Case Law Details

Case Name : Aruna Hotels Ltd. Vs Kamal Babbar (Chennai, Company Law Board)
Appeal Number : CA NO. 194 OF 2012
Date of Judgement/Order : 24/02/2012
Related Assessment Year :
Courts : Company Law Board (19)

COMPANY LAW BOARD, CHENNAI BENCH

Aruna Hotels Ltd.

Versus

Kamal Babbar

CA NO. 194 OF 2012
C.P. NO. 86 of 2012

Date of pronouncement: 24.12.2012

ORDER

1. The present company application has been filed under Regulation 44 of the Company Law Board Regulations, 1991 by the respondents praying this Bench to dismiss the petition as not maintainable.

2. Shri T.K. Bhaskar, learned counsel appearing on behalf of the applicants/respondents submitted that the company petition filed by the 1st respondent/petitioner is not maintainable as the 1st respondent/petitioner does not fulfil the criteria for eligibility to file or maintain the petition. The applicant is constrained to file the present application challenging the maintainability of the above company petition. This application is being filed to seek the dismissal of the company petition in limine on the basis that the 1st respondent/petitioner does not fulfil the eligibility criteria u/s 399 of the Companies Act. He submitted that the present authorized share capital of the 1st Applicant Company is Rs. 32,00,00,000/- divided into Rs. 2,40,00,000 equity shares of Rs. 10/- each and 8,00,000 redeemable cumulative preference shares of Rs. 100/- each. The total paid up share capital of the 1st applicant company is as follows:

S. No.

Types of Shares

No. of Shares

Amount (in Rs.)

1.

Equity Shares of Rs.10/-each (There are calls in arrears of an amount of Rs. 2,13,000 as at 31.03.2011)

90,00,000

9,00,00,000 (2,13,000) 8,97,87,000

2.

14% Redeemable Cumulative Preference Shares Rs. 100/-each

60,000

60,00,000

3.

17.5% Redeemable Cumul Preference Shares of Rs.100/-each

50,000

50,00,000

4.

16.5% Redeemable Cumul Pref Shares of Rs.100/-each

2,00,000

2,00,00,000

Grand Total of paid up share capital (not excluding the calls in arrears)

12,10,00,000

Net paid up Share Capital (excluding the calls in arrears)

12,07,87,000

3. He further submitted that the above mentioned 2,00,000 (16.5%) Redeemable Cumulative Preference Shares of Rs. 100/- each, amounting to Rs. 2 crore, were issued to PNB Capital Market Services Limited (“PNB Cap”) pursuant to the loan of Rs. 2 crore provided by PNB. Though these shares were eligible for redemption in 1997, it has not been redeemed and PNB Cap continued to hold the said preference shares even as of date. It is submitted that Section 80 of the Companies Act, 1956 clearly specifies that preference shares can be redeemed only out of the profits of the company or out of proceeds of fresh issue of shares made for the purpose of redemption. In 2005, the 1st applicant company, being a loss making entity, was unable to redeem the said shares in 1997 because it had no profits and it could not make any fresh issue of shares. However, PNB being the creditor of the 1st Applicant Company, it was advised that the 1st Applicant Company should pay Rs. 2.00 crore to PNB Capital Market Services Ltd and account the same as ‘Loan’. The 1st Applicant Company paid to PNB the said amount of Rs. 2 crore in 1998-99 and it has since been accounted for as ‘Loans and Advances’ in the books of the 1st Applicant Company. Upon perusal of every audited balance sheet of the Company, it would be evident that the said Preference Shares have not been redeemed and are shown as part of the Share Capital Schedule and the Asset side the Schedule of Loans and Advances includes the above amount of Rs. 2 crore.

4. The learned counsel further submitted that the allegation contained in Para 2(b) of the petition is denied as false and baseless as it is incorrect to state that the 2,00,000 Redeemable Cumulative Preference Shares have been already redeemed in the year 2005 itself. It is also incorrect to state that the audited financial statement fails to mention of such redemption and reduce the total paid-up capital accordingly. The 2,00,000 redeemable preference shares most definitely form part of the issued and paid up share capital of the 1st Applicant Company. The 1st Respondent/Petitioner being very much aware that the shares were never redeemed and knowing very well that he does not fulfil the criteria for the purposes of Section 399 of the Act, he is deliberately crafting a false scenario to attempt to mislead the court and to harass the applicants. In fact, the 1st respondent is a signatory to the audited balance sheets that he is questioning in the petition. The applicants submit that the audited balance sheets for the years 2008-09, 2009-10 and 2010-11 have been signed by the 1st Respondent/Petitioner as well. The allegations made by the 1st Respondent/Petitioner in the above petition have been made as an after-thought as he does not fulfil the eligibility criteria u/s Section 399 of the Act.

5. It is submitted that the present shareholding of Respondent No. 1 is 12,00,000 equity shares of Rs. 10/- each of the 1st applicant company which aggregates to 9.9348% of the paid up share capital of the Company. Thus, since the 1st Respondent/Petitioner holds less than 10%, he does not fulfil the criteria for eligibility u/s 399 for filing or maintaining the present petition. This petition is a sheer abuse of the process of law and requested the Bench to dismiss the company petition.

6. Shri R. Sankaranarayanan, the learned counsel appearing on behalf of the respondents/petitioners submitted that the issues revolving around redemption of preference shares require detailed enquiry going into the books of account, records and documents and it is not justifiable to dismiss the company petition at the threshold. The mere fact that the petitioner had signed the financial statements of the Company for the financial years 2009-10 and 2010-11 would not by itself disentitle the petitioner in any way in invoking the jurisdiction of the Hon’ble Bench especially because the petitioner had come to know of the diabolic fraud only when he had to interact with Punjab National Bank recently pursuant to notice issued by the Bank invoking their powers under the SARFAESI Act. It is necessary to note that the petitioner became a director in 2008 and joint managing director in 2010. Petitioner was denied access to all crucial books of account which were exclusively retained by the 2nd Applicant in his office and labelled and named as corporate accounts which included all the activities of the Company. As Joint-Managing Director, the petitioner had only limited access to the accounts relating to day-to-day functioning of the hotel and its management. Only after repeated protests by the petitioner, Respondent No. 2 instructed the accounts department to merge the corporate accounts into the books of hotel accounts and that was also only in the year 2011. The details of such a corporate account for the first time appeared in the unaudited balance sheet of the year 2011-12. The issue whether the preference shares have been redeemed or not is basically a fact that could be derived from records of the Company and the affidavit conspicuously omits to state the same. Further, the petitioner possesses indefeasible rights to getting issued more than 71 lac shares and therefore there can be no challenge to the company petition on the ground of Section 399 of the Act at all. The petitioner humbly submits that the very redemption of preference shares is itself an issue and if on the date of presentation of the company petition if mechanically the books of account alone should be looked into it could defeat the very purpose of the legislative enactment of Sections 397 and 398 of the Act.

7. He further submitted that in the Board Meeting which is under challenge in CA No. 189 of 2012, the respondents have surreptitiously manipulated the entry relating to share application money. It is highly intriguing as to how share application money could be unilaterally transferred to unsecured loan a/c. Secondly, Para 9(h) of the company petition seeks a direction to the Company to file its Annual Returns for the last six years. In fact as per law, a Company is required to furnish a complete list of all its shareholders once in five years which the Company has also not complied with. As disclosed in the audited financial statement as at 31.03.2006, the 2,00,000 preference shares were issued on 15.12.1995. They are redeemable within 15 months from the date of issue. The preference shares ought to have been redeemed in 1997 by March, 1997. As per their own admission in the company application, some adjustments were done between the PNB Capital Market Services Ltd and the company as a result of which technically the redemption has taken place. Apart from this, the petitioner has got necessary clarification from the chartered accountants of the company in response to his request letter dated 7thFebruary, 2012. By a letter dated 8th February, 2012 the chartered accounts of the Company have confirmed to the petitioner that Preference Shares held by PNB Capital Market Services Ltd has been redeemed but only due to paucity of profit the same has not been shown as redeemed and has been reflected only as loans and advances. It is utter false to state that the Company has granted a loan of Rs. 2 crore to PNB Capital Market Services Ltd. It is humbly submitted that in view of the clear statement on the part of the applicants/respondents that the petitioner holds 9.93% of the capital, it would be great injustice to allow the application by dismissing the petition.

8. Heard the learned counsel for the parties, perused the pleadings, documents filed by them. The only issue is whether the petition is maintainable u/s 399 of the Act. The stand of the applicants is that the company petition is not maintainable since the respondent/petitioner i.e., Shri Kamal Babbar does not hold 10% of the paid-up share capital. Therefore, the petition is not maintainable in view of Section 399 of the Act.

9. To maintain a petition u/s 397 or 398 the criteria as envisaged u/s 399(1) are relevant to the core-point of this application. The relevant provision is extracted hereunder:-

Right to apply u/s 397 and 398. Section 399(1). The following members of a company shall have the right to apply u/s 397 or 398:

(a)          In the case of a company having a share-capital not less than 100 members of the company or not less than 1/10th of the total number of its members, whichever is less or any member or members holding not less than 1/10th of the issued share capital of the capital, provided that the applicant or applicants have paid all calls and other sums due on their shares.

10. To file a petition u/s 397, 398 of the Act, one has to fulfil the requirement as contemplated under the above provision of law. Unless and until the above criterion is fulfilled, the petition is not maintainable. The persons who can qualify to file the petition are (i) in case the company is having a share capital, not less than 100 members; or (ii) not less than 1/10th of the total number of its members, whichever is less.

11. In the present case, admittedly, the company is having a share capital and is a public listed company having more than 20,000 shareholders. The petition has been filed by a single shareholder and therefore the above criteria are not fulfilled by the petitioner on the ground that to meet the requirements of the above criteria there must be not less than 100 members and not less than 1/10 of its members. I hold the same is not applicable in the present case.

12. The next criterion to meet the requirement to maintain a petition, in the very same provision, is that any member or members holding not less than 1/10th of the issued share capital of the company provided that the applicant or applicants have paid all calls and other sums due on their shares. There is no dispute in respect of all calls having been paid by the respondent/petitioner. However, it is to be seen that whether the respondent/petitioner being a single share holder, holds 1/10th of the issued paid-up share capital. The applicants stated that the net paid-up share capital of the company is Rs. 12,07,87,000/- i.e. (Rupees Twelve Crore Seven lakh eighty seven thousand only). To maintain a petition by any member or members, 1/10th of the paid-up share capital is required i.e. Rs. 1,20,78,700/-. Admittedly, the petitioner is holding 12,00,000 equity shares of Rs.10/- each, as on the date of filing of the company petition, constituting Rs. 1,20,00,000/-, which is less than l/10th of the required paid-up share capital. The contention of the respondent/petitioner is that he posses indefeasible rights to getting issued more than 71 lakh shares and therefore there can be no challenge to the company petition by the applicants on the ground of Section 399 of the Act. The respondent herein further submitted that in the petition the petitioner is seeking directions to implement the circular resolution dated 12.03.2012 whereby the board of directors consented for issue and allotment of 57,14,285 equity shares at an issue price of Rs. 17.50/- per share at a face value of Rs. 10/- + premium of Rs. 7.50/- per share. I do not accept the said contention of the learned counsel for the respondent herein. Though the paid-up share capital of the Company has been established by producing sufficient material evidence which is on record, I have called for the details regarding the paid-up share capital of the R1 Company from the Registrar of Companies, Tamil Nadu, as independent evidence. The Registrar of Companies, Tamil Nadu vide its letter dated 21.12.2012 addressed to the Bench Officer of this Bench enclosed the schedules, forming part of balance-sheet of the R1 Company for the years 2006-07, 2008-09 and 2009-10 and schedule of share capital for the year 2010-11. From the schedule of the share capital, the paid-up share capital of the R1 Company is shown as Rs. 12,07,87,000/-, which is one and the same as per the records available with Bench. It is proved beyond doubt that the respondent/petitioner is holding 12,00,000 equity shares of Rs. 10/- each constituting less than 1/10 of the issued, paid-up share capital of the Company. Therefore, the petition is not maintainable. Further, the respondent/petitioner i.e. Shri Kamal Babbar has signed the balance-sheet and profit & loss account for the year ended as at 31.03.2011 and is aware of the net paid-up capital of the Company. Further, the respondent/petitioner is fully aware of the fact that the shares issued to the Punjab National Bank have not been redeemed and shown as part of the share capital. Mere seeking implementation of the circular resolution in the main petition does not give any right for the purpose of maintaining the petition. The prayers as made in the petition would be considered only when the petition is maintained. The Bench will strictly adhere to the provisions of the Companies Act, 1956. It is not out of place to mention that the Company Law Board had occasions to consider and take a view regarding maintainability of a petition, namely, a petition is maintainable provided there had been any challenge to further allotment of shares in a petition on the ground that the petitioner’s shareholding was diluted by illegal allotment and the said allotment is challenged in that petition. However, in the present case, there is no challenge to any allotment of shares by which the petitioner’s shareholding was diluted. Therefore, the above stand of the Company Law Board cannot be made applicable to the present case. I hold that the company petition is not maintainable u/s 399 of the Act on the ground that the respondent/petitioner does not hold 1/10th of the paid-up share capital. The citation relied upon by the learned counsel for the respondent/petitioner is not applicable to the facts of the present case. In view of the reasons, the CA No.194/2012 in CP No.86/2012 is allowed. The CP No.86/2012 is dismissed as not maintainable. No orders as to costs.

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Category : Company Law (3484)
Type : Judiciary (10239)
Tags : CLB judgment (29) section 397 (31)

0 responses to “Petition U/s. 397 filed by Minors alleging oppression & Mismanagement is not maintainable”

  1. Dipak J Shah says:

    Can any body supply the Judgment in the case of
    CLB can review its own order obtained by fraud or based on fabricated or forged documents : Shravan Kumar Patel v. Mohanlal Hargovinddas Bidi Udyog P. Ltd. p. 43

    Citation Company Cases. I would be much obliged.
    C A Shah D J
    USA

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