2004 (5) TMI 600 - Board - Companies Law

Summary

Issues Involved:
1. Role and conduct of nominee directors of a State Government.
2. Breach of fiduciary duties.
3. Oppression of minority shareholders.
4. Failure to enforce contractual obligations.
5. Dilution of security for payment of energy bills.
6. Improper adjustment of dividend.
7. Delegation of powers to the Director (Finance).
8. Authority of the chairman.
9. Invocation of arbitration.
10. Reliefs sought by the petitioners.

Issue-wise Detailed Analysis:

1. Role and Conduct of Nominee Directors of a State Government:
The petitioners complained about the conduct of the nominee directors of a State Government, alleging they acted against the company's interest and in breach of fiduciary duties. The company was originally 100% owned by the Orissa Government, which later divested 49% shares to the petitioners. The petitioners argued that the strategic partner should have absolute control over the company's management, but the nominee directors of the State Government gained control and acted oppressively.

2. Breach of Fiduciary Duties:
The petitioners alleged that the nominee directors of the State Government breached their fiduciary duties by not enforcing the company's contractual rights, particularly regarding the tripartite agreement and GRIDCO bonds. The petitioners argued that the directors favored GRIDCO, a 100% government-owned company, over the company's interests.

3. Oppression of Minority Shareholders:
The petitioners claimed that the conduct of the nominee directors was oppressive to minority shareholders. They cited instances where the directors acted against the company's interests, such as not exercising the put option on GRIDCO bonds and not invoking the government's guarantee.

4. Failure to Enforce Contractual Obligations:
The petitioners argued that the nominee directors failed to enforce the company's contractual obligations, particularly regarding the tripartite agreement and GRIDCO bonds. The respondents countered that the board, including the petitioners' nominees, never proposed enforcing these obligations.

5. Dilution of Security for Payment of Energy Bills:
The petitioners alleged that the Director (Finance) diluted the security for payment of energy bills by entering into an agreement allowing GRIDCO to adjust interest payments against excess amounts in the escrow account. The respondents argued that this was a board decision, and the Director (Finance) acted accordingly.

6. Improper Adjustment of Dividend:
The petitioners claimed that the Director (Finance) improperly adjusted a dividend payment to favor the State Government. The respondents countered that the adjustment was made in anticipation of approval, and the State Government was entitled to receive its dividend.

7. Delegation of Powers to the Director (Finance):
The petitioners argued that delegating substantial powers to the Director (Finance) was against the company's interest and amounted to encroaching on the managing director's powers. The respondents contended that the Director (Finance) should have powers as per government guidelines, but the court ruled that such guidelines do not apply to the company after the strategic partner's induction.

8. Authority of the Chairman:
The petitioners questioned the chairman's authority to issue office orders and exercise casting votes. The court ruled that the chairman's role was limited to chairing board meetings and general body meetings, and he could not exercise executive powers without board resolution.

9. Invocation of Arbitration:
The managing director invoked arbitration against GRIDCO without board approval, which the respondents argued was beyond his authority. The court noted that the managing director should have board approval for arbitration but did not delve deeply into the issue as the arbitration led to an amicable settlement.

10. Reliefs Sought by the Petitioners:
The petitioners sought the deletion of Article 3026 related to the delegation of powers to the Director (Finance) and a direction for the State Government to divest further shares to make the petitioners the majority shareholders. The court declined to delete Article 3026 but directed that any delegation of powers to the Director (Finance) should be subject to affirmative votes from both parties. The court also refused to direct the State Government to divest further shares, stating it was a policy decision.

Conclusion:
The court found that the nominee directors of the State Government acted in a manner that was sometimes oppressive to the minority shareholders and against the company's interest. The court provided specific directions to protect the minority shareholders' interests and ensure the smooth functioning of the company. The petitioners' request for majority shares was denied, and the court emphasized the need for both parties to work together harmoniously for the company's benefit.