2016 (3) TMI 929 - HC - Companies Law

Court affirms Company Law Board decision on appeal dismissal, orders appellants to exit by selling shares.

RAJ KUMAR BHATIA AND ORS. Versus M/s. AV LIGHT AUTOMOTIVES LTD. AND ORS.

The court upheld the Company Law Board's decision to dismiss the appeal, directing the appellants to exit the company by selling their shares to the ... Non providing of opportunity to subscribe to Rights issue - increase of share capital - Whether the alleged resignation of Appellant No. 1 & 3 from the directorship of the Company could be held to be valid, when specific case of the Appellant Nos. 1 & 3 was that they never resigned and in the absence of any such resignation in writing being brought on record by the Respondent? - Held that:- The appellants did not impugn either the allotment of the Rights Issue or their removal from the Board of Directors at the relevant time; coupled with the fact that, admittedly, there is no challenge to the company’s requirement for funds through the offer of rights, as well as by way of a bank loan, alongwith the explanations being offered by the respondent in this regard; as also the real likelihood of the appellants having been persuaded to raise all these grievances once the company’s economic difficulties were over, and the company was clearly on the path of substantial progress; makes it clear that these allegations need not be probed further. Obviously if the company’s affairs had taken a down turn after the Rights Issue as well as the loan from the bank, there would have been no question of the appellants’ raising any grievance whatsoever even in June, 2007. To enable the appellants to now reprise their role as directors, whilst also giving them the opportunity to avail the Rights issue at this stage would, in effect, amount to handing them the prize without having played the game at all, because the appellants never ran the risk normally associated with business expansions or personal guarantees. To my mind, once it is clear that the decision to infuse capital through the issue of Rights as well as Loans on personal guarantees was bonafide; and the appellants failed to raise any protest in a timely fashion; then regardless of the reasons for the non subscription to the Rights issue, or for not being required to furnish the necessary personal guarantees to the bank; it would be grossly inequitable to now reward the appellants with the rewards sans the risk; and that too at the expense of the respondents who actually did run that risk by putting in their own moneys and personal guarantees on the line, thus facilitating the increase in the company’s valuation from ₹ 30 lakhs in 1996 to ₹ 12 crores in 2008. Had the appellants been responsible and conscientious participants, both as directors and shareholders; fully able and ever willing to shoulder their burden of the increased business risk under contemplation, nothing stopped them from taking the required steps; and also approaching the Company Law Board if necessary; in a timely fashion, but they chose not do so. That they chose not to protest the lack of any information about any Board meeting, despite the belief that they were indeed directors, for years together; while duly receiving the annual accounts and dividends throughout; can only lead one to conclude that their interest in the company was limited to their initial shareholding and nothing more. After the venture has clearly fructified; and the associated risks run successfully; to enable the appellants to now claim that they would certainly have subscribed to their share of the Rights issue to finance the venture in the first place, and consequently direct the allotment of proportionate shares to the appellant at the initial offer price; while divesting others, who had put down their own moneys at the crucial juncture for those shares; and that too when their current price and future prospects are much more, would not only ensure an undeserved windfall to the appellants; it would, to my mind, also demonstrate an extremely unjudicious naivety on the part of the Court. Issues Involved:1. Dismissal of the petition by the Company Law Board.2. Direction for appellants to exit the company by selling their shares.3. Alleged oppression and mismanagement by the respondents.4. Increase in share capital and issuance of rights shares.5. Removal of appellants from directorship.6. Maintainability of the appeal under Section 10-F of the Companies Act, 1956.Issue-wise Detailed Analysis:1. Dismissal of the Petition by the Company Law Board:The Company Law Board dismissed the appellants' petition and directed them to exit the company by selling their shares to the respondents at a value determined by a valuer. The appellants contended that the respondents neglected them, did not issue notices for Board Meetings or AGMs, and did not provide copies of balance sheets. They claimed this amounted to oppression and mismanagement.2. Direction for Appellants to Exit the Company:The Company Law Board directed the appellants to sell their shares to the respondents to resolve the impasse. The appellants challenged this, arguing that their shareholding was unfairly reduced from 33.33% to 15.87% due to the issuance of rights shares without their knowledge or consent.3. Alleged Oppression and Mismanagement:The appellants alleged that the respondents increased the company's share capital without following due process, violating Section 81(1A) of the Companies Act, 1956. They claimed the respondents issued rights shares to themselves and their associates, reducing the appellants' shareholding. The respondents countered that the share capital increase was necessary for the company's growth and was done following due process.4. Increase in Share Capital and Issuance of Rights Shares:The appellants argued that the issuance of rights shares was illegal as no resolution was passed under Section 81(1A) of the Act, and they were not given an opportunity to subscribe. The respondents contended that the rights shares were issued following due process and the requisite forms were filed with the ROC. The Company Law Board found that the appellants were aware of the rights issue and did not respond, raising the issue as an afterthought.5. Removal of Appellants from Directorship:The appellants challenged their removal from directorship, claiming they never resigned. The respondents argued that the appellants had orally resigned to facilitate a loan from Citi Bank, which required directors not to be defaulters. The Company Law Board found that the appellants voluntarily resigned and did not raise any complaints for years, indicating acceptance of their removal.6. Maintainability of the Appeal under Section 10-F:The respondents argued that the appeal raised only disputed questions of fact, which the Company Law Board is the final authority on. The court agreed, stating that an appeal under Section 10-F is permissible only on questions of law. The court found that the issues raised by the appellants were primarily questions of fact, and the findings of the Company Law Board were reasoned and plausible.Conclusion:The court dismissed the appeal, finding no merit in the appellants' arguments. The Company Law Board's findings on the issues of oppression, mismanagement, and the issuance of rights shares were upheld. The court emphasized that the appellants failed to raise timely objections and their claims appeared to be an afterthought. The decision to increase share capital and the removal of the appellants from directorship were found to be justified and in the company's best interest.