2021 (2) TMI 891 - AT - Companies Law

Oppression and Mismanagement - regulation of conduct of the company s affairs by directing Union of India to appoint two nominees of its choice as Members in the General Committee to monitor the affairs of the Club along with other General Committee Members and give suggestions to the General Committee - Section 242(4) of Companies Act, 2013 - HELD THAT - It is indisputable that an order granting interim relief in terms of provision of Section 242(4) of the Act, 2013 is appealable. The scope of such appeal, however, is limited as there are no findings of fact recorded by the Tribunal in a regular trial in the Company Petition. This Appellate Tribunal, while sitting in appeal against grant of interim relief would be within its province to ascertain whether the Tribunal was right in recording the prima facie satisfaction on the basis of material on record. To put it otherwise, this Appellate Tribunal would be acting within its jurisdiction to consider whether the finding or conclusion in regard to existence of prima facie case has been reached on consideration of relevant material and if it is so, whether such finding is justified. The impugned order cannot be set aside without examining the material on record and recording a contrary finding qua the existence of a prima facie case. Examination of material relied upon for grant of interim relief being inevitable in the instant case, it has to be borne in mind that this Appellate Tribunal would be loath in interfering with the finding unless it is demonstrated that the view taken by the Tribunal is capricious or unreasonable and not merely because other view is possible. On a plain reading of the provisions engrafted in Section 241, it comes to fore that while any member of a Company complaining of affairs of company being conducted in a manner prejudicial to public interest or in a manner prejudicial or oppressive to him or any other member or members or in a manner prejudicial to the interests of the company is entitled to apply to the Tribunal for relief, subject to its entitlement under Section 244, the Central Government is empowered to apply to the Tribunal for relief in case of mismanagement only if the affairs of the company are being conducted in a manner prejudicial to public interest. The Central Government is required to record its opinion as regards affairs of the company being conducted in a manner prejudicial to public interest. Recording of such opinion is a sine qua non for applying to the Tribunal under Section 241(2). Formation of opinion by the Central Government in regard to affairs of Club being conducted in a manner prejudicial to public interest - HELD THAT - In the instant case, it is not in controversy that the order dated 16th March, 2016 came to be passed by the Ministry of Corporate Affairs for inspection of the Club in terms of powers conferred under Section 206(5) of the Act, 2013. This order came to be passed upon receipt of complaints against the Club which, inter alia alleged ineligibility of M/s. S.N. Dhawan and Company for appointment as Statutory Auditors of Club, irregularities in the management of the Club, demand by the Club for revision of registration fee with retrospective effect from some individuals etc. It is also not in dispute that the Inspectors held inspection from January, 2019 to July, 2019 for F.Y. 2012- 13 to 2017-18, in respect whereof report was laid before the Regional Director (Northern Region) of Ministry of Corporate Affairs, who placed the same before the Central Government on 5th August, 2019 - On a plain reading of the letter, it is clear that the Competent Authority has perused the material including the Inspection Reports and it is only upon consideration of such material that directions were given to file petition and take further action as spelt out in the letter. From the nature and character of directions given to Joint Director, it is unambiguously clear that the Competent Authority has applied its mind to the complaints and Inspection Reports. This is clearly gatherable from the directions which include filing of petition under Section 241/242 of the Act, 2013. Sufficiency or otherwise of material for coming to such conclusion would not be subject of review by the Tribunal, more so when no malafides are attributed to Central Government which admittedly has not acted on its own motion but on the basis of complaints pouring in alleging gross irregularities including declining of membership to the aspiring candidates whose funds were allegedly utilized for the benefit of few chosen members, albeit with the blessings of the GC. Existence of a prima facie case - HELD THAT - It is abundantly clear that misuse of the Club meant for pastime and sports activities and denying access of membership even after accepting the enhanced membership fee and putting them in queue for decades together with utilization of the component of interest admissible on their invested membership fee for the benefit of permanent members and users seriously jeopardized interest of such prospective members and involved public interest. That apart, the interests of general public seeking membership but being made to wait for decades together with membership fee being held up and its interest component being utilized for the recreational and pleasurable activities of permanent members and users of the Club despite the Club being aware of the limited number of vacancies in membership occurring every year would be a predominant consideration concerning the rights of general public to gain access and seek membership of the Club, thus involving public interest - Therefore, the Club would not be operating within its province of activities by merely concentrating on recreational activities or pursuing the same as its major objective since the Club was constituted as a company registered under Section 26 of the Companies Act, 1913 and reference in perpetual lease deed to activities of the Club have to be interpreted as activities concerning the objects for which the company was formed. During the course of arguments, learned counsel for the Union of India vehemently stressed that barely 3% of total expenditure was being incurred by the Club towards sports activity and more than 60% was being spent on maintaining the recreational Club. He has also referred to the Inspection Report which unfolds specific acts of omission and commission attributed to the Club and would submit that the violation of the restrictions imposed by law, in the context of enjoyment of lease hold rights by the Club, are palpably injurious to public interest. The stand taken by Respondent No.18 would corroborate some of the allegations in the Company Petition. The considerations which must be present to the mind of Tribunal at the conclusion of the Inquiry while recording the finding that the acts of oppression and mismanagement complained of are of a degree warranting winding up of the Company but that it would be unfair to any class of stakeholders to wind up the company and therefore, would justify only passing of suitable direction, would not weigh at the stage of grant of interim relief when only Interlocutory order may be required to be passed for regulating the conduct of the Company s affairs. At this stage, interim relief can be granted on the basis of legal considerations justifying such grant to prevent continuance of or further prejudice to public interest in the affairs of the company. Having regard to the nature of allegations and the proof sought to be adduced in support of the same as coming to fore from the Inspection Reports, it can be stated without any fear of contradiction that the Union of India has been able to demonstrate that fair questions requiring probe have been raised in the Company Petition which would entitle it to the final relief of replacement of Directors of the Club with Government nominees to conduct the affairs of the Club in accordance with the provisions of law and its charter. Appeal disposed off.

Summary

Issues Involved:
1. Formation of opinion by the Central Government regarding the affairs of the Club being conducted in a manner prejudicial to public interest.
2. Existence of a prima facie case for interim relief.
3. Adequacy of the interim relief granted by the Tribunal.

Detailed Analysis:

1. Formation of Opinion by the Central Government:
The Central Government's opinion that the Club's affairs were being conducted prejudicially to public interest is a prerequisite for filing a petition under Section 241(2) of the Companies Act, 2013. The Tribunal noted that the Ministry of Corporate Affairs had ordered an inspection of the Club based on complaints, which revealed several violations and mismanagement. These findings were detailed in inspection reports, which led to the Central Government forming an opinion and directing the filing of a petition. The Tribunal concluded that the opinion was formed based on material evidence and that the process involved proper application of mind, dismissing the Club's contention of non-application of mind and lack of valid opinion.

2. Existence of a Prima Facie Case:
The Tribunal found a prima facie case demonstrating that the Club's affairs were being conducted in a manner prejudicial to public interest. The Club was alleged to have engaged in various irregularities, including misuse of funds, exclusion of general public from membership, and manipulation of financial statements. The Tribunal observed that the Club's activities had deviated from its primary objective of promoting sports and pastimes to focus more on recreational activities for a select few, thus involving public interest. The Tribunal emphasized that public interest includes the rights and welfare of a section of society, not necessarily the entire population.

3. Adequacy of the Interim Relief Granted:
The Tribunal initially directed the Union of India to appoint two nominees to the General Committee (GC) of the Club to monitor its affairs and constituted a Special Committee to inquire into various issues. However, the Union of India contended that this relief was inadequate as the nominees would be outnumbered in the GC. The Appellate Tribunal agreed, stating that the interim relief must be effective and adequate. It modified the interim relief by suspending the GC and appointing an Administrator nominated by the Union of India to manage the Club's affairs. Additionally, it directed that acceptance of new memberships or fees be kept on hold until the disposal of the waitlist applications.

Conclusion:
The Appellate Tribunal upheld the Tribunal's finding of a prima facie case and the formation of opinion by the Central Government. It modified the interim relief to ensure it was effective and adequate, directing the suspension of the GC and the appointment of an Administrator. The observations made were limited to the grant of interim relief and not an expression of opinion on the merits of the case.