2016 (11) TMI 27 - SC - Companies Law

Supreme Court ruling on company shares issuance, board removal, and oppressive conduct

The Supreme Court found the company petition maintainable as the shares held by Sanwalka Group were not connected to forfeited shares. Bonus shares ... Oppression and mismanagement jurisdiction - mandatory notice of EOGM under statute - binding effect of articles as contract - use of revaluation reserve for issue of bonus shares - proportionate allotment of fresh shares and duty of fair play by Board - voting rights of preference shareholders limited by unpaid dividends - procedure for forfeiture of partly paid shares under articlesProcedure for forfeiture of partly paid shares under articles - binding effect of articles as contract - Maintainability of the company petition in the face of alleged forfeiture of shares and alleged failure to pay calls - HELD THAT: - The Court examined share certificates and the procedure prescribed by the Articles and concluded the shares allotted to the Sanwalka Group were fresh allotments in their own right and bore no stipulation of holding as beneficiaries. The Company failed to prove compliance with statutory procedure for call and forfeiture; the call notice of 5.1.1991 was not proved in terms of Section 53 and in any event did not specify forfeiture consequences as required by the Articles. A balance sheet cannot substitute for a call notice and the asserted forfeiture is not shown to have been effected in accordance with Articles 14-18. On these findings the petition is maintainable. [Paras 14, 15, 16, 17, 18]The company petition is maintainable; the asserted forfeiture on account of the call notice is not sustained.Use of revaluation reserve for issue of bonus shares - binding effect of articles as contract - Legality of the issue of bonus shares against revaluation reserve - HELD THAT: - Although the Act may permit utilization of certain reserves for bonus issues in appropriate cases, the Articles of this company do not empower the Directors to issue bonus shares from a revaluation reserve. Enabling provisions under the Act must be reflected in the Articles; action contrary to the Articles is ultra vires. Further, the Board resolution of 5.7.1994 indicated a sham purpose-revaluation to create fictional capital to benefit the Gupta Group-so the bonus issue cannot be sustained. [Paras 19, 20, 21]The issue of bonus shares was impermissible and liable to be set aside.Proportionate allotment of fresh shares and duty of fair play by Board - oppression and mismanagement jurisdiction - Legality of the issue and allotment of 25,000 new ordinary equity shares - HELD THAT: - The Board has wide power to issue fresh shares and such power is not confined to particular purposes; however, the exercise must observe fair play and proportionate distribution when the allotment affects the relative position of existing shareholders. The Company Law Board's direction, affirmed by the High Court and upheld by this Court, that allotment from the 25,000 shares should be made proportionately taking Sanwalka Group as members is consistent with these principles and does not call for interference. [Paras 22]The issue of 25,000 shares as such is not invalid, but allotment must be proportionate to the shareholding (as directed by the CLB).Oppression and mismanagement jurisdiction - Validity of removal of representatives of the Sanwalka Group from the Board and induction of Gupta Group members - HELD THAT: - The Company Law Board found, and the High Court and this Court agree, that the removal of two representatives of the Sanwalka Group was bad in the context of the other irregularities affecting shareholding and corporate control. Given the conclusions on maintainability and the improper conduct in relation to share issues and meetings, the re-induction ordered by the CLB is appropriate. [Paras 10, 22]The removals are invalid; the re-induction of the Sanwalka Group representatives is sustained.Oppression and mismanagement jurisdiction - mandatory notice of EOGM under statute - Legality of the lease agreement in respect of the industrial plot - HELD THAT: - The forums below left the matter open for determination at a General Meeting after adjusting shareholding as directed. Having disposed of the principal shareholding and allotment issues, the Supreme Court did not consider it necessary to decide the lease issue on merits and permitted the company to address it in an Extra Ordinary General Meeting in accordance with the revised shareholding. [Paras 10, 29]Lease issue left open for consideration in a General Meeting on the basis of revised shareholding (no further decision by this Court).Voting rights of preference shareholders limited by unpaid dividends - Legality of conversion of 3065 preference shares into equity shares - HELD THAT: - Section 87(2) restricts voting rights of preference shareholders except where dividends are in arrears for specified periods. The Board's resolution converting 3065 preference shares into equity purportedly on account of unpaid dividends lacked specification of period and amounts due, and emanated from a controlling group whose conduct was otherwise tainted. In these circumstances it is unsafe to rely on that conversion. The CLB and High Court had deferred certain aspects to proceedings pending in the Delhi High Court; this Court directed that the conversion be struck down and the preference shares reverted to their earlier status, subject to the orders of the Delhi High Court in the pending suit. [Paras 24, 25, 26, 27, 28]The conversion of the 3065 preference shares into equity is set aside and the preference shares are reverted to their earlier status, subject to the Delhi High Court's orders in the pending proceedings.Final Conclusion: The Supreme Court upheld the Company Law Board's and High Court's conclusions on maintainability, set aside the bonus issue, directed proportionate allotment from the 25,000 shares, sustained re-induction of the displaced directors, left the lease for determination in a General Meeting after adjustment of shareholding, and set aside conversion of 3065 preference shares into equity subject to the Delhi High Court's pending orders; the appeal by the Gupta Group is dismissed and the Sanwalka Group's appeal is disposed of in accordance with these directions. Issues Involved:1. Maintainability of the company petition filed by the Sanwalka Group before the Company Law Board.2. Legality of the issue of bonus shares by the company.3. Legality of the issue of 25,000 new ordinary shares.4. Legality of the removal of the representatives of the Sanwalka Group from the Board of Directors and the induction of the members of Gupta Group in their place.5. Legality of the lease agreement executed by the company in respect of the industrial plot.6. Legality of the issue of 3065 ordinary equity shares as against the preference shares.Issue-wise Detailed Analysis:1. Maintainability of the Company Petition:The Supreme Court examined the share certificates issued to the Sanwalka Group, concluding that the shares were held in their own right without any connection to the forfeited shares held by M/s. Gupta Brothers. The call notice dated 5.1.1991 was not proven to have been issued in accordance with Section 53 of the Companies Act. Additionally, the Articles of Association did not support the forfeiture claim, and the balance sheet could not substitute a call notice. Therefore, the company petition was maintainable.2. Legality of the Issue of Bonus Shares:The Court noted that the Articles of Association did not authorize the issuance of bonus shares from revaluation reserves. The resolution dated 5.7.1994, which purportedly aimed to raise funds, was deemed a sham as revaluation did not generate actual funds. The issuance of bonus shares was thus held to be impermissible.3. Legality of the Issue of 25,000 New Ordinary Shares:The Court observed that the notice for the E.O.G.M. dated 5.7.1994, which decided on the share capital increase, was not given to the Sanwalka Group. The issuance of 25,000 ordinary shares without fair and proportionate distribution was contrary to fair play principles. The direction by the Company Law Board to proportionately allot these shares to the Sanwalka Group was upheld.4. Legality of the Removal of Representatives from the Board:The removal of the Sanwalka Group's representatives from the Board was found invalid as they were not given notice of the E.O.G.M. The decision to re-induct them was upheld.5. Legality of the Lease Agreement:The Company Law Board and the High Court left the determination of the lease agreement to an Extra Ordinary General Meeting. The Supreme Court did not find it necessary to address this issue further.6. Legality of the Issue of 3065 Ordinary Equity Shares:The conversion of 3065 preference shares into equity shares was struck down. The Court noted that the preference shares did not carry voting rights except under specific conditions, which were not met. The conversion was deemed unjust, and the preference shares were reverted to their original status, subject to the Delhi High Court's pending decision.Subsidiary Issues:The Supreme Court dismissed the argument that the High Court's failure to frame a substantial question of law invalidated its order. The conduct of the Gupta Group in managing the company was found oppressive, justifying the Company Law Board's intervention under Section 397/398 of the Act. The Court also noted that the facts demonstrated a series of oppressive actions, not just a single act.Conclusion:The appeal by the Gupta Group was dismissed, and the appeal by the Sanwalka Group was disposed of with directions as per the Supreme Court's order.