- (1.) The petitioners, having 25% shares in Ms Lake Shore Palace Hotels Pvt.Ltd. have filed present Company Petition No.32/2005 before the Company Law Board (for short "CLB"), Principal Seat, New Delhi under Section 397/398 of the Companies Act and prayed that (a) the Board of Directors of the respondent-Company be superseded and an Administrator and/or Receiver and/or Special Officer be appointed to forthwith take over the management and administration of the respondent company on such terms as the Board may deem just and proper,(b) if necessary, a scheme of management be framed for running the management and administration of the company on such terms as the CLB may deem just and proper and (c) the Board of Directors of the Company be reconstituted. The petitioners further sought declaration that the business conducted at and/or the proceedings of the meetings of the Board of Directors attended by respondent no.3 are bad in law in view of the Department's Circular No.14/51/62-PR and as such, the same cannot be acted upon and/or implemented. In addition to above reliefs, the petitioners prayed for (a) injunction restraining the respondents from issuing any shares or from increasing either the authorised or paid up share capital of the Company, (b) injunction restraining the respondents and each of them from dealing with or disposing of or alienating or encumbering or transferring any of the assets of the company in any manner whatsoever and (c) permanent injunction restraining the respondents and each of them from expending any funds of the company in any manner whatsoever including for the purpose of contesting the present proceedings. The petitioners then prayed for direction for an independent audit of the accounts of the respondent-company. The company petition was contested by the company and the private parties, the Directors of the company. The company petition was allowed by the Company Law Board vide order dated 14.12.2007. Present three Company Appeals have been preferred, one by petitioner before the Company Law Board and two company petitions by non-petitioners before the Company Law Board. To avoid any confusion in this judgment, the petitioners who preferred company petition, inter alia, are referred as the petitioners and non-petitioner in the company petition are referred as respondent.
(2.) It will be appropriate to mention here that the appellants (Company petitioner No.1) earlier preferred S.B.Company Petition No.1/1991 under Section 397/398 of the Companies Act, 1956 before the Rajasthan High Court in the year 1991 with the allegations and on the grounds that respondent no.2, the real brother of the petitioner and appellant no.1 was having 10% shareholding in the respondent-Company in the year 1984 and was able to increase his share holding in the respondent-Company to 56%. The respondent no.2 also controls another 23% of the shareholding in the respondent-Company belonging to the Estate of Maharana Bhagwat Singh of Mewar(father of appellant no.1 and respondent no.2), which he controls as an Executor of the Trust created by Maharana Bhagwat Singh which is Maharana Mewar Institution Trust. According to the petitioners-appellants, respondent no.2 attempted to oust the petitioners from the management and control of the respondent-Company and, therefore, prayed in the the Company Petition No.1/1991 that:- (1)A Scheme be framed for management and control of the affairs of the company so that the respondent No.2 is divested of his powers to control the company and so that the controlling interest in the company vests in the Maharana Mewar Institution Trust when the Will is administered; (2)An interim scheme be framed for management and control of the affairs of the company till such time the Will is administered so that the interest of the Maharana Mewar Institution Trust and that of the petitioner are secured; (3)The respondent No.2 be removed from the Board of Directors of the company and an independent Director be appointed in his place; (4)The allotment of 1409 shares in favour of the respondent No.2 (which were offered to and ought to have been accepted by the Executors of the Will) be declared as void, in the alternative, the said 1409 shares out of 1712 shares standing in the name of respondent No.2 be transferred to the Executors of the Will and ultimately to the Maharana Mewar Institution Trust so as to maintain the original ratio of shareholding as at the time of death of H.L.H. Maharana Bhagwat Singh of Mewar; (5)It be declared that the present Executors of the Will (Respondent No.2 and Shri A. Subramaniam) shall not be competent to represent the interest of the Estate of H.L.H. Maharana Bhagwat Singh of Mewar in the company and a committee comprising of the trustees of the Maharana Mewar Institution Trust be constituted for the exercise of all rights in respect of the shares in the company transmitted to the said Executors; (6)A new additional director be appointed in place of the resigning Director-Mr. Ashwani Chaturvedi- as per nomination by all the Trustees of Maharana Mewar Institution Trust (as was done in the case of Mr. Ashwani Chaturvedi also) so that the interests of the Maharana Mewar Institution Trust are not prejudiced; (7)Respondent No.2 be directed to account for and make good the funds syphoned off from the company and/or misutilised for his personal gains; (8)The notice dated 26.2.1991 in respect of the meeting of Directors which was to be held on 9.3.1991 be cancelled and any meeting held in pursuance thereto be cancelled; (9)An injunction restraining the respondent No.2 from holding, attending any future meeting of the Board of Directors of the company; (10)An injunction restraining the respondents and in particular respondent No.2 from issuing and/or allotting any further shares beyond the 3027 shares already allotted; (11)An injunction restraining the respondent No.2 from exercising any right or voting right in respect sof 1409 shares allotted to him which were originally offered to the Executors and which ought to have been accepted by them, till the said 1409 shares are cancelled or transferred in terms of prayer (4) above; (12)An injunction restraining the respondent No.2 from appointing anyone else as a Director in the company other than as prayed for in prayer (6) above; (13)An injunction restraining the respondent Nos. 2 and 3 from operating the Bank accounts of the company; (14)A Receiver or Special Officer be appointed to take custory and/or possession of the books of accounts, Directors Minute Books, Minute Books of the Meetings of Shareholders, Share Registers and other statutory and accounting records and books of the company and to permit the petitioner to inspect and take copies of the same; and (15)Pass such other and/or further order(s) and/or direction(s) as may be deemed fit and just with a view to bringing to an end the matters complained of. Said Co. Petition No. 1/1991 was allowed by the learned Single Judge of this Court vide judgment dated 23.11.1994 in the following terms:- (i)Company Petition is partly allowed with costs which are assessed at Rs.50,000/- (Rupees Fifty Thousand only) payable by the respondent No.2 only. (ii)All resolutions passed and decisions taken by the Board of directors of the Company in its meetings in which the respondent No.2 only was present are declared void and nonest. (iii)Maharajkumar Raj Singhji son of HH Maharaja Laxman Singhji and Maharajkumar Samar Singhji son of late Maharaja Veerbhadra Singhji, both resident of Dungarpur, are appointed as directors of Lake Shore Palace Hotel Pvt. Ltd, with immediate effect. In case the or any of them do not/does not wish to act so, any of the parties may move this court for appointment of any other person as director/directors. (iv)The respondent No.2 Arvind Singh is directed to repay the Company all amounts spent by it in connection with his foreign tours, Bombay Flat (spent after April 1, 1988) and present litigation, with interest @ 15% per annum. The amounts of dividends payable to the respondent No.2 will not be paid to him till the aforesaid amounts with interest stand fully paid to the company, if not paid earlier. Against above judgment dated 23.11.1994, three D.B. Special Appeal Nos.3/95, 4/95 and 5/95 were preferred by Lake Shore Palace Hotel, Arvind Singh and by present appellant no.1. Before the Division Bench, the parties decided to settle the matter amicably and memorandum of understanding was entered into between petitioner no.1 and respondent no.2 and it was agreed that in place of two Directors appointed by the learned Single Judge, Shri T. Narayan Unni be appointed as Director of the respondent- Company. In view of the above settlement, S.B.Company Petition No.1/1991 was withdrawn and the Special Appeals filed by both the parties were also dismissed as withdrawn. Now in present petition, the petitioners contention is that amicable settlement referred above and filed before division bench of this court was based on unequivocal understanding that the respondent no.2 would transfer equity shares already allotted in his favour to petitioner no.1 and with clear and unequivocal understanding that the respondent would cease and desist to acquire further shares in respondent-Company. The allegations in this petition are that respondent no.2 did not honour the compromise in its true spirit and continue to mismanage the respondent- Company as its Managing Director. The respondent no.2 in collusion with Shri T.N. Unni, the third Director of the respondent-Company, who though, was appointed with the consent of petitioner no.1-appellant no.1, is attempting to increase the paid up capital of Rs.30,27,000/- to Rs.3,30,27,000/- by issuing 30,000 equity shares of Rs.1000/- each. The said shares are purportedly offered to the existing share-holders on pro-rata basis depending on their entitlement based on the existing shareholding, the petitioner-appellants' contention is that respondent has illegally acquired control of 52% of share holding and further controls 23% shares in his capacity as the executor of the estate, the proposed increase and allotment on prorate basis (of shares) would reduce the petitioners to a helpless minority in the respondent-Company. The petitioners-appellants apprehended that respondent no.2 acting as the Executor of the Will executed by late Maharana Bhagwat Singh founder of the Company would refuse to accept the share offered to the estate which would then be offered to the other shareholders, i.e. the petitioners and respondent no.2. Respondent no.2 is well aware that the petitioners are not in favour of increasing the share capital of the Company and would not accept the shares offered, giving respondent no.2 an opportunity to corner all the shares. In sum and substance, the contention of the petitioners is that the increase of share capital by issuing 30,000/- equity shares of Rs.1000/- each and offered to existing share holders on pro-rata basis is an act of oppression. The contention of the petitioners is that as per the amicable settlement and looking to the nature of the Company and its share-holders, and appellant no.1 and respondent no.2 real sister and brother and in view of the amicable settlement, the percentage of shares held by the appellants-petitioners cannot be reduced nor respondent no.1 can increase the shareholding and further allegation is that all it is being managed by respondent no.2 with collusion of respondent no.3 who is one of the Directors in the Company though initially appointed with the consent of the petitioner no.1- appellant no.1 but, he then indulged in unethical and improper acts to favour respondent no.2. Then appellants-petitioners in Company Petition also submitted that respondent no.2 under the guise of requirement of capital has once again embarked on a plan to increase his shareholding in the company and instead of making attempts or efforts to look for alternate sources of funds for the respondent-Company, either by way of loans from banks and financial institutions or by way of unsecured borrowings, has adopted mode of issuing shares on right basis as stated above. The appellants-petitioners in company petition further asserted that MOU dated 25.8.1999 between the petitioner and respondent no.2 was premised on the understanding that there would be no further issue of capital to reduce the holding of petitioner no.1 or the estate of Late Maharana Bhagwat Singh and it was because of this reason that 145 shares were transferred by respondent no.2 in favour of the petitioner. The respondent, in breach of MOU is attempting to increase the paid up capital of the respondent-Company and, therefore, the proposed increase of share capital is not bona fide and is motivated with the object of reducing the petitioner to a minuscule minority and diminish the value of the estate of Late Maharana Bhagwat Singh. The appellant further submitted that the petitioner has effectively been excluded from the business of the respondent-Company and respondent no.2 has marginalized the petitioner from the functioning of the company and, therefore, the petitioner expressed her willingness to consider selling her interest in the company at a fair price and thus sought various details regarding the assets and liabilities of the respondent- Company including financial of the respondent-Company so that the fair value of the shares held by the petitioner could be ascertained. In the sequence, respondent no.2-called the petitioner to Delhi for a meeting in the month of November, 2004 wherein he offered to buy out the petitioner's group holding for Rs. 1 crore. The petitioner no.1 refused to accept the offer stating that it was necessary that a valuation of the shares to be carried out first. Respondent no.2 deliberately did not provide the information sought by the petitioner from time to time. The petitioner also alleged that the price offered by respondent no.2 was not true and fair price of the shares. In sum and substance, the respondent no.2 when failed to buy shares of petitioners, to force them out from th company evolved this procedure of increase in share capital knowing it well that the petitioner is not in favour of increase in share capital of the company and will not invest more in the company and in that situation the respondent will be able to acquire these unscribed shares. Respondent no.2 issued a notice dated 13.12.2004, calling for a meeting of Board of Directors to be held at Udaipur on 29.12.2004. According to the petitioner, she attended the Board's meeting wherein she recorded her dissent on the proposed increase of authorised share capital of the respondent-Company from Rs.50 lacs to Rs.50 crores. Then respondent no.2 gave another notice dated 5.1.2005, wherein agenda was to consider to increase authorised share capital of the Company from Rs.50 lacs to Rs. 50 crores by creation of 45,000 equity shares of Rs.1000/- each, ranking pari passu with the existing equity shares and that clause V of the Memorandum of Association and Articles of Association of the Company be altered accordingly. According to the petitioner, she also received a document purporting to be a valuation report prepared by respondent no.3 T.N. Unni, which has been shown to have been prepared at the instance of petitioner no.1, whereas petitionerno.1 never asked respondent no.3 T.N. Unni or any body else to prepare any valuation report. It is alleged that it was done with a view to create a false valuation report so that the same may be used to bargain the price of shares in the event of a buy out. Petitioner no.1 immediately protested it and denied preparation of the valuation report by T.N. Unni at the instance of the petitioner and also submitted that action of respondent no.3 was illegal. The petitioner also alleged in the Company Petition that respondent no.3 received substantial amounts from various group concerns and other entities under the control of respondent no.2 and thus is no longer an independent Director. It has also been alleged that the Lake Palace Hotels & Motels Pvt. Ltd., of which company, respondent no.3 is the Auditor and as such, he should not have undertaken the said exercise of preparing the valuation report referred above and further respondent no.3 being the Auditor of the Lake Palace Hotels & Motels Pvt. Ltd., ought not to have agreed and/or ought not to continue as a Director of the respondent-Company which has about 50% shareholding in the Lake Palace Hotels & Motels Pvt. Ltd. The petitioner submitted that appointment of respondent no.3 is bad in law and void ab initio. The petitioner's contention is that all the transactions and decision taken in the meeting of the Board of Directors of the respondent-Company, in particular, in the meeting dated 29.12.2004 convening to holding of EGM dated 29.1.2005 and consequently the resolution passed at EGM on 29.1.2005 are also bad in law and void. The petitioner submitted her protest vide letter dated 27.1.2005 which was replied by respondent no.2 on 7.3.2005. The petitioner no.1 sent a letter dated 27.1.2005 to the Company Secretary of the respondent-Company requesting him not to proceed with the proposals to increase the authorised share capital of the Company in view of her letter dated 27.1.2005. In sum and substance, petitioner no.1 objected to increase in the share capital referred above. The Company Petition was contested by the respondents on all counts, details of pleas are not necessary to avoid repetition as they will come in defence arguments and at relevant places.
(3.) The CLB by its order dated 4.12.2007, after holding that the petitioners failed to establish that there is financial mismanagement in the Company and the Board has no jurisdiction to remove Shri Unni, the Director of the Company, as his appointment was on account of consent terms approved by the High Court in earlier round of litigation between the parties and considering the financial position of the company, it does require funds to carry out renovations. The CLB rejected the allegations of the petitioners that the full project details for the investment to be made had not been disclosed and instead of projects, the one sheet project report reflects only renovation and that the estimates are overstated etc. and held that the objections are mostly technical. The CLB observed that the CLB does not found either in the pleadings or during the arguments that the renovations proposed in the project report are unnecessary or unwarranted and in a hotel, upgradation of the facilities and also constant renovation is a standard practice. The CLB from the accounts of the Company found that there was an addition to the fixed assets of a sum of about Rs. 40 lacs in 2002-03 and about Rs.85 lacs in the year 2003-04. Even after finding the need for the funds for the company genuine, the CLB examined whether the Company was justified in raising the funds and the only source was by way of issue of right shares and whether in terms of the agreement entered into between the parties and submitted before the High Court in the earlier round of litigation, whether there could be no issue of further shares and that share-holdings should remain, all times to come, as it stood after the agreement before the High Court. The CLB held that any attempt to disturb the percentage of shareholding, without the consent of the petitioner, could be an act of oppression. The CLB held that forcing the shareholder to invest such a substantial amount of money without any returns only to maintain their percentage shareholding is harsh, burdensome and therefore, is definitely oppressive.;