Case: G. Nagarajan Vs A.N. Marketing Services P. Ltd. and Ors.. Company Law Board

JudgesKanthi Narahari, Member
IssueCompany Laws
Citation[2009] 150 CompCas 641 (CLB)
Judgement DateMay 01, 2009
CourtCompany Law Board


Kanthi Narahari, Member

  1. The present company petition is filed by the petitioner under Section 397/398 read with Section 402 of the Companies Act, 1956 (hereinafter called "the Act") alleging certain acts of oppression and mismanagement in the affairs of M/s. A. N. Marketing Services P. Ltd. ("the company") by the respondents.

  2. The main allegations are:

    (a) illegal allotment of shares to the extent of 69,000 equity shares to the second respondent;

    (b) removal of the petitioner from the board of directors;

    (c) misappropriation of gifts/incentives;

    (d) siphoning off of funds; and

    (e) diversion of business to Comcare, a partnership firm at Tiruchirapalli.

  3. In view of the allegations, the petitioner sought the reliefs as prayed in paragraph VIII of the petition.

  4. Shri S. Soundararajan, learned Counsel for the petitioner submitted that the brief facts giving rise to file this present petition are that the petitioner, the second respondent and the third respondent herein are the first directors of the company. The authorised share capital of the company is Rs. 15 lakhs divided into 1,50,000 equity shares of Rs. 10 each. The issued, subscribed and paid-up capital of the company is Rs. 11,90,000 divided into 1,19,000 equity shares with the petitioner holding 25,000 equity shares of Rs. 10 each, the second respondent with 69,000 equity shares of Rs. 10 each (which is under challenge) and the third respondent with 25,000 equity shares of Rs. 10.

  5. As per the article 16 of the articles of association of the company, the first directors are to hold office for life or till their resignation, subject to the provisions of the Act and there is no share qualification for holding office as director. The second respondent is the managing director from the year 2002. The company was incorporated with the main objects of trading in computer peripherals and other hardware products. Prior to the incorporation, the petitioner and the third respondent were carrying on the business in partnership under the name and style of A. N. Marketing Services under a deed of partnership dated December 18, 1998. As the business grew up, it was decided that the business could be taken over by the first respondent-company for better management. Under the arrangement in the partnership firm, the ratio of share capital was 50: 50 basis and it was agreed that the same ratio would be maintained in the first respondent-company also. Based on the said mutual agreement, the equity shares in the first respondent-company were issued to the petitioner and the third respondent initially at 5,000 shares each to maintain the ratio as stated above. On March 31, 2002, a further allotment of 20,000 equity shares each was also made to the petitioner and the third respondent with a view to maintain equality according to the original understanding. The second respondent as the managing director with a mala fide intention to have a complete control of the company got an allotment of 69,000 equity shares of Rs. 10 each allotted in his favour on September 25, 2002, without any information, proper resolution or disclosing the same to the petitioner. The second respondent also filed Form No. 2 with the Registrar of Companies, Tamil Nadu, on September 25, 2002 and the same has been taken on record by the office of the Registrar of Companies, Tamil Nadu on April 3, 2003 (A5). Thus, the shares allotted to the parties hereto are 69,000 to respondent No. 2, 25,000 each to the petitioner and respondent No. 3. It is evident from this that the allotment made to the second respondent is only to have full control over the affairs of the company and to reduce the petitioner to that of a minority shareholder. The additional allotment of 20,000 shares each to the petitioner and the third respondent was made in March, 2002, and after nearly six months the second respondent became a major shareholder without following the proper procedure and formalities as required by law. Learned Counsel submitted that there was no offer to the petitioner when the allotment was made to the second respondent. The respondents ought to have offered additional shares to the petitioner if he had good intention, but it was otherwise. Therefore, the very first allotment of 69,000 shares to the second respondent is illegal and not valid in law and the same has to be rectified. He also submitted that it is pertinent to mention that the second and third respondent are husband and wife and deliberately without any proper information or notice, they secured a larger share in the share capital with a view to wrest control of the company and run the same according to their whims and fancies. The petitioner was reduced to a minority. He submitted that from the inception, the second and third respondent did not convene regular board meetings, general meetings and conducted the affairs of the company according to their wishes. The petitioner was in charge of marketing the products which came in handy for respondents Nos. 2 and 3 to take charge of the day-today administration. The petitioner was always kept in the dark and there were no proper disclosures in spite of making requests to maintain transparency in all their dealings both within and outside the company. The respondents hatched a conspiracy to weed out the petitioner and remove him from the management on some ground or the other. The respondents called an extraordinary general meeting to be held on February 3, 2007, at their registered office and sent a notice dated January 29, 2007 (A6) to the petitioner. The explanatory statement to the said notice of the meeting sets out the allegations against the petitioner which are purely administrative in nature, vague and false. The petitioner received the notice only on January 30, 2007, which falls short of the notice period as per the requirement in the articles of association of the company. There should be a clear seven days' notice to convene the annual general body meeting and three clear days' notice to convene any other general meetings. The only agenda for the meeting was the removal of the petitioner from directorship. There should be a show-cause notice from the company calling for explanation from the director concerned before the meeting is called and his explanation should be considered before proceeding with further action. The conduct of the second respondent is against the principles of natural justice. The petitioner addressed a letter dated February 1, 2007, to the shareholders by explaining the contentions clearly, which disproves the allegations. The petitioner has contributed to the growth of the company from the inception and has spared no effort to work for the interest of the company. As stated supra, he was in charge of marketing the products and managing the division known as HP Supplies. The petitioner has to interact with multi national companies such as Hewelett Packard, Accenture, Hindustan Lever Ltd., HSBC and TCS, etc. The petitioner managed two showrooms in Chennai, one in Ashoknagar and another at Velacheri and also a showroom at Trichy. The showrooms were run in the name and style of Com-care. The second and third respondents and one Mr. P. S. Bharathi formed a partnership firm under the name and style of M/s. Comcare at the same place in Tiruchirapalli without the knowledge or consent of the petitioner. They started transferring stocks of the first respondent-company from Chennai to Tiruchirapalli as it was a branch and transferred at cost price (purchase price). Originally, in Tiruchirapalli, the company had a branch and was doing business from the said place. After the formation of the said partnership firm, the second and third respondents stopped all the operations of the first respondent-company with a view to promote the business of the partnership firm. The products were sold locally to customers under the bills and vouchers of the said partnership firm M/s. Comcare with the same TNGST No. of the first respondent-company. In view of transfer of stocks from Chennai to Tiruchirapalli at cost price, the first respondent-company has suffered loss on the sales of the company's products. All these activities were kept secret and the petitioner came to know about it only after the said Mr. P. S. Bharathi retired from the partnership firm due to misunderstanding. The second and third respondents still continued to do business through the said partnership firm. The profits of the company, otherwise earned were siphoned off by means of transfer of the goods at a cost price to the Trichy firm. The estimated loss would be Rs. 25 lakhs and the second and third respondents are liable to bring back the profits earned by them. The day-to-day administration and other business activities are under the control of the second respondent who is the managing director. The petitioner was kept in dark about the company's activities, receivables, income and expenditure. It is only when the annual general meeting is convened, the second respondent would hurriedly place the annual accounts for adoption and rush through the other agenda. The annual returns from the year 2004 onwards were signed only by the second and third respondents and filed with the Registrar of Companies. The petitioner did not raise any serious objections only for the purpose of maintaining harmony. It is further submitted that in or around November, 2006, the multinational company, viz., Microsoft offered a scheme by way of incentives for sale of their products during the scheme period. The company received gift vouchers of the value of approximately Rs. 2 lakhs and likewise from a jewellery concern, viz., Tanishq for Rs. 2.5 lakhs. The petitioner was not informed about the gift vouchers and other incentives and the same were misappropriated by the second and third respondents and the same have not been accounted for. He submitted that but for the petitioner's strenuous efforts and hard work, the...

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