Sugavaneswara SpiningMills Limited v. S.Arunachalam

IN THE HIGH COURT OF JUDICATURE AT MADRASDATED : 30.04.2008CORAM :THE HON’BLE MR. JUSTICE S.TAMILVANANC.M.A. No.258 of 2008andM.P.Nos.1 and 2 of 20081. Sugavaneswara SpiningMills Limited Belur Main Road, Minnampali Post, Salem – 636 106.2. T.Sundaravel3. T.Dhanasekaran4. T.Sivakumar5. V.Chandrasekaran6. A.Loganathan7. M.S.Perumal8. M.A.Manickam9. A.Pachaiappan .... Appellants(Respondents)vs.1. S.Arunachalam2. V.M.Venkatachalam3. R.Kanaga4. R.Prakash5. V.Rajasekaran6. A.Gowri .... Respondents(Applicants)Appeal filed against the Order, dated 28.11.2007 made inC.A.No.82 of 2007 in C.P.No.9 of 2005 on the file of the Company LawBoard, Additional Principal Bench at Chennai. For Appellants: Mr.H.Karthik SeshadriFor Respondents: Mr.S.Parthasarathy, Senior Counsel for Mr.K.RajasekaranJ U D G M E N TAggrieved by the order of the Company Law Board, AdditionalPrincipal Bench at Chennai, in C.A.No.82 of 2007 in C.P.No.9 of https://hcservices.ecourts.gov.in/hcservices/ 2005, this Civil Miscellaneous Appeal has been preferred.2. It is not in dispute that the respondents herein hadoriginally approached the Company Law Board in C.P.No.9 of 2005 withallegations of "oppression and mismanagement" by the appellants underSections 397 and 398 of the Companies Act, 1956. As per Sections 397and 398 of the Companies Act, the shareholders are entitled toapproach the Company Law Board, complaining of acts of oppression andmismanagement by the majority shareholders. 3. According to the respondents herein, their rights asshareholders of the company are being affected by the actions of theappellants group. The Company Law Board, with a view to protectingstatus quo, pending the company petition, passed an interlocutoryorder on 18.08.2005, whereby directed the company not to give effectto any resolution, which might be passed at the Annual General BodyMeeting of the company to be held on 28.08.2005, pertaining to thedirectorship of the first respondent, until further orders in thecompany petition.4. It is also not in dispute that after several hearings andfinally on account of the efforts of the Company Law Board and thecounsel for the parties, there was understanding between the partiesto settle the disputes between them and an order was passed,recording such a compromise entered into between the parties on08.09.2006.5. According to the appellants, the order, dated 08.09.2006 wasthe final order in the company petition and all prior orders passedby the Company Law Board, that were interlocutory in nature came tobe merged with the final order.6. Mr.H.Karthik Seshadri, learned counsel appearing for theappellants submitted that once the final order is a compromise order,as envisaged between the parties, the said order cannot be modifiedor altered by the Company Law Board, except with the consent of allthe parties to the said compromise. According to him, the order dated08.09.2006 passed by the Company Law Board had made the Board"functus officio" and hence, the Board ought not to have entertainedC.A.No.82 of 2007 filed by the respondents.7. Mr.S.Parthasarathy, learned counsel appearing for therespondents relied upon the decision of this Court reported in 90Company Cases 1, in support of his contention submitted that theCompany Law Board has not lost sesin over the matter and therefore,was entitled to pass further orders in C.A.No.82 of 2005.8. Learned counsel appearing for the appellants placed his https://hcservices.ecourts.gov.in/hcservices/ reliance on the decision reported in AIR 2006 SCC 1690. According tohim, the decision of this Court reported in 90 Company Cases 1 is notapplicable to the facts of this case. In this regard, he submittedthe following reasons :"a) The Company Law Board in that case wasdealing with the situation where one group afterhaving suffered an order viz., to conduct ameeting for election of directors of the companyhad obstructed the process and did not permit theproper conduct of the meeting. The chairman ofthe meeting acted in a biased manner and did notallow the conduct of the meeting acted in a fairand proper manner. Under the circumstances, theparties had to once again approach the CompanyLaw Board and seek directions to implement itsorders. In the instant case, that is not thecase. The parties had consciously entered into acompromise and permitted the final disposal ofthe petition based on the compromise. It is notthe case of the respondents here that they hadapproached the Company Law Board again on theground that the appellants were not implementingthe order. On the contrary, the respondents hadadmittedly come with a request that was notcovered by the terms of the compromise order andtherefore, sought modification of the said order.b) The Judgment in 90 Company Cases 1 was dealingwith a situation wherein an order of the CompanyLaw Board was sought to be obstructed by oneparty and hence, the provisions of Regulation 44viz, to prevent the abuse of process of the Courtcould be invoked. In the instant case, that itnot the case. Here parties had with open eyesentered into a compromise. There can be no casewhere the Court would interfere with a compromiseorder, unless it is alleged that the order wasobtained by fraud, misrepresentation or bycoercion. No such allegation of that kind hasbeen made. There cannot be an afterthought andmodification. Reliance is made on AIR 2001 SC1084. Merely because, it pertains to the power ofthe family court it does not in any way dilutethe principles of Section 152 CPC, whichprinciple is equally embodied in Regulations 45of the Company Law Board Regulations. "9. According to the learned counsel appearing for theappellants, under Section 10E(5) of the Companies Act, 1956, the https://hcservices.ecourts.gov.in/hcservices/ Company Law Board shall in the exercise of its power and discharge ofits functions under the Act or any other law be guided by theprinciples of natural justice, shall act in its discretion and assuch, the powers of the Company Law Board are limited.10. According to Mr.S.Parthasarathy, learned Senior Counsel,under Regulation 44 of the Company Law Board Regulations, 1991, andin the light of the decisions of the Hon'ble Apex Court and thisCourt, the Company Law Board, in order to meet the ends of justiceand prevent the abuse of process of law, can exercise jurisdictionand therefore, there is no error or illegality in the impugned order,dated 28.11.2007, passed by the Company Law Board.11. In this Civil Miscellaneous Appeal, the following Questionsof Law arises for consideration :1. Whether the consent order, dated 08.09.2006 has rendered theCompany Law Board 'functus officio' ?2. Whether the Company Law Board has exceeded its powers underRegulation 44 of the Company Law Board Regulations, 1991, by issuingthe order, dated 28.11.2007 ?3. Whether the Civil Miscellaneous Appeal has to be allowed, onthe aforesaid grounds raised by the appellants herein ?12. The Company Law Board has passed the following consent orderon 08.09.2006 :"Heard the learned counsel representing thepetitioners and the respondents. Taking intoconsideration the facts that (a) the Company is aclosely held private limited company; and (b) thelong standing business relationship between theparties, this Bench suggested to them for anyamicable settlement of the disputes. Towards thisend, it has been agreed by both the parties asunder :1. The Company will allot shares afresh tothe extent of shares held in the name of thepetitioner nos.1 and 6 and forfeited by theCompany, viz, 9562 equity shares.2. The parity in shareholding of thepetitioner nos.1 and 6 will be restored back asprevailed prior to 07.04.2005 by allotment ofproportional additional shares, viz, 944 equityshares in their favour @ Rs.260/- per share.3. The Company will allot shares in terms ofclauses 1 and 2 on receipt of the considerationfor the shares from the petitioner nos. 1 and 6within three weeks from the date of receipt of https://hcservices.ecourts.gov.in/hcservices/ consideration.4. The petitioner nos.1 and 6 will repay theCompany a sum of Rs.52 lakhs towards the dues infull and final settlement within 9 months fromthis date and interest will be charged after 6months @ 12% simple on the outstanding balance.5. The civil suits filed by the 6thpetitioner and the Company will be withdrawnunconditionally.6. The allotment of shares on account offorfeiture of shares and the additional shareswill be allotted on receipt of consideration fromthe petitioner nos. 1 and 6.7. The petitioners are entitled to exercisetheir rights as shareholders of the Company.Liberty to apply. "13. In C.A.No.82 of 2007 in C.P.No.9 of 2005, the Company LawBoard has passed the impugned order. The operative portion of theimpugned order reads as follows :"In view of my foregoing conclusions and inexercise of the powers under Regulation 44, it ishereby ordered as under :(a) The removal of the first applicant from theoffice of director of the Company, at the annualgeneral meeting held on 24.08.2005 is declared asinvalid and the Company shall file appropriateform in this behalf with the Registrar ofCompanies, Tamil Nadu, Chennai;(b) The respondents shall pay all the dividenddeclared, if any, and deliver gold coins to theapplicants 2 to 5 in terms of this order, in theevent of any default on their part;(c) The respondents shall pay the dividend asdeclared, if any, to the applicants 1 and 6 forthe period between the year 2003 and March 2005;(d) The Company will re-issue proper receipts inthe name of the firms / controlled by theapplicants 1 and 6 for having discharged theliabilities due to the Company, in cancellationof the receipts already issued in favour of theapplicants 1 and 6; and (e) All other contentious issues raised by theapplicants are rejected for want of any merits. "14. As per the impugned order, the Company Law Board hasconsidered whether the respondents herein are entitled to the reliefsclaimed by them, in the light of the consent order, dated 08.09.2006. https://hcservices.ecourts.gov.in/hcservices/ According to the learned counsel for the appellants herein, noconsent order could be modified or recalled or reviewed, save on theground of fraud, mutual mistake or similar other grounds. 15. It is not disputed by both the learned counsel that afterelaborate discussion between the parties and their counsel, theparties had voluntarily agreed to end the dispute, which resulted inthe consent order, dated 08.09.2006, being passed, which reads thus :1. The Company will allot shares afresh tothe extent of shares held in the name of thepetitioner nos.1 and 6 and forfeited by theCompany, viz, 9562 equity shares.2. The parity in shareholding of thepetitioner nos.1 and 6 will be restored back asprevailed prior to 07.04.2005 by allotment ofproportional additional shares, viz, 944 equityshares in their favour @ Rs.260/- per share.3. The Company will allot shares in terms ofclauses 1 and 2 on receipt of the considerationfor the shares from the petitioner nos. 1 and 6within three weeks from the date of receipt ofconsideration.4. The petitioner nos.1 and 6 will repay theCompany a sum of Rs.52 lakhs towards the dues infull and final settlement within 9 months fromthis date and interest will be charged after 6months @ 12% simple on the outstanding balance.5. The civil suits filed by the 6thpetitioner and the Company will be withdrawnunconditionally.6. The allotment of shares on account offorfeiture of shares and the additional shareswill be allotted on receipt of consideration fromthe petitioner nos. 1 and 6.7. The petitioners are entitled to exercisetheir rights as shareholders of the Company.Liberty to apply. "16. Mr.S.Parthasarathy, learned Senior Counsel appearing for therespondents drew the attention of this Court to Regulation 44 of theCompany Law Board Regulations, 1991, and submitted that the impugnedorder, dated 28.11.2007 passed by the Company Law Board is legallysustainable, since the Board is vested with the inherent power tomake such order as may be necessary for the ends of justice and toprevent the abuse of process of the Bench. 17. Regulation 44 of the Company Law Board Regulations, 1991reads as follows : https://hcservices.ecourts.gov.in/hcservices/ "44. Saving of inherent power of the Bench –Nothing in these rules shall be deemed to limitor otherwise affect the inherent power of theBench to make such orders as may be necessary forthe ends of justice or to prevent abuse of theprocess of the Bench. "It is not in dispute that Regulation 44 of the Company Law BoardRegulations, 1991 is more or less similar to that of the inherentpowers available to any civil Court, under Section 151 CPC.18. Learned counsel appearing for the appellants contended thatonce the final order is a compromise order between the parties, thesaid order cannot be modified or altered by the court, regarding thecompromise, except with the consent of all the parties to the saidcompromise. In support of his contention, he placed reliance on thedecision, Manish Mohan Sharma vs. Ram Bahadur Thakur Ltd., reportedin AIR 2006 SC 1690.19. As per the ruling of the Hon'ble Apex Court in Manish MohanSharma vs. Ram Bahadur Thakur Ltd., reported in AIR 2006 SC 1690, theCompany Law Board, when it deals with an application under section634(A), sits as an executing court, it is subject to all thelimitations to which a court executing a decree. It is well settledthat a executing court cannot go beyond the decree, unless the decreeis sought to be executed is a nullity for lack of inherentjurisdiction. However, as per Regulation 44 of the Company Law BoardRegulations, 1991, the Board is having inherent power to make suchorders, as may be necessary for the ends of justice. Therefore, onlyon the facts and circumstances of the case, the Company Law Board canbe 'functus officio' and while passing orders, to meet the ends ofjustice or to prevent abuse of process of the Bench, it is vestedwith the power under Regulation 44 of the Company Law BoardRegulations, 1991.20. It is not in dispute that as per order, dated 08.09.2006,the respondents herein as petitioners 1 and 6 had to repay thecompany a sum of Rs.52 lakhs towards the due in full and finalsettlement within nine months with 12% interest and the same wascomplied with. It has not been disputed that the sixth petitionerherein withdrew the civil suits filed by the sixth petitionertherein, pursuant to the compromise order, dated 08.09.2006. It isnot in dispute that the respondents herein who were petitioners tothe consent order were entitled to exercise their rights asshareholders of the company, as per the said consent order.21. In the impugned order passed in C.A.No.82 of 2007 inC.P.No.9 of 2005, it has been made clear that the right of ashareholder would include the right to participate in the management. https://hcservices.ecourts.gov.in/hcservices/ The first applicant claims to be a Director for the past 24 years andaccording to him, which remain un-contravened by the respondents, whoare the appellants herein. As per the impugned order, the Company hadconvened on 24.08.2005, its Annual General Body Meeting, during thependency of the Company Petition. The applicants expressed theirconcern on the possible removal of the Directors, belonging to thepetitioners group (respondents herein) and therefore, the Bench, byan order, dated 18.08.2005, while permitting the company to go aheadwith the Annual General Body Meeting on 24.08.2005, directed that"... the directors belonging to the petitioner group will continue tobe the directors, irrespective of the decision that may be taken atthe said meeting until further orders."22. As per the impugned order, dated 28.11.2007, it has beenbrought to light that the consent order, dated 08.09.2006 had beenpassed, subject to the earlier order of the Board, dated 18.08.2005,however, it was ignored by the appellants by giving scope to modifythe consent order. For passing the impugned order, the Company LawBoard has also relied on the decisions, Smt. Neelu Kohli and othersvs. Nikhil Rubbers P.Ltd and others, reported in 2007 Vol.137 CC 374,and ITC Limited vs. George Joseph Fernandes and another, reported in1989 AIR SC 839. The Company Law Board has relied on the decisions topass the impugned order in favour of the applicants, who are therespondents herein, in order to protect the rights of the shareholders.23. The reasons stated in the impugned order, dated 28.11.2007by the Board is that the appellants herein, taking advantage of theconsent order, dated 08.09.2006, ignoring the earlier order of theBoard, dated 18.08.2005 successfully have excluded the firstapplicant (first respondent herein) from the office of the Directorof the Company,which is unjustified, as per the impugned order. Ithas further opined that by applying the same yardstick, theappellants herein can exclude the remaining Directors belonging tothe applicants group (respondents herein) from the post of Directors,under the guise of the consent order, dated 08.09.2006. The exclusionof the first applicant (first respondent herein) from the office ofthe Director, ignoring the order, dated 18.08.2005 is contrary to theconsent order. As per the impugned order, the first respondent hereincannot be deprived of his Directorship in the company. Criminalcomplaints lodged by the first respondent against the appellantsherein will not in any way dis-entitle him to be in the Board of theCompany and the respective parties are to workout their remediesbefore the competent authorities. The Company Law Board has alsofound that it cannot conclusively be asserted that the firstrespondent herein had acted against the interest of the company bymerely filing of the complaints against the appellants, more so, whenthere is no material to show that the shareholders removed the first https://hcservices.ecourts.gov.in/hcservices/ respondent from the office of the Director for having acted againstthe interest of the company, by filing any false complaint.24. The Division Bench of this Court in Shoe Specialties P.Ltdand others vs. Standard Distilleries and Breweries P.Ltd., andanother reported in Company Cases Volume 90-1997, 1, has held thatwhen a case of oppression is made out under Section 397 of theCompanies Act, 1956, it is only within the power of the Company LawBoard to end the matter complained of and to make such orders as itthinks fit. The Board is empowered to remove the board of directorsso that the affairs of the company can be set right. It is only underthe authority of the Company Law Board and also under itssupervision, that the board of directors are being removed. The scopeof Section 284 of the Companies Act is entirely different. For casescoming under that section, there must be some charge against theindividual director and it is the company that seeks the removal ofthat director in such circumstances. Only in such cases, noticecontemplated under Section 284 of the Companies Act, 1956, is calledfor. When the petition under Section 397 itself is for removal ofdirectors, no special notice is required as contemplated underSection 284 of the Companies Act.25. In M.S.D.C.Radharamanan vs. M.S.D.Chandrasekara Raja,reported in 2008 (3) Scale 650, the Hon'ble Apex Court has held thatthe Company Law Board, in exercise of his jurisdiction under Sections397 and 398 r/w 402 of the Companies Act, as per the requisitejurisdiction, direct shareholder to sell his share to the other,although no case for winding up of the company has been made out orno actual oppression on the part of the Director has been proved. Ithas been further ruled by the Hon'ble Apex Court that in case where acase of oppression has been made out a ground for the purpose ofinvoking the jurisdiction of the Board in terms of Sections 397 and398 of the Act, a finding of fact to that effect would be necessaryto be arrived at. But, the jurisdiction of the Company Law Board topass any other or further order in the interest of the company, if itis of the opinion that the same would protect the interest of thecompany, the Board would not be powerless. The jurisdiction of theCompany Law Board in that regard must be held to be existing, havingregard to the aforementioned provisions. Similarly, the Company LawBoard may not shut its doors on sheer technicality, even if it isfound as of fact that unless the jurisdiction under Section 402 ofthe Act is exercised, there will be a complete mismanagement inregard to the affairs of the company. Sections 397 and 398 of the Actempower the Company Law Board, to remove oppression andmismanagement. If the consequences or refusal to exercisejurisdiction would lead to a total chaos or mismanagement of thecompany, the Company Law Board would not be powerless to passappropriate orders. The interest of the shareholders of the company,as a whole is more vital and important. https://hcservices.ecourts.gov.in/hcservices/

26. In the instant case, the learned counsel appearing for theappellants contended that after passing the consent final order,dated 08.09.2006, the Company Law Board became 'functus officio'. Theplain reading of the impugned order, dated 28.11.2007 would show thatthere was earlier order between the parties on 18.08.2005, wherebythe company was permitted to go head with the Annual General BodyMeeting on 24.08.2005. However, there was a specific direction thatthe Directors belonging to the respondents group would continue to bethe Directors, irrespective of the decision that may be taken at thesaid meeting until further orders. This condition was not compliedwith during the Annual General Body Meeting on 24.08.2005. 27. As per the impugned order, the consent order, dated08.09.2006 is subjected to the aforesaid earlier order, dated18.08.2005, however, the appellants herein taking advantage of theorder, dated 08.09.2006, excluded the first respondent herein fromthe office of the Director of the Company in an unjustifiable mannerand by using similar yardstick, there is a possibility for removingother directors belonging to the respondents group from the post ofDirectors under the guise of the consent order, dated 08.09.2006. Theimpugned order is clear that the Company Law Board has passed theorder with the intention only to prevent the abuse of the process ofthe Bench and to meet the ends of justice. I am of the consideredview that the Company Law Board is empowered with the inherent powerunder Regulation 44 of the Company Law Board Regulations, 1991 tomake such order as may be necessary for the ends of justice ought toprevent abuse of process of the Bench.28. On the above facts and circumstances, it is clear that theconsent order, dated 08.09.2006 has direct nexus with the earlierorder, dated 18.08.2005, whereby the Directors belonging to therespondents group were given proper protection. However, under theguise of the order, dated 08.09.2006, cleverly bypassing thedirection given by the Board on 18.08.2005, the Annual General BodyMeeting has been conducted on 24.08.2005. From the impugned order, itis clear that the intention of the Company Law Board is only toprevent the said abuse of process of the Bench and to meet theends of justice and therefore, considering the facts andcircumstances, I answer all the Substantial Questions of Law raisedby the learned counsel for the appellants against the appellants,holding that there is no error or infirmity in the impugned orderpassed by the Company Law Board, so as to exercise its power underRegulation 44 of the Company Law Board Regulations, 1991. https://hcservices.ecourts.gov.in/hcservices/

29. In the result, confirming the order passed by the CompanyLaw Board, Additional Principal Bench, Chennai in C.A.No.82 of 2007in C.P.No.9 of 2005, dated 28.11.2007, this Civil MiscellaneousAppeal is dismissed. However, there is no order as to costs.Consequently, connected miscellaneous petitions are also dismissed. Sd/Asst.Registrar/true copy/Sub Asst.RegistrartsvnTo1.The Company Law Board, Additional Principal Bench at Chennai. 2.The Record Keeper,VR Section, High Court, Madras.+1cc to Mr.K.Rajasekaran, Advocate SR 26322+1cc to Mr.H.Karthick Seshadri, Advocate Sr 25868RL(CO)km/13.5.C.M.A.No.258 of 2008