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Thursday, Mar 18, 2004

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Flogging a dead horse

Mohan R. Lavi

Mohan R. Lavi on a case of `oppression'

SECTION 397 of the Indian Companies Act, 1956 deals with oppression and mismanagement, whereby anyone who feels that the affairs of the company are not going as per generally accepted norms can force the company to a court of law to set the affairs straight.

This Section was looked into by the Mumbai High Court in Maharashtra Power Development Corporation Ltd (MPDCL) vs Dabhol Power Co (DBC) — 2004 44 CC B-387 Bombay HC. Although a host of charges were levied against DBC by MPDCL, the charge about a board meeting would be elaborated here.

The brief facts were that MPDCL held about 14.15 per cent of DBC. As per the Articles of Association (AoA) of DBC, the board of directors was to consist of a minimum of three and a maximum of 13 directors. Each of the shareholders holding 10 per cent of the equity was entitled to nominate one director.

Since MPDCL held 30 per cent of the equity of Phase 1 of the project, it had nominated three directors on the board. The ill-fated Enron held 80 per cent of the equity of DBC.

In December 2001, Enron filed a bankruptcy petition is the US. On issue of equity for Phase-II, the equity of MPDCL in DBC came to 14.15 per cent.

Acting as per the Articles, it withdrew two directors and kept only one Mr RB on the board. At this time, DBC was neck deep in trouble, thanks to Enron, and terminated many of its employees keeping only 18 to keep fighting the fire. The month of March witnessed a spate of resignations, which culminated in Mr RB also resigning.

Since a majority of the directors also had resigned en masse, DBC was left with only two directors. DBC ultimately held a board meeting in June 2002 in San Francisco, wherein there was a replacement of an existing director and a new director was also appointed which met the quorum criteria. MPDCL cried foul and decided to go legally against DBC.

At the outset, MPDCL stated that it should have been given notice of the board meeting held in San Francisco. The logic was that in the normal course, notice of the meeting would have been given to Mr RB but since he has resigned notice should have been given to the company. The company also claimed that there was a letter from one Mr Stummer stating that notice of meeting would be given to the company.

MPDCL felt that the decision of the apex court in Parmeshwari Prasad Gupta vs Union of India (AIR 1973 SC 2389) would apply.

The Mumbai High Court rejected this claim stating that notice of meeting need be given only to directors and the letter of Mr Stummer had no authority since he was only extending a courtesy.

MPDCL seconded its charges against the company by stating that since the Article stipulated a minimum of three directors and since there were only two directors at the time of the board meeting, the meeting itself was illegal.

However, MPDCL was stumped by Regulation 75 of Table A of the Articles which stipulated that two existing directors could validly convene and hold a board meeting with the express agenda of increasing the number of directors to meet certain criteria.

Not willing to let go, MPDCL alleged that the appointment of Mr F as a director was invalid since he was not qualified to be a director. MPDCL saw a loophole in Article 10.13 of the AoA which stated that each person holding 10 per cent shareholding was entitled to appoint one director and directors other than shareholder directors could be elected by members having a majority of shares.

Interpreting this clause, MPDCL opined that only nominees of financial institutions could be appointed as directors to comply with Article 10.13.

The Mumbai High Court did not agree with this contention since it did not see any such meaning in Article 10.13.

The court went on to proclaim that even it the appointment of Mr F was illegal, it cannot be said to be oppressive since it was made to make the board functional.

It went to the extent of stating that MPDCL was acting oppressively since it wanted DBC to be without a proper management. MPDCL also objected to the replacement of the existing directors but did not continue its argument in the court.

MPDCL also alleged that no agenda of the business to be transacted at the board meeting was circulated to the directors and, hence, all decisions taken were illegal.

It sought the succour of Article 10.7 of the AoA of the company which mandated a notice and an agenda for every board meeting. DBC contended that if absence of agenda was pleaded as a ground of appeal, MPDCL could have adduced evidence that the agenda was circulated at or prior to the board meeting.

The Mumbai High Court agreed with the contention of DBC and turned down the appeal.

It was obvious that MPDCL was flogging a dead horse when it went on appeal. The startling collapse of Enron must have given it the clear sign that nothing would come out of the Power Purchase Agreement with DBC. Still it decided to pursue the legal course to the last resort to find out if anything could be salvaged.

Since enactment, the law regarding oppression and mismanagement has come a full circle. It would no longer be judicially permissible to call upon the Section for any and every trifle cause. The Section could do with an amendment taking the wisdom of all prevalent case laws to prevent recurrence of needless litigation.

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