Oppression and mismanagement - CLB rejects the petition on the grounds of maintainability – Appeal-Whether rejection by CLB justified?

JIWAN MEHTA V. EMM BROS FORGINGS (P)

LTD &ORS [P&H] Company Appeal No. 5 of 2008 Hemant Gupta, J. [Decided on 02/11/2010]
Companies Act, 1956 – Section 10(F) – Oppression and mismanagement – CLB rejects the petition on the grounds of maintainability – Appeal-Whether rejection by CLB justified – Held, No.

Brief facts : The appellant is said to be possessed of 67590 fully paid up equity shares representing 15.36% of the total paid up share capital. Respondent Nos. 2 to 4, are said to be Directors along with the appellant, whereas respondent No.4 is the Chairman of the Company. It is alleged that respondent No.3-Shri Mohinder Mehta was appointed as Director of the Company on 7.7.2000, whereas as per the annual report, respondents No. 2, 3 and 4 swapped their individual shareholding in sister concerns EMM Bros Forging Pvt. Ltd and EMM Bros Metals Pvt. Ltd. without knowledge of the appellant. As a result of such swapping, respondent Nos. 2 and 3 have become majority shareholders in EMM Bros Forging Pvt. Ltd. and EMM Bros Metal Pvt. Ltd. The appellant alleged that such transfer of the share holding is illegal and in contravention of the provisions of Articles 7 and 8 of the Articles of Association of the respondent-Company. The appellant has also alleged that respondent Nos. 2 and 3 removed the appellant from directorship without any intimation and that respondent Nos. 2 and 3 appointed their respective wives as Additional Directors in 8th Annual General Meeting of the Company and raised share capital in their names and their wives so as to gain majority stake against all the remaining shareholders.Inter-alia, on the above said fact, the appellant sought restoration of the share holding in the Company as existed prior to the transfer made in the year 2000 and to direct respondent Nos. 2, 3 and 4 to restore funds and render the accounts of the financial affairs of the Company apart from the declaration that the funds were illegally utilized by respondent Nos. 2, 3 and 4 and in contravention of the provisions of law.

The learned Board has dismissed the petition filed by the appellant, primarily for the reason that the appellant has not offered to refute the preliminary objections raised by the respondents in respect of the maintainability of the petition. A finding has been returned that allotment, swapping etc., except of the appellant, was made pursuant to oral understanding as early as on 27.7.2000 and that the appellant has deliberately concealed the Memorandum of Understanding from the Board. The appellants appealed to the High Court.

Decision :  Appeal allowed.

Reason : Before the respective arguments of the learned counsel for the parties are considered on merits, it may be pointed out that since the resolution of the Board of Directors of the respondent- Company were not legible; the original proceedings book of the respondent-Company was called for. Learned counsel for the respondents has also produced photo copies of the aforesaid minutes/proceedings, which are permitted to be taken on record.

The proceedings book start from the meeting of the Directors held on 7.7.2000, which records the fact that the appellant was absent from the meeting and no leave was granted to him. The second minutes of meeting are of 27.7.2000. The appellant was absent and was not granted leave though leave of absence was granted to Shri Mohinder Mehta. The minutes record the transfer of shares of Shri Ashok and Shri Harish Mehta. In the meeting of 23.8.2000, the name of Jiwan Mehta, the appellant, is mentioned as the person present in the meeting, but the proceedings book is not signed by him. Shri Mohinder Mehta was absent, but no leave was granted. In the meetings of 17.10.2000, 30.11.2000, 30.12.2000 and 27.1.2001, Shri Ashok Mehta and Shri Raj Mehta are the persons present in the meeting and Shri Jiwan Mehta, the appellant, was not granted any leave of absence. Such meetings have not transacted any business except to discuss the current business programme or the need to have more working capital. The annual return filed in pursuance of Annual General Meeting held on 29.9.2000 produced by the appellant bears signatures of Shri Jiwan Mehta apart from signatures of Shri Mohinder Mehta and Shri Raj Mehta.

Before adverting to the effect of non-disclosure of Memorandum of Understanding by the appellant in his petition under Sections 397 and 398 of the Companies Act, I find, prima-facie, that the reliance of the respondents on the annual returns of the Company filed in pursuance of the Annual General Meeting held on 29.9.2000, which has been relied upon by the Board, is based upon forged and fabricated signatures of the appellant.

The proceedings book of respondent No.1 from 7.7.2000 till 27.1.2001 shows that Shri Jiwan Mehta is absent from the Board meetings. If Shri Jiwan Mehta has not attended the meeting of Board since July 7, 2000, how he would sign Annual Returns of the Company in pursuance of the Annual General Meeting held on 29th September 2000. It seems to be improbable. The said aspect gets support from the report of the Forensic Expert Annexure A-6, wherein signatures of Jiwan Mehta, the appellant, on such Annual Returns, have been found to be forged and fabricated.

The respondents have also relied upon the communication of the Registrar of Companies, wherein the cessation of office of Director by the appellant in the meeting of the Board on 27.1.2001 is said to be communicated to the appellant. The three meetings, the absence of which led to the vacation of office by the appellant, discuss the need to have more working capital, which is evident from the minutes of 17.10.2000, 30.11.2000 and 30.12.2000. It appears that such minutes have been recorded to make out a ground for cessation of office by the appellant as, prima-facie, the consideration of working capital requirement in three Board’’s meetings seems to be manipulated one. The requirement of working capital possibly cannot be discussed in three meeting of the Board and without taking any corrective step. Such finding is recorded to consider, prima-facie, the maintainability of the petition of the appellant herein. It is for the competent authority to consider and return a categorical finding on the detailed examinations of the documents.

The Board has held that the appellant has deliberately concealed the Memorandum of Understanding from the Board. The Memorandum of Understanding as has been mentioned above is to equally divide the family assets and assets and liabilities of EMM Bros Wires and Strips Ltd. The assets or shareholding of the respondent- Company were not subject matter of the Memorandum of Understanding. There is no specific term as regards the transfer of the shares in the respondent-Company. None of the terms of the Memorandum of Understanding refers to the alleged oral agreement in the year 1997 or 2000, the reference of which has been made only in the impugned order by the Board. The pleadings in the other cases in respect of another Company cannot be said to be relevant for determining the questions raised in the present petition. Clause-IV of the Memorandum of Understanding records that “hence forth, the businesses shall be owned as under”. It does not infer any oral agreement earlier or that the parties have already arrived at a settlement, wherein the appellant has given up his shareholding in the respondent-Company. The businesses were to be reorganized from the date of Memorandum of Understanding only.

In view of the above, though the question whether the Memorandum of Understanding touching the affairs of the respondent-Company, is relevant and to what extent is to be decided by the Board but it cannot be said that non-disclosure of such Memorandum of Understanding is fatal so as to return a finding that the petition itself is not maintainable. Whether such Memorandum of Understanding is relevant to the Company in question and/or whether there was oral agreement or parties have swapped shareholding dehors the Memorandum of Understanding or in terms of the Memorandum of Understanding will be some of the questions, which may require adjudication by the competent authority. But nondisclosure of Memorandum of Understanding is not a fact which goes to the root of the controversy and does not conclusively decide all the questions between the parties. Therefore, even if the appellant has not made any reference to the said Memorandum of Understanding in his petition, but it is not material omission, which disentitles the appellants to even for consideration of his petition on merits.


In view of the above, I am of the opinion that the order passed by the Board, whereby it was held that the petition is not maintainable, suffers from patent illegality and cannot be sustained in law. Consequently, the impugned order is set aside. The matter is remitted back to the Board for fresh decision on merits, in accordance with law.

(Published in Chartered Secretary Dec 2010 - ICSI)