2012 (7) TMI 33 - HC - Companies Law

Whether a management that is found guilty of converting the majority group of shareholders in a company into a minority by issuing further shares in the company without notice to the majority group is liable to be dislodged - group of shareholders represented by the petitioners before the Company Law Board was, admittedly, the majority shareholders in the company prior to the first of the impugned allotment of shares - Agarwal group, by issuing/allotting further shares in company to its group concern without notice to petitioners, had converted petitioners into minority shareholders and had acquired management/control of company - CLB found that issuance of further shares was without convening shareholder s meeting and without passing appropriate resolutions therefor, yet it did not set aside impugned allotment and directed a shareholders meeting to be convened by company on basis of shareholding as on October, 2003 Held that - Sarda group, had promoted the company and were at the helm of its affairs till the arrangement with the Agarwal group by which the Agarwal group was installed in the management ; but the Sarda group continued to hold the majority shares in the company - Agarwal group was to remain in the management of the company at the pleasure of the Sarda group - Agarwal group then to have taken advantage of its managerial position in the company to issue further shares unto itself and to denude the Sarda group of its majority control, was a grave act of oppression - CLB found as a matter of fact, that allotments were made without complying with legal requirements therefor and without notice to petitioners, allotments to be cancelled

Summary

Issues Involved:
1. Whether the management found guilty of converting the majority group of shareholders into a minority by issuing further shares without notice is liable to be dislodged.
2. Whether the allotment of shares can be questioned in proceedings under sections 397 and 398 of the Companies Act, 1956.
3. Whether the impugned allotments of shares should have been cancelled.
4. Whether the Company Law Board erred in its decision regarding the shareholding position and the convening of a shareholders' meeting.
5. Whether the principles of natural justice were breached.

Issue-wise Detailed Analysis:

1. Liability of Management for Converting Majority into Minority:
The principal question raised was whether a management guilty of converting the majority shareholders into a minority by issuing further shares without notice should be dislodged. The court found that the Agarwal group, after taking over the management, issued further shares to themselves, thereby denuding the Sarda group of its majority control. This was deemed a grave act of oppression and mismanagement.

2. Questioning Allotment of Shares in Proceedings under Sections 397 and 398:
The allottee-appellant argued that allotments could not be questioned in such proceedings without the presence of the allottees. The court dismissed this argument, emphasizing that the conduct of the company's management was the primary concern, and any improper allotment could be addressed even if the allottees were not present.

3. Cancellation of Impugned Allotments:
The Sarda group contended that the Company Law Board erred by not canceling the impugned allotments despite finding them illegal. The court agreed, stating that once the allotments were found to be illegal and made without notice, they should have been annulled. The court ordered the cancellation of the shares issued on December 12, 2005, February 14, 2006, and March 19, 2007.

4. Decision on Shareholding Position and Shareholders' Meeting:
The Company Law Board directed a shareholders' meeting based on the shareholding position as of October 2003, which the court found erroneous. The court held that the Agarwal group's undisputed 30% control should not have been disregarded. The court modified the order, ensuring that the meeting would reflect the shareholding post-transfer to the Agarwal group in April 2004.

5. Breach of Principles of Natural Justice:
The appellant argued that the principles of natural justice were breached as Ambo Credit P. Ltd., a beneficiary of the third allotment, was not a party to the proceedings. The court found no merit in this argument, noting that the Agarwal group did not object to the issue being addressed in Ambo Credit P. Ltd.'s absence and that the focus was on the management's conduct.

Judgment Directions:
1. The impugned allotments of shares were annulled.
2. Refunds for the December 12, 2005 allotment were to be made without interest.
3. Adjustments for the February 14, 2006 and March 19, 2007 allotments were canceled, with specific instructions for handling unsecured loans.
4. A general meeting was to be convened based on the shareholding post-April 2004 transfer.
5. Restrictions were placed on the company's financial dealings until the general meeting.

Conclusion:
The appeals and cross-objections were disposed of with costs awarded to the respondents. The court emphasized that the interest of the company must be paramount and that the majority shareholders' natural right to control the company should be respected unless an exceptional case is made out. The judgment aimed to rectify the wrongful actions of the Agarwal group while ensuring the company's stability and proper governance.