2009 (8) TMI 713 - HC - Companies Law

Oppression and mismanagement - Civil liability for mis-statements in prospectus - Held that - The order of the Company Law Board in respect of relief granted under paragraph 9(i) is confirmed with a direction to the second respondent to transfer its shares and all other interest held in the first respondent-company (Creative Port Development Private Limited) to the petitioners either at an agreed consolidated price of Rs. 52.50 crores or any fair value to be arrived at by an independent expert valuer as at 31-3-2009 whichever is higher. The Company Law Board shall appoint on an application by the second respondent within a period of thirty days from the date of receipt of a copy of this order an independent Expert Valuer and decide about all other formalities in that regard. The relief granted by the Company Law Board under paragraph 9(ii) stands set aside holding that the second respondent shall not have any obligation to reimburse any benefit accrued by it under Machilipatnam Port Project either to the petitioners or the first respondent-company. All further acts of the petitioners pursuant to the order of the Company Law Board dated 27-5-2009 are directed to be kept in abeyance except those vital acts which require the petitioners to act for the purpose of retaining the Subarnarekha Port Project with the Government of Orissa till the formalities in respect of fixing the consideration for exit of the second respondent is fixed by the Company Law Board as stated above and the entire amount is paid to the second respondent and the petitioners who have disclosed the affairs of the Subarnarekha Port Project as on 25-6-2009 shall continue to disclose any further developments and communications by sending copies to the second respondent periodically once in a month commencing from the end of August 2009 till the formalities for exit of the second respondent are completed in full and till such formalities are completed respondent Nos. 2 to 5 shall be deemed to continue as the directors of the first respondent-Company.

Summary

Issues Involved:
1. Jurisdiction of the Company Law Board to grant remedy for breach of investment agreement and memorandum of understanding.
2. Whether oppression continues despite respondents' undertaking to act as per investment agreement.
3. Existence of oppression on the factual matrix.
4. Company Law Board's decision on contempt application while disposing of the company petition.
5. Lawfulness of reconstituting the board of directors without securing payment of consideration.
6. Validity of reconstituting the board of directors without shareholders' approval.
7. Whether the claim on Machilipatnam Port Project can be a subject-matter of oppression.
8. Reliance on the memorandum of understanding dated 14-11-2007 by the Company Law Board.
9. Jurisdiction of the Company Law Board to decide an issue referable to arbitration.
10. Personal responsibility of respondent Nos. 3 to 5 for amounts received by the second respondent.
11. Sustainability of relief granted by the Company Law Board under section 402 of the Act.

Issue-Wise Detailed Analysis:

1. Jurisdiction of the Company Law Board to grant remedy for breach of investment agreement and memorandum of understanding:
The Company Law Board (CLB) has the power to grant relief under sections 397 and 398 of the Companies Act, 1956, to address grievances of oppression and mismanagement. The CLB directed the second respondent to transfer its shares and interests in the first respondent-company to the petitioners at a consolidated price of Rs. 52.50 crores or a fair value determined by an independent expert valuer. This was based on the memorandum of understanding and subsequent conduct, which indicated the second respondent's intention to exit.

2. Whether oppression continues despite respondents' undertaking to act as per investment agreement:
The CLB found that the second respondent's conduct, including non-funding and locking the registered office, was prejudicial to the interests of the company and its members. Despite the respondents' undertaking to act as per the investment agreement, the CLB concluded that the second respondent's actions amounted to oppression.

3. Existence of oppression on the factual matrix:
The CLB determined that the second respondent's failure to fund projects and the subsequent actions, including locking the registered office and freezing bank accounts, constituted oppression. The CLB also found that the Machilipatnam Port Project was a project of the first respondent-company, and the second respondent's conduct in relation to this project was oppressive.

4. Company Law Board's decision on contempt application while disposing of the company petition:
The CLB did not find it necessary to decide the contempt application separately while disposing of the company petition. The CLB's decision was based on the overall conduct of the respondents and the need to address the matters complained of comprehensively.

5. Lawfulness of reconstituting the board of directors without securing payment of consideration:
The CLB directed the reconstitution of the board of directors of the first respondent-company without securing the payment of consideration. The High Court found this direction to be premature and held that the reconstitution should occur only after securing the interest of the second respondent.

6. Validity of reconstituting the board of directors without shareholders' approval:
The High Court held that the CLB's direction to reconstitute the board of directors without shareholders' approval was within its powers to bring an end to the matters complained of. However, the reconstitution should be subject to securing the interest of the second respondent.

7. Whether the claim on Machilipatnam Port Project can be a subject-matter of oppression:
The High Court found that the Machilipatnam Port Project was not a project of the first respondent-company. Therefore, the second respondent's conduct in relation to this project could not be considered oppressive towards the first respondent-company or its members.

8. Reliance on the memorandum of understanding dated 14-11-2007 by the Company Law Board:
The High Court held that the CLB's reliance on the memorandum of understanding dated 14-11-2007 was justified. The memorandum of understanding and subsequent conduct indicated the second respondent's intention to exit, and the CLB's direction was based on this understanding.

9. Jurisdiction of the Company Law Board to decide an issue referable to arbitration:
The High Court found that the CLB had jurisdiction to decide the issues raised in the company petition, even if they were referable to arbitration. The CLB's powers under sections 397 and 398 are wide and can address matters of oppression and mismanagement comprehensively.

10. Personal responsibility of respondent Nos. 3 to 5 for amounts received by the second respondent:
The High Court held that respondent Nos. 3 to 5 could not be personally held responsible for the amounts received by the second respondent. The CLB's direction for reimbursement of benefits enjoyed by the second respondent was set aside.

11. Sustainability of relief granted by the Company Law Board under section 402 of the Act:
The High Court upheld the CLB's relief directing the second respondent to transfer its shares and interests to the petitioners. However, the direction for reconstitution of the board of directors was modified to ensure the interest of the second respondent was secured before reconstitution.

Conclusion:
The appeals were partly allowed. The CLB's order directing the second respondent to transfer its shares and interests to the petitioners was upheld, but the direction for reconstitution of the board of directors was modified to secure the second respondent's interest. The direction for reimbursement of benefits from the Machilipatnam Port Project was set aside.