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The Companies Act, 2013 provides certain protections to the minority shareholders against the basic principle of majority rule i.e., When a resolution is passed with the required majority, it becomes binding on all company members. As a result, the court will not usually intervene to safeguard the minority interest impacted by the resolution, because when a person joins the company, he or she implicitly agrees to submit to the majority’s decision.
A member who believes the company’s operations are being conducted in a way that is oppressive to some members, including himself, or against the public interest, may file a petition with the Tribunal under section 241 of the Companies Act, 2013. The Delhi High Court ruled in O.P. Gupta v. Shiv General Finance (P.) Ltd. that a member’s right to move to the court under section 241 was a statutory right that could not be hindered by an arbitration clause in a company’s articles of association.
The Companies Act provides for a minimum number of members who must sign the application under section 241. If the company has a share capital, the application must be signed by at least 100 members or one-tenth of the total number of members, whichever is lower, or any member or members owning one-tenth of the company’s issued share capital. If the company is without share capital, the application has to be signed by one-fifth of the total number of its members. However, the Tribunal may, on application, allow any member or members to sue “if in its opinion circumstances exist which make it just and equitable to do so”.
In the case of Kuttanad Rubber Co. Ltd. v. K.T. Ittiyavirah the Kerala High Court held that terms of sub-section (3) of Section 244(2) , when a petition was moved with the consent in writing of some of the shareholders, such a petition was on behalf of and for the benefit of all of them, namely, the petitioners and the consenting shareholders.
Under Section 242(1) the Tribunal is empowered to make any order as it may think fit to with a view to end the matters complained off in Section 241. Before passing an order the Tribunal needs to satisfy itself that:
(a) the company’s affairs have been or are being conducted in a manner prejudicial or oppressive to any member or members or prejudicial to public interest or in a manner prejudicial to the interests of the company; and
(b) to wind up the company would unfairly prejudice such member or members, but that otherwise the facts would justify the making of a winding-up order on the ground that it was just and equitable that the company should be wound up.
The honourable Supreme Court of India in the case of Shanti Prasad Jain v Kalinga Tubes Ltd. held that:
“The essence of the matter appears to be that the conduct complained of should at the very least involve a visible departure from the standards of fair dealing, and a violation of the conditions of fair play on which every shareholder who entrusts his money to the company is entitled to rely. The complaining shareholder must be under a burden which is unjust or harsh or tyrannical”.
In the Re: Hindustan Cooperative Insurance Society Ltd, the court observed that it is oppression when the majority exercised their authority wrongfully, in a manner burdensome, harsh and wrongful or they attempted to force the minority shareholders to invest their money in a different kind of business against their will.
Similarly, an attempt to deprive a member of his ordinary membership rights is an “oppression” as held in the case of Mohan Lai Chandumall v Punjab Co Ltd. The company Law Board, in the case of Ashok Kumar Oswal v. Panchsheel Textiles Mfg., observed that a single action of allotment of shares can amount to oppression.
The Delhi High Court in the case of Pushpa Katoch v. Manu Maharani Hotels Ltd., held that in a public company, sale of shares of the existing directors without offering them to the promoting director of the company cannot be said to be an act of oppression.
In the case of Ajit Singh Ahuja and Ors. v. Sapphire India Private Ltd. , the Company Law Board dealt with the 5 essentials that need to be established to prove the case of oppression under the Companies Act, 1957.
Facts of the Case
- M/s Sapphire (India) Pvt. Ltd. Company was incorporated on 2nd November 1982. The authorised share capital of the company was Rs. 1 crore comprising one lakh shares of Rs. 100/- each. They obtained a license from ISI, Jaipur and started manufacturing LPG Gas Cylinders.
- In September 1986, Mr. Kulbuhshan Agarwal and Mr. R.K. Chopra approached the petitioner to become a director. Thus, the distribution of the new shareholding of Rs. 12 lacs was:- Mr. Laxmi Kant Jain- Rs. 3 lacs; Mr. Anil Jain (S/o Mr. L.K. Jain)- Rs. 3 lac; Mr. Ajit Singh Ahuja – Rs. 1.50 lac, Mrs. Amrit Kaur Ahuja – Rs. 1.50 lac; Ms. Suminder Kaur (D/o Mr. A.S. Ahuja) – Rs. 1.50 lac; and Mr. Manvinder Singh (H/o Ms. Suminder)- Rs. 1.50 lac. The entire share capital of Rs. 6 lakhs belonging to Mr Ajit Singh Ahuja and his family was paid by Mr. Ajit Singh Ahuja only.
- The company’s profit in 1998-1999 and 1999-2000 was Rs. 12.75 lakhs and Rs. 85.25 lakhs, respectively. However, in 2001-02, the situation completely changed; oil companies issued tenders, which the Respondent business was unable to obtain, and the work was halted. Mr. R.K. Chopra and Mr. Manvinder Singh were watching the factory after the petitioner because he was not feeling well.
- The petitioners owned 16000 equity shares worth Rs. 100 each, accounting for 73 percent of the company (approx.). However, due to the alleged illegal and unlawful distribution of 18500 equity shares of Rs. 100/-, each petitioner’s shareholding was cut to 39.5 percent (approx.), and their shareholding was further decreased to 24 percent.
- Thus, the following petition was filed by the petitioners under Sections 397 and 398 read with Sections 402, 403 & 406 of the Companies Act, 1956 against Sapphire (India) Pvt. Ltd. and Ors. alleging certain acts of oppression and mismanagement. The allegations include illegal allotment of additional shares, unlawful removal of the majority shareholders from the management of the company, illegal appointments of the respondents on the Board of Directors, illegal shifting of the registered office of the company, manipulation and fabrication of accounts and siphoning off of funds of the company.
Arguments of the Parties
- The petitioners’ claim is that they have been subjected to oppression and mismanagement. The petitioners purport that they have been oppressed by the illegal reduction of their shareholding from 73 percent to 39.5 percent and then to 24 percent, which they claim is ongoing; they also claim that they have been oppressed by their illegal removal from the respondent company’s management and the illegal appointment of other directors to the board. They also claim that the company’s registered office was illegally changed, that finances were manipulated and fabricated, that share application money was illegally reduced, that funds were syphoned off, and that plant and machinery were shifted to the respondents’ concerns.
- The respondents claim that the petition is barred by delay and latches; that the petitioners have not come with clean hands, that the petitioners have abandoned the company because they are ill, and that the petitioners have not come with clean hands. They further added that the initial allotment of shares at the time of their joining the respondent company was not fair and in accordance with the Articles of Association, hence if subsequent allotments have to be proportionate the initial allotments also have to be made proportionate. They also contended that there was a deadlock, the petitioners should be asked to go out of the company on receipt of valuation to be done by the Chartered Accountant of the company.
Issues involved in the case
The following issues were involved in the case:
- Whether the petition was barred by the doctrine of delay and latches?
- Whether the Petitioners were oppressed owing to the alleged illegal allotment of shares and appointment of directors?
- Whether the way out proposed by the respondent could be adopted in the light of equity?
Summary of the case and Judgment
The board held that The respondents’ preliminary objection that the petition is prohibited by delay and latches is without merit. Given the parties’ fragile relationship, the claims of improper allotment of shares were made in a reasonable amount of time. In June/July 2003, the illegal allotments were discovered during an inspection of the ROC’s records, and the petition was filed in October 2004. It was also observed that the illegal allotment was an act of continuous oppression.
Regarding the respondents’ contention of the petitioners’ unclean hands, the allegation of unfair and illegal allotment of 18000 shares to themselves and their family members in 1986 when they joined the company not being in accordance with the Articles of Association, the respondents have attempted to resurrect old issues from 1986, to which the respondents have acquiesced. They have raised this issue now despite the fact that the official documents of those transfers with the Registrar of Companies show they themselves are also signatories. There is no way to accept such a contention and this only depicts that the respondents’ do not have clean hands in contrast to what they have claimed.
The board opined that a member must specifically plead five facts in a case of oppression: (a) what is the alleged act of oppression; (b) who committed the act of oppression; (c) how it is oppressive; (d) whether it is in the company’s affairs; and (e) whether the company is a party to the commission of the act of oppression.
The company’s directors have breached their fiduciary responsibility and behaved against the company’s best interests by duping each other and attempting to profit from the company’s transactions to the greatest extent possible.
Directors are obligated to operate in a fiduciary role on behalf of a company, and their acts and actions must be for the benefit of the company. Directors have a fiduciary duty to act in the best interests of the company they represent, which entails acting in good faith, with the highest care and skill, and due diligence on behalf of the company they represent. They have a duty to make full and honest disclosure to the shareholders regarding all important matters relating to the company.
The respondents have been unable to refute the petitioners’ charges of illegal issuance of 18500 and 24500 shares, reducing their shareholding from 73 percent to 39.5 percent and then to 24 percent. In addition to the proper purpose of increasing the share capital, the respondents have failed to indicate the date of allotment of 18500 shares. The board further observed the respondents have failed to counter the charges and support their claims that the petitioners relinquished their positions by operation of law, as provided by Section 283(1)(g) of the Act. Further, the respondents have not been able to justify the shifting of the registered office of the company.
The appointments of other persons as directors are held to be illegal because they were made behind the backs of majority shareholders without following the provisions of the Act and the Articles of Association because the petitioners did not receive any notice for the meetings said to have been held for these appointments.
Given the respondents’ previous acts of oppression and mismanagement, asking the petitioners to leave the company, as per the respondents’ emphatic alternative arguments contending that there is a deadlock and any other adjudication will result in litigation, is nothing more than a reflection on the respondents’ conduct. Granting such a request will entail additional subjugation of the petitioner.
Analysis of the case in the light of equity
It is a settled proposition of law that the conduct of the parties is a very relevant factor to be considered in the equitable proceedings under Sections 397-398.(Now section 241-242) of the Companies Act.
In Sri Kanta Datta Narasimharaja Wadiyar v. Venkateshwar Real Estates Private Ltd. (1991), it was held that a petitioner seeking equitable relief must come with clean hands and good conduct, failing which the petitioner would be guilty of a gross abuse of the court’s process, and the petitioner would be ineligible for any relief under Sections 397 and 398.
In Shrimati Abnash Kaur v. Lord Krishna Sugar Mills Ltd., the Division Bench of the Delhi High Court declared that when exercising equity jurisdiction, which vests the Court with discretionary powers, the Court must consider the principle of equity as follows:
“the discretion cannot be exercised arbitrarily or according to one’s own will or whim. It has to be regulated by law, allay its rigour to advance the remedy and to relieve against abuse. The court, therefore, exercising equity jurisdiction, cannot ignore the well known maxims of equity. Two such maxims are that he who seeks equity must do equity and he who comes into equity must come with clean hands.”
In the present case, the board has rightly applied the principle of equity as the allegation made by the respondent on the basic perusal seems unfair and illegitimate. Further they have failed to provide a valid explanation for various contentions of the petitioner including change of official address, date of the allotment of 18500 shares and other important details.
It is pertinent to note that section 58 of the companies Act, 2013 allows restrictions to be made in the Articles of Association of a private company with regards to the free transfer of the shares. Similar exception is provided under the proviso of the section 58(2) for the public companies however, no such restrictions were made in the Articles of Association of the company in the current case thus, the decision of the court was righteous, fair and equitable.
In the case of Vyomesh M Shah v Vince Developer P Ltd., the board observed that suppressing notices of meetings to some of the members is an act of oppression towards them. Casual omissions may not be, but systematic elimination of notices to some of the members is a serious deprivation of their most important right. This was a clear case of oppression as the relevant notices for the meetings wherein the shares were allotted were not sent to the petitioner along with the bonafide conspiracy to remove him from the board of directors of the company.However, it is important to not that allotment of shares made with knowledge and consent of the petitioner who signed relevant forms, not to be set aside under section 241 of the Companies Act, 2013 as held in the case of Jayesh Koshambi v Vighneshwar Air Conditioning (P) Ltd.