2004 (10) TMI 620 - Board - Companies Law

Issues Involved:

1. Allegations of oppression and mismanagement under Sections 397 and 398 of the Companies Act, 1956.
2. Pleadings and requirements for maintaining a petition under Sections 397 and 398.
3. Applicability of Order XIV Rule 2 of the Civil Procedure Code to proceedings under Sections 397 and 398.
4. Determination of whether the company petition is demurrable and liable to be dismissed in limini.

Detailed Analysis:

1. Allegations of Oppression and Mismanagement:

The petitioner alleged acts of oppression and mismanagement in the affairs of M/s Mani Forgings Private Limited. It was claimed that the respondents, particularly respondents 3 and 4, interfered with the company's operations, falsely represented themselves as directors, siphoned off funds, and diverted business to a family-run proprietary business, thereby causing significant financial loss to the company. The petitioner, holding 32.5% of the share capital and claiming to be the Managing Director, argued that these actions justified relief under Sections 397 and 398 of the Companies Act, 1956.

2. Pleadings and Requirements for Maintaining a Petition:

The respondents contended that the petition lacked the necessary ingredients to constitute oppression or mismanagement under Sections 397 and 398. They argued that the petition did not justify a winding-up order on just and equitable grounds as required by Section 397(2)(b). They cited several decisions, including *R. Ramanathan Chettiar v. A. & F. Harvey Ltd.* and *Subhash Chand Agarwal v. Associated Limestone Ltd.*, to support their position that essential allegations must be made in the petition itself and cannot be supplemented by evidence later.

The petitioner countered that the requirements of Section 397(2)(a) & (b) are questions of fact and should not be confined to the question of law. It was argued that the petition, when read as a whole, contained sufficient allegations of oppression and mismanagement, including the removal of the petitioner from the office of Managing Director and the misappropriation of company funds by the respondents.

3. Applicability of Order XIV Rule 2 of the Civil Procedure Code:

The petitioner argued that by virtue of Order XIV Rule 2 of the Civil Procedure Code, a suit must be tried as a whole on all issues, and trial of preliminary issues is permissible only where the preliminary issue is a pure issue of law. The Gujarat High Court in *Saurashtra Cement And Chemicals Industries Ltd. v. Esma Industries P. Ltd.* held that the provisions of Order XIV Rule 2 would apply to proceedings under Sections 397 and 398 of the Act.

The respondents, however, argued that the applicability of Order XIV Rule 2 lost its relevance as the provisions of Sections 397 and 398 are now administered by the Company Law Board (CLB) in accordance with the Company Law Board Regulations, 1991, and to a limited extent by the provisions of the CPC as envisaged in Section 10E(4C) of the Act.

4. Determination of Whether the Company Petition is Demurrable:

The Board considered whether the company petition is demurrable and liable to be dismissed in limini. It was noted that Section 397 does not mandate specific averments that the facts would justify the making of a winding-up order on just and equitable grounds. The main allegations in the petition, including the false claims of directorship, siphoning of funds, and obstruction of the company's operations, were deemed sufficient to warrant a detailed examination.

The Board referred to several decisions, including *Kalinga Tubes v. Shanti Prasad Jain* and *Hanuman Prasad Bagri v. Bagress Cereals Pvt. Ltd.*, which emphasized that the petitioner must make out a case for winding up of the company on just and equitable grounds. The Board concluded that the allegations made in the petition, if proven, could constitute acts of oppression and mismanagement.

Conclusion:

The Board directed the respondents to file a counter-statement to the company petition by 30.11.2004 and the petitioner to file a rejoinder by 15.12.2004. The company petition was scheduled to be heard on 20.12.2004. The decision to not dismiss the petition in limini was based on the need to fully examine the allegations and determine whether they justified relief under Sections 397 and 398.

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