R KHEMKA Vs. DECCAN ENTERPRISES PVT LIMITED SECUNDERABAD

JUDGEMENT

(1.) The petition is laid under Sections 397 to 399 of the Indian Companies Act, 1956. It has been orbiting for over a decade. Final curtain was laid by this Court by hearing the matter on day to day basis. Voluminous documentary evidence and enormous oral evidence was pressed into service. The following reliefs were claimed in the Company Petition: (i) Declare the induction of the Respondent No.7 as additional Director on to the Board purported to have been made at the Board meeting held on 15-1-87 as void and illegal and injunct the said Respondent No.7 from exercising any power or authority as a Director of the Respondent No. 1 company. (ii) Declare that there was no Annual General Meetings held on 18-12-85 or 18-10-86 and the Board Meeting held on 9-11-85, 11-11-185 and 20-8-86, 20-9-86, if there were any such meeting or meetings and that each of the said meetings are illegal and the resolution if any passed thereat are void and inoperative. (iii) Declare that the purported allotment of further/fresh shares in the year 1985 of 1986 if any, by the Board of the Respondent No.1 is void, illegal and to injunct the Respondent Nos.2 and 3 as Secretary and Managing Director from permitting any rights of such allottee shareholders under such further/fresh allotment including the voting right in respect of such further/fresh allotted shares (iv) Declare that the Respondent No.3 is not the Managing Director of the Company and/or in the alternate to terminate his appointment as Managing Director on the ground that he has shown himself to be unfit to be entrusted with the management of the company. (v) Declare that the Respondent No.2 is not the Secretary of the Company and in alternate to terminate his appointment as the Secretary on the ground that he has shown himself to be unfit to be entrusted with such functions. (vi) Restrain the Respondent Nos.2 and 3 i.e., Secretary and Managing Director by an injunction from giving effect to any resolutions of the Board of the company at the meeting purportedly to have been held on 11-11-85 and restrain Respondent No.3 from acting pursuant to the power of Attorney said to have been executed in his favour based on the said illegal resolution dated 11-11-85. (vii) Give appropriate directions for the convening of the Annual General Meetings of the Company for the year ended March, 1985 and March, 1986 after due notice, and in accordance with the provisions of the Act so that the shareholders of the company may consider and transact such business as may be permitted by law to be transacted at that meeting including the appointment or reappointment or removal of the Directors. (viii) Appoint a special officer or officers to take charge of the business and affairs of the company and to arrange for running the same till the Board is duly reconstituted. (ix) A scheme be framed by this Court for administration of the company with proportionate representation of the petitioners on the Board in the alternate the special officer be directed to convene and hold and conduct an extraordinary general meeting of the company for the purpose of appointment of Directors. (x) Give such other directions as this Honourable Court may deem necessary to put an end to the matters of the mismanagement and oppression referred above and to ensure the appropriate conduct of the affairs of the company in accordance with the understanding of the joint participation and management of the affairs of the Respondent No. 1 and the foreign joint venture company and in accordance with the provisions of the Act and the Articles of Association of the Respondent No. 1 company. Pleadings and Counter Pleadings :

(2.) The averments in support of the Petition can be narrated in nut-shell for proper appreciation of the case : The Deccan Enterprises Private Limited (D.E.P.L.) is the 1st respondent Company (for short 'R1') was incorporated on 15-4-1966 vmder the provisions of the Companies Act with Registered Office at Rashtrapathi Road, Secunderabad. The authorised capital of the Company was Rs.10 lakhs and issue capital was Rs.5 lakhs divided into 50,000 shares of Rs.10/- each. The Petitioner No.1 Skri R.Khemka (for short P1) and Petitioner No.2 possessed 11,320 of shares and thus they held more than l/10th share under the 1st Respondent company. The 7th Respondent Shri S.G.Jalan (for short R7) was sought to be inducted to the Board of Directors of the 1st Respondent Company in January, 1987 and the validity of such appointment is being questioned. P1 and the 9th Respondent Sri R.N.Jalan (for short R9) conceived the idea of setting-up of a personal business for himself and R9 as a partnership in recognition of their close and cordial relations with a view to provide opportunity to the children of two families namely Khemka and Jalan families. During 1965 the son of P1 and R9 were students and they intended to hand over the business after they completed their studies. Therefore, the Company was promoted in April, 1966 as a Private Limited Company, but in fact it is a partnership concern inter alia for manufacturing of rubber rings. Since its inception the P1, R9 were the Directors. Respondent No.3 Shri O.P.Jalan (for short R3) was brought on Board for looking after the affairs of the Company as P1 and R9 were already pre-occupied with the employment in the management of the large public limited company namely Hyderabad Asbestos Company Limited (later on re-named as Hyderabad Industries Limited (for short H.I.L). It was the understanding that the R3 will function under the guidelines of P1 and R9. All the major decisions like capital expenditure, increase of share capital, financial arrangement etc. were being done with the consultation of these two persons. Thus, it is the case of the petitioners that two groups namely Khemka Group and Jalan Group were to function as partners and reposed implicit faith in each other. It is the case of the petitioners that the proportionate of share holdings in the company has always been in the ratio of 1/3 and 2/3 as between Khemka Group and Jalan Group and it was maintained whenever the share capital was increased. The son of P1 is the 11th Respondent Sri Mahesh Khemka in the Petition and subsequently he was transposed as Petitioner No.3 (for short P3). After completing the Engineering Degree he was appointed as Executive Directors of R1 company for looking after the affairs of the company. It is the case of the petitioners that the P1 and R9 had rendered invaluable technical management and support for the improvement of the company. There was always mutual consultation whenever major decisions were being taken. The Company grew leaps and bounds and it bagged Export Awards continuously for Foreign Exchange earnings. The company had built-up large reserves and had been getting huge profits with the cooperative efforts of Khemkas and Jalans (for short 'K' and 'J' group). However, this prosperous trend continued upto 1982-83. It is the case of the P1 that he was regularly being furnished with the Agenda Minutes of the Board and A.G.M. of the Company and he used to sign the balance sheet. However, this practice continued till J group conceived ways and means to pave the way for exclusion of K group in or around 1983. The scheme could not be understood by the petitioners till March, 1984. The Company had established good commercial links with the foreign buyers and has also been rendering technical know-how to the foreign companies. The Company acquired joint-venture project for the manufacture of similar products in Saudi Arabia by investing 20% equity interest in Amiant Rubber Industries Limited (for short A.R.I.L.) in Saudi Arabia. Thus, the P1 and R3 became directors of the Foreign Company A.R.I.L. and P3 was the General Manager of A.R.I.L. in 1977. Accordingly, P3 shifted the residence to Saudi Arabia for supervising construction and commission of the project till 1982. After P3 returned in 1982 from Saudi Arabia, he was expecting that he would be associated with the management of the Rl company as Executive Director, when the Company was in a prosperous and sound state of affairs. However, the P3 was not inducted on the Board on his return from Saudi Arabia. Thus, the disproportionate management took its seeds in the administration of the Company. In March, 1985 in furtherance of the idea of J group to oust K group from the joint venture company informed the K group not to deal with any longer with P3 on behalf of the R1 Company. Thus the humiliation and harassment was being caused to P3. It is the case of the petitioners that from about 1983, R3 of J group unilaterally stopped sending the monthly reports, statement of affairs, notices, Minutes of the meetings or A.G.M. They did not receive any such notices or the audited annual accounts from 1983 and thus the K group was completely kept in dark and it was being surreptitiously excluded from the management and participating in the affairs of the company for the benefit of the J group. The scheme of exclusion was known by March, 1985 when a resolution was passed on 21-8-1984 interfering with the Directorship of P3 on the Board of Joint Venture Company A.R.I.L. Under the said resolution, nomination of the 3rd petitioner was withdrawn from the Board of joint-venture company, Saudi Arabia and the said company removed the P3 in the middle of 1985. Thus, the expectation of K group that the 3rd petitioner would suitably accommodated in the R1 company and also in the joint venture company became futile. Even then, the petitioners were made to sign the balance sheet and statement of accounts for 1982-83 on the assurance of proper management participation held out by R9. But, however, J group continued to work against the interest of P3. Even though the son of R9 was accommodate in a suitable management capacity in a apposition in another company, yet the P3 was kept in lurch. During March, 1985 R9 also left the employment in the Public Limited Company H.I.L. Under these circumstances, P1 addressed a letter dated, 25-3-1985 expressing his anguish over the affairs of the company and filed suit in Calcutta High Court challenging the resolution dated 21-8-1994 withdrawing P3 from the Board of Joint-venture company and the same is pending. It is stated that the said resolution is illegal and invalid and no notice of meeting dated 21-8-1984 was issued to K group. Thereafter, R3 assumed the role of representation of the Rl company on the Board of Joint Venture company in Saudi Arabia and continued to enjoy the extensive and rich benefits. During the year 1984 also it is the case of the petitioners that no notice of the Board meetings were sent to P1, no A.G.M. was held, no notices of the A.G.M. which should be held statutorily in 1984 was sent to the petitioners. In effect it is their case mat upto January, 1985 no notices were received by them. R3 used unfair means and thereby lacked probity and thereby the affairs of the company were conducted in a manner prejudicial to the interest of K group. By letter dated 25-3-1985, the petitioners complained about the non-receipt of the notices etc. However, by letter dated 30-4-1985, the R3 falsely alleged that the notices were sent. It is only along with the letter dated 30-4-1985, the annual statement and balance sheet of 1984-85 were sent to him. But, it was not disclosed as to when the balance sheet was placed before the Annual General Meeting and how the notices of the meetings were sent to all the shareholders. None of the K group shareholders received the notices. However, after a lapse of 18 months for the first time, notices for two board meetings, scheduled to be held on 27-6-1985 and 8-7-1985 were sent. For 1984-85 Annual General Meeting no notices were received and there has been a statutory violation of holding minimum four meetings of the Board for the year 1984-85. On account of the differences between R3 and R9,R2 and R3 started excluding R9 of J group from the participation in the affairs of the company and thus R9 and his wife and children isolated. R9 also did not receive the notice of any Board in the year of 1984-85 or Annual General Meeting. This was brought to the notice of the R2 and R3 by R9 by letters dated 21-10-1985 and 29-10-1985. The petitioner also by letter dated 17-12-1985 hinted R3 not to attempt to alter the pattern of share-holding. The petitioner also by letters dated 9-2-1986 and 22-10-1986 brought to the notice of Rl company the violations of the provisions of the Companies Act. The Registrar of Companies (R.O.C) issued a show cause notice dated 6-11-1986 to the petitioner and other Directors alleging breach of the provisions of the Act and the petitioner by his letter explained the various developments in the company including wrongful exclusion. He also called upon the R3 to intimate the action taken. It is also the case of the P1 that even in the year 1986, he received certain notices for Board Meetings, but they either reached on the date of the meeting or beyond the date of the meetings making it impracticable to attend the meetings. The Respondent No.2 and Shri V. K. Chemariya, Company Secretary (for short R2) has also been conspiring with R3 to keep the K group out of participation. The petitioner was not furnished with the minutes of the meetings nor the audited copy of the balance sheet and accounts. Though the R2 and R3 claimed to have held board meetings dated 8-11-1985 and 11-11-1985 at which the accounts and the balance sheet for the year 1984-85 was supposed to the balance considered and that the Annual General Meeting was said to have been held in respect of the same on 18-2-1985, no such meeting took place and no notice were issued. Even though the requisition was made to R3 for copies of the balance sheet and annual accounts for the year 1984-85 and 1985-86, they were not supplied. The notices for Annual General Meeting for the year 1984-85 and 1985-86 have not been issued to any numbers of the K group. One of the resolutions alleged to have been passed on 11-11-1985 relating to grant of power of Attorney in favour of R3 with regard to joint venture company was not passed and no notices of the meeting was issued to the petitioners. On account of calculated silence the petitioners seriously apprehended that fraudulent resolutions were brought on record and R3 appears to have resorted to unauthorised and wrongful allotment of shares contrary to understanding of proportionate representation. The induction of R7 as Director was illegal and unwarranted. The petitioner recorded his dissent for such induction. Thus, the petitioners stated that there was a systematic oppression of K group, although they were substantial shareholders of the Company. Even R9 and his relations were persistently excluded from the management. R3 has been mismanaging the affairs of the company and flouted the provisions of the Act. In the balance sheet for 1983-84 it was shown as if the company had incurred a loss of Rs. 13 lakhs and it was not real and accounts were manipulated. The Company has been lending money to others concerns where R3 had substantial interest. There was a systematic channeling out of funds by way of lending to related concerns. The Income Tax arrears made the authorities to initiate compulsory recovery proceedings. Any further control in the hands of R2 and R3 would cripple the company and cause severe loss to the petitioners and other shareholders of both K group and R9 group. There was a deliberate oppression of the petitioners. Therefore, the petitioners sought various reliefs referred to above.

(3.) In this regard, it is necessary to note the names of respective parties and relationship which is as detailed below : PI Mr.R. Khemka P2 Mrs. Radha Devi Khemka (Wife of P1) P3 Mr. Mahesh Khemka (son of P1) R1 Company R2 Mr. V.K. Chemariya, Company Secretary. R3 Mr. O.P.Man R4 Mrs. Sudha Man (wife of R3) R5 Mr. Vikas Man (son of R3) R6 Miss. Kavita Man (daughter of R3) R7 Mr. S.N.Man (Brother of R3 and R9) R8 Mr. S.k.Jalan (Father of R3,R7 and R9) R9 Mr. R.N.Jalan (brother of R3 and R7) R10 Mr. Ajay Kumar Ghuwalewala R11 Mr. Mahesh Khemka (Transposed as P3) R11 Registrar of Companies.