K.K. Balu - (1.) THE petitioners collectively holding in excess of 10 per cent of the issued and paid -up capital of M/s. Rajawoods (India) P. Ltd. ("the company"), aggrieved on account of certain alleged acts of oppression and mismanagement in the affairs of the company, have invoked the jurisdiction of the Company Law Board under Sections 235, 397, 398, 402, 403 and Schedule XI read with Sections 542 and 543 of the Companies Act, 1956 ("the Act"), claiming the following reliefs: (a) to appoint one or more competent persons as inspectors to investigate into the affairs of the company; (b) to declare the appointment of K. Bhaskar as a director of the company as invalid ; (c) to appoint a nominee of the petitioners as a director of the company to participate in the day -to -day affairs of the company ; (d) to direct the second respondent to restore the money, misutilised from the company's accounts for personal purpose together with interest ; and (e) to declare the annual general meeting held on September 30, 2004, as invalid and direct the company to call for the annual general meeting of the company for the year 2004.
(2.) SHRI R. Rajesh, learned Counsel, while initiating his arguments, in support of the petitioners, submitted: The company has been incorporated in October 2003, with the main object of carrying on the business as timber merchants. The first petitioner and the second respondent are subscribers to the memorandum of association, each subscribing 5,000 shares of Rs. 100 each and they are the first directors of the company. The petitioners' group consisting of 21 shareholders invested a total sum of Rs. 30 lakhs (Rs. 12 lakhs by way of cheques + 18 lakhs in cash), whereas the second respondent allotted only 25,000 shares of Rs. 100 each in favour of the petitioners, constituting 50 per cent of the paid -up share capital of the company and instead of returning the balance money of Rs. 5 lakhs, the second respondent allotted shares to himself and his group. Form No. 2 filed under the signature of the second respondent, with the Registrar of Companies and the share certificates issued to the petitioners will evidence the payment of consideration in respect of the shares allotted to the petitioners, from and out of their personal funds. The second respondent's father never extended any loan to the first petitioner for the initial investment made in the company. The second respondent did not make any investment in the company and at the same time, falsely claims that his father had lent huge amounts for running the business of the company. The second respondent is the managing director for life and shall not retire by rotation unless he opts for retirement or resignation and has been managing the company and operating the bank account independently, ever since its incorporation. The second respondent failed to call for any board meetings or the annual general meeting for the year 2003 -04 in accordance with Section 285 of the Act, in spite of repeated requests made by the first petitioner. The first petitioner never received any notice of the annual general meeting of September 30, 2004 and therefore, did not attend the annual general meeting. In view of this, none of the resolutions passed at the aforesaid annual general meeting is valid. Any notice of meeting, not meeting the requirements of Section 189 of the Act, read with the articles, cannot be valid as held in V.G. Balasundaram v. New Theatres Carnatic Talkies P. Ltd. : [1993] 77 Comp Cas 324 (Mad). The second respondent decided everything unilaterally, leading to resignation of the first petitioner from the office of director of the company, with effect from December 10, 2004. It later transpired from the balance -sheet for the year 2003 -04 that one K. Bhaskar claimed to be a director of the company in terms of Form No. 32 filed in September, 2004, and thereby the second respondent committed fraud by illegally inducting K. Bhaskar in the board of the company, without the consent and knowledge of the first petitioner. The appointment of K. Bhaskar as an additional director at the board meeting held on September 2, 2004, without participation of the first petitioner, being the only remaining director, apart from the second respondent is invalid and therefore, the balance -sheet and profit and loss account authenticated by the second respondent and K. Bhaskar are not in due compliance with the requirements of Section 215(1)(ii) of the Act. The second respondent is fabricating, with ulterior motive to cover up all his misdeeds and misappropriation of funds, the documents to show as if the board meeting was held on September 2, 2004 and K. Bhaskar was appointed as the additional director. There has been no quorum for the board meetings, subsequent to resignation of the first petitioner from the office of director. It is held in Ashish Das Gupta v. Satvinder Singh : [2000] 2 Comp LJ 376 (CLB), that when there are only two directors, the question of any board meeting being held does not arise without participation of both directors. No board meeting could be held for want of proper quorum and therefore, the question of the petitioner ceasing to be a director of the company pursuant to Section 283(1)(g) of the Act does not arise. There cannot be a one -man meeting. The commonsense view is that for a meeting, there must be at least two persons. This commonsense view is also the true view in law. The provisions relating to the quorum for meetings are mandatory. Any meeting of the board of directors without the required quorum is non est and void. All the resolutions passed and decisions taken in such meetings are void, as held in Maharani Yogeshwari Kumari v. Lake Shore Palace Hotel P. Ltd., [1995] 3 Comp LJ 418 (Raj). The second respondent unauthorisedly (a) transferred funds of the company from its bank account to V.M.S. Timber and Plywood, a concern controlled by the father of the second respondent, without any obligation on the part of the company ; (b) incurred personal obligations ; (c) utilised Rs. 4,30,000 on account of his personal use ; (d) made several cash withdrawals ; (e) utilised an aggregate sum of Rs. 21 lakhs for purchasing the personal property without obtaining the board's consent; and (f) falsified the books of account of the company, thereby showing payment of Rs. 40,000 towards the first petitioner's remuneration as a director without, however, making any such payment. In these circumstances, the Company Law Board may give appropriate directions, with reference to the undertaking given by the second respondent that the landed property, being the subject -matter of the dispute, will not be alienated or sold, which has been recorded, in terms of the order dated July 27, 2005. The director's report for the year ended March 31, 2004, would reveal a meagre income of Rs. 1,25,288 whereas the company has paid Rs. 1.12 lakhs towards the sales tax, which would establish the siphoning off of the funds of the company by the second respondent, necessitating an investigation into the affairs of the company. The central crime branch, on a complaint made by the petitioners for misappropriation of funds against the respondents, in terms of their report, came to the conclusion that the second respondent had withdrawn a sum of Rs. 5,01,000 on May 7, 2004, from the company's account and issued a pay order for Rs. 5 lakhs to P. S. Kuppuswamy, from whom the landed property was purchased by the second respondent and suggested that the petitioners may prefer a complaint before the Company Law Board, since the offence is of civil nature. The petitioners are therefore, seeking appropriate reliefs before the Company Law Board. The company petition has been opposed, on the following grounds: The allegations of oppression and mismanagement are related to the period both before and after the date when petitioners Nos. 2 and 3 have become the members of the company and, therefore, their shares cannot be counted to meet the requirements of Section 399, in which case the company petition is liable to be dismissed. Petitioners Nos. 2 and 3, not being members as on the date of the alleged irregularities, cannot claim to be oppressed at the hands of the respondents. Regulation 20 of the Company Law Board Regulations, 1991, provides that a petition should be founded upon only on a single cause of action, whereas the present case, based on several alleged acts of oppression and mismanagement in the affairs of the company is contrary to the aforesaid regulation. The company petition is also barred by limitation. Section 397 addresses the grievances of the members and not of directors. The oppression as held by the Kerala High Court in P.K. Prathapan v. Dale and Carrington Investments P. Ltd., [2002] 111 Comp Cas 425, must involve at least an element of lack of probity or fair dealing to a member in the matter of proprietary rights as a shareholder, which is lacking in the present case. Furthermore, the acts complained of by the petitioners do not constitute oppression or mismanagement in the affairs of the company. The records produced before the Bench do not show that the affairs of the company were being conducted in a manner prejudicial to the interests of the company or public interest. The petition was not bona fide and therefore, the petition has to be dismissed as held in Dhanna Lal Banthia v. Gaurav P. Ltd. : [1994] 81 Comp Cas 881 (Raj). Petitioners Nos. 1 and 2, had promised prior to incorporation of the company, to invest an initial amount of Rs. 10 lakhs to start the business, but failed to keep up their commitment, compelling the second respondent to arrange for a loan of Rs. 10 lakhs from his father to the petitioners on their request and thereby the initial investment by the petitioners' group as well as the respondent group was scaled down to Rs. 5 lakhs each. Accordingly, the company had initially issued 10,000 equity shares of Rs. 100 each with which the petitioners' group and the respondent group came to hold 5,000 shares each. In June 2004, further shares to an extent of 40,000 shares were issued in favour of the petitioners' group (20,000 shares) and the respondent group (20,000 shares). However, no amount was received in respect of these shares. The petitioners have not produced any material proving payment of any consideration in respect of the allotment of 20,000 shares. Mere Form No. 2 and the share certificates do not conclusively evidence the payment of consideration for the shares allotted in favour of the shareholders. This Board in G. Rama Raju v. South India Research Institute P. Ltd., [2004] 118 Comp Cas 156, held that it is not uncommon to issue shares to achieve certain objectives on oral understanding among the shareholders. V.M.S. Timber and Plywood has business relationship with the company and lent in the normal course of business an amount of over Rs. 35 lakhs. The first petitioner being a party to the said transaction cannot make any complaint, in this behalf. This transaction is reflected in the books of account of the company, which are duly audited and certified by the statutory auditor of the company, in terms of the balance -sheet as at March 31, 2004. The second respondent acquired the landed property out of his personal resources and never made use of the company's funds. The petitioners holding 50 per cent shareholding and with their nominee on the board could themselves convene the board meeting, as held in Lt. Cdr. D.K. Chatterji v. Rapti Supertronics P. Ltd. : [2003] 114 Comp Cas 265 (CLB). Even otherwise, the board meetings have been conducted periodically and the minutes are duly signed by the chairman in accordance with law. The Orissa High Court has held in Prafulla Kumar Rout v. Orient Engineering Works P. Ltd., [1986] 60 Comp Cas 65, that it does not require that all members of the board should sign the minutes of the board meeting, which render the charges of the petitioners, as meaningless. The failure to convene the extraordinary general meeting cannot constitute oppression or mismanagement, as the meeting could be convened by the requisitionist -shareholders themselves under Section 169(b) as reiterated by the Madras High Court in B. Sivaraman v. Egmore Benefit Society Ltd., [1992] 75 Comp Cas 198. However, the petitioners without exhausting any such remedy, rushed with the present petition. Hence no action will lie under Section 397/398 of the Act. The company petition has been filed with the object of exerting pressure to achieve a collateral purpose and not with the genuine object of obtaining any relief, which is nothing but an abuse of the process of law, as held in Bellador Silk Ltd. In re, [1965] 2 Comp LJ 30 :, [1965] 1 All ER 667 (Ch. D). At the board meeting duly convened on September 2, 2004, participated by the first petitioner and the second respondent, K. Bhaskar came to be unanimously appointed as the additional director of the company. The second respondent and K. Bhaskar, as directors of the company had signed the annual report for the period ended March 31, 2004 and therefore, does not suffer from any infirmity as claimed by the petitioners. The annual accounts were approved by the second respondent and K. Bhaskar and passed necessary resolution calling for the annual general meeting, which was validly held after due notice on September 30, 2004, wherein the audited accounts of the company were unanimously adopted and K. Bhaskar was appointed as a regular director of the company. Petitioners Nos. 1 and 2 who were also present did not raise any objection on the resolution appointing K. Bhaskar, as a permanent director of the company. The alleged acts of misappropriation of monies for the purpose of buying personal property, and the acts of oppression, namely, appointment of additional director, conduct of the annual general or board meetings, transfer of funds to V.M.S. Timber and Plywood, being past acts do not satisfy the requirements of Section 397/398. There was no financial irregularity committed by the second respondent and therefore, the relief of restoration of money does not arise. The first petitioner continued to be a director from October 21, 2003 to December 10, 2004 and resigned on personal grounds but never raised any grievances in the affairs of the company at the relevant point of time. Hence, the petition is motivated and the grievances are not genuine and thus, the petition is not a bona fide one, as found in Ramesh Bhajanlal Thakur v. Sea Side Hotel P. Ltd. : [2000] 100 Comp Cas 117 (CLB). The first petitioner having been a party to all the transactions of the company cannot now accuse the second respondent holding him responsible for the alleged irregularities in the affairs of the company. The acts complained of not being prejudicial to public interest, cannot be remedied under Section 397/398 of the Act. The alleged acts should not only be oppressive, but also render the company for winding up on just and equitable grounds. The aggrieved shareholders should resort to alternate remedies, in the interest of the company. The relief of appointment of inspectors for the purpose of investigation into the affairs of the company cannot be granted on mere surmises and vague allegations as held by this Board in Rohinten Mazda v. Hypoids (India) P. Ltd., [2004] 121 Comp Cas 729. M/s. S. P. Associates, auditors appointed by this Bench did not carry out verification of the accounts within the stipulated period. The accounts of the company have already been duly audited by the statutory auditor and therefore, the prayer for appointment of one more auditor at this stage to verify the accounts is not sustainable in law.
(3.) I have considered the matter with reference to the pleadings, oral submissions of learned Counsel for the petitioners and written arguments submitted on behalf of the respondents. The issue before me, in the light of the rival claims of the parties, is whether the intervention of this Bench is warranted in exercise of the powers vested in Sections 397 and 398 read with Section 402 of the Act, with a view to bringing to an end the acts complained of in the affairs of the company. The main controversial issues are relating to (i) investment of parties towards their shareholding in the company ; (ii) non -convening of board or general meetings and non -sending of notices of the general meeting(s) ; (iii) appointment of K. Bhaskar as a director of the company; (iv) validity of the proceedings of the board meetings with participation of K. Bhaskar ; (v) diversion of funds and financial irregularities at the hands of the second respondent; and (vi) irregular conduct of the company's affairs.;