2006 (10) TMI 470 - Board - Indian Laws

Issues Involved:
1. Non-declaration of dividends.
2. Increase of the authorized share capital.
3. Exclusion of the petitioners from the management of the Company.
4. Siphoning of funds by the respondents.
5. Illegal expansion program of the Company.
6. Refusal to increase the salary of the first petitioner while increasing the salary of the respondents 3 & 4.
7. Payment of commission to the respondents 3 & 4 before finalization of accounts.
8. Amendment of articles curbing the rights of the petitioners.

Issue-wise Detailed Analysis:

1. Non-declaration of Dividends:
The petitioners alleged that despite substantial profits, the Company never declared any dividends, which deprived minority shareholders of returns on their investments. The board of directors, controlled by the majority shareholders, rejected the proposal to declare dividends, citing the need to retain profits for expansion and working capital. The judgment noted that non-declaration of dividends, while selectively increasing remuneration for respondents 3 & 4, constituted an act of oppression against the petitioners. It emphasized that every shareholder is entitled to enjoy the profits of the company in the form of dividends, and failure to declare dividends could constitute unfair prejudice to the shareholders.

2. Increase of the Authorized Share Capital:
The petitioners argued that the proposal to increase the authorized share capital from Rs. 3.70 crores to Rs. 10 crores was intended to dilute their shareholding and reduce their protective rights. The judgment acknowledged this concern but did not find sufficient grounds to interfere with the decision, as it was within the collective wisdom of the board of directors.

3. Exclusion of the Petitioners from the Management of the Company:
The petitioners claimed they were excluded from the management and decision-making processes of the Company. The judgment noted that the removal of the eighth petitioner from directorship was part of the broader pattern of exclusion but did not specifically address this issue in detail, as the primary relief sought was the exit of the petitioners from the Company.

4. Siphoning of Funds by the Respondents:
The petitioners alleged that the third respondent siphoned off funds under the guise of sub-contracting charges to M/s Fluid Dynamics Private Limited, a company controlled by the Humbarwadi family. The judgment found that the petitioners failed to substantiate these allegations with concrete evidence. The transactions with M/s Fluid Dynamics Private Limited were part of the Company's business dealings for several years, and the petitioners had not raised any objections at earlier stages.

5. Illegal Expansion Program of the Company:
The petitioners contended that the expansion program lacked financial and technical viability and would burden the Company with excessive debts. The judgment recognized that the decision to increase the capacity of Plant-III from 18,000 MTs to 36,000 MTs was a business decision taken unanimously by the board of directors, including the first petitioner. The CLB refrained from interfering with this decision, emphasizing the importance of recognizing corporate democracy.

6. Refusal to Increase the Salary of the First Petitioner while Increasing the Salary of the Respondents 3 & 4:
The petitioners argued that while the remuneration of respondents 3 & 4 was substantially increased, the first petitioner's salary remained unchanged. The judgment found that the selective and exorbitant increase in remuneration for respondents 3 & 4, without extending similar benefits to the first petitioner, constituted an act of oppression. It noted that there was no link between shareholding and remuneration, but the decision was unfair to the petitioners.

7. Payment of Commission to the Respondents 3 & 4 before Finalization of Accounts:
The petitioners alleged that respondents 3 & 4 withdrew commission amounts before the annual accounts were approved. The judgment acknowledged this grievance but noted that the payment of commission was ratified by the board of directors at a subsequent meeting, thereby curing the irregular payment.

8. Amendment of Articles Curbing the Rights of the Petitioners:
The petitioners challenged several amendments to the articles of association, which they claimed were intended to usurp control of the Company and eliminate the protection provided to minority shareholders. The judgment did not delve deeply into these amendments, as the primary relief sought was the exit of the petitioners from the Company. It noted that the amendments were within the collective wisdom of the board of directors.

Conclusion:
The judgment concluded that the petitioners were entitled to sell their shares to the respondents at a fair market value, determined by an independent valuer. M/s Deloitte Touche was appointed to determine the fair market value of the shares as of 31.03.2005. The respondents were directed to settle the consideration for the shares within 45 days of receiving the valuation report. The Company was to bear the valuation fee. The judgment emphasized the need to bring an end to the matters complained of by the petitioners and ensure fairness in the valuation process. All interim orders were vacated, and no order as to costs was made.

← Previous Next →