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2008 DIGILAW 863 (CAL)

Raj Kumar v. Spark Dealers Pvt Ltd

2008-08-25

INDIRA BANERJEE

body2008
Judgment :- (1) BY an order dated 27th June, 1991, Usha Automobiles and engineering Limited was directed to be wound up. The company had unencumbered leasehold interest in lands at Sahibabad and also at cossipore, which were directed to be sold. (2) A sale notice was duly published, pursuant to which the respondent no. 1 submitted an offer and participated in the auction sale held in Court on 28th April, 1995. The offer of the respondent no. 1 of Rs. 3,61,50,000/-being the highest, the same was accepted. (3) ON an appeal filed by the secured creditors, the sale was set aside by an order of the Division Bench dated 18th June, 1996. An application filed by the respondent No. 1 for review of the aforesaid order, was also dismissed. (4) THE respondent No. 1 filed a Special Leave Petition in the Supreme court. By an order dated 9th May, 1997, the Supreme Court directed the respondent No. 1 to deposit the balance Earnest money of Rs. 63,00,000/- with the Official Liquidator on or before 19th May, 1997. Subsequently, the respondent no. 1 was directed to deposit the balance consideration of Rs. 2,88,50,000/ -. (5) IN the petition it is stated that the respondent No. 1 was a closely held company of the Singhania Group comprising of the respondent Nos. 5 to 14. The principal person in the Singhania Group was the respondent no. 5 and the respondent Nos. 6 to 13 were persons under the employment and/or control of the respondent No. 5. The respondent No. 14 is also a closely held company of the Singhania Group and completely owned and controlled by the Singhania Group. (6) ACCORDING to the petitioner, the Singhania Group carried on business inter alia of purchase of properties in court auctions through companies owned and controlled by them. (7) THESE companies, according to the petitioner, do not have any other business. The properties purchased in Court sales and/or auctions are transferred to the companies. (8) IT is alleged that the Singhania Group could not arrange funds to purchase the assets of the company in liquidation, at the price of rs. 3,61,50,000/- offered by the respondent no. 1. The Singhania Group, therefore, approached the petitioner and the respondent Nos. 2 to 4, who were closely associated with each other and are hereinafter referred to as the Jain Group, for finance. 3,61,50,000/- offered by the respondent no. 1. The Singhania Group, therefore, approached the petitioner and the respondent Nos. 2 to 4, who were closely associated with each other and are hereinafter referred to as the Jain Group, for finance. (9) ACCORDING to the petitioner, negotiations ensued which culminated in an agreement whereby the Jain Group agreed to advance Rs. 63,00,000/-towards initial payment and a further sum of Rs. 1,98,50,000/-to the Official liquidator on behalf of the respondent No. 1 in connection with the purchase of the assets of the company in liquidation. (10) THE Singhania Group, according to the petitioner, admitted and acknowledged their inability to make payment of the amounts advanced by the Jain Group. (11) IT is alleged that it was thus agreed that in consideration of the aforesaid payments, the Singhania Group would transfer its entire shareholding in the respondent No. 1 to the jain Group. The respondent -No. 1 would thus become a concern of the Jain Group. (12) IT was further alleged that the respondent No. 15, another closely held company, owned and controlled by the Singhania Group would make payment of the balance consideration of rs. 90,00,000/- on behalf of the respondent No. 1, which amount would be treated, a s loan, advanced to the Jain Group and/or to the respondent No. 1. (13) UPON payment of the entire consideration to the Official Liquidator within July, 1997, as stipulated in the order dated 9th May, 1997 of the supreme Court, the Official Liquidator was to execute the necessary conveyance and make over possession of the sahibabad and Cossipore lands to the respondent No. 1. (14) ACCORDING to the petitioner, possession of sahibabad and Cossipore properties were made over to the respondent no. 1 by the Official Liquidator. (15) IT is alleged that the Singhania Group without notice to the Jain group fraudulently, wrongfully and without authority obtained an order dated 28th July, 1997, from the Company court, whereby the Official liquidator was directed to execute necessary conveyance in favour of the respondent No. 1 or its nominee or nominees. (16) THE aforesaid order was, according to the petitioner, obtained behind the back of the Jain Group and the respondent No. 1 without their notice or knowledge. (17) IT is alleged that the Singhania Group were not entitled to represent the respondent No. 1, which they had wrongfully done. (16) THE aforesaid order was, according to the petitioner, obtained behind the back of the Jain Group and the respondent No. 1 without their notice or knowledge. (17) IT is alleged that the Singhania Group were not entitled to represent the respondent No. 1, which they had wrongfully done. It is further alleged that the Singhania Group and the official Liquidator in connivance with each other got a deed of assignment dated 1st August, 1997 issued and registered in respect of the Sahibabad property in favour of the respondent No. 15, alleged nominee of the respondent No. 1. (18) THE petitioner contends that the assignment of the Sahibabad property in favour of the respondent No. 15, is wrongful and illegal and the same is, in any case, the subject- matter of an appeal, filed by the respondent no. 2 on behalf of the Jain Group, against the order dated 28th July, 2008. (19) THERE are various legal proceedings between the Jain Group and the Singhania Group. The Jains, it is alleged, have initiated criminal proceedings against members of the Singhania Group. (20) IT is alleged that in or around September, 2007, the petitioner was informed by a development company that it was interest in developing the Sahibabad property. (21) ACCORDING to the petitioner, on being approached by a developer in September, 2000, made enquiries and came to learn that the other members of the Jain Group being the respondent Nos. 2 to 4 were acting in collusion and connivance in prejudicing the rights of the petitioner and had illegally removed the petitioner from the Board of Directors of the respondent No. 1. (22) IT is contended that the said respondents had procured an alleged letter dated 30th September, 2006 evincing the petitioners alleged intention to resign from the directorship of the respondent No. 1. (23) IN the aforesaid circumstances, the petitioner has filed the above suit claiming the following reliefs:- " (a) A scheme be framed for management and administration of me defendant No. 1 after taking into consideration the following factors:- (i) That the plaintiff and the defendant Nos. 2 to 5 should have equal say in the affairs of the company. (23) IN the aforesaid circumstances, the petitioner has filed the above suit claiming the following reliefs:- " (a) A scheme be framed for management and administration of me defendant No. 1 after taking into consideration the following factors:- (i) That the plaintiff and the defendant Nos. 2 to 5 should have equal say in the affairs of the company. (ii) That the assets and properties of the company are not dealt with and/or transferred by any director and/or group of directors of the company without the express consent and approval of the other directors and especially the plaintiff. (iii) That the said two properties belonging to the company mentioned in Paragraph-45b are utilised in such a manner the company earns maximum profits therefrom. (iv) The profits/losses earned by the company by utilisation of the said two properties are equally distributed amongst the plaintiff and the defendant Nos. 2 to 4 in accordance with their respective shareholding. (v) All decisions concerning the affairs of the company and especially as to the mode and manner in which the properties of the company are to be utilized would be taken by the plaintiff and the defendant Nos. 2 to 4 jointly and not by any one of them. (vi) That after the companys two properties mentioned in schedule of Assets are fully dealt with and/or utilized in the best interest of the company, the company is dissolved by the process of voluntary winding up. (b) An Administrator be appointed for management and administration of the company and for implementation of the scheme for management and administration. (c) Perpetual injunction restraining the defendants or any agent or assign of the Singhania Group from holding themselves out as directors of the company or from intermeddling with the assets and business of the company. (d) Perpetual injunction restraining the defendants from dealing with disposing of or alienating or encumbering creating any third party interest or from charging the nature or character of the assets and properties of the defendant No. 1 and particularly the assets mentioned in schedule of assets without the approval of the plaintiff. (e) Mandatory injunction upon the defendant No. 1 to effect recovery of the Sahibabad land morefully described in Annexure "a" hereof from the defendant No. 15. (e) Mandatory injunction upon the defendant No. 1 to effect recovery of the Sahibabad land morefully described in Annexure "a" hereof from the defendant No. 15. (f) Mandatory injunction upon the defendants to discover upon oath all documents brought into existence by them for reducing in any manner whatsoever the interest of the plaintiff in the defendant No. 1. (g) The letter dated 30th September, 2006 and all documents of like nature or produced by the defendants pursuant to prayer (e)above be adjudged void, delivered up and cancelled. (h) Injunction. (i) Receiver. (j) Attachment. (k) Costs. (1) Such further or other reliefs. " (24) COUNSEL appearing on behalf of the petitioner submitted that the petitioner had filed the suit as owner of 32010 shares out of total paid up share capital of 224020 shares of the respondent No. 1. (25) IT is argued that as a Director and minority shareholder of a closely held company, the plaintiff is entitled to maintain derivative action for himself and on behalf of the company for the protection of the assets of the company and for preventing the majority shareholders and persons in control from perpetrating fraud not only upon the minority shareholders but also the company itself. (26) IT is argued that the wrong-doers being in control of the respondent No. 1 would not allow the respondent no. 1 to file a suit for the purpose of protection of its assets and properties. (27) IT is stated that all ingredients of a derivative action are met in the present case and all necessary facts with regard to the ultra vires acts of the company and acts of fraud against the minority have been pleaded with sufficient details. (28) IN support of the submissions, Counsel has cited the following judgments:- (1) Asansol Electric Supply Co. v. Sunil Das, reported in 75 CWN 704 paras 20 and 24. (2) Abonthi Explosives v. Principal Subordinate Judge, Tirupati, reported in 1987 (62) Company Cases 301 at 307-314. (3) Unreported judgment of the Division Bench of this Court dated 26. 4. 2005 (Castron Mining Ltd. and Ors. v. Parmesh war Kumar agarwalla and Ors.). (29) COUNSEL argued that the fact that the plaintiff might have ceased to be a Director or shareholder of the company, does not, in any manner defeat the plaintiffs right to maintain this suit. (3) Unreported judgment of the Division Bench of this Court dated 26. 4. 2005 (Castron Mining Ltd. and Ors. v. Parmesh war Kumar agarwalla and Ors.). (29) COUNSEL argued that the fact that the plaintiff might have ceased to be a Director or shareholder of the company, does not, in any manner defeat the plaintiffs right to maintain this suit. (30) IT is submitted that the allegation of transfer of the shares of the petitioner and/or removal of the petitioner from the Board of Directors of the respondent No. 1 are not admitted and are the subject-matter of challenge in the suit. (31) COUNSEL submitted that where dilution of shareholding is impugned in proceedings under Sections 397 and 398, it is the practice to see whether the petitioner, but for the impugned dilution in shareholding, would meet the requirement under section 399 of the Companies Act. (32) THE issue as to whether the applicants shareholding had been diluted rightly or not, is thereafter to be determined first in the Section 397 proceeding. The action would not be dismissed outright on the ground that the petitioner is not a 10% shareholder on the date of initiation of the proceeding. (33) REFERENCE has in this context been made to the judgment in Om prakash Gupta v. Hicks Thems and Ors. , reported in 97 Company Cases 356 (358). It is submitted that the practice followed by the Company Law board, might be of persuasive value so far as this Court is concerned. (34) COUNSEL further submitted that in a derivative action, shareholder files a suit for the benefit of the company and it is the company who is really the plaintiff. In support of his aforesaid submission Counsel cited judgment of this Court in Jhajaria brothers Ltd. v. Sholapur Spinning and weaving Company Ltd. , reported in 1972 CLJ 458. (35) THE respondents have questioned the maintainability of the suit, contending that the reliefs claimed cannot be granted by the Civil Court. (36) IT is argued that by a deed of assignment dated 1st August, 1995, the Sahibabad property was assigned to the respondent No. 15 and as such, the Sahibabad property could not be treated as an asset of the respondent No. 1. (36) IT is argued that by a deed of assignment dated 1st August, 1995, the Sahibabad property was assigned to the respondent No. 15 and as such, the Sahibabad property could not be treated as an asset of the respondent No. 1. (37) IT is submitted that the plaintiff, had resigned from the Board of Directors of the respondent No. 1 by a letter dated 30th September, 2006 and had transferred his shares in the respondent No. 1 by two deeds of transfer dated 30th September, 2006 and 31st December, 2006. (38) THE plaintiff who had 32010 shares, transferred all his shares in favour of Sunil Jain and Anil Jain by deed of transfer referred to above. The shares have been registered in the names of the transferees. The plaintiff has no interest in the respondent No. 1 except that the Balance Sheet of the company shows a sum of Rs.20,17. 875/- as due from the plaintiff. (39) THE respondents have denied that the petitioner either contributed Rs. 83,00,000/- to the respondent no. 1 or became entitled to 32% of the shares in the respondent No.1. According to the respondents, the letter dated 30th September, 2006 was signed by the plaintiff voluntarily. (40) COUNSEL appearing on behalf of the respondents questioned the jurisdiction of this Court to frame a scheme for voluntary winding up of the company. It is stated that such power is outside the domain of a Civil court in view of the provisions of sections 391, 392, 397, 398 and 484 of the Companies Act, 1956. (41) ACCORDING to the petitioner, it is only the Court as defined in section 2 (10) of the Companies Act, 1956, that is, the Company Court which has exclusive jurisdiction. (42) IT is submitted that with regard to the derivative action, the position in law is that the Directors of a company ordinarily have a right to decide all question relating to the affairs of the company including sale of assets as per the provisions of Sections 291, 292 and 293 of the Companies Act, 1956 and a majority decision shall prevail unless it can be shown that in selling such property, the company is a loser or any fraud has been perpetrated by the sale. (43) COUNSEL relied on a judgment of the Federal Court in Dr. Satya charan Law v. Rameswar Prasad Bajoria, reported in 20 Company cases 39. (43) COUNSEL relied on a judgment of the Federal Court in Dr. Satya charan Law v. Rameswar Prasad Bajoria, reported in 20 Company cases 39. The Federal Court held as follows:- "it seems to be well-settled now that in order to redress a wrong done to a company or to recover monies or damages alleged to be due to the company, the action could prima facie be brought by the company itself. " (44) IT is submitted that it is an elementary principle of law relating to joint stock companies that the Court will not interfere with the internal management of the company acting within their powers and, in fact, has no jurisdiction to do so. In support the aforesaid submission reliance has been placed on the judgment of the Federal Court in dr. Satya Charan Law (supra). (45) COUNSEL submitted that any derivative action has to be taken in the name of the company for redressal of wrong to the company. The petitioner has, however, sought the following reliefs in the injunction application:- " (a) Injunction restraining the respondents from giving any effect or further effect or acting in terms of or in furtherance to or from relying upon the said letter dated 30th September, 2006 or any document of like nature; (b) An interim scheme of administration be framed by this honble having regard to the situation mentioned in Paragraph-34 hereof; (c) A fit and proper person be appointed as Receiver/administrator and be directed to do the following: (i) Make an inventory of the assets and properties of the respondent No. 1 and particularly of the Sahibabad and Cossipore land more fully described in Schedule "a" hereof; (ii) Make an inventory of all books of accounts, statutory records etc. of the respondent No. 1; (iii) Submit a report of inventory before this Honble Court; (iv) Take actual physical possession of the assets and properties of the respondent No. 1 and particularly the Sahibabad and Cossipore land more fully described in Schedule "a" hereof and continue to remain in possession thereof till disposal of the suit; (v) Ensure that there is no change in the nature or character or that there is no construction at the Sahibabad and Cossipore land more fully described in Schedule "a" hereof; (vi) Administer and run the respondent No. 1 in terms of an interim scheme of administration upon the same being made by this Honble Court. (d) Injunction be passed restraining the respondents from dealing with or disposing of or alienating or encumbering or creating any third party interest or from changing the nature or character of any of the assets and properties of the respondent No. 1, particularly the Sahibabad and Cossipore land more fully described in Schedule "a" hereof; (e) Ad interim orders in terms of prayers above; (f) Such further and/or other order or orders be passed, direction or directions be given as Your Lordships may deem fit and proper. " (46) COUNSEL submitted that a perusal of the prayers, indicate that the petitioner has, in fact, complained of infringement of personal rights. Such prayer cannot be made in a derivative action. (47) IT is further submitted that a scheme cannot be framed in the absence of any complaint of mala fides or of action in excess of powers of the Board of Directors of the company. It is also not the case of the plaintiff that in spite of profits being earned, the same has not been distributed in accordance with the shareholding of the shareholders. (48) IT is submitted that the prayer for appointment of receiver with a direction to make an inventory and take possession of the assets and administer and run the respondent No. 1 in terms of any interim scheme of administration cannot be granted since no scheme has been framed and it is the Company Court alone that can frame a scheme under Section 391 of the Companies Act. (49) THE prayers, it is submitted, are beyond the scope of a civil suit. (49) THE prayers, it is submitted, are beyond the scope of a civil suit. It has finally been argued that the prayers in the petition are couched in wide terms seeking restraint order against the respondents from dealing with or disposing of or alienating or encumbering or creating any third party interest or from changing the nature or character of any of the assets and properties of the respondent No. 1. (50) EMPHASIZING on the word assets and properties of the company which includes all assets and not just the immovable assets, it is argued that if this injunction was granted the internal management of the company would come to a halt. (51) IF relief were otherwise expedient having regard to the facts and circumstances pleaded, this Court would not withhold relief, merely because the reliefs claimed are too wide and can be interpreted in a manner to halt the functioning of the company. The Court has the power to mould the reliefs. The question is whether the petitioner is entitled to the reliefs claimed in the suit. (52) FOR grant of interim relief, the essential factors are a strong prima facie case and balance of convenience in favour of the interim reliefs being made as prayed for in the petition. (53) TO Judge the balance of convenience, the Court would have to weigh the possible injury that might be caused to the plaintiff by refusal to grant interim relief, if the suit ultimately succeeds, as against the possible injury that might be caused to the defendant by reason of refusal to grant interim relief, if the suit ultimately fails. (54) THE onus lies on the petitioner, seeking interim relief to satisfy the Court that denial of interim relief would render the suit itself infructuous and that on a comparative assessment of the consequences to the respective parties of grant of interim relief, in the event of ultimate success or failure of the suit, the balance of convenience would tilt in favour of the petitioner seeking interim relief. (55) PRIMA facie, it appears that the plaintiff has transferred its shareholding. The shares have been transferred along with the original share scripts and registered in the name of the respective transferees. (55) PRIMA facie, it appears that the plaintiff has transferred its shareholding. The shares have been transferred along with the original share scripts and registered in the name of the respective transferees. (56) THE question of reference to a hand writing expert may arise during the trial of the suit and not at this stage until and unless the transfer deeds are held to be invalid and are cancelled, there would be a presumption of the petitioner having transferred his shares. The petitioner is, therefore, not entitled to any interim relief at this stage. (57) THE petitioner has not been able to allude to any action of the board of Directors which is ultra vires its powers. There is also substance in the argument that a derivative action cannot be maintained to impugn infringement of personal rights. Just as Public Interest Litigations are not entertained when the petitioner is found to have a personal interest in getting orders of Court, a derivative action would also not be entertained to agitate a personal grievance. (58) THERE can be no dispute with the proposition of law laid down in jhajharia Brothers Ltd. (supra) that minority shareholders may in certain contingencies sue on their own behalf and on behalf of other shareholders, in the interest of the company. The petitioner has apparently transferred his shares. There is not even a single share registered in the name of the petitioner. It is thus not necessary to deal with the judgments cited on behalf of the petitioner with regard to the rights of shareholders at this interlocutory stage. (59) IN Abonthi Explosives (supra) the Court held that a director of a company could maintain a suit before the Civil Court challenging the validity of resolutions passed by the Board of Directors disqualifying him from being Director. The judgment is distinguishable and has no application in the facts of this case. (60) IT is a well-established proposition of law that ouster of jurisdiction of the Civil Court is not readily to be inferred, as held in Asansol electric Supply Co. and Ors. v. Chunilal Daw and Ors. , reported in 75 CWN 704 cited on behalf of the petitioner. (60) IT is a well-established proposition of law that ouster of jurisdiction of the Civil Court is not readily to be inferred, as held in Asansol electric Supply Co. and Ors. v. Chunilal Daw and Ors. , reported in 75 CWN 704 cited on behalf of the petitioner. (61) I am inclined to agree with Counsel appearing on behalf of the respondent that an application for framing of a scheme, must be made by way of an application in the Company Court under section 391 and not by filing a civil suit. (62) THE petitioner has not been able to discharge its onus of satisfying this Court that a strong case has been made out for interim orders as prayed for in this petition. On the other hand, the orders prayed for would seriously prejudice the rights of the respondent No. 5, a bona fide purchaser of the Sahibabad property for value. (63) THIS application is, thus dismissed. (64) COUNSEL appearing on behalf of the petitioner prays for stay of operation of this order. The prayer for stay is considered and refused.