2017 (11) TMI 1981 - HC - Companies Law

Court allows composite petition under Companies Act, deems share transmission invalid. Relief granted for oppression.

The Court held that the composite petition under Sections 111-A, 397, and 398 of the Companies Act was maintainable. Shareholding for the petition should ... Oppression and mismanagement jurisdiction under Sections 397/398 of the Companies Act - maintainability of composite petitions under Section 111 A read with Sections 397/398 - qualification under Section 399 - shareholding to be reckoned prior to the oppressive act - mandatory compliance with Articles of Association for transmission of shares (Article 66/Article 70) - requirement of probate/letters of administration/succession certificate - resignation of a director takes effect on tendering in writing and does not require acceptance - statutory notice and quorum requirements for Board meetings (Sections 286/287 and Articles 150/151/152) - limits of waiver/estoppel where public interest or mandatory statutory provisions are involved - power of the court under Sections 397/402 (and corresponding Sections 241/242 of 2013 Act) to mould relief including substitution/amendment of articles and regulating future conduct of company affairsMaintainability of composite petitions under Section 111 A read with Sections 397/398 - qualification under Section 399 - shareholding to be reckoned prior to the oppressive act - Whether the petition could be maintained as a composite petition under Section 111 A together with Sections 397/398 and whether the appellants possessed requisite qualification under Section 399. - HELD THAT: - The Court held that composite petitions combining relief under Section 111 A (rectification of register of members/transmission) with oppression/mismanagement claims under Sections 397/398 are permissible and that the CLB erred in treating the petition as exclusively under Sections 397/398 (paras 108-113). For eligibility under Section 399 the relevant date for reckoning qualifying membership/shareholding is prior to the act of oppression complained of; thus shareholding before the transfer of 4,00,961 shares (i.e. prior to 10.04.2013) must be considered (paras 114-123). The CLB therefore wrongly relied on post transfer amended shareholding and on civil court interim orders made after filing of the company petition to deny locus (paras 123-151). [Paras 112, 119, 122, 123, 148]Composite petition maintainable; qualification under Section 399 to be reckoned from prior to the alleged oppressive act and CLB erred in relying on amended/post event shareholding and subsequent civil injunctions to deny locus.Mandatory compliance with Articles of Association for transmission of shares (Article 66/Article 70) - requirement of probate/letters of administration/succession certificate - rectification of register under Section 111 A - Validity of the transmission on 10.04.2013 of 4,00,961 shares in favour of respondent No.2 and whether CLB could uphold that transfer despite absence of probate/succession certificate and existence of competing wills and pending civil suit. - HELD THAT: - Article 66 requires probate, letters of administration or succession certificate for recognition of title of a deceased member's shares unless the Board in its absolute discretion dispenses with such production and records taking any indemnity; there was no record of any such dispensation or indemnity in the minutes. Section 109 was inapposite because it applies to transmission by legal representatives (paras 128-136). The CLB's reliance on Section 109 and its acceptance of the Will dated 14 2 2005 was erroneous. Pending adjudication in the civil courts on competing Wills, the Court directed that neither Will be treated as established and that, in the interim, the 81% stake be treated as devolving equally among appellant No.1 and respondent Nos.2-4 (each 1/4 of 81%) until competent court decides validity or succession certificate is obtained (paras 132-146, 141-144). [Paras 134, 135, 141, 142, 144]Transfer of 4,00,961 shares to respondent No.2 on 10.04.2013 violated Article 66 and is illegal; CLB erred in upholding it; register to be provisionally rectified by treating the 81% as divided equally among appellant No.1 and respondent Nos.2-4 (appellant to get 1/4th of 81%) pending the Civil Court's decision.Resignation of a director takes effect on tendering in writing and does not require acceptance - withdrawal of resignation requires consent of company/board - Whether respondent No.5's resignation dated 06 04 2013 took effect immediately and whether his purported withdrawal on 09 04 2013 was valid. - HELD THAT: - Articles did not require acceptance of a resignation; authority and decisions in Glossop and subsequent case law establish that a director's written resignation takes effect when tendered and cannot be unilaterally withdrawn except with the consent of the company/board (paras 169-176, 178-181). There was no material showing prior consent from appellant No.1 (the only other director) or from the Board to validate the purported withdrawal. Respondent No.5 therefore ceased to be a director on 06 04 2013 and the withdrawal on 09 04 2013 was ineffective (paras 182-191). The CLB's contrary finding was held to be perverse (paras 191-194). [Paras 175, 178, 179, 190, 191]Resignation of respondent No.5 effective on 06 04 2013; his alleged withdrawal on 09 04 2013 invalid; CLB erred in holding otherwise.Statutory notice and quorum requirements for Board meetings (Sections 286/287 and Articles 150/151/152) - voidness of meetings held without quorum or requisite notice - Validity of Board meetings held on 09 04 2013, 10 04 2013 and 11 04 2013 and the corporate acts/resolutions passed therein (appointments and share transmissions). - HELD THAT: - After respondent No.5's resignation there was only one director (appellant No.1). Section 252/Articles require minimum two directors and quorum provisions (1/3rd or two whichever higher) and Section 286/Articles require notice; none of these mandatory requirements were complied with and there was no evidence of valid waiver or consent by appellant No.1. Even if withdrawal of resignation were assumed valid (which it was not), a single person could not constitute quorum and transact business (paras 201-216, 218-224). Cases on mandatory effect of minimum directors/quorum were applied. Consequently induction of respondent No.4, appointment of respondent Nos.2 and 3 as additional directors, transfer of shares and subsequent acts were invalid and not binding on the company (paras 225-227). [Paras 208, 218, 222, 226, 227]The Board meetings of 09 04 2013, 10 04 2013 and 11 04 2013 were invalid for want of resignation having taken effect, lack of quorum and absence of requisite notice; all resolutions and acts passed therein are null and void and do not bind the Company.Article 70 - production of original share certificate prior to registration of transfer - prohibition on taking advantage of one's own wrong - nemo ex injuria suo commodum - Whether production of original share certificates and compliance with Article 70 was ensured before registration and whether respondents could rely on acquiescence/estoppel to validate their acts. - HELD THAT: - Article 70 requires production of original share certificates before registration; no evidence was produced that originals were produced (paras 230-233). The appellants had filed applications seeking production which remained undecided by the CLB; CLB's disposal statement was inadequate. Further, respondents cannot take advantage of their own illegal acts; reliance on estoppel/waiver fails where mandatory statutory or public interest safeguards (directorship quorum, transmission formalities) are breached (paras 253-257, 240-244). The CLB's finding of acquiescence by appellant No.1 was held to be perverse given the surrounding conduct and distress after bereavement (paras 239-251). [Paras 230, 232, 251, 253, 256]No proof of compliance with Article 70; transfers therefore vitiated; respondents cannot rely on estoppel/waiver to validate their breaches and CLB erred in ignoring respondents' clandestine conduct.Validity of Annual General Meeting - effect of ratification and Section 290 - non applicability of Section 290 where there is usurpation/fraudulent usurpation of authority - Whether the AGM of 18 12 2013 validated the prior invalid board acts and whether the AGM itself was valid. - HELD THAT: - The AGM purportedly ratified earlier board decisions, but those board meetings were held by persons who were not validly directors (strangers) and therefore could not validly convene the AGM. Section 290 does not validate acts where the appointment was a fraudulent usurpation; authorities cited support that a fraudulent usurpation cannot be cured by subsequent corporate acts (paras 259-272). Thus the AGM and its resolutions are null and void and cannot cure the prior defects. [Paras 259, 261, 266, 269, 271]The AGM held on 18 12 2013 did not validate the prior board acts; the AGM and its resolutions are void insofar as they seek to ratify the invalid board meetings.Oppression and mismanagement jurisdiction under Sections 397/398 of the Companies Act - power of the court under Sections 397/402 to mould relief including amendment of articles and regulation of future conduct - Whether appellants established oppression/mismanagement warranting exercise of jurisdiction and what reliefs the Court should grant. - HELD THAT: - Applying established tests (need for conduct to be harsh, burdensome, wrongful, mala fide or against probity), the Court found a series of illegal acts constituting oppression of appellant No.1 (paras 274-283). While a profitable company is not precluded from such relief, winding up was undesirable; instead the Court exercised its wide discretionary powers under Sections 397/402 (and corresponding provisions of 2013 Act) to set aside illegal acts, remove respondents from directorship, substitute Article 128 to enable the continuing director to increase board strength to quorum, authorize appellant No.1 to increase board to three directors and hold nominated directors for three years, and to provisionally rectify the register (paras 292-324). The Court also held that the CLB acted unreasonably in not adjudicating interim applications and that that was a procedural impropriety though it did not amount to denial of audi in all respects (paras 152-166). [Paras 292, 301, 316, 322, 323]Appellants made out oppression/mismanagement; CLB order set aside. Reliefs granted: acts of respondents 2-7 declared oppressive; board meetings of 09/10/11 04 2013 and AGM 18 12 2013 set aside; transmission of 81% shares to respondent No.2 declared illegal; register to be provisionally rectified by allocating 1/4th of those shares to appellant No.1 pending civil adjudication; respondents 2-7 removed from directorship; Article 128 substituted to permit continuing director to increase board to quorum and appellant empowered to fill board to three directors for 3 years, with ancillary directions and costs.Final Conclusion: The appeal is allowed. The High Court set aside the CLB order and held that respondent Nos.2-7 acted oppressively; the Board meetings of 09 04 2013, 10 04 2013 and 11 04 2013 and the AGM of 18 12 2013 are null and void; the transmission of the 81% shareholding to respondent No.2 is illegal under the Articles; the register is to be provisionally rectified by treating the 81% as divided equally among appellant No.1 and respondent Nos.2-4 (appellant to receive 1/4th of 81%) pending civil adjudication; respondent Nos.2-7 are removed from the Board; Article 128 is substituted to enable the continuing director to increase the Board to quorum and appellant No.1 is empowered to increase the Board to three directors who along with nominees of the appellant shall hold office for three years; ancillary directions (prohibition on dealing with company assets, costs) were issued and the CLB's procedural failure to decide interim applications was criticised. Issues Involved:1. Maintainability of Composite Petition under Section 111-A read with Section 397, 398, 402 to 404, and 406 of the Companies Act.2. Shareholding required for maintaining a petition under Section 397 to 399.3. Validity of transmission of shares based on disputed Wills.4. Withdrawal of resignation of a Director and its legal implications.5. Validity of Board meetings held on 09-04-2013, 10-04-2013, and 11-04-2013.6. Validity of the Annual General Meeting (AGM) held on 18-12-2013.7. Acts of oppression and mismanagement.8. Reliefs to be granted.Detailed Analysis:1. Maintainability of Composite Petition:The Court held that a composite petition under Section 111-A and Sections 397/398 is maintainable. The CLB erred in treating the petition as only under Sections 397/398. The principle laid down in Manoj Kumar Kanunga and others [(2013) 179 Comp Cas 504 [A.P.]] and Charanjit Khanna and others [(2011) 164 Comp Cas 315 (Delhi)] was followed, allowing for composite petitions to avoid multiplicity of legal proceedings.2. Shareholding Requirement:The Court held that the shareholding required for maintaining a petition under Section 397 should be reckoned from the date prior to the act of oppression. The CLB erred by considering the shareholding after the alleged oppressive acts. The shareholding prior to 10-04-2013 should be considered, and the appellant No.1's shareholding would cross the 10% threshold required under Section 399.3. Validity of Transmission of Shares:The Court found that the transmission of shares to respondent No.2 based on the Will dated 14-02-2005 was invalid as it violated Article 66 of the Articles of Association, which requires a probate, letter of administration, or succession certificate. The CLB erred in relying on Section 109, which does not apply to the transmission of shares of a deceased member. The Court held that the shares should be equally divided among appellant No.1 and respondent Nos.2 to 4 pending the decision on the validity of the Wills.4. Withdrawal of Resignation:The Court held that the resignation of respondent No.5 as a Director was effective immediately upon submission on 06-04-2013 and did not require acceptance. The withdrawal of resignation on 09-04-2013 was invalid. The CLB's finding that respondent No.5 continued as a Director was erroneous.5. Validity of Board Meetings:The Court held that the Board meetings held on 09-04-2013, 10-04-2013, and 11-04-2013 were invalid due to the lack of quorum and the absence of proper notice to appellant No.1. Consequently, the decisions taken in these meetings, including the appointment of respondent Nos.2 to 4 as Directors and the transmission of shares to respondent No.2, were invalid.6. Validity of AGM:The Court held that the AGM held on 18-12-2013 was invalid as it was convened by persons who were not validly appointed as Directors. The decisions taken in this AGM, including the ratification of the Board meetings held on 09-04-2013, 10-04-2013, and 11-04-2013, were null and void.7. Acts of Oppression and Mismanagement:The Court found that the acts of respondent Nos.2 to 7 were oppressive towards appellant No.1. The respondents' conduct was harsh, wrongful, and prejudicial to appellant No.1's legal and proprietary rights as a shareholder. The Court held that the appellants made out a case for relief under Section 397 of the Act.8. Reliefs Granted:The Court declared the acts of respondent Nos.2 to 7 as oppressive and set aside the Board meetings held on 09-04-2013, 10-04-2013, and 11-04-2013, including all resolutions passed therein. The AGM held on 18-12-2013 and its resolutions were also declared null and void. The Board of Directors as existing was superseded, and respondent Nos.2 to 7 were removed from Directorship. The transmission of 4,00,691 equity shares to respondent No.2 was declared illegal. The register of members was ordered to be rectified by transmitting 1/4th of the shares to appellant No.1. The Court also authorized appellant No.1 to increase the number of Directors to three and to appoint a committee of advisers for the future management of the Company. The appellant No.1 and the Directors nominated by her were to hold office for three years.The appeal was allowed with costs of Rs. 25,000 to be paid by respondent Nos.2 to 4 to appellant No.1 within four weeks. The judgment was stayed for four weeks to allow for any further legal actions.