2023 (10) TMI 1458 - HC - Companies Law

Company director's oppression claim fails under Section 10F due to unclean hands doctrine and asset diversion misconduct

Sunil Kumar Agarwal, Rekha Agarwal and Nimish Agarwal Versus Laxmi Ventures (India) Ltd., Anil Kumar Agarwal, Chitra Agarwal and Akash Agarwal, Mumbai

The Bombay HC dismissed an appeal under Section 10F of the Companies Act, 1956, challenging a CLB order rejecting oppression and mismanagement claims. The ... Oppression and Mismanagement - scope of interference in an appeal under Section 10F of the Act, 1956 - True Character of the Respondent No.1 Company - Conduct of Petitioner No.1 and Equitable jurisdiction. Scope of interference in an appeal under Section 10F of the Act, 1956 - HELD THAT:- The remit of an appeal under Section 10F of the Act, is bound by the jurisdictional condition of there being a question of law arising out of the order passed by the CLB. There could be no duality of opinion on the point that the appellate jurisdiction is not as wide as that of the first appellate court, where the entire matter on facts and law is open for re-appreciation. Undoubtedly, the High Court in an appeal under Section 10F of the Act would be required to delve into the legality and correctness of the impugned order, but through the prism of question of law raised therein - Non-consideration of the evidence / material may also give rise to perversity. Taking a view which is so unreasonable that no prudent person could have recorded such a view in the given facts and circumstances, also renders the order perverse. The High Court in exercise of appellate jurisdiction under Section 10F of the Act would, therefore, be required to appraise the impugned judgment in the context of the evidence adduced on a broad perspective and in a holistic manner to arrive at a finding as to whether the judgment is based on no evidence, there is an error in not considering the relevant facts/material or being swayed by irrelevant consideration or the finding is otherwise perverse. Certainly, the findings of fact, even if erroneous, may not furnish a justifiable ground for interference on the premise that the appellate court in the given state of facts would have been persuaded to take a different view of the matter. The impugned order is required to be tested on this touchstone. True Character of the Respondent No.1 Company - HELD THAT:- It is true, there is material to indicate that the business founded by the late father of Sunil and Anil grew over a period of time. Various entities were formed with different juridical character. However, the mere fact that two families represented by Sunil and Anil were involved in the operation and management of those entities, individually or jointly, by itself, may not be of decisive significance. Incontrovertibly, apart from Respondent No.1, there were other incorporated companies representing the group and partnership firms/proprietary concern as well - it does not appear that the share holders had a right to be appointed as director of the company. Article 125, in no uncertain terms provided that a director shall not be required to hold any share qualification. Evidently, the share holding pattern, as is pleaded in the petition, indicates that the magnitude of the interest of two groups cannot be said to be more or less equal by any standard. The share holding of Anil Group almost triples to that of the Sunil Group. To add to this, the number of share holders is also a factor in the determination of the character of the enterprise - there is no material to indicate that the Respondent No.1 company was formed by dissolving and converting an erstwhile partnership into a corporate entity. The existence of the entities with different legal characters in the group of enterprises also militates against the intent of the parties that all the entities, including the Respondent No.1, were to be treated as partnerships between two groups. Oppression and Mis-Management - HELD THAT:- Since the Court exercises equitable jurisdiction under Section 397 of the Act, the Court is required to take a broad view of the matter untrammeled by the consideration of a formal legality of an action. In a given case, the oppressive act complained of may have the formal appearance of legality. But it is the intent of the majority and intended effect on the minority, which the court is required to probe into. The legality and permissibility of an action can, therefore, is not the test. It is the propensity to operate in a harsh or burdensome manner and affect the rights of the minority share holders reflecting on the boba fide of the action, that is of relevance. By its very nature, the question of oppresiveness of an action is rooted in facts. The situation which obtains is that upon being served with the special notice under Section 284 (annexure A-4) of the Act, 1956, the Petitioner No.1 tendered resignation. Evidently, the Petitioner No.1 did not face the proceedings for his removal in the Board meeting. Nor any contemporaneous material was placed on record to show that the special notice and action under Section 284 of the Act, 1956 were driven by the objective of oppressing the minority share holders. In the circumstances, it would be difficult to accede to the submission that the resignation was brought about by oppressive acts or the acceptance of the resignation by the Board was in itself an act of oppression. Neither there is material to show that the Petitioner No.1 had filed consent to act as a director under Section 264 of the Act, 1956, nor to indicate that after 14 January 2000, the Petitioner No.1 was served with a notice of meeting of the Board of directors or attended such meeting. If removal from the Board of directors cannot be faulted at, the withdrawal of authority to operate the bank accounts of Respondent No.1 cannot be questioned as it was a consequential act. Conduct of Petitioner No.1 and Equitable jurisdiction - HELD THAT:- It is well recognized, the reliefs under Sections 397 and 398 of the Act are discretionary in nature. A party who seeks equitable reliefs must approach the court with clean hands. The conduct of the party seeking equitable reliefs must not be blameworthy. A party seeking equitable relief should be in a position to demonstrate that he was not unfair and inequitable in his dealings with the party against whom he was seeking equitable relief. In the case of Needle Industries (India) Ltd. and Ors. V/s. Needle Industries Newly (India) Holding Ltd. and Ors. [1981 (5) TMI 89 - SUPREME COURT] the Supreme Court enunciated that a party who is seeking relief under Section 397 of the Act, 1956 must come with clean hands; if he does not, he cannot ask for the relief on the ground that other man’s hands are uncleaned. Even if many acts of malfeasance and misfeasance, attributed to the Petitioner No.1, are discounted as being minor infractions or irregularities, yet the diversion of the assets of the Respondent No.1 company to the entities controlled by the Petitioners and related party transactions bordering on conversion, rendered the conduct of Petitioner No.1 a clear breach of the duty as a director of the Respondent No.1 company. Section 295 incorporates restrictions on advance of loan. Section 297 of the Act, 1956 proscribes related party transaction without the sanction of the Board of directors of the company. Section 299 casts a duty on a director to disclose interest. Breach of these statutory obligations entail the consequence of vacation of office by director under Section 283(1)(h) and (i) - it is not found that the learned Member, CLB committed any error in holding that the conduct of Sunil – Petitioner No.1 was such that it disentitled him to seek equitable reliefs under Sections 397 and 398 of the Act. Thus, neither the impugned order can be said to be based on an erroneous view of law, nor can it be said to be perverse. It does not appear that the impugned order is vulnerable for non-consideration of relevant material or for having taken into account irrelevant material. The learned Member, CLB has exercised equitable jurisdiction, keeping in view the governing principles. Thus, no interference is warranted in exercise of limited appellate jurisdiction under Section 10F of the Act, 1956. Appeal dismissed. Issues Involved:1. Scope of Appeal under Section 10F of the Companies Act, 1956.2. True Character of the Respondent No.1 Company.3. Allegations of Oppression and Mismanagement.4. Conduct of Petitioner No.1 and Equitable Jurisdiction.5. Drawing Adverse Inference for Non-Furnishing of Documents.6. Exercise of Power under Section 402(g) of the Companies Act, 1956.Detailed Analysis:1. Scope of Appeal under Section 10F:The appeal under Section 10F of the Companies Act, 1956, is limited to questions of law arising from the order of the Company Law Board (CLB). The court emphasized that an appeal under this section is not as wide as a first appeal on facts and law but is confined to legal questions. The court noted that a finding of fact could be challenged as erroneous in law if it is perverse or based on no evidence. The court held that the appeal did not present any question of law and was primarily based on factual disputes, which are not within the purview of Section 10F.2. True Character of the Respondent No.1 Company:The court examined whether the Respondent No.1 company could be considered a quasi-partnership. It was observed that the company was not formed by dissolving a partnership, and there was no equal shareholding or participation in management by the two family groups involved. The shareholding pattern and the absence of restrictions on share transfer indicated that the company was not a quasi-partnership. The court concluded that the company was a corporate entity and not a glorified partnership, affecting the applicability of partnership principles.3. Allegations of Oppression and Mismanagement:The court analyzed the allegations of oppression and mismanagement under Sections 397 and 398 of the Act. It held that the removal of Petitioner No.1 from the board did not constitute oppression, as it was a directorial dispute for which other remedies existed. The court emphasized that oppression must involve conduct that is burdensome, harsh, and wrongful, with an element of lack of probity or fair dealing. The court found that the Petitioners failed to establish continuous oppressive acts by the majority shareholders.4. Conduct of Petitioner No.1 and Equitable Jurisdiction:The court considered the conduct of Petitioner No.1, noting allegations of malfeasance and misfeasance, including related party transactions and diversion of assets. It held that equitable relief under Sections 397 and 398 requires the petitioner to come with clean hands. The court found that the conduct of Petitioner No.1 disentitled him from seeking equitable relief, as he engaged in actions prejudicial to the company's interests.5. Drawing Adverse Inference for Non-Furnishing of Documents:The court addressed the issue of adverse inference due to non-furnishing of documents. It noted that the Petitioners failed to specify the issues for which inspection was withheld, and the refusal to draw an adverse inference was not a question of law warranting interference. The court held that the lack of inspection did not substantiate the Petitioners' case of oppression or mismanagement.6. Exercise of Power under Section 402(g):The court considered whether to exercise powers under Section 402(g) to grant reliefs for oppression and mismanagement. It found no evidence of deadlock or mismanagement prejudicial to the company's interests. The court upheld the CLB's decision to give the Petitioners an option to exit the company on a fair valuation of their shares, rejecting the request for appointing a Chartered Accountant to determine shareholding afresh.Conclusion:The court dismissed the appeal, finding no legal errors or perversity in the CLB's order. It upheld the CLB's decision that the conduct of Petitioner No.1 disentitled him to equitable relief and that the company was not a quasi-partnership. The court also continued an interim arrangement for a limited period, allowing the Petitioners to work at the Bhilai Unit without interference.