2020 (9) TMI 307 - Tri - Companies Law

Maintainability of petition - Oppression and Mismanagement - Stay of the Extra Ordinary General Meeting - HELD THAT - A separate Interlocutory Application (C.A. No. 218/2018) was filed before NCLT, Chennai Bench, to dismiss the petition as it is not maintainable. However, the Respondents have not pressed for its hearing even though, they made it a point in their arguments. In order to find out whether the Petitioners were successful in making out a case for interference by this Tribunal by invoking Section 241 and 242 of the Companies Act, 2013 (Corresponding to Sections 397 and 398 of Old Act), we should examine in detail the provisions of these Sections as laid down in the Act. Section 397 deals with relief in case of oppression and Section 398 deals with relief in case of mismanagement and Section 399 states about the right to apply. The Petitioners in the present case was purporting to file the petition on behalf of and for the benefit of all the minority shareholders, where 31 persons who figured in the annexure have filed their consent in writing along with their share certificates. From this it necessarily follows that the said 31 shareholders know what exactly the Petitioners were doing and that they were acting for the benefit of the minority shareholders. It also requires that the consent should be obtained prior to the filing of the petition. If this was proved as a fact, the requirement of filing the consents in writing along with the petition should not render the petition itself not maintainable. We therefore, cannot agree with the Respondent's contention that the consent given was of general nature without applying mind. Therefore, we are of the view that the consent made by the 31 shareholders are an intelligent consent, in the sense, a consent given for the purpose of making allegations in the petition and for the purpose of claiming reliefs therein and therefore it cannot be considered as a blanket consent, but a valid one as contemplated under Section 399(3) of the Old Act - the petition is maintainable. Whether there was any case of oppression of the member or attempt to materially change in the management or control over the company to the detriment of the company? - H ELD THAT - As per the Petitioners, Respondent No. 5 is the king pin of the entire operation of removing the Petitioners No. 1 and 2, who are the original promoters of the Respondent company and took control of the Company and running it as his fiefdom with active support and connivance of Respondent No. 2 to 4. The Respondent No. 5 started this entire operation after entry into the company at a later stage. The Respondent No. 5 started creeping acquisition of shares by gaining the confidence of the original promoters, hiding his real intentions of taking over the company. In the process, the Policy Guidelines of the MIB was also been violated by Respondent No. 5. We also observed from the records that the Petitioner No. 2 has advised Respondent No. 5 to reduce his shareholding to comply with the MIB Guidelines in this regard. It appears that this advice of the Petitioners has triggered the chain of events that led to their removal from the directorship by the Respondent No. 5 and his group - the timing of Board of Directors meeting also indicate the evil design of the Respondent No. 5 and his group in orchestrating the removal of Petitioner No. 1 and 2 from the Directorship of the Company to perpetuate the control and effect their change in the management. Respondent No. 5 and his cohorts had taken advantage of the absence of Petitioner No. 2 from the country, who was holding the position of the Chairman, and called for the illegal Board Meeting. There was no explanation why a Board Meeting was called urgently on 11.10.2012 that too immediately after the validly conducted Annual General Meeting on 29.09.2012. No traces of any allegations were raised on the Company Secretary in that AGM nor any discussion took place on this point. Removal of Company Secretary does not warrant such a hastily called Board Meeting. This gives credence to Petitioners' allegations. Thus, the Respondents have indulged in oppression of minority shareholders and effected change in the control and management of Respondent Company, by their financial clout, muscle power and by adopting dubious methods to achieve their ends. Whether the Respondents in their Capacity as Directors of the Company had failed in complying with the fiduciary duty towards the shareholders? - HELD THAT - Prior to the enactment of the Indian Companies Act 2013, the codified law with regard to the fiduciary duties of directors was largely silent on the said aspect, except for Section 291 which contained the provision dealing with general powers of the board of directors. Duties of directors, hitherto, were largely laid down by courts by looking at common law principles - A close reading of the present section lead us to conclude that it is motley of easily identifiable elements like shareholders and employees along with vague groups like the community. Thus, it would provide a cause of action to any person from the society giving rise to a problematic and absurd scenario. Whether the director is expected to act in 'good faith' for the promotion of the objects of the company or should it also encompass other groups in the sub-section? - HELD THAT - While acting in the best interest, a director must carefully weigh commercial interests of the company on one hand while also taking into account the safeguarding of the interests of the stakeholders, on the other. While doing so, the director must ensure that his actions conform to the standards of those of a reasonably prudent person. The duty of good faith sets a higher standard than the best interest criterion. Harmony must be sought to be struck between commercial considerations of the company and the interests of stakeholders. The allotment of shares was done to achieve different purposes, i.e., to increase the number of members of their group in the company and conversion of loan amount as share application money, is to increase their shareholding and to maintain the control over the company. It is well settled that if the Directors exercise their powers for the purposes other than those for which they were conferred, it may be said that they have exceeded their authority. It is evident that the mala fide intention of the Respondents 2 to 4 at the behest of Respondents 5 to 8 to remove the Petitioners from the Company has been done with undue haste for the purpose of grabbing power in the Respondent No. 1 Company. This clearly depicts that the Respondent 2 to 4 were hand-in-glove and supporting the actions of the Respondent No. 5 and gives credence to the allegations of the Petitioners - Thus, the Respondents group led by Respondent No. 5 are acting against the interest of Respondent Company and minority shareholders, for making material changes in the management of the Respondent company. Whether the discrepancies in the accounts pointed out by the Auditor as per the Annual Report of 2012-13 and 2013-14 amounts to mismanagement of affairs of the 1st Respondent company as alleged in the petition? - HELD THAT - One of the shareholders and the Petitioner's proxies request for poll that was rudely turned down by 2nd Respondent. In the counter the Respondents contended that the authorization was absent in the proxy form submitted by Fr. Geo Kadavi who has been represented as the proxy of 1st and 4th Petitioners. We have gone through the proxy forms submitted by the Petitioners and found out that in Document No. 79 the 1st Petitioner has duly authorized Fr Geo Kadavi as his proxy by signing the proxy form. As such, the argument made by the Respondent doesn't hold any water. The attitude of the Respondents as derived from the records that they are not ready to share any information with shareholders who are not belonging to their groups and also trying to suppress the voices raised against them. This itself recognised to be an act of oppression against minority shareholders, besides hiding the discrepancies in the financial statements and refusing any semblance of discussions on the discrepancies pointed out - The request for poll was refused and the AGM was conducted with scant regard for law and Articles of Association. We are not willing to go with the argument submitted by Respondents in this regard. Further, we are also convinced with the averments made by the Petitioners that the entire acts of the Respondents are mala fide and with ulterior motives. Section 397 gives a right to members of the Company who comply with the conditions of Section 399 to apply to the court for relief under Section 402 of the act or such other relief as may be suitable in the facts and circumstances of the case. In the instant case, it cannot be disputed that the conditions of Section 399 are complied with. There is no substance in the contention that the Petitioners are not entitled to make the application, as the Petitioners do not constitute 10% shareholding in total. However, the tribunal can exercise its powers, the tribunal must be satisfied that the requirements of the Section 397 are fulfilled and the said requirements are that on an application under Section 397 of a member who has right to apply in virtue of Section 399. There was an effort made by both the groups to come to an amicable settlement of the matter and several adjournments were taken indicating that the talks are going on. However, the efforts of the parties have not fructified to arrive at an amicable settlement. During the course of arguments and in their written submission, the counsel for the Petitioners has indicated that the Petitioners group is ready to purchase the shares of the Respondents to protect the interest of the company and the minority shareholders. However, we also observe that the Respondents are not interested in the said proposal by the Petitioner. This Tribunal is of the considered view that the Company's affairs in relation to the Petitioners have been conducted in an oppressive manner by the Respondents and the facts would render that it is just and equitable to wind up the Company. The following order passed to meet the ends of justice i. We hereby declare that the board meetings dated 11.10.2012, 23.10.2012 and the Extra Ordinary General Meeting dated 12.11.2012 are held illegal and invalid and consequently held as null and void. All the resolutions passed and decisions taken at the said meetings are hereby set aside. The actions taken pursuant to the said meetings are also set aside and not binding on the Company. Any forms filed with the Registrar of Companies, Kochi pursuant to the decisions taken in the said meetings shall also stand cancelled. ii. As regards to the strength of the Board this Tribunal restores the position ante as on the date of the last validly held Annual General Meeting on 29.09.2012. Henceforth, the Respondent Company is directed to conduct all Board Meetings in accordance with Article 108 of the Articles of Association of the Company. The Company Secretary and the Auditor who were with the company as on 29.09.2012 are reinstated. The Extra Ordinary General Meeting proposed to be held as per this order should decide on the continuation of the services or otherwise of the reinstated Company Secretary and Auditor. iii. The reinstated Board of Directors should proceed to appoint Directors in proportion to and representative of shareholding as at 31.03.2012 and also in compliance with the policy guidelines issued by the Ministry of Information and Broadcasting. This process should be completed within three weeks from the date of this order. iv. Consequently, the duly reconstituted Board as per point No. iii, should hold an Extra Ordinary General Meeting within a period of 12 weeks from the date of this order for electing new Board of Directors by following due process as laid down in the Companies Act, 2013. The proceedings of the said EoGM should be video graphed. v. We hereby declare that all the Board Meetings as well as the Annual General Meetings of the 1st Respondent Company held after 29.09.2012 as null and void and consequently the resolutions passed and decisions taken therein are set aside. vi. At this juncture, we also propose to give an exit option to the Respondents by considering the proposal made by the Petitioners to purchase their shareholdings at a fair value as decided by an independent valuer appointed by the reconstituted Board as per point No. (iii). vii. An Independent Auditor shall be appointed by the reconstituted Board as per point No. iii, within a month from the date of this order, to audit the accounts of the 1st Respondent Company along with its subsidiary companies for the Financial Years 2012-2013 and 2013-2014 and submit a report to the Respondent Company within 60 days from the date of appointment. The Respondent Company should place the report of the independent auditor for the information of the shareholders in the proposed Extra ordinary General Meeting, which is to be held as per point No. iv. viii. We hereby direct the Regional Director, Ministry of Corporate Affairs, 5th floor Shastri Bhawan 26, Haddows Road, Chennai - 600006 to investigate into the affairs of the 1st Respondent Company under Sections 235 and 237 Companies Act, 1956 (corresponding to Sections 210 and 213 of the Companies Act, 2013) of Companies Act, 1956 and also to investigate the acquisition of shares by the Respondent No. 5 in violation of the norms prescribed in the MIB policy guidelines. The findings should be furnished to the Respondent Company to initiate corrective steps within 60 days from the date of receipt of this order, so as to enable it to put the findings as well as the action taken report before the shareholders in the proposed Extra-ordinary General Meeting, which is to be conducted as per point No. iv. ix. The Registry is directed to forward this order to the Registrar of Companies, Kochi, to immediately effect necessary changes as per this order in their records.

Summary

Issues Involved:
1. Validity of Board Meetings and Extraordinary General Meeting (EoGM)
2. Fiduciary duty compliance by Directors
3. Bona fide allotment of shares
4. Discrepancies in accounts and mismanagement

Issue-wise Detailed Analysis:

Issue 1: Validity of Board Meetings and EoGM
The Tribunal examined the validity of the Board Meetings dated 11.10.2012, 23.10.2012, and the EoGM held on 12.11.2012. The notice for the Board Meeting on 11.10.2012 was issued by Respondent No. 3, who lacked the authority as per Clause 107 of the Articles of Association, which states that only the Managing Director or the Secretary can summon such meetings. The removal of the Company Secretary in this meeting was found to be done without following due process, violating principles of natural justice. The subsequent Board Meeting on 23.10.2012 also lacked proper notice and agenda, and was held in violation of a court injunction. The EoGM on 12.11.2012, convened to remove Petitioners from directorship, did not comply with the procedural requirements under Section 169 of the Companies Act, 1956, including the circulation of requisitionists' letter and explanatory statement. The Tribunal declared these meetings and the resolutions passed therein as illegal and invalid.

Issue 2: Fiduciary Duty Compliance by Directors
The Tribunal highlighted the fiduciary duties of directors under Section 166(2) of the Companies Act, 2013, which mandates acting in good faith and in the best interests of the company and its shareholders. The directors were found to have breached these duties by failing to act in good faith and promoting the interests of the company. The Tribunal noted that the directors used their powers to issue shares and make decisions that were not in the best interests of the company but rather aimed at maintaining their control.

Issue 3: Bona Fide Allotment of Shares
The Tribunal found that the allotment of shares by converting loans into shares and transferring shares to 151 persons was done with the mala fide intention of gaining control over the company. The directors did not follow the due process of offering shares to all shareholders, indicating that the allotment was not bona fide. The Tribunal relied on the precedent set in Piercy V S Mills & Co. Ltd., which states that directors are not entitled to use their powers of issuing shares merely to maintain their control over the company.

Issue 4: Discrepancies in Accounts and Mismanagement
The Tribunal examined the discrepancies pointed out by the auditors in the Annual Reports for 2012-13 and 2013-14, including issues like non-renewal of cash credit, improper loan advances to subsidiaries, and misrepresentation in financial statements. The Tribunal found that the directors failed to provide clarifications on these discrepancies, indicating mismanagement of the company's affairs. The refusal to allow a poll during the AGM and the suppression of dissenting voices further supported the allegations of oppression and mismanagement.

Conclusion:
The Tribunal concluded that the company's affairs were conducted in an oppressive manner by the respondents, justifying relief under Sections 397 and 398 of the Companies Act, 1956. The Tribunal ordered the reinstatement of the Board as it stood on 29.09.2012, directed the reconstituted Board to conduct an EoGM to elect new directors, and appointed an independent auditor to review the company's accounts. The Tribunal also directed an investigation into the affairs of the company by the Regional Director, Ministry of Corporate Affairs.