TMI Blog2009 (8) TMI 698X X X X Extracts X X X X X X X X Extracts X X X X ..... ction is issued to allot 100 number each of equity shares of the value of ₹ 1,000 per share, fully paid-up, in terms of relief No. 1 as claimed before the Company Law Board. Appeal allowed. - COMPANY APPEAL NO. 12 OF 2005 - - - Dated:- 12-8-2009 - D.V. SHYLENDRA KUMAR AND ARAVIND KUMAR, JJ. A. Murali for the Appellant. Vivek Holla, Patil and Nettar for the Respondent. JUDGMENT D.V. Shylendra Kumar, J. - This appeal under section 10F of the Companies Act, 1956 (for short the Act ) by the persons who were petitioners in Company Petition No. 51 of 1996, on the file of the Company Law Board, Principal Bench, Chennai, who had presented the petition under sections 397 and 398 of the Act seeking for the relief in respect of the acts and oppressions complained against the management and majority shareholders of M/s. MSP Plantations (P.) Ltd., Bangalore, as the petition came to be dismissed in terms of the impugned order - Vijayan Rajes v. M.S.P. Plantations (P.) Ltd. [1999] 95 Comp. Cas. 482 (CLB) and being aggrieved by the dismissal of the petition. 2. It is urged in the memorandum of appeal that the Company Law Board has not taken into consi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtually carried on the business of the company; that the second appellant is the wife of the first appellant and both of them held equity shares of 100 numbers each, the face value of which is Rs. 1,000 in the first respondent-company. 5. The authorised share capital of the first respondent-company, if the company had an authorised share capital, was Rs. 50 lakhs, comprising of 2,500, 4 per cent cumulative preference shares of Rs. 1,000 each and 2,500 equity shares of Rs. 1,000 each. The promoters of the company, i.e., respondent Nos. 2 and 3 had subscribed 10 equity shares each. It appears, later the second respondent had subscribed a further 250 equity shares and the first appellant was allotted 100 equity shares, the face value of which was Rs. 1,000 as per the resolution dated 21-6-1987 and the second appellant, with whom the first appellant was married in September 1987, was allotted 100 equity shares of Rs. 1,000 each as per the resolution of the board meeting held on 25-1-1988. 6. It is further averred before the Company Law Board and before this Court that as a measure of tax planning, out of the 460 subscribed equity shares, as many as 455 equity shares were conv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Civil Judge, Bangalore City (CCH 15) and also that it was not in conformity with the provisions of the Act and also not in consonance with the articles of association of the company. 9. It is the version of the appellants that the background to such resolution dated 20-12-1995, was the discovery of several acts of mismanagement of the affairs of the company by the second respondent and the second respondent being called upon to explain his conduct, particularly in misusing the funds of the company, by making investment of the company in other private companies at his sole discretion and acting in a manner prejudicial to the interests of the company by taking decisions regarding diversion of the funds of the company, totally unilaterally and not taking the board of management into confidence. 10. It is also the version of the appellants that the conduct and action on the part of the respondents was only to eliminate the appellants from the membership of the company; that it was only a prelude for further highhanded and oppressive activities on the part of respondent Nos. 2 and 3, constituting majority shareholders of the company; that the further meeting dated 9-3-1996, of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nies belonging to the company which have been invested by him or jointly with respondent Nos. 3 and 4 holding themselves out as directors in any company or concern. 12. The respondents resisted the petition filed invoking sections 397 and 398 of the Act, and had contended that the averments are all false and untenable and without any merit and was only to be dismissed. It had been averred in the statement of objections filed by the second respondent, who alone contested the petition, that the company petition is nothing but a wavered action of an ungrateful and disobedient son; that the second respondent had acted all along in accordance with the provisions of the Act in managing the affairs of the company; that the second respondent had to remove the first appellant from the directorship of the company, as he had failed in proper supervision and taking care of the affairs of the company; that the first appellant was more interested in indulging in petty, frivolous litigation with his father second respondent than to ventilate any legitimate grievance or for seeking any relief tenable in law; that the company petition was a result of misadventure of an ill-advised, arrogant, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g not shareholders of the company on the date of presentation of the company petition; that even in the process of redemption of preference shares as per the resolution of the board of management of the company dated 9-3-1996, there being no violation of the provisions of the Act, the petitioners in any view of the matter were not entitled to maintain the petition being not members of the company in any capacity on the date of presentation of the company petition; that the resolution of the majority shareholders of the company at its general body meeting cannot be made the subject-matter for invalidation before the Company Law Board by filing a petition under sections 397 and 398 of the Act; that the board resolution dated 9-3-1996, had not been in any way shown to be bad in law by the petitioners; that even the contention that by the so-called redemption of preference shares as per the resolution dated 9-3-1996, is not valid in law, as the company would have been left with only one shareholder and, therefore, the company could not have been continued in law, was not tenable fectually, as in terms of the very resolution of even date, the board of management had decided to allot 255 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... impugned order is totally a perverse order; that the Company Law Board has not adverted its attention to the issues raised by the petitioners and the grounds urged in support of the petition; that the Company Law Board has totally misapplied the legal principle and the judgments which were not attracted to the facts of the present case; that the decision of the Company Law Board while is not based on the material on record and the Company Law Board has also not applied the relevant law to the petition and the material; that it is also vitiated being influenced by irrelevant considerations such as the Company Law Board being of the view that the first petitioner-appellant was more interested in getting the property of the company through the second respondent rather than ventilating any bona fide rights of minority shareholders by the oppressive conduct of the majority shareholders; that the Company Law Board has totally given a go-by to the actual relief sought for by the petitioners and has paid attention to discussion with reference to which no relief was sought for by the petitioners by unnecessarily making reference to any property of the company; that the relief claimed was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any petition should have been allowed. 17. It is also pointed out by Sri Murali, learned counsel for the appellants-petitioners that the significance of the resolution of the company while converting the equity shareholding of its shareholders, i.e., shareholding of the appellants-petitioners and respondent Nos. 2 and 3 into equal number of preference shares (455) with all the shareholders having voting rights on par with the equity shareholder, viz., M/s. MSP Investment Co., with shareholding of five shares, which had been transferred from the shareholding of the second respondent prior to the resolution, as being lost sight of by the Company Law Board and the Board has committed a grave error in proceeding under the premise that the appellants-petitioners had only the rights of preference shareholders as understood under the Act and nothing more. 18. It is also the submission of learned counsel for the appellants-petitioners that the acts of mismanagement and oppression in terms of sections 397 and 398 of the Act can exist and can be made good, notwithstanding the company adhering to the statutory provisions and the requirements of law; that it involved more to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ession and mismanagement and only after being satisfied that neither exists, having dismissed the petition, there is no merit in this appeal and that in fact neither any mismanagement nor any oppression; that the facts prevailing in the case never supported the contention of the appellants that the company was a family concern and that from the inception of the company, neither of the petitioners were on the scene; that the company itself was started with an outsider of the family, namely, the third respondent and the second respondent and, therefore, there is no question of treating the company either as a family concern or applying the principles of partnership firm to examine the conduct and affairs of the company. 21. It is also pointed out that the provisions of section 397 can be invoked only when the petitioners are able to make good that the situation as developed is to inevitably lead to winding up the company and if so done, it would unfairly be prejudicial to the complaining members and not otherwise; that the appellants-petitioners have never made good the case that the situation fully justified for passing an order for winding up of the company, as it was just and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the appeal cannot succeed. It is also pointed out that the complaint of the appellants-petitioners was not of any single incident but it is a series of acts involving removal of the first appellant from the directorship, induction of third party and third respondent as directors, uneven way of treating appellants vis-a-vis respondent Nos. 2 and 3 at the time of redemption of preference shares while only respondent Nos. 2 and 3 were allotted equal number of equity shares, same treatment being denied to the appellants-petitioners and, therefore, it is not as though the complaint is of any single incident but as against a scheme and series of acts on the part of the respondents, particularly second respondent. 25. The next submission of Sri Murali, learned counsel for the appellants-petitioners is that the Act does not provide for conversion of equity shares into preference shares and if it is to be the case of reduction of share capital, it is only through the process of section 100(2) of the Act and at any rate the conversion of equity shares in the year 1992 being only for claiming some tax benefits and not for altering the status of the members, as the same members continue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alidity of the redemption process and as a consequence the petitioners being no more members thereafter, i.e., on and after March 9,1996, they ceased to be members and, therefore, a petition presented under section 399 of the Act was held not maintainable at the instance of the petitioners. 32. The reasoning given by the Company Law Board does not appeal to us. If the finding is to be that the persons presenting the petition do not qualify for presenting a petition under section 399 of the Act, no further question arises and the petition was to be dismissed at the threshold. But the Company Law Board has viewed the working of the section 399 of the Act in the converse way, which is not a proper understanding of the provisions of section 399. But, on authority, it has been established that for the purpose of examining as to whether the petitioning members qualify for maintaining a petition under section 399 of the Act, the question to be looked into is as to whether the petitioners constitute the requisite number of members or they had the requisite shareholding in the company prior to the acts complained of. If the date of presentation of the petition should be looked into in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs merits acceptance. 35. The manner in which almost the entire equity shareholding of the company was converted into preference shares in the year 1992, except for the five shares, which had been transferred to a limited company, in which the second respondent has substantial interest and control, from out of the holdings of the second respondent and even thereafter, the preference shares nevertheless having voting rights, only indicates that the so-called conversion of equity shares into preference shares was not the real intention and in this regard, Sri Murali, learned counsel for the appellants, is also right in submitting that the Act does not provide for such a conversion and actually it is only the preference shareholders who managed the affairs of the company even subsequent to the year 1992. The company did not treat preference shareholders as is understood under the provisions of the Act, but only on par with the equity shareholders and, therefore, selective redemption of some part of the preference shares without reconverting the rest into equity shares as in the case of the appellants-petitioners and acting otherwise in the case of respondent Nos. 2 and 3, defini ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act followed by a resolution of the reconstituted board to redeem all preference shares and for the very purpose allotting equity shares of an equal number in favour of only two of the preference shareholders and utilising the very amount for redeeming the shareholding of the petitioners, all necessarily leading to an inference that the transaction are being used as a device to throw out the appellants-petitioners from the membership of the company. To constitute an act of oppression, the question is not so much as to whether the affairs of the company are being conducted in consonance with the provisions of the Act or not, but even while so doing, the power and advantage of holding majority shares in the company is used by the majority shareholders for the purpose of causing prejudice to the minority shareholders. 38. From the sequence of events about which the appellants had complained in their petition before the Company Law Board, it is obvious that the origin of the development leading to the ouster of the appellants from the membership of the company was when the appellants, particularly the first appellant, as a director of the company, objected to the manner in whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany, is a series of actions with the sole object of removing the appellants from the membership of the company and, therefore, in a situation of this nature, the requirement of the provisions of section 397 of the Act, particularly the act of oppression being examined only in the context of a situation where it is inevitable to wind up the company, but so ordering the winding up of the company, adds to the disadvantage of the minority shareholders is precisely not attracted and the act of oppression being in turn linked to the act of mismanagement. If the act of mismanagement when once has been made good, the petition could not have been thrown out as one either not maintainable under section 399 of the Act or on the premise that the series of acts of redeeming preference shares and allotting further equity shares in favour of respondent Nos. 2 and 3 is in no way in violation of the statutory provisions under sections 80 and 81 of the Act. 40. While the provisions of section 80 may not even be attracted, as in the first instance, no preference shares as such had been issued by the company, but the preference shares were only as a result of conversion of earlier equity shareh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was only due to the difference between the first appellant and the second respondent-son and father duo-ironically due to internal family relationship between these two persons being strained and leading to difference due to the entry of third respondent to the family of the second respondent. 43. Be that as it may, if the entire set of circumstances are to be examined on the touchstone of statutory provisions of sections 397 and 398 of the Act, we are of the clear view that the petitioners had made out not only a case of oppression in terms of section 397 of the Act but also a case of mismanagement in terms of section 398 of the Act, particularly with the second respondent acting unilaterally in managing the events of the company and at the moment noticing a complaint of the first appellant-son, action adverse to the interest of the appellants-petitioners having been taken. In the circumstance, we are of the view that the authorities relied upon by Sri Vivek Holla, learned counsel for the respondents while do not advance the case of the respondents does not nor lend support to the order passed by the Company Law Board. 44. We are of the clear view that in the present facts ..... X X X X Extracts X X X X X X X X Extracts X X X X
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