2010 (4) TMI 623 - HC - Companies Law

High Court quashes Company Law Board order due to lack of proof of membership and shareholding

Bihar State Industrial Development Corporation Ltd. Versus Company Law Board

The High Court found the company petition maintainable under Section 398 of the Companies Act, 1956, but determined that the respondents failed to prove ... Whether the petitioners therein (respondent Nos. 2 to 5) are well within their right to maintain a petition under section 399 and the petition is maintainable? Held that:- First of all, respondent Nos. 2 to 5, although they formed part of the co-promoters’ group but admittedly they had not taken up the entire shares which was to be subscribed by the co-promoters, hence even if for the sake of argument, it is assumed that the co-promoters had, as a matter of fact, and not merely by a paper transaction taken up 25 per cent of the shareholding in the company, it does not automatically follow that respondent Nos. 2 to 5 had also made subscription to at least 10 per cent of the shareholding of the company. There had to be specific finding in this regard before any such conclusion could have been drawn by the Company Law Board. There being no such finding with respect to respondent Nos. 2 and 3 and further there being a specific finding that respondent Nos. 4 and 5 did not qualify as holding one-tenth share capital, this court fails to understand as to how Board could have arrived at a conclusion that the petitioners had succeeded in showing that they were holding 10 per cent equity shares and entitled to maintain a petition under section 398 before it. The findings regarding the existence of the so called share certificates produced on behalf of respondent Nos. 2 to 5 also ought not to have been accepted by the Company Law Board in view of the serious allegations that there were hundreds of signed blank share certificates in existence from the time when the company was under the control of private co-promoters. This should have been reason enough for the Company Law Board to have directed the petitioners to first approach the proper forum for correcting the register of members. The appeal is thus allowed Issues Involved:1. Maintainability of the company petition under Section 398 of the Companies Act, 1956.2. Determination of membership and shareholding of the petitioners.3. Compliance with the requirements of Section 399 of the Companies Act, 1956.4. Bona fides of the petitioners in filing the petition.5. Double standards applied by the Company Law Board in similar cases.Analysis of the Judgment:1. Maintainability of the Company Petition:The appellants challenged the maintainability of the company petition under Section 398 of the Companies Act, 1956, filed by respondent Nos. 2 to 5. The Company Law Board held the petition maintainable without categorically addressing the main issue raised by the appellants regarding the exact number and value of shares held by the petitioners. The High Court found that the Company Law Board dealt with the matter in a vague and general manner without specific findings, leading to the conclusion that the petition was maintainable.2. Determination of Membership and Shareholding:The appellants contended that the names of the petitioners were not found in the register of members maintained by the company, thus questioning their status as shareholders. The Company Law Board relied on the annual returns filed with the Registrar of Companies and the original share certificates produced by the respondents. However, the High Court emphasized that to be considered a member, a person must agree in writing to become a member and have their name entered in the register of members (Section 41 of the Companies Act, 1956). The High Court found that the respondents failed to prove their membership as their names did not appear in the register of members.3. Compliance with Section 399:The appellants argued that the respondents did not meet the requirement of holding one-tenth of the issued share capital of the company as mandated by Section 399 of the Companies Act, 1956. The High Court agreed, noting that the respondents did not provide sufficient evidence to show they held the requisite share capital. The High Court criticized the Company Law Board for not recording specific findings regarding the distinctive numbers and value of the original share certificates produced by the respondents.4. Bona Fides of the Petitioners:The appellants questioned the bona fides of the petitioners, suggesting they were mere front-men for Shri Pradeep Sancheti, who was involved in misappropriation and mismanagement of the company's funds. The High Court agreed, highlighting that proceedings under Section 398 are serious and should not be lightly entertained. The High Court cited the Karnataka High Court's decision in Srikanta Datta Narasimharaja Wadiyar v. Sri Venkateswara Real Estate Enterprises (P.) Ltd., emphasizing the need for good faith in filing such petitions.5. Double Standards by the Company Law Board:The High Court noted that the Company Law Board applied different standards in similar cases. The petition filed by the appellants under Section 398 was dismissed due to the pendency of various court cases and alternative remedies pursued. However, the petition filed by respondent Nos. 2 to 5 was entertained despite similar circumstances. The High Court found this approach unjustified, especially considering the serious allegations against the private co-promoters.Conclusion:The High Court quashed and set aside the impugned order of the Company Law Board dated 30-4-1998, holding that the respondents failed to establish their membership and shareholding, lacked bona fides, and the Company Law Board applied double standards in similar cases. The appeal was allowed.