the 2nd respondent had issued 422 additional shares on 5th October 2001 to the 4th respondent being the son of the 2nd respondent. There was no need to issue any further shares since the factory of the company remained closed right from April, 1999. Even assuming that the company needed funds, considering the quasi partnership nature of the company, offers should have been made to the petitioners also. Without making any offer to the petitioners and allotting all the shares to the 4th respondent, the petitioners have been converted into minority with 30.83% shares and a new majority has been created in favour of the respondents. The directors of a company are in fiduciary position and therefore cannot issue shares to benefit one group of shareholders. Issue of shares with the intention of creating a new majority would constitute oppression. Not satisfied with the conversion of the petitioners into a minority, the 2nd respondent has also inducted his own son and another brother as director of the company and has also declared that the petitioners had ceased to be directors in terms of Section 283(1) (g) of the Act on the ground that they had failed to attend three consecutive meetings. The petitioners never received any notice for any Board Meeting and therefore the question of their absenting from the Board Meetings did not arise. The respondents, with a view to deny the petitioners the right to participate in the affairs of the company have not been sending notices for any annual general meetings and they are also not providing any information about the company in spite of repeated requests. For instance the company has filed annual returns for the year 200-2001 stating that the AGM for that year was held on 30th September, 2001 for which the petitioners did not receive any notice. Further, that day being a Sunday, the meeting could not have been held on that day. It is in that meeting that the 4th respondent was allegedly appointed as a whole time director. By these acts, the respondents have acted in a manner oppressive to the petitioners.
(3.) CONTINUING his arguments, Shri Athavale submitted; There has been a gross financial mismanagement in the company. Even though the factory of the company remained closed and no business was being conducted by the company, the 2nd respondent unilaterally increased his remuneration as a director as is evident from annual report for the year 2000-2001. The 2nd respondent had leased out the property in the form of premises owned by the company to one M/S Neha Synthetics in 1993. Even though the company is entitled to receive the lease rentals, respondents 2 to 4 have been directly receiving the lease rentals and have been misappropriating the same. A perusal of the bank statement of the company at Annexure A-11 would reveal that substantial funds had been withdrawn by the 2nd respondent for his own benefit. Further, the said Neha Synthetics had defaulted in payment of excise duty due to which the Excise Department has issued a show cause notice cautioning M/S Neha Synthetics either to clear the excise dues or else the property would be confiscated. The thoughtless act for the 2 respondent in leasing out the property to M/S Neha Synthetics has exposed the property of the company to confiscation. Even though the manufacturing activities of the company were shut down effective from 1st April, 1999, the annual reports for the year 1999-2000, 2000-2001 etc. show substantial expenses on material consumption, expenses on Power and fuel including purchase of raw material. These annual reports also indicate purchase of certain fixed assets like machinery etc. When the factory of the company remained closed, the question of incurring expenses for running the factory or addition of machinery does not arise other than establishing that all these amounts have been siphoned of by the respondents. In the recent past, the company has leased out various portions of the property to certain individuals and whatever lease rentals were received, they have all been siphoned of. To prevent the respondents from siphoning of the funds, the petitioners have written letters to all the lessees asking them to make the lease rentals only by way of cheques.;