2019 (1) TMI 387 - AT - Companies Law

Oppression and mismanagement - transfer of shares approved but not updated in the Company s records - case of appellant is that the Diastar Inc. has initiated bankruptcy proceedings against itself and Respondent No.1 without initiating recovery proceedings has written off all its receivables from Diastar Inc. USA, and money has been siphoned, through Diastar Inc. - beneficial ownership of shares - Appellants argued that Respondent No.2 has misused the funds of the Company. Held that - The Respondents have mismanaged the Company affairs, which is facing proceedings in SARFAESI, and there is also material to show that investigation is necessary relating to loss of revenue to the Company with allegations of siphoning of money by diverting the funds to Diastar Inc. and then put Diastar Inc. into bankruptcy proceedings and write off dues in this Company - The non-responsive attitude of the Respondents to the Appellants and shareholders also amounts to oppression of the Appellants. The Impugned Order is quashed and set aside - matter remitted back to the National Company Law Tribunal, Mumbai Bench - appeal allowed.

Issues Involved:
1. Transfer of Kishanlal Jain’s shares.
2. Alleged financial irregularities and mismanagement.
3. Oppression of shareholders.
4. Appointment and removal of directors.
5. Investigation into the affairs of the company.

Detailed Analysis:

Transfer of Kishanlal Jain’s Shares:
The primary contention revolved around whether Kishanlal Jain’s shares were validly transferred to the Appellants. The NCLT examined two Gift Deeds: one dated 10th December 2002, allegedly transferring shares to Respondent No.2 and his wife, and another dated 16th October 2007, transferring shares to Appellants 2 and 3. The NCLT concluded that the beneficial ownership had already been transferred to Respondents 2 and 3 during Kishanlal Jain's lifetime and recorded in the share register. The NCLT held that an unconditional Gift Deed cannot be revoked unilaterally, thus dismissing the Appellants' claim. However, the Appellate Tribunal found that the 2002 Gift Deed was conditional upon receiving RBI permission, which was never obtained, rendering the transfer ineffective. The 2007 Gift Deed, being unconditional and followed by proper board resolutions, was deemed valid, and the shares were to be transferred to Appellants 2 and 3.

Alleged Financial Irregularities and Mismanagement:
The Appellants accused the Respondents of financial mismanagement, including failing to remit export proceeds, neglecting statutory commitments, and writing off significant dues from Diastar Inc. USA. The NCLT dismissed these claims, stating that writing off loans due to Diastar Inc.'s bankruptcy did not constitute prejudicial conduct. However, the Appellate Tribunal found substantial evidence of financial mismanagement, including the improper write-off of ?1787.05 Lakhs and non-payment of statutory dues, indicating severe mismanagement and potential fraud. The Tribunal emphasized the need for an investigation into these financial irregularities.

Oppression of Shareholders:
The Appellants alleged systematic exclusion from the company’s management and affairs, non-receipt of meeting notices, and deprivation of access to statutory records. The NCLT did not adequately address these allegations. The Appellate Tribunal, however, recognized these actions as oppressive, noting the lack of transparency and communication from the Respondents, and the exclusion of Appellants from significant company decisions.

Appointment and Removal of Directors:
The Appellants sought the removal of Respondents 2 and 3 from the Board and the appointment of professional directors. The NCLT dismissed these requests. The Appellate Tribunal, however, removed Respondent No.2 as Managing Director (though allowing him to continue as a Director) and removed Respondent No.3 from the Board entirely. The Tribunal appointed Appellant No.1 as a Director and directed the NCLT to appoint an Independent Director to oversee the company’s affairs.

Investigation into the Affairs of the Company:
Given the serious allegations of financial mismanagement and potential fraud, the Appellate Tribunal directed the Central Government to investigate the affairs of the company under Section 210 of the Companies Act, 2013. The investigation was to focus on the issues highlighted, including the write-off of dues and the overall financial management of the company.

Conclusion:
The Appellate Tribunal quashed the NCLT's order and remitted the matter back to the NCLT, directing several remedial measures including the appointment of an Independent Director, removal of certain directors, and an investigation into the company’s affairs. The Tribunal emphasized the need to protect the interests of the shareholders and ensure proper management of the company. The costs of the appeal were imposed on Respondents 2 and 3.

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