Case Law Details

Case Name : G. Vijayalakshmi Vs Tirupur Textiles (P.) Ltd. (Company Law Board, Chennai)
Appeal Number : C.P. NO. 3 OF 2007
Date of Judgement/Order : 06/09/2010
Related Assessment Year :

COMPANY LAW BOARD, Additional Principal Bench, Chennai

G. Vijayalakshmi

v/s.

Tirupur Textiles (P.) Ltd.

SMT. LIZAMMA AUGUSTINE, Member

C.P. NO. 3 OF 2007

SEPTEMBER 6, 2010

ORDER

1. This is a petition filed by two shareholders of a family company, under sections 397 and 398 of the Companies Act, 1956 (hereafter to be referred as “the Act”). The averments in the petition can be briefly stated as below :

The first respondent-company, Tirupur Textiles was incorporated on January 19, 1956 and later the articles have been amended adopting a new set of articles with effect from October 1, 1971. The textile mill, incorporated on January 19, 1956, by G. T. Krishnasamy Naidu, the grandfather of the petitioners and the second respondent, was meant to be a closely held family company. Of the original 7,500 shares, only 500 went to an outsider, P. Asher, who owned the licence for setting up the mill. Gradually, Krishnasamy Naidu’s two sons, G. T. K. Sivasubramaniam and G. T. K. Shanmugasundaram, came to own all the family’s shares in the company. After the death of Sivasubramaniam on December 10, 1984, his adopted son Vijaykrishna, the second respondent, became the managing director of the company. Shanmugasundaram continued as a director till his death on November 6, 2000. The second respondent owns 51 per cent. of the company’s paid-up capital. The petitioners who are daughters of Shanmugasundaram jointly own 31 per cent. of the shares. On March 12, 2007, they filed this company petition saying they are being excluded by the second respondent from participating in the day-to-day management of the company.

2. In 1974, the paid-up capital was Rs. 7,50,000, divided into 7,500 shares of Rs. 100 each, out of which Krishnaswamy Naidu held 2,000 shares, his wife Vijayammal held 1,000 shares and their children, Rajasekaran, Sivasubramaniam, Parthasarathy and Shanmugasundaram held 1,000 shares each. Asher was allotted 500 shares. Thus, the entire paid-up capital except 500 shares was held by the family members. The shares held by Rajasekaran was transmitted in the name of his son (Ranganathan), following the adoption of Rajasekaran by T.R. Narayanaswamy (the paternal cousin of Naidu), and thereafter he was no longer associated with the company. After the death of Krishnaswamy Naidu and his wife, the 3,000 shares held by them were equally transmitted in the name of his three sons, Sivasubramaniam, Parthasarathy and Shanmugasundaram. Thus, prior to December 31, 1974, 6,000 shares were being held by the three brothers, and the remaining 500 and 1,000 shares were held by Asher and Ranganathan, respectively. These three brothers were having 2,000 shares each in another company (Palani Andavar Mills) and Sivasubramaniam sold his 2,000 shares to Parthasarathy and in turn purchased 2,000 shares of respondent No. 1 company from Parthasarathy, and thus became a 4,000 shareholder. Later, Ranganathan sold his 1,000 shares among Sivasubramaniam and Shanmugasundaram proportionately. The company had issued bonus shares on December 31, 1974, December 31, 1975, December 31, 1985 and March 31, 1995. As on March 31, 2006, the paid-up capital of the company is Rs. 90 lakhs consisting of 90,000 equity shares of Rs. 100 each. The first petitioner holds 13,800 shares and the second petitioner holds 13,800 shares. Except P. Asher (non family member), the members on the board of the company were, Krishnaswamy Naidu and his sons.

3. The third respondent is the mother of the second respondent, the fifth respondent is a friend of the second respondent and the fourth respondent is son of P. Asher who is associated with the company after the death of his father, and he is a director from December 19, 1969, onwards. The sixth respondent is an employee of the company and functioning as executive director from February 18, 2002. The first petitioner got married and settled in Hyderabad and the second petitioner is settled in Coimbatore. After the death of the petitioners’ father on November 6, 2000, the petitioners who hold 31 per cent. stakes, have been making representations to the second respondent that the petitioners should be associated with the management of the company and they be made the directors. Several attempts were made to settle the issue amicably. As evident from the shareholding pattern and the representation on the board from time to time, each group had their nominees on the board and they have been sharing the responsibilities as also the profits. The petitioners’ father and the second respondent’s father were alone associated with the management of the company as directors from the family. The other directors were nominees of these two families and they had no say in the management of the affairs of the company. Since the petitioner’s father had no male issues, the second respondent has been avoiding the petitioners and ignoring the demand to spin off one out of the three undertakings to the petitioners. The second respondent who is the majority shareholder is having absolute control of the affairs of the company, and enjoying the movable and immovable properties of the company. The company does not declare more than 15 per cent. dividend even though it had a reserve of Rs. 9,64,50,354 as on March 31, 2006. During the past nine years the company has expanded the business by replacing the old plant and machinery with modern, sophisticated and high productive machinery. The company has implemented voluntary retirement scheme by spending substantial amount. Nine wind mills were installed at a cost of Rs. 1,840 lakhs and plant and machinery worth Rs. 2,628 lakhs was imported. Besides, Rs. 63 lakhs has been incurred towards voluntary retirement scheme. The above facts will be evident from annexures A2 and A3 documents. The petitioners have not been receiving notices for extraordinary general meeting and annual general meeting for the past six years.

4. The petitioners are not given notice of the extraordinary general meeting and annual general meetings for the past six years. They did not challenge the same since negotiations were progressing. The second respondent has treated their silence as an approval of the various acts and mismanagement of the company. The company has three units, the second respondent has master minded a scheme to settle all the workmen of Unit II and sell the 14 acres of land belonging to the company in Peelamedu. The company has constructed a bungalow worth several crores, and the second respondent is in exclusive possession of it without paying any rent. This would show that he is not bothered about the interest of the company. The second respondent, in the name of modernisation is disposing of the old machinery at book value and siphoned off the differential amount. There is nobody on the board to protect the interest of the petitioners since all the other members are the nominees of the second respondent. The second respondent as managing director is being paid a salary of Rs. 7 lakhs and the sixth respondent (executive director) is also being paid Rs. 8 lakhs towards salary and other purposes. The sixth respondent has been reappointed for a period of five years from November 1, 2005, at the extraordinary general meeting dated December 28, 2005. There are several inter-company transactions reflected in the balance-sheet for the year 2004 to 2006 which are detrimental to the interest of the company. Those companies are under the control of the second respondent and he is being benefited illegally, thus diverting the profits of the company to his group concerns. The actual income of the company is not disclosed in its books. The net profit disclosed in the balance-sheet ending March 31, 2006, is very meagre. It must earn a net profit of Rs. 5 crores per annum as against Rs. 48 lakhs shown in the balance-sheet. An investigation is required in this matter. As on December 24, 1975, the company had three subsidiaries, viz., respondents Nos. 8 and 9 and Tirupur Gin and Press P. Ltd. Currently respondent No. 8 and respondent No. 9 are no longer subsidiary companies of respondent No. 1. After the introduction of section 43A, the company became a public limited company with effect from April 1, 1976. The second respondent purchased the shares of respondent No. 8 and respondent No. 9 companies at a very nominal value and deprived the company of actual market price. These two companies along with other group companies are entering into various contracts with the company, which are detrimental to the interest of the company and minority shareholders. The eighth and ninth respondents were profit making companies even while they were subsidiaries of the company. It is not known how these two companies ceased to be the subsidiaries of the company. The entire plant and machinery, land and building of the three units are mortgaged to Andhra Bank, Tirupur and charges have been created in respect of the loan sanctioned from time to time. The petitioners did not interfere in this matter because they were awaiting a settlement by way of an exit from the company.

5. The company has been incorporated for the benefit of G. T. K. family, and as on today the family is in management of the company. The following are the seven shareholders :

1.  S. Vijayakrishna (respondent No. 2) 56,125 shares
2.  Chandrakumar P. Asher (respondent No. 4) 6,000 shares
3.  S. Krishnakumari (respondent No. 3) 150 shares
4.  R. Johendran (respondent No. 5) 75 shares
5.  G. Vijayalakshmi (petitioner No. 1) 13,800 shares
6.  S. Nanditha (petitioner No. 2) 13,800 shares
7.  K. Chelladurai 50 shares

6. After the death of the petitioners’ father, their branch has been excluded from participation in the management and enjoying other benefits as shareholders. They have a legitimate grievance of being oppressed by the majority shareholders. Their claim to be on the Board is justified. The petitioners did not raise a dispute because the second respondent has been negotiating for an amicable settlement in the sharing of the profits of the company. Taking undue advantage of this fact, the respondents had taken it for granted that the petitioners have approved the various acts of mismanagement and diversion of the funds of the company by the second respondent, to the companies in which he is interested. The company is financially sound and it will not be in the interest of the company to wind up the company. The real structure of the company is in principle a partnership, and equitable consideration is to be applied to the company. There is a denial of legitimate expectation and exclusion of one group from the management. The conduct of respondent No. 2 is unfair. The petitioners have lost confidence in the respondents and they are entitled to relief from this Bench. The conduct of the respondents is oppressive, burdensome and harsh.

7. After filing the petition, the petitioners requisitioned an extraordinary general meeting of the company to appoint them as directors, but the extraordinary general meeting held on April 28, 2007, rejected the request.

8. The petitioners seek the following reliefs :

(a)  To appoint the petitioners as directors on the board of the company ;

(b)  To amend the articles of association of the company ;

(c)  To declare transfer of shares by the company in the capital of respondent No. 8 and respondent No. 9 ;

(d)  To declare respondent No. 8 and respondent No. 9 continue to be the subsidiaries of the company ;

(e)  To appoint an auditor to investigate the books and records of the company with respect to intercompany transactions ;

(f)  To restrain the respondents from encumbering the immovable assets of the company ; and

(g)  To appoint an administrator by superseding the existing Board.

9. Respondent No. 1 and respondent No. 2 filed a counter denying all the averments alleged against them. The contents of the counter affidavit are briefly extracted as below :

The company petition is not maintainable either in law or on facts. Most of the allegations are raised just to malign these respondents. Immediately after obtaining an ex parte interim order against encumbering the properties forming part of the second unit of the company, the petitioners advertised the order in all the newspapers having circulation in Coimbatore without the leave of the Bench. They were aware that those properties were already charged to Andhra Bank and that the company had no intention to sell any of its properties. When the company was incorporated (1956) Shanmugasundaram (father of petitioners) was a minor aged 14 years, and he was inducted as a director only on June 3, 1968 and continued till his death in 2000. Petitioners Nos. 1 and 2 became shareholders of the company on June 22, 1990, when 4,000 equity shares each were transferred to them by their father. They got married during 1989 and 1993 respectively. Their present shareholding of 13,800 equity shares each include 2,000 bonus shares each issued to them during the year 1994 and a further 7,800 equity shares each, transmitted to them during June 2001, following the death of their father. Since they were married and settled, the company never envisaged any role for them in the management of the company. They have not attended a single annual general meeting despite prompt receipt of notices, nor opposed any decisions of the company. They waited six long years to allege that they have not received notices of the general meetings of the company. The financial track record will disprove the allegations of mismanagement during the five years prior to the filing of this petition. The profit was continuously increasing and dividends were also declared for the four years prior to the filing of this petition. The profits of the company was continuously ploughed back to modernise the plant and machinery. In the absence of specific allegations, the respondents are unable to respond to several statements in the company petition.

10. The fact that the company was started by the grandfather (G.T.K. Naidu) of the petitioners and respondent No. 2 is not disputed. Rajasekaran was the eldest son of G.T.K. Naidu. Even after his adoption by T.R.N. Naidu on June 10, 1946, he was associated with all the enterprises of G.T.K. Naidu and family. Rajasekaran passed away on November 28, 1962 and his shares were transmitted in favour of his two minor sons on February 27, 1964. The petitioners have failed to refer to the reconversion of the company into a private limited company, upon the withdrawal of the operation of section 43A by the Companies Act (Amendment) Act, 2000. It is denied that respondent No. 3, respondent No. 4, respondent No. 5 and respondent No. 6 are the “Yes men” of the second respondent. It is denied that the petitioners have been making representations to the second respondent asking for a role in the management of the company. After the marriage, the first petitioner settled down at Hyderabad and the second petitioner at Coimbatore, without showing any inclination to take part in the management of the company. It is denied that the husband of the first petitioner had approached the second respondent with any proposal. By the time the petitioners became owners of 27,600 equity shares during the year 2001, the company was being managed by professionals and independent directors who had little or no stakes in the company. The company progressed under the leadership of the second respondent who has been the managing director since 1985. The father of the petitioners had no objection in appointing the second respondent as the managing director and he had raised no complaints against respondent No.2 till his death. The shareholding pattern has remained unchanged since June, 2001. The plea for participation in the management is inconsistent with the plea for exit. Till the filing of the company petition no communication was sent to the managing director, nor they took any remedies available to them under the Companies Act. The second respondent has been permitted by the members of the company to use the office car, as per the extraordinary general meeting held on February 21, 2003. The company whose turn over is around Rs. 100 crores, owns several cars, but that fact cannot be described as an act of oppression or mismanagement. The petitioners are not denying the declaration of dividend, modernisation of the plant and machinery and the implementation of the VRS Scheme by the company. It is denied that the petitioners have not been receiving notices of the general meetings of the company. They attended the extraordinary general meeting held on February 23, 2001, through their proxies. Soon after the 2003 annual general meeting the dividend cheques were received by the petitioners through post and they were encashed. The alleged settlement talk is no justification for not raising the allegations levelled against the company in this petition at the proper forum. The petitioners have conceded to all the business conducted at the general meetings since the year 2001. The question of a fair settlement did not arise since the petitioners had never taken up the issue with these respondents. With an intention to expand the second unit, the company at Coimbatore had called for quotations from various labour training institutions specialised in training labourers for spinning mills, as early as in December, 2006. The company does not own any bungalow at Coimbatore, and respondent No. 2 is residing in his own house. The petitioners who just inherited the shares from their father and who did not contribute anything to the company’s growth is not entitled to make this type of allegations against respondent No. 2 whose efforts have led the company to profits. When respondent No. 2 took over on March 31, 1985, the owned funds of the company was Rs. 243 lakhs which had increased to Rs. 1,054 lakhs as on March 31, 2006. The petitioners now want a share in the spoils, without realising that they are also part of owners of the company’s assets. The accounts of the company are prepared and maintained in compliance with accounting standards and regularly audited by the statutory auditors without any adverse remarks.

11. All the old machinery had been sold at market value and duly reflected in the books of account. For the years from 2001 to 2006, the company had shown profits on sale of assets aggregating to Rs. 425 lakhs which has been credited to the profit and loss accounts, as evident from the copies of annual reports. The petitioners cannot expect that the managing director and executive directors should work without remuneration. Respondent No. 6 (the executive director) is a professional with 50 years experience in Textile business. The inter co-transactions are transparently disclosed in the accounts and the secretarial compliances are duly certified by a practising company secretary, whose report is annexed to the director’s report. There is no basis for the allegations that the respondents are diverting the profits of the company to his group concerns and that section 297 of the Act is not complied with. The petitioners are incapable of understanding the balance-sheet, when they allege that the net profit for the year 2005-06 is Rs. 47.88 lakhs. They omitted to refer to the aggregate free reserves amounting to Rs. 9 crores. The actual cash profits earned during the end of March 31, 2000, is Rs. 12.58 crores and not Rs. 48 lakhs after considering an amount of Rs. 12.10 crores provided for depreciation. The disinvestment of the shares held by the company in its erstwhile subsidiaries (respondent No. 8 and respondent No. 9) took place three decades ago (1977), when the second respondent was just a thirteen year old boy. That decision was taken by the then directors including the petitioners’ father. The minutes of the meeting held on October 3, 1977, is produced as annexure to prove that the sale of shares was effected at a value much higher than the net break up value of shares. The valuation of shares of respondent No. 8 and respondent No. 9 is detailed at paragraph (j) of the counter. The sale was effected at Rs. 150 per share while the net break-up value is much low (Rs.97 and Rs. 103 respectively). While the entire land and building of all the three units have been mortgaged with the bank, the petitioners falsely allege that respondent No. 2 is attempting to sell the land in which unit No. 2 is located. It is false to allege that there was delay in transmitting the shares of their father. Their father expired on November 6, 2000, but the request for transmission was made only on June 6, 2001, and the company transmitted the shares on June 11, 2001 (vide annexure 8).

12. It is admitted that the company had been incorporated as a private limited company consisting of family members of G.T.K. Naidu and his sons for the benefit of the family, and after the death of G.T.K. Naidu and his wife, their shares were equally divided among the three sons who were involved in the day-to-day management of the company. But it is a fact that the company had come a long way, thereafter. After the initial phase, the company is being managed by professionals with an impressive track record. It is not denied that the petitioners’ father was associated with the management of the company throughout his life time. But that association was on the strength of his experience in textile industries, and not on the basis of his shareholdings. Besides lack of knowledge and experience in textile business, none of the petitioners sought a place in the board soon after the death of their father. These respondents never attempted to dilute the shareholding strength of the petitioners. If there was a tacit under-standing at the time of incorporation regarding proportional representation in the management, the petitioners would have automatically found a place in the management. Had there been such an understanding, the petitioners’ father would have initiated such steps during his life time. But that is not done so. Besides, till the filing of this company petition in 2007, the petitioners never came up with any claim of proportional representation in the management. The grievance of the petitioners is merely personal and has nothing to do with oppression of the minority shareholders which had never taken place. The petitioners want to pierce the corporate veil to treat the entity as a mere partnership. It is an after thought borne out of misguided advice and personal animosity. The so called legitimate expectations were never projected by the petitioners. The petitioners have failed to establish any oppression of the minority and mismanagement of the affairs of respondent No. 1 company by respondent No. 2. Conflicting statements are made by seeking an exit from the company, while pleading for management participation. There is no prima facie case made out by the petitioners. Balance of convenience is not in their favour.

13. Respondent No. 3 filed a counter affidavit adopting the counter affidavit of respondent No. 1 and respondent No. 2. She is the mother of the second respondent. She says that the second respondent, who, had taken over the management of the company at the age of 20, could lead the company to success by hard work and professional efficiency. The demand of the petitioners to divide the units will only destroy the company. Though the four sons were shareholders of the company during the initial years, in the course of time the other branches transferred their interest to the branch of Sivasubramaniam (father of respondent No. 2 and husband of respondent No. 3) for valuable consideration and the transfers were duly approved by the board of directors. She also denies that any request was made by the petitioners from 2000 to 2007 for representation in the director board.

14. Respondent No. 4 filed a counter more or less adopting the counter of second respondent. It is categorically averred that at no point of time the business of respondent No. 1 was carried on the principle and in the nature of partnership. He is the director of the company for more than 50 years. He inherited his shares from his father, one of the original directors. His father had the license to commence the business and the same was transferred by him to the company. Respondent No. 4 says that he is an independent director. It is stated that the decision to invest in respondent No. 8 and respondent No. 9 and other companies referred to in the company petition and the subsequent decision to divest shares occurred during the time when the father of the petitioners and other directors were on the board, and in accordance with the decision of the board. According to him the company has been earning profits and declaring dividend on almost all the years from 1991 to 2006. He further states that there was no understanding between the parties with regard to the appointment of directors including participation in the management of the company.

15. During the pendency of the company petition, respondent No. 4 filed a petition to transpose him as one of the petitioners. That petition was dismissed by this Bench. Later, C. A. No. 101 of 2008 was filed to delete him from the party array. This Bench allowed that application. However on appeal, the High Court set aside the order of this Bench, observing that the application is an abuse of the process of the court. Later respondent No. 4 filed a C. A. No. 28 of 2009 seeking a direction that respondent No. 2 may be directed to purchase his shares and thereby allow his exit from the company.

16. The fifth respondent (chartered accountant of the company co-opted to the board during 1989) filed a counter alleging that the attempt of the petitioners is to ruin the company. He adopts most of the averments in the counter of respondent No. 1 and respondent No. 2. It is alleged that the allegations regarding mismanagement relate to past acts which even relate to the year 1977, when the petitioners’ father was alive. Neither respondents Nos. 2 to 6 nor their group diverted profits at the expense of the company. None of the transactions referred to in the petition are detrimental to the interest of the company and its shareholders. Respondents Nos. 8 and 9 filed a counter stating that they ceased to be the subsidiaries of the first respondent-company nearly three decades ago, during 1977, when the first respondent-company took a strategic decision to disinvest the shares held in them and that they are totally independent companies having a business of their own.

17. The petitioner filed a rejoinder to the counter, reiterating the averments in the company petition, as well as denying the averments in the counter. As shareholders, the petitioners have certain rights. After the death of their father, except one annual general meeting held on February 23, 2001, the petitioners did not attend any annual general meeting or any notice was received by them. At the request of respondent No. 2, the petitioners gave blank proxies in the names of his trusted employees, so that even the articles could be amended without any objection. The publication of the ex parte order was to protect the interest of the company. The petitioners did not want to precipitate in the matter, hence no notice was issued about the non-receipt of the notices and nomination in the board. Encashment of the dividend does not prove that notice of the annual general meeting was served on them. The present directors have no stakes in the company. Respondent No. 6 who was the one time cashier has been promoted as an executive director, besides the sale of yarn by the company to Samarat Knitters wherein respondent No. 6 is interested. The second respondent’s mother (respondent No. 3) who is not having any experience is made a director. While the group of respondent No. 2 enjoys all the privileges and benefits out of the company, the petitioners are to be satisfied with the dividend which they declare. The company is not entering the transactions in which the directors are interested. The petitioner’s father was scrutinising such transactions during his life time. The company was put on track by the erstwhile directors. The report of the statutory auditor did not go into the intricacies of non-compliance of sections 297 and 299 of the Act. He did not point out the non-compliance of section 301 of the Act, to the shareholders. The Andhra Bank is made a party to the company petition, to put them on notice about the present proceedings. The petitioners and respondent No. 2 are having major stakes in the company, so an implied understanding is existing that each of them will have representation in the board. Representation in the board is one of the normal, legitimate expectations. One family cannot ignore the interests of the other family. In reply to the counter filed by respondent No. 3, respondent No. 4 to respondent No. 6, separate rejoinders are filed more or less in line with the rejoinder against respondent No. 1 and respondent No. 2. The petitioners denied that their presence in the board will affect the smooth functioning of the company. Respondent No. 4 does not have any expertise in textile industry. None of them are experts.

18. The respondents filed a reply to the rejoinder and produced annexures A to E to prove that (1) notices of annual general meeting/extraordinary general meeting had been regularly sent to the petitioners ; (2) the second petitioner had on September 23, 2004, acknowledged the receipt of annual report and encashed the dividend; (3) Respondent No. 2, respondent No.4 and respondent No. 6 had brought in about Rs. 614 lakhs by way of fixed deposit, besides their personal guarantee ; and (4) that respondent No. 6 had been re-appointed as executive director in the extraordinary general meeting held on April 12, 2002, considering his association with the company (40 years) and vast experience in the industry. It is stated that respondent No. 5 is in the board since February 11, 1989, considering his vast experience in banking and finance. The respondents have denied all the averments made in the rejoinder filed by the petitioners.

19. On the basis of the above pleadings the following issues arise for consideration :

(i)  Whether the first respondent is a family company to which principles of quasi partnership applies

(ii)  Whether the petitioners have established a case of oppression and mismanagement of the affairs of the company by the second respondent and his associates ;

(iii)  Whether the fourth respondent is entitled to any reliefs sought for in C. A. No. 28 of 2009 ; and

(iv)  To what reliefs and costs.

Cases relied on by the petitioners :

20. K.N. Bhargava v. Trackparts of India Ltd. [2000] 104 Comp. Cas. 611 (CLB). In a proceedings under section 397 or 398, even if allegations are not established, more so in a family company to protect the interest of the shareholders and the company, appropriate directions should be given, especially when there are irreconcilable differences between major groups of shareholders and that the most appropriate direction to put an end to the disputes between the parties was division of assets of the company.

Vijay Krishan Jaidka v. Jaidka Motor Co. Ltd. [1996] 10 SCL 244 (CLB – New Delhi) Distribution of business and assets as in case of dissolution of partnership is permissible in a family company which are bound by certain understanding and faith which brought them together.

Micromeritics Engineers (P.) Ltd. v. S. Munusamy. [2002] 38 SCL 846/[2003] 116 Comp. Cas 465 (Mad.) The Company Law Board has power, instead of directing purchase of shares by one group from another group and can direct division of companies among the parties so that compliance of abuse of power would be prevented in future.

Yashovardhan Saboo v. Groz Beckert Saboo Ltd. [1995] 83 Comp Cas 371 (CLB – New Delhi) Even if a case of oppression was not established the Company Law Board has power to give relief to do substantial justice between the parties in case of dead lock in the management.

Ashok Kumar Oswal v. Panchsheel Textile Mfg. Trading Co. P. Ltd. (No. 1)). [2002] 110 Comp Cas 800 (CLB)

S. Ajit Singh v. DSS Enterprises P. Ltd.. [2002] 109 Comp Cas 597/[2001] 34 SCL 547 (CLB – New Delhi)

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Mrs. Sushma Harish Sharma v. Hotel Horizon P. Ltd.. [2007] 139 Comp Cas 261/1 CL on line 145 (CLB – New Delhi)

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Chandrakant Kantilal Shah v. National Refinery P. Ltd. [2004] 51 SCL 387 (CLB – New Delhi)

Jagjit Singh Chawla v. Tirath Ram Ahuja Ltd. [2004] 119 Comp Cas 385/36 SCL 606 (CLB – New Delhi)

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Probir Kumar Misra v. Ramani Ramaswamy [2010] 154 Comp. Cas. 65/104 SCL 174 (Mad)

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Binod Kumar Kesera v. Nandlall & Sons Tea Industries (P.) Ltd. [2010] 154 Comp. Cas. 519/1 CL Online 175 (CLB-New Delhi)

Brownlow v. GH Marshall Ltd. [2000] 2 BCLC 655

O’Neil v. Philips [1999] 97 Comp Cas 807 (HL);

Shoe Specialities (P.) Ltd. v. Standard Distilleries & Breweries (P.) Ltd. [1997] 90 Comp Cas 1 (Mad)

Syed Mahomed Aliv v. R. Sundaramurthy [1958] 28 Comp Cas 554 (Mad)

Scottish Co-operative Wholesale Society Ltd. v. Meyer [1959] 29 Comp Cas 1 (HL)

Bennet Coleman and Co. v. Union of India [1977] 47 Comp Cas 92 (Bom)

Nurcombe v. Nurcombe [1984] BCLC 557 at page 563.

A Company (No. 002015 of 1996), In re [1997] 2 BCLC 1, at pages 1-2, 23-25.

Dr. V. Sebastian v. City Hospital P. Ltd. [1985] 57 Comp Cas 453 (Ker.)

Srikanta Datta Narasimharaja Wediar v. Sri Venkateswara Real Estate Enterprises P. Ltd. [1991] 72 Comp Cas 211,231,232 and 237 (Kar.),

Sangramsinh P. Gaekwad v. Shantadevi P. Gaekwad [2005] 123 Comp Cas 566 (SC)

Open Global P. Ltd. v. Opera Hospital Medical & Research Centre P. Ltd. [2008] 145 Comp. Cas. 769, 793-794/[2010] 1 CL on line 148 (CLB – New Delhi).

K.S. Mothilal v. K.S. Kasimaris Ceramique (P.) Ltd. [2007] 135 Comp. Cas. 609, 653-654 (CLB)

Rahul Shah v. AVI Sales P. Ltd. [2008] 141 Comp. Cas. 505/[2010] 1 CL online 137 (CLB – New Delhi)

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V.S. Krishnan v. Westfort Hi-Tech Hospital Ltd. [2008] 142 Comp Cas 235/83 SCL 44 247 (SC)

Mrs. Grimolyn Kagoo v. Gees Marine Products P. Ltd. [2008] 146 Comp Cas 211 at 227-228, 230, 231 (CLB)

Hind Overseas (P.) Ltd. v. Raghunath Prasad Jhunjhunwalla [1976] 46 Comp Cas 91.

S.B.P. Anand Mohan v. Graphic Impressions (Mad.) Ltd. [2004] 120 Comp Cas 265/41 SCL 166, 270 (CLB – Chennai)

M.S.D.C. Radha Ramanan v. Shree Bhaarathi Cotton Mills P. Ltd. [2006] 130 Comp Cas 414/[2005] 63 SCL 21 (CLB – Chennai) at 426 (CLB)

Mrs. Bacha F. Guzdar v. CIT [1955] 25 Comp. Cas. 1 (at paragraph 7)

Mrs. Archana Bansal v. NEPC India Ltd. [2007] 6 MLJ 648 (paragraph 27 at page 656).

Ravi Raj Gupta v. Hans Raj Gupta & Co. (P.) Ltd. [2009] 151 Comp Cas 502, 505-506 (Delhi)

Delstar Commercial & Financial Ltd. v. Sarvottam Vinijaya Ltd. [2003] 113 Comp. Cas. 642/[2001] 32 SCL 413 (CLB – New Delhi)

Smt. Hetal Alpesh Muchhala v. Adityesh Educational Institute (P.) Ltd. [2009] 149 Comp. Cas. 241/[2010] 1 CL online 123 (CLB – New Delhi) 257-258 (CLB)

Northern Projects Ltd. v. Blue Coast Hotels & Resorts Ltd. [2007] 140 Comp Cas 300, 306 (CLB)

BNS Steel Trading (P.) Ltd. v. Orissa Sponge Iron & Steel Ltd. [2010] 154 Comp. Cas. 357, 377 /1 CL online 231 (CLB – New Delhi).

Jalandar Chakrabortry v. Power Tools & Appliances Co. Ltd. [1994] 79 Comp Cas 505, 526-528 (Cal)

Vardjmam Dye-Stuff Industries (P.) Ltd. v. Mrs. M.R. Shah [2009] 149 Comp Cas 345 at 349-352 (Bom.)

Ch. Srihari Rao v. Gopal Automotive Ltd. [1999] 96 Comp. Cas. 493/[1998] 17 SCL 1313 (CLB – New Delhi)

Government of West Bengal v. Chatterjee Petrochem (Mauritius) Co. [2008] 143 Comp Cas 837 (Cal).

22. The first issue is whether respondent No. 1 is a family company to which principles of quasi partnership applies. The first respondent, Tirupur Textiles was incorporated on January 19, 1956. The company is engaged in the spinning of yarn from cotton. The following were the original subscribers :

(1)  G. T. Krishnaswamy Naidu (father)-500 shares (of Rs. 100 each).

(2)  P. Asher-500 shares (non-family) (of Rs. 100 each).

(3)  T. N. Rajasekaran (son-given in adoption in 1946)-1,000 shares (of Rs. 100 each).

(4)  G. T. K. Sivasubramaniam (son)-500 shares (of Rs. 100 each).

23. Except P. Asher, other subscribers were members of the family. Currently, the above subscribers are no more. The paid-up capital prior to bonus issue (1974) was Rs. 7,50,000 (7,500 shares of Rs. 100 each), out of which Krishnaswamy Naidu held 2,000 shares, his wife Vijayammal held 1,000 shares and their children, Rajasekaran, Sivasubramaniam, Parthasarathy and Shanmugasundaram held 1,000 shares each. Asher was allotted 500 shares. Thus, the entire paid-up capital except 500 shares were held by the family members. Rajasekharan was given in adoption on June 10, 1946. He died on November 28, 1962. Thereafter, on February 27, 1964, the shares held by Rajasekaran were transmitted in the name of his son (Ranganathan). After the death of G.T. K. Naidu and his wife the 3,000 shares held by them were equally transmitted in the name of his remaining three sons : Sivasubramaniam, Parthasarathy and Shanmugasundaram. Thus, prior to December 31, 1974, 6,000 shares were being held by the three brothers, and the remaining 500 and 1,000 shares were held by Asher and Ranganathan, respectively. These three brothers were having 2,000 shares each in another company (Palani Andavar Mills) and Sivasubramaniam (father of respondent No. 2) sold his 2,000 shares to Parthasarathy and in turn purchased 2,000 shares of respondent No. 1 company from Parthasarathy, and thus he became a majority shareholder of respondent No. 1. Later, Ranganathan sold his 1,000 shares among Sivasubramaniam and Shanmugasundaram proportionately. Sivasubramaniam was the managing director till his death on December 10, 1984. Respondent No. 2 is the adopted son of Sivasubramaniam, and he was made the director on October 11, 1984, and managing director on January 7, 1985. The bio-logical father of respondent No. 2 is Parthasarathy. P. Asher died on October 4, 1973, following which his shares were transmitted to his son (respondent No. 4), and made a director, and continuing as director. The petitioners are the daughters of Shanmugasundaram, and jointly they hold 31 per cent. shares in the company. Their father was a minor at the time of incorporation of the company and he was made a director in 1962 and continued as director till his death on November 6, 2000, following which his shares were transmitted in the name of the two petitioners without any delay. The company has been reconverted into a private limited company with effect from March 23, 2001. As on March 31, 2006, the authorised capital is Rs. 90 lakhs, consisting of 90,000 equity shares of Rs. 100 each.

24. The complaint in the company petition is that the petitioners are not given any representation in the management of the company. After the filing of the company petition a resolution was moved in the extraordinary general meeting held on April 28, 2007, to appoint the petitioners or their representatives as a director. But that resolution was defeated. So, they ascribe that one branch of the family is being excluded and oppressed by the majority stake holder (second respondent). They alleged that the other directors of the company (respondent No. 3, respondent No. 5 and respondent No. 6) are independent directors appointed by respondent No.2 and hence they will act only according to the direction of respondent No. 2. Because they are not given a board seat, the present contention is that they should be allowed to exit either by giving one of the three units of the company or to direct the company or respondent No. 2 to purchase their shares by appointing an independent evaluator. During the pendency of this petition the valuer appointed by the petitioners reported the value at Rs. 39,000 per share whereas respondent No. 2 suggested Rs. 500 per share. Moreover respondent No. 2 was not willing to purchase the shares of the petitioners. Hence a settlement did not materialise.

25. According to the petitioners respondent No. 1 is a family company for all purposes and the criteria is as to who are the shareholders, and not the board members. It is pointed out that the company was incorporated in 1956 by the grandfather of the present contestants, with himself and his two sons as major shareholders. Out of 2,500 shares, 2,000 shares were held by family and the remaining 500 shares were given to one Asher in whose favour there was a licence to start the spinning mill. It is also pointed out that as per articles of association, apart from Asher (non-family member) the first directors were from the family. It is also pointed out that 99 per cent. of the paid-up capital of the company is held by the family, and that all the family members were directors till their life time. Relying on the averments at page 35 of the reply to rejoinder filed by the second respondent, it is pointed out that the second respondent has impliedly admitted that the company has been promoted by a family.

26. According to the respondents, a perusal of the history of the company will show how the petitioner as well as the second respondent came to acquire their shares and how the board of directors was constituted from time to time. It is pointed out that the company was originally formed by four technocrats, namely, G.T.K. Naidu (who was the managing agent of M/s. Palani Andavar Mills Ltd.), Shri P.D. Asher (a leading cotton merchant and managing agent of M/s. Asher Textiles Ltd.), T.N. Rajasekaran (managing agent of M/s. Kumaran Mills Ltd.) and Shri Sivasubramaniam (son of G.T.K. Naidu and a textiles technologist from M/s. Volton University in UK) (vide articles of association). It is urged that the second respondent happened to hold a majority of the shares not by any design, but that the shares devolved upon him from his grandparents, biological father (Parthasarathy) and adopted father. It is on record that irrespective of the shareholding pattern the company was being professionally managed right from its inception. It is pointed out that the family members found their place in the board purely on the basis of merit and their efficiency to contribute to the growth of the company. This is evident from the fact that the father of the petitioners became a director only on June 3, 1968, 8 years after the date on which he attained majority. It is pointed out that K. Parthasarathy, the third son of G. T. K. Naidu did not continue as director till his death and that he had relinquished his office four years before his death. A list of professionals appointed by the company from 1957 onwards is extracted in the written submissions filed by the respondents to argue that the Board seat was not reserved for family members on representative basis. The list includes several non-family directors. Therefore, it is contented that though the company is promoted by three families and has representatives of three families as its shareholders, it has been professionally managed, and hence there was never any understanding or tacit consent stipulating proportional representation of the shareholders on the board. It is the specific case of the respondents that if such an understanding was there, one of the petitioners would have automatically become a director of the company.

27. I see merit in the contentions of the respondents. The articles of association are silent regarding the representation in the board. The second respondent herein has been appointed as the managing director of the company on January 7, 1985, following the death of his father Sivasubramaniam who was the then managing director. The petitioners’ father was appointed as director on June 3, 1968 and continued as director till his death on November 6, 2000. G.T.K. Naidu had four sons and one daughter. When the company was incorporated in 1956 his two sons, K. Sivasubramaniam (father of respondent No. 2) and Rajasekaran (given in adoption in 1946) alone were made the subscribers to the company, apart from a non-family member, P. Asher. The first directors were the above four subscribers, besides Vijayammal, wife of G.T.K. Naidu. Rajasekaran was given in adoption on June 10, 1946. But he continued as a director till his death in 1962, and thereafter his shares were transmitted in the name of his son (Ranganathan). Later, shares were allotted to Vijayammal, Parthasarathy and Shanmugamundaram who are the wife and other sons of G. T. K. Naidu at 1,000 shares each. Following the death of G. T. K. Naidu and his wife their shares were transmitted among Sivasubramaniam, Parthasarathy and Shanmugasundaram at 1,000 shares each. Sivasubramaniam purchased Parthasarathy’s share (2,000) in exchange for his 2000 shares in another company. Ranganathan also sold his shares to Sivasubramaniam and Shanmugasundaram in proportion to their holdings in the company, i.e., 1,400 shares to Sivasubramaniam and 600 shares to Shanmugasundaram. Thus, in the course of time, the entire family shares are now being held by the petitioners’ group and the second respondent’s group out of which respondent No. 2 is having majority shares. Besides, 6,000 shares are held by P. Asher (respondent No. 4) and nominal shares held by respondent No. 3, respondent No. 5 and respondent No. 6 who hold beneficial interest in such shares through respondent No. 2.

28. On a perusal of the history of the family, in relation to the functioning of the company it is difficult to find that a right was impliedly reserved for family members to be on the board as of right. As pointed out by the respondents, the original allotment of shares among the four sons gradually changed in the course of time due to reasons already mentioned. Two out of the four sons are no longer members of the company. Evidently and admittedly respondent No. 1 is a family company. As already observed, there is nothing on record that each branch of family would be given directorship permanently. From the history of the company spanning over a period of more than 50 years, no material is available even to presume that there was a basic understanding between the parties for equal participation in the management of the company. This is not a case where the petitioners and respondent No. 2 have equal stakes in the company. So there is no question of a dead lock. Regarding the appointment of directors of the company, I am of the view that, the appointments are done in accordance with the articles of association and the principles of legitimate expectation cannot be extended to the facts of this case. Therefore, I am of the view that the principles of dissolution of partnership cannot be invoked in this case. Point is accordingly found.

29. The next issue is regarding the alleged oppression and mismanagement of the affairs of the company by the second respondent and his associates. Learned counsel for the petitioners submitted that the sons of G. T. K. Naidu were on the Board so long as they were holding shares, and that no one can become a director without the support of the family members since more than 90 per cent. of the shares are being held by the family members. It is alleged that the petitioners have made repeated attempts for settlement either by getting a board seat or an exit by giving any of the undertakings to them in lieu of their shares. It is pointed out that the petitioners approached Ramesh Natarajan who is the statutory auditor of the company, before the filing of this company petition and the efforts taken by him had also failed. As already observed, the requisition to appoint the petitioners as directors has been defeated at the extraordinary general meeting held on April 28, 2007. So it is their case that they are excluded from the management of the affairs of the family company which amounts to oppression. Several allegations are raised in the petition and it goes like this :

(1)  the delay in transmitting the shares held by their deceased father,

(2)  non-receipt of notice of the annual general meeting,

(3)  respondent No. 2 is using a bungalow constructed by the company,

(4)  the land on which the second respondent’s house is located was sold to him by the company at a price lower than the market value,

(5)  the company sold the old machinery much below market value,

(6)  the company’s profit is less than similarly situated spinning mills,

(7)  non-compliance of section 297 regarding contracts entered into with the company in which the second respondent is interested,

(8)  the shares held by the company in the two subsidiary companies (respondent No. 8 and respondent No. 9) were transferred to the father of respondent No. 2 and his family in 1977 without any necessity,

(9)  the company has been selling yarn to some of the companies in which respondent No. 6 and respondent No. 2 are interested,

(10)  the fourth respondent had taken a stand in support of the petitioners and an application is filed by him as C. A. No. 28 of 2009 for seeking similar reliefs claimed by the petitioners herein.

30. The respondents have practically admitted that respondent No. 1 is a family company but they have emphatically denied that the exclusion of the petitioners from the management will amount to oppression. It is pointed out that the petitioners never expressed their willingness or desire to participate in the management, after the death of their father in the year 2000. Another contention is that there is no provision in the articles, or any agreement among the shareholders stipulating proportional representation of the shareholders on the board, and that if the alleged proportional representation was being practised by the company, the petitioners would have automatically become a director upon the demise of their father. They point out that even the petitioners’ father became a director about 12 years after its incorporation. The post company petition requisition to appoint the petitioners as director was defeated by the shareholders since they were of the view that the petitioners who have levelled serious allegations against the existing management team and attempted to lower the esteem of the company among public, are unfit to become a team member. They alleged that the petitioners acted against the interest of the company by publishing the interim order passed by this Bench, without obtaining the leave of this Bench, and bringing such persons on the board will not be conducive to the growth of the company. The lack of experience of the petitioners in textile industry and corporate management was reportedly another reason to defeat the requisition. It is pointed out that the petitioners who have been receiving the dividends and bonus shares periodically, stayed away from the affairs of the company on their own free will. According to them despite regular receipt of notices in time, the petitioners did not attend the general meeting of the company for the past six years prior to the filing of the company petition. It is alleged that there is no bona fide in the contention that they were keeping quiet since they did not want to precipitate the matter. All the directors except respondent No. 6 were on the board even during the life time of the petitioners’ father. Respondent No. 6 was made a director in the year 2002 in recognition of his contribution to the company. The respondents alleged that the allegations regarding oppression are absolutely false. They point out that the petitioners had, during the year 1996, withdrawn the fixed deposits (Rs. 10,32,000) kept with the company, and thereafter never contributed anything towards the growth of the company which reached its present glory by the sweat and toil of respondent No. 2 and other respondents. They point out the inconsistency in claiming at the same time, representation in the board, and beneficial interest on proportionate basis, without showing any willingness to share the burden. My attention is invited to annexure C attached to the reply to the rejoinder, to argue that respondent No. 2, respondent No. 4 and respondent No. 6 have collectively placed fixed deposits to the tune of Rs.614.36 lakhs (as on March 31, 2007), besides the personal guarantee (over Rs. 100 crores-annexure D) as security by respondent No. 2. It is pointed out that the intention from the very beginning was that the company should be run by professionals on its board, otherwise the second respondent and his mother alone could have carried on as the directors, and there was no need to appoint others and keep them as ” Yes men” . It is pointed out that the interest of the petitioners is well protected by respondent No. 4, who is still supporting the petitioners. The petitioners were also agreeable to appoint respondent No. 4 as a director. It is therefore pointed out that the petitioners treat respondent No. 4 as their nominee in the board. It is important to note that respondent No. 4 has filed a petition seeking similar reliefs claimed by the petitioners.

31. The contention of the respondents is that the petitioners have given a go by to the alleged oppression and mismanagement while finally limiting their claim to an exit either by selling their shares or allotment of one of the divisions of the company in lieu of their shares. The respondents have denied that the petitioners have made any representation till the filing of the company petition for a board seat or a role in the management of the company. They also denied that the petitioners were given an impression that they will be given an honourable exit route and that negotiations were in progress for an amicable settlement. The conduct of the petitioners according to them disentitles them from claiming any equitable relief as provided under the Companies Act. While the company petition was moved, this Bench issued an interim order restraining the respondents from selling the property in which the second unit of the company is located. Evidently the petitioners gave a public notice, in the newspapers, alerting the public that the property belonging to the company cannot be alienated, without obtaining the leave of this Bench. According to the respondents the petitioners were aware that the property was mortgaged in favour of the Andhra Bank and it is ascribed that the real intention of the petitioners is to lower the esteem of respondent No. 2, and malign the company before the public. It is pointed out that the petitioners have already received from the company whatever documents to which they are entitled as shareholders.

32. Respondents Nos. 2, 3, 5 and 6 also submitted that the petitioners have failed to prove the oppression and mismanagement alleged against them. It is pointed out that no specific allegations are pleaded against them in the petition. According to them the general allegation that they are acting as “Yes men” to respondent No. 2 is without any basis. Similar allegations were levelled against respondent No. 4 also. Currently, after the filing of the company petition the petitioners have given up their case against the fourth respondent. Since the complaint against the fourth respondent is given up, it has to be presumed that the petitioners have given up their case against these respondents also. Several alleged acts of oppression and mismanagement pleaded in the company petition, have occurred during the life time of the petitioners’ father, or rather the petitioners were not even shareholders at that time. It is pointed out that no continuing acts of oppression and mismanagement have been proved against these respondents. According to them, the petitioners failed to establish that the facts complained of are grounds for winding up of the company. It is also argued that no relief under section 402 is allowable since the oppression or mismanagement is not established. According to them the application filed by the fourth respondent seeking similar reliefs in the company petition is not allowable in view of the order dated October 24, 2009, passed by the High Court of Madras. Therefore they pray for dismissal of the company petition as well as C. A. No. 28 of 2009.

33. As already observed, G.T.K. Naidu was the managing director of the company till his death, followed by his son Sivasubramaniam. Sivasubramaniam died on December 10, 1984. He was followed by respondent No. 2 who was made a director on October 11, 1984 and appointed as managing director on January 7, 1985 and continuing ever since. As per section 265 of the Act, it is the option of the company to adopt proportional representation for the appointment of directors. As per the articles of association of the company (clause 8), the first directors shall be entitled to hold the office of directorship for life or until tendering voluntarily resignation which ever is earlier. Clause 9 says that the number of directors in the company shall neither be less than two nor more than ten. Clause 10 provides that any vacancy in the office of directorship may be filled up by the board of directors and any persons so appointed shall be entitled to hold such office till the end of his life or until he resigns. So the articles of association does not specify that there must be a representation in the board from each branch of the family. It is relevant to note that the father of the petitioners was not one of the first directors of the company. He was made a director on June 3, 1968, i.e., 12 years after the company was incorporated. As per the articles, absolute power is vested with the board of directors to fill up the office of directorship. That being the position, there is no basis for the contention that the petitioners are entitled to a legitimate expectation for representation in the board. Respondent No. 4 (son of P. Asher, one of the original director/subscriber) a non-family member is a director for the last more than 40 years. As rightly pointed out by the respondents, a corporate management is maintained throughout the history of the company. In such circumstances, it cannot be held that there is a denial of legitimate expectation and exclusion of one group from the management of the company. At the final stage, Sivasubramaniam (father of respondent No. 2) and Shanmugasundaram father of the petitioners were the only members in the board, from the family of G. T. K. Naidu. There is no basis for the averment that the other directors were nominees of these two families. As rightly pointed out by the respondents, respondent No. 5 and respondent No. 6 are persons with 50 to 60 years experience in textile industry. The petitioner’s father died on November 6, 2000. The petitioners have no case that their father had made any request to make the petitioners or their nominee as a director in the company. There is also no material to hold that the board seat was provided on the basis of the shareholding pattern. There is also no material on record to hold that there was a tacit consent or understanding in the family that the petitioners’ branch would be given directorship permanently. Hence the decision in Vijay Krishan Jaidka‘s case (supra), is not applicable to the facts of this case. As already observed, the articles of association does not provide that each branch should be represented in the board of directors.

34. As per the articles, the transfer of shares in the company shall be in the discretion of the directors and the number of members (excluding persons who are in employment) shall be limited to fifty. Even the initial allotment of shares has not been made uniformly, among the sons of G.T.K. Naidu. It is relevant to note that in 1956 Rajasekharan ceased to be a son of G.T.K. Naidu, since he was given in adoption in 1946 itself. It is evident that the company at no point of time followed the principle of proportionate representation even in the allotment of shares. It is relevant to note that the second respondent’s father purchased the entire shares of another branch (Parthasarathy) and thus became a majority shareholder. The holdings of shares among the two groups were not uniform. The petitioners have only 31 per cent. stake in the company and there is no equality in shareholdings between the petitioners and the second respondent. The main complaint of the petitioners is that in the absence of board seat, there is nobody to protect the interest of the petitioners. That the respondents have been protecting the interest of the petitioners is successfully established by them. Soon after the death of Shanmugasundaram, his shares were transmitted in favour of the petitioners without any delay. They were issued with bonus shares, besides dividend on an average of 15 per cent. every year even after the death of their father. There is also evidence to show that notice of annual general meeting was served on the petitioners. Annexure B (attached to reply to rejoinder) filed by the respondents is a letter dated September 10, 2004, sent by the second petitioner to the board of directors of the company indicating that she has received the 48th annual report which declared a dividend at 15 per cent. In the letter she further requests to make payment of the dividend to her nominee. Similarly acknowledgment of notice of the receipt of annual report is evident from the documents filed by the respondents (vide annexure A document attached to reply to rejoinder). Admittedly they were participating in the annual general meeting through proxy. So there is no basis for the contention that the interest of the petitioners is not taken care of by the majority group. I am of the view that the principles of legitimate expectation cannot be extended to respondent No. 1 company. Directorial complaints are no grounds to allege oppression against respondent No. 2 and others. Even if there is a legitimate expectation, that itself is no ground to hold that there is suppression by the majority. Even though respondent No. 1 is a family company, the facts of this case do not warrant adjudication on directorial complaints. For the reasons stated above, I hold that the petitioners have failed to prove the alleged oppression by the majority shareholders (respondent No. 2).

35. The next issue relates to allegations of mismanagement by respondent No. 2, which in my opinion is not established by the petitioners. The necessary particulars of mismanagement are not forthcoming. The modernisation of the plant at the instance of the second respondent and the disposal of the old machinery at book value are alleged as an act of mismanagement. The respondents have produced the books of account commencing from 2000-01 up to 2005-06 to show that the company had shown profit on sale of assets aggregating to Rs. 425.18 lakhs which has been credited to the profit and loss accounts. This Bench cannot act upon general and vague allegations of mismanagement of the affairs of the company. Even then, the respondents have successfully countered the allegations that several inter company transactions are detrimental to the interest of the company and that the company is not disclosing the actual income in its books and that the net profit disclosed in the balance-sheet for the year ending March 31, 2006, is only a meagre amount (Rs. 47,88,000) and that the company’s funds are diverted by supplying yarn to the companies in which respondent No. 6 and respondent No. 2 are interested. The allegation against the statutory auditor and the sixth respondent at the time of the extraordinary general meeting held on April 28, 2007, are challenged by the respondents on the ground that respondent No. 6 (the statutory auditor) has no right to speak at the extraordinary general meeting and that the statutory auditor is not made a party to the company petition. Regarding the allegation in respect of disinvestment of the shares held in the subsidiaries, it is contended that all those transactions took place about three decades ago and also during the life time of the petitioners’ father.

36. On the application (C. A. No. 65 of 2007) filed by the petitioners, they were permitted to inspect the books of account and other records of the company, but no irregularities have been pointed out so far. The company had to amend the name in the memorandum and articles of association following the amendment of the Companies Act in 2001 under section 43A of the Companies Act and its subsequent amendment. The company again became “private limited”, with effect from March 23, 2001. As pointed out by the respondents, the respondents did not derive any benefit from this amendment. There is a lot of reference to the several transactions which occurred prior to the year 2000. Relying on a decision of the Company Law Board in Northern Projects Ltd. v. Blue Coast Hotels and Resorts Ltd. [2007] 140 Comp Cas 300, learned counsel for the respondents argued that (page 306) : “… the Indian Act does not visualise challenging past acts that too before a person becoming a member of a company. It has been judicially held in a number of cases that in terms of section 397 of the Act, past and concluded transactions cannot be impugned in a petition under section 397/398 of the Act”. Reliance was also placed on BNS Steel Trading (P.) Ltd.‘s case (supra), to argue that past and concluded transactions cannot be agitated. I see merit in the above contentions. Some of the allegations regarding mismanagement relate to the year 1977, during the period which neither the second respondent nor the petitioners were in the picture. The petitioners’ father was a director and he approved all the transactions referred to in the company petition, including the sale of 3 acres of agricultural land in 1977 to the second respondent’s father. The respondents have produced copies of the minutes of the board meeting during the relevant time. The alleged reduction of investment in subsidiary companies is also with the approval of the board which included the petitioners’ father. Regarding the inter company contracts, the respondents pointed out with details, that the volume and value of transactions entered into with the companies in which the directors are interested are insignificant, when compared to the total volume and value of the business of respondent No. 1 company as well as the other companies. The register of contracts with company’s and firms for the period 2003-04 in which the directors are interested is produced to substantiate the contentions that the provisions of section 297 of the Act had been duly complied with. The register shows due compliance of section 297 of the Act. The respondents have shown that the company is filing its income and sales tax returns periodically (vide annexure 4 to the counter statement to the application by the petitioners). The allegation that respondent No. 1 is going to dispose of the second unit of the company at Coimbatore is without any basis. The property is mortgaged to the Andhra Bank. The respondent has proved that the intention of the company is to expand the unit with trained labourers for which steps have been initiated. There is also no basis for the allegation that respondent No. 2 is residing in a bungalow of the company. The respondents have been able to prove that the accounts of the company are maintained in accordance with accounting standards and regularly audited by the statutory auditors. With regard to the allegation that the old machinery had been sold at a book value, the respondents have been able to show that the company had shown profits on sale of assets and the same has been credited to the profit and loss accounts (vide annual reports). There is also no basis for the allegation that the net profit for the year 2005-06 is less when compared to the similarly located spinning mills. On the basis of the balance-sheet and profit and loss account, it is shown that the company had a free reserves amounting to Rs. 9 crores. The petitioners have fairly admitted that the company is financially sound. In the above circumstances there is no difficulty to hold that the petitioners failed to prove the alleged mismanagement by respondent No. 2 and others. Point is accordingly found.

37. According to the petitioners, since respondent No. 2 does not want them in the management and also because 38 per cent. (petitioners + respondent No. 4) of the shareholders are not interested in the company, the only way to put an end to the matter complained of is to allow the petitioners to exit, by directing respondent No. 2 to purchase their shares on a fair value to be fixed by an evaluator appointed by this Bench. Alternatively, it is suggested that any one of the three units may be allotted to them in lieu of their shares in the company. The respondents opposes the suggestion on the ground that (i) there is no specific pleading in the company petition, (ii) it is not in the interest of the company, (iii) the petitioners have not come with clean hands, (iv) the petitioners have not established a case of winding up as provided under sections 397 and 398 of the Act, (v) there is delay in filing this company petition, (vi) interest of the company will be unfairly affected, (vii) there is no dead lock in the company, (viii) the board is not vindictive towards the petitioners, (ix) there is collusion between the petitioners and fourth respondent, (x) that the company is maintaining absolute transparency and fair dealing in all matters, and (xi) the petitioners did not contribute any amount whereas respondent No. 2 has invested substantial amount in the company besides his personal guarantees. According to respondent No. 2, if the petitioners need an exit, they can invoke the provisions in the articles (clauses 23, 24, 25 and 26) and get their shares transferred. Respondent No. 4’s move is opposed on the ground that no relief could be granted to respondent No. 4 in view of the observation of the hon’ble High Court.

38. After having held that the petitioners have failed to make out a case of oppression and mismanagement justifying a winding up, the final issue to be decided is whether the petitioners are entitled to an order from this Bench directing the company or second respondent to purchase the shares of the petitioners, or to spin off any one of the three units to them. In their evaluation the valuation comes around Rs. 104 crores for the petitioners, and Rs. 24 crores for respondent No. 4. It is relevant to note that, there are no pleadings seeking an exit from the company. Learned counsel for the petitioners argued that even without pleadings, this Bench has ample power under section 402 of the Act, even in cases where oppression and mismanagement are not established under sections 397 and 398 of the Act. The contention is that because the respondents do not want them in the management, they may be permitted to quit. Despite earlier suggestion by this Bench, the company or second respondent had never expressed their willingness to purchase the shares of the petitioners. Their consistent stand is that no inequity had been done by them in this case, and that the motive behind the company petition is to arm-twist the respondents to purchase the shares of the petitioners at a “fancy price”. There is a considerable force in the above submission. It is evident from the pleadings in the company petition that the petitioners have been demanding to “spin of” one of the three units of the company, and the failure to settle the matter had resulted in the filing of this company petition, alleging oppression and mismanagement. So it can be reasonably presumed that this company petition is filed with a collateral purpose. The fact that the petitioners had not so far voiced their grievances in general meetings is a circumstance against them. The delay in filing the company petition is not satisfactorily explained, even if the petitioners had some talks in this matter with the auditor of the company. On the basis of my findings on the issues of oppression and mismanagement, I am of the considered opinion that no unfair treatment has been meted out to the petitioners by respondent No. 2’s group and the affairs of the company are not conducted in a manner prejudicial to the interest of the petitioners. It is worth mentioning that they did not even attempt to dilute the share of the petitioners. Respondent No. 2 has brought in substantial funds into the company, besides leading the company to success by his innovative initiatives in textile industry. Currently all the three units are managed by respondent No. 2. Under his management, the company has maintained an impeccable record of steady growth, continuous profitability, and innovation over the years. Mere lack of confidence between respondent No. 2 and the petitioners is not enough, unless lack of confidence arises from oppression of the minority in the management of the affairs of the company. The petitioners have failed to show that the conduct of respondent No. 2 is burdensome, harsh and wrongful, and it is not just to wind up the company. As pointed out by the respondents, it is the settled position in law that the petitioners/shareholders cannot have any interest in the property of the company, but only a right to participate in the profits of the company. Respondent No. 2 and others have discharged their duty in the fiduciary capacity as directors in a just and fair manner. In the facts and circumstances of the case, there is no justification for a division of the assets of the company, which in my view will be against the interest of the company. Learned counsel for the petitioners invited my attention to several decisions and argued that equitable considerations had to outweigh legal considerations. The decision in K.N. Bhargava’s case (supra), is not applicable to the facts of this case. It was a case where wrongs have been committed by both sides and the two groups were in management, and both groups agreed for the division of assets. Vijay Krishan Jaidka’s case (supra), is a case where the petitioners therein who were in management were removed from directorship by invoking section 283(1)(g) of the Act. Micromeritics Engineers (P.) Ltd.’s case (supra), was a case where the respondent therein had misused his fiduciary power as director solely for the purpose of destroying the existing majority and created a new majority. In Yashovardhan Saboo’s case (supra), the company was to be managed by two managing directors, one from each group as per the agreement. The facts of the above case are not applicable in the present case. In Ashok Kumar Oswal’s case (supra), majority was converted into minority by issue of shares made with the consent of the petitioners therein and in the facts of that case, the control of the company was given to the petitioner group on equitable considerations. In Jagjit Singh Chawla’s case (supra), the company was formed upon understanding that there shall be equal participation in management and in which it was specifically mentioned that the aggrieved person therein was one of the founders of the company and was responsible for completion of prestigious projects of the company in which a claim of legitimate expectation of being on the board of the company is justified.

39. There is no dispute that under sections 397 and 402, the Company Law Board has the power to pass any order as it thinks fit to be just and equitable, if the circumstances so warrant. Except the repeated pleadings that respondent No. 2 was offering an amicable settlement, which respondent No. 2 denied, there is no satisfactory explanation for the delay of six years in filing this company petition. It is relevant to note that the seventh respondent (Andhra Bank) filed a counter affidavit stating that the first respondent-company has been dealing with the seventh respondent from 1958 onwards and they have been very prompt in meeting their commitments, and the bank has no grievance against the company and its present management. The petitioners were aware that the properties of the company were mortgaged with the seventh respondent. Even then the petitioners alleged in the company petition that the respondents are attempting to alienate or encumber the properties of the company. The conduct of the petitioners in advertising the ex parte interim order of this Bench, without permission reflects that the petition is a mala fide one. In the facts and circumstances of the case, after having failed to make out a case under sections 397 and 398 of the Act, they also failed to make out a case of equity, to compel the company or respondent No. 2 to purchase their shares, in order to bring to an end any matters complained of in the company petition. In coming to the above conclusion, I am supported by the decisions in Jaladhar Chakrabotry’s case (supra), Vardhaman Dye-Stuff Industries (P.) Ltd.’s case (supra), and Srihari Rao’s case (supra). For the reasons discussed above, I decline to pass an order on the prayer of the petitioners for an exit from the company.

40. Respondent No. 4 filed C. A. No. 213 of 2007, seeking permission to withdraw the counter statement, or in the alternative to transpose him as the third petitioner. He says that he is not happy, since his suggestion to settle the issue with the petitioners was not acceptable to respondent No.2. By order dated May 23, 2008, C. A. No. 213 of 2007 (Chandra Kumar P. Asher v. Tirupur Textiles (P.) Ltd. [2009] 152 Comp Cas 356), was dismissed by this Bench. Thereafter, the petitioners filed a memo on June 9, 2008 and application (C. A. No. 101 of 2008) to delete the name of respondent No. 4 from the party array. By order dated September 13, 2008, the memo and application were allowed. By order dated October 24, 2009, the hon’ble High Court reversed the Company Law Board order and retained respondent No. 4 as a party in the company petition. In view of my findings, on issues 1, 2 and 3, I find no grounds to deal with the application filed by respondent No. 4. C. A. No. 28 of 2009 is dismissed.

41. Before concluding, I will refer to the suggestion made by the second respondent that the petitioners have an alternate remedy to invoke the provisions under the articles to get their shares transferred if they have a desire to exit from the company. The dispute is between cousins. Respondent No. 3 had even stated in the counter that she treats the petitioners as her own daughters. It is some time prior to the marriage of the petitioners (1990) that, their father had transferred shares to them. At this distance of time, it is reasonable and probable that they wish to disassociate with the company, and plan their future rather than remaining in the company by encashing the dividend. Hence I suggest the company or respondents to purchase their shares if the petitioners seek a transfer of shares by invoking the provisions of articles of association, at a reasonably fair price, rather than the parties fighting the suits. I hope that respondent No. 2 and respondent No. 3 will take the initiative with a sense of co-operation and accommodation to purchase the shares of the petitioners at a mutually acceptable price, so as to bring to an end the matters complained of, and the decade old relationship continues to be cordial. The parties are at liberty to apply under section 402 of the Act, in case any clarification is required.

42. All the interim orders passed in this company petition are hereby vacated.

43. Company petition stands disposed as above.

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Category : Company Law (3467)
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Tags : CLB judgment (29)

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