2006 (8) TMI 586 - Board - Companies Law

Oppression and mismanagement - manipulation of records and converting the company into a Shell Company - removal from directorship by appointing new directors - violation of the proper and legal procedure prescribed - gained control of the company and siphoned off funds - misappropriated the funds of the company and has damaged and delayed the project of the company - HELD THAT - All the observations show that the conduct of the respondents is burdensome and oppressive to the petitioners and prejudicial to the interest of the company. From the narration of the events the only conclusion that I can come to is that the respondents have not been able to refute the charges of oppression and mismanagement in the affairs of the company and therefore the petition deserves to be allowed. Relief to be granted depends on the facts of a particular case. The facts of the present case are so manifestly against respondents that two opinions are not possible on the aspect of relief. Relief has to be granted in the present case to undo the advantage gained by the respondents through their manipulations. To safeguard the interest of the financial institutions who chose to fund such a prestigious project in the interest of the country and to do substantial justice between the parties I order as follows I. The resolutions of the R-1 company removing the P-1 and the P-2 from directorship and appointing R-3 R-4 R-5 and R-6 as additional directors are hereby declared as null and void and status quo ante is restored. II. Since nothing has been placed on record to show the need of the company for further investment and hence need for allotment of additional shares I hold the action of increase in the share capital and allotment of additional shares to be totally malafide only motive being to gain control of company hence increase in the share capital and allotment of additional shares is hereby set aside. III. To safeguard the interest of financial institutions namely the Technology Development Board Department of Science and Technology Ministry of Science and Technology Technology Bhawan; Ministry of Food Processing Industries Panchsheel Bhawan August Kranti Marg and the Bank of India New Delhi Corporate Bhawan Banking Branch 37 Shaheed Bhagat Singh Marg (Near Shivaji Stadium) - these organizations are hereby directed to nominate one director each on the Board of the R-1 company with immediate effect. Such nominee directors would continue to be on the Board of the R-1 company till the funds advanced by these organizations are recovered/repaid. The minimum quorum for Board Meetings would comprise two directors one out of which must be from one of these financial institutions. IV. The Board of Directors constituted in compliance of this order at III above in its first meeting to be held within one month of this order shall appoint auditors and order special audit to audit the accounts of the R-1 company from its inception till date within a period of three months from the date of this order. Such audited accounts must be made available to the Ministry of Company Affairs New Delhi to the Registrar of Companies New Delhi; to the Regional Director Kanpur and to the financial institutions forthwith. The R-l company shall pay audit fees @ 50, 000/- for each accounting year. With the above directions I dispose of this petition.

Issues Involved:

1. Allegations of oppression and mismanagement under Sections 397/398 of the Companies Act, 1956.
2. Legality of removal of petitioners from directorship.
3. Legality of increase in authorized share capital and further allotment of shares.
4. Allegations of manipulation of records and misappropriation of funds.
5. Validity of appointment of additional directors.
6. Conduct of the respondents and their compliance with legal procedures.
7. Maintainability of the petition under Section 399 of the Companies Act, 1956.

Detailed Analysis:

1. Allegations of Oppression and Mismanagement:
The petitioners alleged "oppression" and "mismanagement" by the respondents, specifically pointing out the illegal increase in authorized share capital, the arbitrary removal of petitioners from directorship, and the appointment of new directors without following proper procedures. The respondents were accused of manipulating the shareholding structure to marginalize the petitioners and gain control over the company, thereby siphoning off funds.

2. Legality of Removal from Directorship:
The petitioners contended that Petitioner No. 1 was removed as a director through a fictitious resolution without proper notice, which was highly objectionable and oppressive. Similarly, Petitioner No. 2 was removed without proper board meetings, which amounted to oppression. The respondents argued that the removal was legal and in compliance with Section 283(1)(g) of the Companies Act. However, the judgment found that the removal was not conducted following proper procedures, making it oppressive.

3. Increase in Authorized Share Capital and Allotment of Shares:
The petitioners argued that the increase in share capital and the allotment of additional shares were done with malafide intent to reduce their shareholding and control over the company. The respondents failed to justify the necessity for such an increase or to prove that proper procedures were followed. The judgment held that the increase in share capital and the allotment of additional shares were malafide, aimed at gaining control over the company, and thus were set aside.

4. Manipulation of Records and Misappropriation of Funds:
The petitioners alleged that the respondents manipulated records and misappropriated funds. The respondents countered that Petitioner No. 1 was guilty of misappropriating company funds. The judgment noted that the allegations and counter-allegations indicated a significant level of mismanagement and manipulation of records, which were burdensome and oppressive to the petitioners.

5. Appointment of Additional Directors:
The petitioners contended that the appointment of additional directors (Respondents Nos. 3, 4, 5, and 6) was illegal and conducted without proper notice or quorum. The respondents claimed these appointments were necessary. The judgment found that these appointments were made arbitrarily without following the proper procedures, thus were declared null and void.

6. Conduct of Respondents and Compliance with Legal Procedures:
The judgment highlighted that the respondents' conduct was burdensome and oppressive, failing to refute the allegations of oppression and mismanagement. The respondents did not follow proper procedures in removing directors, increasing share capital, and appointing additional directors, which was prejudicial to the interest of the company and the petitioners.

7. Maintainability of the Petition under Section 399:
The respondents argued that the petition was not maintainable as the petitioners' shareholding was reduced below 10%. However, the judgment held that if the shareholding was reduced due to an issue of further shares, and if such issue was challenged, the petition would not be dismissed. The petitioners' shareholding, despite being reduced, constituted one-fourth of the total members, making the petition maintainable under Section 399.

Conclusion:
The judgment concluded that the respondents failed to refute the allegations of oppression and mismanagement. The resolutions removing the petitioners from directorship and appointing additional directors were declared null and void. The increase in share capital and allotment of additional shares were set aside. The judgment ordered the appointment of nominee directors from financial institutions to safeguard their interests and directed a special audit of the company's accounts. The petition was disposed of with these directions, and no order as to cost was made.

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