Pravin Jain & Ors vs Diastar Pvt. Ltd. & Ors

[Arising out of Order dated 01.12.2017 passed by National Company Law Tribunal, Mumbai Bench in TCP 79/2010]

IN THE MATTER OF:

1. Mr. Pravin Jain

2. Mrs. Bharti Pravin Jain

3. Mr. Anuj Pravin Jain

All having common address at Kalptaru Apartment, Flat No.5, 3rd Floor, 39, G. Deshmukh Road, Pedder Road, Mumbai - 400026 ...Appellants (Original Petitioners)

Versus

1. Diastar Jewellery Private Limited Plot no.58, SEEPZ SEZ, Andheri (East), Mumbai - 400096

2. Mr. Pramod Jain Flat - 1201, Camilla - B-Wing, Amrit Shakti, Sector - R-2, Farm House Road, Chandiwali, Powai, Mumbai - 400072 And also at C/o. Plot no.58, SEEPZ SEZ, Andheri (East), Mumbai - 400096

3. Mrs. Rachna Srimal Flat no.15, Deep Sadan Co-op. Hsg. Soc. Ltd., Bldg. no. P-3, Sunder Nagar, Malad (West), Mumbai - 400062. 2

And also at Plot no.58, SEEPZ SEZ, Andheri (East), Mumbai - 400096 ...Respondents (Original Respondents)

For Appellants: Shri Santosh Chauriha and Shri Ashish Verma, Advocates

For Respondents: Shri Siddharth Gautam, Advocate

JUDGEMENT

(7th December, 2018)

A.I.S. Cheema, J. :

1. The Appellants - original Petitioners have filed this Appeal against

Impugned Order dated 1st December, 2017 passed in TCP 79/2010 (filed

on 08.10.2010) whereby National Company Law Tribunal, Mumbai Bench

('NCLT', in short) dismissed the Company Petition filed by the Appellants

making grievances of oppression and mismanagement on the part of

Respondents.

2. The case of the Appellants as put up before NCLT in the Company

Petition in short is as follows:-

2.1 The Appellant No.2 is wife of Appellant No.1 and Appellant No.3 -

Anuj Pravin Jain is the son of Appellant No.1. Respondent No.1 - Diastar

Jewellery Private Limited is the Company concerned (hereafter referred as

'Company'). Respondent No.2 - Pramod Jain is brother of Appellant No.1

Company Appeal (AT) No.74 of 2018 3

and Managing Director of Respondent Company. Respondent No.3 -

Rachna Srimal is another Director in the Company. The Company is in the

business of manufacturing and exporting wholesale jewellery made of gold,

silver, platinum and some precious metals and materials. The Company

Petition claimed that the Petitioners held 24,02,000 shares in their

individual capacity in the Company and further owned 40,77,600 shares

which were earlier owned by father of Appellant No.1, namely Kishanlal

Jain. The Company had approved the transfer of these shares of Kishanlal

Jain to Appellant Nos.2 and 3 but the Respondents failed to update the

records.

2.2 The Company Petition gave details as to how the Company got

incorporated and was allotted Gala No.G-5 at SEEPZ SEZ, Andheri (East),

Mumbai. Respondent No.2 is citizen of United States of America. The

Petition gave particulars regarding shareholding as in 2007. According to

the Appellants, the Company was initially doing well and acquired 5 flats.

Respondent No.2 had migrated to United States of America in 1979 - 1980

and adopted citizenship of USA. Respondent No.2 incorporated a Company

by name Diastar Inc. in USA. It was family held company in which

Respondent No.2 was President and held the entire shareholding with

Pradeep Jain - the other brother of Appellant No.1 and Respondent No.2.

Respondent No.1 Company was manufacturing diamond and gold

jewellery on the basis of raw material and designs supplied by Diastar Inc.

Company Appeal (AT) No.74 of 2018 4

USA and in turn was re-exporting the same to Diastar Inc. in USA. The

arrangement worked for the benefit of the whole family.

2.3 In 2001, due to differences with Respondent No.2, Appellant No.1

resigned as Director of the Company but he continued to be shareholder

in the Respondent No.1 Company. After resignation of the Appellant No.1,

Respondent No.2 was controlling the affairs of the Company. The balance

sheet shows that thereafter there was steady decline in the valuation of the

Company due to illegal activities of Respondents 2 and 3.

2.4 The Appellants claimed that in 2007, Late Kishanlal Jain desired

to transfer his shareholding in the Company in favour of Appellants 2 and

3 and accordingly, executed Gift Deed dated 16.10.2007 and handed his

40,77,600 equity shares which were to the extent of 33.31% to the

Appellant Nos.2 and 3. Accordingly, transfer deed was executed and

lodged. Respondent No.1 Company passed Resolution dated 16.10.2007

authorizing the transfer of shares in favour of Appellants 2 and 3. However,

the Respondents have not updated the records of the Company to reflect

names of Appellants 2 and 3 in these shares. The Appellants filed copies

of the Resolution and transfer deed as well as Gift Deed dated 16th October,

2007 with the Petition.

2.5 According to the Appellants, Kishanlal Jain expired on

07.04.2009. Till he was alive, he assured Appellants that he would resolve

the disputes between the Appellant No.1 and Respondent No.2. Out of

Company Appeal (AT) No.74 of 2018 5

respect for the father, the Appellants did not precipitate the matter.

Appellants claimed that in 2008 - 2009, they came to know the following:-

a) Respondents 2 and 3 have floated a company called

Diastar Inc., USA in 2008 - 2009. A gross sum of

Rs.1822.64 Lakhs still remained to be remitted by Diastar

Inc., USA to the Respondent No.1 Company. Diastar Inc.,

USA failed and neglected to remit the export proceeds. The

Company was suffering losses because of the conduct of

Respondents 2 and 3 (hereafter referred as 'Respondents').

The Respondents failed to meet statutory commitments

and pay provident fund, gratuity, professional tax and

income tax dues. The Petition referred to huge amounts

outstanding on these counts and claimed that the

Respondents have imposed heavy losses on the Company.

b) The Respondents have defrauded shareholders and the

Government and Revenue Authorities. Facts are evident

from the Annual Report for the years 2008 - 2009, copy

of which was enclosed with the Petition.

2.6 The Appellants claimed in the Petition that the Diastar Inc. has

initiated bankruptcy proceedings against itself and Respondent No.1

without initiating recovery proceedings has written off all its receivables

Company Appeal (AT) No.74 of 2018 6

from Diastar Inc. USA, and money has been siphoned, through Diastar

Inc.

2.7 The Appellant claimed that the Respondents were trying to

discharge liabilities of Diastar Inc. utilizing assets of Respondent

Company. They were systematically excluding Petitioners from

management and affairs of the Company, although Appellants - Petitioners

held more than 50% shares in the Company. No Notice of meetings of any

nature were being served on the Appellants in their capacity as

shareholders. Respondents 2 and 3 have not called for any meeting of

shareholders since long. Respondent No.2 holds only 19.60% shares but

has continued to remain Director of Respondent Company and that

Respondent No.2 was acting to the detriment of the Company. The

Appellants referred to the various e-mails and letters sent to the

Respondents, copies of which are annexed as Annexure - 5 (colly) with the

Petition, to claim that in spite of various requests, the Respondents did not

give necessary inspection of statutory records which amounts to depriving

the shareholders of their rightful information. No Notice of any AGM has

been served on the Appellants. Respondents were siphoning off assets of

the Company. The Appellants issued Notice under Section 169 of the

Companies Act, 1956 ('old Act', in short) calling EOGM. The statutory

period of the said meeting would be fulfilled on 10.10.2010. Copy of the

Notice dated 26.08.2010 was annexed with the Petition as Annexure - 6

(copy has handwritten date as 26.08.2008).

Company Appeal (AT) No.74 of 2018 7

2.8 On the basis of such averments against the Respondents, the

Company Petition made various prayers seeking removal of Respondents

2 and 3 and appointment of Professional Directors on the Board and to

direct the Company to transfer 40,77,600 equity shares of Late Kishanlal

Jain in favour of Appellants 2 and 3. The Petition also sought appointment

of Commissioner to take charge of the statutory accounts and records and

for investigation into the affairs of the Company from 2001 onwards.

3. The Respondents filed Reply in NCLT and in short the defence is

as follows:-

3.1 According to the Respondents 1 to 3, Diastar Jewellery Private

Limited was incorporated in 1987 by Late Shri Kishanlal Jain and family

members who were founder of the Company. The Company was new in the

filed of jewellery and technology for mechanised jewellery manufacturing

was supplied to the Company under a collaboration agreement dated

19.03.1988 executed by the Appellant No.1 as Joint Managing Director of

the Company. Under the agreement, Diastar Inc. incorporated in USA

supplied machines and contributed towards equity share capital. The

agreement was registered with Reserve Bank of India. Respondent No.2

was residing in USA and frequently visited India. Appellant No.1 was

entrusted with all the administration and finance of the Respondent

Company since incorporation till June, 2004 with a gap of 3 years of 2001

to 2004. The Appellant No.1 was supported by Appellant No.2 - Mrs. Bharti

Company Appeal (AT) No.74 of 2018 8

Jain as Director and Kishanlal Jain - the father and Chairman of

Respondent No.1 Company. According to the Respondents, around June,

2004, due to Appellant No.1 suffering illness of brain stroke, the Chairman

called upon Respondent No.2 to look after the business and matters of the

Company. Consequently, Appellant No.1 was relieved/suspended from

Management Directorship in Extra Ordinary General Meeting. The

Respondent No.2 was called from USA to look after the business. The Reply

annexed copy of the EOGM Resolution dated 19.06.2004.

3.2 According to the Respondents, after death of Kishanlal Jain on 7th

April, 2009, Appellant No.1 started writing nasty letters and e-mails to the

Respondents which he attached with the Petition. The said letters and e-

mails were bad in law and not correct. In view of mental condition of the

Appellant, Respondent No.2 remained quiet. According to the

Respondents, the intention of the Appellants is to disturb normal working

of the Company. The Respondents referred to the e-mail dated 14th April,

2010 to state that the Appellants wanted to make life of Respondent No.2

miserable. The Respondents accepted that they were in effective and

physical control of the Company. According to them, they never denied the

Appellants right to inspect and access documents. They claimed that

inspection was given to the Appellant on 10th January, 2011 but without

recording inspection, he walked away from the factory premises.

3.3 Respondents claimed that no Notice was received from the

Appellant for EOGM, as alleged, dated 26th August, 2010. The copy

Company Appeal (AT) No.74 of 2018 9

attached with Company Petition has hand written date of 26.08.2008.

According to the Respondents, Appellants 1 and 2 frequently visited factory

premises located in SEZ area. On 12.11.2010, Appellant under Order of

CLB tried to enter factory premises where precious gold and metal jewellery

were manufactured, with his Advocate - Ashok R. Verma on 10th January,

2011 and access was denied by the management. According to them, the

factory premises is situated on Government notified area in free trade zone

belonging to Central Government and it is not free sale area. Respondents

claimed in para - 11 of Reply that "All Fixed such as land and Building,

Plant and Machinery were already Mortgaged by way of deposit of title

deeds and Current assets such as Stock in trade and in process and

finished goods, Book debts and receivables, stores and spares were

Hypothecated to consortium banks", as security for due repayment of cash

credit and other loan facilities. The Respondents put the blame on the

Petitioners - Appellants to claim that they only carried out secured loan

already borrowed by the Appellants. They have added (in para - 11 as Reply

to para - 9 C-II):-

"Respondents would like to inform that Bank of India and other consortium bank may declare company accounts as "Non Performing assets (NPA) as per the Norms Prescribed by Reserve Bank of India."

According to the Respondents, the Appellants withdrew their

personal guarantees from the bank. Grievance raised is that the Petitioners

refused to pledge their equity shares and thus their intention was mala

fide. The Respondents oppose the prayer for appointment of

Company Appeal (AT) No.74 of 2018 10

Commissioner. They attached balance sheet as on 31st March, 2010 with

the Reply and have shown the shareholding of shares from Late Kishanlal

as shares (40,77,600) held by Respondent No.2 - Pramod Jain and his wife

- Anita Jain claiming that Appellants were wrongly showing the same to

be in their favour.

3.4 The Reply has given particulars of Managing Directors to show

that Kishanlal Jain was earlier Managing Director and then continued as

Director and Chairman. The Reply claimed that the Appellant No.1 was

working as MD till 31.07.2001 and then again appointed as Chairman and

MD on 02.04.2004 and relieved in a couple of days on 19.04.2004. The

Respondents accepted that Pramod Jain - Respondent No.2 was appointed

as Additional Director and Vice Chairman on 06.12.2002 and Managing

Director on 01.04.2010. Respondent No.3 - Rachna Srimal is stated to

have been appointed Director on 21.02.2004 and had continued as

Director, however, she could not get the DIN number.

3.5 According to the Respondents, Kishanlal Jain had already

executed a Gift Deed of 40,77,600 equity shares of the Company in favour

of Respondent No.2 - Pramod Jain and his wife Mrs. Anita Jain on 10th

December, 2002. The share transfer deed was executed on 24th April, 2003

and the shares were transferred in joint name of Respondent No.2 and his

wife - Anita Jain. Board Meeting dated 26.04.2003 was held in this regard

and Memorandum of Understanding (MOU) was executed. Thus, according

to the Respondents, these shares of Kishanlal Jain had already been

Company Appeal (AT) No.74 of 2018 11

transferred in favour of Respondent No.2 and his wife - Anita by way of

gift. They claimed that "The original share certificates were stolen from the

Factory premises by Petitioners or their agents". According to the

Respondents, Respondent No.2 was assisting as Vice Chairman to

Kishanlal Jain who was looking after day-to-day operations of the

Company in India. Respondents blamed worldwide depression in jewellery

market for the financial stress noticed in the accounts of 2008 - 2009.

They claimed that the Company discharged its PF liability and all other

liability "has been reduced to some extent". The Reply claimed that the

Company would recover from the debt crunch and would be online in next

two years. According to the Respondents, Diastar Inc. was being

unnecessarily dragged in the disputes. According to Respondents, the

Appellants never approached the Company to record shares of Kishanlal

Jain on their names as according to the Respondents, original share

certificates were unauthorisedly possessed by them. Respondents claimed

that Notice of AGM has been personally handed over to the Appellants from

time to time when the Appellant visited the factory. The Reply claimed that

the Petition deserved to be dismissed.

4. The Appellant filed Rejoinder in NCLT and NCLT after hearing the

parties has dismissed the Company Petition vide the Impugned Order.

5. Regarding the issue whether Kishanlal Jain's shares were

transferred to the Appellants, the NCLT considered the two Gift Deeds

referred to by the parties and was of the view that since beneficial

Company Appeal (AT) No.74 of 2018 12

ownership had already been transferred to Respondents 2 and 3 in the

lifetime of Kishanlal Jain and same had been recorded in the share register

of the Company, now it could not be said that Kishanlal Jain subsequently

gifted his 33% shareholding to original Petitioners 1 and 2 on 16.10.2007.

NCLT was of the view that it is established proposition that unconditional

Gift Deed executed by any party cannot be revoked unilaterally. The NCLT

questioned the Board Resolution dated 16.10.2007 where it was recorded

that Kishanlal Jain would continue to be first shareholder till his lifetime

and after his demise, the shares would be given to P1 (Petitioner No.1) as

the shares had already been gifted to Respondents 2 and 3, but were by

then not registered as transferred to R2 and 3 under Foreign Exchange

Management Act. The NCLT found fault with the Appellants for not lodging

the shares between 2007 to 2010. The NCLT observed that the dispute

between the Appellants and Respondents regarding title over the shares of

their father would be a matter for Civil Court to decide. For such and other

reasons as recorded which can be seen in the Impugned Order, the NCLT

was not with the Appellants and did not find the Appellants entitled to the

shares of Late Kishanlal Jain.

5.1 Regarding the alleged financial irregularities, NCLT was of the view

that Diastar Inc. run by Respondents 2 and 3 became bankrupt whereby

loans given to Diastar Inc. were written off in the books of Respondent No.1

Company. It was of the view that solely because of such writing off, it

cannot be said that Respondents conducted the affairs of the Company in

Company Appeal (AT) No.74 of 2018 13

prejudicial manner. Regarding the issue of creating third party interest

over the assets of the Company, even this issue did not find favour with

NCLT which recorded that Respondents had claimed that the assets had

been mortgaged to the banks when Appellant No.1 was managing the

affairs and so Appellants could not blame the Respondents. For such

reasons, the NCLT went ahead and dismissed the Company Petition.

6. We have heard Counsel for both sides. The respective learned

Counsel argued on the basis of the rival cases put up by the parties in

NCLT and which are still being agitated before us. According to the

Appellants, the Gift Deed dated 10th December, 2002 was purely

conditional gift and due to non-fulfilment of the condition, the shares of

Late Kishanlal Jain were never transferred in favour of Respondent No.2

and his wife. It has been argued that Respondent No.2 being citizen of

America, it was necessary to have the permission of Reserve Bank of India

(RBI) which was not received and thus those shares of Kishanlal Jain could

not be transferred in the name of Respondent No.2 and his wife. These

shares were subsequently transferred by Late Kishanlal Jain by Gift Deed

dated 16.10.2007 in favour of the Appellants 2 and 3. According to them,

Kishanlal Jain was the Chairman and Director and had recorded in the

Board Resolution and these share certificates were endorsed after

completing the formalities. The Appellants argued that Respondent No.2

has misused the funds of the Company. The jewellery exported to Diastar

Inc. in USA which was own Company of Respondent No.2 was a device

Company Appeal (AT) No.74 of 2018 14

whereby the assets went to Diastar Inc. and were then diverted by

Respondent No.2 to themselves and later on, voluntary bankruptcy was

sought in US and on that basis the debts of Diastar Inc. USA were written

off in India. The huge amounts have thus been siphoned by Respondents.

There were no efforts made for recovery of amounts from Diastar Inc. and

the debts were simply written off causing national loss in taxes. According

to the Appellants, even when CLB ordered appointment of Commissioner

which was converted by High Court into special audit, Respondents did

not cooperate with the auditors and did not let the investigations take

place. Counsel for Appellants referred to the various e-mails sent by the

Appellant to show that the Appellants were kept away from the dealings of

the Company with ulterior objects which amounts to oppression. The

Annual Returns show mismanagement where the Company is suffering

huge losses and even statutory dues are not being paid. Counsel pointed

out Form 18 (Page - 361 of Appeal) of Respondent No.1 - Diastar Jewellery

Pvt. Ltd. and referred to the address. He then pointed out another Form

18 (Page - 370 of Appeal) to point out that at same address now some

"Diastar India Pvt. Ltd." is shown as operating and Form 32 (Page 372)

shows some Gour and others as Directors. Thus he argued that

Respondents are hiding facts and transactions.

7. Against this, the Respondents have supported the defence put up

by them in NCLT and the reasons recorded by NCLT in the Impugned

Order. According to the Respondents, the Appellants failed to prove

Company Appeal (AT) No.74 of 2018 15

siphoning of funds by the Respondents and the allegations are vague. The

shares claimed by the Appellants of Late Kishanlal Jain were already

transferred to the Respondent No.2 and his wife by way of absolute gift

and the transfer forms had been executed on 24.04.2003 and Respondent

No.2 and his wife were shown as joint holders in the shares with beneficial

interest to them. Board Resolution was also passed in this regard and filed

with ROC and reflected in Annual Returns for year ending 2004. According

to the learned Counsel for Respondents, there was unconditional gift in

favour of Respondent No.2 and his wife. The allegations of mismanagement

and oppression as made by the Appellants were bald. The Audit Reports

did not spell out financial mismanagement or siphoning of money. When

Diastar Inc. in USA went under liquidation and it became impossible to

recover receivables from Diastar Inc., the same were written off in the

books of the Company and duly recorded in Board Resolution. The five

flats of the Company and fixed assets including factory, building, plant

and machinery have been already mortgaged by way of deposit of title

deeds and current shares were Hypothecated to consortium banks led by

Bank of India as security. The Company cannot dispose these assets.

Respondents argued that the Bank has already taken possession of 5 flats

under Securitisation & Reconstruction of Financial Assets and

Enforcement of Security Interest Act, 2002 ('SARFAESI Act' in short).

8. The Learned Counsel for Respondents has submitted that the

Appellant No.1 was on the Board till 31.07.2001 and then he had resigned

Company Appeal (AT) No.74 of 2018 16

and the Respondent No.2 came down from USA to take charge of the affairs

of the Company on the request of his father Late Kishanlal Jain who

continued to be Director and Chairman of the Company till his death on

07.04.2009. The learned Counsel stated that the Respondent No.2 became

MD on 19.06.2004. When the Company entered into agreement with

Diastar Inc., the Appellant No.1 was MD. Referring to the Gift Deed dated

10th December, 2002, the learned Counsel stated that the Respondent No.2

was American citizen and so permission of RBI was required but in spite

of efforts, permission could not be obtained and because of that Late

Kishanlal Jain transferred the shares making the Respondent No.2 and

his wife joint shareholders with Late Kishanlal Jain for which Board

Resolution dated 26.04.2003 was recorded and endorsements in the

shares were also made as can be seen from copies of share certificates,

some of which have been filed as samples with Diary No.7467 by the

Appellants. The learned Counsel submitted that the earlier Gift Deed of

2002 which was in favour of Respondent No.2, was not acted upon as RBI

did not give the permission. According to the Counsel, as names of

Respondent No.2 and his wife have been entered in the share certificates

as joint shareholders with Late Kishanlal Jain, subsequently Kishanlal

Jain could not have deleted the names of Respondent No.2 and his wife to

add the names of Appellants 2 and 3 as done vide Gift Deed dated

16.10.2007 and Resolution dated 16.10.2007. The Counsel submitted that

Respondent No.2 was not aware of passing of any such Resolution at the

instance of Late Kishanlal Jain. Diastar Inc. went into liquidation and the

Company Appeal (AT) No.74 of 2018 17

Respondents were bound to write off the dues in the circumstances and

siphoning cannot be alleged.

9. We have gone through the record and heard Counsel for both

sides. It appears from the record and the submissions made that Late

Kishanlal Jain, the promoter of the Company who was Director and

continued to be Chairman in the Company till his death, was looking after

day-to-day operations of the Company during his lifetime. Appellants and

Respondent No.2 appear to have let Late Kishanlal manage the affairs of

the Company out of regards and at will, he could ask Appellant Nos.1 and

2 to step aside and to call back Respondent No.2 to take over management

and could execute different Gift Deeds and get Board Resolutions passed

so that once he added Respondent No.2 and his wife as joint holders in his

shares and later substituted Appellants 2 and 3 as joint holders with him.

Even thereafter, till his death a couple of years later, these parties did not

protest. Respondents have pleaded (in Reply para - 18) in NCLT that at

Pedder Road flats of Late Kishanlal Jain, Petitioners as well as

Respondents were staying with their father. As such, ignorance cannot be

pleaded when Petitioners 1 and 2 and Respondent No.2 have been

concerned with running of affairs of the Company. Kishanlal Jain appears

to have earlier taken assistance of the Appellants 1 and 2 in conducting

the affairs of the Company and in 2001, the Appellant No.1 resigned as

MD on 31.07.2001 (which is clear from the Reply of Respondents as filed

in NCLT.) Of course, in the Reply, the Respondents have shown that the

Company Appeal (AT) No.74 of 2018 18

Appellant No.1 was again appointed as MD on 2nd April, 2004 and again

relieved as Chairman and MD on 19th April, 2004. These couple of days

would not be material. Point is that the Appellant No.1 separated from the

conducting of the affairs of the Company on 31.07.2001. The Appellant

No.2 - Bharti Pravin Jain also appears to have resigned on 31.07.2001 as

can be seen from the Reply of Respondents. Respondent No.2 is stated to

have become Additional Director and Vice Chairman on 6th December,

2002 and MD on 01.04.2010. He entered the Board Management since

2003. Respondent No.3 - Rachna Srimal appears to have been associated

as Director since 21st February, 2004 although the Reply of these very

Respondents states that she did not get the DIN number. The Companies

(Amendment) Act, 2006 amended the Old Act to insert new Sections 266A

to 266G w.e.f. 01.11.2006 for the first time, providing for requirement to

have Director Identification Number with provision of penalty for

contravention. The aim and object was to facilitate effective legal action

against Directors keeping in view possibility of fraud by companies. The

Respondent Company, which has been more of a family affair appears to

have continued with such Director against whom both the rival sides do

not appear to have had objections considering the fact that if the

Respondents 1 and 2 are continuing with a person like Respondent No.3

even during the course of this litigation and involving her in the Company

affairs, the Appellants also are relying on the support she gave to Late

Kishanlal Jain in the Resolution dated 16.10.2007 (copy of which is filed

as Board Resolution at Page - 133 of the Appeal), vide which Late Kishanlal

Company Appeal (AT) No.74 of 2018 19

Jain joined Appellants 2 and 3 as joint holders with him and which also

appears to have been bearing signature of Respondent No.3.

Gift Deed dated 10th December, 2002

10. It would be now appropriate to consider the Gift Deed dated 10th

December, 2002 on which the Respondents have relied in NCLT and which

was accepted by the learned NCLT.

11. Copy of this Gift Deed is at Page - 228 of the appeal. It is

unregistered Gift Deed. Although the Gift Deed in para - 2 claims that it

was an absolute Gift from Kishanlal Jain - the donor in favour of

Respondent No.2 - Pramod Jain and also claimed that the donor has

delivered the donee share certificates, para - 3 of the Gift Deed reads as

under:-

"3. The Donee has duly signed the said transfer forms as a Transferee as acceptance of the said gift and has also agreed to take effective steps to get the same transferred in the records of the Company after taking permission from Reserve Bank of India as required by provisions of Foreign Exchange Management Act, 1999."

In the subsequent paragraph marked as 1, the document read as

under:-

1. Pursuant to the said desire of the Donor and in consideration of natural love and affection the Donor bears to the Donee, the Donor DOTH transfer by way of an absolute gift the said fully paid of Equity Shares of face value of Rs.10/-

each of M/s. Diastar Jewellery Ltd. together with right, title and interest of the Donor declares that the said shares will be transferred in the name of

Company Appeal (AT) No.74 of 2018 20

the Donee in the Company's record after obtaining Reserve Bank of India permission and till that they will be deemed to be held by the Donor as Trustee for the Donee."

11.1 The document showed only Respondent No.2 as Donee and not

his wife Anita. It is apparent that although the document claimed that it

was absolute Gift, the donor and the Respondent No.2 (Donee) were aware

that Respondent No.2 being a citizen of America could not get the share

transferred to him without the permission of Reserve Bank of India. Now

admittedly, (considering the submissions made by the Counsel for

Respondents) Reserve Bank of India did not grant the permission and the

argument now adopted is that subsequently, Late Kishanlal Jain added

the names of Respondent No.2 and his wife - Anita Jain in the share

certificates on 26th April, 2003 as joint holders. Although the Gift Deed

dated 10th December, 2002 appears to have been executed, there is yet

another document as Memorandum of Understanding ('MOU', in short)

(Page 231 of the Appeal) which appears to have been attested on 12th

December, 2002 (which would be subsequent to the Gift Deed) which is

between Late Kishanlal Jain and Respondent No.2 and still recorded that

Kishanlal Jain "is desirous of transferring his 33% fully paid up equity

shares" to the Respondent No.2. Para - 2 of this MOU refers to family

settlement which "can be arrived at between all the member of the family"

viz Kishanlal Jain, Respondent No.2, Appellant No.1 and the other son of

Kishanlal Jain namely, P.K. Jain and their respective spouses. Para - 3 of

the MOU recorded that a meeting for the purpose would have to be held.

Company Appeal (AT) No.74 of 2018 21

Other aspects regarding distribution of assets are then recorded. It is

obvious that the Gift Deed dated 10th December, 2002 was not an absolute

Gift and it was subject to RBI permission and the content themselves show

that Late Kishanlal Jain continued to keep the shares with himself. The

MOU also was only a hope of family settlement.

The learned Counsel for the Respondents argued that when

permission was not received, Late Kishanlal Jain on 26th April, 2003

executed Share Transfer Form (Page - 234) and in Board Meeting (copy at

Page - 235), the names of Respondent No.2 and his wife - Anita Jain were

added as Joint holders after the name of Kishanlal. From the Board

Resolution dated 26th April, 2003, Resolution - 4 needs to be reproduced.

It reads as under:-

"4. Transfer of shares:

Shri B.L. Tiwari Director placed before the Board letter received from Shri Kishan Lal Jain, as shareholder of the company requesting to add the name of his son and daughter in laws in the 40,77,600 Equity shares held by him, and as part of the family settlement the joint holder of the shares shall be the beneficial owner of the shares after his death. He further informed that due to old age he is intending to add the name of his son Mr. Pramod Kumar Jain as Joint holder. The Board after some discussion considered the request of Shri Kishan Lal Jain.

Being an interested Director Shri Kishan Lal Jain and Shri Pramod Kumar Jain neither participated in discussion nor voted for the same. Mr. B.L. Tiwari, placed before the Board, transfer deed duly signed by Shri Kishan Lal Jain and Shri Pramod Kumar Jain and Smt. Anita P. Jain and share certificates. The Board passed the following resolution.

Company Appeal (AT) No.74 of 2018 22

"RESOLVED THAT the share transfer deed for 40,77,600 Equity shares of the company duly signed by the existing shareholder and other joint holders placed before the Board along-with letter from transferor for the addition of the name of the Mr. Pramod Kumar Jain and Smt. Anita P. Jain be and are hereby approved and Shri B.L.Tiwari and/or Shri Jatan Bothra Directors of the company are hereby authorized severally to sign the transfer Register and endorsement on the share certificate for and on behalf of the company.

o No of Equity shares: 40,77,600 Folio no 51 & 52 Name of transferor : Shri Kishan Lal Jain Name of transferee : Shri Kishan Lal Jain jointly with Shri Pramod Kumar Jain jointly with Smt. Anita P. Jain"

[Emphasis Supplied]

11.2 Now, the reliance on the Gift Deed dated 10th December, 2002 has

been given up by the Respondents and they are relying on the subsequent

Act of Kishanlal Jain in adding the names of Respondent No.2 and his wife

- Anita Jain in the shares on the basis of the Share Transfer Form (Page -

234) read with Board Resolution dated 26th April, 2003. It is apparent that

the names of Respondent No.2 and his wife - Anita Jain were added gratis.

No consideration was apparently paid by Respondent No.2 and his wife to

Late Kishanlal Jain. When this is so, if the above Resolution is perused

which appears to have signature of Late Kishanlal Jain as Chairman, the

contents are more in the nature of Will declaring that the joint holders of

the shares shall become beneficial owners of the shares "after the death"

of Kishanlal Jain. Such will or wish, which did not transfer rights in the

present, were naturally not binding on Kishanlal in the times to come.

Company Appeal (AT) No.74 of 2018 23

12. The physical shares of Kishanlal Jain are all in possession of the

Appellants, is not in dispute. Respondents vaguely stated in their Reply in

NCLT that the shares were stolen by the Appellants from the factory

premises by themselves or through their agents. As the facts appear from

the record, this appears to be only a name sake defence. The original

shares are all in possession of the Appellants and on directions, the

Appellant No.1 filed Affidavit with Diary No.7467 with which he has filed

photocopies of a couple of shares. The back side of the front page of the

share certificates shows endorsements of 26th April, 2003 on which the

Respondents are relying and also endorsement stamped as 16th October,

2007 on which the Appellants are relying. The shares which were initially

in exclusive name of Kishanlal Jain have endorsement of 26th April, 2003

showing the names of transferees in the following order:-

Mr. Kishanlal Jain

Mr. Pramod Jain

Mrs. Anita Jain

The certificates have the stamp of the Company with authorized

signatory signing the same. Similarly, the endorsement dated 16th October,

2007 has following names:-

Mr. Kishanlal Jain

Mrs. Bharti Pravin Jain

Mr. Anuj Pravin Jain

Company Appeal (AT) No.74 of 2018 24

Even this entry in the share certificates has stamp of the Company

with signatures which appear to be of the present Respondent No.3 who is

now siding with the Respondents. We may state that the entries and

endorsements appear to be in the ordinary course of business.

Gift Deed dated 16.10.2007

13. Now we come to the Gift Deed dated 16th October, 2007 relied on

by the Appellants. The document of Gift deed is at Page - 128. This is also

unregistered Gift deed, executed by Kishanlal Jain as donor. It was

executed in favour of the Appellant No.2 - Bharti Pravin Jain and Appellant

No.3 - Master Anuj Pravin Jain. In this document, Late Kishanlal Jain

recorded that he had executed Gift deed dated 10th December, 2002 which

now he referred as "conditional", in favour of Pramod Jain (Respondent

No.2) recording that the Gift Deed was subject to necessary permission

from RBI and family settlement. Late Kishanlal Jain recorded that the

MOU which had been executed for the transfer of the said shares to

Respondent No.2 was subject to family settlement and family arrangement.

This document recorded that the permission from Reserve Bank of India

for the Gift of shares to Respondent No.2 and his wife - Anita Jain who

were US citizens, was not received and, therefore, the Gift Deed dated 10th

December, 2002 had become void and the same was revoked by the donor.

The document also recorded that the family settlement was not arrived at

among all the legal heirs and the MOU was also cancelled. This Gift Deed

then proceeded to record that out of natural love and affection, the donor

Company Appeal (AT) No.74 of 2018 25

was donating by way of irrevocable confirmed and absolute Gift the fully

paid up shares and also delivered the shares to the donee with Transfer

Forms duly signed. The document appears to have been signed by Late

Kishanlal Jain, Bharti Pravin Jain and for Appellant No.3 who was then a

minor, by guardian - the Appellant No.1.

14. Then there is Board Resolution dated 16th October, 2007 (Page -

133). Although Respondent No.2 has claimed that he was MD he still tried

to claim that he did not have knowledge of such Resolution. We are unable

to accept this defence of the Respondents considering that Respondent

No.3 appears to have signed this document along with Kishanlal Jain. The

Company was being run more as a family affair in which Kishanlal Jain

was the Chairman and admittedly was looking after affairs of the Company

in spite of his one or the other children being made MD, to assist him. We

are unable to accept the defence that Respondent No.2 did not know about

such Resolution being passed. The Resolution No.3 in the Minutes (Page -

133) reads as under:-

3. Transfer of shares

Smt. Rachna Srimal, Director placed before the Board following documents received by the company from Shri Kishanlal Jain, Director and promotor shareholder of the company.

a) Copy of Note sent to Mr. Pravin kumar Jain, Pramodkumar Jain and Pradeepkumar Jain.

b) Note regarding revocation of the Gift of shares made to Mr. Pramodkumar Jain and Mrs. Anita Pramodkumar Jain (U.S. citizen)

c) Copy of the Gift deed and affidavit executed by Shri Kishanlal Jain in favour of Mrs. Bharati

Company Appeal (AT) No.74 of 2018 26

Pravinkumar jain and Master Anuj Pravinkumar Jain for the shares held by him in the company.

d) Transfer deed duly signed by him in favour of himself jointly with Mrs. Bharati P. Jain and Master Pravinkumar Jain (through his father and natural guardian Mr. Pravinkumar Jain)

He further explained the board that in view of non arrival of family settlement among the three sons he decided as per his personal wish to have the shares transferred jointly in the name of Mrs. Bharti Pravinkumar Jain and Master Anuj Pravinkumar Jain.

He also informed that he will continue as first shareholder till his life time and after his demise the shares will be given to Master Anuj Pravinkumar Jain, Grand son. Since Mr. Pramodkumar Jain and Mr. Pradeepkumar Jain, both have opted for US citizenship, shares could not be transferred or gifted under Foreign Exchange Management Act, (FEMA). He further explained that the company is now a Private Limited family company and therefore he intend to keep the shares within family members who are staying with him in India. The board after considering the details and representation made by Shri Kishanlal Jain passed the following resolution:

"RESOLVED THAT the share transfer deed for 40,77,600 Equity shares of the company duly signed by the existing shareholders placed before the Board along with copy of the Gift deed and affidavit and other documents for addition of the name of Mrs. Bharati Pravinkumar Jain and Master Anuj Pravinkumar Jain in the said equity shares be and are hereby approved and Smt. Rachna Srimal Director of the company is hereby authorized to sign the transfer register and endorsement on the share certificate for and on behalf of the company.

No of Equity shares: 40,77,600 Folio no 51/65 Name of transferor : Shri Kishanlal Jain Name of transferee : Shri Kishanlal Jain Smt. Bharati Pravinkumar Jain Master Anuj Pravinkumar Jain"

Company Appeal (AT) No.74 of 2018 27

There is also Share Transfer Form executed by Kishanlal Jain and

Appellant No.2 and for Appellant No.3 signed by Appellant No.1. The

Respondent No.3 took the same on record on behalf of the Company as

can be seen from the endorsements below Page - 135. When we read the

above Resolution No.3 in the document, which is stated to be Board

Resolution dated 16th October, 2007, here again what can be seen is Late

Kishanlal Jain adding names of Appellant Nos.2 and 3 gratis and without

any consideration other than love and affection for his family. With the Gift

Deed of 2002 given up by the Respondents in their arguments and even

otherwise it was apparently unenforceable for want of permission of

Reserve Bank of India, the Gift Deed in favour of the Appellants of 2007

becomes relevant. In 2007, Kishanlal Jain did execute Share Transfer

Form as can be seen at Page - 135 of the Appeal which was accepted by

the Company on the official side, through Respondent No.3. The Affidavit

of the Appellant No.1 filed with Diary No.7476 with which copies of some

of the share certificates have been filed as samples does show the

Respondent Company taking on record the endorsement of Appellants 2

and 3 being added as joint holders with Kishanlal Jain. The Gift Deed of

2007 read with the Resolution dated 16th October, 2007 and the Share

Transfer Form accepted by the Respondent Company do show the Will of

Late Kishanlal Jain that after his demise, his shares shall be owned by

Appellants 2 and 3. Although the Respondents disputed such transfer of

2007, Respondents who are in management of the Company since 2002 -

2004 and have custody of records did not bring on record original Transfer

Company Appeal (AT) No.74 of 2018 28

Register of Company maintained in Ordinary Course to show that in the

Company records in 2007, such entries were not recorded.

15. If the Gift of 2002 could not be acted upon for want of permission

from RBI to transfer the shares of Late Kishanlal Jain in favour of

Respondent No.2 and his wife - Anita Jain, both US citizens, merely by

adding their names as joint holders in 2003 would also be hit for want of

necessary permission. In the absence of permission, the joint names added

of Respondent No.2 and his wife in 2003 could not be legally recognized.

The transactions of 2002 and 2003 in favour of the Respondent No.2 and

his wife were conditional and there was a caveat of Late Kishanlal Jain that

the rights would flow in favour of Respondent No.2 and his wife only after

his death. He did not even handover the shares, a movable property, to

Respondent No.2 and his wife which he did by handing over the shares

duly endorsed to Appellants after entries of 2007. In 2002, no vested right

was created in favour of Respondent No.2 and his wife. It was not a

confirmed right transfer to Respondent No.2 and his wife and when

Kishanlal Jain exercised his option in 2007 to make Appellants 2 and 3 as

joint holders, it cannot be said that he could not have done so in view of

the earlier Gift Deed of 2002 which could not be acted upon. We thus do

not agree with NCLT on this count.

Oppression and Mismanagement

16. Keeping aside the dispute regarding transfer of shares of Late

Kishanlal Jain, the fact remains in this matter that the Appellants 1 and

Company Appeal (AT) No.74 of 2018 29

2 have admittedly been shareholders of the Company and even without the

shares of Late Kishanlal Jain, Petitioners have been holding 19.60% of the

shares. Thus even independently they could maintain the Company

Petition. They have made allegations of mismanagement and oppression

on the part of Respondents. We have referred to the grievances of the

Appellants while referring to their pleadings and Reply by the

Respondents. When we go through the Impugned Order, we find that the

learned NCLT did not properly consider the allegations of the Appellants

regarding oppression and mismanagement. We have already referred to the

Reply of Respondents which shows that actually the Appellants 1 and 2

separated from the management of the Company on 31.07.2001. Starting

6th December, 2002, the Respondent No.2 has been Additional Director,

then Director and Vice Chairman and later Managing Director. Admittedly,

initially the Company was doing well. When the management has been

with the Respondent No.2 since 2002 and the Company Petition has come

to be filed on 8th October, 2010, we are not ready to accept the defence put

up in the Reply in vague manner that the building, plant and machinery

were already mortgaged by way of depositing title deeds and even the

current assets were hypothecated to consortium banks led by Bank of

India for which the Appellants should be held responsible. No documents

have been shown to us of creation of such mortgage and charge at the time

of tenure of the Appellant No.1 but even if it was so, there is nothing shown

by the Respondents to show that before Company Petition was filed at any

earlier time it was put on record or any grievance was made that the

Company Appeal (AT) No.74 of 2018 30

burden of 2001 was so heavy that the Company was unable to come out

of the problems even till 2010. Vaguely blaming the earlier management

which went out more than 9 years earlier cannot be simply taken on the

face value.

17. The Appellants filed in NCLT copy of the Annual Return of 2008 -

2009. Here also, the Respondent Nos.2 and 3 are shown as Directors and

if the Auditors' Report is perused, the Auditors inter alia recorded as

under:-

"vi. We further report that

a) The company has entered in to transactions with parties where the directors of the Company are interested, without prior approval from government as per provisions in section 207(1) of the Companies Act, 1956. The company has applied for the permission, which is awaited.

b) The Company during the year had no full time Company Secretary.

c) The company has not provided for interest expense due to M/s. Gold Metal Trading amounting to Rs.62.42 lakhs for the current year and hence profit is over stated to that extent.

d) The liability for tax is shortly provided as auditors came across the instances wherein the additional tax liability on Statutory liability expense claimed Rs.26.08 lakhs. However few more instances for non deduction of tax was not quantified due to unavailability of records.

The deferred tax amount cannot be quantified considering the above fact and due to absence of future reliable certainty of payment of statutory dues.

Company Appeal (AT) No.74 of 2018 31

e) The company has not provided the employee's dues in respect of leave encashment as required by AS-15. Further as per letter dated 30/01/2009 received from Life Insurance Corporation of India (Pension and Group schemes department), there is a shortfall of Gratuity fund over the present value of past service Liability of Rs.1534957/-. The same is not provided in financial Statement affecting the profitability and financial position to that extent.

f) Attention is invited to note no.11 for non provision of impairment loss based on company's contentions as per Accounting Standard 28 of Institute of Chartered Accountants of India. The amount of impairment loss cannot be quantified by us.

g) As per letter 1/03/2008 Diastar Inc. a debtor with out standing debit balance of Rs.1822.64 lakhs and credit balance of 969.02 lakhs as on 31/3/2008 has filed Bankruptcy proceedings with U.S. Bankruptcy Court District of New Jersey (Newark). The Company has provided for a Write off of Rs.826.55 lakhs on debtor after netting off Rs.129.98 lakhs with creditors outstanding and adjusting the balance creditor of Rs.833.27 lakhs (the reversal of opening reserves in debtors & Creditors was Rs.6.95 lakhs & Rs.5.77 lakhs). In our opinion netting off Rs.129.98 lakhs should be done only after prior approval of Reserve Bank of India and subject to liquidators of Diastar Inc. Further the remaining creditor of Rs.833.27 lakhs should not be adjusted against debtors and provision for foreign exchange loss of Rs.266.93 lakhs should be provided on total creditors of Diastar Inc. outstanding as on 31/03/2009.

Considering the above the total Write off on account of Diastar Inc. should be of Rs.1787.05 Lakhs and loss is understated to that effect.

h) In our opinion the inventories are over valued.

While valuing Work in process expenses like Financial Charges, Repairs and Maintenance, Bank charges, Conveyance & other Overheads pertaining to non-productive staff not linked to production are considered and the same is not in accordance with Accounting Standard-2 and

Company Appeal (AT) No.74 of 2018 32

should be excluded. We are not in a position to quantify the exact amount of such over valuation."

Thus, the Auditors recorded that the total write off on account of

Diastar Inc. should be of Rs.1787.05 Lakhs and loss is under stated to

that effect by the Company. Now, admittedly, Diastar Inc. was a Company

managed by Respondent No.2 in USA. Copy of proceedings from U.S.

Bankruptcy Court, District of New Jersey (Newark) (copy of which is at

Page 149) and which was filed before NCLT also shows that the Company

in USA itself invoked proceedings of bankruptcy. Thus, here we have this

Respondent No.2 who is managing Respondent No.1 Company admittedly

since 2002 which Company was basically doing business with Diastar Inc.

in U.S.A. and same Respondent No.2 was also managing the Company

Diastar Inc. in USA. He wrote off dues recoverable from Diastar Inc. worth

Rs.1787 Lakhs because Diastar Inc. has invoked bankruptcy proceedings.

If Diastar Inc. had been a Company which had no relations with the

Respondent No.1 Company, the matter could have been looked upon

differently. But in the present state of facts where Respondent No.2 is in-

charge of Respondent No.1 Company and he is also himself in-charge of

Diastar Inc. in USA and the business of Respondent No.1 Company is

mainly of dealing with Diastar Inc., by sending jewellery to Diastar Inc.,

the filing of Diastar Inc. of bankruptcy proceedings cannot be looked upon

as an innocent act for which Respondent No.2 can say that he need not be

blamed. According to us, this is serious act which is not merely oppressive

of the Appellants but it relates to revenue and economy of this country. As

Company Appeal (AT) No.74 of 2018 33

per the Auditors netting off Rs.129.98 Lakhs could be done only after

approval of RBI. There is also reference to loss of foreign exchange. Without

following any procedures and without making any efforts to recover money

which would have come as foreign exchange is serious. Apart from

siphoning, there appear to be acts against the economy of this Country

and in public interest, it appears necessary to investigate, if there is fraud

in such acts.

18. Apart from the above factors, the Annual Report of 2008 -2009

shows the auditors recording that the Respondent Company does not

regularly deposit the statutory dues applicable to the Company including

Provident Fund, Employees' State Insurance Corporation, Professional Tax

and Maharashtra Labour Welfare Fund with the appropriate authorities.

The Report listed huge dues which were pending for more than 6 months

and which appears to be running into lakhs of rupees. The Report also

recorded that there were dues of income tax and customs duty also. Apart

from the Annual Report of 2008 - 2009, although Respondents filed copy

of Annual Report of 2009 - 2010, even that did not give any rosy picture.

The copy of the same is at Page - 247 of the Appeal and there is

endorsement at Page - 256 by the Auditors that the Statutory Registers

maintained under the Companies Act were not available for their

verification and so they were unable to comment on compliances and

entries in the Register. Mere reading of this Annual Report shows it to be

Company Appeal (AT) No.74 of 2018 34

a testament of mismanagement. Sadly, NCLT did not examine these

details.

19. We have then various copies of e-mails sent by the Appellant to

the Respondents copies of which he filed in the NCLT as Annexure - 5

(colly) and which copies have been filed in this Appeal at Pages - 161 to

177. Although constantly the Appellant No.1 appears to have been asking

for details and particulars of various matters relating to the Company, the

Respondents maintained stoic silence and only in the Reply dated 15th

April 2010, Respondent No.2 responded that he was thanking for showing

interest in the wellbeing of the Company and list of answers will take time

and he will get all the Replies by the end of 30th April. The learned Counsel

for the Respondents wanted to rely on isolated sentence in the e-mail dated

14th April, 2010 sent by the Appellant No.1 telling Respondent No.2 that

he will make his life in USA also miserable by contacting various agencies

who would like to investigate his activities in that country. The

Respondents claimed that the object of such e-mails was to make life of

the Respondents miserable. We find that in Reply filed in NCLT, the

Respondents claimed that they remained silent because of what they

called the mental condition of the Appellant No.1. What we can see from

the e-mails is that when the Appellant No.1 was admittedly shareholder

and was raising concerns, he did not get any response. The e-mail dated

14th April, 2010 also records that the Appellant No.1 wanted to take every

single step to protect his interest and that of Respondent Company -

Company Appeal (AT) No.74 of 2018 35

Diastar. We do not think that single sentence as tried to be torn and read

by the Respondents can be read in isolation. The learned Counsel for the

Appellants brought to our notice Annexure A-5 (Page 396) the copy of

Order of CLB dated 30th November, 2012. In the Company Petition which

was then before CLB, at initial stage, the CLB had appointed one Hari

Shankar Acharya, Ex-Chief Commissioner of Income Tax to investigate

into the Company accounts and affairs, but which on Appeal by the

Respondents was set aside by the Hon'ble High Court of Judicature at

Bombay in CA 32/12013 (Annexure A-7 - Page 438) and the Hon'ble High

Court had appointed M/s. K.C. Jain & Co. as special auditors to

investigate the finance of the Respondent Company. The learned Counsel

submitted that when the special Auditor tried to investigate, the present

Respondents who were Appellants in the High Court did not cooperate and

did not attend as can be seen from the meeting dated 29th January, 2015,

copy of which has been filed at Page 484. Subsequently Hon'ble High Court

passed Orders dated 4th April, 2016 whereby the Respondents through

their Counsel gave undertaking that they would bear the cost of the

Auditors and would comply the Orders of the High Court dated 14 th

October, 2015. The learned Counsel submitted that in spite of this, the

Respondents did not cooperate with the audit and it could not take place.

Although the learned Counsel for Respondents is submitting that if the

Order of High Court was not complied, procedure of contempt was open to

the Appellants, we are not on the question of contempt. What we are

finding from the record is that the Respondents have an approach of non-

Company Appeal (AT) No.74 of 2018 36

disclosing facts. We have already noted above that the statutory records

have not been shown even to the Auditors.

20. The Appellants - original Petitioners had filed Rejoinder when the

matter was before CLB (Annexure A-3 (colly) - Page-328) and in para -

6(hh), had pointed out that the Respondent No.1 Company had been

declared NPA by Bankers. We have already referred to the Reply filed by

the Respondents where they themselves were wanting declaration of the

Company as NPA.

Further in para - 6(pp) of the Rejoinder, the Appellants claimed

that the Respondent No.2 or on his behest, a Company by name "Diastar

India Pvt. Ltd." has been incorporated having its registered office at same

address at Plot No.58, SEEPZ where Respondent No.1 is also having its

registered office. The Appellants claimed that this showed that the

Respondents are taking away the business of the Respondent No.1 and

making Respondent No.1 Company a paper company. The Counsel for the

Appellants pointed out Form - 18 relating to the Respondent Company

(Page - 361), which needs to be read with Form - 18 (Page - 370) where

some "Diastar India Pvt. Ltd." is shown to be having the same address as

of Respondent No.1 Company. Form - 32 of that Company (Page - 372)

does not appear to be showing the Respondents as the Directors. The

learned NCLT did not consider this material and failed to appreciate that

the Respondents were suppressing facts and the Appellants were deprived

of information and they were oppressed while the Company was

Company Appeal (AT) No.74 of 2018 37

mismanaged. If at the address of the Respondent Company, some other

company is shown to be functional, the substratum itself can be stated to

be in danger.

21. In the Company Petition, the Appellants by way of Interim

Resolution, sought appointment of Commissioner which was granted by

CLB, but Hon'ble High Court changed the same so as to appoint Special

Auditor which aspect we have discussed. It appears to us that forensic

audit in the present matter should have been done. The Appellants in

Company Petition have prayed for removal of Respondents 2 and 3 from

the Board of Directors. Respondent No.3 deserves to be removed as it is

stated that she does not have DIN number. We propose to appoint

Independent Director to look after the management of the Company and

thus, Respondent No.2 should be allowed to be continued only as Director

and not Managing Director. Considering the shareholding of Appellants

and that shares of Late Kishanlal Jain should come to Appellants 2 and 3

by way of transmission of interest, the Appellant No.1 should be on the

Board, in interest of the Company.

22. Looking to these factors, we find that there is material on record,

which was also before NCLT that the Respondents have mismanaged the

Company affairs, which is facing proceedings in SARFAESI, and there is

also material to show that investigation is necessary relating to loss of

revenue to the Company with allegations of siphoning of money by

diverting the funds to Diastar Inc. and then put Diastar Inc. into

Company Appeal (AT) No.74 of 2018 38

bankruptcy proceedings and write off dues in this Company. The non-

responsive attitude of the Respondents to the Appellants and shareholders

also amounts to oppression of the Appellants.

23. We are unable to maintain the Impugned Order passed by NCLT.

We passed the following Order:-

ORDER

A. The Appeal is allowed. The Impugned Order is

quashed and set aside. We remit back the matter to the

National Company Law Tribunal, Mumbai Bench. We

hold that the Respondent Nos.2 and 3 are guilty of

oppression of the Appellants and also guilty of

mismanagement of the Respondent No.1 Company. At

the present stage, passing directions to winding up

Company would unfairly prejudice the Appellants and

other members of the Company. We leave this aspect

open for the learned NCLT, Mumbai to consider at

subsequent stage as we are directing investigation into

the affairs of the Company.

B. Under Section 242(2)(h) of the Companies Act,

2013, we remove Respondent No.2 as Managing

Director of the Company. He will, however, continue as

Director. We remove Respondent No.3 from the

position of Director of the Company. Under Section

Company Appeal (AT) No.74 of 2018 39

242(2)(k) of the Act, we appoint Appellant No.1 as

Director of the Company and his continuation

subsequent to next AGM, would be subject to decision

of the AGM.

C. Keeping in view Section 242(2)(a) & (k) of the Act,

we request the learned NCLT, Mumbai to immediately

appoint an Independent Director to the Company for

regulating the conduct of the affairs of the Company in

future on such remuneration as the learned NCLT may

decide. The learned NCLT will consider need of

continuation or otherwise of the Independent Director

after a period of two years of appointment. The

Independent Director will take over the administration

of the Company as well as its official and statutory

records. In the meeting of Board of Directors, the

decision would require concurrence of the Independent

Director and in case of difference between the other

Directors, the Independent Director would have the

casting vote which will prevail.

D. Copy of this Judgement be forwarded to the

Central Government through Ministry of Corporate

Affairs for information and with a request to get the

affairs of Respondent No.1 Company investigated

Company Appeal (AT) No.74 of 2018 40

under Section 210 of the Companies Act, 2013,

keeping in view observations made by us in para - 17

of the Judgement and record. The Company, through

the Independent Director, will co-operate in the

investigation. If the investigation finds anybody

responsible for acting against public interest, the

person/s would be liable for action.

E. The Company will take on record in the Transfer

Register relating to Register of Members the names of

Appellants 2 and 3 as joint holders of 40,77,600 equity

shares of Kishanlal Jain, since the death of Kishanlal

Jain on 7th April, 2009.

F. Costs of this Appeal of the Appellants are

quantified at Rs.2 Lakhs, which shall be paid by

Respondents 2 and 3 jointly or severally from their own

funds.

G. The Appeal is disposed accordingly.

[Justice A.I.S. Cheema] Member (Judicial)

[Balvinder Singh] Member (Technical) /rs/nn

Company Appeal (AT) No.74 of 2018