2024 (9) TMI 1611 - Tri - Companies Law

Oppression and mismanagement of the Company - Issuing notice of EGM dated 01.10.2022 for the meeting to be held on 11.10.2022 - Removal of Petitioners as Directors and further of Petitioner No. 1 as Managing Director - HELD THAT - Section 242 places a heavier burden on the complainant as he is required to prove that the affairs of the company are oppressive and prejudicial to any member or the interests of the company - The alleged acts of oppression are linked to the EGM dated 11.10.2022. The Companies Act, 2013 lays down procedure as how the meeting is to be convened. As far as removal of directors of the Company other than one appointed by Tribunal under section 169(1) of the Companies Act, 2013, simple majority is enough. In respect of notice for removal of director and appointment of new director in place of removed director, special notice is required to be issued under section 169(2) of the Companies Act 2013. The Petitioners as per their own admission came to know about the said notice on 04.10.2022, which fulfills the requirements of law. Even otherwise, they were having knowledge of the EGM even prior to the said date and perusal of Annexure A-4 filed by the Petitioners reveals that the said notice was issued after complying with all the legal requirements. The stand of Petitioners that no such meeting was held on 11.10.2022 is without any basis as transpired from the record. The meeting was attended by five directors and this record was filed with the RoC. In the circumstances, there is no flaw in sending the notice of the meeting after complying all the requirements of law. The decision of shareholders in the matter of appointing or removing the directors of the Company from the Board cannot be a subject matter of judicial scrutiny since the right to appoint or remove directors is supreme as a part of corporate democracy. It is emphasized that any inconvenience caused to the opposing party during the legal process will not negate the validity of the legal actions taken. Consequently, although the removal of the Petitioners from their directorial positions may be discomforting for them, the decision of the majority will prevail. From this standpoint, the removal of the Petitioners from the directorial posts does not amount to an act of oppression or prejudice against them. It must further be shown that the conduct of the majority shareholders was oppressive to the minority as members and this require that events have to be considered not in isolation but as a part of a consecutive story. There must be continuous acts on the part of the majority shareholders, continuing up to the date of the petition, showing that the affairs of the company were being conducted in a manner oppressive to some part of the members. The conduct must be burdensome, harsh and wrongful and mere lack of confidence between the majority shareholders and the minority shareholders would not be enough unless lack of confidence springs from oppression of the minority by a majority in the management of the company's affairs, and such oppression must involve at least an element of lack of probity or fair dealing to a member in the matter of his proprietary rights as a shareholder. As far as the act of mismanagement by Respondents, if any, in removing Petitioners from the position of directors of the Company is to be considered in light of Section 241(1)(b) as there is a change in the management of the Company resulting from such removal of Petitioners as Directors. The phrase affairs of the company are being conducted in section 241 indicates a continuous wrong. It means that because of the change in the management of company, there is a likelihood that the affairs of the company will be conducted in a manner prejudicial to the interests of the company or members. Petitioners failed to show any act done by the management or the apprehension that the affairs of the Company in future are likely to be conducted in a prejudicial manner as a result of the removal of Petitioners from the position as directors. Thus, in the absence of proof of oppression or mismanagement as alleged by Petitioners, this Tribunal finds no merit in the Petition to grant the reliefs as prayed for and hence, the present Petition is liable to be dismissed.

Issues Involved:
1. Allegations of oppression and mismanagement by Respondents.
2. Validity of the Extraordinary General Meeting (EGM) held on 11.10.2022.
3. Removal of Petitioners as Directors and Managing Director.
4. Compliance with procedural requirements under the Companies Act, 2013.
5. Alleged illegal activities and misuse of company funds.
6. Validity of share transfers and appointments of new directors.
7. Allegations of fraud and criminal misconduct by Respondents.

Issue-wise Detailed Analysis:

1. Allegations of Oppression and Mismanagement by Respondents:
The Petitioners, who are shareholders and former directors of the Company, alleged that Respondents engaged in acts of oppression and mismanagement. They claimed that Respondents siphoned off company funds, failed to share profits, and conducted business in a manner prejudicial to the interests of the Company and its shareholders. The Petitioners sought relief under sections 241, 242, and 59 of the Companies Act, 2013, to declare the actions of Respondents illegal and to restore their positions.

2. Validity of the Extraordinary General Meeting (EGM) Held on 11.10.2022:
The Petitioners contended that the EGM held on 11.10.2022, which resulted in their removal as directors, was illegal due to insufficient notice and procedural violations. However, the Tribunal found that the notice requirements were met as per Article 21 of the Articles of Association, which mandates a minimum of seven days' notice. The Petitioners received the notice on 04.10.2022, fulfilling the legal requirements.

3. Removal of Petitioners as Directors and Managing Director:
The Tribunal held that the removal of directors is a right of the shareholders and cannot be subject to judicial scrutiny if done in accordance with the law. The removal of Petitioners was conducted following the procedural requirements of the Companies Act, 2013, and the Articles of Association. The Tribunal emphasized that the decision of the majority shareholders to remove directors is a part of corporate democracy and does not constitute oppression or prejudice.

4. Compliance with Procedural Requirements Under the Companies Act, 2013:
The Tribunal examined whether the EGM and the removal of Petitioners complied with the procedural requirements under the Companies Act, 2013. It was found that the EGM was convened legally, and the notice for the removal of directors was issued in compliance with sections 100, 102, 169, and 173 of the Act. The Tribunal also referred to judicial precedents that support the right of shareholders to call an EGM and remove directors without disclosing reasons.

5. Alleged Illegal Activities and Misuse of Company Funds:
The Petitioners alleged that Respondents engaged in illegal activities, including siphoning off company funds and mismanagement. However, the Tribunal found no substantial evidence to support these allegations. The statutory audits and compliance with legal requirements indicated that the Company was being managed properly. The Tribunal also noted that the Petitioners themselves were involved in the management and could not claim ignorance of the Company's affairs.

6. Validity of Share Transfers and Appointments of New Directors:
The Petitioners challenged the validity of share transfers and the appointment of new directors, claiming they were done without proper authority. The Tribunal found that the share transfers and appointments were conducted in accordance with the law and were duly recognized by the Registrar of Companies. The Tribunal also noted that the Petitioners were aware of these changes and did not raise objections at the relevant time.

7. Allegations of Fraud and Criminal Misconduct by Respondents:
The Petitioners sought criminal prosecution against Respondents for fraud and misconduct. However, the Tribunal found no merit in these allegations. The actions of Respondents were found to be in compliance with the law, and there was no evidence of fraudulent conduct. The Tribunal emphasized that a single act of procedural non-compliance does not constitute oppression or mismanagement.

Conclusion:
The Tribunal dismissed the petition, finding no merit in the allegations of oppression and mismanagement. The removal of Petitioners from their directorial positions was conducted in accordance with the law, and the procedural requirements were duly followed. The Tribunal held that the actions of Respondents did not amount to oppression or prejudice against the Petitioners, and there was no evidence of illegal activities or misuse of company funds. Consequently, the reliefs sought by the Petitioners were denied.

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