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2011 DIGILAW 787 (CAL)

Murat Viniyog Ltd. v. Bijay Kumar Kajaria

2011-06-15

I.P.MUKERJI

body2011
Judgment I.P. Mukerji, J. 1. ONCE again a dispute in a small business family has come to this Court by way of an appeal from an Order of the Company Law Board. The family involved is the Kajaria family. Some members of this family who are respondents in this appeal made an application to the Company Law Board under section 397 and 398 of the Companies Act, 1956, being C.P.No.18 (Kol) of 2009 complaining of oppression and mismanagement by some other members. The family concern involved was Murat Viniyog Ltd. 2. THE appellant which was the first respondent filed an application before the Board, C.A. No. 503 of 2009 complaining that the petitioners before it did not have the requisite share qualification to maintain the action. On a very small point of procedure to be adopted to deal with that application an appeal came before me, filed by the appellant herein, being A.P.O.T 408 of 2010. I disposed of that appeal on 15th July 2010 by giving some directions to the Company Law Board to deal with the above application filed by the appellant. The group represented by the appellant and the proforma respondents in the appeal will be called the majority and the group represented by the respondents excluding the private respondents will be called the minority when such description is called for. This description is only for convenience and is not to be treated as a finding. Otherwise, the parties are described according to their description in the cause title of the section 397 and section 398 petition. 3. THIS application challenging the locus standi of the minority to file an application before the Company Law Board was dismissed by the Tribunal on 16th August, 2010. The consequence of this dismissal order is that the Company Law Board will now proceed to hear the application on merits. 4. THE majority is aggrieved by this Order. Their point of view is that since the minority does not have the locus standi to maintain the Section 397, 398 application before the Company Law Board, it cannot go into the merits of the dispute. Now I will go into the details of the application. The whole dispute between the parties concerns section 399 of the Companies Act, 1956. This section specifies the class of members who can maintain an application under section 397 and 398. Now I will go into the details of the application. The whole dispute between the parties concerns section 399 of the Companies Act, 1956. This section specifies the class of members who can maintain an application under section 397 and 398. It inter alia states that one hundred members or l/10th of the members of a company whichever is less or holders of not less than l/10th of the issued share capital of the company can apply. Anyone member with the consent of others so as to fulfill the above requirement may also make the application. 5. ACCORDING to the majority, the minority at the time of filing of the section 397, 398 application did not have more than 6% of such share holding in the company. ACCORDING to the majority Bijay Kumar Kajaria, being the petitioner No. 1 before the Company Law Board had sold 37,750 shares of this Company Murat Viniyog Ltd. in the Financial Year 2007-2008. To be more specific, these shares were sold on 8th June, 2007. It was disclosed in his income-tax return for the Assessment Year 2008-2009. It was signed by the petitioner No. 1. Various statements like Balance Sheet, Profit and Loss Account, Computation Sheets and so on being documents accompanying the return are relied on by the majority. ACCORDING to one of such statements these shares were acquired in 1987 and sold on the aforesaid date. 6. SIMILAR return for the same financial and assessment years were placed to show that Uma Kajaria, the petitioner no.2 sold 15,000 shares on 21st June, 2007, 5,000 of which were acquired by her in 1987 and 10,000 in 1984. These shares were sold to the respondent Nos. 4 and 6 in the Company proceedings. Furthermore, these transfers have been recorded and registered by the Company and its register rectified accordingly. After giving effect to such transfers, the minority is left with 6% shares in the Company. Hence according to the majority they cannot maintain the proceeding under section 397 and 398 of the said Act. But, it is common ground, that without such transfer their shareholding would be 16.55%. 7. THE central theme of this story is this. THE company owns a very valuable property numbered as 15/C, Raja Santosh Roy Road, Kolkata. It is in Alipore. Everybody knows how valuable properties in that locality are. But, it is common ground, that without such transfer their shareholding would be 16.55%. 7. THE central theme of this story is this. THE company owns a very valuable property numbered as 15/C, Raja Santosh Roy Road, Kolkata. It is in Alipore. Everybody knows how valuable properties in that locality are. If the minority is reduced to 6% they will have no real interest in the Company and hence will cease to have any controlling interest in the property. It is said that this property is the residence of the family. 8. THE version of the minority group is that the affairs of the company were under the absolute control of the respondent Nos. 2 and 5 being Ajay Kumar Kajaria and Sanjay Kajaria. These two respondents looked into the corporate as well as personal accounts of the petitioners. These respondents also possessed all the records of the company as well as their personal records. THE petitioner Nos. 1 and 2 never signed any transfer deeds by which they were shown to have transferred the above shares to the respondent Nos. 4 and 6 being the son of the respondent No.2 and wife of respondent No. 5 respectively. THE income tax returns of the petitioners were also looked after by the said respondent Nos. 2 and 5 and prepared and filed by them. THE petitioner Nos. 1 and 2 used to sign the income tax returns blindly. In any event only the returns were signed by them and not the accompanying documents, which were all prepared by the respondent Nos. 2 and 5. THE petitioner Nos. 1 and 2 had nothing to do with the documents and had not even seen them when they were allegedly prepared and filed. THE said respondents had also the power to deposit any money they pleased into the bank accounts of the petitioners. THE alleged price of the said shares were deposited in such bank account. The face value of each share was Rs.10/-. They were sold at Rs.5.50/- per share. But what is more important according to the petitioners is that since the company owned the Alipore property the shareholding determined their interest in that property. It is inconceivable that such a valuable property could be parted with for Rs.2,07,625/-. 9. THE core of the case of the petitioners is that the respondent Nos. But what is more important according to the petitioners is that since the company owned the Alipore property the shareholding determined their interest in that property. It is inconceivable that such a valuable property could be parted with for Rs.2,07,625/-. 9. THE core of the case of the petitioners is that the respondent Nos. 2 and 5 were the alter ego of the company and the controlling force within the family. THE petitioner Nos. 1 and 2 always acted according to their will and dictates, to the extent of signing documents blindly and allowing them to run the affairs of the company, their own business affairs including operation of their bank accounts. 10. FURTHERMORE, it was submitted that the transfer deeds had not been signed by the petitioner Nos. 1 and 2. Transfer of shares could not have been registered by the company, unless they were accompanied by proper deeds of transfer, as required by section 108 of the said Act. Therefore, the learned Counsel claimed that these transfers were void and his client had the requisite qualification. The majority takes the point that the shares were transferred between 8th June, and 21st June, 2007. Rectification of the Register of the Company was made contemporaneously. But the proceedings before the Company Law Board were taken out in July, 2009. 11. ACCORDING to the majority, for the purpose of determining whether an applicant in a section 397, 398 application has standing, a court has to go by the shareholding of the applicant in the share register. It cannot go much beyond that. 12. IT was conceded by their learned counsel that if there was some element of illegality committed by the company resulting in non-registration of shares or in allotting shares in such a manner that the shareholding of a group was reduced or if the authorised share capital was increased and consequent allotment of shares so as to reduce its shareholding, the Court had the power to go into such issues. But, any other dispute regarding holding of shares is a private dispute between shareholders or between a shareholder and an outsider and does not concern the company. In a private dispute between two shareholders or one shareholder and one outsider, a court entertaining an application under section 397 and 398 should not interfere. But, any other dispute regarding holding of shares is a private dispute between shareholders or between a shareholder and an outsider and does not concern the company. In a private dispute between two shareholders or one shareholder and one outsider, a court entertaining an application under section 397 and 398 should not interfere. He cited the English case of RE a company (No 001 761 of 1986) reported in BCLC 1987 Ch D page 141 and referred me to the passages at pages 145 to 146. He also cited the case of M.S.D.C. Radharamanan vs. M.S.D. Chandrasekara Raja and Anr., reported in 2008(6) SCC 750 and placed paragraph 22. However, he conceded that dilution of the shareholding of a member by the act of the company can be gone into, citing Om Prakash Gupta and Ors. vs. Hicks Thermometers (India) Ltd. and Anr., reported in 97 Company Cases 356 at page 358. Furthermore, it was submitted by him that the minority had the remedy to promptly approach the Company Law Board under section 111(4) of the Companies Act for rectification of the share register. They have not approached this forum for such purpose. Furthermore, their learned Counsel said that the Company Law Board or this Court could not go into the title of shares in the 397 and 398 proceedings and cited Sangramsinh P. Gaekwad and Ors. vs. Shantadevi P. Gaekwad (dead) Through Lrs. and Ors., reported in (2005)11 SCC 314 , Para 143. 13. HE also cited Verschures Creameries Limited vs. Hull and Netherlands Steamship Company, Limited, reported in 1921(2) KB 608, with regard to the income tax returns and argued that a party should not be allowed to approbate and reprobate at the same time. Thus, the petitioner Nos. 1 and 2 having signed the income tax returns and acted in terms of them cannot resile from their contents. 14. HE also cited (Seemakurti) Somanna and Ors. vs. (Vankadari) Subba Rao and Anr., reported in AIR 1958 AP 200 (paragraphs 9 and 10) to lend authority to the submission that an income tax return is admissible in evidence. 1 and 2 having signed the income tax returns and acted in terms of them cannot resile from their contents. 14. HE also cited (Seemakurti) Somanna and Ors. vs. (Vankadari) Subba Rao and Anr., reported in AIR 1958 AP 200 (paragraphs 9 and 10) to lend authority to the submission that an income tax return is admissible in evidence. He also shows me the case of Ammonia Supplies Corporation (P) Ltd. vs. Modem Plastic Containers Pvt. Ltd. reported in 1998(7) Supreme Court Cases 105, which says that rectification of register application is to be made by way of an appropriate proceeding before the Company Law Board, which has not been made by the minority. Moreover, he shows me paragraphs 27, 31, 32 and 33 of the report to tell me that even in such proceedings, where contentious issues regarding title of shares are raised, the Company Law Board should relegate the parties to a civil forum to resolve the dispute. 15. HE also said that at best the transaction is voidable and not void and is good until it is set aside relying on the decision of the Privy Council in the case of Ramchandra Jivanji Kanago and Anr. vs. Laxman Shrinivas Naik and Anr. reported in AIR (32) 1945 Privy Council 54. 16. FURTHERMORE, according to him, the minority was unable to produce a single share certificate which ought to have been in their possession had the share transfer forms been forged. Share Certificates are prima facie evidence of title according to Section 84 of the said Act. Last but not the least he attacked the order of the Company Law Board on the ground that it was bereft of any reasons. Hence, according to him the order was perverse and liable to be set aside by the Court. Discussion and Findings: 17. THE Company Law Board is required to come to a positive finding whether the petitioners before them have the requisite qualifying shares or not. It has to come to a finding according to the requirements of Section 399. They have no jurisdiction to defer the determination till conclusion of the trial. Look at the consequences if such an approach is taken. A busy body will succeed in opening up the affairs of a company, which otherwise he has no right to do. It has to come to a finding according to the requirements of Section 399. They have no jurisdiction to defer the determination till conclusion of the trial. Look at the consequences if such an approach is taken. A busy body will succeed in opening up the affairs of a company, which otherwise he has no right to do. By the time his absence of right is established he will have accomplished the mischief. A company is entitled to protect its secrets, which it will be unable to do if such procedure is adopted. What are the requirements of section 399? Is the Company Law Board to hold a full trial to ascertain whether the petitioners before them are qualified to take out the proceedings? My answer is an emphatic 'No'. Let me see to what extent the authorities support me. 18. IF there is a dispute between shareholders regarding holding or transfer of shares, or an ordinary dispute between a shareholder or director and the company it is a private dispute and the Company Law Board should not go into it in a section 397, 398 proceeding. [See the case of Re a company (No. 001761 of 1986) reported in BCLC 1987 ChD 141; Sangramsinh P. Gaekwad and Ors. vs. Shantadevi P. Gaekwad (dead) Through Lrs. and Ors., reported in 2005(11) SCC 314 , Para 143 and M.S.D.C. Radharamanan vs. M.S.D. Chandrasekara Raja and Anr., reported in 2008(6) SCC 750 Para 22]. In the case of Re a Company BCLC 1987 Ch D 141 (supra) Harman J. said the following: "In all the circumstances, as it seems to me, Para II shows nothing in the sense of conduct in the course of or an act or omission in the course of the conduct of the company's affairs. All of them are, as I would put it, dehors the company; they are acts by the respondent in her personal capacity. I could not fail in argument to put to counsel for the petitioners this illustration: if a director, using his authority as a director to obtain entrance to the company's premise and his key to the company's safe to obtain access to the safe, then goes to the safe and steals 5,000 of the company's money and leaves, is that a ground for a petition under s 459? Counsel for the petitioners conceded that, in his view, it was not. Counsel for the petitioners conceded that, in his view, it was not. There was no act in the conduct of the company's affairs. There would be plainly a crime (the crime of theft) a gross breach of fiduciary duty, misuse of confidential information (the combination of the safe) and a whole series of civil wrongs. What there would not be was conduct of the company's business in a manner unfair to anybody. The right remedy for that would not be a petition under S 459 but an action to recover money, Mareva injunctions to freeze assets and a prosecution and, one hopes, a term in jail for the director. But there is nothing to do with s 459. As I put it to counsel for the respondent, and she accepted, there is a distinction between actions by a shareholder which are adverse to the company but which are not actions in the course of the company's business; and such, submitted counsel, were exactly the actions of the Scottish Cooperative Wholesale Society in Scottish Co-operative vs. Meyer already cited; actions in the course of the company's business which would not only be the sitting-by probably, though I will not decide necessarily, by a majority of the board condoning such wrongful actions and taking no steps in the company to improve or resolve the company's position. In my judgment, that analysis is right. It applies to this paragraph and the paragraph entirely fails to support the petition. The further Para 12 is merely in the premises a set of conclusions. A general averment in Para 13 brings in unfair prejudice and the reference to s 459 by inference. In my judgment, all those paragraphs, if proved to the hilt, could not justify an order under s 459 because they do not come within the terms of the section and, although the phrase is slightly odd in connection with a petition and such a general right as this, they are within the description in Order 18, r 19(1), a petition which discloses no cause of action, that is, no conduct within the statutory right to relief." 19. OUR Supreme Court, with regard to an inheritance dispute raised in a Section 397, 398 proceeding in Sangramsinh P. Gaekwad and Ors. vs. Shantadevi P. Gaekwad (Dead) Through LRS. OUR Supreme Court, with regard to an inheritance dispute raised in a Section 397, 398 proceeding in Sangramsinh P. Gaekwad and Ors. vs. Shantadevi P. Gaekwad (Dead) Through LRS. and Ors., reported in 2005 11 SCC 314 (supra) at paragraphs 143 and 144 said the following: "143. It is also not in dispute that the matter relating to her claim to succeed FRG as his Class I heir is pending adjudication in Civil Suit No. 725 of 1991 in the Baroda Civil Court. She claimed title in respect of 8000 shares by inheritance in terms of the Hindu Succession Act. Indisputably, in terms of section 15 of the said Act she is a Class I heir but the appellants herein contend that the said provision has no application having regard to section 5(2) thereof as inheritance in the family is governed by the rule of primogeniture. A pure question of title is alien to an application under section 397 of the Companies Act wherefore the lack of probity is the only test. Furthermore, it is now well settled that the jurisdiction of the Civil Court is not completely ousted by the provisions of the Companies Act, 1956. (See Dwarka Prasad Agarwal vs. Ramesh Chander Agarwal) 144. A dispute as regards right of inheritance between the parties is eminently a civil dispute and cannot be said to be a dispute as regards oppression of minority shareholders by the majority shareholders and/or mismanagement." 28. In M.S.D.C. Radharamanan vs. M.S.D. Chandrasekara Raja and Anr., reported in 2008 6 SCC 750 (supra) at Para 22 the Hon'ble Supreme Court pronounced that the impugned action should in some way affect the company or its shareholders to qualify for consideration under section 397 and 398 of the said Act. It opined as follows: "22. The provisions of the Act vis-a-vis the jurisdiction of the Company Law Board must be considered having regard to the complex situation(s) which may airse in the cases before it. No hard-and-fast rule can be laid down. It opined as follows: "22. The provisions of the Act vis-a-vis the jurisdiction of the Company Law Board must be considered having regard to the complex situation(s) which may airse in the cases before it. No hard-and-fast rule can be laid down. There cannot be any doubt whatsoever that the acts of omission and commission on the part of a member of a company should be qua the management of the company, but it is difficult to accept the proposition that the just and equitable test, which should be held to be applicable in a case for winding up of a company, is totally outside the purview of section 397 of the Act. The function of a Company Law Board in such matters is first to see as to how the interest of the company vis-a-vis its shareholders can be safeguarded. The Company Law Board must also make an endeavour to find out as to whether an order of winding up will serve the interest of the company or subvert the same. Further, if an application is filed under section 433 of the act or section 397 and/or section 398 thereof, an order of winding up may be passed, but as noticed hereinbefore, the Company Law Board in a winding-up application may refuse to do so, if any other remedy is available. The Company Law Board may not shut its doors only on sheer technicality even if it is found as of fact that unless the jurisdiction under section 402 of the Act is exercised, there will be a complete mismanagement in regard to the affairs of the company." 20. BUT there is an exception to this principle. If the Company through those in control of it is guilty of reducing the shareholding of a group of shareholders, by illegal allotment of shares or by illegal increase of its unauthorized share capital and thereafter wrongful allotment of those shares, then the Court can determine the correct shareholding under section 399 in a section 397, 398 proceeding. [See the case of Om Prakash Gupta and Ors. vs. Hicks Thermometers (India) Ltd. and Anr., reported in 97 Company Cases 356 at page 358.] BUT the exception is not the case here. A private dispute partly exists between the majority and the minority regarding alleged transfer of shares. The minority belongs to the same family as the majority. [See the case of Om Prakash Gupta and Ors. vs. Hicks Thermometers (India) Ltd. and Anr., reported in 97 Company Cases 356 at page 358.] BUT the exception is not the case here. A private dispute partly exists between the majority and the minority regarding alleged transfer of shares. The minority belongs to the same family as the majority. Their plain and simple case is that the respondent Nos. 2 and 5 were the alter ego of the company. The minority acted according to their wishes, blindly, by inter alia signing papers which were presented to them and by allowing them to make deposits in their bank account. The said transfer forms were never executed, or lodged with the company. I would like to say that the learned Counsel for the majority said that if it was the case of the minority that they had not signed the share transfer forms then the share certificates would be with them. 21. THEREFORE, on the basis of the above authorities, when the above dispute was raised, was the Company Law Board to send the parties to a civil forum for resolution of their dispute regarding alleged transfer of shares? 22. IN my reading of section 399 the petitioner or petitioner with supporting shareholders should have the prescribed qualification. The claim by the minority was that they had more than 10 % of the issued and subscribed shares which was emphatically denied by the majority. In my judgment, only when a dispute is purely private between two shareholders or between a shareholder and a company or between a director and the company, the Company Law Board should not entertain such a dispute in a section 397, 398 proceeding. Only when the company is involved and allegations are made that by an act of the company or its alter ego being one shareholder or a group of shareholders, the qualification of the petitioner or petitioners to apply has been done away with, is the Company Law Board faced with the dilemma, to what extent it should exercise its jurisdiction. 23. IN my judgment a Court or tribunal determining this share qualification must first go by the records of the company. 24. 23. IN my judgment a Court or tribunal determining this share qualification must first go by the records of the company. 24. NOW, the petitioning shareholders might allege that shareholding was manipulated by those in the control of the company, by increasing the authorised capital or by arbitrary allotment of shares to their favourites or both so as to reduce the petitioners to a minority. Since this is part of the affairs of the company the Company Law Board can go into it. Then there is the case like this, where the petitioners allege that another group of shareholders has defrauded them by forging the share transfer forms. It is also alleged that the other group is the alter ego of the company and their act is the act of the company. What should have been the approach of the Company Law Board in this Case? 25. WHEN the locus standi of the minority was challenged, the Company Law Board ought to have asked the Company to produce properly executed transfer deeds lodged with them to effect change of shareholding in its register. If such executed transfer deeds were in the possession of the Company and there was rectification in the register accordingly, then the Company Law Board should have declared that the minority had no locus standi to maintain the action. It should have dismissed the Company petition with liberty to the petitioners to file a fresh petition as and when their right to sue was established in a proper civil forum. 26. IT may have been found by the Company Law Board that there were no executed transfer deeds lodged with the company. In that case, if without such transfer deeds the minority had more than 10% holding in the company, the Board should have entertained the company petition and continued to do so until the majority could bring an Order of the Civil Court that the minority had less than 10% shares. There may be a third situation where it may have been alleged that the transfer deeds had been forged or forged and submitted subsequently. In that case also the Company Law Board would have to consider the register of the company as correct and dismiss the company petition with the same liberty reserved to the minority. There may be a third situation where it may have been alleged that the transfer deeds had been forged or forged and submitted subsequently. In that case also the Company Law Board would have to consider the register of the company as correct and dismiss the company petition with the same liberty reserved to the minority. The Company Law Board should have directed the custodian of the share certificates to produce them at once and come to an appropriate conclusion. 27. I may also observe that in making a determination of the qualification issue the Company Law Board should in all prima facie genuine cases involving consideration of substantial evidence, relegate the parties to a civil forum by dismissing the section 397, 398 proceeding with liberty to reapply in accordance with law. 28. I find that in this adjudication this approach was not taken by the Company Law Board. Therefore, the application made by the majority has to be remanded to the Company Law Board for reconsideration and for a fresh order in accordance with law. The impugned order of the Company Law Board dated 16th August, 2010 is set aside. All questions raised in the application under consideration are kept open. It is expected that the Tribunal shall dispose of this application according to the observations made above within a period of eight weeks from the date of communication of this order. It might adopt any further approach it deems fit and proper according to the legal principles discussed above. The appeal is partly allowed. The stay application if any stand disposed of. No order as to costs. Urgent certified photocopy of this judgment and order, if applied for, to be provided upon complying with all formalities. B.D.