2001 (3) TMI 1059 - Board - Companies Law

Court rules in favor of respondents, directs MD appointment issue to Central Govt under Companies Act. Inspection ordered.

Desein (P.) Ltd. Versus Elektrim India Ltd.

The court found in favor of the respondents on most issues, directing the company to refer the MD appointment matter to the Central Government for ... - Issues Involved:1. Allegations of oppression and mismanagement.2. Appointment of the Managing Director.3. Incorporation of a rival company and diversion of business.4. Financial mismanagement and violation of foreign exchange regulations.5. Appointment of statutory auditors.6. Request for investigation into the affairs of the company.Detailed Analysis:1. Allegations of Oppression and Mismanagement:The petitioners, holding 24% and 6% shares respectively in the company, alleged various acts of oppression and mismanagement. They claimed they were not allowed effective participation in the company, and the respondents appointed their own nominee as the Managing Director (MD) against the petitioners' wishes. Additionally, the respondents were accused of incorporating another company to divert business and financial mismanagement, including violating foreign exchange regulations.2. Appointment of the Managing Director:The petitioners opposed the appointment of the 6th respondent as the MD, claiming it was against their wishes and violated statutory provisions. The MD's appointment was initially proposed by the petitioners' representative in 1994 and was approved in subsequent years, sometimes unanimously. The petitioners' opposition began in 1999 after the 6th respondent incorporated the 16th respondent. The court noted that meaningful participation does not mean decisions cannot be taken without the petitioners' consent. The court directed the company to refer the matter to the Central Government for compliance with Section 316 of the Companies Act.3. Incorporation of a Rival Company and Diversion of Business:The petitioners alleged that the respondents incorporated the 16th respondent to divert business from the company. The court found that the 16th respondent, a wholly-owned subsidiary of the 17th respondent, owed no duty to the petitioners or the company. The restructuring of the 2nd respondent in 1997, which led to its withdrawal from the power sector, was not considered an act of oppression. The court did not find evidence of existing business being diverted and noted that future business opportunities could not be considered diverted without the 2nd respondent's assistance.4. Financial Mismanagement and Violation of Foreign Exchange Regulations:The petitioners alleged financial mismanagement, including maintaining an undisclosed foreign bank account, improper bookkeeping, and unsupported payments. The court noted that the petitioners, having representatives on the Board, were closely associated with the company's affairs and should have addressed any wrongdoing. The court found some substance in the respondents' argument that the investigation request was motivated. However, serious allegations warranted an inspection of the company's books and records under Section 209A of the Companies Act. The court ordered the Central Government to conduct this inspection and maintain the status quo on the company's fixed assets and deposits until further action.5. Appointment of Statutory Auditors:The petitioners challenged the appointment of Gambhir Nanda & Associates as statutory auditors, claiming it was not made in the AGM and violated the Act. The court found that the MD was authorized to appoint the auditors in the AGM, and the petitioners had approved their appointment in subsequent AGMs. The petitioners were estopped from raising this issue after three years and were directed to take the matter up with the Central Government.6. Request for Investigation into the Affairs of the Company:The petitioners based their request for an investigation on an inspection report by Shri Gupta, which highlighted various financial irregularities. The court noted that ordering an investigation under Section 237 is rarely exercised and usually involves public interest. The court found the petitioners' request for investigation to be motivated but acknowledged the serious allegations. The court ordered an inspection under Section 209A and directed the Central Government to take appropriate action based on the findings.Final Relief:The court noted that in closely held companies, one party is usually directed to sell their shares to the other. The respondents were willing to buy or sell shares, but the petitioners wanted the investigation completed first. The petition was disposed of without any order as to costs.