Milap Chandra Jain, J. - (1.) This company petition has been filed under sections 397 and 398, Companies Act, 1956 (hereinafter to be called 'the Act'), with the prayers that a scheme be framed for management and control of the affairs of the Lake Shore Palace Hotel (P) Ltd., Udaipur (hereinafter to be called 'the company'), to divest the respondent No. 2, Arvind Singh Mewar, with his powers as its managing director; he should be removed from the Board of directors and an independent director be appointed in his place; it may be declared that (1) the allotment of 1,408 shares in favour of the respondent No. 2 is void, and (2) the executors of the will of late His Highness Maharana Bhagwat Singhji (for short 'Maharana') were not competent to represent the estate of Maharana; a committee of the trustees of the Maharana Mewar Institution Trust (in short, 'the trust') be constituted for the exercise of all the rights in respect of the shares in the company; a new additional director be appointed in place of resigning director, Shri Ashwini Kumar Chaturvedi; respondent No. 2 be directed to recoup the funds siphoned off by him from the company and misutilised for his personal use and gain; the respondent No. 2 be restrained (1) from holding or attending any meeting of the Board of directors, (2) from issuing/allotting further shares beyond 3,027 shares already allotted, (3) from exercising any right of voting in respect of 1,409 shares which were originally offered to the executors, (4) from appointing any one as a director of the company, and (5) from operating bank accounts of the company; to appoint a receiver or special officer to take the custody of all the books of accounts and records of the company; to permit the petitioner to inspect and to take their copies and to pass such other orders as may be deemed fit and just with a view to bring to an end the matters complained of.
(2.) It has been averred in the company petition in short, as follows. The company was promoted by Maharana; it was incorporated on 27 May, 1972, and he leased out one of his palaces, namely, Shiv Niwas Palace, to the company for the purpose of running a hotel. Its registered office is situated at City Palace, Udaipur. Its nominal capital is Rs. 50 lakhs divided into 5,000 equity shares of Rs. 1,000 each. Objects of the company are set forth in its memorandum of association (Annexure 'A'). Articles of association is Annexure 'B'. Petitioner is a registered holder of 615 equity shares; they are fully paid up and (she) is entitled to move this petition. Maharana died on 3 November, 1984, leaving behind two sons : Maharaj Kumar Mahendra Singh and Maharaj Kumar Arvind Singh (respondent No. 2), and one daughter, namely, Maharani Yogeshwari Kumari (petitioner). She was introduced as a shareholder in the company in the year 1979. Maharana died leaving behind his will dated 15 May, 1984. Under the said will, Shri Arvind Singh Mewar [respondent No. 2 and also 3(a)] and Shri A. Subramaniam [respondent No. 3(b)] were appointed as its executors. They moved an application in this court for grant of probate. By order dated 13 November, 1987, probate was granted. A copy of the will is annexed as Annexure 'C'. By his said will, Maharana has created a trust. The shares of the company were given to the members of his family and it was always his intention that the company should always remain a close-knit family concern. It was the intention and desire of the Maharana that, gradually and ultimately, the trust was to hold the shares of the company in place of family or any of its individual members. Maharana held majority shares in the company and the company in turn held majority shares in another company, namely, Lake Palace Hotels and Motels (P) Ltd., Udaipur. On the death of Maharana, the respondent No. 2 acquired the dual capacity in the company, one as a shareholder and another as an executor of the said will. He exercised domain (dominion) and control over the shares of Maharana as an executor. The executors are purposely delaying the administration of the will to continue to retain their control and domain (dominion) over the shares of Maharana. Through this mode of operation and by cleverly and dubiously utilising his dual capacity, the respondent No. 2 has managed to comer substantial chunks of the shareholdings of the company with the sole purpose of acquiring total control over the affairs of the company and has conducted its affairs to the detriment of her interest as a shareholder. On 11 March, 1986, the respondent No. 2 appointed his friend, Shri Ashwini Kumar Chaturvedi, as an additional director of the company. In the said meeting of the Board of directors dated 11 March, 1986, she was not present and only respondent No. 2 was present. He increased his personal shareholding in a very clever manner by ostensibly offering shares of the estate of Maharana pro rata to the existing shareholders, refusing to accept the pro rata offer as an executor of the will and accepting the same in his personal capacity. The ostensible reason for the increase in the share was the improvement of debt-equity ratio, but the real reason was to get complete and lasting control over the company. By resolution of the Board of directors dated 5 July, 1985, it was decided to increase the subscribed and paid-up capital of the company from Rs. 10 lakhs to Rs. 20 lakhs by a fresh issue of 1,000 equity shares of Rs. 1,000 each. Fresh shares were to be offered to the existing shareholders on pro rata basis. Accordingly, 700, 200 and 100 shares were offered to the executors of the will, to her and to the respondent No. 2, respectively. She and the respondent No. 2 accepted the shares. The executors refused to accept 700 shares. In the meeting of the Board of directors held on 20 January, 1986, it was decided to offer 700 equity shares declined by the executors to the remaining members in proportion of their existing shareholding. In the note enclosed with the notice of the meeting to be held on 4 March, 1986, it was stated that the said decision of offering 700 shares to the remaining members was taken as a consequence of the letter dated 14 December, 1985, of the Bank of India, Udaipur, to improve the debt-equity ratio in order to satisfy the objection raised by the Industrial Development Bank of India (IDBI) for eligibility for re-finance. She believed it as she had reposed faith and confidence on her brother Arvind Singh (respondent No. 2). In fact, this was not the reason for the said offer. The financial position of the company was never such as to warrant fresh issue of shares. It was done to deceive her. She came to know (of) the design of the respondent No. 2 subsequently. A copy of the said note is enclosed as Annexure U. She received letter dated 28 January, 1986 (Annexure 'E'), from the company secretary, A. Subramanium [respondent No. 3(b)], offering her 467 equity shares out of 700 equity shares which were originally offered to the executors of the will. For some reason or the other, the allotment of said 700 shares did not materialise. She received another letter dated 8 April, 1987 (Annexure'F'), from the company secretary informing her that it has been decided to increase the subscribed and paid-up capital from Rs. 13 lakhs to Rs. 20 Iakhs by issuing fresh 700 equity shares of Rs. 1,000 each. 700 shares were offered on pro rata basis to all the existing shareholders, the executors refused. Thereafter, 700 shares were offered to her and the respondent No. 2, respectively. She accepted 215 shares offered to her. The respondent No. 2 also accepted 108 shares offered to him. The executors refused to accept 377 shares. The respondent No.2 requested her to allow him to purchase the shares refused by the executors. Being unaware of his ulterior motive, she permitted him to purchase 377 shares in his personal name. On 1 June, 1987, the respondent No. 2 had greater shareholding for the first time. In the 'extra-ordinary' general meeting of the company held on 1 September, 1989, it was decided to raise authorised share capital of the company from Rs. 20 lakhs to Rs. 50 lakhs divided into 5,000 equity shares of Rs. 1,000 each. By resolution dated 6 November, 1989, of the Board of directors, it was decided to increase the subscribed and paid-up capital of the company from Rs. 20 lakhs to Rs. 50 lakhs by issue of 3,000 equity shares of Rs. 1,000 each. Thereafter, she received a letter dated 10 November, 1989 (Annexure'G'), requesting her to give her acceptance of the offer to subscribe 923 equity shares of Rs. 1,000 each. In her reply dated 26 November, 1989 (Annexure'H'), she, inter alia, stated that she had not received the notice dated 26 October, 1989, of the meeting of the Board to beheld on 6 November, 1989; it was received on 9 November, 1989; she did not learn about agenda of the meeting; it was not proper and fair to act upon the decisions taken at the meeting held on 6 November, 1989, and she requested that the said decisions be not acted upon till the next meeting of the Board. Thereafter, she sent letter dated 29 November, 1989 (Annexure I), conveying her willingness to accept 923 shares and they were, however, not allotted to her. On the other hand, 1,027 shares offered to the respondent No. 2 have been allotted to him on or about 15 January, 1990. As a result thereof, the respondent No. 2 became a virtual dictator. He can pass and adopt any resolution which he wants at any meeting of the Board of directors. The respondent No. 2 is now proposing to take in his name 1,050 shares. If he is permitted to do so, he will thereby increase his shareholding to 3,685 shares, i.e., 73.3% of the total share- holding. The position of the shareholdings on various different dates is as follows : JUDGEMENT_57_LAWS(RAJ)11_19941.html
(3.) The company is holding majority shares in the Lake Palace Hotel and Motels (P) Ltd., Udaipur. By controlling the company, the respondent No. 2 would be able to exercise his total control over the Lake Palace Hotel and Motels (P) Ltd., also. In the Explanatory Note dated 9 August, 1989, it was stated that the company needed to increase its authorised share capital from Rs. 25 lakhs to Rs. 50 lakhs with a view to improve the debt-equity ratio. It was 4.75 : 1 and, as such, the ratio fell far short of the accepted norm of 2 : 1 in the banking business. This ratio of 4.75: 1 was calculated by including unsecured loans advanced to the company by her, her children and the Lake Palace Hotel and Motels (P) Ltd, which could not be included for the purpose of calculating debt-equity ratio. In fact, the debt-equity ratio on 30 June, 1988, was 2:1 within the accepted norm. There was no need for the increase in the share capital of the company. The motive of the respondent No. 2 behind it was to gain total control over the company and to oust other shareholders. Smt. Vijayraj Kumari, wife of the respondent No. 2, had also deposited' Rs. 5,00,000 in the company. It was paid to her on 31 March, 1990, despite claim of the respondent No. 2 that the company was in need of the finance. The amounts of the petitioner and her children were not repaid. In the year 1985-86, the company further acquired 710 shares in the Lake Palace Hotel and Motels (P) Ltd. at the cost of Rs. 8,87,500. The source of this amount was additional subscription to the share capital, funds provided by the directors and their relatives and the accrued dividend received from the shares of the Lake Palace Hotel and Motels (P) Ltd. The petitioner was led to purchase 415 shares of the company at the cost of Rs. 4,15,000 and this amount was utilised by the respondent No. 2 for acquiring shares in the Lake Palace Hotel and Motels (P) Ltd., and to pay loan taken from his wife. On 13 February, 1991, the petitioner came to know that the meeting of the Board of directors was going to be held on 15 February, 1991. She did not receive its notice. She immediately sent telegram (Annexure 'J') requesting for adjournment. On 14 February, 1991, she learnt about the death of her father-in-law and sent letter Annexure 'K' to the Company Secretary intimating about the said death. On 23 February, 1991, the petitioner received notice (Annexure 'M') for the meeting of the Board on 9 March, 1991. She requested for adjournment on account of 'Shradha' ceremony of her father-in-law. No reply was received and she does not know about the fate of this meeting It is reliable learnt that the respondent No 2 is bent upon (a) appointing another additional director of his choice; (b) withdrawing the petitioner as a nominee director in the Board of the Lake Palace Hotel and Motels (P) Ltd.; and (c) allotting 1,973 shares to himself. From the agenda of the meeting, dated 23 February, 1991, it appears that Mr. Ashwini Kumar Chaturvedi has sent his resignation letter. If his resignation is accepted, there will be only two directors of the company-petitioner and the respondent No. 2. Since no chairman has been elected in terms of article 76 of the articles of association, the meeting of the Board of directors can only result in a dead-lock. The petitioner feels that no useful purpose will be served by attending adjourned meeting unless the respondent No. 2 is removed as a director and another independent person is appointed. The only way out of this impasse is by granting the reliefs prayed for in the company petition and by removing the respondent No. 2. The ostensible reason for issuing further 3,000 shares has also gone. The debt-equity ratio has substantially improved and there is no need for issuing further shares. According to the balance sheet of the year ending on 31 March, 1990, the secured loans are to the extent of Rs. 20,03,000 and the equity share is Rs. 30,27,000, giving debt-equity ratio of 8.6 : 1. The balance sheet for the years 1983-90 are enclosed and have collectively been marked as Annexure 'N'. Even according to the directors' report dated 3 September, 1990, regarding financial position of the company, there is no immediate need for issuing/allotting any further shares as is being proposed by the respondent No. 2. The entire debt of the bank of Rs. 20,00,000 has been repaid. Rs. 2,00,000 have also been paid to the Lake Palace Hotel and Motels (P) Ltd., against advances received from them for providing common facilities. The net profit during the year was Rs. 16,07,000 as against Rs. 11,97,000 in the previous accounting year. All along, the petitioner was kept in dark from the working of the company. The respondent No. 2 has misused his position both as her younger brother and also as a co-director. Towards end of the year 1989, she realised that she was being eased out from the affairs of the company by the respondent No. 2 in a very clever and devious manner. She was all along kept in dark. She started enquiring into the affairs of the company and wished to see various documents. She had to make formal requests by her letter dated 13 January, 1990, (Annexure 'O'). She has been refused access to the important documents of the company. She wrote letters on 2 September, 1990 (Annexure 'R'), on 8 September, 1990 (Annexure 'S'), and in third week of September, 1990 (Annexure 'T') for supplying copies of the documents and minutes, but with (of) no avail. The respondent No. 2 was conducting the affairs of the company to her detriment. She has not received any return of her investments. The company has not declared dividends. On the contrary, the respondent No. 2 is enjoying all the benefits and is utilising the funds of he company for his private gain and comforts. He is living with his family in the company premises free of costs. He has indulged in excessive expenditures under various heads and has also inflated the figures. A comparative study with the figures of other hotels will reveal it. The comparative study of the accounts of the company relating to the period before and after the death of Maharana reveals the excessive and exorbitant expenditure under various heads. Huge expenditures have been shown for maintaining an office at Bombay, but no such office exists at Bombay. The so-called office is a residential flat at Pedder Road, Bombay. It was the personal property of Maharana. It has been taken under the control by the respondent No. 2 as an executor of the said will. The said flat does not belong to the company. The respondent No. 2 has also spent money of the company for the renovation of another property of Maharana, and it is now in possession of respondent No. 2 as an executor. The respondent No. 2 has now realised that his game plan has been exposed; she has come to know about his misconduct and misutilisation of the funds of the company and, for this reason, he is not prepared to show the accounts to her. On examination of the account books, all the misdeeds of the respondent No. 2 will be exposed. The respondent No. 2 and his associates are siphoning (off) the funds of the company. They have indulged in excessive expenditures. The respondent No. 2 had dealt with the company as if it was his personal property. She believes that the funds used for the purpose of purchasing shares in the name of the respondent No. 2 were in fact funds obtained from the Maharana. There was no reason for the executors of the will to refuse to accept the shares offered to them from time to time. The movable and immovable properties bequeathed to the trust by the Maharana as per his will are themselves very valuable. The affairs of the company are being conducted in a manner oppressive to the petitioner and in the manner prejudicial to the interest of the company itself. Winding up of the company will prejudice the petitioner.;