2005 (7) TMI 354 - HC - Companies Law

Seeking review of the Company Law Board's order - Opression and mismanagement - Transfer to shares - Power to refuse registration and appeal against refusal - HELD THAT - it was not a case where the outsiders were going to be inducted for the first time. In any case, due to financial crisis the company was unable to repay the borrowings of the financial institutions with the result even notice under section 29 of the State Financial Corporations Act were issued. Sisters were also not having cordial relations among them. The two sisters (respondents Nos. 2 and 3), in these circumstances, decided to part with their shareholdings and in view of the family arrangement, they offered to sell their shares to the appellant and respondent No. 4 way back in the year 1997, although under the provisions of the Companies Act they were under no such obligation. The fact remains that till February 2000, the appellant could not respond to this offer by taking any positive steps. The appellant has herself admitted the same, although she has tried to explain away by giving her own reasons and stating that she got involved in the illness of her daughter-in-law, which was of serious nature and, therefore, she could not arrange the funds. Be that as it may, fact remains that shares were offered to her in the first instance before selling it to the outsiders after waiting for three years and these shares were ultimately sold to respondents Nos. 5 to 9 in February 2000. Even respondent No. 4 joined other two sisters in selling her shareholding. This significant shift in the attitude of respondent No. 4 would signify that offer of respondents Nos. 2 and 3 to the appellant and respondent No. 4 had fizzled out. Therefore, I am of the view that sale of shares by respondents Nos. 2 to 4 to outsiders is perfectly valid and is not an act of oppression. The grievance about induction of three new directors in the board meeting held on February 10, 2000 also does not hold any water. Once new management took over the control, recast of the board was inevitable. The controlling group had the requisite power and authority to appoint its own directors. Non-interference by the Company Law Board is, therefore, justified. I do not find any infirmity in the aforesaid approach of the Company Law Board. As noted above, the basic premise of the entire petition was the transfer of shares by respondents Nos. 2 to 4 to outsiders which was unpalatable to the appellants who wanted right to pre-emption. This challenge of the appellant failed before the Company Law Board and I also do not find any merit therein. Once the majority shareholding has come to respondents Nos. 5 to 9, who have the control of the company, they would naturally appoint their directors as well. The Company Law Board has, none the less adopted a fair approach in not only maintaining the same shareholding pattern qua appellant by directing that she be given offer to buy further shares so as to restore shareholding worth 14.7 per cent. Even she is allowed to remain director so long as she continues to be the shareholder, although she could be retired by rotation as per the articles. Therefore, the Company Law Board has passed necessary directions to secure the interest of the appellant. It is a different matter that the company had offered additional equity shares to the appellant on January 25, 2001 as per the directive of the Company Law Board, but till date she has not chosen to accept the same. I, therefore, do not find any merit in this appeal. An objection was taken to the maintainability of the appeal against order dated January 12, 2001 on the ground that this order was challenged earlier and as the said appeal was withdrawn, no fresh appeal is permissible to impugn the same order. However, as the appeal is dismissed on merits, I do not propose to go into this question. The appeal is accordingly dismissed. However, as the appellant has not given any option for purchase of further equity as offered to her presumably because of the pendency of this appeal, I give further four weeks time to the appellant to signify her intention in this behalf failing which the said offer shall be treated as lapsed.

Summary

Issues Involved:
1. Validity of the transfer of shares by respondents Nos. 2 to 4 to outsiders.
2. Allegations of oppression and mismanagement.
3. Legality of the appointment of new directors in the board meeting held on February 10, 2000.
4. Compliance with statutory provisions while issuing further shares.
5. Review of the Company Law Board's order dated January 12, 2001.

Detailed Analysis:

1. Validity of the Transfer of Shares by Respondents Nos. 2 to 4 to Outsiders:
The appellant challenged the transfer of shares by respondents Nos. 2 to 4 to respondents Nos. 6 to 9, asserting a memorandum of family agreement dated May 4, 1999, which stipulated that any sister wishing to dispose of her shares would first offer them to the other sisters. The Company Law Board (CLB) held that respondents Nos. 2 to 4 had the right to transfer their shareholding to outsiders as the articles of the company did not contain any provision relating to pre-emption rights. The articles mandated the management to accept the registration of transfer, except on specific grounds not applicable in this case. The court upheld the CLB's decision, stating that the articles of association of a public company prevail over any private family arrangement. The Supreme Court's judgment in V.B. Rangaraj v. V.B. Gopalakrishnan was cited, emphasizing that restrictions not specified in the articles are not binding on the company or the shareholders. The court concluded that the sale of shares by respondents Nos. 2 to 4 to outsiders was valid and not an act of oppression.

2. Allegations of Oppression and Mismanagement:
The appellant alleged oppression and mismanagement under section 397/398 of the Companies Act. The CLB found substance in the allegation of non-compliance with statutory provisions while issuing further shares on a preferential basis, which affected the appellant's shareholding. The court agreed with the CLB's finding that the issue of further shares was an act of oppression. The CLB directed that the appellant be offered further shares to restore her shareholding to 14.7 percent and that she should be offered proportionate shares whenever further shares are issued.

3. Legality of the Appointment of New Directors in the Board Meeting Held on February 10, 2000:
The appellant challenged the induction of three new directors, claiming she had not received notice of the board meeting. The CLB found the induction of new directors illegal due to the lack of notice to the appellant. The court upheld the CLB's decision, noting that the new management had the authority to appoint its directors, and non-interference by the CLB was justified.

4. Compliance with Statutory Provisions While Issuing Further Shares:
The CLB found non-compliance with statutory provisions in the issuance of further shares on a preferential basis, which resulted in the appellant's shareholding being diluted. The court agreed with the CLB's finding that this was an act of oppression and directed that the appellant be offered further shares to restore her shareholding to 14.7 percent.

5. Review of the Company Law Board's Order Dated January 12, 2001:
The appellant sought a review of the CLB's order dated January 12, 2001, based on a certificate stating that the notice for the board meeting on February 10, 2000, was not booked at the post office. The CLB dismissed the review application, stating it did not have the power to review its order and that the findings were not based on the alleged non-receipt of the notice. The court upheld the CLB's decision, noting that the primary challenge was the transfer of shares, which failed before the CLB and the court.

Conclusion:
The court dismissed the appeal, affirming the CLB's orders and findings. The appellant was given four weeks to signify her intention to purchase further equity as offered, failing which the offer would lapse. No costs were awarded.