2003 (11) TMI 625 - Board - Companies Law

Court Invalidates Share Allotment: Oppressive Majority Scheme, Director Removal Improper

Arati Dutta Gupta And Ors. Versus Unit Construction Company.

The court invalidated the allotment of shares as it was done without proper notice, aiming to create a new majority, deemed oppressive. Shares were to be ... - Issues Involved:1. Allotment of shares2. Mismanagement and manipulation of accounts3. Diversion of business4. Removal of directors5. Family arrangement and management controlDetailed Analysis:1. Allotment of Shares:The petitioners challenged the allotment of 1,55,000 shares on the grounds that the sole purpose was to reduce their shareholding from 52% to 29% and increase the 2nd respondent group's shareholding to over 50%, converting a majority into a minority, which they argued was a grave act of oppression. They sought to cancel the allotment of these shares. The respondents claimed the allotment was bona fide and in response to ICICI Bank's requirement to increase the company's capital. However, the court found that the allotment was made without proper notice to the petitioner directors, thus invalidating the meeting where the shares were allotted. The court held that the issuance of shares was a breach of fiduciary duties and aimed at creating a new majority, which was oppressive. The court directed that the impugned shares be equally divided among the four family groups.2. Mismanagement and Manipulation of Accounts:The petitioners alleged financial mismanagement, citing discrepancies in the balance sheets of 1998 and 1999, suggesting siphoning of funds. The court directed the statutory auditors to furnish a report explaining the discrepancies. If the report indicated siphoning of funds, the company was to take action to recover the same.3. Diversion of Business:The petitioners alleged that the company was diverting business to DG Industries, enriching it at the company's expense. The court found no evidence that the company could have undertaken the subcontracted work itself or that the subcontracting was unfavourable. The court directed that any future subcontracting to DG Industries should be approved by the Board.4. Removal of Directors:The petitioners argued that their removal as directors was based on the knowledge gained by the respondents in their capacity as directors, which was misused. The court found the removal resolutions invalid as they were passed in an EOGM convened without proper Board approval and based on the oppressive allotment of shares. The court also noted that the petitioners were not justified in convening a Board meeting on 2.4.2001 as they mixed their roles as directors and shareholders.5. Family Arrangement and Management Control:The court recognized the company as a family company managed by consensus among family members. The 2nd respondent, being the eldest surviving son, was invited to manage the company. The court found that the petitioners' proposal to appoint an outsider with overriding powers was against the family arrangement. However, this did not justify the creation of a new majority by the 2nd respondent. The court directed that the 2nd respondent continue in his management role as long as he is fit, and each family group retain their representation on the Board, overriding any contrary provisions in the Articles.Conclusion:The court invalidated the allotment of shares due to lack of proper notice and found it was done to create a new majority, which was oppressive. The shares were to be equally divided among the family groups. The removal of directors was also found invalid. The court directed the continuation of the family arrangement in management and ensured equal representation on the Board for each family group. The petitioners' allegations of financial mismanagement were to be investigated by the statutory auditors.