2016 (6) TMI 138 - HC - Companies Law

Appointment of auditor - Held that - There is no material produced on record to contend that the appellant herein-original respondent No.3 and his group are having no confidence in the statutory auditor. No material is produced to show that the statutory auditor was appointed by the original petitioners No.1 and 2 still act or that the auditor is acting as per the directions of petitioners No.1 and 2. However, at the same time confidence in the enquiry for examination of the record to be made by the Auditor is required. Hence, we find that if there is joint consensus amongst original petitioners No.1 and 2 as well as original respondent No.3, for a particular auditor, he can be assigned the work for examination of the record of the Company as per the direction No.(h) but in the absence thereof, the matter should be left to the Registrar of the Companies to nominate an auditor for examination of the record of the Company. Petitioners No.1 and 2 and respondent No.3 will be the joint signatories of the bank account of respondent No.1-Company and such shall be required for incurring expenses on behalf of the Company, excluding the routine expenses for payment of salary of the staff and for payment of any statutory dues of the Company. In case of routine expenses such as payment of salary of the staff and statutory dues, signature of any of the two persons from amongst the aforesaid three shall be sufficient for the operation of the bank account; The Auditor, who is to be nominated by the Registrar of Companies, in case there is no consensus between the parties, shall examine the allegations of misappropriation of money in the process of audit and the findings, if any, be reported in the auditor s report and the balance sheet.It is observed that, if within a period of two weeks, original petitioners No.1 and 2 as well as original respondent No.3 give a common name of any auditor, the Registrar of Companies shall assign the work to such auditor, failing which, within a period of two weeks therefrom the Registrar of Companies shall exercise his power for nominating the auditor as referred to herein above. It is observed that, if within a period of two weeks, original petitioners No.1 and 2 as well as original respondent No.3 give a common name of any auditor, the Registrar of Companies shall assign the work to such auditor, failing which, within a period of two weeks therefrom the Registrar of Companies shall exercise his power for nominating the auditor as referred to herein above

Summary

Issues:
1. Appellant's contention against CLB's order.
2. Majority and minority shareholding dispute.
3. Directions issued by CLB.
4. Applicability of partnership principles.
5. Modification of CLB's directions.
6. Appointment of auditor for examination of misappropriation allegations.

Analysis:

1. The appeal challenges the Company Law Board's (CLB) order regarding the company petition. Appellant's counsel argued that decisions were taken by the Board, including permanent directorship and affirmative vote, and misappropriation allegations were not proven due to the summary procedure. Appellants objected to directions allowing original petitioners to manage the company exclusively.

2. The CLB's order highlighted the majority shareholding of original petitioners compared to respondents. The CLB found that the minority oppressed the majority, leading to directions such as declaring certain appointments and resolutions null and void. The CLB aimed to prevent prejudicing the majority's interests and ensure fair functioning under partnership principles.

3. CLB's directions included nullifying appointments, resolutions, and affirming joint signatories for bank accounts. The CLB also mandated cooperation among parties, corrections in statutory records, and an audit for misappropriation. The High Court upheld most directions but modified some for operational clarity.

4. The High Court emphasized the application of reasonable prudence in issuing directions, considering the majority's rights and preventing minority oppression. The Court agreed with CLB's approach of undoing actions not in the majority's interest, maintaining the company's fair operation.

5. Modifications were made to CLB's directions, particularly regarding bank account operations. The High Court allowed joint signatures for routine expenses but required specific authorization for other expenditures to ensure fair participation and prevent exclusion of any party.

6. The appointment of an auditor for examining misappropriation allegations was crucial. The High Court mandated joint consensus for selecting an auditor; otherwise, the Registrar of Companies would nominate one. This ensured an impartial audit process and fair investigation into financial discrepancies.

In conclusion, the High Court disposed of the appeal, upholding most of CLB's directions while modifying some for operational clarity and fairness. The judgment emphasized the importance of majority rights, prevention of minority oppression, and impartial audit processes for corporate governance.