2017 (6) TMI 525 - Tri - Companies Law

Cancellation of resignation of directors - family company - dispute - unreasonable remuneration - Held that - The Petitioner is seeking direction to restore the Directors who have resigned from the Board of the R-1 Company. However in a situation when the family members are not keeping good relation, rather a Police Complaint was lodged, it is not worthy to force the Directors who have resigned to sit together with the Petitioners to run the company. This proposition is not suitable considering the background of the case. There is no harmony among the family members as is evident from the attempts of settlement made by the learned member of CLB in the past but all such efforts have gone in vain. The Petitioners at present are having control over the affairs of the Company, therefore the prayer for cancellation of resignation and in consequence restoration of the Directors who have resigned is not worthy to accept. The Petitioner is seeking direction that Respondent 7 be ordered to vacate the Office of Directorship. In this regard it is worth to note that the settled legal position is that the sitting Directors of the Company can take appropriate decision for removal of a Director if his presence in the Board is not suitable for the day to day functioning of the Company. As a result the prayer as raised by the Petitioner is left open, rather leave it upon the sitting Directors, to decide the fate of R-7, so as to take due legal steps, if deem fit. However no specific separate order,as demanded, is lawfully required to be passed. That one of the prayer is to direct to make good the amount siphoned by the Respondents. Inter alia, in this regard, the accounts of the Respondents as appearing in the Books of the Company are the only guiding factor, refer pages 240 to 260 of the Reply of the Respondents, to arrive at the accurate conclusion. It is well known that every Corporate litigation, in one way or the other, ha an economic angle causing dispute. So, the prevalent practice is that the contribution of capital/funds in the business should be in equal proportion by all the groups or the participants. However in this case the admitted position is that the financial contribution by the Respondents was much higher than the Petitioners. Rather the Petitioners have not demonstrated their financial involvement as also financial risk in running this business. Undoubtedly, the Respondents have advanced huge amount of loan to R-1 Company which was in fact returned in the phase manner as and when the funds were available in the Company. A common understanding of Siphon of funds is drain off of money from business without having legitimate authority. Conversely, if the transfer of funds is duly recorded in the books of account with legitimate narration and that narration is a rightful explanation which is not found to be fabricated or untruthful than no court of law shall hold such legitimate transfer of money as illicit siphoning of funds. Entries in the accounts have established a direct nexus of adjustment of loan; duly appearing previously; which was undisputedly used for the purpose of the business of the Company. On the face of records this is an unsubstantiated allegation. Consequently, this is not a case of siphoning of funds but simplistically refund of loan. The relief sought is therefore unjustifiable. The Petitioners have also objected to the remuneration paid to R-6 and R-7 side by side demanding payment of remuneration to the Petitioner. According to me this is a trifle issue because the remuneration was not alleged as excessive or unreasonable paid to R-6 and R-7. The demand of payment of remuneration to the Petitioner has become redundant because the decision in this regard henceforth shall be in the hands of the remaining Directors i.e. Petitioners, of the Company. A fundamental question is how to provide Equitable Justice to both the sides, especially when they are closely related to each other. To maintain the harmony as also to maintain status of the Company it is justifiable to suggest one party to exit from the Company. In this case Respondents have already resigned from the Directorship, except R-7. In furtherance of the said decision already taken by the Respondents it is justified to ask them to surrender their Shareholding in favour of Petitioners at the value to be determined by an independent valuer, to be picked- up from the list of empanelled Chartered Accountants. On the basis of the valuation report the shares can be transferred by the Respondents in favour of the Petitioners or their Representatives after receiving the consideration so determined and also to complete other legal formalities required to accomplish the exit plan. Second, to complete the process of handing over by the Respondent and taking over by the Petitioners the existing loan accounts of the Directors should be settled after due adjustment of liabilities.

Summary

Issues Involved:
1. Validity of the appointment of Additional Director.
2. Legality and motive behind the resignation of Respondents 2 to 5.
3. Alleged mismanagement and siphoning of funds by the Respondents.
4. Allegations of oppression and mismanagement by the Petitioners.
5. Relief sought by the Petitioners including restoration of directors, removal of Respondent 7, and financial compensation.

Detailed Analysis:

1. Validity of the Appointment of Additional Director:
The Petitioners challenged the appointment of Mr. Rajendra H. Kulkarni (R-7) as an Additional Director, questioning his qualifications and the necessity of his appointment. The Tribunal found that the intimation for the meeting was proper and attended by all directors. It was noted that there is no statutory requirement for a specific qualification for a director. The explanation provided by the Respondents that R-7 had eight years of experience with the company and was appointed due to P-2's lack of interest in production was deemed plausible. Thus, the Tribunal dismissed this objection, stating there was no logical basis to interfere with the Board's decision.

2. Legality and Motive Behind the Resignation of Respondents 2 to 5:
The Petitioners alleged that the resignation of Respondents 2 to 5 was with an ulterior motive to siphon the company’s assets. The Tribunal found that the legal formalities for the resignation were complied with, including proper notice and quorum for the meeting. The Tribunal examined the financial contributions made by the Respondents to the company and found that the repayments made to them were justified as they were loans and not siphoning of funds. The Tribunal concluded that the resignations were legal and not driven by any ulterior motive.

3. Alleged Mismanagement and Siphoning of Funds by the Respondents:
The Petitioners accused the Respondents of mismanagement, including selling company assets below market value and siphoning funds. The Tribunal found that the decisions regarding the sale of assets and repayment of loans were commercial decisions made in the interest of the company. The Tribunal noted that the financial contributions by the Respondents were significant and the repayments were justified. The Tribunal dismissed the allegations of siphoning, stating that the transactions were duly recorded and explained in the company’s books.

4. Allegations of Oppression and Mismanagement by the Petitioners:
The Respondents countered that the Petitioners had diverted business to their proprietary concern, M/s. Archana Corporation, and breached their fiduciary duties. The Tribunal acknowledged the strained relationship among family members and noted that the Petitioners had acted in their own interest, adversely affecting the company’s business. The Tribunal emphasized the importance of good faith and fair conduct in family-owned companies and found that the Petitioners had not acted in a manner consistent with these principles.

5. Relief Sought by the Petitioners:
The Petitioners sought various reliefs including the restoration of directors, removal of R-7, and financial compensation. The Tribunal found that restoring the resigned directors was not feasible due to the strained family relations. The Tribunal left the decision regarding R-7’s directorship to the current directors. The Tribunal dismissed the claims of siphoning of funds and found that the remuneration issues were minor and should be handled by the current directors. The Tribunal suggested an equitable solution where the Respondents would surrender their shareholding to the Petitioners at a value determined by an independent valuer, thus facilitating an exit plan.

Conclusion:
The Tribunal partly allowed the Petition, directing an independent valuation for the transfer of shares from the Respondents to the Petitioners and the settlement of existing loan accounts. The Tribunal emphasized resolving the dispute in the best interest of the company while maintaining harmony among the family members.