2006 (7) TMI 705 - Board - Companies Law

Issues Involved:
1. Illegal convening of the eleventh annual general meeting.
2. Issuance of further shares on a rights basis.
3. Exclusion of the petitioners from the office of directors.
4. Election of respondent Nos. 16 to 24 as directors.
5. Transfer of shares.
6. Breach of fiduciary duties by respondent Nos. 2 & 3.
7. Manipulation of minutes of meetings and other records.
8. Statutory violations.
9. Irregularities related to the Investigation Center in the hospital premises.

Issue-wise Detailed Analysis:

1. Illegal Convening of the Eleventh Annual General Meeting:
The petitioners alleged that the eleventh annual general meeting was convened without proper notice to all shareholders, violating Section 172 of the Companies Act. The respondents produced certificates of posting as proof of notice, but the court found these insufficient without corroborative evidence like dispatch registers or books of accounts. The court emphasized that mere production of certificates of posting does not necessarily mean that notice was served on the addressees, referencing Supreme Court precedents.

2. Issuance of Further Shares on Rights Basis:
The court found that the issuance of further shares was not in strict compliance with the order dated 13.02.2006. The share allotment and transfer committee reportedly convened a meeting on 14.02.2006 and allotted further shares without the participation of all committee members, violating the court's order. The court noted that the resolution for issuing further shares lacked necessary details and did not meet the requirements of Section 173(2) and the Unlisted Public Companies (Preferential Allotment) Rules, 2003.

3. Exclusion of the Petitioners from the Office of Directors:
The petitioners, who had been directors since 1998, were excluded from the board following the eleventh annual general meeting. The court found that the exclusion was a departure from the established practice of offering directorship to significant contributors, constituting oppression. The court emphasized the legitimate expectation of the petitioners to continue as directors, given their substantial financial contributions.

4. Election of Respondent Nos. 16 to 24 as Directors:
The court found that the election of respondent Nos. 16 to 24 as directors was invalid due to non-compliance with statutory requirements. The single resolution approving the appointment of eight directors violated Article 90 and Section 263, which mandate separate resolutions for each director's appointment. The court also noted discrepancies in the minutes of the annual general meeting, further invalidating the election.

5. Transfer of Shares:
The transfer of shares by Purushottaman to respondent Nos. 16 to 21 was found invalid due to non-compliance with Section 108, which mandates the issue of duplicate share certificates before transfer. The court observed that the transfer was approved at the board meeting on 24.08.2005 without issuing duplicate share certificates, rendering the transfer invalid.

6. Breach of Fiduciary Duties by Respondent Nos. 2 & 3:
The court found that respondent Nos. 2 & 3 breached their fiduciary duties by failing to act in the best interest of the company. This included the improper maintenance of statutory records, non-disclosure of interest in transactions involving their organizations, and inaction in recovering outstanding amounts from Westfort Hospital. These actions were deemed burdensome, harsh, and wrongful.

7. Manipulation of Minutes of Meetings and Other Records:
The court noted discrepancies in the minutes of board meetings, as highlighted by the petitioners and other directors. The minutes did not reflect a true and correct picture of the proceedings, leading to adverse impacts on the company's functioning. The court drew an adverse inference against the respondents for non-production of the best evidence in their possession.

8. Statutory Violations:
The court identified several statutory violations, including non-compliance with Sections 172, 173(2), 189(2), 263, and 108 of the Companies Act. These violations were significant in determining the invalidity of the resolutions passed at the eleventh annual general meeting and the subsequent actions taken by the respondents.

9. Irregularities Related to the Investigation Center:
The court found that the second respondent failed to act prudently in recovering outstanding amounts from Westfort Hospital related to the Investigation Center. The persistent grievances regarding the Investigation Center were deemed acts of mismanagement and breaches of fiduciary duty, adversely affecting the company's interests.

Order:
1. The further issue of shares is declared illegal and void.
2. The election of respondent Nos. 16 to 23 as directors is set aside.
3. The retiring directors (petitioner Nos. 1 to 4 and respondent Nos. 5 & 14) are deemed re-appointed until the next annual general meeting.
4. The transfer of shares by Purushottaman to respondent Nos. 16 to 21 is invalid.
5. The company is directed to convene the twelfth annual general meeting to address specific business items, including the appointment of directors and further issue of shares.
6. Hon'ble Justice Mr. K. John Mathew (Retd.) will preside over the twelfth annual general meeting.
7. The board of directors must conduct business strictly according to the articles and address issues related to the Investigation Center.
8. A report on the proceedings of the twelfth annual general meeting must be submitted within a week of its conclusion.

The company petition is disposed of with no order as to costs.

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