2015 (5) TMI 1117 - Board - Companies Law

Oppression and mismanagement - petition is filed under sections 397 and 398 read with section 402 and 403 of the Companies Act 1956 - Whether the petitioner has made out any case seeking injunction restraining the respondents from removing the petitioner from the post of director of the RI Company? - Held that - Invariably in settlement of disputes the interest of the company is paramount. As regards the removal of Director is concerned the decision of the shareholders is sovereign. A decision taken by the majority of shareholders is final and binding on the shareholders of the company. A director cannot claim any right to continue in the office against the collective decision of the shareholders under the garb of family company. Though the members of the family may start a business in the name of the company due to its groom over a period of time it may lose its sheen as a family in the long run. As the business and family grows simultaneously it is quite probable and inevitable that differences also arise among members of family in control of the business due to varied opinions. In a family run business such differences arise not due to any business/commercial decisions but rather giving importance or nurturing the growth of their own kin. Thus as long as the thread of goodwill runs through the family any decision taken for the sustenance of the family bond would survive the test of time. The notion of family company may be lost if members of the family start fighting among themselves to further their self-interest rather than the interest of the company. It is not uncommon that we find that fully grown family companies of yester years have of late been in news about rift between members of family as every members Of the family wanted to independently run a business. Once a bond is broken or severed it is difticult to unite. In such a scenario it cannot be called a family company as the underlying principle of give and take does not subsist. Whether the petitioner is entitled to seek a permanent injunction restraining the respondents from interfering with the carrying on duties enjoined on the petitioner in relation of Unit C of the RI Company - Held that - In view of the aforesaid the petitioner cannot seek any relief against the Articles of Association of the company. Hence the petitioner is not entitled to seek a permanent injunction restraining the respondents from interfering with the carrying on duties enjoined on the petitioner in relation of Unit C or the RI Company. Accordingly the issue is answered against the petitioner. The petitioner has not made out any case either on oppression or on mismanagement and the petition is miserably failed and liable to be dismissed.

Summary

Issues Involved:
1. Whether the petitioner has made out any case seeking injunction restraining the respondents from removing the petitioner from the post of director of the company.
2. Whether the petitioner is entitled to seek a permanent injunction restraining the respondents from interfering with the carrying on duties enjoined on the petitioner in relation to Unit 'C' of the company.
3. To what relief is the petitioner entitled.

Issue-wise Detailed Analysis:

1. Injunction Against Removal as Director:
The petitioner filed under sections 397 and 398 read with sections 402 and 403 of the Companies Act, 1956, seeking to restrain the respondents from removing him as a director. The petitioner received a show cause notice regarding:
- Setting up a consultancy service in the USA.
- Registration of certain patents in the name of his family members.

The petitioner argued that the consultancy service was to promote the company's business and that the patents would be assigned to the company. However, the respondents contended that the petitioner started a parallel business without Board approval, constituting a breach of fiduciary duty. The EGM held on 27.06.2009 resolved to remove the petitioner as director, which was approved by the majority. The Bench found that the petitioner's actions, including starting Devi Consultancy Services (DCS) without Board approval and not assigning patents, constituted a breach of fiduciary duty. The Bench also held that the EGM was conducted in compliance with the Articles of Association and the Companies Act. Therefore, the petitioner's removal was valid and legal.

2. Permanent Injunction to Carry Out Duties Related to Unit 'C':
Since the petitioner was validly removed as a director, he could not continue to carry out duties related to Unit 'C'. The Articles of Association empower the Board to appoint managing/executive directors from among its members. As the petitioner was no longer a director, he had no locus standi to continue as executive director or manage Unit 'C'. The Bench held that the petitioner could not seek relief against the Articles of Association, which are binding on the company and its members.

3. Relief:
The Bench concluded that the petitioner failed to make out a case of oppression or mismanagement. The petition was dismissed, and all interim orders were vacated. The Bench emphasized that the decision of the shareholders in the EGM is supreme, and a director cannot claim the right to continue against the collective decision of the shareholders.

Summary:
The judgment addressed the issues of directorial complaints and fiduciary duties within a family-run company. The petitioner's removal as director was upheld due to his unauthorized establishment of a parallel business and failure to assign patents to the company. The EGM was found to be conducted in compliance with the Articles of Association and the Companies Act. The petitioner's request for a permanent injunction to continue duties related to Unit 'C' was denied, as he was no longer a director. The petition was dismissed, with all interim orders vacated.