TMI Blog2010 (5) TMI 390X X X X Extracts X X X X X X X X Extracts X X X X ..... table to do so and to pass appropriate orders to bring to an end the matters complained of. - SPECIAL LEAVE PETITION NO. 9110 OF 2008 - - - Dated:- 7-5-2010 - ALTAMAS KABIR AND CYRIAC JOSEPH, JJ. Jaideep Gupta for the Petitioner. K.G. Raghavan and Dr. Manish Singhvi for the Respondent. JUDGMENT Altamas Kabir, J. - The petitioners herein filed Company Petition No. 69 of 2006 before the Additional Principal Bench of the Company Law Board at Chennai under sections 397, 398, 402 and 403 of the Companies Act, 1956, alleging mismanagement and oppression by the majority share-holders of the first respondent-company. Various reliefs, including reconstitution of the Board of Directors of the said company, were prayed for. By its order dated 17-12-2007, the Company Law Board, (hereinafter referred to as CLB ), dismissed the Company Petition against which the above-mentioned Company Appeal was filed before the High Court under section 10F of the aforesaid Act. The said appeal was dismissed by the High Court as being misconceived upon the finding that the CLB had consi-dered all the materials, applied the law and recorded its findings correctly and no question ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed cost of the project was ₹ 395 crores, out of which equity participation by the three constituent partners was ₹ 175 crores. The balance ₹ 220 crores was to be mobilized as loan by the respondent No. 1-company, and, in the event the respondent No. 1 failed to do so, the deficiency was to be met by further equity contribution by the partners. 7. As mentioned hereinbefore, APAKSH was established as a Special Purpose Vehicle with the sole object of implementing the connectivity project in accordance with the contract awarded by APTS on 21-4-2003, apart from which no other business was to be undertaken by it. On 10-5-2005, the Respondent No. 1 gave a turnkey contract to the Respondent No. 5 which is one of the principal shareholders having a controlling interest in the respondent No. 1-company. The said Engineering, Procurement and Construction contract, (hereinafter referred to as the EPC contract), envisaged the completion of the infrastructural facilities within a period of 65 weeks at a fixed cost of ₹ 370 crores up to the stage of commission and implementation of the project. 8. Appearing for the petitioners, Mr. Jaideep Gupta, learned Senior ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and controlling more than 64 per cent equity of the respondent No. 1 and, on the other, it is the EPC contractor who is responsible for delivering goods and services in accordance with the Agreement executed between itself and the respondent No. 1-company on 10-5-2005. Mr. Gupta submitted that it was in this context that it was necessary for the Company Law Board and the High Court to have inquired into the conduct of the respondent No. 5 in the matter of execution of the turnkey project. Mr. Gupta submitted that such omission has resulted in grave miscarriage of justice insofar as the petitioners were concerned. 11. Mr. Gupta submitted that since the petitioners had not been permitted to adduce oral evidence involving events which had occurred during the pendency of the appeal, the only course left open to rectify the injustice caused to the petitioners was to remit the matter to the Company Law Board for a proper inquiry into the various allegations made by the petitioners regarding the gross misconduct of the respondent No. 5 in executing the turnkey project which was the very substratum of the existence of APAKSH Broadband Limited, the respondent No. 1-company. Mr. Gupta s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... may not be enough for grant of relief and continuous course of oppressive conduct on the part of majority shareholders was, therefore, necessary to be proved. It was also observed that the jurisdiction of the Court to grant appropriate relief under section 397 was of wide aptitude and in exercise of its powers the Court was not bound by the directions contained in section 402 of the Companies Act if in a particular fact situation further relief or reliefs were warranted. At the same time, a word of caution was introduced and it was also held that it had to be borne in mind that when a complaint is made as regards violation of statutory or contractual rights, the shareholders may initiate proceedings in a civil court or in a proceeding under section 397 of the Act which would be maintainable only when an extraordinary situation is brought to the notice of the Court keeping in view the wide and far reaching power of the Court in relation to the affairs of the company. 14. Mr. Gupta pointed out that several letters had been written on behalf of the petitioner-company objecting to the manner in which the funds of the company were being siphoned off by the Engineering Procurement a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... No. 1-company and rendering the holding of the petitioners in the respondent No. 1-company of little or no value. As against the investment of ₹ 112 crores by the petitioner-company, no connectivity had been achieved even in Hyderabad, let alone in the 23 districts and all the mandals and villages of the State or even in at least one district. 17. Mr. Gupta submitted that this was a classic example of oppression by majority shareholders having a controlling interest, confined to unjust enrichment at the expense of minority shareholders of the Company. Mr. Gupta submitted that unless appropriate orders were passed on the petitioners application under sections 397, 398, 402 and 403 of the Companies Act, 1956, the petitioner-company would completely lose its investment in the respondent No. l-company and would also be made to face continuous litigation and harassment at the hands of the respondent Nos. 2 to 6. 18. Appearing for the respondent Nos. 1, 3, 4 and 5, Mr. K.G. Raghavan, learned Senior Advocate, submitted that the conduct of the respondent No. 5 as EPC contractor and a shareholder in Incable Net has been cited by the petitioners in their application under se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lict between the two interests, the Company s interests had to be protected. A Director has to act in the paramount interest of the Company. He has no statutory obligation as far as individual shareholders are concerned. Accordingly, the duty of the petitioner No. 2 as a Director of the respondent No. 1-company was to the Company before his combined interest as a Director in the petitioner No. 1-company, which was a shareholder in the respondent No. 1-company. Mr. Raghavan urged that the Company Law Board had quite correctly disallowed the claims of the petitioners and left it to the collective wisdom of the Directors of the respondent No. 1-company to take such action as was deemed fit and proper in the course of management of the day-to-day affairs of the Company, particularly with reference to evaluation of the quantum of work completed by AKSH and the investments made by it towards the share capital of the Company, realization of the final call money from the shareholders, recovery of the security deposits from the petitioner No. 1, settlement of the pending bills of the Directors, audit of the accounts of the Company, etc., which were within the lawful domain of the Board of D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... used of wrongful conduct is denied an opportunity to controvert the inferences said to have arisen from the documents. The said submission was ultimately not acted upon on the ground that such a submission was a belated attempt to avoid an inquiry into the conduct and motives of one of the Directors of the Company. 24. Mr. Raghavan reiterated his submissions that where there was a conflicting interest between the Company and the shareholders, the Director s duties would at first always be for the benefit of the Company and that in the context of sections 397 and 398 of the Companies Act, the Legislature in its wisdom had left the procedure to be adopted in these matters to the Company Law Board itself, with special emphasis on due compliance with the principles of natural justice. 25. Mr. Raghavan placed reliance on the decision of this Court in V.S. Krishnan v. Westfort Hi-Tech Hospital Ltd. [2008] 83 SCL 44 , wherein, while considering the scope of the expression oppression within the meaning of sections 397, 398 and 402 of the Companies Act, it was held that in order to establish oppression it would have to be shown that the conduct of the majority shareholders ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... question of law and fact as was held in Needle Industries (India) Ltd. s case ( supra ) and the views expressed by this Court in the said case, in fact, applies to the case of the Petitioners necessitating the setting aside of the orders of the Company Law Board as well as the High Court. 30. On the allegations contained in the Company Petition filed by the petitioners under sections 397, 398, 402 and 403 of the Companies Act, 1956, the reliefs prayed for are as follows :- ( i )To direct the 1st respondent-company to incorporate the Shareholders Agreement dated 4-6-2005 in the Memorandum and Articles of Association of the 1st respondent-company; ( ii )To reconstitute the board of directors of the 1st respondent-company and provide that all policy decisions, and all decisions on key matters be decided by a board of directors at a meeting where at only one nominee from each of the groups, viz., 5th respondent, 1st petitioner apart from APTS nominee are present; ( iii )Appoint a Chartered Accountant to investigate into the investments made by the 5th respondent towards the share capital especially keeping in mind the source of funds for investments in share capit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hri R.V.R. Chowdary, was also a party in his capacity as Vice-Chairman of the respondent No. 1-company. Besides being a party to the decision to give the EPC Contract to the respondent No. 5, the petitioner No. 2 was also instrumental in payment of large sums of money being made to the respondent No. 5 which estops him from alleging that the respondent No. 2-company had been siphoning off the funds of the respondent No. 1-company without diligently performing its part of the contract. There is substance in Mr. Raghavan s submissions that the EPC Contract given to the respondent No. 5 by the respondent No. 1 was a commercial contract and stands outside the ambit of sections 397 and 398 of the Companies Act. Failure to act in terms of the contract cannot be said to have amounted to either oppression or mismanagement by the respondent No. 1. At best it can be said that the respondent No. 1 had been used as a tool or mechanism by the respondent No. 5 to acquire benefits for itself, which in the instant case, does not appear to be so, having regard to the fact that one of the petitioners in the Company Petition was himself responsible for such payments being made. 34. Both the part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respondent No. 5. 37. From the facts as revealed, the only conclusion that can be arrived at is that the respondent No. 5 had committed a breach of contract in regard to supply of materials to the respondent No. 1-company in terms of the EPC contract. Such lapse, in our view, would not constitute the ingredients of a complaint under sections 397, 398, 402 and 403 of the Companies Act, 1956. Such breach could give rise to an action of breach of contract under section 73 of the Indian Contract Act, 1872. 38. The decisions cited on behalf of the respective parties and in particular, the decision in Needle Industries (India) Ltd. ( supra ), in support of the claim of the petitioners for being allowed to lead oral evidence, does not really come to the aid of the petitioners, since from the materials on record itself it has been established that at best the respondent No. 5 had failed to abide by its commitments in the EPC contract executed in its favour by the respondent No. 1-company. 39. We are unable to understand as to how the decisions in the above case are of any help to the petitioners, since nothing concrete has been established by them in regard to either oppr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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