2000-(036)-CLA -0183 -CLB Companies Act Judgements



CP No. 50 of 1999, decided on November 17, 1999.


Appearances : S. Malik for the Petitioner.


Gopal Jain, K. B. Hina & Pratap Bhavnani for the Respondents.



1. This petition has been filed under section 397/section 398 of the Companies Act, 1956 (‘the Act’), alleging acts of oppression and mismanagement in the affairs of Sea Side Hotels (P.) Ltd. (‘the company’). There are two groups of shareholders – Thakur and Bhavnanis – each group holding 50 per cent shares in the company. The petitioner is a member of Thakur group, himself holding 20 per cent shares. The Board of the company consists of 4 directors – two from Thakur group and two from Bhavnanis group. The brother of the petitioner representing Thakur group is the managing director of the company. The sister of the petitioner is also one of the directors. Neither of these two directors has been included as a respondent in this petition.

2. The main allegations of the petitioner are that there has been wrongful transmission of certain shares, there has been substantial siphoning of funds of the company, employment of bogus and benami employees, etc. On the basis of these allegations, the petitioner has sought for appointment of a special officer, investigation into the affairs of the company, cancellation of the transmission of shares, restraining the 2nd respondent from functioning as a director of the company.

3. Shri Malik, advocate appearing for the petitioner, submitted as follows The head of the Bhavnanis group – father of the respondents 2 to 5 who held 660 shares in the company – expired on 17th June, 1998. He had reportedly left a will in which the shares held by him in the company were bequeathed to one Ms. Reshma Bakshi with whom the said deceased had intimate relationship during his life time. The 2nd respondent, suppressing this will, had engineered transmission of the shares as intestate succession in a Board meeting held on 22nd March, 1999. This was done in spite of the protest by the petitioner who attended the meeting and also against the protest of another director of his group, namely, the sister of the petitioner. Further, of the 660 shares, 500 shares were allotted to 5th respondent, who is an American citizen without the approval of the Reserve Bank of India (‘RBI’) and in violation of the Foreign Exchange Regulation Act, 1973 (‘FERA’). Further, this transmission was done without any agenda item but under ‘Any other business’ with a view to ensure that the proposal of transmission was not known to any of the directors before the Board meeting. Even though, this transmission was approved as intestate succession, yet, the 2nd respondent had at the time of getting a house transferred, submitted a copy of a will dated 27th March, 1997 to Konark Park Co-operative Housing Society, Pune and the petitioner had taken inspection of that will. If it is so, then, the question of intestate succession does not arise and the 2nd respondent has played a fraud on the Board as well as the other shareholders. Even the will produced before the cooperative society is a forged one as the real will had been suppressed. Therefore, it is necessary that an investigation into this matter should be ordered.

4. His further submissions were : The 2nd and 3rd respondents are guilty of siphoning of funds of the company. The modus operandi for siphoning of funds adopted by the respondents are that by showing as if two employees were working in the company, salaries were being drawn in their names but pocketed by these respondents. Actually, other than three permanent and three temporary employees, no body else was employed in the company. amount of Rs. 30,000 per month was being pocketed by these respondents every month. He referred to annexure P-9 in this connection to show that these sheets indicate the amount of salary drawn for these fictitious employees. Likewise, an amount of Rs. 18,000 is charged in the accounts of the company towards salary for drivers while the company has not engaged any driver. The company is being charged for various civil works done at the house of the 2nd respondent, the hotel electrician is being used to take care of the electric installation at the house of these respondents as well as their other business entities, the telephone of the company has been shifted to another business premises of the 2nd respondent, monies are removed from the hotel from the petty cash on fictitious vouchers, and these respondents charge all the expenses relating to the cars used by them like cost of petrol, repairs, etc., while the cars are used by the family members of the respondents. In this way, the respondents are pocketing between Rs. 40-50 lakh per year out of the company funds.

5. He further submitted as follows : The respondents have entered into a conducting contract with the 6th respondent, a company owned by the 2nd and 3rd respondents. In turn, the 6th respondent has given a sub-contract of running the restaurant to one Shri Devender Nath Sharma. The respondents collect 18 per cent commission on sales while they account for only 9 per cent in the books of account of the company, pocketing the balance. In an earlier contract, the company used to collect 20 per cent commission on sales. The commission payable would work out to about Rs. 2 lakh per month but the respondents collect about Rs. 70,000 in cash and pocketed the same. In addition the entire Bhavnani family use the restaurant for which the company pay about Rs. 50,000 to the restaurant.

6. Summing up his arguments, the learned counsel submitted that even though the petitioner was not a director, he was allowed to involve himself in the management of the company and during the period he was so associated, the profits of the company increased from Rs. 14 lakh per year to Rs. 52 lakh in the year 1998-99. Since the various allegations made against this respondent clearly indicate that there is gross mismanagement in the affairs of the company, the various reliefs sought for in the petition should be granted.

7. Shri Gopal Jain, advocate appearing for the respondents, submitted that the petition is a motivated one with a view to get a position of a director in the company. He stated that the petitioner has wilfully not made the two directors from the Thakur group, of which one of them is the managing director parties to the proceedings since he could not make allegations against his own group of directors. According to him, the petition should be dismissed inasmuch as the managing director who is responsible for the conduct of the company has not been made a party to the proceedings. He also submitted that the petitioner became a shareholder of the company only on the basis of the consent terms arrived at between the parties before the Company Law Board (‘CLB’) proceedings in 1995. Referring to the consent order passed in those proceedings, he stated that as per the consent terms, the petitioner had unconditionally undertaken not to institute any proceedings against the management of the company on the strength of the shares transferred in terms of the consent terms except in case of fraud and falsification of accounts. Further, as per the consent terms, the petitioner was not to create difficulties in any general body meeting of the company. However, notwithstanding these consent terms, the petitioner has initiated the present proceedings and had also been obstructing the proceedings of the general body meetings. Therefore, he submitted that the proceedings initiated by the petitioner in contravention of the consent terms approved by the CLB should not be proceeded with and the petition be dismissed.

8. On merits of the case, he submitted that there has been no siphoning of funds as alleged by the petitioner by the 2nd and 3rd respondents. Since the brother of the petitioner is the managing director of the company, nothing could happen without his knowledge and the managing director has not complained of any siphoning of funds. He stated that it is the petitioner who is not a director, who has been enjoying the benefits of the company by charging personal expenses in the account of the company. According to the learned counsel, in the last one year the company has paid nearly Rs. 4.5 lakh on behalf of the petitioner. In this connection, he referred to the additional documents filed wherein the vouchers relating to the payments made by the company in respect of the expenses incurred by the petitioner for his personal benefit have been enclosed. Therefore, if at all any body is using the funds of the company, it is the petitioner who does not have any status in the company. However, since he is one of the family members, the respondents did not raise any objection towards meeting his personal expenses. In regard to the allegation that there were two, benami employees and the emoluments drawn in their favour were being siphoned of by the 2nd and 3rd respondents, the learned counsel submitted that the very fact that the company has been depositing provident fund, etc., shows that these employees were actually in employment. He submitted that these two had recently resigned. In regard to drawal of salary for drivers, he pointed out that every director has been allowed to engage a driver on his own and an amount of Rs. 4,500 is being reimbursed to these directors to meet the salary paid by them to their respective drivers. The company as such has not employed any driver as it will be more expensive than reimbursement. He further submitted that the 2nd respondent is actually paying a sum of Rs. 6,000 to the driver engaged by him but getting a reimbursement of only Rs. 4,500. As far as the other allegations of alleged siphoning of funds, he submitted that the petitioner could not furnish full particulars since these allegations are baseless. In regard to the catering contract with the 6th respondent, the learned counsel pointed out that in this company also both the families hold 50 per cent shares each and the managing director who is the brother of the petitioner is also a party to this contract. He, therefore, argued that it is inconceivable that one group of directors would allow the other group to get undue benefit out of the contract against their interest. He submitted that other than making allegations that there has been arrangement of underhand dealings with the 6th respondent, the petitioner has not furnished any particulars to substantiate this allegation.

9. In regard to the transmission of 660 shares held by Late Shri Rochram Bhavnani, he stated that Shri Rochram died intestate and as such his legal heirs became entitled to the shares held by him. He never left a will as alleged by the petitioner. Even though, the sister of the petitioner, a director, initially gave a letter objecting to the transmission, at the instigation of the petitioner, yet, in the Board meeting held on 22nd March, 1999, the Board unanimously resolved to transmit these shares on the basis of the consent given by all the legal heirs at Exs. 14 and 15. In this connection, he also referred to article 44 of the articles of association of the company to state that the Board of directors at its absolute discretion could dispense with production of probate or letter of administration or succession certificate before registering transmission of shares. Since, in this case, the Board constituting only two groups of shareholders knew fully well that Shri Rochram had left only 4 legal heirs and that all of them had agreed for transmission of the shares in the name of the 4th and 5th respondents approved registration of the transmission.  In regard to the stand of the petitioner the Late Rochram had prepared a will including Ms. Reshma Bakshi as a beneficiary for the 660 shares in an unsubstantiated stand and as such cannot be taken cognisance of. Accordingly, he submitted that there is no substance in the stand of the petitioner in this regard.

10. Summing up his arguments, the learned counsel stated that the petitioner has not had a clean record and is intemperate in nature and that is the reason why the Board consisting of the petitioner’s brother and sister did not want to register the shares in his name resulting in his filing a petition before the Western Bench of the CLB in 1995. However, later it agreed to transfer only on certain terms as contained in the consent terms. Since, he was a member of the Thakur group, even though, he was not a director, he was allowed to participate in the management and in the Board meetings too. However, in view of his militant attitude, as is evident from the proceedings of the general body meetings, he was not allowed to have free hand and, therefore, he has filed this petition. Since the petition is a motivated one and against the consent terms recorded by the CLB in the earlier proceedings, the petition should be dismissed.

11. We have considered the pleadings and arguments of the counsel. It is a fact that the petitioner became a shareholder of the company only in the year 1096 after the consent terms were recorded by the CLB. One of us (Vice Chairman) was a member of the Bench which recorded the consent terms. At that time, the respondent-directors took a stand that it would not be in the interest of the company to admit the petitioner as a member in view of his militant attitude and were also apprehensive that once he became a member, he was likely to create troubles. However, at the persuasion of the Bench, the respondents agreed to transfer the shares subject to various terms and conditions and accordingly the consent terms were entered into and the shares were registered in the name of the petitioner. The action of the petitioner in filing the petition has confirmed the apprehensions of the respondents that the petitioner was likely to create difficulties in the functioning of the company.

12. In regard to the alleged Wrongful transmission of shares, we do not find anything wrong on the part of the Board of the company to have done so. The shares have been transmitted to the legal heirs and in accordance with article 44 of the articles of association which authorises the Board to dispense with probate, etc. The petitioner, other than claiming that there was a will in which Ms. Reshma Bakshi had been included as a beneficiary, has not produced any evidence to this effect. He has also relied on his inspection of a will purportedly lodged by the respondents with Konark Park Cooperative Society. However, he has not produced copy of the same. Any way, according to us, this is a matter between the legal heirs and Ms. Reshma Bakshi to get the matter sorted out in a civil suit, if so advised. As far as the present proceedings are concerned, in the absence of any evidence of existence of a will, we have to only examine whether the transmission has been effected in accordance with the provisions of the articles of association. We find that the provisions of article 44 of articles of association have been complied with. This action of the Board, therefore, cannot be considered to be either an act of oppression or mismanagement.

13. As far as the allegation of siphoning of funds is concerned, as rightly pointed out by the counsel for the respondents, other than making an averment to this effect, no particulars have been given. Further, we feel that these allegations do not merit any consideration in the absence of impleadment of the managing director of the company, the brother of the petitioner, as a party to the proceedings. Further, we note that in spite of detailed reply filed by the respondents on the allegations of siphoning of funds, the petitioner has not reiterated these allegations in his rejoinder. Further, we note that the petitioner has averred in the petition that the 6th respondent is owned by the 2nd and 3rd respondents while in fact both Thakur as well as Bhavnani groups hold more or less equal shares in the 6th respondent. It is a fact that the Board consists of two representatives from each group of shareholders and making allegation only against one group of directors leaving alone the directors of the other group to which the petitioner is a member, leads us to the conclusion that this petition is a motivated one. We also find that the other two directors have not come forward to support the allegations of the petitioner. It is evident from the fact that these two directors are also in receipt of Rs. 4,500 per month towards the driver’s salary while the petitioner has made allegations against the two directors, It is a normal practice in many companies to reimburse the cost of drivers instead of employing drivers as it would involve additional cost. It is also on record that even though the petitioner is not a director, he has been enjoying the benefits of the company, which in law, he is not entitled. We gain a distinctive impression that the motivation for this petition is that he has been denied a directorship, as is evident from his letter dated 4th July, 1998 (annexure-H) wherein he had sought for a functional role in the company so that he could guarantee a minimum pre-tax profit of Rs. 50 lakh, and from the lawyer’s notice at annexure-M wherein he has complained that even though the company had made him a de facto director, yet had not made him a de jure director and had also complained that the company had not convened an extraordinary general meeting (‘EGM’) to make him a director. As a matter of fact, in para 31 of the petition, he had sought for handing over the management to him in exclusion of the 2nd respondent so that he could guarantee the profits of Rs. 75 lakh per annum.

14. The settled principles of law in a proceeding under section 397/section 398 is that the relief sought should be to put an end to the acts of oppression/mismanagement and not for any oblique purpose. The very fact that the petitioner has targeted the 2nd respondent leaving alone the managing director of the company, who is his own brother and represents his group, shows that the petition is not a bona fide one. Accordingly, we dismiss the petition.

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