2010 (2) TMI 577 - HC - Companies Law

Oppression and mismanagement - Held that - the company and respondent No. 2 prevented the appellant and the members of his family from attending the meetings of the board of directors of the company. We also hold that the appellant and the members of his family have been removed by the company and respondent No. 2 from the office of the directors surreptitiously. The company and respondent No. 2 connived to increase the share capital at such meetings and clandestinely allotted additional 18,876 shares to respondent No. 2 and his group with a view to reducing respondent No. 2 and his group to a flimsy minority. We confirm the order of the Board to set aside the allotment of shares made on 24-11-2003, 14-7-2005 and 27-7-2005 totalling to 18,876 (2,876 14,000 2,000), the allotment is declared null and void and the status quo ante is restored. Also respondent No. 2 and the members of his family will, within three months from today, refund the amount of dividend received by them on the aforesaid 18,876 shares to the company. The action of the company and its board of directors in removing the appellant and the members of his family from the office of the directors is held to be illegal and is set aside. The appellant and the members of his family are restored as the chairman and joint managing director and the directors of the company.

Issues Involved:
1. Oppression and mismanagement under Sections 397 to 401 of the Companies Act, 1956.
2. Legality of the increase in share capital and subsequent allotment of shares.
3. Removal of the appellant and his family members from the directorship.
4. Maintainability of the petition under Section 397/398 of the Companies Act.
5. Involvement of respondent No. 3 in the proceedings.

Issue-wise Detailed Analysis:

1. Oppression and Mismanagement:
The appellant complained of oppression, alleging that the company and respondent No. 2 had surreptitiously removed him and his family members from the directorship and reduced his shareholding from 50% to 6.15%. The Board found that the increase in share capital and allotment of shares to respondent No. 2 and his nominees were illegal and oppressive. The Board set aside the allotment of 18,876 shares, declaring it null and void, and restored the status quo ante. However, the Board refused to grant directorial reliefs and reliefs concerning the sale transaction of the project property and the audited statement of accounts.

2. Legality of Share Capital Increase and Allotment:
The Board found that the increase in share capital from Rs. 6,15,000 to Rs. 25,00,000 and the allotment of shares to respondent No. 2 and his nominees were illegal and oppressive. The allotment of 18,876 shares made on 24-11-2003, 14-7-2005, and 27-7-2005 was set aside, and the status quo ante was restored. The High Court confirmed this decision, acknowledging that the company and respondent No. 2 had acted with an intention to reduce the appellant to a minority shareholder.

3. Removal from Directorship:
The appellant contended that he and his family members were removed from the directorship without proper notice of board meetings. The Board refused to grant directorial reliefs, stating that directorial complaints should relate to rights qua a member and not be the basis for a petition under Section 397/398 unless it concerns family companies or companies in the nature of a partnership. The High Court, however, found that the appellant and his family were not given notice of the meetings, and their removal was surreptitious and illegal. The Court restored the appellant and his family members to their positions as directors.

4. Maintainability of the Petition:
The respondents argued that the petition was not maintainable as the appellant did not hold the required 10% of shares. The High Court noted that the appellant originally held 50% of the shares, which were reduced to less than 10% by the company's illegal acts. The Court held that the reduction in shareholding due to the company's dubious actions did not disqualify the appellant from seeking relief under Sections 397 and 398.

5. Involvement of Respondent No. 3:
Respondent No. 3 sought deletion from the proceedings, claiming no involvement in the dispute between the appellant and the company. The Board rejected this plea, stating that respondent No. 3 was involved in various agreements and was the owner of the land in question. The High Court disagreed, finding that respondent No. 3 was not a proper party to the petition and had been unnecessarily dragged into the litigation. The Court discharged respondent No. 3 from the proceedings.

Conclusion:
The High Court partly allowed the appeal, confirming the Board's order to set aside the allotment of 18,876 shares and restore the status quo ante. The Court directed respondent No. 2 and his family to refund the dividend received on the shares within three months. The removal of the appellant and his family from the directorship was declared illegal, and they were restored to their positions. The appeal by the company and respondent No. 2 was dismissed, and costs were imposed on them. Respondent No. 3 was discharged from the proceedings, and costs were awarded in his favor.

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