2017 (7) TMI 1296 - AT - Companies Law

Oppression and mismanagement - siphoning off funds - illegal removal of Appellant from his directorship from the respondent No.1 company - It is the case of the appellant that the tribunal despite its finding that there is oppression and mis-management against the appellant with minority holding in the respondent no. 1 company instead of reinstating the appellant as director has directed the removal and exit of the appellant from the respondent no. 1 company. HELD THAT - Respondents have clearly stated that dividend was not given because it was never declared. However it is noted from the impugned order that the respondents have not been able to rebut the contention of the appellant as when a company is not functioning then the purpose of taking the whole amount of lease is not justified and amounts to siphoning off funds of the company and oppression of minority shareholders in the company - It is not in dispute that the respondent no.1 company is non-operating company and is in losses. Also the respondent no. 1 company is mainly having the property of 5000 sq. yards at 13 leather complex Jalandhar Punjab which has been given on lease to M/s M.A.Traders for a lease amount of 1, 00, 000/- per month. The said lease which expired on 13.04.2013 was further renewed for a period of 5 years however there is no record and reference of any board s resolution authorising to execute lease agreement by the respondents. It can also not be denied that on the date of expiry of the lease agreement - the appellant was not appointed -as the director of the company. Further it is also not in dispute that the appellant has been removed from the directorship of the respondent no. 1 company illegally because as per section 101 of the companies act 2013 a general meeting of the company can be called by giving not less than a clear 21 days notice in writing or through electronic mode in such manner as may be prescribed and section 100 of the Act relates to calling of the EOGM of the company for which decision has to be taken by the board of directors here both the statutory requirements have not been complied with. The business of the company is practically not there also the removal of the appellant from directorship of the R1 company is illegal and the remuneration drawn by the respondents when the company is not functional in itself may amount to siphoning of funds and an act of oppression against the minority shareholders - the law cannot be used as a weapon to remove the minority shareholder from the company when there is an act of oppression against the minority shareholders. Otherwise it would become easy for a majority shareholder to commit an act of oppression against the minority shareholder and then get him removed from the company by giving him his value of share which has already been reduced due to the act of oppression and mismanagement. The exit of the appellant without giving him the prior right to purchase the majority shareholding may also be unfair to him - It is directed that the appellant be restored as director of the R company till he exits the company. The order passed by the tribunal dated 19.01.2017 stands modified with certain directions - appeal disposed off.

Summary

Issues Involved:
1. Allegations of oppression and mismanagement.
2. Illegal removal of the appellant from directorship.
3. Non-payment of dividends and siphoning off funds.
4. Fair valuation and exit of the appellant from the company.
5. Remuneration of directors despite non-operational status of the company.

Detailed Analysis:

1. Allegations of Oppression and Mismanagement:
The appellants alleged oppression and mismanagement under sections 397, 398, 402, 403, and 406 of the Companies Act, 2013. The Tribunal found that the company’s affairs were being managed in a manner that ignored the interests of the appellant, who held the maximum shareholding. The Tribunal noted the distrust between the petitioner and the respondents, which led to the company’s dysfunctional state.

2. Illegal Removal of the Appellant from Directorship:
The Tribunal found that the termination of the appellant as a director was not legal, subject to the final decision in the pending civil suit. The appellant’s removal did not comply with mandatory statutory requirements under sections 100 and 101 of the Companies Act, 2013, rendering the decision of the meeting illegal and the removal null and void.

3. Non-payment of Dividends and Siphoning Off Funds:
The appellant contended that no dividends were paid for many years, which was not contradicted by the respondents. The Tribunal noted that the company’s non-operational status and the remuneration drawn by the respondents amounted to siphoning off funds and oppression of minority shareholders.

4. Fair Valuation and Exit of the Appellant from the Company:
The Tribunal directed an independent valuer to determine the fair value of the appellant’s shares as of 31.03.2015. The valuation would consider the company’s non-operational status and leased property. The respondents were directed to cooperate with the valuer and submit necessary documents. The appellant was to be given an exit by the respondents by paying the determined amount with interest. If the respondents declined or failed to pay, the appellant could purchase the respondents’ shares.

5. Remuneration of Directors Despite Non-operational Status:
The Tribunal questioned the entitlement of respondents to receive remuneration when the company was non-operational and the appellant received no such remuneration. The Tribunal directed that the respondents should not draw future remunerations until the appellant’s exit is finalized, and the amount should form part of the company’s income to be distributed among shareholders.

Conclusion:
The Tribunal modified the earlier order to reinstate the appellant as a director until his exit and provided a mechanism for fair valuation and potential purchase of shares. The respondents were directed to quote the acquisition value per share, giving the appellant the right to purchase at a discounted rate. If the appellant failed to exercise this right, the respondents could purchase the appellant’s shares. The Tribunal ensured that the order was implemented properly and directed the respondents not to draw future remunerations or alienate company assets during the interim period. The appeal was disposed of with no order as to cost.