9911796707
TMI Blog1994 (6) TMI 178X X X X Extracts X X X X X X X X Extracts X X X X ..... e underlying observations made by Chinnappa Reddy, J. in the case of Life Insurance Corpn. of India v. Escorts Ltd. [1986] 59 Comp. Cas. 548 (SC) as under : "Problems of high finance and broad fiscal policy, which truly are not and cannot be the province of the court for the very simple reason that we lack the necessary expertise and, which, in any case, are none of our business are sought to be transformed into questions involving broad legal principles in order to make them the concern of the court.... The court room becomes their battle ground and corporate battles are fought under the attractive banners of justice, fair play and the public interest. . . . ." (p. 559) 2. In paragraph 2, it is further observed as under : "In the case before us, as if to befit the might of the financial giants involved, innumerable documents were filed in the High Court, a truly mountainous record was built up running to several thousand pages and more have been added in this Court. Indeed, and there was no way out, we also had the advantage of listening to learned and long drawn out, intelligent and often ingenious arguments advanced and dutifully heard by us. In the name of justice, we paid d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aw which is highlighted before this Court is : Whether purchase of shares in the Cement Corporation of Gujarat Limited by the SCCIL would be per se bad because the shares are sought to be purchased by the SCCIL at the instance of the Mehtas who are directors of SCCIL and who are bound to purchase the shares of CCGL held by the GIIC on the basis of the memorandum of understanding. It is contended that the Mehtas are transferring their obligations to purchase shares of the CCGL to SCCIL for maintaining control of management over the CCGL. It is also contended that because of the MOU between the GIIC and the Mehtas, the Mehtas are required to purchase the shares held by the GIIC in the CCGL and as the Mehtas are financially not in a position to purchase the said shares or for ulterior motives, they are transferring their obligation to purchase the shares of the CCGL to the SCCIL in breach of their fiduciary duty. For this purpose, reliance is placed on the principles laid down by the Privy Council in the case of Howard Smith Ltd. v. Ampol Petroleum Ltd. [1974] 1 All ER 1126, wherein the Court has observed as under (page 1133): "In their Lordships' opinion neither of the extreme posit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the arrangement for getting control over the management of such plant, at present the SCCIL is required to invest only Rs. 45 crores; (v)it would be a far-fetched inference that by purchase of shares by the SCCIL, the Mehtas are going to get any benefits. The reason to purchase the shares of CCGL is to see that the CCGL is not controlled by outsiders who are interested in having business competition with the SCCIL; and (vi)the decision to purchase the shares of CCGL by the board of directors of SCCIL is intra vires and is not against the provisions of law. There is no allegation of fraud nor is there any allegation to the effect that the purchase of shares would be against the public interest. 8. For appreciating the aforesaid contentions, we would first refer to the memorandum of understanding dated 30-4-1992, between the Mehta International Limited (TMIL) and the Gujarat Industrial Investment Corporation Limited (GIIC), which inter alia, recites that, in terms of the shareholders' agreement dated 9-4-1981, between them, TMIL and GIIC are the promoters of Cement Corporation of Gujarat Limited (CCGL): there were differences of opinion between them which have resulted in vario ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any clause of this understanding is not capable of being implemented, the steps taken under the memorandum shall be irreversible in spite of non-performance of any clause of this agreement. 11. From the above terms of the MOU, it is apparent that the MOU is executed between the Mehtas and the GIIC and, admittedly, the SCCIL is not party to the MOU. From this MOU, it is further clear that: (1)the obligation to purchase shareholding of 82,69,999 equity shares of CCGL from the GIIC at the rate of Rs. 54.30 per share is that of the Mehtas (TMIL); (2)the Mehtas are required to purchase the shares within sixty days from the date of agreement. If there is delay, they are required to pay 24 per cent interest per annum; (3)Shri M.N. Mehta is elected as chairman of the CCGL on the basis of clause No. 13. The other directors as nominated by the Mehtas are required to be appointed; and (4)GIIC, TMIL and CCGL are required to jointly represent to the BIFR and other financial institutions to ensure all possible help to CCGL for rehabilitation under the management of TMIL. 12. The aforesaid terms of the MOU, in our view, leave no doubt that the Mehtas were and are under the obligation to pur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would not be at all an unreasonable thing to create a sufficient number of shareholders to enable statutory powers to be exercised.' In the instant case, the issue of rights shares was made by the directors for the purpose of complying with the requirements of the FERA and the directives issued by the Reserve Bank under that Act. The Reserve Bank had fixed a deadline and NIIL had committed itself to complying with the Bank's directive before that deadline. Peterson, J. applied the principal enunciated in Fraser v. Whalley [1864] 71 ER 361 and in Punt v. Symons [1903] 2 Ch 506 (Ch. D) in the case of Piercy v. S. Mills & Co. Ltd. [1920] 1 Ch 77 (Ch. D). The learned judge observed at page 84: 'The basis of both cases is, as I understand, that directors are not entitled to use their powers of issuing shares merely for the purpose of maintaining their control or the control of themselves and their friends over the affairs of the company, or merely for the purpose of defeating the wishes of the existing majority of shareholders.' The fact that by the issue of shares the directors succeed also or incidentally in maintaining their control over the company or in newly acquiring it, does ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to have failed in their fiduciary duty to the company if they act in good faith in what they believe, on reasonable grounds, to be the interest of the company. If the directors' primary purpose is to act in the interest of the company, they are acting in good faith even though they also benefit as a result.' In Howard Smith Ltd. [1974] AC 821 (PC), no new principle was evolved by Lord Wilberforce who, distinguishing the decisions in Teck Corpn. [1972] 33 DLR (3d) 288 and Harlowe's Nominees [1968] 121 CLR 483 (Australia) said (page 837 of [1974] AC): 'By contrast to the cases of Harlowe's Teck, the present case, on the evidence, does not, on the findings of the trial judge, involve any consideration of management, within the proper sphere of the directors. The purpose found by the judge is simply and solely to dilute the majority voting power held by Ampol and Bulkships so as to enable a then minority of shareholders to sell their shares more advantageously. So far as authority goes, an issue of shares purely for the purpose of creating voting power has repeatedly been condemned.' The dictum of Byrne, J. In Punt v. Symons [1903] 2 Ch 506 (Ch. D), that 'there may be reasons other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xercise their power for the benefit of the company. If the power to issue further shares is exercised by the directors not for the benefit of the company but simply and solely for their personal aggrandisement and to the detriment of the company, the court will interfere and prevent the directors from doing so. The very basis of the court's interference in such a case is the existence of the relationship of a trustee and of cestui que trust as between the directors and the company. (pages 419-420 of [1950] SCR). It is true that Das, J. held that the Singhanias were complete strangers to the company and consequently the directors owed no duty, much less a fiduciary duty, to them. But we are unable to agree with the contention that the observations extracted above from the judgment of Das, J. are obiter. The learned judge has set forth the plaintiffs' contention under three sub-heads (page 415 of [1950] SCR). At the bottom of page 419 of SCR he finished the discussion of the 2nd sub-head and said: 'This leads me to a consideration of the third sub-head on the assumption that... the additional motive was a bad motive.' The question was thus argued before the Court and was squarely d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... law laid down by the Privy Council in the case of Howard Smith Ltd. (supra) that where the self-interest of the directors is involved, they will not be permitted to assert that their action was bona fide thought to be, or was, in the interest of the company; pleas to this effect have invariably been rejected just as trustees who buy trust property are not permitted to assert that they paid a good price. 15. Further, from the aforesaid discussion by the Supreme Court with regard to exercise of the powers by the directors of a company, it is apparent that the directors are not entitled to use their powers of issuing shares for the purpose of maintaining their control or the control of themselves and their friends over the affairs of the company. What is considered objectionable is the use of such powers merely for an extraneous purpose like maintenance or acquisition of control over the affairs of the company. In such cases, an enquiry as to whether the additional capital was presently required or whether purchase of such shares was necessary is most relevant to the ultimate question. The primary duty of the directors is to act in the interests of the company and in good faith even ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ience to their duty to comply with the law of the land. Further, it cannot be said that, while discharging their duty, respondent Nos. 2 and 3 incidentally got the benefit of acquiring and maintaining the control over the CCGL. However, learned counsel Mr. Chidambaram referred to the passage from the case of Teck Corpn. Ltd. [1973] 33 DLR (3d) 288 to contend that the ultimate question must always be whether the shares were purchased by the directors honestly in the interests of the company. In our view, from the memorandum of understanding, it is apparent that the said agreement is solely between the Mehtas and the GIIC. It nowhere states that the Mehtas were purchasing the shares of CCGL on behalf of the SCCIL or that the Mehtas were empowered to enter into such type of agreement on behalf of the SCCIL. Even from the passage quoted above from the case of Nanalal Zaver v. Bombay Life Assurance Co. Ltd. [1950] 20 Comp. Cas. 179 (SC), it is clear that, if the power to purchase shares is exercised by the directors not for the benefit of the company but simply and solely for their personal aggrandisement, the Court will interfere and prevent the directors from doing so. The very basis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gnificant. In the company petition under section 397 of the Act, what is challenged is the action of the company and not of the individual members. In any case, the concerned individual directors against whom the allegations are made are joined as parties to the company petition. 19. At this stage, we may note that the learned counsel Mr. Chinoy has submitted vehemently that the decision to purchase the shares of the CCGL at the rate of Rs. 54.30 per share is per se bad because the price at the relevant time was Rs. 30 or less than Rs. 30. This contention is vehemently disputed by the learned counsel Mr. Chidambaram by point- ing out various facts that the average price was worked out approximately at Rs. 17. In our view, at this interim stage, it would be difficult to decide this contention by appreciating the facts relied upon by both the parties as it would require detailed investigation. In any case, as observed by the Supreme Court in the case of Needle Industries (India) Ltd.'s case (supra) (page 818) : ". . . it is also not true to say, as a statement of law, that the directors have no power to issue shares at par, if their market price is above par. These are primarily ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ". . . The allegations might in certain circumstances amount to criminal breach of trust or to theft. And to test the question whether a majority can bind a minority under these circumstances, I put it to Sir Chimanlal Setalvad whether supposing a case was one of actual theft and the fiduciary agent had actually stolen the assets of the company, counsel still contended that the majority of the shareholders could bind the minority not to recover those stolen assets of the company. Counsel was forced to argue that the majority could bind the minority.... On general principles this proposition is clearly erroneous. The assets of the company, so far as they represent profits, may be distributed by way of dividend, capital assets may be distributed in a winding up or in certain other limited ways under the Indian Companies Act...." (p. 190) 23. The Court further observed that in those cases in which the assets of the company are being improperly distributed by an attempt to pay them into the pockets of the majority of shareholders of the company or their friends at the expense of the minority, the Court can interfere. The Court referred to the following passage from the decision of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . By the said resolution, the board had approved the proposal to submit an application through the Mehta Group to the BIFR either for take over of CCGL or merging the same with the SCCIL. For this purpose, he further relied upon the order passed by the BIFR in the proceedings held on 11-11-1991. The record of the proceedings is produced at annexure I to the further affidavit filed by Mr. B. N. Attara, duly authorised representative of the appellant-company, in Civil Application No. 12 of 1994. The relevant consideration is in paragraph 11. From the order of the BIFR, it is apparent that the BIFR has not accepted the proposal of the SCCIL for merger of the CCGL mainly on the ground that the SCCIL is itself a sick industrial company and it may take some time before its net worth becomes positive. The Bench has further observed that there was no rationale in considering merger of a sick company (with huge accumulated losses and liability) with another sick company (with a doubtful ability to make requisite funds available for rehabilitation on a long-term viable basis). No other discussion by the BIFR is there in the said order. It, therefore, appears to us that the BIFR rejected the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. E-5 and 7 of the scheme. For this purpose, he also referred to the agenda of the said meeting wherein it is specifically stated that the draft rehabilitation scheme of CCGL was enclosed for the members' perusal to contend that the draft scheme prepared by the BIFR was circulated to the members of the board of directors of the SCCIL. He, therefore, submitted that the SCCIL was a party to the scheme framed by the BIFR and that on behalf of the SCCIL, the persons mentioned in the resolution passed by the board of directors on 22-10-1993, remained present to represent the SCCIL before the BIFR. As against this, the learned counsel Mr. Chinoy contended that the conditions, which were imposed on the SCCIL as per the draft scheme, were deleted in the final scheme, which would indicate that the SCCIL was not a party to the scheme. 27. Prima facie, from the final scheme framed by the BIFR, it appears that the SCCIL was not a party to the scheme. Prima facie, it appears that the promoters according to the scheme, are the Mehta International Limited (TMIL) and the liability under the scheme is that of the promoters and not of the SCCIL. By reading paragraph 2 of the proceedings of the BIF ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ocumentary evidence which may be brought on record by the parties. III. Violation of section 372 of the Companies Act : The next question which requires consideration is whether the arrangement to purchase shares of CCGL by the SCCIL through its subsidiaries is inconsistent with the ambit and scope of section 372 of the Companies Act, 1956 ? If yes, what is its effect at the present stage ? 30. For this purpose, the learned counsel Mr. Chinoy relied upon the resolution dated 27-11-1992, passed by the board of directors of SCCIL. The relevant part is as under : "At the meeting of the board of directors held on July 24, 1992, the board was informed that it is intended to acquire 30 per cent stake of CCGL which will result in achieving the synergies between the two companies and pave the way for common marketing strategies to meet the challenges of competition. Subsequently, at the annual general meeting of the company held on September 29, 1992, the members had passed a unanimous resolution authorising the board to invest the funds of the company not exceeding Rs. 50 crores by way of subscription, purchase or otherwise acquisition, in the shares of any other body or bodies corpor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lier is continued, then the SCCIL would lose a golden opportunity to have control over the CCGL. This cannot be compensated in terms of money. He submitted that it is a golden opportunity for the SCCIL because the SCCIL is engaged in the business of manufacturing cement and by investing only Rs. 45 crores, the SCCIL would get commercial advantage in running its business. He further submitted that this opportunity would be lost because the other competitors in the business of manufacturing cement such as Gujarat Ambuja Cement. Larsen and Toubro, ACC, Tata Chemicals, Birla Jute and Cement Industries, etc., are inter- ested in taking over the management of the CCGL. They have also submitted their offers before the BIFR. (ii)In any case, the SCCIL may be permitted to purchase shares worth Rs. 7.50 crores (remaining part of Rs. 12.50 crores by way of promoters' contribution as Rs. 5 crores are already invested) and Rs. 4.135 crores (for purchase of rights shares). It is his contention that the SCCIL had already invested Rs. 22.45 crores and the investment of the remaining sum may be kept in abeyance. (iii)The purchase of shares is approved by the annual general meeting of the SCCIL. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its. But that would hardly be a ground for refusing the interim relief. Prima facie, from the record as it stands, it appears that the SCCIL was not a party to the scheme framed by the BIFR. Further, Mr. Chinoy has rightly relied upon the provisions of sections 38(3)(a) and 41(h) of the Specific Relief Act, 1963, which are as under, to contend that in a case where there is breach of trust, the court should grant injunction without considering the question of irreparable injury : "38. (3) When the defendant invades or threatens to invade the plaintiff's right to, or enjoyment of, property the court may grant a perpetual injunction in the following cases, namely :- (a)where the defendant is trustee of the property for the plaintiff; 41. (h) An injunction cannot be granted, when equally efficacious relief can certainly be obtained by any other usual mode of processing except in case of breach of trust." [Emphasis supplied] 36. He further rightly relied upon the submissions made by the appellants in the grounds of appeal that the Mehtas have no constraints of funds being a 500 million dollars turnover group worldwide with sufficient interest in India also, to contend that, if the M ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
