2016 (9) TMI 716 - HC - Companies Law

Court Overturns Board Removal & Share Allotment, Upholds Companies Act

The court found in favor of the petitioners, setting aside the removal of petitioners from the Board of Directors, the allotment of shares to respondent ... Oppression and mismanagement - allotment of shares to new additional directors appointed - Held that:- The act of appointing new additional directors by altering the articles of association of the company with the object of completely upsetting the control and management of the company's affairs constitutes an act of oppression. It is settled law that it is not open to the directors of a company to issue and allot shares in a manner by which an existing majority of shareholders are reduced to a minority. The court will scrutinize with particular circumspection any such issue or allotment and unless it is satisfied beyond reasonable doubt that such issue was unavoidable and was resorted to as an express and emergency measure with an object of fundamental importance, e.g., saving the existence of the company, it will not allow the existing balance of power in the company to be disturbed. In Dale & Carrington Invt. (P) Ltd. v. P.K. Prathapan reported [2004 (9) TMI 385 - SUPREME COURT OF INDIA ] their Lordships with regard to oppression held that if a member who holds the majority of shares in a company is being reduced to the position of minority shareholder in the company by mala fide act of the company or by its Board of Directors, such act must ordinarily be considered to be an act of oppression against the said shareholder and what relief should be granted would depend on the facts of the case. The facts of the present case at hand are almost akin to the case referred to above. Allotment of additional shares to the respondent Nos.3 and 4 was made with the objective to gain control by becoming a majority shareholder. The said allotment is not in the interest of the Company and no legal procedure prescribed in the articles of association was followed. The Company Law Board although held that the removal of the petitioner Nos.1 to 8 as directors under Section 284 of the Act was done in contravention of the provisions of the Companies Act, 1956 and also against the principle of legitimate expectation dismissed the company petition. The allotment is also in violation of Article 6B of the Articles of Association. In view thereof the appeal succeeds. The Board Resolution dated May 31, 2013 and consequent allotment of shares in favour of the respondent Nos.3 and 4 are set aside. The judgment dated May 9, 2016 is set aside. Issues Involved:1. Removal of petitioners from the Board of Directors.2. Allotment of shares to respondent No.3.3. Violation of Article 6B of the Articles of Association.4. Legitimacy of the Memorandum of Understanding (MOU) dated 1st June, 2010.5. Allegations of oppression and mismanagement under Sections 397 and 398 of the Companies Act, 1956.6. Financial management and infusion of funds by the respondent No.2.7. Allegations of suppression of material facts by the petitioners.Issue-wise Detailed Analysis:1. Removal of Petitioners from the Board of Directors:The petitioners, who were majority shareholders and founder directors, contested their removal from the Board of Directors. They argued that their removal was done without any notice or resolution, violating Section 284 of the Companies Act, 1956. The respondents claimed that the removal was in accordance with an MOU dated 1st June, 2010, which the petitioners denied executing. The court found that the removal was done in contravention of the Companies Act and principles of legitimate expectation.2. Allotment of Shares to Respondent No.3:The petitioners challenged the allotment of 5776 shares to respondent No.3, which increased the respondents' shareholding from 49.65% to 51%, reducing the petitioners to a minority. The respondents justified the allotment based on the MOU, claiming it was necessary to manage the company’s financial difficulties. The court held that the allotment was not in the company's interest, lacked proper notice to shareholders, and violated Article 6B of the Articles of Association.3. Violation of Article 6B of the Articles of Association:The petitioners argued that the removal of directors and share allotment violated Article 6B, which required specific procedures for such actions. The court agreed, noting that no resolution or proper notice was given, making the actions void.4. Legitimacy of the Memorandum of Understanding (MOU) dated 1st June, 2010:The respondents relied heavily on the MOU to justify their actions. The petitioners disputed its authenticity, claiming it was never given effect. The court found that there was no substantial evidence that the MOU was acted upon, as the financial obligations outlined in the MOU were not fulfilled by the respondents.5. Allegations of Oppression and Mismanagement under Sections 397 and 398 of the Companies Act, 1956:The petitioners alleged oppression and mismanagement, claiming the respondents colluded to change the shareholding and board composition unfairly. The court found merit in these allegations, noting that the actions were aimed at reducing the petitioners from majority to minority, which constituted oppression.6. Financial Management and Infusion of Funds by the Respondent No.2:The respondents claimed that they infused Rs. 45 lakhs into the company to manage financial difficulties, which was treated as share application money. The court noted that while the funds were utilized, they were repaid without interest, and there was no evidence of further financial contributions by the respondents, undermining their justification for share allotment.7. Allegations of Suppression of Material Facts by the Petitioners:The respondents accused the petitioners of suppressing the MOU and material facts. The court found that the petitioners did acknowledge the MOU but argued it was never acted upon. The court did not find sufficient grounds to dismiss the petition based on suppression of facts.Conclusion:The appeal was successful. The court set aside the Board Resolution dated May 31, 2013, and the consequent allotment of shares to respondent Nos.3 and 4, thereby restoring the petitioners' majority status. The judgment dated May 9, 2016, by the Company Law Board was also set aside.