IN THE HIGH COURT OF GUJARAT AT AHMEDABAD O.J.APPEAL No 9 of 1996 in COMPANY PETITIONNo 35 of 1988 with CIVIL APPLICATION No 85 of 1999 For Approval and Signature: Hon'ble MR.JUSTICE B.C.PATEL Hon'ble MR.JUSTICE P.B.MAJMUDAR ============================================================ 1. Whether Reporters of Local Papers may be allowed : YES to see the judgements? 2. To be referred to the Reporter or not? : YES 3. Whether Their Lordships wish to see the fair copy : YES of the judgement? 4. Whether this case involves a substantial question : NO of law as to the interpretation of the Constitution of India, 1950 of any Order made thereunder? 5. Whether it is to be circulated to the Civil Judge? : NO -------------------------------------------------------------- RAMESH B DESAI Versus BIPIN VADILAL MEHTA -------------------------------------------------------------- MR PV SATHE, SR COUNSEL with MR SANJANWALA for petitioner MR DS NANAVATI with MR. SI NANAVATI for Respondent No. 1 MR SAURIN A MEHTA for Respondent No. 4 MR SN SOPARKAR for Respondent No. 9,10 -------------------------------------------------------------- CORAM : MR.JUSTICE B.C.PATEL and MR.JUSTICE P.B. MAJMUDAR Date of Judgment : 10/03/2000 C.A.V. JUDGMENT (Per Patel, J.) This appeal is filed against the order passed on 12.3.1996 by learned Company Judge allowing the Company Application No. 113 of 1995 and dismissing Company Petition No. 35 of 1988 being barred by law of limitation. 2. By filing Company Petition No. 35 of 1988, the Company Court was moved at the instance of R.B. Desai & Others for rectification of the register of the Company. Respondents No. 2 and 3, by taking out the Company Application No. 113 of 1995 sought for an order to the effect that Company Petition No. 35 of 1988 be dismissed on the ground that petition is barred by limitation, without going into the merits of the petition. The said respondents prayed for other reliefs which are reproduced in the judgment, and as the same are not relevant for the purpose of deciding this appeal, we are not referring to the same. 3. The petitioners in Company Petition No. 35 of 1988, are the share holders of Messrs. Sayaji Industries Limited (hereinafter referred to as the Company) came before the Company Court indicating that they are interested in the proper functioning and management of the Company and have filed the petition for proper utilisation and application of the funds and assets of the Company. It was alleged that respondent No.2, Bipin Vadilal Mehta was inducted as an Additional Director of the Company on 18.2.1982 and was appointed as Managing Director on the same date. As stated by the petitioners, one Priyam Bipin Mehta was inducted in the management of the Company from January 1982. 4. From the record it transpires that Vadilal Lallubhai Mehta was the Chairman and Managing Director of the Company. The said Vadilal Lallubhai Mehta and his wife Vimlaben gave birth to two sons, Bipin Vadilal Mehta and Suhas Vadilal Mehta and four daughters who are married. The family had huge properties. Over and above the shares of the Company, there was HUF Trust and other Private Limited Companies under the control of the said family. There was a Memorandum of Understanding (hereinafter referred to as the MOU) between the family members which is dated 30.1.1982. Reading the said MOU, it becomes clear that at the relevant time, all the Companies were managed by Vadilal Lallubhai Mehta and Suhas Vadilal Mehta. The main object of the MOU was to entrust the management of some of the Companies to Bipinbhai Vadilal Mehta and some to Suhas Vadilal Mehta by mutual transfer from one to other. It was decided that the management of the Company, and C.V. Mehta Private Limited was to be entrusted to Bipinbhai Vadilal Mehta while other Companies such as Industrial Machinery Manufacturers Pvt. Ltd., C. Doctor & Co. Pvt. Ltd., Mehta Machinery Manufacturers Pvt. Ltd., and Oriental Corporation Pvt. Ltd., were to remain with Suhas Vadilal Mehta. As per one of the conditions, the shares of the Company and C.V. Mehta Private Limited held by Suhas Vadilal Mehta and the members of his branch or the companies going to his share or Trusts or by Vadilal Lallubhai HUF or by Vimlaben Vadilal Trust shall be sold or transferred to Bipinbhai Vadilal Mehta or as he may desire. Clauses 7 and 8 of the details of understanding of the MOU read as under:- (7). Bipinbhai Vadilal Mehta or his wife or his son are not Directors in any of the Companies going to the share of Suhas Vadilal Mehta and Vadilal Lallubhai Mehta are Directors in Sayaji Mills Ltd., and Smt. Vimlaben Vadilal Mehta and Shri Vadilal Lallubhai Mehta, Suhas Vadilal Mehta and Chhayben Suhasbhai Mehta are Directors in C.V. Mehta Pr. Ltd. They shall resign as Directors of C.V. Mehta Pr. Ltd. and Bipinbhai Vadilal Mehta, his wife and/or son shall be appointed as Directors when Vadilal Lallubhai Mehta is satisfied that the entire understanding hereby recorded has been fully implemented. (8). Shri Vadilal Lallubhai Mehta is also Chairman and Managing Director of Sayaji Mills Ltd. and Suhas Vadilal Mehta is Managing Director of Sayaji Mills Ltd. Both of them shall resign as Chairman and as Directors of Sayaji Mills Ltd., when Vadilal Lallubhai Mehta is satisfied that the entire understanding recorded herein is fully implemented and they have been released from all their guarantees including bank guarantees. Shri Suhas Vadilal Mehta, however, shall resign as Managing Director immediately on the appointment or just prior to the appointment of Shri Bipinbhai Vadilal Mehta as Managing Director of Sayaji Mills Ltd., by the Board of Directors of Sayaji Mills Ltd. Shri Vadilal Lallubhai Mehta shall, however, continue as Managing Director of Sayaji Mills Limited till the entire understanding has been completely implemented and he and Shri Suhas Vadilal Mehta both are released from all their guarantees including bank guarantees. Shri Bipinbhai Vadilal Mehta and Shri Priyambhai Bipinbhai Mehta, immediately on being appointed as Managing Director and Director of Sayaji Mills Limited, shall give their personal guarantee to the banks and all other financial institutions, wherever it is necessary, and get the release of all bank guarantees given by Shri Vadilal Lallubhai Mehta and Shri Suhas Vadilal Mehta to the banks and other financial institutions, immediately. The present constitution of the Board of Directors of Sayaji Mills Limited shall not be altered, save and except that Bipinbhai Vadilal Mehta and Priyambhai Bipinbhai Mehta shall be appointed as Directors of Sayaji Mills Ltd. until Shri Vadilal Lallubhai Mehta and Shri Suhas Vadilal Mehta are discharged from all their guarantees. 5. We are not concerned with the other properties in this Appeal, and, therefore, we are not referring to the arrangements made with regard to other properties in this judgment. By reading clause 28 of the MOU, it is clear that there were restrictions on the sale of shares held by Bipinbhai Vadilal Mehta and if he wanted to sell more than 3500 shares, he was required to offer the said shares to Suhas Vadilal Mehta at the break-up value of the said shares. We are not referring to further details as to the manner in which the transfer was required to be made in this behalf, but we are only indicating that the MOU was arrived only with a view to see that the business remains with the family members. 6. It has been specifically mentioned in the MOU that the same has been arrived at with the blessings, advice and guidance of Shri Vadilal Lallubhai Mehta and Vimlaben for increasing the love and peace in the family. In the concluding portion of the MOU, in paragraph 36, it has been stated that that "the parties hereto agree to faithfully abide by and carry out this understanding under the guidance of Shri Vadilal Lallubhai Mehta and his decision on every matter relating to this understanding or the interpretation or the carrying out of the same or in relation to any matter omitted to be mentioned in this memorandum but connected with or arising out of the matter herein mentioned shall be final and binding upon both the parties and both parties agree to faithfully carry out such decision of Shri Vadilal Lallubhai Mehta and which decision he can give in a summary manner and without assigning any reasons". 7. On 13.11.1982, there was a modification in the MOU. The amount to be brought in by Bipinbhai Vadilal Mehta towards the amounts payable by C.V. Mehta Private Limited was fixed at Rs.39,24,154-88. Shri Bipinbhai Vadilal Mehta agreed to pay and bring in immediately in C.V. Mehta Private Limited a sum of Rs.20,00,000/towards the amount required to be paid by C.V. Mehta Private Limited. The said amount was to be treated as a loan and Bipinbhai Vadilal Mehta was not entitled to claim or demand any repayment of the said loan from C.V. Mehta Pvt. Ltd. as long as the management thereof does not pass into the hands of Bipinbhai Vadilal Mehta . Reading the said Memorandum of Modification , it further appears that Bipinbhai Vadilal Mehta and his sons were to be appointed to the Board of Directors of Sayaji Mills Limited only after the the aforesaid sum of Rs.20,00,000/- was paid and brought in C.V. Mehta Pvt. Ltd. This amount was required to be brought in and paid by Bipinbhai Vadilal Mehta on the next day after the transfer forms in respect of the shares of Sayaji Mills Limited held by Suhas Vadilal Mehta and his family members were to be handed over to Vadilal Lallubhai Mehta on behalf of Bipinbhai Vadilal Mehta and the members of his family. It was also agreed that the actual effect of such transfer was to be given by the Board of Directors of Sayaji Mills Limited only after the payment of the aforesaid sum of Rs.20,00,000/- by Bipinbhai Vadilal Mehta to C.V. Mehta Pvt. Ltd., was made. The remaining sum of Rs.19,24,154-88 was also required to be brought in as a loan by Bipinbhai Vadilal Mehta within a period of 24 months. Reading the agreement, it also transpires that the management of C.V. Mehta Pvt. Ltd. proposed to be transferred to Bipinbhai Vadilal Mehta under the MOU was not to be transferred till Bipinbhai Vadilal Mehta brings in the balance amount of Rs.19,24,154-88 towards the amount payable by C.V. Mehta Pvt. Ltd. to the members of the family of Vadilal Lallubhai Mehta and others. 8. It is also required to be noted that C.V. Mehta Pvt. Ltd. was holding shares of Sayaji Mills Limited . Despite the payment to be made to to C.V. Mehta Pvt. Ltd., clause 8 of the Memorandum of Modification provided as under :- "8. The shares of Sayaji Mills Ltd. belonging to C.V. Mehta Pvt. Ltd., will not be transferred by C.V. Mehta Pvt. Ltd. to Shri Bipinbhai Vadilal Mehta or to the members of his branch or to his nominees but, shall continue to be held by the said C.V. Mehta Pvt. Ltd. C.V. Mehta Pvt. Ltd. shall, however, exercise the voting rights in respect of such shares held by it in favour of Shri Bipinbhai Vadilal Mehta for a period of 24 months. If, within the period of 24 months Shri Bipinbhai Vadilal Mehta has not paid and brought in the aforesaid further amount of Rs.19,24,154-98 (Rupees Nineteen lacs twenty four thousand one hundred fifty four & paise eighty eight only), along with interest, C.V. Mehta Pvt. Ltd., shall be at liberty to sell the shares of Sayaji Mills Ltd. owned and held by it to anyone, as it likes and decides and it will not be required to exercise the voting rights in respect of such shares of Sayaji Mills Ltd. in favour of Shri Bipinbhai Vadilal Mehta after the expiry of the said period of 24 months." 9. Thus, despite the payment to C.V. Mehta Pvt. Ltd. by Bipinbhai Vadilal Mehta , the shares of Sayaji Mills Limited which stood in the name of C.V. Mehta Pvt. Ltd. were not to be transferred. Thus C.V. Mehta Pvt. Ltd., a Company holding shares of Sayaji Mills Limited, continued to be the share holders to the extent which it was holding. So far as the amount given to C.V. Mehta Pvt. Ltd., is concerned, in clause 10 of the Memorandum of Modification , it was provided as to how the said amount is to be utilized. The said clause reads as under :- "10. It is agreed that Shri Suhas Vadilal Mehta shall be entitled to utilize the amount brought in by Shri Bipinbhai Vadilal Mehta forthwith for the payment of the dues payable by C.V. Mehta Pvt. Ltd. to the members of the family of Shri Vadilal Lallubhai and others mentioned in para 3 hereinabove and/or to C. Doctor & Co. Pvt. Ltd., and other companies or associates of Shri Suhas Vadilal Mehta and that Shri Bipinbhai Vadilal Mehta has agreed that the management of C.V. Mehta Pvt. Ltd. will not be claimed or demanded by him before such payments are made by C.V. Mehta Pvt. Ltd. under the management of Shri Suhas Vadilal Mehta ." 10. With regard to the second instalment also, it is clear that it was for the purpose of certain arrangement as mentioned in paragraphs 11 and 12 of the Memorandum of Modification. 11. One Messrs. Santosh Starch Products having its office at 71 New Cloth Market, Ahmedabad, which was a supplier to the Company, received advance payment from the Company by three different cheques of Rs.10,00,000/-, Rs.5,00,000/- and Rs.5,00,000/-. The first two payments were made on 13.11.1982 and the last payment was made on 25.11.1982. It is, however, averred that the said M/s. Santosh Starch Products advanced amount of loan by three cheques, one in favour of Bipinbhai Lallubhai Mehta H.U.F. on 13.11.1982 for Rs.7 lakhs, another of Rs.6 lakhs to Bipinbhai Lallubhai Mehta on 13.11.1982 and thereafter the third of Rs.7 lakhs on 13.11.1982 to Priyam Vadilal Mehta. It is thus alleged that the Sayaji Mills Limited advanced the sum of Rs.20 lakhs which in turn Santosh Starch Products paid to Bipinbhai Lallubhai Mehta and his family. In this background, it is alleged that Bipinbhai Lallubhai Mehta had devised a scheme to dupe the funds of the Company for the purpose of giving effect to the MOU and Memorandum of Modification and thereby used the funds of the Company for acquisition of the shares of the Company. It is further alleged that this is in violation of provisions contained in sec. 77 of the Act. It is further alleged that the aforesaid provision prohibits such transaction made directly or indirectly. It is further alleged that Bipinbhai Vadilal Mehta devised a scheme in terms of which he could use the funds of the Company for the purpose of purchasing and or acquiring shares of the Sayaji Mills Limited and C.V. Mehta Pvt. Ltd., which in turn was holding substantial shares of Sayaji Mills Limited. 12. It was further averred in the petition that a fraud came to be practised upon the statute and therefore, the petitioners, as share holders, are entitled to claim relief under section 155 of the Companies Act. The relevant provisions of the Companies Act, viz. section 77 and 156 are as under :- 77. Restrictions on purchase by company, or loans by company for purchase, of its own or its holding company's shares.- (1). No company limited by shares and no company limited by guarantee and having a share capital, shall have power to buy its own shares, unless the consequent reduction of capital is effected and sanctioned in pursuance of sections 100 to 104 or of section 402. (2). No public company, and no private company which is a subsidiary of a public company, shall give, whether directly or indirectly, and whether by means of a loan, guarantee, the provision of security or otherwise, any financial assistance for the purpose of or in connection with a purchase of subscription made or to be made by any person of or for any shares in the company or in its holding company: Provided xxxx xxxx xxxx xxxx xxxx (3). xxxx xxxx xxxx xxxx xxxx (4). If a Company acts in contravention of sub-sections (1) to (3), the company, and every officer of the company who is in default, shall be punishable with fine which may extend to one thousand rupees. (5). Nothing in this section shall affect the right of a company to redeem any shares issued under section 80 or under any corresponding provision in any previous companies law. 155. Power of the Court to rectify register of members.- (1). If - (a). the name of any person - (i) is without sufficient cause entered in the register of members of a company, or, (ii). after having been entered in the register, is, without sufficient cause, omitted therefrom; or, (b). default is made, or unnecessary delay takes place, in entering on the register the fact of any person having become, or ceased to be, a member; the person aggrieved, or any member of the company, or the company, may apply to the Court for rectification of the register. (2). The Court may either reject the application or order rectification of the register; and in the latter case, may direct the company to pay the damages, if any, sustained by any party aggrieved. In either case, the Court in its discretion may make such order as to costs as it things fit. (3). On an application under this section, the Court- (a). may decide any question relating to the title of any person who is a party to the application to have his name entered in or omitted from the register, whether the question arises between member or alleged members, or between members or alleged members on the one hand and the company on the other hand; and (b). generally, may decide any question which it is necessary or expedient to decide in connection with the application for rectification. (4). From any order passed by the Court on the application, or on any issue raised therein and tried separately, an appeal shall lie on the grounds mentioned in section 100 of the Code of Civil Procedure, 1908 (5 of 1908) - (a). if the order be passed by a District Court, to the High Court. (b). if the order be passed by a single Judge of a High Court consisting of three or more Judges, to a Bench of that High Court. (5). The provisions of sub-sections (1) to (4) shall apply in relation to the rectification of the register of debenture holders as they apply in relation to the rectification of the register of members. 13. In the petition, the petitioners came out with a contention that they could not detect the fraud earlier, and hence there was a delay. However, from one Criminal Complaint which came to be filed by one Ashim Roy of the Trade Union, they came to know about the same somewhere in the month of May 1987. Notice was, therefore, given on June 14, 1987 and as the person did not act in accordance with law despite the notice, the petition was required to be filed interalia praying for rectification of the share registers of the Company and also for deletion of the name of Bipinbhai Lallubhai Mehta and other. In the circumstances, the petitioners have prayed that the delay may be excused. 14. The Secretary of the Company pointed out by filing an affidavit that the petition is barred by law of limitation, delay and latches, acquiescence and waiver. The petition came to be filed after more than five years of the transaction in question. It is required to be noted that the complaint was filed on 18th June 1987, but before that the petitioner No.1 gave a notice to the Company dated 17.6.1987 which is produced at Annexure 'D'. Thus, on behalf of the respondents, it has been pointed out in the affidavit that the statement made in the petition that the petitioners came to know about the same only after the complaint was filed in May 1987 is not correct, and in fact, it is contended that at the behest of the petitioners, the said complaint was filed. By filing an affidavit, it is further pointed out that the petitioners were aware about the transaction in question right from November 1982. Shri Vadilal Lallubhai Mehta, father of respondents No. 2 and 12, was the Chairman and Managing Director of the respondent No. 1 Company. Suhasbhai Vadilal Mehta was the Director of the respondent No. 1 Company and petitioner No. 1 Ramesh Desai was the Administrative Manager of the Company. It is pointed out by the learned Judge in the order that the alleged transaction had taken place on 12, 13, and 25 November 1982. As a matter of fact, on 18.11.92, Suhasbhai Vadilal Mehta had resigned as Managing Director, but had continued thereafter as the Director of the Company. Shri Bipinbhai Lallubhai Mehta was inducted as a Director of the Company and the Managing Director in the meeting of the Board of Directors where both Vadilal Lallubhai Mehta and Suhasbhai Vadilal Mehta were present. Vadilal Lallubhai Mehta and Suhasbhai Vadilal Mehta had resigned from their respective posts on 7th Sept. 1983 and on the same date, the petitioner No.1, R.B. Desai also resigned from the Company. Keeping in mind these dates, the learned Company Judge has pointed out that everything was known to and within the knowledge of the petitioners and especially petitioner No.1, who was holding not only an important position in the Company but was also Power of Attorney holder, and in fact one cheque was signed by him. Thus, even if it is taken for granted that the amount was utilized, it was within the knowledge of the petitioner No.1. It is contended in the affidavit by the affected respondents that the amount has not been utilized for the purpose of purchasing the shares. Shares have not been transferred at that time or soon after the amount was taken from Santosh Starch and paid to C. Doctor & Company which was a shareholder. There is nothing on record to show that the share held by C Doctor & Company were transferred on the alleged transaction. Rectification of Register is a main question. When the shares stand in the name of C. Doctor & Company there is no question of rectification. 15. It was contended before the learned Company Judge that the petition is barred by limitation. The petitioner and the Respondent No.12, supporting each other, took the plea that the petition is not barred by limitation. A preliminary issue was raised regarding the limitation and the Court decided the matter. However, in the grounds of appeal, particularly in paragraphs 2.10 and 2.11, the appellant contended that the Court was addressed only on the question whether the question of limitation should be heard as a preliminary issue or not. In paragraph 2.11, it is specifically contended that the learned Company Judge could have at the highest framed the issue regarding limitation as preliminary question, but could not have disposed off the company petition as barred by limitation. In the grounds, a contention is also raised that the main Company Petition could not have been disposed of in such a manner. At the highest, learned Company Judge could have only framed the issue regarding limitation as a preliminary issue. 16. At the time of hearing of this Appeal, the learned counsel for the appellant did not press paragraphs 2.10 and 2.11 and thus, we are only required to decide whether the learned Company Judge was right in rejecting the Company Petition on the ground that it was barred by limitation. At this juncture, it would be relevant to refer to the following order passed by the Division Bench in the matter on 23.4.1996 while admitting the Appeal: "Admit. Learned advocate Mr. Nanavati has drawn our attention to para 2.10 and 2.11 of the appeal and has