2015 (9) TMI 1451 - HC - Companies Law

Scheme of merger challenged - Held that - We find that other than the eight shares held by the appellant - Shri H.K. Chadha, 99.99% shareholders are in agreement with the merger. All creditors, bankers etc. of the respondent company have also approved the merger and there is no objection at all by them till date to the functioning of the merged company. The appellant holding merely eight shares is litigating as he is clearly peeved at his removal as statutory auditor and that the petition as well as appeal against the merger has been filed maliciously and malafide. The appellant found that by statutory operation, he being a shareholder, could not continue as the statutory auditor of the respondent no.1. He then dishonestly tried to perpetuate this appointment by setting up a false claim of transfer of his shareholding to his son Shri Raman Chadha. Much litigation, as extracted above, was generated, clearly at the instance of the appellant utilising the name of his son as a shield. From the above narration of facts, we find substance in the contention of Mr. Alok Agarwal, learned counsel for the respondent that the objections of the appellant were motivated and malafide and stem out of malice because of his removal as a statutory auditor. A Chartered Accountant by profession, such actions on the part of the appellant are in utmost bad faith. For this reason, apart from the appeal being devoid of legal merit, the appellant deserves to be burdened with heavy costs at ₹ 50,000/- to the contesting respondent. The appellant shall additionally deposit ₹ 25,000/- as costs with the Delhi High Court Legal Services Committee for burdening this court with this malafide mischievous appeal. These costs shall be deposited within four weeks from today.

Issues Involved:
1. Removal of statutory auditor and subsequent malicious litigation.
2. Challenge to the merger approval between two companies.
3. Allegations of improper conduct of AGMs and non-compliance with statutory provisions.
4. Objections to the merger based on alleged statutory violations and financial misrepresentations.
5. Claims of bad faith and malafide intentions by the appellant.

Detailed Analysis:

1. Removal of Statutory Auditor and Subsequent Malicious Litigation:
The case highlights the difficulties a removed statutory auditor can create for a company. The appellant, a former statutory auditor, was removed due to disqualification under Section 226(3)(e) of the Companies Act, 1956, which disallowed shareholders from being appointed as statutory auditors. The appellant's subsequent actions, including filing a writ petition and various complaints, were seen as attempts to misuse his knowledge of the company's workings and initiate malicious litigation.

2. Challenge to the Merger Approval:
The appellant challenged the order dated 20th February 2013, approving the merger between the respondent companies, and the order dated 23rd April 2013, rejecting the modification of the court order accepting the scheme. The court noted that the merger was approved by 99.99% of the shareholders and all creditors, with no objections from statutory authorities like the Regional Director or the Official Liquidator. The appellant's objections were found to be without merit and motivated by malice due to his removal as a statutory auditor.

3. Allegations of Improper Conduct of AGMs and Non-Compliance with Statutory Provisions:
The appellant contended that AGMs for the years 2004 and 2005 were not conducted properly, which should have allowed him to continue as the statutory auditor. The court found these claims to be repetitive, vague, and unsupported by evidence. The Regional Director's inspection and subsequent report negated the appellant's claims, indicating that the AGMs were conducted as per statutory requirements.

4. Objections to the Merger Based on Alleged Statutory Violations and Financial Misrepresentations:
The appellant raised several objections to the merger, including non-compliance with Section 391(2) of the Companies Act, 1956, and alleged financial misrepresentations. The court, after examining the objections and responses, found that all statutory procedures were followed, and the objections were without substance. The court relied on the principles laid down by the Supreme Court in Miheer H. Mafatlal v. Mafatlal Industries Ltd., emphasizing that the court's role is supervisory and not appellate over the commercial wisdom of the majority.

5. Claims of Bad Faith and Malafide Intentions by the Appellant:
The court found that the appellant's objections were motivated by malice due to his removal as a statutory auditor. The appellant's actions, including setting up a false claim of share transfer to his son, were seen as dishonest attempts to perpetuate his appointment. The court noted that such actions by a Chartered Accountant were in utmost bad faith and burdened the judicial system with meritless litigation.

Conclusion:
The appeal was dismissed with costs imposed on the appellant, including Rs. 50,000 to the contesting respondent and Rs. 25,000 to the Delhi High Court Legal Services Committee, for burdening the court with a malafide and mischievous appeal. The court emphasized the importance of adhering to statutory provisions and the need to prevent misuse of judicial processes for personal vendettas.

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