TMI Blog2001 (4) TMI 932X X X X Extracts X X X X X X X X Extracts X X X X ..... ut ₹ 30 crores respectively. The equity shares are of the denomination of ₹ 10 per share. The Bank convened an extraordinary general meeting on 7-8-2000 to transact the businesses relating to amendment to articles, issue of bonus-cum-right shares. In all, there were 4 proposals to be considered as special resolutions. The second item was to increase the authorized capital from ₹ 50 crores to ₹ 100 crores, issue of Bonus shares in the ratio of 1:2 was the third item and issue of right shares at a premium of not exceeding ₹ 15 per share was the 4th item. According to the petitioners, while the first three resolutions were passed unanimously by show of hands, the shareholders protested against the resolution relating to the right issue and demanded a poll. However, the Chairman of the meeting announced the withdrawal of this item and abruptly concluded the meeting and left. Thereafter, according to the petitioners, the remaining shareholders continued the meeting and passed a unanimous resolution by show of hands rejecting the proposal for the right issue. However, the Board of Directors passed a resolution in the Board Meeting on 8-8-2000 to issue the ri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ioners. The motive for the issue of the right shares is not to benefit the shareholders but to allot the same to a foreign bank to be identified by KPMG, with whom the company has entered into an agreement for identifying a suitable foreign bank as is evident from the press report dated 31-5-2000, annexed at page 94 of the petition. Even though the Bank claims, that, in a Board Meeting held on 29-5-2000 prior to the annual general meeting, the decision to issue bonus-cum-right issue was taken, yet, the same was not mentioned in the annual general meeting held on the same date. Further, the bank had also not intimated the Stock Exchange about the same in time. Reference was made to the pamphlets at RJ-3/4 which were circulated to the shareholders during the annual general meeting on 29-5-2000 wherein the bank had projected the paid up capital as in March 2005 at ₹ 30 crores which is the present paid up capital. Normally, banks issue shares only for the purpose of maintaining prescribed capital adequacy ratio (CAR). As far as this bank is concerned, the CAR is higher than the prescribed ratio and at no time the bank had indicated inadequate CAR. Therefore, the decision to issue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he views of the members had not been taken into consideration. The oppressive conduct of the Board of Directors is evident from the fact that after the members had defeated the resolution, the Board chose to pass the same resolution later on. 7. On the powers of the Chairman in conducting a general meeting he relied on certain authorities: Halsbury s Laws of England 1996 issue : Except where empowered by the regulations of the company, the chairman cannot adjourn the meeting nor dissolve it while any of the business for which it was called remained untransacted and if he refuses to act, the shareholders may elect another chairman. He cannot adjourn against the wishes of the majority. Seth Sobhag Mal Lodha v. Edward Mills Co. Ltd. [1972] 42 Comp. Cas. 1 (Raj.) : It is settled law that when once a meeting is called, no chairman can arbitrarily dispose of it. Its continuance or dispersal rests entirely on the will of the shareholders. S. Rm. S.T. Narayana Chettiar v. Kaleeswarar Mills Ltd. AIR 1952 Mad. 515, Deodutt Sharma v. Zahoor Ahmed Zaid AIR 1969 Raj. 25 and National Dwelling Society v. Sykes 1894 Chd. 159 : The chairman of the meeting is not entitled to stop the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to the RBI that the Bank would obtain general body approval. Referring to annexure SSR 3 to the reply to the sur-rejoinder, he pointed out that in this letter dated 14-6-2000, the Bank had informed the RBI that in the EOGM which had to be convened to get the approval of the shareholders for bonus-cum-right issue, the bank would also get the articles amended to provide for capitalisation of reserve for issue of bonus shares and for increasing the authorized capital. Thus, he contended that now the Bank cannot take a stand that it did not require the approval of the members for issue of right shares, after having obtained the approval of the RBI on the basis of certain undertaking. Even otherwise, the residual power always vests in the general body and the ultimate authority on issue of shares rests with the general body. While the shareholders cannot force the Board to do something, yet, they can exercise negative control on the Board of Directors. Even though, the Bank contends that by issue of bonus shares and right shares, the Bank is rewarding the shareholders, yet, when the majority do not want the reward, the same cannot be forced on them. The entire episode clearly indicate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bank. Therefore, he submitted that the decision of the Board to issue right shares should be declared as null and void and since no bonus shares could be issued without a right issue as per the RBI Guidelines, the entire proceedings of the EOGM held on 7-8-2000 also be declared as null and void. 12. Shri Arvind Datar appearing for the bank argued as follows: In terms of section 397, the CLB has to come to a conclusion that the company is liable to be wound up on just and equitable grounds and that such a winding up would not be in the interests of the shareholders. Winding up of a company on just and equitable grounds is provided under section 433(f). Since section 38 of the Banking Companies Regulation Act deals with the winding up of banking company, the provisions of section 433 of the Companies Act are not applicable to a banking company. If so then a petition under section 397 of the Companies Act in respect of a banking company is not maintainable. The Kerala High Court in K.P. Chockochan v. Federal Bank [1989] 66 Comp. Cas. 953 , has held that a banking company cannot be wound up under section 433. Therefore, this jurisdictional aspect has to be first examined before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ving voted for the bonus shares could not have opposed the right issue as both are un-serverable in view of RBI guidelines that bonus shares can be issued only if simultaneously rights/public issue is made by a bank. Before the commencement of the meeting, the Chairman, informed the members that the meeting has been convened for the purpose of issuing bonus-cum-right shares and therefore the shareholders were fully aware that they had to approve right issue in case they decided to have bonus shares. Further, a reading of the explanatory statement in regard to increase in the authorized capital would clearly reveal that the authorized capital was being increased for the purposes of issuing bonus-cum-right shares. He appointed out that in case the petitioners opposed the right issue, then, they cannot get bonus shares inasmuch as the same would be against the guidelines of the RBI. He pointed out that in the petition the petitioners have not sought for cancellation of the bonus issue. 14. By the time the EOGM took place, the Bank had obtained legal opinion from Kanga Co. to the effect that in respect of right issue, there is no need to get the approval of the general body and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... liance with the provisions of the Act, the same does not constitute oppression and such act could be challenged in a civil proceedings. 16. He also contended that the alleged meeting held by the shareholders themselves is invalid inasmuch as the shareholders cannot usurp the powers of the Board as held in Morarka Paint Varnish Works (P.) Ltd. v. Mohan Lal Morarka [1961] 31 Comp. Cas. 301(Cal.), Sububan Bank (P.) Ltd. v. Thariah [1968] 38 Comp. Cas. 13 (Ker.), Pothen v. Hindustan Trading Corpn. (P.) Ltd. 37 Comp. Cas. 266 (Ker.). He also pointed out that holding a meeting by the shareholders in a place other than the one specified in the notice, for the meeting is invalid as decided in Sikkin Bank Ltd. v. R.S. Chowdhury [2000] 102 Comp. Cas. 387 (Cal.). 17. As far as the need for increase in the capital is concerned, referring to various details filed by the bank as well as the petitioners, he pointed out that if the Bank does not go for right issue, its CAR would come down and once it goes below 10 per cent, then, the Bank would not be able to advance any further loans. In this connection, he also referred to RBI directions according to which the private sector banks will h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h them and it is not mandatory. Unless and until they are not in a position to establish some prejudice, they cannot prosecute this petition. On this proposition, he relied on Aligarh Muslim University v. Mansoor Ali Khan [2000] 6 Scale 125. Once the petitioners fail to establish that the action by the Bank is prejudicial to their interest, then they have no locus standi to pursue the petition. When a person is benefited by the action of the company, he can never claim to have been aggrieved by such an act of the company. He also pointed out that the petitioners being business people were fully aware that the Bank cannot issue bonus shares without offering right shares but they have not chosen to challenge the bonus shares in the petition. The oral submissions by the counsel to declare the entire proceedings of the meeting as null and void, having not been sought in the petition, cannot be considered by the CLB on the basis of the oral prayer as it would be against the provisions of Regulation 16 of the CLB Regulations according to which the petitioners will have to indicate the specific reliefs in the petition. He also contended that if the prayer of the petitioners that the proce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mplaints made during the hearing should not be taken cognizance of. Any way he pointed out that the RBI is seized of this matter and the Bank would abide by the decision of the RBI in this regard. He also pointed out that that all cases cited by Shri Sarkar in relation to the applicability of the provisions of section 397/398 in respect of the banking companies related to the provisions of section 391/394 while the case cited by him of the Kerala High Court directly relates to a section 397/398 petition and as such the Kerala High Court case is directly applicable to the present proceedings. Therefore, he pleaded that the petition should be dismissed both as not maintainable as also on merits. He also contended that the petitioners had impleaded KPMG only with a mala fide intention as they are not necessary parties at all to the proceedings. The demand for a copy of the contract between the bank and KPMG cannot be considered inasmuch as, shareholder is not entitled to the same. He also pointed out that in view of the interim stay given by the CLB, the bank has been deprived of the substantial cash inflow which has resulted in heavy loss of interest which the bank would have earned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsistent with the provisions of Banking Companies (Regulation) Act, 1949 (Banking Act). Section 2 of the Banking Act makes it clear that the provisions of that Act shall be in addition to and not in derogation of the Companies Act with certain exceptions. Section 38 dealing with winding up of a banking company has excluded the application of certain sections of the Companies Act but the provisions of section 397/398 are not excluded. He pointed out that section 38 is an additional provision as far as winding up of banking companies is concerned as it makes it mandatory for the court to make a winding up order on two instances as provided in that section unlike the provisions of section 433 where discretion is vested with the Court. Thus it would be evident that the provisions of section 433 are still applicable to banking companies and therefore winding up of a banking company on just and equitable grounds under section 433(f) is permissible and as such the shareholders of a banking company can approach the CLB under section 397/398. To the proposition that the powers of the court under section 38 in respect of winding up of a banking company is in addition to such powers under se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of section 397/398 as long as the ingredients of these sections are satisfied. He also pointed out that section 401 of the Act empowers the Central Government to invoke the provisions of section 397/398 and if it is so, it cannot be said that the Central Government has to satisfy personal prejudice. According to him, the provisions of section 397/398 are special provisions giving wide powers to the CLB under section 402. He pointed out that by investing the funds of the Bank, shares of the Bank have been purchased which is not only against the provisions of the Act but also done with a view to consolidate voting powers indirectly. 27. In regard to the proceedings of the EOGM, he pointed out that the Bank did not reveal that without the right issue, no bonus shares could be issued and they never brought to the notice of the general body about the RBI stipulation in this regard. If the members had known about the stipulation, they would have examined as to whether to approve the increase in the authorized capital or not. The meeting could be cancelled on this issue along that full particulars had not been revealed to the general body even though the same was in possession/knowle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y is also governed by the provisions of the Companies Act except as provided in the Banking Act. In this connection we may refer to the observation of the Apex Court in GOI v. Court Liquidators Employees Assn s case (supra) that The distinction between the banking company and the non banking company, broadly speaking, is that a banking company is a company which deals with banking business and a non banking company, on the other hand, deals with non banking business. The general law applicable to both the categories of companies is the Companies Act . Similar view has, been expressed by the Madras High Court in Laxmi Vilas Bank Ltd. s case (supra). In respect of winding up of a banking company, the Banking Act provides in section 38 as: Winding up by High Court: (1) Notwithstanding anything contained in sections 391, 392, 433, 583 of the Companies Act but without prejudice to its power under sub-section (1) of section 37 of this Act, the High Court shall order the winding up of a banking company (a) If the banking company is unable to pay its debts; (b) If an application for its winding up has been made by the Reserve Bank under section 37 of this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... raised an objection that a single and an isolated act cannot constitute oppression. As a legal proposition it is difficult to accept this contention. Whether a single act would constitute oppression or not would depend on the facts of a case, the nature of the company, the relationship between the parties and also on the provisions of the Articles and the Act. In a family company wherein participation in the Board is provided in the Article, removal as a director, even, if it is a single act could constitute oppression as the removal has a permanent effect of keeping one from the management. In the same way, further issue of shares by which the percentage holding of person a comes down, even though a single act, has continuous effect. In Indian Motor case (supra), the allegation with reference to which the court held that a solitary act cannot constitute oppression related to the complaint that the petitioner was denied the right of inspection of books of account. While the court held that a shareholder is not entitled to the same, it also remarked as above. Even in Needles case (supra) relied on by Shri Datar, the Court has not categorically stated that a single and isolated act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sidered by us but such consideration would be only to mould the relief to be granted in case the petitioner succeeds in the main petition and that any interim relief granted, based on subsequent events, would be limited to the status quo being maintained in regard to the affairs of the company . In view the above, we do not find any bar in subsequent events being considered in a section 397/398 petition. 33. As far as the need for additional capital is concerned, as rightly pointed out by Shri Datar, it is a managerial decision and a judicial forum, should not interfere with the decision of the Board except when the increase in the share capital is with an ulterior motive and not for the bona fide needs of the company, but, in the garb of raising capital, shares are issued either to consolidate one s position or with a view to create a new majority or to convert a majority into a minority. In such cases, a petition under section 397/398 can be maintained. In the present case the company is a banking company having over 50,000 shareholders. The board of directors hold only 0.4 per cent shares in the company. Further the bank cannot increase its share capital without the approval ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion that the Bank likely to allot the un-subscribed shares to a foreign partner which would not be in the interest of the shareholders/bank. Even then they have not indicated as to how and why the same would be against their interest or that of the bank. We also note that in the meeting held with the representative of the 11th respondent as the Chairman, wherein the resolution for right shares was defeated, the minutes of the meeting does not indicate the grounds on which the resolution was defeated. However, now that the bank has filed an affidavit in the form of sur-rejoinder that it has no intention to off load the shares to a foreign partner, we do not find that the decision of the bank to issue right shares could be considered to be an act of oppression. 34. The next issue is the authority of the Chairman to withdraw a resolution included in the agenda for the general meeting. The companies Act does not specify the powers and duties of the Chairman of a meeting. Section 175 of the Act deals with election of a chairman, section 178 stipulates that the decision of the Chairman in case of voting by show of hands is final, section 176 permits the Chairman to seek a poll on his ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be the Chairman of the company or any one of the directors or one of the members elected. (In article 66 of the Bank the same provision has been made). If the Chairman or a director chairs the meeting, he assumes the position of the Chairman of the meeting and is not acting in his capacity as the Chairman or a director of the company to take whatever decision he could take in that capacity. The Chairman of the meeting should be disinterested and impartial and he cannot, at his will, decide whether a resolution is to be tabled and voted upon or to be withdrawn. Once, matters are placed before the members through a valid notice for their consideration, these matters come under their domain and cannot be withdrawn without their consent. 35. In the present case, as per the minutes of the meeting, the Chairman informed the members, that the Board had decided to withdraw the resolution, but no minutes of the Board taking the said decision was either placed before the meeting nor before us. It is also doubtful whether any decision was taken by the Board in this regard before the meeting commenced as we find from the minutes of the Board meeting on 8-8-2000, that there is no mention abo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 37. Now that we have held that the meeting chaired by the representative of the 11th respondent is valid, the issue for consideration is, whether the Board could have resolved to issue right shares in the Board meeting held on 8-8-2000. It is admitted by the learned counsel for the petitioners too that the board has powers to issue right shares under section 81 but according to him, in terms of articles 45 to 47 of the Bank, the approval of the shareholders is necessary even for a right issue and for offering shares with the right to renounce. He also pointed out that on an earlier occasion of issue of right shares, the approval of the shareholders was taken in terms of Articles and that the Bank itself had committed to the RBI to seek shareholders approval. Article 45 : The bank, in general meeting may, from time to time increase the capital by creation of new shares of such amount as may be deemed expedient. Article 46 : The new shares shall be issued upon such terms and conditions, and with such rights and privileges annexed thereto as the General Meeting resolving upon the creation thereof shall direct and if no direction be given, as the director shall determine; and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce with this article. Article 47 requires approval of the general body only when shares are not issued on a right basis, which is in accordance with section 81(1). Therefore, the only issue for consideration is whether this article requires general body approval for issue of shares with the right to renounce. There is nothing in this article to bar the Board from issuing right shares with the right to renounce even though it may appear from the last sentence of the article that the Board cannot do so without the approval of the general body. We are of the view that this sentence cannot be read in isolation but has to be read with the earlier sentence. If it is done so, then it is evident that only when shares are not issued on a right basis, then the persons to whom shares are offered, cannot have the right to renounce without the approval of the general body. In other words, there is no specific bar in the articles to issue shares on a right basis with the right to renounce and therefore we do not agree with the petitioners that right shares could not be issued with the right to renounce, without the approval of the general body. 39. Shri Sarkar contended that the Bank had give ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rd meeting on 8-8-2000. 41. Insofar as the purchase of the shares for the trust out of the bank funds, we find that RBI is already seized of the matter and that certain directions have been given to the Bank in this regard. Further, we do not have enough material to form an opinion on this allegation. Therefore, we are not dealing with this allegation in detail. 42. The next issue is the application of the petitioners for appointment of an independent Chairman to conduct the proceeding of the EOGM requisitioned by the petitioners. This meeting has been adjourned sine die as per our directions. The petitioners have complained that the explanatory statement annexed with the requisition notice had not been circulated to the members. They have also complained that the explanatory statement circulated by the Bank contains certain wrong particulars. They have also complained that the Bank is utilizing its resources to collect proxies etc. Therefore, according to them, to ensure that the meeting is properly held, an independent person should chair the proposed meeting. We find that there is justification in the prayer of the petitioners in view of what happened in the EOGM held on 7 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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