DESEIN P LTD Vs. ELEKTRIM INDIA LTD

JUDGEMENT

(1.) THE 1st petitioner and the 2nd petitioner, respectively, holding 24 per cent shares and 6 per cent shares in Elecktrim India Ltd. (the company) have filed this petition alleging various acts of oppression and mismanagement in the affairs of this company. This company was incorporated in June, 1990. This is a joint venture company between the petitioners and the 2nd and 3rd respondents are incorporated in Poland. THE business of the company is to provide engineering services, carry out erection, testing, commissioning and modification and rectification of equipments in overall Indian power stations including management to such services. THE articles of the company provide for maintenance of 30 per cent shares in the hands of the petitioners, 51 per cent with the 2nd respondent, 10 per cent with the 3rd respondent and 9 per cent with the 4th respondent. THE articles also provides for nomination of 4 directors by the 2nd respondent, 3 by the 1st petitioner, 2 each by the 3rd and 4th respondents. THE Chairman is to be the nominee of the 2nd respondent or of the shareholder holding majority shares in the company. THE Board has powers to appoint one of the directors as the president or the managing director. THE articles also provide that the quorum for the general body meeting shall be 3 members personally present representing each group of shareholders and for the Board meetings one director from each group. THE main grievances of the petitioners are that, they are not allowed to have effective participation in the company, the respondents have appointed their own nominee as the MD of the company against the wishes of the petitioners, that the respondents have incorporated another company with the view to divert the business of the company in active connivance of the 6th respondent and that the 6th respondent is guilty of financial mismanagement, diversion of funds of the company and guilty of violation provisions of foreign exchange regulations etc. and have sought for various reliefs including investigation into the affairs of the company.

(2.) Shri Sudipto Sarkar, the senior Advocate appearing for the petitioners submitted as follows : Even though the company is a 43A company, it has been incorporated in the guise of a quasi partnership between the Indian promoters, namely the petitioners and the foreign promoters, namely the respondents 2 to 4. With a view to ensure active participation in the management of the company, the Article provides for adequate representation from both the groups. Article 6 also provides for permanency in the shareholding percentage. Article 7 provides for pre-emptive rights in case of transfer of shares. Further, article 20 stipulates that for Board Meetings, to constitute the quorum, at least one director representing each group has to be present. Further, Article 15 stipulates that certain business in the general body meetings have to be approved by 75 per cent of all the shareholders of the company, which would mean that without the support of the petitioners, no business mentioned in article 15 could be carried through. Therefore, all these provisions would indicate that the company is nothing but a glorified partnership between the petitioners and the respondents 2 to 4. In spite of all these protective Articles, the respondents have been acting in an oppressive manner against the petitioners. Even though, the relationship between the petitioners and the 2nd respondent had been smooth and fruitful for all these years, yet, by appointment of the 6th respondent as the managing director against the wishes of the petitioners, the smooth relationship has come to an end. Even though, the 6th respondent was originally a nominee of the petitioners, he has changed his sides and has become now a nominee of the respondents. It is normally the 1st petitioner who procures orders from various powerhouses in India for turnkey projects. In these contracts, 80% of the contract value was to be done by the 2nd respondent and out of the balance, a portion of the contract is given to the 1st petitioner. In 1998, the 17th respondent, which itself a subsidiary of the 2nd respondent, incorporated the 16th respondent having similar objects as that of the company and the 6th respondent has started diverting the business of the company to the 16th respondent. This has resulted the company becoming a shell company without any business. When the 6th respondent came up for reappointment as the managing director with effect from 1-2-2000, the fact that he had incorporated another competing company was not disclosed in the resolution circulated. As a matter of fact, he himself is the managing director of the 16th respondent also. Therefore, the consent of all the directors for his appointment as the managing director of the company is required in terms of section 316 of the Companies Act, 1956 ('the Act'), which consent has not been obtained and therefore his appointment as the managing director with effect from 1 -2-2000 is invalid as also the remuneration drawn by him. The managing director being a full lime employee of the company cannot promote a competitor. The worst is that even the registered office of the 16th respondent is housed in the residence of the 6th respondent. Since the company is a consultancy company, the 6th respondent having gained the knowledge, expertise and know how cannot use the same for the benefit of a competitor. Since he is also a director in the company, he is in a fiduciary capacity to protect the interest of the company. Being a trustee, he cannot use the expertise gained during the course of employment in the company other than for the benefit of the beneficiary, being the company. His functioning as the managing director of the 16th respondent is directly in conflict with the interest of the company. Further, in terms of Schedule XIII - Part II, he is entitled to get a maximum remuneration of only Rs. 40,000 but he is being paid much more than his entitlement, which is also illegal. In view of the provisions of section 309(5A), he is liable to refund all the remuneration received in excess.

(3.) SHRI Sarkar further submitted : After having incorporated the 16th respondent, the respondents decided to hold a Board Meeting and an EGM in Poland on 14-3-2000 in which one of the resolutions was that the company would be voluntarily wound up in terms of section 484(1)(b) of the Act. In the same meeting, it was also to be resolved that the 6th respondent would be the voluntary liquidator at a remuneration of Rs. 57,000 per month. In the same meeting the 6th respondent was also appointed as the MD at the same remuneration. Even though for want of quorum, the meetings did not take place it is clear that the respondents had decided to kill the company after diversion of all the businesses to the 16th respondent. There have been irregularities in the appointment of auditors of the company also. One Gupta & Gupta were the auditors of the company for the year 1994-95. In the 5th AGM held on 29-1-1996, these auditors were removed and no auditors were appointed in that AGM. However, the 6th respondent was authorized to appoint the auditors. Accordingly, Gambhir, Nanda & Associates were appointed as auditors. Since the auditors were not appointed in the AGM, the company should have approached the Central Government in terms of section 224(3). These auditors are colluding with the respondents in suppressing various acts of financial mismanagement. One of the partners of this audit firm attended 3 EGMs of the company held in Poland even though there was no item relating to the audit were to be discussed in these meetings. The company had to bear all the expenses in connection with his visit to Poland.