2009 (8) TMI 698 - HC - Companies Law

Oppression and mismanagement - Held that - In the present facts and circumstances the appellants-petitioners have made out a case of oppression and mismanagement attracting the provisions of sections 397 and 398 of the Act notwithstanding the respondents being able to demonstrate that they had not violated or transgressed any of the provisions of the Act including sections 80 and 81 of the Act. While all acts beginning from the extraordinary general body meeting of the company convened on 20-12-1995 are all declared to be null and void and that the redemption of preference shares of the appellants-petitioners is also to be held bad in law for the very reason of mismanagement leading to oppressive acts with the real intention of the parties being not to convert the equity shareholding into preference shareholding in the year 1993 and as demonstrated by the conduct of the respondents in the year 1996 when in place of the preference shareholding of respondent Nos. 2 and 3 they having been allotted an equal number of equity shares are also bad in law a direction is issued to allot 100 number each of equity shares of the value of 1, 000 per share fully paid-up in terms of relief No. 1 as claimed before the Company Law Board. Appeal allowed.

Issues Involved:
1. Maintainability of the petition under section 399 of the Companies Act, 1956.
2. Allegations of oppression and mismanagement under sections 397 and 398 of the Companies Act, 1956.
3. Validity of the resolutions passed by the company, particularly those on 20-12-1995 and 9-3-1996.
4. Alleged misuse of majority shareholding by the respondents.

Issue-Wise Detailed Analysis:

1. Maintainability of the Petition under Section 399:
The Company Law Board (CLB) dismissed the petition, partly on the ground that the appellants were not members of the company on the date of presentation of the petition. However, the High Court found this reasoning flawed. It emphasized that the eligibility to file a petition under section 399 should be determined based on the status of the petitioners prior to the acts complained of. The Court noted that interpreting section 399 in a technical manner could defeat the legislative intent of providing relief to minority shareholders under sections 397 and 398. The Court concluded that the appellants had the requisite standing to maintain the petition, as their removal from membership was itself one of the acts complained of.

2. Allegations of Oppression and Mismanagement:
The appellants alleged several acts of mismanagement and oppression, including the unilateral decisions by the second respondent, misuse of company funds, and the removal of the first appellant from directorship. The Court found that the sequence of events, including the conversion of equity shares to preference shares and the selective redemption of these shares, supported the appellants' claims. The Court noted that these actions were used as a device to oust the appellants from the company, constituting both oppression and mismanagement. The Court emphasized that the real intention behind the conversion and redemption of shares was to remove the appellants from the company, which was evident from the uneven treatment meted out to them compared to the respondents.

3. Validity of Resolutions Passed by the Company:
The resolutions passed on 20-12-1995 and 9-3-1996 were central to the appellants' complaints. The Court found that these resolutions were part of a scheme to remove the appellants from the company. The resolution on 20-12-1995, which removed the first appellant from directorship and inducted new directors, was found to be in contravention of an injunction order and not in conformity with the company's articles of association. The subsequent resolution on 9-3-1996, which redeemed preference shares and allotted new equity shares to the respondents, was also found to be invalid. The Court declared all resolutions passed from 20-12-1995 onwards as null and void.

4. Alleged Misuse of Majority Shareholding:
The Court found that the majority shareholders (respondents) had misused their power to the detriment of the appellants. The acts of converting equity shares to preference shares, selectively redeeming these shares, and removing the appellants from the company were all part of a scheme to consolidate control and exclude the appellants. The Court noted that the misuse of majority shareholding for such purposes constituted oppression under section 397 and mismanagement under section 398 of the Act. The Court held that the respondents' actions were not in the best interest of the company and were aimed at eliminating the appellants from the company's management and membership.

Conclusion:
The High Court allowed the appeal, set aside the order of the Company Law Board, and declared all acts beginning from the extraordinary general body meeting on 20-12-1995 as null and void. The Court directed the company to allot 100 equity shares of Rs. 1,000 each, fully paid-up, to the appellants. The Court found that the appellants had made out a case of both oppression and mismanagement, and the respondents' actions were aimed at ousting the appellants from the company. The appeal was allowed, and the company petition was granted, with parties bearing their own costs.

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