2015 (4) TMI 1186 - Board - Companies Law

Oppression and mismanagement - conduct of EOGM - winding up petition - Held that - The said transfer of shares in favour of the Respondent Nos. 5 to 12 being contrary to the AOA of the Company is illegal and against the provisions of the Company law and therefore the impugned transfer of shares In favour of Respondent Nos. 5 to 12 is liable to be cancelled. As regards mismanagement in the affairs of the company have also examined the allegation made by the Petitioner. To certain extent they are proved. The Respondents admittedly have not Issued the notices of the meetings to the Petitioner as required in law. They have failed to make compliances as required in law within the statutory period. It is also proved that they have fabricated the documents. They have also denied Inspection of the documents to the Petitioner for no valid reason although he was a shareholder and a Director. Therefore of the view that these acts amounts to mismanagement in the affairs of the Company as defined in section 398 of the Act. All these instances amount to mismanagement in the affairs of the Company. It is a well established law that to maintain a petition under Section 397/398 of the Act it must be established that the oppression complained of affected a person in his capacity or character as a member of the company as harsh and unfair treatment in any other capacity such as a director or a creditor is outside the purview of the said section; (b) there must be continuous acts constituting oppression up to the date of the petition; (c) the events have to be considered not in isolation but as part of a continuous story; (d) it must be shown as a preliminary to the application of Section 397 that there are just and equitable grounds for winding up the company; (e) the conduct complained of can be said to be oppression only if it can be said that it is burdensome harsh and wrongful and the oppression involves at least elements of lack of probity and fair dealing to a member in matters of proprietary right as a shareholder. Therefore having regard to the facts of the case in hand the necessary ingredients of the provision contained in Section 397 which provides that to wind up the company would unfairly prejudice such member or members but that otherwise the facts would justify the making of a winding up order on the ground that it was just and equitable that the company should be wound up; also stands proved. A careful analysis of Section 397 would show that the winding up on just and equitable grounds would be automatic and this Board has to only form an opinion that such winding up would not be in the interests of the Company/shareholders and accordingly to mould relief with a view to put an end to the matters complained of. On a overall analysis of the facts of the case discussed hereinabove in my opinion the Petitioner has succeeded to prove that the acts of the Respondents is burdensome harsh and wrongful and lacks in probity and fair deal to the Petitioner. The effect of acts complained of is continuous in nature the petition therefore deserves to be allowed.

Summary

Issues Involved:
1. Illegal increase in authorized and paid-up share capital.
2. Illegal allotment and transfer of shares.
3. Illegal removal and appointment of directors.
4. Mismanagement and suppression of information.
5. Validity of arbitration award and its impact on the company's assets.

Analysis:

1. Illegal Increase in Authorized and Paid-Up Share Capital:
The Petitioner argued that the increase in the authorized share capital from Rs. 25 Lakhs to Rs. 1.5 Crores and subsequently to Rs. 3 Crores was illegal as no notice was served to the Petitioner. The Respondents failed to provide evidence of serving notices and the resolutions passed in the EOGMs were not produced. The Petitioner was not offered the opportunity to purchase additional shares, and the allotment was made selectively to gain control of the company, which is oppressive. The court found that the increase in share capital and subsequent allotments were made with malafide intent to reduce the Petitioner's shareholding from 50% to 5.08%, which constitutes oppression.

2. Illegal Allotment and Transfer of Shares:
The Petitioner contended that the allotment of 1,15,000 shares to Respondent No. 2 and subsequent allotments to Respondent Nos. 3 and 4 were illegal as no notices were served, and the allotments were made to dilute the Petitioner's shareholding. The transfer of 100 shares to Respondent No. 3 and 12 shares to Respondent Nos. 5 to 12 was also challenged as it violated the Articles of Association and was intended to increase the number of shareholders to prevent the Petitioner from maintaining the petition. The court held that these allotments and transfers were illegal and oppressive.

3. Illegal Removal and Appointment of Directors:
The Petitioner claimed that his removal as a director was illegal as no notice was served, and the prescribed procedure was not followed. The Respondents failed to provide proof of service of notices or minutes of meetings where the removal was decided. The court found that the removal was illegal and oppressive. The appointment of Respondent Nos. 3 and 4 as directors was also challenged as it was done without serving notices and was not ratified in any AGM. The court held that these appointments were illegal but did not remove them to avoid a deadlock situation, given the peculiar facts of the case.

4. Mismanagement and Suppression of Information:
The Petitioner alleged mismanagement, including siphoning of funds and denial of inspection of company records. The Respondents failed to issue notices of meetings, fabricated documents, and denied inspection of records to the Petitioner. The court found these actions amounted to mismanagement under Section 398 of the Act.

5. Validity of Arbitration Award and Its Impact on the Company's Assets:
The Petitioner challenged the validity of the arbitration award that allegedly dealt with his shareholding and the company's assets without making him a party to the proceedings. The court refrained from commenting on the arbitration award and its impact on the company's assets, as the matter was already pending before the High Court.

Order:
a. The EOGMs held on 15/2/2010 and 15/6/2010 and the resolutions passed therein are declared illegal, null, and void.
b. The allotments made on 30/3/2010 and 12/8/2010 are declared illegal and void.
c. The transfer of 100 shares to Respondent No. 3 is declared illegal and void.
d. The transfer of 12 shares to Respondent Nos. 5 to 12 is declared illegal and void.
e. The company is directed to comply with the above directions within 45 days.
f. The Petitioner is declared to hold 50% of the paid-up share capital.
g. The Register of Members is to be rectified accordingly.
h. The Petitioner's removal as a director is set aside, and he is reinstated.
i. The company is directed to serve notices through registered post and email and allow inspection of statutory documents.
j. Other prayers by the Petitioner are declined.
k. The petition is disposed of in the above terms.
l. Interim orders and applications, if any, are disposed of accordingly.
m. No order as to costs.
n. Let a copy of the order be issued to the parties.