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of <h1>Court sets aside shares allotment to Managing Director, orders register rectification & General Body meeting</h1> The court allowed the appeal filed by the appellants and dismissed the appeals filed by the company and the Managing Director. The allotment of shares ... Oppression and mismanagement Issues Involved:1. Rectification of the register of members under Section 111 of the Companies Act, 1956.2. Allegations of oppression and mismanagement under Sections 397 and 398 of the Companies Act, 1956.3. Validity of the allotment of shares.4. Compliance with Reserve Bank of India (RBI) permissions under the Foreign Exchange Regulation Act (FERA).5. Remedies and relief for oppressive conduct.Detailed Analysis:1. Rectification of the Register of Members:The petition filed by the company for rectification of shares was dismissed. The court found that the petitioners had invested Rs. 5 lakhs in 1987, which was utilized for purchasing the hotel, the only main business of the company. The court held that equity demanded the petitioners should have been offered further shares when the company decided to mobilize funds. The respondents acted in an oppressive manner by not offering shares to the petitioners. Despite this, the court did not set aside the allotment of shares as the company benefitted from the investments made by the respondents.2. Allegations of Oppression and Mismanagement:The appellants alleged that the affairs of the company were conducted in a manner prejudicial to their interests, including illegal allotment of 17,865 equity shares and manipulation of records. The court found that the Managing Director acted in an oppressive manner. The appellants were not informed about the issuance of new shares, which were allotted to the Managing Director and his relatives, reducing the appellants from majority shareholders to a minority. The court concluded that the exclusion of the appellants from the allotment of shares was an act of oppression.3. Validity of the Allotment of Shares:The court noted that the Managing Director increased the share capital and allotted shares to himself and his relatives without informing the appellants. The appellants were not given notice of the board or general body meetings where these decisions were made. The court found that the shares were issued in a manipulative manner to benefit the Managing Director and deprive the appellants of their majority control.4. Compliance with RBI Permissions under FERA:The company contended that the appellants did not obtain prior permission from the Reserve Bank of India (RBI) to invest in shares in India, making the allotment of shares to them invalid. The court, however, relied on the Supreme Court's decision in LIC of India v. Escorts Ltd., which held that ex post facto permission could be granted by the RBI. The court found that the Managing Director was aware of the appellants' non-resident status at the time of the allotment and had induced them to invest. Therefore, the petition for rectification of shares was dismissed.5. Remedies and Relief for Oppressive Conduct:The court criticized the Company Law Board (CLB) for not setting aside the issuance of shares despite finding oppression. The CLB had suggested that the appellants sell their shares to the respondents at par value with 12% simple interest per year. The court found this remedy unreasonable and perverse, as it would perpetuate fraud and benefit the Managing Director, who had acted deceitfully. The court held that the issuance of new shares should have been set aside and directed the rectification of the share register to reflect the shareholding prior to the oppressive allotments.Conclusion:The court allowed the appeal filed by the appellants (M.F.A. No. 284 of 2001) and dismissed the appeals filed by the company and the Managing Director (M.F.A. Nos. 551 and 586 of 2001). The allotment of shares made in the 82nd Board meeting held on 24-10-1994 and in the meeting held on 26-3-1997 to the Managing Director was set aside. The share register was ordered to be rectified accordingly, and any amount advanced by the Managing Director for the business was to be returned according to law. The future of the company was to be decided by calling a General Body meeting with the shareholding as it existed prior to 24-10-1994.
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