Disputes between two sets of people coming from diverse backgrounds although pursuing a common objective are inevitable at times due to various reasons ranging from ego, misunderstanding, personal objectives taking priority over common objective, ill motives, wrong advice or believing in self-developed notions. The parties knocking the door of the judicial forums are often entangled into cumbersome and costly litigation expecting that result would be in their favour. However, over a period of time, the scenario becomes clear which may not be a favourable outcome, as expected. We are hereunder attempting a series of issues handled by experts in the shareholders disputes like Ab Initio for a better understanding of the reader as to whether it is worthwhile to fight the legal battle or not.
CASE STUDY-3
(Share Allotment by Fraudulent Means)
*This Case Study is part of series of Articles dealing with disputes between Shareholders/Founders/Partners/Family Members resulting into various allegations and litigation before relevant forums.
Factual Matrix
- A dispute arose amongst the shareholders of a company wherein a shareholder allotted further shares in his name via fraudulent means to become a majority shareholder in the company. The company was managed by 3 brothers (Party-A, Party-B and Party-C) in which the appointed statutory auditor was also a distant relative of the Parties.
- These new shares were allotted in favour of Party-B without any intimation to the other shareholders and on the basis of a forged Board Resolution. It was factually hidden from all other directors and shareholders.
- This action reduced Party-A’s shareholding, making it a minority shareholder in the company and bent the bar in favour of Party-B. Party-A had no knowledge of any such actions of Party-B and the statutory auditor (who conspired and allotted the shares) and only got to know of such actions after a period of 3 years had passed. Party-B then took all steps to oppress Party-A and takeover the company in a completely fraudulent manner.
Problem Statement
What all appropriate remedies can be availed by the aggrieved shareholder where a clear case of fraud, forgery and criminal conspiracy is being made out against the other shareholders of a company?
Analysis
- A company and its statutory auditor have the duty to maintain all records of a company and maintain complete transparency with all shareholders and directors of a company. The Companies Act safeguards the interests of all directors and shareholders from any fraud that may have been committed against them by any person.
- In this matter, the aggrieved party (Party-A) plead before the National Company Law Tribunal (NCLT), a judicial body that has been authorised to look into matters emanating from the disputes within a company. To maintain the original status quo of the parties in such cases, a complaint can be filed under section 241 and 242 of the Companies Act for oppression and mismanagement.
- Following this, the aggrieved party also has the right to file complaints before the Registrar of Companies (ROC) and Regional Director (RD), complaints before specialised statutory bodies like the Institute of Chartered Accountants of India (ICAI), which is applicable in this case. Criminal complaints can also be filed against the fraudulent acts of the accused.
- A shareholder’s rights cannot be mismanaged or suppressed under the purview of the Companies Act and have to be regulated and protected by the regulatory bodies.
Conclusion
Party-A filed a complaint before the NCLT under sections 241 and 242 (for oppression and mismanagement) of the Companies Act, a complaint before the ROC and a complaint against the statutory auditor before the ICAI against Party-B and Party-C that had deprived Party-A of its rights as a shareholder. The matter is still ongoing and Party-A is striving to make out its case.
In nutshell, there exists no family ties in business and the sanctity of trust must be preserved at all times with a strict check on the functioning of the company. One must be very vigilant about the management of its company’s affairs and every document must be carefully scrutinised before authorising it.
*Disclaimer: This article is not a legal advice and is published to understand the nuances of resolution process in case of a dispute amongst the shareholders of a company due to oppression and mismanagement.
