2009 (2) TMI 859 - HC - Companies Law

Court Upholds CLB's Findings on Oppression and Mismanagement; MOU Asset Transfer Not Involved; Receiver Request Dismissed.

Zora Singh and others Versus Amrik Singh Hayer and others

The court confirmed the Company Law Board's (CLB) findings of oppression and mismanagement due to improper notice for board meetings and invalid ... Oppression and mis­management - Rights issue of shares - shareholding of the Petitioners had been diluted - no notices were given for the meetings pertaining to the rights issue - shifting of the registered office, also, no notice for the same is given - appointment and removal of directors - Directorial disputes - HELD THAT:- The finding of the Company Law Board that the several resolutions alleged to have been passed in the meeting of the Board of Directors on various dates cannot be held to be validly convened or passed and the decision rendered by the Company Law Board in that regard requires no intervention. The petition is therefore well founded and the grievance seeking for intervention of the Company Law Board u/s 397 and 399 are, therefore, tenable in law. Hence, the persons who were admittedly the Directors of the Company as on 29.10.2005 were entitled to be served with due notices on every share holder found mentioned on the Register of Companies as on that date before taking any decision. It shall be open for the appellants to take such action in his personal capacity as transferee of shareholding of Ajmer Singh to give notices in the manner required by the law and take appropriate decisions after due notices in the manner sanctioned by law. The entitlement or otherwise of Zora Singh to obtain transfer of shares pertaining to 25% held by Amrik Singh will be decided in the Civil Suit which is pending before it and no observation made by this Court shall be construed as constituting any remark in favour of or against either of the parties to contend that one way or the other about the respective merits of the case before the Civil Court. From the discussions made above and the findings rendered for the points raised in appeal by capturing them under relevant sub- headings, the following is summary of the conclusions:- (a) The MOU dated 09.11.2005 did not involve or contemplate transfer of asset of the company. It was an instrument to transfer the shares of the company to the parties to the document and a chosen medium for total control over the affairs of the company to one of the parties to the document. It did not operate to transfer the assets of the company to either of the parties. The fidings rendered by the Company Law Board, and found expressed in para 51 of the impugned order are set aside. (b) The actual payment of consideration under MOU and the entitlement to obtain transfer of all the shares of the company to Zora Singh including the shares of Amrik Singh and Malkiat Singh to give a valid discharge on behalf of Amrik Singh (the respondent No.1 herein) shall be matters which shall fall adjudication only in the civil suit pending between the parties and nothing mentioned in this judgment nor the Company Law Board will operate to be final against the respective interests of the party. (c) The findings rendered by the Company Law Board that Amrik Singh had no due notice of the meetings of the Board of Directors and the notices alleged to have been sent to him for meetings on 09.05.2006, 11.05.2006 and 19.05.2006 are confirmed and consequently the resolutions alleged to have been passed on the respective dates are set aside. Amrik Singh cannot be imputed with constructive notices of the meetings to be bound by any of the decisions in the said meetings. (d) The effect of non-services of the notices on Amrik Singh, admittedly, a 25% shareholder and the purported decisions to appoint additional directors, removal of existing directors, including Amrik Singh and his son and increase in share capital shall constitute oppression and mismanagement of the affairs of the company, actionable before the appropriate forum. The appeal is disposed of in the above terms. Issues Involved:1. Disposition by Company Law Board regarding oppression and mismanagement.2. Points of law enumerated by the appellant.3. Relationship between parties.4. Introduction of a third party to family in company affairs.5. Essential terms of the Memorandum of Understanding (MOU).6. Induction of a third party as a director.7. The genesis of the dispute.8. Payment to one of the joint payees.9. Shareholders' ownership over company assets.10. Institution of a civil suit for specific performance.11. Proof of service of statutory notices.12. Effect of want of notices for board meetings.Detailed Analysis:I. Disposition by Company Law Board:The appeals were filed under Section 10-F of the Companies Act against findings of oppression and mismanagement by the Company Law Board. The Board partially upheld the claims of the petitioner, finding violations of statutory provisions and Articles of Association regarding pre-emptive rights and improper convening of meetings. It declared the increase in authorized share capital and the removal and induction of directors as illegal and constituting gross oppression.II. Points of Law Enumerated by the Appellant:The appellant raised multiple questions of law, including:- Whether a MOU between individuals can be considered an agreement regarding the company's affairs.- Whether the CLB can entertain petitions under Sections 397, 398, and 402 when the dispute is between individuals.- The jurisdiction of CLB over intricate factual disputes.- Acts of oppression and mismanagement post-MOU.- The enforceability of agreements between individuals.- The implications of minority shareholders refusing balance sale consideration.- The validity of the CLB's findings on oppression and mismanagement.- The jurisdiction of CLB over commercial disputes.- The CLB's authority to modify or terminate MOUs.- The eligibility of shareholders to claim relief under Sections 397/398.- The applicability of promissory estoppel.- The right of a Power of Attorney holder to file petitions under Sections 397/398.- The classification of payments under the MOU.III. Relevant Background Facts:- Relationship between Parties: The companies involved were closely held by family members with Ajmer Singh holding 75% shares and Amrik Singh holding 25%.- Introduction of a Third Party: Ajmer Singh and Amrik Singh decided to transfer shares to Zora Singh instead of selling company property to avoid capital gains tax.- Essential Terms of MOU: The MOU signed on 09.11.2005 outlined the transfer of control and management of the company for Rs. 15 crores, with staged payments and penalties for delays.- Induction of Zora Singh as Director: Zora Singh was inducted as a director on 29.10.2005 without transfer of shares.IV. The Genesis of Dispute:The dispute arose over the execution and payment terms of the MOU. Ajmer Singh claimed full payment was made, while the respondent denied this, alleging false receipts and exclusion from the company.V. Payment to One of Joint Payees:The MOU did not specify individual payment amounts, and payment to one joint payee (Ajmer Singh) was considered payment to all. The respondent's contention of non-payment was rejected as the MOU did not stipulate specific payment modes or amounts.VI. Shareholders' Ownership Over Company Assets:The MOU did not contemplate the sale of company property but the transfer of shares. Shareholders do not own company assets directly; they only have rights to profits and residual assets post-winding up.VII. Institution of Civil Suit for Specific Performance:The civil suit for specific performance filed by Zora Singh did not negate the CLB proceedings. Amrik Singh's status as a shareholder entitled him to statutory rights and participation in company affairs.VIII. Proof of Service of Statutory Notices:The CLB found no proof of service of notices to Amrik Singh, despite certificates of posting. The court held that mere production of certificates does not satisfy legal requirements, especially when receipt is expressly denied.IX. Effect of Want of Notices for Board Meetings:The lack of notices for board meetings invalidated resolutions passed regarding director induction/removal and share capital increase. Such actions constituted oppression and mismanagement.Summary of Conclusions:1. The MOU did not involve the transfer of company assets but shares, and the CLB's findings on this were set aside.2. The payment of consideration and transfer of shares will be adjudicated in the pending civil suit.3. The CLB's findings on the lack of notice and invalid resolutions were confirmed.4. The actions taken without proper notice constituted oppression and mismanagement.Final Disposition:The appeal was disposed of in the above terms, confirming the CLB's findings on oppression and mismanagement and dismissing the application for the appointment of a receiver.