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2013 (12) TMI 1691

amaniam, Ms. Radhika, Raj Patel, Ms.Viloma Shah, Ativ Patel and Rishabh Agarwal JUDGMENT 1. The above captioned Company Petition has been filed by the Petitioner invoking the provisions contained in Sections 397 and 398 of the Companies Act, 1956 alleging therein certain acts of oppression and mismanagement in the affairs of Rl Company purportedly committed by the R2 to R16. The Petitioner has sought various reliefs as contained in the Petition which are as follow: (a) To grant appropriate reliefs and pass appropriate orders and directions, inter aliar under the provisions of Sections 397, 398, 402 and 403 of the Companies Act, 1956 to bring an end to the aforesaid acts of oppression and mismanagement perpetrated by the Respondents including but not limited to the reliefs prayed for herein. (b) To appoint a fit and proper person as the administrator of Respondent No. 1 to manage and control the affairs of Respondent No. 1. (c) To appoint a fit and proper person as an independent Director on the Board of Respondent No. 1. (d) To pass an order of permanent injunction thereby restraining the Respondents from alienating, encumbering, selling, disposing of, and/ or creating any third pa .....

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d the Hon'ble BIFR to consider the revival proposal of the Petitioner. 2.4 However, on account of subsequent events, including the fact that IDBI, which was a secured lender, had invoked the provisions of The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 ("SARFAESI"), the Hon'ble BIFR vide an order dated 29/08/2006, abated the reference to BIFR in accordance with the provisions of Section 15 of SICA read with Section 40 of SARFAESI. Being aggrieved by the said order, the Petitioner filed an appeal before the Hon'ble AAIFR against the said order dated 29/08/2006 which was dismissed by an order dated 1/08/2007. However, the Rl Company has disposed off the land at Haribhatki in Vadodara and cleared the dues of the IDBI, which was the only significant secured lender. 2.5 That, for the last 5 years, Rl Company was consistently making profits and the sale turnover of Rl Company increased from approximately ₹ 31 crore in the year ended 31/03/2008 to ₹ 53 crore in the year ended 31/03/2013. Rl Company was thus making substantial profits from the year ended 31/03/2009 to the year ended 31/03/2012. 2.6 T .....

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e of R3 and ₹ 7.70 lakh in the case of R4. 2.9 That R3 to R4 and R9 to R16, being in control and management of the Company, may at the Annual General Meeting, use and exercise their voting rights in the manner, so as to oppress the petitioner and other minority shareholders of Rl Company. 2.10 That, despite the Petitioner having a substantial interest in the R2, the R3 to R4 and R14 may exercise voting rights on behalf of the R2, in such a manner, as would prejudice the interest of the Petitioner and other minority shareholder of Rl Company. 2.11 That, the proposed disposal of the undertaking of the company at Nandesari is not only prejudicial to the interest of the Rl Company, but also prejudicial to the interest of the minority shareholders of the Rl Company. 2.12 That, the reasons purported to be given by R3 in the notice dated 3/09/2013 and the explanatory statement thereto, are contrary to the facts on record and the annual accounts of Rl Company, which had been prepared under the supervision and guidance of the R3 to R8. In fact, it is clear from the Annual Accounts for the year ended 31/03/2013, as well as the earlier years that there is no reason for disposal of the C .....

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planation of the shareholders could have been raised and answered at the meeting. It is alleged that the Petitioner did not raise any query at the meeting and directly approached the Board seeking permission by way of filing the instant petition and this fact itself demonstrates that the only intention of the Petitioner is only to stall the functioning of the Company and to cause harm to it. Respondent has categorically denied that the resolution under challenge and the explanatory note is defective and contrary to law and the same amounts to an act of oppression and mismanagement as alleged by the Petitioner. Based on the above, the Respondents have sought dismissal of the petition. 4. R2 to R4 and R9 to R12 have filed their respective reply(s) in which they have reiterated the same pleas taken by the Rl Company in its reply referred to above. 5. The Petitioner has filed rejoinder to the reply reiterating the pleas taken in the original petition. 6. I have heard both the sides at length and perused the record. Both the Parties have filed their Written Submission. I have also examined the same and gone through the various decisions referred to and relied upon by the ld. Counsel app .....

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aised the salary of the Officers of the Rl company. According to the ld. Counsel, had there been any loss to the company, the salary of the officers would have not been enhanced in the said EOGM arbitrarly. It was therefore, argued that the decision of the Respondents to sell the undertaking of the Rl Company is based on oblique motive and thus such decision being harsh, burdensome wrong and lacking in probity is an act of oppression and mismanagement within the definition of 397/398 of the Act. 11. Responding to the contention of the Petitioner with respect to the decision taken by the company for sale of subject undertaking for its alleged legal necessity, Mr. Subramaniam submitted that the decision had been taken by the shareholders holding approx. 97% shareholding in the company. It is submitted that in view of the doctrine of corporate governance, it is for the Board of Directors of the Company and /or its shareholders to take such decision on majority basis and such decision being commercial cannot be questioned in the Court of law in a petition under Section 397/398 of the Act. According to the ld. Counsel, the Hon'ble High Courts time and again has held that as a genera .....

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the actual terms and conditions are to be determined by the Board of Directors alone in whom the management and administration of the company is vested in law and in terms of the Articles. Based on the above, he contended that the impugned resolution therefore is perfectly valid in law. In support, he has referred to a decision in the case of Cochin Malabar Estates & Industries v. P V Abdul Khader [2003] 45 SCL 170 (Ker.) where it has been held as under:- "11. The general body meeting was accordingly convened on December 7, 2001, and accorded sanction under Section 293(l)(a) to the board of directors to take steps for sale of the immovable property of the company to utilise the sale proceeds for reducing the financial liabilities of the company. The board of directors has therefore authority to take appropriate decision for the purpose of sale when acceptable proposal is received.... 33. The board of directors as a working organ of the company are entrusted with the management of the company by the general body for taking various decisions so as to safeguard the interests of the shareholders, creditors etc. The board of directors could effect sale of the immovable property .....

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dly, he participated in the meeting. It is matter of record that he did not raise any objection in the course of the meeting with respect to proposed sale. Therefore, in my considered view, the said plea taken by the Petitioner's Counsel that the decision of the sale of the unit is malafide and is liable to be rejected is baseless and lacks merit. 15. Now, I proceed to consider the other ground mentioned hereinabove. The ld. Counsel for the Petitioner on his behalf alleged that the Respondents have deliberately choose not to disclose the entire details as required under the provisions under Section 173 of the Act with the sole motive to sell the assets at under price and thereby making wrongful gain to themselves and wrongful loss to the company which by all means amounts to a prejudicial act not only to the company but to its minor shareholders as well and therefore, disputed resolutions is bad in law and liable to be set aside. In support of his submission, the ld. Counsel appearing for the Petitioner has relied upon a decision of the Hon'ble High Court in the case of Firestone Tyre & Rubber Co. v. Synthetics & Chemicals Ltd. [1971] 41 Comp. Cas. 377 (Bom.) wherei .....

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s needed to be disclosed in the explanatory statement are the "material facts", the idea being that the shareholders should be in a position to form an independent opinion on the basis of the facts placed before them to take an appropriate decision. It is difficult, if not impossible to lay down any standard/guideline as to what would constitute material facts as the same would vary from case to case depending on the proposal under consideration. From the very fact that the section uses the words "material facts", it is clear that facts which are not material need not be furnished. As long as the explanatory statement is fair and gives, as far as possible, all information reasonably necessary for the shareholders to understand and appraise the proposal, such a statement would satisfy the requirements of Section 173(2) of the Act, provided it does not conceal or suppress or withhold relevant information or facts and does not make any false suggestion. As long as the explanatory statement contains sufficient, true and correct information to enable the general body to intelligently appraise the proposal, the explanatory statement should be considered to be fulfilli .....

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uot;It is, therefore, clear that regard must be had to the whole scope and purpose of the statute for the purpose of determining whether the statute is mandatory or directory. Judged by that test, the conclusion is irresistible that section 173 enacts a provision which is mandatory and not directory. The object of enacting section 173 is to secure that all facts which have a bearing on the question on which the shareholders have to form their judgment are brought to the notice of the shareholders so that the shareholders can exercise an intelligent judgment. The provision is enacted in the interests of the shareholders so that the material facts concerning the item of business to be transacted at the meeting are before the shareholders and they also know what is the nature of the concern or interest of the management in such item of business, the idea being that the shareholders may not be duped by the management and may not be persuaded to act in the manner desired by the management unless they have formed their own judgment on the question after being placed in full possession of all material facts and apprised of the interest of the management in any particular action being take .....

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t of the general body had not been taken by the Board of Directors. Plaintiffs made a request in this regard, which was turned down on the ground that the Board of Directors had the power. In such circumstances, substantial rights of the appellants/plaintiffs were affected due to the act of the Board of Directors. Section 293 of the Companies Act, 1956 has not been considered by the trial court. The trial court has only held that in accordance with clauses 28, 125 and 126 of the bye-laws, the Board of Directors have power to dispose of the property of the company and shareholders have no such power. In our opinion, the trial court has committed an error of law in not considering the fact that every shareholder of the company has a right to participate in the meeting of general body and in the aforesaid meeting, the shareholder has a right to object about the decision of the Board of Directors of the company in regard to disposal of the property of the company because in accordance with Section 293 of the Companies Act without approval of the General Body, the substantial portion of the property of the Company could not be disposed of by the Board of Directors. The statutory provisi .....

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hin an oblique motive and therefore, the Petitioner is entitled to reliefs as contained in the petition. 20. Mr. Subramaniam the ld. Sr. Advocate refuted all the above contentions and submitted that the details for which the explanatory statement are merely for the purpose of enabling a shareholder to take an informed decision to attend the meeting. According to the ld, Counsel, had the Petitioner raised any question or sought any query in the course of the meeting, his queries would have answered in the meeting. According to him, the Petitioner did not prefer any explanation either in writing nor raised any oral objection in the course of the meeting. Giving the background of the previous litigations filed by the Petitioner against the Respondent Group, the ld. Counsel tried to show the misconduct and malafides on the part of the Petitioner and argued that the sole motive of the Petitioner to file the instant petition is to create hurdles in the smooth functioning of the Rl Company. 21. It was further argued by the ld. Counsel that non-compliance of the provisions contained in Section 173 (2) does not constitute an act of oppression as alleged by the Petitioner. According to him, .....

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tory statement to be annexed to the notice of annual general meeting setting out the material facts concerning each items of business to be transacted thereat. According to him, it is own case of the Petitioner that the explanatory statement annexed to the notice does not provide material facts about contains the fact of sale of the undertaking of the company. According to him, a bare perusal of the Explanatory Statement will reveal that all the material particulars with respect to the sale of the undertaking have been provided, which are sufficient for the shareholders to take an informed decision. According to him, the requirement of stating material facts is to enable the shareholders to take an informed decision of the agenda of the meeting and thereafter decide whether to attend the meeting or not. It is submitted that intention of the legislature is that the Explanatory Statement must include material facts, but not detailed particulars as held in the case of East India Commercial Co. (P.) Ltd. v. Raymon Engineering Workers Ltd. AIR 1966 Cat 232 (DB), it has been held as under:- "In my opinion, all the material facts necessary for the purpose of the proposed special reso .....

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ot subsequently show that there was no reason contained in the statement about the proposed increase. In my opinion the statement is comprehensive and compendious statement. The board has in a way indicated the reasons for the increase. It has stated that it was required to appoint two men of their confidence as additional directors. It is implicit in this action and the statement that the company needed their services. This is followed by a recommendation by the board that the two named persons be appointed to fill up the additional posts. This is sufficient reason for the proposed increase. A shareholder, after reading this information, can certainly form an intelligent judgment and make up his mind one way or the other. He may either choose to attend the meeting or leave it to the good sense of the majority of the voters. As the plaint does not show it what the explanatory statement is defective, there is no reason to further examine the so-called defect pointed out by Mr. Thakkar. Mr. Nariman's distinction between known and unknown reasons is also very far from convincing. One acts only for known reasons. Acting without reasons is a leap in the dark and, therefore, there is .....

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in some cases of municipalities; foreign collaboration and import of materials requires permission under the Foreign Exchange Regulations Act and Import Control Act. It is not, in my view, necessary to state all that before the general body of shareholders: What is necessary, as for instance in this case, is to inform the general body of share-holders as a special business that Swadeshi Cotton Mills Ltd. is investing one crore rupees of its money in Swadeshi Polytex Ltd. and the requirement of Section 372 of the Companies Act has been satisfied.... 40. The important point of this decision is that in construing the provisions like Section 173(2) too rigid an interpretation should not be made as to "hamper the conduct of business". Section 173(2) of the Companies Act means a notice and explanatory statement which should give notice of the essence and substance of the transaction intended to be passed at the meeting. It is a business document. It must be used in a commonsense business way. So long as that standard is satisfied this Court should not be astute to find legal and technical points to defeat the notice and the explanatory statement. Even applying the test laid dow .....

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ch I am required to consider is as to whether the explanatory statement attached with the impugned notice dated 3/09/2013, meets the requirement under Section 173 of Act, and if not whether it is a mere irregularity and such irregularity /defect is curable by passing another Resolution and secondly as to whether this act amounts to a continuing act of oppression as contended by the Petitioner. 31. For the said purpose, I may like to reproduce the contents of the explanatory note attached to the impugned notice dated 3/09/2013 which is as follows:- 'Indo Nippon Chemical Co. Ltd. Continuation Sheet. FXPLANATORY STATEMENT (Pursuant to Section 173(2) of the Companies Act, 1956) Item 4: Company has a plan at Vadodara for manufacturing variety of chemicals. Due to increase in costs, competition from unorganized sector and cheap imports the operations at the plant are incurring continuous losses. For these reasons, in spite of all-out efforts of the management, the operations at the plan cannot reach break-even, recurrence of losses on continuous basis is adversely affecting finances, due to which Company is facing shortage of funds even for investing in its profitable operations. Aft .....

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tal 200 Net worth (140.49) Capital Employed 363.40 4. Export performance and foreign exchange earned during the year 2012-13:- ₹ 1806.54 lakh 5. Foreign investment and collaboration if any:- Not Applicable Information about the Appointee:-a Name P.I. Bhuva H.L Bhuva Background Qualification Bachelor of Engineering from (Chemical) from Kinki University, Japan Bachelor of Commerce University of Mumbai Past Remuneration ₹ 4,08,900 per annum net ₹ 4,54,734 per annum net Job Profile Overall in-charge of production & running of the company & sales of raw materials & policy decisions Overall in-charge of purchase & sales of raw materials & finished products & finance Proposed Remuneration ₹ 18 lakh gross ₹ 18 lakh gross Other information:- (a) Reasons for loss, if any or inadequate profits:- Due to increase in overall costs, competition from unorganized sector and cheap imports. (b) Steps taken or proposed to be taken for the improvement:- Disposal of loss making unit & expansion in capacities of other profitable units. (c) Expected increase in productivity and profits in measurable terms:- As a result of steps to be taken as per ( .....

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1956. iii. In the said case, the Solicitor Director was interested in the impugned resolution. iv. In the said case, the Company Law Board had directed that certain provisions of the sole selling agency agreement when it is to be renewed which were not in the interests of the company to be borne in mind. This view of the CLB was not placed before the general body, finding no mention in the explanatory statement. It is on this ground that the Court held that the Explanatory Statement did not contain material particulars. v. The said judgment is also based on the interpretation of section 314 of the Companies Act, 1956." 34. Similarly, the distinctive facts pointed out by the ld. Counsel in the case of B.A Mendonca (supra) are also without any substance. The conclusion therefore is that the impugned notice purportedly issued by the Respondents under section 173 (2) of the Act is bad in law. 35. Next question that I need to examine is as to whether the mere failure to comply with the requirements of Section 173 of the amounts to an act of oppression as defined in Section 397 of the Act, 36. In this regard, I may like to state that the Hon'ble Apex Court in the cases of Sangr .....

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mpugned resolution cannot be said a oppressive act. 38. Further, as mentioned hereinabove, the arguments advanced by Mr. Subramaniam the ld, Sr. Counsel appearing on behalf of the Rl Company that as soon as the buyer is identified and other terms and condition of the sale are finalized, the Rl Company will hold another meeting and will furnish all the details to the Petitioner which in my view is enough to protect the interest of the Petitioner. In my considered view, this brings the acts complained of to complete end. However, I may further add here that to ensure that the proposed sale of the subject undertaking of Rl Company goes smoothly to the satisfaction of the Petitioner, the Respondents may allow him a reasonable time to bring a better buyer on the same terms and conditions. In case, he succeeds to bring a better buyer before holding the EOGM, the Company may consider such proposal in its Board Meeting and /or in EOGM and take decision with respect to such proposal in the manner as it deems fit by recording the reasons therefor including the objections if any, raised by the Petitioner either in writing or oral in the course of the EOGM. In my opinion, this will bring quiet .....

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interest or in a manner oppressive to any member or members and that to wind up the company would unfairly prejudice such member or members, but that otherwise the facts would justify the making of a windingup order on the ground that it was just and equitable that the company should be wound up. If the Tribunal is satisfied that there exists a situation where the business of the company is being conducted in a manner prejudicial to the interest or in a manner oppressive to any member or members and that winding up of the company would unfairly prejudice such member or members but that otherwise the facts would justify the making of a winding-up order on the ground that it was just and equitable that the company should be wound up, it may with a view to bringing to an end the matters complained of, make such order as it deems fit. Therefore, what it transpires in the present context is, we have to examine whether the acts of the company were oppressive to any member or members justifying the winding up as just and equitable. It is not necessary that in every case, the relief of windingup should be made. It is an option with the Tribunal if it considers that in order to bring to an .....

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