2012 (4) TMI 339 - HC - Companies Law

Jurisdiction of High Court - Disputes between the parties pertain to the Board meetings dated 01st December, 2004 as well as 1st March, 2005, AGM dated 30th May, 2005, allegation of - siphoning off funds of appellant-company, allotment of 4250 shares by the Ajay Paliwal faction on 3rd February, 2005, alleged transfer of 5000 shares - held that - It is clear that Section 10F permits an appeal to the High Court from an order of the CLB only on a question of law i.e. the CLB is the final authority on facts unless such findings are perverse, based on no evidence or are otherwise arbitrary. It is settled law that this Court while exercising its appellate jurisdiction under Section 10F of the Act does not entertain, review or reopen questions of fact save on the ground of perversity. It is pertinent to mention that the Registrar of Companies had produced before this Court the original file maintained by it with regard to the appellant company. The said file contains only the Memorandum and Articles of Association of the appellant company as well as its certificate of incorporation. Consequently, this Court is of the opinion that both the parties have failed to prove the minutes of meeting dated 1st December, 2004. Accordingly, the allocation of additional shares and appointment of three additional Directors by both the appellants and respondents are set aside. The appellants, who constitute a minority shareholding cannot abuse their majority on the Board by completely excluding the respondents from the affairs of the appellant-company and further by converting the majority shareholders into minority. There is also no violation of principles of natural justice as allegation regarding siphoning off funds - except a bald denial of siphoning off funds, neither of the appellants gave any explanation in the CLB with regard to withdrawal of the said fund and/or their usage. Consequently, in the opinion of this Court, the CLB rightly concluded that the denial by the appellants of the allegation of siphoning off funds was bald, lacking in particulars and thus constituted an admission of siphoning off funds on their part. The directions given by the CLB in sub-paras (ii), (iii), (iv), (v), (vi) and (viii) of para 34 of the impugned order are upheld. Instead of directions (i) and (vii) of para 34 of the impugned order, the appellants are directed to restore only the amount of Rs. 7.50 lacs siphoned off from the company s account forthwith. Further, the shareholding of the appellant company shall revert back as it stood as on 30th September, 2004

Summary

Issues:
1. Validity of Board Meetings and Appointments of Directors.
2. Allegations of Siphoning Off Funds.
3. Allotment and Transfer of Shares.
4. Removal of Mr. Sanjay Paliwal from the Board.
5. Compliance with Statutory Provisions and Corporate Governance.

Detailed Analysis:

1. Validity of Board Meetings and Appointments of Directors:
The disputes involved the Board meetings dated 1st December 2004, 3rd February 2005, and 1st March 2005. The appellants claimed appointments of three directors and allocation of shares in these meetings, while the respondents contested these actions. The Court noted that both parties failed to produce the agenda, notice, or resolution of the 1st December 2004 meeting. The certified copy of Form No. 2 provided by the appellants was inconsistent, showing different dates for the same allotment. Consequently, the Court set aside the allocation of additional shares and the appointment of three additional directors by both parties due to lack of evidence and procedural irregularities.

2. Allegations of Siphoning Off Funds:
The respondents alleged that the appellants siphoned off approximately Rs. 40 lacs. The Court found that the appellants' denial was bald and lacked particulars, constituting an admission of siphoning off funds. The Court upheld the CLB's conclusion that the appellants had breached their fiduciary duties and mismanaged the company's affairs. Consequently, the appellants were directed to restore the siphoned amount of Rs. 7.50 lacs.

3. Allotment and Transfer of Shares:
The allotment of 4250 shares on 3rd February 2005 and the transfer of 5000 shares by Mr. J.K. Paliwal to Mr. Ajay Paliwal were contested. The Court found inconsistencies in the share transfer form and the annual return, indicating forgery and fabrication. The appellants failed to produce the original transfer deed despite several opportunities. The Court upheld the CLB's finding that the transfer deed was forged and fabricated, and the allotment of shares was set aside due to procedural irregularities and lack of proper notice to the respondents.

4. Removal of Mr. Sanjay Paliwal from the Board:
The removal of Mr. Sanjay Paliwal was found to be in violation of Sections 190 and 284 of the Companies Act, 1956. The Court noted that the appellants admitted the procedural violations but claimed the removal was due to a loan of Rs. 64.50 lacs advanced to Mr. Sanjay Paliwal's in-laws. However, the Court found that the loan was reflected in the company's balance sheet and no recovery proceedings had been initiated. Consequently, the removal was deemed illegal, and Mr. Sanjay Paliwal was restored to the Board.

5. Compliance with Statutory Provisions and Corporate Governance:
The Court emphasized the importance of compliance with statutory provisions and corporate governance. The appellants' actions, including the appointment of directors and allocation of shares without proper notice and documentation, were found to be oppressive and constituted mismanagement. The Court directed that the company's shareholding revert to the status as on 30th September 2004, and the Board be reconstituted with equal representation from both factions to ensure proper governance.

Conclusion:
The appeals were disposed of with directions to restore the company's shareholding and Board composition to the status as on 30th September 2004. The appellants were directed to restore the siphoned amount of Rs. 7.50 lacs, and the Board was to include two members from each faction, with any deadlock to be resolved by the shareholders in a General Meeting. The Court upheld the CLB's findings and emphasized the need for compliance with statutory provisions and fiduciary duties by the directors.