2015 (3) TMI 464 - HC - Companies Law

Application for Winding up of company - Breach of mutual trust and confidence - Provisions of the Act would override anything to the contrary in the Articles of Association - Held that - Having regard to the allegations by the petitioner and the equally strong counter-allegations against the petitioner by the contesting respondents, this court would have to be satisfied that there is material produced before the Court to demonstrate that the management and conduct of the company ought not to be continued, while exercising discretion under Clause (f) of Section 433 of the Companies Act, 1956. It cannot be said that there is any such clinching material made available by the petitioner. The allegations on both the sides would require a detailed enquiry, which is not contemplated in these proceedings. The allegations by the petitioner as a minority shareholder, are primarily of oppression and mismanagement. The petitioner is provided with a remedy by recourse to Sections 397 & 398 of the Act. The powers of the Court under Sections 397 to 403 have been conferred on the Company Law Board by the Company (Amendment) Act, 1988 (with effect from 31-5-1991). Therefore, in the circumstances of the case the petition is not maintainable and ought to be rejected. But the peculiar circumstance that has been created by the parties of their volition, is in inviting this court to dispose of the application in CA 1886/2013, where by mutual consent - an Extraordinary General Meeting of the company was convened under the Chairmanship of an independent member of the Bar, in whom both the sides had reposed confidence. The contesting respondents having found that the tables were turned on them at the said meeting, whether they would be in a position to refuse to abide by the result of the meeting, dehors the merits of the petition, is a question that looms up for consideration. The contesting respondent shareholders have sought to place reliance on Article 12 (iii) of the Articles of Association in holding that the result of the Extraordinary General Meeting was inconclusive and was not binding on them. Section 284 of the Act provides for the manner of removal of a Director of the company, and notwithstanding anything to the contrary in its Articles, would be removable by an ordinary resolution of which special notice has been given. The Section is general and applies to all Directors and includes all those not retiring by rotation. It applies to permanent Directors or Life Directors and Directors appointed for a fixed term even though they may have been appointed with reference to the Articles or otherwise. here fore, the contesting respondents are held bound by the result of the said meeting. The petitioner is at liberty to enforce the result of the meeting in terms of the report of the Chairman of the Extraordinary General Meeting referred to here in above in the manner known to law.

Issues Involved:
1. Allegations of mismanagement and oppression.
2. Disputes regarding the shareholding and directorship.
3. Financial irregularities and unauthorized transactions.
4. Legality of the Extraordinary General Meeting (EGM) and its resolutions.
5. Applicability of Article 12 (iii) of the Articles of Association.
6. Maintainability of the petition under Section 433(f) of the Companies Act, 1956.

Detailed Analysis:

1. Allegations of Mismanagement and Oppression:
The petitioner, an engineering graduate with an MBA, alleged that after the sudden death of Shankar, the new directors, including Shankar's brother Umesh, began to interfere in the company's operations, sidelining the petitioner. The petitioner claimed that the respondents diverted company funds to their personal accounts and jeopardized the petitioner's properties used as collateral for company loans. The respondents countered, stating that the petitioner mismanaged finances and siphoned company funds for personal use.

2. Disputes Regarding Shareholding and Directorship:
The petitioner and respondents disputed the origins of the company and the roles of the initial shareholders. The petitioner claimed a 33% shareholding alongside Shankar and Venkatesh, with Lokamata holding 1%. After Shankar's death, Umesh and others were inducted as directors, allegedly without proper expertise. The respondents, however, claimed that the petitioner sought to dominate the company post-Shankar's death by attempting to appoint his wife and others as directors without proper procedure.

3. Financial Irregularities and Unauthorized Transactions:
The petitioner alleged that the respondents failed to service loans secured against his properties and diverted company funds. The respondents accused the petitioner of unauthorized cash withdrawals amounting to Rs. 65 lakh and obtaining loans fraudulently using fabricated documents and forged signatures. Financial institutions were notified about these unauthorized loans, leading to freezing of company accounts to prevent further misuse.

4. Legality of the Extraordinary General Meeting (EGM) and Its Resolutions:
An EGM was convened on 25.09.2013 under the chairmanship of an independent advocate, Shreyas Jayasimha, as per court order. The meeting resulted in a deadlock with resolutions for appointing new directors and removing existing ones receiving equal votes for and against. A poll was demanded and conducted, but the validity of the resolutions was contested based on Article 12 (iii) of the Articles of Association.

5. Applicability of Article 12 (iii) of the Articles of Association:
Article 12 (iii) stipulated that resolutions at board and shareholders meetings were invalid without affirmative votes from either Umesh or Lokamata. The respondents relied on this article to claim that the EGM resolutions were inconclusive. However, the court noted that Section 284 of the Companies Act, 1956, which governs the removal of directors, overrides any contrary provisions in the Articles of Association. Section 9 of the Act further supports this by stating that the Act's provisions supersede the Articles.

6. Maintainability of the Petition Under Section 433(f) of the Companies Act, 1956:
The court found that the petitioner's allegations of oppression and mismanagement required detailed inquiry, which was beyond the scope of the current proceedings. The petitioner was advised to seek remedy under Sections 397 and 398 of the Companies Act, which deal with such grievances. Consequently, the petition for winding up the company was deemed not maintainable and was rejected.

Conclusion:
The court ordered that the respondents are bound by the results of the EGM as per the Chairman's report, despite their reliance on Article 12 (iii). The petitioner was granted liberty to enforce the EGM results through legal means. The applications related to the petition were disposed of accordingly.

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