2009 (11) TMI 651 - HC - Companies Law

Oppression and mismanagement - bias and mala fide way of allotment of shares by a Managing Director for his own benefit - Held that - Bereft of legal considerations etc., the act of the management in allotting as many as 2250 shares of the company in favour of two members of the company to the a exclusion of all others by itself can constitute an act of oppression and the question will be as to whether this can be said to be otherwise when tested on the touchstone of the statutory provisions of Section 397 for grant of relief and in the situations as we have mentioned above in terms of clause (a) & (b) of sub-Section (2) of Section 897. Appeal allowed for modification of the order of the Company Law Board directing company to issue six more shares on the same terms as had been issued earlier along with additional 2250 which had been issued in terms of the Resolution dated 13.12.2002 so that the total additional shares the company is issuing in favour of its existing shareholders becomes 2256 and this is to be distributed equally amongst all the then 8 shareholders that is, at 282 shares each and on the same terms. The shareholders who are getting these shares for the first time to pay the amount within four weeks from today by means of a cheque or draft in favour of the company. The Company to transfer such additional shares in favour of all members within a further 10 weeks from the date of receipt of the amount by the Company.

Summary

Issues Involved:
1. Oppression and mismanagement by the respondents.
2. Legality of the allotment of additional shares.
3. Compliance with the requirements of Section 41 of the Companies Act.
4. Equitable treatment of shareholders.
5. Fiduciary duties of directors.
6. Reliefs sought under Sections 397, 398, 402, and 403 of the Companies Act.

Detailed Analysis:

1. Oppression and Mismanagement by the Respondents:
The appellants, shareholders of Prakash Coach Builders Private Limited, filed a petition under Sections 397, 398, 402, and 403 of the Companies Act, 1956, alleging oppression and mismanagement by the respondents. They complained about the exclusion from the allotment of additional shares and the manner in which the company's affairs were conducted, particularly after the passing away of some family members, leading to rivalry and squabbles among the parties.

2. Legality of the Allotment of Additional Shares:
The main grievance was the allotment of 1500 shares each to respondents 2 and 4 without offering an equal opportunity to the petitioners, which they argued was oppressive and illegal. The petitioners contended that the allotment should have been in proportion to the existing shareholding pattern, which was one share each among the eight shareholders.

3. Compliance with the Requirements of Section 41 of the Companies Act:
The petitioners argued that their applications for additional shares were rejected on the pretext of non-compliance with Section 41 of the Act, which requires a written agreement to become a member and entry in the register of members. The petitioners had tendered cheques for the subscription amount but were still excluded from the allotment.

4. Equitable Treatment of Shareholders:
The petitioners emphasized that the company had always maintained parity among the shareholders since its incorporation, and any deviation from this practice was unfair. They sought relief to ensure that the additional shares were allotted equally among all shareholders to maintain this parity.

5. Fiduciary Duties of Directors:
The petitioners accused the directors of breaching their fiduciary duties by allotting shares in a manner that favored certain shareholders over others. They argued that the directors acted with mala fide intentions to upset the equilibrium in the shareholding pattern and to consolidate their control over the company.

6. Reliefs Sought Under Sections 397, 398, 402, and 403 of the Companies Act:
The petitioners sought several reliefs, including:
- Declaration that the letters dated 6.12.2002 were illegal, mala fide, and oppressive.
- Direction to allot an equal number of shares to the petitioners.
- Setting aside the allotment of 3000 shares to respondents 2 and 4.
- Amendment of the Articles of Association to ensure equal representation on the Board of Directors.
- Prevention of any decisions that would change the shareholding pattern.
- Removal of respondents 2, 3, and 7 from the office of Directors.
- Cancellation/buyback of shares held by respondents 2, 4, 5, and 6.

Judgment:
The High Court upheld the Company Law Board's order, which found the allotment of shares to respondents 2 and 4 to the exclusion of the petitioners as an act of oppression. The court directed the company to issue six more shares to each of the original eight shareholders, ensuring equitable distribution of the additional shares. The court emphasized the fiduciary duty of directors to act in the best interest of the company and all its shareholders, not just a select few. The court also encouraged the parties to resolve their disputes amicably and work towards the mutual benefit of the company and its shareholders.