TMI Blog2012 (7) TMI 33X X X X Extracts X X X X X X X X Extracts X X X X ..... ill the arrangement with the Agarwal group by which the Agarwal group was installed in the management ; but the Sarda group continued to hold the majority shares in the company - Agarwal group was to remain in the management of the company at the pleasure of the Sarda group - Agarwal group then to have taken advantage of its managerial position in the company to issue further shares unto itself and to denude the Sarda group of its majority control, was a grave act of oppression - CLB found as a matter of fact, that allotments were made without complying with legal requirements therefor and without notice to petitioners, allotments to be cancelled - A.P.O. NOS. 115 AND 116 OF 2010, A.C.O. NOS. 91, 92, 96 OF 2009 AND 118 OF 2011 - - - Dated:- 21-2-2012 - SANJIB BANERJEE, J. P.C. Sen, Ranjan Deb, Ms. Manju Bhuteria, Sabyasachi Chowdhury, Ravi Asopa and Debanshu Basak for the Appellant. S.N. Mookerjee, Ratnanko Banerji, Krishna Raj Thakker, Rujdrajit Sarkar and Saunak Mitra for the Respondent. JUDGMENT 1. The two appeals under section 10F of the Companies Act, 1956, arise out of the same order passed by the Company Law Board, Principal Bench ( Ratan Mohan Sarda v. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s making up slightly over 70 per cent of the then paid-up capital in the company. At the time of the transition in the management of the company early in 2004, the company's manufacturing facility for production of edible oil was in the process of being set up. In course of time, the company's factory has come up and the company appears to be faring reasonably well. 4. The petition was filed before the Company Law Board in the year 2007 with the principal grievance of the Sarda group being that by the issuance of 7,50,000 shares in the company in December, 2005, made without notice to the Sarda group, the Agarwal group had purported to wrest the shareholding control in the company. A further allotment of shares, made on or about February 14, 2006, was also assailed on the ground that an unsecured loan given to the company by a Sarda concern had been converted into shares in the company without notice to or the knowledge of the relevant Sarda concern. In course of the proceedings before the Company Law Board, it came to light that there was a further issue of 10,00,000 shares in the company that the Sarda group may not have previously been aware of and which the Agarwal group ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany being a public company, no resolution under section 81(1A) of the Act had been passed for the issuance of the first and third lots of shares which were under challenge ; that no meetings of the shareholders of the company had been convened for such purpose ; and, that it was not even the company's case that the shareholders' meetings were convened or appropriate resolutions were passed thereat. The Company Law Board, however, did not set aside the three impugned allotments but directed a shareholders' meeting to be convened by the company on the basis of the shareholding as in October, 2003. In the Company Law Board failing to set aside the three impugned allotments, it did not take into account a serious charge levelled by the petitioners before it that the third allotment of shares was made to an entity controlled by the Agarwal group against no fresh infusion of funds but in lieu of previous loans apparently made available to the company. 7. The Agarwal group suggests that it is not necessary that when the petitioners in proceedings under sections 397 and 398 of the Act succeed in making out a case of oppression or mismanagement that the entrenched management has to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the company and not otherwise. 9. There can be little doubt that proceedings under sections 397 and 398 of the Companies Act are for the benefit of a company. It is thus that an act of illegality may not be seen as an act of oppression or an act of mismanagement if the company's interest has been furthered by such act without it conferring any undue benefit to the persons responsible therefor. Conversely, a perfectly valid act may be found to be oppressive in the circumstances. In India, the right to complain of oppression or mismanagement has not been reserved to only minority shareholders. Though there was once a belief that in this jurisdiction that the majority shareholders should be given control of the company and the minority shareholders only adequate compensation, it is no longer regarded as the obvious form of a final order. Ordinarily, it would be the minority shareholders in the company who would complain of oppression or mismanagement since the majority shareholders can dislodge the management of a company by calling a shareholders' meeting and can, theoretically, have their grievance redressed without having to knock at the doors of any court or Tribunal. But wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have taken advantage of its managerial position in the company to issue further shares unto itself and to denude the Sarda group of its majority control, was a grave act of oppression. That the third allotment of shares was made not against the fresh infusion of capital into the company but by adjustment of loans previously made available to the company by an Agarwal group concern, would also amount to mismanagement. In such circumstances, the Sarda group had to be found to be utterly undeserving to be denied its say as the majority shareholders ; or, the Agarwal group had to be found to be so competent to manage the affairs of the company that its notorious transgressions could be glossed over. 11. The company's business does not involve rocket technology ; nor has the Agarwal group been able to pursuade the Company Law Board on facts that it had the requisite know-how or wherewithal, and the Sarda group did not, run and manage a company in the business of manufacture and sale of edible oil. It mattered little, in the circumstances, that some members of the Sarda group still remained disqualified from being directors of companies or that the shares in the company held by the S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en no justification for the Agarwal group seeking to infuse capital in the company without giving notice therefor to the petitioners or the larger Sarda group. It is possible in some cases that by bringing in further capital in the company, the management or the promoter group may consolidate its control over the company ; but that would be permissible if the consolidation was incidental to the infusion of capital and it would be frowned upon if consolidation was the object of the exercise and the infusion of capital was secondary thereto. In respect of the third allotment, the solitary allottee was Ambo Credit P. Ltd., the appellant in the second of the two appeals before this court. Following the allotment of shares in favour of Ambo Credit P. Ltd., the shareholding of the promoters' group in the company the Agarwal group-was shown to have risen from 52.39 per cent. to 68.24 per cent in the details filed by the management with the Registrar of Companies. That would mean that Ambo Credit P. Ltd., belonged to the Agarwal group. Ambo Credit P. Ltd., was allotted shares not against any payment made pursuant to the allotment but against the unsecured loan of Rs. 1 crore that had previ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company. Just as there is no material that the Agarwal group has been able to show to justify it being allowed to retain control of the company despite its wrongdoing, there is nothing indicated by the Company Law Board as to why the Agarwal group should be deprived of its say to the extent of its undisputed shareholding in the company. 15. The fundamental basis to the order passed by the Company Law Board cannot be questioned. It is evident that the Company Law Board wanted to have a management installed on the basis of the shareholding position as it prevailed prior to the three impugned allotments. But since the Company Law Board did not set aside the three impugned allotments pursuant to which the Agarwal group came to be the majority group in the company, the order passed by the Company Law Board required the two groups to exercise the option of selling out to the other upon a valuation of the shares being made. With respect, such an order is tailor-made for further disputes, both as to the exercise of the option and the valuation of the shares ; and the company and its management remains in virtual limbo till such time that the matters are sorted out by a second set of pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the general meeting is held in terms of this order, the company, its officers and all concerned will remain restrained from dealing with or disposing of or alienating or encumbering any of the assets of the company, except its finished goods in the usual course of business. ( vii ) Till the conclusion of the general meeting of the company to be held in terms of this order, the company, its officers and all concerned will remain restrained from repaying any money to any of the unsecured creditors of the company. ( viii ) Between now and the conclusion of the general meeting to be held in terms of this order, the company will not incur any unusual expense and will confine its expenses to payment of salary and wages and payments essential for continuing the business operations of the company. The particulars of all payments incurred by the company between now and the conclusion of the general meeting to be held in terms of this order, will be furnished by the company to M/s. I. C. Sancheti and Co., advocates, on a weekly basis with the first statement being delivered on February 28, 2012. ( ix ) The subsisting interim order, to the extent it is not repugnant to the direc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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