2006 (10) TMI 506 - Board - Companies Law

Court Invalidates Share Capital Increase & Share Allotment, Orders Government Investigation.

The court declared the increase in share capital and the allotment of shares to the eighth respondent illegal and void. It directed the Central Government ... - Issues Involved:1. Allegations of oppression and mismanagement.2. Legality of the increase in share capital.3. Validity of the allotment of shares.4. Non-compliance with statutory requirements.5. Breach of agreement and arbitration.6. Maintenance of statutory records and registered office.7. Criminal prosecutions and their impact on the company.8. Fiduciary responsibilities of directors.Detailed Analysis:1. Allegations of Oppression and Mismanagement:The petition alleges that the second respondent, in connivance with respondents 3 to 6, engaged in acts of oppression and mismanagement detrimental to the company and oppressive to the petitioner. The petitioner claims that the second respondent used the company to park illegal funds and pledged original share certificates and title deeds unlawfully. However, these allegations were not substantiated with documentary evidence, and thus no relief was granted.2. Legality of the Increase in Share Capital:The petitioner challenged the increase in share capital from Rs. 27 crores to Rs. 53 crores, claiming it was done without proper notice and in violation of statutory requirements. The court found that the notice of the extraordinary general meeting was not properly served, invalidating the resolution to increase the share capital. The court declared the enhancement of authorized capital illegal and void.3. Validity of the Allotment of Shares:The petitioner contested the allotment of Rs. 25 crores worth of shares to the eighth respondent, arguing it was a manipulation to divert funds. The court found that the allotment was not supported by valid consideration and was part of a scheme to bypass a Delhi High Court order. Consequently, the court set aside the allotment of shares as illegal.4. Non-Compliance with Statutory Requirements:The court noted several statutory violations, including the failure to maintain a minimum of seven members, improper maintenance of statutory records, and non-compliance with provisions regarding the appointment of directors and company secretaries. These violations indicated mismanagement and warranted investigation.5. Breach of Agreement and Arbitration:The petitioner claimed the second respondent failed to discharge the company's liabilities and relieve the petitioner from guarantee obligations as per an agreement. The court held that these issues should be resolved through arbitration, as previously directed, and were not within the jurisdiction of the Company Law Board (CLB).6. Maintenance of Statutory Records and Registered Office:The court found that the company failed to maintain statutory records and frequently shifted its registered office without proper notification, constituting mismanagement. The court ordered an investigation into the company's affairs by the Central Government.7. Criminal Prosecutions and Their Impact on the Company:The court acknowledged ongoing criminal prosecutions against the second respondent but found no direct evidence that these affected the company's interests. The petitioner failed to demonstrate how these prosecutions prejudiced the company or its members.8. Fiduciary Responsibilities of Directors:The court emphasized that directors must exercise their fiduciary powers for the company's benefit and not for personal gain. The impugned allotment of shares was found to be a breach of fiduciary duty, justifying the setting aside of the allotment and further investigation.Conclusion:The court declared the increase in share capital and the allotment of shares to the eighth respondent illegal and void. It directed the Central Government to investigate the company's affairs and take appropriate action based on the investigation report. The petition was disposed of with no order as to costs.