2018 (11) TMI 1779 - Tri - Companies Law

Oppression and mismanagement - transfer of shares in violation of the articles of association of the respondent-company - Closely held company - petitioners' contention is that the opportunity to exercise their discretion to purchase shares of respondent No. 7 being denied, is in violation of article 7 - HELD THAT - This Bench is of the opinion that the grounds invoked for oppression and mismanagement are unsustainable. Reliance on article 7 of the articles of association is misplaced. The facts of this case would be governed by article 8 which are categorical and explicit and need no elucidation or interpretation. The articles govern transfer of equity. There is no ambiguity in the said provisions. The provisions of the articles of association in a private limited company are sacrosanct. While article 7 ensures that the affairs of a company remain exclusively in the hands of the members and does not pass on to outsiders unless the members do not wish to exercise their pre-emptive right to purchase them, in case of transfer/transmission of shares by a member to his family, there can neither be any objection nor any ground to withhold registration of the transfer. A transfer from a member to member therefore does not require prior approval of the Board, nor gives the option of purchase to all existing members first. The object of article 7 is only to ensure that the shareholding is restricted to the existing shareholders. Article 8 is an exception to the above provision and is applicable when the transfer takes place within the existing members. In such a situation articles of association are not violated as the only logic behind these articles is to prevent an outsider from purchasing shares without giving opportunity to existing members to exercise their rights. Non-grant of an opportunity to object to the said transfer on grounds of undesirability and raising objections - HELD THAT - The Board had approved the transfer which even otherwise it was legally bound to do. The petitioners being only shareholders have no discretion in this matter and have no right to object. Learned senior counsel for the respondents have submitted that it is only by way of abundant precaution that the resolution passed by the Board approving the transfer in favour of respondents Nos. 5 and 6 was put up before the annual general meeting for ratification by way of transparency, and which in any event had the approval of 75 per cent. in value of the votes. Notwithstanding the explanation that an interest free security amount has been taken from M/s. Firmenich Aromatics for respondent No. 1's property at Daman (as duly reflected in their books of account) to discharge an obligation of an interest bearing inter corporate deposit availed for acquiring the said property, and the investments made in Amitysoft Tech P. Ltd., being in full knowledge of the petitioners (on grounds of their being indirectly connected with Amitysoft Tech P. Ltd.), this Bench is of the view that these are business decisions to be taken by the Board, and cannot be interfered with by this Tribunal - No grounds for oppression or mismanagement are made out on the allegations made by the petitioners. Petition dismissed.

Issues Involved:
1. Alleged oppression and mismanagement under sections 241 and 242.
2. Alleged violation of the Articles of Association regarding the transfer of shares.
3. Non-communication of important business decisions and financial transactions.
4. Alleged improper ratification of share transfer at the Annual General Meeting.
5. Alleged unauthorized financial transactions and investments.

Detailed Analysis:

Issue 1: Alleged Oppression and Mismanagement
The petitioners, holding approximately 22% equity in the respondent company, claimed oppression and mismanagement by the directors (respondents Nos. 2 and 3). They alleged that the directors were not informing them about important company affairs, including financial statements and statutory records, despite repeated requests. The Tribunal found no grounds for oppression or mismanagement, as the petitioners failed to substantiate their claims.

Issue 2: Alleged Violation of Articles of Association Regarding Share Transfer
The petitioners contended that the transfer of shares by respondent No. 7 to respondents Nos. 5 and 6 violated Article 7 of the Articles of Association, which mandates offering shares to other shareholders first. However, the Tribunal held that Article 8(1) governed this case, allowing transfers between members without Board approval. The Tribunal emphasized that Article 8(1) is explicit and permits such transfers without offering shares to other members, thus no violation occurred.

Issue 3: Non-Communication of Important Business Decisions and Financial Transactions
The petitioners argued that they were not informed about significant financial transactions, such as an investment of ?26,45,663 in M/s. Amitysoft Tech and an interest-free security deposit of ?72 lakhs. The Tribunal found these to be business decisions within the Board's domain and not subject to shareholder approval. The Tribunal also noted that the petitioners had indirect knowledge of these transactions.

Issue 4: Alleged Improper Ratification of Share Transfer at the Annual General Meeting
The petitioners claimed they were not properly notified about the Annual General Meeting where the share transfer was ratified. The Tribunal found that the Board's approval of the share transfer was within its legal rights and that the ratification was a transparent step, not a requirement. The Tribunal also noted that the petitioners received the meeting notice and had no valid grounds to object.

Issue 5: Alleged Unauthorized Financial Transactions and Investments
The petitioners questioned the propriety of certain financial decisions, including the interest-free security deposit and investment in M/s. Amitysoft Tech. The Tribunal held that these decisions were within the Board's purview and not subject to interference. The Tribunal found no evidence of these transactions being against the company's interest.

Conclusion:
The Tribunal dismissed the petition, finding no grounds for oppression or mismanagement. The reliance on Article 7 was deemed misplaced, and the transactions and decisions questioned by the petitioners were found to be within the Board's authority. The petitioners' claims were considered untenable, and the petition was dismissed without any order as to costs.

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