2010 (8) TMI 1088 - HC - Companies Law

Summary

Issues Involved:
1. Maintainability of the Company Petition under Sections 397 and 398 of the Companies Act, 1956.
2. Alleged fraudulent transfer of shares and the first respondent's membership status.
3. Jurisdiction of the Company Law Board to address issues of fraudulent share transfer.

Detailed Analysis:

1. Maintainability of the Company Petition under Sections 397 and 398 of the Companies Act, 1956:
The appeals arise from a Company Petition filed under Sections 397 and 398 of the Companies Act, 1956, concerning allegations of mismanagement and oppression. The Company Law Board held that the petition was maintainable as the first respondent met the qualifications under Section 399 of the Act. However, the appellants contended that the first respondent was neither a member nor a shareholder of the company at the time of filing the petition. The High Court found that unless the first respondent was a member on the filing date, the petition could not be maintained. The first respondent's claim to shares and membership status needed to be established before proceeding with the petition.

2. Alleged Fraudulent Transfer of Shares and the First Respondent's Membership Status:
The first respondent alleged that his shareholding was mischievously reduced from 50% to 25.5% and later fraudulently transferred, leaving him with no shares. He claimed that he continued to possess share certificates and that the documents showing the transfer were fraudulent. The appellants argued that the first respondent had sold all his shares and received full consideration. The High Court noted that the Company Petition did not challenge the alleged fraudulent transfer of shares, which was crucial for establishing the first respondent's membership status. The court emphasized that the first respondent must establish his membership and shareholding to maintain the petition.

3. Jurisdiction of the Company Law Board to Address Issues of Fraudulent Share Transfer:
The Company Law Board held that it could consider the first respondent's claim to shares despite the alleged fraudulent transfer. However, the High Court found this approach flawed as the Company Petition did not challenge the transfer. The court cited the Gujarat High Court's decision in *Gulabrai Kalidas Naik v. Laxmidas Lallubhai Patel*, emphasizing that a person must be a member to file a petition under Sections 397 and 398. The High Court concluded that without establishing membership, the petition could not be entertained. The court allowed the first respondent time to file appropriate proceedings to challenge the transfer and establish his membership.

Conclusion:
The High Court set aside the Company Law Board's order, holding that the first respondent must establish his membership to maintain the petition under Sections 397 and 398. The court granted the first respondent twelve weeks to file appropriate proceedings to challenge the alleged fraudulent transfer of shares. If such proceedings are not filed within the stipulated period, the Company Petition will be dismissed as not maintainable. The appeals were partly allowed on these terms.