2015 (11) TMI 133 - SC - Companies Law

Supreme Court reinstates CLB order, directs expedited adjudication & protection of Executive Director role

The Supreme Court set aside the High Court's decision, reinstating the CLB's order and directing the CLB to expedite the final adjudication of the case. ... Demerger - allegation of oppression and mis-management - substitution of existing Board of Directors - Held that:- In our view, there did not exist any searing urgency to substitute the existing Board of Directors as done and to continue with it till the disposal of the suit and at the same time to keep the proceeding of the CLB pending till then. This is more so, as can be culled from the order dated 6.8.2014 of the CLB, the status of the respondent No.1 as Executive Director of the Company has been secured and further alienation of the assets of the company, otherwise has been restrained. Assuredly, these are based on undertakings before the CLB as given by the appellants, the contesting Directors and the CLB having taken note thereof, the same are as good as binding directions on the parties. The aspect of demerger as adverted to hereinabove, is the subject matter of adjudication in a separate proceeding on which, at this stage, no observation is called for. Suffice it to state however, that the aspect of demerger for the present cannot ipso facto be an impelling factor to conclude in favour of allegation of oppression and mis-management as made by the respondent No. 1. As in the course of hearing, some grievance was expressed on behalf of respondent No. 1 that her status as the Executive Director of the company, stands undermined due to uncalled for surveillance imposed at the instance of the existing Board of Directors, we make it clear, as has been assured before us, that she ought to be allowed to function in the aforesaid capacity being provided with all facilities and privileges attached to the office as permissible in law, so much so that she does not have any occasion to complain in this regard. This indeed ought to be in accord with the letter and spirit of the undertaking offered by the Board of Directors to the CLB. The respondent No. 1 too would cooperate in the day to day management of the affairs of the company in her said capacity. The existing Board of Directors would also abide by the undertaking as recorded in the order dated 6.8.2014 of the CLB qua the alienation of the assets of the company. The set-up of the Board of Directors and the arrangement vis-a- vis the administration of the affairs of the company, as was existing on the date on which the order dated 6.8.2014 was passed by the CLB, would continue until further orders by it. The CLB is, however, directed to dispose of the proceeding before it as expeditiously as possible. As the suit filed by the respondent No. 1, as noted hereinabove, is also pending, we hereby direct the Civil Court before which it is pending, to deal with the same with expedition as well, so as to provide a quietus to the lingering family discord in the overall well- being of the company and its constituents. Issues Involved:1. Validity of Board Meetings held on 9.4.2013, 10.4.2013, and 11.4.2013.2. Authority of Mr. G.V. Rao as Director post-resignation.3. Allegations of oppression and mismanagement.4. Interim relief and status quo during litigation.5. Appropriateness of High Court's intervention under Section 10F of the Companies Act, 1956.Detailed Analysis:1. Validity of Board Meetings held on 9.4.2013, 10.4.2013, and 11.4.2013:The respondent No. 1 contended that the Board meetings held on these dates were invalid as Mr. G.V. Rao had resigned prior to these meetings and lacked the authority to convene them. Furthermore, she argued that she was neither noticed nor informed of these meetings, making the proceedings a nullity. The High Court examined the legitimacy of these meetings and the resolutions passed therein, including the appointment of Ms. Mahima Datla as Managing Director. The High Court noted that the respondent No. 1 had acknowledged the appointments in her letter dated 15.4.2013 but later alleged undue influence.2. Authority of Mr. G.V. Rao as Director post-resignation:Mr. G.V. Rao's authority was questioned since he had resigned on 6.4.2013 but later withdrew his resignation on 9.4.2013. The High Court scrutinized whether his withdrawal was valid and if he could legally convene the Board meetings. The High Court found that the withdrawal of resignation was not formally accepted or rejected by respondent No. 1, and thus, his authority remained contentious.3. Allegations of oppression and mismanagement:Respondent No. 1 alleged that the other Directors were engaging in acts of oppression and mismanagement, particularly through a scheme of demerger intended to alienate the company's assets. The High Court delved into these allegations, noting the pending demerger proceedings before the High Court of Andhra Pradesh. The High Court's decision emphasized the need for an interim arrangement to manage the company's affairs while these allegations were being adjudicated.4. Interim relief and status quo during litigation:The CLB initially declined to grant interim relief to respondent No. 1 but secured her position as Executive Director and noted the undertaking by the appellants not to alienate the company's properties. The High Court, however, constituted an ad hoc Board of Directors, including respondent No. 1 and her daughters, to manage the company's day-to-day affairs until the final resolution of the disputes. This arrangement was to ensure that no major policy decisions were taken without unanimity and prior approval from the CLB.5. Appropriateness of High Court's intervention under Section 10F of the Companies Act, 1956:The High Court's intervention was challenged on the grounds that the CLB's order did not raise any question of law, as required under Section 10F. The appellants argued that the High Court's extensive evaluation of the facts and substitution of the CLB's interim order was beyond its jurisdiction. The Supreme Court agreed, stating that the High Court's detailed scrutiny at the preliminary stage was unwarranted and that the CLB should be allowed to adjudicate the matter on merits. The Supreme Court emphasized that appellate courts should confine their review to the aspects considered by the lower forum and not undertake a comprehensive re-evaluation of the facts at an interlocutory stage.Conclusion:The Supreme Court set aside the High Court's decision, reinstating the CLB's order and directing the CLB to expedite the final adjudication of the case. The Supreme Court also directed the Civil Court to expedite the related suit, ensuring that respondent No. 1's role as Executive Director is respected and that the company's assets are not alienated as per the undertakings given. The appeals were allowed, and the proceedings were remanded for further consideration on their merits.