2010 (7) TMI 815 - HC - Companies Law

Oppression and mismanagement - Whether in this case the petitioners could make out a case for any relief on the ground of equity and even if the petitioners failed to make out a case under section 397 still they are entitled to any relief under section 402 of the Companies Act 1956? Held that - There is substance in the submission of learned counsel for the respondent that for such relief there is no fact foundation in the entire company petition nor such declaration as sought by the petitioner in the petition could have been given by the Company Law Board and there is no prayer of the petitioner that respondent No. 3 Shri T.N. Unni be removed from the board of directors.From the above discussions it is clear that the petitioners miserably failed to make out any case under section 397 of the Companies Act 1956. No reason to hold that the company whose shareholding in other companies could have affected and the company in its wisdom found that the company should contest the appeal wherein the petitioner was under an obligation to implead the company as party in the company petition and appeal then the company should not have put forward its own case before the court. The act of the company cannot be condemned to the extent of holding that the company committed wrong and for that wrong the other director and respondents are liable.

Issues Involved:
1. Allegations of oppression and mismanagement.
2. Validity and fairness of the rights issue.
3. Appointment and conduct of respondent No. 3 (director).
4. Equitable relief under section 402 of the Companies Act, 1956.
5. Financial mismanagement allegations.
6. Costs of litigation.

Detailed Analysis:

1. Allegations of Oppression and Mismanagement:
The petitioners, holding 25% shares in the company, alleged oppression and mismanagement by respondent No. 2, who increased his shareholding significantly over time. They sought relief under sections 397/398 of the Companies Act, 1956, including the appointment of an administrator, reconstitution of the board, and injunctions against issuing new shares or dealing with company assets.

2. Validity and Fairness of the Rights Issue:
The petitioners contended that the rights issue to increase the paid-up capital from Rs. 30,27,000 to Rs. 3,30,27,000 was an act of oppression designed to reduce their shareholding to a minority. The Company Law Board (CLB) initially found the need for funds genuine but held that forcing the petitioners to invest to maintain their shareholding was oppressive. The High Court, however, found that the company needed funds for renovations and the rights issue was a legitimate means to raise these funds. The court held that the rights issue per se was not oppressive, especially since the company had shown no financial mismanagement.

3. Appointment and Conduct of Respondent No. 3 (Director):
Respondent No. 3, T.N. Unni, was appointed as a director based on a previous settlement. The petitioners alleged misconduct, claiming he colluded with respondent No. 2 and prepared a valuation report falsely attributed to petitioner No. 1. The CLB and the High Court found no substantial evidence of misconduct by Unni and upheld his appointment.

4. Equitable Relief under Section 402 of the Companies Act, 1956:
The CLB provided four options for relief, including converting investments into loans, continuing the rights issue with compensation, transferring shares in another company, and parting ways with a fixed compensation of Rs. 5 crores. The High Court found these options arbitrary and not based on a fair valuation. It emphasized that equitable relief must be grounded in reason and facts, and the petitioners failed to prove their case for oppression or mismanagement.

5. Financial Mismanagement Allegations:
The petitioners alleged financial mismanagement, including misuse of company funds by respondent No. 2. The CLB found no evidence of financial mismanagement, noting that the company had shown profits and declared dividends. The High Court upheld this finding, emphasizing that the petitioners had not raised objections to the accounts during the relevant period.

6. Costs of Litigation:
The petitioners sought to recover litigation costs from the respondents, arguing that the company should not bear these expenses. The High Court dismissed this application, stating that the company had a legitimate interest in defending its actions and participating in the litigation.

Conclusion:
The High Court set aside the CLB's order, dismissing the company petition and appeals by the petitioners. It upheld the need for the rights issue, found no evidence of financial mismanagement or misconduct by respondent No. 3, and denied the petitioners' claim for equitable relief and litigation costs.

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