M.S.MEWAR v. LAKE PALACE HOTELS MOTELS (P.) LTD. [1997] 4 CLJ 440 (Delhi)

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This is a case[1] which dealt with the family disputes matter and the problems arose due to this knocked the doors of the Court under Sections 397 and 398 of the Companies Act, 1956[2].The dispute relates with the illegal transfer of shares and many other aspects of disputes related to that.

FACTS OF THE CASE

This is a  case in which petition under Section 397 and Section 398 of the Companies Act, 1956 was filed by Maharana Mahendra Singh Mewar against Lake Palace Hotels and Motels (P.) Ltd., respondent No. 1, Shri Arvind Singh, Managing Director, respondent No. 2, Lake Shore Palace Hotels (P.) Ltd., respondent No. 3, Rani Yogeshwan Kumari, respondent No. 4. Shri Vikramaditya Singh, respondent 5, and A. Subramanian, financial controller of the company respondent No. 6. During the pendency of the proceedings, it was intimated that A. Subramanian had died and as such his name was deleted from the array of respondents. It should be noted that the petitioner is the elder brother of respondent No. 2 and respondent No. 4 and family disputes had started even before the demise of their father, viz., Maharana Bhagawat Singh, on November 3, 1984.

 The company( Lake Palace Hotels and Motels (P.) Ltd.) was incorporated on March 2, 1963, as a private company and has now become a public company under Section 43A (1A) of the Act. The paid-up capital of the company as per the petition consists of 3,140 equity shares of Rs. 1,000 each which were held as follows :

Maharana Bhagwat Singh on behalf of HUF 2,288 shares ;

Maharana Mahendra Singh (petitioner) 426 shares ;

Shri Amar Singh 426 shares ;

Total 3,140 shares.

Whereas as per the respondent-company, the total capital includes further 1,284 shares issued as rights shares.

The various allegations contained in the petition can be classified into the following ten major heads, namely:-

  • illegal and malafide transfer and issuance of shares with a view to gain control ;
  • clandestine sale and dissipation of assets of the company ;
  • clandestine manipulation of accounts, fraudulent inflation of expenses and misappropriation of funds ;
  • illegal appointment of ad-hoc directors with ulterior motive ;
  • misuse of the position of managing director and as other directors of the company for entering into agreement with the other company which is prejudicial and against the interest of the company ;
  • specific misappropriation of the company’s funds ;
  • violation of the provisions of law and the articles of association ;
  • ousting the petitioner from management ;
  • holding meetings of the board of directors without the presence of the observer appointed by the court ;
  • other acts of mismanagement prejudicial to the interests of the company.

It is also stated in the petition, that a company petition was filed in the High Court of Rajasthan at Jodhpur under Section 397/398 of the Act which had been subsequently withdrawn after remaining pending for seven years, in order to avail of a more efficacious remedy before the Company Law Board due to change in law. In addition a separate partition suit is also pending before the District Judge, Jodhpur. 

PRAYERS SOUGHT BY THE PETITIONER

 The reliefs sought for in the petition are as follows :

(1) Framing a scheme for the management and control of the company so that respondent No. 2 is divested of his power to control.

(2) Removal of respondents Nos. 2, 4 and 5 and appointment of independent directors in their place.

(3) Removal of the financial controller, namely, respondent No. 6.

(4) Setting aside the transfer/sale of 1,500 shares belonging to the HUF to respondent No. 3 and to vest the same in the karta of the HUF.

(5) Suspending the voting rights in respect of 788 shares belonging to the HUF which are under the control of respondent No. 2 and respondent No. 6 till the final decision in the partition suit.

(6) Setting aside the allotment of 1,284 equity shares issued as rights shares on October 15, 1985.

(7) Ordering investigation into the transactions of sale of land of Haridasji Ki Magri or alternatively to revert ownership and possession of the property and to restrain the company from leasing the outer portion of this property to East India Hotels Company Ltd., and in the alternative if the lease is already entered into then to restrain from acting on the same.

(8) To declare as having no effect, all documents regarding the transfer of upper portion of Shivnivas Palace.

(9) Ordering refund of Rs. 55 lakhs taken by respondent No. 3 through a prejudicial agreement with the company and to declare that such act was without authority.

(10) Appointing a special auditor to audit the books of account of the company for the past years.

(11) To pass such orders to bring to an end the matters complained of.

ISSUE

Keeping aside all the prayers sought and the allegations imposed upon by the petitioner, the one issue which really had the essence of this case was:-

  1. Whether this petition is maintainable?

Except this, the Court dealt with all the allegations imposed by the petitioner.

CONTENTION OF THE PARTIES

Contention by the petitioner:-

Though, earlier, the petitioner fully had emphasis on petition and the reliefs sought in it, but after a few days when the case was before the Court fully,among the reliefs sought, the petitioner later took back the reliefs sought from 2-8 and continued with the reliefs sought in 1, 9,10,11.

Contention by the respondent:-

Respondent contended mainly on the maintainability of the petition and refuted the various allegations made by the petitioner in the petition and also argued against granting any relief sought by the petitioner.In this petition five company applications also came to be filed. The first application was filed on November 21, 1993, on behalf of respondent No. 1-company raising preliminary objections regarding the maintainability of the petition. This application challenged the locus standi of the petitioner to maintain the petition and the prayer was for dismissing the petition accordingly. According to the application the petition is being promoted, supported, pursued, financed and prosecuted by the Taj group who are strangers and have no concern in the legal proceedings.

Reply by the petitioner:-

In reply to the application it is stated on behalf of the petitioner that the petitioner is entitled to raise the grievances in his capacity as a shareholder and that the present petition is in continuation of the earlier petition filed before the High Court, the subject-matter is already lis pendens and, therefore, it is maintainable. The contention of res judicata or constructive res judicata as raised by the respondents and the question of limitation have also been refuted by the petitioners.

There was one more application filed by the petitioner where they asked a restraint on the respondent-company from passing certain resolutions to regularise certain investments made by the company prior to its becoming a public company under Section 43A(1A) in Shikarbadi Hotels (P.) Ltd.

The two allegations which were ultimately pressed on behalf of the petitioner relate to (a) clandestine manipulation of accounts, fraudulent inflation of expenses and misappropriation of funds ;

(b) misuse of the position by respondent No. 2 and other directors for entering into an agreement with respondent No. 3, wholly prejudicial and against the interests of the company.

In addition, the allegation of investment of substantial funds of the company in other companies were also considered as part of the ground for the prayer for investigation and appointment of a special auditor.

GROUNDS TAKEN

  1. Section 397[3] of the Companies Act, 1956:-

   Application to Company Law Board for relief in cases of oppression.

  •  Any members of a company who complain that the affairs of the company are being conducted in a manner prejudicial to public interest or in a manner oppressive to any member or members (including any one or more of themselves) may apply to the Company Law board for an order under this section, provided such members have a right so to apply in virtue of section 399.
  •  If, on any application under sub- section (1[4]), the Company Law Board is of opinion-
  • that the company’ s affairs are being conducted in a manner prejudicial to public interest or in a manner oppressive to any member or members; and
  •  that to wind up the company would unfairly prejudice such member or members, but that otherwise the facts would justify the making of a winding- up order on the ground that it was just and equitable that the company should be wound up; the Company Law Board may with a view to bringing to an end the matters complained of, make such order as it thinks fit.
  • Section 398[5] of the Companies Act, 1956:-

   Application to Company Law Board for relief in cases of mismanagement.

(1) Any members of a company who complain-

  •  that the affairs of the company are being conducted in a manner prejudicial to public interest or in a manner prejudicial to the interests of the company; or
  •  that a material change (not being a change brought about by, or in the interests of, any creditors including debenture holders, or any class of shareholders, of the company) has taken place in the management or control of the company, whether by an alteration in its Board of directors, or of its managing agent or secretaries and treasurer or manager, or in the constitution or control of the firm or body corporate acting as its managing agent or secretaries and treasurers, or in the ownership of the company’ s shares, or if it has no share capital, in its membership, or in any other manner whatsoever, and that by reason of such change, it is likely that the affairs of the company will be conducted in a manner prejudicial to public interest or in a manner prejudicial to the interests of the company; may apply to the Company Law Board for an order under this section, provided such members have a right so to apply in virtue of section 399.
  •  If, on any application under sub- section (1)[6], the Company Law Board is of opinion that the affairs of the company are being conducted as aforesaid or that by reason of any material change as aforesaid in the management or control of the company, it is likely that the affairs of the company will be conducted as aforesaid, the Company Law Board may, with view to bringing to an end or preventing the matters complained or apprehended, make such order as it thinks fit.
  • Section 399[7] of the Companies Act, 1956:-

   Right to apply under section 397[8] and 398[9].

(1) The following members of a company shall have the right to apply under section 397 or 398:-

  •  in the case of a company having a share capital, not less than one hundred members of the company or not less than one- tenth of the total number of its members, whichever is less, or any member or members holding not less than one- tenth of the issued share capital of the company, provided that the applicant or applicants have paid all calls and other sums due on their shares;
  • in the case of a company not having a share capital, not less than one- fifth of the total number of its members.
  •  For the purposes of sub- section (1), where any share or shares are held by two or more persons jointly, they shall be counted only as one member.
  • Where any members of a company are entitled to make an application in virtue of sub- section (1), any one or more of them having obtained the consent in writing of the rest, may make the application on behalf and for the benefit of all of them.
  • The Central Government may, if in its opinion circumstances exist which make it just and equitable so to do, authorise any member or members of the company to apply to, the Company Law Board under section 397 or 398, notwithstanding that the requirements of clause (a) or (b), as the case may be, of sub- section (1) are not fulfilled.
  • The Central Government may before authorising any member or members as aforesaid, require such member or members to give security for such amount as the Central Government may deem reasonable, for the payment of any costs which the Company Law Board dealing with the application, may order such member or members to pay to any other person or persons who are parties to the application.
  • Section 43A(1A)[10] of the Companies Act, 1956:-

   Without prejudice to the provisions of sub- section (1)[11], where the average annual turnover of a private company, whether in existence at the commencement of the Companies (Amendment) Act,1974 , (41 of 1974 ) or incorporated thereafter, is not, during the relevant period less than such amount as may be prescribed the private company shall, irrespective of its paid- up share capital, become, on and from the expiry of a period of three months from the last day of the relevant period during which the private company had the said average annual turnover, a public company by virtue of this sub- section:

Provided that even after the private company has so become a public company, its articles of association may include provisions relating to the matters specified in clause (iii) of sub- section (1) of section 3 and the number of its members may be, or may at any time be reduced, below seven.

  • Section 227(1A)[12] of the Companies Act, 1956:-

   Without prejudice to the provisions of sub- section (1), the auditor shall inquire-

  •  whether loans and advances made by the company on the basis of security have been properly secured and whether the terms on which they have been made are not prejudicial to the interests of the company or its members;
  • whether transactions of the company which are represented merely by book entries are not prejudicial to the interests of the company;
  • where the company is not an investment company within the meaning of section 372 or a banking company, whether so much of the assets of the company as consist of shares, debentures and other securities have been sold at a price less than that at which they were purchased by the company;
  • whether loans and advances made by the company have been shown as deposits;
  • whether personal expenses have been charged to revenue account;
  • where it is stated in the books and papers of the company that any shares have been allotted for cash, whether cash has actually been received in respect of such allotment, and if no cash has actually been so received, whether the position as stated in the account books and the balance- sheet is correct, regular and not misleading.

DECISION

In this case, many applications and their replies where put forward by the parties and ultimately after seeing various allegations put up by the parties and the replies of those allegations put up by the opposite parties gave the Court an insight to understand the very essence of this case and then the Court after considering everything in the case refrained from passing any order in this case.

Considering every aspect, the Court stated:-

 As regards withdrawal of the High Court petition in our view so long as the jurisdiction is with the Company Law Board and in so far as the petitioner has complied with the minimum requirements under Section 399 of the Act, the maintainability of the petition cannot be challenged irrespective of the possibility that the petitioner could have filed the petition before the High Court. 

Now, coming to the merits of the case, as regards low profitability, the limited allegation is that the profitability of the respondent-company’s hotel is not comparable with that of other hotel companies. In this connection the petitioner has not provided any relevant figures of profitability of other hotel companies or explained as to how the performance is poor. This allegation is, therefore, vague and imprecise.

 It is a fact that the Lake Palace Hotel was not the only activity of the company. However, the petitioner tried to highlight the disproportion between the expense under each head incurred in Lake Palace Hotel unit with the expense in total and on other activities. Such a comparison, in our opinion, cannot lead to any meaningful conclusion without understanding the nature and volume of other activities. We would be ending up in totally wrong conclusions by merely making comparisons of absolute figures. In fact the petitioner himself is not aware of some of the other activities. In the circumstances, keeping the nature and volume of other activities, if at least some instances of inflation of expenses had been given, it would have been worth embarking on further probe into the matter. 

Inter-corporate loans and investments by private companies are not very closely regulated by company law as it is done in case of public companies. In other words the law is comparatively relaxed as far as private companies are concerned. In this case, the company appears to have obtained the approval of the board of directors at a meeting for which due notice was stated to have been served on the petitioner, he being a director of the company at that time.

 On going through the limited issues pressed before us there is no case made by the petitioner justifying the removal of respondent No. 2 or the other directors. As such the Court refrain from passing any such order.

ANALYSIS

In this case, the Court though did not pass any order and disposed off the petition with the direction related to the payment of interest on the loan granted by the respondent No.1  to Respondent No.3, which was company. Besides this, there was no any other prayer was conceded by the Court. But this case literally came up with important Sections of the Companies Act, 1956 which got its interpretation and many aspects related to the current facts of the case and the associated problems with it came into picture which showed the take of the Court on that issue. In this case, the Court considered the point of maintainability of the petition and also handled with the allegations put up by the petitioner on the respondent and wherever, the Court found it necessary that there are more investigations required to prove a particular point, the Court stated it loudly in this case. The Court though refrained itself from passing any order, but it literally dealt with the facets in question of this case and tried to guide the parties by its statements and also by its directions.

CONCLUSION

This case came up in the Court while using the multiple Sections of the Companies Act, 1956 and the petitioner through this case tried its every bit to make the Court grant its reliefs sought, whereas on the other hand, the respondents tried to question the maintainability of the petition. The Court after taking all the points tried to bring a clarity to the parties in this case.


[1] Mahendra Singh Mewar v. Lake Palace Hotesl And Motels Pvt. Ltd., 1997 4 CLJ 440 (Delhi).

[2] The Companies Act, 1956 (Act No.1 of 1956).

[3] The Companies Act, 1956, s. 397.

[4] The Companies Act, 1956, s. 397(1).

[5] The Companies Act, 1956, s. 398.

[6] The Companies Act, 1956, s. 398(1).

[7] The Companies Act, 1956, s. 399.

[8] The Companies Act, 1956, s. 397.

[9] The Companies Act, 1956, s. 398.

[10] The Companies Act, 1956, s. 43A(1A).

[11] The Companies Act, 1956, s. 43A(1).

[12] The Companies Act, 1956, s. 227(1A).

Also Read  Special Courts Bill, 1978 (In re)

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