2009 (7) TMI 1314 - Board - Companies Law

Maintainability of Petition - Family companies - Acts of oppression and mismanagement - Quasi judicial authority exercising equitable jurisdiction - Non service of proper notice - extraordinary general meeting was held without sending notices to all the directors - wherein resolution was passed (a) enhancement of share capital (b) allotment of additional shares amongst the members of respondent No. 2 group - Removal of Directors - Additional shares were issued in order to convert personal loans of the directors, i.e., respondent No. 2 group into equity on the say of financial investment, there are two meetings of the same date at two different places, one which is available on the Registrar of Companies record, and another one filed along with the reply by the respondents. Maintainability of Petition - HELD THAT - The petitioners have to meet the requirement u/s 399 either in terms of the number/percentage of shares or in terms of the number of shareholders. Further, it has been held in a number of cases that if the shareholding of the petitioner in a petition u/s 397 and 398 got reduced to below 10 per cent, on issue/allotment of further shares and if the said issue/allotment is the very act which is challenged as oppressive in the said petition, the maintainability of the petition would be decided after determining the validity of the issue of allotment. The requirement of share qualification is relevant and material for maintaining the petition. The prima facie evidence to the shares could be either the share certificate(s) or even the register of members. However, even in the absence of share certificates or entry in the register of members, if a person could establish that certain shares have been allotted to him, then, for the purposes of Section 399 of the Companies Act, 1956, he could be treated as a member. In the case of Navin Ramji Shah v. Simplex Engineering and Foundry Works P. Ltd. 2006 (9) TMI 574 - COMPANY LAW BOARD NEW DELHI , it has been held that in family companies any reduction in the percentage of shareholding irrespective of quantum of percentage, the affected parties can always allege oppression as his position vis -a -vis other family members gets altered due to non -allotment of shares and in this case the petitioners have alleged that their 50 per cent, shareholding has been reduced to 26.6 per cent, besides that the transfer shown is fraudulent showing their 50 per cent, shareholding as reduced to nil. Thus the respondents' contention that before filing a petition u/s 397 and 398 of the Act the petitioners should seek the rectification of register of members under Section 111/111A of the Act is misplaced. In any case, this objection was not taken by the respondents in their reply. The petitioners have succeeded in making out a case that they held 50 per cent, shares in this closely held family company in the nature of quasi -partnership. The respondents' preliminary objection regarding non -maintainability of the company petition in terms of the requisite qualification u/s 399 is not tenable. The petition cannot be thrown out at the threshold. Acts of oppression and mismanagement - It is well -settled proposition that the provision of Sections 397 and 398 of the Act, are to be invoked to get the grievances of oppression and mismanagement redressed. The petitioner has rightly invoked the provisions of these sections. If a member who holds 50 per cent, of the shares in a company is reduced to the position of minority shareholder in the company by an act of the company or by its board of directors' mala fides, the said act must ordinarily be considered to be an act of oppression to the said member. Therefore, the allotment of shares impugned in the company petition made for personal gains and with a view to gain advantage against the other shareholders of a closely held company was neither in compliance with the legal requirements nor ensured the fair play and probity in corporate management, resulting in the enhancement of the shareholders of the second respondent, which would constitute an act of oppression. Quasi judicial authority - The Company Law Board is a quasi judicial authority exercising equitable jurisdiction. The court exercising equity jurisdiction, cannot ignore the well known maxims of equity. Two such maxims are that he who seeks equity must do equity and he who comes into equity must come with clean hands. I agree that it is a settled proposition of law that the conduct of the parties is a very relevant factor to be considered in equitable proceedings u/s 397. In Srikanta Datta Narasimharaja Wadiyar v. Sri Venkateswara Real Estate Enterprises P. Ltd. 1989 (4) TMI 268 - HIGH COURT OF KARNATAKA , it was held that the petitioner seeking equitable relief must come with clean hands and good conduct, failing which the petition would constitute a gross abuse of the process of the court, and the petitioner is not entitled for any relief u/s 397. It also held that the conduct of the parties in other proceedings could also be taken into consideration. The settled Principle of law is that when a person seeks equity he must come with clean hands . In the present case the instances of unclean hands of the respondents are with respect to the affairs of the company and even otherwise the instances of unclean hands are enumerated. The entire action of the respondents of removal from directorship and issue of additional shares was only to oust the petitioner and his wife from the company to illegally gain control and management of the company and is indisputably amenable to the jurisdiction of the Company Law Board. The petitioners are not seeking to enforce the family settlement dated September 26/27, 1987. The family settlement was referred to by the petitioners only to show that the intention of the family members was to have respondent No. 1 company in joint control. As mentioned in the memorandum of understanding the hotel business was not split. The respondents having failed to refute the allegations of the petitioners regarding the acts of oppression and mismanagement complained of in this petition and the petitioners having succeeded in making out their case distinguishing the case law relied upon by the respondents, there being no dispute with the principles laid down in those cases, but the facts of those cases being inapplicable to the facts of this case, each case turns on its own facts, to do substantial justice between the parties, I, hereby order as follows (I) The petitioners' (petitioner No. 1 and petitioner No. 2) cessation/removal as directors, the petitioners did not cease to be directors, they were illegally removed from directorship, is hereby held as illegal, all resolutions and statutory forms filed in this regard are declared as null and void restoring status quo ante. Petitioner No. 1 and petitioner No. 2 continue to be the directors of respondent No. 1 company. (II) Increase in the authorised share capital and allotment of additional shares is hereby set aside being illegal, status quo ante is restored declaring the resolutions passed and the statutory forms filed as null and void. (III) since the respondents are still in possession of the share certificates of the petitioners, which amounts to an act of oppression, the respondents are hereby directed to hand over the same to the petitioners within two weeks of receipt of this order. Company Petition No. 47 of 2004 is hereby allowed and disposed of in the above terms. All company applications stand disposed of. All Interim orders stand vacated. No order as to costs.

Summary

Issues Involved:
1. Allegations of oppression and mismanagement under Sections 397 and 398 of the Companies Act, 1956.
2. Validity of the removal of directors.
3. Legality of the increase in authorized share capital and allotment of additional shares.
4. Alleged fraudulent transfer of shares.
5. Maintainability of the petition under Section 399 of the Companies Act, 1956.
6. Delay and laches in filing the petition.

Detailed Analysis:

1. Allegations of Oppression and Mismanagement:
The petitioners alleged that the respondents engaged in acts of oppression and mismanagement by removing them from the board and reducing their shareholding from 50% to 26.6% without proper notice or following due procedure. The petitioners argued that the respondents manipulated the company's records to gain control and excluded them from the management.

2. Validity of the Removal of Directors:
The respondents claimed that the petitioners ceased to be directors by operation of law under Section 283(1)(g) of the Companies Act due to their absence from board meetings. However, it was noted that no proper notices were sent to the petitioners regarding the board meetings, and the company was non-functional due to disturbed conditions in Srinagar. The removal was deemed illegal as the statutory precondition of sending notices to the directors was not met.

3. Legality of the Increase in Authorized Share Capital and Allotment of Additional Shares:
The respondents increased the authorized capital from Rs. 18 lakhs to Rs. 35 lakhs and allotted additional shares to themselves without offering the same to the petitioners. The petitioners contended that no proper meeting was held, and no notices were issued. The increase in capital and allotment of shares were found to be for ulterior and improper motives, lacking probity and good faith, and thus declared illegal.

4. Alleged Fraudulent Transfer of Shares:
The petitioners argued that the transfer of their shares to the respondents was fraudulent, with no transfer deeds or consideration paid. The respondents failed to provide evidence of the mode and manner of payment. The petitioners highlighted discrepancies in the share certificates and transfer deeds, indicating forged signatures. The transfer was declared invalid.

5. Maintainability of the Petition under Section 399:
The respondents challenged the maintainability of the petition, arguing that the petitioners did not meet the requisite shareholding percentage under Section 399. However, it was established that the petitioners held 50% shares before the disputed allotment, and the reduction in their shareholding was itself an act of oppression. The petition was deemed maintainable.

6. Delay and Laches in Filing the Petition:
The respondents argued that the petition was barred by delay and laches. However, it was noted that the petitioners became aware of the acts complained of only after inspecting the Registrar of Companies' records on February 13, 2004, and filed the petition in August 2004. The delay was not considered deliberate or negligent, and the continuous effect of the oppressive acts justified the petition's timeliness.

Conclusion:
The Company Law Board found in favor of the petitioners, declaring the removal of directors and the increase in authorized share capital and allotment of additional shares as illegal. The petitioners were restored as directors, and the respondents were directed to return the share certificates to the petitioners. The petition was allowed, and all interim orders were vacated.