2010 (2) TMI 593 - HC - Companies Law

Whether once the acquisition of 2, 600 shares by the respondents group has been declared invalid whether the CLB is justified in directing the appellants to sell their shares to the respondents after valuation of shares by the valuer ? Held that - The specific finding of the CLB that allotment of 2, 600 shares by the respondents 2 and 3 for themselves as invalid has become final and no cross appeal has been filed by the respondents against the said finding we set aside the allotment of 2, 600 shares by the respondents 2 and 3 for themselves. The finding of the CLB that the only way by which the parting of ways between the groups could be effected is that the appellants should sell their shares to the respondents would also amount to conferring premium on the respondents and the same is accordingly set aside. Merely because the appellants are not agreeable to purchase the shares of the respondents at Rs. 325 per share as offered by the respondents that itself cannot be a ground to direct them to sell their shares as valued by the independent valuer for the reason that the appellants have rightly not agreed to purchase the shares of the respondents group at Rs. 325 per share as offered by respondents as they have to purchase not only 5, 800 shares held by the respondents group but also 2, 600 shares which were got allotted by respondents 2 and 3 for themselves. Therefore we remit the matter to the CLB for passing appropriate orders by giving an opportunity to both the parties with an option to purchase the shares of other group shareholders in the light of the share value fixed by the approved valuer at Rs. 285 per share or as offered and agreed by each party. Appeal allowed.

Issues Involved:
1. Validity of the allotment of 2,600 shares.
2. Allegations of oppression and mismanagement.
3. Equitable relief and valuation of shares.
4. Direction for one group to sell shares to the other group.

Detailed Analysis:

1. Validity of the Allotment of 2,600 Shares:
The appellants contended that the allotment of 2,600 shares to respondents 2 and 3 was done with mala fide intention to reduce the appellants' group from majority to minority. The Company Law Board (CLB) found that the allotment was made without notice to the first appellant, who was a director, and thus declared the decision taken in the Board meeting on 11th May 1997 invalid. The allotment was not based on the company's need for funds but was an adjustment of certain loans, indicating an intention to gain majority control. This finding was unchallenged by the respondents, making the allotment invalid.

2. Allegations of Oppression and Mismanagement:
The appellants alleged that the allotment was in total disregard of an agreement made in April 1996 to allot shares on a pro-rata basis. The respondents countered by accusing the appellants of embezzlement, fabrication of accounts, and illegal acquisition of shares. The CLB observed that the respondents should have initiated proceedings to invalidate the appellants' acquisition of shares if they believed it was unlawful, rather than allotting shares to themselves as a counteraction.

3. Equitable Relief and Valuation of Shares:
The CLB directed that the appellants should sell their shares to the respondents, who offered Rs. 325 per share. However, this offer was not acceptable to the appellants. The CLB then decided that the shares should be valued by an independent valuer, as provided under article 13 of the articles of association. The valuer determined the value of each share as Rs. 285.50. This valuation was intended to ensure no dispute regarding the price payable by the respondents to the appellants.

4. Direction for One Group to Sell Shares to the Other Group:
The CLB's decision to direct the appellants to sell their shares to the respondents was contested. The appellants argued that the CLB should have set aside the allotment of 2,600 shares without directing the sale of their shares. The High Court noted that directing the appellants to sell their shares to the respondents, who were found guilty of wrongful conduct, would be unjust. The court referred to similar judgments, emphasizing that equitable orders should be passed to protect the company's interest and not confer benefits on those guilty of misconduct.

Conclusion:
The High Court set aside the allotment of 2,600 shares to respondents 2 and 3 and the CLB's direction for the appellants to sell their shares to the respondents. The matter was remitted to the CLB to pass appropriate orders, giving both parties the option to purchase the shares of the other group at the value determined by the approved valuer or as agreed upon by the parties. The appeal was allowed with no order as to costs.

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