Companies Act Case Law Incable Net (Andhra) Limited Petitioners Vs Ap Aksh Broadband Ltd

  Companies Act Case Law

Incable Net (Andhra) Limited & Ors. Petitioners Vs Ap Aksh Broadband Ltd. & Ors. Respondents

REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION
SPECIAL LEAVE PETITION NO.9110 OF 2008
INCABLE NET (ANDHRA) LIMITED & ORS. .. PETITIONERS

Vs.

AP AKSH BROADBAND LTD. & ORS. .. RESPONDENTS
J U D G M E N T
ALTAMAS KABIR, J.
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
2

 

Company. Various reliefs, including reconstitution

of the Board of Directors of the said Company, were

prayed for. 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. 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. This

Special Leave Petition arises out of the said order

of the High Court.
2. In order to appreciate the submissions made on

behalf of the respective parties, the facts

leading to the filing of the Company Petition

before the CLB are set out hereinbelow.
3

 

3. With the intention of providing broadband

network connectivity to all Government offices

across the State of Andhra Pradesh, to connect

the State capital with the Districts, Mandals,

Blocks and Gram Panchayats, the State

Government with the help of Andhra Pradesh

Technology Services, hereinafter referred to as

“APTS”, identified a consortium of Companies,

led by the Respondent No.5 to form a Joint

Venture Company under the name of M/s AP AKSH

Broadband Limited, the Respondent No.1 herein.

M/s AP AKSH Broadband Limited, hereinafter

referred to as “APAKSH”, was contemplated as a

Special Purpose Vehicle to undertake and

complete the project.
4. The Petitioner No.1 was one of the companies

forming the consortium which entered into a

Share Holders Agreement with the Respondent

No.5, Aksh Broadband Ltd. (since merged with
4

 

Aksh Optifibre Limited), hereinafter referred

to as `AKSH’. The Petitioner No.1 is the

Company and the Petitioner No.2 is its Managing

Director. The Respondents Nos. 2 to 4 are

Directors of APAKSH. The Respondent No.5 holds

57% of the fully paid up equity shares and in

addition it was allotted 12,41,62,500 partly

paid shares, giving the said Company a complete

majority control over the affairs of the

Respondent No.1 Company.
5. In terms of the Share Holders Agreement the

Petitioner No.1 was to acquire 21.10% of equity

capital, AKSH was to acquire 64.80% equity

capital and the balance 14.30% was to be

allotted to APTS. On 29.5.2006 the Board of

Directors of APAKSH passed a Resolution to call

upon the share-holders of the partly paid

shares to pay the balance of the call money of

Rs.2/- per share on or before 28.2.2006 (Date
5

 

to be confirmed). A second and final notice was

issued by the Respondent No.1 for payment of

the call money, but on the request of the

Petitioner No.2 the time was extended.

Ultimately, on 25.11.2006, yet another notice

was issued by the Respondent No.1 for payment

of the balance call money of Rs.2/- per share

on the partly paid shares.
6. The overall estimated cost of the project was

Rs.395 crores, out of which equity

participation by the three constituent partners

was Rs.175 crores. The balance Rs.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
6

 

the sole object of implementing the

connectivity project in accordance with the

contract awarded by APTS on 21st April, 2003,

apart from which no other business was to be

undertaken by it. On 10th May, 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 Rs.370 crores upto

the stage of commission and implementation of

the project.
8. Appearing for the Petitioners, Mr. Jaideep

Gupta, learned Senior Advocate, submitted that

the Schedule of work in the Agreement entered
7

 

into between APTS and APAKSH provided that the

project was to be completed and commissioned

within 65 weeks, which was to end on 31st

December, 2006. It also stipulated that

connectivity upto the district and all mandal

levels was to be completed in a phased manner

within a period of seven months from the date

of execution of the contract. Mr. Gupta

submitted that towards that end the Respondent

No.1 placed orders for supply of optic fibre

cables on its sister concern, AKSH Broadband

Limited, the Respondent No.5, which

subsequently merged with AKSH Optifibre

Limited, the substituted Respondent No.5,

represented by the Respondents Nos. 2 to 4, for

completion of the project. Mr. Gupta submitted

that despite the fact that over a crore of

rupees had been contributed by the Respondent

No.1 to the Respondent No.5 towards the

execution of the EPC contract, it had not
8

 

achieved connectivity in any of the 23

districts of the State in terms of the

Agreement dated 21st April, 2005, executed by

APTS. Mr. Gupta submitted that AKSH Broadband

Limited had used its sister concern, AKSH

Optifibre Limited, prior to its merger, to dump

useless and defective cable and to store them

as part of the stores of AKSH Broadband Limited

and siphoned out the monies from APAKSH

Broadband Limited, purportedly for execution of

the EPC contract, but without any tangible

benefit to the Respondent No.1.
9. Mr. Gupta urged that the Petitioner had been

lured by the Respondents Nos. 2 to 4 to procure

finance for the purpose of investment in the

Respondent No.1 Company from Elegant Capitals

Private Limited, the Respondent No.6 herein,

which had promised to advance a loan of Rs.33

crores to the Petitioners towards capital
9

 

contribution in the Respondent No.1 Company.

Mr. Gupta submitted that taking advantage of

their stranglehold over the Company and its

officers, the Respondent Nos. 2 to 5 had by a

series of acts mismanaged the affairs of the

Respondent No.1 Company and rendered the

Petitioners completely ineffective inspite of

their investment, thereby attracting the

provisions of Sections 402 and 403 of the

Companies Act, 1956.
10. Mr. Gupta urged that the Respondent No.5 was

involved with the turnkey project in two

capacities. On the one hand, it is the

principal shareholder of the Respondent No.1

Company, holding and controlling more than 64%

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
10

 

between itself and the Respondent No.1 Company

on 10th May, 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 in so far 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
11

 

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 submitted

that the aforesaid acts of the Respondent No.1

Company through the Respondent No.5 herein,

taking advantage of its complete control over

the management and affairs of the Respondent

No.1 already established that the Company’s

affairs are being conducted in a manner

oppressive to the Petitioners and the facts

justified the making of a winding-up order on

the ground that it was just and equitable that

the Company be wound up.
12. Mr. Gupta also submitted that after holding

that they lacked jurisdiction under Sections

397 and 398 and 10-F of the Companies Act,

neither the Company Law Board nor the High

Court should have commented on the merits of
12

 

the matter which has prejudiced the interests

of the Petitioners. It was urged that it is in

this context that the complaint made about the

failure of the principles of natural justice

before the Company Law Board assumes

significance. Referring to the decision of

this Court in Needle Industries (India) Ltd. &

Ors. vs. Needle Industries Newey (India)

Holding Ltd. & Ors. [(1981) 3 SCC 333], Mr.

Gupta submitted that in the said decision it

had been held as follows :-

“63. We appreciate that it is generally
unsatisfactory to record a finding
involving grave consequences to a person
on the basis of affidavits and documents
without asking that person to submit to
cross-examination. It is true that men may
lie but documents will not and often,
documents speak louder than words. But a
total reliance on the written word, when
probity and fairness of conduct are in
issue, involves the risk that the person
accused of wrongful conduct is denied an
opportunity to controvert the inferences
said to arise from the documents………..”.

In the said judgment, this Court also observed

that many decisions had been cited in support of
13

 

the contention that issues of mala fides and abuse

of fiduciary powers are almost always decided not

on the basis of facts but on oral evidence.
13. Mr. Gupta also referred to the decision of

this Court in Sangramsinh P. Gaekwad vs. Shantadevi

P. Gaekwad [(2005) 11 SCC 314], in which the

question of oppression for the purposes of Section

397 and 398 of the Companies Act has been dealt

with in some detail. Their Lordships held that the

remedy under Section 397 of the Companies Act is

not an ordinary one. The cause of oppression had

to be burdensome, harsh and wrongful and an

isolated incident 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
14

 

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 extra-ordinary 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 and Construction Contractor,
15

 

hereinafter referred to as “the EPC Contractor”,

without any progress in the project work. In the

first of such letters dated 22nd August, 2006,

addressed by Shri R.V.R. Chowdary, Chairman and

Managing Director of the Petitioner Company, to the

Chairman of the Respondent No.1 Company, the

financial indiscipline on account of payment of

commission to the EPC contractor was objected to as

the same ought to have been spent in proportion to

the funds earmarked for each category of

expenditure. The next letter referred to by Mr.

Gupta was the one dated 1st November, 2006,

addressed by the Vice-Chairman of the Respondent

No.1 Company to the Respondent No.5 complaining of

the fact that despite all the support received by

the Respondent No.5 as the EPC contractor and

payment of about Rs.100 crores, connectivity had

not been completed even in one district nor in the

State Secretariat which was the central hub of the

project. Various other shortcomings of the
16

 

Respondent No.5 were also pointed out and it was

also stated that A.P. Broadband Project had been

used by the Respondent No.5 to enrich itself using

the free right of way granted by the Government of

Andhra Pradesh. It was also mentioned that no

further infusion of funds was necessary and the EPC

contractor would have to make immediate measures to

make triple play completely operational in at least

4 to 5 districts.
15. Yet another letter dated 29th September, 2006,

addressed to Mr. V.K. Dhir, the Chief Executive

Officer of the Respondent No.5 was referred to by

Mr. Gupta from which it would be evident that the

work had not been completed nor had the timelines

indicated been followed. A letter on similar lines

addressed by the Department of Information

Technology and Communication, Government of Andhra

Pradesh, to Dr. Kailash Chowdary, Managing Director

of the Respondent No.5, expressing serious concern
17

 

with regard to the progress made, was also brought

to the notice of the Court.
16. Mr. Gupta submitted that it is only too obvious

that the Respondent No.5 had misused its control

over the Respondent No.1 Company in not only

securing the contract for the project which was

nothing but the modus operandi of the Respondent

No.5 in collusion with Respondent No.1 to siphon

off the funds of the Company, after having induced

the Petitioners to invest large sums of money in

the Respondent 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 Rs.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.
18

 

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.1 Company and would also be made to

face continuous litigation and harassment at the

hands of the Respondents 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 Sections 397 and 398 of the

Companies Act, as acts of oppression on the
19

 

Petitioner Company. Referring to the various

allegations made against the Respondent No.5 and

its purported control of the Respondent No.1, Mr.

Raghavan pointed out that the Petitioners had

deliberately suppressed the fact that the payments

made to the Respondent No.5 had been done under the

signature of the Petitioner No.2. Mr. Raghavan

submitted that having himself participated in the

Board meetings as Director of the Respondent No.1

Company and having chaired eight Board Meetings

between 14.2.2005 and 4.3.2006 and having been a

signatory to the minutes of the meeting dated 21st

April, 2005, in which the EPC contract had been

awarded in favour of the Respondent No.5, it did

not lie in the mouth of the Petitioner No.2 to

attribute acts of oppression by the Respondent No.1

as far as the Petitioners are concerned. Mr.

Raghavan submitted that apart from the above, the

Petitioner No.2 was also a member of the Managing

Committee and Audit Committee of the Respondent
20

 

No.1 Company and had also signed the Audit Report

and its Balance Sheet for the year 2005-06.
19. Mr. Raghavan submitted that during this period,

when the Petitioner No.2 was not only participating

in the affairs of the Company, but was taking an

active role in its management, no allegation as to

oppression or even mis-management was raised. It

was only after the call money for the balance price

of the partly paid shares was repeatedly demanded

from the Petitioners and the Petitioners failed to

pay the said amount, that all these allegations

began to surface for the first time after 1st

November, 2006. Mr. Raghavan submitted that

between 2003 and 2006, ten Board Meetings were

chaired by the Petitioner No.2 as Chairman.

Special reference was made to the meeting held on

21st April, 2005, which was chaired by the

Petitioner No.2, and wherein the EPC contract to be

given to the Respondent No.5, was approved. Mr.
21

 

Raghavan submitted that at no point of time was any

demand made for cancellation of the EPC Agreement

and even in the Company Petition before the CLB no

such prayer was made.
20. Mr. Raghavan submitted that the Director of the

Company stands in a fiduciary capacity to the

Company, but the same cannot be equated with his

duties towards the shareholders which stood on a

different footing and in case of conflict 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
22

 

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 Directors.
21. In this regard, Mr. Raghavan referred to the

decision of this Court in Sangramsinh P. Gaekwad

(supra), which had also been referred to by Mr.

Gupta, in support of his contention that the duties
23

 

of a Director to the Company and to the

shareholders stand on different levels, but while a

Director stands in a fiduciary capacity to the

Company, he does not have such a duty towards

shareholders.
22. As far as denial by the CLB as well as the High

Court to the adducing of oral evidence is

concerned, Mr. Raghavan submitted that Section

10E(5) of the Companies Act, 1956, indicates the

manner in which the Company Law Board has to

exercise its powers and to discharge its functions

under the Act.

For the sake of reference, Section 10E(5) is

set out hereinbelow :

“10E. Constitution of Board of Company Law
Administration.-
(1) ……………………
(2) ……………………
(3) ……………………
(4) ……………………
(5) Without prejudice to the provisions of
sub-sections (4C) and (4D), the Company
Law Board shall in the exercise of its
powers and the discharge of its functions
24

 

under this Act or any other law be guided
by the principles of natural justice and
shall act in its discretion.”
23. Mr. Raghavan submitted that there was no

compulsion on the Company Law Board to record oral

evidence, when all that the Petitioners had to say

had already been said by them on affidavit. The

Company Law Board, therefore, did not commit any

illegality in disallowing the Petitioners’ prayer

for adducing oral evidence. Mr. Raghavan also

referred to the relevant portions of the decision

of this Court in Needle Industries (India) Ltd.

(supra), where an argument had been advanced that

under the Company Court Rules framed by this Court,

the provisions of the Civil Procedure Code were

made applicable to proceedings before the Company

Law Board under Section 397 of the Act. Mr.

Raghavan pointed out that in paragraph 63 of the

judgment this Court had observed that, although, it

had to be appreciated that it is generally
25

 

unsatisfactory to record a finding involving grave

consequences towards a person on the basis of

affidavits and documents, without asking that

person to submit to cross-examination, but a total

reliance on the written word, when probity and

fairness of conduct are in issue, involved the risk

that the person accused 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
26

 

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 & Ors. vs. Westfort Hi-

Tech Hospital Ltd. & Ors. [(2008) 3 SCC 363],

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 towards the majority

shareholders was harsh, burdensome and wrong and

that such conduct was mala fide and was for a

collateral purpose where although the ultimate

objective might be in the interest of the Company,

the immediate purpose would result in an advantage

for some shareholders over others. It was also
27

 

observed that the action of the majority

shareholders was against probity and good conduct.

Once the conduct was found to be oppressive under

Sections 397 and 398, the discretionary power given

to the Company Law Board under Section 402 to set

right, remedy or put to an end such an oppression,

is very wide.
26. Mr. Raghavan submitted that even in the

decision of this Court in Dale & Carrington Invt.

(P) Ltd.& Anr. vs. P.K. Prathapan & Ors. [(2005) 1

SCC 212], this Court had held that when a majority

shareholder was reduced to a minority shareholder

by a mala fide act of the Company or its Board of

Directors, such act would amount to “oppression”

against the minority shareholders.
It was also submitted that it is only in such

circumstances that a decision was taken by the

Respondent No.1 Company to consider the question of

forfeiture of the partly paid shares held by the
28

 

Petitioner No.1. He also submitted that the call

money amounting to Rs.24,83,25,000/- had already

been deposited by the Respondent Nos.3 to 5.
27. Except to submit that the project had been

undertaken by the State Government to abridge the

digital divide which existed within the State, Dr.

Manish Singhvi, learned Advocate appearing for the

Respondent No.2, had little else to add.
28. In reply to the submissions made on behalf of

the respondents, Mr. Jaideep Gupta submitted that

the High Court had not decided the question of

jurisdiction under Sections 397 and 398 of the

Companies Act. The findings of misconduct by the

High Court against the Petitioners was not only on

the question of contractual obligation between the

Respondent No.1 and Respondent No.6, but also with

regard to the mala fide manner in which the

Petitioners were placed on account of the close

proximity between the Respondent No.1 and the
29

 

Respondent No.5. Mr. Gupta also submitted that the

participation of the Petitioner No.2 as a Director

in the affairs of the respondent No.1 Company was

prior to the implementation of the project.
29. It was lastly urged that “oppression” is a

mixed question of law and fact as was held in the

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 04.06.2005 in the Memorandum and
Articles of Association of the 1st
respondent company;
30

 

(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
capital of the 1st respondent company;

(iv) Appoint a team of Chartered Accountants/
Chartered Engineers to evaluate the
quantum of work done by the 5 respondent
th

company, and declare that the investment
of the 5th respondent company over and
above the said quantum of work to have
been issued without consideration and
consequently annul the said shares and
direct the modification of the
shareholding of the 1 respondent company;
st

 

(v) Vest the day-to-day administration of the
1st respondent company in a Committee of
Directors comprising of a nominee from
each group viz., petitioners, APTS and 5th
respondent; and pass such other order(s)
as the Hon’ble Board deems fit and proper
in the circumstances of the case.”
31. The allegation on the basis of which such

reliefs have been prayed for basically is that the
31

 

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 not fall

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
32

 

most cases been done by him on behalf of the

Company.
32. 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.
33. Admittedly, the Respondent No.5 is a majority

shareholder in the Respondent No.1 Company and at

the same time the EPC Contract has also been given

by the Respondent No.1 Company to the Respondent

No.5, to which transaction the Petitioner No.2,

Shri 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
33

 

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

 

34. Both the parties have placed reliance on the

decision of this Court in Needle Industries (India)

Ltd. (supra). Mr. Gupta relied on the said

decision in support of his submission that by

denying an opportunity to the Petitioners to adduce

oral evidence, the CLB had shut out vital evidence

which would have strengthened the case of the

Petitioners. The views expressed in paragraph 63

of the said decision is the expression of a general

principle of law and only confirms the principle of

adducing evidence, but does not lay down a hard and

fast rule that in all cases the Court or the CLB is

bound to allow oral evidence to be led as otherwise

there is a risk that the person accused of wrongful

conduct is denied an opportunity to controvert the

inference said to have been arrived at from the

evidence produced before the Court alone. As a

proposition of law there can be no disagreement

with the same, but the question is as to whether
35

 

the same is required to be applied in the facts of

the instant case.
35. 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.
36. Whether there is any truth in Mr. Gupta’s

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
36

 

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.
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
37

 

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.
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 oppression

or mismanagement by the Respondent No.5 as far as
38

 

the Petitioners are concerned. On the other hand,

the conduct of the Petitioner No.2 provides a

different picture since at the relevant point of

time he was at the helm of affairs of the

Respondent No.1 Company, despite being a Director

on the Board of the Petitioner No.1 Company. The

decision in V.S. Krishnan’s case (supra) is more

apposite to the facts of the case. Quoting

Halsbury, this Court observed that the expression

“oppression” within the meaning of the Sections

398, 399 and 402 of the Companies Act had been

interpreted to mean that the conduct of the

majority shareholders towards the minority

shareholders was harsh, burdensome and wrong and

that such conduct was mala fide and was for a

collateral purpose which would result in an

advantage for some shareholders over others,

although, the ultimate object might be in the

interest of the Company. However, the facts

disclosed in this case do not establish such
39

 

conduct on the part of the Respondent No.5. Until

the conduct of the majority shareholders was found

to be oppressive in terms of the above description,

under Sections 397 and 398 of the Companies Act,

1956, the Company Law Board was not competent to

invoke its jurisdiction under Section 402 of the

said Act to set right, or put an end to such

oppression.
40. 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
40

 

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.
41. The Special Leave Petition is, accordingly,

dismissed.
42. There will, however, be no order as to costs.
…………………………………………J.
(ALTAMAS KABIR)

 

…………………………………………J.
(CYRIAC JOSEPH)
New Delhi
Dated:07.05.2010

Leave a Comment