1996 (4) TMI 377 - HC - Companies Law

Summary

Issues Involved:
1. Legality of the Board Resolution dated 30th December 1992 and subsequent issuance of 68,000 Equity Shares.
2. Validity of the letter of offer dated 20th January 1993.
3. Alleged wrongful recording of 22,120 equity shares in the name of defendant No. 3.
4. Alleged interference by defendants Nos. 2 and 3 in the affairs of defendant No. 1.
5. Alleged siphoning of funds by defendants Nos. 2 and 3.
6. Requirement of additional working capital for defendant No. 1.
7. Alleged benefits given to Flexaire, a partnership firm.

Detailed Analysis:

1. Legality of the Board Resolution dated 30th December 1992 and Subsequent Issuance of 68,000 Equity Shares:
The petitioners sought a declaration that the resolution to issue new shares passed on 30th December 1992 and all acts pursuant to it were illegal, null, and void. They also sought a perpetual injunction to restrain the defendants from giving effect to the resolution. The petitioners alleged that the resolution was passed with the intention to oust them from management and reduce them to a minority. The court, however, found no prima facie case of mala fides or breach of trust by the directors. The court referenced the Supreme Court judgment in Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holdings Ltd., which held that the issuance of shares for the benefit of the company cannot be struck down if it incidentally benefits the directors.

2. Validity of the Letter of Offer dated 20th January 1993:
The petitioners challenged the letter of offer for the issuance of 68,000 equity shares, claiming there was no genuine demand for augmenting working capital. The court found that the decision to issue shares is primarily within the purview of the directors and should not be interfered with unless there are extreme circumstances of mala fides or breach of trust. The court dismissed the petitioners' apprehensions regarding the American company's participation in the rights issue.

3. Alleged Wrongful Recording of 22,120 Equity Shares in the Name of Defendant No. 3:
The petitioners alleged that 22,120 equity shares were illegally recorded in the name of defendant No. 3, a transferee of Dilip Sen. The court noted that the transfer took place in 1983 and the suit was filed in 1993, making it barred by limitation. Additionally, the court observed that one of the plaintiffs was present in the Board Meeting in 1983 when the transfer was accepted, and no objections were raised for ten years.

4. Alleged Interference by Defendants Nos. 2 and 3 in the Affairs of Defendant No. 1:
The petitioners sought a permanent injunction to restrain defendants Nos. 2 and 3 from interfering in the affairs of defendant No. 1. The court found no prima facie evidence to support the allegations of interference or meddling by the defendants.

5. Alleged Siphoning of Funds by Defendants Nos. 2 and 3:
The petitioners alleged that defendants Nos. 2 and 3 had been siphoning funds belonging to defendant No. 1. The court found no prima facie evidence to support these allegations and dismissed the application for an interim injunction on this ground.

6. Requirement of Additional Working Capital for Defendant No. 1:
The petitioners argued that there was no genuine need for additional working capital. The court held that the decision regarding the need for additional capital is primarily decided by the directors and should not be interfered with unless there are extreme circumstances indicating mala fides or breach of trust.

7. Alleged Benefits Given to Flexaire, a Partnership Firm:
The petitioners alleged that Flexaire, a partnership firm of Mrs. Rita Sen, was given undue benefits. The court noted that the facilities were granted in 1976 with a Board Resolution and that Flexaire had been paying rent to the company. The court found no prima facie case for issuing an interim injunction based on these allegations.

Conclusion:
The application for interim injunction was dismissed, and all interim orders were vacated. The respondent No. 1 company was allowed to proceed with the issue of rights shares. The court found no prima facie case of mala fides, breach of trust, or personal aggrandizement by the directors. The judgment emphasized that the directors' decision to issue shares should not be interfered with unless there are extreme circumstances warranting such interference.