2015 (9) TMI 1069 - Board - Companies Law

Court upholds Petitioner's claims under Companies Act, 1956, rules against oppression and mismanagement

Girdharlal Nathubhai Dalal Versus Star Grain & Shipping (P.) Ltd. and Others

The court found the Petitioner eligible to file the petition under Section 399 of the Companies Act, 1956, due to the original shareholding. Allegations ... Oppression and mismanagement - illegal removal of the Petitioner as a Director of the Company - illegal increase in the authorized share capital - Respondent No. 3 has been illegally appointed with a view to gain control over the management of the Company by the Respondent No.2 alone - siphoning off funds and non-payment of dividend - Held that:- It is a well-settled proposition of law that if a party approaches a court for redressal of his grievances under equitable jurisdiction, he must come with clean hands and, in case, such party conceals any material facts or suppresses the relevant documents, he is not entitled to the discretionary reliefs from the court. - Petitioner has suppressed any material facts or documents in this petition. Therefore, this preliminary objection is also not tenable and deserves to be rejected. Regarding illegal increase in the authorized share capital - Held that:- Undisputedly, the Respondent No.3 became a shareholder only on 1/9/2007 and could not be present at the said meeting as he was not a shareholder then. The said meeting was not held at the registered office of the company. All these reasons clearly go to prove that the purported meeting held on 18/6/2007 for Increasing the authorized share capital of the company was not held in accordance with law. The decisions taken at the said meeting smack mala fide intention on the part of the Respondents. - the resolutions deserves to be set aside. Regarding illegal allotment of additional shares to the Respondent Nos. 2 and 3 - Held that:- Where the Directors seek, entering into an agreement to issue new shares, to prevent a majority shareholder from exercising control of the Company, they will not be held to have failed in their fiduciary duty to the Company if they act in good faith In what they believe, on reasonable grounds, to be the interests of the Company, but if the power to issue shares is exercised from an improper motive, the issue is liable to be set aside and it is immaterial that the issue is made in bona fide belief that it is in the interest of the Company. - allotment of shares was mala fide and purpose was to gain control and management of the Company - allotments are bad in law and deserves to be set aside. Removal of the Petitioner as a Director of the company - Held that:- The Petitioner is admittedly has been primary director of the company ever since his induction as the shareholder since 1996 and 1976 and has also been the chairman of the company. In a family company, undisputedly, the principles of quasi-partnership do apply. - the petitioner has been removed as a Director illegally without following due course of law. Further, the Company is in the nature of quasi-partnership, hence, the removal of the Petitioner as a director amounts to an act of oppression. On a overall analysis of the facts of the case discussed hereinabove, in my opinion, the Petitioner has succeeded to prove that the acts of the Respondents are burdensome, harsh and wrongful and lack in probity and fair deal to the Petitioner. The effect of acts complained of is continuous in nature. The petition, therefore, deserves to be allowed. To bring an end to the acts complained of and to do substantial justice between the parties. - Respondent No.2 has siphoned off the Company's funds, and the company has suffered loss, the same shall same shall be reimbursed by the Respondent No.2. - Special Auditor Appointed - Decided in favor of appellant. Issues Involved:1. Eligibility of the Petitioner to file the petition under Section 399 of the Companies Act, 1956.2. Allegations of oppression and mismanagement by the Respondents.3. Illegal increase in authorized share capital.4. Illegal allotment and transfer of shares.5. Illegal removal of the Petitioner as a Director.6. Illegal appointment of Respondent No. 3 as a Director.7. Non-service of notices and statutory documents.8. Denial of inspection rights to the Petitioner.9. Alleged siphoning off of funds and non-payment of dividends.10. Delay and laches in filing the petition.11. Alleged suppression of material facts and documents by the Petitioner.Detailed Analysis:1. Eligibility of the Petitioner to file the petition under Section 399 of the Companies Act, 1956:The Petitioner claimed to hold a 30% shareholding in the company, which was allegedly diluted to 0.03% due to illegal acts by the Respondents. The court held that the original shareholding before the disputed allotments is the criterion for determining eligibility under Section 399. The Petitioner was found eligible to file the petition. This decision was supported by precedents such as Vijayan Rajes v. Plantations (P.) Ltd. and T.N.K. Govindaraju Chetty & Co. v. Kadri Mills (CBE) Ltd.2. Allegations of oppression and mismanagement by the Respondents:The Petitioner alleged various acts of oppression and mismanagement, including illegal increase in share capital, illegal allotment and transfer of shares, and denial of inspection rights. The court found merit in these allegations, noting that the actions of the Respondents were burdensome, harsh, and wrongful, lacking in probity and fair dealing.3. Illegal increase in authorized share capital:The authorized share capital of the company was increased from Rs. 25 lakh to Rs. 1 crore in an EOGM purportedly held on 18/6/2007. The court found that no notice was served on the Petitioner for this meeting, and the meeting was not held in accordance with the Articles of Association. The increase in share capital was declared invalid and unlawful.4. Illegal allotment and transfer of shares:The Petitioner alleged that additional shares were illegally allotted to Respondent Nos. 2 and 3, diluting his shareholding from 30% to 0.03%. The court found that the allotments were made without proper notice to the Petitioner and in violation of the Articles of Association. The allotments were declared null and void. Additionally, the transfer of 13 shares by Respondent No. 2 to Respondent Nos. 4 to 12 was found to be in violation of the pre-emptive rights of the Petitioner and was also declared illegal.5. Illegal removal of the Petitioner as a Director:The Petitioner was removed as a Director without following due process. The court found that the removal was done without proper notice and in violation of the principles of quasi-partnership applicable to the closely held family company. The removal was set aside, and the Petitioner was reinstated as a Director.6. Illegal appointment of Respondent No. 3 as a Director:The court found that Respondent No. 3 was appointed as a Director without proper procedure, with the intent to gain control over the company and oust the Petitioner. However, the court did not remove Respondent No. 3 to avoid potential deadlock in the company's management.7. Non-service of notices and statutory documents:The Petitioner alleged that no notices of board meetings, AGMs, or other meetings were served on him since 2007. The court found that the Respondents failed to provide evidence of service of notices and held that this amounted to gross mismanagement.8. Denial of inspection rights to the Petitioner:The Petitioner was denied inspection of the company's documents and records, to which he was entitled as a shareholder and Director. The court held that this denial amounted to an act of oppression and mismanagement.9. Alleged siphoning off of funds and non-payment of dividends:The Petitioner alleged that he had invested Rs. 4.5 crore in the company, which was not reflected in the balance sheet post-2007-08, and he did not receive his share of dividends. The court found that the accounts of the company were not transparent and that the Petitioner had not received his rightful share of dividends, amounting to mismanagement.10. Delay and laches in filing the petition:The Respondents argued that the petition was barred by delay and laches. The court held that the provisions of the Limitation Act do not apply to proceedings under Section 397/398 of the Companies Act. It was found that the Petitioner had acted upon discovering the acts of oppression and mismanagement in 2013, and the petition was not barred by delay or laches.11. Alleged suppression of material facts and documents by the Petitioner:The Respondents alleged that the Petitioner had suppressed material facts and documents. The court found no merit in this objection, stating that the Petitioner had not suppressed any material facts or documents.Order:a. The EOGM held on 18/6/2007 increasing the authorized share capital was declared null and void.b. The allotments of shares on 15/6/2007 and 17/7/2007 to Respondent No. 2 were declared illegal and cancelled.c. The transfer of 100 shares on 1/9/2007 to Respondent No. 3 was declared illegal and cancelled.d. The Register of Members was ordered to be rectified to reflect these cancellations.e. The Petitioner was declared to hold 30% of the total paid-up capital.f. The transfer of 13 shares on 11/7/2013 to Respondent Nos. 4 to 12 was declared illegal and cancelled.g. The Petitioner was reinstated as a Director.h. The company was directed to comply with these orders within 45 days and to allow inspection of statutory documents to the Petitioner.i. A Special Auditor was appointed to conduct an audit from 1/4/2007 to 31/3/2015.j. The petition was disposed of in these terms, with no order as to costs.