1998 (3) TMI 536 - HC - Companies Law

Summary

Issues Involved:
1. Validity of Share Allotment to Respondents
2. Allegations of Mismanagement and Financial Irregularities
3. Failure to Convene Annual General Meetings (AGMs)
4. Legality of the Extraordinary General Meeting (EGM) Held on 31-3-1986
5. Appointment and Qualification of Directors
6. Relief Sought by the Petitioner

Detailed Analysis:

1. Validity of Share Allotment to Respondents:
The petitioner contested the allotment of 50,000 shares to the 6th respondent and 10,000 shares to the 2nd respondent, claiming these were invalid. The court found that the allotment of shares was made without proper consideration and was not bona fide or genuine. The loan ledger presented by the respondents, which purported to show loans converted into equity shares, was found to be unreliable and manipulated. The court declared the allotment of shares to U.K. Rajah and his wife, Smt. Sivakamasundari, as illegal and prejudicial to the interests of the company and its members.

2. Allegations of Mismanagement and Financial Irregularities:
The petitioner alleged various acts of mismanagement, including financial difficulties due to mismanagement, failure to convene AGMs, non-audited accounts, and misappropriation of company assets. The court noted that the company had not held AGMs since 1979, had not audited its accounts, and had not filed necessary returns with the Registrar of Companies. The respondents' failure to produce audited accounts and proper records supported the petitioner's claims of mismanagement.

3. Failure to Convene Annual General Meetings (AGMs):
It was undisputed that the company had not held AGMs since 1979. The court emphasized the mandatory nature of holding AGMs, even if accounts are not ready. The prolonged failure to convene AGMs was seen as an attempt by the current board to entrench themselves in office, prejudicing the interests of the company and its members.

4. Legality of the Extraordinary General Meeting (EGM) Held on 31-3-1986:
The petitioner attended the EGM on 31-3-1986, where U.K. Rajah was elected as a director. The court found that the minutes of this meeting showed several corrections and overwriting, indicating manipulation. The court declared the proceedings of the EGM held on 31-3-1987 invalid, as votes were cast in respect of 60,000 shares, the allotment of which was illegal.

5. Appointment and Qualification of Directors:
The court found that U.K. Rajah and his wife, Smt. Sivakamasundari, were not qualified to hold the position of directors. U.K. Rajah held only 10 shares at the time of his election and did not acquire the necessary qualification shares within the stipulated time. His wife was not a shareholder before the disputed allotment. The court declared that neither U.K. Rajah nor his wife had the qualification shares to hold office as directors, making their continuance in office illegal.

6. Relief Sought by the Petitioner:
The petitioner sought several reliefs, including the appointment of a receiver, declaration of invalid share allotments, direction to hold AGMs, and declaration of the EGM held on 27-3-1987 as invalid. The court appointed a receiver to take charge of the company's affairs for six months, during which an AGM must be convened. The court declared the 2nd and 6th respondents not entitled to hold office as directors and invalidated the EGM held on 31-3-1987. The receiver was tasked with convening the AGM, ensuring proper shareholder participation, and facilitating the election of a new board of directors.

Conclusion:
The court concluded that the actions of the respondents, including the illegal allotment of shares and failure to hold AGMs, constituted mismanagement and were prejudicial to the interests of the company and its members. The court's orders aimed to rectify the situation by appointing a receiver, invalidating the disputed share allotments, and ensuring the proper governance of the company through the election of a new board of directors.