2025 (5) TMI 942 - Tri - Companies Law

Oppression and mismanagement - Entitlement to an investigation under Section 213 of the Companies Act 2013 into the affairs of the Respondent No. 1 Company based on alleged fraudulent oppressive or unlawful conduct - HELD THAT - Section 213 of the Companies Act 2013 empowers this Tribunal to order an investigation into the affairs of the company if inter-alia the business of the company is being conducted with intent to defraud its creditors members or any other person or otherwise for a fraudulent or unlawful purpose or in a manner oppressive to any of its members or that the company was formed for any fraudulent or unlawful purpose. Remuneration and its accounting in the books - HELD THAT - This issue has been disputed by the Respondent No. 8 by placing on record a bank certificate evidencing payment of Rs. 1, 42, 70, 000/- to the Petitioner in his Bank Account No. 520101257897859 with Corporate Bank Pune during February 2019 to April 2019. This revelation is contrary to the assertion of the Petitioner in his petition that the Petitioner has never received the said amounts classified by the Respondent No 1 Company as the Petitioner s remuneration as a Director which fact is evident from the Bank Statements of the Petitioner s bank account . The remaining amount out of Rs. 1, 80, 00, 000/- is stated to be payable in the books of the Respondent No. 1 Company accordingly no case of fudging the books is made out in this regard. It is relevant to note here that none of the Respondents other than Respondent No. 1 Company holds share in Dishti Vishal Private Limited and any benefit flown to such company indirectly accrues to the Respondent No. 1 Company in terms of accretion to its share value. Unathorised buy-back of shares was completed by the Respondent No. 1 Company - HELD THAT - It is relevant to note that such buy-back was carried out by the Respondent No. 1 Company at face value while the intrinsic value of its shares was much higher than the face value. Accordingly the buy-back had resulted into reduction of outstanding shares but the pro-rata share of outstanding shareholders in the reserves of the Respondent No. 1 Company had gone up resulting into increase in the intrinsic value thereof. Accordingly such buy-back cannot be said to be an act of oppression prejudicial to the interest of its members (remaining) or of the Respondent No. 1 Company. Allegation of personal benefits taken by Respondents is in relation to usage of a car owned by Respondent No. 1 Company by the ex- wife of the Respondent No. 2 and mother of Petitioner and provision of a corporate credit card for her expenses - HELD THAT - The Respondent No. 2 has clarified that she is employed with the Respondent No. 1 Company in marketing department and said car and credit card has been allotted to her in course of her employment. It is customary to grant perquisites/benefits to the employees by an employer and no adverse inference can be drawn from it - the allegation is arising as the Petitioner has not been granted similar benefits. It is relevant to note that the Petitioner is not in employment of the Respondent No. 1 Company hence cannot be allowed such benefits. Irregular appointment of Respondent No. 4, 5 and 6 as additional directors of the Respondent No. 1 Company on 02.03.2015 and thereafter non-confirmation of their appointment in the AGM - HELD THAT - It is relevant to note that the Petitioner was a Director when the AGM is claimed to have been held on 30.09.2015 and has also signed the Financial Statement for the FY 2014-15 laid before the AGM for the shareholder s approval. Accordingly the Petitioner cannot raise this issue in this Petition after a lapse of about 8 years and the said contention is ex facie barred by limitation. Proceeds of Key Man Insurance Policy in the name of the Petitioner purchased by the Respondent No. 1 Company - HELD THAT - The Respondent No.1 Company has clarified that the benefits of the policy are already being credited to the personal accounts of the Petitioner maintained with the Respondent No. 1 Company till 2021 and from 2022 the receipts of insurance policies are directly being credited to the savings account of the Petitioner by the Insurance Company - The mere non-payment of the money lying to the credit of the Petitioners in the books of the Respondent No. 1 Company cannot be held to be an act of oppression and the Petitioner has remedies available under the civil law in relation to recovery of those amounts. Benami property creation - Respondent No. 1 Company s funds were paid to Dishti Vishal Private Limited as advances which were in turn utilised by Dishti Vishal Private Limited for funding the purchase of large land parcels in the name of Mr. Suryakant Shantaram Dhamne who was working as a land labourer in the farm and later on appointed as a director of Dishti Vishal Private Limited - HELD THAT - The allegation that money given in advances by the Respondent No. 1 Company to Dishti Vishal Private Limited has been utilised for the funding of acquisition of land in the name of Mr. Suryakant Shantaram Dhamne is not corroborated from the facts placed on record. Hence there are no substance in the unfounded allegation of the Respondent No. 1 Company entering into benami transactions. It is settled law that the shareholders cannot claim the dividend payment as a matter of right and the declaration of dividend is within the powers of the management of the company. Accordingly non- payment of dividend to shareholders does not constitute an act of oppression. Conclusion - The Petitioner has failed to make out a case of oppression as alleged in the Petition. Petition dismissed.

Summary

The Tribunal considered multiple core legal questions arising under the Companies Act, 2013, primarily concerning allegations of oppression and mismanagement within the Respondent No. 1 Company. The key issues presented and considered include:

1. Whether the Petitioner is entitled to an investigation under Section 213 of the Companies Act, 2013 into the affairs of the Respondent No. 1 Company based on alleged fraudulent, oppressive, or unlawful conduct.

2. Whether the Respondents have committed acts of oppression and mismanagement under Sections 241 and 242 of the Companies Act, 2013, including unauthorized changes in directorship, improper buy-back of shares, and misuse of company funds.

3. Whether the Petitioner is entitled to payment of outstanding Director's remuneration and other monetary claims alleged to be due from the Respondent No. 1 Company.

4. Whether the Respondent Nos. 2 to 6 should be removed as directors and an administrator appointed under Section 242(2)(h) of the Companies Act.

5. Whether the Respondent No. 2 is obligated to transfer back the balance equity shares to the Petitioner, restoring his original shareholding.

6. Whether the Company Secretary and Statutory Auditor acted negligently or in conspiracy with the Respondents, thereby justifying an investigation.

7. Whether the advances and loans granted by the Respondent No. 1 Company to its Associate Company, Dishti Vishal Private Limited, were improper or oppressive.

8. Whether the Petitioner's rights as a shareholder, including access to company premises, documents, and benefits, have been violated.

9. Whether the use of company funds for personal benefits by Respondents constitutes oppression or mismanagement.

10. Whether the alleged creation of benami property using company funds amounts to mismanagement or fraudulent conduct.

Issue-wise Detailed Analysis

1. Investigation under Section 213 of the Companies Act, 2013

Legal Framework and Precedents: Section 213 empowers the Tribunal to order an investigation if the company's affairs are conducted fraudulently, oppressively, or for unlawful purposes. The Supreme Court in the cited case elucidated that oppression involves conduct that is harsh, burdensome, mala fide, or against probity and good conduct.

Court's Interpretation and Reasoning: The Tribunal examined the Petitioner's allegations of fraudulent accounting, misappropriation of funds, and irregularities in shareholding and director appointments. The Respondents provided documentary evidence, including bank certificates and audited accounts, to rebut claims of fraud or mismanagement.

Key Evidence and Findings: The Respondent No. 8 (Auditor) produced bank certificates evidencing partial payment of the Petitioner's remuneration. Audited financials of Dishti Vishal Private Limited and Respondent No. 1 Company were scrutinized, showing proper accounting of advances and investments. The Tribunal found no substantive material to support claims of fraudulent financial reporting or procedural violations warranting investigation.

Application of Law to Facts: The Tribunal held that mere allegations without corroborative evidence do not satisfy the threshold for ordering an investigation under Section 213. The Petitioner's claims appeared to be family disputes and shareholder disagreements rather than company affairs conducted oppressively or fraudulently.

Treatment of Competing Arguments: The Respondents' explanations regarding the buy-back, remuneration payments, and loans were accepted as compliant with statutory provisions and company policies. The Petitioner's assertions were often contradicted by documentary evidence or found to be matters of civil dispute rather than corporate mismanagement.

Conclusions: No grounds for investigation under Section 213 were established.

2. Allegations of Oppression and Mismanagement under Sections 241 and 242

Legal Framework and Precedents: Sections 241 and 242 provide relief against oppression and mismanagement. The Supreme Court's criteria for oppression include harsh, burdensome, mala fide conduct, even if legally permissible.

Court's Interpretation and Reasoning: The Tribunal analyzed allegations such as unauthorized director appointments, non-payment of remuneration, failure to transfer shares, misuse of company funds, and denial of shareholder benefits.

Key Evidence and Findings: The Tribunal noted that the Petitioner was a director during the relevant meetings approving director appointments and financial statements, thus estopping him from raising those issues later. The buy-back was conducted at face value with Board approval, consistent with Articles of Association and statutory provisions. The Petitioner's share transfer was a voluntary gift, and the company's affairs are distinct from shareholder agreements. The alleged misuse of funds for personal benefits was explained as legitimate employee perks. The Petitioner was no longer a director or employee, thus not entitled to such benefits.

Application of Law to Facts: The Tribunal held that shareholder disputes over share transfers and benefits do not constitute oppression of company affairs. The buy-back and director appointments were lawful and ratified. Non-payment of dividends is a commercial decision and not oppressive.

Treatment of Competing Arguments: The Petitioner's claims were often based on verbal agreements or family arrangements, which cannot be enforced as company affairs. The Respondents' compliance with statutory procedures and company policies was accepted.

Conclusions: No acts of oppression or mismanagement were proven.

3. Payment of Director's Remuneration and Other Monetary Claims

Legal Framework: Directors are entitled to remuneration as per company policy and statutory approvals. Non-payment may constitute oppression if deliberate and unjustified.

Court's Reasoning and Findings: The Auditor's bank certificate showed substantial payment to the Petitioner. The balance amount was reflected as payable in the company's books. The Tribunal found no evidence of deliberate withholding or fraudulent accounting. The Petitioner's claim for interest was not substantiated.

Conclusions: No entitlement to additional payments beyond those evidenced was established.

4. Removal of Directors and Appointment of Administrator under Section 242(2)(h)

Legal Framework: Section 242(2)(h) permits removal of directors and appointment of an administrator if company affairs are conducted oppressively or prejudicially.

Findings: Since no oppression or mismanagement was established, removal of directors or appointment of an administrator was unwarranted.

5. Restoration of Shareholding by Transfer of Shares

Legal Framework: Share transfers between shareholders are private arrangements and do not affect company affairs unless fraudulent or oppressive conduct is involved.

Court's Reasoning: The Petitioner's transfer of shares was voluntary and unconditional as per records. The Tribunal held that enforcement of verbal arrangements between shareholders is beyond the Tribunal's jurisdiction under Sections 241/242, which address company affairs, not private contracts.

Conclusion: No direction to restore shareholding was issued.

6. Allegations against Company Secretary and Auditor

Legal Framework: Auditors and Company Secretaries are bound by professional codes and must act independently.

Findings: No material was found to demonstrate negligence, conspiracy, or breach of duties by these professionals. The Tribunal observed that family disputes were improperly extended to implicate these independent officers.

7. Advances and Loans to Associate Company

Legal Framework: Loans to associate companies must comply with Section 186 of the Companies Act, 2013. Interest-free loans may attract penalties but do not necessarily constitute oppression.

Findings: The loan was approved by the Board and shareholders where required. No permanent alienation of funds occurred, and the advances were reflected in audited accounts. The Petitioner's claim of oppression on this ground was rejected.

8. Shareholder Rights and Access to Company Premises and Benefits

Findings: The Petitioner was denied access to premises after ceasing to be a director and employee. The Tribunal found no violation of shareholder rights requiring intervention. The dispute over occupation of residential premises was sub judice before civil courts.

9. Misuse of Company Funds for Personal Benefits

Findings: The Respondents explained that vehicles and credit cards were provided as employee benefits. The Petitioner, no longer employed, was not entitled to such benefits. No evidence of siphoning or misappropriation was found.

10. Allegations of Benami Property Creation

Findings: The advances to the Associate Company and its investments were transparent and recorded. The allegation of land purchased in the name of a laborer was unsubstantiated by financial records and dismissed.

Significant Holdings

"The Tribunal held that the Petitioner has failed to make out a case of oppression as alleged in the Petition."

"An understanding between two shareholders of the Respondent No. 1 Company does not have any relationship with the conduct of company's affairs as the company and its shareholders are two distinct entities and any breach in the promise, even if there was one, by one shareholder to another shareholder in relation to shares of the Company cannot concern the company."

"The mere non-payment of the money lying to the credit of the Petitioners in the books of the Respondent No. 1 Company cannot be held to be an act of oppression and the Petitioner has remedies available under the civil law in relation to recovery of those amounts."

"The buy-back was carried out at face value, while the intrinsic value of its shares was much higher than the face value. Accordingly, such buy-back cannot be said to be an act of oppression prejudicial to the interest of its members or of the Respondent No. 1 Company."

"No substantive material on record to demonstrate any mis-statement in the financial statements or non-observance of disclosure or procedural requirements by the Auditor or Company Secretary."

"Non-payment of dividend to shareholders does not constitute an act of oppression."

Final determinations included dismissal of the Petition under Sections 241, 242, and 213 of the Companies Act, 2013. The application for vacation of company property by the Respondents was partly allowed with directions to refund rental proceeds collected unlawfully by the Petitioner. The Tribunal refrained from ordering vacation of premises as the matter was sub judice before the civil courts.