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The petitioner has filed this petition under Section 397/398 of the Companies Act 1956 alleging that the respondent-directors have made a secret profit of over Rs. 50 lakhs. The respondent directors have also proposed to issue shares at a premium of Rs. 5 with a view to gain total control. On the basis of these allegations the petitioner has sought for various reliefs.
- Ayyan Fire Works Private Limited, participated in the tender issued by the debt recovery tribunal and purchased all the items of machinery for Rs. 1.16 crores.
- Subsequently, Ayyan Fire Works Factory Limited sold one of the bought items. To finance this purchase, the company took a term loan from the Tamil Nadu Mercantile Bank Limited.
- Later, to meet the interest liability the company proposed to issue rights shares. Both these acts of the company have been impugned in the petition.
- The petitioners also filed an application, later, challenging the validity of the general body meeting held on August 23, 1999, in which the resolution to issue rights shares at a premium of Rs. 5 had been proposed as a special business.
- According to the application, meeting did not commence at the specified time or within half-an-hour thereafter, the meeting should be held to be invalid.
- Further, against resolution No. 5 regarding the proposal to issue rights shares, poll was taken. The votes polled in favor of the resolution were less than 3/4ths of the total votes polled and as such this business could not be declared to have been passed with the requisite majority. However, the chairman of the meeting declared that the resolution had been carried through on the ground that the votes polled were more than two-thirds of the total votes polled. This poll was not mandatory as it was not a special issue.
- Accordingly, it has been prayed that the meeting itself should be declared as invalid and that the resolution regarding the rights shares should not be implemented.
- Whether the decision to issue rights share that was made in the general meeting in compliance with the section 81(1A) ?
- Whether the petitioner is entitled to relief for oppression as per section 397 of the companies act, 1956 ?
- Whether the petitioner is entitled to relief for mismanagement as per section 398 of the companies act, 1956 ?
Summary of the Court Decision
- The court held that none of the allegations were established and hence the petition was dismissed.
- The court also stated that the company will allot the entitled shares to the petitioner if it makes an application together with remittance of the consideration on or before January 15, 2000, within 15 days thereafter.
- No order as to costs.
In this case, the court considered two major issues in respect of the appeal made by the petitioner:
- The directors tried to make extra profits by unlawful means
The petitioner claimed that while purchasing the offset printing machine for Rs. 87.48 lakhs, the respondents have made a secret profit of over Rs. 50 lakhs as the price of the machine would not be more than Rs, 35 lakhs. The petitioner also said that it was not prudent to go for such a costly deal in the times of recession. The petitioner claimed that the high amount for the machine was agreed upon due to mutual family benefits of both the companies that were a part of this deal.
It was however, established by the court that the chartered engineer appointed by SBI held the cost of the machine to be around 100 lakhs. In addition, same bids in the range of 80 lakhs were also made by the other companies present at the auction. It was also observed by the court that the offset press was purchased for Rs. 83 lakhs and with sales tax and installation charges, the cost came to Rs. 87.48 lakhs. Since the company was already having an identical offset press, the board thought it prudent to add one more similar unit and accordingly after negotiations with Ayyan Fire Works Factory Limited, purchased the same for Rs. 83 lakhs. An identical new machine would cost about Rs. 6.5 crores and the company itself had earlier decided to bid for this machinery for Rs. 90 lakhs. Under the circumstances, the court held that the payment of Rs. 83 lakhs is very reasonable. Hence the petitioner was not entitled to compensation under section 398/397, since there is no mismanagement or oppression was proved on the part of the respondent.
- The decision to issue right share was not in compliance with the law
Regarding this issue, the court found that the decision regarding the right shares was made as per the provisions of the companies act,1956. It was pointed out by the petitioner that the chairman of the company arrived at the venue of the meeting only at 6.40 p.m. and the general body meeting commenced only afterwards as against the scheduled time of 5.00 p.m. as indicated in the notice. Since the meeting did not commence at the specified time or within half-an-hour thereafter, the meeting should be held to be invalid. Further the votes polled in favour of the resolution regarding the issue of right shares were less than 3/4ths of the total votes polled and as such this business could not be declared to have been passed with the requisite majority.
The court noticed that the contentions made by the petitioner were not well established. Rather, it was observed by the court that the allegation that the chairman of the meeting arrived only at 6.40 p.m. and as such the meeting commenced only afterwards, the meeting commenced within 1/2 hour of the scheduled time of 5 p.m. The petitioner has not stated that the quorum was not present before 5.30 p.m. According to section 174 of the Act, only because of the presence of the quorum within 1/2 hour of the scheduled time is talked upon and not of the time at which the meeting should be called to order. The court also found that, in the explanatory statement, the company has given full and complete particulars for the reason for going in for the rights issue and the resolution has been passed by a majority of the shareholders. Since, for a rights issue, there is no need to get the approval of the general body in terms of section 81 (1A) of the Act, requiring 3/4ths majority, passing of this resolution by a simple majority would suffice. It is also observed by the court that in the notice for this annual general meeting, there is no indication that the resolution was a special resolution. It is also established that besides the respondent-directors, there are five other directors on the board and the respondent-directors cannot act on their own in allotting the unsubscribed shares to themselves.
The court has been very observant in this case. It has not only considered the major points but also look upon the minor points that were raised by both the parties. The court also very correctly interpreted section 397 and 398 of the companies act 1956 and decided the course of action. It was finally held that there was no oppression or mismanagement on the part of the company as far as its operations are concerned.
Upon the hearing of the case and its facts in details the court decided that the petitioner was not entitled to a compensation as none of the allegations could be established by the petitioner. The compensation for mismanagement as well as for oppression did not exist in the first place because there was no proof of the act that was alleged on the part of the respondents to make them liable. The case also deals with the rules governing annual meetings of a body corporate. Therefore, it could be concluded that if there is no oppression or mismanagement on the part of the company, there is no relief available for a person.