2011 (6) TMI 666 - HC - Companies Law

Closely held company - deemed public company - deemed public limited company pursuant to section 43A of the Companies Act 1956 - free transferability of shares oppression of minority.

Summary

Issues Involved:
- Applicability of Section 111A to a private company that became a public company under Section 43A.
- Effect of the 2000 amendment on the status of companies that acquired public status under Section 43A.
- Validity of pre-emption rights in the Articles of Association of a public company.
- Allegations of oppression and mismanagement by majority shareholders.

Detailed Analysis:

1. Applicability of Section 111A to a Private Company that Became a Public Company under Section 43A:
The Court examined whether Section 111A, which deals with the free transferability of shares, applies to a private company that became a public company under Section 43A. The Court noted that Section 111A does not apply to a private company that became a public company under Section 43A, as clarified by Section 111(14). However, with the 2000 amendment, Section 43A ceased to apply, and thus, the company in question, Gharda Chemicals Ltd. (GCL), was considered a public company, making its shares freely transferable under Section 111A.

2. Effect of the 2000 Amendment on the Status of Companies that Acquired Public Status under Section 43A:
The Court discussed the implications of the 2000 amendment, which rendered Section 43A inapplicable except for sub-section (2A). The amendment aimed to abolish the concept of deemed public companies. The Court concluded that after the 2000 amendment, GCL, which had become a public company under Section 43A, continued to be a public company and could not revert to being a private company. The defeat of the special resolution to amend the Articles of Association to include clause (d) confirmed GCL's status as a public company.

3. Validity of Pre-emption Rights in the Articles of Association of a Public Company:
The Court examined whether the pre-emption rights in Article 57 of GCL's Articles of Association, which restricted the transfer of shares, were valid for a public company. The Court held that the statutory provisions, specifically Section 111A, providing for the free transferability of shares, override any contrary provisions in the Articles of Association. Therefore, Article 57, which imposed pre-emption rights, was not applicable to GCL as a public company.

4. Allegations of Oppression and Mismanagement by Majority Shareholders:
The appellants alleged various acts of oppression and mismanagement by the majority shareholders, including dividend squeezing and unjust enrichment. The Court noted that these allegations were similar to those raised in a previous company petition (No. 77 of 1990), which had been dismissed. The Court found no substantial proof to support the allegations of oppression and mismanagement. The appellants' withdrawal from the previous petition without seeking liberty to raise the issues again further weakened their case. The Court concluded that the appellants failed to make out a case for oppression of minority shareholders.

Conclusion:
The Court dismissed the appeal, holding that GCL is a public company with freely transferable shares under Section 111A. The pre-emption rights in the Articles of Association were not applicable, and the allegations of oppression and mismanagement were not substantiated. The interim order was continued for six weeks to allow the appellants to seek further legal recourse.