FACTS
A company by the name of Dale and Carrington Investments Private Limited was incorporated for the hotel business. Ramanujam (appellant) was shown as the promoter of the company and was to get a salary for looking after the business. The Hotel was accordingly acquired by the company. A sum of Rs. 6 lakhs was required to be paid in cash to the vendors out of which Rs. 5 lakh were received from Prathapan (respondent) in the name of his mother. and a sum of Rs. 50,000/- was invested by Muralidharan, brother of the respondent. The rest of the amount came from other respondents. There was no financial contribution by the appellant.
Subsequently, 5000 equity shares were allotted in the name of the respondent’s mother which was then transferred in the name of the respondent and his wife, 2500 each, subject to the transferees obtaining requisite permission from the RBI under FERA.
The respondent then made several other investments in the company, but was not issued the shares for the same.
Later, the respondent discovered that the authorized capital of the company has been increased and 6865 equity shares were issued to the appellant, making him the majority shareholder instead of the respondent and his wife during an alleged meeting of the Board of Directors on 24th October, 1994.
The matter was first taken to the Companies Law Board. Since none of the parties were satisfied by the ruling of this, it was then filed in the High Court of Kerala. Here, the court ruled against the appellant and hence this appeal has been filed against that judgement.
ISSUES
Issue 1.Validity of allotment of equity shares of the Company in favour of Ramanujam whereby he becomes a majority shareholder and Prathapan and his wife are reduced to minority shareholders.
This issue gives rise to following questions:
(a) Was a meeting of the Board of Directors of the Company held on 24thOctober, 1994 when the first allotment of additional shares in favour of Ramanujam is said to have been made?
(b) Was it a valid meeting of the Board of Directors of the Company?
(c) Did the Company require funds so as to necessitate raising of share capital of the company by issuing further equity shares?
(d) Was the alleged allotment of equity shares in favour of Ramanujam a bonafide act on the part of Board of Directors in the interest of the Company? In other words does the act of raising share capital by allotment of additional equity shares in favour of Ramanujam, the Managing Director, amount to an act of oppression on his part towards the then majority shareholders?
Issue 2. What is the effect of not obtaining permission of the Reserve Bank of India under the Foreign Exchange Regulation Act (FERA) by Prathapan regarding transfer of shares in his and his wife’s favour? Did Prathapan and his wife Pushpa have no locus standi to file the petition under Sections 397 and 398 of the Companies Act before the Company Law Board?
Issue 3. Scope of power of the High Court in an appeal under Section 10F of the
Companies Act;
Issue 4.Relief to be granted to a majority shareholder who by an act of oppression on the part of management of the company is converted into a minority shareholder.
JUDGMENT
ISSUE 1 –
It was observed by the court that the appellant had neither placed on record anything to justify issue of further share capital nor had it been shown that proper procedure was followed in allotting the additional share capital. Conclusion is inevitable that neither the allotment of additional shares in favour of Ramanujam was bonafide nor it was in the interest of the company nor a proper and legal procedure was followed to make the allotment. The motive for the allotment was malafide, the only motive being to gain control of the company. Therefore, the court upheld the judgement of the high court that the entire allotment of shares to the appellant has to be set aside.
ISSUE 2 –
It was observed that since the appellant himself recorded the transfer of shares in the records of the company, it is not open for him to raise the question of FERA violation now. Hence, it was held that since the respondents were registered as shareholders of the company on the date of filing of the petition and they held the requisite number of shares in the company, they could maintain the petition under Section 397/398 of the Companies Act.
ISSUE 3 –
It was observed that since the Board had not gone into depths of certain matters, the High Court has rightly done so and hence, the contention that High Court of Kerala had exceeded its jurisdiction as per Section 10F of the Companies Act was held to be invalid.
ISSUE 4 –
It was observed that the ruling given by the Board allowed the appellant to benefit from his own wrong and hence, the court upheld the decision of the High Court of setting aside the allotment of shares to the appellant.
CONCLUSION
The facts of the case make it clear that there was an attempt of taking over the company by the appellant by increasing the authorized share capital and making himself the majority shareholder. But the major point of clash between the judgement of the Board and the Courts is that the Board allowed the appellant to buy the shares, hence giving him a chance to benefit from his own wrong and getting the control of the company. On the other hand, the Court made sure that a proper remedy was given to the respondents and hence set aside the allotment of shares to the appellant, again making the respondents the majority shareholders, as was the case before.