TMI Blog1996 (10) TMI 367X X X X Extracts X X X X X X X X Extracts X X X X ..... nown as Shoe Specialities Private Limited (hereinafter referred to as "SSPL"), the first respondent in the company petition. That company was incorporated, some time in November, 1987, and as on July, 1991, the shareholding pattern of the company stood as follows : Standard Distilleries Pvt. Ltd. (hereinafter referred to as "Standard") 1,000 shares Stridewell Leathers Pvt. Ltd. (for short, referred to as "Stridewell") 2,000 shares Bhankerpur Simbhaoli Beverages (P.) Ltd. (for short, "Bhankerpur") 2,000 shares. It is seen that some disputes arose between members of the family, i.e. , between MRC on the one hand and RDC and MDC on the other. MRC was controlling Shaw Wallace Company Ltd., and the employees of the company were directors in SSPL. In view of the misunderstanding between the members of the family, MRC wanted to take control of SSPL, and, at his instance, the board of directors resolved to increase the paid-up capital of the company. The same was done without the knowledge of Standard and Stridewell, which were controlled by RDC and MDC. They filed Company Petition No. 29 of 1992 before the Board, and the attempt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , especially when petitioners Nos. 1 and 2 having become majority shareholders in view of order dated May 28, 1993, and can effectively exercise their majority right along with their directors on the board of SSPL" It may be stated that reference in that order regarding the requisition which was rejected by SSPL is dated June 30, 1993, on the ground that the person who signed the requisition was not authorised to do so. It was subsequent to that another requisition was made on October 8, 1993. The Board further said thus : "Accordingly, we dispose of this petition with the direction to the board of directors of SSPL to act on the requisition lodged by the petitioner on October 8, 1993, as per the provisions of section 167 of the Companies Act, as if the second requisition had been lodged with SSPL on September 26, 1994. Both the parties are at liberty to approach us in case of any difficulty in convening the general meeting. Till the extraordinary general meeting is held, the present board will not take any decision except relating to the said requisition." The order is dated June 8, 1994. We have already quoted the order of the Board which said that the petitioners can e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Act, and its powers can be exercised under section 402 of the said Act as well. It was also held that the word "convening" which it used in its main order in C. P. No. 44 of 1993 should not be construed literally and the same was used by them in a larger perspective to include all proceedings till the completion of the extraordinary general meeting. Thereafter, it came to the conclusion that even though it has got the power to appoint an independent chairman, it was not doing so, since the independent chairman will have to take decision on the eligibility of the shareholders to take part in the proceedings of the meeting, and that may not be possible for him in the context of the different interpretations given by parties to the order of the Division Bench of this court. Under the above circumstances, it gave the following directions : "However, at the same time, we feel that it is absolutely essential that the proceedings of the EOGM are conducted in a proper manner and we should have independent information as to the conduct of the meeting from an independent source. Accordingly, we appoint Shri B. Bhavani Shankar, former Regional Director, Department of Company Affairs, pres ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... edgee of the shareholders is entitled to vote. The chairman wanted the persons who attended the meeting to identify themselves by entering the name of the company which they represented. From the observer's note, it is seen that Shri A. S. Varadharajan represented the first petitioner (having 1,000 votes), and B. Raghavan represented Stridewell having 2,000 votes, K. Swaminathan represented the seventh respondent having 2,000 votes. Another person by name V. Subramaniam claimed himself to represent Alakananda Manufacturers and Finance Limited, as beneficial owner of 2,000 shares of Stridewell (second petitioner) also claimed as representing Stridewell. One M.K.C. Pie representing Alakananda and one M. Seal represented Jose Investments Private Limited claimed themselves as having some right under the seventh respondent. The locus standi of V. Subramaniam who claimed himself to be the beneficial owner of Stridewell was objected to on the ground that Shri Raghavan is the competent person to represent the same, and when the second petitioner himself is present for voting, the beneficial owner or alleged power of attorney cannot have a right. When this objection was raised it is said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... votes were cast against it, i.e. , by Alaknandha and Jose as transferees of the seventh respondent, and, therefore, all the resolutions were defeated. The effect was, the removal of the directors sought for could not be achieved by the ruling of the chairman. It was this stand taken by the chairman which was objected to by the petitioners and, therefore, they filed an application before the Board as Company Application No. 208 of. 1994. The following reliefs were sought for in that application : "( a )To set aside the decision of the chairman in permitting Alaknanda to vote in respect of 2,000 shares held by Stridewell in SSPL and in permitting Alaknanda and Jose to vote in respect of 2,000 shares owned by Bhankerpur in SSPL ; and to declare that votes polled by Stridewell in respect of their 2,000 shares to be counted. ( b )To declare that the resolutions 6( a ) to 6( g ) and resolutions 8 to 10 in the agenda of the meeting held on October 19, 1994, have been passed. ( c )To direct the respondents to deliver possession of all records, statutory books or documents relating to SSPL to the petitioners. ( d )To supersede the board of directors of SSPL and to appoint an interi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idavit, heard learned counsel and finally held that the stand taken by the chairman was not proper. The representation by Raghavan on behalf of the second petitioner was held as proper, and in fact, there was nobody to put forward a counter-claim against him and, therefore, non-consideration or rejection of his vote was improper. In that view, the Board held that the resolution be declared as passed. It also held that the contention that it has become functus officio and it has no power to pass orders on the application is not correct, and under section 397 read with section 402 of the Companies Act, it has power to rectify all matters that are complained of. In that view, the application was allowed. With the result, the directors who were sought to be appointed by the petitioners were declared as appointed and seven directors who were appointed after June 1, 1993, were declared as removed from their office. The directors were directed to hand over charge to the newly appointed directors within ten days from the date of receipt of a copy of the order. It is against the said order of the Company Law Board, dated September 3, 1995, that these appeal's are filed. Except one appeal fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sputes, the Board can give appropriate relief. It is not confined to the relief that is sought for. It is also said that the contention that the Board is not seized of the matter is against the prior decisions in this case, especially in C. A. No. 114 of 1994 where a similar argument was put forward and rejected by the Board, and which has become final. It is further said that under section 397 of the Companies Act, the power of the Board is very vast and till the entire matter which is complained of is settled, law presumes that the Board will have jurisdiction. No substantive rights are affected when the alleged rights accrued only pending determination by the Board, and violation of the principles of natural justice is not a matter that was taken either at the time when the extraordinary meeting was held or before the Board and the same is being taken for the first time only before this court. On the merits, it was further contended that the question of vagueness of the resolution dated October 7, 1993, was a matter of discussion at the time of voting and in spite of the same, the chairman understood the scope and intent of the resolution and allowed voting. Once the chairman hi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eting of the board of directions whereby the shareholding was increased from 5,000 shares to 25,000 shares and even without offering the same to the existing members, the entire increased share capital was sold to Bhankerpur, the seventh respondent herein, who later alleged to have pledged the same to Malleswara Finance Company. It is contended that this action done at the behest of the ninth respondent has been found to be fraudulent and it was also found that no intimation was given to the existing shareholders though documents were created to show that the matter had been communicated to them. When fraudulent documents were created which were denounced by the Board, it cannot but be doubted that the board of directors were mismanaging the affairs of the company and were misusing their official capacity. It is said, the Board considered this question. The intention of the ninth respondent and the existing board of directors was an act of oppression. By one stroke, a substantial majority in a company was reduced to a minority. All acts of the ninth respondent and the then board of directors were found to be fraudulent and oppressive in character. It is said that the act of oppress ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... possible the democratic rights of the shareholders should be respected, and that is why it said that petitioners Nos. 1 and 2 can effectively exercise their majority right to elect their own directors on the board of SSPL. The Board at that time thought that the views of the majority shareholders will be respected, and a board of directors need not be imposed by it. The impugned application on which the impugned order was passed was filed on October 27, 1996. In the meanwhile, something more had happened, and it was also brought to our notice. Against the judgment of the Company Law Board in C. P. No. 29 of 1992, Malleswara Finance and Investments Co. Private Limited filed a writ petition and the same was dismissed. It filed a writ appeal before a Division Bench of this court as Writ Appeal No. 806 of 1994. The order of the Company Law Board was challenged by the seventh respondent and another in A. A. O. No. 743 of 1993 and A. A.O. No. 875 of 1994. All these matters were heard and disposed of by a common judgment dated September 27, 1994 ( Malleswara Finance and Investments Co. P. Ltd. v. Company Law Board [1995] 82 Comp Cas 836 (Mad)). At the time when the appeals were be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and omissions subsequent to the judgment in C. P. No. 29 of 1992 and which they made mention of in the judgment in Writ Appeal No. 806 of 1994, and the connected C. M. As. was the subject-matter in C. M. As. Nos. 106 to 109 and 132 of 1996. From the facts stated above, it is clear that though the petitioners had majority shares, they were not allowed to work or manage the company. Everything was controlled by the employees of the ninth respondent who were acting against the interest of the company. That was the matter which was complained of in C. P. No. 44 of 1993 and the complaint was proved. Therefore, all grounds were made out for invoking the powers under section 397 of the Companies Act. Now, we will consider the scope of section 397 of the Companies Act. Section 397 of the said Act reads thus : "Application to Company Law Board for relief in cases of oppression ― (1) Any members of a company who complain that the affairs of the company are being conducted in a manner prejudicial to public interest or in a manner oppressive to any member or members (including any one or more of themselves) may apply to the Company Law Board for an order under this section, pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e only limitation is that the order it makes must be relevant and appropriate to give relief from the matters complained of. The petitioners must state in their petition what orders they wish the court make and a petition will not be heard if it merely asks the court to make an order regulating the company's affairs, or such order as the court thinks just. Without affecting the generality of its power to give whatever relief is appropriate in the circumstances, the new statutory provision empowers the court to make any order it thinks fit regulating the conduct of the company's affairs in future ; to require the company not to do or not to continue doing any act complained of, or to require it to do any act when the petitioner has complained of the company's omission to do it in the past (injunctive and mandatory injunctive relief)." In Rajahmundry Electric Supply Corporation Limited v. A Nageswara Rao [1956] 26 Comp Cas 55 (AP); [1956] 2 An WR 123, the Andhra Pradesh High Court had occasion to consider a corresponding provision of the Indian Companies Act, 1913. Section 153C of the earlier Companies Act corresponds to section 397 of the present Act. In the said decision, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on under section 397 would entitle the court to refrain from investigating into the various charges levelled against the directors. In Gower's Modern Company Law (second edition), at page 513, the scope of section 210 of the English Act which corresponds to section 397 of the (Indian) Companies Act is discussed and referring to the Cohen Report, on which the section in the English Act was based, the learned author says 'that it was the intention that the court should "have power to impose upon the parties whatever settlement the court considers just and equitable". While recognising that the court could not be expected in every case to find and impose a solution it was thought that its discretion must be unfettered for it is impossible to lay down a general guide in the solution of what are essentially individual cases'. Referring to the decision in Antigen Laboratories Ltd., In re [1951] 1 All ER 110 (Ch D), the learned author says 'that it has been held that the petitioner cannot just ask the court to exercise its discretion but must indicate the nature of the relief wanted. This decision though perhaps inevitable seems regrettable and inconsistent with the intention that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder section 397 or 398 read with section 402 for, if these sections confer upon the court jurisdiction and powers of the widest amplitude to pass appropriate orders which the circumstances of the case may require, it would be difficult to accept Mr. Sen's submission that the impugned orders and directions are liable to be set aside on the basis that the reconstituted board or modified article 95 was not in consonance with section 255 of the Act. To correctly appreciate the ambit of the court's jurisdiction and the amplitude of the court's power under sections 397, 398 read with section 402 of the Companies Act, 1956, it will be necessary to consider the entire scheme of the Act pertaining to corporate management of companies. At the outset, it may be stated that all these concerned provisions occur in Part VI of the Act which deals with the management and administration of companies. It may be further pointed out that in this part there are eight chapters. Chapter I contains general provisions with regard to corporate management and administration of the companies such as registered office, register of members and debenture holders, annual returns, meeting and proceedings, account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the powers of the court thereunder cannot be so read. Further, an analysis of the sections contained in Chapter VI of Part VI of the Act will also indicate that the powers of the court under section 397 or 398 read with section 402 cannot be read as being subject to the other provisions contained in sections dealing with usual corporate management of a company in normal circumstances. As stated earlier, Chapter VI deals with the prevention of oppression and mismanagement and the provisions therein have been divided under two heads under head A powers have been conferred upon the court to deal with cases of oppression and mismanagement in a company falling under sections 397 and 398 of the Act while under head B similar powers have been given to the Central Government to deal with cases of oppression and mismanagement in a company but it will be clear that some limitations have been placed on the Government's powers while there are no limitations or restrictions on the court's powers to pass orders that may be required for bringing to an end the oppression or mismanagement in future or to see that the affairs of the company are not being conducted in a manner prejudicial to public ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 397 and 398. Without prejudice to the generality of the powers conferred on the court under these sections, section 402 proceeds to indicate what type of orders the court could pass and clauses ( a ) to ( g ) are clearly illustrative and not exhaustive of the type of such orders. Clauses ( a ) and ( g ) indicate the widest amplitude of the court's power ; under clause ( a ) the court's order may provide for the regulation of the conduct of the company's affairs in future and under clause ( g ) the court's order may provide for any other matter for which in the opinion of the court it is just and equitable that provisions should be made. An examination of the aforesaid sections clearly brings out two aspects, first, the very wide nature of the power conferred on the court and, secondly, the object that is sought to be achieved by the exercise of such power with the result that the only limitation that could be impliedly read on the exercise of the power would be that nexus must exist between the order that may be passed thereunder and the object sought to be achieved by these sections and beyond this limitation which arises by necessary implication it is difficult to read any other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... affairs in future because of oppression or mismanagement that has occurred during the course of normal corporate management, the court must have the power to supplant the entire corporate management or rather corporate mismanagement by resorting to non-corporate management which may take the form of appointing an administrator or a special officer or a committee of advisors, etc., who could be in charge of the affairs of the company. If the court were to have no such power the very object of the section would be defeated. We must observe in fairness to Mr. Sen that it was not disputed by him that powers of the court under section 398 read with section 402 of the Companies Act were wide enough to enable the court to appoint an administrator or a special officer or a committee of advisors for the future management of the company and thereby supplant completely the corporate management through the board of directors and it was conceded that it should be so for the simple reason that if as a result of the corporate management that has been allowed to run for a certain period oppression or mismanagement has resulted, the court should have power to substitute the entire corporate manage ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that is sought to be achieved by the exercise of such power, with the result that the only limitation that could be impliedly read on the exercise of the power would be that nexus must exist between the order that may be passed thereunder and the object sought to be achieved by those sections and beyond this limitation which arises by necessary implication it is difficult to read any other restriction or limitation on the exercise of the court's power." In Rakhra Sports Pvt. Ltd. v. Khraitilal Rakhra [1993] 76 Comp Cas 545 , a Division Bench of the Karnataka High Court, while dealing with the powers of court under section 397 of the Companies Act, had held thus (at page 586) : "Under section 397 of the Companies Act, 1956, the court is empowered to make an order 'as it thinks fit'; similar is the power vested in the court under section 398. Power under section 402 is a power which may be exercised, without prejudice to the generality of the powers of the court under sections 397 and 398, and, therefore, such a power can in no way be of a limited nature. A power to make an order as the court thinks fit would, necessarily comprise within it a power to make an order which is j ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be handed over management and by virtue of the impugned order, the relief that was sought for in Company Petition No. 44 of 1993 is now granted in an interlocutory application. We cannot accept the said argument. At the time when Company Petition No. 44 of 1993 was filed, the extraordinary general meeting was not held and, therefore, that could be the only relief at that time. In view of the subsequent events and that too after the extraordinary general meeting under the guidance of the observer, the only thing that had to be considered was, whether the new directors were duly elected to the board and whether the existing board is to be removed. Company Petition No. 44 of 1993 itself was filed to get management of the company by the majority shareholders and that was the main complaint. We do not find any difficulty in coming to the conclusion that under the provisions of the Companies Act, the Board was legally entitled to and has got the power which it exercised under the impugned order. While exercising the powers under sections 397 and 402 of the Companies Act, the court is considering not only the relief that is sought for, but also considers as to what is the nature of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l for the appellants contended that the application has been filed under rule 44 of the Company Law Board Regulations, 1991. Rule 44 corresponds to section 151 of the Code of Civil Procedure. The contention raised by learned senior counsel is that rule 44 could be invoked only in a pending proceeding and the same cannot be a subject-matter to investigate the rights of parties. It is their case that once an order has been passed in the main application, the Board has ceased to have any power to pass a subsequent order and that too far in excess of the relief that was granted in the main petition. Regulation 44 reads thus : "Saving of inherent power of the Bench. ─Nothing in these rules shall be deemed to limit or otherwise affect the inherent power of the Bench to make such orders as may be necessary for the ends of justice or to prevent abuse of the process of the Bench." The submission of learned senior counsel for the appellants is that the Board has no jurisdiction to entertain Company Application No. 208 of 1994, the reason being that it has already disposed of the main matter and no matter was pending before the Board. Since the application is filed under regulatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expired, and who has consequently no further official authority ; and also to an instrument, power, agency, etc., which has fulfilled the purpose of its creation, and is, therefore, of no further virtue or effect. . ." Further down, it is said thus : "The term has been compared with 'spent'." Taking into consideration the purpose of sections 397 and 402 of the Companies Act, until the matter complained of is fully settled, it cannot be said that the Board has become functus officio. Apart from the meaning which we have given, on the facts of this case, we do not think that learned senior counsel for the appellants will be justified in contending that the Board has become "functus officio". We state the reasons here-under. The very same contention was taken by the appellants when Company Application No. 114 of 1994 was filed by the petitioners in the very same case. The Board rejected that contention. In paragraph 7 of the order in that application, the Board said thus : "In regard to the objection of Shri Singhvi that the Company Law Board has become functus officio after the disposal of the main petition, one of the important aspects to be considered is whether after h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt to the passing of the order. Otherwise, there was no necessity for the Board to give the following directions in their order : "However, at the same time we feel that it is absolutely essential that the proceedings of the EOGM are conducted in a proper manner and we should have independent information as to the conduct of the meeting from an independent source. Accordingly, we appoint Shri B. Bhavani Shankar, former Regional Director, Department of Company Affairs, presently residing at L-11, Paras Apartments, Jeevaratnam Nagar, Adyar, Madras-20, to observe the proceedings of the EOGM whenever the same is held and send us a report within 15 days thereof. He will be paid an honorarium of Rs. 5,000 by the company. We also direct whoever calls the meeting, either the company or on the failure of the company, the requisitionists, to serve a copy of the notice calling for the meeting to the independent observer. The chairman of the meeting is directed to record all the votes polled in favour or against each and every resolution separately memberwise and send a copy of the minutes of the meeting within 15 days from the date of holding the meeting with a copy to the petitioners ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It is also said that the resolution is vague and is not directed against a particular director. Learned senior counsel for the appellants laid emphasis on the words "to remove a director", appearing in various portions of the section in the Act. Learned junior counsel also relied on the decision in Ruttonjee and Co., In re [1970] 40 Comp Cas 491 ; AIR 1969 Cal 550, and took us through the following passage in the said decision (headnote of AIR 1969 Cal 550) : "Assuming that by virtue of section 284 even permanent directors may be removed ; it is to be observed that the power which is given to a company under this section is not an absolute or an unrestricted power. The Legislature has provided for adequate safeguards against arbitrary or unreasonable exercise of this power. To remove a director under section 284 certain essential requirements are to be fulfilled. The director concerned must be given a reasonable opportunity to make representations against the proposal for his removal and the shareholders of the company should also have adequate opportunities of being acquainted with such representations before they subscribe to a resolution for removal. But before a court is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d for. When C. P. No. 44 of 1993 itself is for removal of the board of directors, we do not think that any special notice is required as contemplated under section 284 of the Companies Act. The contention that the resolution is bad and vague was taken at the time when the extraordinary general meeting was held. One of the appellants himself was chairman. After hearing the parties, he permitted voting on that resolution, holding that the resolution is good and valid. The purpose of the resolution itself was to remove the directors appointed after June 1, 1993, and the concerned directors also knew that the resolution was intended against them. When the matter was taken before the Company Law Board, the decision of the chairman was not challenged and this point was never urged before the Board. Only when the decision went against them, an argument is put forward before this court regarding violation of the principles of natural justice. There is also one legal obstacle for the appellants to put forward such a contention. The petitioners can only send the resolution to the company. The receipt of the resolution is admitted. Persons in charge of the company are bound to send a copy ..... X X X X Extracts X X X X X X X X Extracts X X X X
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