SP VELUMANI & ANR v. MAGNUM SPINNING MILLS INDIA PVT. LTD. 

Case Name	S.P. Velumani & Anr v. Magnum Spinning Mills India Pvt. Ltd
Citation	Appl. No. 299 of 2019 MANU/NC/2366/2024
Court	NCLT Delhi
Bench	S.J. Mukhopadhyaya, Dr. Ashok Kumar Mishra, Mr. Justice Jarat Kumar Jain.
Decided On.	24th June 2020.
Plaintiff	S.P. Velumani
Defendants	Magnum Spinning Mills India pvt. Ltd.

INTRODUCTION 

The case concerns the internal affairs of Magnum Spinning Mills India Pvt. Ltd., a closely held private company, and involves claims of oppression and mismanagement under Sections 241 and 242 of the Companies Act, 2013. The respondent majority directors were accused by the appellants, minority shareholders and directors, of conducting business in a way that was oppressive and discriminatory to the minority, manipulating company accounts, changing bank mandates without the required authority, and engaging in fraudulent transactions. 

The case seeks judicial intervention to safeguard minority shareholders’ rights and guarantee sound corporate governance by addressing the legitimacy of board resolutions, the right to manage company bank accounts, and allegations of financial irregularities. 

IMPORTANT PROVISIONS 

• Companies Act, 2013, Section 241: Allows members (shareholders), depositors, or any class thereof to apply to the National Company Law Tribunal (NCLT) alleging that the affairs of the company are being conducted in a manner oppressive to any member or prejudicial to public interest. 
• Companies Act, 2013 Section 242: Empowers the NCLT to pass a wide variety of orders, including restraining the company from acts complained of; regulating conduct of affairs of company; appointment of directors, managers, or administrators; ordering purchase of shares of any member by other members or by the company; and extinguishing or modifying rights conferred by any class of shares.
• Companies Act, 2013 Section 62: Deals with the rights of existing shareholders in cases where shares are newly issued, relevant to the shareholders’ right to maintain their proportionate shareholding as protection against dilution.

BRIEF FACTS – 

The closely held private company Magnum Spinning Mills India Pvt. Ltd. (Respondent No. 1) was established in 2010 and operates a spinning mill. A board of seven directors is in charge of running the business.

Mr. S.P. Velumani, Appellant No. 1, is a director, founder, promoter, and owner of 19.55% of the company’s shares. His wife, appellant No. 2, owns 2.31% of the company, and together, the remaining directors (Respondents 2 through 7) own the majority of the company and are closely related family members. According to the appellants, the majority of directors stole company funds by creating fraudulent transactions, such as exaggerated purchase invoices and vouchers, and engaging in other forms of oppression and poor management. They asserted that these actions were taken on purpose to harm minority shareholders’ interests.

The appellants argued that Mr. Velumani was illegally barred from overseeing the bank operations of the company, they claimed that the board changed the mandate so that the appellant was no longer required to be a signatory or have sole control over the company’s bank accounts by passing a forged resolution on August 22, 2016, of which the appellant was unaware and did not participate.

The majority of directors were accused by the appellants of engaging in unapproved construction without the required board or legal approvals, and additionally, they claimed that the company suffered financial harm as a result of the diversion of company funds, including the potential for unlawful construction expenditures and other unapproved payments.

The appellants asserted that the company’s management shunned them after they opposed the aforementioned acts, and they were routinely denied access to information, and their involvement in business matters was diminished. Mr. Velumani emphasized that for loans and credit facilities given to the business, he had offered significant personal guarantees and collateral security, including real estate valued at crores of rupees. Nevertheless, he claimed that the majority of directors, who dominated the company’s management, were oppressive and biased.

ISSUES INVOLVED – 

1. Whether the alterations of the bank accounts operating mandate by the majority directors without appellant no.1 consent amounted to oppressions and mismanagement under sections 241 and 242 of the Companies Act, 2013. 
2. Whether the companies’ affairs were conducted in a manner prejudicial or oppressive to the minority shareholders. 
3. Whether there was sufficient justification for the exclusion of the appellants from the company management.

ARGUMENTS ADVANCED BY APPELLANTS – 

• According to the counsels representing the appellants, the appellants argued that the August 22, 2016, board resolution, which allegedly changed the bank mandate to permit any two directors to manage the company’s bank accounts, was fraudulent and unconstitutional. They asserted that they were not notified or permitted to take part in such a crucial decision-making process, that the resolution was passed without adequate notice, and that no legitimate meeting was called.
• It was claimed that this change was made on purpose to deny Appellant No. 1, Mr. S.P. Velumani, management control, specifically the veto or exclusive authority over important financial operations, and according to the appellants, this was a component of the majority directors’ deliberate strategy to marginalize and weaken the minority shareholder.
• Serious charges of financial impropriety were brought up by the appellants, who pointed out numerous fraudulent transactions and manipulated vouchers involving exorbitant procurement costs, including fictitious cotton purchase bills that were purportedly from Gujarat but were actually from Andhra Pradesh. They asserted that the goal of these fraudulent schemes was to embezzle company funds, which would have negatively impacted the company’s and minority shareholders’ interests.
• Additionally, they argued that Appellant No. 1 experienced harassment and exclusion from the company’s management as a result of their opposition to and inquiry into these malpractices. This included routinely excluding them from meetings, denying them access to company data and documents, and creating an atmosphere that made it impossible for them to participate in business matters.
• The appellants raised serious concerns regarding unapproved construction activities on company property, allegedly carried out without board or legal approvals. These activities pose a risk of encroaching on government land and possibly resulting in demolition, which could result in a significant loss of company funds and assets.
• They maintained that the majority of directors ignored the rights and interests of minority shareholders in favor of autocratic and capricious governance, and because of the majority’s dominance, internal controls and fair corporate governance procedures were disregarded, which made the oppression and poor management even worse.
• As a remedy, the appellants wanted the company’s board to be composed with proportional representation in order to limit the unbridled power of the majority; they prayed for judicial action to stop the oppressive behavior and to offer fair remedies to protect the company’s assets and minority shareholders.

ARGUMENTS ADVANCED BY RESPONDENTS  – 

• The counsels for the respondents argued that any claim of irregularity was refuted because all of the payments and transactions that the appellants contested were properly authorized and approved, many of which bore the signatures and authorizations of Appellant No. 1 himself during the pertinent period.
• They contended that Appellant No. 1 lacked any required signing authority or exclusive contractual or legal right to control the company’s bank accounts. The board was given the authority to choose signatories democratically by the company’s Articles of Association and regulatory frameworks.
• According to the respondents, the board’s decision to permit any two directors to manage the company’s bank accounts jointly was a reasonable and legal move that complied with corporate governance standards. This democratic adaptation was neither out of the ordinary nor inappropriate.
• It was stressed that the board resolutions and decisions made by the majority, including those pertaining to financial and operational issues, were legitimately passed and subsequently ratified. The respondents argued that such meetings and resolutions were not vitiated or invalidated by Appellant No. 1’s simple failure to receive notices or objections.
• They rejected the claims of siphoning, account manipulation, and fraudulent conspiracies as unfounded, unsubstantiated, and brought late in the lawsuit without sufficient proof.
• By blocking important financial transactions, refusing to sign required paperwork, and postponing statutory compliance, the appellants themselves came under fire for hindering business operations. The company experienced real harm as well as financial difficulties as a result of these actions.

JUDGEMENT  – 

• The Hon’ble NCLT the democratic principle that the Board of Directors has the inherent authority to determine bank account operating mandates in accordance with the Articles of Association and company regulations was upheld by the Court. It was noted that designating two directors to sign checks is a legitimate business choice and does not constitute oppression.
• Furthermore, there was insufficient evidence to support Appellant No. 1’s claims of notice non-receipt and the invalidity of the board meeting, particularly in light of the CCTV and attendance records.
• According to the Court, oppression or mismanagement must be severe, involve wrongdoing, and ongoing acts that cause prejudice; isolated or business-related decisions (like financial write-offs or construction done for safety reasons) do not qualify.
• By itself, disagreements over management choices or the lack of unrestricted control over bank accounts do not amount to oppression.
• The Court was unable to find any hard proof to support allegations of fraudulent vouchers or money laundering. It pointed out that the appellant had approved numerous transactions in the past and had not objected right away until the petition was filed.
• The Appellant’s actions, which caused hardship for the company, were criticized by the NCLAT. These actions included blocking bank operations and refusing to sign documents for bank facility renewals. The Court pointed out that the appellant’s lack of access to some operational powers did not equate to being shut out of the business.
• The NCLAT upheld the NCLT’s decision to reject the petition alleging mismanagement and oppression. It underlined that, in light of the situation, no extraordinary relief was necessary and that, in corporate management, the majority directors’ business decisions are subject to democratic majority rules.

CONCLUSION – 

The ruling in S.P. Velumani & Anr. v. Magnum Spinning Mills by the NCLAT highlights the significance of majority-rule corporate governance principles and the high bar for allegations of oppression and poor management. 

Despite claims made by a minority shareholder, the Court refused to get involved in what seemed to be legitimate business management choices made by the majority directors. The ruling makes it clear that, in the absence of proof of dishonest or oppressive behavior, exemption from some controls is insufficient to grant relief.

This article has been written by Mayur Shrestha (Presidency University Bengaluru School of Law).