Abdul Wahid Abdul Gaffor Khatri Director & Others v. M/s. Safe Heights Developers Pvt. Ltd. & Others (2018) - Oppression & Mismanagement u/s 397 & 398 Companies Act

• JUDEGMENT SUMMARY: Abdul Wahid Abdul Gaffor Khatri Director & Others v. M/s. Safe Heights Developers Pvt. Ltd. & Others
• DATE OF JUDGEMENT: 24^th February, 2018
• JUDGES:  Hon’ble Mr. Justice K.R. Sriram
• PARTIES: Abdul Wahid Abdul Gaffor Khatri Director & Others (Plaintiff)
• M/s. Safe Heights Developers Pvt. Ltd. & Others (Respondent)

SUBJECT

The following judgement deals with the Pvt. Ltd COMPANY APPEAL NO.22 OF 2013 explains the law on Sections 397 and 398 of the Companies Act which deal with oppression of the minority and mismanagement.

AN OVERVIEW

As it appears from the appeal memo it is mentioned date below:

(i) On the date of 4.7.2005 respondent no.1 company was incorporated. The only authorized, issued and paid up equity share capital of respondent no. 1 Safe Heights Developers Pvt. Ltd. (the Company) at the time of incorporation was Rs. 2,00,000/- divided into 20,000 equity shares of Rs. 10/- each. The Appellant no. 1 and appellant no. 2 and respondent no .2 and respondent no. 3 were the first directors and shareholders of the company at the time of incorporation and account was opened in the name of the company on 7.7.2005 with Samata Sahakari Bank Ltd. in which appellant no.1 and respondent no.2 were the signatories.

(ii) On the date of 27.6.2006 an account was opened in the name of company with HDFC Bank, Goregaon branch in which appellant no.2 and respondent no.2 were joint signatories. Respondent no.2 resigned from office of director on 2.11.2006 which was accepted by Board and form 32 was filed accordingly with Registrar of Companies (ROC).

(iii) On the date of 6.11.2006 an Extraordinary General Meeting was called in which the authorized capital of the company was increased from Rs. 2,00,000/- to Rs. 5,00,000/-.

(iv) On the date of 14.3.2007 in another Extraordinary General Meeting the authorized share capital of the company was increased from Rs. 5,00,000/- to Rs. 55,00,000/- .

(v) On the date of 3.9.2007 form 32 was filed by the company for appointment of respondent nos.3, 4 & 5 as additional directors. On 3.9.2007 form no.2 was filed by respondent no.2 for allotment of 2,30,000 equity shares of Rs. 10 each at par and 25,000 preference shares at par of Rs. 10 each to himself.

(vi) On the date of 3.9.2007 Resolution was passed by the company to shift the registered office of the company to a Fort office by filing form no.18. Thereafter registered office was shifted to Nasik.

(vii) On the date of 7.9.2007 it is alleged by appellants that respondent no.2, to bring appellants shareholding under minority, allotted 2,26,000 equity shares of Rs. 10 each at premium of Rs. 120 and 25,000 preference shares of Rs. 10 each at par by filing form no.2 w.e.f 23.8.2007 to the family members and company in which respondent nos. 4 & 5 were interested and this allotment was without any notice, meeting, knowledge and consent of Board of Directors. It is also alleged that on 15.12.2007 respondent no. 2 again filed form no. 2 for allotment of 24,000 equity shares of Rs. 10 each at a premium of Rs. 120 per share w.e.f. 22.9.2007 to one Geeta Constructions Pvt. Ltd. wherein respondent no. 5 is an interested director.

(viii) On the date of 5.11.2007, appellants caused a Show Cause Notice issued to respondent nos. 2 & 3 calling upon them to explain their misconduct and activities detrimental to the interest of the company and to return the books of accounts, correspondence, original agreements, records and registers of the company.

(ix)On the date of 7.11.2007 respondent no.2 replied stating that appellants had sold their stake in the Company and the matter was settled, with one Mr. Deepak M. Mehta, who was acting as mediator/escrow agent for the purpose.Abdul Wahid Abdul Gaffor Khatri Director & Others v. M/s. Safe Heights Developers Pvt. Ltd. & Others                        

IMPORTANT PROVISIONS

Companies Act

• Section 397- Any members of a company who complain that the affairs of the company are being conducted in a manner prejudicial to public interest or] in a manner oppressive to any member or members (including any one or more of themselves) may apply to the [Company Law board] for an order under this section.
• Section 398 - Application to Company Law Board for relief in cases of mismanagement.
• Section 10-F: Appeals against the orders of the Company Law Board. Any person aggrieved by any decision or order of the Company Law Board may file an appeal to the High Court within sixty days from the date of communication of the decision or order of the Company Law Board to him on any question of law arising out of such order

ISSUES

The issues raised by the appellants

• By the rights issue in 2007, the shareholding of the Petitioners had been diluted; allegedly no notices were given for the meetings pertaining to the rights issue;
• The Respondents had caused the registered office of the Company to be shifted on two occasions; allegedly no notices were given for the meetings pertaining to the shifting of the registered office; and
• They raised disputes pertaining to appointment and removal of directors

ANALYSIS OF THE JUDGEMENT

After a comprehensive judgment was held dismissing the Petition, but directing the Respondents to buy out the Petitioners' shareholding.

1. It was well settled, as held, inter alia, by the Hon'ble Supreme Court that the CLB is the final authority on facts, unless, such findings are perverse, based on no evidence or are otherwise arbitrary.
2. It was further well settled that an order passed by the CLB (Company Law Board) under Sections 397 and 398 is a discretionary order as held by the Hon'ble Supreme Court of it being a discretionary relief, the Appellate Court, i.e. this Court ought not to interfere with the judgment or replace the same with its own exercise of discretion, particularly given the restrictive scope of Section 10-F. It was further stated that the Appellants are attempting to treat the present proceedings as a First Appeal and are in effect seeking that this Court delve deeply into the facts and exercise its discretion to replace the discretionary judgment of the CLB. The CLB has analyzed the factual and legal position in depth and has arrived at a conclusion on facts that no case of oppression and/of mismanagement has been made out by the Appellants.
3. Shri Khare submitted that there were various facts that the CLB, ought to have noticed from the record but did not. Although if what Shri Khare says is correct, i.e., if it is the grievance of the Appellants that any material facts which were relied upon or any submission which was raised were not reflected in the judgment, it was incumbent upon the Appellants to draw the attention of the CLB to the same by filing a proper application for review or clarification, as held by the Hon'ble Supreme Court.
4. In respect of delay and laches, that despite full knowledge from November 2007 January 2008 of all the acts complained of in the Petition, no steps were taken by the Appellants to approach the CLB until July 2011 as noted by the CLB in paragraph 39 of the judgment. When asked there was no explanation whatsoever from the Appellants to explain this significant delay aside from stating that they had preferred a representation to the Registrar of Companies. Subsequently this explanation was rightly rejected by the CLB while noting that the reliefs which could be granted by the CLB could never have been granted by ROC, and therefore this could not be a reason for not approaching the CLB earlier.
5. Another aspect looked into by the Court was unclean hands i.e, the CLB has, after a detailed consideration of the Appellants' conduct, arrived at a finding of fact that the Appellants had suppressed material facts and had not come with clean hands, having indulged in various acts of misconduct as set out in the order, including running a parallel Board of Directors, holding meetings without any notice (as opposed to the Respondents having shown UPC records for service of notice for their meetings) and appointing/removing directors at their whim. The CLB has rightly noted that a party seeking relief in an equitable jurisdiction must itself act equitably (i.e., a person who wants equity must do equity), and has arrived at a conclusion that the Appellants have not acted equitably.
6. The Appellants argued that, no proper notice was issued. Contrasting this it was argued that, no such attempt has been made by the Appellants to show that the notice was in fact not received by them. In the circumstances, it cannot be said that the CLB judgment is perverse or unreasonable or arbitrary on this score. It states that notice of a meeting ought to be given under Section 286, with which principle there can be no dispute. In the present case CLB has accepted that notices were in fact given under UPC.
7. In view of the argument of the rights issue, it was thus obviously contemplated as being the avenue for increasing the funds of the Company and for the growth of the Company. The CLB has recorded a finding of fact (in paragraph 28) that the rights issue was necessary for the growth of the Company and therefore the action of issuing the shares could not be termed as oppressive to the Appellants and/or mismanagement of the affairs of the Company.
8. Under the same argument. The Appellants have no explanation for their having taken back their loan, save and except to contend that this was not reflective of their disinterest in the company. Hence the CLB has arrived at a finding of fact, based on the conduct of the Appellants and this finding ought not to be interfered with in exercise of jurisdiction under Section 10-F. As a matter of fact, after accepting their loan amounts back in or about March 2007, at no point did the Appellants write a single letter or demand to participate or show any interest in participating in the company until issuance of the show cause notice on 5th November 2007. It was argued that if the Appellants truly desired to partake in the management of the company and felt that they had been wrongly prevented from doing so, any reasonable person would have approached the appropriate forum, i.e., the CLB in 2007 itself. Although, no such steps were taken by the Appellants until July 2011. Thus on this basis, it cannot be said that the rights issue was either oppressive or done behind the back of the Appellants.
9. It was further raised by the Appellants grievance that the registered office of the Company was shifted from Jogeshwari to Sir P. M. Road in April 2007 and thereafter from Mumbai to Nashik in July - August 2007. To take into account it has to be noted that the jurisdiction of the ROC was not changed, and there was no prejudice whatsoever caused to the Company by virtue of the change of the registered office. There is nothing to show that the shifting was done to prejudice the Appellants, thus, it does not constitute oppression or mismanagement.
10. Lastly in the aspect of directorial disputes, the Appellants have relied upon an RTI Application of 2012 to contend that no notice was received of the meeting for removal of the Appellants as Directors. It so appears that from the impugned judgment that this issue of the RTI Reply was not pressed before the CLB. Even though, it is pertinent to note that in all the various allegations of not having received notice for various meetings, the Appellants have not sought to obtain any RTI on the delivery of notices for all the meetings which are the subject matter of dispute between 2007 and 2010, but they have only purported to obtain an RTI for a meeting held in 2011. To place the facts as it is, the Appellants have been removed by resolutions and with appropriate Form 32's filed, to the satisfaction of the ROC. It is therefore finally up to the ROC, that where it has wants to raise any objections to the filing of the Forms or indeed to the manner of removal of the Appellants.

 CONCLUSION:

Culmination of all the points stated above, the order was given accordingly. The Company is not under any circumstances either a family company or a closely held quasi partnership, in which the circumstances of potential directorial disputes may arise. The judgments mainly relied upon by the Appellants in this regard will have no application to a company such as Respondent No.1. Subsequently, it does not appear that this issue of ‘quasi-partnership’ was pressed before the CLB, and was not pressed in arguments before this Court. Hence, the judgments placed in the Written Submissions, are, to be taken as substantial extent, on points not raised before the CLB or before this Court in the arguments canvassed by the Appellants. Hence, the Appeal was rightly ought to be dismissed as it does not give rise to any question of law. In fact, the factual findings are strictly matters which were within the province of the CLB. In this regard the CLB had exercised its discretion after analyzing the evidence before it, this Court cannot replace the discretionary order passed by the CLB with any contrary order. Even otherwise stated, on the findings of delay/laches and unclean hands, the present Appeal ought to be dismissed as the CLB has rightly declined to exercise its equitable jurisdiction in favor of the Appellants. Finally coming to a conclusion that, even on the merits, the Appellants’ case is untenable and contrary to the record. Hence, no case of oppression or mismanagement has been made out, and the Appeal ought to be dismissed, with costs which is fixed in the sum of Rs.2 lakhs. It is ordered that the Appellants has to pay this amount within 4 weeks by way of cheque drawn in favor of the advocate on record for Respondents.

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