TaxTMI 
TaxTMI 
2019 (6) TMI 331
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.... that 1st appellant was incorporated on 19.3.1996 by 1st and 2nd respondent. 1st appellant is a subsidiary of 6th Respondent. 6th Respondent is a company based in UK which holds 51% shares in the company. 39% shares of the 1st appellant are held by 2nd Respondent. 1st respondent holds only 10% of the equity shares of 1st appellant. 3rd to 5th respondent and 2nd appellant are nominee directors of 6th respondent. 7th respondent is a practising company secretary. 1st respondent was removed as Director of the 1st appellant pursuant to the Management losing confidence in him at the EGM on 7.8.2015 which resulted in 1st respondent to file company petition before the NCLT, Chennai for relief against oppression and mismanagement under Sections 241 and 242 of the Companies Act, 2013. The 1st respondent alleged five acts of oppression while alleging three acts of mismanagement. The appellants pleaded that the Company Petition is filed with the ulterior motive of extracting Rs. 10 crores from the Company. The main contentions of the 1st respondent, in brief, are as follows: a) That the R7 (R6 herein) company, registered under law of England engaged in the business of software develop....
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....itioner (1st respondent) resulting in appointment of KPMG (auditor firm) to review the operations of the company that pointed out certain violations regarding direct tax, labour law, indirect tax and transfer pricing, for which, Respondent 2 was mainly responsible. l) That R2 to R6 (R2 to R5 and 2nd appellant herein) pressurized the petitioner (1st respondent) to resign from the post of Managing Director and the Petitioner (1st respondent) had also decided to exit from the post of Managing Director on a compensation ofRs. 10 crores from the company. However, the Respondents offered meagre amount. m) That on receipt of report of KPMG (audit form) the holding company and the other Respondents issued a special notice dated 15.5.2015 under Section 169 of the Companies Act, 2013 for removal of the Petitioner (1st Respondent) from the office of Managing Director by making false allegations. Prior to this, a notice was given on 8.5.2015 for holding a Board Meeting on 15.5.2015 to discuss the position of the Petitioner (1st respondent) as the Managing Director. The special notice to discuss convening of an EGM on 15.6.2015 by the holding company contemplates only removal ....
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.....10.2015 and on 13.10.2016 wherein company has increased its capital from Rs. 25 lakhs to Rs. 35 lakhs and also amended the Articles of Association. As per the FCA, the presence of the Petitioner (1st respondent) is a must for shareholders meeting and since the petitioner did not attend the meeting, the AGMs convened on 19.10.2015 and 13.10.2016 illegal and null and void. r) That the Petitioner (1st respondent) was removed from the office of the Managing Director and Director on 7.8.2015 and they have not paid the terminal benefits to the Petitioner (1st respondent) till date. 3. Respondent filed their reply and rebutted in brief as under:- a) That the 1st respondent did not invest in the shareholding of the company and 10% shareholding which he holds is not sweat equity and it was gifted by R2. b) That the Petitioner (1st respondent) has prayed for an award of damages to the tune of Rs. 10 crores from the Respondent but the petitioner (1st respondent) was always willing to resign and leave the company and he has written many letters and sent emails to this effect. Petitioner was offered a generous package of two years salary, two company cars and grat....
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....g Director and Director cannot be considered as an "act of oppression". i) That the transfer of shares from R2 to the Petitioner is a contract between them and it cannot be an act of oppression in the affairs of the company. k) That the Petitioner has not proved any violation in transfer pricing regulations. The company has appointed M/s Ernest & Young to advise the company on transfer pricing in the year 2007 and subsequently in the year 2015 (KPMG) was appointed to report on non-compliance including transfer pricing. The KPMG did not find any non-compliance of transfer pricing and only found non-compliance of direct tax, indirect tax, corporate and labour laws. The e-mail dated 14.11.2011 of R2 refers to remittances from UK to India and Sales Tax on such remittances and it also refers to bring the company's transfer policy in line with the other customers. The Petitioner having known of the violations has chosen to keep quiet from the year 2011 till filing of the Petition. l) That the Petition is the joint signatory for the company's bank account from the year 1996 and R2 cannot withdraw any cash without signing on cheques by the Petitioner. If the alle....
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....ss of confidence" on him. According to the Respondents words used to mean "revoke such appointment" gives the Board of Directors the power to remove the Petitioner. Revocation of appointment is synonymous with removal. In such cases, it is not necessary to find the Petitioner "guilty of fraud or gross negligence" (Para 15 at Page 4 and 5 of the written submissions of the Respondents). The above submissions indicate that the Respondents have the ultimate power to remove the Managing Director even if the condition of the removal as mentioned in the articles did not arise. The lack of confidence is the contingency for removal of the Managing Director, even according to the said Clause of AOA. The action of removal of the Petitioner from the post of Managing Director by the majority shareholders cannot be questioned. Hence, his removal from the office of the Managing Director would remain valid. 10. As per the FCA also, as seen in the pattern of shareholding of the company, only 10% was fixed and decided to be allotted to the Petitioner. There is no evidence that the Petitioner is entitled to get 15% of the shares from R2. Therefore, the claim of the Petitioner for 25% of the ....
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....he appellants stated that the removal of the 1st respondent as Director of the company is valid. The appellants stated that they have done substantial compliance with Section 169 of Companies Act, 2013. 7. The appellants stated that the NCLT has grossly erred in holding that Financial Collaboration Agreement was entered into before the incorporation of the Company. The appellants stated that the finding is ex facie contrary to the documents filed before the NCLT. The appellants stated that the documents show that the said agreement was entered on 7.11.1996 nearly 8 months after the incorporation of the Company. 8. The appellants stated that the NCLT had no jurisdiction to pass orders under Section 242 of the Act in absence of any oppression or mismanagement. 9. That appellants stated that the NCLT was not correct in directing the purchase of the shares of 1st respondent at a mutually agreed rate. 10. Reply has been filed by Respondent No.1. 1st respondent has stated that the appeal should have been filed by the 1st appellant represented by any of the Respondents No.2,3,4 and 5 as the allegations were against these respondents and these respondents cannot afford to remai....
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....any. 1st respondent stated that Section 196 (2) of the Act only prescribed that even in a private limited company simpliciter that a managing director cannot be appointed for a term exceeding 5 years at a time. It is further stated that the 1st appellant company did not pass any resolution restricting the period of appoint on or after 1.4.2014. 16. 1st respondent stated that mere "lack of confidence" cannot be a ground to revoke or remove the 1st respondent from the office of director. It is further stated that 1st respondent was not removed from the office of Managing Director in the Board Meeting held on 15.5.2015 and the meeting was concluded abruptly without taking any decision. 17. 1st respondent stated that the appellant and other respondent illegally removed him from the office of managing director only in the EGM held on 7.8.2015 as he was not present in the said EGM and his presence was must in terms of Clause 1 of Section V of FCA. 1st respondent stated that the appellant and other respondent were bent upon removing the 1st respondent from the office of managing director by foisting false charges on him and for that purpose appointed M/s KPMG an audit firm to find o....
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.... (Page 195) in which one of the item is to discuss the position of Mr. K.K. Jagadish as Managing Director of the Company on 15.5.2015. We have also seen the copy of Special Notice dated 15.5.2015 (Page 198) by which it is proposed that a Meeting will be held on 7th August, 2015 to removed 1st respondent as Managing Director. We have also seen the minutes of the meeting of the Board of Directors held on 15.5.2015 (Page 201 to 203) in which it was resolved that 1st respondent be and is hereby removed from the Directorship and Office of Managing Director of the company with effect from the date of approval of this resolution by the shareholders. We have already observed that in the notice there was an agenda for removal of 1st respondent as Managing Director and not director. Therefore, the NCLT in exercise of its powers under Section 242 of the Act has rightly set aside the decision of the company to remove 1st respondent as director of the company. 24. Learned counsel for the appellant argued that the NCLT committed an error of fact in holding that the FCA was pre-incorporation and binding on the 1st appellant even though it was entered eight months after the incorporation and 1s....
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....ss of confidence was the reason for removal of the 1st Respondent as Director and Managing Director. 27. Learned counsel for the 1st respondent argued that the various instances of oppression and mismanagement and has been cited by him. Learned counsel for the 1st respondent further argued that taking note all the instances of oppression and mismanagement, the NCLT has held that the removal of 1st respondent from directorship is illegal and directed 1st appellant to grant compensation for removal from the post of Managing Director under Section 202 of the Companies Act, 2013. 28. We have heard the learned counsel for the parties. Section 202 of the Companies Act, 2013 provides as under:- "202. Compensation for loss of office of managing or whole-time director or manager.- (1) A company may make payment to a managing or whole-time director or manager, but not to any other director, by way of compensation for loss of office, or as consideration for retirement from office or in connection with such loss or retirement. (2) No payment shall be made under sub-section (1) in the following cases, namely:- (a) where the director resigns from his office as a ....
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....d for a fixed tenure. 1st respondent was removed from the company. Upon removal as Managing Director, 1st respondent is entitled to compensation for loss of office as per Section 202 of the Companies Act, 2013. Section 202(1) of the Act provides that a company may make payment to a managing director by way of compensation for loss of office, or as consideration for retirement from office or in connection with such loss or retirement. Section 202(2) of the Act is not applicable in the case of 1st respondent. Section 202(3) of the Act provides that any payment made to a managing director shall not exceed the remuneration which he would have earned if he had been in office for the remainder of his term or for three years whichever is shorter, calculated on the basis of the average remuneration actually earned by him during a period of three years immediately preceding the date on which he ceased to hold office, or where he held the office for a lesser period than three years, during such period. On critical analysis of Section 202 of the Act we observe that the appellant company may make payment of compensation to 1st respondent for loss of office of managing director. We have also ob....