2006 (11) TMI 337 - HC - Companies Law

Meetings and proceedings - Contents and manner of service of notice and person on whom it is to be served, Directors - Appointment of directors and proportion of those who are to retire by rotation, Share capital - Further issue of, Oppression and mismanagement, Directors - Validity of acts of

Issues Involved:
1. Validity of the 11th Annual General Meeting (AGM) notice.
2. Election of directors at the AGM.
3. Issuance of right shares.
4. Issuance of duplicate shares and transfer of shares.
5. Allegations of oppression and mismanagement.
6. Application of the doctrine of legitimate expectation.
7. Financial dealings with the special investigating center.

Detailed Analysis:

1. Validity of the 11th Annual General Meeting (AGM) Notice:
The court examined whether the AGM notice was properly served. The Company Law Board (CLB) found that the notice was not properly given, invalidating the AGM. However, the court disagreed, noting that the first petitioner attended the board meeting where the AGM was scheduled, and notices were sent under certificate of posting as required by Section 53 of the Companies Act. The court emphasized that the statutory presumption of notice service was not rebutted by the petitioners, thus validating the AGM notice.

2. Election of Directors at the AGM:
The CLB set aside the election of eight directors due to improper notice and the lack of specific mention in the AGM agenda. The court agreed with the CLB's decision on technical grounds, noting that the agenda only mentioned the election of six directors, not eight. However, the court disagreed with the CLB's order to re-appoint the retiring directors, stating that directors retiring by rotation cannot continue beyond the AGM date unless re-elected.

3. Issuance of Right Shares:
The CLB invalidated the issuance of right shares, but the court reversed this decision. The court found that the right shares were offered proportionately to all shareholders without discrimination, fulfilling the requirements of Section 81 of the Companies Act. The court noted that the issuance was necessary for the company's financial needs and was done in good faith. The court allowed NRI shareholders one month to accept the right shares offer to maintain their share ratio.

4. Issuance of Duplicate Shares and Transfer of Shares:
The CLB set aside the issuance of duplicate shares to Purushothaman and their subsequent transfer. The court found this decision incorrect, noting that the issuance and transfer were done in compliance with Section 84(2) of the Companies Act and were not challenged by the petitioners.

5. Allegations of Oppression and Mismanagement:
The court analyzed the allegations under Sections 397 and 398 of the Companies Act, emphasizing that oppression must involve continuous acts that are burdensome, harsh, and wrongful. The court found no evidence of such conduct by the majority shareholders. The court noted that the decision to issue right shares was made in good faith and was necessary for the company's financial health.

6. Application of the Doctrine of Legitimate Expectation:
The CLB applied the doctrine of legitimate expectation to re-appoint the retiring directors, citing an understanding that they would remain directors due to their investment. The court rejected this application, stating that legitimate expectation is primarily an administrative law concept and not applicable in company law without a clear promise or representation. The court found no evidence of such a promise by the Chairman.

7. Financial Dealings with the Special Investigating Center:
The petitioners alleged mismanagement related to the special investigating center run by the Chairman. The court noted that the agreement with the center was made when the petitioners were part of the board, and they could not claim relief under Section 398. The court directed the company auditor to review the agreement and accounts related to the center and report to the board for appropriate action.

Conclusion:
The court allowed the appeals partly, setting aside the CLB's decisions on the validity of the AGM notice, issuance of right shares, and issuance of duplicate shares. The court upheld the CLB's decision to set aside the election of eight directors but rejected the re-appointment of retiring directors. The court directed the company to conduct the 12th AGM by 30-12-2006 and allowed NRI shareholders one month to accept the right shares offer.

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