2004 (1) TMI 381 - HC - Companies Law

Summary

Issues Involved:
1. Allegations of oppression and mismanagement under Sections 397 and 398 of the Companies Act, 1956.
2. Validity of the transfer of shares in respondent companies.
3. Election and constitution of the new Board of Directors.
4. Valuation and sale of shares.

Detailed Analysis:

1. Allegations of Oppression and Mismanagement:
The petitioners alleged that the transfer of shares in respondents 5 to 7 companies was fraudulent and without proper consideration, constituting oppression and mismanagement. They claimed that these shares were major assets of the Kanthimathy Company and were sold at a value prejudicial to the company's interests. The Company Law Board (CLB) initially ordered a status quo and later directed the convening of a general body meeting to elect five directors.

2. Validity of the Transfer of Shares:
The CLB found that the consideration paid by the second respondent for the shares did not represent their true value. It noted a lack of transparency in the transfer process, as there was no record of offers made to other members or invitations for offers from others. Consequently, the CLB set aside the transfer of shares, ordering the company to refund the consideration received and rectify the register of members accordingly.

3. Election and Constitution of the New Board of Directors:
The CLB directed the election of a new Board of Directors, which resulted in petitioners 1 to 5 being elected. The old Board, including the second appellant, ceased to function. The CLB advised the inclusion of the second appellant as a director, which was agreed upon. However, the new Board's constitution was challenged, leading to the appeal.

4. Valuation and Sale of Shares:
The CLB's decision to set aside the share transfer was based on the finding that the shares were sold at an undervalued price. The appellants argued that the decision to sell the shares was taken with legitimate business considerations and that the valuation certificates produced by the appellants were not properly considered by the CLB. The High Court noted that the CLB failed to consider relevant materials, such as balance sheets and profit and loss accounts, and did not appoint an independent chartered accountant for proper valuation.

Judgment:
The High Court found that the CLB misdirected itself on the question of law regarding the circumstances under which it could set aside the Board's decision. The High Court emphasized that the decision to sell the shares was taken when the second appellant was not a Board member and that there was no evidence of mismanagement or prejudice to the company during Sivaramkrishna Iyer's tenure as Chairman. The High Court concluded that the CLB should have appointed an independent chartered accountant for valuation before determining that the shares were undervalued. Consequently, the High Court set aside the CLB's decision to cancel the share transfer and remanded the matter to the CLB for reconsideration.

Conclusion:
The appeal was partly allowed, and the matter was remanded to the CLB to decide the question of share valuation and transfer afresh, considering all relevant materials and appointing an independent chartered accountant if necessary.