MANU/CL/0024/2007

Equivalent Citation: [2007]141C ompC as236(C LB), (2008)1C ompLJ458(C LB)

BEFORE THE COMPANY LAW BOARD

PRINCIAL BENCH, NEW DELHI
Decided On: 15.06.2007
Appellants: Shri Ramesh Chander Bammi and Mrs. Meena Bammi
Vs.
Respondent: Pindi Road Links Pvt. Ltd., Shri C.P. Bammi and Shri H.L. Bammi
Hon'ble Judges/Coram:
Vimla Yadav, Member
ORDER
Vimla Yadav, Member
1 . In this order I am considering the Company Petition No. 32 of 2002 filed by
Ramesh Chander Bammi and Mrs. Meena Bammi against the respondents, M/s Pindi
Roadlinks Pvt. Ltd. The CP has been filed under Sections 397 and 398 of the
Companies Act, 1956 (hereinafter referred to as 'the Act'). alleging certain acts of
oppression and mismanagement in the affairs of the Respondent company.
2. The undisputed facts of the case are: The respondent company, namely, M/s Pindi
Road Links Ltd. was incorporated on 25.10.1983 with its registered office at B-116,
Ashok Vihar, Phase-I, Delhi-52. The authorised share capital was Rs. 15,00,000
comprising of 15000 equity shares of Rs. 100/- each. The paid up capital of the
company was Rs. 15,00,000/-. The main objects of the company are to carry on the
business of transport of passengers, goods and animals by means of motor crafts,
motor buses, lorries, motor cycles, motor rickshaws, tempos, trucks, tractors,
scooters, ships, aeroplane, helicopters, trams, railways, carriers and other vehicles
whether propelled or moved by electricity, petrol, vapour gas, diesel oil, oil or
otherwise and to carry on the business of all other modes of transport.
3 . Shri J.C. Mahindro, Counsel for the petitioners pointed out that the respondents
have tried to mislead the Hon'ble Board by trying to confuse the provisions of Section
397 and 398 of the Act. It was argued that the case set up by the petitioners is
clearly showing that the respondents had in a manner oppressive to the petitioners as
well as the public at large, conducted the business of the respondent No. 1 in a
manner prejudicial to their interest. It was pointed out that the petitioners hold 48%
as against 33.9% of the paid-up equity capital of the respondent company. A search
conducted of the documents file of R-1 company by one M/s Tilak Raj Associates,
Company Secretary revealed that the said company had given a certificate detailing
change in shareholding pattern in the R-1 company. The Respondents had hijacked
the business and funds of the respondents company to H.K. Goods Transport Pvt.
Ltd., which was a company floated by the R-2 with his wife and son as Director. The
list of the clients of the said H.K. Goods clearly shows that all the clients of the
respondent company were diverted to the said company. The acts of the R-2 have
brought about a material change. It was further argued that the respondents have
failed to appreciate the fact that the cases cited by them are clearly not applicable to
the instant matter as in the instant case the respondents had created M/s H.K. Goods
Transport Company Pvt. Ltd. to hijack the business of the Respondent company and

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 the said company was nothing else but the continuation of the R-1. That the
respondents have alleged that the business of the company stood closed since Nov.
1999 in view of letters having been written by the petitioners to various clients of the
respondent No. 1. Further, the respondents have also alleged that the sons of the
petitioner No. 1 started interfering with the said business or that they had nothing to
do with the company as they were neither its employees nor shareholders nor
directors. It was pointed out that the R-2 himself authorized one of the sons of the
petitioner, namely Charan Bammi, to operate the bank accounts in Faridabad. Both
sons of the petitioners namely Shri Charan Bammi and Shri Gaurav Bammi were
given salary for managing the affairs of the company which is reflected in the balance
sheet duly signed by the R-2 during the relevant period. Further, the story of the
petitioner having connived with his sons and indulging in criminal activities by
usurping the amounts realized from sale of trucks and a car of the company is also a
distortion of the correct facts. It was pointed out that the sale proceeds from the
trucks was deposited with the company.
4 . The counsel for the petitioner pointed out that the petitioner No. 1 was not a
signatory to the bank accounts and/or that all withdrawals as incorporated in Books
of Accounts duly verified were not signed by the petitioner No. 1. All the alleged
signatures of the P-1 in the books of accounts were forged by the respondent No. 2.
R-2 became dishonest and started making unwarranted cash withdrawals from the
bank. The respondent No. 2 had himself made cash withdrawal amounting to 95% of
the R-1's money himself in last nine months before the disputes arose. Further, it
was argued that the respondents' contention that the Division Bench has found
diversification of funds of the Respondents company to H.K. Goods Transport
Company Pvt. Ltd. be untrue is not correct. Admittedly an FIR has already been
registered and the mischief of the R-2 is apparent from the fact that he himself wrote
a letter to the SHO, Police Station Punjabi Bagh, wherein he had alleged that the
record was lying with his C.A. and would be presented by him. It is apparent from
the record that the goodwill and business of the R-1 has been transferred and
siphoned off by the R-2 and 3 by creating the aforesaid H.K. Goods Transport
Company Pvt. Ltd. just to oust the petitioners. It was further pointed out that during
the interregnum of signing the said MOU and the freezing of account the R-2
managed to withdraw funds of the R-1 company from its various bank accounts to
the tune of approximately Rs. 31.00 lac. My attention was drawn to the bank
statements of the R-1 company reflecting the said withdrawals during the relevant
time. It was contended that the respondents have also created false documents which
have not been admitted by the Petitioners and the P-1 did not verify or sign the
alleged payments reflected in the said documents. Reliance was placed on the
judgment reported in Kamal Kumar Dutta v. Ruby General Hospital Ltd. It was
reiterated that the P-1 was fraudulently shown as having vacated the office of
Director under Section 283(1)(g) of the Act and within seven days R-3 could not
have been inducted as director on 8.7.99 as from 1st July to 8th July there was only
one Director in the R-1 company.
5 . Shri Vineet Malhotra, Counsel for the respondents argued that a perusal of the
Sections 397 and 398 of the Act would show that a petition under Section 397 for
Oppression on under Section 398 for mis-management of the company is concerned,
the same are maintainable only in case if the affairs of the company are being
conducted in a manner prejudicial to public interest or perusal of the language used
in the said sections makes it absolutely clear that Sections 397 or 398 of the
Companies Act can only be attracted only if at the time and on the day of the filing of

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 the company petition the company is carrying on its functions and its doing business.
From the language used it is clear that Section 397 and 398 of the Companies Act is
not attracted where on the day of the filing of the company petition under Sections
397 and/or 398 of the Companies Act, the company is not doing any business. It was
argued that as far as the present petition is concerned, it is an admitted fact that the
company has not being doing any business of any kind whatsoever since November
1999 when the bank accounts of the company were frozen on the instructions of the
petitioner. Reliance was placed on the decision of the Hon'ble High Court of Delhi in
Suresh Kumar Sanghi v. Supreme Motors Ltd. and Ors. Vol. 54 Companies Cases
page 235 wherein it has been held as under:
In that very case, it was also observed that the action of the directors, if it is
illegal or invalid, may be challenged in a court of law by an appropriate
action. The learned Judge held that challenge to such an action was not
appropriate under S.397 or S.398 of the Companies Act. It was, of course,
held that under S.397 or S. 398, action of the directors could be challenged
if that action was oppressive to the minority shareholders or prejudicial to
the interests of the company. In Kalinga Tube's case [1965] 35 Comp. Case
351 also it was held by the Supreme Court that in order to constitute
oppression within the meaning of S.397, "there must be continuous acts on
the part of the majority shareholders, continuing up to the date of petition,
showing that the affairs of the company were being conducted in a manner
oppressive to some part of the members". From the aforesaid judgments, it
was argued that it clearly follows that (1) past acts which have come to an
end cannot be challenged under S. 397 of S. 398;(2) the relief under
Sections 397 and 398 would be available only if there are continuous acts of
oppression by the majority shareholders; (3) illegal acts committed by the
directors, unless they are oppressive on the minority shareholders, cannot be
challenged in a petition under S.397 of the Act. The instances of violation of
the provisions of the Companies Act, which were referred to by the learned
Counsel for the petitioner, cannot be complained of in the present
proceedings under S.397 or S. 398 of the Act.
Further, reliance was placed on the decision in Sheth Mohnlal Ganpatram v. Shri
Sayaji Jubilee Cotton and Jute Mills Co. Ltd. [1964] 34 Comp. Cas 777 (Guj), Justice
P.N. Bhagwati (as he then was) while dealing with the applicability of provisions of
Section 397 and 398 of the Companies Act held as under:
...the power of the court under both the sections is confined only to making
an order for the purpose of putting an end to oppressive or prejudicial
conduct and the court cannot make an order setting aside or interfering with
past and concluded transactions which are no longer continuing wrongs or
giving compensation to the company or the aggrieved shareholders in
respect of such transactions.
Furthermore, the counsel for the respondents relied upon the Division Bench of the
Hon'ble High Court of Delhi at New Delhi in Moti Films Private Ltd. and Anr. v. Harish
Bansal and Ors. as reported in MANU/DE/0244/1981 wherein it was held as under:
Some very fundamental questions are involved, in this case. It is good to
pose and examine these. The Company Court's jurisdiction has been
complicated by the introduction of Sections 397 and 398 of the Act. Before
these provisions appeared a shareholder placed in the position of the

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 petitioners in the winding up petition under consideration had only one
remedy and no other; that remedy was to apply for winding up of a Company
on 'just and equitable' clause. Now, there are two choices open: The second
order to bring to an end mis-management, oppression or other act relating to
the Company. The second choice was introduced with the purpose of
enabling the court to interfere in the internal management of the company
which it might not be able otherwise to do under the equitable rules relating
to internal management. The new power has obviously to be used only when
it is possible for the court to end internal disputes. When the court finds that
it does not seem to be suitable for resorting to those provisions, then it can
be said that the choice before the petitioner is to move a winding up petition
and no other alternative relief is available.
It was pointed out that it is an admitted case of the petitioner that the respondent
company is not doing any business since November, 1999. Therefore, it was argued
that the present petition under the provisions of Section 397 and 398 of the
Companies Act is not maintainable and deserves to be dismissed. Further, it was
pointed out that respondent No. 3 has already filed a petition for winding up of the
company which is an appropriate remedy. The said petition is pending consideration
before the Hon'ble High Court of Delhi at New Delhi.
6 . Further the counsel for the respondents pointed out that the petitioner is
responsible for the present state of affairs in as much as if is the petitioner who
wrote false, frivolous and defamatory letters to various clients of the respondent
company and also to the banks to get the bank accounts of respondent No. 1 frozen.
It was pointed out that in fact the business of respondent No. 1 company was
running smoothly until the sons of the petitioner No. 1 started interfering with the
said business. The sons of the petitioner had nothing to do with the company as they
were neither its employees nor shareholders nor directors, yet they interfered with
the business of the company. It was pointed out that the business of the company
came to a stand still some time in November 1999 immediately after the freezing of
bank accounts of the company as per instructions contained in the petitioner's letter
dated 18.11.1999 which was issued to the banks.
It was pointed out that in fact it is the petitioner who in connivance with his sons
who has been indulging in criminal activities and has even usurped the amounts
realized from illegal sale of trucks and a car of the company without informing
respondents there being a Board Resolution of the company. It was pointed out that
the petitioner had sold the trucks and cars belonging to the company and had
misappropriated the funds. The petitioner No. 1 himself was a signatory to the Bank
Accounts and all withdrawals were incorporated in Books of Accounts which were
duly verified and signed by the petitioner No. 1. It was denied that respondents have
hijacked the business and funds of Respondent No. 1 company to HK Goods
Transport (P) Ltd.
It was pointed out submitted that the said allegations have already been examined
and found untrue by a Division Bench of this Hon'ble court. That a Division Bench of
this Hon'ble court vide order dated 31.5.2001 held as under:
Crl. W.546/01 & Cr.M.461/01
After taking into consideration the totality of the circumstances and the fact
that as yet there is no document with the investigating officer to show that

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 the amount was diverted from M/s Pindi Road Links Pvt. Ltd. to M/s H.K.
Goods Transport (P) Ltd. an independent company established by the
petitioner. As per Mr. P.P. Malhotra, Sr. Advocate of the petitioner there
might be about Rs. 4.00 lacs lying in the freezed bank accounts of the
petitioner as of date. Future business of the petitioner will come to standstill
if the accounts are not defreezed.
Taking into consideration the facts of this case, we direct that the accounts of
M/s H.K. Goods Transport Pvt. Ltd. with the Standard Chartered Bank and the
Central Bank of India be defreezed. In future if the 10 is able to collect
cogent documentary evidence against petitioner then action in accordance
with law be taken.
With these observations the petition disposed of. Dasti.
Sd/- Usha Mehra, J.
Sd/- M.A. Khan, J.
30.5.2001.
7. The counsel for the respondents further pointed out that the Respondent company
was set up by respondent No. 3 and respondent No. 2 was a shareholder of the said
company together with his wife holding about 36% shares in the said company. It
was denied that that the appointment of the respondent No. 3 on the Board of the
Respondent Company as of 8.7.99 is null and void or of no effect in law. It was
pointed out that the same is in accordance with law.
8 . Shri Vineet Malhotra, Counsel for the respondents argued that the petitioner had
sought to make false and frivolous allegations against HK Goods, which was not a
party in this petition, and against respondent Nos. 2 & The petitioner had been
writing false and frivolous letters. In this regard the Hon'ble High Court of Delhi at
New Delhi by its judgment and order dated 28.2.2006 passing a decree wherein the
suit of the plaintiff was decreed and the Hon'ble High Court held as under:
A decree is, thus, passed in favour of the plaintiffs and against the
defendants restraining the defendants or any one on their behalf from writing
as defamatory letters in respect of the plaintiffs or from interfering with the
business of plaintiff No. 1 company except in accordance with law as per the
legal proceedings. The plaintiffs shall also be entitled to costs.
Decree sheet is drawn up accordingly.'
February 28,2006
It was pointed out that the Hon'ble High Court of Delhi has restrained the petitioner
from writing defamatory letters against respondent No. 2 and 3 also.
9 . Further, it was argued that the petitioner is making allegations in respect of
running of the partnership firm. It was pointed out that the dispute with regard to the
partnership are pending consideration in arbitration proceedings before Hon'ble Mr.
Justice J.B. Goel, Arbitrator. The petitioner has no locus standi in the present
proceeding to raise dispute with regard to the functioning of the partnership firm.
Therefore, it was contended that the petition filed is wrong, illegal, fraudulent,
mischievous and malafide.
10. The respondents have raised preliminary objections regarding the maintainability

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 of this company petition which was mentioned on 31.5.2002. It has been alleged that
impasse was created by the petitioner's letter dated 19.11.99 written to the R1's Bank
for freezing the account as there were inter se dispute between the shareholders. As
a result of the Bank not allowing any operation of any kind whatsoever in the bank
account the business of the respondent company came to a stand still. For filing any
petition under Sections 397 and 398 of the Act, it has been argued, that there must
be continuous acts on the part of the majority shareholders, continuing up to the date
of petition, showing that the affairs of the company were being conducted in a
manner oppressive to some part of the members and that "the affairs of the company
are being conducted in a manner prejudicial to public interest or in a manner
prejudicial to the interest of the company". The respondent company has not been
carrying on any business for more than 5 years and is also unable to pay the debts,
hence winding up petition has also been filed in January, 2005 by the R-3 i.e. the
father of the petitioner. There is no scope of commencing business as there are both
civil and criminal cases filed by the shareholders against each other. Even the Debt
Recovery Tribunal allowed the Bank's OA vide order dated 18.11.2004 directing the
defendants to pay a sum of Rs. 37,54,500.69 as well as interest @ 10% p.a. w.e.f
from 26.7.2000 within ten days, therefore, it is further argued that no useful purpose
would be served if the R-1 company is allowed to exist and is not wound up. The
petitioner has resorted to criminal activities, FIRs for which have been lodged. He has
usurped the amounts realised from sale of trucks and a car belonging to the R-1
company. According to the respondents Petitioner's allegation that the R-1's assets
and resources have been diverted to the present company namely H.K. Goods is not
true as has been held by the Division Bench of the High Court mentioning that there
is no document with the investigating officer to show that the amount was diverted
from Pindi Roadlinks Pvt. Ltd. to H.K. Goods Transport Pvt. Ltd. Petitioner's case is
that he has been ousted by the respondent, he has been removed as a director; R-3
has been appointed as a director; the respondents have made the R-1 a shell
company by diverting funds and assets and other resources including the Goodwill of
R-1 to H.K. Goods which is nothing but Pindi Roadlinks Pvt. Ltd. the R-1 has been
made defunct company on paper only, the winding up petition filed by the R-3 is only
to hoodwink the creditors, the respondents withdrew 95% of the amounts pertaining
to R-1 within nine months before the dispute arose, documents have been fabricated,
petitioner's signatures have been forged and hence prayer for directing R-2 and R-3
to pay back Rs. 1.97 crores into R-1's accounts and for appointment of a receiver to
take over the assets and get the true accounts rendered from 1.4.99 till date.
1 1 . On considering the pleadings and the documents filed therewith as well as
arguments of the parties, I do not find the preliminary objections tenable in this case.
It is true that the provisions of Sections 397 and 398 can be attracted when there is a
continuing course of oppressive conduct, as the phrase "the affairs of the company
are being conducted" suggests, prima facie, a continuing process and is wide enough
to cover oppression by anyone who is taking part in the conduct of the affairs of the
company, whether de facto or de jure. But in the context of the petitioner's
allegations that the R-1 company has been converted into a shell company and the
business is continuing the name of H.K. Goods Transport Pvt. Ltd., the continuity of
the oppression as well as mismanagement cannot be denied. In as much as in the
present case, it is not in dispute that the facts would justify a winding up order under
the "just and equitable" rule and it is recognised that such an order would unfairly
prejudice the complaining member, to be specific, the petitioner and the creditors. As
regards the failure of the petitioner to make out a case for winding up on just and
equitable grounds, in this regard the CLB's decision in the case of Girdhar Gopal
Dalmia and Ors. v. Bateli Tea Co. Ltd. and Ors. (2006) 74 CLA 36 (CLB) deserves to

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 be mentioned. "It was forcefully argued by the learned Counsel for the respondents,
that in view of the decision of the Supreme Court in Bagree Cereals case that unless
the petitioners establish that the company is liable to be wound up on just and
equitable grounds and that such winding up would be prejudicial to them and also
the company, no relief can be granted in these petitions as the petitioners have not
so established. In this connection, it has become necessary to examine the provisions
of Section 397(2). It reads "If on any application under Sub-section (1), the
Company Law Board is of the opinion - (a) 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 (b) that to wind up the company 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". A careful analysis of the above would indicate that it is for this
Board to form an opinion that the affairs of the company are being conducted in an
oppressive manner and once it forms such an opinion, the just and equitable grounds
for winding up of the company becomes established and this Board has to grant relief
in terms of Section 402, if it again forms an opinion that such winding up would
prejudicially affect the interest of the members/company. In other words, once this
Board gives a finding that acts of oppression have been established, winding up of
the company on just and equitable grounds becomes automatic. Shri Sarkar
relevantly referred to the unreported judgment of Delhi Court in Prentice Hall case,
wherein, the Court has held that once oppression is established, reliefs under Section
402 could be granted". In the present case the petitioners have succeeded in
establishing a case that the affairs of the company are being conducted in an
oppressive manner and that there is mismanagement as well, hence winding up
would be prejudicial to the petitioners' interests safeguard of which has been prayed
for in this petition. I agree that it is a settled proposition of law that the conduct of
the parties is a very relevant factor to be considered in the equitable proceedings
under Sections 397/398. In Sri Kanta Datta Narasimharaja Wadiyar v. Venkateshwar
Real Estates Private Ltd. (1991) 3 Comp. LJ 336 (Karn) : (1991)72 Comp Cas 211
(Karn), it was held that the petitioner seeking equitable relief must come with clean
hands and good conduct, failing which the petitioner would constitute a gross abuse
of the process of Court, and the petitioner is not entitled for any relief under Sections
397 and 398. It also held that the conduct of the parties in other proceedings could
also be taken into consideration. However, it was held that the conduct of the
petitioner before filing of the petition may not be a relevant factor. Regarding the
principle of equity in Shrimati Abnash Kaur v. Lord Krishna Sugar Mills Ltd 44 CC 390
the Division Bench of Delhi High Court has held that while exercising equity
jurisdiction, which clothes the Court with discretionary powers "...the discretion
cannot be exercised arbitrarily or according to one's own will or whim. It has to be
regulated by law, allay its rigour advance the remedy and to relieve against abuse.
The court, therefore, exercising equity jurisdiction, cannot ignore the well known
maxims of equity. Two such maxims are that he who seeks equity must do equity and
he who comes into equity must come with clean hands. " The respondents have failed
to make out a case of unclean hands of the petitioners. Rather it is the respondents
who have not come with clean hands. The case of diversion of assets and amounts as
well of the goodwill of the R-1 to H.K. Goods Transport Pvt. Ltd. is established.
Moneys have been siphoned off causing prejudice to the interest of the petitioners
and the R-1 and its creditors. It is well established principle that when directors
decide upon a course of action which is advantageous to themselves but injurious to
the company and even if the majority of the shareholders also support them, in such
a case the directors are not acting as directors but are wronging the company as third
persons and are liable for such actions. The directors have breached their fiduciary

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 duties. On the role of Directors, the law is well settled. In some respects, Directors
resemble trustees. Equity prohibits a trustee from making any profit by his
management, directly or indirectly. It is objectionable to use such power simply or
solely for the benefit of directors or merely for an extraneous purpose like
maintenance or acquisition of control over the affairs of the company. Directors are
required to act on behalf of a company in a fiduciary capacity and their acts and
deeds have to be exercised for the benefit of the company. The fiduciary capacity
within which Directors have to act enjoins upon them a duty to act on behalf of a
company with utmost good faith, utmost care and skill and due diligence and in the
interest of the company they represent. They have a duty to make full and honest
disclosure to the shareholders regarding all important matters relating to the
company. The respondents' conduct has been burdensome, harsh and wrongful.
Besides, the affairs of the company have been mismanaged as pointed out above.
1 2 . In view of the foregoing and keeping in view that there are allegations and
counter allegations, the parties have entangled themselves in criminal complaints and
that there is an MOU dated 18.10.99 wherein the petitioners have expressed their
desire of not to continue with R-2 in this business, and to do substantial justice
between the parties, I hereby order as under:
i. The R-2 and R-3 are hereby directed to restore the siphoned off funds to
the R-I's account forthwith.
ii. R-1 is hereby directed to appoint an independent auditor to render proper
accounts w.e.f. 1.4.99 till date.
iii. The R-3's induction on the Board being illegal, there was only one
director from 1st July to 8th July, is hereby declared as null and void. Status
quo ante is restored.
iv. The P-1 is restored as Director on the Board till he leaves the R-1 on
payment of value of his shares to be determined by an independent valuer to
be appointed by the parties after siphoned off money is restored to the R-1's
account.
v. In case of any difficulty in implementing this order, the parties are at
liberty to apply.
13. With the above directions, the Company Petition No. 32/2002 stands allowed. All
interim orders stand vacated. All CAs stand disposed of. No order as to cost.

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