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2007 (5) TMI 652 - Board - Companies LawPetition filled u/s 397 and 398 - Oppression and Mismanagement - manipulation of accounts - matrimonial discord between the two directors - Seeking winding up of the company and appointment of the liquidation office - R-1 company was incorporated by husband and wife as the only two directors - stocks and cash of the company always remained under exclusive control of the respondent No. 2 - R-2 namely Shri Sandeep Dutt (petitioner s husband against whom divorce proceedings are pending) - HELD THAT - Considering the pleadings and the documents filed therewith as well as the arguments of the counsels of the parties it cannot be denied that the matrimonial discord is the root cause of this petition. But at the same time it is a composite petition having allegations of oppression mismanagement including siphoning off of funds and breach of fiduciary relationship prejudicial to the interest and health of the R-1 as well. It is true that it is not possible to separate the human aspect of disharmony in the personal relationship between the directors which has led to the deadlock and the ill health of an earlier profit making company. It is a fact that there is a deadlock. Cause is known - matrimonial discord. And may be even spite and negligence which cannot be ruled out. But the preliminary objections raised in the case cannot be sustained. The case of oppression and mismanagement u/s 397 and 398 of the Act has been made out. Personal cruelty in the relationship has lead to compelling circumstances of the wife director to withdraw from her successfully established business to look for another job to fed for herself and her two children. It is not an easy and painless decision. Driving an almost indispensable director out of the company resulting in the deadlock is itself an act of oppression. For the purposes of Sections 397 and 398 of the Act oppression may be an act of cruelty severity defaulting of will or excessive use of authority. It is unfortunate but it is true that the personal relationship of the directors has affected the functioning of the R-1 company. It is humanly impossible to exclude and detach the personal relationship when personal life and business are mixed up and intricably linked. The respondents preliminary objections as regards the misjoinder of the parties cannot be accepted in view of the fact that the appointment of R-2 s mother as additional director/director is in violation of Section 252 of the Act and is illegal and in contravention of the provisions of the Act. An illegal act cannot generate legal rights. However during the arguments the counsel for the petitioner did not insist on relief qua R-2 s mother her main allegations being against R-1 and R-2. As regards the petitioner joining hand with another person in the competing business alleged to be an unethical business practice affecting the clients and the goodwill of the R-1 the allegation is merely a bald allegation no case is made out what else can a professional interior designer do other than that to earn a livelihood for herself and her two children is also not understood. The R-2 has failed to appreciate the constraints of her choice. Thus I find that the respondents have failed to meet the allegations on merits of the case under Sections 397 and 398 of the Act. The manipulation of accounts of the R-1 siphoning off of discount sale consideration and non-furnishing of the statements and annual returns to the ROC for several years are all acts of oppression and mismanagement in the conduct of the affairs of the company. Since there is a deadlock in the company the petitioner has expressed her inability to be in the R-1 s business in the circumstances of this case parting ways may be good for the general health of the R-1. It is also a settled proposition of law that the fiduciary capacity within which Directors have to act enjoins upon them a duty to act on behalf of the company with utmost care and skill and due diligence and in the interests of the company. They have a duty to make full and honest disclosure to shareholders regarding all important matters relating to the company. In the present case the fiduciary duties have been breached by both the parties - by the petitioner as well as by the respondents. Both the parties have indulged in acts in the conduct of the affairs of the company which have been prejudicial to the interests of the R-1. To do substantial justice between the parties I hereby direct the R-2 to restore the sale consideration received in respect of the discounted sales and other amounts siphoned off from the R-1 company s accounts forthwith. Since there is a deadlock in the R-1 and since both the parties know the worth of the company I hereby direct the parties to arrive at an amount to be paid to the petitioner for her going out of the company which would be acceptable to the petitioner. In case no such acceptable consideration is arrived and paid to the petitioner within a month of receipt of this order I consider it appropriate to direct that both the parties to be present in the CLB Court Room along with their counsels on 23.8.2007 at 11.30 a.m. to bid for the shares and the party which bids the higher price for the shares should purchase the shares of the other party at that price. Hence I dispose of the petition keeping seisin over the matter till the finalization of the bidding if required. All CA s stand disposed off. All interim orders stand vacated.
Issues Involved:
1. Allegations of oppression and mismanagement under Sections 397 and 398 of the Companies Act, 1956. 2. Control and management of company finances and assets. 3. Legality of the appointment of an additional director. 4. Allegations of siphoning off funds and misappropriation. 5. Impact of matrimonial discord on company operations. 6. Non-joinder of necessary parties in the petition. Detailed Analysis: 1. Allegations of Oppression and Mismanagement: The petitioner, a professional interior designer, alleged oppression and mismanagement in the affairs of the respondent company, M/s Chavi Designs Pvt. Ltd., specifically against her husband, respondent No. 2, under Sections 397 and 398 of the Companies Act, 1956. The petitioner claimed that after being thrown out of the company, respondent No. 2 did not comply with statutory requirements under the Companies Act, 1956, and the Income Tax Act, leading to complete oppression and mismanagement. 2. Control and Management of Company Finances and Assets: The petitioner argued that the stocks and cash of the company remained under the exclusive control of respondent No. 2, who manipulated the balance sheets and profit and loss accounts. It was claimed that the turnover was more than Rs. 5 crores, but the true financials were never shown. The respondent allegedly siphoned off funds amounting to Rs. 10,19,000/- and sold company stocks at discounted prices without proper accounting. 3. Legality of the Appointment of an Additional Director: The petitioner contended that respondent No. 2's mother, Shubhra Dutt, was illegally appointed as an additional director beyond the permissible term under Section 260(2) of the Companies Act. The appointment was not renewed after the AGM held on 27.9.1999, making her continued role as a director illegal and in contravention of the Act. 4. Allegations of Siphoning Off Funds and Misappropriation: The petitioner alleged that respondent No. 2 siphoned off company funds and sold stocks from the showroom at Aya Nagar and Greater Kailash at discounted rates under the name Chavi Interiors, without maintaining proper accounts. The respondent did not provide any explanation for the use of the withdrawn money or the stock worth Rs. 34,43,375/-. 5. Impact of Matrimonial Discord on Company Operations: The respondent argued that the petition under Sections 397 and 398 was essentially a matrimonial dispute. The petitioner had withdrawn from the company to take up employment elsewhere, which led to a halt in the company's operations. The respondent claimed that the petitioner's actions were driven by spite and vengeance due to the breakdown of their matrimonial relationship, and the petition was filed to pressurize the respondent in the ongoing divorce proceedings. 6. Non-Joinder of Necessary Parties: The respondent contended that the petition was not maintainable due to the non-joinder of necessary parties, specifically Shubhra Dutt, who was alleged to have committed forgery and misappropriation of company funds. The respondent argued that without impleading her, the petition should be dismissed. Judgment: The judgment recognized that the matrimonial discord between the directors had significantly impacted the company's operations, leading to a deadlock. The court found that the allegations of oppression and mismanagement were substantiated, including the manipulation of accounts, siphoning off of funds, and non-furnishing of requisite statements to the ROC. The appointment of Shubhra Dutt as an additional director was deemed illegal. The court directed respondent No. 2 to restore the siphoned amounts and ordered that the parties should either agree on a settlement amount for the petitioner's exit from the company or participate in a bidding process to determine the buyout price for the shares. The court emphasized the fiduciary duties of directors and the need for full and honest disclosure to shareholders. The petition was disposed of with directions for the restoration of siphoned funds and potential buyout arrangements, with the court retaining jurisdiction until the finalization of the bidding process. All interim orders were vacated, and no costs were awarded.
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