C.P. No. 62 of 2009. Case: Abdul Latheef Meera Sahib and Another Vs Tacel Sanitaryware P. Ltd. and Others. Company Law Board

Case NumberC.P. No. 62 of 2009
CounselFor Appellant: Dr. K.S. Ravichandran, PCS and For Respondents: G. Sundaram for Respondents Nos. 1 and 2, H. Karthik Seshadri for Respondents Nos. 8 and 9
JudgesLizamma Augustine, Member
IssueCompanies Act, 1956 - Sections 171, 172, 257, 260, 397, 398, 402, 53, 53(2)(a)
Judgement DateMay 17, 2012
CourtCompany Law Board


Lizamma Augustine, Member, (Chennai Bench)

  1. The company petition is filed under sections 397/398 and 402 of the Companies Act, 1956. The dispute in the petition revolves around Tacel Sanitaryware P. Ltd. (respondent No. 1), originally incorporated on March 28, 2002, under the name and style Arcot Ceramics P. Ltd., and subsequently changed to the new name with effect from July 21, 2005. According to the petitioner the authorised capital of the company as per the audited balance-sheet as at March 31, 2008, is Rs. 3,20,00,000 divided into 32,00,000 equity shares of Rs. 10 each. The issued, subscribed and paid-up capital is Rs. 3,20,00,000 divided into 32,00,000 equity shares of Rs. 10 each. The respondents had subsequently increased the authorised and paid-up capital to Rs. 5,20,00,000 which is under challenge in this company petition. The company is engaged in the business of manufacture of and dealers in ceramics, sanitary ware, ceramic table ware, ceramic art potteries, etc. The petitioners are two individuals. The first petitioner is chairman of Hercules International Enterprises. The petitioners collectively hold 15,68,000 shares aggregating 49 per cent. of the shares in the paid-up capital of the company as on March 31, 2008. Respondents Nos. 2 to 7 are shareholders/directors of the company who collectively hold the remaining 51 per cent. shares. On November 12, 2007, the petitioners were appointed as directors of the company. The 49 per cent. shares were allotted to the petitioners on August 14, 2008 and the share transfer was duly approved by the board of directors on August 14, 2008. The petitioners got acquainted with the company through respondent No. 3 who is the son of respondent No. 2. On November 12, 2007, a memorandum of understanding was executed between petitioner No. 1 and respondent No. 2 who was the managing director of the company. The memorandum of understanding envisaged an equity participation of the petitioner in the company on the terms detailed in the memorandum of understanding as hereunder:

    (i) The net worth of the company is Rs. 2,95,12,693.

    (ii) The land on which the factory is occupying on rental basis, is to be bought by the company and its value is Rs. 1,23,60,000 out of which the petitioner has to contribute his 49 per cent. of the value as his share.

    (iii) Respondent No. 2 is to make good the net loss by contributing Rs. 90 lakhs.

    (iv) The accounting and marketing functions to be taken over by petitioner No. 1.

    (v) Respondent No. 2 shall manage administration, production and quality control.

    (vi) Both petitioner No. 1 and respondent No. 2 shall jointly manage the financial requirements.

    (vii) All statutory and other liabilities prior to the memorandum of understanding is to be borne by respondent No. 2.

    On November 12, 2007, both the petitioners were inducted as directors of the company and the board appointed petitioner No. 1 as the chairman of the company. In pursuance of the memorandum of understanding, on the same day the petitioners remitted a sum of Rs. 2,05,17,620 to the account of the company with Canara Bank to tide over working capital crunch and on the undertaking that respondent No. 2 would achieve break even point within 2 or 3 months. The fund was intended to serve as the contribution of petitioner No. 1 to acquire a stake of 49 per cent. in the company. Another agreement of sale was executed on the same day with respondent No. 3 agreeing to sell the 8.24 acres of land to the company. The company was already in possession of this land on lease basis and the bank had a charge over this land. As per the sale agreement Rs. 25,00,000 has been paid to respondent No. 3 as sale consideration and the balance Rs. 5,00,000 should be adjusted against the lease advance paid to respondent No. 3. Even though respondent No. 2 was supposed to complete all the documentation in 72 hours, it took about 9 months for him to transfer the shares in favour of the petitioners. Within two months of investment all the money invested by the petitioners got drained from the account of the company. Relying on the repeated representations and assurances from respondents Nos. 2 and 3, the petitioners took a lot of steps to assist the company, but respondent No. 2 failed to honour the terms of the memorandum of understanding. Petitioner No. 1 arranged for an export order for Rs. 65 lakhs, arranged a letter of credit, paid Rs. 25,00,000 to enable the company to run its manufacturing unit and paid another 18 lakhs on June 1, 2008, for obtaining LPG from Caltex so that the plant could be run. With the support of the petitioners respondent No. 2 could have achieved the promised break even point, but he failed to do so. The balance-sheets and financial statements given to the bank reflected profits, whereas the copy supplied to the petitioners indicated losses. The petitioners understand that the respondents are not interested in the joint venture. Even then petitioner No. 1 agreed to invest further provided the equity representation is increased to 76 per cent. Without proper notice to the petitioners, the annual general meeting of the company was held on September 30, 2008. The notice of the annual general meeting has been purportedly approved at a board meeting held on September 30, 2008. The respondents have concocted the minutes of the board meeting as well as annual general meeting with some purpose, and they are in contravention of the statutory rights of the petitioners as shareholders. In the purported annual general meeting, the names of the petitioners have been dropped as directors with effect from September 30, 2008. Form 32 to the above effect has been filed only on June 26, 2009. Yet another purported general meeting was held on January 5, 2009, authorising the increase of capital from Rs. 3.20 crores to Rs. 5.20 crores. But Form 5 has been filed only on April 1, 2009. The articles of association have also been amended and Form 23 had been filed on March 28, 2009. The petitioners had no notice of such meetings and the conduct of the meeting is highly oppressive. Subsequently, on March 13, 2009, 20 lakhs shares were issued to respondents Nos. 8 and 9 and the return of allotment has been filed with the Registrar of Companies on May 5, 2009. This allotment is without consideration and notice to the petitioners, and hence liable to be annulled. As per the balance-sheet as at March 31, 2008, the loss accumulated comes to Rs. 465 lakhs which is double the turnover of the company. The respondents have shifted the registered office of the company as is evident from Form 18 filed at the Registrar of Companies on May 30, 2009. The allotment of shares to respondents Nos. 8 and 9 violates the pre-emptive right guaranteed under the articles of association. The respondents have ousted the petitioners from the board within a few weeks after shares were allotted to them. The two companies to whom shares have been allotted are dummy companies without any resource. The allotment is planned in such a way as to reduce the petitioners to abject minority. The removal of directors from directorship and allotment of shares to respondents Nos. 8 and 9 are illegal and liable to be set aside.

  2. Counter: Respondent No. 1 filed a counter admitting the execution of memorandum of understanding on November 12, 2007, as per which investment was made by petitioner No. 1 in the company after conducting a feasibility study. The memorandum of understanding was signed under compulsion and not with free will. The sale agreement dated November 12, 2007, is also admitted. Respondent No. 1 says respondents Nos. 2 and 3 were compelled to concede to all the terms dictated by petitioner No. 1 in view of the fact that the company was facing financial problems. Petitioner No. 1 agreed to invest Rs. 5 crores as his investment, but he remitted only Rs. 2,05,17,620 out of which Rs. 1,44,61,220 was required to be treated as equity capital and the balance sum of Rs. 60,56,400 to be treated as unsecured loan. The value of 8.24 acres of land is Rs. 1,23,60,000 but a meagre sum of Rs. 30,00,000 was shown in the agreement as sale consideration and still a reduced sum of Rs. 25,00,000 was paid to respondent No. 3 after adjusting Rs. 5,00,000 as advance lease rent. The 49 per cent. of the total value of the land cost was not paid as contribution of the petitioners, but as unsecured loan to the company. The 8.24 acres of land is under the occupation of respondent No. 1 and there is no question of selling this land to third parties. The land could not be registered in the name of the company for want of money to spend for stamp duty and registration charges. Out of the amount invested by petitioner No. 1, Rs. 1,40,00,000 was adjusted to discharge the bank loan of the company, Rs. 25,00,000 paid to respondent No. 3 towards sale consideration and the balance of Rs. 40,17,620 was utilised for payment to suppliers, salary, wages, etc. When the requirement of the working capital was discussed by respondent No. 2 there was no positive response from the petitioners. By making false statements and assurances, they got 49 per cent. of the equity shares transferred in their name. The above shares were purchased by respondents Nos. 2 and 3 from other shareholders and transferred to petitioner No. 1 with the sole intention to salvage the company. However, petitioner No. 1 had a secret intention to acquire 100 per cent. control of the company. Since the petitioners did not care to pump in money in terms of the memorandum of understanding, respondents Nos. 2 and 3 had to issue fresh shares to the extent of Rs. 2 crores to respondents Nos. 8 and 9 which are the associate companies of respondent No. 1. Provoked by this, the petitioner has filed this petition.

  3. In view of clause 20 of the memorandum of understanding providing for arbitration, the Company Law Board has no jurisdiction to entertain this company petition. The company...

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