BEFORE THE COMPANY LAW BOARD, PRINCIPAL BENCH, NEW DELHI 

ARUN KHOSLA, Advocate, for the petitioners. 

DR. MEERA AGARWAL and R. C. MISHRA, Advocates, for respondent 6. 

DR. S. R. SHARMA, Advocate, for respondent 1. 

MOHAN AKELLA, respondent 4 in person. 

C. L. NARASIMHAM, Advocate, for respondents 3 and 4. 

ORDER 

S. BALASUBRAMANIAN, CHAIRMAN - This petition filed under section 397/section 398 of the Companies Act ('the Act') in the matter of Software Mart India Ltd. (the company) is essentially in connection with the composition of the Board of directors of the company. This petition has been filed with the consent of 106 shareholders holding approximately 19.67 per cent shares in the company. Ibis company was incorporated sometimes in February, 1992, with the main object of carrying on the business of development of system software and application software and related activities. Of the authorised capital of Rs. 10 crores, the paid up capital is Rs. 2.13 crores. 

2. A summary of the petition is as follows : The first petitioner, a successful technocrat having promoted a few successful public listed companies was approached by the second respondent who is the Chairman and Managing Director of Zenith Computers Ltd. (Zenith), and the third respondent, an employee thereof, for promoting the company in the year 1991. At that time, the understanding was that Zenith would remain a separate entity and the respondents would ensure that their interest in Zenith did not in any way affect the interest of the company. Accordingly, the company was promoted and incorporated by the first petitioner and these two respondents. It was agreed that the day to day management of the company would be with the 2nd and the 3rd respondents in view of their experience in the field of computer software. The first petitioner, through his friends and associates, mobilised nearly 60 per cent of the share capital of the company by giving an assurance about the good prospects of the company. Since for nearly 4 years, the company did not declare any dividend and since there was no indication that the shares would be listed, with a view to infuse more funds in the company, the first petitioner took certain steps in this direction which was not favoured by the respondents. In view of the unsatisfactory performance of the company, the first petitioner did an in-depth study of the affairs of the company which revealed that nearly 80 per cent of the revenue of the company was being routed through one Diplomat Electronics (P) Ltd., Singapore (Diplomat) in which the majority shareholder was the brother of the 2nd respondent. This relationship was not disclosed by the 2nd respondent in any Board meeting which is in violation of the provisions of section 299 of the Act. Since the major portion of the business was routed through Diplomat, a major portion of the profits was retained by Diplomat and negligible profit was passed on to the company. In other words, at the cost of the company, 2nd respondent allowed Diplomat to flourish. Further, it was also noticed that most of the hardware purchases were from Zenith in which the 2nd respondent was the managing director. Relating to these transactions also, no disclosure in terms of section 299 was made by the 2nd respondent. Further, for the registered office sub-tenanted by Zenith, originally, the company was paying a rent of Rs. 75,000 per month which was subsequently increased to Rs. 2.25 lakhs per month while Zenith itself was paying to the landlord only Rs.75,000 per month. This way, Zenith was making a profit of Rs. 21 lakhs per year from the company. It was also noticed that the company was spending over Rs. 15 lakhs to maintain the office in Singapore for the use of Diplomat which is against the interests of the company. All the records relating to transactions with Diplomat are maintained by the 3rd respondent without associating the accounts department of the company only with the safeguard the under hand dealings between the company and Diplomat. It is further alleged in the petition that some of the lucrative orders obtained by the first petitioner were not acted upon by the respondents since they were more interested in routing their business through Diplomat. The company has developed a software called 'Super Banker' a very versatile software for use in banks. However, this could not be marketed effectively due to the black-listing of the company by Bank of India because of the association of the 2nd respondent with the company. The manner in which the affairs of the company are being managed would be evident from the fact that while software industry margin of profit is between 30 per cent to 40 per cent of the turnover, the company's profit was 2 per cent of the turnover in 1994-95 and coming down to 0.4 per cent in 1995-96. 

3. When the company convened 4th AGM on 30.11.1996, in spite of insufficient notice, the first petitioner was able to collect proxies to the tune of 43 per cent of the subscribed capital of the company and lodged the same with the company on 27.11.1996 and 28.11.1996, i.e., 48 hours before the scheduled time of the AGM. Apprehending that with such a large support, the first petitioner would be in a position to effect change in the management, the 2nd and 3rd respondents issued a public notice through newspapers on 28.7.1996 cancelling the proposed AGM on the ground that 21 days notice had not been given for the meeting. Notwithstanding the cancellation, a large number of members of the company assembled at the scheduled time at the venue of the meeting and decided to proceed with the meeting in spite of the absence of any of the directors and passed certain resolutions like adoption of accounts for the year 1995-96, re-election of the first petitioner as director and appointment of an auditors Later, on 3.12.1996, the first petitioner convened a Board meeting with due notice to respondents 2, 3 and 5. Respondent 2 and 3 did not attend the said meeting. In that meeting, 3 new directors were appointed and resolution regarding change in the instructions for operating bank accounts of the company was passed. The respondents have challenged the business transacted in this Board meeting in a civil suit in the Bombay City Civil Court (Suit No. 6723 of 1996) and the learned Judge passed an ad interim injunction restraining the first petitioner and the 5th respondent from acting upon those resolutions. With a view to highjack the company, 2nd and 3rd respondents convened a meeting of the Board on 9.12.1996 wherein resolutions were passed ratifying the shifting of the registered office and appointment of 3 new persons as additional directors. On the same day, members of the company gave a notice under section 169 of the Act seeking requisition of an EOGM for passing resolutions to remove the 2nd and 3rd respondents as directors. However, the 3rd respondent, through a letter, dated 27.12.1996, conveyed that the Board of directors of the company had decided not to convene the said meeting for various reasons. In view of this, the members of the company once again sought a requisition of an EOGM, vide their letter, dated 30.12.1996 which was also rejected by the company, through a letter, dated 21.1.1997. The first petitioner filed a Civil Suit No. 7457 of 1996 at the Bombay Civil City Court on 1.1.1997 seeking for a declaration that the resolutions passed in the Board meeting held on 9.12.1996 should not be acted upon and that the first petitioner continued to be a director on the Board and for appointment of a court receiver to take custody of the statutory books of the company and for giving inspection thereof to the first petitioner. Vide order, dated 1.1.1997, the said court directed the 3rd respondent to give inspection of the statutory books of the company to the first petitioner and also consolidated suit No. 6723 of 1996 with Suit No. 7457 of 1996. However, Suit No. 7457 was withdrawn by the first petitioner with the liberty to file the present petition before the Company Law Board. 

4. In view of the disputes between the petitioners' group and the respondents' group, the business of the company has come to a standstill. The conduct of the 2nd and 3rd respondent lacks in probity and they are guilty of not allowing the shareholders' democracy to prevail by not allowing the EOGM requisitioned by them and they are guilty of acting against the interests of the company by various acts of misfeasance. In view of this, the petitioners have averred that it is just and equitable that the company should be wound up, but to do so would be against their interest, and as such; the following reliefs should be granted. Direct convening a general body meeting of the company to consider the agenda of 30.11.1996 and of the EOGM requisitioned by the members of the company on 6.12.1996 and 1.1.1997 to be chaired by a retired Judge of a High Court; for a declaration that the 2nd respondent had vacated the office of director for contravening the provisions of section 299; for declaration that the Board meeting held on 9.12.1996 is illegal and void and various other consequential reliefs arising out of the allegations made in the petition. 

5. Respondents 1 to 4 have filed a common reply wherein they have denied all the allegations. In the reply, these respondents have raised certain preliminary objections that the petition does not fulfil requirements of regulation 18(1) of the CLB Regulation, 1991, as no documents supporting the allegations have been filed; the letter of consent filed along with the petition cannot be construed to be valid in law and the affidavits and the verification thereof do not comply with regulation 14(7) of the Company Law Board Regulations. The petitioners have not disclosed the fact that the disqualification of the 2nd respondent in terms of section 299/section 283 was agitated in the Civil Suit No. 7457 of 1996, but the same was. rejected by the Civil Court and the petitioners did not go on appeal against that order. In the same way, the petitioners have also not disclosed the fact that the ad interim injunction against the first petitioner and respondents 1 and 5 restraining them from giving effect to the resolutions passed in the Board meeting held on 3.12.1996 was granted on 6.12.1996 and was made absolute on 25.2.1997. 

6. A summary of the reply on merits is as follows : The foundation of the petition is that the 2nd respondent being the managing director of Zenith, without disclosing his interest with Zenith, has been enriching Zenith at the cost of the company. This allegation is absolutely baseless as the first petitioner was always aware of the association of the 2nd respondent with Zenith. It was Zenith which paid the preliminary expenses and the same was noted in the statement in lieu of prospectus filed with the Registrar of Companies, and this statement was approved in a Board meeting held on 26.2.1992 which was also attended by the first petitioner. In a Board meeting held on 26.3.1992; the amount spent by Zenith towards preliminary expenses and operative expenses was approved by the Board which was attended by the first petitioner. In the said meeting, the 2nd respondent disclosed his interest in Zenith as well as Zenith Technologies (P) Ltd. in terms of section 299. In the same meeting various other arrangements with Zenith were also approved. In that meeting, when these proposals were approved, the 2nd respondent withdrew from the discussions as he was an interested director. As far as the increase in the rent is concerned, Price Water House, Auditors of the company, have indicated in their report for 1995-96 as 'reasonable'. This increase in rent was approved in a Board meeting held on 9.4.1996 unanimously and the 2nd respondent did not participate in the discussion, nor exercised his vote. All transactions with the Zenith were with the approval of the Board in which the petitioner was always present, and as such, it is incorrect to say that Zenith was enriching at the cost of the company without any disclosure of interest by the 2nd respondent. As far as transactions with Diplomat are concerned, the first petitioner was fully aware of the same inasmuch as in a Board meeting held on 3.6.1995, a resolution was passed authorising opening of an account in the name of the company with Indian Bank in Singapore to be operated by two of the directors or two authorised representatives. One of the authorised representatives was the managing director of Diplomat. If the first petitioner had not known anything about Diplomat, then, he could not have approved the proposal to operate the account by the managing director of Diplomat. The 2nd respondent does not hold any share or position in Diplomat warranting disclosure under section 299. Further, in a Board meeting held on 30.10.1996 in which the accounts for the year ended 31.3.1996 were approved, the first petitioner was present, and these accounts carried detailed notes about the Singapore operations of the company and the first petitioner did not raise any queries in this regard. Further, the first petitioner was fully aware as to why no dividend has been declared by the company as every year, the matter of declaration of dividend was being discussed at the time of approval of the annual accounts and for various reasons, the Board decided not to declare any dividend and in all these Board meetings, the first petitioner was always present and participated. 

7. When this petition was being heard, we passed an order on 28.4.1997 recording the undertaking of the 3rd respondent to file a monthly statement of receipts and payments of the company from April, 1997, onwards with the Bench and also gave further direction to complete the pleadings. The respondents filed an application CA No. 156 of 1997 seeking staying of the proceedings on the ground that the petitioners had filed a Civil Suit No. 7457 of 1996 on similar issues as contained in the petition before Bombay City Civil Court. In our order, dated 19.9.1997, we recorded that this application would be considered along with the petition. In the order, dated 7.1.1998, with the consent of the parties and with a view to resolve the disputes between them, we directed that the 5th AGM of the company should be held on or before 31 March, 1998, after giving 30 days notice to the shareholders to transact the statutory business as well as special business relating to appointment of directors. We also, as agreed to by the parties, appointed Shri justice V. D. Tulzapurkar to chair the AGM in case he was agreeable, and if not, the parties should suggest, in consultation with each other, some other retired High Court or Supreme Court Judge after obtaining his consent for appointment as Chairman. We also directed that the notice of the meeting should be published in an English as well as in a Marathi newspaper and the shareholders would be at liberty to propose resolutions for appointment of directors not later than 10 days before the AGM. In the hearing held on 3.3.1998, the counsel reported that Shri Justice V. D. Tulzapurkar declined to chair the meeting and suggested the names of 3 other retired judges. We directed the counsel to approach the 3 Judges and whoever was willing, be requested to chair the meeting, which should be held before 30 April, 1998. Since it was reported that the 5th AGM could not be held without holding the 4th AGM, we directed that both the AGMs should be held on the same day, one after the other. In the same order, we also noted that one Shri Beni Prasad Verma claiming to hold 6.5 lakh shares in the company had filed an application C.A. No. 34 of 1998 seeking to implead himself as the 6th respondent and that his prayer for such impleadment was allowed subject to production of satisfactory evidence regarding his shareholding. In the hearing held on 12.5.1998 when no one represented the respondents, the counsel for the petitioners informed that no AGM had been convened in spite of our directions and he sought for further directions. Since respondents were not represented, the matter was adjourned to 25.5.1998 on which date also none was present on behalf of the respondents. On 1.6.1998, when this matter was being considered, none from respondents' side was present and, at the request of the counsel for the petitioners, Shri Arun Khosla, it was decided to consider the petition on merits on 21.8.1998. On this date, Dr. S. R. Sharma, advocate for the company, sought for adjournment on the ground that he had been engaged only on the previous day. We observed that in spite of our efforts to set in motion the democratic process in the company, no headway had been made in this regard. However, to explore the possibilities of holding the AGM for the year ended 31.3.1997, we directed the statutory auditors of the company, Price Water House, to conduct and complete the audit of the accounts of the company for the year ended 31 March, 1997, by 30 November, 1998, with further directions to the company to render all necessary assistance to the Auditors. The matter for considering the holding of the AGM was posted for hearing on 15 December, 1998. On this day, none was present on behalf of the petitioners. We pointed out to the counsel for the respondents that the auditors have informed this Board, vide their letter, dated 23.9.1998 that their communication to the company regarding audit requirements had been returned undelivered with the remarks 'Left-not known-returned to sender'. It also transpired from the letter of the Auditors, that it was the 1st petitioner and not the company which had conveyed our order, dated 21 August, 1998, to the Auditors. Thus, our directions regarding completion of the audit also did not materialise. We adjourned the matter to 27.1.1999, noting therein that if the petitioners did not enter appearance on that date, the petition would be dismissed for non-prosecution. Due to administrative reasons, the hearing was preponed to 19th January, which was later declared as a holiday and the hearing was held on 20th January, when only the advocate for the company was present. In view of this, the matter was adjourned to 18.2.1999. In the meanwhile, the first petitioner filed an affidavit, dated 18.1.1999 on 11.2.1999, through a letter, dated 19.1.1999. In this letter, he has stated that even though he was present in Delhi on 19.1.1999 to appear before the Company Law Board, on learning that it was declared as a holiday, he had left Delhi and that the enclosed affidavit be taken on record. In the said affidavit, he has brought out further allegations in relation to the inability of the company to meet its contractual obligations. He has also stated in the affidavit that he would not be in a position to appear before the Bench and that the Bench may pass any order it may deem fit in regard to the prayers in the petition including the prayers for interim reliefs. When the matter came up for hearing, the advocates for the respondents were present and we recorded in our order that the petitioners have left the decision to the Company Law Board for passing appropriate orders on the petition and that no progress had been achieved in the auditing of the accounts. We also recorded that we shall pass appropriate order and hence this order. 

8. At the outset, we would like to make it clear that we are not going to deal either with any of the allegations in the petition or with certain preliminary objections raised by the respondents for the reasons that both the sides had agreed before us that the disputes could be sorted out by convening a general body meeting to elect the directors. We have already detailed the efforts taken in this connection, and as such, we are not repeating the same. Unfortunately, whether due to deliberate action or otherwise, no general body meeting could be convened. Therefore, the only order that we consider appropriate to pass in this petition is to ensure that a general body meeting of the company is convened so that 900 odd shareholders of the company have their own elected representatives on the Board to carry on the affairs of the company, as, at present, due to the various litigations among the promoters, the business of the company has come to a standstill, the turnover having practically come to nil as against the turnover of the company in the year 1993-94 of about Rs. 5.43 crores and of about Rs. 9.4 crores in 1994-95. We have seen that the company or the directors have not been able to convene or hold a general body meeting in spite of our repeated directions. Therefore, we feel that while directing the company to convene an EOGM of the company to elect the directors, the same should be under the overall guidance and direction of a nominee of this Bench who will also be the Chairman of the proposed EOGM. Accordingly we appoint Shri S. P.Upasani, former Chairman of the CLB, (Tel. No. 2027779 Mumbai) as our nominee to oversee the convening of the EOGM and conduct the proceedings of the EOGM. He will also function as the Chairman of the EOGM which is to be convened and conducted in terms of the following directions : 

(1) The EOGM will be convened and conducted on a day not later than 31.8.1999. 

(2) The EOGM will conduct only one business, i.e., election of 4 directors being the number of directors prevailing in 1994-95. 

(3) Within ten days of receipt of this order, respondents 2 and 3 will meet Shri Upasani with the register of members and updated list of shareholders along with their address and in consultation with him prepare the notice for the meeting, form for proposing names for directors, proxy forms, etc. 

(4) It will be the responsibility of the respondents 2 and 3 to take all steps towards this end : issue of notices for the meeting, fixing the venue of the meeting, etc., in consultation with Shri Upasani. Petitioner 1 also will be at liberty to assist in the matter of convening the EOGM. 

(5) In addition to issuing individual notices to the shareholders under the supervision of Shri Upasani, a summary of the notice should be published in a Marathi and English newspaper in circulation in Mumbai. 

(6) The election of the directors will be out of the names proposed by shareholders on receipt of notice for the EOGM. 

(7) 30 days notice will be given for holding the EOGM and the shareholders would be at liberty to propose names for directors at least 15 days before the date of the meeting and the proposals so received will be circulated among the members one hour before the scheduled time or the EOGM. 

(8) As soon as the last date for receiving the names for directors is over, in case more than 4 names are proposed, then the company/ respondents 2 and 3 should arrange to get the ballot papers printed/numbered under the supervision of Shri Upasani. 

(9) Shri Upasani will preside over this EOGM and his decisions on the proceedings will be final. 

(10) Since we find from the statement of receipts and payment filed with us for the period ended 28.2.1999 that the company has a balance of Rs. 7.5 lakhs, the expenses towards convening and holding the meeting will be met out of this fund. 

(11) Shri Upasani is at liberty to engage the services of professionals like practising company secretary/chartered accountant/ advocate to assist him in his assignment on such terms and conditions as he deems fit, and the expenditure incurred in this connection will be borne by the company. 

(12) Till the EOGM is held, the company shall not incur any other expenditure other than for the purpose of the EOGM. 

(13) Shri Upasani will be paid a consolidated honorarium of Rs. 35,000 to complete this assignment of which Rs. 15,000 will be paid immediately and the balance at the conclusion of the EOGM. 

(14) On election of the directors in the EOGM, the present Board of directors will hand over the management of the company to the new Board together with all statutory records and books of account of the company. 

9. In case of any difficulty in complying with the above directions, Shri Upasani is at liberty to apply to us. With the above directions, we dispose of this petition.