2004 (12) TMI 723 - Board - Companies Law

Summary

Issues Involved:
1. Alleged unlawful removal of the first petitioner as a director.
2. Issuance of further shares to reduce the petitioners' shareholding.
3. Allegations of mismanagement and siphoning of funds by the respondents.
4. Maintainability of the petition under Sections 397/398 of the Companies Act, 1956.
5. Application of Sections 542/543 read with Schedule XI of the Companies Act, 1956 against the first petitioner.

Issue-wise Detailed Analysis:

1. Alleged Unlawful Removal of the First Petitioner as a Director:
The petitioners claimed that the first petitioner was unlawfully declared to have vacated his office of director under Section 283(1)(g) of the Companies Act, 1956, without proper notice for Board meetings. The respondents argued that the first petitioner failed to attend three consecutive Board meetings or all meetings for a continuous period of three months. The Board noted that the petitioner had already filed a civil suit on this issue before filing the present petition. Therefore, the issue of directorship was left to be decided by the civil court, and no adjudication was made on this matter in the present proceedings.

2. Issuance of Further Shares to Reduce the Petitioners' Shareholding:
The petitioners alleged that further shares were issued to disturb the equality in shareholding and to gain majority control by the respondents. The Board acknowledged that in a quasi-partnership company, any disturbance in shareholding could be considered an act of oppression. However, it was established that the company needed funds to complete its project, and the respondents had offered the petitioners an opportunity to invest further to maintain their 50% shareholding, which the petitioners did not accept. The Board concluded that the issuance of further shares was not solely to oppress the petitioners but to meet the financial needs of the company. Therefore, the prayer to cancel the further issue of shares was not granted.

3. Allegations of Mismanagement and Siphoning of Funds by the Respondents:
The petitioners accused the respondents of mismanagement and siphoning of funds. However, no substantial evidence was provided to support these allegations. The Board noted that the project cost was justified by the petitioner's own bid of Rs. 152 lacs for the unit in an auction, indicating that the project cost could not be less than Rs. 152 lacs. The Board found no merit in the allegations of mismanagement and siphoning of funds.

4. Maintainability of the Petition under Sections 397/398 of the Companies Act, 1956:
The respondents argued that the petition was not maintainable as the acts complained of occurred before the filing date of the petition. The Board noted that the petition was filed nearly six months after the civil suit, indicating that the petitioners were aware of the issues well before filing the present petition. The Board inferred that the petition was filed not to redress grievances but for a collateral purpose of enriching the petitioners at the cost of the respondents.

5. Application of Sections 542/543 read with Schedule XI of the Companies Act, 1956 against the First Petitioner:
The respondents sought action against the first petitioner under Sections 542/543 for fraudulent conduct of business. However, the Board found no material evidence to support the claim that the first petitioner conducted the affairs of the company fraudulently. The allegations of collusion with RICCO and failure to ensure payment of dues by Gauri Cement were not sufficient to attract the provisions of Section 542. Consequently, the application for action against the first petitioner was dismissed.

Conclusion:
The petition was disposed of with no order as to costs. The main reliefs sought by the petitioners, including the restoration of the first petitioner as a director and the cancellation of further issue of shares, were not granted. The Board emphasized that the petition appeared to have been filed for an oblique motive rather than to address genuine grievances.