1982 (10) TMI 217 - HC - Companies Law

Summary

Issues Involved:
1. Transmission of 2% shares held by the late Mr. A.C. Daphtary.
2. Transfer of 9% shares held by the Swedish company to Mr. M.T. Shah.
3. Allegations of oppression and mismanagement under Sections 397 and 398 of the Companies Act, 1956.
4. Compliance with the Foreign Exchange Regulation Act (FERA), 1973.
5. Validity of the board resolutions passed on August 25, 1981.
6. Termination of the sole selling agency agreement.

Issue-wise Detailed Analysis:

1. Transmission of 2% Shares Held by the Late Mr. A.C. Daphtary:
The court examined whether the transmission of shares from the late Mr. A.C. Daphtary to Mrs. Leila Daphtary was valid under the Articles of Association. Article 48 stipulates that only the executor, administrator, or succession certificate holder can be recognized for transmission. The executor, Mr. Jagjit Singh, had not applied for transmission, and no probate had been granted. The court held that Mrs. Daphtary had no locus standi to apply for transmission. Article 49, which allows for transfer upon the death of a member, was also considered. However, the court found that even if Article 49 applied, the transfer to Mr. M.T. Shah violated Articles 34, 35, and 40, which provide pre-emptive rights to existing shareholders.

2. Transfer of 9% Shares Held by the Swedish Company to Mr. M.T. Shah:
The court scrutinized the transfer of 9% shares from the Swedish company to Mr. M.T. Shah, focusing on Article 34, which restricts share transfers without the consent of all shareholders. The court found no evidence of such consent, either written or implied. The court emphasized that consent must be an individual act of each shareholder and cannot be inferred from the presence of a representative at a board meeting. The court also noted that the Swedish company's attempt to transfer shares to Mr. Shah was a circumvention of the FERA, which mandates dilution of foreign equity participation.

3. Allegations of Oppression and Mismanagement:
The petitioners alleged that the Swedish group, with the help of Mr. Shah, was oppressing the Indian group. The court agreed, noting several instances of oppressive conduct, including the manipulation of board resolutions and attempts to terminate the sole selling agency agreement. The court found that the actions of the Swedish group and Mr. Shah lacked probity and fair dealing, thereby justifying relief under Sections 397 and 398 of the Companies Act.

4. Compliance with the Foreign Exchange Regulation Act (FERA), 1973:
The court highlighted that the Swedish company's actions were in clear contravention of the FERA, which requires foreign equity participation to be reduced to 40%. The court emphasized that the provisions of the FERA are intended to ensure effective Indian control of companies with foreign equity participation. The court found that the Swedish company's attempt to transfer shares to Mr. Shah was a deliberate attempt to circumvent these provisions.

5. Validity of the Board Resolutions Passed on August 25, 1981:
The court examined the validity of the board resolutions passed on August 25, 1981, which included the transmission of shares to Mrs. Daphtary and the transfer of shares to Mr. Shah. The court found these resolutions to be void and illegal, as they were not on the agenda and lacked the necessary consent from all shareholders. The court also noted that the resolutions were passed in the absence of the nominee directors of the Singh group, further questioning their validity.

6. Termination of the Sole Selling Agency Agreement:
The court addressed the petitioners' apprehension that the sole selling agency agreement with petitioner No. 5, M/s. B.M. Singh and Sons, would be terminated. The court found that the petitioners' apprehension was justified, given the hostile actions of Mr. Shah and the Swedish group. The court granted an injunction restraining the termination of the agreement, which was valid until May 1983.

Conclusion:
The court declared the resolutions passed on August 25, 1981, void and illegal. It directed the Swedish company to transfer 9% of its shares to existing shareholders other than the Swedish group, in compliance with Article 34 of the Articles of Association. The court also set up a committee of management to oversee the company's affairs until a new board of directors is elected. The petitioners were awarded costs, and the court emphasized the importance of adhering to the FERA and the Articles of Association to ensure fair and lawful management of the company.