RAJESH PATIL Vs. MOONSHINE FILMS PVT. LTD.

JUDGEMENT

(1.) IN this order I am considering Company Petition No. 90/2005 pertaining to M/s Moonshine Films Pvt. Ltd. and other respondents. M/s Moonshine Pvt. Ltd. was incorporated by the petitioner namely, Shri Rajesh Patil and respondent No. 2 namely, Shri Himanshu Gosai on 29.1.1997 as a private limited company having its registered office at 604B Building, President Plaza, Near RTO Ring Road, Surat. The main object of the company is to construct and operate a Drive in Cinema. This private limited company is nothing but a quasi -partnership formed by two individuals with equal shareholding and equal number of their family members as their nominees on the Board without any shares to their nominees. The respondent No. 3 namely, Shri Jaivant Virchand Shah was the only non -family director inducted into the Board without any shares only to give him confidence for the funds he promised to bring in for the project. The company purchased lands from private parties and Gujarat Industrial Development Corporation (GIDC) for its Drive in Cinema project and the said purchases were financed through unsecured loan of Rs. 42.39 lakhs from the petitioner; Rs. 18.85 lakhs from the respondent (Respondent No. 2); from borrowing of Rs. 44 lakhs from one Shri Nalinbhai Patel and Rs. 4.64 lakhs from Jaivant Shah both of them being NRI. All lands of the company were purchased before 30th Nov. 1997 and payments were completed by June, 1998. On 11.12.2002 Respondent No. 2 issued 8800 shares exclusively to himself and his wife (Respondent No. 4) jointly and on 8.1.2003 out of 2,90,000 shares further 2,89,520 shares were issued jointly to Respondent No. 2 and his father (Respondent No. 5) by conversion of unsecured loan of Rs. 17,90,200 standing in the name of Respondent No. 2 and by depositing the balance fund required amounting to Rs. 11,05,000 by way of deposit in the bank on 10.1.2003 (i.e. after the date of allotment and filing of return of allotment on 9.1.2003). By issue of shares on 11.12.2002 and 8.1.2003 the petitioner who was holding 50% of issued share capital as on 10.12.2002 was marginalized and reduced to a hopeless minority. Further, the petitioner and his nominees were removed from the Board of the company under Section 283(1)(g) on 30.1.2003. Hence, this petition under Sections 397/398 of the Companies Act, 1956.

(2.) THE petitioner's case is that the alleged issue of further shares of 8800 on 11.12.2002 exclusively to Respondent No. 2 and his wife jointly in the guise of fulfilling the statutory requirement of minimum Rs. 1 lakh paid up share capital for private limited companies and further issue of 2,89,520 shares (out of 2,90,000) shares jointly to Respondent No. 2 and his father (Respondent No. 5) on 8.1.2003 were made only to marginalize and reduce the petitioner into a hopeless minority from holding of 50% of the issued share capital as on 10.12.2002. The issuing of shares on 11.12.2002 and 8.1.2003 amounted to acts of oppression against the petitioner as notices for such Board meetings wherein decision regarding such issuing of shares was taken were said to have been given only through UPC. No such notices were, infact, ever received by the petitioner and even the minutes for such meetings were forged. The justification given by the Respondents for issuing 8800 shares on 11.12.2002 was that issuing of further shares was necessitated for fulfilling the statutory requirement of minimum Rs. 1,00,000 paid up share capital for private limited companies in pursuance of Government's notification on 12.12.2000 through the company's Amendment Act, 2000. The petitioner's case is that for fulfilling this statutory requirement Respondent No .2 did nothing for 2 years and only on the penultimate day i.e. on 11.12.2002 the share capital was increased by alleged issue of 8800 shares by conversion of unsecured loans of R -2 and the return of allotment for the same was filed on 8.1.2003 with Registrar of Companies Gujarat after the petitioner left India on 25.12.2002. Further, it was pointed out that while converting unsecured loans of Rs. 18,85,000 lying in the exclusive name of Respondent No. 2 for joint allotment of shares to Respondent No. 2 and Respondent No. 4(Respondent No. -2's wife) was an illegality also. The undated notices said to have been sent through UPC for Board's Meetings held on 15.10.2002 and 11.12.2002 were never ever received by the petitioner. It was argued that the undated notices and the UPC certificates show that the notices were subsequently generated by forgery and fraud to show that notices were sent to the petitioner and his family members on the Board of Directors. It was pointed out that the respondents plea that the petitioner was reluctant at the alleged Board meeting held on 25.9.2002 to subscribe for further shares by conversion of his unsecured loans to take care of statutory requirement of issuing of 8800 shares is unbelievable and ludicrous. It was argued that since when the petitioner had brought in Rs. 42,39,324 as unsecured loans as on 31.3.1999 vis -a -vis Rs. 18,85,000 brought in as unsecured loan by Respondent No. 2 on that date, and further that the petitioner had brought in further amount of Rs. 32,39,324 thereafter till date, it is completely inconceivable that the petitioner was not ready to risk Rs. 44,000 for 4400 shares on 25.9.2002. Further, it was pointed out that on 8.1.2003 by issuing of 2,89,520 shares jointly to Respondent No. 2 and his father (Respondent No. 5) was again an illegality of converting unsecured loans in a single name (Respondent No. 2's) into shares with joint names of Respondent No. 2 and Respondent No. 5 besides the same amounting to oppression to the petitioner as no notice was ever given to the petitioner and his nominee directors for such Board meetings and further issuance of shares. The shares were issued jointly by conversion of unsecured loan of Rs. 17,90,200 standing in the name of Respondent No. 2; and the balance required funds amounting to Rs. 11,05,000 were deposited in the bank only on 10.1.2003 (i.e. after the date of allotment and filing of return of allotment on 9.1.2003). Further that on the date of alleged allotment on 8.1.2003 the company did not have even application money required funds in its hand and the return of allotment was filed on 9.1.2003 itself. It was pointed out that when the petitioner inspected the record of Registrar of Companies the fraudulent issue and allotment of further shares and removal of petitioner and his family members from the Board of the company came to the knowledge of the family members as late as in March 2004. It was argued that cessation as being directors of the company in respect of the petitioner and his family nominees was illegal and was an act of oppression against the petitioner. The notices said to have been sent under post certificates (UPC) are invalid as a proof of service as the UPC can be procured at any point of time as held in para 6 of Supreme Court's judgment in Shiv Kumar v. State of Haryana reported at . The said ratio was followed by the apex Court in the case under Companies Act reported as (2003) 9 ILD 95 (SC) -M.S. Madhusoodhanan v. Kerala Kaumudi Petition Ltd. (paragraph 23.17). The ratio in Shiv Kumar v. State of Haryana (Cited Infra) has been followed by the Honourable CLB in a long line of decision namely, Satish Chandra Sanwalka and Ors. v. Tinplate Dealers Association Petition Ltd and Ors.(2001) 3 Comp LJ 284 (CLB); S. Ajit Singh and Anr. v. DSS Enterprises Petition Ltd and Ors. (2001) 4 Comp LJ 421 (CLB); Deepak C Shriram and Ors. v. General Sales Ltd and Ors. (2001) 4 Comp LJ 450 (CLB) and Shankarlal Gilada v. Kapricon Sleeper Works (P) Ltd reported in (2005) 5 Comp LJ 280 (CLB). Further, it was pointed out that the respondents indulged in mismanagement by appointing M/s Kothari and Company as new auditor on 24.9.2003 within two days of resignation of M/s B.T. Shah and Company - earlier auditor who resigned on 22.9.2003 due to non production of books of accounts by Respondent No. 2 to the auditor for conducting the audit for the year ended on 31.3.2003. It was emphasized that the respondent acted in a most oppressive manner and against the interest of the company and the petitioner group. The respondent No. 2 extended the financial year 2002 -2003 to 15 months (until 30.6.2003) after ensuring that the statutory auditors M/s B.T. Shah resigned out of frustration. It was alleged that Respondent No. 2 did not produce the books of accounts and other documents before the first auditor only to avoid the first auditor getting knowledge of the illegal share issues; introduction of 48 new members and removals under Sections 283 (1)(g), etc indulged by Respondent No. 2 during December, 2002 and January, 2003 by forgery and fraud. The extension of financial year 2002 -2003 to 15 months after the resignation of the first auditors, it was pointed out, was malafide. Further, the petitioner relied on the case of Jagjit Singh Chawla and Ors. v. Tirath Ram Ahuja Ltd. and Ors. (2002) 2 Comp LJ 72 (CLB); Dale and Carrington Investment P. Ltd. v. P.K. Prathapan (2004)4 Comp LJ (SC) 1; and V.B. Thirumalai and Ors. v. Best Ventures Trading P, Ltd (2004)4 Comp LJ (CLB) 593 to prove its case that Respondent No. 1 company was nothing but a quasi -partnership formed by the petitioner and Respondent No. 2 as a private limited company to take advantage of the principles of limited liability. As regards removal of petitioner and his family members from directorship under Section 283(1)(g) the petitioner relied on the ratio of judgment in S.T. Ganapathy Mudaliar and Anr. v. S.G. Pandurangan and Ors. (1999) 1 Comp LJ 350 and it was further argued that the respondents reliance on Calcutta High Court's judgment in Ruby General Hospital reported in (2006) 126 Company Cases 1 (Cal) and the prayer for non restoration of the directorships of petitioners' group is illegal in view of the settled law of the land vide Apex Court's judgment in Dale and Carrington Investment P. Ltd. v. P.K. Prathapan(2004)4 Comp LJ (SC) 1 and in view of the judgment in Jagjit Singh Chawla and Ors. v. Tirath Ram Ahuja Ltd. and Ors. (paragraph 20 -21) (2002) 2 Comp LJ 72 (CLB) wherein application of partnership principle by Allahabad High Court even to a listed company has been discussed by Company Law Board. The counsel also pointed out to the distinguishing features between Ruby General Hospital's case and petitioner's case. Further the petitioner specifically relied upon paragraphs 37,49, 79 -81 of the judgment in Deepak C. Shriram and Ors. v. General Sales Ltd and Ors. (2001) 4 Comp LJ 450 (CLB) In view of the foregoing, the petitioner prayed that ;(i) the illegal share issue of 11.12.2002 be sustained only due to legal requirement of paid up capital of Rs. 1 lakh for private limited companies under the Companies Act subject to 4,400 shares being ordered to be transferred by respondent No. 2 to petitioner by conversion of his unsecured loans; (ii) 2,90,000 shares issued on 8.1.2003 be declared as null and void and the names of 48 persons be struck off form the register of members; (iii) the removal of petitioner and his family members from the Board under Section 283(1)(g) on 30.1.2003 be set aside and their directorship restored; (iv) costs of the petition be awarded to the petitioner; and (v) any other consequential or incidental relief(s) be awarded to the petitioner as may be deemed fit in the facts and circumstances of the case. Rebutting the preliminary objections to the petition, the petitioner argued that as regards the objection that in terms of Section 399 of the Companies Act the petitioner does not have 10% shares on the date of filing the petition, that from 29.1.1997 to 11.12.2002 both the petitioner and Respondent No. 2 had equal number of shares and no other person was holding any shares in the company until 11.12.2002. The exclusion of the petitioner from the issue of 8800 shares on 11.12.2002 and further issuance of 2,90,000 shares on 8.1.2003 again to the exclusion of the petitioner was illegal and ab initio void as it was done malafide to marginalize and reduce the petitioner to a hopeless minority from holding of 50% of issued share capital as on 10.12.2002. Hence, it was argued, that the increase in the share capital made on 11.12.2002 and 8.1.2003 cannot be taken into consideration for considering the 10% limit for maintainability under Section 399 of the Act. The petitioner relied on the ratio in paragraph 10 of the case reported as Navin B. Patel and Or. Bhoomi Builders P. Ltd. and Ors. (2005) 5 Comp LJ 273 (CLB). As regards to the objection that criminal complaint No. 475 of 2005 filed by petitioner before JMFC Surat, being identical to the present petition, it was clarified that the Criminal Complaint was only against Respondent No. 2 and under the Indian Penal Code and further that the said criminal complaint is not for any other relief sought in the petition under Sections 397 & 398 of the Act. Further, with regard to the objection of filing of winding up company petition No. 149 of 2004 in the High Court of Gujarat it was pointed out that the said petition was filed due to incorrect legal advice and hence the same has been withdrawn. It was argued that the principle of res judicata with regard to winding up petition would not apply. For this, the petitioner relied on the following case laws : Devaraj Dhanaram v. Firebricks Potterres P. Ltd. and Ors. (2000) 1 Comp LJ 398 (karn); Deepak C. Shriram and Ors. v. General Sales Ltd. and Ors. (2001) 4 Comp LJ 450 (CLB) (paragraph 43); Namita Gupta v. Cachar Native Joint Stock Company Ltd. and Anr. (2002) 2 Comp LJ 88; and B.M. Jain & Sons Co P. Ltd. v. Bombay Cable Car P. Ltd. and Ors. (2001) 1 Comp LJ 468 (paragraph 11). As regards the ground of law of limitation being applicable for filing the petition under Section 397, petitioner emphasized that no time limit could be applied to the petition challenging allotment of shares allegedly made on 11.12.2002 and 8.1.2003 and the removal of the petitioner and his nominees from the Board under Section 283(1)(g) on 30.1.2003, as the oppressive effects arising out of the said allotment of shares and removal of directors are continuous and perpetual. The petitioner contended that the ratio in Tea Brokers' Case (1998) 5 Comp LJ 463 (Cal) relied upon and applied in paragraph 24 of Ashok Kumar Oswal and Anr. v. Panchsheel Textile Manufacturing and Trading Co P. Ltd (2002) 3 Comp LJ 224 (CLB) applied to his case as well. It was further pointed out that the admission of 48 Members each scattered as far as Gandhi Nagar to Mumbai with 10 shares to each of them on 8.1.2003 based on a stereo typed formatted application form printed from the same computer with the same date (10.12.2002) (evidenced by the application in pages 370 -417 of exhibit of affidavit in reply) shows that the said 48 persons were introduced to reduce the petitioner into a hopeless minority in the event of voting by show of hands. The petitioner relied on the decision in Prabhu Dayal Chitlangia and Anr. v. Trinity Company Associates P.td and Ors. (1999) 4 Comp LJ 514 (CLB). Further it was pointed out that Sh. J.V. Shah was never involved in the formation of the company or its activities. He was inducted into the Board only because of he promised to bring substantial funds to the project and he was merely a sundry creditor for Rs. 4,64,000/ - He was never involved in any work of the company, nor any Board Meetings were held during his visit to India. Further it was pointed out that leave of absence has always been granted to Sh. J.V. Shah even without any application in this regard while the same facility was denied to the petitioner and his family members. It was emphasized that the non production of any original records in regard to notices of meeting; minute books; leave of absence; attendance registers and dispatch registers clearly point to utter falsehood of the alleged meetings during 25.9.2002 to 30.1.2003. Further pointing to the affairs of the company, the petitioner drew my attention to the cash balance of the company running into nearly Rs. 7 lakhs being kept as "Cash in hand" since 31.3.2000 and a Rs. 12,000/ - which has been kept in the bank account of the company showing that the company is being run as Respondent No. 2's personal fiefdom and hence mere non debit of air ticket fare to company account cannot prove that the petitioner's visit in London has not been in connection with company's work. As regards the Respondent plea that it was after Gujarat Government's notification dated 2.9.2004 regarding de -reserving the company's land that made the petitioner withdraw winding up petition filed against the company in July 2004 and file a company petition with the Company Law Board. The petitioner argued that the de -reservation of the land had already come vide Government's notification dated 17.5.2001. The Respondents objected to the petitioner reliance on the notification dated 17.5.2001 as the same had not been appended to the C.P. No. 90 of 2005.

(3.) I have considered the pleadings and arguments of the counsels for the Petitioner and the Respondents. Petitioner's case is that of "oppression" and "mismanagement", Increasing of authorized share capital and allotment of additional shares is alleged to be malafide besides not being in the interest of the company and being in violation of the proper and legal procedure prescribed. By manipulating the allotment of shares; by removal of Petitioner from the Directorship; the Respondents gained control of company and mismanaged the affairs of the company. According to the petitioner though this is a fit case of winding up, the winding up order would clearly prejudice the interests of the petitioner because of the fact of illegal reduction in his shareholding. Respondent's case is that the petitioner's entire case is for price of his shares and unsecured loans; the petitioner has not come with clean hands - having lost interest in the continuation of the company by shifting to UK for two years; cessation of petitioner and his family nominees from directorship cannot form the subject matter of a complaint under Sections 397 & 398 of the Act; no case has been made out for winding up; besides the preliminary objections of eligibility under Section 399 of the Act and the petition is barred by limitation.