2016 (1) TMI 421 - HC - Companies Law

Court Validates Meetings Under Companies Act, Grants Reliefs for Illegal Control

The court upheld the maintainability of the petition filed by Respondent Nos. 1 and 2 under Sections 397 and 398 of the Companies Act, 1956. It validated ... Oppression and mismanagement - CLB accepted the case of Respondent Nos. 1 and 2 of oppression and mismanagement, and dissolved the Board of Directors of Appellant no.2 and reconstituted the same - Held that:- . As rightly held by CLB, it is inconceivable that Appellant No.1, who is an industrialist and who has been running the Company having net worth of crores of rupees (with financial assistance worth about ₹ 124 crores from banks), was not aware of the consequences of the documents or that he signed the documents under a belief that they would not be used for any purpose other than for arranging the additional finance of ₹ 10 crores. There was adequate material before CLB to come to this finding and no question of law arises for the consideration of this Court in connection therewith. There is no substance in the Appellants' contention that this was a matter for the Civil Court to decide by reason of being a complicated question of fact needing extensive evidence. In the facts of the case, it was obviously for the Appellants to discharge the onus to show that the documents were signed under misrepresentation or were otherwise not binding. They could very well have led evidence in this behalf . There is nothing on record to show that they offered to lead any evidence on the subject besides what was produced before CLB or were denied any opportunity to lead further evidence. Parties take various positions in their pleadings. What is considered at the hearing by any Court or tribunal is the submissions advanced before it at the hearing. Without advancing submissions on a particular issue, and that too on an issue of fact, a party cannot fault an order of the Court or the tribunal relying on its case on the issue pleaded in its pleadings. That would clearly spring a surprise on the opponent and compromise the integrity of the trial. Besides, the parties have clearly acted on the resolutions passed at the EOGM; the Appellant in Company Appeal (Lodging) No. 46 of 2013 was a nominee director of promoters represented by Appellant No.1 in the main appeal and has himself signed the share certificates issued to Respondent Nos. 1 to 3 in pursuance of decision take at the EOGM of 5 March 2010. It was the case of Respondent Nos. 1 to 3 before CLB that he was part of the management under Appellant No.1; that many general meetings were called by the Company likewise with a short notice; and that he had notice of the Board meeting as well as EOGM of 5 March 2010. Had the submissions concerning want of notice been placed before CLB, all these relevant matters would have been considered by it. It is too late in the day to now agitate these issues. In that view of the matter, it is not necessary for me to consider the case law cited by learned Counsel on merits of the submissions on consequences of want of notice. The impugned order does not, in the premises, suffer from any error of law in this behalf. There is no substance, thus, in any of the submissions advanced by the Appellants. All three Company Appeals are accordingly dismissed. Issues Involved:1. Maintainability of the petition.2. Validity of the Board and General Body meetings held on 5 March 2010.3. Allegation of collateral purpose behind the petition.4. Legality of meetings held after 5 March 2010.5. Violation of Articles by holding meetings without notice to nominated directors.6. Assumption of control over the Company by illegal means.7. Just and equitable grounds for winding up the Company.Detailed Analysis:Maintainability of the Petition:The petition filed by Respondent Nos. 1 and 2 was deemed maintainable by the CLB. The issue of maintainability had been previously decided in favor of the petitioners and was not appealed, making it final. The petitioners, holding at least 1/10th of the total number of members, satisfied the threshold requirement under Sections 397 and 398 of the Companies Act, 1956. The court held that non-rectification of the register of members did not affect the maintainability of the petition for reliefs under these sections.Validity of the Board and General Body Meetings (5 March 2010):The CLB validated the Board and General Body meetings held on 5 March 2010, including the resolutions passed during these meetings. These resolutions included amendments to the Share Subscription cum Shareholders Agreement (SSSA) and the Articles of Association, which allowed Respondent Nos. 1 to 3 to convert their preference shares into equity shares, increasing their shareholding to 69.38%. The court found that the meetings were duly held and the resolutions were binding.Allegation of Collateral Purpose:The appellants contended that the petition was filed for a collateral purpose, specifically to recover their investment with a 50% IRR. The CLB found no merit in this contention, stating that the petitioners were entitled to exercise their rights as shareholders until their shares were purchased in accordance with the SSSA. The court rejected the argument that the petition was an abuse of process for a collateral purpose.Legality of Meetings Held After 5 March 2010:The CLB declared all meetings held after 5 March 2010 by the appellants as illegal and void. The decisions taken in these meetings were set aside. The court found that these meetings were held without notice to the nominated directors of Respondent Nos. 1 to 3, violating the Articles of Association and demonstrating a lack of probity and fairness.Violation of Articles by Holding Meetings Without Notice:The court found that holding Board and General Body meetings without notice to the nominated directors of Respondent Nos. 1 to 3 was a clear violation of the Articles of Association. This act seriously jeopardized the interests of the petitioners and constituted oppression.Assumption of Control Over the Company by Illegal Means:The CLB concluded that the appellants had assumed control over the Company by illegal means, including manipulation of records. The court noted that the appellants fabricated company records, leading to 100% net worth erosion and a rejected reference before BIFR.Just and Equitable Grounds for Winding Up:The CLB opined that it would have been just and equitable to wind up the Company due to the circumstances. However, such winding up would be unfairly prejudicial to the interests of the petitioners, who were genuinely entitled to participate in the management of the Company. Therefore, the court granted various reliefs, including setting aside the resolutions passed in the illegal meetings and reconstituting the Board of Directors.Conclusion:The court dismissed all three Company Appeals, upholding the CLB's findings and orders. The ad-interim orders were extended for six weeks from the date of the judgment. The court found no substance in the appellants' submissions and ruled in favor of the petitioners, maintaining the reliefs granted by the CLB.