2005 (9) TMI 313 - HC - Companies Law

Summary

Issues Involved:
1. Forfeiture of shares and unpaid calls.
2. Allegations of oppression and mismanagement under sections 397 and 398 of the Companies Act, 1956.
3. Increase of capital and issuance of preference shares without notice.
4. Validity of meetings and removal of board members.
5. Unlawful allotment of bonus shares.
6. Lease of immovable property by the company.

Detailed Analysis:

1. Forfeiture of Shares and Unpaid Calls:
The core issue revolved around the forfeiture of shares held by the Sanwalka group, which were originally allotted to Gupta Brothers and later forfeited due to unpaid calls. The Sanwalkas argued that no calls were made to them, and the Guptas could not prove receipt of any such call letters. The Company Law Board (CLB) held that the contention that the shares were held on account of Gupta Brothers was baseless. The terms of re-issue governed the shares, and in the absence of any valid call made by the company, the plea that the petitioners were not entitled to present the petition under section 399 could not be sustained. The High Court agreed with the CLB, noting that the company did not genuinely attempt to inform the Sanwalkas about the unpaid calls and that the terms of allotment did not mention any outstanding calls from Gupta Brothers.

2. Allegations of Oppression and Mismanagement:
The Sanwalkas approached the CLB under sections 397 and 398 of the Companies Act, 1956, alleging oppression and mismanagement. Their grievances included the increase of capital without notice, improper conduct of meetings, unlawful removal of board members, bringing in outsiders without consent, and unlawful allotment of bonus shares. The CLB found merit in these allegations, particularly noting that the lease of the company's land was against the company's interest and favored the lessee. The High Court upheld the CLB's findings, emphasizing that the petitioners had made a case of oppression and mismanagement.

3. Increase of Capital and Issuance of Preference Shares Without Notice:
The Sanwalkas contended that the company increased its capital and issued preference shares without proper notice to them, which diluted their shareholding. The CLB restored the shareholding position to its status prior to the forfeiture of shares and issuance of preference shares. The High Court agreed with this restoration, affirming that the original ratio between the two groups should be maintained.

4. Validity of Meetings and Removal of Board Members:
The Sanwalkas claimed that the meetings were not held as per the provisions of the Companies Act and that their representatives were removed from the board without due process. The CLB's order implicitly addressed these issues by restoring the status quo ante and directing the induction of the petitioners' nominee into the board of directors. The High Court found no reason to interfere with this part of the CLB's order.

5. Unlawful Allotment of Bonus Shares:
The issue of unlawful allotment of bonus shares was resolved through the settlement initially reached between the parties, which was later challenged and led to the restoration of the petition. The CLB's final order canceled the bonus shares allotted to the respondents and restored the original shareholding. The High Court upheld this decision, finding it consistent with the need to maintain the original shareholding ratio.

6. Lease of Immovable Property by the Company:
The Sanwalkas alleged that the Guptas dealt with the company's immovable property to their detriment by leasing it at a low price. The CLB found that the lease was one-sided and against the company's interest. However, the High Court noted that while the CLB could have canceled the lease, it was more appropriate for the company to take action against the lessee for cancellation of the lease. The High Court agreed with the CLB's decision not to interfere directly with the lease.

Conclusion:
The High Court dismissed both appeals, upholding the CLB's order to restore the status quo ante regarding the shareholding and management of the company. The court found no merit in the company's contentions about the unpaid calls and forfeiture of shares, and it supported the CLB's findings of oppression and mismanagement. The court also agreed with the CLB's decision to leave certain issues, such as the preference shares and lease cancellation, to be resolved through appropriate legal channels or shareholder meetings. Both appeals were dismissed with no order as to costs, and a stay of operation of the judgment was granted for three weeks.