2013 (4) TMI 567 - HC - Companies Law

Oppression on part of majority shareholders over minority shareholders - appeal under Section 397 r.w.s. 398 and 85 of the Companies Act, 1956 - Whether if a shareholder fails to get elected as a director of company as he does not acquire requisite shares to get elected, it is a ground for winding up of company on just and equitable grounds or would amount to an act of oppression on part of majority shareholders over minority shareholders? - Piercing or Lifting the Veil - Held that - The instant case is not a case of one group of family members trying to dominate the other group and are trying to exclude the minority shareholders from participating in the management of the company. On the contrary an attempt was made by a person who did not have a shareholding in the company to acquire shares and render the family which had the majority share to the status of a minority shareholder and wanted to takeover the company. It is because the said design was stopped by the majority of the shareholders, the instant petition is filed. Therefore, as requested by the respondents, when the veil is pierced and seen, the undisputed facts of instant case, this is what emerges. Therefore, the said legal principles which are well settled has no application to the facts of instant case. Regarding Allotment of Preference Shares - Held that - From sections 85 and 86, it is clear that a person who acquires preference share capital would not acquire any voting rights. By such allotment the voting pattern has not been altered to any extent to the detriment of the respondents. As the allotment of the said preferential shares has in no way altered the voting rights of the shareholders and it was done to prevent the company being a defunct company and now that the company has come forward to allot equal number of preferential shares to the petitioners also, if they wish to have it, the said ground does not constitute a just and sufficient cause for winding up of the company. It does not constitute an act of oppression and mis-management. Exclusion from Management - Held that - In a corporate democracy if a shareholder wants to hold a post of director he must secure the requisite votes in the general body meeting and become a director. If the members in a general body meeting do not vote and he is not elected, he cannot, complain against the company. If the majority shareholders in such corporate democracy do not vote for a shareholder in whom they have no confidence and thereby see to it he is defeated, they are exercising their just lawful rights in such corporate democracy based on their rights which are vested in them by virtue of the share which they hold. The said act cannot be construed as an act which justifies an order of winding up on just and equitable grounds or it would constitute an act of oppression as sought to be made out. It is only an act vis-a-vis shareholder which can be a ground for passing an order under section 397(2) and if that shareholder also happens to be the director and if the director has any grievance, he has to work out remedies in a manner known, to law and not by invoking section 397(2). The complaint which is upheld by the CLB, is in respect of the so called injustice done to a director and not to a shareholder and, therefore, the said finding is unsustainable. Unfortunately, the CLB has not appreciated the facts in a proper perspective and seems to think that as the petitioners are holding 44 per cent of the shares, they should not be excluded from the management, they should be given representation in the board proportionate to their shareholding, which concept has no legal basis. On the contrary, it runs contrary to the corporate democracy which finds statutory provisions in the provisions of the Companies Act. Therefore, the CLB committed a serious error in recording its finding. Execution of Lease Deeds - Held that - In the minutes it is expressly stated that, as the first petitioner has a substantial interest in the companies in favour of which these leases are executed, he has not participated in those proceedings. Therefore, these leases have come into existence at an undisputed point of time when the relationship between the family members were very cordial. When the leases were granted in favour of the companies where the petitioners had substantial interest, the first petitioner though he was a director of the company, has not participated in those proceedings. Therefore, it is not a case where any lease is created without the knowledge of the director of the company in a clandestine manner and given to the respondents to make any wrongful gain. If provision is not made for periodical enhancement of rent, the blame squarely falls on the members of both groups. Obviously, it was not done because it was beneficial to the members of both the groups. Unfortunately, the CLB has not properly applied its mind, has not taken into consideration the point at which the lease deed came into existence, who were the persons in management of the company and who were the directors of the company on the date of those lease deeds. Non-Sending of Notice - Held that - It is not in dispute that the company is declaring dividends for the last 10 years. The dividend certificates have been handed over to the petitioners without any acknowledgement, which they have encashed. It is only in respect of this particular General Body Meeting, it is contended, they had no notice. If the notice is served and no acknowledgement is taken as of the practice, it is not possible for the respondents to show by any documentary evidence whether notice is served. But in the facts of this case, we are satisfied that, the plea is taken is only an after thought to show that the respondents in a bad position, before the Company Law Board. None of the grounds urged by the petitioners or all grounds put together would not constitute a ground for passing up of a winding up order on the ground of just and equitable clause. It is not enough to show that there is just and equitable cause for winding up the company, though that must be shown as preliminary to the application of section 397. It must further be shown that the conduct of the majority shareholders was oppressive to the minority as members. The averments in the objection statement as well as the documents produced in the case clearly discloses that the company is a profit making company. They have declared 50 per cent dividend for the last 8 years. The dividend warrants have been promptly sent to the petitioners who have encashed them. In those circumstances, there is absolutely no case either for winding up of the company or for exercise of power under section 397(2). Once they hold 44 per cent shares and the company is running under profit and proportionate to their shareholding they are paid dividend to the extent of 50 per cent their request for winding up is wholly misconceived and is actuated with mala fide intention. Therefore, the CLB misdirected itself and has not applied its mind to this basic requirement of law before it exercised the power under section 397 Therefore, the impugned order passed by the CLB cannot be sustained.

Summary

Issues Involved:
1. Non-registration of shares
2. Delisting of shares
3. Exorbitant expenses and personal expenses charged to the company's account
4. Allotment of preference shares
5. Exclusion of petitioners from management
6. Non-sending of notices and balance sheets
7. Leasing of lands

Detailed Analysis:

1. Non-registration of Shares:
The Company Law Board noted that the respondents assured the registration of shares would be done expeditiously upon fulfilling legal requirements. Consequently, this issue was deemed resolved and did not survive for further consideration.

2. Delisting of Shares:
The petitioners argued that delisting the company's shares from the stock exchange deprived them of the ability to trade their shares. The Company Law Board acknowledged this concern but did not find fault with the respondents' actions. Thus, this issue was not considered a ground for winding up the company.

3. Exorbitant Expenses and Personal Expenses Charged to the Company's Account:
The Company Law Board found that while the expenses appeared high, there was no evidence to prove that these expenses were incurred for personal use by the respondents. Therefore, this issue did not constitute a ground for winding up the company.

4. Allotment of Preference Shares:
The petitioners claimed that the allotment of 2000 preference shares to respondents 8 and 9 was done without proper notice and was intended to benefit the respondents' group. The respondents countered that the allotment was necessary to comply with statutory requirements to maintain the company's status as a public limited company. The Court found that the allotment did not adversely affect the voting rights of the petitioners and was done to prevent the company from becoming defunct. The Court also noted that the company was willing to allot an equal number of preference shares to the petitioners. Thus, this issue did not justify winding up the company or constitute oppression.

5. Exclusion of Petitioners from Management:
The petitioners contended that their exclusion from the Board of Directors was an act of oppression. The respondents argued that the removal of the petitioners from directorship was in accordance with corporate democracy and the petitioners failed to secure the requisite votes. The Court held that exclusion from management, in this case, did not constitute oppression or a just and equitable ground for winding up the company. The decision to elect directors lies with the shareholders, and the petitioners' failure to get elected did not amount to oppression.

6. Non-sending of Notices and Balance Sheets:
The petitioners alleged that they did not receive notices for meetings and balance sheets. The respondents explained that due to the close relationship among the parties and their residence in the same town, notices were usually handed over without formal acknowledgment. The Court found this explanation plausible and noted that the company had consistently declared dividends, which the petitioners received. The Court directed the company to send all future notices and communications by registered post to avoid such issues.

7. Leasing of Lands:
The petitioners argued that the company leased its lands at nominal rents to entities controlled by the respondents, which was detrimental to the company's interests. The respondents countered that these leases were executed when the petitioners were also in management and were aware of the terms. The Court found that the leases were executed with the knowledge and participation of the petitioners and were not clandestine. The leases were not deemed oppressive or mismanagement.

Conclusion:
The Court concluded that none of the issues raised by the petitioners constituted a just and equitable ground for winding up the company or amounted to oppression and mismanagement. The Court set aside the Company Law Board's order and directed the respondents to allot 2000 preference shares to the petitioners' group and to send all future notices by registered post.