2008 (2) TMI 921 - Board - Companies Law

Court upholds petitioner's grievances on shareholding, financial irregularities, and directorship removal.

B.V. Reddy Versus Legend Technologies (India) (P.) Ltd.

B.V. Reddy Versus Legend Technologies (India) (P.) Ltd. - [2009] 90 SCL 73 (CLB - CHENNAI), [2009] 147 COMP CASE 81 (CLB) Issues Involved:1. Shareholding2. Non-convening of board or general meetings and non-sending of notices to board or general meetings3. Appointment of the second respondent as Chairman and Managing Director and fixation of his remuneration4. Appointment of additional directors5. Operation of the bank account solely by the second respondent6. Financial irregularities at the instance of the second respondent7. Diversion of funds as well as business orders of the partnership firm to the Company8. Allotment of shares to outsiders9. Impugned transfers, namely, 15000 shares of MJR and 28500 shares of the petitioner in favour of the second respondent10. Removal of the petitioner from the office of directorDetailed Analysis:1. Shareholding:The Company was incorporated in May 1998 by the petitioner and the second respondent, initially holding equal shares. Over time, the shareholding changed due to impugned transfers and further allotments. The petitioner's shareholding decreased due to the disputed transfer of 28500 shares to the second respondent. The principle of quasi-partnership was found applicable to the Company, given the equal status and mutual trust between the petitioner and the second respondent.2. Non-convening of Board or General Meetings and Non-sending of Notices:The petitioner claimed no formal board or general meetings were held before August 2004. However, the search report from the Registrar of Companies indicated that the Company had been convening meetings periodically. The petitioner's belated accusations lacked merit, and the non-production of attendance sheets for meetings prior to August 2004 was not considered fatal.3. Appointment of the Second Respondent as Chairman and Managing Director and Fixation of His Remuneration:The petitioner was aware of the appointment of additional directors and the second respondent as Chairman and Managing Director at the board meeting on 11-8-2004. The petitioner's challenge to these appointments and the terms of remuneration was dismissed as he had participated in the meetings and decisions.4. Appointment of Additional Directors:The appointment of additional directors at the board meeting on 11-8-2004 and their subsequent confirmation at the AGM on 21-8-2004 was upheld. The petitioner's challenge to these appointments was dismissed as he had participated in the meetings and decisions. The petitioner's claim that the directors ceased to be directors after the AGM was also dismissed.5. Operation of the Bank Account Solely by the Second Respondent:The board meeting on 11-8-2004 authorized the second respondent to operate the bank account solely. Despite the petitioner's objections, the circular resolution dated 16-12-2005 confirmed this authorization. The petitioner's challenge to this resolution was dismissed.6. Financial Irregularities at the Instance of the Second Respondent:The petitioner's allegations of financial irregularities were not substantiated by evidence. The remittance of US$ 1092 was found to be for the purchase of a laptop for the Company. The unsigned guarantee letters for the second respondent's son's education lacked evidentiary value. The bank statement did not indicate any financial irregularities.7. Diversion of Funds and Business Orders of the Partnership Firm to the Company:The petitioner's complaint about the wrongful collection of funds due to the partnership firm and diversion of business orders was dismissed as the partnership firm had been closed, and the unit sold by KSFC. The grievances related to the partnership firm were not within the scope of section 397/398 proceedings.8. Allotment of Shares to Outsiders:The allotment of shares to outsiders was not challenged by the petitioner at the relevant time. The petitioner's belated challenge to these allotments was dismissed. The petitioner's acquiescence in the matter disentitled him from challenging the allotments.9. Impugned Transfers:- 15000 Shares of MJR: The evidence indicated that MJR had invested in the Company's share capital, and the transfer of 15000 shares to the second respondent was approved by the board. The petitioner's challenge was dismissed.- 28500 Shares of the Petitioner: The transfer of 28500 shares to the second respondent was found to be invalid due to discrepancies in the transfer deed and lack of evidence of consideration. The transfer was set aside.10. Removal of the Petitioner from the Office of Director:The petitioner's removal from directorship was found to be oppressive and not in conformity with section 284 of the Act. The removal was based on an invalid notice and denied the petitioner adequate opportunity to defend himself. The removal was set aside.Conclusion:The petitioner's grievances regarding shareholding, financial irregularities, and removal from directorship were partly upheld. The transfer of 28500 shares to the second respondent was set aside, and the petitioner's removal from directorship was found to be oppressive and set aside. The valuation of shares was ordered to facilitate the exit process for the parties, ensuring an equitable resolution.