2006 (9) TMI 574 - Board - Companies Law

Oppression and mismanagement - jurisdiction under Sections 397/398 - director removed from the board - family company - Whether the letter of the petitioner could have been treated as a letter of resignation - seeking declaration that the allotment of shares is bad in law - HELD THAT - Admittedly the company took over the business of partnership firms in which the petitioner was a partner and thereafter he continued to be a whole time director of the company. Thus the petitioner has a vested right to continue as a director. There is no mention about directorship nor the letter has been addressed either to the company or to the board of directors. There is not even a mention of resignation . Therefore by treating this letter as the letter of resignation and ousting the petitioner who was a partner in the earlier firm the business of which the company had taken over and continued as a whole time director of the company the respondents have acted highly oppressive to the petitioner. It is seen that all the 598676 shares proposed to be allotted on the two occasions had been allotted only to the members belonging to the respondents group and thus they have consolidated their position in the company. There is no evidence that for the first allotment shares were offered to the petitioner and the respondents have admitted that in respect of the second allotment no offer was made to the petitioners. Thus the petitioners are justified in claiming that by the said allotments not only the respondents have enriched themselves but also reduced the percentage holding of the petitioners. Considering the fact that the petitioners holding in the company is only around 10% and that the company is engaged in a profitable business winding up of the company would be against the interest of the shareholders as well as the company. Therefore since in terms of section 397 the acts complained of should be put an end to I could direct the company to take back the 1st petitioner as a director and also direct the allottees of the shares to transfer such number of shares to the petitioners which would bring their share holding to the original percentage. However I do not propose to do so. It is the understanding of the respondents that the desire of the petitioner in saying good bye amounted to resignation. He had actually desired to say good bye to the business association and partnership. It would mean that he did not desire to have any association with the respondents. This being the case his business association can be terminated by purchasing his shares in the company so that the respondents would have truly acted not only in spirit but also in terms of that letter. Even otherwise since the relationship between the petitioners and the respondents has soured in the interests of all concerned the petitioners being in minority their shares could be purchased either by the company or the respondents as the case may be at the option of the respondents. This would not only put an end to the disputes but also would be in the long term interests of all concerned. By another order of even date in respect of another company in which the same shareholders are parties I have given the option to the respondents who are in minority to go out of the company. Therefore in terms of Section 402 I consider it appropriate that the final goodbye should be by way of exist of the petitioners as members of the company by directing the respondents/the company to purchase the shares held by the petitioners on a fair value to be determined by an independent valuer. such fair value will also take care of the allegation of the petitioners that the respondents have issued shares to themselves at par value when the fair value was much higher. Accordingly I order so. The parties will appear before me to suggest a mutually acceptable valuer to determine the fair value. The valuation of the shares shall be on the basis of the balance sheet being the proximate to the date of the petition.

Issues Involved:
1. Alleged oppression through the reduction of shareholding by allotment of further shares.
2. Alleged illegal removal of the petitioner from the board of directors.
3. Alleged non-receipt of annual reports and notices for AGMs.
4. Alleged improper issuance of new shares without offering them to the petitioners.
5. Alleged misuse of the petitioner's personal letter as a resignation letter.

Issue-Wise Detailed Analysis:

1. Alleged Oppression through Reduction of Shareholding:
The petitioners, holding 12.99% of the company's paid-up capital, claimed their shareholding was reduced to 10.05% due to the exclusion from further share allotments. They sought a declaration that the allotment of shares was illegal or, alternatively, that the allottees pay the fair value of shares determined by an independent valuer. The respondents argued that the petitioners were offered shares during the first allotment, which they did not subscribe to due to an oral family arrangement. For the second allotment, the company had converted to a private limited company, and thus, Section 81(1) was not applicable. The Board found that the petitioners were not offered shares during the second allotment, which was oppressive, as it altered their position within the family company.

2. Alleged Illegal Removal from the Board:
The petitioner claimed he was removed from the board based on a personal letter misinterpreted as a resignation. The letter was addressed to the 2nd respondent, not to the company or the board, and did not explicitly mention resignation. The respondents contended that the letter indicated the petitioner's intention to resign and that his accounts were settled, and personal guarantees released as requested. The Board concluded that the letter could not be considered a resignation letter due to its ambiguity and the lack of proper addressing, thus finding the removal oppressive.

3. Alleged Non-Receipt of Annual Reports and AGM Notices:
The petitioner alleged that after his removal, he stopped receiving annual reports and AGM notices, which he could only obtain through a personal visit to the company's office. The respondents did not directly address this issue. The Board noted the petitioner's significant involvement and investment in the company, supporting his claim of being sidelined.

4. Alleged Improper Issuance of New Shares:
The petitioners argued that the company issued new shares at par value despite a higher fair value, causing a loss to the company and reducing their shareholding. The respondents justified the share issuance as necessary for the company's financial needs and compliance with statutory rules. The Board found that the issuance of shares at par value, without offering them to the petitioners, was oppressive and enriched the respondents at the petitioners' expense.

5. Alleged Misuse of Personal Letter as Resignation:
The petitioner contended that his letter dated 10.6.1998 was misused to remove him from the board. The respondents argued that the letter clearly indicated resignation and was accepted accordingly. The Board examined the letter and concluded it was not a resignation letter due to its ambiguous content and improper addressing, thus finding the removal oppressive.

Conclusion:
The Board determined that the petitioners had established acts of oppression. Instead of winding up the company, which would be against the shareholders' interests, the Board directed the respondents or the company to purchase the petitioners' shares at a fair value determined by an independent valuer. This resolution aimed to end the disputes and serve the long-term interests of all parties involved. The parties were instructed to suggest a mutually acceptable valuer for determining the fair value based on the balance sheet as of 31st March 2003.

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