1981 (11) TMI 156 - HC - Companies Law

Court Intervenes in Shareholder Dispute, Offers Share Buyout Options

The court found no oppression under Sections 397 and 398 of the Companies Act but intervened under Section 398 due to prejudicial conduct, resolving the ... Oppression and Mismanagement – Right to apply under section 397 and 398, Power of Tribunal on application under sections 397 and 398 Issues Involved:1. Allegations of oppression and mismanagement under Sections 397 and 398 of the Companies Act, 1956.2. Validity of the induction of additional directors.3. Allegations of tampering with share scrips.4. Non-declaration of dividends.5. Allegations of manipulation of accounts.6. Maintenance of statutory records and internal control procedures.7. Transfer of shares and nomination of directors.8. Conduct of board meetings and manipulation of records.9. Relief under Section 398 for prejudicial conduct of company affairs.10. Resolution of deadlock and future management of the company.Detailed Analysis:1. Allegations of Oppression and Mismanagement:The petitioner, a minority shareholder, alleged that the company's affairs were being conducted oppressively and prejudicially by the majority shareholders, specifically targeting Respondent No. 3 and his son, Respondent No. 5. The court examined the scope and ambit of Section 397, referencing Supreme Court decisions which elucidated that continuous acts of oppression must be shown, involving a lack of probity or fair dealing.2. Induction of Additional Directors:The petitioner contended that Respondent No. 5's induction as an additional director was an act of oppression. However, the court noted that the petitioner himself was a party to this appointment and had transferred shares to Respondent No. 5. The court concluded that the induction did not amount to oppression as the petitioner was complicit in the process.3. Tampering with Share Scrips:The petitioner alleged that Respondent No. 3 tampered with share scrips to increase his shareholding. The court found that the unauthorized addition of names to the share scrips was rectified and did not constitute oppression, especially since the petitioner's name was also added.4. Non-declaration of Dividends:The petitioner argued that the non-declaration of dividends was oppressive. The court held that since the company was incurring losses, the non-declaration of dividends could not be considered an act of oppression.5. Manipulation of Accounts:The petitioner alleged that the accounts were manipulated, specifically pointing to the booking of expenses in the wrong year. The court found that while the expenses should have been recorded in the correct year, this did not amount to oppression. Allegations of a bogus bill were not substantiated by evidence.6. Maintenance of Statutory Records and Internal Control Procedures:The petitioner claimed that the company failed to maintain proper records and internal controls. The court held that while this might indicate mismanagement, it did not constitute oppression of the minority shareholders.7. Transfer of Shares and Nomination of Directors:The petitioner contended that Gopal Krishan Gupta transferred shares to him and nominated his son as a director. The court found that the shares had not been lodged with the company for transfer and thus no grievance could be made. The court also recognized the nomination of Sanjay Gupta as a permanent director but noted that any grievance regarding his non-recognition should be raised by Sanjay Gupta himself.8. Conduct of Board Meetings and Manipulation of Records:The petitioner alleged that board meetings were not held and records were manipulated. The court found that meeting fees were paid, indicating meetings were held. However, discrepancies in the balance-sheet filings suggested possible misconduct but did not amount to oppression.9. Relief under Section 398 for Prejudicial Conduct:The court found that the company's affairs were conducted prejudicially due to disputes among directors leading to losses and mismanagement. This justified intervention under Section 398, which addresses conduct prejudicial to the company's interests.10. Resolution of Deadlock and Future Management:To resolve the deadlock, the court proposed that Respondents Nos. 3 and 5 be given the first option to buy the shares of other shareholders at Rs. 225 per share. If they failed to exercise this option, the petitioner could purchase their shares. The court also mandated continued payment to the father, Respondent No. 2, and provided detailed steps for the transfer of shares and management of the company.Conclusion:The court concluded that while no case of oppression was made out under Section 397, the conduct of the company's affairs justified intervention under Section 398. The court provided a detailed mechanism for resolving the deadlock and ensuring the future management of the company, emphasizing the equitable jurisdiction to prevent further disputes and ensure smooth functioning.