2017 (7) TMI 534 - Tri - Companies Law

Oppression and mismanagement - Held that - Mismanagement of funds done at the instance of the Respondents who have failed to comply with the conditions of the bank vis-a-vis the loan accounts. In addition to the aforementioned, according to the contentions of the Petitioner, the Petitioner had at an earlier point of time through a letter dated 21st October, 2010 had requested clarification from R1 regarding the irregularities and the illegalities that had arisen in the Company by virtue of the appointments of managing director, director and further issue and allotment of shares. It can be seen that the increase in authorized share capital of the Company and the subsequent issue and allotment of further shares to the Respondents was done in violation of the Articles of Association and the Companies Act, 1956. The appointment of R3 as a director and R2 as the managing director was also done in violation of the Companies Act, 1956 and the Articles of Association of the Company. The Respondents have not held either board meetings or general meetings and have failed to serve upon notices to the Petitioner regarding the same. Additionally, the Respondents have denied access to the Petitioner into the factory premises and have not regularized the Company s account maintained with the Punjab National Bank and defaults in payment of dues against the loans sanctioned by The Punjab National Bank, are apparent, which indicates towards acts of mismanagement. Further the Petitioner has also contended that the statutory auditors appointed by the Respondents for the Company have not reported any qualification on the operation and financial transaction of the Company, or about related party transaction, illegal allotment of shares, illegal appointment of directors and gross violation of the provisions of the Companies Act, 1956. In the present Petition, since the Petitioner has been reduced to an insignificant minority due to the acts of the Respondents whereby they increased the authorized share capital of the Company and issued and allotted further shares of the Company without notifying the Petitioner about the same, such acts of Respondents constitute acts of oppression. Therefore, in the light of the contentions and pleading of the parties, it is clear that there is a case of oppression against the Petitioner by the Respondents. Petition is allowed. The Respondents are hereby directed to reverse the change in the authorized capital to the initial amount and undo the issue and allotment of shares to the Respondents. It is hereby also being directed that R3 s appointment as the director of the Company and R2 s appointment as the managing director be reversed and a managing director be appointed in the Company through proper procedure as per statutory provisions.

Issues Involved:
1. Appointment of R2 as Managing Director and R3 as Director.
2. Issue and allotment of further shares.
3. Acts amounting to oppression and mismanagement.

Detailed Analysis:

1. Appointment of R2 as Managing Director and R3 as Director
The petitioner contended that the appointments of R2 as Managing Director and R3 as Director were done without any valid Board or General Meeting and without notifying the petitioner. The Articles of Association and the Companies Act, 1956, require a resolution to be passed in a valid meeting for such appointments. The Tribunal found that the appointments were made in violation of these statutory provisions and the Articles of Association. The appointment of R3 as Director and R2 as Managing Director was declared illegal due to the lack of a valid quorum and proper notice to the petitioner.

2. Issue and Allotment of Further Shares
The petitioner alleged that additional shares were allotted to the respondents without holding any valid Board or General Meeting and without notifying the petitioner. The Tribunal noted that the increase in authorized capital and subsequent allotment of shares were done without following the statutory requirements under the Companies Act, 1956, and the Articles of Association. The purported further issue of capital was done at various AGMs for which the petitioner was never notified. This act of allotting shares to the respondents, excluding the petitioner, reduced the petitioner’s shareholding to an insignificant minority and was deemed an act of oppression.

3. Acts Amounting to Oppression and Mismanagement
The petitioner argued that the respondents mismanaged the company’s affairs by not regularizing the company’s bank accounts, failing to hold proper meetings, and not providing financial statements. The Tribunal observed that the respondents failed to comply with statutory requirements, such as holding Annual General Meetings and providing notices for the same. The petitioner also highlighted the mismanagement of funds and the company’s financial distress, as indicated by the bank’s letter. The Tribunal found that these actions constituted mismanagement and oppression against the petitioner.

Conclusion:
The Tribunal concluded that the actions of the respondents amounted to oppression and mismanagement. The Tribunal directed the respondents to reverse the changes in the authorized capital and undo the issue and allotment of shares to the respondents. The appointments of R2 as Managing Director and R3 as Director were also to be reversed. An independent audit of the company’s accounts was ordered, with the cost to be borne by the respondents.

Order:
The petition was allowed. The respondents were directed to reverse the changes in the authorized capital and the allotment of shares. The appointments of R2 and R3 were to be reversed. An independent audit was ordered, with the petitioner to propose an auditor within seven days, failing which both parties could propose three auditors each for the Tribunal to choose from. The costs of the audit were to be borne by the respondents. No orders as to costs were made.

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