2020 (6) TMI 394 - Tri - Companies Law

Maintainability of petition - oppression and mismanagement - Stay of the Extra Ordinary General Meeting - whether the Petitioners were successful in making out a case for interference by this Tribunal by invoking Section 241 and 242 of the Companies Act, 2013? - HELD THAT - The reading of Sections 397 and 398 provides a right to members of a company who comply with the conditions of Section 399 (Section 244 of the New Act) to apply to the court for relief under section 402 of the Old Act (Section 242 of the New Act) or such other reliefs as may be suitable in the circumstances of the case, if the affairs of a company are being conducted in a manner oppressive to any member or members including any one or more of those applying. Therefore, we have to understand Section 399 of Old Act (Corresponding to Section 249 of New Act) to arrive at a decision on maintainability of the instant petition. Whether the Petitioners have the requisite qualifications as prescribed under section 399 to file this petition? - HELD THAT - The object of prescribing a qualifying percentage of shares to file petitions under sections 397 and 398 is clearly to ensure that frivolous litigation is not indulged in by persons who have no real stake in the company. What is required in these matters is a broad common-sense approach. If the court is satisfied that the Petitioners represent a body of shareholders holding the requisite percentage, it can assume that the involvement of the company in litigation is not lightly done and that it should pass orders to bring to an end the matters complained of and not reject it on a technical requirement. However, the Respondents have raised their objections regarding the eligibility of the Trusts which are holding 13.8% and have questioned the eligibility of Secretary/General Secretary who are repressing the Petitioners No. 3 and 4. Whether the Trust represented before the NCLT have sufficient authorization to fulfil the eligibility criteria? - HELD THAT - In the present case it is seen that Petitioner Nos. 3 and 4 are Trusts namely, Matha Jeevan Trust and Jeeva Trust, which were represented through their Secretary and General Secretary respectively. The answer to this question would depend on whether the trustees of the trust could authorize one of them to initiate proceedings for and on behalf of the Trust. The Secretary of the Petitioner No. 3 and General Secretary of the Petitioner No. 4 was authorised to appear before any Court of law or in any legal proceedings by the respective Trust Deeds, and they have duly filed this petition. The trustee can come before the court through the representation of Secretary/General Secretary, as the Trustees of the Trusts are the members of the Company and their names appears in the Register of Members of the Company. If the name of the Trustee/Chairman is in the Register of Members or if the share certificates have been issued in the name of the Trustee/Chairman, in respect of the shares, irrespective of whether such admission of a Trustee/Chairman as a member is valid or not, the Trustee/Chairman can maintain the petition as it has been admitted as the member, especially when no proceedings has been initiated to rectify the Register of Members for deleting the name of the Trustee/Chairman on the ground that they cannot be admitted as a shareholder/member - In the present case, the Trustee of 3rd Petitioner, i.e., Matha Jeevan Trust holds 14425 equity shares constituting 4.8% of the paid-up capital of the company whereas, the Chairman of the 4th Petitioner, i.e, Jeeva Trust holds 26980 equity shares constituting 9% of the paid-up share capital of the company. The 3rd and 4th Petitioners hold share certificates issued in their names and they are in a position to establish that the name of the Trustee/Chairman is in the Register of Members, then the Respondents cannot question the capacity of the member/Trustee/Chairman who hold more than 10% to file this petition. The consent made by the 31 shareholders are an intelligent consent, in the sense, a consent given for the purpose of making allegations in the petition and for the purpose of claiming reliefs therein and therefore it cannot be considered as a blanket consent, but a valid one as contemplated under section 399(3) of the Old Act. Even assuming that the consent given by these 31 shareholders is not valid, even then, the petition satisfies the conditions under section 399 as the percentage of shareholding has already crossed the 10% threshold laid down in the Section - in the light of Sections 397, 398 and 399 of the Companies Act, 1956 (Corresponding to Sections 241, 242 and 244 of the Companies Act, 2013), prima facie , we are of the view that the petition is maintainable. In the instant petition, the Respondents had conducted the EoGM at Thiruvananthapuram. Even assuming that the EoGM was validly conducted by a proper requisition, if the resolutions passed in the said EoGM are oppressive in the eyes of law to the minority shareholders, then we are of the considered view that the Tribunal can exercise the inherent power to take appropriate action against the wrong doers. If the acts are done legally but not with a good faith in the interest of the company or was done with a mala fide intention to gain control over the company, the acts are said to be illegal and non-est in the eyes of law. It is explicit that, when a meeting is requisitioned by some shareholders for the purpose of removing directors, the requisitionists' letter must be circulated prior to the meeting and it must disclose the grounds on which they want to proceed against the director - the notice of the meeting must be accompanied by a copy of the resolution and an explanatory statement. In the instant petition, we have not come across any explanatory note from the requisitionsts as well as the company, attached to the letter sent to Petitioners. The Respondents have indulged in oppression of minority shareholders and effected change in the control and management of Respondent Company, by their financial clout, muscle power and by adopting dubious methods to achieve their ends. Whether the Respondents in their Capacity as Directors of the Company had failed in complying with the fiduciary duty towards the shareholders? - HELD THAT - It has neither a mind nor a body of its own. This makes it necessary that the company's business should be entrusted to some human agents. Hence the necessity of Directors. The law, therefore, continues to struggle against their wiles and imposes upon them certain duties which, when properly enforced, will without driving away from the field competent men, materially reduces the chances of abuse. Prior to the enactment of the Indian Companies Act 2013, the codified law with regard to the fiduciary duties of directors was largely silent on the said aspect, except for Section 291 which contained the provision dealing with general powers of the board of directors. Duties of directors, hitherto, were largely laid down by courts by looking at common law principles - A close reading of the present section lead us to conclude that it is motley of easily identifiable elements like shareholders and employees along with vague groups like the community. Thus, it would provide a cause of action to any person from the society giving rise to a problematic and absurd scenario. Whether the director is expected to act in 'good faith' for the promotion of the objects of the company or should it also encompass other groups in the sub-section? - HELD THAT - While acting in the best interest, a director must carefully weigh commercial interests of the company on one hand while also taking into account the safeguarding of the interests of the stakeholders, on the other. While doing so, the director must ensure that his actions conform to the standards of those of a reasonably prudent person. The duty of good faith sets a higher standard than the best interest criterion. Harmony must be sought to be struck between commercial considerations of the company and the interests of stakeholders. Whether allotment of shares was done bonafide in the interest of the company or the said allotment was made mala fide with the object of gaining the control of the company? - HELD THAT - The allotment of shares was done to achieve different purposes, i.e., to increase the number of members of their group in the company and conversion of loan amount as share application money, is to increase their shareholding and to maintain the control over the company - the directors are not entitled to use their powers of issuing shares merely for the purpose of maintaining their control or the control of themselves and their friends over the affairs of the company or merely for the purpose of defeating the wishes of the promoter Directors and to capture the company. It is well settled that if the Directors exercise their powers for the purposes other than those for which they were conferred, it may be said that they have exceeded their authority. It is evident that the mala fide intention of the Respondents 2 to 4 at the behest of Respondents 5 to 8 to remove the Petitioners from the Company has been done with undue haste for the purpose of grabbing power in the Respondent No. 1 Company. This clearly depicts that the Respondent 2 to 4 were hand-in-glove and supporting the actions of the Respondent No. 5 and gives credence to the allegations of the Petitioners - the Respondents group led by Respondent No. 5 are acting against the interest of Respondent Company and minority shareholders, for making material changes in the management of the Respondent company. The applicability of the provisions contained in Sections 397and 398 of the old Act. Section 397 gives a right to members of the Company who comply with the conditions of Section 399 to apply to the court for relief under section 402 of the act or such other relief as may be suitable in the facts and circumstances of the case. In the instant case, it cannot be disputed that the conditions of Section 399 are complied with. There is no substance in the contention that the Petitioners are not entitled to make the application, as the Petitioners do not constitute 10% shareholding in total. However, the tribunal can exercise its powers, the tribunal must be satisfied that the requirements of the Section 397 are fulfilled and the said requirements are that on an application under section 397 of a member who has right to apply in virtue of Section 399. This Tribunal is of the considered view that the Company's affairs in relation to the Petitioners have been conducted in an oppressive manner by the Respondents and the facts would render that it is just and equitable to wind up the Company - Petition allowed.

Summary

Issues Involved:
1. Validity of Board Meetings and Extra-Ordinary General Meeting (EoGM).
2. Fiduciary duty compliance by the Directors.
3. Bona fide nature of share allotment.
4. Discrepancies in the accounts and mismanagement allegations.

Detailed Analysis:

Issue 1: Validity of Board Meetings and Extra-Ordinary General Meeting (EoGM)
Board Meeting on 11-10-2012:
The notice for the Board Meeting on 11-10-2012 was issued by Respondent No. 3, who was neither the Managing Director nor the Company Secretary, violating Clause 107 of the Articles of Association. The removal of the Company Secretary in this meeting was not mentioned in the agenda, and the meeting was held at Thiruvananthapuram instead of the usual location, raising questions about its validity.

Board Meeting on 23-10-2012:
The meeting was convened despite an injunction from the Munsiff Court, Ernakulam, making it illegal. The agenda did not mention the removal of directors or the requisition for an EoGM.

EoGM on 12-11-2012:
The EoGM was convened to remove Petitioners from directorship based on a requisition from shareholders. The requisition letter was not circulated among members, violating Section 173(2) of the Companies Act, 1956. The removal of the Chairman, as per Clause 108 of the Articles, was invalid as there was no abuse of authority by the Petitioners.

Issue 2: Fiduciary Duty Compliance by the Directors
Directors must act in good faith for the benefit of the company and its shareholders. The Respondents failed to comply with this duty by:
- Increasing their shareholding through conversion of loans into shares without offering shares to all shareholders.
- Violating MIB Guidelines by increasing the number of small shareholders through dubious share transfers.
- Advancing loans to subsidiaries without pursuing any activity, violating Section 185 of the Companies Act, 2013.

Issue 3: Bona Fide Nature of Share Allotment
The allotment of shares was done to maintain control over the company, not for raising capital. The conversion of loans into shares and subsequent share transfers were aimed at increasing the number of members in the Respondents' group, violating fiduciary duties. The allotment was not in the best interest of the company or its shareholders.

Issue 4: Discrepancies in the Accounts and Mismanagement Allegations
The Annual Reports for 2012-13 and 2013-14 showed several discrepancies, including:
- Non-renewal of cash credit and withdrawal of collateral security.
- Misrepresentation of share application money as unsecured loans.
- Advancing loans to inactive subsidiaries, violating Section 185 of the Companies Act, 2013.
- Removal of the Auditor without proper procedure, violating Section 225 of the Companies Act, 1956.

The AGM held on 28-2-2014 dismissed shareholders' objections without discussion, and the request for a poll was refused, violating the Articles of Association and Section 179 of the Companies Act, 1956.

Conclusion:
The Tribunal found that the actions of the Respondents were oppressive to minority shareholders and constituted mismanagement. The Board Meetings on 11-10-2012 and 23-10-2012, and the EoGM on 12-11-2012 were declared illegal and invalid. The resolutions passed in these meetings were set aside. The Tribunal restored the position of the Board as on 29-9-2012 and directed the reconstituted Board to conduct an EoGM within 12 weeks to elect a new Board of Directors. An independent auditor was to be appointed to audit the accounts for 2012-13 and 2013-14, and the Regional Director, Ministry of Corporate Affairs, was directed to investigate the affairs of the company.