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2019 (2) TMI 969 - HC - Companies LawOppression and mismanagement - Sections 397 and 398 read with Section 402 of the Companies Act, 1956 - principle of lis pendis - was it proper on the part of the Board to throw out the petition on the ground that the appellants could not invoke Sections 397, 398 and 402 to redress their grievances? Held that - It is very sad to note that the learned member of the Company Law Board could not view the law in its proper perspective. Suppose a company has two options of entering into a contract with either A or B. B is the nominee of some of the Directors of the Company and those Directors are likely to gain by virtue of the contract in favour of B. The contract with A is more beneficial for the company while B would be highly detrimental. In my opinion, a Section 397/398 application can be made before the Company Law Board to compel the company to enter into a contract with A and an order of injunction restraining the company from entering into any contract with B. This kind of a situation is opposed to a plain and simple contract by the company. Where specific performance of an ordinary contract is necessary, the company has to take an action and such action is not invited from a shareholder or a group of shareholders but is taken by the company through the board, usually. The appellants say that the control of the company had been changed over their head. Its only asset was being tossed around several purchasers without consultation with the appellants. Now, the allegation is that in the name of entering into a compromise with the intending purchasers, money is now diverted to corporate entities controlled by the Govind Sarda and his group - if it is alleged that one group of shareholders was divesting the only asset of the Company for their personal gain, could an action under Section 397 or Section 398 of the Companies Act, 1956, not be maintainable? - Surely it is. Yet, the Company Law Board has come to the opinion that no case under Sections 397 or 398 of the Companies Act had been made out. Where change of circumstances become material, a particular litigant is entitled to bring on record subsequent events post filing of the litigation by amendment of the pleadings so that there is full and complete adjudication of the disputes between the parties. It is quite possible as it has happened in our case that even after filing of the litigation between the parties the cause of action is continually made larger, wider and more complex by events. In this case, there was entry of SEARS, thereafter, the order of status quo, then negotiation between SEARS, Upasana and Kajaria for return of the investments of the last two parties by SEARS, the entry of Adarsh, the false representation before the Court on 18th December, 2013 and so on. It was within the rights of the parties to include the subsequent events in the cause of action and to ask for reliefs compatible with the changed cause of action by moulding, if necessary, the original reliefs, without causing prejudice to any party. The appellants make a strong case that there is a very close connection between the Govind Sarda group, SEARS and Adarsh. The stamp papers for the transaction between the first respondent company and SEARS were purchased in West Bengal. The agreement was executed in New Delhi. The 5th April, 2010 Memorandum of Understanding between the first respondent company and SEARS Bilt was signed by Mritunjay Kumar Singh, the respondent no. 24 on behalf of SEARS Bilt describing himself as its authorized signatory. The cancellation agreement dated 27th December, 2010 between the first respondent and Upasana was signed by Mritunjay Kumar Singh, the respondent no. 24 who is also one of the Directors of SEARS Bilt. One Manish Chaudhary, a Director of Adarsh Bilt Estate signed the application on behalf of the first respondent to Jaipur Development Authority seeking the conversion of the property. As there was a lot of apprehension in the appellants that the property would again change hands during the Christmas vacation, the Court after hearing the submission of learned Counsel for the parties passed an order recording an assurance that the subject matter of the controversy in the appeals would not be disturbed by any party till the Court was in a position to hear out the appeals - It was clear as daylight to anybody that the only asset the first respondent company had was the Jaipur property and that through this company petition the Ghanshyam Das group was fighting to regain control of the company and the property. The undertaking which the Court understood, learned Counsel to be making related to that property only. No other interpretation of the undertaking is possible. But it soon transpired that Adarsh Bilt Estate was working on this property. Then both SEARS and Adarsh declared that in November, 2013 by a registered agreement Adarsh had been inducted into the property by SEARS to develop and sell the same. I emphasize there is enough evidence to suggest that SEARS was another face of the Govind Sarda group and entirely controlled by it. Therefore, I have no hesitation to declare the transfer in favour of SEARS as detrimental to the company. There is also sufficient evidence to prove the collusion of the Govind Sarda group with Adarsh. I also have no hesitation to declare the transaction between SEARS and Adarsh as detrimental to the company - This Court has enough powers under Section 397, 398 read with Section 402, 403 of the Companies Act, 1956 to undo any act or declare it as void and not binding on the company or its shareholders. Applying the principle of lis pendis the property could not be divested from the first respondent company pending this appeal. So on both grounds, it remains with the first respondent company. The Company Law Board ought to have heard the petition on merits instead of throwing it out - there is no point in remanding the matter to the tribunal for fresh adjudication because that would delay the matters further and result in complication. Since the appeal is a continuation of the trial Court proceeding this Court has now to ascertain how on the above available facts and evidence which are prima facie, Court can do justice to the case. - Applications disposed off with directions.
Issues Involved:
1. Wrongful issue and allotment of share capital. 2. Wrongful increase in authorized share capital. 3. Wrongful alteration in the Board of Directors. 4. Change in the location of the registered office. 5. Wrongful cancellation of the MoU and subsequent agreements. Issue-wise Detailed Analysis: 1. Wrongful Issue and Allotment of Share Capital: The appellants alleged that shares were issued and allotted without proper notice to them, reducing their shareholding from 33?% to less than 10%. The discrepancies in the minutes of the meetings and the lack of notice indicated that the meetings were either not held or were fabricated. The court found substance in the appellants' allegations and noted that the respondents failed to prove receipt of notices by the appellants, leading to the conclusion that the meetings were dubious and the resolutions oppressive and burdensome. 2. Wrongful Increase in Authorized Share Capital: The increase in authorized share capital was purportedly done to meet working capital requirements and repay loans. However, the appellants argued that the increase was a strategy to dilute their shareholding. The court observed discrepancies in the minutes of the meetings and found that the resolutions to increase the share capital were taken without proper notice to the appellants, making the process dubious and oppressive. 3. Wrongful Alteration in the Board of Directors: The appellants contended that the Board of Directors was altered without proper notice, with new directors being appointed retrospectively. The court noted that the respondents failed to prove that notices were sent to the appellants and observed discrepancies in the minutes of the meetings. The court concluded that the alterations in the Board were done without proper procedure, making them null and void. 4. Change in the Location of the Registered Office: The change in the registered office was not a major issue in the judgment. However, it was part of the broader strategy to control the company without proper notice to the appellants. The court did not focus extensively on this issue but included it in the overall findings of oppression and mismanagement. 5. Wrongful Cancellation of the MoU and Subsequent Agreements: The appellants argued that the cancellation of the MoU dated March 7, 2007, and the subsequent agreement with SEARS were done to benefit the Govind Sarda group. The court found that the agreement with SEARS was detrimental to the company and was part of a strategy to divert the company's assets to entities controlled by the Govind Sarda group. The court noted that the transactions were done without proper consultation with the appellants and were prejudicial to their interests and the company's interests. Conclusion: The court concluded that the actions of the Govind Sarda group were oppressive and prejudicial to the appellants and the company. The court declared all meetings and resolutions from January 2, 2009, as non-est and null and void. The shareholding was ordered to be restored to the position as of January 1, 2009. The Board of Directors was superseded, and a committee of management was appointed to take control of the company's assets and operations. The court also set aside the sub-lease of the Jaipur property to SEARS and declared the property to remain with the first respondent company. The court emphasized the broad powers under Sections 397, 398, and 402 of the Companies Act, 1956, to undo any act detrimental to the company and its shareholders.
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