2009 (5) TMI 539 - HC - Companies Law

Oppression and mismanagement - Held that - Appeal allowed and remitted to the Company Law Board to value the shares of the company by a competent expert who may be appointed by the Company Law Board offer the shares so assessed to respondent Nos. 2 to 5 and if they decline to the third party-joint developer issue notice to third party-joint developer for consideration of modification of the terms that could provide for an adjustment in the value of the shares that is offered to be purchased (that is in case if the third party-joint developer is interested in purchasing the shares) by increasing the percentage of stake that the third party developer would have in the company or increase the share of income such as to have due regard for value of shares of the appellants to be transmitted to them. With reference to 18, 300 equity shares that had already stood allotted to M/s. Rajaram Maize Products in respect of which a suit is still pending before the Court of Additional District Judge Rajnandgaon M.P. If the decree is returned in favour of the appellants the value of the shares shall also be offered for sale in the manner and in the order of preference mentioned above. The value of the shares shall be determined as on the date of filing of petition before the Company Law Board and the value so determined will carry interest from that date at 7.5 per cent till the date of payment. If neither respondent Nos. 2 to 5 nor the third party is willing to purchase the shares at the valuation so made in the manner referred to above having regard to the finding that there are just and equitable circumstances for winding up of the company the company shall be ordered to be wound up.

Issues Involved:
1. Oppression and mismanagement under Sections 397 and 398 of the Companies Act, 1956.
2. Systematic stripping of company assets.
3. Justification for sale of assets due to Pollution Control Board directives.
4. Irreconcilable differences among family members and their impact on company management.
5. Non-declaration of dividends and its implications.
6. Validity and transparency of the joint venture agreement.
7. Appropriate reliefs and directions under Section 402 of the Companies Act, 1956.

Issue-wise Detailed Analysis:

I. Oppression and Mismanagement:
The appellants filed a petition under Sections 397 and 398 of the Companies Act, 1956, alleging oppression and mismanagement. They held 10.7% equity shares and 19% preference shares in the respondent company. The board of directors consisted of the second respondent (the elder brother of the first petitioner), his wife, and daughter. The company, incorporated in 1974, was primarily engaged in manufacturing starch but had been systematically stripped of its assets over 34 years without declaring any dividends.

II. Systematic Stripping of Assets:
The appellants contended that the company had been stripped of its assets, including factories in Bangalore and Mohali, which were closed and sold. The only remaining asset was the land in Mohali, which the second respondent sought to sell through a joint venture agreement for constructing a multiplex. The audited annual statements indicated a 94.27% reduction in total assets, suggesting a complete lack of transparency and mismanagement.

III. Justification for Sale of Assets:
The respondents justified the sale of the Bangalore property and the Mohali plant and machinery due to directives from the Pollution Control Board, which deemed the operations hazardous. The company had filed for registration as a sick company with the BIFR, but the reference was dismissed. The sale proceeds were used to discharge loans, and the respondents argued that the company's land in Mohali was still valuable, worth over Rs. 55 crores.

IV. Irreconcilable Differences:
The Company Law Board (CLB) noted irreconcilable differences among family members, directing the purchase of the minority interest by the company or other shareholders. The CLB found no substance in the allegation of asset stripping and justified the sale of assets due to Pollution Control Board orders. It preserved the petitioners' right to secure details of the joint venture agreement and affirmed their voting rights on preference shares.

V. Non-declaration of Dividends:
The appellants argued that the non-declaration of dividends for over 34 years indicated mismanagement. The CLB affirmed the petitioners' voting rights under Section 87 of the Companies Act, 1956, and directed the respondent company to notify general meetings by registered post to protect the petitioners' interests.

VI. Validity and Transparency of Joint Venture Agreement:
The appellants challenged the CLB's decision, arguing that the systematic sale of assets and non-declaration of dividends established oppression and mismanagement. They contended that the joint venture agreement lacked transparency and sought directions for the respondents to buy their shares at market value or to appoint an independent committee to oversee the sale of assets.

VII. Appropriate Reliefs and Directions:
The court found that the company's original purpose had failed, and it had lost significant assets, with no profits or dividends declared since its incorporation. The family feud further complicated matters. The court noted that the joint venture agreement with M/s. Suncity Projects (P.) Ltd. was not transparent, and the respondents had not involved the petitioners in decision-making.

The court directed the valuation of the company's shares by a competent expert and offered the shares to respondent Nos. 2 to 5 or the third-party joint developer. If neither party was willing to purchase the shares, the company would be ordered to be wound up. The court also addressed the disputed 18,300 equity shares, pending a suit before the Additional District Judge, Rajnandgaon, M.P.

Final Disposition:
The appeal was allowed, setting aside the CLB's order and remitting the matter to the CLB with directions to:
1. Value the company's shares by a competent expert.
2. Offer the shares to respondent Nos. 2 to 5 or the third-party joint developer.
3. Issue notice to the third-party joint developer for consideration of modifying the joint venture agreement terms.

The value of the shares would be determined as of the filing date of the petition before the CLB, with interest from that date at 7.5% until payment. If no party was willing to purchase the shares, the company would be wound up. The appeal was allowed on these terms.

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