2007 (11) TMI 666 - Board - Companies Law

Issues Involved:
1. Allegations of financial mismanagement and siphoning off funds.
2. Deadlock in the board of directors and the appointment of additional directors.
3. Validity of decisions taken without board authority.
4. Resolution of disputes through arbitration.
5. Proposal for winding up the company.
6. Sale of shares to an outsider and its implications.
7. Equitable considerations in resolving disputes between majority and minority shareholders.

Detailed Analysis:

1. Allegations of Financial Mismanagement and Siphoning Off Funds:
The petitioner accused the second respondent of financial mismanagement and siphoning off funds, including paying heavy remuneration to her son and husband without consent. However, the petitioner had previously investigated and found no fraudulent activity, as stated in his letter dated December 29, 2006. The second respondent asserted that such payments were in practice even during the partnership, which the petitioner did not deny. Therefore, the allegations of financial mismanagement were not substantiated.

2. Deadlock in the Board of Directors and the Appointment of Additional Directors:
The petitioner, holding 80% shares, sought to appoint additional directors to break the deadlock in the board. The second respondent opposed this, arguing it violated the partnership deed's addendum. The court noted that the articles of association should prevail over the addendum, as the latter was not incorporated into the articles. The court emphasized that while the majority shareholder has the right to appoint additional directors, such actions should not be detrimental to the interests of the minority shareholder in a quasi-partnership.

3. Validity of Decisions Taken Without Board Authority:
The petitioner claimed that the second respondent had taken decisions without board authority, including not convening board meetings and failing to attend those convened by the petitioner. The court directed holding an extraordinary general meeting, where the petitioner's proposals were approved, and the second respondent's proposals were defeated. The court held that the resolutions passed at the extraordinary general meeting should be implemented for the company's smooth functioning, or alternatively, the second respondent should sell her shares to the petitioner.

4. Resolution of Disputes Through Arbitration:
The second respondent initiated arbitration proceedings against the petitioner, invoking Article 66 of the articles of association. The court held that while the articles provide for arbitration, the petitioner is entitled to enforce rights arising from other articles, such as appointing additional directors under Article 37 and admitting outsiders as shareholders under Article 5.

5. Proposal for Winding Up the Company:
The second respondent proposed a resolution for winding up the company, indicating her lack of interest in its welfare. The court observed that this proposal demonstrated the second respondent's unwillingness to continue with the company, justifying the petitioner's actions to ensure the company's smooth functioning by appointing additional directors.

6. Sale of Shares to an Outsider and Its Implications:
The petitioner entered into an agreement to sell his shares to M/s. Core BPO, which the second respondent opposed. The court noted that the petitioner acted against the company's interests by selling the dialer to M/s. Core and blocking the company's bank account. The court held that the second respondent, who had significantly contributed to the company's growth, should have the right to purchase the petitioner's shares.

7. Equitable Considerations in Resolving Disputes Between Majority and Minority Shareholders:
The court emphasized that in quasi-partnerships, equitable considerations should prevail over strict legal rights. The court cited various cases to support the principle that the oppressor should buy the oppressed's shares, and the majority should not be directed to sell to the minority except in unusual circumstances. The court concluded that the second respondent, who had managed the company and contributed significantly to its growth, should purchase the petitioner's shares on the same terms as the agreement with M/s. Core BPO.

Conclusion:
The court directed the second respondent to purchase the petitioner's shares and loans with 5% interest per annum within 90 days. The petitioner will continue as a director until full payment is made. The resolutions passed at the extraordinary general meeting appointing additional directors will not be given effect, and any decisions taken by the reconstituted board will have no effect. The second respondent must withdraw all cases against the petitioner and M/s. Core. If the second respondent fails to make the payment, the petitioner will have the right to purchase the second respondent's shares and loans on the same terms. The petition was disposed of, vacating all interim orders and without any order as to costs.

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