2019 (7) TMI 523 - AT - Companies Law

Oppression and mismanagement - Termination of services of 1st appellant as an employee - HELD THAT - Due to internal disputes within the Management, the bank account being suspended for operation, the company was in financial crises. In these circumstances the need for raising funds through issue of equity shares cannot be held to be unreasonable. There is also force in the argument of the Learned counsel for the Respondent that these shares have been issued to the appellant himself and his supporters. It cannot said that it is fair allotment of shares. We observe that even if the company was in need of funds, the new equity shares should have been issued in a fair manner to the existing shareholders on pro-rata basis as per their holding in the company. This company being company of employees is being run by the employees. While the present parties before us are rival groups who continue to claim right to Management and continue to assert rights against each other and have created various confusions relating to the incidents and facts. The confusion gets reflected even in the impugned order. It appears to us that this company which appear to be running well needs to be protected from internal group rivalries. The appointment of 1st Respondent, Shri Deba Kumar Hazarika, as Director is held illegal - decision taken at the EOGM dated 14.11.2009 removing original R-5 as Director and Managing Director of the Company is set aside - Impugned order is set aside - appeal allowed.

Summary

Issues Involved:
1. Legality of the EOGM held on 14.11.2009 and the resolutions passed therein.
2. Validity of the resolutions adopted in subsequent Board Meetings.
3. Issuance of additional shares and increase in authorized share capital.
4. Allegations of oppression and mismanagement.
5. Appointment of an Administrator to manage the company.

Detailed Analysis:

1. Legality of the EOGM held on 14.11.2009 and the resolutions passed therein:
The appellants argued that the EOGM held on 14.11.2009, which removed the original Respondent No.5 from the position of Managing Director, was illegal due to a prior court injunction. The NCLT observed that the injunction order dated 13.11.2009 prohibited any discussion on the removal of the original Respondent No.5. Despite this, the resolution was passed, making the removal illegal. Consequently, the NCLT declared the resolutions passed in the EOGM held on 14.11.2009, including the appointment of the 1st respondent as Director, as invalid.

2. Validity of the resolutions adopted in subsequent Board Meetings:
The NCLT declared the resolutions adopted in the Board Meeting held on 25.11.2009, which appointed the 1st respondent as Managing Director, as illegal. This decision was based on the illegality of the initial removal of the original Respondent No.5. The resolutions adopted in the EOGM held on 02.03.2010 and 06.09.2010, which involved the removal of certain directors and the increase in authorized share capital, were also declared null and void.

3. Issuance of additional shares and increase in authorized share capital:
The issuance of additional shares on 20.02.2010 and 15.09.2010 was declared illegal by the NCLT. The appellants argued that the issuance was necessary due to financial crises caused by internal disputes and the freezing of bank accounts. However, the NCLT found that the shares were issued in a manner that unfairly favored the original Respondent No.5 and his supporters, converting the majority shareholding to a minority. The NCLT ordered the re-allotment of these shares to the shareholders as of 14.11.2009 on a pro-rata basis.

4. Allegations of oppression and mismanagement:
The appellants contended that the petition under Section 398 of the Companies Act, 1956, was not maintainable and that the respondents had not approached the Tribunal with clean hands. The NCLT found that the original petitioners had failed to disclose material facts and acted in violation of court orders. However, the NCLT concluded that the management of the company had engaged in acts of oppression and mismanagement, justifying the relief granted.

5. Appointment of an Administrator to manage the company:
Given the ongoing disputes and internal rivalries, the NCLT appointed an Administrator to manage the company for six months. The Administrator was tasked with re-allotting the illegally issued shares, holding an EOGM to reconstitute the Board of Directors, and ensuring the company's compliance with legal and regulatory requirements. The Administrator was authorized to seek an extension if the process was not completed within six months.

Final Order:
The NCLT's order dated 8.3.2018 was set aside. The decisions taken at the EOGM dated 14.11.2009 and the subsequent Board Meetings were declared illegal. The existing Board of Directors was suspended, and an Administrator was appointed to manage the company and complete the re-allotment of shares and reconstitution of the Board. The appellants and respondents were directed to cooperate with the Administrator, and any interim orders were vacated.