2025 (6) TMI 1188 - HC - Companies Law

Oppression and Mismanagement - Entitlement to nominate one director on the Board of the Company - date of acquisition of 1/3rd shares of the Company - denial of prayer for representation on the Board of the Company - analysis of Section 397 read with Section 402 of the Companies Act 1956 by the CLB and its effect on the question of alleged oppression. Whether the CLB in the impugned order rendered perverse findings with regard to the changes / deletions / modifications made in the register of share transfers by holding that the same did not amount to manipulation of the records and that the same did not amount to fraud while holding against Aasia Properties? - Whether the CLB was justified in holding against Aasia Properties i.e. the original petitioner to come to a conclusion that it became 1/3rd shareholder in the Company only on 28.01.1983 solely on the basis of the dates mentioned in the share certificates ignoring the alleged manipulations made in the register of share transfers in the records of the Company? - Whether the impugned order passed by the CLB suffers from perversity while rendering a finding that Aasia Properties became a shareholder of the Company only on 28.01.1983 without specifically finding that the entries made in the register dated 30.08.1982 were null and void? - HELD THAT - The party that approaches the Court (in this case the CLB ) is required to stand on its own legs and to produce positive evidence about assertions made in the petition. Even if the allegations of alleged manipulation are to be taken into consideration that by itself cannot be treated as positive evidence for demonstrating the date on which the shares were transferred in favour of Aasia Properties to become 1/3rd shareholder in the Company. Under the aforementioned provisions of the Companies Act a share certificate assumes vital importance and it is statutorily recognized as prima facie evidence of title in shares. In the present case the share certificates that crucially bear the stamp of the ROC show the date 28.01.1983 - The CLB correctly relied upon the said document to hold against Aasia Properties on its claim of having become 1/3rd shareholder prior in point of time i.e. 30.08.1982. The primary and the basic documents in this case i.e. the share certificates demonstrated that it was on 28.01.1983 that Aasia Properties became 1/3rd shareholder of the Company. The CLB also correctly came to the conclusion that the share certificates under Section 84 of the Companies Act have precedence over Section 164 thereof for the reason that the register of members is in control of the Company and it can be susceptible to manipulation. The Supreme Court in the case of Mannalal Khetan and others vs. Kedar Nath Khetan and others 1976 (11) TMI 135 - SUPREME COURT found that unless a proper instrument of transfer duly stamped in terms of Section 108 of the Companies Act is produced no entry recording transfer of shares can be made in the register. Emphasis was placed on the words shall not register to hold that the same are of mandatory character. Rahejas are justified in relying upon the said position of law to contend that Aasia Properties in the present case failed to justify its claim of having become 1/3rd shareholder of the Company on 30.08.1982. Therefore questions A B and C are answered against Aasia Properties. Interpretation and effect of Article 38 of the Articles of Association relating to right of pre-emption of purchasing the shares - Whether the CLB committed an error in applying Article 38 of the Articles of Association pertaining to the right of pre-emption while holding that the transfer of shares by the Shah Group in favour of the B. Raheja Group was not hit by the said Article? - Whether the CLB erred in holding that even though the Raheja Group had not given their consent in writing for the transfer of shares made subsequent to 28.01.1983 Article 38 of the Articles of Association could not be applied to hold in favour of Aasia Properties? - Whether the CLB was justified in holding that it would be a fruitless exercise to consider violation of Article 38 of the Articles of Association as regards transfer of shares post 28.01.1983 as the Raheja Group in any case held 2/3rd shares thereby misinterpreting Article 38 and in the alternative failing to give effect to the same in accordance with law? - HELD THAT - The right of pre-emption would arise only if 2/3rd shareholders do not approve of transfer of shares to third party. In other words in a situation where 2/3rd shareholders do approve such proposed transfer of shares there is no question of the right of pre-emption being exercised - Since this Court has already come to a conclusion hereinabove that the finding rendered by the CLB is correct to the effect that Aasia Properties became 1/3rd shareholder only on 28.01.1983 there is no question of applying the right of pre-emption under Article 38 of the Articles of Association to the transfer of 1/3rd shares by the Shah Group to the B. Raheja Group on 15.01.1983. At that point in time Aasia Properties was not even a shareholder and therefore there was no question of it having any right of pre-emption in the matter. On a plain reading of the Article 38 this Court is unable to agree with the aforesaid contention raised on behalf of Aasia Properties. In this context the contention raised on behalf of Rahejas appears to be justified that when a restriction is specified in an Article it must be read strictly and in the case of any ambiguity it must be construed in favour of the shareholder who is desirous of making the transfer - There is also substance in the approach adopted by the CLB that even if express consent of 2/3rd shareholders was not manifested by the material on record the entire exercise would be fruitless for the reason that Raheja Group admittedly had 2/3rd shareholding in the Company. It is also of no consequence for Aasia Properties to contend that if the transfers made subsequent to 28.01.1983 are to be set aside by applying Article 38 of the Articles of Association such shares would automatically stand transferred to Aasia Properties. This is because even if the contention raised on behalf of Aasia Properties on the interpretation of application of Article 38 of the Articles of Association is to be accepted the transferred shares would revert back to the transferors. The CLB correctly came to the conclusion that the exercise insisted upon by Aasia Properties on the basis of its interpretation of Article 38 of the Articles of Association would be a fruitless exercise. In that light the questions are also answered against Aasia Properties and in favour of Rahejas. Whether the CLB was justified in holding that once oppression is established while exercising jurisdiction under Section 397 of the Companies Act the winding up of the Company on just and equitable grounds is automatic and the CLB is only required to form an opinion that such winding up would not be in the interest of the company / shareholders in the teeth of the settled position of law laid down by the Supreme Court? - Whether the CLB correctly applied the ratio of judgements of the Supreme Court in the cases of Shanti Prasad Jain Vs. Kalinga Tubes Limited 1965 (1) TMI 17 - SUPREME COURT Needle Industries (India) Limited Vs. Needle Industries Newey (I) Holding Limited and others 1981 (5) TMI 89 - SUPREME COURT Sangramsinh P. Gaekwad Vs. Shantadevi P. Gaekwad (dead) through LRs 2005 (1) TMI 409 - SUPREME COURT Kamal Kumar Dutta Vs. Ruby General Hospital Limited 2006 (8) TMI 313 - SUPREME COURT and Hanuman Prasad Bagri and others Vs. Bagress Cereals Private Limited and others 2001 (3) TMI 931 - SUPREME COURT ? - Whether the original petitioner i.e. Aasia Properties is justified in contending that even if the requirements of Section 397 of the Companies Act are not satisfied and although powers under Section 402 thereof cannot be exercised the CLB can still exercise power beyond the scope of the said provisions for doing justice between the parties? - HELD THAT - A bare perusal of Section 397 of the Companies Act indeed shows that twin requirements are to be satisfied before the CLB could exercise power under the said provision. The first requirement is for the CLB to come to a conclusion under Section 397(2)(a) of the Companies Act to the effect that the affairs of the company are conducted in a manner prejudicial to public interest or in a manner oppressive to any member / members. The second requirement under Section 397(2)(b) is for the CLB to reach a conclusion that the facts justify issuing an order of winding up on the ground that it is just and equitable that the Company be wound up but for the fact that winding up of the Company would unfairly prejudice such member - a perusal of the impugned order passed by the CLB shows that upon an analysis of Section 397 of the Companies Act that once oppression is established the winding up on just and equitable grounds would be automatic and that the CLB is only required to form an opinion that such winding up would not be in the interest of the company / shareholders. This Court is of the opinion that the aforesaid finding rendered by the CLB is unsustainable in the light of the settled position of law. Even if much emphasis is placed on behalf of Aasia Properties on paragraph 172 of the judgement of the Supreme Court in Needle Industries (India) Ltd. and others vs. Needle Industries Newey (India) Holding Ltd. and others and paragraph 199 of Sangramsinh P. Gaekwad vs. Shantadevi P. Gaekwad (dead) through LRs wherein the Supreme Court has indicated that the Court would always have the power to do substantial justice between the parties observations made in other portions of the said judgements cannot be ignored. Thus it becomes evident that the requirements of Section 397 of the Companies Act are indeed required to be satisfied for the CLB in the instant case to have exercised jurisdiction even if of wide amplitude considering Section 402 of the Companies Act. It cannot be disputed that a Court or an authority which is created by a Statute can exercise power limited to the scope provided under that Statute itself. Such a Court or authority cannot exercise powers beyond the provisions of such a Statute. In that sense it is evident that the CLB in the present case assumed jurisdiction to entertain and pass orders on the company petition filed by Aasia Properties invoking jurisdiction under Section 397 of the Companies Act only upon Aasia Properties satisfying the twin requirement indicated under the said provision. Upon failure to satisfy the said requirements the CLB would have no power or authority to pass an order. Even if it was to be held that such power could be exercised it would necessarily have to be justified by the facts of the individual case. It cannot be said that the party that approaches the CLB invoking jurisdiction under Section 397 of the Companies Act and seeking even wide-ranging reliefs under Section 402 thereof is absolved of the burden of satisfying the statutory provisions to claim the relief which was not even claimed in the petition filed before the CLB. Therefore this Court is unable to agree with the finding rendered by the CLB in paragraph 30 of the impugned order. Whether the CLB was justified in directing that Aasia Properties had right to nominate a non-functional director on the Board of the Company despite holding that it had failed to make out the case of any oral understanding of right to nominate a director on the Board? - HELD THAT - There is no dispute about the fact that at least from 1989 onwards if not earlier Aasia Properties were aware that 1/3rd shares of the Shah Group had been transferred to the B. Raheja Group and that according to the Company Ashok Hinduja was no longer the director of the Company. Aasia Properties was holding 1/3rd shares and it continued to do so. It is undisputed that rights shares were always offered to it ensuring that 1/3rd shareholding of Aasia Properties was and is maintained throughout. It is a matter of record and so found by the CLB that whenever Aasia Properties demanded documents and inspection the same was indeed granted by the Company. These factors indicate that Aasia Properties essentially played the role of an investor in the Company. The hotel run by the Company has been doing excellent business and there is no dispute that Aasia Properties as 1/3rd shareholder is enjoying benefit of such business. Therefore the fact that Aasia Properties approached the CLB 23 years after the first alleged trigger point of the cause of action or at least 17 years after gaining knowledge about transfer of 1/3rd shares by the Shah Group to the B. Raheja Group and the claim of the Company that Ashok Hinduja was no longer the Director shows that there was indeed delay on the part of Aasia Properties to claim any relief and this would clearly be a relevant factor even if equities were to be considered. But the CLB ignored all these factors and proceeded on equitable considerations to hold in paragraph 29 of the impugned order that in the light of the long association of Aasia Properties as 1/3rd shareholder and it being an investor denial of equitable right to have a nominee on the Board was an act of oppression. The CLB compounded the error by holding in paragraph 30 that once oppression was established winding up on just and equitable grounds was automatic and thereupon granted the impugned declaration of the right of Aasia Properties to have its nominee as a non-functional director on the Board of the Company. The said approach adopted by the CLB is found to be unsustainable and hence it is liable to be set aside. This Court is of the opinion that the impugned direction issued by the CLB granting limited relief to Aasia Properties cannot be justified on the ground that being the 1/3rd shareholder it has the right at least to be an observer and to be a non-functional director on the Board of the Company. When Aasia Properties failed to succeed in its stated case before the CLB and in the absence of any such provision in the Articles of Association of the Company there was no basis for the CLB to have issued such a direction. The said direction on facts and on law is unsustainable and hence deserves to be set aside. Question J is accordingly answered against Aasia Properties and in favour of Rahejas. Whether the petition filed by the original petitioner Aasia Properties before the CLB was hit by limitation? - HELD THAT - The CLB has rendered findings in favour of Aasia Properties in the impugned order. Rahejas have challenged the same again on the ground that if the trigger point for the cause of action occurred in the year 1981-82 or at least in the year 1989 filing of the company petition in September 2005 was barred by limitation. But the CLB has taken into account the assertions made on behalf of Aasia Properties with regard to the inspection provided in the year 2004 when it became aware about the alleged manipulations in the record giving cause of action for approaching the CLB. Since the allegation of oppression of minority shareholder was a ground taken before the CLB and Aasia Properties made specific assertions with regard to the material being available in the year 2004 showing continuous oppression and hence the need to approach the CLB this Court is of the opinion that the finding rendered by the CLB in that regard does not deserve any interference. Hence the question is answered by holding that the original petition filed by Aasia Properties before the CLB cannot be said to be hit by limitation. Conclusion - i) The CLB s findings that Aasia Properties became a shareholder on 28.01.1983 and that alleged record manipulations did not amount to fraud were upheld. ii) The CLB s interpretation and application of Article 38 were affirmed rejecting Aasia Properties claims on pre-emption rights. iii) The CLB s erroneous holding that winding up on just and equitable grounds is automatic upon oppression was set aside. iv) The CLB s direction granting Aasia Properties the right to nominate a non-functional director was set aside as unsupported by law and facts. v) The petition was held not barred by limitation. This Court is of the opinion that the impugned order deserves to be set aside to the limited extent of the direction issued in favour of Aasia Properties on the basis of a declaration that it had a right to nominate a non-functional director on the Board of the Company. - Appeal disposed off.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court in these appeals arising under Section 10F of the Companies Act, 1956, challenging the order of the Company Law Board (CLB), include:

A. Whether the CLB erred in holding that alleged changes, deletions, and modifications in the register of share transfers did not amount to manipulation or fraud against Aasia Properties.

B. Whether the CLB was justified in concluding that Aasia Properties became a 1/3rd shareholder only on 28.01.1983 based on share certificates, ignoring alleged record manipulations.

C. Whether the CLB's finding that Aasia Properties became shareholder on 28.01.1983 without declaring the earlier register entries null and void was perverse.

D. Whether the CLB erred in applying Article 38 of the Articles of Association regarding pre-emption rights, particularly in relation to the transfer of shares by the Shah Group to the B. Raheja Group.

E. Whether the CLB was correct in holding that lack of written consent by the Raheja Group for transfers post-28.01.1983 did not invoke Article 38 in favor of Aasia Properties.

F. Whether the CLB misinterpreted Article 38 and wrongly held that setting aside transfers post-28.01.1983 would be a fruitless exercise.

G. Whether the CLB erred in holding that once oppression is established under Section 397, winding up on just and equitable grounds is automatic, requiring only an opinion that winding up would not be in the company's interest.

H. Whether the CLB correctly applied Supreme Court precedents on the jurisdiction and powers under Sections 397 and 402 of the Companies Act.

I. Whether the CLB can exercise powers beyond Sections 397 and 402 to do substantial justice even if statutory requirements are not satisfied.

J. Whether the CLB was justified in directing that Aasia Properties had the right to nominate a non-functional director on the Board despite rejecting its claim of any oral understanding for such right.

K. Whether the petition filed by Aasia Properties before the CLB was barred by limitation.

2. ISSUE-WISE DETAILED ANALYSIS

Issues A, B, and C: Alleged Manipulation of Company Records and Date of Share Acquisition

The CLB found discrepancies in the company's registers but held that these did not constitute manipulation or fraud sufficient to establish Aasia Properties' claim of acquiring 1/3rd shares on 30.08.1982. Instead, reliance was placed on share certificates dated 28.01.1983, which under Section 84 of the Companies Act are prima facie evidence of title to shares. Section 108 requires that transfers be registered only upon production of a duly stamped and executed instrument of transfer, and Section 164 makes the register of members prima facie evidence of matters therein.

Aasia Properties alleged extensive tampering with registers, overwriting, deletions, and additions to mask the true date of share acquisition. However, the CLB and this Court found that such discrepancies, while indicating poor record-keeping, did not amount to positive evidence to rebut the statutory presumption under Section 84. The share certificates stamped by the Registrar of Companies were decisive, showing the acquisition date as 28.01.1983. The Court emphasized that the burden lies on the petitioner to produce cogent proof, which Aasia Properties failed to discharge.

Further, the Court noted that Aasia Properties could not explain the discrepancy between the share certificate date and the alleged earlier acquisition date. The CLB's approach was consistent with the Supreme Court's ruling that no transfer can be registered without a proper instrument of transfer. Therefore, the CLB's findings were not perverse but legally sound.

Issues D, E, and F: Interpretation and Application of Article 38 (Right of Pre-emption)

Article 38 of the Articles of Association stipulates that shares may be transferred to a third party only with the approval of holders of not less than two-thirds of the issued share capital, and existing members have a right of pre-emption to purchase shares at face value before transfer to outsiders.

The Court held that since Aasia Properties was found to have become a shareholder only on 28.01.1983, it had no right of pre-emption in the Shah Group's transfer of shares to the B. Raheja Group on 15.01.1983. Thus, the claim that such transfer was illegal under Article 38 failed.

Regarding transfers post-28.01.1983, the Court rejected Aasia Properties' contention that the transferor's shares should be excluded from the calculation of the two-thirds approval threshold. The Court held that the plain language of Article 38 includes all shareholders, including the transferor, in the two-thirds calculation. This interpretation aligns with Supreme Court precedent emphasizing strict construction of share transfer restrictions in favor of free transferability.

The Court also agreed with the CLB that even if transfers post-28.01.1983 were invalid for lack of consent, the shares would revert to the transferors (Raheja Group), not to Aasia Properties, negating any increase in its shareholding. The Court found the reliance on a Supreme Court case concerning immovable property inapposite, as the facts and legal context differ significantly.

Therefore, the CLB's interpretation and application of Article 38 were correct, and the relief sought by Aasia Properties on this ground was rejected.

Issues G, H, and I: Jurisdiction and Powers of CLB under Sections 397 and 402

Section 397(2) requires the CLB to be satisfied of two conditions before exercising its powers: (a) that the company's affairs are conducted in a manner oppressive to members, and (b) that winding up the company would unfairly prejudice such members, but otherwise just and equitable grounds for winding up exist.

The CLB erred in holding that once oppression is established, winding up on just and equitable grounds is automatic, requiring only that the CLB form an opinion that winding up would not be in the company's interest. This misinterprets the statutory requirement that both conditions must be satisfied cumulatively.

Supreme Court precedents clarify that the CLB's jurisdiction under Sections 397 and 402 is conditional upon satisfaction of these twin requirements. The Court emphasized that the CLB cannot exercise powers beyond those conferred by statute.

Aasia Properties argued that even if statutory requirements are not met, the CLB retains broad powers to do substantial justice between parties. While the Court acknowledged that the CLB has wide powers under Section 402 to pass orders "as it thinks fit" to end oppression or mismanagement, such powers are exercisable only within the scope of Section 397's requirements.

The Court rejected Aasia Properties' reading of precedents that purportedly allow the CLB to act beyond statutory limits, holding that such interpretations take portions of judgements out of context. The power to do substantial justice is not unfettered and must be exercised within the statute's framework.

Issue J: Right to Nominate a Non-Functional Director on the Board

The CLB directed that Aasia Properties was entitled to nominate one non-functional director on the Company's Board on equitable grounds, despite rejecting its claim of any oral understanding or arrangement granting such right.

The Court found this approach erroneous. The CLB had correctly concluded that no legitimate expectation or oral agreement existed. Further, the delay by Aasia Properties in asserting any such right-being aware since at least 1989 that Ashok Hinduja was no longer a director and that share transfers had occurred-defeats any equitable claim.

The Court held that granting such a direction without basis in the Articles of Association or statutory provisions is unsustainable. The relief granted was effectively an invented form of oppression not pleaded or proven. The Court set aside the direction for nomination of a non-functional director as unsupported by law and facts.

Issue K: Limitation

Rahejas contended that the petition was barred by limitation, as the cause of action arose in the early 1980s or at least by 1989, but the petition was filed only in 2005.

The CLB found that the cause of action arose only when full records became available to Aasia Properties in 2004, revealing alleged manipulations and oppression, and that oppressive acts were continuous. The Court upheld this finding, holding that the petition was not barred by limitation.

3. SIGNIFICANT HOLDINGS

"The share certificates, that crucially bear the stamp of the ROC, show the date '28.01.1983'. This is a positive piece of evidence to ascertain the date on which Aasia Properties acquired the shares to become 1/3rd shareholder in the Company."

"The use of the word 'and' between clauses (a) and (b) of Section 397(2) of the Companies Act itself makes it abundantly clear that both the clauses must be satisfied before the CLB can invoke power under the said provision."

"The CLB is required to render findings on both the clauses by application of mind to the material in each individual case. There is no question of clause (b) being automatically satisfied upon the requirement of clause (a) being satisfied."

"The CLB... proceeded on the basis of 'equitable considerations'. This approach of the CLB is erroneous... delay itself would defeat equity."

"The relief granted by the CLB directing that Aasia Properties had the right to nominate a non-functional director on the Board of the Company is unsustainable and hence deserves to be set aside."

"The petition filed by Aasia Properties before the CLB cannot be said to be hit by limitation."

Core principles established include:

• Prima facie evidence of share ownership is established by share certificates bearing the Registrar's stamp, which cannot be displaced without cogent evidence.
• The right of pre-emption under Articles of Association is triggered only if two-thirds of shareholders do not approve a transfer; transferors are included in the two-thirds calculation.
• The CLB's jurisdiction under Section 397 requires satisfaction of both oppression and just and equitable grounds for winding up; neither condition alone suffices.
• The CLB cannot exercise powers beyond those conferred by statute, even in pursuit of substantial justice.
• Equitable reliefs cannot be granted where delay and acquiescence defeat equity.
• Claims of oral understandings for board representation must be supported by evidence and cannot be invented after long delay.
• Continuous oppression and discovery of manipulated records can extend limitation periods.

Final determinations:

• The CLB's findings that Aasia Properties became a shareholder on 28.01.1983 and that alleged record manipulations did not amount to fraud were upheld.
• The CLB's interpretation and application of Article 38 were affirmed, rejecting Aasia Properties' claims on pre-emption rights.
• The CLB's erroneous holding that winding up on just and equitable grounds is automatic upon oppression was set aside.
• The CLB's direction granting Aasia Properties the right to nominate a non-functional director was set aside as unsupported by law and facts.
• The petition was held not barred by limitation.
• Accordingly, Appeal No.6 of 2006 was allowed and Appeal No.11 of 2006 was dismissed, confirming the CLB's findings against Aasia Properties except for the relief of board nomination.