Judgment:
1. In this company petition, the petitioners together claiming in excess of 10% of the issued and paid up capital of M/s. Central Park Farm and Developers Private Limited, ("the Company") have invoked the equitable jurisdiction of the Company Law Board under Sections 397, 398, 402, 403 & 406 of the Companies Act ("the Act") to remedy their grievances on account of certain alleged acts of oppression and mismanagement in the affairs of the Company at the hands of the respondents, as under: (a) to declare that the third respondent has no authority to represent as a director of the Company and execute the sale deeds in favour of the respondents 7 & 8; (b) to declare that the sale of the properties of the Company under two sale deeds dated 28.04.2005 by the third respondent in favour of the respondents 7 and 8 are null and void and not binding on the Company; (c) to declare that the form No. 32, filed with the ROC notifying that the petitioners have resigned from directorship of the Company is illegal and void ab initio; (d) to frame a scheme for the vesting of the properties of the Company in the hands of an Administrator for distribution to all the shareholders as per their original shareholding or to dispose off the properties and distribute the proceeds to the share holders in proportionate to their shareholding; (e) to declare that the further allotment of shares made by the Company on 29.06.2002, 30.06.2003, 30.12.2004 and 14.03.2005 are illegal and void ab initio and not binding on the Company; and (f) to direct the Company to be wound up and distribute the proceeds of the sale of the properties in favour of the shareholders or in the alternative to distribute the properties in the ratio of the share holding as it existed at the time of incorporation.
2. Shri K.V. Satish, learned Counsel, while initiating his arguments in support of the petitioners submitted: o The Company has been promoted in July 1997, by the petitioners and the respondents 2 to 6, with the main object of carrying on construction activities. As at 31.03.2000 the petitioners and the respondents 2 to 6 each held one-seventh share capital of the Company. The petitioners and the respondents 2 to 6 are the first directors of the Company. The respondents 2 to 4 have been appointed as the Joint Managing Director, Managing Director and Chairman respectively. However, the third respondent had resigned from the office of director and Managing Director, with effect from 14.08.2000, leaving the petitioners and the respondents 2 & 4 to 6 as directors of the Company. The respondents 7 & 8 are the son and the brother s son of the third respondent. The respondent No. 8 is the brother of the fifth respondent.
o The Company had acquired certain immovable properties with a total extent of 00 acres and 07 guntas, comprised in survey Nos. 33/1 and 33/2 situated at Nelamangala Taluk Bangalore District, under two sale deeds dated 25.08.1997 and 02.01.1908 for a total consideration of Rs. 22.94 lakhs, contributed equally by the petitioners and the respondents 2 to 6, as evident from the sale deeds. The payment so made by both the parties has been treated as an investment in equity in the books and records of the Company and is reflected in the balance sheet for the year ended 31.03.2000, as share application money. Both the sale deeds were withheld by the Sub-Registrar, after registration for non-payment of appropriate stamp duty, which led to a reference made under Section 45A of the Karnataka Stamp Act, 1057, for adjudication of the proper stamp duty. In view of the crisis in the real estate business the company did not carry on any business, and efforts were made by the promoters to develop the lands as a resort, on account of which the Company's properties came to be treated as current assets, even though they formed part of the fixed assets of the Company. Furthermore, the plea of the respondents 1 to 6 that the assets of the Company are treated as stock-in-trade has not been raised in their reply and they are guilty of "false uno false omnibus". In the meanwhile, the respondents 2 to 6 had clandestinely sold the properties by keeping away the petitioners away from negotiations, without obtaining any approval of the board of directors and shareholders of the Company and without valuation in favour of the respondent No. 7 (Survey No. 33/2 for Rs. 11,62,000/-) and respondent No. 8 (Survey No. 33/1 for Rs. 15,90,000/-) under two sale deeds executed on 28.04.2005. The specific pica of the petitioners raised in the main petition that..."during the last week of June 2005 one Sri S. Mohanan S/o Sri Shankaran Kutty, approached the Petitioner No. 1 and informed him that he is negotiating for purchase of the petition schedule properties with the Respondent Nos. 2 to 6 and since the Petitioner No. 1 also happens to be a Director of the Company, he has approached him as he was not present during the discussions with the said Respondents. The petitioner No. 1 was shocked and surprised to note that a decision had been taken by the Respondent Nos. 2 to 6 to sell the petition schedule properties without calling for any board meeting of the Company and without informing him." has not been denied by the respondents 2 to 6. The board minutes dated 15.02.2005 would show as if the directors deliberated about sale of the immovable properties of the Company, which are untrue. The affidavit sworn on 11.12.200b by the second respondent and produced before the Bench would only affirm the resolution authorising the bank account and not of the resolution deliberating the sale of the properties.
The respondents simultaneously got released the original sale deeds in the name of the Company from the Sub-Registrar, pursuant lo the order dated 10.06.2005 of the High Court of Karnataka made in W.P. No. 13912/2005, with an endorsement dated 30.06.2005 made by the District Registrar on the reverse of the sale deeds to the effect that the release of the sale deeds were subject to the order of the High Court that may be passed in W.P. No. 13912/2005. At the same time, the entire stamp duty and registration fee aggregating Rs. 2,75,200/- incurred on account of the sale deeds dated 28.04.2005 executed in favour of the respondents 7 & 8, have been borne by the Company. The sale consideration was paid by the respondents 7 & 8 by way of post dated cheques, realisation of which are unknown to the petitioners. There was no response from the respondents 2 to 6 for the legal notice dated 04.07.2005 and the telegram dated 04.07.2005 sent by the first petitioner, indicating a ready offer of Rs. 1.65 crores and the intimation of the second petitioner regarding the willingness of a third party to buy the properties for Rs. 3 crores.
However, the legal notice sent to the respondents 1, 3 & 4 was returned unserved. The properties are located next to Bangalore-Pune National High way and are very close to Peenya Industrial Area, the biggest Industrial Area in Asia, which are valued at Rs. 40 lakhs per acre, but sold for an insignificant price in favour of the respondents 7 & 8, being the brothers son and son of the third respondent, who are the nominee of the third respondent. The value of equity shares in the Company is lost on account of the sale of the properties at a meagre value and consequently, the petitioners have lost the equivalent market value proportionate to their investment in the Company or equal distribution of the properties.
The properties sold by the Company consisted of a large number of coconut and mango trees, and silver oak, valued several lakhs of rupees. All the mango trees valued over Rs. 40 lakhs have been removed and sold by the Company. Thus, the respondents 2 to 6 have unilaterally and clandestinely wiped out the entire assets of the Company for their personal gains, thereby defrauding and denying the petitioners of the lawful returns on their investment in the Company and committing breach of their fiduciary duties owed to the Company, by acting contrary to the provisions of the articles of association and the Act. When the board of directors is guilty of misconduct, they will be liable to pay compensation under Section 543 read with Schedule XI, as held in Life Insurance Corporation of India v. Hari Das Mundhra and Ors. (1996) Vol. 36 CC 371.
o The properties have further been sold by the purchasers, namely, the seventh respondent entered into an agreement dated 09.12.2005 for sale of 3 acres and 35 guntas in favour of Shri V.G. Malapur and three others -for a sum of Rs. 1.74 crores. The eighth respondent entered into an agreement on 09.12.2005 in respect of 5 acres and 12 guntas for an amount of Rs. 2.39 crores with certain purchasers, who in turn developed the properties by converting into 176 sites and entered into an agreement dated 03.04.2006 with Science Institute Employees Sites Purchasers Committee of Indian Institute of Science, Bangalore, for sale of the sites at the rate of Rs. 300/- per sq.ft., which would ultimately fetch Rs. 8.39 crores, whereas the respondents 2 to 6 sold the whole of properties only for Rs. 27.52 lakhs, causing huge losses to the Company and its shareholders. The agreements entered into by the respondents 7 & 8 have been witnessed by the respondents 3 & 5. By virtue of Sections 542 and 543 read with Schedule XI of the Act, the respondents are personally responsible for the losses suffered by the Company on account of sale of the properties for an insignificant amount and further they must compensate all the losses suffered by the Company.
o The petitioners before approaching the CLB, had filed a civil suit on 17.02.2000 in O.S. No. 16 of 2006, before the Court of Civil Judge, (Junior Division), Nelamangala for an order of permanent injunction restraining the respondents from selling or leasing or encumbering the properties of the Company, which was however withdrawn on 15.07.2006. The remedies now sought before the CLB are with a view to redress the grievances against the oppressive acts of the respondents and many other issues, affecting the rights of the petitioners, as shareholders of the Company. It cannot, therefore, be said that the petitioners are engaged in forum shopping to remedy their grievances.
o The Court (now CLB) as held in Rakhra Sports (P) Ltd. v. Kharatilal Rakhra and Ors. (1993) 2 CLJ 207 is empowered under Section 397/398 to make any order 'as it thinks fit'. Power under Section 402 is a power which may be exercised without prejudice to the generality of the powers of the Court under Sections 397 and 398 and, therefore, such a power can in no way be of a limited nature.
The Karnataka High Court held in C.B. Pardhanani and Ors. v. M.B. Pardhanani (1990) Vol. 69 CC 106 that the remedy provided by Sections 397 & 398 is of a preventive nature so as to bring to an end oppression or mismanagement on the part of controlling shareholders and not to allow its continuance to the detriment of the aggrieved shareholders or the company. The remedy is not intended to enable the aggrieved shareholders to set at naught what has already been done by the controlling shareholders in the management of the affairs of the company. While it was putforth in that case that (a) Section 406 enables the Court to award compensation in respect of past and concluded transactions falling within Section 543 as set out in Schedule XI, even though they are no longer continuing wrongs; and (b) these are the only two cases in which, on an application under Section 397 or 398, the Court is empowered to give reliefs in respect of past and concluded transactions, by way of exceptions to the general principle manifest from the language of Sections 397 and 398 that the power of the Court under both the Sections is confined only to making an order for the purpose of putting an end to oppressive or prejudicial conduct and the Court cannot make an order setting aside or interfering the past and concluded transactions which are no longer continuing wrong giving compensation to the company or the aggrieved shareholders in respect of such transactions, the Karnataka High Court declined to entertain such submissions, yet they are squarely applicable to the present case.
o The respondents 2 to 6 illegally tiled Form No. 32 with the Registrar of Companies on 06.07.2005 notifying as if both the petitioners ceased to be directors of the Company with effect from 04.07.2005, consequent upon their resignation from the office of director. The petitioners on the other hand at no point of time tendered any resignation from directorship and it is a clear case of filing of false documents by the respondents 2 to 6. These respondents, with a view to get away with the falsification of the statutory returns, have fabricated and produced three postal covers containing notices of the board meetings reportedly held on 06.06.2005, 23.06.2005 and 02.07.2005 and falsely contended that the petitioners failed to attend those board meetings consecutively and thereby ceased to be directors under Section 283(1)(8), whereas, the petitioners did not cease to be directors as borne out by the legal notice dated 04.07.2005, issued by the first petitioner, wherein it was clearly stated that he attended the previous board meeting conducted by the Company. The addresses mentioned on the postal covers have been over written in different ink and pen and subsequently filled up with the correct door number of the petitioners. The postal sticker affixed does not disclose the hill addresses of the petitioners. There is no resolution produced establishing the petitioners' cessation from directorship. The Company never adopted the practice of issuing notices by registered post, in which case notices ought to have been issued to all the respondents by registered post but never sent by the Company.
o As on the dale of the incorporation of the Company, the petitioners as well as the respondents had equal shareholding and any further allotment of shares ought to have been equally made, whereas the impugned allotments were made illegally on 29.06.2002, 30.06.2003, 30.12.2004 and 14.03.2005., without following the procedure prescribed in the Act. Accordingly, at the board meeting held on 30.12.2004, 1250 shares were allotted at premium to the respondents 2 to 6 and at the board meeting on 14.03.2005 at premium to the petitioners 1 & 2, (each 2550 shares) nephew of the first petitioner (2375 shares), the lather of the second petitioner (2375 shares), since deceased and the second respondent (750 shares) as borne out by the board minutes dated 14.03.2005. The petitioners were reportedly present, at the board meeting held on 14.03.2005, whereat 2375 shares were allotted in favour of his lathe who died four years back on 24.08.2001, which establishes the manipulation of the board minutes at the instance of the respondents. While the respondents 2 to 6 were allotted shares at face value in June 2002 and June 2003 almost equally on those occasions, the petitioners were offered only minimum number of shares and that too at a premium. The second petitioner had signed only the provisional accounts for the year ended 31.03.2002, disclosing the enhanced capital, which were to be finalised after consulting the Chartered Accountants. The balance sheets produced by the respondents are not the audited balance sheets certified by the Chartered Accountants.
No share certificates have been issued to the petitioners. The Company never received any consideration from the respondents 2 to a towards such discriminate allotment of shares. The petitioner each held 14% prior to the impugned allotment, which came to be reduced to 1 1% by virtue of the allotments challenged in the petition. The impugned allotments, are therefore, illegal and not binding on the petitioners.
o Shri Dinesh Vora became a director, as reflected in the annual return for the period as at 30.09.2000, to whom the third respondent sold his one-seventh shares and thereby he became a stranger to the Company. These facts are not disputed by the respondents. The third respondent who ceased to be a director with effect from 14.08.2000 was never re-appointed by the Company. Form No. 32 dated 25.04.2005, filed with the Registrar of Companies on 27.04.2005 would disclose as if the third respondent was appointed as director of the Company on 14.03.2005, whereas no board meeting was ever held appointing him as a director of the Company. The board minutes produced by the respondents, appointing the third respondent as a director are fabricated and must be ignored. The search of the records of the Company made at the office of Registrar does not reveal any board meeting purportedly convened on 14.03.2005 in terms of Form No. 32 said to have been filed on 27.04.2005, and therefore, the appointment of the third respondent as a director is not true.
o The respondents 2 to 6 without filing any balance sheet after the period ended 31.03.2000 have stealthily taken steps under Section 560 for striking off the name of the Company as per the Simplified Exit Scheme of the Central Government, without the knowledge of the petitioners and without disclosing the dues payable to Government.
This act of the respondents, after selling the properties of the Company, is a clear case of fraud played against the petitioners, Government of Karnataka and Government of India.
3. Shn R. Eshwar, learned Authorised Representative, opposed the company petition on the following, among other, grounds: o The main grievance of the petitioners is on account of the sale of the properties of the Company, which is a past and concluded transaction and therefore, does not fall within the ambit of Section 397/398.
o By virtue of Section 54 of the Provincial Insolvency Act, 1920 every transfer of property, with a view to give a creditor preference over the other creditors shall, if such person is adjudged insolvent on a petition presented within three months after the date thereof, be deemed fraudulent and void as against the receiver and shall be annulled by the Court. The sale of the properties caused by the Company does not amount to a fraudulent preference as envisaged in Section 54 of the Provincial Insolvency Act. The petitioners cannot either invoke the remedy contemplated in Section 402(f) since the company petition has been filed beyond three months of the sale of the properties effected by the Company.
o The petitioners are guilty of forum shopping by filing civil suits in respect of the subject matter of the main petition, which are prior in point of time. All the averments raised in the civil suit are forming part of the company petition, which in addition deals with the impugned allotment of shares. The petitioners with ulterior motive pressed for interim reliefs in the civil court even a tier tiling of the company petition and withdrew the suit only on 15.07.2006. The petitioners have initiated the present proceedings with a view to arm twist the respondents, compelling them to come to the terms imposed by the petitioners. The petitioners threatened the respondents 7 & 8, with serious consequences, as affirmed by the respondents 2 to 6 in an affidavit filed before this Bench, and therefore, the company petition is liable to be dismissed in-limine.
The petitioners have not come with clean hands and therefore, the equitable reliefs should be declined to them.
o The impugned allotments are legally made with the knowledge of the petitioners. While the petitioners are challenging the allotments, they claim together 5100 shares allotted on 14.03.2005 and thus, are taking contradictory pleas. The board of directors with a view to realise a better price increased the valuation of the Company by allotting shares on 30.12.2.004 and 14.03.2005 at premium. The board minutes dated 30.12.2004 allotting shares at premium and approving sale of the properties have been signed by, among others, the petitioners. The board minutes dated 30.12.2004 were confirmed at the board meeting held on 15.02.2005 by the directors, including the petitioners. The petitioners were present at the board meeting held on 14.03.2005, where shares were allotted by the Company. The respondents are not aware of the death of the second petitioner's lather on 24.08.2001 till today and therefore, the allotment made in his favour may be set aside. The Company is not maintaining the attendance register for the board or general meetings, as sworn by the second respondent in his affidavit on 11.12.2006. According to the petitioners, they were aware of the allotments on 06.01.2006, but the civil suit tiled on 17.01.2006 does not challenge the allotments. The balance sheet for the year ended 31.03.2002 and 31.03.2003 signed by the second petitioner, disclose the share capital of Rs. 25 lakhs, which include the impugned allotment of shares. The signing of the balance sheets by the second petitioner has been admitted in the rejoinder filed by the petitioners.
o The properties of the Company are reflected in the balance sheet for the year ended 31.03.2000 under the head "current assets". The auditors' report for the year ended 31.03.2000 states that the stock of land has been physically verified by the management at the year end. The prices of real estate in Bangalore suffered a steep decrease in the later part of 1999 and the current asset even with any development would not have fetched the cost price for the Company, ultimately resulting in huge losses to the Company. The petitioners did not evince any interest in the day-to-day affairs of the Company, when the value of the current assets got depleted and did not choose to attend the board meetings conducted periodically by the Company. Nevertheless, the petitioners were appraised of the developments at the board meetings from time to time. The board of directors including the petitioners, resolved at the board meeting held on 14.03.2005 to sell the current assets, even though no board resolution is required for the purpose of selling the current assets of the Company. The respondents 7 & 8 purchased the current assets of the Company for a little more than the Company's purchase price and paid the consideration by way of post dated cheques. At the board meeting held on 23.05.2005, it was decided to take steps to strike off the name of the Company under the Simplified Exit Scheme.
The petitioners did not attend the board meetings and they vacated their office on 02.07.2005. The legal nonce dated 04.07.2005 and the telegram of 04.07.2005 sent by the first petitioner alter sale of the properties would show that they are aware of the sale of the current assets of the Company. The petitioners have been claiming the value of the properties differently at different places of the company petition. The petitioners have valued the properties at Rs. 1.65 crores both in the legal notice dated 04.07.2005 and in the company petition; Rs. 3 crores in the reply given by the second petitioner to the first petitioner; and Rs. 3.50 to Rs. 4 crores in the company petition. However, the petitioners have not produced any document substantiating the value of the properties as claimed by them. The respondents on the other hand have sold the properties for the guideline value and, therefore, the petitioners cannot challenge the action of the respondents which has been done in the best interest of the Company. No fraud has been committed by the respondents 1 to 6 upon the petitioners. The reply notice dated 06.07.2005 of the second petitioner would show that one Shri Mohanan was interested to buy the properties for Rs. 3 crores, but never established any such offer by the petitioners.
o The third respondent was re-appointed as a director at the board meeting held on 14.03.2005, to which the petitioners were parties.
Form No. 32 notifying the appointment of the third respondent as a director was filed on 27.04.2005, prior lo sale of the properties in favour of the respondents 7 & 8. The petitioners specifically contended in the civil suit filed before the Court of Civil Judge, Nelamangala, that the third respondent is a shareholder of the Company, whereas it is pleaded before the CLB that the third respondent is not a shareholder of the Company. The first petitioner by sending a legal notice dated 04.07.2005 to the third respondent, deemed to have admitted that the third respondent is a shareholder, in the absence of which he need not have sent any legal notice to the third respondent. Thus, the third respondent continues to he a shareholder and director of the Company, belying the version of the petitioners.
o The petitioners are concerned with the properties of the Company but not the welfare of the Company. The petitioners are seeking (a) to set aside the sale deeds dated 28.04.20O5 executed in favour of the respondents 7 & 8; (b) to dispose the properties and (c) to distribute the sale proceeds among the members according to their shareholding or for (a) an order lo wind up the Company, and (b) to distribute the sale proceeds of the properties in favour of the shareholders. The petitioners, will not, therefore be prejudiced on account of winding up of the Company, whereas the petitioners are claiming that any winding up order will prejudicially affect the interest of the Company and its members, thereby making inconsistent plea to suit their connivance. In view of the conduct of the petitioners, they should be denied the equitable reliefs claimed under Section 397, save the prayer for a declaration that Form No. 32 filed with the Registrar of Companies, notifying the resignation of the petitioners from the office of director of the Company as illegal and void ab initio.
o The Company has made an application prior to filing of the company petition for striking off the name of the company under Section 560 in accordance with the Simplified Exit Scheme, 2005, introduced by Ministry of Company Affairs. The CLB has wide powers, which include the authority to wind up the Company and therefore, the Company may be permitted to be struck off from the register maintained by the ROC. The CLB, while exercising the inherent power cannot go against any statutory prescription in violation of the provisions of law as held in Jindal Praxair Oxygen Co. (P) Ltd. v. Praxair Pacific Ltd. (2005) 61 SCL 93. Therefore, the interim order of this Bench directing the Regional Director to keep in abeyance the proceedings under Section 560 against the Company being in conflict with his statutory power vested in Section 560 of the Act has to be vacated.
The maxim falsee in uno, false in omnibus quoted by Shri S. Satish, learned Counsel (false in one thing, false in everything) is neither a sound rule of law nor a rule of practice, which is applicable only in case of tons and not in civil cases, as held in Ugar Ahiv v. State of Bihar CDJ 1964 SC 353. The maxim "falsus in uno falsus in Omnibus" has no application in India and has not received general acceptance nor has this maxim come to occupy the status of rule of law and it is merely rule of caution, as held in Sucha Singh v. State of Punjab CDJ 4. Shri V. Mahesh, learned Authorised Representative, in support of the claim of the respondents 7 & 8 submitted: o These respondents have purchased the properties from the Company for guideline value fixed by the Appropriate Authority in good faith after taking due care, by verifying the board minutes and after satisfying that the Company owned the properties, which were free from encumbrances; paid the entire consideration; thereafter, spent considerable amount of money in developing the lands; obtained approvals for lay-outs and laid down residential plots. The annual return as at 30.09.2000 shows that the third respondent is a director of the Company, which is clearly admitted by the first petitioner by sending the legal notice dated 04.07.2005 and the telegram to him. The third respondent who ceased to be a director came to be again appointed as a director oil 14.03.2005, in term of Form No. 32 filed with the Registrar of Companies. Hence, the Company has been duly represented by the third respondent, while conveying the properties in favour of the respondents 7 & 8. The respondents have filed the present petition with ulterior objects.
The stamp duty and registration fee, as agreed between the parties, were borne by the Company, for which there is no bar under law. No reference has been made to Shri Mohanan who reportedly made an offer of Rs. 3 crores for the properties, in the legal notice of the first petitioner but made only in the reply nonce of the second petitioner. There is no material substantiating the value of the properties, as claimed by the petitioners. By virtue of Section 402(f), any sale transaction ought to have been challenged within three months, which is not satisfied in the instant case. The seventh respondent has already sold the property acquired by him in two blocks as borne out by the sale deeds dated 21.07.2006 and 30.08.2006. The eighth respondent entered into a development agreement with a third party; developed 176 plots and already sold a large number of plots in favour of third parties. The respondents have sold after acquiring the properties, prior to filing of the company petition. The subsequent purchasers have not been impleaded as parties to the company petition. The civil suit filed earlier by the petitioners has been converted into the present company petition, which has to be dismissed.
5. I have considered the pleadings and arguments of learned Counsel for the parties. The main grievances of the petitioners have arisen on account of- (a) sale of the immovable properties belonging to the Company; (b) impugned allotment of shares; (c) cessation of the petitioners as directors; (d) re-appointment of the third respondent as a director; (e) sinking off the name of the Company under Section 560 of the Act, etc.
o It is on record that the Company had acquired certain landed properties with a large number of trees therein, namely (i) 5 acres 12 guntas in Survey No. 33/1 of Bydarahally Village, Bangalore District in August 1997 for Rs. 13.25 lakhs; and (ii) 3 acres 35 guntas in Survey No. 32/2 of Bydarahally Village, Bangalore District in March 1998 for Rs. 9.69 lakhs. The Company, represented by the third respondent, later in April 2005 sold 5 acres 12 guntas for Rs. 15.90 lakhs in favour of the eighth respondent and 3 acres 35 guntas for Rs. 11.62 lakhs in favour of the seventh respondent. The properties purchased for an aggregate sum of Rs. 22.94 lakhs have been sold by the Company for a total sum of Rs. 27.52 lakhs, which according to the petitioners is far below the market price prevailing at the relevant point of lime.
o The seventh respondent had in mm entered into an agreement on 09.12.2005 with Shri V.G. Malapur and three others to sell 3 acres 35 guntas in Survey No. 32/2 lor Rs. 1,74,37,500/-, while the eighth respondent had entered into an agreement on 09.12.2005 with Shri V.G. Malapur and three others to sell 5 acres 12 guntas in Survey No. 33/1 for Rs. 2,38,50,000/-. However, the respondents 7 & 8 have denied, by swearing affidavits on 29.10.2006, the execution of any agreement with Shri V.G. Malapur and three others, as contended by the petitioners. The agreement holders, namely, Shri V. G. Malapur and three others have developed a layout in the properties by convening into 176 sues and entered into an agreement of sale on 03.04.2006 with Science Institute Bangalore, for the benefit of its employees at the rate of Rs. 300/- per sq.ft. The agreement encompasses 133 sites with different dimensions accounting for 2,06,100 sq.ft., the value of which at the rate of Rs. 300/- per sq.ft. would fetch Rs. 6,18,30,000/-. There are 43 sites of odd dimensions, details of the total extent of such sites are not furnished in the agreement and, therefore, the extent and value of 43 sites are not determinable from the agreement. However, the specific charges of the petitioners are that the agreement holders would realise an amount of over Rs. 8 crores bv way of sale of the properties in favour of the Science Institute, According lo the seventh respondent, in terms of his affidavit of 29.10.2008, an agreement was entered into with Shri M. Kantharaj, Bangalore, for development of 3 acres 35 guntas in Survey No. 32/2 by formation of lay out for Rs. 18,91,300/-. The eighth respondent, as borne by an affidavit dated 29.10.2006, sold 5 acres 12 guntas in Survey No. 33/1 in favour of Shri G. Sudhakar Shelly (2 acres 12 guntas) and Shri Mohan B. Naidu (3 acres) for a total amount of Rs. 47.70 lakhs.
Thus, the respondents 7 & 8, claim that they have disposed the properties acquired from the Company for an aggregate sum of Rs. 66,6 1,300/-.
o The petitioners aggrieved by sale of the properties, belonging to the Company, which according to them, is without any authority of the board of directors have filed in January, 2006 a civil suit in O.S. No. 16 of 2006 before the Court of Civil Judge at Bangalore for an order of permanent injunction restraining the respondents 1 to 8 from selling, leasing, mortgaging, encumbering, parting with possession or changing the nature or putting up construction on the properties in any manner, which came to be withdrawn in July, 2006.
The petitioners, in the meanwhile, have invoked the equitable jurisdiction of the CLB under Section 397, 398, 402, 403 and 406 of the Act for a declaration that the sale of the properties of the Company through the third respondent in favour of the respondents 7 & 8 is null and void and not binding on the Company. While the properties have been sold as early as on 28.04.2005, the petitioners have initiated the present proceedings only on 17.02.2005, well beyond a period of three months of the date of the application made under Sections 397 and 398 of the Act. According to Section 402, without prejudice to the generality of the powers under Sections 397 and 398 any order under these Sections may provide for the setting aside of any transfer, delivery of goods, payment, execution or other act relating to property made or done by or against the company within three months before the date of the application under Sections 397 or 398, which would, if made or done by or against an individual, be deemed in his insolvency to be a fraudulent preference. The petitioners having failed to claim the relief of setting aside the sale of the properties of the Company within the time specified in Section 402(f), have lost their remedy under this sub-section, irrespective of the merits of their claim for having belatedly approached the CLB, impugning the sale transactions in respect of the properties belonging to the Company. Nevertheless, the petitioners are not remediless in the light of the provisions of Section 406 of the Act, which contemplates that in relation lo an application under Section 397/398, Sections 539 to 544 shall apply in the form set forth in Schedule XI. Section 406 thus, empowers the CLB, in cases of involving oppression and mismanagement, to invoke Schedule XI for imposing penalty upon guilty officers in case of specified events and assessing damages against guilty directors so as to compensate the Company for its losses. Section 543(1)(b) read with Schedule XI specifically provides that in the course of the proceedings on an application made under Section 397 or 398, if any director has been guilty of any misfeasance or breach of trust in relation to the company, the CLB may or. the application of any creditor or member, examine into the conduct of such director and compel him to repay or restore the money or property or any part thereof respectively with interest at such rate just or to contribute such sum to the assets of the Company by way of compensation in respect of the misapplication, retainer, misfeasance or breach of trust as its thinks fit. In this connection, re Terence is invited to the decision in Life Insurance Corporation v. Hari Das Mundhra (Supra), wherein it was held that the Court may grant relief to a company under Section 543 even in the absence c any separate application as envisaged therein and that the directors who are guilty of misconduct are liable to pay compensation in terms of this Section read with Schedule XI. It shall now be seen as to the applicability of these provisions in the facts and circumstances of the present case. The Company admittedly bought the properties for an amount of Rs. 22.94 lakhs in August 1997 (Survey No. 33/1) and in March 1998 (Survey No. 32/2) which are situated about 30 kilometres from City of Bangalore on Bangalore-Pune Highway, not only enjoying the locational advantage but also attracting an prospective buyer.
The Company valued the properties at Rs. 27,04,802/- which is found reflected in the balance sheet as at 31.03.2000. The minute of the board meeting dated 14.03.2005 disclose that the board of the Company authorized the third respondent, to sell the Company's properties (sic) a price which is not less than the cost price to the Company. The petitioners are reported to be parties to the resolution authorizing the third respondent to sell the properties, which is, however, seriously disputed by them. The Company has reported that it is not maintaining any attendance register in respect of the general or board meetings. There is no documentary evidence other than the disputed board minutes dated 14.03.2005 showing the participation of the petitioners at the board meting and it is unsafe to sustain by virtue of a mere board resolution, not corroborated by any other documentary proof, the claim of the respondents that the petitioners attended the board meting on 14.03.2005 and voted for the resolution authorizing the third respondent to sell the Company's properties. The board minutes do not divulge any deliberation of the directors in regard to the prevalent market rate or any valuation report of the properties or any decrease in the real estate prices, as argued on behalf of the respondents. While according to Shri Eshwar, the learned Authorized Representative, the prices of real estate in Bangalore, suffered a steep decrease in the later part of 1999, the current assets comprising of the landed properties are valued at Rs. 27,04,802/-, in the balance sheet for the year ended 31.03.2000, which is marginally higher than the acquisition price of Rs. 22.94 lakhs, which stands reduced to an extent of Rs. 2,75,200/- being the stamp duty and registration fee met by the Company on account of the sale deeds executed in favour of the respondents 7 & 8. No desperate circumstances are either pleaded or proved by the respondents for sale of the properties of the Company and for taking all the expenses by the Company in connection with the impugned sales. There is not a shred of evidence to support the market value of the properties as on the date of effecting the sale by the third respondent. The first petitioner had sent on 04.07.2005 a telegram to the respondents 1 to 6 and the second petitioner indicating a "better sale offer for Rs. 165 (1,65,00,000) lakhs" for the properties belonging to the Company. There is no denial of non-receipt of any such telegram by the respondents 1 to 6. The first petitioner, in furtherness of his telegram, had sent a legal notice to the respondents 1 to 6 and the second petitioner setting out his grievances in relation to the immovable properties of the Company at the instance of the respondents 1 to 6 and reiterating "a ready offer from an intending buyer for purchasing the said properties, namely the properties belonging to the Company for a sum of Rs. 1,65,00,000 only...." There has been no response from any of the respondents in spite of the serious charges levelled by the first petitioner in his legal notice dated 04.07.2005. It is relevant to observe that the legal notice has been served upon the respondents 2, 5 & 6, without invoking any response from them despite the fact that the properties were already sold on 28.04.2005, prior to the telegram and the legal notice for an amount of Rs. 27.94 lakhs and there was a ready and uncontroverted offer for sale of the properties of the Company. It was rather obligatory and expected on the part of the respondents to have intimated the petitioners the fact of sale of the properties in April 2005 in favour of the respondents 7 & 8 and release of the impounded sale deeds in the name of the Company, pursuant to the High Court Order made in W.P. No. 13912/2005, by way of response to the telegram and the legal notice sent by the first petitioner. There has been no material to show that the respondents 2 to 6 have ever divulged to the petitioners regarding the sale transactions. When the petitioners specifically conveyed a ready offer from an intending purchaser for Rs. 1.65 crores, the respondents 2 to 6 did not choose to counter the correctness of valuation of the properties, as set out by the petitioners till filing of the present company petition.
The respondents 2 to 6 not only kept mum but also failed to deny that the properties would have fetched Rs. 1.65 crores and, therefore, they are now estopped from denying the value of the properties at Rs. 1.65 crores as of July 2005. The version of the petitioners on the value of the properties is rather probable on account of the fact that the seventh respondent realized an amount of Rs. 18,91,300/- by entering into an agreement with Shri Kantharaj in respect of 3 acres 35 guntas and the eighth respondent realised a total sum of Rs. 47.70 lakhs by sale of 5 acres and 12 guntas in favour of G. Sudhakar Shetty and Shri Mohan B. Naidu under sale deed dated 30.08.2006 (2 acres 12 guntas) for Rs. 20.70 lakhs and sale deed dated 21.07.2006 (3 acres) for Rs. 27 lakhs. Thus, the respondents 7 & 8 in their own version realized an amount of Rs. 66,61,300/- by way of sale of the properties over a period of 16 months of acquiring the properties from the Company. None of the respondents has denied the execution of the agreement with the Science Institute, Bangalore for sale of 176 plots for its employees, economic details of which have been elucidated elsewhere.
The Science Institute, in reply to a legal notice dated 01.08.2006 sent on behalf of the petitioners categorically stated as under: Already Science Institute Employees Site Purchasers Committee has purchased the land bearing Survey No. 33/1, 33/2 aggregating to 9 Acres and 7 guntas. Since it is converted, sites have been formed and till dated 90% has heen registered. We have individually registered in the name of Employees.
The above sequence of events would show that the assertion of the first petitioner that there was a ready offer for Rs. 1.65 crores which remained un-repudiated by the respondents till initiation of the present proceedings, is genuine as well as probable and to that extent the Company suffered losses, apart from the amounts spent by the Company (Rs. 2,75,200/-) on the sale deeds executed in favour of the respondents 7 & 8, on account of the conduct of the respondents.
The second petitioner valuing the properties at Rs. 3 crores in his reply notice dated 06.07.2005 sent to the first petitioner, has little consequence, especially when the respondents 2 to 6 had no knowledge of any offer at any point of time. The petitioners estimating the value of the properties between Rs. 3.5 crores and Rs. 4 crores in the company petition remains to be mere pleading and is not supported by any material and, therefore, must necessarily be ignored, while determining the quantum of losses suffered by the Company. It is, therefore, doubtless that the respondents 2 to 6 have been guilty of breach of trust in relation to the Company by sale of its properties for an aggregate sum of Rs. 27.52 lakhs in favour of the respondents 7 & 8, when the properties could have fetched not less than an amount of Rs. 1.65 crores as claimed, by the first petitioner in his telegram as well as legal notice dated 04.07.2005 and, consequently, in the light of the decision reported in C.B. Pardhanani and Ors. v. M.B. Pardhanani (Supra), and by virtue of Section 543(1)(b) read with Schedule XI of the Act, and the respondents 2 to 6 shall contribute the difference of amount between the minimum expected realisation of Rs. 1.65 crores and the actual sale proceeds of Rs. 27.52 lakhs, amounting to Rs. 1,37,48,000/-(Rs. 1,65,00,000 - 27,52,000) and Rs. 2.75,200/- towards the stamp duty and registration fees incurred by the Company on the impugned sale deeds executed in favour of the respondents 7 & 8, without any justification and authority of the board of directors, to the assets of the Company by way of compensation.
This, in my view, will meet the ends of justice in the facts of the present ease. The CLB as held in Rukhra Sports (P) Ltd. v. Kharaitilal Rakhra and Ors. (Supra) has wide powers under Section 397/398 read with Section 402 to make any order as it thinks fit with a view to bringing to an end the acts complained of in the affairs of the Company. The petitioners having withdrawn the civil suit after filing of the company petition cannot be guilty of forum shopping, more so when the prayer before the civil court is only for an order of permanent injunction against the respondents 2 to 6 from selling or encumbering the properties of the Company. The maxim false in uno, false in omnibus as re-enforced in Ugar Ahiv v. State of Bihar and Sucha Singh v. State of Punjab (Supra) has no application to the present case and. therefore, will not be of any assistance either to petitioners or the respondents.
o The petitioners are challenging the allotment of 51,950 shares on various dates as per the details furnished herebelow:-------------------------------------------------------------------------------------Sl. No. NAME P/R Date and No. of shares alloteed AsTotal --------------------------------------------- per 29.06.2002 30.06.2006 30.12.2004 14.03.2005 MOA (with (with------------------------------------------------------------------------------------1. Mohamed P1 -- - - 2550 1002650------------------------------------------------------------------------------------2. L.A. Krishnappa P2 - - - 2550 1002650------------------------------------------------------------------------------------3. Anjanapp - - - - 2375 -2375------------------------------------------------------------------------------------4. L.R. Khan - - - - 2375 -2375------------------------------------------------------------------------------------5. Rahul K. R2 1800 - 250 750 1002900------------------------------------------------------------------------------------6. Manoharlal R3 2000 7700 250 - 100 10050------------------------------------------------------------------------------------7. Sampath Raj R4 1800 7700 250 - 1009850------------------------------------------------------------------------------------8. Nirmal Kumar R5 1900 7700 250 - 1009950------------------------------------------------------------------------------------9. Sanjay Chand R6 1800 7700 250 1009850------------------------------------------------------------------------------------ Total 9300 30800 1250 10600 700 52650------------------------------------------------------------------------------------ It is evident that while 42,100 shares were allotted in favour of the respondents 2 to 6 at par with exception of 1000 shares allotted at premium in favour of the second respondent, the petitioners were allotted only 9,850 shares and that too at premium, without offering any explanation for such discriminatory allotment of shares. The hoard minutes dated 29.06.2002; 30.06.2003; 30.12.2004 and 14.03.2005 merely disclose the allotment of 9300, 30800, 1250 and 10600 equity shares to the persons as per the list placed before the board, without giving any reasons for such allotments. No list of the allottees is available, as envisaged in those board minutes, the allotments made on 30.12.2004 and 14.03.205 carried premium, without offering any justification. The resolutions do not give any of the essential particulars regarding any yardstick or requirement of any funds for the Company for the discriminatory allotment of shares, especially when, it does not pursue any business since its inception. None of the board resolution contains the justification for the impugned allotments as put forth on behalf of the respondents for the first time in the course of oral submissions to the effect that the board of directors with a view to realise a better price increased the valuation of the Company by allotting shares and this is not supported by the pleadings and to my mind, it is not a justifiable reason for allotting shares according to the whims and fancies of the respondents 2 to 6. The board of directors at the board meeting of 14.03.2005 while thought fit to dispose of the Company's properties, did not deem it necessary to spell out in the board minutes of the requirement for allotment of 10,600 shares equity shares of Rs. 10/- in favour of the petitioners at a premium of Rs. 70/- each. The need and necessity for this impugned allotment run parallel to the decision of the board of directors to sell the properties of the Company. The board meeting allotting 9300 shares in favour of the respondents 2 to 6 on 29.06.2002 was attended by the respondents 2, 4 & 6. The board meeting allotting 30,800 shares in favour of the respondents 3 to 6 on 30.06.2003 was attended by the respondents 2 & 4 to 6. The board meeting allotting 1250 shares in favour of the respondents 2 to 6 on 30.12.2004 was attended by the respondents 2 & 4 to 6. The board meeting allotting 10,600 shares in favour of the petitioners, the second respondent, the deceased father of the second petitioner and the nephew of the first petitioner on 14.03.2005 was reportedly attended by, among others, the petitioners. All these board meetings arc under serious dispute. The petitioners are admittedly not parties to the resolutions dated 29.06.2002 and 30.06.2003 and 30.12.2004 allotting me impugned shares in favour of the respondents and the bare board minutes will not substantiate the impugned allotments. According to the respondents the Company is not maintaining any attendance register either for board meetings or general meetings.
There is no other documentary evidence other than the board minutes dated 14.03.2005 and form No. 2 filed with the Registrar of Companies to establish the disputed allotment of 10,600 shares which alone will not, however, conclusively establish the participation of the petitioners at the board meeting reportedly held on 14.03.2005, as being asserted by the respondents. It is rather strange to observe from the board minutes dated 14.03.2005 that the second petitioner "conveyed his acceptance on his behalf and on behalf of Mr. Anjanappa (the second petitioner's father) for allotting shares to the extent of putting money into the company at premium", whereas the second petitioner's father, namely, Anjanappa, died as early as on 24.08.2001 which throws a lot of doubts on the genuineness of the allotment of shares at the board meeting purportedly held on 14.03.2005. The second petitioner, by no stretch of imagination, would have conveyed his acceptance on behalf of his deceased father for allotting shares in his name, namely, deceased father, which establishes the hollowness in the claim of the respondents 2 to 6, made in this behalf. The balance sheet for the year ended 31.03.2002 and 3 1.03.2003'reflecting share capital of Rs. 24,99,910/- signed by the second petitioner does not in any way improve the version of the respondents in establishing the further issue of shares, in view of the requirement of Section 215(3) of the Act, according to which, every balance sheet and profit and loss account of a company must be signed by among others its managing director, which is not found satisfied in respect of the balance sheet of the Company for the years ended 31.03.2002 and 31.03.2003. The directors of a company stand in a fiduciary capacity vis-a-vis the company. They must act in good faith and for the paramount interest of the Company as a whole and for proper purpose thereof. The power to raise additional capital by the directors should be fairly and justly exercised for the benefit of the Company. It is well settled that further shares are normally issued for augmentation of funds for the Company or towards compliance with statutory requirement or requirements of banks and financial institutions. It is evident that none of these requirements has been satisfied in the present case. By virtue of further issue of shares, the respondents 2 to 6 cornered the majority shares of the Company at the cost of the petitioners. This unjust and unfair action of the respondents has a serious and continuance impact, permanently prejudicing the interest of the petitioners and, therefore, oppressive as well as burdensome. The impugned allotment of shares is not found to be legitimate on the part of the respondents. The respondents 2 to 6, in my considered view, as borne out by the sequence of events, failed in their fiduciary duties in having allotted discriminately the disputed shares, with an ulterior objective and not in the interest of the Company and thereby failed to ensure fair play in the corporate management. There is no doubt that the petitioners have been deprived of their privileges and rights, as shareholders of the Company, which are harsh and burdensome, requiring the intervention of the CLB. o The rival contentions of the parties with regard to cessation of the petitioners as directors do not assume any significance in the light of the categorical submissions made on behalf of the respondents 2 to 6 that they are ready and willing to induct the petitioners again in the board of the Company and there is, therefore no need to adjudicate the issue of directorship of the petitioners, which is no longer contentious between the parties.
o The controversies on account of the status of the third respondent, both as a shareholder and director of the Company must be gauged on the basis of the records produced before the Bench. The Board minutes dated 14.03.2005 containing the resolution on reappointment of the third respondent as a director, followed by form No. 32, are not free from dispute and therefore, it is not safe to place any reliance on such disputed documentary evidence produced by the respondents. It is observed that while pleading in the civil suit (O.S. No. 10 of 2006) that the third respondent had resigned from directorship with effect from 14.08.2000, the petitioners never questioned the status of the third respondent as a shareholder of the Company. The first petitioner had sent the telegram as well as the legal notice in favour of among others, the third respondent, challenging the act of the respondents 2 to 6 and the second petitioner in disposing of the properties of the Company for a lesser value, without convening a meeting of the board of directors of the Company and warning them not to take any steps without his knowledge either to sell the properties or creating any interest in favour of any third person. The first petitioner has not choosen to explain as to why the telegram as well as the notice was sent to the third respondent, when he is neither a shareholder nor a director, as claimed by the first petitioner. Moreover, it is already found that the petitioners have lost their remedy under Section 402(f) to set aside the sale deeds executed by the third respondent on behalf of the Company in favour of the respondents 7 & 8, who have already parted with title and possession of the properties in favour of third parties, much prior to the delayed approach by the petitioners, and, therefore, the authority of the third respondent lo execute the sale deeds on behalf of the Company does not merit am consideration, in the present proceedings.
o The properties of the Company have been admittedly sold in April 2005. Nevertheless, the respondents 2 to 6 have neither produced any material to show that the petitioners have been kept informed of such sale of the properties nor rendered any account of the sale proceeds of the properties including a large number of trees, realised by them. At the same time, the board resolution dated 23.05.2005 would show that the decision was taken to close down the Company, without however, giving any reasons, towards which the third respondent has been authorised to take necessary advice from the auditors, pursuant to which the Company opted for striking off its name under the Simplified Exit Scheme 2005, as provided under Section 560 of the Act. These acts of the respondents 2 to 6 are inevitably prejudicial to the interest of the petitioners as shareholders, who have been denied of the benefit of the properties owned by the Company and enjoyed by the respondents 2 to 6, which warrant adequate remedial measures without, however, encroaching upon the powers vested in the Competent Authority, by virtue of Section 560 of the Act and in view of the principles enunciated in Jindal Praxair Oxygen Co. (P) Ltd. v. Praxair Pacific Ltd. (Supru).
Towards this end, the respondents 2 to 6 shall however, undertake to contribute the difference of amount between Rs. 1,65,00,000/- and Rs. 27,52,000/-, namely, Rs. 1,37,48,000/- and Rs. 2,75,200/- towards sale deed(s) expenses to the assets of the Company by way of compensation, in the affidavit as well as the indemnity bond, which are required to be executed as per the "Simplified Exit Scheme, 2005".
In view of the foregoing conclusions and in exercise of the powers under Sections 397, 398, 402 & 406 read with Section 543 as set forth in Schedule XI and with a view to bringing to an end the acts complained of in the affairs of the Company, it is directed as under: (i) The petitioners shall stand forthwith inducted in the board of directors of the Company and the Company shall file necessary Form No. 32 with the Registrar of Companies in accordance with the relevant provisions of the Act.
(ii) All the allotment of shares made by the Company on 29.06.2002, 30.06.2003, 30.12.2004 and 14.03.2005, being oppressive as well as illegal are set aside as null and void and consequently, its share capital stands reduced.
(iii) The Company shall rectify the register of members in respect of all the impugned shares which are set aside, by deleting the names of the concerned allottees within 30 days of the receipt of the order.
(iv) The respondents 2 to 6 shall contribute an amount of Rs. 1,40,23,200/-(Rs. 1,37,48,000 + Rs. 2,75,200) to the assets of the Company by way of compensation on or before 30.06.2008, failure of which shall attract 9% simple interest for the period of default.
The respondents shall further execute necessary affidavit and indemnity bond as provided in the "Simplified Exit Scheme, 2005" undertaking to contribute the compensation in terms of this order, before getting the name of the Company struck off from the register of companies under Section 560 of the Act, through the operation of the "Simplified Exit Scheme, 2005".
(v) The board of directors of the Company shall distribute the sale proceeds of the properties of the Company in favour of all the shareholders in proportion to their shareholding, after meeting the statutory liabilities and expenses if any, before availing the benefit of the "Simplified Exit Scheme, 2005".
(vi) The Bench Officer shall forward a copy of the order to the Registrar of Companies, Karnataka at Bangalore, for appropriate action, in pursuance of the directions, as per Clauses (i) and (iv) here above.
6. With the above directions the company petition and the connected applications are disposed of, without any order as to costs. In view of this, all the interim orders are vacated.