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2013 (12) TMI 1691

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..... d 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 party rights of any nature whatsoever in respect of the undertaking of Respondent No. 1 at Plot No. 2, Nandesari Industrial Estate, P.O. Nandesari, District Vadodara, Gujarat 391 340. (e) To pass an order of injunction thereby restraining the Respondents from increasing the remuneration of Respondent Nos. 3 and 4, in the manner as proposed by the notice dated 3rd September, 2013. 2. In order to crystallize the points in dispute for determination, it may be useful to refer relevant facts as set out in the petition are herein as under:- 2.1 That the Rl Company was incorporated on or about is 21/05/1960. The father of the Petitioner was the Chairman of Rl Company. However, during the lifetime of the father of the Petitioner, in and around the year 1998, R3 and R4 were appointed as the Managing Directors of Rl Company. R3 and R4 along with R5 to R8 have been in management and control of .....

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..... 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 That, in the year ended 31/03/2013, Rl Company claims to have incurred a loss of ₹ 43.55 lakh. A comparison of the figures of Profits/ losses from 2009 to 2013 would show that the year ended 31/03/2013 is the first and only year in which Rl Company has incurred any loss from its operations. A significant portion of the loss incurred by Rl Company is in fact on account of depreciation and amortization of expenses and the Rl Company has admittedly not incurred any cash loss even in the year ended 31/03/2013. In fact, the carried forward losses in the books or the Rl Company have been reduced from approximately ₹ 16 crore in the year ended 31/03/2008 to approximately ₹ 5.44 crore in the year ended 31/03/2013. 2.7 That on or about 4/09/2013, the Petitioner, as a shareholder of Rl Company received a notice for the 52nd Annual General Meeting of Rl Company to be held on .....

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..... to, 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 Company's undertaking. 2.13 That, the acts of oppression and mismanagement of Rl Company are so serious that they would justify the making of and an order of winding up against Rl Company. The Petitioner states that to wind up Rl Company would unfairly prejudice the interest of the members of Rl Company and hence this Petition. 3. Respondent No.l appeared and filed its reply. The Rl Company has stated that the Petitioner has wrongfully sought to approach this Board based on 25% of his shareholding in R2 which in turn holds 44% on Rl Company. It is further stated that the share of Mr. Bhuva has been transferred to the name of the Petitioner. 3.1 At the outset, the Rl in its reply has raised a preliminary objection thereby challenging the maintainability of the petition and seeking its dismissal interalia on the ground that the Petitioner has not approached the Board with the clea .....

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..... 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 appearing for the respective Parties. 7. At the outset, it is pertinent to mention that in the course of hearing in respect of the interim reliefs, on the suggestion of the Board, the ld. Counsel appearing for both the sides agreed that the petition may be decided finally on the basis of the pleadings and the material available on record. The ld. Counsel appearing for the Respondents submitted that the other Respondent Nos. 2 to 4 and 9 to 12 who have filed their short reply hereby adopt the reply filed on behalf of Rl Company for the said purpose. I, therefore, with the consent of the parties, proceed to decide the C.P on merits. 8. Before, I proceed to consider the scope of the arguments advanced on behalf of the rival Parties through their ld. Counsel, it is relevant to refer the questions arising for my consideration which are as follows:- "i. Whether the impugned resolution .....

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..... ors 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 general rule, the Court would not interfere with the internal management of the company. He added that it is for the Board of Directors to decide the manner in which the affairs of the Company are to be carried on. According to the ld. Counsel, the Courts determine question of law and adjudicate the question of facts and not the question related to any of its business decisions. The ld. Counsel urged that even a commercial misjudgment does not amount to oppression of mismanagement. According to him, the Board of Directors may commit error but every error cannot be a ground for action as the Court is not a correctional body for all the errors. He therefore submitted that a shareholder cannot approach to the court with fanciful idea that he could move the machinery of the court to set right what he thinks is correct and what the Board of Directors does is wrongs. He further contends that t .....

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..... eceived.... 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 only with the sanction of the general body under Section 293(1) of the Companies Act and sanction was accorded by the general body in its meeting on December 7, 2001. The general body of the company examined the decision taken by the board of directors and felt in the facts and circumstances the only feasible option was to sell some of the immovable properties and utilise the sale proceeds for meeting the financial obligations particularly to the banks and financial institutions. Once necessary sanction has been obtained from the general body and a business decision has been taken by the board of directors, an ordinary shareholder has no power to question the same. 34. A shareholder could express his views in the general body meeting. The company is a legal entity and it can act only through its directors.... 42. The company judge would normally start with the presumption that the .....

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..... 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.) wherein the Hon'ble Bombay High Court has held as follows: - "The object underlying section 173(2) is that the shareholders may have before them all facts which are material to enable them to form a judgment on the business before them. Any fact which would influence them in making up their minds, one way or the other, would be a material fact under section 173(2) and had to be set out in the explanatory statement to the notice of the meeting. The views expressed by the Company Law Board would have certainly played a part, and perhaps an important part, in enabling the company's shareholders to make up their minds whether to vote for approval of the further appointment or not. The contention that the matter was closed by the said letter dated June 15, 1966, is too naive and is belied by subsequent events. By its letter dated April 9, 1969, headed "Sole selling agents; t .....

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..... 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 fulfilling the requirements of Section 173(2) of the Act. In the present case, the proposal was for the sale of a unit of the company. Therefore, in the case, the material farts could comprise the reasons for the sale, whether sale would affect the interest of the company, to whom the sale is being effected, the consideration for the sale, how and by whom the consideration was assessed, whether the directors have any interest in the sale, whether all statutory clearances have been obtained etc These material facts, we feel would enable the shareholders to decide on the issue.' 17. The ld. Counsel for the Petitioner has relied further referred the judgment of Hon'ble Gujarat High Court in the case of Y.S. Spinners Ltd. v. Official Liquidator of Shri Amibica Mills Ltd. [2000] 25 SCL 26 wherein the Hon'ble Gujarat High Court has, inter alia, has held as under:- 'Section 293(l) .....

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..... y 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 taken. Having regard to the whole purpose and scope of the provision enacted in section 173, I am of the opinion that it is mandatory and not directory and that any disobedience to its requirements must lead to nullification of the action taken. If, therefore, there was any contravention of the provisions of section 173, the meeting of the company passed held on 5 September, 1961, would be invalid and so also would be the resolution passed at that meeting be invalid." It is relevant to note that the learned Judge has followed the law laid down by the single Judge of this court in the earlier mentioned judgment and concurred with it in its entirety. Thus, when a resolution is passed without disclosing material facts in the explanatory statements in flagrant violation of the requirements of section 173 of the Companies Act, it cannot be said to be anything but a void resolution and .....

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..... f 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 provisions of Section 293 of the Companies Act override the provisions of Memorandum of Association of the company. 13. Hon'ble Supreme Court in the case of R.C. Cooper v. Union of India AIR 1970 SC 564 has held as under in regard to jurisdiction of the court to grant relief if the rights of the individual civil holders are impaired:- "Jurisdiction of the Court to grant relief cannot be denied, when by State action the rights of the individual shareholder are impaired, if that action impairs the rights of the Company as well. The test in determining whether the shareholder's right is impaired is not formal; it is essentially qualitative : if the State action impairs the right of the shareholders as well as to the Company, the Court will not, concentrating merely upon the technical, operation of the action, deny itself jurisdiction to grant relief." 14. The argument advan .....

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..... etitioner 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, it is merely an irregularity and is curable by passing another resolution. It was therefore contended that this single alleged act of oppression which has no more continuing effect cannot be held as an act of oppression within the meaning of 397 of the Act. In support of contention the ld. Counsel has referred the decisions in the case of Maharani Rajya Lakshmi v. Indian Motor Co. AIR 1962 Cal 127 (DB), where it has been held as under :- "18. Now the second answer is on the law on this branch of the appellant's argument Section 173 of the Companies Act concerns what is indicated in the marginal note of that section as "Explanatory statement to be annexed to notice." Although it imposes by Section 173(2) an obligation that there shall be annexed to the notice of meeting a statement of the type and nature which I have discussed above, "the question is, does fa .....

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..... ment 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 resolution has been given in the Explanatory Statement. It is not the function of an Explanatory Statement to travel beyond the proposed resolution, Material facts have to be given, but not detailed particulars. So far as the purely technical part of the collaboration is concerned that is a matter which is within the province of the Directors of the Company, It is the Directors who have been entrusted by the shareholders to carry on the administration of the Company. Therefore, the technical details of the Company's work and administration, including the question as to where certain projects were to be set up or how, are not matters which the Directors are bound to disclose to the shareholders in the Explanatory Statement, unless there are special reasons why they should do so. These are details concerning the general administration of the Company, and if the shareholders have lost .....

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..... ment 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 never any occasion for giving unknown reasons, But, I must make it clear that under section 173(2) material facts will not necessarily include the reasons. It will all depend upon the nature of the subject-matter which constitutes the special business. Sometimes the facts stated are sufficiently eloquent and there is no need to justify the proposed action by giving reasons. In the absence of sufficient pleadings, the plaintiffs in the present case cannot challenge the statements contained in the notice and the explanatory statement on the ground that the particulars are insufficient and/or misleading. In the result I disagree with the finding of the learned judge and hold that there is no contravention of the provisions of section 173 of the Companies Act." 25. According to the ld. Counsel for the Respondents, the Respondent No. 1 has given sufficient and appropriate particul .....

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..... ction 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 down by Kekewich, J., that "the man I am protecting is not the dissentient but the absent shareholder" as applied in the decision of Biswanath. Prasad Khaitan v. New Central Jute Mills Co. Ltd. [1960] 64 CWN 970), the instant case does not come within the meaning of that test." 27. In addition to the above, it was also argued by the ld. Counsel for the Respondent that a single shareholder cannot question the decision of the Board of Directors approved by the Shareholders in the General Meeting and for this reason also the petition is liable to be dismissed as held in the case of Cochin Malabar Estates & Industries (supra). it has been held as under :- "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, .....

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..... uous 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. After lot of deliberations, it is proposed to dispose of Vadodara Plant to a suitable party at the best possible value. None of the Directors have any concern or interest in the proposed resolution. In principle approval of the members is hereby requested for disposal of the undertaking as required under provisions of Section 293 (l)(a) of the Companies Act, 1956. Item Nos. 5 and 6: The present term of office of Mr. Harish I. Bhuva and of Mr Prafull I. Bhuva expires on 30th September, 2013. As recommended by the Remuneration Committee & subject to approval of the members, the Board of Directors has at its meeting held on 30th August, 2013 reappointed the aforesaid Directors for a period of 3 years from I" October, 2013. The draft appointment letters to be issued by the Company with Mr Harish 1. Bhuva and Mr Prafull 1. Bhuva in respect of their reappointments for a further per .....

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..... n 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 (b), company expects to increase turnover by 10%-20% & commensurate increase in profitability. The company undertakes efforts on ongoing basis for cost reduction and value addition. The draft appointment letters to be issued to Mr. Harish I. Bhuva and Mr. Prafull I. Bhuva are available for inspection at the Registered Office of the Company on any working day up to the date of 52nd Annual General Meeting. Yours Directors recommend the resolutions set out in Item Nos. 5 and 6 of the Notice for your approval. The above may also be treated as an abstract of the terms of contract between the Company and Mr. Harish I. Bhuva and Mr. Prafull I. Bhuva pursuant to Section 302 of the Companies Act, 1956. Mr. Harish 1. Bhuva and Mr. Prafull I. Bhuva may be deemed to be concerned or interested in the resolution no(s). 5 and 6 None of the other Directors of Company are in any way concerned in .....

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..... s 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 Sangramsinh P. Gaekwad v. Shantadevi P. Gaekwad [2005] 57 SCL 476 (SC) and in the case of Needle Industries (India) Ltd. v. Needle Industries Newy (India) Holding Ltd. [1981] 3 SCC 333 has categorically held that a resolution may be passed by the Board of Directors which is perfectly legal in the sense that it does not contravene any provisions of law, and yet it may be oppressive to the minority shareholders or prejudicial to the interests of the Company and therefore, such a resolution can certainly be struck down by the Court under Section 397 or 398. Equally a converse case can happen. A resolution may be passed by the Board of Directors which may in the passing contravene a provision of law, but it may be very much in the interests of the Company and its shareholders. It has been further laid down in the said cases that the conduct which is technically legal and correct, thus, may .....

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..... 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 quietus to any possible dispute that the Petitioner may raise in respect of the proposed sale. 39. Now, I propose to consider the questions raised challenging the maintainability of the petition broadly on the following two grounds. Firstly, the Respondents have assailed the maintainability of the petition contending that the Petitioner has failed to place any circumstance which would justify winding of the Company under the just and equitable clause and/or to show that it would be prejudicial to the interest of the shareholders to windup the company. The ld. Counsel in this regard has referred to the. following decisions. a. Chatterjee Petrochem (I)(P.) Ltd. v. Haldia Petrochemicals Ltd. [2011] 167 SCL 373 (SC) wherein it has been held as under :- "It will be evident that in order to pass orders under Section 397 of the Companies Act, 1956, the CLB has to be satisfied that the Com .....

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..... xt 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 end the matters complained of, it can pass orders for windingup if it is just and equitable or it can pass such order as it thinks fit." 40. Secondly, it was contended by the Ld. Counsel for the Respondents that the Petitioner has concealed numerous material and vital in his petition and therefore, he is guilty of suppression of facts. Thus, the petition is liable to be dismissed on this ground as the Petitioner has not approached this Bench with clean hands. 41. I have considered both the objections referred to above with respect to maintainability of the C.P. Insofar as the first objection is concerned, in my view, where any shareholder is denied his most valuable right in utter disregard of the statutory protection, the making of a winding of order, on the ground that it is just and equitable would be justified. Therefore, having regard to the facts of the case on hand, th .....

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