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2017 (12) TMI 1662 - Tri - Companies LawOppression and mismanagement - Legality of allotment of shares - Board Meetings held without quorum - Whether the allotment of shares i.e. 5,05,000 in favour of Respondent Nos.2 and 3 in the Board Meetings purportedly held on 25.04.2008 and 11.08.2010 is legal and valid? - Whether the continuance of Respondent 3, viz., Mrs. Bindu Paul as a Director of 1st Respondent company is legal and valid? - Whether the appointment of 4th Respondent as a Director of the 1st Respondent company purportedly made on 27.1.2011 is legal and valid? - HELD THAT - It is settled legal position that if further issue of shares results in conversion of majority into a minority, or creation of new majority, then, such issue of shares is not only in breach of fiduciary responsibilities but also a grave act of oppression against the existing majority. Therefore, the allotment of shares impugned in the Company Petition which have been made without proper service of notice with a view to gain advantage against the Petitioners being the majority shareholders of the closely held company is in breach of fiduciary obligation of the Directors which is neither in compliance with the legal requirements nor ensures the fair play and probity in corporate management. Thus, it amounts to an act of gross oppression. In view of this, the allotments made on 25.04.2008 and 11.08.2010 of 505000 shares to Respondent Nos. 2 and 3 is illegal. Board Meetings held without quorum as required by the Articles of Association of the 1st Respondent Company are bad in law and the appointments of additional Directors at such Board Meeting was also bad in law, as that failed to satisfy the test required by law as has been laid down in Murari Mohan s case 2015 (7) TMI 298 - COMPANY LAW BOARD The allotments of shares i.e. 5,05,000 in favour of the Respondent Nos. 2 and 3 made on 25.04.2008 and 11.08.2010 are declared illegal, and the same stand set aside. The Board Meetings purportedly held on 25.04.2008 and 11.08.2010 are not tenable in the eye of law, the same are declared as illegal, and all decisions taken there at are set aside. The EoGMs dated 22.01.2011 and rights offer dated 01.02.2011 are declared illegal, null and void and hence, are set aside. The continuance of Respondent No. 3 and appointment of Respondent No.4 are declared as illegal, null and void, and hence, set aside. The 1st Petitioner is appointed as Managing Director of 1st Respondent Company and Mr. K. J. Paul is removed from the position of Managing Director, but he shall perform the duties as Director of the 1st Respondent Company. Consequently, the said Board of Directors is directed to rectify the Register of Members by restoring the shareholding pattern as on 30.09.2005 as shown under para 6(a) of the Petition. As proposed to appoint an independent Auditor within three weeks of passing this Order, with the consensus of the Board of Directors comprising of 1st Petitioner and the 2nd Respondent, failing which, this Bench on mention by any of the Directors, shall appoint the independent Auditor out of the names, if suggested, by the parties, who (Independent Auditor) shall determine the true and fair value of the shares of 1st Respondent Company by taking into consideration three Financial Years w.e.f. 2011 onwards. Based on the said value, and keeping in view the shareholding pattern as on 30.09.2005, the first opportunity for purchase of shares of Respondents is given to Petitioner, failing which the Respondents shall purchase the shares of the Petitioner. This process shall commence after the submission of the report of the independent Auditor, who shall submit the same within four weeks from the date of his appointment, and shall get completed within the twelve weeks thereafter. Till this process is completed, there shall not be any change in the composition of the Board constituted by this Bench, and shareholding pattern shall remain the same as on 30.09.2005. The fee of the independent Auditor shall be paid by the 1st Respondent Company which shall be fixed as per mutually agree of terms
Issues Involved:
1. Legality and validity of the allotment of shares on 25.04.2008 and 11.08.2010. 2. Legality and validity of the continuance of Respondent No. 3 as a Director. 3. Legality and validity of the appointment of Respondent No. 4 as a Director. 4. Consequential reliefs. Issue-wise Detailed Analysis: 1. Legality and Validity of the Allotment of Shares: The Petitioners contended that the allotments of 445,000 shares and 60,000 shares on 25.04.2008 and 11.08.2010 respectively, in favor of Respondents Nos. 2 and 3, were illegal. No notice of the Board Meetings was given to the 2nd Petitioner, a Director at the time. The Respondents claimed that notices were dispatched, but there was no proof of service, and the notices lacked necessary details. The Tribunal found the notices insufficient and invalid, noting that certificates of posting are unreliable. The Respondents failed to disclose the share allotments to the Petitioners, constituting an oppressive act and mismanagement. The Tribunal ruled that the share allotments were made to create a new majority, reducing the Petitioners from majority to minority, which is a breach of fiduciary duty and an act of gross oppression. Thus, the allotments were declared illegal. 2. Legality and Validity of the Continuance of Respondent No. 3 as a Director: The Petitioners argued that Respondent No. 3, Mrs. Bindu Paul, was a retiring director who did not seek reappointment at the Annual General Meetings of 2006 and 2008, making her continuance as Director illegal. The Respondents contended that an inadvertent omission to retire and reappoint her was not fatal. The Tribunal held that Mrs. Bindu Paul's continuation as Director was contrary to the Articles of Association, rendering the Board below the requisite quorum. This invalidated the share allotments made on 25.04.2008 and 11.08.2010. The Tribunal declared her continuation as Director illegal and invalid. 3. Legality and Validity of the Appointment of Respondent No. 4 as a Director: The Petitioners contended that the appointment of Respondent No. 4, Mr. K. A. Mathai, on 22.01.2011 by the Board, was in violation of Article 28(i) of the Articles of Association, which required Directors to be appointed at Annual General Meetings. The Respondents claimed the appointment was in terms of Article 23 and Section 260 of the Companies Act, 1956. The Tribunal found the appointment invalid as the Board lacked proper quorum, having only one Director. Thus, the appointment of Respondent No. 4 was declared illegal. 4. Consequential Reliefs: The Tribunal declared the share allotments on 25.04.2008 and 11.08.2010 illegal and set them aside. The Board Meetings on these dates were declared illegal, and all decisions taken therein were set aside. The EoGMs dated 22.01.2011 and rights offer dated 01.02.2011 were also declared illegal and set aside. The continuance of Respondent No. 3 and the appointment of Respondent No. 4 were declared illegal and set aside. The 1st Petitioner was appointed as Managing Director, and Mr. K. J. Paul was removed from the position but remained as Director. The Board was directed to rectify the Register of Members to restore the shareholding pattern as on 30.09.2005. An independent Auditor was to be appointed to determine the true and fair value of the shares, with the first opportunity to purchase given to the Petitioner. The process was to be completed within twelve weeks after the Auditor's report. No change in the Board composition or shareholding pattern was allowed until the process was completed. No order as to costs was made.
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