1994 (5) TMI 275 - HC - Companies Law

Summary

Issues Involved:
1. Violation of principles of natural justice.
2. Jurisdiction of the Company Law Board (CLB) under Sections 397 and 398 of the Companies Act.
3. Rights of a pledgee versus a shareholder.
4. Rectification of the Register of Members.
5. Alternative remedy under Section 10F of the Companies Act.
6. Validity of the CLB's order in the context of fraud allegations.

Detailed Analysis:

1. Violation of Principles of Natural Justice:
The petitioner argued that the CLB's order violated principles of natural justice as they were not made a party to the proceedings, nor were they given an opportunity to be heard. The petitioner contended that their name was ordered to be deleted from the Register of Members without a hearing, which is a violation of Section 111(5) of the Companies Act. However, the court found that the petitioner was present through its counsel during the proceedings and had the opportunity to present documents. The court held that the petitioner's failure to get itself impleaded as a party, despite being aware of the proceedings, negates the claim of violation of natural justice.

2. Jurisdiction of the Company Law Board under Sections 397 and 398:
The respondents argued that the CLB had the jurisdiction to pass orders under Sections 397 and 398, which are comprehensive enough to include rectification of the Register of Members. The court agreed, stating that the CLB has wide powers under these sections to address grievances related to the management of a company, including setting aside fraudulent allotments of shares and rectifying the Register of Members.

3. Rights of a Pledgee versus a Shareholder:
The petitioner claimed rights as a shareholder since their name was entered in the Register of Members. However, the court found that the petitioner was only a pledgee of the shares, not a shareholder. The letter of pledge and other documents indicated that the shares were held as security for an inter-corporate deposit, and the petitioner's rights were limited to those of a pledgee. The court held that the petitioner could not claim independent rights over the shares once the allotment was set aside.

4. Rectification of the Register of Members:
The petitioner argued that their name could not be removed from the Register of Members without a hearing. The court held that once the allotment of shares was set aside, the rectification of the Register of Members followed automatically. The court cited the decision in V. Radhakrishnan v. P. R. Ramakrishnan, which held that rectification of the register is a necessary consequence of setting aside an allotment of shares.

5. Alternative Remedy under Section 10F of the Companies Act:
The respondents contended that the petitioner had an alternative remedy under Section 10F of the Companies Act and should have filed an appeal instead of a writ petition. The court agreed, noting that the petitioner could have sought leave to appeal and that the availability of an alternative remedy is a significant factor in deciding whether to entertain a writ petition.

6. Validity of the CLB's Order in the Context of Fraud Allegations:
The respondents argued that the entire transaction involving the allotment of shares was fraudulent and manipulated to gain control of the company. The court found that the CLB had rightly set aside the allotment of shares based on findings of fraud and manipulation. The court held that the CLB's order was valid and aimed at doing substantial justice between the parties.

Conclusion:
The court dismissed the writ petition, holding that the petitioner was only a pledgee and not a shareholder, and that the CLB had the jurisdiction to rectify the Register of Members under Sections 397 and 398. The court also found no violation of principles of natural justice, as the petitioner had the opportunity to participate in the proceedings but failed to get itself impleaded as a party. The court emphasized the availability of an alternative remedy under Section 10F and upheld the CLB's order as valid and just.