2010 (8) TMI 777 - Board - Companies Law

Court Upholds Restraint Order, Dismisses Modification Applications

The Bench concluded that the restraint order dated January 12, 2010, should not be modified, as the reasons given in the order aligned with the interim ... Oppression and mismanagement Issues Involved1. Modification of the order dated January 12, 2010, restraining respondent No. 5 from alienating or creating third-party rights over the fixed assets of Rampur Texpro Unit.2. Applicability of Section 293(1)(a) of the Companies Act, 1956.3. Allegations of oppression and mismanagement by the petitioners.4. Balance of convenience and the business-like approach in leasing the idle property.Detailed AnalysisIssue 1: Modification of the Order Dated January 12, 2010Respondent No. 5 sought modification of the order dated January 12, 2010, which restrained them from alienating or creating third-party rights over the fixed assets of Rampur Texpro Unit. Respondent No. 5 argued that they had received offers to lease the property, which would prevent financial loss. The petitioners opposed this, arguing that creating third-party rights would affect their interests as significant shareholders and lead to further litigation.The Bench observed that the order from the Principal Bench was not final but based on prima facie satisfaction. It noted that the offers received by respondent No. 5 were disputed and appeared to have surfaced only after the restraint order. Therefore, the Bench found it inappropriate to modify the interim order without further evidence.Issue 2: Applicability of Section 293(1)(a) of the Companies Act, 1956Respondent No. 5 argued that Section 293(1)(a) of the Act was not applicable because the Rampur Texpro Unit was a closed unit and not a going concern. They cited Pramod Kumar Mittal v. Andhra Steel Corp. Ltd. to support this claim. However, the petitioners contended that the explanatory statement required under Section 293(1)(a) was given, and thus the section was applicable.The Bench noted that the cited case did not apply because it involved a court-appointed committee, and no explanatory statement was given. It further referred to P.S. Offshore Inter Land Services (P.) Ltd. v. Bombay Offshore Suppliers & Services Ltd., which held that Section 293(1)(a) applies to both running and closed undertakings. Therefore, the Bench concluded that Section 293(1)(a) was applicable in this case.Issue 3: Allegations of Oppression and MismanagementThe petitioners alleged that the incorporation of respondents Nos. 4 and 5 and the transfer of primary assets constituted oppression and mismanagement. They argued that creating third-party rights would further complicate the litigation and affect their interests as shareholders.The Bench observed that the petitioners had made a prima facie case of oppression and mismanagement. It noted the relationship between respondent No. 3 and the directors of respondent No. 5, which clouded the business trade agreement with allegations of fiduciary duty violations. Therefore, permitting respondent No. 5 to create third-party rights was deemed inappropriate at this stage.Issue 4: Balance of Convenience and Business-like ApproachRespondent No. 5 argued that leasing the property would generate income and prevent financial loss, which was a business-like approach. They suggested depositing the lease proceeds in the company's account without withdrawal until the petition's disposal.The Bench acknowledged that leasing the property could be beneficial but emphasized that creating third-party rights could lead to further complications and potential irreparable loss. It highlighted that the proceedings were summary in nature and could be expedited with cooperation from the parties.ConclusionThe Bench concluded that the restraint order dated January 12, 2010, should not be modified. It found that the reasons given in the order were compatible with the interim reliefs sought by the petitioners. Therefore, the applications for modification (C.A. No. 61 of 2010 and C.A. No. 63 of 2010) were dismissed, with liberty granted to respondent No. 5 to seek early disposal of the case upon completion of pleadings.