K.K. Balu, Member
1. The petitioner holding 50 percent of the issued share capital of M/s Sun Freight Systems Private Limited ("the Company") has filed this company petition under Sections 397 and 398 of the Companies Act, 1956 ("the Act") alleging acts of oppression and mismanagement in the affairs of the Company and seeking the following reliefs:
(a) to declare that the removal of the petitioner as director of the Company is illegal and void;
(b)to declare that the induction of the third respondent as director is illegal and void;
(c) to grant an order of permanent injunction restraining the third respondent from claiming herself as director of the Company;
(d) to appoint an independent auditor to verify the books of account of the Company from 03.10.2001; and
(e) to pass an order of permanent injunction restraining the second respondent from operating the Bank account of the Company.
2. Shri R. Prem Kumar, learned Counsel, while initiating his arguments submitted that the Company was incorporated in October, 2001 by the petitioner and second respondent, each subscribing to 5000 equity shares of Rs. 10/- each, with object of carrying on the business as Clearing and Forwarding agents in Tuticorin. The petitioner and second respondent are the first directors. The second respondent is brother of the third respondent, who is wife of the petitioner. While the petitioner, a qualified Clearing and Forwarding agent was engaged in the conduct and day-to-day affairs, the second respondent was looking after the accounts and administration of the Company. The Company did not possess any licence, but acted on behalf of M/s A.J.D. Cruz and Sons, possessing licence as a Clearing and Forwarding agent, thereby the Company with the expertise of the petitioner being the power of attorney of M/s A.J.D. Cruz and Sons could develop the business achieving a turnover of nearly Rs. 200 lakhs during the period between October 2001 and May 2002. In the meanwhile, the petitioner met with a severe car accident on 24.05.2002 and was hospitalised for a period of nearly one month and thereafter he was forced to take bed rest for some time to recoup from the injuries sustained by him. During the absence of the petitioner, the second respondent fabricated and forged his signature and cleared consignments from the Customs on behalf of the Company and secreted profits for his own personal benefits. The third respondent on account of the differences of opinion is not living with the petitioner, as a result of which the second respondent is enimical towards the petitioner and taking an advantage of the health condition of the petitioner, he was illegally removed on 27.05.2002 from the office of director and the third respondent was inducted as an additional director with a view to usurp the control and management of the Company. The removal of the first petitioner and the induction of third respondent on the Board of the Company are bad in law and not binding on the petitioner and the Company. The petitioner at no point of time even after the accident lost his mental capacity, as borne out by the medical certificates produced before this Bench and sale deed dated 22.08.2002 purchasing a property jointly by the petitioner and the third respondent, who joined execution of the document. The application filed by the third respondent against the petitioner in O.P. No. 252/2002 under the Mental Health Act before the District Court, Tuticorin has been dismissed for default on 10.06.2004. Therefore, the plea of the respondents that the petitioner is not of sound mind to institute the present company petition is liable to be rejected. The second respondent wilfully disobeying the order dated 30.10.2002 of this Bench to furnish in favour of the petitioner a statement of income and expenditure of the Company on weekly basis is unjustly enriching himself. According to the petitioner, no Board meetings or extraordinary general meetings, as claimed by the respondents were held approving the transfer of shares in favour of the third respondent or appointing Karl Marz as director or increasing the authorised share capital of the Company allotting the impugned shares. All these proceedings are concocted and false. Therefore, the resolutions passed in any of these meetings are neither valid nor binding on the petitioner. The notice dated 25.05.2002 convening the extraordinary general meeting of the Company on 27.05.2002 to remove the petitioner and appoint the third respondent as director is a fabricated document. The Company has not chosen to produce copy of the notice for any other meeting. The petitioner and second respondent holding equally the entire capital of the Company, it is a family Company formed out of mutual trust and confidence among the shareholders. Nevertheless, the second respondent acted in breach of the trust reposed upon him by the petitioner. There is justifiable lack of confidence in the affairs of the Company. There is no probity and fair play in the affairs of the Company. These facts and the circumstances show that there is irreconcilable deadlock among the shareholders of the Company which can be resolved only by intervention of this Bench. Shri Premkumar, learned Counsel, therefore, sought for the reliefs claimed in the company petition.
3. Shri. T.K. Seshadri, learned Counsel appearing for the respondents 1 & 2 advanced arguments on merits of the company petition notwithstanding the plea that the petitioner is of unsound mind and further that the company petition filed in the name of the petitioner is not maintainable either in law or on facts. The petitioner when met with a car accident on 24.05.2002 was admitted in the hospital and discharged on 17.06.2002. The medical records would show that the petitioner was not stable but disoriented when he was discharged from the hospital. The medical certificates dated 13.09.2002 and 09.10.2002, produced by the petitioner are of no value, as they have been procured, after the disputes started between the parties. The serious condition of the petitioner on account of the accident, which according to Shri Seshadri, learned Counsel necessitated the reconstitution of the Board in the interest of the Company by removing the petitioner from the office of director under the provisions of Section 284(1) and strengthening the Board of directors with the induction of the third respondent in the casual vacancy of the petitioner, at the extraordinary general meeting held on 27.05.2002 and increasing the number of members with a view to ensure that the Company's constitution and activities are in conformity with the provisions of the Act and for the continuity of the Company. There were no disputes between the petitioner and second respondent till the petitioner met with the accident in May 2002. The circumstances under which the petitioner ceased to be a director must be taken into consideration on the date of the accident and not as on the date of filing the company petition. The removal of the petitioner as director will not amount to an act of oppression and mismanagement. At no point of time, the petitioner's signature was forged or misused by the Company or the second respondent. The Company accounted its income earned in the course of business and is reflected in the books of account. According to the respondents, at the Board meeting held on 08.04.2002 the transfer of 500 shares by the second respondent in favour of the third respondent was approved. The petitioner was a party to the resolution approving the transfer of shares in favour of the third respondent. At the extraordinary general meeting convened on 13.05.2002, when the petitioner was present, the Articles of Association of the Company was amended enabling the Company to convene the Board meeting at a short notice under Section 171 of the Act. At the same meeting M.S. Karl Marz was appointed as an additional director to hold the office till conclusion of the succeeding annual general meeting. At the extraordinary general meeting held on 12.08.2002, the authorised capital was increased from Rs. 1,00,000 to Rs. 2,00,000 in pursuance of which at the Board meeting held on 02.09.2002, the Board of directors allotted shares in favour of the second respondent (3,000 shares), third respondent (2,000 shares) M.S. Karl Marz (3,000 shares) and J. Rajathi (2,000 shares). The theory of the petitioner that he holds 50 per cent of the equity shares of the Company is incorrect. There is, therefore, no question of dead-lock in the affairs of the Company. The petitioner has not furnished any particulars showing any act of oppression or mismanagement in the affairs of the Company. The necessary ingredients constituting oppression or mismanagement as required under Section 397 and 398 have not been made out. In these circumstances, the company petition is liable to be dismissed.
4. The third respondent adopted the arguments advanced on behalf of the respondents 1 & 2. The fourth respondent, being the Company's banker, submitted that they will abide by any order of this Bench.
5. I have considered the pleadings and arguments of learned Counsel. It is on record that the petition in O.P. No. 252/2002 on the file of the District Court, Tuticorin filed by the third respondent seeking inter-alia for an order directing inquisition as to the mental condition of the petitioner has been dismissed for default. There is no material to show whether the third respondent is pursuing her dismissed petition before the District Judge Court, Tuticorin. The plea of the third respondent that the CLB cannot go into the merits of this company petition until the civil court adjudicates the issue regarding mental condition of the petitioner is devoid of any merit. At this juncture, the observations of the court recorded on 22.01.2003 assume importance, the relevant portion of which reads as under: -
"Alleged mentally ill person is present in court. This court puts questions to the alleged mentally ill person and he was able to answer without any difficulty to all questions."
At the instance of this Bench for an amicable settlement of the disputes, while the respondents were willing to transfer their shares in favour of the petitioner without any consideration, the petitioner who was present consciously rejected the offer made by the respondents forcing the latter to withdraw their settlement proposal. Under these circumstances, the preliminary objection of the respondents that the petitioner is of unsound mind and that the company petition in his name is not maintainable, prima-facie no longer survives. There is, therefore, no need to go into the claim and counter-claim of the parties with reference to the various medical certificates produced before this Bench. It is on record that the Company was incorporated by the petitioner and second respondent, being his brother-in-law. They are subscribers to the Memorandum and Articles of Association of the Company each subscribing 5,000 shares of Rs. 10/- each. They are the first directors of the Company. The petitioner and second respondent were holding equal number of shares and there was participation in the management by both of them, till the allotment of shares impugned and appointment of the directors challenged in the company petition. The Company is a closely held company, as conveyed by the second respondent to the shareholders in the course of the extraordinary general meeting held on 13.05.2002 (page 133 of reply statement of respondents). The Company being a family company, the third respondent was inducted on the Board in the casual vacancy of the petitioner, as borne out by copy of the minutes of the extraordinary general meeting held on 27.05.2002 (page 143 of reply statement of respondents). Against this background, the rival contentions of the parties are being considered. While, according to the petitioner, his removal from the office of director, induction of the third respondent as director, allotment of the impugned shares and diversion of funds and business of the Company to the personal benefit and business of the second respondent would constitute serious acts of oppression and mismanagement in the affairs of the Company, the respondents defended their action, on the ground that every act is in the best interest of the Company and further denied any diversion of funds and business of the Company. According to the respondents, the Board of directors including the petitioner had on 08.04.2002 approved the transfer of 500 equity shares held by the second respondent in favour of the third respondent, in support of which copies of the extracts from the register of members and register of share transfers are made available before this Bench. The right to transfer the share in the capital is restricted in the manner mentioned in the Articles of Association of the Company. Articles 13 to 18 prescribe the procedure for transfer of the shares by a member or other person entitled to transfer to any existing member selected by the transferor. There is no need to elaborate the procedure envisaged in the relevant articles. There is nothing on record to show that the transfer of 500 shares by the second respondent to third respondent was in due compliance with the Articles of Association of the Company. The Company has not produced the minutes of the Board meeting approving the impugned transfer, without which, neither the register of members nor the register of share transfers, in my view, could conclusively prove the transfer of shares by the second respondent in favour of the third respondent. At the extraordinary general meeting said to have been held on 13.05.2002, attended by the petitioner, the Articles of Association was amended enabling the Company to convene the Board meeting at a short notice under Section 171 and further M.S. Karl Marz was appointed as an additional director, which are supported by Form No. 23 and Form No. 32 respectively filed with the Registrar of Companies. However, copy of the notice together with agenda of the extraordinary general meeting or mode of despatch of the notice or the attendance sheet in relation to the extraordinary general meeting is not produced sustaining the plea of the respondents. It is the case of the respondents that the physical and mental condition of the petitioner pursuant to the accident did not allow him to carry on day-to-day affairs of the Company, forcing them to remove the petitioner from the office of director and co-opt the third respondent, his wife as director of the Company, which the respondents assert that they in the best interest and benefit of the Company. The petitioner met with a major car accident on 24.05.2002 and in his own words as made out in the legal notice dated 28.08.2002, he was in the hospital unconscious for about twenty days and after recovery he was in the bed for another twenty days in the hospital. On the very next day of the accident viz., 25.05.2002, the Directors had at the meeting of the Board of directors resolved to convene an extraordinary general meeting on 27.05.2004, as seen from copy of the minutes of the said meeting. But the minutes of the Board meeting do not disclose any agenda for the proposed extraordinary general meeting. I find from copy of the notice dated 25.05.2002 on record that the resolution for removal of the petitioner from the office of director as well as for appointment of the third respondent as director was to be considered at the extraordinary general meeting held on 27.05.2002. There is no material to show whether the mandatory requirements as contemplated under Section 284(1) & (2) read with Section 190 for removal of any director have been complied with by the Company. At the extraordinary general meeting, while the petitioner was removed by passing an ordinary resolution, as he became incapable of acting under the provisions of Section 284(1) of the Act, the third respondent, his wife was co-opted as director of the Company. It is clear from the explanatory statement forming part of the notice dated 25.05.2002 that the petitioner had suffered severe head injury on account of the accident. The doctors in their report stated that the petitioner cannot act on his own and was incapacitated to do any activities. It is further reported that as per the provisions of Section 274, the petitioner had to vacate the office and liable to be removed from the office of director under Section 284(1). It shall be borne in mind that by virtue of Section 274(1)(a), a director becomes disqualified when he has been found to be of unsound mind by a Court of competent jurisdiction and if the finding is in force. There is nothing to show that the requirement of Section 274(1)(a) has been 'satisfied before removing the petitioner from the office of director, irrespective of the fact whether proper notice was sent before convening the extraordinary general meeting or not. It is the case of the respondents that Karl Marz was appointed as an additional director at the extraordinary general meeting held on 13.05.2002 and the third respondent became a shareholder as early as on 08.04.2002. Article 29 stipulates that unless otherwise determined by the Company in general meeting, the number of directors shall not be less than two and not more than twelve. In this context, the justification of the second respondent that the third respondent was co-opted as director "in the interest of the company to strengthen the Board of directors and also increase the number of members with a view to ensure that the company's constitution and activities are in conformity with the provision of Companies Act and for continuity of the Company", is not realistic. When there are already minimum of directors and several members consequent upon the allotments made on 08.04.2002 and the petitioner is in death bed, his removal from the office of director, within less than twenty four hours of the fatal accident, by no stretch of imagination, could be in the interest of the Company, being a closely held family company and the petitioner being the promoter director with equal shareholding in the Company till his removal. In this connection, beneficial reference is invited to
J.C. Augustine v. Remanika Silks (P) Ltd - (2001) 1 Comp LJ 347,
B.M. Jain & Sons Co. (P) Ltd. v. Bombay Cable Car Company (P) Ltd. - (2001) 1 Comp LJ 468
Ador-Samia Limited v. Indocan Engineering Systems Ltd. - (2000) 3 Comp LJ 307.
to show that directorial complaints have been entertained by this Board in cases of family companies in the guise of quasi-partnership and on equitable consideration depending upon the facts of each case. In these circumstances, Form No. 32 filed with the Registrar of Companies, in support of the removal of the petitioner and appointment of the third respondent as director, has no legal consequences. Thereafter, at the meeting of Board of directors held on 03.07.2002 the second respondent came to be appointed as the Managing Director with effect from 03.07.2002, which was ratified by the members at the extraordinary general meeting held on 12.08.2002. At the same meeting, the authorised share capital was increased from Rs. 1 lakh to Rs. 2 lakhs, the necessity of such increase, is nowhere justified, save the bald statement of the Chairman reflected in the minutes of the extraordinary general meeting held on 12.08.2002. It is observed that the Board of Directors had on 02.09.2002 allotted 10,000 shares viz., Karl Marz (3000 shares), his wife (2000 shares), both being strangers; second respondent (3000 shares) and third respondent (2000 shares). There is nothing to substantiate the requirements of funds for the Company and the actual receipt of funds into the kitty of the Company, by way of consideration in support of the impugned allotments. The register of members of the Company, reflecting these allotments cannot establish the funds requirement and actual receipt of consideration for such allotment of shares. Under Section 193, the entries of minutes of every general meeting or Board meeting or any other meeting shall be made in the book kept for that purposes with its pages consecutively numbered and the same shall be kept for 30 days of the conclusion of the meeting. Furthermore, each page of the minutes book shall be initialled or signed and the last page of the minutes shall be dated and signed by the Chairman of such a meeting. If the requirements of Section 193 are not duly complied with, no presumption under Section 195 can be drawn. The respondents have produced copies of minutes books of the Board meetings held on 03.10.2001, 15.03.2002, 08.04.2002, 25.05.2002 and 03.07.2002 and general meetings held on 13.05.2002, 27.05.2002 and 12.08.2002. A perusal of copies of these minutes shows that none of the pages is consecutively numbered, but the minutes are recorded in the loose letter heads of the Company not satisfying the requirements of Section 193 and hence no presumption under Section 195 could be drawn. The Company failed to produce the original minutes books of the various meetings, in spite of the disputes raised by the petitioner and in spite of the admission of the respondents that "... the petitioner himself has signed the minutes of the Board of Directors". The third respondent filed in October 2002 an application in O.P.No. 252/2002 on the file of District Court, Tuticorin under the Mental Health Act, 1987 seeking for an order directing inquisition as to the mental condition of the petitioner for the purpose of ascertaining whether he is of unsound mind and incapable of managing himself and his affairs and to appoint the third respondent as the guardian of the petitioner and manager of his estate, comprising 5000 equity shares of the petitioner held in the Company; deposit amount of Rs. 50,000/- kept in City Union Bank Ltd and the landed property at Tuticorin. The said petition now stands dismissed for default. The cumulative effect of the above acts of the respondents viz., the transfer of shares of the second respondent to third respondent in April 2002; the appointment of Karl Marz as director in May 2002; the removal of the petitioner and co-option of the third respondent as director in later part of May 2002; the appointment of the second respondent as Managing Director in July 2002 and the allotment of shares in favour of the respondents and others in exclusion of the petitioner in September, 2002 is oppressive of the petitioner, irrespective of whether these acts are lawful or not. The sequence of events shows that the petitioner, being a promoter director with equal shareholding and in the joint management of the Company, is now out of control and management and his shareholding is reduced. The allegations that the second respondent had fabricated and forged the signature of the petitioner, clearing the consignments from the Customs on behalf of the Company for his personal benefits and diversion of business of the Company, being drastic in nature and without any details no definite conclusion on such financial irregularities could be given, on the basis of prima facie opinion, more so when the respondents have defended these charges and the petitioner failed to discharge the burden of proof establishing such financial irregularities. The petitioner has not furnished any details regarding the clients or orders of the Company diverted to the concern of the second respondent. Admittedly, the power of attorney in favour of the petitioner was cancelled by A.J.D. Cruz and Sons, subsequent to the accident met by the petitioner, in which case the Company could not have continued the business of clearing and forwarding agents and there could hardly be any scope for any financial irregularities on the part of the second respondent. This Bench while disposing of the company applications in CA Nos. 104/2002 and 2/2004 by a common order dated 13.05.2004 found that the Company was furnishing the statement of accounts, of course, beyond the stipulated time, in terms of the order dated 30.10.2002. In view of the foregoing conclusions and in exercise of the powers of the Company Law Board under Section 402, the following order is passed:-
The removal of the petitioner from the office of director of the Company is declared as illegal.
The appointment of the third respondent and Karl Marz as directors of the Company is set aside.
The transfer of 500 shares in favour of the third respondent is set aside.
The allotment of 10,000 shares in favour of the respondents 2 & 3 Karl Marz and his wife is set aside.
In view of the irreconcilable differences and loss of mutual trust between the petitioners and the respondents, the Company cannot run smoothly with the co-existence of both the parties. The only way to ensure the smooth functioning of the Company is that the warring parties must part ways by the exit of one group from the management of the Company. Towards this end, the second respondent who expressed his willingness to go out of the Company, will sell his shares to the petitioner or his nominee at par value. Accordingly, within 30 days from the date of receipt of the original share certificates with the blank transfer forms from the second respondent, the petitioner or his nominee will pay consideration for the shares at par value.
With the above directions the company petition stands disposed of and the interim order made by this Bench is vacated. No order as to costs.