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CORPORATE LAWS
Company Law Update
[2015] 189 Comp Cas 38 (CLB)
[Before the Company Law Board – Mumbai
Bench]
Chandrakant Shankar Pathak vs. Indigo Hotels P.
Ltd and Others.
Conducting board meetings without
serving the proper notice or increase in
share capital, appointment and removal of
directors and allotment of shares, where
powers are used by the majority merely for
an extraneous purpose like maintenance or
acquisition of control over the affairs of the
company cannot be upheld.
Brief facts
The present petition has been filed under
section 397 and 398 of the Companies Act,
1956. The petition is for the act of oppression
and mis-management carried out by the
respondents.
Petitioner along with the respondent No. 2
(“R2”) had acquired the entire share capital
of the Indigo Hotels P. Ltd. (“Co”), having
properties at Panchgani for a certain amounts
from other respondents. The share capital was
in to class. Class A, Class B. Class A share has
10 vote and Class B share has only 1 vote.
ML-445
Besides the payment for shares, they have
also paid debts of the Co. to its directors and
certain repairs and maintenance of the hotel.
The petitioner and R2 had agreed to acquire
equal number of shares for which other
respondents who were original shareholders
had executed the power of attorney in the
favour of petitioner and R2 to carry out the
transactions.
R2 pursued petitioner to buy 50% of Class A
shares as it has voting power of 10 and thus
indirectly it has total voting power of 40%.
Petition had agreed to it in a good faith.
It was also agreed as follows.
a.
Shareholding of the Co. will not change
and that shares shall not be alienated
transferred or disposed-of unless same
is first offered to the petitioner.
b.
All the directors shall be from family
members of petitioner and R2.
The charges made by the petitioner are as
follows.
a.
R2 has refused to transfer the Class
A shares as agreed in favour of the
petitioner, even though from first
day he has paid full amount of
consideration as agreed.
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b.
In the annual return of the Co., only
part of shares were shown as owned by
the petitioner.
c.
Illegal appointments of directors
without following procedure.
d.
Increasing authorised share capital
without proper notice to the petitioner.
e.
Transfer of shares and alteration of
Articles of Association without valid
and proper notice to the petitioner.
f.
Siphoning and misuse of funds.
g.
Removal of petitioner as director
through extraordinary general meeting
when trial was going on.
h.
Denial of
documents.
taking
inspection
a.
On transfer of shares, CLB after
verifying the documents has concluded
that certain shares, which R2 and other
claims as theft and were transferred
by way of forgery in fact actually
transferred. The signature on transfer
deed is original and that filing FIR after
one year is nothing but after thought.
CLB also observed the huge amount
paid to the Company by petitioner and
which as per respondents claimed as
secured loan to the company is nothing
but payment made by the petitioner
for the consideration for purchase of
shares.
b.
On balance shares, which petitioner has
claimed that same is being held by R2 is
trust is not proved as nothing on record.
c.
On the appointment of additional
directors on the Board, CLB observed
that same is null and void as no notice
were given, petitioner has been shown
as absent in the said board meetings,
no proof of dispatch of notices to
petitioner has been shown on record.
CLB held that holding board meeting
without complying the requirements of
section 286 of the Act, the resolutions
passed at the board meeting without
issuing valid notice is invalid. CLB has
referred the judgments in (1) Mst. L. M.
S. Ummu Saleema vs. B. B. Gujral MANU/
SC/0072/1981; [1981] 3 SCR 67. (2) M. S.
Madhusoodhanan vs. Kerala Kaumudi P.
Ltd. [2003] 117 Comp Cas 19 (SC); MANU
/ SC / 0553/2003 (3) Dankha Devi Agarwal
vs. Tara Properties P. Ltd [2006] 133 Comp
Cas 236 (SC), where Supreme Court has
held that a decision taken in a meeting
without due notice of such meeting for
of
In their reply R2 and others had filed their
response as follows.
a.
Petitioner
has
not
paid
full
consideration amount as he claims.
b.
He is only a nominee on behalf of R2
and thus some shares were transferred
to him.
c.
He has committed fraud and forgery
and theft of some of the shares which
were owned by other respondents and
for which FIR was filed.
d.
Other charges against the petitioner
for act of misconduct on the part of
petitioner.
Judgments and reasoning
CLB has allowed the petition. It has
concluded that the series of acts of oppression
and mismanagement alleged by the petitioner
are burdensome, harsh, and inequitable and
demonstrated the misconduct and lack of
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probity on the part of the respondents. CLB
has also looked at each and every relief
sought by the petitioner and granted the same
as mentioned below.
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(SC) (2) Needle Industries (India) Ltd. vs.
Needle Industries Newey (India) Holding
Ltd. [ 1981] 51 Comp Cas 743 (SC); [1981]
3 SCC 333 and (3) Hogg vs. Cramphorn
Ltd.; [1967] 37 Comp Cas 157 (Ch D);
were referred. Thus, CLB has concluded
that principle deduced from these cases
is that when powers are used merely for
an extraneous purpose like maintenance
or acquisition of control over the
affairs of the company, same cannot be
upheld.
removal or induction would be instance
of oppression and mismanagement.
(4) Zora Singh vs. Amrik Singh Hayer
[2009] 149 Comp Cas 328 (P & H), it
has been held that when the receipt of
all the notices were denied then mere
production of such certificates do not
satisfy the requirement of law.
d.
On the appointments of some more
additional directors, petitioner has
proved that the notice of board meeting
where the above additional directors
were appointed was dispatched after
the date of board meeting. It also
observed that immediately upon receipt
of notice, petitioner has sent a letter
objecting such appointments. Thus
CLB, has also set aside the another
appointment of additional directors.
e.
On increase of authorised capital,
alteration of AoA and removal of
petitioner as director in EGM, CLB has
perused the letter sent by petitioner
to the respondents on non-receipt of
notice of board meetings and alleged
EGM and appointment of various acts
of oppression mentioned therein. CLB
also observed that no proof of dispatch
of notice to the petitioner was shown by
the respondents.
f.
CLB also set aside the issue and
allotment of additional shares by
respondents to themselves as no proper
notice was served on petitioner and that
no shares were offered to the petitioner
as existing shareholders as required by
the AoA thereby playing a fraud on
petitioner. The judgments in the case
of Dale and Carrington Invt. P. Ltd vs. P.
K. Prathapan [2004] 122 Comp Cas 161
g.
On removal of petitioner as director,
CLB has observed that all due process
as required under section 284 read
with section 173 were followed.
However, CLB has questioned that
whether petitioner was subject to such
oppressive act as retaliation by the
respondents on filing this petition.
CLB also questioned whether the
respondents by misusing their
predominant position on the basis of
unfounded allegations have removed
petitioner as director. CLB also
observed that Bench has restrained the
respondents to do so in spite of that
petitioner is removed, which is an act
of oppression CLB has directed the
Co. to reinstate the petitioner and file
necessary forms.
h.
CLB has appointed a special auditor
for the verifying company’s accounts
for mismanagement. If any loss
incurred, should be recovered from
respondents.
i.
If, petitioner wishes to part with the
company, he after receiving fair value
may transfer the shares.
High expectations are the key to everything.
ML-447
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