2006 (6) TMI 519 - Board - Companies Law

Oppression Or Mismanagement - Increasing of authorized share capital and allotment of additional shares - manipulating the allotment of shares - removal of Petitioner from the Directorship - violation of the proper and legal procedure prescribed - barred by limitation - HELD THAT - It is a well settled proposition that the provision of Sections 397 and 398 are to be invoked to get the grievances of oppression and mismanagement redressed. The petitioner has rightly invoked the provisions of these sections. If a member who holds 50% of the shares in a company is reduced to the position of minority shareholder in the company by an act of the company or by its Board of Directors malafide, the said act must ordinarily be considered to be an act of oppression to the said member. I am, therefore, of the view that the allotment of shares impugned in the company petition made for personal gains and with a view to gain advantage against the other shareholders of a closely held company was neither in compliance with the legal requirements (except the allotment on 11.12.2002 though it suffered from on illegality and no proper procedure was followed)nor ensured the fair play and probity in corporate management, resulting in the enhancement of the shareholding of the second respondent, which would constitute an act of oppression, as held in Praful M Patel v. Wonderweld Electrodes P. Ltd 2001 (9) TMI 1154 - COMPANY LAW BOARD, NEW DELHI , Akbarali A Kalvert v. Konkan Chemicals P. Ltd. 1994 (5) TMI 270 - COMPANY LAW BOARD and M.K. Haridas v. Asal Malabar Beedi Depot P. Ltd. 2002 (2) TMI 1345 - COMPANY LAW BOARD, CHENNAI .The member who holds 50% hares in the company is entitled by virtue of his position control, manage and run the affairs of the company. This is a benefit or advantage which the member enjoys and is entitled to enjoy in accordance with the provisions of company and in the matter of administration of the affairs of the company by electing his own members to the Board of Directors of the company. The facts on record show that holding of meetings, increasing share capital, allotting additional shares and removing the petitioner as directors without following proper procedure were wholly unauthorized and invalid and hence have to be set aside. The facts of the present case are so manifestly against respondents that two opinions are not possible on the aspect of relief. Relief has to be granted in the present case to undo the advantage gained by the respondents through their manipulations and fraud. To do substantial justice between the parties, I order as follows vacating the interim order dated 17.10.2005 I. The issue of 8800 shares on 11.12.2002 is hereby sustained with the directions that 4400 shares out of the total 8800 shares issued on 11.12.2002 be transferred by Respondent No. 2 to the petitioner names -Sh. Rajesh Patil by conversion of his unsecured loans. II. The issue of 2,90,000 shares on 8.1.2003 being totally malfide, only motive being to gain control of company is hereby declared null and void and all allotment are set aside with the directions that the name of 48 persons be struck off from the register of members. III. Since I have held that the stand of the company that the petitioner and his nominees had vacated office of the director u/s 283(1)(g) cannot be sustained for the reasons given above, I declared that the petitioner and his nominees shall continue of directors of the company. Thus, I dispose of this petition. No order as to cost.

Issues Involved:
1. Alleged oppression and mismanagement.
2. Issuance of additional shares.
3. Removal of petitioner and his nominees from the Board.
4. Maintainability of the petition under Section 399 of the Companies Act.
5. Allegations of concealment of material facts and res judicata.
6. Applicability of the Limitation Act.
7. Equitable relief and clean hands doctrine.
8. Fiduciary duty and proper purpose doctrine.
9. Validity of notices and procedural compliance.

Detailed Analysis:

1. Alleged Oppression and Mismanagement:
The petitioner alleged that the issuance of additional shares and the removal of the petitioner and his nominees from the Board were acts of oppression and mismanagement. The petitioner claimed that the actions were taken to marginalize and reduce his shareholding from 50% to a minority position, thus gaining control of the company.

2. Issuance of Additional Shares:
The petitioner contended that the issuance of 8800 shares on 11.12.2002 and 2,90,000 shares on 8.1.2003 was done without proper notice and was intended to marginalize him. The respondents justified the issuance of 8800 shares to meet the statutory requirement of minimum paid-up capital but failed to provide a valid reason for the issuance of 2,90,000 shares. The Board found that the issuance of 8800 shares was necessary for compliance but was done without proper procedure. The issuance of 2,90,000 shares was declared null and void due to its malafide intent.

3. Removal of Petitioner and His Nominees from the Board:
The petitioner and his nominees were removed from the Board under Section 283(1)(g) on the grounds of absenteeism without leave. The petitioner argued that the notices for the meetings were not properly served. The Board found that the removal was not justified as proper notice was not given, and the petitioner and his nominees were reinstated as directors.

4. Maintainability of the Petition under Section 399:
The respondents argued that the petitioner did not hold the required 10% shares to file the petition. The Board held that the petitioner's shareholding was reduced below 10% due to the impugned issuance of shares, and thus, the petition was maintainable.

5. Allegations of Concealment of Material Facts and Res Judicata:
The respondents claimed that the petitioner had concealed the filing of a criminal complaint and a winding-up petition. The Board found that the criminal complaint was not for the reliefs sought in the present petition and that the winding-up petition was withdrawn. Therefore, the principle of res judicata did not apply.

6. Applicability of the Limitation Act:
The respondents argued that the petition was barred by limitation. The Board held that the oppressive effects of the alleged acts were continuous and perpetual, and thus, the petition was not barred by limitation.

7. Equitable Relief and Clean Hands Doctrine:
The respondents contended that the petitioner did not come with clean hands. The Board found that the instances of unclean hands were not related to the affairs of the company and were unfounded. The petitioner was entitled to equitable relief.

8. Fiduciary Duty and Proper Purpose Doctrine:
The Board emphasized that directors owe a fiduciary duty to act for a proper purpose. The issuance of shares to gain control was deemed an extraneous purpose and an act of oppression. The Board cited precedents to support the principle that shares issued for control purposes cannot be upheld.

9. Validity of Notices and Procedural Compliance:
The Board found that the notices for the Board meetings were not properly served, and the procedural requirements were not followed. The reliance on certificates of posting was not sufficient to prove proper service of notices.

Conclusion:
The Board allowed the petition, finding that the respondents had committed acts of oppression and mismanagement. The issuance of 8800 shares was sustained with the condition that 4400 shares be transferred to the petitioner. The issuance of 2,90,000 shares was declared null and void, and the petitioner and his nominees were reinstated as directors. The petition was not barred by limitation, and the petitioner was entitled to equitable relief.

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