2004 (10) TMI 609 - Board - Companies Law

Issues Involved:
1. Alleged acts of oppression and mismanagement under Sections 397 and 398 of the Companies Act, 1956.
2. Legality of the removal of the petitioner as director.
3. Legality of the induction of the third respondent as director.
4. Appointment of an independent auditor to verify the company's books of account.
5. Restraint on the second respondent from operating the company's bank account.
6. Validity of the transfer and allotment of shares.

Issue-wise Detailed Analysis:

1. Alleged Acts of Oppression and Mismanagement:
The petitioner, holding 50% of the issued share capital, alleged acts of oppression and mismanagement in the affairs of the company. The petitioner claimed that during his absence due to a severe car accident, the second respondent fabricated his signature and misappropriated company profits. The petitioner also alleged that the second respondent acted inimically towards him, leading to his illegal removal as a director and the induction of the third respondent to usurp control of the company. The respondents, however, argued that the petitioner's removal and the third respondent's induction were in the company's best interest due to the petitioner's incapacitation following the accident.

2. Legality of the Removal of the Petitioner as Director:
The petitioner contended that his removal from the directorship was illegal, as it was done without proper notice and in violation of Section 284(1) and (2) read with Section 190 of the Companies Act. The respondents claimed that the petitioner was removed due to his incapacity post-accident, asserting that the reconstitution of the board was necessary for the company's continuity. The court found that the removal did not comply with the mandatory requirements and was not in the company's best interest, especially given the petitioner's equal shareholding and role as a promoter director.

3. Legality of the Induction of the Third Respondent as Director:
The petitioner sought a declaration that the induction of the third respondent as director was illegal. The respondents argued that the third respondent was inducted to fill the casual vacancy created by the petitioner's removal. However, the court found that the induction was not justified, particularly given the lack of compliance with the Articles of Association and the absence of proper notice and agenda for the extraordinary general meeting.

4. Appointment of an Independent Auditor:
The petitioner requested the appointment of an independent auditor to verify the company's books from October 3, 2001. The court did not specifically address this issue in detail but focused on the broader context of the alleged financial irregularities and the overall management disputes.

5. Restraint on the Second Respondent from Operating the Company's Bank Account:
The petitioner sought a permanent injunction to restrain the second respondent from operating the company's bank account. The court's decision to set aside the removal of the petitioner and the appointment of the third respondent indirectly addressed this issue by restoring the petitioner's position and thereby impacting the control over the bank account.

6. Validity of the Transfer and Allotment of Shares:
The petitioner challenged the transfer of 500 shares to the third respondent and the allotment of 10,000 shares to the respondents and others. The court found that the transfer and allotment did not comply with the Articles of Association and lacked proper justification. The court set aside both the transfer of shares to the third respondent and the allotment of additional shares, citing the lack of evidence for the necessity and actual receipt of funds for such allotments.

Conclusion:
The court declared the removal of the petitioner as director illegal and set aside the appointment of the third respondent and Karl Marz as directors. It also nullified the transfer of 500 shares to the third respondent and the allotment of 10,000 shares to the respondents and others. Given the irreconcilable differences and loss of mutual trust, the court ordered the second respondent to sell his shares to the petitioner or his nominee at par value to ensure the smooth functioning of the company. The company petition was disposed of with these directions, and the interim order was vacated. No order as to costs was made.

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