2005 (8) TMI 389 - HC - Companies Law

Summary

Issues Involved:
1. Validity of the proposed Extraordinary General Meeting (EGM) on 4th August 2005.
2. Applicability of Section 87(2) of the Companies Act, 1956.
3. Voting rights of preference shareholders.
4. Status of the plaintiff as a private limited company.
5. Allegations of mismanagement and oppression.
6. Authority of Mr. H.S. Toor to sign and verify the plaint.

Issue-wise Detailed Analysis:

1. Validity of the Proposed EGM:
The plaintiff sought an ad interim injunction to restrain defendant No. 1 from holding an EGM on 4th August 2005. The plaintiff argued that the notice for the EGM was invalid as it was issued by "Hill Crest Reality Sdn. Bhd.," a non-existent entity in the shareholder records. Defendant No. 1, however, affirmed the notice was issued by their attorney and insisted on convening the EGM under Section 169 of the Companies Act, 1956.

2. Applicability of Section 87(2) of the Companies Act, 1956:
The central issue was whether Section 87(2) of the Act, which grants voting rights to preference shareholders under certain conditions, applied to the plaintiff. The plaintiff contended that as a private limited company, it was exempt from Section 87(2) under Section 90(2) of the Act. Defendant No. 1 argued that the plaintiff was a subsidiary of a public company, Moral Trading & Investment Ltd., and thus Section 87(2) applied.

3. Voting Rights of Preference Shareholders:
The plaintiff asserted that under Article 4 of its Articles of Association, preference shareholders had no voting rights. Additionally, since the company had not commenced business or earned profits, no dividend was payable under Section 205 of the Act, making Section 87(2) inapplicable. Defendant No. 1 contended that their preference shares were cumulative, and they were entitled to voting rights due to non-payment of dividends for over two years.

4. Status of the Plaintiff as a Private Limited Company:
The court examined whether the plaintiff was a private limited company or a subsidiary of a public company. The plaintiff argued it met the criteria of a private company, limiting members to 50 and prohibiting public invitations for shares. Despite Moral Trading & Investment Ltd.'s significant shareholding, subsequent transfers reduced its stake to 46%, and the plaintiff maintained its status as a private company.

5. Allegations of Mismanagement and Oppression:
Defendant No. 1 alleged fraud and mismanagement, claiming changes in shareholding were made without notice or Board resolution. The plaintiff denied these allegations, asserting that no notice was required for transferring equity shares among shareholders. These factual disputes required evidence and could not be resolved at this stage.

6. Authority of Mr. H.S. Toor to Sign and Verify the Plaint:
Defendant No. 1 questioned the authority of Mr. H.S. Toor to sign and verify the plaint on behalf of the plaintiff. This issue, involving factual disputes, was to be resolved at trial.

Judgment:
The court found that the plaintiff was a private limited company and not a subsidiary of a public company, making Section 87(2) inapplicable. Consequently, defendant No. 1 had no voting rights, rendering the notice for the EGM invalid. The court granted the ad interim injunction, restraining defendant No. 1 from giving effect to any resolutions passed in the EGM held on 4th August 2005.

Conclusion:
The court held that the plaintiff had established a prima facie case for an injunction, preventing defendant No. 1 from acting on any resolutions passed in the disputed EGM. The suit involved substantial questions of fact and law, necessitating a trial for final resolution.