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2015 (3) TMI 1443 - HC - Companies LawOppression and Mismanagement - Validity of transfer of shares - section 397 398 of the Companies Act 1956 - Appointment of Mr. R.K. Malhotra as Managing Director - Cancellation of Builder s Agreements for office spaces LG 1 to LG 4 - Payment of rent by the Oriental Bank of Commerce for LG 1 to LG 4 and G 18 - Participation rights of the three groups on the Board of the Company. Validity of the Transfer of Shares to the Bharti Group - HELD THAT - Since the Bharti Group hold 1/3rd shares it is entitled to a proportionate representation. Admittedly since the very inception of its membership the Bharti Group has had proportionate representation. There are three groups the Bharti Group represented by Mr. S.K. Bharti the Malhotra Group represented by Shri R.K. Malhotra and the Gupta Group represented by Shri K.R. Gupta. Each one of the groups hold 1/3rd shares of the Company and since a long time each has had 1/3rd representation on the Board of the Company. In these circumstances the CLB cannot be said to have erred in directing that each group would be entitled to an equal participation on the board - As there are serious disputes in respect of the functioning of the Company and there is distrust amongst the three groups it would be in the interest of the Company and its shareholders that the Bank operation is carried out by at least two of the Directors. There is no thus infirmity in the CLB directing that the Bank operation shall be by two Directors jointly - the appeal by the Company is thus liable to be dismissed. Appointment of Mr. R.K. Malhotra as the Managing Director - Cancellation of Builder s Agreements for office spaces LG 1 to LG 4 - HELD THAT - The challenge raised by the Bharti Group to the CLB upholding the appointment of Mr. R.K. Malhotra as the Managing Director is not sustainable. The CLB has returned a finding of fact that effective from July 1997 Mr. S.K. Bharti ceased to be a functional Director and from March 1998 Mr. R.K. Malhotra had been a functional Director having complete control and management of the affairs of the Company. The CLB has noted that even without the designation of the Managing Director Mr. R.K. Malhotra had been discharging the functions of a Managing Director and has in these circumstances held that his designation as a MD with or without the knowledge and consent of the Bharti Group could not be considered as an act of oppression - there are no infirmity with the reasoning and finding of the CLB that as Mr. R.K. Malhotra had been acting as an MD and discharging all functions as Managing Director since March 1998 even without being so designated formally then his being so designated clearly does not amount to an act of oppression. The Company and the other Directors have not shown that any action has been taken against the other buyers whose names are reflected in the said statement. If the record qua the Bharti Group is not available then how is it possible that the records of the other buyers of the same period are available? The Bharti Group has been clearly singled out. The order of the CLB to this extent is clearly not sustainable - the action of the Company and the other Directors in cancelling the four Builder s agreements dated 15th June 1994 in respect of LG 1 to LG 4 of the Bharti Group being wrongful burdensome harsh and oppressive is liable to be set aside. Payment of rent by the Oriental Bank of Commerce for LG 1 to LG 4 and G 18 - HELD THAT - It is apparent that the Bank before the CLB made a statement on 30.08.2005 that it was willing to vacate the premises but the premises was not vacant on the said date the Bank had only expressed its willingness to vacate. There is a difference in willingness to vacate and actual vacation of the premises. The Bank has submitted that it actually vacated the premises on 21.11.2005. Though the Bank issued a legal notice to the parties offering to hand over the keys however the keys were not actually handed over. Both the Bharti Group and Company demanded the keys from the Bank. Faced with the conflicting demand the course of action for the Bank was to approach the CLB where the proceedings were pending offering to deposit the keys in court - since the Bank had prayed to this court by its reply dated 21.08.2008 to deposit the keys in Court the Bank would not be liable to pay any rental after the said date. As it was obligatory on the part of the Bank to approach the court for deposit of the keys in court similarly it was obligatory on the part of the Company and the Bharti Group to accept the prayer made by the Bank in its reply dated 21.08.2008 to deposit the keys in court. The Bank is thus liable to pay rent for the said premises comprising of LG 1 to LG 4 and G 18 till 21.01.2008. Seeking a restrain against the Company from passing any resolution as proposed in the notice dated 08.08.2014 - HELD THAT - As the admitted case of the Bharti Group is that there are three groups each holding 1/3rd shares of the Company and further it is on this very ground that the CLB has directed that Mr. S.K. Bharti shall continue as a Director on the board the Bharti Group cannot challenge the right of Mr. K.R. Gupta to continue on the board to represent his group which holds 1/3rd shares of the Company. Each of the three groups is entitled an equal participation on the Board of the Company. Mr. K.R. Gupta is thus entitled to be a Director on the board of the Company and further is also entitled to nominate in his place a Director on the board to represent his group in case for any reason he is not in a position to continue as a Director. The application are disposed off.
Issues Involved:
1. Validity of the transfer of shares to the Bharti Group. 2. Appointment of Mr. R.K. Malhotra as Managing Director. 3. Cancellation of Builder's Agreements for office spaces LG 1 to LG 4. 4. Payment of rent by the Oriental Bank of Commerce for LG 1 to LG 4 and G 18. 5. Participation rights of the three groups on the Board of the Company. Issue-wise Detailed Analysis: 1. Validity of the Transfer of Shares to the Bharti Group: The Company Law Board (CLB) determined that the Bharti Group's membership in the Company was improperly revoked. The Company had recognized the Bharti Group as shareholders for over 20 years. The cancellation of shares was based on photocopies of transfer instruments, which the Company did not possess in original. The High Court upheld the CLB's decision, finding the removal of the Bharti Group from membership to be malafide and oppressive. The Court emphasized that the transfer of shares in 1984 was duly recorded and recognized, and the Company could not challenge it after two decades without original documents. 2. Appointment of Mr. R.K. Malhotra as Managing Director: The Bharti Group's challenge to Mr. R.K. Malhotra's appointment as Managing Director was dismissed. The CLB found that Mr. Malhotra had been functioning as a Director with control over the Company's affairs since 1998, and his formal designation as Managing Director did not constitute oppression. The High Court agreed with the CLB's findings, noting that the designation did not alter the existing management dynamics. 3. Cancellation of Builder's Agreements for Office Spaces LG 1 to LG 4: The CLB's decision that the cancellation of the Builder's Agreements was a contractual matter not subject to Section 397 and 398 of the Companies Act was overturned by the High Court. The Court found the Company's action to revoke the agreements as oppressive, burdensome, and wrongful. The Bharti Group had been singled out, and the cancellation was not supported by any evidence of non-payment or misuse. The High Court held that the Bharti Group's rights to the spaces were valid and set aside the Company's cancellation action. 4. Payment of Rent by the Oriental Bank of Commerce for LG 1 to LG 4 and G 18: The High Court determined that the Oriental Bank of Commerce was liable to pay rent for LG 1 to LG 4 and G 18 until 21.01.2008. The Bank had deposited rent from 01.01.2004 to 30.11.2005, and the Court ordered it to pay the balance rent with interest from 01.12.2005 to 21.08.2008. The Court also directed the release of FDRs deposited with the Court to the respective parties and ordered the keys of the premises to be handed over to the rightful owners. 5. Participation Rights of the Three Groups on the Board of the Company: The High Court confirmed that each of the three groups, including the Bharti Group, is entitled to equal participation on the Company's Board. Mr. K.R. Gupta, representing one of the groups, was entitled to continue as a Director and nominate a representative if necessary. The Court emphasized the importance of maintaining fairness and transparency in the Company's operations, directing that banking operations require joint approval by two Directors, with regular updates provided to the third Director. Conclusion: The appeals were disposed of with no orders as to costs, affirming the CLB's directions regarding membership and banking operations, dismissing the challenge to Mr. Malhotra's appointment, setting aside the cancellation of Builder's Agreements, and directing the payment of rent by the Bank. The Court also ensured equal participation rights for all three groups on the Board.
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