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2004 (10) TMI 614 - Board - Companies LawAct of oppression - Allotment of shares - transfer of shares - Removal of petitioners from the office of directors - Violation of the pre-emption clauses contained in the article of association - Powers of the CLB under Section 402 - close knit group of different families - HELD THAT - In the present case there is no record to show as to whether any offer was made to the petitioners before making the impugned allotment exclusively in favour of the respondents 2 3 or any disclosure to the shareholders on further issue of shares or any issuance of notice of further shares. While the impugned allotment of shares was made in lieu of the amounts available to the account of the second respondent the quantum of which is under dispute Form No. 2 filed with the Registrar of Companies is not in consonance with the stand taken by the second respondent. Form No. 2 filed after a delay of 19 months remains unexplained. It is not denied that the petitioners had also repaid the matured deposits in favour of certain depositors on behalf of the Company towards which no shares were allotted in favour of the petitioners. Furthermore there is no documentary evidence establishing the allotment of shares at any meeting of the Board of directors of the Company. By allotment of the impugned shares in favour of the respondents 2 3 the shareholding of the petitioner group has been reduced to a minority. In a number of cases this Board has categorically held that if further issue of shares results in conversion of majority into minority or creation of new majority then such issue of shares is an act of oppression. 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 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 There is no material to substantiate that the petitioners or any other shareholders have been afforded any opportunity to exercise their right of pre-emption to purchase the shares sold by the respondents 5 to 8 which is clearly in violation of the articles constituting an act of oppression in the affairs of the Company. There is nothing on record to show that the notice of extraordinary general meeting dated 28.06.2002 was served upon the petitioners in the absence of which it cannot be said that the requirements of Section 284 have been duly met. Any omission to serve a special notice on the directors sought to be removed constitutes denial of their statutory right of reply and the absence of such notice to the directors any resolution for their removal would be vitiated by such omission. I do not see any other material substantiating the fulfilment of the requirements of Sections 284 and 190 before removing petitioners from the post of directors. Moreover the first petitioner is one of the promoter -directors of the Company. The second petitioner having had acquired shares of Kasthuri Swamy yet another promoter of the Company has been director of the Company. Under these circumstances the resolution passed at the extraordinary general meeting on 08.07.2002 even if it were perfectly legal yet would be oppressive warranting appropriate reliefs. The various discrepancies appearing in the share certificates issued in favour of a number of shareholders and the irregularities as pointed out by Shri Ramakrishnan learned Counsel in the minutes of certain general meetings of the Company in my view cannot disentitle the petitioners from claiming any equitable relief especially when the second respondent was forming part of the management and no prejudices were shown to be suffered by the Company or the shareholders. Therefore I am of the view that the most equitable relief would be that the first petitioner group the second petitioner group and the second respondent group shall quote their price per share and the group that quotes the higher price should purchase the shares of the other group at that price. Thus in exercise of the powers of the CLB under Section 402 the following order is passed i) The allotment of 50, 000 shares in favour of the respondents 2 3 as well as the transfer of 40, 000 shares by the respondents 5 to 8 in favour of ninth respondent are declared as invalid. Consequently the paid up capital of the Company shall be reduced to 25, 00, 000/- only. ii) The removal of the petitioners from the office of director of the Company is declared as null and void. iii) The Board of directors of the Company shall stand reconstituted by the petitioners and the second respondent with the immediate effect. iv) M/s Jaggannathan Vishwanathan Chartered Accountants Coimbatore are appointed to verify all payments made towards repayment of deposits financial obligations assumed and expenses incurred whatever may be the nature on behalf of the Company by the first petitioner group second petitioner group and second respondent group as the case may be after taking into account the submissions of the parties and the books of accounts financial vouchers or any other document which may produced by them. The whole exercise shall be completed by 30.11.2004. The amounts so verified and found to be due to the various groups shall be reimbursed by the Company with ten per cent simple interest till date of settlement. The Company shall bear the remuneration payable to the Chartered Accountants. The company petition is disposed of with these directions reserving the right to pass a consequential order on 15.12.2004.
Issues Involved:
1. Validity of the allotment of 50,000 equity shares to respondents 2 & 3. 2. Validity of the transfer of 40,000 equity shares to the ninth respondent. 3. Validity of the appointment of respondents 3 & 4 as directors. 4. Alleged vacation of office by the second respondent as director. 5. Direction to convene a general meeting to elect new directors. 6. Setting aside the acts performed by respondents 2 to 4 as directors. Summary of Judgment: 1. Validity of the Allotment of 50,000 Equity Shares: The petitioners alleged that the allotment of 50,000 equity shares to respondents 2 & 3 was invalid due to lack of notice and consideration, and was aimed at gaining undue advantage. The Board found that the allotment was not in compliance with legal requirements and lacked fair play, resulting in the enhancement of the second respondent's shareholding, constituting an act of oppression. The allotment was declared invalid. 2. Validity of the Transfer of 40,000 Equity Shares: The petitioners argued that the transfer of 40,000 equity shares to the ninth respondent violated pre-emption clauses in the articles of association. The Board found that there was no evidence of compliance with the pre-emption rights and that the transfer was approved by interested directors, constituting an act of oppression. The transfer was declared invalid. 3. Validity of the Appointment of Respondents 3 & 4 as Directors: The petitioners challenged the appointment of respondents 3 & 4 as directors. The Board did not delve into the validity of this appointment due to the ultimate reliefs proposed. 4. Alleged Vacation of Office by the Second Respondent: The petitioners claimed the second respondent vacated office u/s 283(1)(g) of the Act. The Board did not address this issue as the petitioners did not press this prayer. 5. Direction to Convene a General Meeting: The petitioners sought to convene a general meeting to elect new directors. The Board ordered the reconstitution of the Board of Directors to include the petitioners and the second respondent. 6. Setting Aside Acts Performed by Respondents 2 to 4: The petitioners sought to set aside acts performed by respondents 2 to 4 as directors. The Board ordered verification of payments made towards deposits and expenses by an independent Chartered Accountant, and reimbursement with interest. Final Order: 1. The allotment of 50,000 shares to respondents 2 & 3 and the transfer of 40,000 shares to the ninth respondent were declared invalid, reducing the paid-up capital to Rs. 25,00,000. 2. The removal of the petitioners from the office of director was declared null and void. 3. The Board of Directors was reconstituted to include the petitioners and the second respondent. 4. An independent Chartered Accountant was appointed to verify payments and expenses, with reimbursement to be made by the Company. 5. The parties were directed to submit their offers in closed covers indicating the price per share they were willing to offer, with the highest bidder to purchase the shares of the other group(s). The company petition was disposed of with directions for consequential orders to be passed on 15.12.2004.
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