2002 (2) TMI 1345 - Board - Companies Law

Court orders relief to restore parity among shareholders in family company oppression case

M.K. Haridas and Ors. Versus Asal Malabar Beedi Depot Pvt. Ltd. and Ors.

The court found in favor of the petitioners, holding that the exclusionary allotment of shares constituted oppression in a family company with a history ... - Issues Involved:1. Allegations of oppression and mismanagement.2. Allotment of shares in exclusion of the petitioners.3. Parity in shareholding and participation in management.4. Delay in filing the petition.5. Justification for allotment of additional shares.Detailed Analysis:1. Allegations of Oppression and Mismanagement:The petitioners, holding more than one-tenth of the total members and 3.83% of the issued share capital of Asal Malabar Beedi Depot Private Ltd., filed a petition under Section 397/398 of the Companies Act, 1956, alleging acts of oppression and mismanagement. The primary grievance was the allotment of shares to respondents Nos. 3 to 9, excluding the petitioners, which they claimed was done in bad faith to secure the ultimate purposes of the respondents and reduce the petitioners' shareholding from 33.5% to 3.83%.2. Allotment of Shares in Exclusion of the Petitioners:The petitioners argued that the additional shares were allotted without any necessity or justification, violating the principle of parity among the original shareholders. They cited several legal precedents to support their claim that such allotment without mutual agreement in a family company with parity in shareholding constitutes an act of oppression.3. Parity in Shareholding and Participation in Management:The petitioners contended that the company was incorporated on the premise of parity in shareholding and equal participation in management. They highlighted that the first petitioner and respondents Nos. 2 and 3, being brothers, had a long-standing arrangement of equal shareholding and participation, which was disrupted by the exclusionary allotment of shares. The respondents, however, argued that there was no formal agreement for equal shareholding and that the company's articles of association did not envisage such parity.4. Delay in Filing the Petition:The respondents pointed out that the alleged acts of oppression and mismanagement dated back to 1994-95, but the petition was filed only in 2001, indicating laches on the part of the petitioners. They argued that the petitioners' delay in challenging the allotment of shares, which took place in December 1997 and January 1999, should preclude them from obtaining relief.5. Justification for Allotment of Additional Shares:The respondents justified the allotment of additional shares by stating that the company's turnover had increased significantly, necessitating an increase in paid-up capital to improve the business. They also claimed that the profits of the company were shared equally among the partners of the partnership firm, which included the first petitioner, thereby maintaining the principle of equal benefit.Judgment:The court found that there was a tacit arrangement among the first petitioner and respondents Nos. 2 and 3 to share the profits equally, which had been in practice since 1972. The court applied the principles of quasi-partnership and legitimate expectations, concluding that any disturbance in the long-held shareholding arrangement in a family company would amount to an act of oppression. The respondents' justification for the allotment of additional shares was deemed unconvincing, and the exclusion of the petitioners from the allotment was found to be oppressive.Relief Granted:The court did not set aside the impugned allotments but directed that the petitioners' group should be entitled to 33.33% of the newly allotted shares, amounting to approximately 700 shares. The petitioners were given the option to acquire these shares from respondents Nos. 3 to 9 at the original consideration paid. The process for transferring and registering the shares was outlined, with a deadline for the petitioners to exercise their option.Conclusion:The petition was disposed of with directions to restore parity among the shareholders, ensuring that the petitioners' group received their rightful share of the newly allotted shares, thereby addressing the acts of oppression and mismanagement. No order as to costs was made.