2018 (3) TMI 644 - AT - Companies Law

Oppression and mismanagement - removal of directors - personal liabilities of the Directors towards the Bank - two Managing Directors of the company, one appointed by the Tribunal below and the other one already performing the duties of the Managing Director - Held that - We are not comfortable that the 1st respondent can be expected to look after the affairs of the 2nd respondent while also looking after the affairs of his own company which is in a competing business. We cannot think about any mechanism by which it can be ensured that 1st respondent who has now been appointed as Managing Director that he will not take care of his own company in the competing business unless he closes his business. Therefore, we are unable to uphold the Tribunal s order in appointing as Managing Director (he was already director and continues to be). While appointing 1st respondent as Director cum Managing Director, no discussions has been made in respect of the Managing Director already performing the duties. Therefore, the Tribunal should not have appointed 1st respondent (petitioner in the company petition) as Director cum Managing Director of the 2nd respondent. As the Tribunal has held that the acts of omission and commission of appellant and the 3rd respondent have caused losses to 2nd respondent and the 1st respondent is not liable for the losses that has been suffered by the respondent company if any loss has been occurred due to non-completion of these projects will be borne by the company and not an individual. The company should have made a thorough investigation that the loss has been occurred due to inactiveness/negligence of the appellant. The company should have also convened a Board Meeting to analysis the difficulty in non-completion of projects. The sub account accounts are consolidated in the name of company. One person cannot be held responsible for the same. The company is liable to the Bank. The Board of Directors of the company should have investigated and have settled the matter internally. Therefore, the interference in the matter on this issue by the Tribunal is unwarranted.

Summary

Issues Involved:
1. Removal of the appellant from Directorship and appointment of the 1st respondent as Director-cum-Managing Director.
2. Liability of the appellant to pay ?16.48 Crores with Bank interest.
3. Allegations of operation and mismanagement against the 2nd respondent.
4. Competing business activities by the 1st respondent.

Issue-wise Detailed Analysis:

1. Removal and Appointment of Directors:
The Tribunal removed the appellant from the Directorship of the 2nd respondent company and appointed the 1st respondent as Director-cum-Managing Director. The Tribunal's decision was based on the finding that the appellant was responsible for significant financial losses due to mismanagement. However, the appellate tribunal observed that no such relief was sought in the original petition and that the Tribunal did not provide a finding of oppression and mismanagement against the 3rd respondent, who was already performing the duties of Managing Director. The appellate tribunal noted that appointing the 1st respondent as Director-cum-Managing Director effectively removed the 3rd respondent from his position without due process.

2. Liability to Pay ?16.48 Crores:
The Tribunal held the appellant liable to pay ?16.48 Crores with bank interest for overdrawn funds through his sub-account. The appellate tribunal, however, found that the main account maintained with the Bank was of the company, and the company was liable to pay any overdrawn amount. It was argued that the amounts withdrawn were for execution of projects and that profits from these projects were transferred to the company's accounts. The appellate tribunal concluded that the company, not an individual director, should bear the losses due to non-completion of projects.

3. Allegations of Operation and Mismanagement:
The 1st respondent filed a petition alleging operation and mismanagement against the 2nd respondent. The Tribunal found that the acts of omission and commission by the appellant and the 3rd respondent caused losses to the 2nd respondent. The appellate tribunal noted that the Tribunal's conclusion that each director functioned as an individual cost and profit center was incorrect. It was argued that the tenders were submitted in the name of the Managing Director and that all projects were company projects. The appellate tribunal concluded that these matters were within the domain of company management and not typically subject to oppression and mismanagement claims.

4. Competing Business Activities:
The appellant argued that the 1st respondent, while continuing as a Director of the 2nd respondent, was engaged in competing business activities through a new company, M/s Roger Mathew & Co. The Tribunal had forbidden the 1st respondent from competing with the 2nd respondent. However, the appellate tribunal expressed concerns about the 1st respondent's ability to manage the 2nd respondent's affairs while running a competing business. The appellate tribunal found no mechanism to ensure that the 1st respondent would not prioritize his own company over the 2nd respondent unless he ceased his competing business activities.

Conclusion:
The appellate tribunal allowed the appeal, quashing and setting aside the impugned order. The company petition was dismissed, and it was concluded that the Tribunal's interference in the company's internal management was unwarranted. The appellate tribunal emphasized that the company should have internally investigated and resolved issues related to project management and financial losses.