2017 (5) TMI 1118 - HC - Companies Law

Oppression and mismanagement - removal of the Director - Held that - The observations of the CLB that the provisions of Section 397 and 398 of the 1956 Act would not be applicable in the instant case, as the grievance articulated by the appellant are in the nature of directorial complaints, in my view, does not bear in mind the fact that in a small private limited company, such as DPPL, which emerged out of a partnership comprising of members of one family, who, decided to give a corporate structure to their business relationship, only to manage their affairs in a manner which would benefit each member of the family - would, necessarily, give rise to charge of oppression, upon exclusion of a member, who represents a branch of the family, from an assigned managerial role. In the given case, the appellant, stands excluded from a managerial role, after having invested over a period of 34 years, in a manner of speech, his blood, toil and sweat to the growth of DPPL - it cannot but, to my mind, be an act of oppression. To entertain any other view, in my opinion, would cause such deep chasm between law and justice that it would defeat the very purpose, for which these provisions are enacted. More often than not a single infraction, which has a continuing impact, as in this case can be more oppressive than a series of acts. This is not, in substance, a case of a single act of oppression, as was sought to be portrayed by the counsel for the respondents. Therefore, the removal of the Director in a widely held public limited company may not always compare, with the removal of a Director in a closely held private company, where, as in this case, each branch of the family is expecting to be represented on its BOD. In such cases, removal of a member from the BOD, can amount to oppression and mismanagement, when, it is carried out on made-up and flimsy grounds, as in this case and would, thus, in my opinion, bring the action within the ambit of provisions of Sections 397 and 398 of the 1956 Act. In a public limited company, much would depend on the facts obtaining in that case. Say, for example, where, controlling interest is centered in one or more groups, and shares, though, listed on the Stock Exchange, are not freely traded. In such cases, different connotations may arise. The acts of oppression, in my view, will, thus, have to be examined, bearing in mind the totality of circumstances obtaining in a case, without being unduly burdened by the fact that it is a family company, or a private limited company, or even a public limited company. For grant of relief, qua oppression, the principles of quasi partnership are applicable, even to a public limited company. Allow the appeal and set aside the impugned order of the CLB dated 28.05.2015. Resultantly, the decision taken at the EOGM convened on 27.06.2009, to remove the appellant as the Director of DPPL and as a consequence thereof, his removal as the Executive Director is held to be bad in law. It is relevant to note that the nature of jurisdiction, which stood vested upon the High Court under Section 66 of the Income Tax, 1922, is different from the jurisdiction, which is conferred on the CLB under Sections 402 of the 1956 Act. In the given case, the failure to exercise such jurisdiction may give rise to a question of law under Section 10F. That the power of CLB under Section 402 of the 1956 Act is of the widest amplitude, is statutorily exemplified by clause (g) of the very same provision. Clause (g) of Section 402 brings within its sway, all other matters, qua which it is just and equitable for CLB to make a provision.

Summary

Issues Involved:
1. Validity of the appellant's removal as Director of DPPL.
2. Whether the removal constituted oppression and mismanagement.
3. Applicability of the principle of quasi partnership.

Detailed Analysis:

1. Validity of the appellant's removal as Director of DPPL:
The appellant was removed based on allegations of setting up a parallel business (DCS) and failing to assign patents to DPPL. The appellant argued that DCS was set up to enhance DPPL's business and had the knowledge and tacit approval of the Board of Directors (BOD). Evidence, including the website links and payment approvals for DCS, supported the appellant's claim. The Memorandum of Understanding (MOU) with Michael Jackson was in line with previous MOUs executed by the appellant, and payments were made with the knowledge of the respondents. The appellant had also assigned patents to DPPL before the Extraordinary General Meeting (EOGM). The Court found the removal process flawed due to non-compliance with Section 190 of the Companies Act, 1956, which requires a 14-day notice for special resolutions. The notice was served only three days before the EOGM, making the removal procedurally invalid.

2. Whether the removal constituted oppression and mismanagement:
The removal was deemed harsh and unfair, constituting oppression under Sections 397 and 398 of the Companies Act, 1956. The appellant's significant contributions to DPPL and his legitimate expectation to continue in a managerial role were disregarded. The Court emphasized that the removal on flimsy grounds in a closely held family company amounted to oppression. The Supreme Court's quashing of the FIR against the appellant further supported the lack of substantive grounds for removal.

3. Applicability of the principle of quasi partnership:
DPPL, originally a partnership firm, was transformed into a private limited company with equal shareholding among five family branches. The Court held that DPPL functioned as a quasi partnership, where each branch expected representation on the Board of Directors (BOD). The appellant's removal disrupted this expectation, constituting oppression. The Court rejected the CLB's view that quasi partnership principles apply only with equal shareholding and deadlock in management. The principle of quasi partnership was applicable due to the family nature of the company and the legitimate expectations of the appellant.

Conclusion:
The Court allowed the appeal, set aside the CLB's order, and reinstated the appellant as Director and Executive Director of DPPL. Recognizing the impracticality of forced co-existence, the Court directed the National Company Law Tribunal (NCLT) to value the appellant's shareholding and provide an exit route, ensuring fair compensation. The parties were instructed to appear before the NCLT for further proceedings regarding the valuation and buyout of the appellant's shares.