1980 (12) TMI 155 - HC - Companies Law

Court Appoints Special Officer to Resolve Company Deadlock and Mismanagement

The court appointed a Special Officer to regulate the affairs of the respondent-company due to a complete deadlock, mutual mismanagement allegations, and ... Certain perosns not to be appointed as managing director, Oppression and mismanagement Issues Involved:1. Appointment of a Special Officer and/or Administrator under sections 397, 398 of the Companies Act, 1956.2. Regulation of the conduct of the affairs of the respondent-company.3. Declaration regarding the entitlement of certain respondents to act as managing directors.4. Allegations of mismanagement and misappropriation.5. Deadlock in the management of the company.6. Financial jeopardy due to the bank's overdraft notice.7. Equitable division of the business and assets of the company.Issue-wise Detailed Analysis:1. Appointment of a Special Officer and/or Administrator under sections 397, 398 of the Companies Act, 1956:The application sought the appointment of a Special Officer and/or Administrator to regulate the conduct of the affairs of the respondent-company. Given the complete deadlock and mutual allegations of mismanagement and misappropriation, the court found it necessary to appoint a Special Officer to administer the company and discharge the functions of the board. The Special Officer, Mr. Trilokesh Goswamy, was appointed to manage the company's affairs until the liabilities were liquidated and the assets divided equitably between the two groups.2. Regulation of the conduct of the affairs of the respondent-company:The court noted that there was a complete deadlock in the management, with both groups holding equal shares and unable to cooperate. The deadlock made it impossible to carry on the business smoothly. The court decided that the best course of action was to divide the business and assets of the respondent-company equitably between the two groups, ensuring that the company could continue its operations without further conflicts.3. Declaration regarding the entitlement of certain respondents to act as managing directors:The court examined whether the managing directors could continue to act without the approval of the Central Government, as required under sections 268 and 269 of the Companies Act, 1956. It was admitted that the terms of the managing directors had expired and no approval for reappointment had been sought. Therefore, the court held that the managing directors could not continue to act as such, and there was no valid board of directors, which amounted to mismanagement and was prejudicial to public interest.4. Allegations of mismanagement and misappropriation:The petitioners alleged mismanagement and misappropriation by the respondents, including the transfer of stocks and formation of a rival business. The court found that there were mutual allegations of mismanagement and that the company had suffered financial losses. The court concluded that there was sufficient evidence of mismanagement and that the situation warranted intervention under sections 397-398 of the Companies Act, 1956.5. Deadlock in the management of the company:Both parties admitted that there was a complete deadlock in the management of the company, making it impossible to carry on the business. The court found that this deadlock justified the intervention and the need for an equitable division of the company's business and assets to resolve the impasse.6. Financial jeopardy due to the bank's overdraft notice:The court noted that the company's banker, United Industrial Bank Limited, had called upon the company to liquidate its overdraft amount. This financial jeopardy, along with the pending ejectment suit filed by petitioner No. 2, further complicated the situation. The court directed the Special Officer to ascertain and repay the overdraft amount to secure the company's financial stability.7. Equitable division of the business and assets of the company:The court decided that an equitable division of the business and assets of the respondent-company between the two groups was the most viable solution. The Special Officer was tasked with overseeing this division, ensuring that both groups could carry on business independently without further conflicts. The court provided detailed instructions on the allocation of properties, repayment of liabilities, and the division of shares and assets.Conclusion:The court found that the deadlock and mismanagement justified intervention under sections 397-398 of the Companies Act, 1956. A Special Officer was appointed to manage the company's affairs, repay liabilities, and equitably divide the business and assets between the two groups, ensuring the smooth continuation of operations and resolution of disputes.