9911796707
TMI Blog2009 (2) TMI 469X X X X Extracts X X X X X X X X Extracts X X X X ..... he company as a special business was proposing to pass a resolution under section 81(1A) of the Companies Act, 1956 (hereafter the Act) for issue and allotment of 1,32,000 equity shares of Rs. 10 each on a preferential basis to the promoters, viz. Hindusthan Composites Limited (defendant No. 2) and M/s. J.L. Morrison (India) Limited (defendant No. 3) out of un-issued authorized share capital; that the explanatory statement attached to the notice of the Annual General Meeting under section 173 of the Act revealed the object of issuing the said shares on preferential basis to the defendants 2 and 3 which, purportedly, was to augment the capital of the company and retire certain debts, to improve its Debt Equity Ratio; that from the explanatory statement it was also evident that the Debt Equity Ratio of the company was not favourable to obtain additional financial assistance from banks as it had huge borrowings; that the notice of the Annual General Meeting of the company and the explanatory statement under section 173 of the Act are tricky inasmuch as sub-section (3) of section 173 thereof had not been complied with; that on 18-9-2006, the plaintiff had a meeting, inter alia, with th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ainst such high-handed action on the part of the Chairman in postponing the poll without adjourning the meeting but to no avail; and that on the following day, the plaintiff attended the poll at the registered office of the company when, however, the resolution was passed although gross irregularities in conducting the polling on 26-9-2006 were noticed. According to him, some of the shareholders of the company had not been allowed to cast their votes by the management of the company being respondent Nos. 4 to 11 on one pretext or the other while a number of votes cast against the resolution were rejected on flimsy grounds. 3. Feeling aggrieved by the resolution adopted by the company under Agenda item No. 6 of notice of Annual General Meeting dated 24-7-2006 for allotment of 1,32,000 equity shares in favour of respondents 2 and 3 on a preferential basis purportedly approved at the Annual General Meeting of the company held on 25-9-2006, the plaintiff instituted the suit on 11-10-2006 before this Court upon obtaining leave from Court under Order 1 Rule 8 of the Code of Civil Procedure. He prayed for a declaration that such agenda item together with the resolution adopted are illega ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith the rider that he would not act as the Chairperson but would be in charge of overall supervision of the Annual General Meeting, as and when held. Appeal preferred against such order was disposed of on 26-9-2007 with a slight modification, reference to which is considered unnecessary at this stage. 7. After an advertisement was published by the plaintiff upon obtaining leave from the Trial Court, applications praying leave for being added as parties to the suit had been taken out by various shareholders on or about 17-11-2006. By an order dated 26-6-2008, the Trial Court allowed the applications of four shareholders who were added as parties to the suit. 8. The interlocutory applications being G.A. No. 3253 of 2006, G.A. No. 3509 of 2006 and G.A. No. 2973 of 2007 were then heard on contest. By reason of the impugned judgment and order, G.A. No. 2973 of 2008 was held to have worked itself out and disposed of as such while the applications of the plaintiff being G.A. No. 3253 of 2006 and G.A. No. 3509 of 2006 were dismissed. The Trial Court, however, stayed the order for two weeks. 9. On hearing the applications for stay filed in connection with the three appeals, the order of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... djourned Annual General Meeting and no reason had been cited by him to conduct the poll on the next day. The intention was clear, overwhelming majority of shareholders who were present on 25-9-2006 were sought to be kept away from taking part in the meeting either by way of debate or by way of vote. While at the Annual General Meeting 365 shareholders were either present or represented, only 46 shareholders were represented at the adjourned Annual General Meeting which represents a reduction in attendance by 87 per cent. A meeting could be adjourned by the Chairman for the purpose of giving the shareholders a reasonable opportunity to debate or vote on a resolution but the Chairman in the present case had not exercised his power to adjourn a meeting validly and hence proceedings purportedly conducted at the adjourned Annual General Meeting are invalid and of no effect. Reliance in this connection was placed on the decision reported in Byng v. London Life Association Ltd. [1989] 1 All ER 560. Adjournment of the Annual General Meeting on 25-9-2006 was thus illegal because it deprived a vast majority of shareholders to cast vote. (iii)The polling that was conducted on 26-9-2006 was a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g and such action is contrary to Article 65 of the Articles of Association of the Company and, therefore, void. The Chairman of the Annual General Meeting could not have nominated another person to chair the adjourned Annual General Meeting. By referring to the decision of the Apex Court reported in Sangramsinh P. Gaekwad v. Shantadevi P. Gaekwad [2005] 57 SCL 476 through, it was contended that any action in violation of the Articles of Association ought to be declared void. (v)By unlawful issuance of preference shares there has been a breach of fiduciary duties. The power to issue shares was exercised for the purpose of strengthening and consolidating the power of the group of promoters of the company, viz., the defendants 2 and 3. This was an improper purpose and necessitates setting aside of the issue. Power to issue shares is a fiduciary power to be exercised for the proper purpose of enabling capital to be raised when required. Such power is to be exercised bona fide for the benefit of the company when it is in need of further capital. However, such power may not be exercised by a group of promoters or Board of Directors merely for the purpose of maintaining control over the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wering the contention raised on behalf of the plaintiff that the Chairman of the Annual General Meeting could not have nominated a Chairman for conducting the poll and that there has been breach of Article 65 of the Articles of Association of the company, he firstly submitted that this is a point which has neither been averred in the pleadings before the Trial Court nor was it argued before it and, therefore, ought not to be considered and secondly, the terms of the said Article would have no application on facts of the case. Quite apart, if any objection had been raised on the floor the Chairman may not have nominated somebody else. The action of the Chairman, in the circumstances, cannot thus be branded unfair. 16. The point that Teji Mandi and Jemco were unlawfully prevented from casting votes was sought to be countered by him by referring to the relevant discussion in the Trial Court's judgment. He submitted that nowhere had the Trial Court accepted that the four corporate shareholders' valid votes had been wrongfully rejected, as urged on behalf of the plaintiff. On the contrary, the issue was not finally decided and a contention has been raised on incorrect appreciation of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry if the injunction granted earlier is discontinued. He, accordingly, prayed for dismissal of the appeals. 19. We have heard learned Counsel for the parties and perused the materials on record. We have also examined the judgment and order under appeal. 20. The suit is founded on a grievance that power to issue and allot 1,32,000 equity shares in favour of the defendants 2 and 3 on a preferential basis has been exercised by the Directors of the company not for its benefit but to benefit the promoters group. It is also the grievance of the plaintiff that such issue and allotment of shares on a preferential basis in favour of the defendants 2 and 3 is wrongful and illegal being the consequence of unfair conduct and dealings. Serious objection has been raised in respect of postponing the poll on the date the Annual General Meeting was fixed and the manner in which polling was conducted on the following day. The grounds based whereon the impugned action has been branded wrongful and illegal have been noticed above. It would thus be our endeavour to examine the points raised and to determine whether the plaintiff is entitled to have the injunction continued on the basis of the materia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... records. In view thereof, we have no other option but to hold that the finding arrived at by the Trial Court that the second authorization does not find place in the bunch of documents relating to the voting does not call for any interference. 23. This finding of the Trial Court also finds support from two documents to which we shall presently refer. In response to a letter of Teji Mandi dated 26-9-2006, letter dated 12-10-2006 was issued on behalf of the company by its Advocate, being part of Annexure-C to the application filed by Teji Mandi. Therein, it was specifically mentioned that "no authority in respect of Mr. Raj Kumar More to act on behalf of Teji Mandi .......has been lodged with our client". In its reply letter dated 16-10-2006 although Teji Mandi referred to an authorization given to More to represent it, no specific case has been made out therein that the same was duly lodged by him prior to exercise of the right to vote. All that has been said therein is that More was not allowed to exercise voting rights on behalf of Teji Mandi. In paragraph 8 of its application for being added as a party in the suit, it was claimed that "More attended the balloting equipped with t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... against the resolution was rightly excluded and, therefore, any defect in excluding the votes of the other four shareholders comprising 2.2 per cent of the shareholders would not have made any difference in the ultimate analysis. 26. Prima facie, we find no reason to hold that by not allowing Teji Mandi and Jemco to vote, they have been deprived of something which they were entitled to in law. 27. Next, we proceed to consider the point raised by the plaintiff that the explanatory statement was tricky and misleading. It appears from the judgment under appeal that the Trial Court, prima facie, did not find the contention having any merit. We too have perused the explanatory statement. It records that the Vanaspati Industry has been going through a difficult phase due to dumping of Vanaspati from the neighbouring countries; that in order to overcome the situation, production levels have to be increased for which the company is in need of fresh funds; the Debt Equity Ratio of the company is not favourable to obtain additional financial assistance from banks since the company has huge borrowings; and that the company intends to augment its capital and retire certain debts to improve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the meeting to regulate the proceedings so as to give all persons entitled to vote a reasonable opportunity. While it requires no argument to establish that the Chairman of a meeting has the discretion to either adjourn a meeting or to postpone voting, such power has to be exercised on the existence of reasonable grounds and on being satisfied that prevailing circumstances do warrant exercising the power to postpone. When discretion is wide enough, it is imperative that discretion is exercised in such manner that it may not give an impression of arbitrariness or being moved by ulterior criteria, and when exercised, a discernible principle satisfying the test of reasonableness and fairness must emerge from the action impugned. The person/authority exercising discretion is accountable for his action. When challenged, the impugned action has to be tested on the anvil of fairness or justice particularly when competing interests of members of society are involved. Exercise of discretion thus would be vitiated if the action were bereft of rationality, lacks objective and purposive approach. It must be exercised within the limit to which an honest man competent to the discharge of his of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9-2006 was attended by 365 shareholders is not in dispute. In sharp contrast, only 46 were present on the date polling was actually held. Out of 9 votes that had been rejected, 6 had voted against the resolution. The contention of the plaintiff that had a poll been conducted on 25-9-2006 itself, the resolution would have been defeated and that to avoid the resolution being defeated polling was postponed till the following day, in our prima facie opinion, has substantial merit. The minutes of the proceedings of the Annual General Meeting in question does not record the reason as to why the Chairman decided to conduct polling on the resolution on the following day. It appears to us that the reason cited in the counter affidavit (of prior arrangements for polling not having been made) is nothing but a subterfuge to anyhow justify postponement of polling. In our view, the conduct of the Chairman in postponing the poll to the following day does not pass the test of fairness and reasonableness. That the original meeting was conducted unfairly is writ large. The plaintiff himself having threatened to demand a poll a week before holding of the Annual General Meeting if resolution No. 6 was ..... X X X X Extracts X X X X X X X X Extracts X X X X
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