2016 (7) TMI 476 - HC - Companies Law

Oppression and mismanagement - main grievance of the appellant is the sale of the property of the company - necessity of sale transaction - whether the sale transactions were fraudulent in nature and that they were entered into with the son of one of the Directors for a consideration lesser than the market value? - failure of the respondents to produce the dispatch register to show that they sent the notices - Held that - The company in question was a private limited company at the time when the sale transaction took place. Therefore, even assuming that no notices were issued for the General Body Meetings, such failure would not vitiate the sale transaction that could have been validly approved in the meeting of the Board of Directors. Hence, the first ground of attack to the order of the Company Law Board cannot be sustained. There is no dispute about the fact that the company in question had borrowed money from Dena Bank and State Bank of India. Dena Bank filed an application before the DRT for recovery of money against a company by name Akkammal Steels Private Limited, which was also held by the members of the very same family. In the said case, the present company was impleaded as the fourth respondent. There was yet another application by State Bank of India against G.K.Alloy Steels Private Limited for recovery of money. The proceedings under the SARFAESI Act were also taken against Akkammal Steels Private Limited. A petition in C.P.No.70 of 2002 was filed against the company in question for winding up. By an order dated 22.3.2006, the Company Court ordered winding up. Therefore, there was a dire necessity for procuring finances. Hence, the argument that there was no necessity to sell the properties, is completely misconceived. The Directors were actually facing an emergency to save the company from being wound up. The appellant, who was mostly out of India, does not appear to have contributed anything to save the company. In the proceedings before the DRT, he was actually set ex parte. The bank could not even serve notices on him. Therefore, the Company Law Board was right in holding that the sale transactions are not proved to be fraudulent, warranting an inference of oppression and mismanagement. The appellant cannot successfully maintain an action for oppression and mismanagement against the respondents, merely on the strength of the sale transactions relating to the properties of the company, especially when those transactions were entered into at a time when the company was in financial crisis.

Issues Involved:

1. Whether the affairs of the company were being conducted in a manner oppressive of one shareholder and prejudicial to the interest of the company?
2. Whether the sale of 6.3 acres of land was liable to be set aside?
3. Whether the Joint Development Agreement was liable to be set aside?
4. Whether the Directors were liable to be surcharged?

Issue-wise Detailed Analysis:

1. Oppression and Prejudice:

The appellant contended that no Board or General Body Meetings were held, and no notices were served. The Company Law Board found that the appellant, a non-resident, showed scant interest in the family business, and notices sent to him were often returned undelivered. The Board held that even if notices were not served, the sales were in the company's interest and not oppressive to the appellant. The Court upheld this finding, noting that the appellant failed to demonstrate that the Board's finding was perverse.

2. Sale of Land:

The appellant argued that the sales were unnecessary and fraudulent, being made to Narayanaswamy's sons for less than market value. The Company Law Board found that the sales were necessary due to financial crises, including winding-up proceedings and recovery actions by banks. The Court agreed, stating that the sales were commercially expedient and not indicative of bad faith, even if the consideration was below market value.

3. Joint Development Agreement:

The appellant contended that the company could not enter into a Joint Development Agreement as it was beyond the scope of its Memorandum and Articles of Association. The Court found that the agreement was not an act of real estate promotion but a necessary measure to raise funds without engaging in new business activities. Thus, the agreement did not violate the company's objects clause.

4. Directors' Surcharge:

The Company Law Board directed the Directors to remit ?20 lakhs to the company, finding some undervaluation in the property sales. The Court noted that the surcharge was imposed despite the Board's earlier finding that the transactions were in the company's interest. However, considering the family nature of the dispute, the Court upheld the surcharge as an equitable relief, despite its legal inconsistencies.

Conclusion:

The Court dismissed both appeals, upholding the Company Law Board's findings and orders, including the surcharge against the Directors. The Court emphasized the need to balance interests in family-run companies and acknowledged the equitable nature of the Board's decisions.

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