MUMBAI: A shareholder can initiate legal action on behalf of a company if he can prove that wrong-doers are in control of it, the Bombay high court has ruled.
Upholding shareholders’ right to initiate derivative action on behalf of a company in exceptional cases, the HC last month struck down the 2007 sale of Genelec Ltd’s Mumbai property in a suit filed by a shareholder.
As per the details of the case, three of Genelec’s directors — Vinod Faria, Suresh Faria and Amarish Nishar — had sold the company’s Andheri property valued at Rs 18.28 crore for Rs 6.95 crore without seeking approval from the company’s general body.
Nirad Mehta, a shareholder in Genelec, moved court challenging the sale, alleging fraud and non-compliance with legal procedures.
The three directors opposed the petition stating that a shareholder did not have the locus standi to initiate action on behalf of the company.
Normally, it is a company that is entitled to initiate action for any wrong done.
However, Mehta’s lawyers Rajni Iyer and Mansukhlal and Hiralal & Co alleged that the three directors themselves had wrongfully alienated and transferred the property of the company in breach of their fiduciary duty. The directors, therefore, were unlikely to initiate action on behalf of the company to set aside the sale.
“Since the directors themselves are alleged to be wrong doers and are in charge of the company, an action by the plaintiff would be maintainable,” Justice D G Karnik stated.
The three directors claimed that a resolution was passed on March 23, 2007, in a general body meeting to sell the suit property.
Mehta’s lawyers, however, pointed out that no notices were served to members for the alleged meeting, no register maintained for members present at the meeting and no minutes prepared as mandatory under the Companies Act.
“It must therefore be held, at least at this prima facie stage, that no meeting was ever held on 23rd March 2007, much less a meeting in accordance with law,” Justice Karnik ruled.
Genelec, an electrical manufacturing company, has been declared a sick company by the Board of Industrial and Financial Reconstruction, though the winding up order is yet to be issued. The HC noted that the market value of the suit property, which was sold for Rs 6.95 crore by the three directors, was more than Rs 18.28 crore as per stamp
authorities. Stamp duty was paid on the valuation of Rs 18.28 crore.
