2018 (4) TMI 919 - HC - Companies Law

Oppression and mismanagement - Held that - Appellant no.1 had responded to all allegations and had pointed out that the payment to Barkha lnds had been made in the normal course of business and respondent no.2 s allegation that the company did not need such service/ software was baseless; that the amount debited to SCA International was the commission earned by respondent no.1 company, i.e., income generated by the company and not money taken from or allegedly diverted from the company; that the fixed deposits were encashed to meet a liability of ₹ 2.5 Crores of respondent no.1 as on 31st March 1998; that the shares of appellant no.3 held by respondent no.1 company were transferred to KSB Engineers Pvt. Ltd. against receipt of full consideration vide cheque No.762618 dated 30th June 2004 for ₹ 5 Lakhs and Cheque No.762619 dated 30th June 2004 for ₹ 750,000/ and that the transaction was carried out with the full knowledge of the board of directors. The Company Law Board has in its order noted these responses at Para 17 Re sale of Spectron Shares to KSB engrs , Para 19 Re Barkha lnds , Para 20 Re SCA International and Para 21 Re the encashment of the fixed deposits and at Para 18 Re the facts , figures and explanation re catering expenditure. However, thereafter in Para 50 of its order the CLB merely records a bald finding that As regards the allegation of misappropriation of fund and siphoning off of funds to the Respondents own concerns, the Respondents hove failed to refute the specific allegations made in that regard. It has to be noted that even the allegations of misappropriation and siphoning off by respondent no.2 were generally bald unsubstantiated allegations. Moreover, the CLB has, in the order noted and recorded responses/explanations offered by appellant no.1. Thereafter, without dealing with the same, the CLB has in an error apparent concluded that the Respondents have failed to refute the specific allegations made in that regard . In the aforesaid context of facts, allegations and pleadings, the CLB s finding is totally unreasoned, discloses an error apparent and is ex facie perverse. The impugned order, therefore, is unsustainable and requires to be set aside and is hereby set aside, with costs.

Summary

Issues Involved:
1. Allegations of oppression and mismanagement.
2. Legality of the increase and allotment of shares.
3. Alleged diversion of business and misappropriation of funds.
4. Examination of findings by the Company Law Board (CLB).

Detailed Analysis:

Allegations of Oppression and Mismanagement:
The appeal was filed under Section 10F of the Companies Act, 1956, challenging the order of the Company Law Board (CLB) dated 23rd June 2008. The original petition alleged oppression and mismanagement by the appellants and certain respondents. The primary allegations included illegal activities by the appellants, particularly appellant no.1, in collusion with respondent no.5, leading to the removal of appellant no.1 from the company's board and subsequent disputes over shareholding and control.

Legality of the Increase and Allotment of Shares:
Respondent no.2 alleged that appellant no.1 unilaterally and illegally created and issued additional shares, reducing respondent no.2's shareholding from 97% to 19.2%. The CLB's findings on this issue were deemed perverse by the High Court, which noted that respondent no.2 had signed balance sheets and annual returns reflecting the increased share capital, thereby approving the increase. The High Court found that respondent no.2's claims of ignorance and allegations of signing blank documents were false and that the share capital increase had been duly approved with respondent no.2's knowledge.

Alleged Diversion of Business and Misappropriation of Funds:
Respondent no.2 accused appellant no.1 of diverting business to his own company and misappropriating funds. Specific contracts allegedly diverted included those with BG Exploration, Hyundai Heavy Industries, Oil India, and Cairn Energy. Appellant no.1 countered that these contracts were obtained after respondent no.2 had ousted him from the company and that certain business relationships had been severed due to respondent no.2's interference. The High Court found no wrongful diversion of business, noting that the contracts were bid for and obtained by appellant no.1 after his removal from the company's management.

Examination of Findings by the Company Law Board (CLB):
The High Court criticized the CLB's handling of the case, stating that the CLB's judgment was cursory and cavalier, failing to address the real issues. The High Court emphasized that an appeal under Section 10F of the Companies Act is permissible on a question of law, and if a finding of fact is perverse and based on no evidence, it can be set aside. The High Court found the CLB's findings perverse, noting that respondent no.2 had suppressed material facts and documents and approached the CLB with false statements. The High Court concluded that the increase in share capital had been duly approved and that respondent no.2's allegations were unfounded.

Conclusion:
The High Court set aside the CLB's order, declaring it irrational and unsustainable. It ordered respondent no.2 to pay costs to appellant no.1 and disposed of the company appeal and all pending applications. The High Court's decision emphasized the importance of accurate and truthful representation of facts in legal proceedings and the necessity of thorough examination by judicial bodies.