C.P. No. 14 of 2008. Case: A. Mylsamy Vs Sri Gajendira Paper and Boards P. Ltd. and Ors.. Company Law Board

Case NumberC.P. No. 14 of 2008
JudgesLizamma Augustine, Member
IssueCompany Law
Citation[2011] 161 CompCas 125 (CLB)
Judgement DateNovember 15, 2010
CourtCompany Law Board


Lizamma Augustine, Member, (Chennai Bench)

  1. This is a petition filed by one of the original promoters who holds 90,000 shares in the first Respondent-company under Sections 397 and 398 of the Companies Act, 1956 (hereinafter to be referred as "the Act"). The allegation is that the Petitioner had been sidelined by other directors who are functioning as one group, and that removal of the Petitioner from the post of director and the subsequent meetings held by the company are illegal, and there is lack of confidence between the two groups and that parting of ways is the only equitable solution.

  2. The first Respondent is a limited company (Sri Gajendra Paper and Boards P. Ltd.), incorporated on November 10, 2000, with its registered office at Udumalpet, with an authorised capital of Rs. 30,00,000 and issued, subscribed and paid-up capital of Rs. 30,00,000 divided into 3,00,000 equity shares of Rs. 10 each. The company is engaged in the manufacture of paper and paper boards. Out of the total number of six members of the company, one of them is dead, and the Petitioner is one of the remaining five members. Respondents Nos. 2 to 5 are the other shareholders/directors of the company. The Petitioner is holding 30 per cent, shares. The second Respondent is holding 95,040 shares (30 per cent.) and he is the managing director of the company, the third Respondent is holding 90,000 shares (30 per cent.), Respondent No. 4 has 15,000 shares and Respondent No. 5 has 5,400 shares in the paid-up capital of the company. The Petitioner and Respondents Nos. 2 to 4 are also permanent directors of the company. On December 27, 2004, the articles have been amended with the Petitioner and Respondents Nos. 2 to 5 as the directors. Respondents Nos. 2 to 5 are related to each other. As on March 31, 2007, the company had a sum of Rs. 62,47,596 as secured loans, out of which working capital facilities utilised was Rs. 33,94,742 and the same was borrowed from the State Bank of India (SBI), and the term loan borrowed from the Tamil Nadu Industrial Investment Corporation Ltd. (TNIIC) was Rs. 25,27,112. Apart from the above, the hire purchase loans from financial institutions amount to Rs. 3,25,742.

  3. In the year 2008-09 the registered office was shifted from the residence of the Petitioner to another place within the town, which is the residence of the second Respondent. The registered office was shifted without any meeting of the board of directors or the shareholders. This act constitutes a serious act of oppression on the Petitioner. Section 146 of the Act stipulates that the shifting of registered office requires a board resolution. The Petitioner was not given notice to attend the board meeting for considering the issue of shifting of the registered office. The Respondents have suddenly taken custody of the books of account, cheque books and other records. The Petitioner and Respondents have been jointly managing the affairs of the company, and he managed the bank account operations till September, 2007. The Respondents took away the cheque books from the Petitioner, despite the fact that all the three directors are entitled to operate the bank account of the company. The Respondents have fabricated records to make it appear that resolutions have been passed by the board of directors and attempted to alter the cheque signing powers in their favour. They sent a letter to the bank to the above effect. Respondents Nos. 2 and 3 have another partnership firm by name Vighneswara Paper and Boards. The wives of Respondents Nos. 2 and 3 are the directors of another company, Raghunandana Paper and Boards. The Respondents have been misusing the accounts of the company in order to evade tax liabilities. Contrary to the understanding the Petitioner was never appointed as the managing director. Respondents Nos. 2 and 3 have been holding the office of the managing director on rotation basis since the inception of the company. The Respondents are attempting to sell goods for cash without bringing the proceeds to the books of account and creating huge liabilities by borrowing money from lenders and financial institutions. Liability is also created by way of unsecured loans. After the dead lock, the Respondents are demanding a highly inflated figure to exit from the company. They are attempting to alter the composition of the board of directors in order to sideline the Petitioner. The copies of the financial statements are not furnished to him. The Petitioner who occupies the position of a partner is entitled to disclosure of all the actions of the Respondents. The affairs of the company are conducted in a manner not only oppressive to the Petitioner but also prejudicial to interest of the company. In view of the irreconcilable dead lock in the affairs of the company, a stale mate has been created. Unless the dead lock is resolved the interest of the company will be severely jeopardised. So directions may be issued to sell the shares of one party to another party. The Petitioner is willing to acquire all the shares of Respondents Nos. 2 to 5 at a fair price.

  4. After the filing of the counter by the Respondents, the Petitioner has come to know that a meeting of the board of directors was held on June 21, 2008, which resolved to call an extraordinary general meeting on July 17, 2008, to decide on effecting borrowing from TNIIC and to replace the existing auditor. The Petitioner submits neither the notice of the board meeting was served on the Petitioner nor the items that were to be transacted in the meeting were disclosed in the notice. The repeated attempts by the Petitioner to inspect the books of account and minutes book did not bring any result. The Respondents have not produced the minutes book even now. The meetings and the minutes if any are liable to be declared as null and void. The Commissioner who went for authenticating the minutes did not get access to the original minutes of the board meetings or general meetings. Even if the meetings are validly conducted, the Petitioner did not receive any notice of the extraordinary general meeting. The extraordinary general meeting appears to have been held on July 17, 2008, in which a new auditor was appointed in the place of the earlier statutory auditor who resigned. The Respondents have breached their fiduciary duty. The extraordinary general meeting held on July 17, 2008, has been conducted in contravention of law and the provisions of the articles of association and amounts to oppression to the Petitioner by the Respondents. Similarly, no notice was issued about the meeting of the board of directors held on August 26, 2008. Copies of statements of account were not served on the Petitioner. Records were fabricated to make it appear that financial statements were approved in the board meeting held on August 26, 2008. In the board meeting held on August 26, 2008, it has been shown that the Petitioner was present in the meeting. It is a fabricated proceeding. The annual general meeting held on September 24, 2008, should be declared illegal since the Petitioner did not get notice of the annual general meeting. None of the meetings were ever conducted and the Petitioner never attended those meetings. It is therefore prayed to allow the company petition by granting the following reliefs:

    (a) That the fair valuation of shares of the company may be carried out through a reputed firm of chartered accountants or the statutory auditors of the company.

    (b) That Respondents Nos. 2 to 5 may be directed to sell all their shares to the Petitioner at the fair price, and

    (c) Also some alternative reliefs.

  5. Respondents Nos. 1 and 2 filed a counter with the following averments:

    The Petitioner is a whole-time director of the company and the second Respondent is the managing director. It is admitted that the company had been managed jointly by the Petitioner and Respondent No. 2. The Petitioner was not keen in associating with the management of the company due to some misunderstandings between the Petitioner and the Respondents. He has decided to withdraw even the collateral security given for availing credit facility from the Tamil Nadu Industrial Investment Corporation Ltd. (TNIIC) and the State Bank of India (SBI), Udumalpet, as has been made clear from the letters written by him on November 12, 2007, May 15, 2008 and May 19, 2008. Accordingly, the company took steps to relieve the Petitioner from the personal guarantee and collateral security given by him. Since the TNIIC insisted for extension of the entire collateral security offered by the Petitioner, the Petitioner could not be relieved. Since the Petitioner refused to continue the personal guarantee and collateral securities, the loan could not be availed. Similarly, the State Bank of India also insisted to execute personal guarantee by all directors in respect of the facilities availed earlier, and since the Petitioner refused to furnish the personal guarantee, the company was unable to utilise the cash credit facility from the State Bank of India.

    The registered office was shifted in view of the conduct of the Petitioner. The Petitioner was given notice of the board meeting held on April 11, 2008, in which the board decided to shift the registered office. There is no necessity to give general notice in this aspect. The shifting of the office was for the convenience of the company and there is no lack of probity and fairness. The Petitioner can always have access to the books and records of the company. As per the earlier resolution of the board any of the three directors can operate the bank account. However, that resolution was modified in the meeting held on April 11, 2008, allowing Respondents Nos. 2 and 3 to operate the bank account jointly. The Petitioner was not available to sign the...

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