Company Appeal Nos. 16 and 17 of 2010. Case: V.L. Sridharan and Anr. Vs Econo Valves P. Ltd. and Ors.. High Court of Madras (India)
| Case Number | Company Appeal Nos. 16 and 17 of 2010 |
| Counsel | For Appellant: R. Murari, Adv. and For Respondents: Karthik Seshadri, Adv. for Iyer and Thomas, Advs. |
| Judges | P. Jyothimani, J. |
| Issue | Companies Act, 1956 - Sections 2(27), 10E, 10E(4C), 10E(5), 10E(6), 10F, 41, 108, 111, 111A, 163, 196, 210, 237, 397, 398, 399, 399(1), 399(3), 402, 403, 406 and 408; Arbitration and Conciliation Act, 1996 - Sections 9, 11, 34(2) and 37(2); Arbitration Act, 1940 - Section 8; Companies (Amendment) Act, 1988; Sick Industrial Companies (Special ... |
| Citation | [2010] 158 CompCas 505 (Mad) |
| Judgement Date | July 19, 2010 |
| Court | High Court of Madras (India) |
Judgment:
P. Jyothimani, J.
1. These appeals are filed under Section 10F of the Companies Act, 1956 against the order of the Company Law Board dated May 11, 2010, by which the Company Law Board allowed the application filed in C A. No. 112 of 2009 (Econo Valves P. Ltd. v. V.L Sridharan [2010] 156 Comp Cas 355) by respondents Nos. 1 to 3 and consequently dismissed the company petition in C. P. No. 81 of 2009 filed by the appellants.
2. The first respondent-company is a private limited company stated to have been promoted by the appellants having substantial stake as on December 13, 2006. the second and third respondents have entered into two agreements with the appellants offering to purchase the appellants' shareholding in the first respondent-company, viz., (i) shareholders agreement; and (ii) agreement to sell all technical processes for the manufacture of plug valves and various other types of valves on December 14, 2006:
(a) It is the case of the appellants that while as per the shareholders' agreement, the consideration in respect of both the agreements has to be paid and according to the appellants, respondents Nos. 2 and 3, after paying the first stage of consideration and obtaining majority of shares, failed to pay the balance amount and there was a failure on the part of respondents Nos. 2 and 3 in performing their obligation under the said agreement, which resulted in filing of applications in O. A. Nos. 667 and 668 of 2009 by the appellants under Section 9 of the Arbitration and Conciliation Act, 1996 in which a direction was given by this Court against respondents Nos. 1 and 2 to furnish security.
(b) It is stated that 45,600 shares were transferred in favour of respondents Nos. 2 and 3 as on December 14, 2006. Respondents Nos. 4 and 5 were appointed as additional directors of the first respondent-company. The first appellant, who is stated to have continued to be the director and managing director, has also been appointed as the chief operating officer of the first respondent-company from December 14, 2006 and as per the shareholders' agreement, respondents Nos. 2 and 3 have also agreed to acquire 14,018 equity shares representing 23.36 per cent. interest in the paid up share capital and they also received transfer forms and share transfer certificates and in spite of the first appellant's readiness, respondents Nos. 2 and 3 did not make payment as per the agreement.
(c) it is the case of the appellants that respondents Nos. 2 and 3 increased the share capital of the first respondent-company from Rs. 1 crore to Rs. 2 crores in an extraordinary general meeting conducted on June 4, 2007 and in respect of the increased share capital, further allotment of shares were made in favour of respondents Nos. 2 and 3 to the extent of 71,400 and 68,600 equity shares respectively under a board resolution dated October 10, 2007, which according to the appellants is against the articles of association.
(d) After such transfer, it is the case of the appellants that respondents Nos. 2 to 5 attempted to control the first respondent-company at the exclusion of the first appellant by conducting meeting at Nagpur, outside the place of the first respondent-company which is at Chennai. It is the case of the appellants that in the meeting purported to have been conducted by the above respondents on September 21, 2009, removed the first appellant from all his roles and responsibilities as managing director of the first respondent-company by taking away the cheque signing authority and the first appellant's salary was also discontinued from September, 2009.
(e) It is due to the above said conduct, the appellants alleging oppression and mismanagement, filed the company petition under Sections 397 and 398 of the Companies Act before the Company Law Board and the Company Law Board on September 24, 2009, granted an order of injunction restraining respondents Nos. 2 to 5 from convening and holding any board meeting without leave of the Board and from taking any steps to amend the articles of association of the first respondent-company without leave of the Board.
(f) Respondents Nos. 1 to 3 filed company application in C. A. No. 112 of 2009 questioning the maintainability of the company petition and for dismissal of the same, apart from filing the application in C. A. No. 113 of 2009 under Section 8 of the Arbitration Act. It is stated that the earlier order passed by the Company Law Board on September 24, 2009 came to be modified on the application filed by the respondents. It is stated that the Company Law Board modified the order permitting the respondents to hold board meeting to approve and adopt the accounts of the first respondent's company for the year 2008-09 for submitting the same to the bankers stating that finality shall be subject to the outcome of the company petition.
(g) It is stated that the statutory auditors of the company, viz., M/s. Venkatramani and Associates functioning for 28 years, also submitted resignation on February 5, 2010. It is also stated that in an emergent general body meeting stated to have been conducted by the respondents on March 13, 2010, M/s. Agarwal Chhallani and Co. was appointed as statutory auditors. It is stated that the said auditors are directors of a group of companies "NECO Group of Industries", to which the transfer of shares of the first respondent-company is stated to have been effected.
(h) It is stated that the Company Law Board on an application filed by the appellants in Application No. 47 of 2010, restrained the respondents from implementing the resolution for appointment of the said auditors. In the meantime, on the filing of the said company application in C. A, No. 112 of 2009 by respondents Nos. 1 to 3, the Company Law Board passed an order allowing the said application and holding that the company petition filed by the appellants under Sections 397 and 398 of the Companies Act is not maintainable and vacated the interim orders stated above.
3. The Company Law Board having taken note of the admitted facts of transfer of shares effected by the appellants in the following manner:
(a) transfer of 30,600 shares by the first appellant to the second respondent;
(b) transfer of 455 shares by the first appellant to the second respondent; and
(c) transfer of 14,545 shares by the second appellant in favour of the third respondent
held that it constituted 76 per cent. of total number of shares. After the authorised share capital of the first respondent-company which was originally rupees one crore came to be increased to two crores, having found that in the board meeting held on October 10, 2007, the increased shares to the value of Rs. 1,40,000 were transferred to respondents Nos. 2 and 3, the Company Law Board held that both the appellants jointly held 14,410 shares equivalent to 7.20 per cent. while respondents Nos. 2 and 3 held 1,85,590 shares to the extent of 92.80 per cent. Therefore, having found that the appellants jointly have not constituted more than one-tenth of the members of the company, the Company Law Board came to the conclusion that the company petition is not maintainable.
4. The Company Law Board has also found that in the board of directors meeting of the first respondent held on December 14, 2006, it was resolved to approve the transfer effected by the appellants in favour of respondents Nos. 2 and 3 and in the consequent board meeting dated October 10, 2007, it was resolved to allot 1,40,000 equity shares to respondents Nos. 2 and 3 further resolving to authorise the first appellant and respondent No. 5 to make necessary entries in the books of account and in fact, returns were filed by the first appellant and in the annual general body meetings held on September 29, 2007 and September 29, 2008, the first appellant participated in which the shareholdings of the first appellant holding 328 shares was found to be 0.164 per cent. while the second and third respondents along with their groups were holding 1,85,600 shares to the extent of 9.08 per cent. and others were holding 14,072 shares to the extent of 7.036 per cent. Taking note of the letter written by the first appellant dated November 16, 2007, admitting that the second appellant is no more a director of the company and she is also not a shareholder since her shares were completely transferred and finding that in spite of the said letter, the appellants chose to file the company petition to set aside the allotment made on or after December 14, 2006 and to restore the original shareholding pattern as on December 13, 2006 and that in the meeting there was no challenge by the first appellant in respect of the said shares, the Company Law Board came to the conclusion that the entire dispute rests on the shareholders' agreement dated December 14, 2006, that said dispute has been raised by the appellants in respect of payment which is only a dispute attracting the breach of agreement and therefore, no relief can be asked for before the Company Law Board. Accordingly, the Company Law Board passed the order holding that the company petition is not maintainable and dismissed the same.
5. The order is challenged by the appellants on various grounds including that the further increase of shares or allotment was not taken into consideration; that the appellants complied with the requirements of Section 399 of the Companies Act; that even before deciding the validity or otherwise of the further increase of share capital, it cannot be held that the appellants have not conformed with the requirements of qualifying shares for filing the petition under Section 399 of the Companies Act; that the transfer stated to have been effected to NECO Limited to the extent of 14,400 shares is against the articles of association; that all these are substantial issues that are to be decided and even before deciding the same, on the maintainability of requirement of qualifying shares, the company petition was...
To continue reading
Request your trial