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S.P.Velumani v/s Magnum Spinning Mills

In this case a petition is being filed under Sec 241/242 [1]of Companies Act 2013 which deals with providing relief for cases against oppression. The Petitioners are satisfying the requirements for maintaining the petition under Sec 244 [2]of the Companies Act 2013. There are two Petitioners and eight Respondents including the company which is Respondent-1. Respondent 2-6 are the first directors of the respondent company including respondent no.7 and 8. The Petitioner-1 is the promoter, shareholder and one of the first directors of the company holding 19.55% shares in the share capital. The Petitioner-2 is his wife who holds 2.31% shares in the capital.

Promoter is a person who has a direct or indirect control in the company's affairs. They bring ideas into existence and sets the vision and growth targets. A director must function with the company's AOA[3]and he should act in the best interests of the company to promote its objectives.

Facts Of The Case
The Respondent company was incorporated on 29.10.2010 under The Companies Act 1956. Petitioner being the founder and the director of the company was handling all the day to day affairs of the company and was having 19.55% of shares in the share capital of the company. The company was of the nature of partnership firm who had specific shares for each group. All the forms file with Registrar of Companies were signed and filed by Petitioner 1[4].

The Petitioners accused the Respondents of fabricating transactions that they made personal gains in wrongful manner and used payments in their favor. Petitioner-1 also denied to sign the invoices for which he was doubtful that they were not real transactions and the Respondents are claiming wrong payments. Petitioner-1 also contended that he was persuaded by the rest respondents no.2-8, who were close relatives, to not rake the issues and allow the payments of the invoices.[5]

He said Respondents have allegedly conducted the board meeting without giving any notice to him. Then when he enquired into the Bank he happened to learn that the directors have submitted that any two directors can operate the bank account. Petitioner-1 submitted a letter stating that he was not a part of any resolution and requested the bank to not give any instruments to them. Bank denied to accept his request and favored the respondents.

Aggrieved by this, Petitioners filed a petition under NCLT (National Company Law Appellate Tribunal) under sec 2421, 242 of The Companies Act 2013.

  • Whether the removal of the name of the 1st Petitioner vide resolution passed in the Board meeting held on 22.08.2016, who was sole signatory for operating the Bank account of the 1st Respondent company, constitutes an act of oppression?
  • Whether in the facts of the case, this tribunal can interfere with the management of the company by directing to give proportionate representation to the Shareholders on the Board of the Directors?
  • Whether the alleged construction made on the government land by the respondents without any approval of Board and competent authorities constitutes an act of mismanagement?
  • Whether writing off the bad debts of Rs 48,41,801 during the financial year 2017-18 by the respondents constitutes an act of mismanagement?[6]

Petitioner's Arguments
The Petitioners contended that:
  • They argued that the respondents are misappropriating the records as though on 22.08.2016, because the mandate for operating the bank has been changed by them. Before the resolution, the powers of operating the bank was within Petioner-1 along with any one director of the company. In the Board meeting all mandates were changed and modified. This was the act of fraud and grave oppression as the resolution was invalid per se.
  • They argued that respondents made all the Fake records to show that there were Board and AGM in 2016. They never received any notice of AGM [7]and the financial statements of the company. He, being the director didn't receive any of them for approving.
  • Excluding Petitioner-1 from holding meeting of Board of Directors, passing of accounts, taking major decisions and paving way for indiscriminate use of funds were highly oppressive. These are also the acts of mismanagement.
  • They also argued that as the company had the nature of the partnership, every director had its proportional representation. Presently, 77.5% stake was with the respondents 2-8. There are not less than 3 directors who hold 10%, and still enjoy directorship.
  • They argued that the notice and agenda of Board meetings dates 31.08.2017 on 21.08.17 and they sent a letter stating their objections on 25.08.17. Without raising the objections, the respondents conducted the AGM.
  • Every Board meeting and AGM held during the pendency of the company should be liable to be set aside and declared as invalid.

Respondent's Arguments
The Respondents contended that:
  • They filed the counter stating that Petitioners have claimed alleged irregularity owing that they are consenting parties to such transactions and Petitioner-1 authorized the payments.
  • They said that mere change in the mandate can't be categorized as an act of oppression.
  • They also submitted that there is a settle law that court will not interfere in affairs relating to internal management of the company. A single shareholder cannot override the will of the majority on the issue as to who will operate a bank account of the company.
  • They argued that there is no contractual agreement or any article in the AOA mandating that the petitioner should remain a mandatory signatory to the operation of the bank account of the company.
  • The rest of the directors felt that the power to operate the bank account can't be concentrated only in hands of the petitioner, and that he can't retain a practical veto right in operation of the bank.
  • They argued that the meeting was called on 22.08.16 and an email was also sent and it was received by the petitioners and the Petitioner-1 attended the meeting and decision was taken there at the mandate.
  • They argued that the Petitioner-1 was on his own accord refusing to cooperate with the other promoters in jointly operating the bank account. He attended the meeting but refused to sign the register deliberately.
  • The argued that the resolution can't be invalidated since its bonafide and in the interest of the company.
  • They denied the allegations stating that all the directors of the company are related to each other and they denied the act of oppression that it had been committed.
The Petitioners filed a memo stating that Rs 48,41,801 has been written off as bad debts while earlier there were no debts.

The Respondents filed a reply to the memo that no such construction took place, the compound wall was constructed even in the year 2012. The bad debts reflect the true affairs of the company and its still taking steps and following for the recovery of the said sums.

The court in the first issue said that- In reference with V.M. Rao and Ors V. Rajeshwari Ramakrishnan and Ors[8], it was held that it must be established that oppression complained of affected a person in his capacity as a member, as harsh and unfair treatment in any other capacity such as Director is outside the purview of oppression[9]. The court should not restrict the power of Board of Directors and it shall also not interfere with the day to day affairs and management of the company.

Hence, the decision that any two of the directors can operate the bank account is a commercial decision and the court cannot interfere in it. So, issue no-1 is decided against the Petitioners and it favored the Respondents.

The court in the second issue said that- In the Articles of the Respondent company they have provided that any person whether a member or not, may be appointed as the director of the company and he needs no qualification for the same. Hence, in the absence of any provision in the AOA, the Respondent company can't be forced to have proportionate representation. The court declined to interfere into the internal affairs of the respondent company. So, this also stands against the Petitioners, favoring the Respondents.

The court in the third issue said that- As presented by the Petitioners that the portion of land was being used for construction purposes illegally, they have not provided sufficient evidences which prove the construction as contended by them rather the Respondents have shown the proof that no such construction was happening, only a wall was constructed to safeguard serious injuries and the wall was certified by the surveyor. The decision was against the petitioners and in favor of Respondents.

The court in the fourth issue said that- Petitioners argued that an amount of Rs 48,41,801 has been written off as bad debts and it was not disclosed. The Respondents contended that bad debts written off is in the normal course of business and the transactions are absolutely with unrelated parties, it reflects a true and fair view in the accounts. It was a commercial decision, and it will not amount to oppression and mismanagement. It stands against the Petitioners and favored the Respondents.

The acts complained of are neither falling within the purview of oppression nor mismanagement. Therefore, company petition no-17 of 2017 is dismissed. The order is pronounced in the open court.[10]

The court gave the judgment in the favor of the Respondents. Aggrieved by this, the Petitioners filed an appeal. In view of the above observation and discussion, they were of the opinion that the NCLT, Chennai has rightly held that the allegations made by the Appellants are baseless.

We found no merit to interfere in the impugned order dated 11th July 2019 passed by the NCLT, Chennai Bench in Company Petition No. 17 of 2017 and the same is upheld. No order as to cost. NCLT rightly observed all the issues correctly and it was fair and just on their part to give such judgment.[11]

  1. Any member of a company can file a petition if the affairs of the company have been or are being conducted in a manner prejudicial to public interest or oppressive to him or any other members of the company.
  2. Oppression and mismanagement- Establishes a person's right to register a complaint against tyranny and mismanagement.
  3. Articles of Association
  4. S.P. Velumani
  5. S.P. Velumani & Anr vs Magnum Spinning Mills India Pvt. ... on 24 June, 2020 (
  6. S.P. Velumani & Anr vs Magnum Spinning Mills India Pvt. ... on 24 June, 2020 (
  7. Annual General Meeting
  8. (1987) 61 Company Cases 21
  9. document.pdf
  10. document.pdf
  11. S_P_Velumani_Anr_vs_Magnum_Spinning_Mills_India_Pvt_on_24_June_2020.PDF

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