Breach of contract of supply by one of the consortium member is not oppressiona & mismanagement

INCABLE NET(ANDHRA) LTD & ORS v. AP AKSH BROADBAND LTD.& ORS [SC]
Special Leave Petition No.9110 of 2008

Provisions involved: Sections 396 and 397 of the Companies Act,1956
Section 396 in The Companies Act, 1956

Power of Central Government to provide for amalgamation of companies in public interest

(1) Where the Central Government is satisfied that it is essential in the public interest that two or more companies should amalgamate, then, notwithstanding anything contained in sections394 and 395 but subject to the provisions of this section, the Central Government may, by order notified in the Official Gazette, provide for the amalgamation of those companies into a single company with such constitution; with such property, powers, rights, interests, authorities and privileges; and with such liabilities, duties, and obligations; as may be specified in the order.

(2) The order aforesaid may provide for the continuation by or against the transferee company of any legal proceedings pending by or against any transferor company and may also contain such consequential, incidental and supplemental provisions as may, in the opinion of the Central Government, be necessary to give effect to the amalgamation.

(3) Every member or creditor (including a debenture holder) of each of the companies before the amalgamation shall have, as nearly as may be, the same interest in or rights against the company resulting from the amalgamation as he had in the company of which he was originally a member or creditor; and to the extent to Which the interest or rights of such member or creditor in or against the company resulting from the amalgamation are less than his interest in or rights against the original company, he shall be entitled to compensation which shall be assessed by such authority as may be prescribed and every such assessment shall be published in the Official Gazette The compensation so assessed shall be paid to the member or creditor concerned by the company resulting from the amalgamation

(3A) Any person aggrieved by any assessment of compensation made by the prescribed authority under sub-section (3) may, within thirty days from the date of publication of such assessment in the Official Gazette, prefer an appeal to the Company Law Board and thereupon the assessment of the compensation shall be made by the Company Law Board.

(4) No order shall be made under this section, unless-

(a) a copy of the proposed order has been sent in draft to each of the companies concerned;
(aa) the time for preferring an appeal under sub- section (3A) has expired, or where any such appeal has been preferred, the appeal has been finally disposed of; and
(b) the Central Government has considered, and made such- modifications, if any, in the draft order as may seem to it desirable in the light of any suggestions and objections which may be received by it from any such company within such period as the Central Government may fix in that behalf. not being less than two months from the date on which the copy aforesaid is received by that company, or from any class of shareholders therein, or from any creditors or any class of creditors thereof.

(5) Copies of every order made under this section shall, as soon as may be after it has been made, be laid before both Houses of Parliament.

Section 397 in The Companies Act, 1956
Application to Company Law Board for relief in cases of oppression.

(1) Any members of a company who complain that the affairs of the company are being conducted in a manner prejudicial to public interest or in a manner oppressive to any member or members (including any one or more of themselves) may apply to the Company Law board] for an order under this section, provided such members have a right so to apply in virtue of section 399.

(2) If, on any application under sub- section (1), the Company Law Board is of opinion-

(a) that the company' s affairs are being conducted in a manner prejudicial to public interest or] in a manner oppressive to any member or members; and

(b) that to wind up the company would unfairly prejudice such member or members, but that otherwise the facts would justify the making of a winding- up order on the ground that it was just and equitable that the company should be wound up; the Company Law Board may with a view to bringing to an end the matters complained of, make such order as it thinks fit.

Brief facts

1. 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 shareholders of the first respondent Company. Various reliefs, including reconstitution of the Board of Directors of the said Company, were prayed for.

2. By its order dated 17th December, 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.

3. The said appeal was dismissed by the High Court as being misconceived upon the finding that the CLB had considered all the materials, applied the law and recorded its findings correctly and no question of law arose from the said order.

4. This Special Leave Petition arises out of the said order of the High Court.

Decision: Dismissed.

Reason

The allegation on the basis of which such reliefs have been prayed for basically is that the EPC Contractor AKSH, the Respondent No.5, which is also the majority shareholder in the Respondent No.1 Company, had mismanaged the funds and operations of the Company and the work on the project was delayed on account of the various acts of omission and commission on the part of AKSH.

The reliefs prayed for have been opposed on behalf of the Respondents contending that the contractual obligations under the EPC Contract did notfall within the scope of Sections 397 and 398 of the above Act and the right of the Petitioners as shareholders was in no way affected, particularly, when the Petitioner No.2 was a Director and Vice- Chairman and a member of the Managing Committee constituted to monitor the implementation of work of the project and at no point of time had he made any grievance with regard to the EPC Contract.

That apart, he had chaired the meetings of the Board and operated the bank accounts and payments made to AKSH by the Respondent No.1 Company had in most cases been done by him on behalf of the Company.

It is on the said foundation that a case of oppression and mismanagement has been attempted to be made out by the Petitioners. However, in the facts of the case it becomes difficult to take a different view as has been expressed both by the CLB as also by the High Court.

From the submissions made on behalf of the respective parties and the materials on record, the point which falls for consideration in this appeal is as to whether a case of oppression and mismanagement by the majority shareholders against the minority shareholders had been established or not.

Whether there is any truth in the submissions as to the siphoning of funds by the Respondent No.5 Company from the Respondent No.1 Company, which had been set up as a Special Purpose Vehicle and in which the Respondent No.5 was a majority shareholder, holding about 60% of the equity shares has not been properly established. On the other hand, the materials on record indicate that the Petitioner No.2, who is a Director of the Petitioner No.1 Company, which is also a shareholder in the Respondent No.1 Company, had functioned as a Vice President of the Respondent No.1 Company and had also chaired 8 of its Meetings including the Meeting held on 21st April, 2005, in which the decision was taken to award the EPC Contract to the Respondent No.5 Company.

Further more, the Petitioner No.2 had signed most of the cheques by which payments were made to the Respondent No.5 Company for supply of materials under the EPC contract. It does not lie in the mouth of the Petitioner to now contend that the funds of the Respondent No.1 Company had been siphoned by the Respondent No.5.
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 Section 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.

DECISION

On an overall analysis of the facts involved and the part played by the Petitioner No.2 in the affairs of the Company at the relevant time, we are not inclined to interfere with the orders of the High Court or the Company Law Board, since we are not satisfied that any act of oppression or mismanagement within the meaning of Sections 397, 398, 402 and 403 of the Companies Act, 1956, has been made out by the Petitioners against the majority shareholders of the Respondent No.1 Company which would justify the making of a winding up order on the ground that it would be just and equitable to do so and to pass appropriate orders to bring to an end the matters complained of.

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