TMI Blog2010 (7) TMI 274X X X X Extracts X X X X X X X X Extracts X X X X ..... considered view, there is no grievance in existence for the appellants. The findings of the Company Law Board in the impugned order cannot be either treated as perverse or against the law or that the Company Law Board considered irrelevant materials so as to enable this Court to interfere with the same under section 10F of the Companies Act on the basis of any question of law. The appeals fail and the same are dismissed accordingly. - COMPANY APPEAL NOS. 16 AND 17 OF 2010 - - - Dated:- 19-7-2010 - P. JYOTHIMANI, J. R. Murari for the Appellant. Karthik Seshadri for the Respondent. JUDGMENT 1. These appeals are filed under section 10F of the Companies Act, 1956 against the order of the Company Law Board dated 11-5-2010, by which the Company Law Board allowed the application filed in Econo Valves (P.) Ltd. v. V.L. Sridharan [2010] 156 Comp. Cas. 355 (CLB-Chennai), by respondent Nos. 1 to 3 and consequently dismissed the company petition in C.P. No. 81 of 2009 filed by the appellants. 2. The first respondent-company is a private limited company stated to have been promoted by the appellants having substantial stake as on 13-12-2006. The second ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respondent Nos. 2 to 5 attempted to control the first respondent-company at the exclusion of the first appellant by conducting meeting at Nagpur, outside the place of the first respondent-company which is at Chennai. It is the case of the appellants that in the meeting purported to have been conducted by the above respondents on 21-9-2009, removed the first appellant from all his roles and responsibilities as managing director of the first respondent company by taking away the cheque signing authority and the first appellant s salary was also discontinued from September, 2009. ( e )It is due to the above said conduct, the appellants alleging oppression and mismanagement, filed the company petition under sections 397 and 398 of the Companies Act before the Company Law Board and the Company Law Board on 24-9-2009, granted an order of injunction restraining respondent Nos. 2 to 5 from convening and holding any board meeting without leave of the Board and from taking any steps to amend the articles of association of the first respondent-company without leave of the Board. ( f )Respondent Nos. 1 to 3 filed company application in C.A. No. 112 of 2009 questioning the maintainabilit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eeting held on 10-10-2007, the increased shares to the value of ₹ 1,40,000 were transferred to respondent Nos. 2 and 3, the Company Law Board held that both the appellants jointly held 14,410 shares equivalent to 7.20 per cent while respondent Nos. 2 and 3 held 1,85,590 shares to the extent of 92.80 per cent. Therefore, having found that the appellants jointly have not constituted more than one-tenth of the members of the company, the Company Law Board came to the conclusion that the company petition is not maintainable. 4. The Company Law Board has also found that in the board of directors meeting of the first respondent held on 14-12-2006, it was resolved to approve the transfer effected by the appellants in favour of respondent Nos. 2 and 3 and in the consequent board meeting dated 10-10-2007, it was resolved to allot 1,40,000 equity shares to respondent Nos. 2 and 3 further resolving to authorise the first appellant and respondent No. 5 to make necessary entries in the books of account and in fact, returns were filed by the first appellant and in the annual general body meetings held on 29-9-2007 and 29-9-2008, the first appellant participated in which the shareholdi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is binding on the first respondent-company which fact has been brushed aside by the Company Law Board; that the acts of respondent Nos. 2 to 5 are continuous acts of oppression and misconduct which include removal of the first appellant from the post of director without convening a meeting of the board when the appellants challenged the increase in the authorised share capital; that unless and until the merit of the same is decided, the appellants cannot be thrown out; that the Company Law Board dismissed the company petition at the threshold which is not correct; that the Company Law Board has failed to consider the question of law which is a mixture of law and fact which cannot be decided in the preliminary stage and that as per the judicial precedents, the Company Law Board has no power to decide the matter on preliminary issues. 6. Mr. R. Murari, learned counsel appearing for the appellants on the above said facts would contend that even though the shareholders agreement is not disputed by the appellants, the acts against the shareholders agreement and also against the articles of association in increasing the authorised share capital by which the appellants are said to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n considered for the purpose of eligibility to move a petition under section 397 of the Companies Act as on the date of the shareholders agreement viz., 14-12-2006 and even as per the terms of the said agreement, on the said date, the appellants had more than 10 per cent of interest in the paid-up share capital of the company and it was, only subsequent to the said shareholders agreement, the conduct of oppression by respondent Nos. 2 to 5 was revealed by unauthorised transfer of shares against the provisions of the articles of association, apart from the unauthorised increase of share capital which requires appreciation of evidence and therefore, the decision of the Company Law Board in rejecting the company petition on maintainability has to be set aside. ( e )It is his further submission that under section 10E(4C) of the Companies Act, there are only six instances where the Code of Civil Procedure is applicable and apart from those exhaustive circumstances, it is not open to the Company Law Board to decide anything in the name of maintainability. He has also referred to various Company Law Board Regulations to substantiate his contention. 7. On the other hand, it is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Tribunals and according to him, the Company Law Board should also be construed as a court for limited purpose. ( d )He has also submitted that the powers of the Company Law Board under section 402 are vast and such powers are not ousted in respect of the Company Law Board on reading of Order 14, rule 2 of the Civil Procedure Code. He would insist on the judgment of the Division Bench of this Court in Om Sakthi Renergies Ltd. v. Megatech Control Ltd. [2006] 2 CTC 161 and the judgment of the Supreme Court in ITI Ltd. v. Siemens Public Communications Network Ltd. [2002] 5 SCC 510 2 ; and the order of the Company Law Board in Morgan Ventures Ltd. v. Blue Coast Hotels Resorts Ltd. [2010] 155 Comp. Cas. 431 3 (CLB - New Delhi) to assert his stand that the Company Law Board s powers are vast. It is his submission that inasmuch as the appellants have not questioned the transfer which was effected and the transfer itself is in the individual capacity of the appellants, it cannot be termed as the affairs of the company. ( e )It is his submission that the validity or otherwise of the transfer can be questioned by the appellants in a different forum. He would submit th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ade in the company petition filed by the appellants show that as per the said agreements dated 14-12-2006, the appellants transferred 45,600 shares out of 60,000 equity shares of the company to the second and third respondents and that constituted 76 per cent of the total number of shares of the first respon- dent-company, and it is also not in dispute that they executed necessary instrument for transferring such shares as per the provisions of the Companies Act. 11. After such transfer, the second and third respondents were holding 76 per cent of stake in the first respondent-company, while the appellants were having 24 per cent stake. It is seen that pursuant to the said two agreements, on 14-12-2006, viz., the date of agreements, the second and the third respondents waived ₹ 15 million and ₹ 5 million respectively under the shareholders agreement and the agreement for sale of technical process for manufacture of plug valves and various other types of valves. As stated above, for the balance amount, the appellants approached this court by filing the application under section 9 of the Arbitration and Conciliation Act. 12. It is stated by the second and thir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is stated in the company petition that the balance amount of ₹ 1.50 crores was payable on 31-3-2008, 31-3-2009 and 31-3-2010 at ₹ 50 lakhs, ₹ 25 lakhs and ₹ 75 lakhs respectively. It is also specifically admitted in the company petition filed by the appellants that they agreed in the extraordinary general meeting held on 4-2-2007 for increasing the authorised share capital from ₹ 1 crore to ₹ 2 crores, and allotment was made to respondent Nos. 2 and 3 in the resolution dated 10-10-2007. However, the appellants have chosen to state that they have not agreed for the increase of such shares and it is an unilateral increase of shares, even though it is stated that respondent Nos. 2 to 5 have given certain assurance that the appellants interest in the company would be taken care of and therefore, they have agreed. 15. There are other averments in the company petition which are relating to the conduct of respondent No. 5. It is specifically stated in the company petition that the appellants have agreed to transfer their shares in the first respondent-company on the bona fide belief that the same could be adhered to its obligation in letter and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The major relief is based on the allegation of fraud, deceit and oppression against respondent Nos. 2 to 5 to the shareholders of the company in general and the appellants in particular. Therefore, on the broad analysis, it is clear that admittedly on the date of presentation of the company petition by the appellants before the Company Law Board under sections 397 and 398 of the Companies Act, the shareholding pattern of the appellants jointly was not more than 7.20 per cent of the share capital of the first respondent-company. It is also not in dispute that before the transfer and further allotment of shares on 14-12-2006 and 10-10-2007 respectively, the appellants jointly were holding 24 per cent of shareholdings. 17. It is, in those circumstances, the Company Law Board took note of the averments made by the appellants in the company petition that out of four members of the first respondent-company, the appellants were two, apart from respondent Nos. 2 and 3 who were holding major shares. Having found that it is not true as per the details of members furnished in the annual return of the company up to 30-9-2006 that besides the appellants there were 31 other members in the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions 397 and 398 was presented by the appellants. There was a further allegation of mala fide and fraud against the majority and based on the earlier resolution dated 20-12-1995, by which time the first appellant was holding the post of managing director, a meeting was convened on 9-3-1996 after removal of the first appellant in which 455 numbers of preference shares in the company were redeemed and 245 numbers of equity shares of ₹ 1,000 each were allotted in favour of the second respondent. When that petition was resisted by the respondents on the ground that the appellants ceased to be the directors of the company as per the procedure adopted by the respondents and in the manner known to law, there arose an issue of maintainability of the company petition. The Company Law Board dismissed the petition as not maintainable on the ground that after 9-3-1996, by virtue of redemption process which was held to be valid, the appellants especially the first appellant, who was the managing director of the company on 28-12-1995, were held to have no locus standi. It was in that context, the Division Bench held as follows (page 428 of 151 Comp. Cas.) :- 32. The reasoning give ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in issue of oppression and mismanagement which requires appreciation of evidence, certainly the company petition cannot be thrown out on the ground of maintainability. 20. While construing the term, member , as defined under section 2(27) of the Companies Act and also as defined in section 41 of the Act which provides for a deemed member who is a subscriber to the memorandum and on registration, entitled to be a member and other persons who are entered in the register of members, in the context of sections 397 and 398 of the Companies Act, the Supreme Court in World Wide Agencies (P.) Ltd. v. Mrs. Margaret T. Desor [1990] 67 Comp. Cas. 607, rejected the contention that the term member in the context of sections 397 and 398 of the Companies Act has to be strictly construed and held as follows (page 612 of 67 Comp. Cas.) :- On behalf of the appellants, it was contended that the right which is a specific statutory right, is given only to a member of the company and until and unless one is a member of the company, there is no right to maintain an application under section 397 of the Act. Mr. Nariman contended that there was no automatic transmission of shares, in the ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... risdiction of the court. 23. By referring to various judgments, I had an occasion to deal with the said issue in S.V.T. Spg. Mills (P.) Ltd. s case ( supra ). That was a case where the Company Law Board held that the complaint of a person that his name has not been duly registered in the list of members of the company has to be decided along with the main petition and therefore, rejected the claim that the company petition itself has to be dismissed on the ground of maintainability. In such situation, I held as follows (page 249 of 151 Comp. Cas.) :- The applicability of sections 397 and 398 of the Companies Act is an equitable jurisdiction which is intended to protect the minority members of the company from any oppression and mismanagement at the hands of the majority members. It is in that background, the Supreme Court has held that the wider meaning of the term member should be given in the context of sections 397 and 398 of the Companies Act. On the facts and circumstances of the case, especially in the circumstance that the respondents filed a composite application, viz., the company petition seeking reliefs including the issuance of duplicate share certificate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tuation. 26. If it is the case of the appellants that on the date of complaining oppression, the appellants were competent to maintain the company petition under section 397 of the Companies Act, as per the requirements of section 399(1) and majority of shares was sought to be taken away by way of oppression or mismanagement resulting of which the shareholding of the appellants was reduced, certainly the question of maintainability cannot be decided to throw away the case of such persons without deciding the merits of the matter. But, astonishingly on the facts of the present case, admittedly the resolution was passed in the presence of the first appellant who was holding the post of the managing director at that time on 10-10-2007 for further allotment of shares in favour of respondents and the appellants agreed by resolution to transfer the shares pursuant to the further increase of share capital. After following the statutory requirements on the basis of the agreements entered into between the appellants and respondent Nos. 2 and 3 in respect of transfer of shares and receiving a part of the sale consideration and on the basis that further consideration was not paid as per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , it is necessary to extract section 10E of the Act which is as follows :- 10E. Constitution of Board of Company Law Administration. -(1) As soon as may be after the commencement of the Companies (Amendment) Act, 1988, the Central Government shall, by notification in the Official Gazette, constitute a Board to be called the Board of Company Law Administration. (1A) The Company Law Board shall exercise and discharge such powers and functions as may be conferred on it, by or under this Act or any other law, and shall also exercise and discharge such other powers and functions of the Central Government under this Act or any other law as may be conferred on it by the Central Government, by notification in the Official Gazette under the provisions of this Act or that other law. (2) The Company Law Board shall consist of such number of members, not exceeding [nine], as the Central Government deems fit, to be appointed by that Government by notification in the Official Gazette : Provided that the Central Government may, by notification in the Official Gazette, continue the appointment of the chairman or any other member of the Company Law Board functioning as such immediat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... going provisions of this section, the Company Law Board shall have power to regulate its own procedure. 29. The contention of learned counsel for the appellants is that when section 10E(4C) only categorises certain circumstances in giving the power of a court under the Civil Procedure Code, it should be presumed that the other provisions of the Code of Civil Procedure are excluded and therefore, the Company Law Board is not having the power to decide the question of maintainability of the company petition. It is his submission that the principles of natural justice and the discretion that has been contemplated under section 10E(5) of the Act on the Company Law Board must be in consonance with section 10E(4C) and in accordance with the Companies Act and therefore, the discretion cannot be exercised by the Company Law Board for holding a company petition as not maintainable without going into the merits of the matter. 30. To substantiate his contention, he would rely upon the judgment of the Andhra Pradesh High Court decided in Company Appeal Nos. 19 and 20 of 2005 by judgment dated 3-7-2009, B. Subba Reddy s case ( supra ). A reference to the facts of the said case show ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4. The contentious issue in these two appeals is whether the Company Law Board is vested with the power to entertain applications to decide preliminary issues. It is no gainsaying that the Company Law Board is a creature of a statute under section 10E of the Companies Act. Its proceedings are governed by the regulations made by the Company Law Board under section 10E(6) of the Companies Act. These regulations known as Company Law Board Regulations, 1991 (hereafter called the Regulations ), promulgated by the Company Law Board do not contain any regulation, which specifically confer power on the Company Law Board to decide preliminary issues. The respondent filed an interlocutory application under regulation 44 of the Regulations, which in the considered opinion of this court does not even remotely suggest that the power to decide preliminary issues inheres in the Company Law Board. 5. Section 10E(4C) of the Companies Act is to the effect that every Bench of the Company Law Board shall have powers which are vested in a court under the Code of Civil Procedure, 1908 (CPC), while trying a suit in respect of only the following matters : ( a ) discovery and inspection of documents, ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctions, temporary or permanent, do not inhere in the Commission nor can such a power be inferred or derived from a reading of clause (8) of article 338 of the Constitution. 7. Learned counsel for the respondents have not placed before this court any provision of Companies Act or Regulations (except regulation 44) which confers the power on the Company Law Board to decide the preliminary issues as per Order XIV, rule 2 of the CPC. It must, therefore, be held that the Company Law Board has no power to decide preliminary issues nor can exercise powers under CPC other than those conferred under section 10E(4C) of the Companies Act. 31. On a careful consideration of the findings of the learned Judge in the above said case, I am of the considered view that the reasonings contained therein cannot be applicable to the case on hand, for more than one reason. First of all, when admittedly the court or Company Law Board is entitled to decide as to the act of oppression and mismanagement complained of as per sections 397 and 398 of the Companies Act, in my considered view, to decide at the first instance as to the competence of a person to file such petition and that decision is depe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t exercised its discretion in a proper manner, in my considered view, it is not possible to accept the contention of learned counsel for the appellants Mr. Murari that as per the judgment of the Andhra Pradesh High Court, these appeals have to be allowed. With great respect, I disagree, with the findings of the learned Judge in the above said judgment. 33. Further, while dealing with the petition under sections 397 and 398 of the Act, the power of the Company Law Board, as contained in section 402 of the Act, is on just and equitable ground, in the opinion of the Board. One other aspect which has to be remembered in this case is that it is not as if by holding that the company petition filed by the appellants as not maintainable, the jurisdiction of the Company Law Board in dealing with such situation afresh if the appellants are able to succeed in their efforts in invalidating the transfer of shares and thereafter obtaining the right to maintain an application under sections 397 and 398 of the Act as required under section 399(1) of,the Act by way of fresh application, inasmuch as there is no ouster of jurisdiction of the Company Law Board by the impugned order passed by it, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d share capital which would include preference shares and therefore, the shareholdings claimed by the petitioners who moved the petition under sections 397 and 398 of the Companies Act did not amount to 10 per cent of such total. It was on that basis, while referring to various case laws on the subject, the Supreme Court made the above said observation. In any event, the issue involved in the present case cannot be said to be technical. Apart from want of right on the part of the appellants in maintaining the petition under sections 397 and 398 of the Act, the very conduct of the appellants in approaching the court under section 9 of the Arbitration and Conciliation Act, 1996 for preserving their right pending arbitration proceedings regarding the dispute under the said agreements dated 14-12-2006, clearly shows the interest of the appellants to enforce the said agreements. 36. While dealing with section 111 of the Companies Act, 1956, as it stood then, where, as against the refusal of the company to register transfer of shares, an appeal was provided to the Central Government, which power has subsequently been vested with the Company Law Board and of course, to the Tribunal, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sfer was subsequently changed, this intention was affirmed at the board meeting of Kerala Kaumudi held on April 23, 1985. The fifth and sixth resolutions as appearing in the minutes of the meeting [exhibit P62( b )] which were also signed by Mani read as under : Sri M.S. Mani Letter of resignation from the direct directorship of Kerala Kaumudi (P.) Ltd. effective from April 23, 1985, afternoon submitted by Sri M.S. Mani was approved by the board. (6) Shares owned by Sri M.S. Mani and family in Kerala Kaumudi (P.) Ltd. Shares owned by Sri M.S. Mani and family in Kerala Kaumudi (P.) Ltd. will be transferred to Sri M.S. Madhusoodhanan forthwith on a consideration to be mutually agreed between the transferor and the transferee. The liabilities of Sri M.S. Mani to the Income-tax Department, etc., up to March 31, 1985 should be settled by Kerala Kaumudi (P.) Ltd. before finally deciding a consideration for the share transfer. The Kerala Kaumudi (P.) Ltd. undertakes to discharge the liabilities arising on account of personal guarantees given by Sri M. S. Mani for the company . [Emphasiss spplied] 37. By referring to various judgments and passages from Hallsbury, the S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Bench presided over by A.P. Shah, CJ. (as he then was) in Om Sakthi Renergies Ltd. s case ( supra ) held as follows :- 12. It is also required to be noted that this is not a case of lack of territorial jurisdiction, but only a waiver of a contractual clause. If a party allows the trial court to proceed to judgment without raising the objection as to the place of suing and takes a change of verdict in his favour, he clearly waives the objection and will not subsequently be permitted to raise. The present proceedings under section 9 are in effect final proceedings. The objection to the jurisdiction though taken before the trial court should have been pressed to its normal and failure to do so would amount to waiver as per section 21 of the Code of Civil Procedure, it is true that section 21 of the Civil Procedure Code is not specifically made applicable to the proceedings arising under the Act, but there in no express prohibition against the application of the Code to the proceedings arising out of the Act before the civil court. In ITI Ltd. v. Siemens Public Communications Network Ltd. [2002] 5 SCC 510 : AIR 2002 SC 2308 : [2002] 2 CTC 620, a two Judge Bench of the Supre ..... X X X X Extracts X X X X X X X X Extracts X X X X
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