Oppression and mismanagement

COMPANY LAW BOARD BENCH NEW DLEHI Suresh Kumar Rungta v. Roadco (I) (P.) Ltd. SMT. VIMLA YADAV, MEMBER CP NO. 93 OF 2005 AUGUST 10, 2007 Section 397, read with section 398 of the Companies Act 1956 - Oppression and mismanagement - Whether for every petition under sections 397 and 398, maintainability has to be proved as per provisions of Act and principles of natural justice which guide CLB in exercise of its powers and discharge of its functions under Act or any other law - Held, yes - Petitioner holding 13.28 percent shares in respondent no. 1 company filed instant petition under section 397/398 alleging that conversion of respondent company into private Ltd. was done by other respondents by fraudulent means and falsification of records with out notice and consent of shareholders - It was seen from records that false information had been filed with statutory authorities by manipulation of notices to shareholder and directors - Respondents had resorted to falsification of records by antedating documents and statutory authorities had been duped by furnishing fabricated documents with malafide intention by manipulation of process of conversion - Whether aforesaid state of affairs not only revealed mismanagement in affairs of respondents company but also established act of oppression of minority as alleged by petitioner - Held, yes - Whether, therefore, conversion of respondent-company to a private limited company was to be set aside - Held, yes FACTS The petitioner holding 13.28 percent shares in the respondent-company filed instant petition under section 397/398 alleging certain acts of oppression and mismanagement in the affairs of the respondent no.1 company by the other respondents. It was alleged that the conversion of the respondent company into private Ltd. was done by fraudulent means and falsification of records without notice to and consent of the shareholders as prescribed by the provision of the Act. The respondents raised preliminary objections and argued that the instant petition was not maintainable as it was merely a counter blast to the disputes arising in another company petition wherein the respondent nos. 1 and 2 had filed a petition under sections 397, 398, 402 and 409 against the petitioner and his group companies for oppression and mismanagement and which was pending adjudication before the CLB. HELD It was true that there were several other company petitions pending with the CLB wherein the petitioner had been made a respondent. The proceedings in the company petitions were pending. This petition could not be dismissed on this ground that other proceedings were pending against the petitioner before the CLB, for every petition under sections 397 and 398, maintainability has to be proved as per provisions of Act and principles of natural justice which guide CLB in exercise of its powers and discharge of its functions under Act or any other law. As regards the Respondents’ preliminary objection that there was delay in agitating the issue and allotment of shares on 25-11-2001 which was challenged in the year 2005, it was noticed that merger scheme had been approved by the Rajasthan and Calcutta High Courts, the paid up capital of the company on the date of merger stands and the capital issued also could not be challenged, the petitioner had himself acquiesced to the share allotment in this regard and to that extent the prayer in the petition had already been given up whereby the respondents’ preliminary objection in respect of delay became infractuous. Hence, this preliminary objection also could not be entertained. [Para 23] Considering the oral and written arguments of the parties as well as the facts and circumstances of the case, the respondents not had been able to refute the petitioner’s allegation that the public limited company had been converted into a private limited company without following the due procedure as provided in the Act and the conversion had been done by antedating and fabricating the documents illegally and malafidely at the back of the petitioner who held 13.28 percent shares in the respondent No.1 company. The petitioner had also objected to the written arguments of the respondents as some of the arguments made in the written rejoinder were not made in the pleadings and oral arguments. It had been reiterated by the petitioner, that no mention much less an explanation was made by the respondents during oral arguments or even otherwise regarding the Petitioner’s case of illegal and malafide conversion of public limited company into a private limited company, even the respondents’ pleadings had not dealt with any of the submissions on behalf of the petitioner relating to the documents filed by the respondents. The petitioner’s contentions were found to be correct. The respondents had tried to make this a case of certain irregularities in conversion and it had been contended that irregularities per se be held to be oppressive in nature. It had been argued that how an act of conversion of the company from a public limited company to a private limited company could be held to be oppressive rather the rights of a member/shareholder in a private company were better protected than in a public company and moreover the rights of shareholders in transferring the shares in a private company were restricted and also there was a restriction on a number of members beyond 50. Respondents’ contention was not correct in view of the specific instances given by the petitioner pointing out the antedating and fabrication of the documents with regard to the conversion of the public limited company to a private limited company. The petitioner’s contention in that regard remained uncontroverted. The respondents had avoided the issue by reiterating their contentions on the maintainability of the petition and making reliance on the fact of amalgamation scheme of group companies of the petitioner and the respondents. The allegations made by the petitioner were factually correct. As per the respondents the meeting and the resolution for conversion of respondent No. 1 company from a public limited company to a private limited company was made on 23-8-2004. The petitioner had contended that no notice, explanatory statement, proxy forms, etc. were issued for holding any meeting of the shareholder of the respondent No.1 company on 23-8-2004 and in fact no meeting was held and the entire exercise was only a paper action by the respondents which the petitioner had proved by the documents furnished by the respondents. As pointed out above the explanatory statement was dated 13-7-2005 whereas the meeting was allegedly held on 23-8-2004. Further, the explanatory statement should have accompanied the notice for the meeting on 23-8-2004. The notice was also dated 13-7-2005 and in the explanatory statement there was no explanation for conversion of a company from a public limited company to a private limited company. Furthermore, the resolution passed at the alleged meeting dated 23-8-2004 filed by the respondents was for change of the name of the company and for addition of the word ‘private’ to the name but the resolution was dated 10-8-2005 which was one month after the date of the notice and the explanatory statement dated 13-7-2005 which was two months prior to the filing of the instant petition obviously proved the petitioner’s case that the meeting was antedated. According to the respondents, the respondent No.1 was changed from public limited company to a private limited company after the alleged meeting of 23-8-2004. But, as pointed out by the petitioner, it was noticed that the notice of the meeting was given by the respondent No.1 as a private limited company and similar was the position regarding UPCs which showed receipt as private limited company. Same was the situation regarding the proxy forms wherein the letterhead of the proxy form showed the respondent company as ‘R’ (India) Private Ltd.” even before conversion. This was proved by one P’s proxy form stating that he was a member of ‘R’ (India) Pvt. Ltd” and that he was appointing a proxy for the EGM of the company to be held on 23-8-2004. Similar proxy forms with identical averments and letterhead of private limited company were filed by the respondents in respect of ‘L’ and ‘R’. Their affidavits were totally contrary to the documents filed by the respondents themselves. Furthermore, the discrepancies in the annual return filed by the company had also not been satisfactorily explained by the respondents. While antedating the documents the respondents lost track of the fact that on the date of filing the annual return ‘D’ was still shown as a member whereas UPC receipt showed ‘S’ his successor after his death. Similar was the situation regarding the number of members. The annual return on 28-7-2004 showed a list of 35 members and the alleged meeting for conversion of the company from a public limited company to a private limited company was allegedly held on 23-8-2004. The UPC list was of 42 members. The respondents showed all 35 members to be present in the meeting in person without realizing that out of these 35 members one had died during 1999-2000 and he could not have attended the alleged meeting of 23-8-2004. However, the respondents had themselves admitted that only 15 members attended the alleged meeting. All these contradictions proved that the declaration filed before the Central Government showing all 35 members present in the meeting was completely false and misleading. This defeated the mandate of the proviso to section 31(1). The meeting was allegedly held on 23-8-2004 but the notice and the explanatory statement as admitted by the respondents were dated 13-7-2005 which was subsequent to the holding of the meeting. The explanatory statement did not mention the change in the name of the company. These were not mere irregularities. In the instant case, it was not an isolated act which was only contrary to law and was simply irregular and might per se not amount to oppression. The instances given by the petitioner were not merely those of irregularities but were the ones which proved fabrication of documents by antedating the alleged meeting and the proceeding to convert public limited company into a private limited company. And all this had been done at the back of the petitioner, who held 13.28 percent shares in the company. Conversion in the manner as pointed out above revealed not only mismanagement of the affairs of the company but also oppression to the shareholders and its creditors and such an act was prejudicial to public interest as well. Subsequent to the scheme of amalgamation approved by the High Court the respondent company was converted into a private limited company by fraudulent means and falsification of records without notice and consent of the shareholders as prescribed in the Act. False information was filed with the statutory authorities by manipulation of notices to the shareholders and directors. The respondents’ acts had not only been illegal but also fraudulent. They had resorted to falsification of records by antedating the documents and the statutory authorities were duped by furnishing fabricated documents with malafide intention by manipulation of the process of conversion. Such state of affairs not only revealed mismanagement in the affairs of the company but established the act of oppression of the minority as alleged by the petitioner. The shareholders, the creditors, the Govt. through the Regional Director, the Registrar of Companies and other concerned authorities had been taken for a ride vide this abuse of process of law. Such a gross misuse of process of law could not be brushed aside and ignored. [Para 24] To do substantial justice between the parties and to uphold proper compliance to the provisions of the Act, the conversion of the respondent No.1 company to a private limited company was set aside. The alleged meeting dated 23-8-2004 and the resolution passed therein were declared null and void. [Para 25] The petition was accordingly disposed of. [Para 26]