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2019 (5) TMI 763 - SC - Companies LawOppression and mismanagement - allotment of shares - Declaration, cancellation and mandatory injunction against the requisition under section 169 of the Companies Act - allotment/transfer of shares - Sections 397/398 of the Act - voting rights - sections 286, 300 and 108 of the Companies Act - financial mismanagement or not - HELD THAT - The Company Law Board as well as the High Court have found that the provision of notice under Section 286 of the Companies Act was not complied with. The High Court has observed that the interested Directors have participated in the meeting. Mr. R.P. Mittal and Mrs. Sarla Mittal were in a fiduciary capacity they could not participate in the decision where shares were transferred to their own group/company. Even if HQRL were a private limited company, the compliance with the provisions of section 300 of the Act was mandatory. The High Court has also observed that there was undervaluation of HQRL shares. The allotment of shares at par to Moral in the meeting on 10.5.2005 and on the same very date, shares of Moral were transferred to Mr. R.P. Mittal @ ₹ 20 per share. Thus, the High Court has opined that these acts in overall factual matrix of the case, were sufficient to conclude that ground under section 397 had been made out. It was improper for the Directors to allot shares to themselves and to the exclusion of Mr. Ashok Mittal in the facts and circumstances of the case and that too without issuance of notice to him. Section 19(2) of the Companies Act provides that nothing in sections 85 to 89 shall apply to a private company unless it is a subsidiary of a public company and this question has to be finally decided whether it is a private or public limited company in the pending civil suit which have been stated to be transferred to NCLT for decision in accordance with law. Otherwise, section 87 provides that notice has to be issued to preference shareholders also for the meeting and they have a right to participate in the meeting. It appears prima facie even if dividend has not been declared. In that case also, preference shareholders shall have a right to vote in the meeting. Section 108 operates independently of section 286 or section 300. The invalidation of meeting is dependent under the provisions of section 108. There was violation of section 108 of the Companies Act. HQRL did not file share certificate along with the duly executed share transfer form as on 10.5.2005, the date of Board resolution. The plea of Mr. R.P. Mittal has been disbelieved that share certificates were returned on 23.6.2003. The High Court has also ordered the proceedings under section 340 Cr.P.C. against Mr. R.P. Mittal for filing an affidavit to the contrary. The High Court has relied on the affidavit of Mr. Vivek Dixit and Mr. Deepak Sudan, the concerned officials of the Indian Overseas Bank. The High Court has found that the share certificates were delivered to Mr. R.P. Mittal not on 23.6.2003 but on 23.6.2005. No doubt about it that there was violation of the provisions of section. Taking into consideration the overall scenario, the impugned order calls for no interference - Appeal disposed off.
Issues Involved:
1. Legality of the Board meetings held on 27.7.2004, 7.1.2005, and 10.5.2005. 2. Compliance with Sections 286, 300, and 108 of the Companies Act, 1956. 3. Voting rights of preference shareholders under Section 87(2)(b) of the Companies Act. 4. Allegations of oppression and mismanagement under Sections 397 and 398 of the Companies Act. 5. Validity of the resolutions passed and the subsequent transfer/allotment of shares. 6. Financial contributions and management control disputes between the parties. Detailed Analysis: 1. Legality of the Board Meetings: The Supreme Court examined whether the Board meetings held on 27.7.2004, 7.1.2005, and 10.5.2005 were legally valid. It was found that no notice of these meetings was given to Mr. Ashok Mittal, who was a Director at the time. This non-compliance with Section 286 of the Companies Act rendered the resolutions passed in these meetings void. The Court cited Sri Parmeshwari Prasad Gupta v. Union of India (1973) 2 SCC 543, which held that notice to all directors is essential for the validity of any resolution passed at a Board meeting. 2. Compliance with Sections 286, 300, and 108 of the Companies Act: The Court found multiple violations: - Section 286: Notice of the Board meetings was not given to Mr. Ashok Mittal. - Section 300: The interested directors, Mr. R.P. Mittal and Mrs. Sarla Mittal, participated in decisions where they had a personal interest, violating their fiduciary duties. The Court referenced Dale & Carrington Invt. (P) Ltd. v. P.K. Prathapan (2005) 1 SCC 212 and Firestone Tyre and Rubber Co. v. Synthetics and Chemicals Ltd. (1971) 41 Co. Cases 377. - Section 108: The transfer of shares from Moral to Mr. R.P. Mittal was invalid as the share certificates were not available at the time of the Board meeting. The Court relied on Mannalal Khetan v. Kedar Nath Khetan (1977) 2 SCC 424, which emphasized the mandatory nature of Section 108. 3. Voting Rights of Preference Shareholders: The Court upheld the rights of preference shareholders under Section 87(2)(b) of the Companies Act, which allows them to vote on every resolution if the dividend due on their shares remains unpaid for a specified period. This was supported by the Court's earlier decision in Ram Parshotam Mittal v. Hillcrest Realty (2009) 8 SCC 709, which held that Hillcrest, as a cumulative preference shareholder, had voting rights due to unpaid dividends. 4. Allegations of Oppression and Mismanagement: The Court considered the allegations of oppression and mismanagement under Sections 397 and 398. It was found that the actions of Mr. R.P. Mittal and Mrs. Sarla Mittal were oppressive and prejudicial to the interests of Mr. Ashok Mittal and Hillcrest. The Court cited Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd. (1981) 3 SCC 333 and Sangramsinh P. Gaekwad v. Shantadevi P. Gaekwad (2005) 11 SCC 314 to emphasize that even legally permissible actions can be oppressive if they are unfair or prejudicial. 5. Validity of Resolutions and Share Transfers: The resolutions passed on 27.7.2004, 7.1.2005, and 10.5.2005 were invalidated due to non-compliance with statutory requirements. The Court highlighted that the resolutions were passed without proper notice and involved interested directors voting on matters where they had a personal interest, violating Sections 286 and 300. The transfer of shares was also invalid due to non-compliance with Section 108. 6. Financial Contributions and Management Control: The Court noted the financial contributions made by both parties. While the appellants claimed significant contributions, the Court found that the major investments were made by Hillcrest and Mr. Ashok Mittal. The Court observed that the appellants failed to demonstrate substantial funding or creditworthiness to support their claims. The Court also noted that the management control shifted to Mr. Ashok Mittal and Hillcrest following the High Court's interim orders. Conclusion: The Supreme Court upheld the High Court's decision to invalidate the resolutions and share transfers due to violations of Sections 286, 300, and 108 of the Companies Act. The Court recognized the voting rights of preference shareholders under Section 87(2)(b) and found the actions of the appellants oppressive and prejudicial. The Court set aside the direction to prosecute Mr. R.P. Mittal under Section 340 Cr.P.C. but otherwise dismissed the appeals, affirming the High Court's findings.
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