2007 (12) TMI 531 - Board - Companies Law

Petitioners' Grievances Dismissed for Breach of Contract - No Relief Granted

The Company Law Board (CLB) concluded that the petitioners' grievances stemmed from breaches of contractual obligations rather than shareholder rights, ... - Issues Involved:1. Incorporation of the Shareholders Agreement (SHA) into the Company's Memorandum and Articles of Association.2. Reconstitution of the board of directors.3. Appointment of a Chartered Accountant to investigate investments by AKSH.4. Evaluation of the quantum of work done by AKSH and annulment of shares issued without consideration.5. Administration of the Company by a Committee of directors.6. Allegations of oppression and mismanagement by AKSH.7. Necessity of oral evidence to establish facts.8. Disputed invoices and missing documents.9. Financial contributions and call money payments by shareholders.10. Mismanagement of funds and activities by AKSH.11. Alleged collusion between AKSH and the sixth respondent.12. Cancellation of the marketing agreement.Issue-wise Detailed Analysis:1. Incorporation of the SHA into the Company's Memorandum and Articles of Association:The petitioners sought to direct the Company to incorporate the Shareholders Agreement (SHA) dated 04.06.2005 into the Memorandum and Articles of Association. The SHA outlined the roles and responsibilities of the shareholders, including AKSH, APTS, and the first petitioner, and specified the shareholding pattern. The request was based on the belief that this incorporation would ensure adherence to the agreed terms and provide legal enforceability.2. Reconstitution of the Board of Directors:The petitioners requested the reconstitution of the board of directors to ensure that decisions on policy and key matters would be made with the presence of nominees from each shareholder group, including the petitioners, AKSH, and APTS. This was aimed at preventing unilateral decisions by AKSH, which held a majority stake.3. Appointment of a Chartered Accountant to Investigate Investments by AKSH:The petitioners sought the appointment of a Chartered Accountant to investigate the investments made by AKSH towards the share capital of the Company. They alleged that AKSH had mismanaged funds and inflated invoices, necessitating an independent investigation to verify the legitimacy of these investments.4. Evaluation of the Quantum of Work Done by AKSH and Annulment of Shares Issued Without Consideration:The petitioners requested the appointment of a team of Chartered Accountants/Chartered Engineers to evaluate the quantum of work done by AKSH. They alleged that AKSH had not performed tangible work under the EPC contract and had issued shares without consideration. They sought the annulment of these shares and modification of the shareholding structure accordingly.5. Administration of the Company by a Committee of Directors:The petitioners proposed that the day-to-day administration of the Company be vested in a Committee of directors comprising nominees from each shareholder group. This was intended to ensure balanced decision-making and prevent mismanagement by AKSH.6. Allegations of Oppression and Mismanagement by AKSH:The petitioners alleged that AKSH, as the majority shareholder and EPC contractor, had mismanaged the funds and operations of the Company. They claimed that AKSH had inflated bills, supplied defective materials, and failed to achieve project milestones. They sought relief under Sections 397, 398, 402, and 403 of the Companies Act, 1956, to address these acts of oppression and mismanagement.7. Necessity of Oral Evidence to Establish Facts:The petitioners argued that several disputed questions of fact required oral evidence to establish the acts of oppression and mismanagement. They cited the need to prove the non-performance of tangible work by AKSH, mismanagement of funds, and collusion between the respondents to eliminate the petitioners from the Company.8. Disputed Invoices and Missing Documents:The petitioners highlighted discrepancies in the invoices produced by AKSH, including missing invoices, unsupported invoices, and fabricated documents. They alleged that AKSH had supplied cables worth Rs. 114 crores without proper documentation and that the invoices were bogus. They sought to summon an unsigned letter dated 14.06.2007 from APTS, which disclosed irregularities in AKSH's supply of materials.9. Financial Contributions and Call Money Payments by Shareholders:The petitioners and AKSH had agreed to contribute specific amounts towards the equity capital of the Company. The petitioners alleged that AKSH had not brought in its share of final call money, amounting to Rs. 25 crores, as directed by the Bench. They also claimed that the sixth respondent, controlled by the third respondent, had failed to release the balance loan amount to the petitioners, preventing them from paying their final call money.10. Mismanagement of Funds and Activities by AKSH:The petitioners accused AKSH of siphoning funds from the Company by raising fictitious invoices and withdrawing money without performing tangible work. They alleged that AKSH had not achieved any triple play connectivity as per the EPC contract and had supplied defective materials. They claimed that the second petitioner had signed cheques on behalf of the Company under the impression that actual supplies were made and services rendered by AKSH.11. Alleged Collusion Between AKSH and the Sixth Respondent:The petitioners alleged collusion between AKSH and the sixth respondent to prevent the release of loan amounts to the petitioners. They claimed that this collusion had incapacitated them from raising further funds and paying the final call money. They sought to strike off the sixth respondent from the array of parties, arguing that it was not a necessary or proper party to the proceedings.12. Cancellation of the Marketing Agreement:The petitioners expressed concern that AKSH intended to cancel the marketing agreement between the Company and the first petitioner. They argued that this cancellation would adversely affect their interests and sought to protect the marketing agreement from being terminated.Conclusion:The Company Law Board (CLB) concluded that the main grievances of the petitioners arose from breaches of the contractual obligations under the agreement dated 21.04.2005, the EPC contract dated 10.05.2005, and the SHA dated 04.06.2005. These breaches did not relate to the petitioners' rights as shareholders and fell outside the scope of Sections 397 and 398. The CLB emphasized that the petitioners had not acted diligently and had acquiesced in the alleged mismanagement. Therefore, the petitioners were not entitled to the reliefs claimed, and the collective wisdom of the board of directors should address the issues within the lawful domain of the Company's management. All interim orders were vacated.