2017 (1) TMI 1343 - Tri - Companies Law

Oppression and mis-management - Whether giving a notice for holding EGM for removal of Sanjay is oppressive or not? - Whether a proposal for removal of P1 in a family Company in the given facts of the case be treated as an oppressive act or not? - Held that - General fulfilment to meet u/s 397 & 398 is that the act complained of shall be unfair to the aggrieved or the company and laced with malafide, and it shall be consequently led to winding up of the company, it always remains there, but when none of such fulfilment is evident, then removal of director even in a family company cannot be taken on standalone basis to pass orders under section 402, because in the case of removal of director in a family company also, it is incumbent upon the aggrieved to prove said act falls within the four corners of sections, either 397 or 398, if it is not so, the only recourse is suit. Here Sanjay himself is at fault and his conduct is doubtful in relation to the affairs of the company, on the other hand, the mother has 98% shareholding, therefore when Sanjay as director could not discharge his fiduciary obligations effectively in the company, he cannot seek a relief by owning this family concept. Whether non-payment of statutory dues by the Company be treated as an act done by the Respondents causing oppression to the Petitioners or to the Company? - Held that - Respondents placed voluminous material, employees writing letters to R2 and R3 that P1 directly taking out cash from the cash counter on his own, but whereas for third party s statement cannot be taken as evidence unless it is proved before Court of Law, such material cannot therefore have any legs to say that Sanjay siphoned the monies of the Company by taking cash from the cash counter. Hence, the same is not taken into consideration. It is also pertinent to point out that when R2 and R3 went to PNB to withdraw money from PNB account for medical treatment of R2, P1 wrote a letter to the authorities of PNB not to allow them to withdraw money from the account. It is a fact that this Company is bread and butter to R2, R3 and to P1 as well. In the Order passed by the Hon ble High Court of Bombay, the Hon ble High Court itself passed an Order directing the Company to meet the medical expenses of R2 i.e. mother. By reading these two observations, an inference could be drawn that R2 is an ailing mother requires money from time to time to meet the medical expenses. For the reasons stated above, the Petitioners failed to prove that Respondents caused hindrance for clearing the statutory dues. Therefore, this issue is decided against the Petitioners. Despite the case of the petitioners not being proved, this Company alone being major source of income of the family members including Sanjay as director, of course his wife (P2) working as Ophthalmologist, this Bench, for the well being of all the members of the family and for smooth running of the company, hereby directs R1 Company to allow P1 to continue as director of the Company only to claim salary equivalent to the salary Rajiv taking, but not to interfere with the affairs of the Company, including day to day affairs of the company as long as R2 has remained alive. If the mother who is holding above 98% shareholding, changes her mind to make P1 as active as R3, she is at liberty to do so. Therefore, first petitioner, hereafter, shall not operate any of the bank operations of the company; accordingly, his cheque signing authority in both the accounts is hereby revoked. As to casting vote given to the mother in the order dated 22.4.2015 in the Board Meetings, it will continue and without her sign, no cheque shall be passed. The Company shall provide financial statements on fortnightly basis to P1 so as to keep him informed about the business happening in the Company. However, R1 Company shall give notice and allow P1 to attend Board Meetings as and when they are called. For the company already passed a resolution for appointment of R3 s wife Bavana as director, the same could be hereafter given effect to. The reason for considering Bavana s appointment is, one - the company already approved the resolution making her as director; two - for P1 and his wife being directors, to balance the same, it is just and equitable to have two directors from R3 side as well. Since R2 is natural mother to P1 and R3 as well, her continuation in the Board as director cannot be looked as weighing to the side of one son or the other.

Summary

Issues Involved:
1. Whether giving a notice for holding EGM for removal of Sanjay is oppressive or not.
2. Whether non-payment of statutory dues by the Company be treated as an act done by the Respondents causing oppression to the Petitioners or to the Company.
3. Whether a proposal for removal of P1 in a family Company in the given facts of the case be treated as an oppressive act or not.

Issue-wise Detailed Analysis:

1. Whether giving a notice for holding EGM for removal of Sanjay is oppressive or not:

The mother issued a requisition notice for the removal of Sanjay as director. Sanjay and his wife approached the Company Law Board (CLB) before the meeting, obtaining an adjournment without objecting to the mother's appointment as director. The CLB allowed the EGM to proceed, with certain agenda items adjourned. The Hon'ble High Court of Bombay passed orders allowing EGMs to be held, subject to the final outcome of the petition. The court emphasized that the democratic rights of shareholders should not be interfered with lightly. The petitioners had the opportunity to raise grievances in the EGMs and before the CLB, thus the meetings held cannot be invalidated for procedural non-compliance. The court reiterated that in cases under sections 397 and 398, equities of the case prevail over procedural compliance. The petitioners' reliance on certain case laws was found inapplicable due to differing facts, and the petitioners' minimal shareholding (less than 2%) was noted. Therefore, the notice for holding EGM was not considered oppressive.

2. Whether non-payment of statutory dues by the Company be treated as an act done by the Respondents causing oppression to the Petitioners or to the Company:

The petitioners were in the majority on the Board and had control over the SBI account. Despite allegations of non-cooperation from the respondents, the petitioners had the capacity to clear statutory dues themselves. No direct evidence was presented showing that Rajiv refused to sign cheques for statutory dues. The court found the petitioners' allegations to be unsubstantiated and aimed at dressing up the petition. The respondents presented material suggesting Sanjay's misconduct, but third-party statements were not taken as evidence. The court concluded that the petitioners failed to prove that the respondents caused hindrance in clearing statutory dues, deciding this issue against the petitioners.

3. Whether a proposal for removal of P1 in a family Company in the given facts of the case be treated as an oppressive act or not:

The court noted that the company was set up by the father and the mother held 98% of the shareholding. The petitioners had less than 2% shareholding and had already initiated civil proceedings for specific performance over a Partition Deed. The court emphasized that quasi-partnership principles apply when shareholders equally invest and participate in the company. The petitioners failed to prove that the respondents' conduct was oppressive or prejudicial. The court highlighted that directorial complaints do not fall within sections 397 and 398 unless it is a family company or company on partnership lines. Sanjay's conduct was found dubious, and the mother, holding the majority share, was deemed fit to continue managing the company. The court directed that Sanjay be allowed to continue as director for salary purposes but not interfere in company affairs. The mother's casting vote and Bavana's appointment as director were upheld.

Conclusion:

The court found no merit in the petitioners' claims of oppression and mismanagement. The petitioners' allegations were unsubstantiated, and the respondents' actions were not deemed oppressive. The court directed the company to allow Sanjay to continue as director for salary purposes but not interfere in company operations, maintaining the mother's casting vote and Bavana's appointment as director. The petition was disposed of with no order as to costs.