Tax Management India. Com
Law and Practice  :  Digital eBook
Research is most exciting & rewarding
  TMI - Tax Management India. Com
Follow us:
  Facebook   Twitter   Linkedin   Telegram

Home Case Index All Cases Companies Law Companies Law + HC Companies Law - 2009 (5) TMI HC This

  • Login
  • Cases Cited
  • Referred In
  • Summary

Forgot password       New User/ Regiser

⇒ Register to get Live Demo



 

2009 (5) TMI 539 - HC - Companies Law


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.

 

 

 

 

Quick Updates:Latest Updates