Judgment:
1. This is a petition for orders under Sections 397/398 of the Companies Act, 1956 for appointment of an Administrator/Special Officer to take charge over the management and affairs as well as assets and properties of the respondent company; appointment of an independent auditor to re-audit the accounts of the company since 2000; directions to the respondent company to notify the changes carried out in its Register of Members; directions to the respondent company to transfer and endorse the shares in favour of the petitioners in respect of the share certificates already handed over to the respondent company and to rectify the register accordingly; restraining the N.C. Jain group from managing the affairs of the company in any manner, etc.
2. The undisputed facts of the case are: The respondent company was incorporated . under the Companies Act, 1956 (hereinafter referred to as the Act) on 17.10.1990 as a private limited company in the name and style of M/s Ahimsa Mines and Minerals Pvt. Ltd. by ROC, Rajasthan. On 14^th July, 1992 the name of the company was changed to M/s Shri Ahimsa Mines and Minerals Pvt. Ltd. Thereafter, on 19^th August, 1992 the company got converted into a public limited company in the name and style of M/s Shri Ahimsa Mines and Minerals Ltd. having its registered office at D-50, Jyoti Marg, Bapu Nagar, Jaipur. The authorized capital of the company is Rs. 10 crores divided into 1,00,00,000 equity shares of Rs. 10/- each. The company's issued, subscribed and paid up capital is Rs. 1,51,05,000 comprising 15,10,500 equity shares of Rs. 10 each/-.
The company is a 100% export oriented small scale unit engaged in the operations relating to manufacture of Natural Caffeine which is used in medicine and soft drinks. The admitted shareholding of the petitioners is 20.3%. However, as per claim in the petition the shareholding is 45.4%.
3. The counsel for the petitioners contended that the promoter of the company Shri Nemi Chand Jain (R-2) entered into an MOU with the petitioners according to which the petitioners were to be given equal representation in the Board of Directors and 50% shares of the profit and loss account with effect from 1.4.1999. The parties had agreed that the post of Managing Director shall be assigned on rotational basis and bank accounts shall be operated by both the parties. It was contended that the respondents did not comply with the MOU and mismanaged the affairs of the company to the detriment of the petitioners and other shareholders. Emphasizing the contention off siphoning of funds it was pointed out that the petitioners had advanced a loan of Rs. 1,72,50,000 to the company for the purpose of repayment of loan taken from SIDBI.But the respondents instead of utilizing the loan for repayment to SIDBI siphoned off the same in complete disregard to the purpose for which it was advanced. The respondents clarification that these loans were utilized as working capital of the company, according to the petitioner, has no merit. Regarding non endorsement of share certificates by the respondents it was pointed out that vide letter dated 12.6.2003 the petitioners had handed over 339300 shares to one Mr. Deepak Kumar Jain, the Company Secretary of the respondent company for endorsement. Despite the petitioners' reminders dated 17.10.2003 and 29.11.2003 the petitioners did not get any response. It was only on sending a legal notice dated 20.5.2004 that the petitioners were advised to apply for issue of duplicate shares in case they have lost the shares. The petitioners further contended that as per Clause 7 of the MOU the banking operations were to be done by both the parties and all such accounts were to be operated on the joint signatures of respondent No. 2 and petitioner No. 1. It was alleged that R-2 without the signatures of petitioner No. 1 and 2 has closed the bank account with HDFC without any notice/intimation of any Board Meeting for conducting such an act. Further, it was alleged that R-2 had opened another bank . account with ICICI Bank without any consent from P-l and 2. Petitioners' counsel also drew my attention to one cheque for a sum of Rs. 13.5 lakhs in favour of Mahavir Prasad Jain HUF of petitioner No. 3 drawn on HDFC bank. It was informed that this cheque got dishonored with the remark "account closed". It was pointed out that the respondents contention that this account was closed with the approval of the Board of Directors in a meeting attended by petitioner No. 1 and 2 is incorrect and baseless as no minutes of the said meeting have been furnished to the CLB despite an opportunity provided in this regard. The petitioners further pointed out that the respondents have changed the Regd. Office of the company from D-58A, Madhav Singh Road, Bani Park, Jaipur to D-50 Joti Marg, Bapu Nagar, Jaipur without following the proper procedure and without giving any intimation of the said change of Regd. Office to the Registrar of Companies, Rajasthan in compliance with Section 146 of the Act. Lastly, it was alleged that the petitioners have been removed from the Board of Directors illegally and without following the proper procedure. It was contended that the respondents' act of oppression and mismanagement is clear from the facts that- a. No evidence has been led for holding of Annual General Meeting or circulation of agenda for removal of the petitioners from the directorship.
b. No evidence has been led for having complied with provisions of Section 190 of the Companies Act.
c. No evidence has been led of having issued notice to the petitioners of their removal d. No evidence has been led as to compliance of Section 284 of the Companies Act.
The counsel for the petitioners contended that all these acts of the respondents were oppressive and detrimental to the interest of the shareholders. The respondents had acted in gross violation of the terms of the MOU. which had envisaged 50% shareholding to the petitioners besides giving them joint financial authority by being in the management and operating the bank accounts with the joint signatures of both the parties.
4. The counsel for the respondents contended that the petitioners have made baseless allegations and the petition is totally frivolous and vexatious. It is rather the petitioners who have acted in an oppressive and detrimental way against the interest of the company. It was contended that the petition suffers from various technical defects as only petitioner No. 1 signed this petition, the other petitioners have neither signed the petition nor authorised the petitioner No. 1 to represent them. Further, the petitioners have not furnished any evidence of their requisite shareholding by way of producing copy of the share certificates to prove that they hold the requisite shareholding as per mandatory requirement of Section 399 of the Act.
Moreover, it was pointed out, that Mahavir Prasad Jain, HUF is not a petitioner and its shareholding cannot be considered for the purpose of calculating the requisite percentage of shareholding for eligibility of the petition. It was pointed out that the recent shareholding of the petitioners is barely 20.3% as per records of the company, but it is likely that the petitioners have sold some shares which may not have been presented for transfer to the company, and as such, there is a possibility of petitioner groups shareholding being reduced substantially. Petitioners allegedly hold 3,79,300 shares including 107500 shares held by Mahabir Prasad Jain HUF who is not a petitioner (page 39/Pt.) and thus the shareholding shown by petitioners is less than their shareholding as per Company's Record, it shows that they have sold some shares which have not been presented for transfer to the Company. It was pointed out that as per company's record, Petitioners group hold 3,82,000 shares, which include 3,10,500 shares transferred to petitioners on 17.7.2000 (page 55 to 57/R) and 26,500 shares transferred to petitioners on 7.10.2003 (page 301/Ry) (N.K. Jain and Group -Narendra Kumar Jain, Mahabir Prasad Jain, Sandhya Devi Jain, Manbhar Devi Jain and Mahabir Prasad Jain HUF) whereas the Shareholding of respondents group is 10,38,500 shares (page 288/Ry) (N.C. Kaom and Group - Nemi Chand Jain, Sumitra Devi Jain, Ahimsa Holding Pvt. Ltd. and Bimneer Investments Pvt. Ltd.).
5. As regards non compliance of MOU it was pointed out that only a verbal MOU was entered between P-1,P-2 and R-2 according to which P-1 was required to increase his group's shareholding to 50% and provide minimum amount of Rs. 200 lakhs as interest free unsecured loan to R-1 and in turn P-1 and P-2 were required to be appointed as directors.
This oral agreement was, in fact, immediately complied with by the respondents by making P-1 and P-2 as directors with effect from 18.8.99 till 13.3.2004 though they brought in only funds worth Rs. 172.50 lakhs into the company. It was agreed that the petitioners will hold 50% shares in the company but the petitioners failed to increase their shareholding to 50% and provide minimum interest free unsecured loan of Rs. 200 lakhs despite the opportunity given by the respondents to the petitioners from the year 1997 to 2003. The respondents were always willing to cooperate and comply with the terms of the MOU but the petitioners adopted illegal means to take over the management of the company and resorted to false complaint to the Registrar of Companies.
It was pointed out that the petitioners had practiced fraud on the CLB by producing two sets of MOU, one photocopy was filed before CLB (pages 130-133) in which no dates, etc. of its execution have been given, it is not signed by witnesses, it is not notarised - the photocopy of MOU produced in CLB with the petition is the photocopy of the original MOU signed by R-2 in the year 2000. The original copy of MOU, it was alleged, after committing forgery has been filed by petitioners in Civil Suit No. 130/2004 filed by them for specific performance of the MOU and a certified copy of the same has also been produced by the petitioners as Annexure I alongwith their additional reply dated 14.10.2005 to misllaneous application No. 138/2005, which is dated 3.10.1999 signed by witnesses and notarised on 7.10.1999. Thus, the original MOU was forged to make it legal document and then produced in Jaipur Court -comparison of MOU filed with the Court in Jaipur and photocopy of MOU produced in CLB reveals the true story. The petitioners in their reply dated 27.6.2005 to Notice in Form 10, given in Form 11 under Order 12, Rule 5 of CPC (point 11), have stated that the MOU is notarised at Jaipur on 7.10.1999, and the said written MOU does not bear the signatures of witnesses. It was pointed out that the petitioners, at para 2 of page 3 in their additional reply dated 14.10.2005 to CA 138, have stated that the MOU was signed by R-1 and R-2 in original in more than one copy. But on 7.10.1999, P-1 was at Guwahati as is evident from letter dated 7.10.1999 (page 281(Ry), and as such there was no possibility of MOU being notarized on that date.
6. As regards the change of Regd. Office it was pointed out by the respondents that from 29.1.2001 to 12.11.2003 the Regd. Office of the company was at D-50 Jyoti Marg, Bapu Nagar, Jaipur, from 29.1.2001 to 12.11.2003 (page 110 to 112/Ry). This is the residence of petitioners, P1 and P2 who were residing there. Records (accounts, statutory records, cheque book, etc), were kept there, and those were in possession of P1 and P2. Registered Office was shifted to this address at the insistence of P1 and P2 (para 12.2. of page 15/Pt), and thereafter again shifted to factory address since 13.11.2003 at the insistence of p1 and P2 only, it was pointed out, to hide their misdeeds as they already committed fraud by misusing the Cheque of Company. It was contended that they had filed false and fabricated complaint to Registrar of Companies regarding non-transfer of shares, which was dismissed by the Registrar of Companies due to non-submission of records by petitioners (Annexure R4-page 70/Ry). As regards the allegation regarding unilateral closure of HDFC Bank Account and opening of ICICI Bank Account it was pointed out by the respondents that the HDFC Bank Account was operated by R-2 and P-1 individually and severally vide Board's resolution dated 3.9.2002 and this account was closed on 30.3.2003 with the knowledge and consent of P-1 and P-2 besides P-1 was individually and/or severally authorised to operate SBI Bank Account with effect from 18.8.1999 to 16.2.2004 still the petitioners chose to file complaint under Section 138 of Negotiable Instrument Act vide Case No. 4330/2003 before Additional Chief Judicial Magistrate (K) Gauhati in September 2003 by M/s Mahabir Prasad Jain (HUF) against R-1 and R-2 for issuing cheque No. 937539 dated 25.6.2003 for Rs. 13,50,000 of HDFC Bank account which was closed on 3.3.2003 to the knowledge of Petitioner and no amount was payable by R1 to MP Jain HUF (page 72/Ry). Courier receipt regarding service of notice to R2 was forged (page 75 para 7(ii)/Ry). No notice was sent to R1 drawer of the cheque. In response to para 4 of the notice to admit facts dated 17.6.2005 given in form No. 10 under Order XII Rule 5 of CPC, the petitioners have admitted that there is no liability payable by company to M/s Mahabir Prasad Jain (HUF). The case was stayed by Guwahati High Court on 14.10.2004 (page 108/Ry). In view of the complaint R1/R2 filed FIR No. 102/2004 dated 20.3.2004 against P1 and P2 and P2 Under Section 406,420,1206 of IPC regarding misuse of aforesaid cheque of HDFC Bank charge sheet has been filed by police in the case, (page 31 to 65/WS by R). As regards non endorsement of share certificates in respect of 3,39,300 shares purchased in the open market by the petitioners during 1999-2002 and lodged for transfer on 12.6.2003, the respondents contended that the allegations are baseless without any evidence furnished in particular. My attention was drawn to the reply dated 4.6.2004 placed at pages 59-70 of the reply affidavit of the respondents given in response to the legal notice dated 20.5.2004 whereby the petitioners were advised to apply for issue of duplicate shares in case they have lost the shares but they had not applied for duplicate share certificates so far and it was pointed out that this fact is deliberately concealed by the petitioners in the petition.
However, no benefit is going to accrue to the respondents by not endorsing the shares. And the respondents, it was pointed out, are always willing to issue duplicate share certificates. The respondents expressed their apprehensions that the petitioners are not holding the shares and, therefore, they are not applying for issue of duplicate share certificates. It was further pointed out that a complaint made to the ROC regarding non transfer of shares was finally closed in the absence of any reply by the petitioners This fact was not disputed by the petitioners. As regards the allegation pertaining to siphoning off funds the respondents contended that as per the verbal MOU petitioners were to provide minimum amount of Rs. 200 lakhs as interest free unsecured loan to the respondent company. The petitioners provided amount only to the extent of Rs. 172 lakhs which was utilized for the purpose of the company and duly accounted for. SIDBI had further provided term loan aggregating to Rs. 133.60 lakhs. SIDBI has recalled the loan. Personal guarantee has been given by R-2 and his family members. The company wants to prevail upon SIDBI/SBI to consider rehabilitation proposal and for the purpose it was necessary to make part payment of the loan by selling unutilized land.
7. It was pointed out that the land would be sold after obtaining permission from SIDBI and entire sale proceeds will be deposited with SIDBI. Earlier SIDBI was agreeable to consider rehabilitation proposal but at that time P-1, it was alleged, misused his position as director and wrote a letter in which the rehabilitation proposal was rejected.
The rehabilitation proposal was to consider waiver of penal interest and further interest and re-scheduling of interest overdue and term loan, and no additional funds were required. SIDBI has not made any allegations about mismanagement of the company. It was further pointed out that the State Bank of India sanctioned Working Capital limit of Rs. 150 lacs to the company. Due to recall of loan by SIDBI, the sanctioned limit is not allowed to be used. However, they will allow to use the sanctioned limit as soon as rehabilitation is considered by SIDBI. The project of the company is very good and has substantial profit margin, but due to non availability of sanctioned working capital from Bank it is not able to operate properly. It was pointed out that inspite of default in payment due to the industry becoming sick for various reasons being beyond the control of respondents, the respondents enjoy very good creditability with SIDBI/SBI. All statutory liabilities including salaries and wages are being paid. Petitioners have not extended adequate financial assistance as agreed, in the absence of which the company is suffering.
8. Further instances of the conduct of the petitioners were given by the respondents by pointing out that the petitioners offered that all outstanding borrowings and other dues of SIDBI and SBI shall be repaid on behalf of the respondent company by the petitioners if the respondent No. 2 handed over the management of the company to them. To justify their means, the petitioners obtained a fax on 5.3.2003 and 6.3.2003 from the 1^st party's fax number from their company at Guwahati (M/s Rare Brothers Pvt. Ltd. or "RBPL") through respondent wherein it is stated that UCO Bank, Guwahati has sanctioned limits of Rs. 480 lakhs out of which they require only Rs. 250 lakhs and they have additional funds of Rs. 230 lacs for investment. This limit was in addition to the earlier limit of Rs. 130 lakhs already availed by RBPL.
Later on, it was learnt that the limit sanctioned by UCO Bank is less than Rs. 100 lakhs, which appeared to be a total lie. The respondents referred to the Copies of two faxes which are enclosed as Annexures R2 to reply. Further, it was pointed out that the petitioners then being in control of the administration and accounts of respondent company, got an entry relating to payment of rent (for Document -50 Jyoti Marg, Bapu Nagar, Jaipur) passed without any agreement and after a clear understanding that no rent shall be payable for it. Further, the petitioner No. 1 without any authority or a decision by the Board of respondent company, decided to increase the salary of his own and got the entry passed in books of accounts of the company for the increased salary. All these entries were objected to by the statutory auditor and then such unauthorized accounting entries pressurized by them were rectified to the satisfaction of the audit requirements. Thus it was reiterated by the respondents that the conduct of the petitioners has been unexpected and unbecoming, and detrimental to the interest of respondent company. Finally it was argued that the petition is frivolous and vaxatious as the petitioners have made baseless allegations against respondents without giving any evidential particulars, and there is no cause of action disclosed in the petition, and petition is submitted with sole intention to harass and harm the respondents and to pressurize the respondents to repay the unsecured loan given by the petitioners to the company, and this is a gross misuse of the process of law.
9. I have considered the pleadings and the documents filed therewith as well as the arguments of the counsels for the petitioners and the respondents. The respondents preliminary objection that the petitioners do not hold the shares as claimed and that they might have sold some shares which have not been presented for transfer to the company besides the fact that the shareholding claimed by them includes 1,07,500 shares held by Mahavir Prasad Jain HUF which is not a petitioner cannot be accepted for non admissibility of the petition as it is their admitted case that the shareholding of the petitioners' is at least 20.3%. Further, the respondents preliminary objections to the technical defects in the petition that only Petitioner No. 1 has signed this petition and other petitioners have neither signed the petition nor authorised the petitioner No. 1 to represent them also cannot be accepted because to do substantial justice between the parties if technical defects and substantial justice are pitted against each other preference must be given to substantial justice and hence petition cannot be dismissed at the threshold. However, considering the facts and circumstances of the case, I find that the petitioners have failed to prove their case. Their allegations of siphoning off funds have not been conclusively proved. As regards non endorsement of share certificates by the respondents, petitioners' complaint to the ROC in this regard failed due to the non submission of documents. Despite the respondents' willingness to issue duplicate share certificates, the petitioners' have not applied for issue of duplicate shares even in response to the advice to their own legal notice dated 20.5.2004. The respondents have rightly expressed their apprehensions that the petitioners are not holding these shares and therefore, they are not applying for issue of duplicate share certificates. Considering the facts and circumstances of the case, I see no reason as to why a shareholder would not apply for duplicate share certificate in case he is really interested. As regards the petitioners unilateral closure of HDFC Bank Account and opening of ICICI Bank Account, the respondents have brought my attention to the petitioners complaint under Section 138 of the Negotiable Instruments Act whereby they made a complaint knowing that no amount was payable by R-l to M.P. Jain HUF and when the fact of closure of account on 3.3.2003 was in their knowledge. I see no reason to reject the contention of the respondents that the petitioners participation was intended in the financial management but it was the petitioners own doings that they did not continue with the agreed conduct of business. The petitioners' entire case is that as per MOU they should get 50% shares and equal participation in financial management. The existence and validity of a proper MOU has been questioned. But the facts and circumstances of the case reveal that the respondents have acquiesced to the terms of the MOU. However, the petitioners themselves have not endeavoured to get it implemented in de facto. They have not brought in the required funds, and by their conduct have acted contrary to the interest of the company. In these circumstances the balance of convenience is more in favour of the respondents. As regards change of Regd. Office of the company, the petitioners have not refuted the respondents arguments that the Regd.
Office of the company was at the residence of the petitioners and was later on shifted on their own insistence. The only other allegation against the respondents is removal of petitioners from the Board of Directors of the company. Since this is a public limited company such directorial complaints cannot be adjudicated by this Board in Section 397/398 proceedings. Further, I agree that it is a settled proposition of law that the conduct of the parties is a very relevant factor to be considered in the equitable proceedings under Sections 397/398. In Sri Kanta Datta Narasimharaja Wadiyar v. Venkateshwar Real Estates Private Ltd. (1991) 3 Comp. LJ 336 (Karn) : (1991)72 Comp Cas 211 (Karn), it was held that the petitioner seeking equitable relief must come with clean hands and good conduct, failing which the petitioner would constitute a gross abuse of the process of Court, and the petitioner is not entitled for any relief under Sections 397 and 398. It also held that the conduct of the parties in other proceedings could also be taken into consideration. However, it was held that the conduct of the petitioner before filing of the petition may not be a relevant factor.
Regarding the principle of equity in Shrimati Abnash Kaur v. Lord Krishna Sugar Mills Ltd. 44 CC 390 the Division Bench of Delhi High Court has held that while exercising equity jurisdiction, which clothes the Court with discretionary powers "...the discretion cannot be exercised arbitrarily or according to one's own will or whim. It has to be regulated by law, allay its rigour advance the remedy and to relieve against abuse. The court, therefore, exercising equity jurisdiction, cannot ignore the well known maxims of equity. Two such maxims are that he who seeks equity must do equity and he who comes into equity must come with clean hands...." There have been allegations and counter allegations. The Company Law Board is a court of equity and considering the equities between the parties, I find that the equity is in favour of the respondents as it is they who have been nurturing the company even while facing the brunt of various cases against them. Rather it is the conduct of the petitioners as detailed above which has been prejudicial to the interest of the functioning of the company.
Therefore, it would be highly unjust to grant the prayers sought by the petitioners . Such a relief, if granted could be highly oppressive to the respondents. Thus, the petitioners have not established any act of oppression or mismanagement in the affairs of the company and as such the petition deserves to be dismissed.
10. The petition is hereby dismissed with no order as to cost. All interim orders stand vacated.