2015 (5) TMI 1261 - HC - Companies Law

Oppression and mismanagement - Maintainability of the petition under Sections 397 and 398 of the Companies Act 1956 - Respondent no. 1/ petitioner is neither the member nor a share holder in the appellants-companies - arguments raised by learned counsel for the appellants is that application can be filed under Sections 397 or 398 of the Act only against the company whose affairs are to be seen by the Board whether being oppressive against any member or share holder or the same being mismanaged - HELD THAT - While dealing with the petition under Sections 397-398 of the Act the Board can even terminate set aside or modify any agreement between the company and the managing director director manager or any other person and can even delete or modify any Article of the company. The other respondents impleaded in the petition filed before the Board besides the company namely Perpetual are certainly the necessary parties. The principles of holding and subsidiary company are applicable in a case where the affairs of the company are to be gone into as it can be stretched only upto a subsidiary company. The prayer of CPI before the Board is not to go into the affairs of the parties impleaded before it besides the company i.e. Perpetual whose affairs are to be gone into rather these have been impleaded for the reason that the dealings of the company with other parties impleaded in the petition before the Board may have to be gone into and in case those transactions are reversed they may have to be issued some directions. It was to observe principles of natural justice. Hence to plead that they are not necessary parties is misconceived hence rejected. As far as challenge to the interim order passed by the Board directing audit of Triangle is concerned there are no reason to interfere in that part of the order. CPI being a foreign investor invested huge fund in Perpetual. The money was siphoned off from Perpetual to Triangle and other group companies with no track to CPI. The project for which the money was invested never took off. Justification is being given by the appellants companies before this Court in which the investments were made by Perpetual that it was in terms of decision taken by the Board of Directors of Perpetual. The appeals are dismissed.

Issues Involved:

1. Maintainability of the petition under Sections 397 and 398 of the Companies Act, 1956.
2. Jurisdiction of the Company Law Board (CLB) in directing audit and restraining orders.
3. Applicability of the concept of alter ego and lifting of the corporate veil.
4. Addition of parties to the proceedings under Section 405 of the Companies Act.
5. Interim orders and their implications on the appellants.

Issue-wise Detailed Analysis:

1. Maintainability of the Petition:

The appellants argued that the petition filed by respondent no. 1 under Sections 397 and 398 of the Companies Act was not maintainable against them as respondent no. 1 was neither a member nor a shareholder in the appellant companies. The petition was originally filed against Perpetual Infracon Private Limited, where respondent no. 1 had invested. The appellants contended that the provisions under Section 399, which define the eligibility to file such petitions, were not fulfilled in their case. The court, however, found that the petition against Perpetual was maintainable, and the other companies were impleaded as necessary parties because they were likely to be affected by any order passed by the Board, given their interlinked transactions with Perpetual.

2. Jurisdiction of the CLB:

The appellants challenged the jurisdiction of the CLB, stating that the interim order directing an audit of their accounts and restraining them from creating third-party rights was beyond the scope of Sections 397 and 398. They argued that the Board had exceeded its jurisdiction by rewriting the provisions of the Act. The court, however, upheld the Board's jurisdiction, emphasizing that Sections 402 and 403 provide the Board with wide powers to pass orders it deems just and equitable, including interim reliefs and audits, especially when substantial investments by foreign investors like CPI were involved.

3. Alter Ego and Lifting of Corporate Veil:

The concept of alter ego was discussed in the context of whether the companies controlled by Kabul Chawla could be treated as extensions of Perpetual. The appellants argued against this, stating that the companies were independent entities. The court, however, noted that the inter-se investments and control indicated a significant overlap, justifying the inclusion of these companies in the proceedings. The court referenced previous judgments to support the lifting of the corporate veil in cases of oppression and mismanagement.

4. Addition of Parties:

Section 405 of the Act allows for the addition of parties to a petition under Sections 397 and 398. The court found that the inclusion of the appellants as parties was justified as they were necessary for the effective resolution of the issues raised in the petition. The relationships and transactions between the companies warranted their involvement to ensure that any orders passed would be comprehensive and enforceable.

5. Interim Orders:

The appellants contended that the interim orders were unjust as their applications for deletion from the proceedings were not decided before passing such orders. The court rejected this argument, stating that the Board had thoroughly considered the issues and that the interim orders, including the audit of Triangle, were justified given the allegations of fund misappropriation and the lack of transparency in the dealings of the companies involved. The court emphasized the need to protect the interests of foreign investors and maintain their confidence in the Indian corporate framework.

In conclusion, the appeals were dismissed, and the court upheld the CLB's orders, emphasizing the broad powers conferred under Sections 397 and 398 to address issues of oppression and mismanagement comprehensively.

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