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2015 (7) TMI 1246 - HC - Companies LawPetition under Section 397 of the Act alleging acts of oppression - the registration of the subject transfer of shares was in contravention of Section 108 - directions concerning maintenance of adequate representation of the Appellants on the board of directors - Held that - It is seen from the record of the case that the transfer of 536 shares was made purportedly as part of a family arrangement between the late Shankarrao and his brothers; it was made during the lifetime of Shankarrao; it was backed by transfer deeds purportedly executed by the late Shankarrao in favour of his four brothers Respondent Nos. 6 to 9; there is a board resolution as of 25 March 2003 duly recorded in the Minute Book maintained by the first Respondent company accepting such transfer and providing for its registration; the transfer is recorded in the original share certificates; the Annual Report of the first Respondent company of the year 20032004 reflects this transfer and shows the names of all the transferees; and finally, the AGM of the first Respondent company immediately following such transfer is admittedly attended by the transferees as members of the first Respondent company in the presence of Appellant No.3, who attended as a proxy of the late Shankarrao (who continued to hold 135 shares after the transfer). The conclusion of the CLB in the backdrop of these facts that the issue concerning the transfer of 536 shares being made fraudulently, that is to say, by forging the signatures or overwriting the transfer forms, etc., could not be adjudicated upon by the CLB, cannot be termed as an impossible or perverse conclusion. Article 11 provides for the right of preemption of existing shareholders of the company in the case of a proposed transfer of shares. It is submitted that the transfer of 536 shares of the late Shankarrao was in contravention of this provision. Article 11 takes effect in a case which is not otherwise provided for under the Articles. It opens with the words Except as herein provided . Article 10, which immediately precedes this Article, provides that notwithstanding the restrictions contained in the Articles, shares may be transfered by a member to another member or a person in any of the enumerated relationships with the transferor member. It is an admitted position that the transferees of these 536 shares are brothers of the late Shankarrao and fall within this clause. What is in dispute here is the applicability of that proposition to the facts of the present case. As discussed above, the transfers in the present case cannot be said to be in contravention of the Articles. No submissions were advanced by learned Counsel for the Appellants on mismanagement under Section 398 of the Act. In that view of the matter, there is no merit in the Company Appeal. As far as the Respondents crossobjections in the appeal are concerned, the same are on the footing that the CLB has directed the Respondents to give an adequate representation to the Appellants on the board of directors of the first Respondent company - Whether or not the Appellants hold over 46% shareholding in the first Respondent company, is a matter of serious dispute between the parties. In fact, if 536 shares of the first Respondent company are treated as correctly transfered by late Shankarrao to Respondent Nos. 6 to 9, the total shareholding of the Appellants comes to about 26.46%. This appears to have been completely lost sight of by the CLB. The order that an adequate representation be given to the rival group of shareholders first on the basis of a purported finding in the original order and correcting that order later by maintaining the final direction but this time simply on the basis of the rival group s claim to hold a certain percentage of shareholding, clearly exhibits a perverse approach. Even otherwise, the direction that an adequate representation should be given to the Appellants without indicating what is meant by such adequate representation is clearly impermissible and cannot be sustained.the findings of the CLB and the directions based thereon clearly exhibit errors of law and cannot be sustained, as discussed above. The crossobjections of the Respondents are, accordingly, allowed and the directions of the CLB requiring the Appellants to be given an adequate representation to the Appellants in the management of the business of the first Respondent company as also its finding concerning the Respondent company being a family company in the nature of quasi partnership, are set aside.
Issues Involved:
1. Validity of the share transfer of 536 shares. 2. Allegations of oppression and mismanagement under Sections 397 and 398 of the Companies Act, 1956. 3. The nature of the first Respondent company as a quasi-partnership. 4. Adequate representation of the Appellants on the board of directors. Analysis: 1. Validity of the Share Transfer of 536 Shares: The Appellants contended that the transfer of 536 shares from the late Shankarrao to Respondent Nos. 6 to 9 was fraudulent, involving forged documents and non-compliance with Section 108 of the Companies Act, 1956. They argued that the transfer was also in violation of Article 11 of the Articles of Association, which required the right of preemption for existing shareholders. The CLB rejected these contentions, noting that the issue of fraudulent transfer could not be adjudicated by the CLB and that procedural defects in the share transfer did not constitute oppression. The High Court upheld this view, stating that mere non-compliance with Section 108 did not suffice to claim oppression under Sections 397 and 398, especially since the transfer occurred during Shankarrao's lifetime and was recorded in the company's documents. 2. Allegations of Oppression and Mismanagement: The Appellants alleged that the Respondents conducted the affairs of the first Respondent company in a manner oppressive to them and prejudicial to public interest. They cited issues such as improper notice of AGMs, mismanagement of funds, and non-compliance with statutory provisions. The CLB found no merit in these allegations, concluding that the Appellants failed to demonstrate harsh, burdensome, and wrongful conduct by the Respondents. The High Court agreed, emphasizing that the Appellants did not make a case for oppression or mismanagement under Sections 397 and 398. 3. The Nature of the First Respondent Company as a Quasi-Partnership: The CLB initially observed that the first Respondent company was a quasi-partnership and that the ouster of Appellant Nos. 1 to 3 was against the principles of such a partnership. However, the High Court found this conclusion unsustainable. The Court noted that the company admitted new members shortly after its incorporation, indicating it was not intended to be a quasi-partnership. There was no evidence of mutual confidence or personal relationships among shareholders necessitating such a classification. 4. Adequate Representation of the Appellants on the Board of Directors: The CLB directed the first Respondent company to provide adequate representation to the Appellants on its board, based on their claimed 46.71% shareholding. The High Court found this direction vague and unsupported by facts, as the actual shareholding of the Appellants was disputed and likely lower if the 536 shares were validly transferred. Conclusion: The High Court dismissed the Company Appeal and allowed the Respondents' cross-objections. It set aside the CLB's findings regarding the quasi-partnership nature of the first Respondent company and the direction to provide the Appellants with adequate representation on the board. The Court found that the Appellants failed to establish a case of oppression or mismanagement and that the procedural defects in the share transfer did not constitute grounds for relief under Sections 397 and 398.
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