MANU/CL/0097/2002

Equivalent Citation: [2002]51C LA149(C LB), (2004)5C ompLJ586(C LB)

BEFORE THE COMPANY LAW BOARD

PRINCIPAL BENCH, NEW DELHI
Company Petition No. 90/2000
Decided On: 25.09.2002
Appellants: V. Natarajan
Vs.
Respondent: Nilesh Industrial Products Private Limited
Hon'ble Judges/Coram:
S. Balasubramanian, Vice Chairman and C.R. Das, Member
Counsels:
For Appellant/Petitioner/Plaintiff: Ajay Kumar, Practising Company Secretary and Party
in person
For Respondents/Defendant: M.R. Reddy, Adv.
ORDER
1. This petition under Section 397/98 of the Companies Act, 1956 (hereinafter
referred to as 'the Act') has been filed by the petitioner holding not less tan one-tenth
of the total number of members of M/s. Nilesh Industrial Products Private Limited
(hereinafter referred to as 'the company') alleging acts of oppression and
mismanagement in the affairs of the company. The main grievance of the petitioner is
that he was wrongly/illegally removed from the position of a director of the company
and that such act is an act of oppression in view of company being in the nature of
partnership. In addition to the main grievance, the petitioner has also alleged
violation of Maharashtra Government Pollution Control norms and siphoning off of
funds, etc., by the Respondents and allotment of further 720 shares to the
Respondents group. On the basis of these allegations, various reliefs have been
sought including re-instatement of the petitioner as director of the company and
restraining the respondents from committing any act in breach of the partnership
principles in the conduct of the affairs of the company being quasi-partnership in
nature.
2 . It is appropriate to narrate, in brief, the contents of the petition. This company
was incorporated on 11.2.1988 as a private limited company consisting of Shri T.N.
Bharatharajan, Respondent No. 2 and Shri T.N. Vishwanathan, Respondent No. 4 each
holding 100 shares of Rs. 100/- each. The authorised capital of the company as on
31.3.2001 is Rs. 3,00,000/- (Rupees three lacs only) divided into 3000 (three
thousand) shares of Rs. 100/- each and the paid up capital is Rs. 3,00,000/- divided
into 3,000 shares of Rs. 100/- each. The petitioner is holding 170 shares of Rs. 100/-
each and the rest of the shares are held by six members of the Respondents group.
Presently, the company is engaged in the business of manufacture of PARA NITRO
ANILINE CHEMICALS. The company had taken over the business of the erstwhile
proprietary firms. Deogiri Chemicals, Aurangabad of the Respondents' group with all
its assets and liabilities. The petitioner had given an amount of Rs. 17,000/- (Rupees

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Seventeen thousand only) as loan to the said firm. He was never taken in the
erstwhile firm as a partner and was not allotted any shares in the company at the
time of its incorporation. He was allotted a total of 170 shares of Rs. 100/- each as
against the said loan in 1989 which was used by the company for more than 4-5
years till then. The petitioner was already working as manager of the flagship
company of the Respondents' group Vibgyor Chemicals Private Limited at its Mumbai
office prior to his appointment as whole time director of this company w.e.f.
20.4.1988 on a monthly remuneration of Rs. 4,500/- which was later revised to Rs.
6,000/- p.m. He was receiving his salary regularly till 31st March, 1993. He has not
received his salary w.e.f. 1.4.1993 till date. He was informed in 1996 in reply to his
legal notice that he had allegedly vacated the office of director in terms of 283(1)(g)
of the Act as he failed to attend three Board Meetings continuously without obtaining
leave of absence. Further, he was informed that he had failed to acquire the minimum
number of qualifying shares to be a director in terms of Article 33 of the Articles of
Association of the company and, therefore, he had been removed from the
directorship of the company in terms of resolution passed at the Extra Ordinary
General Meeting held on 28.3.93. In view of the aforesaid circumstances, the present
petition has been filed by the petitioner.
3. The Respondent company has filed its reply and the petitioner has filed rejoinder.
4. The petitioner sought for our assistance for requesting someone to appear for him
due to his indignant position. We have requested Shri Ajay Kumar, Practicing
Company Secretary to appear for the petitioner and he has agreed to do so.
5 . Shri Ajay Kumar, Authorized Representative for the petitioner submitted that the
removal of the petitioner as a director is a grave act of oppression and, therefore, the
same should be declared null and void, especially in view of the fact that the
company is in the guise of a quasi partnership. He cited the case of Atmaram Modi
v. ECL Agrotech Ltd. and Ors. (1999) 4 Comp.L.J.379 (CLB)in this regard. He
further stated that in case of a family company or a company in the guise of a
partnership, where there is an agreement, express or implied (as may be established)
or the articles so provide, that the shareholders would participate in the management
of the company, then exclusion/ouster of one of the shareholder/directors from the
management of the company could be considered to be an act of oppression. To urge
his point that the company is a family company in the guise of quasi partnership, he
traced the relationship between the petitioner and the Respondents for a long period
before the incorporation of the company. Respondent No. 2 and 4 are brother-in-law
of the petitioner. All other members in the company are also relatives of the
Respondents. The petitioner had given a loan of Rs. 17,000/- to M/s. Deogiri
Chemicals, a proprietorship firm of the Respondents' group whose business was
taken over by this company. The company had allotted 170 shares of Rs. 100/- each
to the petitioner as against this amount only in 1989. Before being appointed as
director w.e.f. 20.4.88, he was already in the employment of its flagship company of
Respondents' group, Vibgyor Chemicals Ltd. at its Mumbai office. The long personal
association between the petitioner and the Respondents would prima facie establish
that the company has been incorporated with mutual trust and confidence among
shareholders with a view to run it in the form of quasi-partnership and therefore, the
petitioner is at liberty to challenge his ouster from the management in this petition
under Section 397.
6 . Shri Ajay Kumar also pointed out that the removal of the petitioner as director
w.e.f. 28.3.93 is in gross violation of the provisions of the Companies Act, 1956 and

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hence is illegal and liable to be quashed. The petitioner has been removed without
following the procedure laid down under Section 284 of the Companies Act, 1956. he
had neither been served any notice for Extraordinary General Meeting held on 28.3.93
in which he was removed as director nor any special notice of the resolution
proposed for removing him as director was received by him. The reasons for removal
from directorship as told to the petitioner by the Respondents, viz. non-attendance of
three consecutive Board Meetings without obtaining leave of absence and non
acquisition of the qualification shares as a director are also not correct. The petitioner
had not received any notices for the three consecutive Board Meetings allegedly held
by the company which he is alleged to have not attended. As regards his not
acquiring the qualifying shares it is stated that he was not allowed to contribute
further to enable him to acquire further shares. The company has not observed any
corporate governance. The Respondent No. 2 himself had not acquired the qualifying
shares for nearly 2 years after being appointed as director of the company. The
Respondents have issued and allotted further 720 shares of Rs. 100/- each during
1996-97 to their own group fraudulently with a view to gain absolute control of the
company. The petitioner being an existing minority shareholder was not even offered
any of the said shares. The issue of further 720 shares by Respondents to their own
group is also an act of oppression. He further stated that the Respondents had been
mismanaging the affairs of the company by flouting pollution control norms laid
down by Maharashtra Pollution Control Board (MPCB) in the interest of public. He had
simply wished to ensure that the Respondents should act in conformity with the
norms laid down by MPCB for pollution control. Since the MPCB was not satisfied with
the explanation of the Respondents in this regard, it ordered for closure of the unit of
the company at Balapur and cut off the water and electricity supply to the company.
The company has neither given any concrete proposal for proper treatment and
disposal of its effluent nor it has taken recourse to legal remedies by challenging the
order of MPCB in High Court by way of writ petition. The company has become non
operational because of mismanagement on the part of the Respondents and the
petitioner is not responsible for the same in any manner.
7 . Summing up his arguments, Shri Ajay Kumar, Authorised Representative for the
petitioner submitted that the petitioner is prepared to go out of the company provided
he is given suitable compensation for loss of his office as director and his shares are
purchased at a fair price after proper valuation.
8 . Shri M.R. Reddy, Council for the Respondents denied all contentions of the
petitioner. However, he admitted that the company is a family company with
shareholders being closely related. he argued strongly that removal of the petitioner
from the Board of Directors is not an act of oppression as being made out by the
petitioner and allegations in this regard are baseless. The petitioner failed to acquire
qualification shares to be director and had failed to attend the Board meetings which
was duly informed to him owing to which the proceedings for his removal had to be
initiated. This ultimately resulted in his removal from the Board of Directors in 1993
and his remuneration as director was stopped about which he was informed. As
regards allegation of the petitioner in respect of allotment of further 720 shares by
the Respondents to their own group, he explained that the petitioner had been
present at the Board Meetings until 1992 and had never raised objections to the
allotment of said shares till then. If the petitioner had wanted to contribute further
capital to the company he could have done so and obtained the shares during his
period as director. On the contrary, he never did so and permitted further allotment
of shares at face value. The very fact that the petitioner never attempted to hold
enough shares required to qualify as director coupled with the fact that he still was

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appointed as director in the company, points to the fact that this was done by the
fellow Board Members out of sympathy for the petitioner at that time. Further, the
petitioner attributed the closure of the unit of the company by writing a complaint to
MPCB to take revenue for his removal as director from the company. The pressure
exerted by the petitioner on MPCB may have caused MPCB to act in haste and then
issue closure notice without proper application of mind, logic and reasoning. To sum
up, the Counsel for Respondents expressed his unwillingness for an amicable
settlement and pressed for dismissal of the petition and decide the case on merits.
9 . We had given time to both the parties to arrive at an amicable settlement of the
dispute. However, both the parties have reported today their failure in arriving at any
settlement. This petition, therefore, has to be decided on merits.
10. Even though the petition contains many other allegations other than the removal
of the petitioner as director, arguments were advanced mainly in respect of removal
of the petitioner as director and allotment of further shares to the Respondents group
and as such we are restricting our findings only to those allegations. As rightfully
pointed out by the Authorised Representative for the petitioner relying on Atmaram
Modi v. ECL Agrotech Ltd. and Ors. (1999) 4 Comp.LJ 379 (CLB)that in case of a
'family company' or a company in the guise of a partnership, where there is an
agreement expressed or implied (as may be established) or the articles so provide
that the shareholders would participate in the management of the company then
ouster/exclusion of one of the shareholders from the management could be
considered to be an act of oppression. In another case of Dipak G. Mehta v. Shree
Anupar Chemicals(P) Ltd. (1999) 2 Comp.LJ 539 (CLB): (1999) 33mCLA 393
(CLB) - we held, in facts of that case in which it was established that the company as
in the guise of a partnership, removal of the petitioner as director was an act of
oppression. In the same way in case of Naresh Trehan v. Hymatic Agro
Equipment (P) Ltd. (1999) 4 Comp.L.J. 369 (CLB)where the company being a
family company wherein implied agreement relating to participation of all the
shareholders in the management was established, CLB held that ouster of one of
them as director was an act of oppression warranting winding up of the company on
just and equitable grounds.
In the present case, the claim of the petitioner is that the company is really a family
company and is in the guise of a partnership. The said claim of the petitioner has not
been refuted by the Respondents. The petitioner claims that there are three
identifiable groups of shareholders--1st group consisting of the petitioner, 2 nd group
consisting of Respondent No. 2 and his family members and 3rd group consisting of
Respondent No. 4 and his family members. The petitioner is the brother in law of
Respondent No. 2 and Respondent No. 4. As a matter of fact there is nothing on
record to show that the company invited any outsider to become a shareholder. The
composition of Board of Directors shows that one member from each group has been
taken on the Board as director and thus ensuring joint management. These facts
combined with the long personal association between the petitioner and the
Respondents would prima facie establish that the company has been incorporated
with mutual trust and confidence among shareholders with a view to run it in the
form of a quasi partnership and, therefore, the petitioner is at liberty to challenge his
ouster from the management in this petition under Section 397.
11. The grievance of the petitioner relating to his removal is two fold. One is about
contention of the company that had ceased him as director in terms of Section 283(1)
(a) and 283(1)(g) and the second is his removal by the general body meeting held on

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28.3.93. According to the petitioner, he did not receive any notices for the alleged
three consecutive board meetings which he is alleged to have not attend. It is,
however, observed that Respondents have neither indicated the dates of holding the
alleged three Board Meetings nor have produced minutes and notices with proof of
dispatch as evidence for the said meetings. The Respondents have also failed to show
any proof of giving any opportunity to the petitioner to acquire qualification shares to
be a director and/or by way of any offer of further shares to him as an existing
shareholder. In absence of any evidence from the Respondents in support of their
contention, we are of the view that the question of the petitioner vacating the office
of director under Section 283(1)(a) and 283(1)(g) does not arise.
12. As far as the removal of the petitioner as director in EOGM held on 28.3.93 is
concerned, the allegation of the petitioner is that he neither received any notice for
the said meeting nor any special notice proposing a resolution for is removal as
director pursuant to Section 284 of the Act. The Respondents failed to produce any
notice with proof of dispatch and minutes of the alleged meeting as evidence. Thus,
the petitioner's removal as director is illegal due to noncompliance of the provisions
of Companies Act, 1956 in this regard. The facts of the case show that the act of
removal of the petitioner as director is unjustified and oppressive to the petitioner
who has been excluded from the management of the company.
13. As the petitioner has expressed his desire to go out of the company by selling his
shares at a fair value and also after getting suitable compensation for loss of his
office as director, we consider it appropriate in the interest of the company and the
shareholders that the company should pay suitable compensation to the petitioner for
loss of his office as director and his shares are purchased by the company or the
Respondents at a fair value. For this purpose the amount of compensation for loss of
office and fair value of the shares should be determined. As regards the amount of
compensation for loss of office as director, we feel that a sum of Rs. 1 lac would be
appropriate. Accordingly, we direct the company to pay a sum of Rs. 1 lac to the
petitioner towards compensation within one month from the date of receipt of this
order under intimation to this Bench. As regards valuation of shares, since the
company is not doing any business now, the determination of fair value of the shares
would not be appropriate. Therefore the value of the shares will be determined at
face value with 12% simple interest per annum from the date of investment of Rs.
17,000/- by the petitioner in the company till the date of payment. Either the
company or the respondents may purchase the shares at the value so computed and
make payment within 30 days of this order. In case the company purchase the
shares, its issued/paid up capital be reduced to the extent of the face value of the
shares.
14. With the above directions, we dispose of the petition without any order as to
cost. Liberty is granted to the parties to apply incase of any difficulty in implementing
this order.

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