TMI Blog2002 (2) TMI 1343X X X X Extracts X X X X X X X X Extracts X X X X ..... s Ltd., Mahavir Spinning Mills Ltd. and Vardhman Polytex Ltd. In addition to these 3 manufacturing companies, there are a number of investment companies within the group which hold shares in these 3 companies. During the lifetime of Shri R.C. Oswal (who expired on 6-1-1990), the petitioner became MD of the company, while the 1st respondent was the MD/Executive Director of other companies. He was also the chairman of the company. Shri R.C. Oswal left behind a will dated 2-4-1996 in which it has been stated that an understanding had been reached between him and his two sons that the ownership and control of the company shall be with the petitioner and the ownership and control of the other two companies shall be with the 1st respondent. The 4th respondent company holds about 26.2 per cent shares in the company, in which, according to the petitioner, he held majority shares and, thus, was in control of the said company. There had been an issue/allotment of 10,000 additional shares in the company, by which the 1st respondent and his family members have become majority shareholders in that company and as such now they have effective control over the 26.2 per cent shares. The petitioner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e shareholding of the company. The very fact that the 1st respondent has appointed himself as the chairman and MD of the company, there has been a change in the composition of the Board. The 1st respondent, being the head of the family, has also acted in a manner prejudicial to the interest of the company. Therefore, all the ingredients of Section 409 are present in this case and as such the petitioner, being the MD of the company, has filed this petition for appropriate relief. 4. In regard to change in the ownership of shares, he submitted: The petitioner had controlling interest in the 4th respondent-company which holds 26.2 per cent shares in the company. In good faith and out of respect, the petitioner had allowed the appointment of the 1st respondent and his daughter as directors in the 4th respondent-company. By clandestine and illegal means, and without the consent and knowledge of the petitioner, the 1st respondent had issued 10,000 shares in that company to his own family members by which his family has now gained control of majority shares in that company by virtue of which the control over 26.4 per cent shares in the company has come under his control. This is not wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... EOGM to amend the articles to provide for more than one MD as is evident from the minutes of the Board meeting held on 11-8-2001. However, even before effecting the amendment to the articles, the 1st respondent got himself appointed as the chairman and MD with effect from 11-8-2001 for a period of 3 years in the same Board meeting. This appointment itself could be considered to be a change in the Board attracting the provisions of Section 409. Further, this appointment itself is invalid inasmuch as he had already been functioning as MD/Executive director of two other companies and as such, he could not have been appointed to a managerial position in a third company. Even though it has been recorded in the minutes that the 1st respondent had already resigned from the other two companies, yet, nothing has been placed on record that these companies had accepted his resignation before his appointment as the chairman and MD of the company. The 1st respondent has justified his appointment as the chairman and MD of the company on the ground that the petitioner had decided to have a separate corporate identity for the company from that of Vardhman group which would be against the interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spondent as the Chairman and MD of the company should be stayed and the company should not be permitted to convert the warrants into shares. 9. Shri Sarkar appearing for the company submitted : This petition is not maintainable in terms of Section 409. The basic requirement of this section is that there should be a change in the ownership of the shares held in the company. In other words, there should be direct change in the ownership of shares. The change in the ownership as alleged by the petitioner is with reference to the 4th respondent-company and, therefore, the provisions of Section 409 relating to change in ownership of shares do not arise. Further, a strict interpretation of the provisions of Section 409 would mean that only when by virtue of acquisition of shares and exercise of voting in respect of those shares if there is a change or likely to be change in the Board, then the provisions of this section would apply. The petitioner has attacked the decisions of the existing Board while the provisions of Section 409 are for ensuring the continuity of the existing Board as is evident from the heading of the section which reads: Power of Company Law Board to prevent chan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en change in ownership of the shares in the company itself takes place or is likely to take place, then the provisions of this section are attracted. In Ajaib Singh v. RG Shah Co. Ltd. [1985] 3 CLJ 411, in which, on the contention that acquisition of a foreign company which held 38.7 per cent shares in Shaw Wallace Co. Ltd. amounted to a change in the ownership of shares attracting the provisions of Section 409, the erstwhile CLB held that the same would not fall within the provisions of Section 409. This order of the CLB was upheld by the Supreme Court in Shaw Wallace Co. Ltd. [1987] 1 SCC 424. Therefore, even the fundamental requirement of Section 409 that there has been change in the ownership of shares is not established. As far as the likely change in the ownership of shares, as alleged by the petitioner, in view of the extension of life of the detachable warrants is concerned, it also would not fall within the provisions of Section 409. The allegation that the extension of life of the detachable warrants is illegal is not correct. This matter was taken up with the SEBI and on its advise, the approval of the general body was taken for extension of the life of the warrant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany for such a long time that he could never be considered to be a new comer. In a petition under Section 409, the CLB cannot adjudicate whether an act has been done legally or illegally. Section 409 is a 'straight jacket section' and only when all the 4 ingredients of this section are satisfied, the CLB can pass suitable order which incidentally is only temporary. The petitioner has invoked the provisions of this section with a mala fide intention knowing fully well that there is no scope to invoke the provisions of this section in facts of this case and, therefore, this petition should be dismissed as not maintainable. 13. Shri Mookherjee, appearing for respondents 1 to 3 submitted: This petition is misconceived. The term 'change in ownership of shares' would mean that shares are in existence and that by transfer of the shares, the ownership has changed. Unless the change in ownership takes place on acquisition of shares by transfer of existing shares, this section has no application. This section does not deal with the issue of further shares. On that ground alone, all the allegations relating to extension of life of detachable warrants will have to be ignor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oard does not result in change in the Board to attract the provisions of Section 409. Section 2(6) defines a Board as the board of directors of a company and, therefore, any hierarchical change in the Board cannot constitute change in the Board. Further, this section is preventive in nature and acts which had already taken place cannot be remedied by this section. Since the 1st respondent has already been appointed as the Chairman and MD, the petitioner cannot seek stay of the resolution regarding the appointment of the 1st respondent. 16. Shri Choudhary in rejoinder submitted: The objections of the learned counsel for the respondents have been more on interpretation of Section 409 and not on the facts of the case. The main object and purpose of Section 409 is to protect the interest of the company. There can be no strict application of each and every word of the provision of this section. The interpretation should be to suit the needs of the society as economic laws are dynamic in nature. The rule of interpretation should be liberal to advance justice. The circular of the Department of Company Affairs which has been relied on by the learned counsel for the respondents was issue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the detachable warrants but it has done so only to benefit Mahavir which is under the control of the 1st respondent. 18. We have considered the pleadings and arguments of the counsel. Section 409 reads : Power of Company Law Board to prevent change in the Board of Directors likely to affect the company prejudicially.--(1) Where a complaint is made to the Company Law Board by the managing director or any other director or the manager of a company that as a result of a change which has taken place or is likely to take place in the ownership of any shares held in the company, a change in the Board of directors is likely to take place which (if allowed) would affect prejudicially the affairs of the company, the Company Law Board may, if satisfied, after such enquiry as it thinks fit to make that it is just [and equitable] and proper so to do, by order, direct that no resolution passed or that may be passed or no action taken or that may be taken to effect a change in the Board of directors after the date of the complaint shall have effect, unless confirmed by the Company Law Board; and any such order shall have effect notwithstanding anything to the contrary contained in any o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll Communication Ltd.'s case (supra), this Board has observed that Sections 250(3) and 250(4) are more or less pari materia to Section 409. The former sections specifically refer to transfer and likely transfer of shares resulting in change in the composition of the Board, while Section 409 refers to change or likely change in the ownership of shares held in a company. No change of ownership of the shares held in a company can take place, unless the shares are acquired by transfer or transmission. In the present case, according to the petitioner, since there is a change in the control and ownership of the 4th respondent which holds 26.2 per cent shares in the company, it should be construed as change in the ownership of the shares of the company. His learned counsel urged that liberal construction should be adopted to interpret this term to include even indirect acquisition of control over the shares which should be brought within the purview of this term. In construction of a section, the Court has to examine the section as a whole. This section enjoins that order passed by the CLB would have effect notwithstanding the provisions of the Act, the memorandum and the articles or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ations of change in ownership of shares arising out of future shares which are to be prospectively issued/allotted, as is evident from the plain language of that section. Therefore, we are not examining the arguments of the counsel as to the legality or otherwise of the decision to extend the life of the warrants. 23. The foundation of a petition under Section 409 has to be that there has been a change or a likely change in the ownership of shares. However, we have found that neither the change in control of the 4th respondent could come within 'change in ownership of shares of the company' nor the proposed issue of shares against the warrants would come within 'likely change in ownership of shares'. This being the case, there would have been no need for us to examine whether the change in ownership of shares has changed or likely to change the Board. 24. However, assuming that the contention of the petitioner that taking control of the 4th respondent by the 1st respondent amounts to a change in the ownership of shares, we have to see whether the same has brought out or is likely to bring out a change in the Board. In Skycell Communication Ltd.'s case (sup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The petitioner has challenged this appointment as being in violation of the provisions of the Act and the articles. As rightly pointed out by the learned counsel for the respondents, legality or otherwise of the appointments is not within the scope of enquiry by this Board in a proceeding under Section 409. 25. Whether the acquisition of control of the 4th respondent is likely to change the Board has not been categorically answered by the petitioner in the affirmative. From the details of the shareholding furnished by the respondents, we find that nearly 48 per cent of the shares are held by outsiders, and in exclusion of the holding of the 4th respondent, the petitioner controls about 10.3 per cent and the 1st respondent about 15.6 per cent. This being the case, it is doubtful whether 26.2 per cent shares held by the 4th respondent alone could bring about a change in the Board. 26. Since we have held that the appointment of the 1st respondent as the CMD has not brought about any change in the Board, nor there is any likely change in the Board, there is neither a need nor a scope to make any examination as to whether the change or likely change is prejudicial to the interest ..... X X X X Extracts X X X X X X X X Extracts X X X X
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