2014 (10) TMI 1080 - HC - Indian Laws

Company Law Board's order replacing entire board set aside as too harsh in oppression case

NSR Gastronomy (Mauritius) LLC (Now South Asia Gastronomy Enterprises LLC) C/O Citco Mauritius Limited Versus MR. K.N. Vasudeva Adiga, Parameshwara Adiga, Vasudeva Adigas Fast Food Private Limited, Jacob Kurian, Shantanu Yeshwant Nalavadi, Vivek Anil Chand Sett and The Registrar Of Companies, Bangalore

The HC set aside the Company Law Board's order replacing the Board of Directors in an oppression and mismanagement case, finding it too harsh. The court ... Oppression and mismanagement - Appointment of Administrator and Committee of Management replacing the Board of Directors and issuing further directions for running of the company - Whether a case for interference with an equitable order passed by the Company Law Board is made out? - HELD THAT:- What appears from the material on record is that it is clear the promoters were running this business in a profitable manner. Now the respondents have invested up to 51% in the shareholding. Under the said agreement substantial portion of the amount is already paid and invested. A letter extracted in the impugned order shows the relationship between the CEO – the 3rd respondent – Managing Director and the Chairman of the Company is strained. The Chairman is from the group of promoters. Managing Director is from the group of investors. The grievance of the petitioners is that the Managing Director is not consulting or taking the Chairman into confidence. The grievance of the CEO is that the Chairman is coming in the way of Managing and therefore, it is not possible to run the business in a peaceful manner. Though on the day the agreement was entered into there were 12 out lets. Subsequently another 12 outlet were added. Though there is no audit report by a statutory auditor as he could not be appointed because of difference of opinion between the petitioners and the respondents relating to audit report, yet according to him shows some of the out lets have been closed - in order to achieve the said object the order replacing the Board of Directors, is too harsh. After passing the said order liberty is given to the factions to appoint two members/groups in the committee of management. As a consequence equal opportunity is given to both the factions in the existing Board of Directors. There are no justification to appoint persons other than the persons who are already Directors in the interest of the two factions. In fact the Chairman belongs to one faction, the Managing Director belongs to another faction. Now that this Court has already appointed a statutory auditor to audit the accounts for two years and interim orders are passed to protect the interest of both the persons, the order passed by the Board could be modified appointing the learned Judge as Administrator permitting him to participate in the Board meetings where both the sides are represented equally and to ensure that the affairs of the company are conducted in accordance with law and to assist them in case of any divergence of opinion. That would meet the ends of justice. There are no justification to appoint Mr. M.R. Gopinath as the advisor. The order passed by the Board replacing the Board of Directors is hereby set aside. Learned administrator and the Directors, who are already on Board and who are running the administration could continue to run the business. Having regard to the nature of business itself between the parties, it is a fit case where the Company Law Board should take up the main matter out of turn and dispose of the petition itself expeditiously including the application filed invoking Section 8 of the Arbitration and Conciliation Act and pass appropriate orders at the earliest. As the application under Section 8 of the Arbitration and Conciliation Act is already pending, it will be appropriate to decide the application as expeditiously as possible. If the application is to be allowed the entire petition would go out of jurisdiction of the Company Law Board. The said application is to be disposed of within a period three months from the date of communication of this order. Application disposed off. Issues Involved:1. Appointment of an Administrator and Committee of Management.2. Allegations of oppression and mismanagement.3. Disputes over shareholding and management rights.4. Validity of resolutions and appointments within the company.5. Financial investments and obligations under the Shareholder Agreement.6. Interim orders and their implications on company management.7. Jurisdiction and applicability of the Arbitration and Conciliation Act.Issue-Wise Detailed Analysis:1. Appointment of an Administrator and Committee of Management:The appeal challenges the Company Law Board's order appointing an Administrator and a Committee of Management to replace the existing Board of Directors. The Board had appointed Justice K.N. Keshavanarayana as the Administrator to oversee the company's affairs amidst disputes between the promoters and investors. The High Court found that while the intention was to protect the interests of both parties, replacing the entire Board was too harsh. Instead, the Court suggested that the Administrator should participate in Board meetings to ensure lawful conduct and assist in resolving any disagreements.2. Allegations of Oppression and Mismanagement:The promoters alleged that the investors' actions were not in line with the agreement and were detrimental to the company and its shareholders. They claimed that the investors failed to convene regular Board meetings, appoint a statutory auditor, and conduct the Annual General Meeting, leading to operational losses. The Company Law Board found these allegations prima facie valid, prompting the interim order. The High Court acknowledged the strained relations between the CEO and the Chairman and the operational challenges faced by the company.3. Disputes Over Shareholding and Management Rights:The dispute arose from the Share Subscription-cum-Share Purchase Agreement, which gave the investors a 51% shareholding and management control. The promoters argued that the investors were sidelining them, despite their 49% stake, and that the company's declining profitability was eroding their shareholding. The High Court noted the ongoing investment obligations and the need for cooperation between the parties to ensure the company's success.4. Validity of Resolutions and Appointments Within the Company:The promoters contested the removal of the first petitioner as Managing Director and the appointment of the third respondent as Managing Director, claiming these actions were contrary to the agreement. The High Court observed that the investors had the right to appoint Directors as per the agreement and that the removal and appointment were not immediately challenged by the promoters.5. Financial Investments and Obligations Under the Shareholder Agreement:The agreement required the investors to invest up to Rs. 165 crores, of which Rs. 101 crores had been invested. The promoters received Rs. 57.2 crores for their shares. The High Court highlighted the ongoing investment obligations and the investors' readiness to invest the remaining amount, subject to the promoters' consent.6. Interim Orders and Their Implications on Company Management:The Company Law Board's interim order restrained the management from making major decisions and utilizing company funds for litigation. The High Court continued the interim order, emphasizing the need for a balanced approach to protect both parties' interests and ensure the company's smooth functioning.7. Jurisdiction and Applicability of the Arbitration and Conciliation Act:The High Court directed the Company Law Board to expedite the decision on the pending application under Section 8 of the Arbitration and Conciliation Act. If allowed, the petition would fall outside the Board's jurisdiction. The Court stressed the importance of resolving this issue promptly to determine the appropriate forum for the dispute.In conclusion, the High Court modified the Company Law Board's order to allow the existing Board, under the supervision of the Administrator, to continue managing the company. The Court emphasized the need for cooperation between the factions and urged the Company Law Board to expedite the main petition's resolution.