2017 (8) TMI 1144 - AT - Companies Law

Application under Sections 241 and 242 of the Companies Act, 2013 alleging oppression and mismanagement - non adherence to provisions require the Nominee Directors to obtain consent of the Board of Directors before taking any decision on matters contemplated in the said provisions of the AoA - Held that - It is pertinent to examine the wordings used in Article 60(d) of the AoA which are clear and unequivocal in stating that the ACL Directors (which includes the Appellants herein) are deemed to have a conflict of interest inter alia on all matters relating to OPCD Documents and that the Nominee Directors shall on such matters constitute a quorum and shall have the sole right make any decision, take any action, etc. in respect of the said matters. The Tribunal has correctly dealt with the said contentions in paragraph 23 of the Impugned Order in which paragraph it has been held that it is clear and unambiguous that the Nominee Directors have been given full liberty to give instructions to ITSL directly and therefore the Appellants contention that the instructions should be routed through the Board of Directors is untenable on the fulcrum of oppression and mismanagement. The Appellants have attempted to cause confusion between Reserved Matters as per Article 63 of the AoA and matters wherein the Appellants have a conflict of interest as per Article 60(d). The contentions raised by the Appellants which pertain to alleged unauthorized instructions given by the Nominee Directors to ITSL relate to matters concerning OPCD documents and thus fall within the ambit of Article 60(d) and not under Article 63. In fact, money is recoverable by Vinca pursuant to legal proceeding initiated by ITSL on behalf of Vinca . It was pointed out by the Ld. Counsel for the Respondents that the present proceedings are fundamentally premised on the contention that the subject transaction is illegal and/or a colourable device to circumvent FEMA in order that FMO can secure for itself an assured return which it can repatriate out of the country. On this basis, the Appellants have contended that the actions of ITSL including of taking out legal proceedings for the enforcement of security given by or on behalf of Amazia and Rubix under the subject transaction are actually for the benefit of FMO. In this context, it is pertinent to note that in Summons for Judgment proceedings in the Summary Suit filed by ITSL against Hubtown before the Hon ble Bombay High Court to enforce its rights under the Corporate Guarantee, the defence raised by Hubtown Ltd., i.e. Hubtown s contentions in relation to the subject transaction are identical to the Appellants contentions in the present proceedings as set out above on which contentions the present proceedings are premised. The transaction is not violative of FEMA and that the funds realized by Vinca upon enforcement of the security offered by and on behalf of Amazia and Rubix would remain with Vinca and is thus for the benefit of Vinca and not FMO. Therefore, by way of the aforementioned relief sought in the Company Petition, it appears that the Appellants are attempting to obstruct receipt of funds by Vinca upon enforcement and realization of its securities under the subject transaction and acting in a manner prejudicial to the interests of Vinca .

Summary

Issues Involved:
1. Allegations of oppression and mismanagement under Sections 241 and 242 of the Companies Act, 2013.
2. Validity of the investment structure under FEMA regulations.
3. Fiduciary duties of nominee directors.
4. Compliance with Articles of Association (AoA).
5. Whether the Company Petition was vexatious and frivolous.

Detailed Analysis:

1. Allegations of Oppression and Mismanagement:
The Appellants alleged that the investment structure conceived by FMO for bringing foreign investment into Amazia and Rubix through Vinca was in breach of FEMA. They argued that the rights accrued to FMO should not be exercised, and all rights vested with FMO should be set aside, claiming that FMO's actions were oppressive. The Tribunal concluded that no case was made out under Section 241 of the Companies Act, 2013, and dismissed the application as vexatious and frivolous, imposing a cost of ?50,000.

2. Validity of the Investment Structure under FEMA Regulations:
The Appellants contended that the investment structure violated FEMA regulations, particularly Regulations 3 to 6 of FEMA (Borrowing or Lending in Foreign Exchange) Regulations, 2000, and Circular 60 dated 21.05.2007 of RBI, which prohibits borrowings in real estate. However, the Tribunal, referencing the Hon’ble Supreme Court's judgment, found that the transaction was not in violation of FEMA regulations. The Supreme Court had held that the transaction was not a colorable device to circumvent FEMA and that the funds realized would remain with Vinca, benefiting Vinca and not FMO.

3. Fiduciary Duties of Nominee Directors:
The Appellants argued that the nominee directors of FMO acted in a manner oppressive to Vinca by not converting OPCDs into equity or granting extensions for debenture payments, thereby threatening the closure of Amazia and Rubix, Vinca's only businesses. The Tribunal found that the nominee directors were authorized to take such actions under the AoA and that their actions were not oppressive but within their fiduciary duties.

4. Compliance with Articles of Association (AoA):
The Appellants claimed that decisions on "Reserved Matters" were not taken at Board Meetings as required by the AoA, and instead, unilateral directions were issued by the nominee directors to the Debenture Trustee. The Tribunal noted that Article 60(d) of the AoA allowed nominee directors to make decisions on matters relating to OPCD documents without routing through the Board of Directors. The Tribunal held that the instructions given by the nominee directors to ITSL were valid and within their rights under the AoA.

5. Whether the Company Petition was Vexatious and Frivolous:
The Tribunal dismissed the Company Petition on the grounds that it was vexatious and frivolous, stating that the Appellants' contentions were untenable and that the actions of the nominee directors were within their rights under the AoA. The Tribunal found that the Appellants were attempting to obstruct the receipt of funds by Vinca and acting prejudicially to Vinca's interests.

Conclusion:
The Tribunal dismissed the appeal, finding no merit in the Appellants' claims. It held that the actions of the nominee directors were in compliance with the AoA and not oppressive. The investment structure was not in violation of FEMA regulations, and the Company Petition was deemed vexatious and frivolous. The appeal was dismissed without costs.