PARMANAND CHOUDHARY Vs. SHUKLA DEVI MISHRA

JUDGEMENT

(1.) THIS is an appeal under Section 485 of the Companies Act, 1956, by the appellants/petitioners against rejection of their petition under Sections 397 and 398 of the Act, for relief against oppression and mismanagement, by the learned single judge.

(2.) A partnership firm known as "durga Pesticides" comprising petitioners Nos. 1 and 2, Paramanand Choudhary and Sunderlal Dalai, and respondent No. 2, Brijmohan Mishra, was constituted with effect from August 1, 1974, for carrying on the business of manufacture and sale of pesticides at Burhanpur, Khandwa District. The business was located at 13, Industrial Estate, Burhanpur. Each of the three partners contributed a capital of Rs. 25,000 and the profits and losses were to be shared almost equally between them. This firm was reconstituted with effect from April 1, 1976, by the addition of petitioner No. 3, Smt. Tara Devi and Smt. Padmadevi Gupta also as partners. The shares of all the five partners as well as their contribution to the capital were equal. A further reconstitution of the firm was made with effect from August 10, 1979. By this reconstitution, respondent No. 2, Brijmohan Mishra, and Smt. Padmadevi Gupta ceased to be partners of the firm ; but Smt. Shukla Devi Mishra, wife of respondent No. 2, Brijmohan Mishra, became a partner along with the three petitioners. The capital of the firm was increased to Rs. 2,00,000 and each of the four partners' contribution was Rs. 50,000 and the profits and losses were to be shared equally by all the four partners. The partnership was converted into a company, "durga Pesticides Pvt. Ltd. ", on November 18, 1980. The registered office of the company is situated at 13, Industrial Estate, Burhanpur, and the share capital of the company is Rs. 5,00,000 divided into 5,000 equal shares of Rs. 100 each. The main object of the company was to take over, purchase and acquire as a going concern the business of the partnership firm, 'durga Pesticides', together with all the assets and liabilities of that business and to carry on that business of manufacturing and selling of pesticides, insecticides and other plant protection chemicals. The other objects of the company are set forth in the memorandum of association of the company. The petitioners and respondent No. 1 were subscribers to the memorandum of association and had taken 10 shares each. Further shares were issued by the company and each of the petitioners and respondent No. 1 hold 520 shares making the subscribed capital Rs. 2,08,000. The said firm, Durga Pesticides, had taken a loan of Rs. 4,18,500 from the M. P. Finance Corporation and the liabilities were taken over by the company. Petitioners Nos. 1 to 3 and respondent No. 1 were made permanent directors with petitioner No. 1 as managing director. The M. P. Finance Corporation issued a notice dated April 13, 1981, demanding repayment of its loan with interest amounting to Rs. 4,89,608. 14 as on December 1, 1980, and threatening legal action in the event of default. An extraordinary meeting of the board of directors was called on April 19, 1981, and a resolution was passed stating that there was no objection to the management of the company being taken over by the M. P. Finance Corporation so that it can recover its dues. Thereafter, petitioner No. 1 submitted his resignation as managing director on May 5, 1981. However, a meeting of the board of directors was again called on May 8, 1981 at Indore, apparently to facilitate the presence of S. K. Pandit, General Manager of the M. P. Finance Corporation. In that meeting, the resolution dated April 19, 1981, was superseded and, it was decided that respondent No. 1 be appointed as chairman-cum-managing director of the company for a period of five years with the other directors, i. e. , the petitioners discharging an advisory role. The day-to-day working of the company was entrusted to respondent No. 1 and she was authorised to streamline the management and improve the working of the company. This arrangement was made to tide over the difficulties faced by the company which were accentuated by the M. P. Finance Corporation demanding repayment of its loan. It was mentioned that respondent No. 1 will ensure that all the directors get a reasonable return on their investment, i. e. , Rs. 24,000 annually. A separate agreement was also executed by the petitioners and respondent No. 1, on May 15, 1981, incorporating these conditions, but on August 17, 1981, the petitioners made a grievance that they were not permitted to enter into the factory premises and to discharge their advisory role as directors. This event was repeated on September 3, 1981. A meeting of the board of directors was called by petitioner No. 2 on September 22, 1981. This meeting was attended by the petitioners and not by respondent No. 1 who challenged the authority of petitioner No. 2 to call the meeting, saying that petitioner No. 2 has no power to call the meeting. In that meeting, the resolution dated May 8, 1981, was superseded and petitioner No. 2 was appointed as chairman-cum-managing director and the next meeting of the board of directors was fixed for September 29, 1981, but no such meeting took place. Respondent No. 1, by notice dated September 25, 1981, called a meeting of the board of directors on October 5, 1981, at the office of the M. P. Finance Corporation at Indore. On that day, the petitioners attended the meeting but not respondent No. 1 and so nothing happened on that day. Thereafter, a meeting of the board of directors was called by respondent No. 1, on November 30, 1981, at the registered office which was attended by respondent No. 1, Shukla Devi Mishra, and respondent No. 6, D. P. Khanna, who was nominated as a director by the corporation under the State Financial Corporations Act. In that meeting, a resolution was passed appointing respondents Nos. 2 to 5, Brijmohan Mishra, Girija Shanker Bhatnagar, Padamkumar Mazumdar and Chandra Gopal Sharma, as additional directors of the company under Section 260 of the Companies Act. In the next meeting held on December 3, 1981, attended by respondents Nos. 1 to 5, a resolution was passed to issue 2,920 equity shares of Rs. 100 each for the remaining part of the authorised capital and allot the same to the members of the company. It was further resolved that in case the existing members of the company did not subscribe individually to the shares, then the shares be allotted to the additional directors of the company, i. e. , respondents Nos. 2 to 5. In the meeting held on December 26, 1981, attended by respondents Nos. 1 to 5, 650 shares were allotted to respondent No. 1, 1920 shares to respondent No. 2 and 150 shares to each of respondents Nos. 3 to 5, i. e. , in all 2,920 shares. On January 25, 1982, the petitioners sent a registered letter to respondent No. 1, saving that they had come to know that a meeting of the board of directors has been called, but they do not know any other particulars though, as directors, they are entitled to that information. In the next meeting held on March 5, 1982, the allotment of new shares was confirmed and it was resolved that respondent No. 1 should take steps regarding the continued absence of the petitioners in the meetings of the board of directors commencing from November 30, 1981. In the next meeting held on March 19, 1985, respondents Nos. 1 to 5 alone were present and it was resolved that all the three petitioners had ceased to be directors of the company under Section 283 (1) of the Companies Act on account of their continuous absence without leave and their failure to explain the reasons for their absence. Respondent No. 1 then gave a notice to the petitioners on April 19, 1982, saying that they had ceased to be directors of the company. The first annual general meeting of the company was held on May 17, 1982. In this meeting also, the petitioners were absent and respondents Nos. 1 to 5 alone were present. By a resolution passed in the meeting, the appointment of respondent No. 1 as chairman-cum-managing director for a period of five years from May 8, 1981, was confirmed and respondents Nos. 2 to 5 were appointed as directors of the company. The petitioners then filed a petition under Sections 397 and 398 of the Companies Act on July 9, 1982, for relief against oppression and mismanagement. It is also alleged that petitioners Nos. 1 and 2 hold degrees of M. Sc. in Chemistry and being unemployed graduates obtained a loan from the M. P. Finance Corporation and also from the Director of Industries and a plot was allotted in the industrial area at Burhanpur in their names for establishment of a factory in the name of Durga Pesticides ; petitioners Nos. 1 and 2 were the active partners, the remaining two partners being ladies, they were sleeping partners ; the plot on which the factory is built was also allotted in the names of petitioners Nos. 1 and 2 as unemployed graduates ; petitioners Nos. 1 and 2 alone have the technical know-how for running the factory and the respondents were made permanent directors under Clause 18 of the articles of association.

(3.) THE appellants'/petitioners' case is that the resolution and the agreement dated May 8, 1981, contravene Clause 18 of the articles of association and the said resolution and agreement are not binding on the company. Besides, the said resolution stood superseded by the subsequent resolution dated September 22, 1981, in the meeting of the board of directors called by petitioner No. 2. In spite of the resolution dated May 8, 1981, being superseded, respondent No. 1 committed serious acts of oppression and mismanagement by taking complete control of the company and by preventing the other permanent directors from participation in the affairs of the company ; she is abdicating her functions as managing director by handing over the management to her husband, respondent No. 2 the petitioners were refused access to the books of the company and were not even allowed to play their advisory role in running the affairs of the company ; by the resolution dated September 22, 1981, respondent No. 1 ceased to be the managing director and petitioner No. 2 was made the managing director in place of respondent No. 1 ; respondent No. 1 illegally and unauthorisedly flouted the resolution dated September 22, 1981, the petitioners have no notice of the meetings held on November 30, 1981, December 3, 1981, December 26, 1981, March 4, 1982, and March 19, 1982, of the board of directors as well as the annual general meeting held on May 17, 1982 ; as such, the resolutions passed in those meetings are non est and not binding on the petitioners ; as there was no notice of meetings, there was no question of the petitioners attending those meetings ; and, consequently, they did not cease to be directors of the company; moreover, they being, permanent directors, they could not be removed from directorship ; in these meetings, respondents Nos. 2 to 5 were illegally-made additional directors and also allotment of 3,020 shares were made unauthorisedly ; no shares could have been allotted to respondents Nos. 2 to 5 without first offering those shares to the petitioners ; respondents Nos. 2 to 5 are close relations and friends of respondent No. 1 and they have been made additional directors and shares were allotted to them mala fide and against the provisions of the articles of association ; respondent No. 1, as managing director, did not convene any annual general meeting within 18 months of the incorporation of the company as required under Section 166 of the Companies Act ; respondent No. 1 is refusing to recognise and acknowledge the creditors and depositors of the company affecting the credibility, reputation and goodwill of the company ; respondent No. 1 is guilty of falsifying the books of account by manipulating entries thereof by wrongly advising its auditor to change the entry of deposit or debt initially standing in the name of the relations of the petitioners by adjusting them against the names of the petitioners and forfeiting the said advances and deposits towards losses suffered by the company ; the petitioners are also not being paid their annual remuneration of Rs. 24,000 each ; respondent No. 1 was appointed as managing director in order that the dues of the M. P. Finance Corporation would be cleared but she did not care to pay anything to the corporation with the result, a civil suit has been filed by the corporation for realisation of the loan advanced by it with interest ; in that suit, the property of the company has been attached ; the overdraft facility from the bankers was misused and the raw material which was pledged with the bank was used for preparation of finished goods and which were directly sold to the customers without depositing payments in the bank as required ; the misuse of overdraft facility resulted in stoppage of the facility ; respondent No. 1 committed dishonesty and breach of trust amounting to criminal offence by secretly taking out raw material kept under the lock and key of the bankers in the factory premises for being used in the manufacture of the goods ; the cheques issued by her were dishonoured by the bank ; the course of action adopted by respondents Nos. 1 to 5 resulted in complete ruin of the company since it is a going company having immense potentialities of prosperity and further expansion, winding-up of the company would prejudice the petitioners and other shareholders ; besides the affairs of the company are being con ducted in a manner prejudicial to the public interest and object of the petitioners as members of the company ; the petitioners, therefore, prayed that the resolution dated September 22, 1981, be enforced and made binding on respondent No. 1 and all consequent proceedings of the company be declared null and void.