2006 (10) TMI 231 - HC - Companies Law

Issues Involved:
1. Whether the Company Law Board had objectively analyzed the evidence before arriving at its conclusion.
2. Whether the ingredients of section 397 of the Companies Act are attracted in the facts and circumstances of the case.
3. Whether the shares standing in the name of the first respondent belong to him or to the Hindu undivided family.
4. Relief to be granted.

Detailed Analysis:

Point No. 1: Objective Analysis by the Company Law Board
The appellant argued that the Company Law Board did not objectively analyze the evidence before it and made erroneous conclusions. The Board's decision on the non-co-option of a third director was criticized as it failed to recognize the second respondent's obstruction in appointing a new director. The second respondent's refusal to clear accumulated stocks and his unjustified objection to surrendering 100 KVA electricity were also highlighted. The Board's finding on the non-issuance of duplicate share certificates was challenged, asserting that the second respondent's non-cooperation was evident. The Board's conclusion on the non-redemption of preference shares was accepted, but it was argued that the second respondent's obstruction in sanctioning increments to staff was unjustified. The Board's overall finding of a deadlock due to animosity between the petitioner and the second respondent was upheld, recognizing the impossibility of their cooperation.

Point No. 2: Applicability of Sections 397 and 402 of the Companies Act
The Court discussed the applicability of sections 397 and 402, referencing precedents that support intervention in cases of deadlock and oppression, even if the company is profitable. The Court cited decisions like Eastern Linkers (P.) Ltd. v. Dina Nath Sodhi and Kilpest (P.) Ltd. v. Shekhar Mehra, which emphasize that family-run companies should be treated as partnerships for the purpose of these sections. The Court concluded that the deadlock and animosity between the father and son justified the application of section 402 to resolve the situation.

Point No. 3: Ownership of Shares
The ownership of shares standing in the name of the first respondent was contested. The appellant argued that the shares were held in his individual capacity, while the second respondent claimed they belonged to the Hindu undivided family. The Court acknowledged that the question of ownership is a serious factual issue, best resolved by a competent civil court. For the purpose of the current proceedings, the Court accepted the Company Law Board's prima facie finding that the shares belonged to the first respondent individually, allowing for immediate relief under the Companies Act.

Point No. 4: Relief
The Court upheld the Company Law Board's order for the second respondent to purchase the shares of the first respondent, with the valuation to be determined by a valuer. The Court provided a timeline for the purchase and allowed for alternative measures if the initial purchase failed. The Court also recorded the petitioner's willingness to deposit 50% of the sale proceeds in a fixed deposit in the High Court, ensuring protection of the second respondent's potential rights in the pending civil suit. The appeal was partly allowed, modifying the Company Law Board's order to ensure the smooth running of the company.

Conclusion:
The appeal was partly allowed, with modifications to the Company Law Board's order to ensure the smooth functioning of the company amidst the deadlock between the directors. The Court emphasized the need for immediate relief under the Companies Act while leaving the final determination of share ownership to the civil court.

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