2021 (7) TMI 621 - Tri - Companies Law

Oppression and mismanagement - stay on subscription of rights issue - Whether right issue could be cancelled on the ground of breach of fiduciary duty and relationship between directors? - balance of convenience - HELD THAT - It is a settled law from judicial precedents that while considering interim relief, the Tribunal has to look into the aspect of balance of convenience between the parties. The interim relief is discretionary and the Court is also required to consider whether Petitioner/Applicant has established prima facie case and it is not frivolous or vexatious - The Company is a private limited company and is in practice of obtaining loans from friends, social circles and relatives. The genuineness of loans is not disputed by any party. Under Section 241 and 242 being an Equity Jurisdiction, the interests of the Company are paramount and to be given prime consideration. Balance of convenience - HELD THAT - The Respondent No. 1 Company is raising and would require that their loans to be paid immediately. The Petitioner has defaulted in payment of loan taken in personal capacity and Petitioner has chosen to not to subscribe to the right issue having been offered to them on the same terms and conditions as well. Thus, requirement of raising funds for the purpose of running business of the Company appears to exist - there is no justification for staying or keeping the right issue in abeyance at this initial stage. The prayer made by the Petitioners for interim relief is rejected. It is made clear that this interim order cannot be construed as an expression of any opinion on the merits of other issues, if any, raised in the present petition filed under Section 241 and 242 of the Companies Act, 2013.

Issues Involved:
1. Alleged acts of oppression and mismanagement under Section 241-242 of the Companies Act, 2013.
2. Legitimacy and necessity of the right issue.
3. Fiduciary duty of directors and the proper purpose doctrine.
4. Balance of convenience and the need for interim relief.

Issue-wise Detailed Analysis:

1. Alleged Acts of Oppression and Mismanagement:
The petition was filed under Section 241-242 of the Companies Act, 2013, alleging acts of oppression and mismanagement by the Respondents. The Petitioners sought interim relief to completely stay the right issue, arguing that it would reduce their shareholding from 50% to 1%, which they claimed was the primary intent behind the right issue.

2. Legitimacy and Necessity of the Right Issue:
The Petitioners argued that there was no business necessity to raise funds. They claimed the primary purpose was to repay a loan taken by Petitioner No. 1 in his personal capacity, for which the Respondent No. 1 Company had provided a corporate guarantee and security. They further alleged that the right issue was launched to repay loans to companies connected with Respondents No. 2, 3, and 4, which was not discussed in the Board meeting. They also contended that the basis for determining the price of shares in the right issue was not disclosed and was exorbitant.

The Respondents countered that the right issue was necessary to protect the company’s interests, as the property of the company was pledged against the loan taken by Petitioner No. 1. They argued that the company had to raise funds to avoid legal action under the SARFAESI Act and to repay loans and interest to creditors, which included friends and relatives. The Respondents emphasized that the right issue was offered to all shareholders on the same terms and conditions, and the funds were needed to meet business exigencies.

3. Fiduciary Duty of Directors and the Proper Purpose Doctrine:
The Petitioners relied on the Supreme Court judgment in Dale & Carrington Invt. (P) Ltd. and Another v. P.K. Prathapan and Ors., arguing that the right issue was a breach of fiduciary duty and was launched with an improper motive to reduce them to minority shareholders. The judgment emphasized that directors must act in good faith, with utmost care and skill, and for the benefit of the company. The directors owe a fiduciary duty to issue shares for a proper purpose, and any misuse of power for personal gains or ulterior motives could be considered a breach of trust.

The Respondents argued that the case relied upon by the Petitioners was not applicable, as the right issue in the present case was offered to all shareholders equally and was necessary for the company’s interests. They also cited V.S. Krishnan Vs. Westfort HiTech Hospital Ltd., where the Supreme Court held that if the need for funds was admitted and the right issue was offered to all shareholders equally, no prejudice could be considered to have been caused.

4. Balance of Convenience and the Need for Interim Relief:
The Tribunal considered the submissions from both sides regarding the interim relief. It noted that the interim relief is discretionary and must consider the balance of convenience between the parties. The Tribunal found that the balance of convenience tilted towards the Respondent No. 1 Company, as the company needed to raise funds to repay loans and avoid legal action. The Petitioner had defaulted on personal loan payments and chose not to subscribe to the right issue offered on the same terms and conditions.

Conclusion:
The Tribunal held that there was no justification for staying or keeping the right issue in abeyance at this initial stage. The prayer for interim relief was rejected, and the interim order was vacated. The main matter was scheduled for hearing on 12.08.2021. The Tribunal clarified that the interim order should not be construed as an expression of any opinion on the merits of other issues raised in the petition.

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