2003 (9) TMI 535 - HC - Companies Law

Maintainability of the appeal - Oppression and mismanagement - Whether an action which is illegal or irregular is per se oppressive ? - HELD THAT - In the present case there was no pre-existing business. The business by no means was small nor was it intended to be small; it was of generation of hundreds of 700 mega watts of power involving investment of thousands of crores of rupees. Though the members were few and initially only three they were all multinational corporations. Enron before it s fall was a Fortune 500 company. G.E. and Bechtel continue to be Fortune 500 companies. The normal reason why a partnership firm is converted into an incorporated company viz. to avail the benefits of limited liability was absent as the respondent No. 1 was incorporated with unlimited liability of members. The appellant who is the subsidiary of MSEB - an arm of the Government of Maharashtra - was not a promoter shareholder and was not a party to the shareholders agreement. It is only after several years of incorporation that the appellant became a shareholder by purchasing 30% of the equity from the EMC. The appellant did not join the respondent No. 1 as a quasi partner but joined it as a purchaser of part of the equity from an existing shareholder in Kilpest (P.) Ltd. v. Shekhar Mehra 1996 (10) TMI 347 - SUPREME COURT the Supreme Court laid down that the submission that the limited company should be treated as a partnership should not be readily accepted. The interest of the appellant as a member of the respondent No. 1 and the interest of the appellant as a subsidiary of MSEB are clearly conflicting. The recovery of money through the arbitration proceedings is for the benefit of the respondent No. 1 and all it s creditors and members including the appellant in the capacity as a member. The fact that the compensation may come from the coffers of the Government of Maharashtra or MSEB is against the interest of the appellant. The money would come to the respondent No. 1 and for the benefit of the respondent No. 1. It would also benefit the members of the respondent No. 1 inasmuch as their liability-unlimited as it is - would be reduced. The fact that the holding company of one of the members would be a loser in a different capacity and some other members would be beneficiaries (in their capacity as creditors who have supplied the plant machinery) cannot make the decision taken by the Board to continue the arbitration proceedings oppressive of the appellant. In my opinion the continued meeting of the Board after establishment of a quorum by appointment of Mr. Freeman can be construed as an independent and separate Board meeting to which the provisions of Regulation 75 would not apply. Therefore the meeting was legal. Assuming however that the said meeting was illegal the decisions taken at the said meeting were in interest of the respondent No. 1 and were not oppressive. In the absence of a finding of oppression the CLB could not assume jurisdiction under section 397 of the Act to declare the meeting dated 4th June 2003 and the decisions taken thereat as null and void . The jurisdiction of the CLB is limited only in respect of the acts of oppression. The words of crucial significance used in section 397 of the Act are in a manner oppressive to any member or members . Section 397 of the Act does not speak of any irregularity or illegality in the conduct of affairs of the company but speaks of oppressive manner in conduct of the affairs of the company. As held earlier an illegal act is not per se oppressive. As the acts were not oppressive the CLB lacked jurisdiction to declare them to be null and void . That part of the decision of the CLB is therefore required to be set aside. As stated the appellant was entitled to nominate only one director by virtue of 14.15% of the voting power. This decision of the CLB regarding appointment of the 2nd nominee director by the appellant is assailed by the respondents by filing an appeal bearing lodging No. 6 of 2003. The challenge appears to be correct. The minimum number of directors required to form a quorum were elected in the general meeting of 9th September 2002. The members have agreed to the manner in which directors should be appointed/elected and the provision regarding the manner of appointment of directors have been made in the Articles. There was no occasion for the CLB to interfere in the said arrangement unless the Articles were breached and such breach in the opinion of the CLB was oppressive. In my opinion there was no oppression of the appellant. The CLB could have permitted nomination of one person as a director by the appellant on the Board. And if one nominee is nominated by the appellant even now the other members of respondent No. 1 would be bound to elect him in the general meeting and pending a general body meeting the Board would be required to co-opt him as required in the article No. 10.4. Subject to this the order of the CLB regarding the reconstitution of the Board of the Respondent No. 1 is also required to be set aside. Conclusion - ( i ) The appellant has not proved that affairs of the respondent No. 1 company were conducted in a manner prejudicial to public interest or in a manner oppressive to the appellant. ( ii ) The appellant has not proved that the facts exist which would justify making of an order for winding up of the respondent No. 1 on the ground that it is just and equitable to do so but to wind up the company would unfairly prejudice the appellant. ( iii ) In the absence of any proof that the affairs of the respondent No. 1 company were being conducted in a manner prejudicial to public interest or in the manner oppressive to the appellant and also in the absence of any justification to pass an order for winding up of the respondent No. 1 on the ground that it was just and equitable to do so the CLB lacked the jurisdiction to pass any order u/s 397 of the Companies Act. ( iv ) The CLB should have dismissed Company Petition and the same is accordingly dismissed. Company Appeal Lodging No. 4 of 2003 is dismissed and Company Appeal No. 6 of 2003 is allowed in aforesaid terms.

Summary

Issues Involved:
1. Maintainability of the Appeal
2. Whether an action which is illegal or irregular is per se oppressive
3. Acts of oppression
4. Preliminary objections regarding the maintainability of the petition u/s 397 of the Act
5. Regarding the Board meeting held on 4th June, 2002
6. Regarding general body meeting dated 9th September, 2002
7. Regarding nomination of respondent Nos. 6 to 9 by EMC by a letter dated 8th October, 2002
8. Public Interest

Summary:

Maintainability of the Appeal:
The appeal u/s 10F of the Act is maintainable only on questions of law and not on questions of facts. The appeal involves questions of interpretation of the Articles of Association and other legal questions, thus it cannot be dismissed at the threshold.

Whether an action which is illegal or irregular is per se oppressive:
An illegal or irregular action is not per se oppressive, but the illegality of an action may have a bearing upon its oppressiveness. The Supreme Court in Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holdings Ltd. held that every illegality is not per se oppressive.

Acts of oppression:
The appellant alleged that actions of the majority shareholders were illegal and oppressive. The actions complained of were divided into three sets of events: the Board meeting on 4th June 2002, the general meeting on 9th September 2002, and the subsequent nomination of directors by EMC on 8th October 2002.

Preliminary objections regarding the maintainability of the petition u/s 397 of the Act:
1. Single Act of Oppression: A petition u/s 397 cannot be filed alleging a single act of oppression unless the effects of the single act are of a continuing nature.
2. Subsequent Events: The Division Bench allowed the appellant to amend the petition to include subsequent events, thus the CLB rightly considered these events.
3. Oppression of Minority by Majority: A petition u/s 397 is maintainable even if the oppression is not by the majority shareholders. The Supreme Court in Needle Industries (India) Ltd. considered a charge of oppression made by a majority shareholder against minority shareholders.
4. Just and Equitable Ground for Winding Up: The appellant did not prove facts justifying winding up on the "just and equitable" ground, nor did it show how winding up would unfairly prejudice it.

Regarding the Board meeting held on 4th June, 2002:
1. Absence of Notice: The appellant was not entitled to a notice of the Board meeting as it was not a director.
2. Quorum for the Board Meeting: Regulation 75 permitted the continuing directors to convene a Board meeting for increasing the number of directors to that fixed for the quorum.
3. Appointment of Mr. Freeman: Mr. Freeman's appointment was valid under article 10.13, and the appellant's challenge was for collateral purposes.
4. Replacement of Mr. Allison by Mr. Walsh: This was not challenged before the court.
5. Agenda for the Board Meeting: The absence of agenda was not pleaded in the petition, and thus cannot be considered.
6. Further Decisions: The decisions taken in the meeting were in the interest of the company and not oppressive.

Regarding general body meeting dated 9th September, 2002:
The appellant was entitled to nominate only one director by virtue of its 14.15% equity holding. The CLB's decision regarding the appointment of the second nominee director by the appellant was incorrect.

Regarding nomination of respondent Nos. 6 to 9 by EMC by a letter dated 8th October, 2002:
1. EMC's Bankruptcy: The Board of directors of EMC continued to have the power to manage the affairs of EMC.
2. Nomination of Employees: There is no restriction on a shareholder nominating employees of other shareholders as directors.
3. Timing of Nomination: EMC could nominate directors soon after the general meeting.

Public Interest:
Continuation of arbitration proceedings cannot be considered against public interest. Exercise of contractual rights against the Government is not against public interest.

Conclusion:
1. The appellant failed to prove that the affairs of the respondent No. 1 were conducted in a manner prejudicial to public interest or oppressive.
2. The appellant did not justify winding up on the "just and equitable" ground.
3. The CLB lacked jurisdiction to pass any order u/s 397 of the Act.
4. Company Petition No. 45 of 2002 is dismissed.
5. Company Appeal Lodging No. 4 of 2003 is dismissed and Company Appeal