Section 399, read with sections 397 and 398

The petitioner should hold 10 per cent of the issued capital in the company to maintain a petition under section 397 or section 398, but his shareholding, according to the respondents, accounted for 5.34 per cent thereby attracting disqualification under section 399. However, the fact that the authorized share capital of Rs. 45 lakh divided into 4,50,000 equity shares of Rs. 10 each and the issued and paid-up share capital of the company of Rs. 10,67,840 divided into 1,06,784 equity shares of Rs. 10 each were not in dispute. The petitioner admittedly held prior to the year 2002-03, 52,652 shares representing 49.30 per cent of the then paid-up capital of the company. The transfer of 33,126 shares by the petitioner out of his 52,652 shares made in August 2002 to the third respondent, was reportedly without his consent and under duress and coercion. Accordingly, the transfer of 33,126 shares constituting 31.01 per cent of the issued capital was impugned in the company petition. The petitioner’s remaining shareholding with 19,526 shares, despite the impugned transfer of 33,126 shares in favour of the third respondent, represented 18.29 per cent of the issued capital of the company and entitled him to maintain the instant company petition under section 397 or section 398. However, the subsequent reduction in the petitioner’s shareholding to 5.34 per cent on account of the further allotment of 2,58,216 shares, of which he pleaded ignorance, was to be considered separately. By virtue of section 111A, the shares of a public company shall be freely transferable except as provided under sub-section (3), failure of which, empowers the CLB to rectify the register of members within two months from the date of transfer of any shares. The instrument of transfer in respect of the impugned shares was signed by the petitioner on 6- 8-2002. The two-month period prescribed under section 111A(3) applies to the transfer of shares effected in normal course of transactions but not in respect of transactions, in which the shareholder has been deprived of his shares without free consent by way of coercion or duress or force. [Para 6] The plea of the respondents that the notice of the extraordinary general meeting said to have been held on 25-11-2003, for allotting further shares had been sent to the petitioner, remained to be mere pleading without supported by any material. Whether the petitioner had prior knowledge about the further allotment and whether the notice of extraordinary general meeting was sent to the petitioner were seriously disputed questions of fact. In that view of matter, the claim of the respondents that the allotment of 2,58,216 shares was made after complying with the provisions of the Act, could not be adjudicated as a preliminary issue. Therefore, the further allotment of 2,58,216 shares challenged in the rejoinder by the petitioner and justified by the respondents in their rejoinder must necessarily be adjudicated in the instant proceedings. However, the grievances raised in that behalf whether could be remedied, without any prayer being sought in the company petition, could not be considered at the threshold. It was in that context, when the holding of a petitioner was reduced below 10 per cent due to further allotment of shares and such allotment was impugned that the petition would be maintainable under section 399 on the strength of his holding before the further allotment of shares. The petitioner’s holding of 19,526 shares, after ignoring the impugned transfer of 33,126 shares, accounted for 18.29 per cent of the issued capital, which got reduced to 5.34 per cent on account of the further allotment of shares and, therefore, such further allotment of shares under serious dispute must be ignored, while determining maintainability of the company petition. Thus, when the allotment of further 2,58,216 shares was not taken into consideration, then the petitioner’s holding would constitute 18.29 per cent of the issued capital of the company, thereby satisfying section 399. Whether the issue of further shares in the facts of the instant case would constitute an act of oppression against the petitioner had to be adjudicated on merits. Therefore, the company petition could not be dismissed at the threshold more so, when such dismissal at threshold would lead to serious repercussions. [Para 9] The conduct of the respondents could not in any way disentitle them from agitating their rights before any forum. However, the issues raised by the respondents in the instant application involving a mixed question of law and fact and not being pure issue of law touching upon the question of jurisdiction of the Court or barred by any law, could not be tried as preliminary issues in the light of the provisions of Order XIV, rule 2 of the Code of Civil Procedure. Thus, it could not be contended that maintainability was to be tried as a preliminary issue. [Para 10] The petitioner had raised in the company petition quite a few acts of oppression and mismanagement as well as non-compliance with the statutory requirements, which according to the respondents, lacked details and was not supported by any materials, thereby not satisfying the requirements of sections 397 and 398, in support of which the respondents cited a number of decisions. While the proposition of law, as enunciated in various judgments, must necessarily be satisfied before granting any relief for the alleged acts of oppression and mismanagement, it is far from doubt that (a) whether the company’s affairs are being conducted in a manner oppressive to any member; (b) whether the facts set out would justify the making up of a winding up order on the ground that it is just and equitable that the company should be wound up; and (c) whether a winding up order would unfairly prejudice the petitioner, could be gone into when the company petition is considered on merits. Similarly, the prayer for investigation of the affairs of the company by the independent chartered accountants and for reconstitution of the board of directors would not arise at the preliminary stage and, therefore, the company petition could not be rejected as not maintainable. Therefore, the application filed by the respondents was liable to be dismissed. [Para 11]