2014 (6) TMI 1046 - Board - Companies Law

Appointment of professional management organization such as Alvarez Marsal to manage the affairs of the Company - directing Promoter Group immediately cease to participate in the management and day to day operations of the Company - directing the Company and the Promoter Group to schedule and attend a meeting between BSR and Deloitte no later than three days from the date of this application - appointing a suitable person as an Administrator on the Board of Directors of the Company with the power to forthwith conduct the day to day affairs of the Company and to takeover charge of the maintenance of the statutory books and accounting records of the Company - restraint on Promoter Group from acting or holding themselves out to be Directors/executive of the Company - restraint on R-2 to R-8 from holding any meeting of the Board of Directors or shareholders of the Company and/or passing any resolution/s without the consent of this Hon ble Board - restraint on R-2 to R-8 from appointing any other persons as Directors on the Board of Directors of the Company - directing the Respondents to provide to Deloitte all information books and records including but not limited to the Tally server of the Company for the last two years - directing the Respondents jointly and/or severally to provide to the Petitioners all information as sought for by them in respect of the activities of the Company and to provide the Petitioner with all the necessary cooperation and information to ascertain the working of the affairs of the Company. HELD THAT - The Respondents all along avoided to accept service of documents. It is further apparent from their conduct that they did not extend any cooperation to Deloitte who was undertaking the impact assessment exercise on the basis of the consent order. The Respondents caused delay in their exercise of carrying out an impact assessment on one ground or the other. I have also carefully gone through various orders passed by the Committee headed by Mr. Mehta prescribing the mechanism whereby the Company was directed to provide its comments on the documents that were handed over by EY to Deloitte. However it appears from the perusal of the record that the Respondents avoided to accept the documents and despite an opportunity being afforded to them to raise any objections in a timely manner they did not do so. However it appears that to deflect attention from the findings of the interim report the Respondents have resorted to raise unfair allegations against Deloitte on the pretext that Deloitte did not get the documents authenticated from the Company. There are no reason to disregard the interim report submitted by Deloitte. I am also not inclined to accept the contentions of the Respondents that since no physical verification regarding the alleged variation in the assets of the Company was made the report is liable to be ignored on this ground. In the absence of full cooperation from the side of the Respondents it was not possible for the Deloitte to physically verify the assets of the Company. I am therefore not convinced with the contentions of the Ld. Sr. Counsel that the interim report deservers to be set aside. Based on the above I do not find any merits in the application. Prayers made in this application are thus declined. It is a settled proposition of law that while granting an ad-interim injunction order the Court is required to examine three essential ingredients. Firstly prima facie case in favour of a party who seeks an ad-interim injunction orders. Secondly balance of convenience and thirdly question of irreparable loss. In other words the court while granting or refusing to grant ad interim injunction should exercise sound judicial discretion to find out the amount of substantial mischief or injury which is likely to be caused to the parties if the injunction is refused as compared with that it is likely to be caused to the other side if the injunction is granted. In light of the above law I will consider the submissions advanced by the Ld. Counsel appearing for the respective parties. The CLB after giving an opportunity to the Parties to lead their evidence finally comes to a final conclusion that the Respondents have diverted the funds of the company to their own entities and/or there are related party transaction the CLB is competent to pass an order to recover such amounts from the third parties who have been benefited by the Respondents by way of diversion of funds. In my considered view an arbitrator is incapable to pass such orders. I have therefore come to the conclusion that looking into the nature of the disputes raised in the petition and the reliefs sought for are not capable of being arbitrated by an Arbitrator nor as an Arbitrator empowered to grant such reliefs which the CLB enjoys by virtue of Section 402 of the Act. Having regard to the facts and circumstances of the case as well as the law propounded by various courts granting of such reliefs would amount to granting of final prayers at the interim stage which is impermissible under law. I therefore keeping in mind the paramount interest of the Company and balancing the equities between the parties allow the prayers for further interim reliefs. The Respondent No. 1 shall not raise any new debt or issue any guarantee(s) without prior approval of this Board - The Respondent No. 1 Company shall not alienate encumber or dispose off any of its movable and/or immovable assets save and except it is required in the usual course of business and with prior information to the Petitioners and this Bench - Application disposed off.

Summary

Issues Involved:
1. Reference to Arbitration under Section 45 of the Arbitration and Conciliation Act, 1996.
2. Allegations of oppression and mismanagement under Sections 397 and 398 of the Companies Act, 1956.
3. Appointment of an independent management organization and administrator.
4. Validity and impact of the interim report submitted by Deloitte.
5. Interim reliefs sought by the Petitioners.

Detailed Analysis:

1. Reference to Arbitration under Section 45 of the Arbitration and Conciliation Act, 1996:
The Respondents sought to refer the disputes to arbitration based on the arbitration clause in the Shareholders Agreement (SHA) and Articles of Association (AOA) of the Company. The Petitioners opposed, arguing that the nature of disputes and reliefs sought under Sections 397/398 of the Companies Act are not arbitrable. The judgment emphasized that the Company Law Board (CLB) must examine whether the disputes are arbitrable before referring them to arbitration. The CLB held that the disputes involving allegations of oppression and mismanagement, which require wide-ranging powers under Section 402 of the Companies Act, are not arbitrable. Therefore, the application for arbitration was dismissed.

2. Allegations of Oppression and Mismanagement under Sections 397 and 398 of the Companies Act, 1956:
The Petitioners alleged serious financial irregularities, siphoning off funds, and mismanagement by the Respondents. The CLB noted that the statutory auditors and Deloitte raised several queries and discrepancies in the financial records, including differences in balance confirmations, fixed assets, and bank accounts. The CLB found prima facie evidence of acts of oppression and mismanagement, justifying the need for interim reliefs to protect the interests of the Petitioners and the Company.

3. Appointment of an Independent Management Organization and Administrator:
The Petitioners sought the appointment of an independent management organization and an administrator to manage the affairs of the Company. The CLB, while recognizing the seriousness of the allegations, deemed it harsh to appoint an administrator at the interim stage. Instead, the CLB imposed several interim measures to ensure transparency and prevent further mismanagement, such as restricting new debts, alienation of assets, and significant expenditures without prior approval.

4. Validity and Impact of the Interim Report Submitted by Deloitte:
The Respondents challenged the interim report by Deloitte, alleging it was based on unauthenticated data and biased. The CLB rejected these contentions, noting the Respondents' lack of cooperation and deliberate attempts to derail the assessment process. The CLB found no reason to disregard the interim report and relied on its findings to support the Petitioners' allegations of financial irregularities.

5. Interim Reliefs Sought by the Petitioners:
The CLB granted several interim reliefs to protect the interests of the Petitioners and the Company, including:
- Prohibiting the Company from raising new debts or issuing guarantees without CLB approval.
- Restricting the alienation or encumbrance of assets except in the usual course of business.
- Requiring fortnightly bank account statements and prior approval for significant expenditures.
- Allowing the Petitioners to inspect company documents and appoint nominee directors.
- Appointing an Independent Observer to oversee board meetings and ensure compliance with the CLB's orders.

The CLB dismissed the applications for arbitration and the challenge to the Deloitte report, while partially granting the interim reliefs sought by the Petitioners. The case was scheduled for final hearing on August 27, 2014.