2008 (3) TMI 760 - Board - Companies Law

Summary

Issues Involved:
1. Maintainability of the company petition under Sections 397 and 398 of the Companies Act, 1956.
2. Compliance with Section 399 requirements.
3. Validity of the issue and conversion of redeemable cumulative preference shares (RCPS) into equity shares.
4. Allegations of oppression and mismanagement.
5. Impact of share allotment to R.N. Shetty Family Trust.
6. Historical litigation and its relevance to the current petition.

Detailed Analysis:

1. Maintainability of the Company Petition:
The primary issue is whether the petitioner qualifies under Section 399 to invoke the jurisdiction of the Company Law Board (CLB) under Sections 397/398 for acts of oppression and mismanagement in the company. The petitioner claims to hold 15.60% of the company's paid-up capital. However, after the conversion of RCPS into equity shares, his shareholding was reduced to 1.42%. The petitioner has challenged the issue and conversion of these shares, arguing that if these actions are found invalid, his shareholding would revert to 15.60%, qualifying him to maintain the petition.

2. Compliance with Section 399 Requirements:
Section 399 stipulates that members holding not less than one-tenth of the issued share capital of the company have the right to apply under Sections 397/398. The petitioner originally held 15.60% but was reduced to 1.42% due to the conversion of RCPS. The validity of this conversion is under challenge, and if found invalid, the petitioner would meet the Section 399 requirement.

3. Validity of Issue and Conversion of RCPS:
The petitioner did not subscribe to the RCPS offered to him, leading to a reduction in his shareholding. The company justified the issue and conversion of RCPS as necessary for raising funds and benefiting the company. However, the petitioner argues that the conversion was done for ulterior purposes and without proper disclosure. The validity of these actions involves substantial factual matters that cannot be adjudicated as a preliminary issue but must be examined in the main proceedings.

4. Allegations of Oppression and Mismanagement:
The petitioner alleges that the issue and conversion of RCPS were acts of oppression and mismanagement aimed at reducing his shareholding. The company contends that the actions were in the company's best interest and approved by the board and shareholders. The petitioner's failure to subscribe to the RCPS and the subsequent reduction in his shareholding are central to these allegations.

5. Impact of Share Allotment to R.N. Shetty Family Trust:
The petitioner asserts that shares were improperly allotted to R.N. Shetty Family Trust, which holds a significant portion of the company's shares. The company acknowledges the allotment but claims compliance with applicable laws. The validity of this allotment and its impact on the petitioner's shareholding must be examined to determine the maintainability of the petition.

6. Historical Litigation:
The petitioner has a history of litigation against the company, starting in 1989. Previous petitions were dismissed, and the petitioner was given the option to either continue as a member or exit the company by transferring his shares. The current petition is another attempt to address grievances related to shareholding and management practices.

Conclusion:
The judgment concludes that the petitioner's right to apply under Section 399 cannot be denied at the threshold. The validity of the issue and conversion of RCPS and the allotment to R.N. Shetty Family Trust must be examined in the main proceedings. The petition cannot be dismissed as not maintainable until these issues are resolved. The parties are directed to complete the pleadings, and the proposed parties must be given an opportunity to be heard. The final determination of the petition's maintainability will depend on the findings regarding the issue and conversion of RCPS and the allotment of shares.