2006 (12) TMI 541 - Board - Companies Law

Summary

Issues Involved:
1. Membership of the petitioners in the company.
2. Claims relating to the space/flats allotted to the petitioners.
3. Directorship of the petitioners.
4. Appointment of the 2nd respondent as Managing Director (MD).
5. Allegations of oppression and mismanagement by the respondents.
6. Payment of rent by the bank.
7. Proposal for parting of ways between the petitioners and respondents.

Detailed Analysis:

1. Membership of the Petitioners in the Company:
The primary issue was whether the petitioners continued to be members of the company. The petitioners became shareholders by acquiring shares from erstwhile shareholders. The respondents challenged their membership based on unstamped transfer instruments. However, the court held that the company could not invoke Section 108 of the Act to cancel the membership after recognizing the petitioners as members for over 20 years. The court declared that the petitioners continue to be members and directed the company to rectify the register of members by restoring their names within 20 days.

2. Claims Relating to the Space/Flats Allotted to the Petitioners:
The petitioners claimed that their right to the flats/space arose from their membership in the company. However, the court found no evidence of any nexus between shareholding and entitlement to the space. The court concluded that the entitlement to the space was purely a contractual matter, not arising out of membership. Therefore, grievances relating to the cancellation of the license agreements had to be agitated in a civil court, not under Sections 397 and 398 of the Act.

3. Directorship of the Petitioners:
The court noted that the 1st petitioner continued to be a director. Since the petitioners' group held 1/3rd shares in the company, the 1st petitioner would continue as a director, and the respondents were directed not to remove him. The court also directed that the 1st petitioner should receive 10 days' notice for board meetings by registered post and that bank operations should be handled jointly by two directors.

4. Appointment of the 2nd Respondent as Managing Director (MD):
The court found that the 2nd respondent had been functioning as a director with complete control since March 1998. The designation of MD, whether with the knowledge and consent of the petitioners or not, was not considered an act of oppression. Therefore, the court did not find any substance in the allegations regarding the appointment of the 2nd respondent as MD.

5. Allegations of Oppression and Mismanagement:
The petitioners alleged various acts of oppression and mismanagement by the respondents, including revoking the lease deed authority, canceling license agreements, and siphoning off funds. The court found that the actions taken by the respondents, such as removing the petitioners' names from the register of members without original documents, were malafide and grossly oppressive. However, issues relating to the space/flats were deemed contractual and not subject to relief under Sections 397/398.

6. Payment of Rent by the Bank:
The court noted that the bank had stopped paying rent due to disputes between the parties. Since the issues relating to the premises were contractual, the court left it to the bank to decide to whom the rent kept in deposit should be paid.

7. Proposal for Parting of Ways:
Given the complete loss of trust and mutual confidence between the petitioners and the 2nd respondent, the court considered the suggestion for parting of ways. The petitioners proposed purchasing the respondents' shares, but the respondents suggested selling their shares to outsiders. The court noted that in a closely held private company, the sale to outsiders was not feasible. Therefore, the court directed that if the petitioners opted to sell their shares, the company should purchase them at a fair valuation to be determined by an independent valuer.

Conclusion:
The petition was disposed of with directions to restore the petitioners' membership, maintain their directorship, and handle bank operations jointly. The court held that issues relating to the space/flats were contractual and should be addressed in a civil court. The court also provided a mechanism for the petitioners to sell their shares to the company at a fair valuation.