These appeals are preferred against the order passed by the Company Law Board, Southern Region Bench, Chennai (CLB) on 23rd September, 1998, in Company Petition. No. 16 of 1997 {1999 32 CLA 120).

The respondent Nos. 1 to 4 hold 15.5 per cent shares in Anugraha Jewellers Ltd. They filed the petition under sections 397, 398, 402 and 403 of the Companies Act, 1956 (the Act) alleging certain acts of oppression and mismanagement in the affairs of the company.

The gist of the case

There has been irregularity in the allotment of shares to the petitioners. Funds from the company have been siphoned off in the form of loans and advances to certain companies. The appointment of the managing director is neither legal nor proper. The petitioners were removed from the Board in a irregular manner. There is defalcation of stock. Mainly on the basis of the above allegations, which have been stated above broadly, the application was filed by the respondents herein as petitioners before the CLB.

The averments made by the petitioners were replied by the respondents by filing a detailed reply and denying the various allegations. It is seen from the proceedings of the CLB that on behalf of the appellants herein, an objection was also raised to the maintainability of the petition on the ground that already a complaint has been registered, alleging certain irregularities and therefore, a parallel proceeding cannot be permitted under law. It was also put forward by the appellants that the respondents herein have also moved the civil court, viz., the Subordinate Judge, Coimbatore. Therefore, as there is already a complaint, alleging certain irregularities, which is pending investigation, and as on identical grounds, the respondents have also filed a suit before the sub court, the present application is not maintainable in lawThe CLB held that it was appropriate that the management of the company should be entrusted for some time to an independent person so that the inter se disputes between the promoters do not affect the business of the company any further and, therefore, the Board appointed one Aghoramurthy, former regional director of the Department of Company Affairs, as the administrator. Aggrieved by the said order, the present appeal is preferred, challenging the said decision of the CLB.

Anugraha Jewellers was incorporated as a public limited company on 8th December, 1994. The company was promoted by the sons of K. Ramakrishna Pillai, who started and established jewellery business in the name and style of K. R. & Sons Jewellery. The main object of the company is to carry on business of gold-smiths, silver-smiths, jewellers, gem and diamond merchants and to do all manufacturing of and dealing in jewellery, their components and accessories. The inauguration of the company was on 8th December, 1994 and by public issue, a sum of Rs. 2.5 crore was raised. The paid-up capital of the company is Rs. 5 crore and the capital is Rs. 5 crore. The petitioners before the CLB held 15.5 per cent of shares. The appellants herein hold 18 per cent of shares. About 67.5 per cent of the shares are held by the public.

Before we take up the issues for consideration, it will be appropriate to state the law on this point. A Single Judge of this court held in the decision Vivek Goenka v. Manoj Sonthalia 1995 18 CLA 302/1993 II MLJ 163 that it is the duty of the court to recognise the corporate democracy of a company in managing its affairs, and that it is not for the court to restrict the powers of the Board of directors. It further held that it will not be open to this court to interdict the functions of the Board managed company and the court shall not interfere with the day-to-day functions, management and administration of a company, unless it is established that the decisions taken by the Board are ultra vires the Act or the articles of association of the company. Further, it held that it is not for the court to dictate to the Board as to how it should function. When the matter comes before the court, the court is not concerned with inter se relationship of the parties. But, it has to keep in mind the corporate democratic principlesIn yet another decision of this court G. Kasturi v. N. Murali 1991 5 CLA 269 it has been held that the principle of quasi-partnership is applied to a small private company founded on a personal relationship involving mutual confidence as between the members. Interests of the shareholders and that of the company must always be preferred over the interests of any one else irrespective of the position occupied by him it further held that prejudice to companys interest is to be shown only under section 398. While referring to the demand by minority shareholders for additional shares and the refusal of such request, the court observed that it is not a case of oppression and that the refusal by the managing director of a company to allow publication of certain news items will not affect public interest.

In Nurcombe v. Nurcombe, it was held that a minority shareholders action in form, is nothing more than a procedural device for enabling the court to do justice to a company controlled by miscreant directors or shareholders. Since the procedural device was evolved so that justice can be done for the benefit of the company. Whoever comes forward to start the proceedings, must be doing so for the benefit of the company, and not for some other purpose. It follows that the court has to satisfy itself that the person coming forward is a proper person to do so. The court is entitled to look at the conduct of the plaintiff in a minority shareholders action to satisfy itself that he is a proper person to bring the action on behalf of the company; and that the company itself will benefit. A particular plaintiff may not be proper person, because his conduct is tainted in some way which under the rules of equity may bar relief. He may not have come with clean hands or he may have been guilty of delayIt is relevant in this context to refer to a passage, from Gowers Principles of Modern Company Law, where it is observed as follows:

"The right to bring a derivative action is afforded to the individual member as a matter of grace. Hence, the conduct of shareholder may be regarded by a court of equity as disqualifying him from appearing as plaintiff on the companys behalf. This will be the case, for example if he participated in the wrong of which he complains."

Vaughan Williams, LJ, has observed in Towers African Tug & Co. 1904 (1) Ch 558 (CA) at p. 567 as follows:

"I think that an action cannot be brought by an individual shareholder complaining of an act which is ultra vires, if he himself has in his pocket, at the time he brings the action, some of the proceeds of that very ultra vires act. Nor in my opinion, does it alter matters that he represents himself as suing on behalf of himself and others."

It was held in the decision in V. M. Rao v. Rajeswari Ramakrishnan that the oppression complained of must affect a person in his capacity or character as a member of the company; harsh or unfair treatment in any other capacity, for example, as a director or creditor, is outside the purview of the section. There midst be continuous acts constituting oppression up to the date of the petition. The events have to be considered not in isolation but as a part of a continuous story. It must be shown as a preliminary to the application of section 397 that there is just and equitable ground for winding up the company. The conduct complained of can be said to be oppression only when it could be said that it is burdensome, harsh and wrongful oppression and involves at least an element of lack of probity and fair dealing to a member in matters of his proprietary right as a shareholder. The exercise of the inherent right of shareholders, in such circumstances, to elect their directors cannot be contended as constituting oppression. The majority shareholders are not bound to accept the view of the minority shareholders. If it is a lawful exercise of power by the majority, the minority shareholder is bound by the sameNow, in the background of the pronouncements, of law as reported in the decisions referred to above, it would be appropriate to deal with the case of the parties on hand. The main grounds on which the petition was filed are : irregularity in the allotment of shares to the petitioners; siphoning off funds of the company in the form of alleged loans; irregular removal of petitioner-directors from the Board; invalidity in the appointment of the managing director. The last accusation is that there is a defalcation.

The Commissioner has actually noted excess stock as regards gold ornaments. It is not in dispute that K. R. S. Mani, who is the 1st respondent herein, lodged a complaint on 22nd September, 1996, which was registered in Cr. No. 28 of 1996 in City Crime Branch, under section 477 of Indian Penal Code, 1860. The complaint against K. R. Loganathan and his two sons is regarding is appropriation of Rs. 3 crore. It appears that after consulting the legal advisor to the Commissioner of Police and after satisfying that a prima facie case under sections 406 and 477A of the Indian Penal Code has been made out against K. R. Loganathan, the managing director of the company and two others, the case was registered in Cr. No. 28 of 1996 in City Crime Branch, under sections 406 and 477A. This complaint was laid on 22nd September, 1996 and the case was registered on 22nd September, 1996.

While so, a suit was filed on the file of the sub-court, Coimbatore, in No. 945 of 1996 by K. R. S. Mani, K. R. S. Anand Kumar, K. R. S. Suresh and L. Prakash as plaintiffs against Anugraha Jewellers Ltd. and K. R. Loganathan, as defendant Nos. 1 and 2 respectively. The reliefs asked for are that the resolution purported to be passed at the second annual general meeting of the company on 4th September, 1996 (i) removing the 1st plaintiff from the office of wholetime director is illegal, invalid and not binding on the 1st plaintiff, (ii) a permanent injunction restraining the defendants, any officers and agents of the 1st defendant-company from interfering in any manner with the discharge of duties by the 1st plaintiff as wholetime director; (iii) declaration that the resolution passed on 4th September, 1996 removing the 2nd plaintiff from the office of the vice president is illegal and for consequential injunction; (iv) declaration that the resolution passed on 4th September, 1996 removing the 3rd plaintiff from the office of vice-president is illegal and for permanent injunction restraining the defendants in that regard; and (v) for declaring that the 4th plaintiff upon retirement as a director at the annual general meeting held on 4th September, 1996 has been re-elected as a director of the 1st defendant company and for consequential injunction with reference to the sameThe plaint proceeds on the footing that the 2nd defendant completely withheld information whatever sought by the plaintiffs and they were kept in dark and no Board meeting was convened by the defendants in spite of the requisition of the plaintiffs. There was gross discrepancy between the account as was circulated to the directors and the auditor report submitted in news papers publication (Economic Times). The plaintiffs raised detailed clarifications regarding such discrepancies and misappropriation of funds and that at the time of meeting on 4th September, 1996, number of goondas were present outside the meeting hall. An atmosphere of threat and intimidation was built up by the 2nd defendant to confront the plaintiffs and cow them down. Resolutions were not properly proposed or seconded. There was no proper poll taken and the procedure required under law was not followed, and, thus, the resolutions are invalid in law.

It, is to be pointed out that the respondents herein has filed this petition before the Board on identical grounds. It is also to be pointed out that there was yet another suit filed with reference to the affairs of the company. Thus, we find that there were proceedings already initiated and pending with reference to the dispute between the parties, vis-a-vis, the company of which they were directors and shareholders. A complaint was laid which was registered under sections 406 and 477A. Apparently, the investigation on the said complaint is pending. There was also the suit filed with reference to the, resolution dated 4th September, 1996. There was other proceeding by way of another suit between the parties with reference to the affairs of the company. When proceedings have been already initiated, it is really understandable as to why petition was filed before the CLB. It may be that after the initiation of this proceeding, the plaintiffs in the suit might have withdrawn the suit. But that will not erase the effect of action taken by them. This only will indicate the absence of bona fide in the proceedings initiated by the respondents before, the CLB. This has to be viewed further in the context of the participation of the respondents herein some of the very activities which are now questioned by them. Having been a party to certain decisions or actions, the respondents would now file an application before the Board accusing the appellants herein of those acts. This would only underline the oblique motive in filing the applicationI have already referred to the ruling in Nurcombes case (supra), where it has been pointed out that the court has to satisfy itself that the person who comes forward is a proper person to do so. If it is shown that the person, who has come forward, has a conduct tainted in some way, then the court will not be justified in allowing the person to maintain such an application. In other words, as field in Gowers Principles of Modern Company Law (4th edn., 1979) if he had participated in the wrong of which he complains, he cannot maintain an action.

Here, the actions of the respondents filing an application before the Board has to be viewed from that angle. Rightly or wrongly, they have already initiated steps under law. They have not only set the ball rolling by initiating criminal action, but also by resorting to civil action. They are parties to the transaction, which now they question. In such circumstances, one has to hold that the actions of the respondents in filing application before the Board is a mala fide one. They ought not to have been allowed to maintain such an application. Therefore, in this view of the matter, to begin with, it has to be held that the application filed by the respondent before the CLB is, but one born of mala fide intention and has been initiated only with a view to harass the appellants further. A person cannot be allowed to take different stand at different points of time. He cannot be allowed to question certain actions to which he was a party. Such an attitude should not only be deprecated, and if it is permitted, it will affect the smooth administration and would only encourage people to resort to such proceeding at slightest provocation and without any rhyme or reason. Hence, the respondents are not proper persons. They cannot maintain such an action. By their conduct, they have demonstrated that they are not entitled to maintain an actionWith regard to the allegations of discrepancy in the stools, the Commissioners report reads as follows:

"Physical verification of the jewels jointly conducted by both parties in my presence tallied with the stock statement with negligible difference. No other stock of raw-gold, silver, precious stones, etc., was reported in the Coimbatore show room. No stock of any kind was also reported in companys factory at Coimbatore which is housed behind the showroom in the same building. A quantity of 575.490 grains of gold was reported to be with the following artisans as on 16th November, 1998 as work-in-progress for making jewels.

I called upon Hari Logatiathan, director of the company to arrange for production of the above quantities of gold for my verification on 18th November, 1998 at Coimbatore. The artisans at S. Nos. 1 and 2 above turned up. The gold stock brought by the artisan at S. No. 2 above, Nandu was verified jointly by Hari Loganathan and KRS. Anand Kumar in my presence with reference to the carbon copy of the relevant issue voucher. Finally, in view of the extreme positions taken by the parties, the matter could not be, proceeded further and had to be left at that. Though the quantity is not, material, the stocks to remain with the Artisans since May, July and September 1998 is prima facie for too long a time."

The Commissioner has referred to in para, 2(4), the stock position as per the computer stock statement and physical stock. He has stated as follows:

Gold Stock as per computer statement - 2130.510 gms. Stock as per physical verification - 2188.375 gms. Difference - 57.865 gms. (excess) Silver articles as per computer statement - 8219.830 gms. Stock as per physical verifications - 2281.34 gms. Difference - 352.350 gms. (excess) Precious stones as per computer statement - 2396.75 gms. Stock as per physical verifications - 2281.34 gms. Difference - (-115.41 gms.)The reasons for the difference as above have been explained in the companys letter dated 23rd December, 1998.

From the report of the Commissioner, we find that there was no discrepancy in the stock. In fact, the stock on hand as regards gold and silver was found to be in excess. Regarding precious stones, they were with the artisans and of course they were with the artisans for considerable time. It is stated that artisans would require minimum six months to make certain types of gem-studded jewels, though the respondents would say that it cannot take more than a month. One of the artisans also appeared before the Commissioner and has stated about it. Therefore, the Commissioner report shows clearly that the allegations made by the respondents are patently false. The report of the Commissioner does not support any prima facie case in favour of the respondents.

The main accusation is that a sum of Rs. 1.37 crore was siphoned off by way of loans and advances of different parties. The company paid Rs. 45 lakh on 31st May, 1995 and Rs. 20 lakh on 22nd July, 1995 to A. M. Consultancy. The first payment was made by way of cheque drawn on Punjab National Bank and the second payment was made by way of demand draft obtained from Tamil Nadu Mercantile Bank. The cheques in both the cases were issued under the joint signatures of KRS Anand Kumar and Hari Loganathan. A sum of Rs. 16.32 lakh was received back on 4th September, 1995, thus, leaving the outstanding of Rs. 48.68 lakh. In the accounts, interest at 18 per cent has been provided for upto 31st March, 1996. There was also a letter of confirmation dated 31st March, 1996 signed on behalf of A. M. Consultancy, acknowledging the principal sum of Rs. 48.68 lakh and the accumulated interest of Rs. 7.58 lakh. The Commissioner called upon the debtor A. M. Consultancy to state the purpose for which the amount in question was borrowed. A reply was sent, stating that the amount was received for the purpose of subscribing the shares of Anugraha Jewellers from the public issue as well as from the market, and they have purchased the shares and requested Anugraha Jewellers to take delivery. In spite of reminders, they have not taken delivery and, therefore, they, dont have to pay any amount to them. It is to be pointed out that the payment was made by way of two cheques, signed not only by Hari Loganathan, but also by one of the respondents, viz., KRS Anand Kumar. Therefore, it is not open to the respondents to state that they did not know anything about the transaction and that it was done without their knowledge or consent or thought their authority. Thus, they are parties to the transactions. To disown any knowledge will be, but futile. The accounts show that interest has been provided upto 31st March, 1996. Thus, a sum of Rs. 96.32 lakh was received back, leaving one instalment of Rs. 48.65 lakh. These transactions have taken place the year 1995. It is not known why they should wait till 1998 to take action. It is apparent that owing to certain disputes, inter se, and perhaps aggrieved by the fact that at the annual general body meeting, they were thrown out by the shareholders, they have resorted to such application. The respondents stand tainted by their conduct. Having participated, it is not open to them to make an issue, Nurcombes case (supra). Hence, this attack peters out. Further, a bad decision cannot be called a mismanagement. The Commissioner was not competent to doubt the genuineness of the transactions in the face of the facts referred to above. The director of the defendants company has made a statement before the CommissionerNow coming to the issue and transfer of shares, the allegation is that KRS Suresh and KRS Mani have issued only 1, 74, 000 shares as against 2, 50, 000 shares due to them, resulting in short issue of 76, 000 shares. The other allegation is that 1 lakh shares of KRS Anand Kumar have been wrongfully transferred to Hari Loganathan by tampering the transfer deed and manipulating the records. It is also alleged that L. Prakash has been issued share certificates only for 3, 30, 000 shares as against 3, 50, 000 shares standing in his name, resulting in non-issue of share certificates for 20, 000 shares. It was stated that KRS Suresh had issued a cheque for Rs. 8 lakh for which two applications were made. One by Mr. KRS Mani for 30, 000 shares and another by Mr. Hari Loganathan for 50, 000 shares. The consideration of Rs. 5 lakh was paid on the next day to KRS Suresh by Hari Loganathan by way of cheque drawn on Dena Bank, dated 24th March, 1995. Thus, the statement mentions the return of the said amount to KRS Suresh to Hari Loganathan on the next day. But, the Commissioner has observed that the crucial question is why KRS Suresh would pay for the application of Hari Loganathan and what authority Hari Loganathan had to appropriate to himself the remittance received from Suresh.

I do not think that the Commissioner was justified in posing such a question, which is clearly beyond his authority or power. The Commissioner has stated that as against the remittance of Rs. 8 lakh made by KRS Suresh to the company, he has been issued shares only to the extent of Rs. 3 lakh and he has a valid claim for issue of shares for the remaining amount of Rs. 5 lakh. Such a case has not been even projected by the parties concerned. Thus, we find that there is absolutely no warrant in the peculiar, circumstances for the CLB to have intervened at all. The observations of the Commissioner that KRS Suresh has been issued shares only to the extent of Rs. 3 lakh and that he has a valid claim for remaining 5 lakh is obviously wrong. It is not even an allegation of the petitionersEven assuming that there is a dispute with regard to issue of shares, the CLB has no authority. Nor, on that ground, it can supersede the Board. There are sufficient provisions in the Act to take care of it and resolve it. In this connection, it will be fruitful to refer to section 111, sub-sections (4), (5) (6) and (7) and section 113 of the Act. With regard to non-issue of shares, the allegations are denied and the Commissioner has himself stated as follows:

"No doubt that the statement also mentions return of the said amount to KRS Suresh by Hari Loganathan on the next day."

Therefore, it is not clear how and on what ground, it is open to the CLB to have interfered with. The CLB found that it was treading upon slippery grounds. Therefore, the CLB has not been able to decisively say that there has been mismanagement. For, we find that the CLB has stated as follows:

"Even though the petitioners claim that they were not aware of the diversion of the funds, yet, they cannot absolve themselves as the third petitioner has been a signatory to some of the cheques issued in connection with loans and advances."

Yet, it is not known how on a petition by a person who has been party to such action, the CLB chose to take further action.

In para 36 of its order, while referring to shortage of stock of gold, the CLB has been rather specious. For, it has glossed over this aspect by saying that because there is excess of stock, it shows that there is possibility of the stock on hand being different from the one as shown in the stock register. Whereas, the case is that there has been misappropriation and defalcation.

With regard to variations in the accounts circulated to the Board and the one published in Economic Times, the CLB has stated clearly that the petitioners are not justified in making this as an issue, as we find that the one circulated to the Board had been discussed by the Board and the Board approved results had been published. I do not find anything from the order of the CLB to show that a definite finding has been reached by the CLB that there is any mismanagement. The Board has also mentioned in its order that the Board sought the approval of the general body to sell back the billing to the petitioners within a year thereafter for Rs. 115 lakh, and the general body approved auctioning of the building to the highest bidder. It is not known how, when the general body has approved, it can be stated that the Board or members are acting against the interest of the shareholders. I am not prepared to accept that any question of misconduct would arise at all. The CLB has simply adopted the reasoning of the CommissionerIn the facts and circumstances, I am unable to accept that there is any proof of misconduct which alone would empower the CLB to interfere. The CLB has simply adopted, if I may say so the reasoning of the Commissioner. The jurisdiction of the CLB or the court is not to decide the dispute between the parties 1997 (1) CLJ 243. [LQ/CalHC/1997/71] The CLB was aware of the fact that it was treading on slippery ground. For, the CLB has observed that though the petitioners claim that they were not aware of the diversion of the funds, yet, they cannot absolve themselves as the third petitioner has been a signatory to some of the cheques issued in connection with the loans and advances. Again, it has observed that the CLB is of the view that the petitioners are not justified in making this as an issue as the Board find that the one circulated to the Board had been discussed and the Board approved results had been published. The CLB has again pointed out that a decision of the Board in general body in a democratic manner may not be subject to judicial scrutiny. Yet, it did so it is not known how it can say after all that the AGM was not properly held, yet, how, without any basis, it can say that there is any act of oppression

The CLB has, thus, not agreed with the petitioners on main issues. It also concedes that it will not be proper to interfere with the democratic functioning of the company. Yet it in a superficial manner and though conscious of its limitation, has chosen to order this petition. It cannot be concluded from the materials before court that respondent Nos. 1 to 4 herein can state that their rights of the shareholders are affected in any manner. It is not a case, where oppression has been established. In this case, necessary condition under section 397 has not been complied with. In the absence of certain specific pleadings, we find that certain observations have been made by the CLB. Necessary ingredient, under sections 397, 398 and 403 of the Act have not been satisfied in this caseThe order of the CLB, therefore, is untenable in law and unjustified on facts. From the very findings given by the CLB, it is clear that the CLB having found most of the points. against the petitioners, somehow have persuaded themselves to order the petition, which is really surprising. There is no proof of mismanagement. On the materials placed, there is nothing to show that the company has been acting against the interest of the shareholders. In respect of the transaction that took place in 1995 to which the petitioners were parties, they have chosen to cite it as a ground, when they filed application before the CLB in the year 1998. Yet having taken note of this fact, it is strange that the CLB allowed them to take advantage of their own mistake by ordering the petition. Therefore I am satisfied that the order passed by the CLB cannot be sustained at all and it has to be set aside.

In the result, the two CMAs are allowed, setting aside the order passed by the CLB. The Administrator appointed by the CLB will hand over immediately the entire management to the Board of directors. The cost of the appeal shall be paid by the respondents. Consequently, CMP Nos. 4439 to 4441 of 1999 shall stand dismissed.