2011 (8) TMI 971 - Board - Companies Law

Operation and mismanagement - illegal and fraudulent transfer of shares petitioner alleged that respondents had wrongfully deleted their shareholding and added same in name of respondents thereby reducing majority shareholders to a minority and creating a new majority to gain control and management of respondent-company with oblique motive Held that - Shareholding was changed with the sole object of gaining control of the company by becoming majority shareholders was an act of oppression on the part of the respondents - meetings passing such resolutions were held at the back of the petitioners without giving proper notices and without following proper procedure Regarding service of notices, it is settled law that the onus to prove service rests on the sender. That onus has not been discharged - petitioners allegations that their group has been converted from a majority to a minority in shareholding and respondents representation in management has substantially been increased are found to be correct - Once conduct is found to be oppressive under sections 397 and 398, the discretionary power given to the CLB under section 402 to set right, remedy or put an end to such oppression is very wide - company is hereby directed to restore the position of shareholding as reflected in its annual returns Petition allowed

Summary

Issues Involved:
1. Alleged oppression and mismanagement under sections 397, 398, 402, and 409 read with section 111 of the Companies Act, 1956.
2. Illegal and fraudulent transfer of shares.
3. Appointment of directors without proper procedure.
4. Manipulation of shareholding to gain control.
5. Destruction of company records and failure to produce statutory documents.
6. Alleged fraud and misrepresentation by the respondents.
7. Petitioners' right to requisition an Extraordinary General Meeting (EGM).

Detailed Analysis:

1. Alleged Oppression and Mismanagement:
The petitioners filed Company Petition No. 82 of 2005 against the respondents alleging oppression and mismanagement under sections 397, 398, 402, and 409 read with section 111 of the Companies Act, 1956. They sought the setting aside of the illegal and fraudulent transfer of shares, rectification of the register of members, and setting aside the appointment of certain directors. The petitioners contended that their shareholding was wrongfully reduced from 67.39% to 11.57%, while the respondents' shareholding increased to 80.72% due to manipulation of records.

2. Illegal and Fraudulent Transfer of Shares:
The petitioners alleged that the respondents wrongfully deleted their shares from the register of members and added them to the names of certain respondents without any transfer deeds or corroborative evidence. The respondents argued that the records were destroyed in heavy rains in Kolkata in 1999, and the petitioners manipulated the shareholders' list for the year 2002. The respondents failed to produce the original share certificates or any statutory records to substantiate their claim.

3. Appointment of Directors Without Proper Procedure:
The petitioners argued that the respondents unlawfully appointed directors without convening a proper Board meeting and without their consent. The respondents contended that the directors were appointed in an EGM and not in a Board meeting. However, the petitioners' contention that the appointments were made to circumvent the CLB's order dated 13th July 2004 was found to be correct. The respondents failed to produce any notices for convening Board meetings or EGMs, and the appointments were found to be arbitrary and without proper procedure.

4. Manipulation of Shareholding to Gain Control:
The petitioners contended that the respondents manipulated the shareholding to gain control of the company by reducing the petitioners' majority shareholding to a minority. The respondents' claim that the shareholding list for 2002 was manipulated by the petitioners was not substantiated by any evidence. The petitioners' shareholding as reflected in the annual returns for 2002/2003 was found to be correct, and the change in shareholding in the annual return for 2004 was not justified.

5. Destruction of Company Records and Failure to Produce Statutory Documents:
The respondents claimed that the company records were destroyed in heavy rains in 1999. However, they failed to produce any records even for the subsequent years. The petitioners produced contract notes, purchase vouchers, and balance sheets showing their investments, while the respondents failed to produce any supporting documents like transfer deeds, register of members, or Board minutes.

6. Alleged Fraud and Misrepresentation by the Respondents:
The petitioners argued that the respondents played fraud on the CLB by not producing relevant supporting documents and making frivolous pretexts. The respondents' contention that the petitioners' share certificates were stolen was not substantiated by any evidence. The investigation report filed by the petitioners regarding the theft of their shares was found to be credible.

7. Petitioners' Right to Requisition an EGM:
The petitioners contended that their right to requisition an EGM was defeated by the respondents' actions. The respondents' contention that the notice for the EGM was not convened due to the CLB's order was found to be baseless. The petitioners' right to control and manage the company by electing their own men to the Board of directors was upheld.

Conclusion:
The petition was allowed. The R-1-company was directed to restore the shareholding as reflected in the annual returns for 2002/2003. The appointment of directors was set aside, and the register of members was ordered to be rectified accordingly. The respondents' actions were found to be oppressive, and the petitioners' right to control and manage the company was upheld. All resolutions passed in Board meetings/AGMs/EGMs related to the disputed shareholding and appointments were cancelled.