2011 (2) TMI 1279 - HC - Companies Law

Oppression and mismanagement company is closely held company of six brothers - family had another business venture run by another closely held company which borrowed funds from Bank - loan was secured by a corporate guarantee executed by Aruna Theatres and Enterprises - default committed by them - bank initiated proceedings - Receiver appointed by the Debts Recovery Tribunal had taken over charge of the management of the theatres receiver alleged acts of oppression and mismanagement - On basis of such report instant petition under section 397/398 was preferred by legal heirs of six brothers and other shareholders of company making out a case that facts disclosed in such report established oppression and mismanagement respondent challenged the petition on the ground that there were no continuing acts of oppression and mismanagement as on the date of filing of the company petition Held that - temporary suspension of perpetration of acts of oppression and mismanagement by receiver, not for benefit of company but for benefit of bank, could not entitle respondents to contend that there were no acts of oppression and mismanagement on date of filing of instant petition - company petition was maintainable - In favour of company

Issues Involved:
1. Maintainability of the petition under sections 397/398 in the absence of continuing acts of oppression and mismanagement.
2. Adherence to rules of pleading and evidence by the Company Law Board (CLB).
3. Correctness of findings on alleged acts of oppression and mismanagement.
4. Legality of ordering an investigative audit under section 237(b).
5. Evidentiary value of the receiver's reports.
6. Acceptance of photocopies of documents after conclusion of arguments.
7. Consistency of CLB's order with the directions of the High Court.
8. Reliance on a letter from a non-party to the proceedings.

Detailed Analysis:

1. Maintainability of the Petition:
The petition was filed after the appointment of a receiver by the Debts Recovery Tribunal (DRT). The appellants argued that since the alleged acts of oppression and mismanagement were not continuing at the time of filing the petition, it was not maintainable. However, the court held that the consequences of the acts complained of continued up to the date of filing the petition. The temporary suspension of these acts by the receiver did not negate the ongoing adverse effects on the company. Therefore, the petition was maintainable.

2. Adherence to Rules of Pleading and Evidence:
The appellants contended that the CLB should have adhered to strict rules of pleading and evidence. The court noted that the CLB is guided by principles of natural justice and has the discretion to regulate its own procedure. The fundamental facts alleged by the respondents were admitted by the appellants, shifting the burden of proof to the appellants. The court found that the CLB provided adequate opportunities for the appellants to respond, and the acceptance of additional facts and documents was within its discretion.

3. Correctness of Findings on Alleged Acts of Oppression and Mismanagement:
The court examined each act of oppression and mismanagement:
- Sale of Petrol Bunk: The sale was found to be questionable due to the payment of compensation to the first appellant despite ongoing litigation for arrears of rent.
- Lease of Kalyana Mandapam: The lease was granted at a rent far below market value, benefiting the first appellant's son.
- Receipt of Rents from RPG Cellular: The rental income was diverted to the first appellant's son, which was stopped by the receiver.
- Receipt of Remuneration by the First Appellant: Unauthorized payments were made to the first appellant and others.
- Receipt of Advances from Shop Tenants: The allegation was based on the receiver's report, which was found credible.
- Failure to Convene Meetings and Serve Notices: The CLB found that the appellants failed to comply with statutory requirements.

4. Legality of Ordering an Investigative Audit under Section 237(b):
The court upheld the CLB's order for an investigative audit, finding that the circumstances justified such an investigation. The power under section 237(b) is administrative, and the CLB formed a valid opinion based on the facts presented.

5. Evidentiary Value of the Receiver's Reports:
The court held that the receiver's reports, while not conclusive evidence, were sufficient to form an opinion for ordering an investigation. The receiver acted within his mandate to protect the interests of the company and its stakeholders.

6. Acceptance of Photocopies of Documents:
The court found that the acceptance of photocopies after the conclusion of arguments did not prejudice the appellants, as the core allegations were already admitted by them.

7. Consistency of CLB's Order with High Court Directions:
The court confirmed that the CLB's order was consistent with the directions issued by the High Court in C.M.A. No. 1900 of 2007. The newly constituted board of directors was directed to act in compliance with the DRT's order appointing the receiver.

8. Reliance on a Letter from a Non-Party:
The court noted that the letter from K. Vadivel Murugan did not significantly influence the CLB's decision. The allegations were supported by other credible evidence.

Finale:
The appeal was dismissed, and the court opened the sealed cover containing the investigative auditor's report, which corroborated the findings of the CLB. The report highlighted significant financial irregularities and mismanagement, further justifying the CLB's order.

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