2016 (5) TMI 645 - Board - Companies Law

Doctrine u/s 10 of CPC - request for stay of proceedings - allegations of violation of the principles of corporate governance which has led to payment crisis - Held that - The remedy under section 388B, 397, 398 is altogether different from the remedy, the investors sought in Civil Cases. Moreover, Section 10 says that the parties must be the same in the prior suit and the matter in issue shall be directly and substantially in issue in a previously instituted suit between the parties. Though, the fact of not making payment to the investors in both the cases is the same, the issues are entirely different in these two proceedings, the parties are different, the remedies are different, the objects are different, the nature of claim is different. Therefore, the bar u/s 10 of CPC is not at all applicable to the present proceeding. FTIL has made hectic efforts to keep these proceedings under carpet by highlighting that subject matter in all these proceedings is one and the same, ignoring the fact when fraud is manifest actions are many to control the damage that has been caused to individuals and to the public as a whole. Here it is managerial personnel against whom an allegation of defrauding investors for an amount of ₹ 5600 crores is made; therefore, an enquiry has to be conducted as expeditiously as possible to decide whether their removal of directors is necessary or not. The doctrine u/s 10 of CPC is not applicable to the present case. - Application dismissed - Decided against the applicant.

Issues Involved:
1. Whether the proceedings under Sections 388B, 397, and 398 of the Companies Act should be stayed or adjourned sine die.
2. Whether the proceedings under Section 10 of the Civil Procedure Code (CPC) apply to the current case.
3. The relationship between the compulsory merger proceedings and the current proceedings.
4. The impact of pending civil suits on the current proceedings.

Issue-wise Detailed Analysis:

1. Whether the proceedings under Sections 388B, 397, and 398 of the Companies Act should be stayed or adjourned sine die:

The Union of India (UoI) filed a Company Petition (CP) under Sections 397/398 read with Sections 388B, 388C, 401, 402, 403, 406, and 408 of the Companies Act, 1956, seeking the removal of directors (R2 to R28) from the board of Financial Technologies (India) Ltd. (FTIL) due to alleged fraud and mismanagement in its subsidiary, National Stock Exchange Ltd. (NSEL), leading to a payment crisis of approximately ?5,600 crores affecting 13,000 investors.

FTIL filed an application under Regulation 44 of the Company Law Board Regulations, 1991, to stay or adjourn the CP sine die until the final disposal of related proceedings pending before the High Court of Bombay. FTIL argued that the merger proceedings and the CP both aim to protect public interest and thus overlap, necessitating a stay to avoid conflicting decisions.

The UoI countered that the High Court of Bombay had already decided that the proceedings under Section 396 (amalgamation of companies) and the CP are in different fields. The CP aims to preserve the company's property and address the alleged mismanagement by the directors, which is distinct from the merger proceedings.

The judgment concluded that the CP proceedings are independent and distinct from the merger proceedings. The CP focuses on the removal of directors due to alleged fraud, while the merger proceedings deal with the amalgamation of companies. Therefore, the CP proceedings should not be stayed.

2. Whether the proceedings under Section 10 of the Civil Procedure Code (CPC) apply to the current case:

FTIL argued that the current proceedings should be stayed under Section 10 of the CPC, which mandates a stay of proceedings if the matter in issue is directly and substantially the same as in a previously instituted suit between the same parties.

The judgment noted that the civil suits pending before the High Court are not filed by the UoI but by public sector undertakings and individuals seeking monetary relief based on contractual obligations. Although the facts may be similar, the issues, parties, remedies, and objectives are different. The CP seeks to address public interest and corporate governance issues, while the civil suits seek contractual remedies.

Therefore, the bar under Section 10 of the CPC does not apply to the current proceedings.

3. The relationship between the compulsory merger proceedings and the current proceedings:

FTIL contended that the compulsory merger proceedings and the CP both aim to protect public interest, and thus the CP should be stayed until the merger proceedings are resolved.

The judgment emphasized that the public interest is a broad and inclusive term, and different actions can be taken to protect it. The merger proceedings focus on amalgamating two companies, while the CP addresses the alleged misconduct of the directors. Both proceedings are independent and serve distinct purposes.

The judgment reiterated that the CP proceedings should not be stayed solely because both aim to protect public interest. The High Court of Madras had only modified the order lifting the time limit for disposing of the CP, not indicating a stay of the proceedings.

4. The impact of pending civil suits on the current proceedings:

FTIL argued that the subject matter of the civil suits is the same as the CP, and since the civil suits were filed earlier, the CP should be stayed.

The judgment clarified that the civil suits are seeking monetary relief based on contractual obligations, whereas the CP addresses issues of fraud and corporate governance. The remedies and objectives are different, and the CP proceedings are not barred by the pending civil suits.

The judgment concluded that the action under Sections 388B, 397, and 398 is not overlapping with the civil suits or the merger proceedings. The CP proceedings are necessary to address the alleged fraud and mismanagement by the directors, and should proceed expeditiously.

Conclusion:

The application by FTIL to stay or adjourn the CP proceedings sine die was dismissed as misconceived. The CP proceedings under Sections 388B, 397, and 398 of the Companies Act are distinct and independent from the merger proceedings and civil suits, and should proceed to address the alleged misconduct by the directors.

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