The Hindu Business Line : ‘Mismanagement charge can stick from acts of subsidiary cos’

The Bench passed the order last week, while disposing of a set of petitions involving allegations of oppression of minority shareholder rights and mismanagement of affairs of CEPL.

Our Bureau

Chennai, Aug. 20 The Additional Principal Bench of the Company Law Board here has ordered that Cheran Enterprises Private Ltd (CEPL) and certain other entities controlled by Mr K.C. Palanisamy, a Coimbatore-based industrialist, return with interest, the Rs 75 crore investment made by the US-based Fairfax Group in the former.

The Bench further ordered that in the event of failure to do so within 12 months, CEPL and other entities in question will convey in favour of the Mauritian subsidiary of the Fairfax Group, lands currently held by Vasantha Mills – one of the entities controlled by the Coimbatore based industrialist.

The entire transaction will be structured as a reduction of capital by CEPL in respect of the shares issued in favour of the American company’s Mauritian affiliate.

The Bench passed the order last week, while disposing of a set of petitions involving allegations of oppression of minority shareholder rights and mismanagement of affairs of CEPL. The CLB ruled on an examination of various facts and evidence submitted before it that the Articles of Association of the company recognised the overriding value of the terms of the joint venture agreement between the American company and Mr K.C. Palanisamy.

Moreover the subsidiary companies of CEPL were intrinsic to giving effect to the objectives/purpose (promoting real estate ventures) of the joint venture agreement. In the event, the affairs and functions of CEPL and its subsidiaries are inseparable and should be treated as a single economic entity.

Allegations of mismanagement or suppression of minority shareholder rights by aggrieved shareholders of the parent company can draw sustenance from acts and omissions and commissions of the subsidiary companies.

The Bench was ruling specifically with regard to contracts entered into by Vasantha Mills and Cheran Properties – the two subsidiaries of CEPL – with Cheran Construction Ltd another company largely owned and controlled by Mr K.C. Palanisamy, that the Fairfax Group alleged were one-sided and hence inimical to its own interests as minority shareholder in CEPL.

The contract also suffered from the added infirmity of it being contrary to the terms of the joint venture agreement and without the approval of the Board of Directors of CEPL.

The CLB also took note of the fact that CEPL funds were applied towards liquidating the income tax liabilities of CG Holdings an entity controlled by Mr K.C. Palanisamy.

“The conduct of KCP in having regarded CEPL’s funds as though his own funds, is burdensome, harsh and wrongful,” the Principal Bench of the CLB noted.

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