16 June 2025 Shares >> Business & Commercial Law  

In a significant judgment delivered on June 16, 2025, the High Court of Judicature at Bombay, presided over by Justice Manish Pitale, ruled on Company Appeal Nos. 6 and 11 of 2006, challenging an order passed by the Company Law Board (CLB) on September 19, 2006. The case, involving Jyoti C. Raheja & Others (referred to as 'Rahejas') and Aasia Properties Development Ltd. & Others (now Hinduja Realty Ventures Ltd., referred to as 'Aasia Properties'), centered on disputes over share transfers, allegations of oppression and mismanagement, and the right to board representation in Juhu Beach Resorts Limited (the 'Company').

Background of the Dispute

Juhu Beach Resorts Limited was incorporated in 1974. By 1978, the Shah Group and K. Raheja Group held 1/3rd and 2/3rd shares, respectively. The core of the dispute revolved around Aasia Properties' acquisition of 1/3rd shares in the Company. Aasia Properties claimed the shares were acquired on August 30, 1982, while Rahejas contended the transfer occurred on January 28, 1983, a date supported by share certificates bearing the Registrar of Companies (ROC) stamp. This discrepancy was crucial, as it impacted Aasia Properties' claim of pre-emption rights under Article 38 of the Company's Articles of Association.

Aasia Properties alleged extensive manipulation of company records, including the register of share transfers, to obscure their earlier acquisition date and deny their rightful shareholding and board representation. They asserted that an oral understanding existed for proportional representation and equity in management, a claim vehemently denied by Rahejas due to the absence of any written agreement.

Despite prolonged correspondence and demands for inspection of company documents, Aasia Properties filed Company Petition No. 91 of 2005 under Sections 397 and 398 of the Companies Act, 1956, before the CLB in September 2005. They sought declarations nullifying certain share transfers and the appointment of their nominee as a non-functional director on the Company's Board.

CLB's Initial Findings

The CLB acknowledged discrepancies in the Company's records but determined that Aasia Properties failed to provide cogent evidence to prove their acquisition of 1/3rd shares on August 30, 1982. Instead, the CLB relied on the share certificates dated January 28, 1983, as prima facie evidence of title.

Regarding Article 38 (pre-emption rights), the CLB held that since the Raheja Group collectively held 2/3rd shares, transfers to a third party were permissible with their approval, even without written consent from all members of the Raheja Group. While the CLB found no legitimate expectation for Aasia Properties to have board representation based on an oral understanding, it granted a limited equitable relief, directing that Aasia Properties, as the single largest shareholder with 1/3rd shares and substantial investment, was entitled to nominate a non-functional director.

The CLB also opined on Section 397 of the Companies Act, stating that once oppression was established, winding up on just and equitable grounds would be automatic, and relief could be moulded to end the complained matters, provided it was not against the company's interest.

High Court's Review and Decision

Both parties appealed the CLB's order. Rahejas challenged the direction granting Aasia Properties the right to nominate a director, arguing it lacked legal basis under the Companies Act or the Articles of Association. Aasia Properties appealed the CLB's findings on the share transfer date and manipulation allegations, and the denial of their full representation prayer.

The High Court meticulously examined several key questions of law:

• Manipulation of Records and Share Transfer Date: The High Court upheld the CLB's finding that Aasia Properties became a 1/3rd shareholder on January 28, 1983, relying heavily on the ROC-stamped share certificates as conclusive evidence. The Court dismissed claims of record manipulation, accepting Rahejas' explanation of corrections for technical errors. The Court emphasized that share certificates are prima facie evidence of title as per Section 84 of the Companies Act, and a proper instrument of transfer is mandatory for share registration as per Section 108.
• Article 38 (Pre-emption Rights): The High Court affirmed that Article 38 would only apply if 2/3rd shareholders did not approve a transfer to a third party. Since the Raheja Group held 2/3rd shares, their transfers were deemed valid. The Court interpreted Article 38 strictly, aligning with the principle that restrictions on share transfers must be read in favor of the shareholder desiring the transfer.
• Right to Nominate a Director: The High Court set aside the CLB's direction granting Aasia Properties the right to nominate a non-functional director. It concluded that this relief was not justified under the Companies Act or the Articles of Association, especially since Aasia Properties failed to prove any oral understanding for board representation.
• Interpretation of Section 397 of the Companies Act: The High Court sided with Rahejas, stating that the CLB's interpretation of Section 397, where oppression automatically leads to winding up on just and equitable grounds, was an erroneous understanding of established legal precedent. The Court emphasized that the CLB, as a creature of statute, cannot exercise powers beyond its statutory mandate.
• Limitation: The High Court found the petition filed by Aasia Properties to be barred by limitation. It noted that Aasia Properties was aware of the alleged issues and share transfers as early as 1989 but only filed the petition in 2005.

Consequently, Company Appeal No. 6 of 2006 (filed by Rahejas) was allowed, and Company Appeal No. 11 of 2006 (filed by Aasia Properties) was dismissed. This ruling confirms the High Court's stance on strict interpretation of company law provisions and the requirement for concrete evidence in disputes concerning shareholding and board representation. 

Section 10F, Companies Act - 1956    

Section 84, COMPANIES ACT - 2013    

Section 108, Companies Act - 1956