2016 (3) TMI 882 - Board - Companies Law

Oppression and mismanagement - Held that - It is crystal clear that the Company Petition was filed by the Petitioners/Non-Applicants based on the allegations of acts of oppression and mismanagement on the part of the Respondents and this implies that the Respondent Nos.2 & 3 were not having control over the affairs of the Company. This is further confirmed by the fact that in any annual return, the Respondent Nos.2 & 3 were not shown as Promoters. As admitted by the Applicant Advocate as well as the Petitioners/Non-Applicants Advocate, there has been restraint Order dated 15.12.2010, whereby interim injunction has been imposed from holding the general meetings of the Company. Consequently, the financial statements for the years 2010-11, 2011-12 & 2012-13 have not yet been filed. In this regard, there is nothing on record to show as to whether either of the rival parties has approached the Court seeking direction/ modification of the aforesaid restraint Order so as to facilitate the filing of the annual returns and financial statements by holding AGM to meet the statutory compliances. On the contrary, the Applicant (Respondent No.3) and Petitioner No. 1, without making some Company Application in the pending legal proceedings since 2010 before this Hon ble Board seeking directions/reliefs as to filing of the financial statements and invocation of Sections 164 and 167 of the Companies Act, 2013, have claimed to be Promoters and new Directors have been appointed. As a matter of fact, there are controversial arguments as to whether there is Promoter in the Company, especially due to the claims of both the rival parties of having control over the state of affairs of the Respondent No. 1 Company. In addition, the provisions of Sections 164 and 167 of the Companies Act, 2013 have been notified w.e.f. 01.04.2014 and hence, consequential action under Section 167(3) accrues on non-filing of financial statements for three years commencing from 01.04.2014. In view of this legal position, the erstwhile Directors continue to be validly and legally appointed directors and hence, the said Board of Directors is competent to appoint the Advocate by following the provisions of law. As such, in the interest of justice, the prayers made in the instant Company Application are hereby disallowed.

Summary

Issues Involved:
1. Allegations of oppression and mismanagement under Sections 397, 398, 399, 402, 403, and 406 of the Companies Act, 1956.
2. Validity of the appointment of new Advocate-on-record and Counsels under the authorization of erstwhile Directors.
3. Disqualification and vacation of office by erstwhile Directors under Sections 164 and 167 of the Companies Act, 2013.
4. Legality of the reconstitution of the Board of Directors.
5. Compliance with statutory requirements for filing financial statements.
6. Authority of Respondent Nos.2 & 3 as Promoters and their control over the company.

Detailed Analysis:

1. Allegations of Oppression and Mismanagement:
The Petitioners filed a Company Petition (C.P. No.509/2010) under Sections 397, 398, 399, 402, 403, and 406 of the Companies Act, 1956, alleging acts of oppression and mismanagement in the affairs of the Respondent Company. This petition is pending adjudication.

2. Validity of Appointment of New Advocate-on-record:
The Respondent No. 1 Company filed Company Application (C.A. No.684/2015) seeking an order to restrain and/or declare as non-est the appointment of any Advocate-on-record and/or Counsels under the authorization of the erstwhile Directors. The Respondent No. 1 Company argued that the erstwhile Directors vacated their offices due to defaults in filing financial statements, rendering any appointments by them unauthorized and illegal.

3. Disqualification and Vacation of Office by Erstwhile Directors:
The Respondent No. 1 Company contended that all erstwhile Directors vacated their offices under Section 167(1) read with Section 164(2) of the Companies Act, 2013, due to defaults in filing financial statements for 2010-11, 2011-12, and 2012-13. A Board Meeting on 06.02.2015 recorded the constitution of a new Board and appointment of new Directors under Section 167(3) of the Act.

4. Legality of Reconstitution of the Board of Directors:
The Petitioners argued that the purported appointment of Respondent Nos.2 & 3 as Directors was illegal and untenable, claiming no valid reconstitution of the Board could occur as the existing management was still in power. The Respondent No. 1 Company countered that the erstwhile Directors were disqualified and the new Board was validly appointed under Section 167(3).

5. Compliance with Statutory Requirements for Filing Financial Statements:
The Petitioners claimed they were unable to file Annual Returns and financial statements due to a Court Order preventing the holding of Annual General Meetings (AGMs). The Respondent No. 1 Company argued that the Court Order dated 15.12.2010 only restrained holding AGMs but did not prevent filing financial statements, and the Petitioners were aware of their statutory obligations.

6. Authority of Respondent Nos.2 & 3 as Promoters and Their Control Over the Company:
The Respondent No. 1 Company asserted that Respondent Nos.2 & 3 were named as Promoters in the Shareholders' Agreement and had substantial authority and responsibility, satisfying the criteria of Promoters as defined in Sections 2(27) and 2(69) of the Companies Act, 2013. The Petitioners contended that Respondent Nos.2 & 3 were not Promoters within the meaning of the Act and lacked control over the company's affairs.

Judgment:
The Board concluded that the erstwhile Directors were not disqualified under Sections 164 and 167 of the Companies Act, 2013, as these provisions came into effect on 01.04.2014 and required non-filing of financial statements for three consecutive years post-implementation. Consequently, the existing Board of Directors was deemed validly and legally appointed and competent to appoint Advocates. The prayers in C.A. No.684/2015 were disallowed, and the application was disposed of without any order as to costs.