THE HON’BLE SRI JUSTICE B.SESHASAYANA REDDY Company Appeal Nos. 33 of 2008, 19 of 2009 & 21 of 2009 (Dated : 16-08-2011) Between: Company Appeal No.33 of 2008 M/s. Bharat Circuits Pvt. Ltd. and another …Appellants v. Nukala Nageshwar Rao and others …Respondents THE HON’BLE SRI JUSTICE B.SESHASAYANA REDDY Company Appeal Nos. 33 of 2008, 19 of 2009 & 21 of 2009 COMMON JUDGMENT:- Company Appeal No.33 of 2008 is directed against the order dated 04.12.2008 passed in Company Petition No.63 of 2006. Company Appeal No.19 of 2009 is directed against the order dated 31.8.2009 passed in Company Application Nos.16 and 17 of 2009 in Company Petition No.63 of 2006. Company Appeal No.21 of 2009 is directed against the order dated 31.8.2009 passed in Company Application No.12 of 2009 in Company Petition No.63 of 2006, on the file of Company Law Board, Additional Principal Bench, at Chennai. 2(a). The Company Law Board, Chennai (for brevity, “CLB”) disposed of Company Petition No.63 of 2006 directing the respondents therein viz., M/s. Bharat Circuits Private Limited, T.Nagarjuna Rao, K.Krishnaiah and K.Subramanyam to pay a sum of Rs.57.50 lakhs together with simple interest at 8% per annum from 15.02.2008 till the date of payment to the petitioner- Nukala Nageshwara Rao. The petitioner in C.P.No.63 of 2006 filed C.A.No.12 of 2009 for enforcement of the order dated 04.12.2008 passed in C.P.No.63 of 2006 under Section 634 A of the Companies Act, 1956 (hereinafter referred to as “the Act”) and whereas the respondents 1 and 2 (M/s. Bharat Circuits Private Ltd. and T.Nagarjuna Rao) in C.P.No.63 of 2006 filed C.A.No.17 of 2009 seeking review of the order dated 04.12.2008 passed in C.P.No.63 of 2006. Since there was delay in filing the review application, the respondents in C.P.63 of 2006 filed C.A.No.16 of 2009 to condone the delay of 130 days. 2(b) Background facts, in a nutshell, leading to filing of these appeals by M/s. Bharat Circuits Pvt. Ltd and T.Nagarjuna Rao are :- M/s. Bharat Circuits Pvt. Ltd., was incorporated under the provisions of the Act on 1st March, 2006 in the State of Andhra Pradesh as a private limited company under registration No.01-49358 of 2005-2006. The authorized share capital of the company is Rs.50 lakhs divided into 5 lakh equity shares of Rs.10/- each. The issued, subscribed and paid up capital of the respondent company is Rs.1,20,000/- divided into 12,000 equity shares of Rs.10/- each. The company was engaged in the manufacture, sale, export and import of electronic components, gadgets, electrical and electro mechanical equipments. Nukala Nageshwar Rao, T.Nagarjuna Rao and K.Krishnaiah are the directors of the company. Each of them has 4000 equity shares of Rs.10/- each, in the company. The company purchased the land in Survey No.282/1, 282/7 admeasuring Ac.3-00 gts., together with an RCC construction of 1333 Sq. meters situated in Kadalur Village, Tada Mandal, Nellore District for Rs.41.5 lakhs in the auction held by Andhra Pradesh State Financial Corporation (for brevity, `APSFC’). The company also proposed to purchase machinery belonging to M/s. Hitech Circuit Products, Bangalore, for a sum of Rs.2,62,30,000/- and paid a part payment of Rs.32 lakhs on 25.8.2006. N.Suresh Babu, who is son of Nukala Nageshwar Rao, one of the directors of the company, came to be inducted on the Board of Directors of the Company. Even before commissioning of the project, disputes cropped up between the shareholders viz.,:- Nukala Nageshwar Rao on the one side, and T.Nagarjuna Rao, K.Krishnaiah and K.Subaramanyam on the other side. According to Nukala Nageshwar Rao, induction of K.Subramanyam on the Board of Directors and allotment of shares to him is only to make him a minority shareholder. It is also the case of Nageshwar Rao that his son N.Suresh Babu invested Rs.42.50 lakhs with legitimate expectation of his group continuing to participate in the management of the affairs of the company. In the Board meeting held on 01.10.2006, resolution was passed allotting shares to N.Suresh Babu. Instead of giving effect to the resolution, T.Nagarjuna Rao, K.Krishnaiah and K.Subramnyam manipulated the records and got in to existence document purporting allotment of 2,40,000 shares to T.Nagarjuna Rao and K.Subramanyam. The allotment of 2,40,000 shares each to T.Nagarjuna Rao and K.Subramanyam is contrary to the earlier Board Resolution. An Extraordinary General Meeting came to be held on 30.10.2006 in which a resolution came to be passed removing Nukala Nageshwar Rao and N.Suresh Babu from the office of Director. Form No.32 also came to be submitted to the Registrar of Companies, Hyderabad. According to N.Nageshwar Rao, the said resolution dated 30.10.2006 is passed with mala fide intentions to eliminate him and his son and to gain control over the company. Nukala Nageshwar Rao filed Company Petition No.63 of 2006 under Sections 397 and 398 of the Act against the company, T.Nagarjuna Rao, K.Krishnaiah and K.Subramanyam, seeking the following reliefs:- “ 1) To set aside the shares allotted on 18.8.2006 or any subsequent dates in favour of the respondent No.2 to 4 as illegal, void ab initio and not binding on the petitioners and 1st respondent. 2) Declare the alleged appointment of 4th respondent as director on 30.10.2006 and subsequent dates in the 1st respondent company is in violation of the provisions of Companies Act, illegal and void. 3) To declare that the 2nd respondent is not a fit and proper person to manage the affairs of the 1st respondent company. 4) And to pass such other order or orders as this Hon’ble Bench may deem fit and proper in the circumstances of the case” 3. For better understanding of the grievance of N.Nageshwar Rao, I deem it appropriate to refer paras 14 to 16 of the affidavit filed in support of Company Petition No.63 of 2006, which read thus:- “14) It is submitted that the respondents 2 to 4 with their malafide intentions proceeded with the EGM on 30.10.2006 and purportedly passed resolutions removing the petitioner and his son as Directors. The said fact was informed to the petitioners by the letter addressed by the respondent. Copies of the letter addressed to the petitioner and extract of the purported minutes of the EGM held on 30.10.2006 are filed Annexures A-14 and A-15. It is submitted that the petitioners through practicing company Secretary viz., M/s.P.S.Rao and Associates got the records of the 1st respondent company inspected at the office of Roc, Hyderabad. Upon inspection it is seen that the 2nd respondent has filed Form No.32 with the Registrar of Companies, Hyderabad, wherein it is shown that the petitioner and his son are removed as directors and that the 4th respondent is nominated as Director of the 1st respondent company. A copy of Form 32 purportedly filed by the 2nd respondent is filed Annexure A- 18, A-19 and A20. It is submitted that the above acts clearly show that the respondents 2 to 4 developed malafide intentions after the petitioner by himself and his group having invested more than Rs.42.50 lakhs and also after registration of land purchased in the auction held by APSFC in the name of the 1st respondent company and also after purchase of necessary machinery from Bhopal for the 1st respondent company. This has been done with a malafide intention to gain control over the company by mismanaging and oppressing the members of the company. 15) It is submitted that the respondents 2 to 4 after excluding the petitioner and his group by their illegal acts from the management of the 1st respondent company are taking steps to avail loans by mortgaging and also by selling the immovable properties of the 1st respondent company by falsely representing that amounts are required for purchasing machinery etc. The fact remains that machinery has already been purchased and if the respondents 2 to 4 are permitted to deal with the properties of the 1st respondent company the same will effect the interest of the members in as much as the respondents 2 to 4 are along laundering the money belonging to the respondent company. 16) The petitioner submit that, from the above, the acts done by the 4th respondent has usurped the office of director and has no authority at all. Further, instead of issuing share certificates in favour of the petitioner and his group in proportion to the investment by them of Rs.42.50 lakhs the shareholding of the petitioner and his group has been seriously reduced, jeopardized by a course of conduct of the 2nd, 3rd and 4th respondent herein. Further, the above facts also show the acts on part of the 2nd and 3rd respondent are oppressive in nature in conducting Board meeting and manipulation of minutes. Further, the continuous act done by the 2nd and the 3rd respondent in calling Board meeting without complying with requirements of section 286 and giving sufficient time is oppressive to its members. Further, the acts of the 2nd and 3rd respondent in issuing and allotting further shares to the 2nd respondent and 4th respondent who is the brother of the 3rd respondent is only for the purpose of ousting the petitioner and converting the petitioner’s shareholding into a minority, which is act of grave oppression The removal of the petitioner as directors and cooption of 4th respondent as director is to exclude the petitioner and his group from the management of the affairs of the company. In the above facts and circumstances, the 1st respondent company being a quasi partnership, the issuance of shares in exclusion of the other group and appointment of directors without knowledge and/or participation of other group amounts to an act of oppression and mismanagement”. 4. The respondents in C.P.No.63 of 2006 filed counter resisting the prayer sought for by the petitioner. It is stated in the counter that by the time of purchasing the landed property from APSFC, the company was not incorporated. Therefore, the land came to be purchased in the name of M/s. Sri Sai Vamshi Graphics and after incorporation of the company on 1.3.2006, sale deed came to be obtained in the name of the company. The Board of Directors of the company in a duly convened board meeting held on 10.5.2006 appointed K.Subramanyam as Director of the company. N.Nageshwar Rao insisted of his son N.Suresh Babu being appointed as Director of the company for the purpose of safety of his investment. N.Nageshwar Rao opted to go out from the Board of Directors consequent on his son being brought on the Board of Directors. Keeping in view of the assurance of Nukala Nageshwar Rao; his son-N.Suresh Babu came to be appointed as a Director of the Company. By the time of N.Suresh Babu being taken as Director of the company, he was not holding any shares in the company. The Company entered into an agreement on 01.6.2006 with M/s.Hitech Circuit Products for purchase of certain machinery located at Bangalore for Rs.2,62,30,000/- and paid an advance of Rs.32 lakhs on 25.8.2006. When the company approached various financial institutions to raise funds for purchasing machinery, N.Nageshwar Rao and his son N.Suresh put lot of obstacles and thereby, the financial institutions resiled of their commitment. Because of the attitude of N.Nageshwar Rao and his son N.Suresh Babu, the Board of Directors passed resolution removing them from the office of director by following due procedure contemplated under the Act. Nukala Nageshwar Rao attended the Board meeting on 18.8.2006 and he is well aware of the increase in the paid up capital of the company by further allotment of shares. The respondents never indulged in any act of oppression and mismanagement of the company. 5. The proceedings before the CLB went on for quite some time. The CLB explored the possibilities of amicable settlement in the interest of the company. At the hearing held on 15.2.2008, Nukala Nageshwar Rao agreed to accept Rs.57.50 lakhs towards final settlement of his claim in the company. However, the parties could not reach any amicable settlement. The CLB exercising powers under Section 402 of the Act, directed Nukala Nageshwar Rao to exit from the company on receiving a total sum of Rs.57.50 lakhs together with simple interest at 8% p.a. from 15.2.2008 till the date of payment by giving schedule for the payment. The relevant portion of the order dated 04.12.2008 passed in Company Petition No.63 of 2006 reads as hereunder:- “ The Company petition came up for hearing from time to time, in the course of which, it was found that (i) the Company closely held among the contesting parties is yet to commence its operations; (ii) the parties lacking mutual trust and confidence, are at loggerheads; (iii) the existing animosity and acrimony among the parties would leave adverse impact in the paramount interest of the Company as well as the smooth management of the affairs of the Company; and (iv) any order either declining or granting the reliefs as urged can never protect the interest of the Company and its members. In view of the foregoing situation and in the light of the jurisdiction of this Board under Sections 397 and 398 read with Section 402 of the Act to direct a shareholder to sell his share to the other in the interest of the Company, even when no actual oppression on the part of the respondents has been proved, I suggested to the parties to explore the possibility of any amicable settlement of the disputes, which was well received, leading to a consensus, after several rounds of discussions among the parties. Accordingly, the petitioner agreed as early as on 15.02.2008 to accept a lump sum of Rs.57.50 lakhs towards value of his 4,000 equity shares in the Company to be paid forthwith by the respondents, while the latter did not come forward to settle the aforesaid sum at one stroke and ultimately in July 2008 agreed to pay an initial sum of Rs.5 lakhs on or before 20.8.2008 and the balance of Rs.52.50 lakhs in 8 equal monthly instalments of Rs.6.56 lakhs, commencing from 15th September 2008 onwards, as borne by the records before the Bench. The bone of contention among the parties is that the petitioner desired to have the whole of Rs.57.50 lakhs for his shares, whereas the respondents are unable to meet the petitioner’s demand forthwith, but over a period of time. The Company admittedly has not started its commercial production. Nevertheless, the Company is bound to service Bank debts, running into several lakhs of rupees and incur substantial amounts to operationalize the factory, owned by the Company, justifying the prayer of the respondents, to settle the agreed amount of Rs.57.50 in instalments, but at the same time, the petitioner is not to suffer any prejudices on account of staggered payments and, therefore, he must appropriately be compensated by way of interest on the agreed amount, to meet the ends of justice. According to July 2008 proposal of the respondents, they ought to have paid to the petitioner an aggregate sum of Rs.18.12 lakhs, during the period between 20.8.2008 and 15.10.2008 and the next instalment of Rs.6.56 lakhs falls due on 15.11.2008. The entire amount would remain paid by April 2009. In these circumstances and with a view to safeguard the interests of the petitioner as well as the respondents, it is hereby directed that the respondents shall pay to the petitioner a total sum of Rs.57.50 lakhs together with simple interest at 8% from 15.02.2008 till date of payment in full by way of demand draft(s) strictly in terms of the following schedule:- 1. Rs.20 lakhs plus interest by 30.11.2008 2. Rs.7.50 lakhs plus interest on the outstanding balance by 31.12.2008. 3. Rs.7.50 lakhs plus interest on the outstanding balance by 31.01.2009. 4. Rs.7.50 lakhs plus interest on the outstanding balance by 28.02.2009. 5. Rs.7.50 lakhs plus interest on the outstanding balance by 31.03.2009. 6. Rs.7.50 lakhs plus interest on the outstanding balance by 30.04.2009. The assets of the Company, by virtue of this order, shall stand charged in favour of the petitioner for the amount payable by the respondents, however, subservient to the existing charges, if any. The respondents shall not sell the fixed assets, plant and machinery belonging to the Company till settlement of the entire amount, without leave of the Bench. The petitioner is at liberty to enforce the order, in the event of any default, on the part of the respondents in the manner, as envisaged in Section 634A of the Act. With the payment in entirety by the respondents as per the schedule hereabove, the petitioner shall forward within seven days thereafter, to the former the original share certificates in relation to his 4,000 equity shares of the Company together with duly signed blank instrument of transfer without fail, upon which the petitioner has no interest whatsoever in the affairs of the Company. 4. With the above directions, the Company petition stands disposed of. In view of this, all the interim orders are vacated. No order as to costs. Liberty to apply, in case of any difficulty in implementation of the order”. 6. Assailing the order passed in C.P.No.63 of 2006, M/s. Bharat Circuits Pvt. Ltd and T.Nagarjuna Rao filed Company Appeal No.33 of 2008. Pending appeal, Nukala Nageshwar Rao filed C.A.No.12 of 2009 before CLB for enforcement of the order dated 04.12.2008 passed in C.P.No.63 of 2006 and whereas the company and T.Nagarjuna Rao filed C.A.No.17 of 2- 009 for review of the order along with delay condonation petition. The delay condonation petition was taken on file as C.A.No.16 of 2009. All the three applications came to be disposed of by the CLB by a common order dated 31.8.2009. The review petition came to be dismissed on the ground that CLB is not empowered to review it’s order in the absence of specific provision in the Company Law Board Regulations. 7. Since the survival of Company Appeal Nos.19 and 21 of 2009 depends on the result in Company Appeal No.33 of 2008, all the appeals are heard together and are being disposed of by way of this common judgment. 8. Notice to the respondents in Company Appeal No.33 of 2008 came to be ordered on 18.12.2008. The 1st respondent entered appearance through a counsel and filed counter. An interim stay of execution proceedings before the Principal District Judge, Nellore, came to be passed on 04.02.2010, subject to the appellants depositing an amount of Rs.10,00,000/- with two weeks, in Company Application No. 2038 of 2009. Subsequently, the time for payment of Rs.10,00,000/- has been extended by two more weeks, vide orders passed in C.A.No.226 of 2010, dated 16.4.2010. 9. Heard Sri V.Hari Haran, learned counsel appearing for the appellants and Sri C.Kodandaram, learned Senior Counsel on behalf of N.V.Shravan Kumar, learned counsel appearing for the 1st respondent. 10. Learned counsel appearing for the appellants submits that the CLB committed serious error in directing the appellants to deposit Rs.57.50 lakhs without recording a finding as to oppression or mismanagement as alleged by Nukala Nageshwar Rao. A further submission has been made that the figure arrived at by the CLB is without there being any material and therefore, the order passed by the CLB being based on no material is liable to be set aside. The Board has to satisfy that there is an oppression before passing any order exercising power under Section 397 and so also as to mismanagement before passing an order under Section 398. The language of the sections 397 and 398 is that the power of the Court under both the sections is confined only in making an order in the event of the aggrieved party satisfy the essential ingredients of oppression and mismanagement. He would also contend that it is the 1st respondent and his son who resorted to filing more than 12 complaints before various authorities, viz., Police, RBI, ROC, Pollution Control Board, Central Excise Department, Sales Tax Department, Director of Factories etcetera and prevented the company being operational. When such is their conduct, the CLB ought not have entertained the petition filed by N.Nageswara Rao under Sections 397 and 398 of the Act and refrain from exercising its powers under Section 402 of the Act. By referring the dates of filing the company petition by Nukala Nageshwar Rao, learned counsel contended that the company was incorporated in the month of March 2006 and whereas the company petition was filed by Nageshwar Rao in the month of June 2006 alleging oppression and mismanagement. Learned counsel would further contend that the communications between the lawyer and the client is not part of the record and there being no settlement reported before the CLB, the order dated 04.12.2008 passed by the CLB cannot be sustained. 11. Sri C.Kodandaram, learned senior counsel appearing for the 1st respondent (N.Nageshwar Rao) submits that no question of law was involved in these company appeals and therefore, they do not deserve for admission. A further submission has been made that the order impugned in Company Appeal 33 of 2008 is virtually a consent order and no appeal lies against a consent order in which case, C.A.33 of 2008 is liable to be dismissed at the threshold. It is also contended by the learned senior counsel that under Section 10F of the Act, an appeal lies against the order on any question of law arising out of the order passed by the CLB. A question of law can be said to arise out of the order of the CLB only if is dealt with by the CLB or is raised before it though not decided by the CLB and a question of law not raised before the CLB and not dealt with by it in its order cannot be said to arise out of its order, even if, on the facts of the case stated in the order, the question fairly arises. In other words, when a question of law was neither raised before the CLB nor considered by it, it would not be a question arising out of its order notwithstanding that it might arise on the finding given by it. In support of his submissions, reliance has been placed on the following decisions:- 1) Commissioner of Income-Tax, Bombay v. Scindia Steam Navigation Co. Ltd.[1] 2) Sir Chunilal V.Mehta and sons Ltd. v. Century Spinning and Manufacturing Co. Ltd.[2] 3) C.Sri Hari Rao v. Sri Ramdas Motor Transport [3] 4) 1.Caparo India Ltd. (U.K), 2. Machino Plastics Ltd. v. Caparo Maruti Ltd.[4] 5) Dale & Carrington Invt. (P) Ltd. v. P.K.Prathapan and Others[5] 6) 1.Trackparts of India Limited and others 2. Smt. Radhika Bhargava and others v. K.N.Bhargava and others[6] 7) V.S.Krishnan v. WestFort Hi-tech Hospital Ltd.[7] 8) Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holdings Ltd.[8] 9) Chand Mall Pincha and others v. Hathimal Pincha and others[9] 10) Kuki Leather Private Ltd. v. T.N.K.Govindaraju Chettiar and Co.[10] 12. Before dwelling deep into the contentions of the parties, it is trite to note the admitted facts, and they are:- Ø The Company was incorporated on 1st March 2006. Ø There were only three shareholders as on the date of incorporation of the company. Ø The authorized share capital of the company was Rs.50 lakhs divided into 5 lakh equity shares of Rs.10/- each. Ø The issued, subscribed and paid up capital of the company is Rs.1,20,000/- divided into 12,000 equity shares of Rs.10/- each. Ø The equity shareholders are T.Nagarjuna Rao (4000 equity shares), Nukala Nageshwar Rao (4000 equity shares), K.Krishnaiah (4000 equity shares) [ total number of equity shares : 12000] Ø The disputes between the shareholders commenced within three months of the incorporation of the company, Nukala Nageshwar Rao on one side and T.Nagarjuna Rao and K.Krishnaiah on the other side. Ø Nukala Nageshwar Rao and N.Suresh sent petitions against the Company to various authorities and thereby, they prevented the company from raising funds from financial institutions. Ø Nukala Nageshwar Rao and his son invested about Rs.42 lakhs on various dates from 28.2.2006 to 15.6.2006. Ø Nukala Nageshwar Rao filed C.P.No.63 of 2006 under Section 397 and 398 complaining oppression and mismanagement of the affairs of