TMI Blog2008 (4) TMI 505X X X X Extracts X X X X X X X X Extracts X X X X ..... O, J. V.B. Nadkarni, M.S. Sonak and P.S. Rao for the Appellant. U.K. Chowdhari, Rahul Srivastava, Savrabh Kalia, S.G. Dessai and Shivan Dessai for the Respondent. ORDER 1. Challenge in this appeal, filed under section 10F of the Companies Act, 1956 (Act, for short) is to the Order dated 3-5-2007 of the Company Law Board (CLB, for short), Principal Bench at New Delhi by which the appellant s petition filed under section 397/398 of the Act has been rejected, holding that the appellant did not qualify to file the said petition in terms of section 399 of the Act as the appellant held less than 1/10 of the "issued share capital". 2. Some undisputed facts are required to be stated to dispose off the appeal. 3. The Respondent-company was first incorporated on 27-7-1992 and after it changed its name several times, it is now registered in its present name, having its registered office at Arossim, Cansaulim, Goa. 4. The Appellant is a company incorporated on 4-3-1983 having its registered office at 6, Old Post Office Street, 4th Floor, Kolkata-700 001. 5. The authorized capital of the Respondent (company, for short) is Rs. 100,00,00,000 (Rs. One Hun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 1/10th allotted share capital of the company. That was in brief the controversy before the CLB which came to be decided against the appellant. 10. The case of the appellant, in brief, was that the said cumulative preference shares were issued by the company with the sole objective of diminishing the voting rights available to the appellant and other equity shareholders of the company to virtually nil and with a view to usurp more than 90 per cent of voting rights to the detriment of the appellant and other shareholders. As per the appellant, the same also violated the provisions of SEBI (Substantial Acquisition and Takeover) Regulations, 1977 in that, by virtue thereof the Promoters/Directors held more than 55 per cent of the voting rights in the company without complying with the requirements specified under the said Regulations. In fact the proviso to Regulation 11 of the said Regulations stipulates that "no acquirer shall acquire shares or voting rights, through market purchases and preferential allotment pursuant to a resolution passed under section 81 of the Companies Act, 1956 or any other applicable law, which (taken together with shares or voting rights, if any, hel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 13. I have heard the learned Senior Counsel appearing on behalf of the parties at length. 14. The object behind the provisions of sections 397, 398 has been set out in Mohanlal Ganpatram v. Shri Sayaji Jubilee Cotton Jute Mills Co. Ltd. AIR 1965 Guj. 96 on which extensive reliance has been placed on behalf of the appellant, and it has been stated by the learned Single Judge of that Court that sections 397 and 398 are part of a fasciculus of sections commencing from section 397 and ending with section 407 and this fasciculus of sections occurs in section A dealing with Powers of Court under Chapter VI headed "Prevention of Oppression and Mismanagement". Under section 397 any member of a company who complains that the affairs of the company are being conducted in a manner oppressive to any member or members including any one or more of themselves, may petition the Court which, if satisfied that the company s affairs are being conducted in a manner oppressive to any member or members and that the facts justify the making of a winding up order on the ground that it is just and equitable to do so but that this would unfairly prejudice such member or members, may make such ord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng to the true intent of the makers of the Act, probono publico . Now Mr. S.B. Vakil is certainly right in his submission that sections 397 and 398 being designed to suppress an acknowledged mischief, they should receive liberal interpretation and the Court should give such construction as will advance the remedy, but even applying this principle of interpretation, it is not possible to accept the construction contended for on behalf of the petitioners. 15. It has also been stated in the aforesaid decision that the object and purpose of the remedy was to cure the mischief of oppression or mismanagement on the part of controlling shareholders by bringing to an end such oppression or mismanagement so that it does not continue in future. The remedy was intended to put an end to a continuing state of affairs and not to afford compensation to the aggrieved shareholders in respect of acts already done which were no longer continuing wrongs. Sections 397 and 398 thus clearly postulate that there must be at the date of the application a continuing course of conduct of the affairs of the company which is oppressive to any shareholder or shareholders or prejudicial to the interests of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... share capital which can only mean legally, valid issued share capital and certainly not inclusive of any share capital, which is ab initio null and void and which consequently necessarily will have to be ignored for the purpose of calculating the percentage thereof as postulated in section 399 of the Act. According to the appellant, the requirement of 10 per cent of issued share capital , even assuming without conceding includes both kinds of share capital namely the equity share capital and preference share capital it has necessarily to be 10 per cent of the validly issued total of the two kinds of the share capital and after applying the aforesaid tests and in case the issue of 41,50,000 preference shares is held to be void and consequently ignored, the appellants will be eligible to maintain the petition under section 397/398 of the Act as its percentage of holding would be 14.70 per cent of the validly issued share capital of the company. 18. On behalf of the appellant, it is therefore submitted that the impugned order be set aside and the matter be remitted to the Company Law Board to give its decision whether 41,50,000 preference shares are null and void in view of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to a sense analogous to a less general. It was further held that expressed differently, it means that, the meaning of a doubtful word may be ascertained by reference to the meaning of words associated with it. In Norman J. Hamilton ( supra ) this Court was dealing with the expression securities as defined under section 2( h ) of Securities Contracts (Regulation) Act, 1956. Securities were defined to include ( i ) shares, scripts, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate; ( ii ) Government securities, and ( iii ) rights or interests in securities. This Court referred to the judgment of the Apex Court in State of Bombay ( supra ) and applying the doctrine of Noscitur a Sociis held that it was permissible to read the definition of securities so that it applies to only securities which are marketable, that is to say, those securities which enjoy a high degree of liquidity and can be freely bought and sold in the open market. At the cost of repetition, it may be reiterated that the doctrine of Noscitur a Sociis means that, when two or more words which are susceptible ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is a horse, donkey or an elephant. In other words, the literal rule of interpretation simply means that we mean what we say and we say what we mean. If we do not follow the literal rule of interpretation, social life will become impossible, and we will not understand each other. If we say that a certain object is a book, then we mean it is a book. If we say it is a book, but we mean it is a horse, table or an elephant, then we will not be able to communicate with each other. Life will become impossible. Hence, the meaning of the literal rule of interpretation is simply that we mean what we say and we say what we mean. On the same aspect reliance has been placed on behalf of the company on some other judgments to which no reference is required to be made. As per the Company the expression issued share capital would mean issued capital which would include equity and preference share capital and not otherwise. Hence, the word issued share capital cannot be read or understood as issued equity share capital to the expression issued share capital . 24. In my view, there is absolutely no scope for applying the rule of Noscitur a Sociis in interpreting the expression issue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pt the contention raised on behalf of the appellant that there is no explicit intrinsic clue to suggest that the issued share capital would be total of the two kinds of share capital. Such clue can be now found in section 86 of the Act which with effect from 13-12-2000 provides that the share capital of a company, limited by shares shall be of two kinds only, namely ( a ) equity share capital and ( b ) preference share capital. Preference shares, as their name implies, carry some preferential rights in relation to other class of shares, namely, equity shares. There must be two kinds of shares for one to be preference. This class is given preferential treatment over the other. Section 86 of the Act deals with kinds of share capital and sub-section (1) of section 86 defines preference share capital and sub-section (2) defines equity share capital. Sub-section (1)( a ) of section 87 of the Act deals with voting rights of equity shareholders and sub-section (2)( b ) deals with voting rights of equity shareholders and sub-section (2)( b ) deals with voting rights of preference shareholders. Having regard to the provisions of sections 85, 86 and 87 of the Act, the expression issued shar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have so far been allotted to shareholders, and it follows, of course, that the difference between the Company s nominal and issued capital is its unissued capital. Company Law by Robert R. Pennington. In the second treatise it is stated : 30.2 Nominal Capital. Every Company Limited by shares or limited by guarantee and having a share capital is required to have a nominal capital with which it is registered. This is one of the essential features of the Company s Constitution and must be stated in the memorandum of association. It is equal to the nominal value of shares which the directors are authorized to issue (hence the term authorized capita ). The nominal capital may be increased above or reduced below, the figure stated in the memorandum. 30.3 Issued Capital. The nominal capital in its original or altered form sets the limit of capital available for issue, and accordingly the issued capital of a company can never exceed its nominal capital. The nominal capital is, strictly speaking not capital at all since, as we have seen, it is only an authority by the shareholders to the directors to create new capital by the issue of shares. The issued capital, on the other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess transaction in the market and thus it covers the third category of equity shareholders who are neither subscribers as contemplated by sub-section (1) nor whose names are entered in the register of members as contemplated under sub-section (2) of section 41. Sub-section (3) of section 41 is therefore only in addition to section 41(1) and section 41(2) and not in derogation or substitution of the first two sub-sections. It appears that the word shareholder and member is used in the same connotation under the Act, as rightly submitted on behalf of the Company. 30. From the aforesaid discussion, and from whatever angle one looks at the expression issued share capital of the Company it is very clear that the expression issued share capital can only refer to the preference share capital as well as equity share capital of the Company and the appellant was required to hold one-tenth of the total of this issued share capital before he became eligible to maintain a petition under section 397/398 of the Act. The appellant at no time held more than 2.01 per cent of issued share capital. It did not have it when it became a member or shareholder. It did not have the requisite per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontended on behalf of the Respondents that the allotment of preference shares is legally valid and not violative of the said Regulations. It is further contended that the voting right on the preference shares have accrued to the preference shareholders by operation of law i.e., in view of the provisions of section 87(2)( b ) of the Act which specifically provides that in case the company does not pay the dividend for 2 consecutive years, the preference shares will have voting rights. 33. It is not necessary for this Court to enter into this controversy since the submissions in this regard are on the merits of the case which are required to be decided, at the first instance by the CLB. Past actions are bound to produce future reactions. Prima facie, the consistent view held by the CLB that past and concluded transactions cannot be impugned in a petition under section 397/398 appears to be correct. A view to the contrary can create havoc into running of the companies. 34. Similarly, the view held by the learned CLB that in the case of Mega Resources ( supra ) was not applicable to the facts of the case also appears to be correct. The Company has assailed the validity of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on under section 399 of the Act. 35. Lastly, it must be noted that there was no dispute at all as to facts and being so the CLB was certainly entitled to dispose of the petition on the preliminary issue of law i.e., on the maintainability of the petition. Hence the observations of the Gujarat High Court in Saurashtra Cement Chemicals Industries Ltd. v. Esma Industries (P.) Ltd. [1990] 69 Comp. Cas. 372 are inapplicable to the facts of this case. To the same effect in the case of Rajkumar Devraj v. Jai Mahal Hotels (P.) Ltd. [2006] 134 Comp. Cas. 405 2 (CLB - New Delhi). There cannot be quarrel with the proposition of law stated by the Apex Court in Exphar S.A. v. Eupharma Laboratories Ltd. AIR 2004 SC 1682 and Scientific Instrument Co. Ltd. v. Rajendra Prasad [1999] 95 Comp. Cas. 615 3 (All.) which are otherwise is inapplicable to the facts of this case. In Exphar S.A. s case ( supra ) the Apex Court stated that when an objection to jurisdiction is raised by way of demurrer and not at the trial, the objection must proceed on the basis that the facts as pleaded by the initiator of the impugned proceedings are true. The submission in order to succeed must ..... X X X X Extracts X X X X X X X X Extracts X X X X
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