2008 (6) TMI 624 - Board - Companies Law

Summary

Issues Involved:
1. Allegations of illegal increase and allotment of shares.
2. Allegations of siphoning off funds and mismanagement.
3. Allegations of oppression and reduction of majority shareholder to minority.
4. Allegations of fraudulent transfer of shares.
5. Allegations of improper conduct by the auditor (R-8).
6. Allegations of diversion of business and funds.
7. Allegations of improper removal of the petitioner from the directorship.

Detailed Analysis:

1. Allegations of Illegal Increase and Allotment of Shares:
The petitioner alleged that the increase and allotment of shares were illegal and unauthorized, violating Clause 16 of the Articles of Association. It was contended that no board meeting was held, and no notice was given to the petitioner regarding the increase in share capital. The respondents argued that the increase was necessary for securing bank facilities and was done with the petitioner's consent, as evidenced by his signatures on balance sheets and annual returns. The court found the respondents' explanations unconvincing, noting that the petitioner had handed over control due to personal difficulties and the respondents took undue advantage. The court held that the increase and allotment of shares were fraudulent and set them aside, restoring the status quo ante.

2. Allegations of Siphoning Off Funds and Mismanagement:
The petitioner alleged that R-3 and R-8 siphoned off funds through fictitious bills and mismanagement. Specific instances included payments to Spectron Engineers Pvt. Ltd. (R-5) for non-existent catering services and fraudulent transactions with Barkha Industries. The respondents denied these allegations, arguing that the payments were legitimate and necessary for business operations. The court found the respondents' justifications inadequate and noted that the respondents failed to refute the specific allegations. The court ordered an investigative audit to ascertain and quantify the siphoned-off funds.

3. Allegations of Oppression and Reduction of Majority Shareholder to Minority:
The petitioner, who initially held 97.33% of the shares, alleged that the respondents reduced his shareholding to 19.20% through fraudulent means. The court found that the respondents exploited the petitioner's personal difficulties and lack of oversight to manipulate the shareholding structure. The court held that the acts of oppression were continuous and prejudicial to the petitioner's interests, warranting relief under Sections 397 and 398 of the Companies Act.

4. Allegations of Fraudulent Transfer of Shares:
The petitioner alleged that 3,10,000 shares were fraudulently transferred to R-3 through benami transactions. The respondents argued that the transfers were legitimate and made with the petitioner's knowledge and consent. The court found the respondents' explanations unconvincing, noting the lack of proper documentation and the involvement of R-8 in the fraudulent transactions. The court set aside the fraudulent transfers and restored the petitioner's original shareholding.

5. Allegations of Improper Conduct by the Auditor (R-8):
The petitioner alleged that R-8, the auditor, masterminded the fraudulent activities and mismanagement. R-8 denied these allegations, arguing that he acted within his professional duties. The court found that R-8 connived with the respondents to manipulate records and accounts, causing oppression to the petitioner. The court held that R-8 misused his position and breached the trust reposed in him, contributing to the reduction of the petitioner's shareholding.

6. Allegations of Diversion of Business and Funds:
The petitioner alleged that R-3 diverted the business of the respondent company to their own group companies, causing financial loss. The respondents denied these allegations, arguing that the transactions were legitimate and necessary for business operations. The court found that the respondents failed to refute the specific allegations and noted the contradictions in their statements. The court held that the diversion of business and funds was part of the oppressive conduct against the petitioner.

7. Allegations of Improper Removal of the Petitioner from the Directorship:
The petitioner alleged that the respondents attempted to remove him from the directorship through an EGM requisitioned by R-3. The respondents argued that the removal was justified due to the petitioner's detrimental activities. The court found that the removal was part of the continuous oppressive conduct against the petitioner and quashed the notice for the EGM, declaring it illegal and unwarranted.

Conclusion:
The court held that the petitioner had established a case of continuous oppression and mismanagement by the respondents, leading to the reduction of his majority shareholding and causing financial loss. The court set aside the illegal increase and allotment of shares, ordered an investigative audit to ascertain the siphoned-off funds, and quashed the notice for the EGM. The petition was disposed of with no order as to the cost of litigation.