Jiwan Mehta vs Emmbros Metal Pvt. Ltd. and Others

Deepak Gupta, J.—This appeal is directed against the order of the Company Law Board (here-in-after referred to as the CLB) dated 20th November, 2007, whereby it rejected the petition filed by the appellant under Sections 397 and 398 of the Companies Act, 1956 (here-in-after referred to as the Act) against Emmbros Metal Pvt. Ltd and others. The allegation in the claim petition was that the respondents No. 2 and 3 have in an illegal manner reduced the share holdings of the petitioner for their own benefit and to the detriment of the other share holders. According to the petitioner, he was wrongly removed from the directorship of the Company. On this basis it was prayed that action be taken against the respondents and suitable orders be passed in terms of Sections 397 and 398 of the Companies Act, 1956.

The appellant and respondents No. 2 and 3 are real brothers. Late Shri T.D. Mehta had six sons, namely Mr. Jiwan Mehta (petitioner), Mr. Mohinder Mehta, Mr. Ramesh Mehta, Mr. Raj Mehta, Mr. Harish Mehta (respondent No. 2) and Mr. Ashok Mehta (respondent No. 3). Shri T.D. Mehta had set-up three companies in which all the brothers had cross holdings. Shri T.D. Mehta had holdings in all the companies. Each company was managed by two set of brothers in the following manners:

Name of the Company Managed by

Emmbros Wires & Strips Ltd. Mr. Jiwan Mehta & Mr. Ramesh Mehta

Emmbros Forgings P. Ltd. Mr. Raj Mehta and Mr. Mohinder Mehta

Emmbros Metals P. Ltd. Mr. Harish Mehta and Mr. Ashok Mehta

Unfortunately, Shri T.D. Mehta expired on 25.6.1996. According to the respondents, in August, 1997, the brothers arrived at an oral understanding and agreed that each set of two brothers would fully run and control the Company, which was being managed by the said set of brothers. The cross holdings of the brothers in the other companies would be totally removed over a period of time. Even the shares held by Shri T.D. Mehta were transferred amongst the brothers in such a manner that the brothers managing the Company got a higher proportion of the shares. By 2001, except for the petitioner Shri Jiwan Mehta, all the brothers had swapped their share holdings and removed their cross holdings in the Companies with which they were no longer concerned. Pursuant to the oral agreement on 7.10.2001 all the brothers entered into a written agreement (MOU) to incorporate the oral understanding already existing between them. This MOU infact deals with other properties owned by the brothers and Clause VIII of the MOU provides that the MOU has been executed in furtherance of the oral agreement already entered between the brothers.

The petition filed by the petitioner was contested by the respondents, who raised certain preliminary objections. According to the respondents, the petitioner had not come to the CLB with clean hand as the factum of having entered into the MOU was not disclosed to the Board. It was also alleged that swapping of the shares by the five brothers and the withdrawal from the office of Directorship of the Company was to the knowledge of the petitioner. He was aware about this fact right from the year 2000 and therefore, the petition was hit by the principle of delay and laches.

The CLB held that the parties were governed by the MOU. It also held that the petitioner deliberately concealed the MOU from the Board. It rejected the contention of the petitioner that the MOU was never acted upon. It further held that the petitioner was estopped from raising these objections since he had waived and acquiesced in the swapping of shares. The petition was, therefore, rejected on these preliminary objections. Hence, this appeal.

We have heard Shri Ashwani Kumar Chopra, learned Senior counsel for the appellant and Shri P.S. Patwalia, learned senior counsel for the respondents.

The main ground raised by Shri Chopra is that the Board could not have dismissed the appeal on preliminary submissions and was bound to give a finding on all the issues involved. He further contends that the findings returned by the Board are even otherwise illegal and liable to be set-aside.

At the outset, we may make reference to Section 397 of the Companies Act, which reads as follows:

Application to (Company Law Board) for relief in cases of oppression - (1) Any member of a company who complain that the affairs of the company (are being conducted in a manner prejudicial to public interest or) in a manner oppressive to any member or members (including any one or more of themselves) may apply to the (Company Law Board) for an order under this section, provided such members have a right so to apply in virtue of Section 399(2) 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 unfairly prejudice such member or members, but that otherwise the facts 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;

The (Company Law Board) may, with a view to bringing to an end the matters complained of, make such order as it thinks fit.

A bare perusal of the Section shows that any member of a Company is entitled to apply to the Company Law Board if it has right to do so by virtue of Section 399 of the Act. It is contended by Shri Chopra that Section 397 does not permit the Company Law Board to reject an application on grounds of limitation or any such preliminary objections and the board is bound to decide the entire controversy between the parties. In our view this contention cannot be accepted. Every Court/judicial authority has right to see whether the person approaching it has come to it with clean hands. Every judicial authority is entitled and in fact has a duty to ensure that frivolous claims are not entertained. If the claim is highly belated or on the face of it, not maintainable, then the Board can reject the claim on preliminary objections. It is not necessary for the Board or any other judicial authority to waste time to go into the merits of a case when the same can be disposed of on the basis of the undisputed facts which make the petition not maintainable.

Coming to the merits of the case the main grievance of the petitioner before the CLB was that upto the year 2000 there was 1,70,000 fully paid up shares of Rs. 10/- each in the Company and all the brothers had an equal percentage of 28333 shares i.e. each one of the six brothers had 16.66% share holdings in the Company. According to the petitioner, the respondents No. 2 and 3 issued 80,000 shares on 29th February, 2000 and another 1,00,000 shares on 24th April, 2000 to themselves/their wives and thus reduced the holding of the petitioner to barely 8.09% and the holding of the other brothers was totally removed. It was also alleged that the petitioner has been removed from the Directorship of the Company. The petitioner alleged that both the increase in the number of shares as well as his removal from the Directorship was done without issuing any notice as required by law and hence the same was totally illegal.

The respondents in their reply took the plea that the petitioner only holds 8.09% of the total paid up capital and does not fall within the person entitled to file a petition in terms of Section 399 of the Act. It was submitted that all the brothers except the petitioner had swapped their shares so as to extinguish their cross holdings in other companies. It was also alleged that this was done pursuant to an oral family arrangement entered between the parties. It was also submitted that arrangement between the parties was reduced to written MOU on 7.10.2001. It was alleged that the petitioner was aware about the change in the share holding pattern as well as his removal from the Board of Director since he had visited the office of the Registrar of Companies, Jalandhar on 8.5.2000 and ascertained these facts. It was further alleged that the petition was not maintainable since the petitioner had slept over the matter for four years as the petition was filed in the year 2004. The respondent alleged that in fact the petitioner alongwith Ramesh Mehta was handed over control of Emmbros Wires and Strips Pvt. Ltd. According to the respondents this Company was very cash rich when the petitioner took it over. But due to mismanagement the said Company defaulted and claims were filed against the said Company by the creditors. It was also alleged that the petitioner had misappropriated certain funds of Emmbros Wires and opened a secret account at Mohali but thereafter the respondents No. 2 and 3 had traced the said account and ensured that payments were made to the Bank. It is alleged that due to these reasons the petitioner is not entitled to any relief.

At the outset it may be stated that the petitioner did not make a mention about the MOU in the petition filed by it before the CLB. It is not denied before me that the petitioner is a signatory to the said MOU. This MOU has direct bearing on the decision of the case. It would be pertinent to mention that when the creditors of Emmbros Wires which is the parent company being managed by the petitioner started recovery proceedings and the petitioner feared that his property at Panchkula would be taken over he filed a writ petition in the High Court of Punjab and Haryana. There also he did not annex a copy of the MOU though reference thereto was made in the petition. Thereafter the present respondents and other brothers moved an application for being impleaded as a parties in the said petition. They were impleaded as parties by order of the Court. According to the respondents they ensured the repayment of the loans with a view to protect their other properties. The MOU was in the nature of family settlement between the parties whereby the parties decided to settle their dispute. It is well settled law that a family arrangement or settlement stands at a higher pedestal than other compromises/ agreements.

By means of a family arrangement or settlement, members of a family seek to resolve all their differences and disputes once and for all in order to buy peace. Courts attach a special equity to family arrangements. The effort in this regard is to ensure that family arrangements are enforced if honestly made. Even if there is an error of judgment while making the family arrangement, the Courts lean towards upholding such family arrangements.

The Apex Court in Kale and Others Vs. Deputy Director of Consolidation and Others, held as follows:

xxxx... The object of the arrangement is to protect the family from long drawn litigation or perpetual strifes which mar the unity and solidarity of the family and create hatred and bad blood between the various members of the family. Today when we are striving to build up an egalitarian society and are trying for a complete reconstruction of the society, to maintain and uphold the unity and homogeneity of the family which ultimately results in the unification of the society and, therefore, of the entire country, is the prime need of the hour. A family arrangement by which the property is equitably divided between the various contenders so as to achieve an equal distribution of wealth instead of concentrating the same in the hands of a few is undoubtedly a milestone in the administration of social justice. That is why the term "family" has to be understood in a wider sense so as to include within its fold not only close relations or legal heirs but even those persons who may have some sort of antecedent title, a semblance of a claim or even if they have a spes successions so that future disputes are sealed for ever and the family instead of fighting claims inter se and wasting time, money and energy on such fruitless or futile litigation is able to devote its attention to more constructive work in the larger interest of the country. The courts have, therefore, leaned in favour of upholding a family arrangement instead of disturbing the same on technical or trivial grounds. Where the courts find that the family arrangement suffers from a legal lacuna or a formal defect the rule of estoppel is pressed into service and is applied to shut out plea of the person who being a party to family arrangement seeks to unsettle a settled dispute and claims to revoke the family arrangement under which he has himself enjoyed some material benefits.

The Apex Court culled out the essentials of a binding family arrangement in para 10 of the judgement, which reads as follows:

In other words to put the binding effect and the essentials of a family settlement in a concretised form, the matter may be reduced into the form of the following propositions:

(1) The family settlement must be a bona fide one so as to resolve family disputes and rival claims by a fair and equitable division or allotment of properties between the various members of the family.

(2) The said settlement must be voluntary and should not be induced by fraud, coercion or undue influence;

(3) The family arrangements may be even oral in which case no registration is necessary;

(4) It is well settled that registration would be necessary only if the terms of the family arrangement are reduced into writing. Here also, a distinction should be made between a document containing the terms and recitals of a family arrangement made under the document and a mere memorandum prepared after the family arrangement had already been made either for the purpose of the record or for information of the court for making necessary mutation. In such a case the memorandum itself does not create or extinguish any rights in Immovable properties and therefore does not fall within the mischief of Section 17(2) (sic) of the Registration Act and is, therefore, not compulsorily registrable ;

(5) The members who may be parties to the family arrangement must have some antecedent title, claim or interest even a possible claim in the property which is acknowledged by the parties to the settlement. Even if one of the parties to the settlement has not title but under the arrangement the other party relinquishes all its claims or titles in favour of such a person and acknowledges him to be the sole owners, then the antecedent title must be assumed and the family arrangement will be upheld and the Courts will find no difficulty in giving assent to the same;

(6) Even if bona fide disputes, present or possible, which may not involve legal claims are settled by a bona fide family arrangement which is fair and equitable the family arrangement is final and binding on the parties to the settlement.

In Manish Mohan Sharma and Others Vs. Ram Bahadur Thakur Ltd. and Others, the Apex Court while dealing with the family arrangement held as follows:

It has been repeatedly emhasised in several decisions that family settlements are governed by a special equity and are to be enforced if honestly made. This would be so "even if the terms may have been agreed to on the basis of an error of the parties or originate in a mistake or ignorance of fact as to what the rights of the parties actually are, or of the points on which their rights actually depend". This is because the object of an arrangement is to protect the family from long drawn out litigation and to bring about harmony and goodwill in the family. (See Kale and Others Vs. Deputy Director of Consolidation and Others, The courts lean heavily in favour of family arrangements and, "matters which would be fatal to the validity of similar transactions between strangers are not objections to the binding effect of family arrangements". This view has been reiterated recently in Amteshwar Anand Vs. Virender Mohan Singh and Others,

In Hari Shankar Singhania and Others Vs. Gaur Hari Singhania and Others, the Apex Court while dealing with the sanctity of the family arrangement held as follows:

Another fact that assumes importance at this stage is that, a family settlement is treated differently from any other formal commercial settlement as such settlement in the eyes of law ensures peace and goodwill among the family members. Such family settlements generally meet with approval of the Courts. Such settlements are governed by a special equity principle where the terms are fair and bona fide, taking into account the well being of a family.

The concept of ''family arrangement or settlement'' and the present one in hand, in our opinion, should be treated differently. Technicalities of limitation etc should not be put at risk of the implementation of a settlement drawn by a family, which is essential for maintaining peace and harmony in a family. Also it can be seen from decided cases of this Court that, any such arrangement would be upheld if family settlements were entered into ally disputes existing or apprehended and even any dispute or difference apart, if it was entered into bona fide to maintain peace or to bring about harmony in the family. Even a semblance of a claim or some other ground, as say affection, may suffice as observed by this Court in the case of Ram Charan Das Vs. Girjanandini Devi and Others,

Xxx ...xxxxx ....xxxx ...xxxx Xxx ...xxxxx ....xxxx ...xxxx

Therefore, in our opinion, technical considerations should give way to peace and harmony in enforcement of family arrangements or settlements.

Similar view was taken by the Apex Court in Hansa Industries Pvt. Ltd. and Others Vs. Kidarsons Industries Pvt. Ltd.,

The execution of this family settlement is not disputed. However, it is urged that the properties which fell to the share of the petitioner in terms of the family settlement have not been given to him and in fact respondent No. 2 has filed a suit for partition of the property falling to the share of the petitioner. The stand of the respondents is that they were compelled to file the Civil suit since the petitioner himself did not abide by the terms of the settlement. The respondents had to clear the dues of Emmbros Wires which should have been paid by the petitioner. This Court is not going into the merits of this question but there is no manner of doubt that it is the petitioner who is trying to wriggle out of the family settlement. This he cannot be permitted to do so.

This family settlement makes it apparently clear that the petitioner was aware about the agreement between the brothers that they would swap their share holdings in each company leaving a set of two brothers in exclusive control of the company which fell to their share. It is also not disputed that five brothers have swapped their shares. It is only the petitioner who has failed to do so. The petitioner was well aware of the fact that the brothers had agreed to swap their shares. He even signed the agreement in this regard. He thereafter visited the office of the Registrar of Companies, Jalandhar and found out that the respondents had increased their share-holdings in the Company and also reduced the share holding of the petitioner. On that date i.e. 24th April, 2000 he also knew that he had been removed from the Directorship of the Company on the ground that he had not attended three meetings. There is no valid explanation as to why he kept silent till the year 2004. It is urged by Shri Chopra, learned senior counsel for the petitioner that the petitioner being the eldest brother did not take the matter to the Court and was trying for a compromise and therefore, did not approach the Court earlier. This explanation is totally false. From the facts on record, it is apparent that it is only the petitioner who has failed to comply with the agreement and all the other brothers were willing to perform their part of the agreement. The petitioner had acquiesced in the transfer of the shares and has, therefore, waived his right, if any, to challenge such transfer. Moreover, there is a delay of four years in raising such a challenge. We are of the considered view that the CLB had rightly held that in view of the acts of the petitioner and also in view of the unexplained delay the petition itself was not maintainable.

In State of Nagaland Vs. Lipok AO and Others, , the question which arose was what constitutes substantial cause for condonation of delay. This authority in our opinion is not at all applicable to the facts of the present case because in this case the petitioner never filed any application for condonation of delay nor gave any explanation for the delay in the petition filed by it before the CLB but in fact in para 7 alleged that the petition is not barred by limitation.

In Kamal Kumar Dutta and Another Vs. Ruby General Hospital Ltd. and Others, the question decided was that since no proper notice was served on the appellant the Board meeting held was not valid. In the present case, as held by us above, the petitioner himself was aware about the swapping of the shares and about the fact that the brothers were to withdraw from the other companies. The petitioner despite knowing this fact signed the MOU. Therefore, the petitioner is not entitled to challenge his removal from directorship.

The Apex Court in Girdhar Gopal Gupta and Others Vs. Aar Gee Board Mills Pvt. Ltd. and Others, has clearly held that where the parties were aware about the allotment of the shares they could not at a later stage challenge the same.

In our view no question of law much less a substantial question of law is involved in this appeal. In view of the above discussion, we find no merit in the appeal, which is dismissed with costs assessed at Rs. 10,000/-.