2013 (4) TMI 306 - HC - Companies Law

Ground of maintainability - Beyond the scope U/s 397 and 398 - Whether or not the disputes between the parties are purely private or not - It is a family Company - Two brothers are fighting against the third - The third one complains that the other two brothers have oppressed him and his family by inter alia deceiving him to purportedly transfer shares in their favour - Held that - At this stage it is to be assumed that the platform of this family Company resting on a pivot is to be kept in equilibrium - This platform is kept in equilibrium by recognition of rights, obligations, expectations of every family member who constitutes a small family company which resembles a partnership, as recognised in the above case and in O Neil s Case and in the Madras decision following it. Permission is granted to the first respondent to go ahead with the rights issue - However, Bijay and his group have to be offered rights shares as if their claim for shares was true, subject to the results of the Company Law Board petition - Furthermore, Bijay and his group will be able to exercise the option of provisionally taking the rights shares without making any payment for them, for the time being - The rights shares will be allotted to them, subject to the stipulations - Upto this time they will not have any voting right in 9,66,638 - Only, after disposal of the Company Law Board petition the said group will be obliged to exercise the final option to take and pay for the rights shares- The rights shares should be strictly in the ratio of 1 1 - Therefore, even if the rights shares are allotted, the said group will not be prejudiced by dilution of their shares or by being put to financial burden - Therefore, the Company Law Board should not have dismissed the application - This appeal is disposed of with the above directions - The Company Law Board is directed to dispose of the Company Law Board petition within six months from date positively.

Issues Involved:
1. Maintainability of the Company Petition.
2. Rights Issue and its implications on the petitioners.

Detailed Analysis:

1. Maintainability of the Company Petition:

The first respondent filed an application (C.A. No. 366 of 2011) seeking dismissal of the company petition on the grounds of maintainability, arguing that the disputes were purely private between shareholders and did not involve any act of the company or mismanagement or oppression of shareholders. This point was raised in the counter affidavit but was not decided by the Company Law Board in its order dated 29th February, 2012, which recorded incorrectly that it had been decided before.

The court noted that the maintainability point was raised 2 1/2 years after the filing of the petition and should have been addressed much earlier. The court found that the issue of maintainability was a mixed question of law and facts, involving whether the disputes were purely private or involved acts of the company. Given the complexity, the court decided that the question of maintainability should be decided along with the merits of the disputes by the Company Law Board.

2. Rights Issue and its Implications:

The company proposed to raise about Rs.10 crores through a rights issue of equity shares to improve its financial condition, as advised by the Bank of Baroda in letters dated 14th January, 2008, 4th February, 2009, 12th March, 2011, and 2nd February, 2012. The bank highlighted issues like negative net working capital and advised improving the debt equity ratio.

The petitioners argued that the rights issue would further dilute their shareholding and was unnecessary. They contended that the company's financial issues were due to increased borrowing and reduced production capacity utilization. They also claimed that the rights issue was announced to oppress them, as their shareholding had already been diminished due to alleged wrongful transfer of shares by the respondents.

The court acknowledged the technical nature of financial management and assumed, for the time being, that the company's board knew best how to manage its affairs. However, the court emphasized that the rights issue should not work as an engine of oppression against the petitioners, especially in a family company resembling a quasi-partnership.

Decision:

The court permitted the first respondent to proceed with the rights issue but with safeguards for the petitioners. Bijay and his group were to be offered rights shares as if their claim for 9,66,638 shares was true, subject to the Company Law Board's final decision. They could provisionally take the rights shares without payment for the time being. If they lost before the Company Law Board, the rights issue for the claimed shares would be canceled, and they would have the option to take the rights issue for the shares actually held. If they succeeded, they could take the full claimed shares. Until the Company Law Board's decision, they would not have voting rights on the disputed shares.

The court directed the Company Law Board to dispose of the petition within six months and concluded that the application (C.A. 366 of 2011) should not have been dismissed by the Company Law Board.

The appeal was disposed of with these directions, ensuring that the petitioners were not prejudiced by dilution of their shares or financial burden during the pending decision.

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