Writing off debt is purely commercial nature not required judicial intervention

S. P. Velumani & Anr. (Appellants) vs. Magnum Spinning Mills India Pvt. Ltd. &Ors. (Respondents)-NCLAT Company Appeal (AT) No.299 of 2019

BRIEF FACTS

1. The Respondent is a closely held company incorporated on 29.10.2010 under the name of Magnum Spinning Mills Private Limited engaged in the business of running a spinning mill.

2. The Company has seven directors.

3. The Appellant pointed out the bogus transactions and siphoning of funds taking place in the company is an act of Oppression and Mismanagement and filled a company petition in NCLT, Chennai.

4. After having heard the averments made by the parties the NCLT, Chennai Bench dismissed the Company Petition stating that the acts complained of are not falling within the purview of Oppression and mismanagement.

5. Being aggrieved by the said order of the NCLT the appellant has filed the present appeal.

6. The contention of the Appellant that during the financial year 2017-18, an amount of Rs. 48,41,801/- has been written off as bad debts, while in the previous year it was nil and the details as to identity of the party, whether related party or otherwise is not disclosed.

7. Further, Appellant No. 1 also submitted that when he started questioning, the respondents with an intend to put an end to the intervention of the Appellant No. 1, decided to change the mandate for operating the bank accounts of the company and concocted a plan as if an alleged Board Meeting was conducted on 22.08. 2016 and resolution were allegedly passed by which any two directors can operate the account.

8. The Respondent No. 1 filed its reply and stated that while the Appellant have claimed alleged irregularity in respect of certain payments, the Appellant was estopped from challenging the transection ex facie, as the relevant purchase documents have been pursued and passed for payment only by Appellant No. 1 and cheques also issued only by the Appellant No. 1.

9. The Appellant has raised the issue for the first ever time only in 2017 in the Company Petition and has not raised the issue in any prior correspondence. It is further stated on behalf of Respondent No. 1 that there is no contractual arrangement or promoters’ agreement or Articles of Association mandating that the Appellant No. 1 should remain compulsory signatory for operating bank account.

THE ISSUE

10. Whether the decision of the Board of Directors to write off the bad debt and operation of bank Account warrants judicial interference in respect of Oppression and Mismanagement of Companies?

DECISION OF NCLAT

11. The NCLAT observed that the records of Appellant attending the meeting and the signatures put on the entry register shows that Appellant No. 1 was present at the registered office of respondent No. 1 Company, where the meeting was conducted.

12. In that meeting the resolution was passed by the majority directors to regulate the procedure pertaining the signatories to the bank accounts of Respondent No. 1 Company, which is in no way oppressive as the decision relating to the Operation of bank account is within the domain of the Board of Directors.

13. NCLT has rightly put its reliance on Judgement of NCLAT in Upper India Steel Manufacturing and Engineering Co. Ltd. &Ors. Vs. Gurlal Singh Grewal &Ors. where it was held that cheque signing power is solely a business decision and cannot be interfered. Further after the authority to sign the cheques has been revised we do not have any fact whether after the revision of the authority the appellant has been totally excluded or not from the operation of the account.

14. In case a person is excluded positively not to have signed even a single cheque after the revision this could be colourable exercise. No evidence has been brought forth to make the change in authorisation to operate the bank account as a colourable exercise. Therefore, this contention has no weight.

15. The NCLAT upheld the decision of the NCLT, Chennai bench that decision of the Board of Directors to write off the bad debt is a commercial decision, which does not warrant any judicial interference.

16. The allegations made by Appellants are baseless. In the same matter the NCLT, Chennai bench rightly opined that to invoke the provisions of oppression and Management the acts of oppression must be harsh and wrongful. An isolated incident may not be enough for grant of relief and continuous course of oppressive conduct on the part of the majority shareholders is, thus, necessary to be proved.

DISCLAIMER: The case law presented here is only for sharing knowledge with readers on subject matter. The views are personal and shall not be considered as professional advice. In case of necessity do consult with professionals.

Footnote

Definition of Oppression: Oppression means, lack of morality and fair dealings in the affairs of the company which may be prejudicial to some members of the company

The word 'Oppression' is not defined under the Companies Act, 2013. Oppression is the movement made by the authority in unjust manner against the party who gave his consent.

As per the Dictionary of Black Law, the term 'Oppression' means 'the act or an instance of unjustly exercising power.'

Oppression can also be defined as it is an act which involves a violation or contravention of fair conditionespecially which is regarding the right of shareholders.

The word 'Mismanagement' is also not defined under the Companies Act, 2013. It can be described as a control the affairs of the company in unjust, dishonest manner.

The member of the company can make an application against the affairs of the company, when the member feels there is something shady in the affairs of the company. That action can affect the interest of the members and also the public at a large. The affairs of the company may be oppressive to the individual member or to all the members of the company. The member who is making an application can also make an application when as of his opinion there is some material change in the affairs of the company which is prejudicial to the company. Even the Government can also file an application to the tribunal if they think it may deem fit, that there is something shady in the management of the company.

Sections 241 to 245 deals with Oppression and Mismanagement under Companies Act, 2013.