2009 (7) TMI 771 - HC - Companies Law

Court Upholds Company Law Board Decision on Article 37 Violation

Devaraj Dhanram Versus Firebricks & Potteries (P.) Ltd.

The court dismissed the appeal, upholding the Company Law Board's findings that there was no violation of Article 37, no act of oppression, and no ... Transfer of as many as 2,392 shares of the company held by respondent Nos. 2 to 5 in favour of respondent Nos. 6 to 9 at a price of ₹ 7,031 per share - Whether is clearly in contravention of article 37 of the articles of association and the order of the Company Law Board is vitiated for not taking note of the specific provision? Held that:- Dual or conflicting stand adopted by the appellant-petitioner only indicates that, while on the one hand when it comes to buy shares by himself, to exercise pre-emptive right, the appellant-petitioner complaining of higher price and when it comes to the examination of the question of transaction in favour of the sixth respondent, the appellant-petitioner is complaining of under-valuation of shares. This is nothing but blowing hot and cold at the same time, which reflects on the conduct of the appellant-petitioner, who has not really availed of the pre-emptive right but is complaining without really making use of the right available in his favour. It is for this reason, the Company Law Board dismissed the petition. We find no reason to defer from the view taken by the Company Law Board. Insofar as the argument regarding mismanagement is concerned, on facts, the Company Law Board found lack of supporting materials in favour of the allegation of mismanagement and merely a complaint that the company had leased some part of its assets in favour of a sister concern of the sixth respondent while the sixth respondent was also a part of the management, whether here or there, that itself does not prove any mismanagement, which is based on such irrelevant aspect not based on any aspect as to how such leasing had resulted in prejudicial interest of the company. We are not impressed by the submission and the request of Sri Ramesh, learned counsel for the appellant that the matter should be remanded to the Company Law Board for further examination on the act of mismanagement, subject-matter for examination under section 398 of the Act.Appeal dismissed. Issues Involved:1. Compliance with Article 37 of the Articles of Association2. Allegations of Oppression under Section 397 of the Companies Act, 19563. Allegations of Mismanagement under Section 398 of the Companies Act, 1956Detailed Analysis:1. Compliance with Article 37 of the Articles of AssociationThe appellant contended that the transfer of 2,392 shares by respondents 2 to 5 to respondents 6 to 9 at Rs. 7,031 per share violated Article 37 of the Articles of Association, which provides a pre-emptive right to existing shareholders. The appellant argued that the offer to sell shares was a mere formality after respondents 2 to 5 had already negotiated and fixed the price with respondent 6. This, according to the appellant, constituted a violation in both letter and spirit.The Company Law Board concluded that there was compliance with Article 37, as an offer was made to the appellant, which he did not avail. The court noted that the Articles did not specify a mechanism for valuing shares, implying that the price set by the selling shareholders is legitimate unless declined by the buyer. The court found no merit in the appellant's claim of pre-emptive rights being violated, as the appellant did not indicate a willingness to purchase the shares at the offered price during any stage of the proceedings.2. Allegations of Oppression under Section 397 of the Companies Act, 1956The appellant alleged that the actions of respondents 2 to 5, in selling shares to respondent 6 without a genuine offer to existing shareholders, constituted oppression. The court observed that the appellant's dual stance-complaining of both overvaluation and undervaluation of shares-demonstrated inconsistency. The appellant's failure to exercise his pre-emptive right further weakened his claim of oppression. The court upheld the Company Law Board's decision, finding no act of oppression as alleged by the appellant.3. Allegations of Mismanagement under Section 398 of the Companies Act, 1956The appellant also claimed that leasing a company asset to a sister concern of respondent 6 at non-remunerative rates amounted to mismanagement. The Company Law Board found no supporting material to substantiate this allegation, noting that the mere fact of leasing to a sister concern does not prove mismanagement. The court agreed, emphasizing that the appellant failed to demonstrate how the lease was prejudicial to the company's interests.The court dismissed the appeal, supporting the Company Law Board's findings on both oppression and mismanagement. It clarified that the appellant is not compelled to sell his shares as per the Company Law Board's directions and can continue as a shareholder.Conclusion:The court concluded that there was no violation of Article 37, no act of oppression, and no substantiated claim of mismanagement. The appeal was dismissed, with a clarification that the findings in this appeal would not affect any subsequent litigation between the parties.