Shri Surinder Kumar Virdi vs Beavers Leather Pvt Ltd. & Ors

1. This appeal has been preferred by the appellants against order

dated 19.01-.2017 passed by National Company Law Tribunal

Chandigarh Bench filed under sections 397, 398, 402, 403 and

406 of the Companies Act, 2013 alleging oppression, mis-

management, siphoning off funds and illegal removal of Appellant

from his directorship from the respondent No.1 company.

2. The Tribunal after hearing the parties and perusing the record held

as under in paras 37, 39 and 40 of the impugned order:

37. ,ocxx Prima-facie therefore the termination of petitioner as director is not legal though the same would be subject to the final decision in the pending civil suit filed by the petitioner, if the same is maintainable. LW

39. xxxx Yet the fact remains that the respondents are

getting the remunerations of Rs. 3,60,000/- per annum as -

whole time Directors as reflected in the annual returns. As

per additional documents attached with CA No. 14 of 2014,

the petitioner has flied the financial statements of the

Company for the years 2014-15 and 2015-16, which shows

that the remunerations are being paid to R-2 and R-3. From

the said statements, it is quite clear that R-3 shown as

Chairman and whole time Director receives Rs,2, 10,000/-

per annum as remuneration, whereas R2 whole time Director

receives Rs. 1,50,000/- per annum. The petitioner has

categorically stated that no dividends of the Company are

being paid for the past many years and this fact is also

reflected in these financial statements. The respondents

have not even contradicted the aforesaid allegation that the

dividends have not been paid to the petitioner since the time

of his induction as Director. The petitioner also wanted to say

that nothing was even paid to his mother. who was a shareholder during her life time, but mother of the petitioner

never raised any such issue before any forum. This aspect

would however give rise to a cause as to how the affairs of

the Company are being managed just to ignore the interest

of the petitioner. who has maximum shareholding in the

Company out offour shareholders.

40.Looking into the aforesaid aspects, it is quite clear that functioning of the respondent No. 1 Company is in a total mess because of the distrust between the petitioner on the one hand and the respondents on the other. We find it just and proper to provide exit to the petitioner because respondents No. 2 to 4 jointly hold majority shares in the Company, whereas the petitioner is a minority shareholder. We take cut off date as end of financial year 2014-15 i.e. 31.03.2015 tor evaluating the fair value of the shares of the Company as soon thereafter i.e. on 07.05.2015. the petitioner was prima-facie illegally removed from the Board of Directors. We thus issue the following directions; I) MIS Khurana Rajiv & Company, Chartered Accountant, SCO No. 83940, Sector 22-A lind Floor, Chandigarh (from out of the panel of Valuers approved by the High Court of Punjab and Haryana as informed by Official Liquidator to the Registrar of our Bench) are appointed as independent Valuer for determining the fair value of the shares held by the petitioner with cut off date as 31 .03.2015. The Valuer shall determine the fair value of the shares keeping in mind that the manufacturing business of the Company is closed for many years and the factory of the Company except for 1000 square yards of vacant land has been leased out for about eight years, as apparent from terms of the lease deed. The Valuer shall determine the value by all the recognised methods and applicable rules and regulations on the said date i e. 31.032015;

ii)The parties are directed to extend cooperation to the said

Valuer. The Company shall submit all the official

documents/papers for the purpose for valuation as

desired/ required by the Valuer;

iii)The Valuer shall supply to the parties the copy of the report to which the parties would be at liberty to file their objections within two weeks and the Valuer shall then prepare the final report within one month and send the same to the parties;

iv)On valuation of the shares of the petitioner, he shall be given exit by R-2 and R-3 by paying the amount as per percentage of their shareholding as on 31.03.2015 along with interest at the rate of 10% per annum from 01.04,2015 till payment This payment shall be made within three months of communication of the final report by Valuer and on receipt amount the petitioner shall execute all the documents/deeds necessary for the transfer of the shares held by petitioner of the Company in favour of the respondents and/or their nominees within two weeks therefrom;

v)In case the respondents decline to purchase the shares of petitioner or fail to pay the amount within the period of three months from receipt of the final report of Valuer, the petitioner shall have the right to purchase the same from the respondents No.2 and 3. The procedure and time line as indicated as per the direction at (iv) shall be followed even in that case;

vi)The remunerations of the Valuer shall be negotiated and paid by the Company in three equal Instalments. The first instalment shall be paid to the Valuer within one week of receipt of certified copy of this order and second instalment on submission of the valuation report within the stipulated period and the third and final Instalment shall be payable to the Valuer on submission of the final report together with the objections and supplementary report;

vii) We further direct that with effect from the date of passing of this judgment, the respondents shall not draw the remunerations for future till the exit is provided to the petitioner and the amount of remuneration shallform part of the income of the Company till the exit is finalised, which would be liable to be distributed among the shareholders to the extent of shareholding of the petitioner and respondents No.2 to 4. The respondents would also not transfer, lease or otherwise alienate any immovable assets of the Company during the interregnum.

3. The brief facts of the case that Respondent NO. 1 company was

incorporated under Companies Act, 1956 on 29.05.1992 and as

on 31.03.2014 the shareholding of the company with respondent

no 2 had 10480 equity shares being 35.35%, respondent no. 3 with

7020 equity shares (23.68%) and the respondent no 4 had 1300

shares (4.38%) forming majority and on the other hand the

Appellant who was appointed as a director of RI company on

2 1.12.2013 had 10850 equity shares (36.50%) forming minority

holding in the Ri company.

4. That the main object of the company was to manufacture, process,

treat and deal in leather, leather cloth, plastics, oil cloth, linoleum,

trapaulihes, saddles, garments, gloves, purses, saddler, harness,

travelling bags, springs, boot and shoe, leather dressers, tanners

and every description of leather goods and leather chemicals.

5. That the respondent no. 1 company is mainly having property of

5000 sq. yards at 13 leather complex, Jalandhar, Punjab, which

has been given on lease to M/s M.A. Traders for a lease amount of 7

Rs. 1,00,000 in the year 2005 due to losses in the business carried

on behalf of the Ri company. This lease which expired on

13.04.2013 was further renewed for a period of 5 years and the

rental is one lac per month.

6. That the appellant being director of the company of the respondent

No. 1 company had convened its board meetings on 21.03.2015,

06.04.2015, 02.05.2015 and 18.05.2015 in which two additional

directors were also appointed. One additional director was the wife

of the appellant i.e., Mrs. Nachhattar Virdi and other appointment

was of Mr. Prem Kumar the brother in-law Of the appellant.

7. That tht appellant had approached the Ld. NCLT (earlier before

CLB) by filing the said company petition on 20.10.2015 wherein

the appellant alleged mass scale oppression and mismanagement

in the company and that the books of account were found to be

fudged and cash entries had not been updated. It is further averred

that the true profit of company was never declared nor the legally

due dividend has been paid to the shareholders. Also, the appellant

challenged the renewal of the lease deed by R2 & R3 and his

removal from the directorship of RI company.

8. The appellant had also separately filed a civil suit, bearing case no.

1482/2015 before id. Court of Sh. Simran Singh, PCS, Civil Judge, Jalandhar on 06.07.2015 seeking the declaration that his removal

from the directorship as null and void.

9.It is the case of the appellant that the tribunal despite its finding

that there is oppression and mis-management against the

appellant with minority holding in the respondent no. 1 company

instead 'of reinstating the appellant as director has directed the

removal and exit of the appellant from the respondent no. 1

company.

10. That the only income of the respondent no 1. company is the

rental income received from the lease property. It is contended by

the appellant that when R-2 and R-3 are not handling the day-to-

day affairs of the respondent no. 1 company, how can they be

entitled to receive the said remuneration which is reflected in the

financial statements when no such remuneration is being received

by the appellant. Moreover, no dividend was paid to the

shareholders.

11. It is contended by the respondents that the appellant without any

lawful authority conferred upon him by the board of directors

issued notice to the answering respondents for convening and

holding the board meeting on 21.03.2015. It was further submitted

by R-1 to R-3 in their reply dated 25.03-2017 that tribunal has

made an observation that the respondent no. 1 company is in total mess bocause of the distrust between the petitioner on the one

hand and the respondents on the other hand and not on ground

of minority Oppression.

12. That in the written submissions Respondents have clearly stated

that dividend was not given because it was never declared.

However, it is noted from the impugned order that the respondents

have not been able to rebut the contention of the appellant as when

a company is not functioning, then the purpose of taking the whole

amount of lease is not justified and amounts to siphoning off funds

of the company and oppression of minority shareholders in the 4

company.

13. However, it is not in dispute that the respondent no.1 company is

non-operating company and is in losses. Also, the respondent no.

1 company is mainly having the property of 5000 sq. yards at 13

leather complex, Jalandhar, Punjab, which has been given on lease

to M/s M.A.Traders for a lease amount of Rs. 1,00,000/- per

month. The said lease which expired on 13.04.2013 was further

renewed for a period of 5 years, however there is no record and

reference of any board's resolution authorising to execute lease

agreement by the respondents. It can also not be denied that on

the date of expiry of the lease agreement - the appellant was not

appointed -as the director of the company.

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14. Further, it is also not in dispute that the appellant has been

removed from the directorship of the respondent no. 1 company

illegally because as per section 101 of the companies act 2013, a

general meeting of the company can be called by giving not less

than a clear 21 days' notice in writing or through electronic mode

in such manner as may be prescribed and section 100 of the Act

relates to calling of the EOGM of the company, for which decision

has to be taken by the board of directors, here both the statutory

requirements have not been complied with. These provisions are

mandatory in nature and non-compliance of any of them would

render the decision of the meeting as illegal and therefore the

removal of the appellant by the respondents in the EOGM dated

7.05.20 15 is null and void.

15. In the light of the above observations made, we are of the view that

the business of the company is practically not there, also the

removal of the appellant from directorship of the R1 company is

illegal and the remuneration drawn by the respondents when the

company is not functional in itself may amount to siphoning of

funds and an act of oppression against the minority shareholders.

It is also noted that the law cannot be used as a weapon to remove

the minority shareholder from the company when there is an act

of oppression against the minority shareholders. Otherwise, it 11

would become easy for a majority shareholder to commit an act of

oppression against the minority shareholder and then get him

removed from the company by giving him his value of share which

has already been reduced due to the act of oppression and mis-

management. Further,. the law cannot be applied in a manner that

it incentivise the oppressor by providing him the benefit of

purchasing the minority shareholding which has already been

reduced due to his act of oppression. Therefore, the exit of the

appellant without giving him the prior right to purchase the

majoritf shareholding may also be unfair to him and to curb such

practices, we issue the following directions-

(i) that the appellant be restored as director of the R company

till he exits the company.

(ii) That the respondent shall quote the acquisition value per

share to the appellant within a period of one month.

(iii) That the appellant shall be given the right to purchase the

value of shareholding of R2 and R3. However, to compensate

the appellant being minority shareholder having received

neither remuneration nor dividend, he shall be given the 4

right to purchase the shareholding of R2 and R3 at a

discount of 10% to the quoted rate.

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(iv) The appellant shall exercise the above right within 15 days

from the date of communication of the acquisition value by

the respondents and settle the accounts within 2 months

from the date on which such right is exercised.

(v) Further in case the appellant fails to provide the amount of

the value of shareholding of R2 and R3 as per the quoted

amount or fails to exercise his right within the above

mentioned period, then R2 and R3 shall have the right to

purchase the shareholding of the appellant as per the quoted

acquisition value.

(vi) However, this right of the respondentsha1l be exercised and

accounts settled within 2 months from the date of failure of

the appellant to exercise his right.

(vii) We further direct that with effect from the date of passing of

the judgment, the respondents shall not draw the

remunerations for future till the accounts are finalised and

either party is provided exit from the Ri company, which

would be liable to be distributed among the shareholders to

the extent of shareholding of the appellant and respondents

no. 2 to 4. The appellant and respondents shall not transfer,

lease or otherwise alienate any immovable assets of the

company during the interregnum.

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(viii) Further the tribunal is directed to reschedule the date of

listing according to the above mentioned timeline and ensure

that the order of this appellate tribunal is implemented

properly.

The order passed by the tribunal dated 19.01.2017 stands modified to

the extent above. The appeal stands disposed of with aforesaid

observations, However, in the facts and circumstances of the case there

shall be no order as to cost.

(Justice S.J. Mukhopadhaya) (Mr. Balvinder Singh) Chairperson Member Technical

New Delhi Dated: 21st July, 2017