2019 (9) TMI 411 - Tri - Companies Law

Validity of resolution plan - sections 397 and 398 of the Companies Act, 1956 - oppression and mismanagement - valuation of assets and liabilities - valuation of shares - appointment of auditor for auditing of statements of accounts - HELD THAT - For auditing of statement of accounts, an auditor was appointed by the Tribunal, and two successive independent chairman, so also valuer was appointed at the request of parties in order to resolve the issue rather than to adjudicate it since various allegations of acts of oppression and mismanagement are hardly tenable, as alleged. Moreover, as stated supra, the Registrar of Companies has already conducted its investigations into various allegations made by the parties, and submitted a report for initiating criminal prosecution. Therefore, various allegations of acts of oppression and mismanagement as alleged by the parties are no more required to be gone into details. There are several violations/offences committed by the parties in the affairs of company, which prima facie requires to launch prosecution by the statutory authorities. Therefore, respondent No. 1-company cannot be ordered to wind up as per law, however, the Tribunal can exercise its powers on it, under section 402 of the Companies Act, 1956 read with section 242 of the Companies Act, 2013 so as to put an end to the affairs of company as alleged in the company petitions, by granting liberty to the statutory authorities to take appropriate action basing on their findings during investigation as stated in their letters. It is settled position of law that the Tribunal is entitled to exercise its powers under the above sections of the Companies Acts. Since, independent chairman and valuer have already discharged their duties, they are no more required to be continued and they are discharged of their duties. The board of directors as existed on the date of filing of cases stands restored so as to take appropriate action basing on the valuation report. It is declared that the report of valuation of assets and liabilities of M/s. Omega Hospitals P. Ltd., dated September 6, 2018 submitted by SNSB Associates, chartered accountants, is legal and the same is binding on both the parties - Both the parties are at liberty to take appropriate action either to buy/sell their respective shareholding of respondent No. 1-company basing on the valuation report dated September 6, 2018.

Summary

Issues Involved:
1. Validity of resolutions passed by the board of directors.
2. Appointment of an independent chairman and auditor.
3. Investigation into the affairs of the company.
4. Transfer of shares.
5. Allegations of mismanagement and oppression.
6. Valuation of shares for buyout purposes.
7. Prosecution for statutory violations.

Issue-wise Detailed Analysis:

1. Validity of Resolutions Passed by the Board of Directors:
The petitioner in C.P. No. 64 of 2007 sought to declare the resolutions passed by respondents Nos. 2 to 6 in the board meeting held on July 24, 2007 as illegal and void ab initio. The resolutions in question included the appointment of Dr. P. S. Bhat as managing director, the retention and pro-rata allotment of transferred shares, and the extension of the term of office of directors. The Tribunal found these resolutions to be in gross violation of the Companies Act, 1956 and the company's articles of association, thus declaring them invalid and not binding on the company.

2. Appointment of an Independent Chairman and Auditor:
In C.P. No. 77 of 2010, the petitioners sought the appointment of an independent chairman and auditor to inspect the books of account and investigate the affairs of the company. The Tribunal appointed Shri Ameerul Millath S. M. as the independent chairman and Shri R. Thiyagarajan as the statutory auditor to audit the books of account for the financial years from April 1, 2007 to March 31, 2013. This was done to ascertain the exact liabilities and assets of the company.

3. Investigation into the Affairs of the Company:
The petitioners in C.P. No. 77 of 2010 alleged that respondent No. 2 had siphoned off funds and diverted business to a new entity, Mangalore Heartscan Foundation. The Registrar of Companies, Karnataka, conducted an inspection and found several statutory violations, recommending prosecution under various sections of the Companies Act, 1956. The Tribunal granted liberty to statutory authorities to take appropriate action based on their findings.

4. Transfer of Shares:
The transfer of shares by respondent No. 8 to other shareholders was contested. The board's decision to retain and pro-rata allot these shares was found to be in violation of the company's articles of association and the Companies Act, 1956. The Tribunal declared the board's actions regarding the share transfer as illegal and void.

5. Allegations of Mismanagement and Oppression:
Both petitions contained numerous allegations of mismanagement and oppression. The Tribunal noted that these allegations led to a deadlock in the company's management, affecting its financial stability and reputation. The Tribunal emphasized the need for an amicable resolution and the restoration of the board of directors as it existed prior to the initiation of the cases.

6. Valuation of Shares for Buyout Purposes:
The Tribunal appointed Shri Subhash Chandra Salian to conduct a valuation of the company's assets and liabilities. The valuation report, submitted on September 6, 2018, assessed the share value at ?520 per equity share. Despite disputes from both parties, the Tribunal found the valuation report to be based on sound financial principles and declared it binding on both parties.

7. Prosecution for Statutory Violations:
The Registrar of Companies, Karnataka, identified several statutory violations during their inspection, including issues related to section 260, section 285, section 3(1)(iii)(d), section 58A, section 209(1)(c), section 297, AS-15, section 224(1A), section 303(2), section 159, and section 220 of the Companies Act, 1956. The Tribunal granted permission for the Registrar to launch prosecutions based on these findings.

Conclusion:
The Tribunal disposed of both company petitions with the following directions:
1. The valuation report dated September 6, 2018, is declared legal and binding.
2. Both parties are at liberty to buy/sell their shareholding based on the valuation report.
3. The board of directors is restored as it existed prior to the initiation of the cases.
4. The independent chairman's services are discharged.
5. Statutory authorities are at liberty to initiate appropriate action based on their findings.
6. The Tribunal advised the parties, being reputed doctors, to resolve the matter amicably and focus on their medical practice rather than litigation.
7. No order as to costs.