2007 (11) TMI 716 - Board - Companies Law

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Company Law Board in this petition under Sections 397 and 398 of the Companies Act, 1956, are as follows:

Whether the allotment of additional shares by the respondent company to certain shareholders and their family members, allegedly without notice to the petitioner and without offering shares to existing shareholders, was illegal and resulted in reduction of the petitioner's shareholding from approximately 16.33% to about 8%, and subsequently to less than 1%;
Whether the petitioner's removal from directorship of the respondent company was lawful, particularly considering the alleged absence of notice of board meetings and the petitioner's non-attendance;
Whether the oral and written family settlement (Memorandum of Understanding or MOU) entered into between the brothers, which included swapping of cross-holdings and exclusive management of companies by two sets of brothers, was valid and binding, and whether the petitioner's failure to act upon or disclose the MOU affects his rights under the Companies Act;
Whether the petitioner has come to the court with clean hands, considering allegations of concealment of material facts, delay in filing the petition, and financial mismanagement in the petitioner-controlled company;
Whether the alleged fabrication of company records and forged board resolutions by the respondents occurred, and if so, the legal consequences thereof;
Whether the valuation and merger of a partnership firm ("Emmbros Exports") with the respondent company, and the issuance of shares therefor, was conducted fairly and legally;
Whether the petition is maintainable in view of estoppel, waiver, acquiescence, and delay;
Whether the petitioner is entitled to relief under Sections 397 and 398 of the Companies Act, 1956, including restoration of shareholding and directorship, or removal of respondents from management.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Legality of Share Allotments and Reduction of Petitioner's Shareholding

The legal framework includes the Companies Act, 1956, particularly provisions relating to share allotments and rights of shareholders, as well as the Articles of Association (AOA) of the respondent company. Clause 5 of the AOA empowers directors to allot shares at their discretion. Section 81(1A), which restricts allotment without offering shares to existing shareholders, was held inapplicable to private companies.

The respondents argued that the share allotments on 29.2.2000 and 24.4.2000 were made with the full knowledge, consent, and acquiescence of the petitioner, pursuant to an oral understanding among the brothers, later reduced to the MOU dated 7.10.2001. The petitioner had inspected the Registrar of Companies (ROC) records on 8.5.2000 and did not object for over four years. The allotments were also justified as necessary for the company's growth and expansion, supported by board meeting minutes dated 20.1.2000.

The petitioner contended that the allotments were made without notice and without offering shares to existing shareholders, thereby illegally diluting his shareholding. He also challenged the allotment of 51,50,000 shares on 1.10.2005 during the pendency of the petition, alleging no consideration was paid and that the shares were issued to respondents and their wives, reducing his holding to less than 1%. He further argued that the valuation of goodwill of the partnership firm used as consideration was unfair and detrimental.

The Court noted that the petitioner's failure to object to allotments for a prolonged period, his prior disproportionate allotment in his own company (EWSL), and the existence of the family settlement (MOU) which contemplated share swapping, indicated acquiescence. The respondents' reliance on the AOA and the inapplicability of Section 81(1A) to private companies was accepted. The petitioner's challenge to the 1.10.2005 allotment was undermined by his delay and failure to raise timely objections.

Competing arguments concerning fairness and legality were evaluated in light of the petitioner's conduct and documentary evidence. The Court found that the allotments were not illegal per se and were made with the petitioner's knowledge and consent, negating claims of illegality or oppression.

Issue 2: Removal of Petitioner as Director

Section 283(1)(g) of the Companies Act, 1956, provides for vacation of office by a director who absents himself from three consecutive board meetings without leave. The respondents submitted minutes of board meetings dated 20.1.2000, 24.2.2000, and 1.4.2000, which the petitioner did not attend, leading to vacation of office on 24.4.2000. Notices of meetings were allegedly delivered by hand, consistent with the familial proximity of directors.

The petitioner argued that no notice was given and that some board meeting minutes (notably of 24.2.2000) were fabricated, as no such meeting was held. He alleged forgery and lack of proper procedure, asserting that the removal was without his knowledge or consent.

The Court observed that the petitioner was aware of his removal by the time he inspected ROC records in May 2000. The absence from meetings was voluntary, and the company followed established practice for notice delivery. The petitioner's failure to attend meetings and his knowledge of removal undermined his challenge. Allegations of forgery were not substantiated with particulars or documentary evidence and were thus disregarded.

The Court concluded that removal was lawful under Section 283(1)(g), and the petitioner had acquiesced to it.

Issue 3: Validity and Effect of the Family Settlement (MOU)

The MOU dated 7.10.2001 recorded an earlier oral understanding among the six brothers that each company would be exclusively managed by two brothers, and cross shareholdings would be swapped without consideration. The petitioner did not swap shares, unlike other brothers. The respondents contended that the MOU was binding and that the petitioner's failure to disclose it to the Company Law Board and the Punjab & Haryana High Court amounted to concealment of material facts.

The petitioner denied the existence or enforceability of the MOU, pointing to contradictory actions by respondents, including a public notice asserting his lack of rights in EWSL, and statements in court filings indicating the MOU was not acted upon. He also highlighted unfulfilled terms and inconsistent conduct by respondents.

The Court recognized that family settlements are governed by principles of equity aimed at preserving harmony and avoiding litigation. It emphasized that such settlements must be honestly made and acted upon. The Court found that the MOU reflected the parties' conduct post-1997 and that the petitioner had knowledge and acquiesced to the arrangements, including share swapping by others. The petitioner's concealment of the MOU and delay in challenging transactions that were consistent with it undermined his case.

Though the petitioner argued that the MOU could not restrict his statutory rights under Sections 397 and 398, the Court held that the petitioner's conduct, including delay and concealment, barred him from invoking those provisions to challenge settled family arrangements.

Issue 4: Petitioner's Conduct, Clean Hands Doctrine, Delay, and Laches

The Court applied settled legal principles requiring a petitioner seeking equitable relief under Sections 397 and 398 to come with clean hands. It relied on precedents holding that concealment of material facts, delay, and acquiescence constitute bars to relief.

The petitioner delayed filing the petition by over four years after knowledge of allotments and removal from directorship. No plea for condonation of delay was made. The petitioner also failed to disclose the MOU and was found to have financial mismanagement issues in his own company, including diversion of funds and sickness of the company controlled by him.

The Court found that the petitioner's conduct amounted to abuse of the process of the Company Law Board and that he was estopped from challenging past transactions to which he had consented or acquiesced. The principles of waiver, estoppel, and acquiescence were applied to dismiss the petition on maintainability grounds.

Issue 5: Allegations of Fabrication of Records and Forgery

The petitioner alleged that certain board meeting minutes, particularly of 24.2.2000, and company records were fabricated to oust him and consolidate shareholding. The respondents denied these allegations and produced original records.

The Court noted the petitioner failed to provide particulars or documentary evidence to substantiate forgery claims. The alleged fabricated resolutions were contradicted by other board minutes and documents. The Court declined to accept bald allegations without proof and dismissed these claims.

Issue 6: Valuation and Merger of Partnership Firm with the Respondent Company

The respondents admitted issuing 51,50,000 equity shares on 1.10.2005 as consideration for merger of the partnership firm "Emmbros Exports" and valuation of goodwill at Rs. 475 lacs. The petitioner challenged this as unfair enrichment of respondents and detrimental to other shareholders.

The Court observed that the petitioner delayed raising objections to this allotment until the company proposed an IPO, suggesting an attempt to extract money through litigation. The valuation and merger were admitted in the draft prospectus and were not challenged timely. The Court did not find sufficient grounds to invalidate the allotment or merger based on the record.

Issue 7: Maintainability of the Petition

Considering the above issues, the Court found the petition not maintainable on multiple grounds:

The petitioner failed to come with clean hands, having concealed the MOU and delayed filing;
The petitioner acquiesced to allotments and removal from directorship;
The petitioner's challenge related to past and concluded transactions;
Principles of estoppel, waiver, and acquiescence barred relief;
The petitioner did not seek restoration as director, indicating incomplete relief;
Preliminary objections raised by respondents were upheld, consistent with earlier orders in related petitions involving the same parties and facts.

3. SIGNIFICANT HOLDINGS

The Court held:

"The petitioner seeking equitable relief must come with clean hands and good conduct, failing which the petitioner would constitute a gross abuse of the process of Court, and the petitioner is not entitled for any relief under Sections 397 and 398."
"The allotments, swapping, vacation of office was with the full knowledge, consent/acquiescence of the petitioner who cannot challenge past and concluded transactions. The principles of estoppel, waiver and acquiescence also apply in this case."
"Family settlements are governed by a special equity and are to be enforced if honestly made... The Court leans heavily in favour of family arrangements."
"The petition is not maintainable. I find no justification to consider the arguments on merits. The petition is hereby dismissed."

Core principles established include the necessity for petitioners invoking Sections 397 and 398 to approach the Court with clean hands, the binding effect of family settlements where parties have acquiesced, the applicability of estoppel and waiver to bar belated challenges to share allotments and directorship changes, and the non-applicability of certain statutory provisions (e.g., Section 81(1A)) to private companies.

Final determinations were that the petition was dismissed on maintainability grounds without adjudicating merits, the petitioner was estopped from challenging allotments and removal, and the family settlement (MOU) was a significant factor in assessing the parties' rights and conduct.

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