2018 (8) TMI 1031 - AT - Companies Law

Allegation of oppression and mismanagement by the appellant - second director became ineligible by operation of law - thereafter, appellant acting in furtherance of her obligations under Section 174(2) of the Companies Act, 2013, appointed 3rd respondent on 12.10.2017 as an Additional Director to ensure the smooth functioning of the 1st respondent who s board consisted of only one director as the office of 2nd respondent became vacany by operation of law. - NCLT directed that, Status Quo ante 12.10.2017 be restored. All decisions taken subsequent to 12.10.2017 and thereafter are hereby set aside. Held that - If the disqualification of original petitioner whether it was in fact and in law is yet to be decided, so is the question whether the appellant could or could not have legally appointed Respondent No.3 as Additional Director by sending off an email. The case put up by the appellant is that in view of Section 174 when she was the only director left she could appoint another Additional Director. When the company had only two directors, and shareholding was equally divided between the two groups, prima facie, fairness required consultation with the original petitioner to ask if he would nominate a person of his choice. This does not appear to have been done. We are concerned with the interest of the Company because in the CP No.401(ND)/2017 which has been filed by the appellant after the present petition, NCLT has passed the order dated 15.11.2017 (Annexure A filed with counter affidavit, Diary No.2704) and where it is recorded that it was not in dispute that the business of the company under the Respondent No.2 i.e. the present original petitioner had prospered over the years. Keeping in view this provision, prime consideration for NCLT should have been and which is now our consideration because of this appeal is that the interim order needs to concentrate on regulating the conduct of the company s affairs on such terms and conditions as are just and equitable. Now when we are disposing this appeal, we find the operative order of the impugned order was not correct as it was in the nature of final orders which could not have been passed at the interim stage. We intend to give directions so as to balance the equities between the parties. The impugned order is quashed and in its place it is directed that the 2nd respondent-original petitioner will continue as director alongwith the appellant. The appointment of Respondent No.3 as Additional Director/Director is stayed. The decisions taken by original Respondent No.2 and 3 subsequent to 12.10.2017 are also stayed till the decision of the company petition. We request NCLT to appoint, during the pendency of the company petition, an independent Director to the company on remuneration similar to other directors who will ensure compliances by the Company with provisions of the Companies Act and Rules.

Summary

Issues Involved:
1. Disqualification of the 2nd respondent as a director.
2. Legality of the appointment of the 3rd respondent as an additional director.
3. Validity of the Board Meeting and resolutions passed on 12.10.2017.
4. Interim relief and status quo ante ordered by the National Company Law Tribunal (NCLT).

Issue-Wise Detailed Analysis:

1. Disqualification of the 2nd Respondent as a Director:
The appellant argued that the 2nd respondent was disqualified under Section 164(2)(a) of the Companies Act, 2013, which led to the vacancy of his office as a director. The 2nd respondent, however, contended that the disqualification was an error by the Registrar of Companies (ROC) and had been subsequently removed. The Tribunal noted that the disqualification of the 2nd respondent was an apparent error and that his rights as a director could not be stripped based on this error. The Tribunal emphasized that the issue of whether the disqualification was valid in fact and law was yet to be decided.

2. Legality of the Appointment of the 3rd Respondent as an Additional Director:
The appellant appointed the 3rd respondent as an additional director under Section 174(2) of the Companies Act, 2013, claiming that it was necessary to ensure the Board's functionality after the 2nd respondent's disqualification. The 2nd respondent argued that this appointment was illegal as it was done via email without a proper Board Meeting. The Tribunal highlighted that whether the appointment complied with legal provisions was yet to be determined and that fairness required consultation with the 2nd respondent, given the equal shareholding between the parties.

3. Validity of the Board Meeting and Resolutions Passed on 12.10.2017:
The 2nd respondent challenged the validity of the Board Meeting held on 12.10.2017, claiming no notice was given to him, and the resolutions passed were illegal and against the company's interest. The Tribunal observed that the decisions taken by the newly constituted Board, including the appointment of the 3rd respondent, were tainted with illegality. The Tribunal directed that the status quo ante 12.10.2017 be restored, setting aside all decisions taken subsequent to that date.

4. Interim Relief and Status Quo Ante Ordered by the NCLT:
The NCLT granted interim relief by restoring the status quo ante 12.10.2017, which the appellant challenged as a final order passed at an interim stage. The Tribunal, while quashing the impugned order, directed that the 2nd respondent would continue as a director along with the appellant, and the appointment of the 3rd respondent was stayed. The Tribunal also stayed the decisions taken by the original Respondent No.2 and 3 subsequent to 12.10.2017. To balance equities, the Tribunal requested the NCLT to appoint an independent director to ensure compliance with the Companies Act and Rules, granting the independent director a casting vote in case of disagreements between the parties.

Conclusion:
The Tribunal quashed the NCLT's interim order, emphasizing that the disqualification issue and the legality of the 3rd respondent's appointment were yet to be decided. The Tribunal directed the continuation of the 2nd respondent as a director and stayed the appointment of the 3rd respondent, as well as the decisions taken after 12.10.2017. An independent director was to be appointed to oversee compliance and mediate disagreements, ensuring the company's interests were safeguarded.