2014 (4) TMI 1191 - Board - Companies Law

Oppression and mismanagement - whether the petitioner himself voluntarily resigned from the office of director of the respondent No. 1-company Or the respondents fabricated his resignation and filed the same in the office of the Registrar of Companies ( RoC ), thereby showing his cessation as a director of the respondent No. 1-company? - Held that - The acts complained of and the conduct of the respondents towards the petitioner narrated hereinabove are unfair, prejudicial, wrong, harsh and burdensome and there is an element of lack of probity and fair dealing and they are containing till date. The petitioner has succeeded to make out a case under sections 397 and 398 of the Act. Therefore, in order to bring an end to the acts of complained off. The petition is therefore, disposed off with the following directions (i) It is declared that the purported EGM held on 7th July, 2011 is non est illegal and ultra vires and the resolution passed there at to the extent it relates to the removal of the petitioner as a director is invalid, ineffective and not binding and the same is hereby set aside. The petitioner is reinstated to the post of director with effect from the said date with all consequential benefits. Let statutory form be filed with the RoC within a period of 30 days. (ii) The appointment of the respondent Nos. 3, 4 and 5 as directors on the Board of the company is declared illegal, non est and invalid and they are removed as the directors of the company with immediate effect. Let statutory form be filed as required under law. (iii) It is further declared that the meetings where at the allotment of further shares were made to the respondent Nos. 3, 4 and 5 are declared non est, ultra vires and illegal and the resolutions passed thereat insofar as they relate to allotment of additional shares to the respondent Nos. 3 to 5 and further shares to the respondent No. 2 is set aside and status quo ante be maintained as it existed prior to allotment of such shares. The respondents shall get back their respective application money. However, it is clarified that the company is not prevented from making allotment of additional shares for raising funds in accordance with the provisions contained in the Act for the time being in force and the articles of association of the company. (iv) It is further declared that the AGM purportedly held on 6th March, 2006 where the auditors were appointed is declared as null and void and the resolution passed thereat insofar it relates to appointment of Sagar Kawna as statutory auditors is hereby set aside. (v) After the re-constitution of the Board of directors as directed above, they may appoint a statutory auditor for the company in accordance with the provisions of law who shall re-audit the accounts for the years beginning from 31st March, 2009-10 onwards. Further, the newly appointed auditor shall also enquire into the loss, if any, caused to the company by any of the directors including that of the petitioner and such loss will be recovered from the party (ies) whosoever is found responsible from his/their personal resources and the amount so recovered will be paid to the company. (vi) In case the petitioner is willing to exit out of the company, he may submit his request to the Board and in that case, the prayer may be considered by the company in terms of its articles of association. The petitioner shall also be at liberty to move a miscellaneous application before the CLB in pursuance to the said direction, if he is so advised.

Summary

Issues Involved:
1. Illegal holding of Board meetings and general meetings without serving statutory notice.
2. Illegal removal of the petitioner as director.
3. Illegal appointment of new directors.
4. Unauthorized increase in authorized share capital.
5. Illegal allotment of additional shares.
6. Siphoning of funds.
7. Financial mismanagement.

Detailed Analysis:

1. Illegal Holding of Board Meetings and General Meetings Without Serving Statutory Notice:
The petitioner alleged that Board meetings and general meetings were held without serving statutory notice as required by law. The respondents contended that notices were duly served. The Board found that the service of notice through Under Postal Certificate (UPC) was not sufficient and reliable, as corroborative evidence was lacking. The petitioner's claim that he did not receive notices was accepted, making the meetings invalid.

2. Illegal Removal of the Petitioner as Director:
The petitioner claimed that he was fraudulently removed as a director using a pre-signed blank resignation letter. The respondents argued that the petitioner had voluntarily resigned and was re-appointed later. The Board concluded that the petitioner's removal based on the alleged resignation letter was irrelevant since he was reinstated. However, the removal under Section 284 of the Companies Act was deemed invalid due to lack of proper notice and the company being a quasi-partnership, thus constituting an act of oppression.

3. Illegal Appointment of New Directors:
The petitioner challenged the appointments of respondents Nos. 3, 4, and 5 as directors, claiming they were made without proper notice and were ante-dated. The Board found that the appointments were indeed ante-dated and made without proper notice, rendering them illegal and invalid. The respondents failed to provide convincing evidence to prove the legality of these appointments.

4. Unauthorized Increase in Authorized Share Capital:
The petitioner alleged that the authorized share capital was increased from Rs. 5 lakh to Rs. 25 lakh without proper notice or meeting. The respondents claimed that notices were duly served and the increase was necessary for the company's benefit. The Board found that the increase in share capital and subsequent allotment of shares were done unilaterally without offering shares to the petitioner, constituting oppression.

5. Illegal Allotment of Additional Shares:
The petitioner's shareholding was reduced from 50% to 2% due to the allotment of additional shares to the respondents. The respondents argued that the allotment was necessary for the company's financial needs. The Board concluded that the allotment was made with the intent to gain control over the company and was done without offering shares to the petitioner, making it illegal and oppressive.

6. Siphoning of Funds:
The petitioner accused the respondents of siphoning funds for personal benefits. The Board noted financial irregularities and mismanagement, indicating that funds were indeed misappropriated by the respondents. The Board directed an independent audit to determine the exact loss caused to the company.

7. Financial Mismanagement:
The petitioner highlighted various instances of financial mismanagement, including unauthorized withdrawals and failure to conduct proper audits. The Board acknowledged these issues and ordered a re-audit of the company's accounts from March 31, 2009, onwards, to ascertain the financial mismanagement and recover any losses from responsible parties.

Conclusion and Directions:
1. The EGM held on July 7, 2011, was declared illegal, and the petitioner was reinstated as a director with all consequential benefits.
2. The appointments of respondents Nos. 3, 4, and 5 as directors were declared illegal and they were removed from their positions.
3. The increase in authorized share capital and allotment of additional shares to respondents Nos. 2, 3, and 4 were declared illegal and set aside.
4. The AGM held on March 6, 2006, for appointing auditors was declared null and void.
5. A re-audit of the company's accounts was ordered, and any losses due to mismanagement were to be recovered from responsible parties.
6. The petitioner was given the option to exit the company, with the Board considering the request as per the company's Articles of Association.
7. No order as to costs, and the interim order was vacated.

The petition was disposed of with these directions, ensuring the petitioner's rights were upheld and the company's management was corrected.