2014 (11) TMI 1201 - Board - Companies Law

Court invalidates oppression, restores shareholder rights, mandates fair procedures for company actions

The court found in favor of the Petitioners, declaring the alleged acts of oppression and mismanagement by the Respondents, invalidating key decisions and ... Oppression and mismanagement - illegal allotment of shares - maintainability of petition - time limitation - lack of qualification in terms of the provisions contained in Section 399 of the Act - HELD THAT:- Respondent Nos. 1 to 8 have failed to discharge their onus to prove the fact that the consideration was paid to the Petitioners for transfer of the shares-in-question, as contended by them. It is further an established law that transfer of shares without consideration is unlawful, ultra vires and void. In addition to the above, it is pertinent to mention here that, the Petitioners have filed a copy of Register of Members of the company as Annexure 'A-6' to the Petition, which clearly shows that the Petitioners' name still exist in the Register of Members of the Company. The Annual Returns filed by the Respondents with the ROC further confirm the said fact. Lastly, non-compliance of Section 108(1) of the Act clearly establishes that the Petitioners never transferred or intended to transfer the shares held by them in the Company - the Petitioners are eligible to file the present petition under Section 397/398 read with Section 402 of the Act in terms of the provisions contained in Section 399 of the Act. Whether the Petition is barred by law of limitation? - HELD THAT:- According to the Ld. Counsel, to the Respondents did not file the Annual Statement with the ROC timely and as soon as the Petitioners came to know about the wrong doings deliberately committed by the Respondents depriving the Petitioners' right as the shareholders, the Petitioners immediately, without any delay, approached the Court for redressal of their grievances and hence, the questions of in-ordinate delay and laches on their part, do not arise as contended by the Respondents. It is established that the Respondents actions are harsh, unfair and prejudicial towards the Petitioners. They lack in probity. There are series of acts of oppression as narrated above, the effect of which is still continuing on the rights of the Petitioners being shareholders of the Company. It is an established law that once the CLB gives a finding that the acts of oppression have been established, winding up of the Company on just and equitable grounds becomes automatic and the reliefs sought under Section 402 of the Act could be granted - In the present petition, in view of the proved arts of oppression and mismanagement in the conduct of the affairs of the Company, though it is a fit case for winding up of the Company, the winding up order would clearly prejudice the interest of the Petitioners and the other shareholders. It is the right of the shareholders to receive notices of General Body Meetings and if a Company deliberately does not sent notices the shareholders have right to complain of oppression and mismanagement. In this case, the complaint of non receipt of notices by the Petitioners, being the shareholder-members of the Company, is a valid complaint, and therefore the Meeting held without notices to the Petitioners has to be declared as invalid, as also the Resolutions passed thereat. In my opinion, the Petitioners are right in contending that the allotment of additional shares was made only with an oblique motive of ensuring the entire control over the affairs of the Company to the exclusion of the Petitioners. The main allegations of the Petitioners are found to have been established that the EOGM held on 30/5/2005 is invalid on account of non-receipt of the Notices thereof by the Petitioners and consequently the decision to increase the authorized share capital is also invalid. Once the increase in the authorized share capital is invalid, then the consequent allotment of the additional shares is also invalid. It has also been established that the allotment of additional shares was only with a view to push the Petitioners from minority to super-minority and thereafter further transfer of shares to their own persons by the Respondent No. 2 was with a purpose to get majority of members to enable him to make decisions according to his choices, I am, therefore, of the view that the EOGM held on 30/5/2005 and the Resolutions passed thereat deserve to be declared as null and void. The Petitioners have successfully established their allegations regarding the acts of oppression and mismanagement. Application disposed off. Issues Involved:1. Eligibility of Petitioners to file the petition under Section 397/398 of the Companies Act.2. Whether the petition is barred by the law of limitation.3. Alleged acts of oppression and mismanagement by the Respondents.4. Validity of the EOGM held on 30/05/2005 and subsequent decisions.5. Validity of the allotment of additional 7000 shares to the Respondent No. 2.6. Validity of the EOGM held on 15/11/2011 and 30/06/2012.7. Reliefs sought by the Petitioners.Detailed Analysis:1. Eligibility of Petitioners to file the petition under Section 397/398 of the Companies Act:The Respondents challenged the maintainability of the Petition on the grounds that the Petitioners are not eligible under Section 399 of the Act. They argued that the Petitioners surrendered their shares and received consideration in kind, thus losing their shareholder status. However, the Petitioners refuted this, denying any transfer or receipt of consideration. The court found no evidence of consideration paid and noted the Petitioners' names in the Register of Members and Annual Returns, concluding that the Petitioners are eligible to file the petition.2. Whether the petition is barred by the law of limitation:The Respondents argued that the petition is time-barred as it was filed after a significant delay. The Petitioners countered that the Limitation Act does not apply to Section 397/398 petitions and that the acts of oppression are continuous. The court agreed with the Petitioners, noting the persistent effect of the alleged acts and rejecting the limitation argument.3. Alleged acts of oppression and mismanagement by the Respondents:The Petitioners alleged various acts of oppression, including misappropriation of shares, unauthorized increase in share capital, and unilateral share allotments. The court found that the Respondents failed to prove any transfer of shares by the Petitioners and noted the lack of proper procedures and notices for meetings and share allotments, establishing acts of oppression.4. Validity of the EOGM held on 30/05/2005 and subsequent decisions:The Petitioners claimed they did not receive notice for the EOGM where the authorized share capital was increased. The court examined the evidence and found no valid notice was served, making the EOGM and its decisions invalid. The lack of explanatory statements and proper documentation further supported this conclusion.5. Validity of the allotment of additional 7000 shares to the Respondent No. 2:The Petitioners argued that the additional shares were allotted without offering them proportionately to existing shareholders, violating the Articles of Association and the Companies Act. The court found that the Respondents failed to prove any bona fide purpose for the allotment and noted the lack of statutory returns and proper procedures, concluding that the allotment was an act of oppression.6. Validity of the EOGM held on 15/11/2011 and 30/06/2012:The Petitioners contended that these EOGMs were held without proper notice to them, constituting acts of oppression. The court found no evidence of notice being served and noted the unilateral decisions to sell company assets, further establishing acts of oppression.7. Reliefs sought by the Petitioners:The court granted the following reliefs:- Declared the EOGM held on 30/05/2005 as illegal and set aside the increase in authorized share capital.- Annulled the allotment of 2000 and 5000 shares to Respondent No. 2.- Declared the transfer of shares as illegal and void, reducing the paid-up capital accordingly.- Declared the EOGMs held on 15/11/2011 and 30/06/2012 as illegal and set aside the resolutions passed.- Confirmed the Petitioners as lawful owners of their shares and directed the company to file requisite forms with the ROC.- Allowed the company to allot further shares and sell assets transparently, giving the Petitioners an opportunity to match offers.Conclusion:The court found substantial evidence of oppression and mismanagement by the Respondents, invalidated key decisions and allotments, and restored the Petitioners' rights as shareholders, ensuring fair procedures for future actions by the company.