2012 (10) TMI 421 - HC - Companies Law

Oppression and mismanagement - scope of proceedings under Sections 397 and 398 - Held that - As the first respondent herein had admitted in her first affidavit before the CLB that she had signed the memorandum of settlement of September 17, 2011 & there is nothing in the second affidavit by way of even a line of explanation as to what compelled the first respondent to admit her signature and her execution of the memorandum of settlement of September 17, 2011 or the changed circumstances under which she wished to retract therefrom. Upon the admitted execution of the share transfer forms and the handing over of the share certificates, and the subsequent registration of the transfer thereof, the respondents herein ceased to be shareholders of the company on the transfer being effected and could no longer pursue the proceedings under Section 397 and Section 398 whether on merits or for the oblique purpose of extracting further money for the sale of the shares or even for obtaining their rightful due therefor - the CLB ought to have focussed on the primary issue before it as to the permissibility of the continuation of the petition and not traversed beyond jurisdiction to ensure that the petitioners before it got their rightful due. The CLB should have appreciated that the petition under Sections 397 and 398 could no longer be prosecuted and ought to have left the petitioners before it free to canvass their grievance as to the inadequacy of the consideration before the appropriate forum. If the share certificates have been deposited by the appellants or their nominees with the CLB pursuant to the direction contained in the order impugned, they shall be immediately returned to the named holders thereof. If the sum of Rs.12,03,47,715 has been deposited by the respondents with the CLB, the respondents will be entitled to refund of the same immediately together with any accrued interest thereon.

Issues Involved:
1. Jurisdiction of the Company Law Board (CLB) to continue proceedings under Sections 397 and 398 of the Companies Act, 1956 after the petitioners have transferred their shares.
2. Validity and enforceability of the settlement agreement dated September 17, 2011.
3. Adequacy of consideration for the transfer of shares.
4. Authority of the CLB to assess the fair value of shares post-transfer.
5. Impact of the petitioners ceasing to be shareholders on the continuation of the petition.

Issue-wise Detailed Analysis:

1. Jurisdiction of the CLB to Continue Proceedings Under Sections 397 and 398:
The primary legal issue was whether proceedings under Sections 397 and 398 of the Companies Act, 1956 could continue after the petitioners transferred their shares. The court held that a petition under Sections 397 and 398 is personal to a complaining member and becomes irrelevant if all petitioners cease to be shareholders unless exceptional circumstances of public interest are cited by the CLB. The court emphasized that the requisite share qualification is relevant at the institution of the petition and cannot be revisited post-transfer.

2. Validity and Enforceability of the Settlement Agreement:
The appellants claimed that the disputes were settled by an agreement on September 17, 2011, and the respondents' shares were transferred. The respondents contested the validity of the settlement, alleging they were misled into signing the agreement under false pretenses and without understanding its finality. The court noted that the respondents' affidavits contained conflicting statements about the signing and understanding of the settlement agreement, undermining their credibility.

3. Adequacy of Consideration for the Transfer of Shares:
The respondents argued that the consideration for the share transfer was inadequate. The court found that the adequacy of consideration was irrelevant to the jurisdiction of the CLB under Sections 397 and 398 once the shares were transferred. The court pointed out that the CLB's focus should have been on whether the petition could continue, not on the fairness of the consideration.

4. Authority of the CLB to Assess the Fair Value of Shares Post-Transfer:
The court held that the CLB overstepped its jurisdiction by attempting to assess the fair value of shares after the transfer was completed. The CLB's mandate is to address complaints of oppression and mismanagement, not to retrospectively evaluate share transactions. The court stated that such an inquiry should be pursued in a different forum if necessary.

5. Impact of the Petitioners Ceasing to be Shareholders:
The court concluded that once the petitioners transferred their shares, they ceased to be members of the company and lost the standing to continue the petition under Sections 397 and 398. The court emphasized that the CLB should have dismissed the petition upon recognizing that the petitioners were no longer shareholders, irrespective of any alleged inadequacies in the share transaction.

Conclusion:
The court set aside the CLB's order and allowed the appellants' application to dismiss the petition. It ruled that the respondents could no longer pursue the proceedings under Sections 397 and 398 after transferring their shares. The court also clarified that its decision did not preclude the respondents from seeking remedies regarding the adequacy of the share transaction in an appropriate forum. The respondents' request for a stay of the order was declined.

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