TMI Blog2013 (5) TMI 518X X X X Extracts X X X X X X X X Extracts X X X X ..... ase of the appellant as well as HVL is that the said section applies in the event there is an arrangement or agreement between two companies but so far as investment in mutual fund is concerned, the agreement or contract is between the appellant and the mutual fund and subclause (6) of Section 299 of the Act also does not apply as HVL does not hold two per cent or more of the share capital of both the companies. So far as this issue is concerned, again the matter has to be remanded to the CLB for further consideration as CLB does not appear to have had examined applicability of the aforesaid provision in detail. So far as the transactions themselves are concerned, mere involvement of the company in CBLO or MIBOR linked debentures or investment in mutual funds through the two finance companies per se would not warrant an order or investigation. It does not appear again that the CLB had examined that issue in detail but investigator was appointed on being satisfied that the company was conducting business through entities connected with one of the Directors. It would be within the inherent jurisdiction of the CLB to take assistance of specialized agencies where having regard to na ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed on 17th June 2011, in an application, registered as C.A. No. 302/2011, seeking certain interim reliefs. The application was taken out by the petitioners in C.P. No. 1 of 2010, (the main petition) which is pending for final adjudication before the CLB. The respondent nos. 1 to 6, who instituted both the proceedings before the CLB have made various allegations over mismanagement of the affairs of Birla Corporation Ltd. I shall refer to them as petitioners later in this judgment. There are also allegations of conducting affairs of the company in a manner prejudicial to public interest, causing oppression to the members of the company. On behalf of the appellants such allegations have been denied. The appellants have attributed motive behind institution of the original proceeding, C.P. No. 1 of 2010. There is an ongoing dispute of the respondent no. 2 over succession to the estate of Priyamvada Devi Birla (PDB), widow of late M.P. Birla. That dispute originates from an application for grant of probate of a Will said to be the last Will of PDB, which was filed by Rajendra Singh Lodha (since deceased), as the executor of the said Will. Now the said proceeding is being prosecuted prima ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ls, swaps, rights or interest in securities, foreign currencies, carbon credits financial securities and any other securities issued by any entity whether for the purpose of hedging, arbitrage, or for any other purpose. 3. In the said application, the right of the respondent No. 7 in this appeal (HVL) to continue as a director in the company has also been questioned and additional prayer is for freezing of voting rights in respect of 62.9% shares of the company which was earlier controlled by PDB through different commercial entities. On behalf of the appellants, certain element on inconsistency in describing source of control of 62.9% shares of the company on the part of the petitioners have been referred to. In the main petition, petitioners have alleged that these shares belong to certain charitable trusts and societies. According to the appellant, in C.A. No. 302, it has been stated that these shares form part of estate of PBD. I am not addressing this question in this judgment as the petitioners have framed the action as a petition by minority shareholders only, and the instant appeal being an appeal from an order in an interlocutory proceeding, I do not think I ought to ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n favour of the Applicants their contentions remaining uncontroverted, to do substantial justice between the parties, the following reliefs are hereby granted to remedy the situation and to regulate the conduct of the Company s affairs in future, it is just and equitable to order that:- I. The R-1 Company and other Respondents are hereby restrained from further proceeding with the voting through Postal Ballot in respect of the Special Resolution seeking Amendment to the Object Clause of the Memorandum of Association of the R-1 Company. Action taken in respect of Postal Ballot Notice (dated 28.4.2011) so far and hereafter is hereby declared as null and void. II. The R-1 Company and other Respondents are hereby restrained from taking any action for alteration of the Object Clause as per Special Resolution in the Postal Ballot Notice dated 28.4.2011 and sought to be incorporated as Clause No. 17 O and 17 P or any clause of the same kind or having similar provisions and stipulations. III. The R-1 Company and other Respondents are hereby restrained from doing any business of the kind proposed to be commenced or in fact already doing as contemplated or envisaged under the proposed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ead as part of C.P. No. 1/2010, CP and relief sought therein stand amended to that extent. 86. CA No. 302/2011 is disposed of in the above terms. No order as to cost. 87. Order Dasti. 6. On behalf of the appellant, it has been submitted that the CLB had no jurisdiction to take cognizance of facts which accrued subsequent to filing of the main petition without proper amendment of pleadings having been made in the main petition. On this issue, further submission of the appellant is that no specific prayer had been made in C.A. 302 of 2011 either for amendment of pleading. In paragraph 67 of the application of the petitioner made under Regulation 44 of the Company Law Board Regulations 1991 (the 1991 Regulations), it has been stated:- 67. The petitioners crave leave to add to, alter, amend and/or modify the instant petition if the need so arises and to refer to and rely upon such other documents as may be found relevant at the time of hearing of the petition, if so required. The petitioners further submit that this petition, if necessary, may be treated as part of C. P. No. 1 of 2010 and the main petition be ordered and directed to stand amended accordingly. 7. In paragra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ression under the Companies act, the CLB should have confined itself to the case made out in the petition, and not look at other evidence relating to events occurring subsequent to filing of the petition. Other authorities relied upoin in this point were (i) Maqboolunnisa Vs.Mod. Sahela Quaraishi [(1998)9 SCC 585} (ii) Sangramsinh P. Gaekwad Vs. Shantidevi P. Gaekwad [(2005)11 SCC 314], Union of India Vs. Jagdish Pandey [(2010)7 SCC 689} and a Bench decision of this Court in the case of Bharat Bhari Udyog Nigam Vs. Jessop Co. Ltd. [(2003)4 Comp LJ 333 (Cal). 11. In course of hearing, however, learned counsel appearing for the parties submitted that amendment of the main petition by incorporating the allegations contained in CA 302 of 2011 has been allowed by the CLB by an order passed on 25th September, 2012. Thus, in this judgment I would have to decide as to whether at the point of time the CLB took cognizance of the allegations contained in the said application, it was lawful for the CLB to consider those allegations or not. This question has to be examined both in relation to form as well as content of such amendment. It is permissible for the Court to allow introduction of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inion of the CLB on the disputes involved in CA 302 of 2011 has already been expressed. 12. Now comes the question of form in which such amendment is required to be carried on. Both the decisions cited by the appellants relate to amendment of pleadings under Order 6 Rule 17 of the Code of Civil Procedure. In the judgment under appeal, while directing amendment, jurisdiction appears to have been exercised by the CLB in terms of Clause 46 of the 1991 Regulations. Though in my opinion, the practise prescribed in the decision of the Supreme Court in Gurdial Singh (supra) ought to be followed by the CLB as well, in the absence of a clear cut legal mandate excluding any other procedure, I am not inclined to hold the decision of CLB on this count to be invalid. In the event certain facts are before a Court or Tribunal in pleading, and the opponents have the opportunity to deal with such facts, and thereafter the Court or Tribunal forms an opinion based on such pleading and submissions made thereon and order is passed on that basis, I do not think such decision would suffer from a fatal flaw just because formal procedure pertaining to amendment of pleadings is not adhered to in that case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such amendment. Secondly, it has been argued that in any event CLB ought to have waited till the resolution was passed to examine the legality of the alterations making way for introduction of new provisions to the object clause in the memorandum of the company. Submission of the appellant on this point is that it could not be contended that carrying through the resolution was fait accompli as admittedly the appellant did not have control over shares to push through a special resolution. Analogy was drawn with the legislative process, with which a Court of law cannot interfere, when the lawmakers are considering a proposed legislation. A decision of this Court in the case of Shyamsundor Gupta Vs. Union of India Ors. (AIR 1994 CAL 64) was referred to by the learned counsel for the appellant. In this case the petitioner had challenged the legality of the Constitution (64th Amendment) Bill 1989, which was yet to be enacted. It was held in this judgment:- 21. In view of the discussion made by me hereinbefore I am of the opinion that the legislative competency of Parliament must not and should not be interfered with by the High Court at a stage when the Constitution (Sixty-Fourth A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t altogether immune from judicial scrutiny even at the proposal stage. Members or shareholders of a company do not have carte blanche power to carry on the affairs of a company in any manner they wish to. If a proposal is made to undertake something which would be per se illegal under the statute, then initiating the very proposal itself could constitute mismanagement and oppression, and justify shareholders action, whether in the form of an application under Sections 397/398 of the Act, or an independent suit. 16. On behalf of the petitioners it was argued that there is a bar under the provisions of Section 17 of the Act on entering an altogether new field of business. Referring to sub-Section (a) of Section 17(1) of the Act, it was submitted on behalf of the petitioners that alterations of the provisions of the object clause in the memorandum of a company was permissible so far such alteration would have had enabled the company to carry on its existing business more economically, and sub-Clause (d) of the said sub-section ought to be construed in that context. Referring to Section 17(1)(a) of the Act, it was submitted that any new venture of a company sought to be undertaken u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bring about alteration of the object clause in the memorandum has not been repealed altogether, and alteration in the object clause can be effected by a special resolution only for the purposes specified in sub-Clauses (a) to (g) of Section 17(1) of the Act. What has been repealed is the provision which required sanction of the Company Court and later the CLB for such amendment to become effective. As I have already discussed, in the event the shareholders of a company even by a special resolution seek to bring about alteration of the object clause beyond what is permissible under sub- Section (1) of Section 17 of the Act, such action would be illegal. That would be void in terms of the provisions of Section 9 of the Companies Act, which provides:- Save as otherwise expressly provided in the Act- (a) the provisions of this Act shall have effect notwithstanding anything to the contrary contained in the memorandum or articles of a company, or in any agreement executed by it, or in any resolution passed by the company in general meeting or by its Board of directors, whether the same be registered, executed or passed, as the case may be, before or after the commencement of this Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tors through whose concern the proposed business is allegedly having been done through the concerns which are allegedly the family concerns of the Director(s) specifically R-2 in this matter. Expertise or no expertise, surplus funds or long term borrowings, the management of the R-1 company has proceeded blindly or deliberately to tread the paths which are unknown, to get lost in the wilderness and that too appears to be advantageous to a few being at the helm of affairs. There is no way that such act of the mismanagement can be allowed to reach a logical conclusion which certainly shall be disastrous for the R-1 company whose interest is paramount to the CLB. 21. Section 17 (1)(d) of the Act permits amendment of the object clause to enable a company to carry on its business more economically or more efficiently or to carry on some business which under existing circumstances may conveniently or advantageously be combined with the business of the company. In none of the authorities to which reference has been made on this point, mere introduction of a provision in the object clause to permit the company to venture into an altogether a new field of business has been held to be con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... med that venturing into such business would be permissible in terms of sub-Clauses (a) and (d) of Section 17(1) of the Act. But a different line of business in my opinion, can also be started by a company by altering the memorandum if such business can be conveniently or advantageously be combined with the subsisting business of the company. The provisions of Section 17(1)(a) of the Act, which provides for alteration of the object clause enabling a company to carry on its existing business more effectively or more efficiently cannot be interpreted in a manner to mean that the said sub-clause would dominate the rest of the sub-clauses of Section 17(1). Each sub-clause in that sub-section has its independent sphere of application. The conjunction or has been employed at the tail of each of these sub-clauses, which deals with a specific purpose for which the object clause can be amended. I do not think there is any implicit bar under the Act on the type of business a company can venture into, upon amending its object clause. The test to be applied to ascertain permissibility for expansion into a new field of business would be as to whether the proposed business can be combined with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an instrument through which they can borrow money against Government securities at an interest rate lower than the rate prevailing in the market. The acronym MIBOR, I am apprised, represents Mumbai Inter-Bank Offered-Rate, and MIBOR linked debentures carry interest rate set by MIBOR. The company s stand is that money borrowed through these instruments was utilized for working capital and other requirements of the company. Stand of the petitioners, on the other hand is that the company already having large surplus was resorting to market borrowing for the purpose of entering into money market transactions. And these transactions were being carried on through investment companies owned or associated with HVL, generating in the process substantial profit for HVL or his family associates. I have been taken through the balance sheets of the company by the learned counsel for the petitioners for the last few years, on the basis of which it has been sought to be argued that there were high-frequency highvolume transactions and substantial investment was made in mutual funds. I am avoiding specific reference to the figures representing the volume of trading in such products in this judgme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7(O) and 17(P) would imply a company developing its own financial products through borrowed or self-generated funds and floating such products in the market. The CLB, however, has not come to any finding in that regard, but on the other hand, directed appointment of the said audit firm to ascertain profits made by HVL in relation to dealings through Lodha Capital Market Ltd., and PLC Securities Ltd. As regards the allegation that HVL is an interested party, it was submitted on his behalf that this point was not taken in the pleadings and the provisions of Section 299 of the Act is not applicable in the instant case. Case of the appellant as well as HVL is that the said section applies in the event there is an arrangement or agreement between two companies but so far as investment in mutual fund is concerned, the agreement or contract is between the appellant and the mutual fund and subclause (6) of Section 299 of the Act also does not apply as HVL does not hold two per cent or more of the share capital of both the companies. So far as this issue is concerned, again the matter has to be remanded to the CLB for further consideration as CLB does not appear to have had examined applica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the company was conducting business through entities connected with one of the Directors. As regards overall jurisdiction of CLB to direct investigation into accounts of a company through an auditor, such jurisdiction can be derived from Section 403 of the Act read with Clause 46 of the 1991 Regulations. Such power or jurisdiction can also be traced to sub-Section (4C) of Section 10E of the Act, read with Rule 14 of Order 11 of the Code of Civil Procedure. It would be within the inherent jurisdiction of the CLB to take assistance of specialized agencies where having regard to nature of information required, it may lack specific expertise or infrastructural support. But such investigation is to be directed only after a case is made out of prima facie mismanagement and oppression in connection with a company in relation to the subject on which investigation is being directed, and only after such case is established, again prima facie by the petitioners, who seek investigation about large scale misapplication or unauthorized application of company s funds. Question, however, may arise as to what would be the course if silhouettes of irregularities appear in financial statements ..... X X X X Extracts X X X X X X X X Extracts X X X X
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