Ramesh B. Desai And Others vs Bipin Vadilal Mehta And Others

3. The Company Petition No. 35 of 1988 was filed by Ramesh B. Desai and 8 others, who are shareholders of the Company, which is a public limited company. The allegations made in the company petition are as follows. Vadilal Lallubhai Mehta was the Chairman and Managing Director of the Company. He had two sons, viz., Bipin Vadilal Mehta and Suhas Vadilal Mehta (for short "Bipinbhai and Suhasbhai") and four daughters, who are all married. The family owned several properties. Besides shares in the Company, there was HUF Trust and other private limited companies under control of the said family. A Memorandum of Understanding (MOU) was executed by the family members on 30.1.1982 and the main object thereof was to entrust the management of some of the companies to Bipinbhai and some to Suhasbhai. It was decided that the management of M/s. Sayaji Industries Ltd. and M/s. C.V. Mehta Private Ltd. was to be entrusted to Bipinbhai while other companies such as M/s. Industrial Machinery Manufacturers Pvt. Ltd., M/s. C. Doctor and Company Pvt. Ltd., M/s. Mehta Machinery Manufacturers Pvt. Ltd. and M/s. Oriental Corporation Pvt. Ltd., were to remain with Suhasbhai. Clause 10 of MOU provided that Bipinbhai should deposit Rs.40 lacs and odd with M/s. C.V. Mehta Pvt. Ltd. in order that the latter could pay back the debts which it owed to Suhasbhai and his family members and family concerns. This amount of Rs.40 lacs and odd was the consideration for getting the controlling interest and management of M/s. Sayaji Industries Ltd. and M/s. C.V. Mehta Pvt. Ltd. Though under the terms of the MOU the said amount of Rs.40 lacs and odd was to be paid by Bipinbhai immediately, but he could not do so as he could not arrange the necessary funds. The result of non-payment by Bipinbhai was that he could not get the control and management of M/s. Sayaji Industries Ltd. and M/s. C.V. Mehta Pvt. Ltd. in January, 1982 as was contemplated by the MOU dated 30.1.1982. A modified MOU was accordingly executed on 13.11.1982 whereunder it was provided that Bipinbhai would pay the entire amount in two instalments, one in the sum of Rs.20 lacs pursuant to which the control and management of M/s. Sayaji Industries Ltd. were to be transferred to him by making the transfer of 13,000 shares of the Company in his name and in the names of his family members. The balance amount of Rs.19 lacs and odd was to be deposited by Bipinbhai with M/s. C.V. Mehta Pvt. Ltd. within a period of 24 months from the date of the agreement. This was necessary as M/s. C.V. Mehta Pvt. Ltd. held 9,000 equity shares of M/s. Sayaji Industries Ltd. Acquisition and control of M/s. C.V. Mehta Pvt. Ltd. and thereby 9,000 equity shares of M/s. Sayaji Industries Ltd. would have been possible only after payment of the said amount. It is further averred in the company petition that Bipinbhai was not in a position to pay or deposit Rs.20 lacs without which he could not have got the controlling interest in M/s. Sayaji Industries Ltd. He, therefore, devised a scheme whereunder the Company, viz., M/s. Sayaji Industries Ltd. paid an amount of Rs.20 lacs by way of advance to M/s. Santosh Starch Products by means of three cheques of Rs.10 lacs and Rs.5 lacs (both dated 13.11.1982) and third cheque of Rs.5 lacs dated 25.11.1982, all drawn on Punjab National Bank, Maskati Market Branch, Ahmedabad. The said M/s. Santosh Starch Products paid an amount of Rs.20 lacs to Bipinbhai and his family by means of three cheques of Rs.7 lacs, 6 lacs and 7 lacs all dated 13.11.1982 and drawn on the same branch of Punjab National Bank. The aforesaid amount paid through cheques was deposited in the personal account of Bipinbhai and his family members on the same day. This whole amount of Rs.20 lacs was transferred to M/s. C.V. Mehta Pvt. Ltd. in order to get control of the company M/s. Sayaji Industries Ltd. as per the MOU. The specific case of the petitioners in the company petition is that the funds of the company amounting to Rs.20 lacs were utilized by Bipinbhai in paying the said amount to M/s. C.V. Mehta Pvt. Ltd. for the purpose of acquiring the shares of M/s. Sayaji Industries Ltd. and thereby he became the director of the said company. This camouflage was adopted only to ensure that the violation of Section 77 of the Companies Act, which provision imposes a restriction on a company to buy its own shares unless the consequent reduction of capital is effected and sanctioned in pursuance of Section 100 to 104 or Section 402 of the Companies Act, would not be known. The aforesaid devise of payment of advance by the Company to M/s. Santosh Starch Products also violated Article 20 of the Articles of Association. Bipinbhai had thus devised a scheme whereunder funds of the company were directly used for the purpose of acquiring shares of the company and also that of M/s. C.V. Mehta Pvt. Ltd., which in turn was holding substantial shares of M/s. Sayaji Industries Ltd. The company had no knowledge of the devise adopted by Bipinbhai nor the company had authorized these transactions by passing any resolution of the Board and the Company never rectified the action of Bipinbhai. Bipinbhai was inducted in the management of the company on 18.11.1982 and payment of cheque by the Company to M/s. Santosh Starch Products on 25.11.1982 represented act of the Company itself and clearly showed that the funds of the company were being utilized in order to benefit Bipinbhai and his family members. The transactions whereunder shares of M/s. C.V. Mehta Pvt. Ltd. were acquired related to the period when Bipinbhai had been inducted in the management of the Company. The manner of acquiring the control of M/s. C.V. Mehta Pvt. Ltd. was violative of Section 77(2) of the Companies Act as it was only a devise for the ultimate control of shares of M/s. Sayaji Industries Ltd. It was also averred in the petition that Article 20 of the Articles of Association of the Company stipulates that "none of the funds of the company shall be employed in the purchase of shares of the company". The transaction devised by Bipinbhai in order to purchase the shares and get control of the company is also contrary to Article 20 of the Articles of Association of the Company and, therefore, it is void. It was further pleaded in the company petition that the petitioners could not detect the fraud earlier. They came to know about the same in detail in the month of May, 1987 when a criminal complaint was filed by some office bearers of the union of the Company before a criminal court at Narol. After making enquiries and collecting information the petitioner No. 1 gave a notice dated 14.6.1987 to the respondents to make rectification in the register of the Company. It was accordingly prayed in the Company Petition that directions may be issued to the respondents to rectify the register of the Company in accordance with Section 155 of the Companies Act and the names of Bipinbhai Vadilal Mehta, Smt. Nirmaiben Bipinbhai Mehta and Priyambhai Bipinbhai Mehta may be deleted from the register of the Company.

6. As mentioned earlier the learned Company Judge allowed the Company Application No. 113 of 1995 and dismissed the Company Petition as being barred by law of limitation. The appellants preferred an appeal against the decision of the learned Company Judge before the Division Bench of the High Court but the same was also dismissed on 10.3.2000.

This principle would be equally applicable to a Company Petition. Therefore, unless it becomes apparent from the reading of the Company Petition that the same is barred by limitation the petition cannot be rejected under Order VII Rule 11(d) CPC.

27. Mr. Soli Sorabjee has also submitted that the continuance of the name of Bipinbhai in the register of the Company was a continuing wrong and, therefore, the period of limitation would begin to run at every moment of time during which the wrong name of Bipinbhai continues to remain in the register. Learned counsel has submitted that in such a situation the principles enshrined in Section 22of the Limitation Act will apply and the Company Petition cannot be held to be barred by limitation and the view to the contrary taken by the High Court is erroneous in law. Since we have held above that the Company Petition could not be dismissed on a preliminary issue, namely, as being barred by limitation as the petitioners had not been given opportunity to lead evidence and the finding of the High Court has been reversed on that point, we do not consider it appropriate to examine the aforesaid contention on merits. However, as the High Court has to hear the Company Petition again, the findings recorded by the High Court on the point of continuing wrong and condonation of delay are set aside.

28. The appeal accordingly succeeds and is hereby allowed with costs throughout. The judgment and order dated 12.3.96 passed by learned Company Judge and that of the Division Bench dated 10.3.2000 are set aside. The High Court shall decide the Company Petition afresh in accordance with law.

29. It is made clear that any observation made in this order is only for the limited purpose of deciding this appeal and shall not be construed as an expression of opinion on the merits of the case.