Oppression and mismanagement relief cannot reward an invalid share allotment; neutral buyout directions were required.

In oppression and mismanagement proceedings, equitable relief under sections 397 and 398 of the Companies Act, 1956 cannot be used to validate or reward an illegal share allotment. The High Court noted that the respondents' allotment of 2,600 shares had already been held invalid and had attained finality, so directing the appellants to sell their shares to the respondents after valuation would confer an unfair advantage on the wrongful allotment. The direction was therefore set aside, and the matter was remitted for fresh orders on a neutral basis, with both sides to be given an opportunity to purchase shares on the approved valuation.

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Issues: Whether, in a petition for oppression and mismanagement, the company court could direct the appellants to sell their shares to the respondents after valuation, despite a final finding that the respondents' allotment of 2,600 shares to themselves was invalid.

Analysis: The invalidity of the 2,600-share allotment made in favour of the respondents had attained finality. In such circumstances, directing the appellants to sell their shares to the respondents would effectively confer a premium on the respondents' wrongful conduct. While proceedings under sections 397 and 398 of the Companies Act, 1956 permit equitable relief to protect the company and to resolve a deadlock between groups, that power cannot be used to validate or reward an illegal allotment. The appropriate course was to undo the invalid allotment and then consider a neutral method of resolving the dispute, including an option available to both sides on the basis of a proper valuation.

Conclusion: The direction compelling the appellants to sell their shares to the respondents was unsustainable and was set aside; the matter was remitted for fresh orders giving both sides an opportunity to purchase shares on the basis of the approved valuation.

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