section 397-398

7/28/2019 Section 397-398

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BEFORE THE COMPANY LAW BOARD, ADDITIONAL PRINCIPAL BENCH CHENNAI

C.P. No. 35/ 2000

Present: 1. Shri S. Balasubramanian, Vice-Chairman.

2. Shri K .K.Balu, Member.

IN THE MATTER OF COMPANIES ACT, 1956 (1 OF 1956)SECTION 397/398

ANDIN THE MATTER OF M/S VALE EXPORTS PRIVATE LIMITED

PETITIONER:

Smt. A. Kalyani

RESPONDENTS:

1. M/s Vale Exports Private Limited2. Shri C.K. Ashok Kumar3. Shri K. Sasidharan,4. Shri V. Ramani

PRESENT ON BEHALF OF PARTIES:

1. Shri T.K. Seshadri, Advocate … for Petitioner.2. Shri T.K. Bhaskar, Advocate … for Petitioner.3. Shri V. Ramakrishnan, Advocate … for Respondents 1 & 2.

O R D E R

(Date of Hearing: 4.6.2002)K.K. BALU:1. The petitioner constituting more than one-tenth of the total members of M/s Vale Exports

Private Limited (“the Company”) as well as holding more than 10 per cent of the shares,before allotment of the impugned shares, has filed this petition under Section 397/398 of the Companies Act, 1956 (“the Act”) alleging oppression and mismanagement in theaffairs of the Company.

2. The main acts of oppression and mismanagement relate to the following:(a) exclusion of the petitioner from the day-to-day affairs and business of the Company

denying her statutory rights as a shareholder;(b) denying the audited accounts and balance sheets of the Company for several years;(c) non-convening of annual general meetings as well as Board meetings of the Company

and non-sending of notices for such meetings whenever conducted, if any;(d) illegal allotment of 2,59,000 equity shares in favour of respondents 2 to 4;(e) illegal removal of the petitioner as a director of the Company;(f) non-issue of share certificates for the shares originally allotted to the petitioner; and

on 397-39 http://clb.nic.in/sections/Vale_397

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(g) illegal appointment of directors.3. Shri T.K. Seshadri, Advocate appearing for the petitioner, while initiating his arguments

submitted that the Company was incorporated in April, 1990 by the petitioner and thesecond respondent being the wife and husband with the main objects of carrying on thebusiness of acting as marketing agents, consultants, brokers etc. The petitioner and thesecond respondent were the first directors of the Company. Apart from the Company, the

petitioner was also running a proprietary concern under the name and style of M/s Cos. Trades. While the second respondent was running the affairs of the Company at a loss, thepetitioner was making profits in her proprietary concern which resulted in certain disputesbetween them. Subsequently, their matrimonial relationship became estranged resulting indivorce proceedings initiated by the second respondent before the family court. In view of these disputes, the second respondent started ignoring the petitioner and excluded her fromthe day-to-day affairs and management of the Company. The second respondent failed tosend notices for the annual general meetings and the Board meetings of the Company. Thenotices said to have been sent to the petitioner were all addressed to the incorrect address

and not received by her. The petitioner was not given copies of the audited accounts forthe years 1994-95 to 1998-99 and the balance sheet of the Company for the years ended31.03.1991 to 31.03.1999 in spite of the written communications sent to the respondents 1& 2. The respondents fraudulently raised the authorized capital and allotted the impugnedshares, i.e., 8600 shares to the second respondent and 200 shares each to the third andfourth respondents at the Board meeting said to have been held on 5.11.1993 and 2,50,000shares to the second respondent at the Board meeting said to have been held on27.03.1997. The Company being a family company, the allotment of shares cannot bemade to one of the members in exclusion of other member. By virtue of the impugned

allotment, the petitioner’s shareholding has come down from 26 per cent to 3.4 per cent. The respondents 4 & 3 were appointed as directors at the annual general meeting held on15.11.1993 & 9.9.1994 (Pages 77 & 81 of typed set of documents by respondents). Theseproceedings are void without notice to the petitioner. The second respondent fabricatedseveral documents and filed before the Registrar of Companies as though the petitionerceased to be the director with effect from 1.3.1995 for not attending three consecutiveBoard meetings said to have been convened by the respondents. According to thepetitioner, no Board meetings were convened from May, 1993 and no notice was sent forany of the Board meetings convened, if any. Thus, the petitioner was excluded from the

day-to-day affairs of the Company, removed from directorship, respondents 3 & 4 wereillegally appointed as directors and the impugned shares were illegally allotted in favour of respondents 2 to 4.

4. Shri Seshadri has taken pain to point out several of the irregularities in the conduct of business of the Company as under:-

· The notices said to have been sent by the respondents by certificates of posting areconcocted. The respondents failed to send notices by registered post in spite of thewritten request made by the petitioner in her letter dated 2.12.1999 (page 196 of Petition).


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· The minutes of the Board meeting (Page 45 of typed set of documents by respondents)said to have been held on 01.03.1995 resolving to remove the petitioner fromdirectorship on account of her consistent absence at the Board meetings is not signedby the Chairman of the meeting. Again the minutes of the general body meeting (Page83 of typed set of documents by respondents) of members of the Company said to havebeen held in September, 1995 show that members resolved that as per Section

283(1)(g), the petitioner ceased to be a director for non-attending the consecutiveBoard meetings without leave of absence from the Board of Directors. Thus, theminutes of the Board meeting convened on 01.03.1995 as well as annual general bodymeeting convened in September, 1995 are concocted.

· The letter dated 23.12.1996 sent by Counsel for the second respondent to Counsel forthe petitioner (Page 162 of Petition) shows that the petitioner continued to be directoras on 23.12.1996.

· The annual return made up to 29.09.1994 (4 of Petition); Memorandum andArticles of Association of the Company (Pages 123 and 135 of Petition) and the

register of members and Form-32 (Page 38 of Petition) contain the full and correctaddress of the petitioner. However, the notices (Page 49 to 75 of typed set of documentsby respondents) sent by Certificates of Posting do not contain the complete address.

The respondents have not produced certificates of posting in respect of the otherdirectors.

· The minutes of the Board meetings held on 12.06.1994, 20.12.1994 and 01.03.1995(Pages 39, 43 and 45 of typed set of documents by respondents) are not signed by theChairman and are not in accordance with the Section 193 of the Act.

· The notice (Page 117 of typed set of documents by respondents) convening the annual

general meeting on 10.09.1999 to adopt the audited balance sheet, profit and lossaccount of the Company for the year ended 31.3.1999 is dated 30.08.1999 and sent tothe petitioner on 30.08.1999 as seen from the certificate of posting (Page 119 of typedset of documents by respondents) produced by the Company. However, the auditorsreport (Page 265 of typed set of documents by respondents) attached to the balancesheet of the Company for the year ended 31.03.1999 is found to be signed on3.9.1999. This is not feasible and the notice is concocted by the respondents 2 & 3.

· The letters of the petitioner (Pages 150 & 154 of Petition) requesting the Company toconvene Board meetings show that the petitioner continue to be the director during that

relevant period. However, the minutes of the Board meetings said to have been heldon 12.6.1994 and 1.3.1995 (Pages 39 and 45 of typed set of documents by respondents)reveal that the petitioner did not continuously attend the Board meetings, which iscontradictory to the requests made by the petitioner. Though the petitioner had againasked for the Board meeting on 04.11.1993 (Page 154 of Petition) and the Companyfailed to intimate the petitioner of the Board meeting held on 05.11.1993. (Page 31 of typed set of documents by respondents).

· Form No.2 (Page 5 of typed set of documents by respondents) shows the allotment of


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2,50,000 shares on 27.03.1997, but the Return was filed on 18.11.1999 after the disputearose between the parties.

· Form No.2 reveals that a sum of Rs.20 lakhs was paid by cash and the remaining Rs.5lakhs by way of acquiring the assets by the Company, but the Company failed to filethe requisite form No.3. Return of allotment discloses names of two allottees, but theregister of members does not contain their names. There is no documentary proof for

cash consideration of Rs.20 lakhs made by the second respondent for allotment of shares. The counter affidavit dated 21.02.2000 (Page 15 of typed set of documents bypetitioner) of the second respondent filed before the family court confirms that he hasmeager income and that he has no source for payment of Rs.20 lakhs towards allotmentof the impugned shares.

· Though 200 shares were allotted to the respondent No.4 on 5.11.1993 (Page 1 of typedset of documents by respondents), the register of members produced before the Benchdoes not reveal his name.

· The annual return as at 29.09.1995 (Page 50 of Petition) and the annual return as at

23.09.1997 (Page 94 of Petition) do not show the name of the fourth respondent.· The annual return made up to 29.09.1995 (8 of Petition) shows that the petitioner

ceased to be a director of the Company with effect from 8.3.1995, but form-32 filedwith the ROC, Chennai (Page 3 of typed set of documents by respondents) reveals thatshe ceased to be a director with effect from 1.3.1995.

· The minutes of the Board meeting held on 15.11.1993, the original of which wasproduced before the Bench at the time of hearing, contains many corrections and arenot signed by the Chairman.

· Though the petitioner by her letters dated 3.11.1999, 2.12.1999 (Pages 172, 192 and

195 of Petition) requested the Company to send notices for any meeting of theCompany and also minutes by registered post forwarding the demand drafts to meet theexpenses in this behalf, the Company did not adhere to the request of the petitioner.

5. While summing up his arguments, Shri Seshadri reiterated that the petitioner has beendeliberately excluded from the affairs of the Company; that the petitioner’s shareholding isreduced from 26% to 3.4% by the illegal allotment of shares to respondents 2 to 4 and thatrespondents 3 & 4 were illegally inducted on the Board. He, therefore, sought for thereliefs made in the petition. Shri Seshadri in support of his legal contentions relied uponthe following decisions:-

(i) (1997) 4 Comp LJ 440 (CLB) – Mahendra Sing Mewar Vs. Lake Palace Hotelsand Motels (P) Ltd.– to show that the plea of limitation does not apply to the

Company Law Board proceedings and cannot constitute a ground for

non-maintainability.(ii) (1995) 3 Comp LJ 418 (Raj) – Maharani Yogeshwari Kumari Vs. Lake Shore

Palace Hotel (P) Ltd.– to show that the Company Law Board is empowered to look

into the acts of oppression and mismanagement which occurred three years prior to

the date of filing petition and continuing upto to the date of petition.


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(iii) AIR 1968 Supreme Court 1413(V 55 C 276) Gopal Krishnaji Ketkar Vs.

Mohamed Haji Latif and others – to show that if a party in possession of best

evidence which would throw light on the issue in controversy is withholding it, the

Courts ought to draw an adverse inference against him notwithstanding that onus of proof does not lie on him.

(iv) (1997) 88 Comp Cas 245 Akbarali A.Kalvert Vs. Konkan Chemicals Pvt. Ltd.

&(v) AIR 1966 CALCUTTA 512 (V 53 C 91) Ramashankar Prosad Vs. Sindri Iron

Foundry (P) Ltd. – to show that mere production of certificates of posting issued by

the Postal authorities would not be conclusive proof of having served thecommunications upon the addressees.

(vi) AIR 1958 CALCUTTA 644 (V 45 C 159) Hulas Kunwar Vs. Allahad Bank Ltd. –

to show that in the absence of evidence of posting the letter, there is no presumption

of due delivery of the letter upon the addressee.

(vii) (1974) 44 Comp Cases 1 Parmeshwari Prasad Gupta Vs. Union of India – to

show that unless due notice has been given to all the directors, the meeting of directors cannot be deemed to have been duly convened and that the business

transacted at a meeting not duly convened is invalid.

(viii) (1999) 96 Comp Cases 919 S.T.Ganapathy Mudaliar and Another Vs.

S.G.Pandurangan and others.

&

(ix) (1997) 1 Comp LJ 268 (CLB) Vijay Krishan J aidka and others Vs. J aidka MotorCo. Ltd. – to show that in the absence of proper service of notice upon the

directors, vacation of their office by absenting themselves for the Board meetings

should be proved by the Company. In the absence of proof of service of notice uponthe directors vacation of office by them under Section 283 is not proper.

(x) (1995) 82 Comp Cases 563 Rashmi Seth Vs. Chemon (India) Pvt. Ltd. – to show

that the directors of a company cannot utilize their fiduciary powers over the sharespurely for the purpose of destroying an existing majority or creating a new

majority. If the power to issue further shares is exercised by the directors not for the

benefit of the Company, but simply and solely for the purpose of consolidating and

improving their voting power to the exclusion of the existing majority shareholder,

the Court cannot allow exercise of such powers, which have been delegated by the

Company to the Board of Directors.6. Shri V.Ramakrishnan, Counsel appearing for Respondents 1 & 2 recapitulated several of the proceedings pending before the various forums between the parties. According to him,this petition is filed only with the intention to harass the second respondent. He pointedout the strained relationship between the petitioner and the second respondent not only inthe company’s affairs, but also on account of personal affairs. According to him, thealleged acts of oppression and mismanagement took place in the years between 1993 and1997, but the petitioner has approached the CLB only in February, 2000 after a lapse of more than three years. He, therefore, urged that the petition is barred by limitation, in


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support of which he relied upon the decision of the Company Law Board reported in2002(1) CLJ 177 to show that the provisions of the Limitation Act will be applicable tothe proceedings under Section 111 before the CLB. He further drew our attention to thedecision of the Apex Court in (2000) 2 Comp LJ 161 (SC) Corporation Bank Vs. Navin

J . Shah to show that even if the Limitation Act does not apply, the claim must be madewithin the reasonable period of three years. Even otherwise, the petition should be

dismissed on the ground of laches, for which he relied upon the decision in (1998) 5 CompLJ 561 (CLB) A.P.J ain Vs. Faridabad Metal Udyog (P) Ltd. The petitioner has failed toexplain the long delay in initiating the proceedings before the CLB and therefore, notentitled for any relief. He further pointed out that on account of the matrimonial disputeswhich arose from May, 1993 between the petitioner and the second respondent, thepetitioner never showed any interest in the affairs of the Company till October, 1999. Allthe letters sent by the petitioner are prior to the year 1993.

7. Shri V.Ramakrishnan, while arguing the matter on merits referred to the notices for all theBoard meetings (Pages 53 to 73 of typed set of documents by respondents) sent to the

petitioner under Certificates of Posting and categorically stated that the covers wereproperly addressed and posted. In this connection, he made a reference to the decision inAIR 1981 MADRAS 277 M. Meenakshisundaram Vs. S. Venkatesan to show that in caseof letters sent by certificates of posting the presumption is that the letters are delivered tothe addressee. The petitioner never chose to attend the Board meetings, continuously heldin February, 1994, 31.03.1994, 12.06.1994, 26.08.1994 and 20.12.1994, despite the noticesand she therefore ceased to hold the office under the provisions of Section 283(1)(g).Accordingly, the Board of Directors at its meeting held on 01.03.1995 (Page 45 of typedset of documents by respondents) recorded cessation of directorship of the petitioner.

The cessation is on account of operation of law, in which case, the petitioner cannot bere-instated as a director in support of which he relied upon the decision reported in (2000)

2 Comp LJ 354 (CLB) Vinod Kumar Mittal Vs. Kaveri Lime Industries Ltd. Though thepetitioner was requesting to convene the Board meeting in her various letters, later she didnot evince interest in the affairs of the Company and failed to attend the Board meetingsand annual general meeting as and when called by the Company after due notice to thepetitioner. He pointed out that the petitioner did not express any grievance in her letterdated 3.11.1999 (Page 172 of Petition) regarding cessation of her directorship. ShriRamakrishnan strongly contended that the petitioner cannot rely on the letter dated

23.12.1996 (Page 162 of Petition) addressed by Counsel for the second respondent to thepetitioner in the matrimonial disputes to show that the petitioner continued to be a director,in view of the fact that the said letter was sent “without prejudice”. The said letter cannotbe produced as evidence in the proceedings before the CLB. In this connection, hereferred to AIR’s Commentary on Section 23 of the Evidence Act. Section 23 ensures thatletters sent without prejudice cannot be relied on as evidence in all proceedings and not

just the proceedings in which the letters were exchanged. According to ShriV.Ramakrishnan the impugned allotments were for the benefit of the Company and not forany oblique purpose. The allotment of the impugned shares was partly in kind with a view


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to avoid recurring cash out flow for the Company on account of periodical lease hold rent.In the circumstances, the allotments are in the interest of the Company. The petitioner hasnot been reduced to a minority shareholder in view of the fact that the petitioner is alwaysin minority. He further pointed out that though the minutes of the meetings have not beensigned by the Chairman, the minutes does not become invalid, but only the presumptionunder Section 195 with regard to their validity will not be available. However, taking into

consideration the facts and circumstances of the case, the minutes produced before theCLB reflect the true proceedings of the meetings of the Board. While concluding hisarguments, he submitted that by setting aside the allotments made from year 1993 runningof the Company will be affected and the Company’s Banker will recall the loan. In thisconnection, he cited the decision of the CLB reported in (2000) 4 Comp LJ 262 (CLB)

Ashok V.Desai Vs. Doshi Times Industries (P) Ltd. where the CLB has declined to grantsuch a relief. He further submitted that though the second respondent was willing topurchase the shares held by the petitioner, the present financial position is not favourableto buy out the petitioner. However, the second respondent is willing to maintain the

petitioners’ shareholding at 25 per cent by allotting further shares at par value. He,therefore, sought for dismissal of the petition.8. We have considered the pleadings and arguments of Counsel for the petitioner and the

respondents.9. Before going into merits of the case, we shall deal with the issue of limitation. While it is

the contention of the respondents that the petition is barred by limitation and that thepetitioner is guilty of laches, it is denied by the petitioner. The CLB has considered thisissue in quite a number of cases and categorically held that plea of limitation does not arisein the case of proceedings in relation to Section 397/398 proceedings. In this connection,

reference is invited to the decision in Lake Palace Hotels and Motels (P) Ltd. Case citedsupra. The decision in 2002 (1) CLJ 177 cited by Shri Ramakrishnan in regard tolimitation is not applicable to the facts and circumstances of the present case. Moreover,the CLB is exercising equitable jurisdiction in its proceedings under Section 397/398. Wecannot, therefore, debar the petitioner from claiming the equitable relief on merits of thecase. In the circumstances, the plea of the respondents must fail.

10.In regard to the plea of the petitioner that the Company had never sent notices for theBoard meetings, the Company claims that the notices were sent to the petitioner properlyaddressed and posted. The correct and complete address of the petitioner is found in

Memorandum and Articles of Association of the Company (Pages 123 & 135 of Petition),annual return made up to 29.09.1994 (Pages 34 of Petition). But all the certificates of posting (Pages 51, 55, 59, 63, 67, 71, 75 of typed set of documents by respondents)produced by the Company do not specify the road name. There is no record to show thatthe notices have been served upon the petitioner. In the circumstances, there is nonecessity to deal with the cases cited by both the Counsel in regard to the validity of service of notice by certificates of posting. In the absence of proof of service of noticeupon the petitioner for the Board meetings, the proceedings of the Board are not valid ashas been held in (1974) 44 Comp Cases 1 Parmeshwari Prasad Gupta Vs. Union of


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India. Therefore, the plea that the petitioner ceased to be a director by virtue of Section283(1)(g) must fail. Moreover, in the minutes of the Board meeting said to have been heldon 1.03.1995 (Page 45 of typed set of documents by respondents), the cessation of thepetitioner as a director is found to be recorded. Again, the minutes of the annual generalbody meeting of members said to have been held in September, 1995 (3 of typed setof documents by respondents) show that the petitioner ceased to be a director for

non-attending the consecutive Board Meetings without leave of absence from the Board of Directors. Thus, the cessation has been recorded on 01.03.1995 as well as in September,1995, both of which cannot be correct. The letter dated 23.12.1996 (Page 162 of Petition),unequivocally shows that the petitioner continued to be a director as on that date. The pleaof the respondents that the said letter cannot be relied upon in the present proceedings isnot tenable, in view of the fact that the said letter is in relation to the divorce proceedings.

Therefore, in our view, the said letter can be relied on as evidence in the proceedingsbefore the CLB. For all these reasons, the petitioner cannot said to have ceased to be adirector by virtue of Section 283(1)(g).

11. From the various instances pointed out by Shri Seshadri, we are convinced that therehas been manipulation of the minutes of meetings of Board of Directors and as such theycannot be relied on in so far as allotment of shares impugned in the petition is concerned.

There is nothing on record to show that offers were made to the petitioner even though shewas the only other shareholder in the Company. Even though the respondents havecontended that the petitioner had always been a minority and therefore non-allotment of further shares to her cannot be considered to be either for creation of a new majority or forconversion of a majority into minority, yet, when there are only two shareholders,allotment of shares to only one of them is a clear act of oppression. While, we do find that

by allotment of further shares, the Company has been benefited, yet, in our view, thepetitioner should have been offered further shares.12.On a overall assessment of the facts of the case, we are convinced that the petitioner has

made out a case under Section 397 and as such deserves to be granted appropriate relief. The second respondent is willing to allot further shares to the petitioner to maintain 25 percent shareholding which is not acceptable to the petitioner. It is on record thatmatrimonial disputes between the parties have been going for long and they are not intalking terms. They are living separately. In the circumstances, by either allotting sharesto the petitioner to her entitlement or setting aside the impugned allotments and restoring

her directorship would not put an end to the acts complained of. Moreover, by settingaside the impugned allotments, the affairs of the Company and interest of its Banker willbe adversely affected. Therefore, mere restoration of the shareholding position as itexisted before the allotments of the impugned shares and putting the petitioner in theBoard would only result in the percolation of the matrimonial differences into the affairsof the Company. Even though, our advice that the petitioner could consider going out of the company was accepted by both the parties, yet they could not reach an acceptable termof settlement. Under these circumstances, taking into consideration the interest of theCompany and also to put an end to the acts complained of, we direct the second


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respondent to purchase the shares held by the petitioner. The consideration for the sharescould be either the investment made by the petitioner together with appropriate rate of

interest or the fair value of shares based on the balance sheet as on 31st March, 2000,being the proximate date of petition. Therefore, we give the option to the petitioner todecide as to which of the two options she desires to choose. In case she desires to have theinvestment made by her to be returned, the same will be returned together with a simple

interest at the rate of 20 per cent per annum from the date of investment till the date of payment. In case, she desires to have the fair value determined as on 31st March, 2000,the same will be determined on the basis of all the shares that were in existence on thatdate, since the amount received as consideration for the further shares that were allottedand impugned in the petition had been utilized by the Company for a long period. Sheshould indicate her option before us on 09.08.2002. In case she desires to get herinvestment back with interest, the same should be paid to her by the second respondentwithin a period of 30 days from the date of exercising the option. In case, she chooses thesecond option of having the fair value determined, we shall appoint an independent valuer

to value the shares.13.The petition is disposed of in the above terms, keeping it open only for ascertaining the

option of the petitioner and if necessary for appointment of an independent valuer.

(K.K. BALU) (S. BALASUBRAMANIAN)

Dated this the 5thday of July, 2002


section 397-398

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