1982 (10) TMI 211 - HC - Companies Law

Issues Involved:

1. Transfer of 2% shares held by late Mr. A.C. Daphtary.
2. Transfer of 9% shares held by the Swedish company.
3. Compliance with Articles of Association.
4. Allegations of oppression under Section 397 of the Companies Act.
5. Allegations of mismanagement under Section 398 of the Companies Act.
6. Compliance with Foreign Exchange Regulation Act (FERA).
7. Validity of resolutions passed at the board meeting on August 25, 1981.
8. Appointment of a committee of management.
9. Conduct of the Swedish group and Mr. M.T. Shah.
10. Role of the Reserve Bank of India (RBI).

Issue-Wise Detailed Analysis:

1. Transfer of 2% Shares Held by Late Mr. A.C. Daphtary:

The court examined Articles 48 and 49 of the Articles of Association concerning the transmission of shares. Article 48 applies to the executor or administrator of a deceased member, requiring probate or letters of administration. Article 49 allows a person entitled to shares due to death to be registered as a member with the board's consent. The court found that Mrs. Daphtary lacked the locus standi to apply for the transmission of shares without probate. The transfer of these shares to Mr. M.T. Shah was deemed invalid as it violated pre-emptive rights under Articles 34, 35, and 40.

2. Transfer of 9% Shares Held by the Swedish Company:

The transfer of 9% shares to Mr. M.T. Shah was challenged based on Article 34, which restricts share transfers without the consent of all shareholders. The court held that the transfer violated pre-emptive rights and the provisions of the Foreign Exchange Regulation Act (FERA). The Swedish company's attempt to transfer shares to Mr. Shah without offering them to existing shareholders was invalid.

3. Compliance with Articles of Association:

The court emphasized the importance of complying with Articles 34 to 40, which provide a mechanism for share transfers, including pre-emptive rights for existing shareholders. The court found that the Swedish company's actions violated these provisions, rendering the transfers invalid.

4. Allegations of Oppression Under Section 397:

The court found that the Swedish group's actions, including the transfer of shares and attempts to terminate the sole selling agency, were oppressive to the Indian group of shareholders. The court noted that these actions aimed to oust the Indian group from the management of the company and circumvent FERA provisions, justifying relief under Section 397.

5. Allegations of Mismanagement Under Section 398:

The court did not find substantial evidence of mismanagement but focused on the oppressive conduct of the Swedish group. The court held that the actions of the Swedish group and Mr. Shah were prejudicial to the interests of the company and its shareholders.

6. Compliance with Foreign Exchange Regulation Act (FERA):

The court highlighted the importance of FERA in regulating foreign equity participation. The Swedish company's attempt to transfer shares to Mr. Shah was seen as an attempt to circumvent FERA provisions, which require dilution of foreign equity to 40%. The court held that this was a matter of public interest and national policy.

7. Validity of Resolutions Passed at the Board Meeting on August 25, 1981:

The court declared the resolutions passed at the board meeting on August 25, 1981, invalid due to the lack of agenda and the absence of Indian group nominees. The resolutions concerning the transfer of shares were found to be in violation of the Articles of Association and FERA.

8. Appointment of a Committee of Management:

The court appointed a committee of management consisting of representatives from both the Indian and Swedish groups, with Dr. Monotosh Mukharji as the chairman. This committee was tasked with managing the company until a new board of directors was elected.

9. Conduct of the Swedish Group and Mr. M.T. Shah:

The court found that the conduct of the Swedish group and Mr. Shah lacked probity and fairness. Their actions were aimed at maintaining control over the company and were oppressive to the Indian group. The court emphasized the need for fair dealing and compliance with legal provisions.

10. Role of the Reserve Bank of India (RBI):

The court noted that the RBI had directed the dilution of foreign equity participation and rejected the Swedish company's proposal to transfer shares to Mr. Shah. The court held that the RBI's directives must be followed, and the Swedish company's actions were in violation of these directives.

Conclusion:

The court declared the resolutions passed on August 25, 1981, void and directed the Swedish company to transfer 9% of its shares to existing shareholders, excluding the Swedish group, at Rs. 150 per share. The court also directed compliance with the Articles of Association for the transfer of 2% shares held by late Mr. Daphtary. A committee of management was appointed to oversee the company's operations until a new board of directors was elected. The court emphasized the need for compliance with FERA and fair dealing among shareholders.

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