2009 (12) TMI 501 - HC - Companies Law

Transfer of shares - Not to be registered except on production of instrument of transfer, Oppression and mismanagement,

Issues Involved:
1. Financial condition and inability to pay dues.
2. Resolutions for selling the tea estate and shares.
3. Plaintiff's claim of pre-emptive right to purchase shares.
4. Board of directors' actions and plaintiff's objections.
5. Legal proceedings and injunctions.
6. Maintainability of the suit and necessity of shareholders as parties.
7. Public interest and discretion of the board of directors.

Detailed Analysis:

1. Financial Condition and Inability to Pay Dues:
The appellant, a private limited company, has been running into losses, unable to pay electricity dues, creditors, statutory levies, and demands from financial institutions. The electricity supply was disconnected in 2007, and the appellant was declared a non-performing asset by its bank, leading to proceedings in the Debts Recovery Tribunal.

2. Resolutions for Selling the Tea Estate and Shares:
An extraordinary general meeting on December 15, 2006, resolved to sell the tea estate and its assets and liabilities to liquidate dues. This resolution empowered the board of directors to negotiate with the highest bidder without calling for another general meeting. This resolution was ratified in another extraordinary general meeting on March 19, 2007.

3. Plaintiff's Claim of Pre-emptive Right to Purchase Shares:
The plaintiff, a shareholder with 192 shares, claimed a pre-emptive right to purchase the shares at the highest value offered by any outsider. Despite his objections, the plaintiff was a party to the resolutions. The plaintiff later communicated his desire to retain the tea estate and purchase all shares at the highest bid.

4. Board of Directors' Actions and Plaintiff's Objections:
The board resolved on August 14, 2007, to transfer the equity shares to the highest bidder. The plaintiff claimed he expressed the desire to buy the shares but was ignored. The plaintiff's communication on October 26, 2007, reiterated his intent to retain the tea estate within the family. The board's actions, including a meeting on December 14, 2007, concluded that the plaintiff had no pre-emptive right to purchase the shares, leading to further communications and the plaintiff's non-attendance at meetings due to a bandh.

5. Legal Proceedings and Injunctions:
The plaintiff filed a suit seeking various declarations and a permanent injunction against the sale or transfer of shares to outsiders. The trial court granted an ex parte ad interim injunction on February 29, 2008, which was later upheld on May 14, 2009. The appellants challenged this order, arguing that the shareholders were necessary parties and the suit was not maintainable.

6. Maintainability of the Suit and Necessity of Shareholders as Parties:
The court discussed the necessity of shareholders as parties, emphasizing that a suit for specific performance of a contract to sell shares requires the shareholders as necessary parties. The court held that the plaintiff's suit was prima facie not maintainable due to the absence of shareholders as parties. The court also discussed the applicability of sections 397 and 398 of the Companies Act, which provide remedies for oppression and mismanagement, suggesting that the plaintiff's remedy lay under these sections.

7. Public Interest and Discretion of the Board of Directors:
The court highlighted the importance of public interest, particularly in cases involving large-scale employment like tea estates. The board's discretion to allow the sale of shares to outsiders was upheld as being in public interest, considering the financial distress and potential risks to human life and property due to labor unrest. The court emphasized that the board's decision was not ultra vires, mala fide, or fraudulent.

Conclusion:
The court concluded that the plaintiff's suit was prima facie not maintainable, and no injunction could be granted. The decision to sell shares to an outsider was deemed valid and in public interest. The appeal was allowed, and the impugned order of injunction was set aside.

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