2018 (8) TMI 1952 - Tri - Companies Law

Maintainability of petition - Oppression and mismanagement - siphoning off of funds - conversion of majority shareholder into minority - HELD THAT - The averments and allegations of the petitioners, inter-alia is that the estate of Late MJS is sought to be threatened or has been threatened by conversion of a 99% majority behooving the estate of Late MJS to a miniscule minority which action pre-dominantly is sought to be challenged by the petitioners as co-owners to the estate, which if successful enures to the benefit of the estate as a whole of which MGD also had a share as a co-owner and can result in an obvious advantage to her as well on the date of filing the petition and since her right as a co-owner or as a tenant in common not being challenged anywhere in the petition, but in fact repeatedly reinforced, even according to the contentions of the respondents as stated in their reply giving rise to the said objection, this Tribunal holds that the petition as filed by the petitioners without impleading MGD, as long as no rival claim is set up to that of her interest is maintainable. Conversion of majority shareholder into minority - HELD THAT - From the facts it is seen that upon the death of MJS in 1997 who was holding 5050 equity shares constituting an overwhelming majority of 99%, the 2nd and 3 rd respondents, despite the petitioners and MGD being close relatives and the legal heirs of Late MJS and thereby to his estate, dragged their feet in transmitting the equity shares of Late MDS to the legal heirs including the petitioners of MJS, in accordance with Articles 16 and 18 of Articles of Association of the 1 st respondent company. MGD being only a grand mother could not have represented the other legal heirs, namely the petitioners in relation to their rights to the Estate and particularly to act to their detriment, even though she could have acted for the preservation and benefit of the Estate and in the interest of other legal heirs, She could not have held out for the other legal heirs in denying the additional capital without any specific authorization, even assuming that the petitioners were not capable of entering into a contract in view of minority. Only the mother of the petitioners could have acted, even assuming that the petitioners were disabled into entering into a contract due to their minority, on their behalf/ in refusing the additional allotment, which is not the case here. Further despite challenge in the rejoinder that due notices of the EGM held on 27,03.2001 was not given to them, the respondents have not adduced any evidence to the contrary - In the absence of production of minutes of the meetings, either of the Board or General Meetings by the respondents to establish as to what transpired in the Board or General Meetings and as to the persons who attended the meetings, it cannot be discerned as to the happenings and thus the respondents have also prima facie failed to establish per se the holding of these meetings and the necessity and rationale for the issue of additional capital and whether the same stood justified, particularly when even according to the respondents there has been an uncertainty in relation to succession to the estate of Late MJS holding 99% of the paid up equity at the relevant point. Expansion of business and necessity of funds - issue of additional capital - whether such a momentous decision can be taken without taking on board the interest of 99% of paid up equity of the company? - HELD THAT - Huge sums of monies, even according to the respondents seems to have been committed in relation to the properties situated at Mussoorie in Uttranchal disbursing a sum of ₹ 8 crores in the month of September-October, 1999 and at Sohna, Haryana disbursing a sum of ₹ 3 crores out of the then existing funds of the 1 st Respondent company and not out of the additional issue of capital which in any case amounts to only ₹ 60,88,200/- as compared to ₹ 8 crores spent by the company in paying the amount payable under the assignment deeds, From the balance sheet produced by the respondents for the year ending 31.03.2000 it is seen that the said amounts have been given only from interest free security deposits provided by IHCL and in view of FD's and interest accruals to the extent of Rs,7.35 crores or in excess thereof, the 1 st respondent company did not have any compelling circumstances for additional capital during the relevant period when the additional capital was raised. - The manner in which the entire sequence of events seems to have been unleashed clearly points out that between 1999 to 2003 a concerted effort has been put up which seems to be more premeditated solely to benefit the family of 2 nd and 3 rd respondents and thereby to the detriment of the shareholding of the estate of Late MJS and its legal heirs in the 1 st respondent company. Since the act of the respondents in denying their legitimate right to become members being the legal heirs to the estate of Late MJS holding 99% of the paid up equity of the 1 st respondent company had been consistently denied and on the other hand their majority shareholding having been converted into a minority by the overt and covert acts of the respondents and the said acts being returned with the finding, constituting as oppressive acts in relation to the petitioners by the respondents and having a continuous bearing and suffering even as of today, the aspect of limitation, delay and laches sought to be used as a defence to ward of the present litigation on the part of the respondents is totally unsustainable. This Tribunal is of the considered view that the company's affairs in relation to the petitioners have been conducted in an oppressive manner by the respondents and that the facts would render that it is just and equitable to wind up the company, however the same would unfairly prejudice the petitioners and in the circumstances a case under the provisions of Section 397 and Section 398 of the Companies Act, 1956 has been made out and thereby petitioners are entitled to reliefs under the said provision read with Section 402 of the said Act - Petition disposed off.

Summary

Issues Involved:

1. Dispute over the estate of a deceased royal, specifically involving 5050 equity shares of Jai Mahal Hotels Private Limited.
2. Legitimacy of the increase in authorized and paid-up share capital of Jai Mahal Hotels Private Limited.
3. Allegations of oppression and mismanagement by the respondents.
4. Validity of board appointments and resolutions passed without proper notice to the petitioners.
5. Entitlement of the petitioners to represent the estate of the deceased and maintain the petition.
6. Allegations of siphoning off funds by the respondents.
7. Request for a special audit and appointment of an administrator for the company.

Detailed Analysis:

1. Dispute over the estate of a deceased royal:
The dispute arose over the estate of a deceased royal, including 5050 equity shares of Jai Mahal Hotels Private Limited. The petitioners, as legal heirs, claimed their rightful ownership of these shares. The respondents, however, insisted on a succession certificate, delaying the transmission of shares and denying the petitioners' participation in the company's affairs.

2. Legitimacy of the increase in authorized and paid-up share capital:
The authorized capital of the company was increased from ?10,00,000 to ?1 crore, and the paid-up capital was increased by allotting 60,882 equity shares to the 2nd and 3rd respondents. The petitioners argued that this increase was done without proper notice and was intended to convert their majority shareholding into a minority. The tribunal found that the increase in capital and the subsequent allotment of shares were done without proper notice to the petitioners and were not justified by any pressing financial need.

3. Allegations of oppression and mismanagement:
The petitioners alleged that the respondents engaged in acts of oppression and mismanagement, including appointing additional directors without notice, increasing the authorized capital without proper notice, and allotting additional shares to themselves at par value, thereby diluting the petitioners' majority shareholding. The tribunal found these actions to be oppressive and lacking in probity.

4. Validity of board appointments and resolutions:
The respondents appointed additional directors and increased the authorized capital without proper notice to the petitioners. The tribunal set aside these appointments and resolutions, restoring the position to what it was immediately after the death of the deceased royal. The tribunal also ordered the rectification of the company's register of members to reflect this position.

5. Entitlement of the petitioners to represent the estate:
The tribunal held that the petitioners, as legal heirs of the deceased royal, were entitled to represent the estate and maintain the petition. The tribunal rejected the respondents' argument that the petitioners could not maintain the petition without the deceased's mother being a party, as the petitioners were co-owners of the estate and had an equal right to possess the whole property.

6. Allegations of siphoning off funds:
The petitioners alleged that the respondents siphoned off funds from the company under various pretexts, including administrative and operating expenses, traveling expenses, and legal expenditure. The tribunal found that these allegations warranted a special audit to identify any siphoning of funds and transactions prejudicial to the company's interest.

7. Request for a special audit and appointment of an administrator:
The tribunal appointed an independent auditor to conduct a special audit of the company's accounts from the date of the deceased royal's death until March 31, 2018. The purpose of the audit was to identify any siphoning of funds and transactions prejudicial to the company's interest. The tribunal also directed the reconstitution of the company's board to include nominees of the petitioners and ordered the convening of an extraordinary general meeting to confirm or reject the reconstituted board.

Conclusion:
The tribunal found that the actions of the respondents constituted oppression and mismanagement, warranting relief under Sections 397 and 398 of the Companies Act, 1956. The tribunal set aside the resolutions and appointments made without proper notice to the petitioners, ordered the rectification of the company's register of members, and appointed an independent auditor to conduct a special audit. The tribunal also directed the reconstitution of the company's board and imposed costs on the respondents.