2007 (6) TMI 556 - Board - Companies Law

Summary

Issues Involved:
1. Allegations of oppression and mismanagement u/s 397 and 398 of the Companies Act, 1956.
2. Misappropriation and diversion of funds.
3. Legality of the appointment of directors.
4. Maintainability of the petition under Sections 397 and 398.
5. Allegations of criminal activities and defamation.

Summary:

1. Allegations of Oppression and Mismanagement u/s 397 and 398:
The petitioners alleged that the respondents conducted the business of the respondent company in a manner oppressive to the petitioners and prejudicial to their interests. The petitioners held 48% of the paid-up equity capital, while the respondents diverted the business and funds to H.K. Goods Transport Pvt. Ltd., a company floated by R-2 with his wife and son as directors. The respondents argued that the petition under Sections 397 and 398 is maintainable only if the company is carrying on its functions and doing business at the time of filing the petition. They contended that the company had not been doing any business since November 1999.

2. Misappropriation and Diversion of Funds:
The petitioners accused R-2 of making unwarranted cash withdrawals and diverting funds to H.K. Goods Transport Pvt. Ltd. The respondents denied these allegations, stating that the business came to a standstill due to the petitioner's actions, including writing letters to freeze the company's bank accounts. The Division Bench of the Hon'ble High Court of Delhi had previously found no documentary evidence to show that funds were diverted from Pindi Road Links Pvt. Ltd. to H.K. Goods Transport Pvt. Ltd.

3. Legality of the Appointment of Directors:
The petitioners challenged the appointment of R-3 as a director, arguing that it was illegal and void. They claimed that P-1 was fraudulently shown as having vacated the office of Director u/s 283(1)(g) of the Act. The respondents maintained that the appointment was in accordance with the law.

4. Maintainability of the Petition under Sections 397 and 398:
The respondents raised preliminary objections regarding the maintainability of the petition, arguing that the company had not been carrying on any business for more than five years. They cited various judgments to support their contention that past acts which have come to an end cannot be challenged under Sections 397 and 398. The Board, however, found that the continuity of oppression and mismanagement could not be denied, as the business was allegedly continuing in the name of H.K. Goods Transport Pvt. Ltd.

5. Allegations of Criminal Activities and Defamation:
The respondents accused the petitioner of indulging in criminal activities, including the illegal sale of company assets. They also pointed out that the petitioner had been restrained by the Hon'ble High Court of Delhi from writing defamatory letters against the respondents. The Board found that the respondents had not come with clean hands and that the diversion of assets and goodwill to H.K. Goods Transport Pvt. Ltd. was established.

Order:
i. R-2 and R-3 were directed to restore the siphoned-off funds to the R-1's account forthwith.
ii. R-1 was directed to appoint an independent auditor to render proper accounts from 1.4.99 till date.
iii. The induction of R-3 on the Board was declared null and void, and status quo ante was restored.
iv. P-1 was restored as Director on the Board until he leaves R-1 upon payment of the value of his shares, to be determined by an independent valuer.
v. The parties were given liberty to apply in case of any difficulty in implementing the order.

With these directions, the Company Petition No. 32/2002 was allowed, all interim orders were vacated, and all CAs were disposed of with no order as to cost.