2020 (10) TMI 1272 - Tri - Insolvency and Bankruptcy

Proposal to change the designation of Applicant from the Managing Director to Non-Executive Director in the proposed Board meeting - seeking to declare that Applicant No.1 cannot be threatened and/ or cannot be removed as a Managing Director of Respondent No.9 till a final decision is arrived in the Petition. Whether the Bench has any discretionary power under its fold, even if it wants to exercise, to interfere with the Corporate Governance process of Respondent No.9 (Cotmac Electronics Private Limited) by interfering in the wisdom of the Board of the Company? HELD THAT - The appointment of any Director as Chairman or Managing Director is as per the Articles of the Company and the prerogative and the wisdom of the Board of the Company. It also clear that the Bench cannot interfere with the wisdom of the Board in such cases. Therefore, it becomes abundantly clear that this Bench cannot use its discretion for the wisdom of the Board of Respondent No.9. The issue of appointment of Director as Managing Director has to be in line with the Articles of the Company and the wisdom of the Board of the Company. This Bench places reliance on a similar Judgment given by Hon'ble High Court of Delhi in case of Ranjit Singh vs Sylvania Laxman Ltd, 1978 (5) TMI 131 - DELHI HIGH COURT where the Hon ble Delhi High Court has observed that the holding of a meeting is only the first stage in the matter and the result of such a meeting is quite different from restraining the removal of the Managing Director. If a meeting is held and action taken at that meeting to remove the Managing Director or Joint Managing Director, then only can it be said that the action is either wrongful or contrary to contract which would led to damages or it can be said that such action is ultra vires leading to the Court's decision that the removal is nonest. Before such removal actually takes place, there is no occasion for the grant of an interim injunction. The above Judgment of High Court clearly again substantiates the view of the Bench that even if there is going to be change of designation of a Managing Director to Non-Executive Director as per proposed Agenda of the Board meeting of the Respondent no. 9, there is no occasion for the grant of an interim injunction. This Bench feels that it has no business to interfere in the Corporate Governance matter which is entirely in the purview of Articles of Associations and Board of the Company. Application dismissed.

Summary

Issues Involved:
1. Allegations of mismanagement by the Sirur family.
2. Refusal to convert Class B Equity Shares to Class A Equity Shares.
3. Capability of Respondent No. 3 to manage the company.
4. Legality of the Extra Ordinary General Meeting held on 07.08.2020.
5. Removal of Applicant No. 3 as Executive Director.
6. Threat of removal of Applicant No. 1 as Managing Director.
7. Legal expenditures incurred by Respondents from company resources.

Detailed Analysis:

1. Allegations of Mismanagement by the Sirur Family:
The Applicants alleged that the Sirur family managed the activities of Respondent No. 9 without involving Applicant No. 1 and 3, aiming to gain personally and eventually shut down or shift operations.

2. Refusal to Convert Class B Equity Shares to Class A Equity Shares:
The Applicants claimed that despite a Board decision, Respondent No. 1 refused to convert their Class B Equity Shares to Class A Equity Shares, violating the quasi-partnership agreement.

3. Capability of Respondent No. 3:
The Applicants argued that Respondent No. 3, being a non-technical person, was incapable of handling the company’s operations professionally and in the best interests of the company.

4. Legality of the Extra Ordinary General Meeting (EGM) on 07.08.2020:
The Applicants sought to declare the EGM held on 07.08.2020 as illegal and void, and to stay any decisions made therein, particularly concerning the removal of Applicant No. 3 as Executive Director.

5. Removal of Applicant No. 3 as Executive Director:
The Applicants requested to stay the removal of Applicant No. 3 as Executive Director until a final decision in the main petition.

6. Threat of Removal of Applicant No. 1 as Managing Director:
The Applicants sought to prevent the removal of Applicant No. 1 as Managing Director and to declare any such proposal as illegal and void until a final decision in the main petition.

7. Legal Expenditures Incurred by Respondents:
The Applicants requested that Respondents be directed not to incur legal expenditures from the company’s resources until the final decision in the petition.

Findings:

1. Mismanagement Allegations:
The Tribunal did not find sufficient grounds to interfere with the Board’s management decisions.

2. Conversion of Equity Shares:
The Tribunal did not address this issue in detail, focusing instead on the removal of the Managing Director.

3. Capability of Respondent No. 3:
The Tribunal did not find evidence to support the Applicants’ claims regarding the incompetence of Respondent No. 3.

4. Legality of the EGM on 07.08.2020:
The Tribunal noted that the Applicants had previously sought similar reliefs which were denied, and no interim relief was granted by the NCLAT. Thus, the Tribunal did not find grounds to declare the EGM illegal.

5. Removal of Applicant No. 3 as Executive Director:
The Tribunal reiterated that the removal of directors is a corporate decision and cannot be interfered with unless it violates the law or the Articles of Association.

6. Threat of Removal of Applicant No. 1 as Managing Director:
The Tribunal emphasized that the removal of a Managing Director is governed by the Articles of Association and the Board’s discretion. The Tribunal cited previous judgments to support the view that it cannot interfere with the Board’s decisions unless there is a clear violation of the law.

7. Legal Expenditures:
The Tribunal did not find sufficient grounds to direct the Respondents regarding legal expenditures.

Conclusion:
The Tribunal dismissed the Interlocutory Application No. 1139 of 2020, stating that the Applicants were seeking reliefs previously denied and that the Board’s decisions regarding the removal of the Managing Director were within their corporate governance rights. The Tribunal emphasized that it cannot substitute its judgment for the Board’s wisdom unless there is a clear legal violation.