TMI Blog2013 (5) TMI 548X X X X Extracts X X X X X X X X Extracts X X X X ..... circumstances whatsoever (pleaded or otherwise) which would have necessitated the grant of the said extreme and drastic directions by the CLB and at the hearing before the CLB, all the reliefs sought in the Petition except prayer 'c' were expressly given up by the Respondents. Therefore, once the Respondents expressly gave up all prayers in the Petition except prayer 'c', it was not open to the CLB to pass the drastic and extreme directions which went far beyond the limited relief sought by the Respondents and which would have the effect of creating a deadlock in the affairs of the Company where none existed earlier. In the present case, by issuing unwarranted, drastic and extreme directions in the impugned order, the CLB has without any basis whatsoever placed the control of the Company in the hands of the minority i.e. the Respondent Group, thus enabling the Respondents to achieve indirectly a virtual veto right on all issues and the ability to paralyze the functioning of the Company. In this context, it may be reiterated that the Respondents have never participated in the management of the affairs of the Company and have at all times refused to provide personal guarantees ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rned Member, Ms. Vimla Yadav, of the Company Law Board, Principal Bench, New Delhi ( CLB ), in Company Petition No. 60 of 2006. By the impugned order the Learned Member has: (i) directed the Appellant No. 1 Company to alter/modify its Memorandum and Articles of Association to provide for proportional representation to the Respondents (original Petitioners) on the Board and till this is done directed that the Respondent No.1 himself or through his nominee continue to attend the Board Meetings along with two more Directors from that Group; (ii) directing that the quorum in the Board Meeting of Appellant No. 1 shall not be complete without the presence of at least one of the Directors from the Respondents Group; and (iii) further directing that the Respondents Group shall also nominate one of the Directors from their Group who is resident in India who shall be a joint signatory to the transactions with Banks and other organizations. The Learned Member of the CLB has passed the said directions against the Appellants on the ground of oppression of the Respondents who are the minority shareholders of the Company. 2. This Court (Coram: S.C. Dharmadhikari, J.) by an order dated 2nd Dec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts have also provided the corporate guarantee of Shah Paper Mills Ltd. in which they and their family members are major shareholders. 5. Since 1997, Respondent Nos. 1 and 2, residents of Kenya, made financial investments in the Company and thereby acquired 20% of its shares. During the period 2002 to 2004, the Respondents from time to time increased their investments/shareholding in the Company and did not raise any grievance either with regard to the management of the Company or of any nature whatsoever. With the Respondents increasing their investments/shareholding in the Company, the Respondents together hold 40 per cent shareholding in the Company and the Appellants together hold the balance 60 per cent. None of the Respondents ever provided personal guarantee for the Company. 6. Respondent No. 1 was a Director in the Company from 23rd December 1997 to 23rd January 2002 and Respondent No.2 was a Director in the Company from 23rd December 1997 to 24th March 2006. However, Respondent Nos. 1 and 2 did not attend a single meeting either of the Board of Directors of the Company or any General Meeting of the Company, save and except the EGM held on 24th May 2006. Respondent Nos. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent Nos. 1 to 3 indicated that they were not willing to provide guarantees and pledge their shares in the Company as security to the Bank and that their protest should be noted. According to the Appellants, it was therefore clear that the Company would not be able to raise the necessary finance. Not a single vote was therefore cast in favour of expansion of plant and machinery. In the aforesaid circumstances, the alternate resolution for sale of the undertaking was taken up for voting. Respondent No.1 suggested an amendment viz. the offers received for the sale of the undertaking be placed before the shareholders and thereafter they should be given an opportunity to give a higher offer and purchase the undertaking. The amendment was put to vote and defeated. According to the Appellants, the amendment suggested by Respondent No. 1 was defeated because it was felt that this would prevent serious bids from being received. One Mr. Girish Shetty also proposed an amendment to the resolution for sale of the undertaking, which was to the effect that the Board of Directors of the Company shall not accept to sell the undertaking for consideration less than the paid up capital of the Company, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Company, the Minutes of the Board Meetings of the Company, the Minutes of any Committee of the Board Members, the Minutes of General Meetings of the Company, the Share Transfer Register, the Register of Members, the Books of Accounts maintained by the Company as per section 209 of the Act, the Register of Directors maintained as per Section 303 of the Act and the records of all filings made by the Company with the Office of the Registrar of Companies. However, till date the said information has not been provided to the Respondents; (viii) Even though the Respondents were agreeable for passing of the Resolution and investment of more money in the Company, the Appellant Nos. 2 to 7 defeated their own Resolution for expansion of plant and machinery and necessary increase in capital by way of rights issue and further borrowings; (ix) The Respondents requested Appellant Nos. 2 to 7 to amend the resolution for sale by proposing that right to better the best offer received for the sale of the undertaking be given to Members of the Company a proposal which was rejected by Appellant Nos. 2 to 7; (x) Appellant No. 4 offered to buy shares of the Respondents at Rs. 12.50 per share, wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndents at such fair price as this Hon ble Tribunal determines; (h) That the Company be ordered and directed to issue the share certificates to Respondent Nos. 3 to 11; (i) Such further and other reliefs as the CLB may deem fit and proper; (j) Cost of the interim application and orders thereon. 13. In response the Appellant Nos. 2 to 7 submitted before the CLB as follows: (i) Respondent Nos. 1 and 2 are residents of Kenya and apart from making financial investments in the equity of the Company during their association with the Company since 1997, have never participated in the management or the running of the Company. During their tenure as Directors or even thereafter, they have not attended a single Board Meeting or General Body meeting. The only meeting ever attended by Respondent No. 1 was the EGM held on 24th May 2006, which he admittedly attended as a Shareholder and a Member. The Respondents have not attended any meeting of the Company even after the filing of the Petition. Not a single letter nor any communication has been addressed by the Respondents to the Company or any of the Appellants/Directors to make any enquiry about the schedule of the Board Meetings or a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is no more the Director of the Company is reflected in the balancesheet for the year ending 31st March 2002, which is signed by Respondent No.3. Respondent No.1 has alleged in the Petition that he came to know about him not continuing as a Director of the Company in the year 2005. However, no letter is written by him to the Company in this regard. In fact, in his correspondence dated 11th May 2006 addressed to the Company, Respondent No.1 has stated that he will be attending the meeting as a (vi) The allegation of share certificates not being handed over to the Respondents is false and incorrect. The share certificates were handed over to Respondent No.3 who was a representative Director and was visiting the plant on a day to day basis. Not a single communication or demand is made, until in the petition the allegation of nonreceipt of share certificates is made for the first time. Share Certificates were found from the drawer of Respondent No.3 which have been admittedly handed over on 16th March 2007 to the Respondents before the CLB. (vii) Resolution No.1 placed before the EGM convened on 24th May 2006 pertained to the expansion of the plant and machinery and necessary increa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... counsel appearing for the Respondents stated that if the Appellants were going to insist on a valuation on the basis of the balancesheet for the year ending 31st March 2006, the Respondents did not wish to press reliefs (f) and (g) and were happy to remain in the Company with their current holding and that the Respondents were only pressing relief (c ) whereby they have sought the reinstatement of Respondent No.1 as a Director on the Board of the Company and reservation of a permanent place on the Board for the representative of the Respondents. The Respondents cannot seek modification of the relief by stating that the Respondents were now seeking a representation on the Board proportionate to their shareholding. (xi) The Respondents have not made out any case against the Appellants for oppression and/or mismanagement and the Petition deserves to be dismissed with costs. 14. The Appellants have before this Court, repeated their submissions recorded hereinabove. They have submitted that the Learned Member of the CLB has set out the submissions of the parties in great detail. However the Learned Member of the CLB has without application of mind and without appreciating any of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ade out against the Respondents by the Appellants, who perceived lack of transparency in the manner of the purported sale of undertaking keeping the consideration for sale of the undertaking for a sum not less than paid up capital of the Company which the paid up capital of the Company is Rs. 11 crores while at the same time it is a matter of record that the counter offer by the Respondents to take over the Company was Rs. 38 crores, which figure was provided by the Appellant No.4 himself. This offer was turned down. The apprehension of the Respondents is that on the one hand the appellants were agreeable to mere return of capital of Rs. 11 crores but were not willing to allow the Respondents to take over the socalled unviable undertaking at Rs. 38 crores (being the price initially quoted by the Appellants themselves) . 16. It is further submitted by the Respondents that the CLB has rightly observed that with a substantial holding of 40 per cent and with no returns on their investment and looking at the nontransparent manner in which the sale was sought to be done, the Respondents had a valid apprehension as regards the conduct and management of the Company. In fact, by wanting t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ries (India) Ltd. vs. Needle Industries Newey (India) holdings Limited AIR 1981 SC 1298(paras 171 and 172); (ii) M.S.D.C.Radharamanan vs. M.S.D.Chandrashekhar 2008 (143) Comp. Cases 97 (SC): 2008 (1) UJ SC 0583 (paras 15 and 17); and Shanti Prasad Jain vs. Kalings Tubes Limited AIR 1965 SC 1535, (b) this Hon ble Court in the case of Bennet Coleman Co. vs.. Union of India 1997 (47 Comp. Cases 92) (Paras 116 onwards) ; and (c )the Andhra Pradesh High Court in the case of Sri Ramdas Motor Transport Ltd. vs. Karedla Suryanarayana and others (2002) 110 Comp. Cases 193 (Paragraph 116 onwards). 18. I have considered the submissions advanced on behalf of the parties and also the case law relied upon by them. From a perusal of the impugned order, I find that though the submissions of the parties have been recorded at length, the discussions qua the submissions made by the parties and the reasoning given in support of the finding that the minority (Respondents) have been oppressed by the majority is not adequate or satisfactory. In fact it is pointed out by the learned Senior Advocate appearing for the Appellants that in paragraph 55 of the impugned order, the Learned Member has discusse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iodic compliances with the Registrar of Companies have been duly made by the Company. The production capacity of the Company is now double that of its original installed capacity, as stated in the Affidavitinreply of the Company (Annexure R5/Pg. 257 Vol. I). Considerable profits have been made by the Company (Annexure R5/pg. 257 Vol. I) which have been ploughed back into the Company and utilized for reduction of borrowings in order to save interest thereon. There are no overdue secured loans or outstanding unsecured loans and the overall liabilities have been substantially reduced (Annexure R6/Pg. 258). 20. Despite the aforesaid facts being placed before the CLB, the Learned Member of the CLB has, without taking a note of the aforesaid facts submitted,and without taking the same into consideration, erroneously come to a completely bald finding that, in the interest of the R1 Company and in the interest of the petitioners and the Respondents, the R1 Company cannot be left to be run in the manner being run at present . 21. It is alleged in the Petition that Respondent Nos. 3 to 11 have not been handed over their share certificates and the Respondents were not forwarded with cop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and untenable, in view of the fact that Respondent No. 3 is himself a signatory to two of the balance sheets of the Company (viz. balance sheets for the years ending March 31, 2002 and March 31, 2003), which balance sheets the Respondents claim were not allegedly received by them. As correctly submitted on behalf of the Appellants, upon balancesheets of any Company being duly filed by the Company with the Registrar of Companies,, the same becomes a public document available to the public at large. Thus the Appellants had absolutely nothing to gain by keeping back the balancesheets from the Respondents. The only letter written to the Appellants by the Respondents is the letter dated 11th May 2006 by the Respondent No.1 to the Chairman of the Company. In the said letter not a whisper is made about the Respondent No.1 or the other Respondents not having received any notices qua the meetings of the Company. The letter dated 11th May 2006 written by the Respondent No.1 to the Chairman of the Company was immediately responded to by the Company in its letter dated 16th May 2006. In paragraph 3 of the said letter, it is categorically recorded that the statement of accounts were provided to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... years as Director of the Company did participate in the meetings and also signed the balancesheets of the Company for the years ending 31st March 2002 and 31st March 2003. Even after he resigned he continued to work for the Company on a salary of Rs. 30,000/per month. Admittedly the Respondents have at no time during their tenure of Directorship of the Company provided any guarantee to Banks and Financial Institutions from which monies were borrowed by the Company. According to the Appellants, since the Respondents were not wanting to give any guarantee to Banks and Financial Institutions from which monies were borrowed by the Company, they were not keen on continuing as Directors of the Company. For this reason, Respondent No.1 informed the Appellant No.2 in the year 2002 that he is desirous of resigning as a Director from the Board of the Company and that he would also be sending a letter to this effect. Accordingly his resignation was accepted in the meeting of the Board of Directors held on 23rd January 2002 and the same also featured in the balancesheet for the year ending 31st March 2002, which balancesheet is admittedly signed by Respondent No.3. Though the Respondent No. 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cure some funds by way of advances/loans from financial institutions and to raise additional funds by additional issue of share capital. It also appeared at that time that if the expansion plan failed then it would be in the interest of the shareholders to sell the undertaking while the Company was still a profit making concern and had not run into a financial crunch. Accordingly, an EGM was convened on May 24, 2006 and notices (along with the requisite explanatory statement and the proposed resolutions of the same) were sent to all the shareholders, including the Respondents. The said notice ( Annexure R7 Pgs. 259 to 266 Vol. I) was duly received by the Respondents and it was in response to this notice that Respondent No.1 addressed the letter dated May 11, 2006 to the Company ( Annexure D at pg. 198 Vol. I). As can be seen from the explanatory statement appended to the notice, Resolution No. 2 for sale of the undertaking was to be considered and voted upon only if Resolution No. 1, for expansion of the Plant and Machinery and necessary increase in capital by way of Rights Issue and further borrowing, did not find support with the shareholders of the Company. The EGM of the Compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is submitted that there is no provision in the Articles of Association of Appellant No.1 or in any other document which entitles the Respondents to have a right of preemption on the assets/undertakings of Appellant No.1. It is submitted that the amendment with regard to sale not being made at less than the paid up share capital which was passed, was reasonable and adequately protected the interests of all the shareholders. I am of the view that the Appellants have therefore given cogent reasons as to why the proposal of Respondent No.1 to amend the said Resolution No. 2 was rejected upon being put to vote viz. that if the shareholders of the Company were to have a right to better any bids received by the Company, it was felt that no bid or at least no serious bids would have been received by the Company for the said undertaking. This appears to be a genuine apprehension on the part of the Appellants who have after considering the proposed amendment as suggested by Respondent No.1, rejected the same by majority. The said rejection of the proposal to amend Resolution No.2 after application of mind, by no stretch of imagination, as suggested by Respondent No.1, can be termed as an act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d order. The motive is nowhere found in the Petition nor is the alleged motive which was allegedly appreciated by the CLB and which led to the passing of the impugned order, mentioned anywhere in the impugned order which runs into 27 pages. 26. The Respondents have also alleged that they have not received any dividends on their shares in the Company. The Appellants have relied on the decision of the Calcutta High Court in the case of Maharani Lalita Rajya Lakshmi vs. Indian Motor Co. AIR 1962 Cal 127 in support of their submission that it is well settled law that nondeclaration of dividend does not amount to oppression of the shareholders. In any case as explained in the affidavitinreply of the Company before the CLB, it has ploughed its profits back into repayment of debt and acquisition of assets (Pg. 215 Vol. 1). By doing so, the Company has ensured that it has not defaulted on its obligations to Bankers in servicing its debt and has also reduced its debt (Pg. 258 Vol.1). A decision to this effect taken at various meetings, has also been supported by Respondent No.3 who was present at such meetings. Again it is not the case of the Respondents that the profits of the Company ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere now willing to stay in the Company on account of the fact that the Appellants were allegedly not willing to pay a fair value for their shares and therefore, were only seeking the relief of 'proportional representation on the Board' and prayer 'C' at para 8 at page 15 of the Petition; and (c) The Appellants emphasized the nonparticipation of the Respondents in the affairs of the Company and questioned the right of the Respondents to stay on in the Company after initiating litigation with the Appellants. Further the Appellants questioned the legality of the Respondents orally changing/modifying the reliefs sought and submitted that it was the Respondents who ought to exit the Company and for the fair value of their shares. It is settled law that the valuation date has to be approximately close to the date of the filing of the Petition. (ii) In paragraph 57 of the impugned order, the following directions were given to the Company: (a) The Company was directed to amend its Memorandum and Articles of Association so as to give Respondents proportional representation on the Board of Directors of the Company. Till this was done, Respondent No. 1 (or his nominee) was to continue a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y transparent and was, in fact, not opposed by Respondent No.1 except that Respondent No.1 proposed an amendment (which was defeated for the reasons set out hereinabove) to the said Resolution giving a preemption right to the members of the Company to better the bids received for the undertaking. Therefore, it is clear that Respondent No. 1 himself, was not per se opposed to the sale of the undertaking. However, even after Resolution No. 2 was passed, no bids for the undertaking were received from the Respondents. Therefore, there was no question of the Respondents feeling oppressed on account of the Resolution for sale of the undertaking having been passed at the EGM held on May 24, 2006. (iv) In any event having specifically given up all the prayers in the Petition except prayer 'C', at the hearing before the CLB, in my view it was not open to the CLB to pass the aforementioned extreme and drastic directions. The said directions have the effect of creating a deadlock in the affairs of the Company where none existed earlier. Further, the said directions have no relation whatsoever with the alleged grievance (which, in any event, was totally specious and untenable) of the Respo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the court to grant appropriate relief under Section 397 of the Companies Act indisputably is of wide amplitude. It is also beyond any controversy that the court while exercising its discretion is not bound by the terms contained in Section 402 of the Companies Act if in a particular fact situation a further relief or reliefs, as the court may deem fit and proper, are warranted. (See Bennet Coleman Co. v. Union of India (1977) 47 Comp Cas 92 (Bom) and Syed Mahomed Ali v. R. Sundaramoorthy AIR 1958 Mad 587: (1958) 2 MLJ 259: (1958) 28 Comp Cas 554). But the same would not mean that Section 397 provides for a remedy for every act of omission or commission on the part of the Board of Directors. Reliefs must be granted having regard to the exigencies of the situation and the court must arrive at a conclusion upon analysing the materials brought on record that the affairs of the company were such that it would be just and equitable to order winding up thereof and that the majority acting through the Board of Directors by reason of abusing their dominant position had oppressed the minority shareholders. The conduct, thus, complained of must be such so as to oppress a minority of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In this context, it may be reiterated that the Respondents have never participated in the management of the affairs of the Company and have at all times refused to provide personal guarantees or to pledge their shares in order to raise finances for the Company. Such a position would enable the Respondents to arm twist the Company on every issue and thereby ensure that there is a deadlock on every issue. In other words, by the impugned order, the CLB has created a situation for a potential deadlock where none existed earlier. It is once again reiterated that the aforesaid directions have been passed by the CLB in a case where (I) the allegations of the Respondents as regards alleged 'oppression' are demonstrably false and incorrect; and (ii) all the prayers except prayer 'c' in the Petition were expressly given up by the Respondent. Therefore, far from being in the interest of the Company, the said directions of the CLB are extremely detrimental and prejudicial to the interest of Appellant No.1 Company and are therefore not permissible under Section 402 of the Companies Act, 1956. Question No.4: (IV) Whether in exercise of these powers, can the Company Law Board ignore pleadings ..... X X X X Extracts X X X X X X X X Extracts X X X X
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