2004 (8) TMI 777 - Board - Companies Law

Deadlock in Company Affairs Leads to Mandatory Share Sale for Resolution and Stability.

M.S.D. Chandrasekar Raja Versus Shree Bhaarathi Cotton Mills (P) Ltd.

The judgment concluded that a deadlock existed in the company's affairs, warranting the sale of the petitioner's shares to the second respondent. The ... - Issues Involved:1. Non co-opting of a third director on the Board.2. Non-clearance of accumulated stocks.3. Surrender of surplus power in favor of TNEB.4. Non-issuance of duplicate share certificates.5. Non-redemption of preference shares.6. Non-sanctioning of increment to staff members.7. Deadlock in the affairs of the company.Detailed Analysis:1. Non co-opting of a third director on the Board:The petitioner proposed the co-option of Shri A. Jayakumar, which was opposed by the second respondent citing a lack of cordial relationship and the need for prior approval from the lending institution. The petitioner argued that these reasons were belated and intended to perpetuate the deadlock. The judgment noted that the petitioner could have proposed another person for co-option as per Article 6 of the company's articles of association, which allows any person to be appointed as a director. Therefore, the second respondent alone cannot be blamed for this issue.2. Non-clearance of accumulated stocks:The second respondent was accused of failing to clear accumulated stocks, affecting the company's liquidity. However, the minutes of Board meetings on 02.05.2003 and 16.06.2003 show that steps were unanimously resolved to clear the stock. The second respondent attributed the accumulation to a severe recession and lower yarn prices, advocating for holding stocks until market revival. The petitioner's rejoinder did not effectively counter these reasons, leading to the conclusion that the second respondent did not fail to cooperate.3. Surrender of surplus power in favor of TNEB:The second respondent opposed the surrender of 100 k.v.a of surplus power, arguing that future business needs might require it. The judgment recognized this as a business decision, noting that the company had consumed varying amounts of power over the years. It concluded that the second respondent's decision was a legitimate business judgment, not an act of oppression.4. Non-issuance of duplicate share certificates:The agenda for issuing duplicate share certificates to the petitioner was deferred, not opposed, at the Board meeting on 02.05.2003. The second respondent did not attend the subsequent meeting on 20.03.2004, citing the sub judice status of the matter. The judgment found no ultimate denial of the issuance of duplicate share certificates by the second respondent.5. Non-redemption of preference shares:The petitioner claimed the second respondent did not cooperate in redeeming preference shares or declaring dividends. However, the directors' reports for 1997 and 1998 recommended dividends, and the Board minutes showed no agenda for redemption or declaration of dividends. Thus, the second respondent had no occasion to oppose these actions.6. Non-sanctioning of increment to staff members:The second respondent agreed to increments for eight out of ten staff members but objected to two involved in alleged cash misappropriation. The petitioner approved increments for all staff despite these objections. The judgment found this issue irrelevant to the main dispute.7. Deadlock in the affairs of the company:The judgment reviewed Board meeting minutes and correspondence, noting irreconcilable differences and animosity between the petitioner and the second respondent. It concluded that the deadlock situation justified the winding up of the company, which would be against the company's interest. The judgment suggested that the petitioner, considering his age, should sell his shares to the second respondent at a value determined by a valuer. The judgment found that the shares held by the petitioner were in his individual capacity, not as karta of the HUF, based on the company's records.Conclusion:The judgment concluded that the petitioner had established a deadlock in the company's affairs, justifying the sale of his shares to the second respondent. The parties were directed to suggest a mutually acceptable valuer for determining the share value. The judgment emphasized the need for one party to exit to resolve the deadlock and ensure the company's smooth functioning.