COMPANIES ACT, 1956:Secs.397 and 398

Court :
SUPREME COURT

Brief :
COMPANIES ACT, 1956: ss. 397 and 398 - Allegations of oppression and mismanagement, illegal allotment of equity shares resulting in conversion of majority shareholding into minority shareholding, appointment of Additional Director and removal of two Directors - Company Law Board holding allotment of 5564 shares out of 9507 shares as illegal and giving benefit of doubt as regards allotment of 3943 shares as it was within the knowledge of petitioners, and holding appointment of Additional Director and removal of two Directors illegal and in favour of petitioners - Appeal by petitioners as regards allotment of 3943 shares - HELD: There being some factual controversies as regards petitioners ratifying the Balance Sheet and their representing before authorities including sales tax and income tax authorities, which clearly rule out the possibility of petitioners being unaware of the situation - Considering the nature of controversy it is not a fit case where any interference under Article 136 of the Constitution is called for - Constitution of India, 1950 - Article 136. Respondent no. 1-Company was incorporated as a private limited company in which shareholdings of the group led by appellant no. 1 was 50.9% and that of the group led by respondent no. 2 was 49.1%. The company purchased a sick unit from UPFC in the year 1985 alongwith its land admeasuring 7215 sq. yards in the Industrial Area of the city. Later the unit was closed. Thereafter disputes arose between the parties and the matter was referred for arbitration. Awards were given, but no steps were taken to make the awards rule of the court. On 20.8.1998 the respondent no. 2 group filed return before the Registrar of Companies showing about the allotment of 9507 equity shares of Rs.100/- each to have been made in their favour in the years 1994 and 1995. With the said allotment of shares shareholding of the appellant group came down to 13.4% and that of the respondent group rose to 86.6%. The appellant group filed a petition u/ss 397 and 398 of the Companies Act, 1956 before the Company Law Board alleging oppression and mismanagement on the part of respondent group for illegal allotment of 9507 equity shares, appointment of an Additional Director w.e.f. 20.10.1994 at the instance of respondent group and removal of two Directors of the appellant group from 16.9.1998. The Company Law Board held that the allotment of 5564 shares out of 9507 equity shares, was illegal and set aside the same. As regards the remaining 3943 shares, benefit of doubt was given to respondent group on the ground that this allotment was within the knowledge of the appellant group. The Board further declared appointment of Additional Director and removal of two Directors as illegal. Both the parties filed appeals, which were dismissed by the High Court. In the instant appeal, it was contended for the appellants that allotment of shares could only be done by the Board of Directors and there was no presumption in law of allotment of shares merely because of receipt of share application money; that by allotment of 3943 shares the appellants' majority shareholding from 50.9% was reduced to 23.5% and as such, the converting of majority shares to minority shares was a continuous oppression.

Citation :