2022 (5) TMI 928 - Supreme Court

An examination of the terms of "Oppression and Mismanagement" under the Companies Act, 1956 and 2013.

Oppression and Mismanagement - validity of Board Meetings - validity of withdrawal of resignation from the post of Directorship - transmission of Equity Shares - validity of Annual General Meetings (AGM) conducted - failure to adhere to the request of the petitioner regarding furnishing the documents and inspection of books and accounts of the Company.

A family feud between mother on one side and her three daughters on the other, concerning Respondent Company (Biological E. Ltd.). The Company was established in 1953. The husband Dr. Vijay Kumar Datla died leaving behing his wife and three daughters. The third daughter being educated and well groomed with the affairs of the aforesaid company, to carry on the operations of the Company as compared to the other two and in comparison to her mother (Opposite party) and her two other sisters (Co-respondents) clearly points out to intention of testator to make such Will. 

There is no allegation of fraud or dishonesty noticeable in this case, one cannot ignore -the Duomatic Principle-strict adherence to a statutory requirement may be dispensed with if it is demonstrated otherwise on facts, if the same is consented by all members was the legal reasoning given by the hon'ble apex court. The fact that one of the directors of the company resigned from the company and took back his resignation three days later in the larger interest of the company and the other shareholders of the company is no irregularity. Further there was no protest or objection at that point of time to taking back of resignation as director and the appointment of the third daughter as the managing director of the Company. The transfer of shares to the third daughter and her consequent increase in the shareholding and the ownership of the company was not a fraud as alleged to anyone or on the company. It was the legitimate will of the testator. 

The Company Law Board (CLB) judgment was upheld by the hon'ble apex court which specifically mentioned that the Appellant mother knew of the fact that the third daughter was appointed as the managing director of the company and did not object to this at that point of time. Moreover the mother could not be appointed as trustee to the trusts formed specifically for the daughters. Held that she had no locus standi in filing any litigation on behalf of trust/s. 

The Appellant herself communicated the fact of appointment of all daughters to the Board of Directors of the Company herself to all the shareholders of the company, third daughter being appointed as managing director of the Company, acquiesced (approved) all the events is estopped from raising the said grievance at this point of time before the hon'ble apex court. 

Held there was no act of oppression or mismanagement of the company, no order for winding up the company can be passed on such grounds. 

Duomatic Principle as discussed above stated "anything the members of a company can do by formal resolution in a general meeting, they can also do informally, if all of them assent to it."

Lord Devey in Salmon v. Salmon Co. Ltd., [1897] AC 22, (also known as “Salmon’s case”) held that “a company is bound in a matter intra vires by the unanimous agreement of its members”.

Principle emanating from Salmon’ Case (supra) has found its utility across various aspects of company law such as Duomatic Principle, Doctrine of Indoor Management, etc. This Principle having its origin in common law, is applicable even in the Indian context.

We must note that application of Duomatic Principle is only applicable in those cases wherein bona fide transactions are involved. Fraud is a clear exception to application of these principles, be it Duomatic Principle or Doctrine of Indoor Management. 

The thrust of the Duomatic Principle is that strict adherence to a statutory requirement may be dispensed with if it is demonstrated otherwise on facts, if the same is consented by all members.

A party cannot be allowed to wax and wane as the contradictory decision tend to take judicial proceedings to ad nauseam. A judicial proceeding should assume finality.  

The affairs of the Company were not being conducted in a manner prejudicial to the public interest. From the Memorandum and Articles of Association, it is seen that the Company is in the business of manufacturing vaccines with profitability and even did good business during Covid pandemic.

The above case clearly points to the fact that there can be no oppression or mismanagement when there is an acquiescence/tacit consent. 

---

Full Text:

2022 (5) TMI 928 - Supreme Court

Duomatic principle: unanimous member assent can validate informal corporate acts and bar oppression claims without fraud. The Duomatic Principle validates informal corporate acts effected with unanimous or tacit member assent, permitting departure from strict statutory formalities where transactions are bona fide and free from fraud. Prior knowledge, acquiescence and estoppel by a complainant can negate claims of oppression or mismanagement arising from appointments, withdrawal of resignations, share transmissions, and conduct of meetings, preserving corporate finality and internal decision-making.