Case Law Details

Case Name : K. Venkatachalam Vs Premier Roller Floor Mills Ltd. (Chennai Company Law Board)
Appeal Number : CP NO. 36 OF 2008
Date of Judgement/Order : 04/04/2012
Related Assessment Year :

COMPANY LAW BOARD, CHENNAI BENCH

K. Venkatachalam

Versus

Premier Roller Floor Mills Ltd.

CP NO. 36 OF 2008

APRIL 4, 2012

ORDER

1. This is a petition filed under sections 397 and 398 read with sections 402, 234, 235, 237 and 111 A, 111(4) of the Companies Act, 1956 (‘the Act’) and pertaining to the affairs of Premier Roller Mills, a public limited company incorporated in the year 1960. The company, according to the petitioners, was taken over by the first petitioner and other petitioners in the year 1979. The petitioners claim that there were 44 shareholders including the petitioners as per the annual return for the year ended 31st March, 2004. It is alleged that the share certificates evidencing the shareholding of the petitioners were entrusted to a mediator (RS) as a security for the loan availed from a money lender who are impleaded as respondents 2 to 6. From the year 2006 onwards, the respondents are filing returns with the Registrar of Companies (‘RoC’), deleting the names of the petitioners from the list of shareholders. The main allegation is that R2 to 6 bad illegally and forcefully seized the share certificates and took possession of the company’s properties and later on increased the paid-up capital and started filing wrong returns with the RoC from the year 2006 onwards. R7 is A R R S Mega Mall (P.) Ltd. who had purchased the company’s property in the year 2008 for a consideration of Rs. 12 crore, illegally according to the petitioners. The ninth respondent is the son of the so-called mediator (R8). R9 has been appointed as auditor of the company by respondents 2 to 6. 10th respondent is Indian Overseas Bank, Salem, which according to the petitioners could explain the financial position of the various accounts and also explain whether any norms prescribed by the Reserve Bank of India has been violated by the respondents. Respondent 11 is Madras Stock Exchange, which according to the petitioner, could explain how the shares of Premier Roller Flour Mills – a listed company -have been purchased by respondents 2 to 6. SEBI is included as respondent 12 to clarify whether the takeover of the company by respondents 2 to 6 was informed to them and whether any approval was obtained.

2. The company, according to the petitioners, began to face financial crisis in the year 1999 following which Rs.1.50 crore was borrowed from Salem Urban Co-operative Bank Ltd. When the company failed to service the loan the bank initiated legal process and proceeded to auction the property of the company (2 acres). At that juncture due to the mediation of R7, second respondent bailed out the company by giving a cheque dated 30th October, 2004 from his firm Raja Binding Works for Rs. 1,99,94,597 in favour of the bank. As a security for the loan,(documents of the company’s properties and share certificates of Venkatachalam & Sons (petitioners) were given to the custody of R2. Incorporating the terms, a special agreement was entered into between borrowers and lenders as per which R7 should keep the documents under his custody till 30th October, 2007 by which time the borrowers should repay the amount to the second respondent and take back the documents. After a period of two years and ten months, when Venkatachalam & Sons approached R2 and R7 with the loan amount and requested to return the documents, they were told that the company absolutely belongs to the second respondent and his group. Form 32 filed by them with the RoC on 1st November, 2007 was given as proof of their contention. As per the agreement the respondents were bound to wait till 31th October, 2007. But the respondents have filed Form 32 on 1st November, 2004 itself indicating the appointment of R2 to R6 as directors and resignation of petitioners as directors with effect from 1st November, 2004. Allegedly five persons have acquired the entire shares of the listed company without complying with the takeover norms. Nor SEBI was informed in the matter. Approval of the Central Government was also not obtained for family directors/relatives of directors being allotted shares en bloc. Thus, the respondents are conducting the affairs of the company in an oppressive manner which is prejudicial to the interest of the members, the petitioners say. The increase of the authorised capital of the company to Rs. 10 lakh and the allotment of three lakh shares to R2 to R6, the change of face value of shares as Rs.1,000, changing the number of shareholders as five, etc., are other oppressive acts alleged by the petitioners. R2 to R6 filed annual return for the year 2006 as if the petitioners have ceased to be shareholders/directors. Everything was done in collusion with R9 (auditor) who was appointed without obtaining the consent of the earlier auditor. The eighth respondent also committed breach of trust and colluded with R2 to R6 by handing over the documents of the company to the second respondent on the next day of availing the loan.

2.1 On 10th September, 2007, petitioners sent a legal notice offering to repay the loan and requested to return the share certificates and documents of the company. While so, respondents, through their henchmen had forcefully taken possession of the property of the company. Out of fear, petitioners and their relatives signed some blank papers. The petitioners filed criminal OP No. 2844/2007 before the High Court of Madras and the same is pending. In the same year, a company petition CP No.110/2007 was moved before the Company Law Board (‘CLB’) and during the pendency of the petition, R2 sold company’s property (2 acres of prime land worth Rs.36 crore and factory along with machineries) to R7 for a sum of Rs.12 crore. The sale of the property is illegal for want of a special resolution under section 293(1)(a) of the Act. The factory building in the property had been demolished and sold as scrap. Petitioners were threatened to receive demand drafts aggregating Rs.5.70 crore and they received the same under protest, and undertaking to return the same without interest at the time of disposal of the case. In this background the petitioners seek a direction to (i) investigate the affairs of the company ; (ii) to declare that the alleged actions of the respondents are oppressive ; (iii) to restore the shareholding of the petitioners by rectifying the register of members and also the original Board of directors ; (iv) to set aside the sale of the property to R7 ; (v) to annul the appointment of R2 to R6 as directors ; and (vi) to delete the returns and forms filed by R2 and others.

3. In the counter filed by respondents 1 to 6, the competence of the petitioners to file this petition is challenged. They say that the company is not a listed company as per the records. It is the specific case of the respondents that petitioners transferred their entire shareholding in the company by execution of valid instruments of transfer and delivery of share certificates to the respondents in October 2004 and the transfer came to be effected at the Board meeting held on 1st November, 2004 which was attended by the petitioners who were also the directors of the company. Respondents say that the petitioners who were the original shareholders of the company sold the company to the respondents herein when they were unable to meet the debts of the company and at a time when the company’s properties were brought for sale through public auction. The annual return of the company for the year ended 31st March, 2005 discloses the transfers, respondents say, followed by the annual returns for the years 2006 and 2007. The petitioners filed a civil suit OS No.312/2007 before the Munsif Court, Salem raising the very same allegations. They also sought a declaration that the petitioners are directors of the company. The suit was contested by the respondents which ultimately ended in a comprehensive compromise of all issues pending between the parties; on 8th April, 2008. As per the compromise, an aggregate amount of Rs. 8 crore (including the payments in 2004) was paid to the petitioners who acknowledged and ratified the transfer of shares in favour of the respondents and also the reconstitution of the Board by inducting the respondents as directors, and also the resignation of petitioners from the Board. It was further recorded that petitioners have no right, title or interest in respect of the company’s properties. The memorandum of compromise specifically details all the transactions from 29th October, 2004 onwards. Rs.6,45,00,000 was paid to the petitioners on 8th April, 2008 and the petitioners confirmed the transfer of shares (86.5 per cent) in favour of the respondents and also agreed to transfer the remaining shares, and consented to the sale of the company’s properties to A R R S Mega Mall by the respondents/directors. All the cases pending before the various forums were agreed to be withdrawn. On the basis of the compromise, the suit was disposed on 17th April, 2008 as settled out of court. The petitioners executed a receipt for the amount received by them under the compromise. On 28th April, 2008, the petitioners further executed a full satisfaction receipt-cum-compromise deed detailing the full satisfaction of the compromise, and further recording that the petitioners approve the alienation of the properties of the company to the 7th respondent. CP No.110/2007 filed by them before CLB claiming status as shareholders was also withdrawn. Another company petition, CP No.6/2008 filed before the CLB was agreed to be withdrawn. The satisfaction/receipt-cum-compromise deed contains all the details of the compromise. All the relevant documents were executed in the presence of the counsel for the petitioners and notary. The bankers have confirmed the encashment of all the demand drafts. By letter dated 29th April, 2008, the petitioners have withdrawn the complaint filed by them before the RoC.

3.1 The company sold the property to the seventh respondent as per sale deed registered on 4th January, 2008 for a consideration of Rs. 12 crore, for which sanction has been given by the Board of directors of the company. In view of the compromise entered into in the civil proceedings, the petitioners are estopped from resorting to a fresh legal proceeding. No liberty has been reserved in the prior proceedings, to initiate fresh proceedings against the respondents. The present attempt is an abuse of the process of the court by the petitioners. Petitioners have reaped the benefits of an earlier compromise by receiving substantial sums of money. Petitioners have not come to the court with clean hands, but with an oblique motive of receiving more consideration. They received the consideration as well as executed various documents with open eyes and the plea of coercion does not arise in this case. Moreover, the issue whether the transfer of shares is vitiated by coercion is a civil dispute to be tried by a civil court. The challenge against the sale of the property to the 7th respondent is barred by limitation and hit by section 402(f) of the Act. The 7th respondent is a bona fide third party purchaser for a valuable consideration. The attempt of the petitioners is to get a review of the concluded and compromised issues by foisting a false case. The authorised and paid-up capital of the company is Rs.10 lakh divided into one lakh equity shares of Rs.10 each. It is false that the authorised capital of the company is only Rs.7 lakh. It is denied that respondents 2 to 6 had misused the instrument of transfer or share certificates entrusted with the 8th respondent towards money lending transaction. It is also denied that company’s property was worth Rs. 36-40 crore. It is denied that 8th and 9th respondent acted as middlemen in the transaction. They are qualified professionals and their names have been unnecessarily dragged into these proceedings and, insinuating allegations have been intentionally made to tarnish their image. All the procedures legally required for takeover of the company have been complied with. Having had the benefit of share transfer consideration for the newly allotted shares, the petitioners cannot turn around and impugn the allotment, which were made by them. No coercion was employed to get the CP No.110/2007 withdrawn.

4. In the counter filed by R7 it has been stated that the promoters of R7 are leading businessmen, running the biggest textile store in Salem. The landed property of R1-company was sold to him by deed of sale dated 3rd January, 2008 and registered on 4th January, 2008 and the resolution passed under section 293(1)(a) by the R1-company on 19th November, 2007, the annual return of the R1-company filed with RoC duly disclosed Mr. C Duraiswamy to the managing director of the company at the relevant point of time. It is pointed out that the purchase of the property of R1 by R7 was a genuine transaction between a third party buyer (R7) and the R1-company, where R7 had no prior relationship with either the R1 or the petitioners or R2 to R6. It is argued that the sale of the property of R1-company to R7, the aggregate consideration of Rs. 12 crore paid by R7 is in order and fair as per guideline value prevalent on the relevant date. It is contended that R7 has locked huge amount of money in the property and is unable to put the property to effective use for constructing a mall owing to the pendency of the petition which has put him to irreparable loss and prejudice and such the petition deserves to be dismissed.

5. The brief extract of the counter filed by R12 is as under. It is contended that R12 is neither a member nor a necessary party to the above proceedings and that the CLB does not have any jurisdiction to pass directions against R12 since it is a statutory authority constituted under the SEBI Act. It is argued that for matters which are within the regulatory purview of SEBI, any party claiming to be aggrieved should not be permitted to forum shope at its whims and fancies.

6. The learned counsel for the petitioners argued that the matter is pertaining to a listed company with huge landed property, building, machinery, etc., held by 44 shareholders and about five directors. By the year 1994, the company’s activity came to a halt and the company was being run with the rental income from the office complex. It is argued that the alleged takeover of the company on 1st November, 2004, on the basis of an annual return filed by the respondents in the year 2004, is illegal for several reasons. The takeover of the company is in violation of the mandatory provisions of the Act, SEBI norms and listing agreements. It is submitted that even if the company is accepted to be unlisted, the mandatory provisions of the Act are violated. One violation is that the approval of the Central Government has not been obtained as provided under section 108A of the Act. The non-compliance of the above provision makes it probable that the arrangement between the parties was only money-lending. The petitioners say that the respondents are silent about the methodologies of transfer and adherence to mandatory norms and, hence, the annual return as at 30th September, 2005 is not a dependable evidence to prove the transfer of shares. There are contradictions if the annual returns for the years 2004 and 2005 are analysed. Petitioners wonder how the respondents got shares transferred from persons who are dead. Regarding the minutes dated 1st November, 2004, it is argued that mere production of loose leaf cannot be taken as evidence according to sections 193 and 194 of the Act. It is argued that the purported minutes had been fabricated out of the signed blank papers obtained by coercion. The alleged collusion is well substantiated from the following proceedings initiated by the 1st petitioner and his group : (i) OS No.312/2007 filed before civil court on 7th March, 2007 ; (ii) written police complaints dated 9th September, 2007; (iii) order dated 21st September, 2007 by the local magistrate directing the police to investigate and report ; (iv) criminal OP No.28441/ 2007 filed before the Madras High Court on 14th September, 2007.

7. Regarding the above proceedings, it is relevant to note that all the civil and criminal cases and also company petitions referred to above were subsequently withdrawn as compromised on 8th April, 2008, as evident from the records produced by the petitioners themselves. Criminal OP was disposed of by directing the police not to interfere in civil disputes. As such, I am of the view that petitioners cannot rely on those documents.

8. It is pointed out that the transfer deeds and share certificates produced by the respondents have been forged and fabricated by them. The transfer deed is neither approved by the Board nor contains the signatures mentioning the date of transfer. Mere possession of transfer deed along with share certificates will not entitle a person to be a member of the company. Petitioners rely on a decision in Ashok Chaturvedi v. Shitul H. Chanchani [1998] 94 Comp. Cas. 401 (SC) to argue that a director who knowingly accepts a forged transfer runs the risk or being prosecuted (but this decision is not applicable to this case). According to the learned counsel, the forged transfer can pass no title and is void – Simm v. Anglo-American Telegraph Co. [1879] 5 QBD 188 CA. It is pointed out that the respondents failed to prove that the consideration mentioned in the transfer deeds were paid to the petitioners by the five transferees (R2 to R6). Where there was no proof of payment as consideration for transfer of shares and there was no proof of such payment, in spite of the record of transactions in the minutes, the transfer to be declared as not reflecting the correct legal position –M S Mani v. M S Madhusudhanan [1991] 5 CLA 187 (Ker.). As per the annual return as on 30th September, 2004, the sellers have purportedly sold more than what they owned on 30th September, 2004. In the light of the above submissions the petitioners argue that there were no transfer of shares on 1st November, 2004 and, hence, the petitioners satisfy the criteria under section 399 of the Act.

8.1 The provisions of section 399(1) of the Act are not procedural but are a part of substantive law and, therefore, their requirements should be construed as mandatory. If the issue of share or allotment is the very act which is challenged as oppressive in the petition, the maintainability of the petition would be decided after determining the validity of the issue of allotment — Desh Chand Technoligical Resources (P.) Ltd. v. Rajendra Keshwani [2009] 150 Comp. Cas. 123 (CLB); Mohinder Singh v. Hoshiarpur Express Transport Co. Ltd. [2008] 86 SCL 155 (CLB-New Delhi). It is pointed out that the recitals in the loan agreements and sale agreements both dated 29th October, 2004 and deed of contract dated 30th October, 2004 were executed between the second respondents group and first petitioner’s group and that the company is not a party or signatory to those documents. The provision to pay interest from the rent collected from the tenants is heavily relied on by the petitioners to argue that the understanding among the parties was that the transaction is only a loan agreement for Rs. 3 crore to be repaid after two years and eleven months. This provision, according to the petitioners, supports their case that there was no takeover of the company not there was any sale of the company’s property. According to the petitioners, the validity of the loan agreement and the two sale agreements dated 29th October, 2004 has validity only for two years and, hence, the remedy open to the respondents was to approach the civil court by depositing the balance sale consideration and get the property registered. It is pointed out that the two sale agreements dated 29th October, 2004 were intended as security documents only. The specific argument is that the handing over of the share certificates and the property documents of the company cannot be construed as transfer of shares or sale of company’s property. Another argument is that R2 to R6 had unilaterally filed false Form 32 on the next day of lending, i.e., 3rd November, 2004 and the shareholders have not approved the same. At the maximum they can be co-opted as additional directors in the Board indicating that the original directors should continue to be the directors even after the co-option. If all the erstwhile directors resign en masse there should be a person who accepts the resignation and this fact has not been proved by the respondents. The respondents have violated sections 314 and 263 of the, Act in their appointment as directors – Amrik Singh Hayer v. Hayer Estates (P.) Ltd. [2009] 147 Comp. Cas. 761 (CLB). The respondents were bound to establish the fact of having properly convened the Board meeting after due service of notice on the petitioner. The director’s attendance register has not been placed before the Board. Mere extract of minutes of the meeting or Form 32 notifying appointment of the third respondent as a director of the company without support of the primary documents would not prove beyond doubt the appointment of the third respondent as a director A.H Ahmed Jaffer v. ACE Rubber & Allied Products (P.) Ltd. [2004] 52 SCL 350 (CLB-Chennai); Sachin Bansal v. Accent Shoes (P.) Ltd. [2009] 150 Comp. Cas. 319 (CLB).

8.2 It is argued that the company being the owner of the immovable properties, second respondent has no authority to sell the property of the company. According to the learned counsel for the petitioners, even the original borrowings from Salem Urban Co-operative Bank was ultra vires the company since the loan amount was exclusively used by the directors for other business needs.

8.3 Relying on the decision in Suryakant Gupta v. Rajaram Corpn. Products (Punjab) Ltd. [2010] 100 SCL 41 (Punj. & Har.) the petitioner argued that the CLB has powers under section 402 of the Act to set aside the fraudulent sale executed by the second respondent who is a non-shareholder/non-director of the company. It is further pointed out that after the sale of the property the entire substratum of the assets of the company had eroded justifying a winding up of the company on just and equitable grounds. Regarding the compromise deed dated 8th April, 2008 and the full satisfaction-cum-compromise deed signed on 28th April, 2008, it is argued that both the documents were executed by individuals and the company is not at all a party or signatory to these compromise deeds. Petitioners wonder as to how a reasonable man ought to have agreed to sell the valuable property of the company at Rs. 8 crore. The ratification by the petitioners of all the illegal acts will not give the compromise deed any legality and, hence, not enforceable. Above all the payment of Rs. 5.7 crore on the date of the compromise deed is not sufficient consideration. Of late, petitioners are relying on a criminal complaint filed by them before the Judicial Magistrate and also a criminal OP filed before the High Court of Madras in the year 2011 to argue that they are still prosecuting the alleged coercion and threat practised by the respondents in bringing about the compromise and encashment of the demand drafts.

9. Case Laws cited by respondents

 •   Syed Musharraf Mehdi v. Frontline Soft Ltd. [2007] 75 SCL 329 (CLB-Chennai)….A combined reading of sub-sections (1) and (4) of section 399 would show that the CLB has no option, but to reject an application made under sections 397 and 398 which is not supported by the requisite number of members at the time of filing the application before the CLB. Thus, the requirements of section 399(1) being statutory are not directory in nature, breach of which cannot be waived by the Board.

 •   Prafulla Kumar Rout v. Orient Engineering Works (P.) Ltd. [1986] 60 Comp Cas 65 (Ori.)… Held, on the facts, that the petition filed by the petitioner under sections 397 and 398 of the Act, for relief against oppression and mismanagement was not maintainable as he did not discharge the burden of proving that he held shares in the company, and the respondents were able to show that there was a transfer of all shares he had held prior to the presentation of petition.

 •   Mrs. M.R Shah v. Vardhman Dye-Stuff Industries (P.) Ltd. [2005] 60 SCL 623 (CLB-New Delhi) Oppression and mismanagement – Petition for relief – Petitioning shareholder party to all decisions taken by company – Not entitled at later point of time to invoke equitable jurisdiction – Improper use of company’s funds – Suitable action to be taken by authorities – No case of oppression.

 •   Gulabrai Kalidas Naik v. Laxmidas Lallubhai Patel [1977] 47 Comp Cas 151 (Guj.) … It is not in all cases that a composite petition under section 155 and sections 397 and 398 is not maintainable. It would be for the court to decide whether the petition should be rejected on the ground that it is a composite petition unworthy of examination or to admit the petition in part leaving open the question of admission of the remainder of the petition to a later date. The petition, so far as it sought reliefs under section 155, should be admitted and the consideration of the petition for the purpose of admission for reliefs under sections 397 and 398 should be deferred to a later date.

 •   Sarguja Transport Service v. State Transport Appellate Tribunal AIR 1987 SC 1988 …. Constitution of India, Article 226 ― Procedure ― Withdrawal of petition under article 226 without permission to institute fresh petition – Fresh petition under article 226 in respect of same cause of action is not maintainable – Rule of public policy as contained in order 23, rule 1 of Code of Civil Procedure applies to such case – Exception is habeas corpus petition.

 •   KSP Valli v. Richfield Agencies (P.) Ltd. [2006] 71 SCL 33 (CLB-Chennai)….Reaped the benefits of the deed of arrangement and declaration by unconditionally accepting the title deeds of the immovable properties, a sum of Rs. 15 lakh as per the schedule indicated in the deed and twenty-three LIC policies in full and final settlement of her claim. Having acted upon the deed of arrangement and having relinquished their interest in the company, she was bound to act in accordance with its various terms and having failed to satisfy the requirement of sections 397 and 398 of the Act she was not entitled to relief.

 •   Vijayan Rajes v. MSP Planatations (P.) Ltd. [1999] 19 SCL 106 (CLB-Chennai) …..Held also, that it was clear that the motive of the first petitioner was to bring pressure on respondent No.2 to transfer his building to petitioner No. 1. It is an established legal position that, when a petition under sections 397 and 398 is filed with a view to achieve some ulterior objective/collateral purpose, such a petition should not be encouraged.

 •   Ramesh Bhajanlal Thakur v. Sea Side Hotel (P) Ltd. [2000] 23 SCL 164 (CLB-New Delhi). The settled principle of law in proceedings under sections 397 and 398 of the Act, is that the relief sought should be to put an end to the acts of oppression/mismanagement and not for any oblique purpose.

 •   Srikanta Datta Nnrasimharaja Wadiyar v. Sri Venkateswara_Real Estate Enterprises (P.) Ltd. [1991] 70 Comp. Cas. 211 (Kar.).. It is well-settled that the relief under sections 397 and 398 of the Act, is an equitable relief which is entirely left to the discretion of the company court. Because of the equitable and, therefore, discretionary character of the court’s jurisdiction, the requirement of good faith on the part of the petitioner is necessary…. The question of good faith has to be tested by the conduct of the petitioner as reflected not only in the proceedings before the company court but also in parallel proceedings in civil courts and in other civil litigations in other courts.

 •   K.R.S Mani v. Anugraha Jewellers Ltd. [2004] 52 SCL 488 (Mad.)…. The Single Judge had rightly held that the Company Law Board had not decided the issue of mismanagement with reference to material evidence on record. Moreover, the appellants had not approached the Company Law Board with clean hands as the relief claimed in the said suit was almost identical with the relief claimed in the company petition. It was only when a preliminary objection was raised about the maintainability of the company petition the said suit had been withdrawn. Merely because the appellants had withdrawn the suit on a subsequent date, it would not absolve their conduct in not approaching the CLB with clean hands.

 •   Gunjan Cement (P.) Ltd. v. Rajasthan State Industrial Development & Investment Corpn. Ltd. AIR 1996 Raj. 88 – It may be stated that as per the term loan agreement between the petitioner and the respondent, the rate of interest was dependent upon the rate at which refinance for the term loan was available from Small Industries Development Bank of India (‘SIDB1’) plus 3½ per cent thereon. The petitioner, knowing fully well the legal implications of the contract, has signed the ‘deed of modification’. It was not a case of an illiterate person signing the deed without understanding the contents thereof. The theory of coercion and duress submitted by the petitioner is not acceptable and the submission so made is hereby rejected.

 •   Charanjit Singh Ghumman v. Dr Reddy’s Laboratories Ltd. [1999] 21 SCL 71 (CLB-Chennai). It was free from doubt that the petitioner withdrew the civil suit filed against the company and with the consent of the petitioner, the transfer of the shares in question was effected in favour of the second respondent, as borne out from the letter dated 21st July, 1994, of the petitioner. In view of the provisions of section 206A of the Act, the company could not have delivered the bonus share certificates to the petitioner when the transfer of the original shares was pending with the company. The evil suit filed by the petitioner was withdrawn with a certain understanding and the petitioner had executed the transfer instruments both in respect of the original 100 shares as well as 200 bonus shares. As had been noted by the Principal Bench in its order in the petition under section 237(b) filed by the petitioner, the company had taken an enormous precaution in the matter of registration of the transfer of the shares and whatever the company did was with the knowledge and consent of the petitioner. The petitioner having acquiesced, was not stopped from questioning the registration of transfer if he was aggrieved that either he was coerced into entering into an agreement before withdrawal of the suit or the terms of some agreement had not been complied with, it was for him to agitate the same elsewhere and not before the CLB.

 •   Smt. S. Anuratha v. A.K.M.N Cylinders (P.) Ltd. [1999] 19 SCL 1 (CLB-Chennai)….That the contentious issues raised by the parties regarding fraudulent manipulation of the duplicate share certificates, fabrication of the transfer instruments and other records could not be resolved in summary proceedings by the CLB. The CLB could not go into the question whether the agreement dated 16th November, 1995, became infructuous in section 111 proceedings which could be agitated only in a civil suit.

 •   K.S. Motilal v. K.S. Kasimaris Cerantique (P.) Ltd. [2007] 135 Comp. Cas. 609..(CLB).. Oppression and mismanagement – Petition for relief ― Sale of property – By resolution passed by Board of directors ― Proper interest of company does not suffer in dispute between shareholders ― Companies Act, 1956, sections 397 and 398.

 •   Mrs. Saroj Goenka v. Nariman Point Building Services & Trading (P.) Ltd. [1997] 90 Comp. Cas. 205 (Mad.). But in cases where the pleadings run into several hundreds of pages and several issues arise, it would not be just and proper to subject the parties to the trial of the entire case for the purpose of deciding the issue of maintainability. If in such cases, the maintainability issue is decided as a preliminary issue, it would be convenient for both parties because in the event it is held that the petition is not maintainable, several other issues involved in the case need not to be tried and the evidence need not be adduced. On the facts, therefore, the Single Judge was justified in directing that the issue as to maintainability should be tried as a preliminary issue.

 •   Heeral Constructions (P.)Ltd. v. Blue Pearl Developments (P.) Ltd. [2009] 150 Comp. Cas. 234 (CLB-Chennai).. Oppression and mismanagement – Petition for relief – Transfer of shares pursuant to agreement – Grievances as to non-payment of consideration – In nature of Breach of Agreement – Not to be decided by Company Law Board – Companies Act, 1956, sections 108, 111, 397, 398 and 402.

Oppression and mismanagement – Petition for relief – Locus Standi -Petitioners transferring entire shares pursuant to share purchase agreement – No locus standi in to file petition – Companies Act, 1956, sections 397, 398, 399.

 •   Mrs. S Lakshmi v. E.M Shivamani Engineering (P.) Ltd. [2009] 150 Comp Cas 250. (CLB-Chennai)… Oppression and mismanagement-Petition for relief – Purchase of property notified to be acquired – Compensation received from seller – Money received from seller deposited in company account – No misappropriation of funds – Companies Act, 1956, sections 397 and 398.

 •   Oppression and mismanagement – Petition for relief – Transfer of shares – Share transfer form signed by shareholder – Transferor participating in proceedings of Board ratifying transfer – Technical objection that adhesive stamps affixed not cancelled not sustainable – Transfer of shares valid.

Heard both sides ; gone through the pleadings and case laws submitted by both sides. The following issues arise for consideration.

Issues

10. (a) Whether Premier Roller Flour Mills is a listed company?

(b) Whether the petitioners herein are shareholders of the company as on the date of filing this CP?

(c) Whether the petitioners herein have made out a case of oppression and mismanagement under sections 397 and 398 of the Act?

(d) Whether the petitioners are entitled to any reliefs under section 402(f) of the Act?

(e) To what reliefs and costs?

Issue (a)

11. Before recounting the facts in any great detail and deciding the other issues, it is necessary to decide whether R1 is a listed company as contended by the petitioners and if so, whether the SEBI takeover code has been violated by the respondents. According to the respondents, the petitioners never held out the company as a listed company and, hence, the petitioners are estopped from raising such plea. The annual returns for the years 1999, 2001, 2004 and 2005 are made available to show that the company on the relevant dates is “Unlisted” on their own showing. The annual return of the company for the year 1999 show the status as ‘shares not listed’ (Vol. F.p. 58). This annual return has been signed by the first petitioner, and as per this annual return 90 per cent of the shares is held by directors/relatives of directors which make it improbable that it is a listed company. In a listed company 25 per cent of the shares are to be held by the public. That is not done in 1999, during which the petitioners were in absolute control over the company, The annual return for the years 2000 (vide p, 72) and 2001 (vide p. 86), filed by the first petitioner herein also indicate that the company is not listed during the relevant years. The copy of the annual return for the year 2006 (AGM held on 30th September, 2006) also does not indicate that it is a listed company. In the above circumstances, the only assumption that can be drawn is that the petitioners have been administrating the company as if it is an unlisted company, even before 2003. Petitioners cannot convey anything more than what they project in the records. As rightly pointed out by the respondents the SEBI De-listing Regulations came into force in 2003. Similarly, the copy of the annual return for the year 2005 produced by the RoC, Tamil Nadu, Coimbatore would show the company is ‘not listed’ during that year. The columns required to be filled in respect of stock exchanges of the listed company also manifest a “Nil” status. R2 has produced the Master data of the company, as per which the company is ‘unlisted’ as on 2nd June, 2008. As against the above materials the petitioners did not care to produce any documents to show that it is a listed company. It appears that based on a letter dated 29th January, 2010 from the petitioners, SEBI had called for certain information regarding the change in promoters and their shareholding, percentage of shareholding since the year 2003-04, etc. But this letter is not conclusive enough to show that the company is a listed one. Materials produced by the respondents sufficiently establish that the petitioners have been holding out the company as unlisted. In the above circumstances I am of the considered opinion that they are estopped from contending that the respondents have not complied with the SEBI takeover code by offering the shares to the public. Petitioners have been parties to the execution of transfer deeds, party to the Board meetings and resolution for transfer of shares by executing a compromise ratifying the transfer, and receiving consideration and repeatedly acknowledging the validity of transfer. That being the case, the petitioners are estopped from challenging the validity of these transactions, to which they have been consenting parties. Petitioners cannot blow hot and cold and cause prejudice to the respondents as held in M.R Shah (supra). The company is an unlisted one for the purpose of this CP. In, the above circumstances the contention of the petitioners to treat the company as a listed one is bound to fail. This point is accordingly held.

Issues (b), (c), (d) and (c)

12. To make a seemingly complicated story simple, I think it will be better to continue with the cardinal issue of competence of petitioners to initiate these proceedings. This is a composite petition in which reliefs under sections 397 and 398 of the Act have been claimed along with section 111 of the Act. Unless petitioners are found to be shareholders of the company they would have no locus standi to maintain this petition. CLB in such an event need not go into the merits of the allegations. Petitioners and their group held the entire shares in the company at some point of time. R2 to R6 have alleged that the petitioners have transferred all their shares in the company by executing valid instruments of transfer and delivery certificates in favour of R2 to 6, which became effective from 1st November, 2004 on which date a resolution was passed in the Board meeting to effect the above transfer. It is, therefore, contended that the petitioner ceased to be the shareholders of the company. The petitioners say that the respondents have misused the share certificates, and documents of the company and other forms signed by them which were entrusted with R8 (mediator) as a security for the loan availed from R2’s group on 29th October, 2004. They allege collusion between R2 to R6 and the eighth respondent. Since the entrustment of share and transfer deeds and the share certificate with the respondents is admitted, it is the burden of the petitioners to prove that the entrustment was by way of security and the alleged collusion and breach of trust by the R2’s group.

13. There are certain admitted facts in this case. The company was taken over by the petitioners in the year 1979. The company began to face financial difficulties from 1999 onwards and when the company’s properties were about to be auctioned for realisation of the money due to the bank, the respondents advanced a loan of Rs. 1.99 crore with interest at Rs. 1.25 per Rs. 100 to petitioners. The interest was payable from the income received from the tenants in the flour mill. Incorporating the terms of the agreement a loan agreement was executed on 29th October, 2004 between the shareholders/directors of the company (petitioners) and the respondents. The agreement further mentioned that in lieu of the amount borrowed from B Party (R2) the ‘A’ Party (petitioners) had transferred the shares (86.5 per cent) in respect of the above said mill (company) to the ‘B’ Party (respondents 2 to 6)’ {vide loan agreement dated 29th October, 2004 p. 6, vol. IIA). The above terms in the agreement will clinch the issue in favour of the respondents. The subsequent agreement dated 30th October, 2004 further asserted that the petitioners had transferred the shares of the Premier Mills Ltd. company and the documents had been signed by both the parties. Thus, it can safely be concluded that the essential elements of a sale under the Sale of Goods Act has been complied with. The loan agreement dated 29th October, 2004 further provided that they will also execute sale agreements in favour of second respondent in respect of the property of the company. The above two agreements to be registered in the office of the Sub-Registrar and the period of the agreement would be for a period of 2 years and 11 months. On default of the repayment within the above period, this agreement provides that the respondents shall calculate the sale price to the entire lands along with the immovable property at the rate of Rs.550 per sq. feet and, thus, the principal and interest would be realised. The building standing in the name of the company and the possession of the mill would be handed over by the petitioners to the respondents on the date of the execution of this agreement. As mentioned in this agreement, on 29th October, 2004 two other agreements for the sale of the company’s property were also executed between the same parties. On 30th October, 2004, another agreement was executed between the same parties, agreeing to handover the documents pertaining to the company to the custody of Shri S Duraisamy (R8). This agreement further mentioned that if petitioners repay the loan with interest within the period of 2 years and 11 months, the two sale agreements dated 29th October, 2004 shall be cancelled and that the shares of the company shall be transferred to the petitioners. While executing each of the above agreements some money was also paid to the petitioners. Contentions diverge at this point.

14. Thereafter, no initiative is seen taken by the petitioners to get back the properties by repaying the loan. No civil suit is also filed for recovery of possession of the property. Instead, on March 2007, the petitioners filed a civil suit OS No.312/2007 before the Munsif Court, Salem seeking a declaration that the petitioners are the directors of the company, and seeking to annul the forms, return or any other papers filed by the respondents herein before the RoC and also to restrain them from interfering with the possession and enjoyment of the company’s property. The affidavit in support of the suit was sworn to by the 1st petitioner herein as managing director and petitioners 3 to 5 herein and 2 others as directors of the company. The respondents herein contested the matter by stating that the petitioners herein are neither managing directors nor directors/shareholders of the company since they have transferred all their shares to R2 to R5 for valuable consideration and, hence, ceased to be directors from 1st November, 2004 and that R2 to 4 are in management of the company. The allegation that ‘blank signed transfer forms’ were given as security for the loan availed was also specifically denied by them. The plaint and written statement is available at pp. 49-85 of the typed set documents produced by the respondents. The suit was compromised by executing a deed of compromise on 8th April, 2008 between the 2nd respondent and petitioners, following which the suit was dismissed “as settled out of court”. Memorandum of compromise, memorandum of withdrawal of the suit, decrees and judgment of the court are available at pp. 86 to 98. As per the deed of compromise, including all the payments from 2004, an aggregated amount of Rs. 8 crore was paid to the petitioners herein. As per this deed, the (petitioners categorically ratified and consented that the shares of the company had been transferred in the name of R2 to R4, that the petitioners had resigned the directorship of the company, that the 2nd respondent and his family members had become the directors thereafter, that they have mutually agreed to solve the dispute by receiving a total sum of Rs. 8 crore, that the balance shares of the company also shall be transferred to the second respondent, that they have no objection to the respondents selling the properties to R7, that the agreements dated 29th October, 2004 and 30th October, 2004 stand cancelled, that the cases pending between the parties would be withdrawn, that the petitioners do not have any connection with the properties of the company (vide pp. 86-91 respondents typed set).

15. After the dismissal of the suit on 17th April, 2008, petitioners executed a receipt dated 19th April, 2008 for the amount received by them under the compromise (vide pp-99 to. 101). Yet another full satisfaction-cum-compromise deed was executed on 28th April, 2008 (vide pp. 102 to 105) by petitioners and others ratifying all the actions and proceedings (including the sale of land) taken by R2 to R6 herein. It further mentioned that the company petition filed before the CLB as well as other cases pending in connection with the company will be withdrawn. The Company Petition No.110/2007 filed was dismissed as withdrawn vide order dated 22nd February, 2008 (vide pp. 106 to 109). All the above mentioned documents are not disputed by the petitioners herein, or rather admitted by them. The above materials on record are sufficient enough to conclude that the case put forward by the petitioners is with mala fide motive. Though initially, the loan agreements prima facie seem to be a borrowal of money on the basis of the security of company’s properties and its shares, the subsequent conduct of the petitioners reveal that they actually intended to transfer the shares in the company. They also conceded that the respondents 2 to 6 have the right to sell the property of the company to R7. On the basis of the above documents, I have no hesitation to find that the petitioners had no intention to treat the agreement as a loan transaction. The minutes dated 1st November, 2004 (vide pp. 46 to 48), further corroborates this fact. As per this Board meeting held on 1st November, 2004, the petitioners and respondents 2 to 6 attended this meeting and the meeting related to the change of management and connected matters. The minutes detail the circumstances under which the petitioners agreed to sell their 87.5 per cent equity shares to the 2nd respondent and associates. It was resolved to appoint the 2nd respondent and others as the new directors in management. It was further resolved that the instruments of transfer executed by petitioners together with share certificates in respect of 88,960 shares of Rs. 10 each is being transferred to second respondent’s group. The auditor’s resignation was also accepted. The minutes further mentioned that due to the long closure of the company the statutory dues and records and books of account of the company is not available with the petitioners and it will be handed over if traced out. As is evident from the above minutes, (there is a change of management in which the petitioners were replaced by R2 to R6. It was further resolved that the old management will indemnify the new management for any defect in title to shares.

16. The petitioners strongly dispute the genuineness of these documents on me allegation that the original register of minutes is not produced and, hence, not acceptable as a piece of evidence. The impugned minutes contained the signature of the petitioners and other directors. If the minutes were actually not signed by them, the petitioners would have taken steps to get an expert opinion regarding genuineness of their signature in the minutes. But that is not done so. Except posing certain questions, the particulars of the coercion and threat are not forthcoming in the CP. De hors the alleged coercion which is not proven, the transfer of shares stands admitted and again ratified in the year 2008. In the written statement filed in the civil suit, the respondents have mentioned that the shares were transferred for consideration and the transfer was effected on 1st November, 2004. But the petitioners did not care to mention anything about it in this company petition. Evidently, the petitioners have not gone to the corporate office after October 2004. The annual return for the year 2005, has been signed by the second respondent in his capacity as the managing director (vide pp. 32 to 44) and the names of the petitioners are not shown as directors of the company during this period. The transfer of shares in favour of the respondents is recorded in the annual return for the years 2005 and 2006 (p. 39 to 44). It is in the year 2007 that the petitioners go to the civil court. The averments in the original suit filed in the year 2007 and the reliefs claimed therein are identical to the averments in this company petition also. The averments in this company petition is the verbatim reproduction of the averments in CP 08. The petitioners have given up their claims in the civil suit by settling the matter as per a compromise deed. The earlier CPs filed in the years 2007 and 2008, filed by other shareholders was also withdrawn. Thus; the petitioners have given up their claim as directors/shareholders of the company and also the claim over the property. In my considered opinion the petitioners are estopped from raising the same contentions in these proceedings on principles of res judicata and estoppel. The remaining contention of the petitioners is that the company is not a party in the civil suit. I see no merit in this contention. The transfer of shares in favour of R2 to R6 was impugned in the civil suit and that claim was given up in the deed of compromise.)

17. The only relief sought in the civil suit is an injunction restraining R2 to R6 from transferring the shares to the third parties. This averment amounts to an admission of transfer of shares to R2 to R6. As per the various settlement deeds and other records referred to in my order above, the petitioners have categorically admitted the transfer of shares to the respondents herein. All the alleged illegalities averred in those pleadings regarding the legality of the transfer of shares were given a go-by, when the petitioners unconditionally signed the deed of settlement. The payment of consideration is proved by the letter issued by Punjab National Bank on 20th June, 2008 [vide p. 110). The petitioners have withdrawn all the complaints in the matter of Premier Roller Flour Mills, filed by them before the RoC, Coimbatore (vide letter dated 29th April, 2008 – p. 126). Viewed in this background I see no basis for the allegation that the petitioners have signed the transfer forms and the various documents under coercion. The alleged collusion between R2 to R6 and R7 remains as mere plea. There is no believable explanation as to why the petitioners have accepted the consideration (Rs.8 crore) by encashing the demand drafts. If they had signed any of the documents under coercion or threat, they would have abstained from encashing the cheque. At no point of time the petitioners have expressed any intention to deposit the loan amount received by them to show they have been honest in performing the original three agreements. Being a party to the transfer of shares, the petitioners are estopped from challenging the transfer on the ground that it had violated certain statutory provisions under the Act. I am of the considered opinion that challenge against the transfer of shares on the ground of non-compliances of several provisions under the Act, is per se not sustainable. Once the transfer of shares are upheld it automatically follows they are not shareholders of the company on the date of filing of this CP. For all the reasons discussed above, I have no hesitation to hold that the petitioners do not satisfy the criteria under section 399 of the Act to file this petition against the respondents.

18. To summarise, the petitioners themselves admitted that they signed blank transfer forms and handed over the possession of share transfer deeds and share certificates based on the understanding in the agreements. As per the records filed, the shares now stand transferred in the name of R2 to R6. The chain of events proved in this case clearly establishes that the petitioners have relinquished their rights as shareholders of the company. The impugned share transfer was challenged in the civil suit on the ground of fraud and coercion, but unconditionally withdrawn and on the basis of a settlement deed of 2008. No liberty has been reserved to file fresh proceedings on the same subject-matter. In such circumstances a petition under section 111A is not maintainable as held in Gulabrai Kalidas Naik (supra).

He is estopped from reagitating the same issues again and again as held in Pradip Kumar Sengupta v. Titan Engineering Co. (P.) Ltd. [1998] 18 SCL 20 (CLB-New Delhi). On the respondents’ side, they have succeeded in showing that there has been a transfer of shares in their favour.

19. Even if the petitioner’s case is accepted, the petitioners are not entitled to any reliefs under sections 397 and 398, because they have derived the benefits of the arrangement between the two parties, by receiving Rs. 8 crore, through various payments spanning over a period from 2004-08, after voluntarily relinquishing their interest in the company by signing the deed of compromise, which is binding between the parties SP Valli (supra)/Gunjan Cement (P.) Ltd. (supra). The petitioners signed the deed of compromise fully aware of the legal implications.

20. As rightly argued by the learned counsel for the respondents, the company petition does not make out a case of oppression or mismanagement. The subsequent sale of the property had the approval of the Board and the valuation appears to be reasonable. No relief under section 402(f) could be granted since the CP is filed three months after the date of sale. In view of the finding recorded above, I do not think it necessary to go into details regarding the genuineness of the sale deed, undervaluation, etc. Those issues are beyond the purview of this CP, since a consideration of oppression and mismanagement arises only if the petitioners are found to be shareholders of the company. That issue being held against them the other issues pleaded in the CP do not arise. The petitioners had been indulging in forum shopping with some ulterior motive probably to extract money from respondents – M S P Plantations (supra). I have no hesitation to hold that they have approached this Bench with unclean hands and they are not entitled to any equitable reliefs’. The attempt of the petitioners to reagitate the concluded issues is nothing but an abuse of the process of the court. The company petition is devoid of any merits. Accordingly issues (b) to (e) are found against the petitioners.

21. All the interim orders passed in this CP are hereby vacated and all pending applications are closed.

22. In the result company petition stands dismissed. No costs.

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Category : Company Law (3567)
Type : Judiciary (10460)
Tags : CLB judgment (29) section 397 (31)

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