1963 (9) TMI 30 - HC - Companies Law

Summary

Issues Involved:
1. Control of the company's affairs and management.
2. Validity of the extraordinary general meeting and resolutions passed therein.
3. Allegations of wrongful acts and mismanagement by the Prosad group.
4. Legitimacy of the new share allotment and appointment of new directors.
5. Legal standing of the petitioners to seek relief under sections 397 and 398 of the Companies Act, 1956.
6. Appropriateness of court intervention under sections 397 and 398.

Issue-wise Detailed Analysis:

1. Control of the Company's Affairs and Management:
The petitioners acquired a majority of shares and were elected directors, gaining control of the company's affairs. However, discord arose with the Prosad group, leading to rival board meetings and conflicting resolutions. The petitioners alleged that the Prosad group retained control of the company's books and forcibly took over the company's factory, ousting the petitioners from management.

2. Validity of the Extraordinary General Meeting and Resolutions Passed Therein:
The Prosad group allegedly held an extraordinary general meeting on February 21, 1963, where several significant resolutions were passed, including altering the articles of association, increasing the authorised capital, and issuing new shares. The petitioners contended that the meeting was invalid, as they did not receive notice and did not attend. The court found that the extraordinary general meeting was not lawful, and the resolutions passed were invalid and not binding on the company or its shareholders.

3. Allegations of Wrongful Acts and Mismanagement by the Prosad Group:
The petitioners accused the Prosad group of withholding the company's books, misappropriating funds, and forcibly taking over the company's factory. The Prosad group denied these allegations, claiming joint possession of the books and proper management of the company's affairs. The court noted the serious allegations and found that the conduct of the Prosad group justified intervention.

4. Legitimacy of the New Share Allotment and Appointment of New Directors:
The extraordinary general meeting purported to issue and allot 2,113 new shares and appoint new directors, including Kedar Nath Bhagat and Biswanath Prosad. The court held that the allotment of shares and the appointment of new directors were invalid, as the extraordinary general meeting was not lawful. The actions taken at this meeting were ultra vires and not binding on the company.

5. Legal Standing of the Petitioners to Seek Relief Under Sections 397 and 398 of the Companies Act, 1956:
The respondents argued that sections 397 and 398 are intended for minority shareholders and not for a majority. The court rejected this argument, stating that the sections do not limit applications to minorities only. The court held that even a majority rendered ineffective by wrongful acts could seek relief under these sections.

6. Appropriateness of Court Intervention Under Sections 397 and 398:
The court found that the company's affairs were in a state of confusion and mismanagement, justifying intervention under sections 397 and 398. The court noted that the company's business could not continue as it was, and appropriate orders were necessary to remedy the situation.

Conclusion:
The court appointed an administrator to take charge of the company's business and supersede the board of directors. A special auditor was appointed to investigate the company's affairs, and an extraordinary general meeting was ordered to elect a new board of directors. The court also restrained the alleged allottees of the new shares from exercising any rights as shareholders. The petitioners were awarded costs from the respondents.