2019 (8) TMI 999 - Tri - Companies Law

Oppression and mismanagement - removal of minority directors - appointment of his wife as director and transfer of 10 shares to her, etc. - HELD THAT - The petitioners and the second respondent are first and permanent directors of the company. Therefore, they cannot be removed by the impugned proceedings and the alleged resignation of the first petitioner is also denied. In this regard, the first petitioner, namely, Puttanarayanappa Nadikeraiah, has addressed a letter dated September 18, 2014 to Mr. Nagaraj P. (respondent No. 2), by, inter alia, intimating that he came to know about his alleged resignation when he made a public inspection of documents of the company, with the Registrar of Companies on August 30, 2005 - the second respondent, though holding 70 per cent. of shareholding, cannot act arbitrary against the interests of minority shareholders (petitioners), who are none else than his family members. It is settled principle of law that affairs of company will be run basing on majority rule and courts/Tribunal, as a general principle, do not enter into internal affairs of the company unless a serious prejudice is caused to minority shareholders, contrary to law. Therefore, in order to strike a balance between majority and minority shareholders, it is necessary to intervene in the issue to the extent of removing the petitioners from the position of directors of the company. It is a fit case to exercise powers conferred on the Tribunal, under section 402 of the Companies Act, 1956 read with section 241/242 of the Companies Act, 2013 to pass appropriate orders in order to put an end to the affairs of the company. We hereby set aside the removal of the petitioners from the position of directors of respondent No. 1-company, and consequently their positions as directors are hereby restored - respondents are hereby directed to convene a board meeting of the company, within a period of two months, after duly serving appropriate notices to all petitioners, and to transact usual business by resolving their other issues if any.

Issues Involved:
1. Fitness of Respondent No. 2 to occupy the office of director.
2. Legality of the resignation of Mr. Puttanarayanappa Nandikeraiah.
3. Allegations of fund diversion and mismanagement by Respondent No. 2.
4. Request for surcharge against Respondent No. 2 for misdeeds and omissions.
5. Recasting and re-auditing the accounts of the company for the past five financial years.
6. Other reliefs sought by the petitioners.

Detailed Analysis:

1. Fitness of Respondent No. 2 to Occupy the Office of Director:
The petitioners sought a declaration that Respondent No. 2 is not fit to occupy the office of director due to alleged mismanagement and diversion of company funds. The Tribunal noted that Respondent No. 2 holds 70% of the shares and is the managing director. Despite the allegations, the Tribunal did not find sufficient evidence to declare Respondent No. 2 unfit to occupy the office of director.

2. Legality of the Resignation of Mr. Puttanarayanappa Nandikeraiah:
The petitioners claimed that the resignation of Mr. Puttanarayanappa Nandikeraiah was illegal, null, and void. The Tribunal acknowledged that the first petitioner, Mr. Puttanarayanappa Nadikeraiah, denied having resigned and pointed out that the resignation was discovered during a public inspection of company documents. The Tribunal found that the alleged resignation was not substantiated and thus declared it illegal.

3. Allegations of Fund Diversion and Mismanagement by Respondent No. 2:
The petitioners accused Respondent No. 2 of diverting funds to another company, Shreeambe Labels P. Ltd., and mismanaging the affairs of the company. Respondent No. 2 denied these allegations, stating that Shreeambe Labels P. Ltd. operates in a different sector and does not compete with the petitioner’s company. The Tribunal did not find concrete evidence to support the allegations of fund diversion and mismanagement.

4. Request for Surcharge Against Respondent No. 2 for Misdeeds and Omissions:
The petitioners requested a surcharge against Respondent No. 2 for his alleged misdeeds and omissions. The Tribunal found that the allegations were not substantiated with sufficient evidence and thus did not impose any surcharge.

5. Recasting and Re-auditing the Accounts of the Company for the Past Five Financial Years:
The petitioners sought to recast and re-audit the accounts of the company for the past five financial years. The Tribunal found no substantial grounds to order a re-audit of the company’s accounts and rejected this relief.

6. Other Reliefs Sought by the Petitioners:
The petitioners sought various other reliefs, including the sale of shares held by Respondent No. 2 and the appointment of another director. The Tribunal found these requests to be devoid of merit and rejected them.

Conclusion:
The Tribunal concluded that the removal of the petitioners from the position of directors was illegal and restored their positions. The Tribunal directed the respondents to convene a board meeting within two months to resolve any outstanding issues. All other reliefs sought by the petitioners were rejected as devoid of merit. No order as to costs was made.

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