TMI Blog2000 (10) TMI 971X X X X Extracts X X X X X X X X Extracts X X X X ..... . On 30-8-2000 the petitioner filed another application praying for certain urgent interim orders in view of some subsequent developments. On 1-9-2000 after hearing the counsel for the parties we ordered that till the matter was heard on 6-9-2000, without prejudice to the rights and contentions, both parlies were restrained from holding any meeting of Board of Directors and general meeting of the company and taking any further steps in pursuance to the resolutions passed in the AGM's of 23rd Aug. and the resolutions passed in the meeting of the Board of Directors on 26-8-2000. 3. On 4-9-2000 the second respondent filed its reply to the petition wherein it has inter alia challenged the maintainability of the petition mainly on the ground that the ingredients of section 409 of the Act are not attracted in the facts and circumstances of the present case. On 6-9-2000 while granting time to the petitioner to fiie a rejoinder it was further directed that the question regarding maintainability and the prayer for interim relief shall be considered on 13-9-2000. The petitioner has filed a short rejoinder mainly in respect of the objection pertaining to the maintainability of the peti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... themselves for reappointment there is a strong apprehension that the other shareholders holding 59.5% of the equity will act together to keep them out and foreign shareholders nominees would then constitute the majority of the Board and control the company to suit their end without having any regard to the business interest of the first respondent. This may not only jeopardize the licence granted by DOT in favour of Skycell, but might result in the lenders recalling their loans. This petition under section 409 is necessitated as there has been a change in ownership of 40.5 per cent shareholding, resulting in a likely change in the Board of Directors and if such a change is allowed it would prejudicially affect the affairs of the company. It is, therefore, absolutely necessary as well as just and equitable that this Board may pass appropriate orders to insure that no resolution passed or action taken that may affect a change in the Board of Directors of Skycell unless confirmed by the Board. An interim order on the same lines have been sought under section 409(2). 5. The 2nd respondent has raised an issue relating to the maintainability of the petition in terms of section 409 on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t venture agreement among 4 shareholders. CGL being one of the promoters transferred its shares to Bharti and thus Bharti has stepped into the shoes of CGL with 40.5 per cent shareholding. The balance 59.5 per cent shares are held by the promoter respondents. In other words, there is no change in the majority shareholders and this majority could exercise its voting rights in deciding the composition of the Board of Directors irrespective of the fact whether CGL is a shareholder or Bharti. In regard to the facts of this case, he pointed out that the petitioner was appointed as the managing director on 13 -8-1999 in a casual vacancy of a director whose term was to expire in the next AGM. The petitioner and two other directors whose term was to expire in the AGM and who were eligible for reappointment were nominees of CGL, Since his term would have expired on the date of the AGM on 23-8-2000, a resolution was proposed for his appointment as a director. His appointment was to be a fresh appointment for which a notice had been received from a shareholder proposing his name for directorship. The other two nominees of CGL also came up for reappointment. Under the circumstances it is for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any. He also pointed out that this company is a deemed public company, yet it is essentially and basically a private company, and as such the provisions of section 409 are not applicable, in view of the exception provided in section 409(3). 7. Shri Haksar, the senior Advocate appearing for the 3rd respondent (Bell South) supplementing the arguments of Shri Sawhney pointed out that the provisions of section 409 are to prevent corporate raiders from taking over the control of a company by acquiring shares and by virtue of shares so acquired, effect change in the Board. Therefore, it is to be first examined, at the threshold, as to whether changes are being brought about by such change in the ownership, as a preliminary issue. In the present case, he pointed out that Bharti, even assuming, is a raider, is only in minority and cannot have a say in the composition of the Board. Tn facts of the case, he contended that the petitioner has not established any cause of aciion and as such this petition is not maintainable. Referring to the decision of the CLB in R. Baba Chandrasekar v. V.R. Textile Ltd. [1992] 2 CLJ 103-CLB, he contended that the provisions of section 409 cannot be utilize ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is for the respondents to establish otherwise. Therefore, without going to the merits of this case, the matter cannot be decided at this preliminary stage and therefore the petition should be heard on merits without any separate order on the maintainability of the petition. He also pointed out that the Supreme Court has held in Needle Industries [1981] 3 SCC 333 that provisions applicable to a public company are applicable to a deemed public company and as such the present petition against the company is maintainable notwithstanding the provisions of section 409(3). 9. Shri Dave, the senior advocate for the company whose appearance for the company has been challenged by the 2nd respondent, submitted as follows : The only issue that could be decided as a preliminary issue in these proceedings is whether the petitioner is the managing director or a director. Once it is found so, the petition has to be heard an merits since various other facts have to be examined before passing a final order on the petition. Since the reply of the 2nd respondent raises various questions of facts, they cannot be looked into at this stage. While interpreting the provisions of a Statute, no words ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ioner had been earlier appointed as directors in casual vacancies of those whose appointments were to come to an end at the AGM and accordingly, their names had been proposed for appointment as directors. There are two versions of what happened in that meeting. According to the petitioner, the said meeting was chaired by the petitioner and resolutions relating to reappointment/appointment as per the notices were carried through, while according to the 2nd respondent, the meeting was chaired by Shri Satwant Singh at a different venue and that the resolutions relating to reappointment of two directors and the appointment of the petitioner as a director were defeated. If the resolutions relating to appointments of directors had been carried through as claimed by the petitioner, then he has no cause of action, since there is no change in the Board. However, if the resolutions had been defeated as claimed by the 2nd respondent, then, there is change in the Board and we have to examine whether the same has been brought out by the change in ownership of shares as contemplated in section 409. 12. We shall first examine whether we should consider the maintainability of the petition as a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ector or the manager of a company that as a result of a change which has taken place or is likely to take place in the ownership of any shares held in the company, a change in the Board of Directors is likely to take place which (if allowed) would affect prejudicially the affairs of the company, the Company Law Board may, if satisfied, after such enquiry as it thinks fit to make that it is just and proper so to do, by order, direct that no resolution passed or that may be passed or no action taken or that may be taken to effect a change in the Board of Directors after the date of the complaint shall have effect unless confirmed by the Company Law Board; and any such order shall have effect notwithstanding anything to the contrary contained in any other provision of this Act or in the Memorandum or articles of the company or any agreement with, or any resolution passed in the general meeting by, or the Board of Directors of the company. 14. A reading of the section would show that the order that may be passed by the CLB would have overriding effect of the Act, the memorandum, articles or any resolution passed by the Board or the general body. When such a primacy has been conferre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ke place and the Company Law Board is of the opinion that any such change would be prejudicial to the public interest, it may, by order, direct that- (a) the voting rights in respect of those shares shall not be exercisable for such period not exceeding three years as may be specified in the order; (b) no resolution passed or action taken to effect a change in the composition of the Board of Directors before the date of the order shall have effect unless confirmed by the Company Law Board. Where the Company Law Board has reasonable ground to believe that a transfer of shares in a company is likely to take place whereby a change in the composition of the Board of Directors of the company is likely to take place and the Company Law Board is of the opinion that any such change would be prejudicial to the public interest, the CLB may, by order, direct that any transfer of shares in the company during such period not exceeding three years as may be specified in the order shall be void. A perusal of the above twoprovisions would show that both the sections deal with change in the ownership of shares and consequent change in the Board as in section 409. The only difference is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rti, and if any of the directors had invoked the provisions of seciton 409 against Bharti, we would have found some substance in the petition and our enquiry would have been to find out whether, Bharti could have, with the strength of the shares acquired, changed the Board. This section is essentially to ward of the take over attempts by an incoming shareholder and not to put fetters in the right of the existing shareholders in changing the Board. By this petition, what the petitioner seeks, is to prevent the existing majority shareholders from exercising their right to constitute the Board, the obvious reason being that he has aligned himself with Bharti, which has acquired the ownership of shares in the company. In the present case, there is no connection between the second link and the third and as such, there is no need to look into the fourth link i.e. whether the change in the Board is prejudicial to the interest of the company. The basic objective of the provisions of section 409 is that an acquirer of shares in a company should not be allowed to change the Board with the strength of the shares so acquired. In the present case, what is sought is that such an acquirer should ..... X X X X Extracts X X X X X X X X Extracts X X X X
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