2013 (5) TMI 548 - HC - Companies Law

Ambit and scope of the powers conferred on the Company Law Board - Company was directed to amend its Memorandum and Articles of Association so as to give Respondents proportional representation on the Board of Directors of the Company - Held that - The powers of the CLB under Section 402 of the Companies Act, 1956 are wide in nature. However, there must be some nexus between the complaint made and the relief granted. The exercise of the powers by the CLB cannot be divorced from the case for alleged oppression made out by the Petitioner before the CLB and other existing circumstances which may necessitate such directions being issued. It is equally trite law that there must be some basis for the CLB to issue directions in proceedings under Section 397 of the Companies Act. The Appellants are correct in their submission that in the present case, the following circumstances militate against the directions issued in the impugned order as the alleged case of the Respondent as regards oppression was demonstrably false and untenable, there were no other circumstances whatsoever (pleaded or otherwise) which would have necessitated the grant of the said extreme and drastic directions by the CLB and at the hearing before the CLB, all the reliefs sought in the Petition except prayer c were expressly given up by the Respondents. Therefore, once the Respondents expressly gave up all prayers in the Petition except prayer c , it was not open to the CLB to pass the drastic and extreme directions which went far beyond the limited relief sought by the Respondents and which would have the effect of creating a deadlock in the affairs of the Company where none existed earlier. In the present case, by issuing unwarranted, drastic and extreme directions in the impugned order, the CLB has without any basis whatsoever placed the control of the Company in the hands of the minority i.e. the Respondent Group, thus enabling the Respondents to achieve indirectly a virtual veto right on all issues and the ability to paralyze the functioning of the Company. In this context, it may be reiterated that the Respondents have never participated in the management of the affairs of the Company and have at all times refused to provide personal guarantees or to pledge their shares in order to raise finances for the Company. Such a position would enable the Respondents to arm twist the Company on every issue and thereby ensure that there is a deadlock on every issue. By the impugned order, the CLB has created a situation for a potential deadlock where none existed earlier. It is once again reiterated that the directions have been passed by the CLB in a case where (I) the allegations of the Respondents as regards alleged oppression are demonstrably false and incorrect; and (ii) all the prayers except prayer c in the Petition were expressly given up by the Respondent. Therefore, far from being in the interest of the Company, the said directions of the CLB are extremely detrimental and prejudicial to the interest of Appellant No.1 Company and are therefore not permissible under Section 402 of the Companies Act, 1956. Respondents Petition is based on false and frivolous allegations and is without merit and the Petition deserves to be dismissed. The CLB has, under the garb of doing substantial justice, granted extreme directions under Section 402 which as explained hereinabove places control of the Company in the hands of the minority i.e. the Respondents Group, thus enabling the Respondents to achieve indirectly a virtual veto right on all issues and the ability to paralyze the functioning of the Company. In view thereof the Appeal is allowed and the impugned order is set aside. Respondents be directed to sell their shares to Appellant Nos. 2 to 7 at a value to be ascertained by a Valuer on the basis of the balancesheet for the year ending 31st March, 2006. M/s. V.B. Haribhakti and Company having their office at 42, Free Press House, Nariman Point, Mumbai400 021 are therefore appointed as Valuers to value the shares of the Company.

Summary

Issues Involved:

1. Oppression of minority shareholders.
2. Non-issuance of share certificates.
3. Non-payment of interest or dividends.
4. Removal of a director without notice.
5. Non-provision of balance sheets and meeting notices.
6. Alleged mismanagement and financial irregularities.
7. Validity of resolutions passed at the EGM.
8. Powers and scope of the Company Law Board under Section 402 of the Companies Act, 1956.

Issue-wise Detailed Analysis:

1. Oppression of Minority Shareholders:
The minority shareholders (Respondents) alleged oppression by the majority (Appellants), particularly regarding the resolution for the sale of the company's undertaking. The Court found that the Respondents' claims were not substantiated with adequate evidence. The Company Law Board (CLB) had directed proportional representation for the Respondents on the Board, which the Court deemed unjustified and likely to create a deadlock in the company's functioning. The Court emphasized that the CLB's powers under Section 402 must be exercised with the company's and shareholders' best interests in mind, and the directions given were extreme and unwarranted.

2. Non-Issuance of Share Certificates:
The Respondents alleged that share certificates were not issued to them. The Court found that the share certificates were handed over to Respondent No. 3, who negligently or deliberately left them at the company office. This issue was resolved during the proceedings, and no act of oppression was established.

3. Non-Payment of Interest or Dividends:
The Respondents claimed they did not receive dividends on their investments. The Court noted that the company's profits were reinvested to reduce debt and acquire assets, a decision supported by the Board, including Respondent No. 3. The Court referenced the Calcutta High Court's ruling that non-declaration of dividends does not constitute oppression.

4. Removal of a Director Without Notice:
Respondent No. 1 alleged he was removed as a director without notice. The Court found that Respondent No. 1 had voluntarily resigned in 2002, a fact reflected in the company's balance sheet signed by Respondent No. 3. The Court dismissed the claim, noting that the Respondent failed to raise this issue until filing the petition in 2006.

5. Non-Provision of Balance Sheets and Meeting Notices:
The Respondents alleged they were not provided with balance sheets and meeting notices. The Court found no evidence supporting this claim, noting that the Respondents received balance sheets and meeting notices regularly until 2006. The Court highlighted that the Respondents did not raise any complaints about non-receipt until the petition was filed.

6. Alleged Mismanagement and Financial Irregularities:
The Respondents alleged mismanagement and financial irregularities by the Appellants. The Court found no evidence of such claims, noting that the company complied with all statutory requirements and maintained financial stability. The Court emphasized that the Respondents did not participate in the company's management and refused to provide personal guarantees for securing financial assistance.

7. Validity of Resolutions Passed at the EGM:
The Respondents contested the validity of resolutions passed at the Extraordinary General Meeting (EGM) held on May 24, 2006. The Court found that the EGM was conducted transparently, and the resolutions were passed by majority vote. The Respondents' proposal to amend the resolution for the sale of the undertaking was rejected by majority vote. The Court noted that the Respondents did not bid for the undertaking, undermining their claims of oppression.

8. Powers and Scope of the Company Law Board under Section 402 of the Companies Act, 1956:
The Court reiterated that the CLB's powers under Section 402 are wide but must be exercised in the company's and shareholders' best interests. The Court found that the CLB's directions in the impugned order were extreme and unjustified, creating a potential deadlock in the company's functioning. The Court emphasized that the CLB must consider the company's overall interests and the shareholders while granting relief.

Conclusion:
The Court allowed the appeal, setting aside the CLB's impugned order. The Court directed the Respondents to sell their shares to the Appellants at a value determined by a valuer based on the balance sheet for the year ending March 31, 2006. The Court appointed M/s. V.B. Haribhakti and Company as valuers to determine the share value. The appeal was disposed of accordingly.