TMI Blog2008 (3) TMI 760X X X X Extracts X X X X X X X X Extracts X X X X ..... ors of the Company at the meeting held on 24.04.2006 had approved the issue of 32,500 10% redeemable cumulative preference shares (RCPS) of ₹ 100/- each at a premium of ₹ 400/- per RCPS on rights basis to the existing shareholders in the ratio often RCPS for every one equity share held by the members. The petitioner was entitled to 5,060 shares constituting 15.60% and he was required to pay ₹ 25.30 lakhs. The petitioner by his letters dated 19.05.2005 and 20.06.2006 requested for extension of time, but failed to exercise his option for the rights issue and therefore, cannot make a case of oppression and mismanagement of the affairs of the Company. These vital aspects have not been disclosed by the petitioner, throwing light on the conduct of the petitioner. The RCPS issued by the Company were subsequently converted into equity shares of ₹ 100/- with a premium of ₹ 400/- as approved at the extra ordinary general meeting of the members of the Company held on 20.09.2006. Consequently, the shares held by the petitioner came to be reduced from 15.60%o to 1.42%, disqualifying him from applying under Section 397/398 of the Act. The petitioner has n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erments contained in the main petition to the effect that the present authorised capital is ₹ 80 lakhs. The petitioner has not questioned the validity of the extra ordinary general meeting and there is no prayer to set aside the extra ordinary general meeting held by the Company, but is challenging the issue of preference shares in the company petition. Nevertheless, the petitioner failed to plead that the shareholding of the petitioner got reduced below 10% on account of further issuance of shares. The action of the Company to convert preference shares into equity sharesis not relevant for the purposes of Section 399. The notice of the extra ordinary general meeting discloses the business regarding the issue of preference shares and amendment of the capital clause of the memorandum of association of the Company. The explanatory statement appended to the notice of the extra ordinary general meeting speaks of the proposal of the board of directors to develop the existing property by building residential apartments to augment regular source of income. The Company, therefore, proposed to raise funds partly by issue of preference share capital. The directors report for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of litigation onthe same subject matter before the CLB. The petitioner started the litigation as early as in 1989, by invoking the jurisdiction of the Karnataka High Court, wherein he challenged the transfer of 85% of shares by the members of his family to the respondents 2 to 5 herein. When the petitioner was unsuccessful, he approached the Supreme Court, but the SLP came to be dismissed. The petitioner thereafter filed C.P. No. 25 of 1999 for almost a similar relief before this Bench, wherein by an order dated 28.02.2002, it was held that no case of oppression or mismanagement was made out and gave an option to the petitioner either continue as a member or exit the Company by transferring his shares at a fair consideration. The petitioner has challenged the order of the CLB, before the High Court of Karnataka and the appeal is pending. 2 . Shri R. Murari, learned Counsel, while opposing the maintainability application submitted: The issue of maintainability raised by the applicants involves determination of factual matters concerning the issue of preference shares and the consequent conversion into equity shares which cannot be gone into in the present procee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot maintainable in terms of Section 399 of the Act, instead the allegations relating to the issue of further shares would be examined first as to whether the same is an oppressive act and if it is found to be so then only other allegations in petition would be examined, as held in (a) Mrs. Farhat Sheikh v. Esemen Metalo Chemicals Private Limited and Ors. and Detinners Private Limited and Ors. (1996) Vol. 87 CC 290; (b) T.N.K. Govindaraju Chetty and Co. and Ors. v. Kadri Mills (CBE) Limited and Ors. (1999) Vol. 96 CC 871; (c) Om Prakash Gupta and Ors. v. Hicks Thermometers (India) Ltd. and Anr. (1999) Vol. 97 CC 356; (d) S. Ajith Singh and Anr. v. DSS Enterprises Private Limited and Ors. (2002) Vol. 109 CC 597; and (e) Dinesh Sharma and Anr. v. Vardaan Agrotech Private Limited and Ors. (2007) Vol. J35 CC 133. The petitioner's holding of 1.42% of the share capital of the Company has been arrived at only after including the impugned allotments and in the absence of the same, the eligibility of the petitioner to maintain the petition can never he in doubt. The Company offered preference shares to the petitioner to be refused by him so that no one would invest in the Company. As lon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he case, as held in Goldmark Enterprise Limited v. Pondy Metal and Rolling Mills Private Limited and Ors. (2007) Vol. 136 CC 598. The auditors' report dated 09.08.2006 speaks of the proposal to issue cumulative preference shares which are convertible into equity shares by the board as it may deem fit, whereas the preference shares have been converted into equity capital within two months without giving any reasons. The Company is aware that the petitioner will not subscribe to the preference shares. The Company is dealing only with the entities of the respondent 2-5 and entered into three agreements in respect of the lands belonging to the Company, thereby appropriating the lands of the Company for themselves and carrying out developmental activities thereon to deprive the petitioner of such benefits. The shareholding as on 30.09.2006 furnished by the Company discloses31304 shares held in the name of R.N. Shetty Family Trust, a new shareholder. The allotment in favour of the Trust having been hit by the provisions of Section 153, is not valid. The provisions of Section 153 are mandatory and continue to be on the statute and as such required to be followed, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... res, being the subject matter of an appeal in MFA No. 3 of 2005 before the High Court of Karnataka arising out of the CLB order dated 28.02.2002 made in C.P. No. 25/1999. The board of directors of the Company had approved at the meeting held in April 2006 a proposal to issue 32500, 10% redeemable cumulative preference shares (RCPS) of ₹ 100/- each at a premium of ₹ 400/- per RCPS on rights basis to the existing share holders in the ratio of ten RCPS for every one equity share held by the members. Accordingly, the Company had offered 5060 shares to the petitioner as per his entitlement which were not subscribed for his own reasons. The RCPS issued by the Company in favour of the members came to be subsequently converted into equity shares of ₹ 100 with a premium of ₹ 400/- as approved at the extra ordinary general meeting of the members of the Company held in September, 2006. This conversion of RCPS into equity shares of the Company, resulted in reduction of the shares held by the petitioner from 15.60% to 1.42 %. The petitioner while claiming reliefs under Section 397/398, has inter-alia sought for declaration that the issue of 40,000 cumulative preference s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also challenged in the petition, then, the petition will not be dismissed as not maintainable in terms of Section 399. Instead, the allegations relating to the issue of further shares would be examined first as to whether the same is an oppressive act and if it is found to be so, then only other allegations in the petition would be examined; (iii) S. Ajith Singh and Anr. v. DSS Enterprises Private Limited and Ors. (supra) held that where the qualification to apply under Section 399 has been affected by further issue of shares or by admission of new members which is also challenged, the CLB, would first adjudicate on these complaints before examining other issues. Further, whether the petition is maintainable in terms of Section 399 or not would depend upon the findings given on the allegations relating to issue of further shares and admission of new members by transfer of shares and further the petition would not be dismissed in limine as sought for by the respondents; (iv) T.N.K. Govindaraju Chatty and Co. and Ors. v. Kadri Mills (CBE) Limited and Ors. (supra) held that when the holding of a petitioner is reduced below 10% due to further allotment of shares and such allotment itse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce, containing among other matters, reads thus: At present the Company does not have any income other than lease rentals. The Board of Directors proposes to develop the existing property jointly with other interested parties to augment some regular source of income which enables the Company to strengthen it's financial position. In the first instance, it is proposed to build residential apartments with an initial investment of about ₹ 300 to ₹ 350 lakhs. To part finance the said project your directors propose to raise funds to the extent of about ₹ 165 lakhs by issue of Preference Share Capital. The existing authorised share capital of the Company is ₹ 4,00,000/- divided into 4000 shares of ₹ 100/- each. Hence it is also essential that the authorised share capital of the Company is increased, so that further share capital can be raised. 5. The petitioner in response to the notice of extra ordinary general meeting, by his letter dated 04.03.2006 requested the Chairman of the Company, in view of (a) pendency of the appeal proceedings initiated by him before the Karnataka High Court, in relation to the affairs of the Company; (b) pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ainst the issue of preference shares at the annual general meeting held on 31.08.2006, in pursuance of the notice dated 27.08.2006, received by him on 29.08.2006. The objection now raised by the petitioner by referring to the directors report dated 09.08.2006, that the Company has issued cumulative preference shares at the insistence of the lending Banks/Institutions is contrary to the reasons stated in the explanatory statement appended to the notice of extra ordinary general meeting dated 06.02.2006, to my mind, is nothing but an after thought and devoid of any merits. In this connection, the Company by its letter dated 20.03.2006, stated supra, advised categorically the petitioner that it has proposed to undertake developmental activities to make the Company a viable unit. The financing Banks normally look for stake of promoters in the share capital of the Company. The board, therefore, proposed to issue shares to the existing members on pro-rata basis. There is, therefore, no insistence but only expectation on the part of the Company's Bankers for enhancement of the stake of the promoters in the share capital of the Company. It is on record that the Company has entered into ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al for want of completion of the pleadings. The petitioner has raised therein substantial question of law on the issue of any trust holding shares of a company. The extract of the minutes of the meeting of the board of directors held on 23.05.2006 and the list of allottees would show that 23940 preference shares have been allotted in favour of R.N. Shetty Family Trust. The Company has stated in its communication dated nil addressed to the Registrar of Companies that the Company has converted the 10 per cent of redeemable cumulative preference shares of ₹ 100/- each into equity shares of ₹ 100/- in terms of the approval of the board of directors at its meeting held on 25.09.2006 and furnished a list of members who held preference shares and whose shares are converted into equity shares, wherein it is found that 2900 preference shares held in the name of R.N. Shetty Family Trust have been converted into 29000 equity shares. The enclosures to Form No. 2 discloses the allotment of 29000 equity shares in the name of R.N. Shetty Family Trust. The shareholding of the Company as at 30.09.2006 produced by the Company discloses 31304 shares constituting 87.56% in the name of R.N. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y of the company petition. The petitioner's right to apply under Section 399 squarely would depend upon the validity of the issue and conversion of RCPS into equity in the name of R.N. Shetty Family Trust, which involve a mixed question of law and fact and cannot be adjudicated at the preliminary stage. The main petition cannot, therefore, be dismissed at the threshold as not maintainable in terms of Section 399. In the circumstances, it is directed that the parties shall complete the pleadings in C.A. No. 220 of 2007 and other connected applications by filing counter on or before 09.04.2008 and rejoinder to be filed by 25.04.2008. The applicant will take notice to the proposed parties in the connected applications, since prima facie I am of the opinion that the proposed parties must be afforded an opportunity of hearing on account of the involvement of their interest in the subject matter of the proceedings. The decisions in Sangramsinh P. Gaekwad v. Shantadevi P. Gaekwad (Supra) and T.N.K. Govindaruju Chetty v. Kadri Mills (CBE) Limited (Supra) would be relevant only when the validity of the further issue of shares is examined in the main proceedings. The parties shall ensure ..... X X X X Extracts X X X X X X X X Extracts X X X X
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