2005 (12) TMI 289 - HC - Companies Law

Issues Involved:
1. Alleged fraudulent share allotment and rotation of funds.
2. Oppression and mismanagement under sections 397 and 398 of the Companies Act.
3. Validity and impact of the Memorandum of Understanding (MoU) dated March 11, 1995.
4. Bona fides of the appellant and respondent's conduct.
5. Equitable relief and rectification of the register of members.

Issue-Wise Detailed Analysis:

1. Alleged Fraudulent Share Allotment and Rotation of Funds:
The appellant claimed that the respondents fraudulently allotted shares worth Rs. 21 crores without actually remitting their part of the cash contribution towards the consideration for the shares. This was allegedly achieved by rotating Rs. 1 crore 21 times through cheques signed by Mr. S. P. Gupta. The Company Law Board found that the shares were allotted against the value of the land and not cash, and the appellant was aware of this arrangement. The Board directed respondent No. 2 to recover Rs. 21 crores paid to HJ Consultants either in cash or by property within nine months.

2. Oppression and Mismanagement Under Sections 397 and 398 of the Companies Act:
The appellant, holding 24.17% shares in respondent No. 1 company, claimed oppression by respondents Nos. 3 to 5, who allegedly allotted shares fraudulently to themselves and others. The Company Law Board found that the appellant did not come with clean hands and had acted prejudicially against the company's interest. The Board also noted that the appellant's primary motive was to recover its investment rather than addressing the alleged oppression or mismanagement.

3. Validity and Impact of the Memorandum of Understanding (MoU) Dated March 11, 1995:
The MoU outlined the financial contributions and responsibilities of both parties. The appellant was to invest Rs. 7 crores as share capital and Rs. 10 crores as a security deposit, while the promoters were to contribute Rs. 22 crores. The Company Law Board did not adequately consider the terms of the MoU, which was a fundamental error. The High Court noted that the Board's findings were flawed as they did not take into account the MoU's terms and impact, necessitating a fresh consideration of the dispute by the Company Law Board.

4. Bona Fides of the Appellant and Respondent's Conduct:
The Company Law Board found that the appellant's conduct was not bona fide, as it had taken steps to block and harm the project, even during the pendency of the proceedings and settlement process. The Board also noted that the appellant's withdrawal from the settlement was not bona fide, as evidenced by a resolution passed by the appellant-company.

5. Equitable Relief and Rectification of the Register of Members:
The appellant sought the cancellation of the allotment of shares and rectification of the register of members. The Company Law Board declined to grant equitable relief, noting that the appellant had disentitled itself by its prejudicial conduct against the company's interest. The Board also noted that granting the relief sought by the appellant would result in the appellant becoming the majority shareholder, which was deemed unjustified.

Conclusion:
The High Court set aside the Company Law Board's order dated June 13, 2001, and directed the Board to reconsider the entire dispute afresh, taking into account the MoU dated March 11, 1995. The Company Law Board was instructed to consider the pleas of both parties in light of the MoU and other transactions. The appeal was allowed, and the Company Law Board was directed to expedite the matter and decide it by June 30, 2006.

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