companies
act
[2004] 54 scl 601 (sc)
SUPREME
COURT OF
Dale & Carrington Investment
(P.) Ltd.
v.
P. K. Prathapan
mrs.
Ruma Pal and Arun Kumar, JJ.
Civil
Appeal Nos. 5915 to 5918 of 2002
september
13, 2004
When powers to issue additional shares are used by
directors of company merely for an extraneous purpose like maintenance or
acquisition of control over affairs of company, same cannot be upheld
Section 291, read with section 81, of the
Companies Act, 1956 - Directors - Power of - Whether fiduciary capacity, within
which directors have to act, enjoins upon them a duty to act on behalf of a
company with utmost good faith, utmost care and skill and due diligence and in
interest of company they represent - Held, yes - Whether in matter of issue of
additional shares, if powers are used by directors merely for an extraneous
purpose like maintenance or acquisition of control over affairs of company,
same cannot be upheld - Held, yes - Whether even though section 81, which
contains certain requirements in matter of issue of further share capital by a
company, does not apply to private limited companies, directors in a private
limited company are expected to make a disclosure to shareholders of such a
company when further shares are being issued - Held, yes
Section 397, read with section 398, of the
Companies Act, 1956 - Oppression and mismanagement - Appellant was private
limited company - P, who was majority shareholder in company, filed petition
under section 397/398 alleging that 'R', who was managing director of company,
had allotted to himself certain equity shares of company without making offer
to ‘P’ regarding further issue of shares and as a result of such allotment 'P'
had been reduced to minority shareholder in company - 'R' had neither placed on
record anything to justify issue of further share capital nor it had been shown
that proper procedure was followed in allotting additional share capital;
rather only motive for allotment appeared to be mala fide to gain control of
company - CLB held that allotment of additional shares by 'R' to himself was an
act of oppression on his part and as a relief gave option to 'P' to sell his
shares to 'R' - On appeal by 'P', High Court maintained CLB's finding regarding
oppression but as a relief set aside allotment of additional shares in favour
of 'R' - Whether on facts of case, only relief that had to be granted was to
undo advantage gained by ‘R’ through his manipulations and fraud and,
therefore, allotment of all additional shares in favour of ‘R’ had rightly been
set aside by High Court - Held, yes
Section 10F of the Companies Act, 1956 -
Company Law Board - Appeal against order of - Whether if a finding of fact is
perverse and is based on no evidence, it can be set aside in appeal even though
appeal is permissible only on question of law - Held, yes - Whether where
judgment of CLB was given in a very cursory and cavalier manner and CLB had not
gone into real issues which were germane to decision of controversy involved in
case, High Court had rightly gone into depth of matter while exercising
jurisdiction under section 10F - Held, yes
FACTS
R and P were
natives of Kerala. P had been working in
The CLB decided
the issue of locus standi against R. It took the view that R had committed an
act of oppression by not only not informing P about issue of further share
capital of the company but also not offering him the further share capital
which was being issued by the company. However, it, while considering relief,
gave an option to P to sell his shares to R. The CLB dismissed R’s petition for
rectification of register of members.
The High Court
on being approached by both parties maintained the judgment of the CLB so far
as the rejection of petition for rectification of register of members was
concerned. However, it allowed the appeal filed by P which was directed mainly
to the question of relief granted by the CLB. It further took a serious view of
the manner in which R was managing the affairs of the company and held it to be
an act of fraud on the part of R in allotting additional equity shares of the
company in his favour. It, accordingly, ordered setting aside of allotment of
shares made in the board meetings held on 24-10-1994 and 26-3-1997, to R.
On appeal to
the Supreme Court :
held
Validity of allotment
of equity shares
A doubt had
been cast about whether the alleged meetings in which additional equity shares
were allotted to R were held at all. The appellants had filed a photocopy of
the minutes of the alleged meeting of the board of directors said to have taken
place on 24-10-1994. However neither a copy of a notice convening the board
meeting nor the log book meant to record signatures of directors attending the
meeting of the board of directors were produced. In the absence of these
documents and any other proof to show that a meeting was held as alleged it
could not be accepted that a meeting of the board of directors was held on
24-10-1994. If no meeting of the board of directors took place on the date, the
question of allotment of shares to R did not arise. The photocopy of the
minutes of the alleged meeting produced by the appellants was sham and
fabricated. The alleged allotment of additional equity shares of the company in
favour of R was, therefore, wholly unauthorized and invalid and deserved to be
set aside. Even assuming that a meeting of the board of directors of the
company did take place as alleged by R, the first question that arose whether
the company required additional funds for which the shares were issued. Nothing
had been placed on record to show that during the financial year 1993-94, i.e.,
1-4-1993 to 31-3-1994, suddenly a need had arisen for a substantial investment.
No particular reason for making a major investment had been shown. Nothing had
been shown as to how such amount was utilized.
Hence, it
appeared that the only purpose of R was to allot additional shares in the
company to himself to gain control of the company and to achieve that
objective, the books of the company had been manipulated. The High Court was
right in holding that the entire manipulation of records of the company by R
was an act of fraud on his part. [para 11]
Legal position of
directors of companies
A company is a
juristic person and it acts through its directors who are collectively referred
to as the board of directors. An individual director has no power to act on
behalf of a company of which he is a director unless by some resolution of the
board of directors of the company specific power is given to him/her. Whatever
decisions are taken regarding running the affairs of the company, they are
taken by the board of directors. The directors of companies have been variously
described as agents, trustees or representatives, but one thing is certain that
the directors act on behalf of a company in a fiduciary capacity and their acts
and deeds have to be exercised for the benefit of the company. They are agents
of the company to the extent they have been authorized to perform certain acts
on behalf of the company. In a limited sense, they are also trustees for the
shareholders of the company. To the extent the power of the directors are
delineated in the memorandum and articles of association of the company, the
directors are bound to act accordingly. As agents of the company, they must act
within the scope of their authority and must disclose that they are acting on
behalf of the company. The fiduciary capacity, within which the directors have
to act, enjoins upon them a duty to act on behalf of a company with utmost good
faith, utmost care and skill and due diligence and in the interest of the
company, they represent. They have a duty to make full and honest disclosure to
the shareholders regarding all important matters relating to the company. It
follows that in the matter of issue of additional shares, the directors owe a
fiduciary duty to issue shares for a proper purpose. That duty is owed by them
to the shareholders of the company. Therefore, even though section 81, which
contains certain requirements in the matter of issue of further share capital
by a company, does not apply to private limited companies, the directors in a
private limited company are expected to make a disclosure to the shareholders
of such a company when further shares are being issued. That requirement flows
from their duty to act in good faith and make full disclosure to the
shareholders regarding the affairs of a company. The acts of directors in a
private limited company are required to be tested on a much finer scale in
order to rule out any misuse of power for personal gains or ulterior motives.
Non-applicability of section 81 in case of private limited companies casts a
heavier burden on its directors. Private limited companies are normally closely
held, i.e., the share capital is held within members of a family or within a
close knit group of friends. That brings in considerations akin to those
applied in cases of partnership where the partners owe a duty to act with
utmost good faith towards each other. Non-applicability of section 81 to
private companies does not mean that the directors have absolute freedom in the
matter of the management of affairs of the company. [
In the instant
case, articles of association of the company prohibited any invitation to the
public for subscription of shares or debentures of the company. The intention
appeared to be that the share capital of the company would remain within a
close knit group. Therefore, if the directors failed to act in the manner
prescribed above, they could be held liable for breach of trust for misapplying
funds of the company and for misappropriating its assets. [
When powers are
used merely for an extraneous purpose like maintenance or acquisition of
control over the affairs of the company, the same cannot be upheld. [
In the instant
case, the managing director had neither placed on record anything to justify
issue of further share capital nor it had been shown that proper procedure was
followed in allotting the additional share capital. Conclusion was inevitable
that neither the allotment of additional shares in favour of R was bona fide
nor it was in the interest of the company nor a proper and legal procedure was
followed to make the allotment. The motive for the allotment was mala fide, the
only motive being to gain control of the company. Therefore, the entire
allotment of shares to R had to be set aside. [
Even the CLB
found that the allotment of additional shares by R to himself was an act of
oppression on his part. The CLB drew that conclusion solely for the reason that
no offer had been made to the majority shareholders regarding issue of further
share capital. The High Court accepted the finding of oppression. However, it
placed it on a much broader base by taking into consideration various other
factors. The High Court’s finding was based on a much stronger footing. In
fact, the High Court had gone on to conclude that R had played a fraud on the
majority shareholders by manipulating the allotment of shares in his favour.
There was no reason to differ with the finding of the High Court [
Locus
standi to file petition
So far as the
question of permission of the Reserve Bank of
The entire
scheme regarding purchase of shares in the name of mother of P was suggested by
R himself. He saw to it that the shares were transferred by the company in the
name of P and his wife. The company had recorded the transfer and corrected its
register of members in that behalf which, in fact, led R to file a petition for
rectification of the register of members as a counterblast to the petition
filed by P under section 397/398. It was not open to R later to raise the
question of the FERA violation, more particularly in view of his having
recorded the transfer of shares in the name of P and his wife in the records of
the company. That also answered the objection regarding locus standi of P and
his wife to file section 397/398 petition before the CLB. Since they were
registered as shareholders of the company on the date of filing of the petition
and they held the requisite number of shares in the company, they could
maintain the petition. [
Scope
of powers of High Court in appeal under section 10F
Section 10F
refers to an appeal being filed on the question of law. The appellant argued
that the High Court could not disturb the findings of fact arrived at by the
CLB. It was further argued that the High Court had recorded its own finding on
certain issues which the High Court could not go into and, therefore, the
judgment of the High Court was liable to be set aside. One could not agree with
the submission made by the appellants. It is settled law that if a finding of
fact is perverse and is based on no evidence, it can be set aside in appeal
even though the appeal is permissible only on the question of law. The
perversity of the finding itself becomes a question of law. In the instant
case, the judgment of the CLB was given in a very cursory and cavalier manner.
The Board had not gone into the real issues which were germane to the decision
of the controversy involved in the case. The High Court had rightly gone into
the depth of the matter. The controversy in the case revolved around alleged
allotment of additional shares in favour of R and whether the allotment of
additional shares was an act of oppression on his part. On the issue of
oppression the finding of the CLB was in favour of P, i.e., his impugned act
was held to be an act of oppression. The said finding had been maintained by
the High Court although it had given stronger reasons for the same. Hence,
there was no merit in the argument that the High Court exceeded its
jurisdiction under section 10F while deciding the appeal. [Paras 13.1 and 13.2]
Relief
The facts of
the instant case were so manifestly against R that two opinions were not
possible on the aspect of relief. The only relief that had to be granted in the
instant case was to undo the advantage gained by R through his manipulations and
fraud. The allotment of all the additional shares in favour of R had to be set
aside. The High Court was fully justified in granting the relief of setting
aside the impugned allotment of additional shares in favour of R. The approach
of the CLB was totally erroneous inasmuch as after having found that there was
oppression on the part of R, he was still allowed to take advantage of his own
wrong inasmuch as he was given the option to buy P’s shares and that too not
for a proper price. The CLB was wrong in allowing purchase of shares of P and
his wife by R. Such an order amounted to rewarding the wrong-doer and
penalizing the oppressed party. Therefore, the relief granted by the High Court
was a proper relief in the facts of the case. [
The appeals
were, therefore, to be dismissed. [
Cases
referred to
Regal
(Hastings) Ltd. v. Gulliver 1942(1) All ER 379 (para 11.4), Alexander v.
Automatic Telephone Co. [1900] 2 Ch. 56 (para 11.4), Needle Industries (India)
Ltd. v. Needle Industries Newey (India) Holding Ltd. [1981] 3 SCC 333 (para
11.4), Punt v. Symons [1903] 2 Ch. 506 (para 11.4), Piercy v. S. Mills &
Co. Ltd. [1920] 1 Ch. 77 (para 11.4), Hogg v. Cramphorn Ltd. [1967] 1 Ch. 254
(para 11.4), Howard Smith Ltd. v. Ampol Petroleum Ltd. 1974 AC 821 (PC) (para
11.4), Rolled Steel Products (Holdings) Ltd. v. British Steel Corpns. 1986 Ch.
246 (CA) (para 11.6), Bishopsgate Investment Management Ltd. (In Liquidation)
v. Maxwell (No. 2) [1994] 1 All ER 261 (CA) (para 11.6), Whitehouse v. Carlto
Hotel (P.) Ltd. [1987] 162 CLR 285 (para 11.6), Tea Brokers (P.) Ltd. v.
Hemendra Prosad Barooah [1998] 5 Comp. LJ. 463 (para 11.7), LIC of India v.
Escorts Ltd. [1986] 1 SCC 264 (para 12), Rajahmundry Electric Supply Corpn.
Ltd. v. A. Nageshwara Rao AIR 1956 SC 213 (para 12.1), S. Varadarajan v.
Venkateswara Solvent Extraction (P.) Ltd. [1994] 80 Comp. Cas. 693 (
Dushyant A. Dave,
Krishnan Venugopal, K.S. Venugopal, E.B. Shaji, Nikhil Goel, Prasad Vijay
Kumar, A. Venugopal and A.D. Sikri for the Appellant. S. Ganesh,
Joseph Kodianthapa, Ajay K. Jain, Saji Kurup, Deepak Prakash and M.P.
Vinod for the Respondent.
Judgment
Arun Kumar,
J. - P.K. Ramanujam, appellant 2 and P.K. Prathapan and his wife Pushpa
Prathapan, respondents 1 and 2 are the contesting parties in this litigation.
Appellant 1 is the company in which they are all shareholders and the
litigation is about its control and management. Both parties are making claims
to the right to control and manage the company. Briefly the facts are :
Ramanujam had returned to Kerala, his native place, after resigning his job as
an accountant in England in the year 1983. He was looking for an opportunity to
work. Prathapan, also a native of Kerala, had been working in Muscat since long
and was staying there alongwith his family. The mother of Prathapan, named
Kalyani Kochuraman, was living in Kerala. Prathapan had two sons. According to
Prathapan his sons were desirous of returning to India and settling down in
their native place. Therefore, Prathapan wanted to set up some business in
India in order to settle his sons. Since the parties are relations they were in
touch with each other. Towards the middle of 1987 Ramanujam informed Prathapan
that a hotel called ‘Hotel Siddharth’ in a town called Chalakudy, was available
for sale. The hotel building had ten rooms, besides a restaurant with a bar
attached to it. The partners who were running the hotel were interested in
selling it immediately. Ramanujam further informed Prathapan that the hotel was
available for down payment of Rs. 6 lakhs (Rupees Six Lakhs). The purchaser, in
addition, had to take upon a liability of about Rs. 18 lakhs (Rupees eighteen
lakhs) which was standing on the hotel. Ramanujam offered a look after the
business of the hotel till Prathapan decided to return to India. The parties
decided to go ahead with the purchase of the hotel for which Prathapan agreed
to send Rs. Five Lakhs. Ramanujam was to get a salary for the services to be
rendered by him in looking after the business of the hotel. A company by the
name of Dale and Carrington Investments Private Limited was incorporated on 4th
November, 1986 for the hotel business. Ramanujam and his wife Draupathy were
shown as the promoters of the company. On the request of Ramanujam, Prathapan
sent a Bank Draft in the sum of Rs. 5 lakhs (Rupees Five Lakhs) favouring his
mother Kalyani Kochuraman on 3rd March, 1987. The draft was sent in the name of
the mother because Prathapan was an NRI and the company could not receive money
directly from him. The device of money being first sent in the name of
Prathapan’s mother and thereafter the mother transferring it to the company,
was suggested by Ramanujam in his letter dated 25th February, 1987 to
Prathapan. The Hotel was accordingly acquired by the company in March, 1987. A
sum of Rs. 6 lakhs (Rupees Six Lakhs) was required to be paid in cash to the
vendors out of which Rs. 5 lakhs (Rupees five lakhs) were received from
Prathapan and a sum of Rs. 50,000 (Rupees Fifty Thousand) was invested by
Muralidharan, brother of Prathapan. The rest of the amount came from other
respondents. There was no financial contribution by Ramanujam. Initially
Ramanujam and his wife Draupathy were the Directors of the company. However, in
December, 1988 Draupathy was dropped as director and in her place Muralidharan,
brother of Prathapan and Suresh Babu, brother of Prathapan’s wife, were taken
as Directors of the Company. 5000 (five thousand) equity shares worth Rupees
five lakhs were allotted in the name of Smt. Kalyani Kochuraman, mother of
Prathapan against the investment of Rupees Five Lakhs. These 5000 equity shares
were subsequently transferred in the name of Prathapan and his wife, 2500 (two
thousand five hundred) each, subject to the transferees obtaining requisite
permission of the Reserve Bank of India under the Foreign Exchange Regulation
Act (FERA). The transfer of shares in the name of Prathapan and his wife Pushpa
was duly recorded in the Register of Members maintained by the company. Thus
Prathapan and his wife Pushpa became shareholders of the company to the extent
of 2500 equity shares each.
2. Initially the
company was making losses. However, by about the year 1991-92, the company
turned the corner. Copies of balance sheets of the company for a few years of
its working have been placed on record by the appellant which show that till
31st March, 1992 there were no profits in the company. For the first time some
profit was shown as on 31st March, 1993. Till 31st March, 1993, under the head
‘Advance towards share capital pending allotment’ only a sum of Rs. 3000
(Rupees Three Thousand) was shown whereas as on 31st March, 1994 under the said
head, a balance of Rs. 6,86,500 (Rupees six lakhs eighty six thousand five
hundred only) was shown. We have mentioned this figure here because it will be
relevant for the main controversy in this case.
3. It is the case of Prathapan
that he continued to provide finance to the company by sending money to
Ramanujam from time to time. The details of some of such disbursements are as
under :
(a) A sum of Rs. 1,00,000 in March, 1989;
(b) US $ 6300 in favour of
Maruthi Udyog Ltd. for allotment of a vehicle for the use of second appellant
in November, 1991;
(c) A
sum of Rs. one lakh in February, 1994;
(d) A deposit of Rs. one lakh
with State Bank of India in the year 1996 to provide bank guarantee in favour
of the sales tax authorities at Kerala;
(e) A
sum of Rs. Nine lakhs in January, 1996 for making remittance in favour of the
Sales Tax Authorities.
4. According to
Prathapan he was to be issued shares of the company against these remittances
while according to Ramanujam the remittances were on personal account in view
of the close relationship between the parties. The fact remains that the
remittances were to Ramanujam and not to the company.
5. In the beginning,
the business of the company was carried on by Ramanujam with the assistance of
Muralidharan, brother of Prathapan who was acting as Manager of the Company,
while Ramanujam was the Chairman and Managing Director of the company. It is
not denied that Ramanujam was regularly getting salary for working as Managing
Director of the company. According to Prathapan he was kept completely in the
dark about the affairs of the company throughout. He never received a penny
towards dividend on the shares held by him in the company.
6. Sometime in the
year 1998 Prathapan is said to have come to India to consider acquiring another
Hotel for expanding the business of the company. At that time he is said to
have discovered certain startling facts about the company. The most important
fact which is at the centre of the controversy in this case is that the
company’s authorised capital was increased from Rs. 15 lakhs to Rs. 25 lakhs
and thereafter to Rs. 35 lakhs without the knowledge of Prathapan, a principal
shareholder of the company. Further in an alleged meeting of the Board of
Directors of the company said to have been held on 24th October, 1994, chaired
by Ramanujam, the Board of Directors of the company is said to have been
informed about a sum of Rs. 6,86,500 (Rupees six lakhs eighty six thousand five
hundred only) standing to the credit of Ramanujam in the books of the company.
He made a proposal for allotment of shares in lieu of that amount in his
favour. As per the case of Ramanujam the Board allotted 6,865 equity shares of
Rs. 100 each in the said meeting in his favour. According to Prathapan he was
never made aware of the increase in authorised share capital of the Company and
the alleged allotment of additional equity shares of the company in favour of
Ramanujam. The alleged allotment reduces Prathapan, who was a majority shareholder
in the company, to a minority shareholder in the company. Prathapan challenged
this alleged allotment of shares in favour of Ramanujam by filing a Company
Petition under sections 397 and 398 of the Companies Act before the Company Law
Board in July, 1999. The main challenge in the Company Petition filed by
Prathapan alongwith his wife as co-petitioner, was to the said alleged
allotment of 6865 equity shares of Rs. 100 each of the company. This was
alleged to be an act of oppression on the part of Ramanujam who was managing
the company. Prayer was made that the allotment of shares be set aside, and
necessary correction be made in the Register of Members of the company.
According to Prathapan Ramanujam did not contribute any money from his own
resources for purposes of the company while all along he drew a handsome salary
for working as the Managing Director. His maximum investment in the company
could not be more than Rs. 20,000. He committed fraud and breach of trust as a
result of which Prathapan and his wife had been totally marginalised in the
company. In fact, Muralidharan, brother of Prathapan was removed from the Board
of Directors of the company on 1st October, 1994 while Suresh Babu,
brother-in-law of Prathapan and brother of Pushpa, (Prathapan’s wife) was
removed as Director on 30th September, 1996. Prathapan also alleged that
Ramanujam siphoned off funds of the company for personal gains.
7. The Company Law
Board took the view that Ramanujam had committed an act of oppression by not
only not informing him about issue of further share capital of the Company but
also not offering him the further share capital which was being issued by the
company. Having given a finding of ‘oppression’ in favour of Prathapan the
Company Law Board while considering relief, gave an option to Prathapan to sell
his shares to Ramanujam. It was observed that a return of 12% per annum on the
investment made by Prathapan would be fair in the facts of the case. Prathapan
and his wife, who were petitioners in the company petition, were given liberty
to sell their shares to Ramanujam at par value with 12% simple interest per
year from the date of their investment.
8. During the
pendency of the company petition filed by Prathapan, a petition was filed
before the Company Law Board for rectification of the Register of Members so as
to delete the entries recording of transfer of shares in favour of Prathapan
and his wife. This was on the ground that they had failed to obtain permission
of the Reserve Bank of India under the Foreign Exchange Regulation Act
regarding transfer of shares in their favour.
9. In the proceedings
in the petition under sections 397 and 398 of the Companies Act, locus standi
of Prathapan and his wife to file the petition was challenged. This issue was
decided by the Company Law Board against Ramanujam. The petition for
rectification of Register of members was dismissed. However, Prathapan was
aggrieved about the relief granted by the Company Law Board. Inspite of the
finding on oppression being in his favour, he was asked to sell his shares and
leave the company. Ramanujam was aggrieved of the finding of oppression against
him and of the dismissal of the application for rectification of Register of
Members. Both parties approached the High Court of Kerala against the judgment
of the Company Law Board. The High Court maintained the judgment of the Company
Law Board so far as the rejection of petition for ratification of Register of
members was concerned. However, the High Court allowed the appeal filed by
Prathapan which was directed mainly on the question of relief granted by the
Company Law Board. The High Court took a serious view of the manner in which
Ramanujam was managing the affairs of the company. The High Court held it to be
an act of fraud on the part of Ramanujam in allotting 6865 equity shares of the
company in his favour. The High Court further held that a perpetrator of fraud
could not be allowed to take benefit of his own wrong. The High Court found
that the observation of the Company Law Board that the appellants can sell
their shares at par value to the Managing Director, getting 12 per cent
interest on their investment, will not be justified but will only help the
manipulator. The High Court ordered setting aside of allotment of shares made
in the Board Meetings held on 24th October, 1994 and 26th March, 1997, to
Ramanujam, the Managing Director of the company. The Share Register was ordered
to be rectified accordingly. The present appeal by Ramanujam is directed
against the judgment of the High Court.
10. On the basis of the
submissions made by the learned counsel for the parties, following issues arise
for consideration :
Issue 1.Validity of allotment of equity shares of the Company in favour
of Ramanujam whereby he becomes a majority shareholder and Prathapan and his
wife are reduced to minority shareholders.
This issue gives rise to following questions :
(a) Was a meeting of the
Board of Directors of the Company held on 24h October, 1994 when the first
allotment of additional shares in favour of Ramanujam is said to have been made
?
(b) Was it a valid meeting of the Board of
Directors of the company ?
(c) Did the Company require
funds so as to necessitate raising of share capital of the company by issuing
further equity shares ?
(d) Was the alleged allotment
of equity shares in favour of Ramanujam a bona fide act on the part of Board of
Directors in the interest of the company ? In other words does the act of
raising share capital by allotment of additional equity shares in favour of
Ramanujam, the Managing Director, amount to an act of oppression on his part
towards the then majority shareholders ?
Issue 2.What is the effect of not obtaining permission of the Reserve
Bank of India under the Foreign Exchange Regulation Act (FERA) by Prathapan
regarding transfer of shares in his and his wife’s favour ? Did Prathapan and
his wife Pushpa have no locus standi to file the petition under sections 397
and 398 of the Companies Act before the Company Law Board ?
Issue 3. Scope of power of the High Court in an appeal under section 10F
of the Companies Act;
Issue 4.Relief to be granted to a majority shareholder who by an act of
oppression on the part of management of the company is converted into a
minority shareholder.
Issue 1. Validity of allotment of equity shares
11. This is the main
issue which arises for consideration in this case. As already noted Ramanujam
who was the Managing Director of the company got allotted 6865 equity shares to
himself in a meeting of the Board of Directors of the company alleged to have
been held on 24th October, 1994. Again on 26th March, 1997 he managed to get
allotted further 9800 equity shares to himself. Prathapan has challenged these
allotments of shares in favour of Ramanujam as acts of oppression on the part
of Ramanujam, the Chairman and Managing Director of the company for which he
filed a petition under sections 397 and 398 of the Companies Act before the
Company Law Board. A doubt has been cast about whether the alleged meetings in
which additional equity shares were allotted to Ramanujam were held at all. In
this behalf the following facts are noticeable :—
(a) The appellants have filed
a photocopy of the minutes of the alleged meeting of the Board of Directors
said to have taken place on 24th October, 1994. As per the photocopy the
minutes appear to be signed by Ramanujam as Chairman. The presence of Suresh
Babu as a Director of the Company has been shown in the minutes. However, there
is no evidence of presence of Suresh Babu in the said meeting. Article 36 of
the Articles of Association of the company requires that a notice convening the
meetings of the Board of Directors shall be issued by the Chairman or by one of
the Directors duly authorized by the Board in this behalf. Suresh Babu filed an
affidavit in the proceedings before the Company Law Board wherein he has
categorically stated that at no point of time he was involved in the affairs of
the company and in running the business of the company. Further he has stated in
the said affidavit that at no point of time he was informed that he had been
appointed as Director of the company. He had never received any notice of any
Board meetings nor had he ever attended any Board meeting. In view of this
categorical denial by Suresh Babu about attending any meetings of the Board of
Directors of the company, it was incumbent on the part of Ramanujam who was the
Chairman and Managing Director of the company and was in possession of all the
records of the company, to place on record a copy of a notice calling a meeting
of the Board of Directors in terms of article 36. No copy of the notice
intimating Suresh Babu about the meeting of the Board of Directors and asking
him to attend the same, has been placed on record to show that Suresh Babu was
informed about holding of the meeting in question.
Here reference is
required to be made to certain other articles of the company which are relevant
for the controversy. Article 8 provides that shares of the company shall be
under the control of the Directors who may allot the same to such applicants as
they think desirable of being admitted to membership of the company. Article 10
provides that allotment of shares “shall exclusively be vested in the Board of
Directors, who may in their absolute discretion allot such number of shares as
they think proper...” Article 38 requires that the Directors present at the
Board Meeting shall write their names and sign in a book specially kept for the
purpose. Article 4(iii) prohibits any invitation to the public to subscribe for
any shares or debentures of the company. The above provisions of the Articles
of Association show that the Board of Directors have an absolute discretion in
the matter of allotment of shares. But this pre-supposes that such a decision
has to be taken by the Board of Directors. The decision is taken by the Board
of Directors only in meetings of the Board and not elsewhere. Ramanujam, the
Managing Director cannot take a decision on his own to allot shares to himself.
If Suresh Babu was present in the meeting, as is the case of Ramanujam, he must
have signed a book specially kept for recording presence of the Directors at
the Board Meeting in terms of article 38. Ramanujam should have been the first
person to produce such a book to show the presence of Suresh Babu at the
alleged Board meeting said to have been held on 24th October, 1994, specially
when Suresh Babu was denying his presence at the meeting. Nothing has been
produced. Thus neither a copy of a notice convening the Board meeting nor the
log book meant to record signatures of Directors attending the meeting of the
Board of Directors were produced. In the absence of these documents and any
other proof to show that a meeting was held as alleged we are unable to accept
that a meeting of the Board of Directors was held on 24th October, 1994. If no
meeting of the Board of Directors took place on that date, the question of
allotment of shares to Ramanujam does not arise. We are inclined to believe
that photocopy of the minutes of the alleged meeting dated 24th October, 1994
produced by appellants, is sham and fabricated. The alleged allotment of
additional equity shares of the company in favour of Ramanujam is, therefore,
wholly unauthorized and invalid and has to be set aside.
Normally this Court
would not have gone into these questions of fact. However, the learned counsel
for the appellant in the course of his arguments drew our attention to the
various Articles of Association of the company, which unfortunately neither the
Company Law Board nor the High Court considered. We cannot help referring to
them, particularly in view of the fact that the Articles of a company are its
constituent document and are binding on the company and its Directors.
The facts on record show
that the company was being run as one man show and Ramanujam was maintaining
the Minutes Book of meetings of Board of Directors only to comply with the
statutory requirement in this behalf. The minutes were being recorded by him
according to his choice and at his instance. The minutes do not reflect the
actual position. Article 38 mandated that a book should be maintained to record
presence of Directors at meetings of the Board of Directors. If a book for
recording signatures of Directors attending meetings of the Board of Directors
was not maintained, it was in clear violation of article 38 of the Articles of
Association of the company. The Company Law Board without going into these
relevant aspects, proceeded on an assumption that a meeting of the Board of
Directors did take place on 24th October, 1994. This assumption of the Company
Law Board is clearly without any basis.
(b) When no meeting of the
Board of Directors of the company was held on 24th October, 1994, the question
of validity of the meeting does not arise. On the relevant date Suresh Babu was
the only other Director of the Company. He denies having attended any meeting
of the Board of Directors of the company. There is nothing to rebut this stand
of Suresh Babu. In his absence no valid meeting of the Board of Directors could
be held.
(c) For considering this
point let us assume that a meeting of the Board of Directors of the company did
take place as alleged by Ramanujam. First question that arises is whether the
company required additional funds for which the shares were issued. We have
already referred to Balance Sheets of the company, copies whereof have been
placed on record. Till 31st March, 1993 the Balance Sheets did not show any
investment of substantial amounts of money in the company. It is the Balance
Sheet for the year ending 31st March, 1994 which for the first time shows an
advance of Rs. 6,86,500 towards share capital pending allotment. Nothing has
been placed on record to show that during the financial year 1993-94, i.e., 1st
April, 1993 to 31st March, 1994 suddenly need had arisen for a substantial
investment. The company was running a hotel, the property whereof was owned by
the company. No particular reason for making a major investment has been shown.
Nothing has been shown as to how the amount of Rs. 6,86,500 was utilised. It
appears that Ramanujam who was managing the affairs of the company single
handedly, realized that the company had turned around and the Hotel property
had appreciated in terms of its market value. He started working on a strategy
to get controlling shares in the company. It was in furtherance of this
objective that Ramanujam managed to show the entry regarding advance against
shares in the Balance Sheet as on 31st March, 1994. For this amount, he
allotted equity shares to himself to gain control of the company. In these
facts it is difficult for us to appreciate that the additional funds were
required by the company. In our view the finding of the High Court that no
funds were needed by the company is fully justified. The only purpose was to
allot additional shares in the company to himself to gain control of the
company and to achieve this objective, the books of the company appear to have
been manipulated. The High Court was right in holding that the entire
manipulation of records of the company by Ramanujam was an act of fraud on his
part.
(d) We may also test the
alleged act of allotment of equity shares in favour of Ramanujam from a legal
angle. Could it be said to be a bona fide act in the interest of the Company on
the part of Directors of the Company?
11.1 At this stage it may
be appropriate to consider the legal position of Directors of companies
registered under the Companies Act. A company is a juristic person and it acts
through its Directors who are collectively referred to as the Board of
Directors. An individual Director has no power to act on behalf of a company of
which he is a Director unless by some resolution of the Board of Directors of
the Company specific power is given to him/her. Whatever decisions are taken
regarding running the affairs of the company, they are taken by the Board of
Directors. The Directors of companies have been variously described as agents,
trustees or representatives, but one thing is certain that the Directors act on
behalf of a company in a fiduciary capacity and their acts and deeds have to be
exercised for the benefit of the company. They are agents of the company to the
extent they have been authorized to perform certain acts on behalf of the
company. In a limited sense they are also trustees for the shareholders of the
company. To the extent the power of the Directors are delineated in the
Memorandum and Articles of Association of the company, the Directors are bound
to act accordingly. As agents of the company they must act within the scope of
their authority and must disclose that they are acting on behalf of the
company. The fiduciary capacity within which the Directors have to act enjoins
upon them a duty to act on behalf of a company with utmost good faith, utmost
care and skill and due diligence and in the interest of the company they
represent. They have a duty to make full and honest disclosure to the
shareholders regarding all important matters relating to the company. It
follows that in the matter of issue of additional shares, the directors owe a
fiduciary duty to issue shares for a proper purpose. This duty is owed by them
to the shareholders of the company. Therefore, even though section 81 of the
Companies Act which contains certain requirements in the matter of issue of
further share capital by a company does not apply to private limited companies,
the directors in a private limited company are expected to make a disclosure to
the shareholders of such a company when further shares are being issued. This
requirement flows from their duty to act in good faith and make full disclosure
to the shareholders regarding affairs of a company. The acts of directors in a
private limited company are required to be tested on a much finer scale in
order to rule out any misuse of power for personal gains or ulterior motives.
Non-applicability of section 81 of the Companies Act in case of private limited
companies casts a heavier burden on its directors. Private limited companies
are normally closely held, i.e., the share capital is held within members of a
family or within a close knit group of friends. This brings in considerations
akin to those applied in cases of partnership where the partners owe a duty to
act with utmost good faith towards each other. Non-applicability of section 81
of the Act to private companies does not mean that the directors have absolute
freedom in the matter of management of affairs of the company.
11.2 In the present case
Article 4(iii) of the Articles of Association prohibits any invitation to the
public for subscription of shares or debentures of the company. The intention
from this appears to be that the share capital of the company remains within a
close knit group. Therefore, if the directors fail to act in the manner
prescribed above they can in the sense indicated by us earlier be held liable
for breach of trust for misapplying funds of the company and for
misappropriating its assets.
11.3 The learned counsel
for the appellant argued that Articles of Association of the company give
absolute power to the Board of Directors regarding issue of further share
capital. The Board of Directors exercised the power while issuing further
shares in favour of Ramanujam and the same cannot be challenged. In our view,
this argument has no merit because the facts of the case do not support the
argument. Firstly, the Articles of Association require such decisions regarding
issue of further share capital to be taken in a meeting of the Board of
Directors and we have found that the alleged meeting of the Board of Directors in
which the additional shares are purported to have been issued in favour of
Ramanujam was sham. Secondly, assuming for the sake of argument that meetings
of Board of Directors did take place the manner in which the shares were issued
in favour of Ramanujam without informing other shareholders about it and
without offering them to any other shareholder, the action was totally mala
fide and the sole object of Ramanujam in this was to gain control of the
company by becoming a majority shareholder. This was clearly an act of
oppression on the part of Ramanujam towards the other shareholder who has been
reduced to a minority shareholder as a result of this act. Such allotments of
shares have to be set aside.
11.4 On the role of Directors,
the law is well settled. The position has been the subject-matter of various
decisions. Some of them are:
In Regal (Hastings) Ltd. v. Gulliver 1942 (1) All. ER 379 Lord Russell of
Killowen observed as under:
“Directors of a limited company are the
creatures of a statute and occupy a position peculiar to themselves. In some
respects they resemble trustees, in others they do not. In some respects they
resemble agents, in others they do not. In some respects they resemble managing
partners in others they do not. The said judgment quotes from Principles of
Equity by Lord Kames. In one sentence the entire concept is conveyed. The
sentence runs ‘Equity prohibits a trustee from making any profit by his
management, directly or indirectly. Ultimately the issue in each case will
depend upon facts of that case’.”
Lindley MR observed in Alexander v. Automatic Telephone Co. (1900) 2 Ch.
56 at pages 66-67:
“The Court of Chancery has always exacted from
directors the observance of good faith towards their shareholders and towards
those who take shares from the company and become co-adventurers with
themselves and others who may join them. The maxim ‘Caveat emptor’ has no
application to such cases, and directors who so use their powers as to obtain
benefits for themselves at the expense of the shareholders, without informing
them of the fact, cannot retain those benefits and must account for them to the
company, so that all the shareholders may participate in them.”
Needle
Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd. [1981]
3 SCC 333 is a judgment of this Court in which amongst various other aspects
the power of directors regarding issue of additional share capital was also
considered. This Court observed:
“The power to issue shares is given primarily
to enable capital to be raised when it is required for the purposes of the
company but it can be used for other purposes also as, for example, to create a
sufficient number of shareholders to enable the company to exercise statutory
powers, or to enable it to comply with legal requirements as in the instant
case. Hence if the shares are issued in the larger interest of the company, the
decision cannot be struck down on the ground that it has incidentally benefited
the Directors in their capacity as shareholders. So if the Directors succeed,
also or incidentally, in maintaining their control over the company or in newly
acquiring it, it does not amount to an abuse of their fiduciary power. What is
objectionable is the use of such power simply or solely for the benefit of
Directors or merely for an extraneous purpose like maintenance or acquisition
of control over the affairs of the company. Where the Directors seek, by
entering into an agreement to issue new shares, to prevent a majority
shareholder from exercising control of the company, they will not be held to
have failed in their fiduciary duty to the company if they act in good faith in
what they believe, on reasonable grounds, to be the interests of the company.
But if the power to issue shares is exercised from an improper motive, the
issue is liable to be set aside and it is immaterial that the issue is made in
a bona fide belief that it is in the interest of the company....” (p. 339)
In Needle
Industries (India) Ltd.’ s case (supra) the Board of Directors had resolved to
issue 16000 equity shares of Rs. 100 each to be offered as rights shares to the
existing shareholders in proportion to the shares held by them. The offer was
to be made by a notice specifying the number of shares to which each
shareholder was entitled to. The notice further said, in case the offer was not
accepted within 16 days from the date on which it was made, it was to be deemed
to have been declined by the concerned shareholder. The Holding Company held
18990 shares and it was entitled to 9495 rights shares. The Holding Company
could not avail its right to exercise the option for purchase of rights shares
offered to it. As a result the whole of the Rights Issue consisting of 16000
shares was allotted to the Indian shareholders. The Holding Company filed a
petition under sections 397 and 398 of the Companies Act, 1956 in the High
Court. The Single Judge held in favour of the Holding Company that it had
suffered a loss in view of the fact that the market value of the rights share
was Rs. 190 whereas the shares were allotted at par, i.e., at Rs. 100. The
grievance of the Holding Company was that on account of postal delays it failed
to receive the notice containing the offer of rights shares in time, and
therefore, it could not exercise its option to buy the share. On appeal the
Division Bench held that the affairs of Needle Industries (India) Ltd.’s case
(supra) were being conducted in a manner oppressive to the Holding Company. The
Division Bench ordered winding up of the company. A further appeal to the Court
was allowed mainly on the ground that there was no oppression. However, a
direction was issued that the Indian shareholders pay an amount equivalent to
that by which they unjustifiably enriched, namely Rs. 90 × 9495 which comes to
Rs. 8,54,550 to the Holding Company.
In Needle
Industries (India) Ltd.’s case (supra) this Court referred to some old English
decisions with approval. Punt v. Symons [1903] 2 Ch. 506 was quoted in which it
was held “where the shares had been issued by the Directors, not for the
general benefit of the company, but for the purpose of controlling the holder
of the greater number of shares by obtaining a majority of voting power, they
ought to be restrained from holding the meeting at which the votes of the new
shareholders were to have been used.”
Piercy v. S. Mills & Co. Ltd. [1920] 1 Ch. 77 applied the same
principle while holding:
“....the basis of both cases is, as I
understand, that directors are not entitled to use their powers of issuing
shares merely for the purpose of maintaining their control or the control of
themselves and their friends over the affairs of the company, or merely for the
purpose of defeating the wishes of the existing majority of shareholders.” (p.
84)
In Hogg v.
Cramphorn Ltd. [1967] 1 Ch. 254, Buckley, J. reiterated the principle in Punt’s
case (supra) and in Piercy’s case (supra). It was held that if the power to
issue shares was exercised for an improper motive the issue was liable to be
set aside and it was immaterial that the issue was made in a bona fide belief
that it was in the interests of the company.
11.5 The principle
deduced from these cases is that when powers are used merely for an extraneous
purpose like maintenance or acquisition of control over the affairs of the
company, the same cannot be upheld.
11.6 Courts in the
Commonwealth countries including England and Australia have emphasized that the
duty of the Directors does not stop at ‘to act bona fide’ requirement. They
have evolved a doctrine called the ‘proper purpose doctrine’ regarding the
duties of company directors. In Hogg’s case (supra), explicit recognition was
given to the proper purpose test over and above the traditional bona fide test.
In this case the director had allotted shares with special voting rights to the
trustees of a scheme set up or the benefit of company employees with the
primary purpose of avoiding a takeover bid. Buckley, J. found as a fact that
the directors had acted in subjective good faith. They had indeed honestly
believed that their actions were in best interests of the company. Despite this
it was observed:
“...an essential element of the scheme, and
indeed its primary purpose, was to ensure control of the company by the
directors and those whom they could confidently regard as their supporters.”
As such, he
concluded that the allotment was liable to be set aside as a consequence of the
exercise of the power for an improper motive. He also held that the power to
issue shares was fiduciary in nature. In Howard Smith Ltd. v. Ampol Petroleum
Ltd. 1974 AC 821, the Privy Council confirmed the above view expressed by
Buckley, J. which shows a preference for the proper purpose doctrine. The Privy
Council felt that the bona fide test was not sufficient to meet the challenge
because it failed to encompass the obligation of directors to be fair. The
directors’ acts should not only satisfy the test of bona fides they should also
be done with a proper motive. Any lingering doubts over the status of the
purpose doctrine as a separate and independent head of directors duty within
the common law jurisdiction have been laid to rest by two decisions of the
Court of Appeal in England in Rolled Steel Products (Holdings) Ltd. v. British
Steel Corpns. 1986 Ch. 246 and Bishopsgate Investment Management Ltd. (In
Liquidation) v. Maxwell (No. 2) [1994] 1 All ER 261. It was held by the Court
of Appeal in Bishopsgate that the bona fides of the directors alone would not
be determinative of the propriety of their actions. In a parallel development
in Australia the proper purpose doctrine has been approved in a decision of the
High Court in Whitehouse v. Carlto Hotel (P.) Ltd. [1987] 162 CLR 285.
11.7 The Tea Brokers (P.)
Ltd. v. Hemendra Prosad Barooah [1998] 5 Comp. LJ. 463 was also a case of a
minority shareholder who on becoming managing director of the company, issued
further share capital in his favour in order to gain control of management of
the company. Barooah and his friends and relations were majority shareholders
of the respondent company having 67 per cent of the total issued capital of the
company. Barooah personally held 300 equity shares out of 1155 shares issued by
the company. He was at all material times a director of the company. His case
was that he was wrongfully and illegally ousted from the management of the
company. One Khaund, who initially started as an employee of the company had
110 shares in the company and belonged to the minority group. Khaund was
appointed as the managing director of the company. Barooah’s grievance was that
Khaund took advantage of his position as managing director and acted in a
manner detrimental and prejudicial to the interests of the company and in a
manner conducive to his own interest. Khaund had hatched a plan with other
directors to convert petitioner Barooah into a minority and to obtain full and
exclusive control and management of the affairs of the company. In a petition
filed under sections 397 and 398 of the Companies Act, 1956, acts of Khaund
were found to be by way of ‘oppression and mismanagement’ within the meaning of
sections 397 and 398 of the Companies Act. Allotment of 100 equity shares by
the company to Khaund at a meeting of the Board of Directors said to have been
held on 14th January, 1971 was held to be illegal. The Board of Directors of
the company was superseded and a special officer was appointed to carry on
management of the company with the advice of Barooah, Khaund and a
representative of labour union. There were several other directions issued by
the court which are not necessary to be mentioned here. The Division Bench
considered in detail the relevant legal position. Without using the phrase
‘proper purpose doctrine’ the principle enunciated therein, was applied. The
following observations of Justice A.N. Sen are reproduced:
“It is well settled that the directors may
exercise their powers bona fide and in the interest of the company. If the
directors exercise their powers of allotment of shares bona fide and in the
interest of the company, the said exercise of powers must be held to be proper
and valid and the said exercise of powers may not be questioned and will not be
invalidated merely because they have any subsidiary additional motive, even
though this be to promote their advantage. An exercise of power by the
directors in the matter of allotment of shares, if made mala fide and in their
own interest and not in the interest of the company will be invalid even though
the allotment may result incidentally in some benefit to the company.”
Further it was
held that if a member who holds the majority of shares in a company is reduced
to the position of minority shareholder in the company by an act of the company
or by its Board of Directors mala fide, the said act must ordinarily be
considered to be an act of oppression to the said member. The member who holds
the majority of shares in the company is entitled by virtue of his majority to
control, manage and run the affairs of the company. This is a benefit or
advantage which the member enjoys and is entitled to enjoy in accordance with
the provisions of company law in the matter of administration of the affairs of
the company by electing his own men to the Board of Directors of the company.
On the question of relief, the court observed:
“A majority shareholder should not ordinarily
be directed to sell his shares to the minority group of shareholders, if per
chance through fortuitous circumstances or otherwise, the minority group of
shareholders come into power and management of the company. The majority
shareholders by virtue of their majority will usually be in a position to
redress all wrongs done and to undo the mischief done by the minority group of
shareholders, as it will always be possible for the majority group of shareholders
to regain control of the company so long as they remain in majority in the
company by virtue of the majority. Except in unusual circumstances, the
majority group of shareholders, in my opinion, should never be ordered or
directed to sell their shares to the minority group of shareholders. An order
directing the majority group of shareholders to sell his shares to the minority
group of shareholders will not redress the wrong done to the majority group of
shareholders and will not give him sufficient compensation or relief against
the act of oppression complained of by him, and, on the other hand, may add to
his suffering and grievance and cause him greater hardship. Such an order will
not further the ends of justice and indeed the cause of justice may be defeated.”
On the
question of issue of fresh share capital, it was held to be illegal to issue
shares to only one shareholder. This was held to be a violation of common law
right of every shareholder. Common Law recognized a pre-emptive right of a
shareholder to participate in further issue of shares however. In India in view
of section 81 of the Companies Act, such a right cannot be found for sure.
However, the test to be applied in such cases which requires the court to
examine as to whether the shares were issued bona fide and for the benefit of
the company, would import such considerations in case of private limited
companies under the Indian Law. Existence of right to issue shares to one
director may technically be there, but the question whether the right has been
exercised bona fide and in the interests of the company has to be considered in
facts of each case and if it is found that it is not so, such allotment is
liable to be set aside.
11.8 Reference has been
made to the case of Piercy (supra) “where directors, who controlled merely a
minority of the voting power in the company allotted shares to themselves and
their friends not for the general benefit of the company, but merely with the
intention of thereby acquiring a majority of the voting power and of thus being
able to defeat the wishes of the existing minority of shareholders, it was held
that, even assuming that the directors were right in considering that the
majority’s wishes were not in the best interests of the company, the allotments
were invalid and ought to be declared void. It follows from this case that the
exercise by directors of fiduciary powers for purposes other than those for
which they were conferred is invalid. It may be said that although the power of
issuing shares is given to directors primarily for the purpose of enabling them
to raise capital when required for the purpose of the company, this was not the
object of the directors in this case...”
11.9 It will be seen from
the judgments in Needle Industries (
11.10 In the present case
we are concerned with the propriety of issue of additional share capital by the
Managing Director in his own favour. The facts of the case do not pose any
difficulty particularly for the reason that the Managing Director has neither
placed on record anything to justify issue of further share capital nor it has
been shown that proper procedure was followed in allotting the additional share
capital. Conclusion is inevitable that neither the allotment of additional
shares in favour of Ramanujam was bona fide nor it was in the interest of the company
nor a proper and legal procedure was followed to make the allotment. The motive
for the allotment was mala fide, the only motive being to gain control of the
company. Therefore, in our view, the entire allotment of shares to Ramanujam
has to be set aside.
11.11 Even the Company Law
Board found that the allotment of additional shares by Ramanujam to himself was
an act of oppression on his part. The Company Law Board drew this conclusion
solely for the reason that no offer had been made to the majority shareholders
regarding issue of further share capital. The High Court accepted the finding
of oppression. However, it placed it on a much broader base by taking into
consideration various other factors. The High Court’s finding is based on a
much stronger footing. In fact, the High Court has gone on to conclude that
Ramanujam has played a fraud on the minority shareholders by manipulating the
allotment of shares in his favour. We find no reason to differ with the finding
of the High Court.
Issue 2
12. This
brings us to the issue regarding locus standi of Prathapan and Prathapan’s
family to maintain the petition under sections 397 and 398 of the Companies Act
and their failure to obtain permission of the Reserve Bank of
12.1 On
the question of locus standi the learned counsel for the respondent cited
Rajahmundry Electric Supply Corpn. Ltd. v. A. Nageshwara Rao AIR 1956 SC 213, wherein
it was held that the validity of a petition must be judged from the facts as
they were at the time of its presentation, and a petition which was valid when
presented cannot cease to be maintainable by reason of events subsequent to its
presentation. In
12.2 It
is to be further noted that the entire scheme regarding purchase of shares in
the name of mother of Prathapan was suggested by Ramanujam himself. He saw to
it that the shares were transferred by the company in the name of Prathapan and
his wife. The company has recorded the transfer and corrected its Register of
Members in this behalf which, in fact, led Ramanujam to file a petition for
rectification of the Register of Members as a counter blast to the petition
filed by Prathapan under section 397/398 of the Companies Act. It is not open
to Ramanujam now to raise the question of FERA violation, more particularly in
view of his having recorded the transfer of shares in the name of Prathapan and
his wife Pushpa in the records of the Company. This also answers the objection
regarding locus standi of Prathapan and his wife to file the section 397/398
petition before the company Law Board. Since they were registered as
shareholders of the company on the date of filing of the petition and they held
the requisite number of shares in the company, they could maintain the
petition.
12.3 We,
therefore, find no merit in the contention that the petition under sections
397/398 of the Companies Act, filed by the Prathapan and his wife before the
Company Law Board was not maintainable.
Issue 3 : Scope of power of High Court in appeal
under section 10F of the Companies Act
13. We
have now to deal with the question of scope of appeal filed under section 10F
of the Companies Act by Prathapan in the High Court.
13.1 Section
10F refers to an appeal being filed on the question of law. The learned counsel
for the appellant argued that the High Court could not disturb the findings of
fact arrived at by the Company Law Board. It was further argued that the High
Court has recorded its own finding on certain issues which the High Court could
not go into and therefore the judgment of the High Court is liable to be set
aside. We do not agree with the submission made by the learned counsel for
appellants. It is settled law that if a finding of fact is perverse and is
based on no evidence, it can be set aside in appeal even though the appeal is
permissible only on the question of law. The perversity of the finding itself
becomes a question of law. In the present case we have demonstrated that the
judgment of the Company Law Board was given in a very cursory and cavalier manner.
The Board has not gone into real issues which were germane for the decision of
the controversy involved in the case. The High Court has rightly gone into the
depth of the matter. As already stated the controversy in the case revolved
around alleged allotment of additional shares in favour of Ramanujam and
whether the allotment of additional shares was an act of oppression on his
part. On the issue of oppression the finding of the Company Law Board was in
favour of Prathapan, i.e., his impugned act was held to be an act of
oppression. The said finding has been maintained by the High Court although it
has given stronger reasons for the same.
13.2 We
find no merit in the argument that the High Court exceeded its jurisdiction
under section 10F of the Companies Act while deciding the appeal.
Issue 4 : Relief
14. On
the question of relief, the learned counsel for the parties referred to
decisions in support of their respective stands. We do not consider it
necessary to refer to these decisions because relief depends on facts of a
particular case. We have seen the facts of the present case which to our mind
are so manifestly against Ramanujam that two opinions are not possible on the
aspect of relief. The only relief that has to be granted in the present case is
to undo the advantage gained by Ramanujam through his manipulations and fraud.
The allotment of all the additional shares in favour of Ramanujam has to be set
aside. In our view, the High Court was fully justified in granting the relief
of setting aside the impugned allotments of additional shares in favour of
Ramanujam. The approach of the Company Law Board was totally erroneous in as
much as after having found that there was oppression on the part of Ramanujam,
he was still allowed to take advantage of his own wrong in as much as he was
given the option to buy Prathapan’s shares and that too not for a proper price.
In our view the Company Law Board was wrong in allowing purchase of shares of
Prathapan and his wife by Ramanujam. Such an order amounts to rewarding the
wrong doer and penalizing the oppressed party. In the circumstances of this
case asking the oppressed to sell his shares to the oppressor not only fails to
redress the wrong done to the oppressed, it also results in heavy monetary loss
to him. The relief granted by the High Court was a proper relief in the facts
of the case.
15. All the appeals are
accordingly dismissed with costs. Counsel fee Rs. 50,000.
SEBI
Act
[2004]
51 SCL 204 (
High
Court of
v.
Peerless General Finance & Investment Co. Ltd.
SUBHRO
KAMAL MUKHERJEE, J.
A.C.O.
NO. 76 OF 1999
JULY 30,
2003
Where part of consideration for transfer of shares
passed years after transfer of shares and transfer forms was dated on such
date, transaction does not satisfy definition of spot delivery contract
Section 13, read with section 16, of the
Securities Contracts (Regulation) Act, 1956 - Contracts and options in
securities - Contracts in notified areas illegal in certain circumstances - In
1986, appellant ‘B’ gave loan to one ‘T’ to acquire shares of ‘P’ and ‘T’
assured repayment in 1991 - On 30-10-1987, ‘T’ agreed to transfer shares of
respondent-company ‘P’ to ‘B’ by way of repayment of loan and further agreed
that ‘B’ will be entitled to all benefits accrued in respect of said shares of
company ‘P’ - Bonus shares were declared consecutively - In a civil suit, a
compromise was arrived at in terms of an agreement dated 21-11-1994 wherein,
payment of Rs. 10 lakhs by ‘B’ to ‘T’ on 21-11-1994 was made as a part of
consideration for sale of shares on 30-10-1987 and it was further agreed
between ‘B’ and ‘T’ that ‘T’ would be entitled to remain as absolute owner of
dividends on entire shares including bonus shares upto accounting year 1989-90
as part of consideration - Company Law Board held that instant transaction did
not satisfy definition of a spot delivery contract since part of consideration
passed on much after transfer of shares on 30-11-1987 and that share transfer forms
were all dated 21-11-1994, i.e., date on which consideration of Rs. 10 lakhs
passed from ‘B’ to ‘T’ and held that transfer of shares in question was hit by
provisions of sections 13 and 16 and, therefore, was illegal, void and a
nullity - Whether findings of CLB was sustainable in view of reasoning given
and, therefore, would not be interfered with in appeal under section 10F of
Companies Act - Held, yes
Section 10F of the Companies Act, 1956 -
Company Law Board - Appeal against orders of - Whether on appeal under section
10F, arising from any order of Company Law Board, High Court has no
jurisdiction to reverse any conclusion of fact except to see if there is
material evidence on record to justify findings and that whether proper legal
tests have been correctly applied - Held, yes - Whether even a finding of fact
cannot be reversed, if there is possibility of a different conclusion on
evidence and in such circumstances, findings of fact should be accepted without
further enquiry - Held, yes
Facts
One ‘T’,
approached appellant ‘B’ for a loan of Rs. 38.83 lakhs for purchasing 3530
equity shares in the respondent-company. In July, 1986 the loan was given. In
November, 1986 they entered into a formal agreement and ‘T’ assured to repay
the loan on or before 31-12-1991. However, on 3-10-1987, ‘T’ agreed to transfer
the said 3530 shares of the respondent company to ‘B’ by way of repayment of
the said loan. Consequently, ‘T’ handed over the shares scrips as also transfer
deeds. ‘T’ agreed that ‘B’ would be entitled to all the benefits, i.e., the
dividends, bonus shares, etc., accrued in respect of the said shares. In 1988,
‘P’ declared bonus shares and ‘T’ received 3530 bonus shares. In 1991, the
respondent-company again declared bonus shares and ‘T’ received 7060 bonus
shares. ‘B’ filed a suit against ‘T’ and the respondent-company in the court of
Civil Judge and obtained an ad interim order of injunction restraining ‘T’ from
claiming any right, title and interest in respect of total of 14,120 shares of
‘P’. In 1994 ‘B’ and ‘T’ entered into an agreement wherein ‘T’ admitted that he
had lawfully sold the shares to ‘B’ and that ‘B’ was entitled to bonus shares
declared by the respondent-company. Consequently, the Civil Judge disposed of
the said suit on compromise in terms of said agreement. ‘B’ lodged the transfer
deeds in respect of the said 14,120 shares with the respondent-company for
transfer. It refused to register the said shares in favour of ‘B’, on the
ground that the said transfer of shares by ‘T’ in favour of ‘B’ was in
violation of the provisions of the Securities Contracts (Regulation) Act, 1956
since the contract for sale of shares was not on spot delivery basis.
On application
under section 111, the Company Law Board, accepted pleas raised by the
respondent-company and held that the transfer was as such illegal in terms of
sections 13 and 16. The respondent-company raised preliminary objection on
ground of bar of limitation.
Held
It was a matter
of regret that an important document like a certified copy of the judgment and
order of the Company Law Board was sent by the Bench Officer concerned under
certificate of posting, particularly, when under section 10F, the limitation to
prefer an appeal runs from the date of communication of the decision or the
order of the Company Law Board to the aggrieved person. Such a valuable right
cannot be allowed to be frustrated due to omissions on the part of the office
of the Company Law Board. The appellant contested the matter in the Tribunal
seriously and, therefore, the High Court refused to accept the allegation that
in spite of knowledge of the order, the appellant did not prefer the appeal in
time. It was admitted that the judgment was not pronounced in the open Court.
The contentions that the appellant did not receive the certified copy of the
judgment and order was sent under certificate of posting, was to be accepted.
In any event, the statements made in the application filed before the High
Court, clearly established sufficient cause for extension of time for filing
the appeal. Therefore, the delay, if any, was condoned and the appeal was to be
dealt on merits. [
Any person
aggrieved by an order or decision of the Company Law Board is entitled to
maintain an appeal in the High Court under section 10F on any question of law
arising out of such order. Therefore, the jurisdiction of the High Court in an
appeal arising out of an order passed by Company Law Board is confined to the
determination of any question of law arising out of such order. As a
consequence thereof, a finding of fact recorded by the Company Law Board is
final and cannot be reversed by the High Court. [
The Company Law
Board found, as findings of fact, that the provisions of the Securities
Contracts (Regulation) Act, 1956 would be applicable to a public limited
company even though it’s shares might not be listed on any recognised stock
exchange. It was further held that it was obvious that the part of
consideration for the sale of shares passed on much after the date on which the
sale of shares took place i.e., on 30-10-1987. The payment of Rs. 10 lakh by
‘B’ to ‘T’ was a part of consideration for the sale of the said shares and,
further, it was agreed between ‘B’ and ‘T’ that ‘T’ would be entitled to remain
as absolute owner of the dividends on the entire shares including the bonus
shares up to the accounting year 1989-90 as part of consideration. The
transaction did not satisfy the definition of a spot delivery contract since
part of the consideration passed on much after the transfer of shares.
Moreover, the shares transfer forms were all dated, on the date on which the
consideration of Rs. 10 lakh only passed from the ‘B’ to ‘T’. Therefore, the
transfer of shares in question was hit by the provisions of the sections 13 and
16 of the Securities Contracts (Regulation) Act, 1956 and, therefore, was
illegal, void and a nullity. [
In view of the
language of section 10F, an appeal lies to the High Court only on a question of
law arising from any decision or order of the Company Law Board. The High
Court, therefore, has no jurisdiction to reverse any conclusion of fact except
to see if there is material evidence on record to justify such findings and
that whether proper legal tests have been correctly applied. Even a finding of
fact cannot be reversed if there is possibility of a different conclusion on
evidence and, in such circumstances, the findings of fact should be accepted
without further enquiry. The Company Law Board had considered all the materials
placed before it and, thereafter, arrived at the findings of fact that the
impugned transactions were hit by the provisions of the Securities Contracts
(Regulation) Act, 1956 and the guidelines issued by the Government of India.
The Company Law Board correctly formulated the points for determination before
it and the decision of the Company Law Board could not be termed as perverse,
in the sense that no normal person would have arrived at. The Company Law Board
found, as finding of fact, that the consideration for transfer of shares included
Rs. 10 lakh paid by ‘B’ to ‘T’. The said finding was sustainable from the
reasoning given by the Company Law Board and, therefore, could not be
interfered with in the instant appeal. Therefore, there was no merit in the
instant appeal. The appeal was accordingly, dismissed. [
Utpal Bose,
Aniruddha Chatterjee and P.K. Jhunjhunwala for the Appellant. Sudipta
Sarkar, Abhijit Chatterjee and D. Chaudhury for the Respondent.
Judgment
S.K.
Mukherjee, J. - This is an appeal against judgment and order dated November
25, 1998 passed by the Company Law Board, Eastern Region Bench at
2. When the appeal is
taken up for hearing, Mr. Sudipta Sarkar, learned senior advocate, appearing on
behalf of the respondent No. 1 submits that this appeal is barred by
limitation. Mr. Sarkar argues that an aggrieved person can file an appeal under
section 10F of the said Act to the High Court within sixty days from the date
of communication of the decision or order of the Company Law Board to him;
however, the said aggrieved person can obtain extension of time for filing the
appeal for a further period not exceeding sixty days provided that he has been
prevented by sufficient cause from filing the appeal within the said period of
sixty days. Mr. Sarkar argues that the appellant got the certified copy of the
order of the Company Law Board on November 27, 1998 and as such the present
appeal, which has been presented on May 14, 1999, has been filed out of time.
Mr. Sarkar submits that the appellant failed to show sufficient cause for the
late filing of the appeal.
3. Mr. Utpal Bose,
learned advocate for the appellant, in reply, argues that the hearing of the
case before the Company Law Board was concluded on August 25, 1998 and the
Company Law Board reserved its judgment. As the appellant did not hear from the
Company Law Board till third week of February 1999, the appellant sent a letter
dated February 22, 1999 to the Bench Officer of the Eastern Region Bench of the
Company Law Board. The said Bench Officer by a letter dated February 23, 1999
informed the learned advocate for the appellant that the case was disposed of
by judgment and order dated November 25, 1998 and a copy of the said judgment
and order had been sent to the learned advocate for the appellant under
certificate of posting. The said letter dated February 23, 1999 was received by
the learned advocate for the appellant on March 8, 1999 and on March 9, 1999 an
application was filed for a certified copy of the said judgment and order. The
learned advocate of the appellant, however, informed the Bench Officer
concerned, in reply to his letter dated February 23, 1999, that the certified
copy of the judgment and order, sent under certificate of posting, did not
reach the learned advocate for the appellant. The appellant received the
present certified copy on March 25, 1999 and the present appeal has been
presented on May 14, 1999. Mr. Utpal Bose, therefore, submits that the appeal
is not barred by limitation, but the same has been filed in time.
4. It is a matter of
regret that an important document like a certified copy of the judgment and
order of the Company Law Board could be sent by the Bench Officer concerned
under certificate of posting, particularly, when under section 10F of the said
Act the limitation to prefer appeal runs from the date of communication of the
decision or the order of the Company Law Board to the aggrieved person. Such a
valuable right cannot be allowed to be frustrated due to omissions on the part
of the office of the Company Law Board. The appellant contested the matter in
the Tribunal below seriously and I refuse, therefore, to accept the allegation
that in spite of knowledge of the order, the appellant did not prefer the
appeal in time. It is admitted before me that the judgment was not pronounced
in the open Court. I accept the contentions of Mr. Utpal Bose that the learned
advocate for the appellant did not receive the certified copy of the judgment
and order sent under certificate of posting. In any event, the statements made
in paragraph 29 onwards of the application and the annexures, which have been
marked collectively as Annexure ‘F’ to the application filed before this Court,
clearly establish sufficient cause for extension of time for filing the appeal.
I, therefore, condone the delay, if any, and propose to deal with the appeal on
merits.
5. The brief fact leading to filing of
this appeal before this Court are summarised as under :
Tuhin Kanti
Ghosh (hereinafter referred to as ‘Tuhin)’ approached Bhagwati Developers
Private Limited, formerly known as Lodha Services Private Limited (hereinafter
referred to as ‘Bhagwati’) for a loan of Rs. 38,83,000 (Rupees thirty eight lakh
eighty three thousand) only for purchasing 3530 (three thousand five hundred
thirty) equity shares in the Peerless General Finance and Investment Company
Limited (hereinafter referred to as ‘Peerless’).
6. On July 25, 1986
Bhagwati advanced Rs. 38,83,000 (Rupees thirty eight lakh eighty three
thousand) only as loan to Tuhin.
7. On November 10,
1986 Bhagwati and Tuhin entered into a formal agreement in respect of the said
loan and Tuhin assured to repay the loan on or before December 31, 1991.
8. On October 30,
1987 Tuhin agreed to transfer the said 3530 (three thousand five hundred
thirty) shares of Peerless to Bhagwati by way of repayment of the aforesaid
loan. Consequently, Tuhin handed over the shares scrips as also transfer deeds
for doing the needful by Bhagwati. It was stated by Tuhin in his letter dated
October 30, 1987 that Bhagwati would be entitled to all the benefits, that is,
the dividends, bonus shares etc., accrued in respect of the said shares.
9. On December 28,
1987 Bhagwati wrote a letter to Tuhin contending that the transfer deeds were
not properly filled in and executed and asked Tuhin to put his signatures in
the fresh transfer deeds and to return them to Bhagwati. Bhagwati, also, asked
Tuhin to send the bonus shares and the dividends received by Tuhin from
Peerless.
10. In the meantime
Peerless declared bonus shares in the ratio of 1:1 and being the registered
shareholder Tuhin received further 3530 (three thousand five hundred thirty)
bonus shares.
11. As Bhagwati did not
hear anything from Tuhin, Bhagwati on July 6, 1988 asked Tuhin to furnish fresh
transfer deeds in respect of the total shares, namely, 7060 (seven thousand
sixty) shares.
12. In 1991 Peerless
declared further bonus shares in the ratio of 1:1 and Tuhin being the registered
shareholders was allotted further 7060 (seven thousand sixty) bonus shares.
13. On May 29, 1991
Bhagwati filed a suit against Tuhin and Peerless being No. 282 of 1991 in the
Court of a learned Civil Judge at Allahabad and obtain an ad interim order of
injunction restraining Tuhin from claiming any right, title and interest in
respect of those 14120 (fourteen thousand one hundred twenty) shares of
Peerless.
14. On November 21,
1994 Bhagwati and Tuhin entered into an agreement wherein Tuhin admitted that
he has lawfully sold the shares to Bhagwati and Bhagwati has been entitled to
bonus shares declared by Peerless in 1997-98. The relevant clauses of the said
agreement are as under :
“1.1 It recorded the TKG has lawfully sold the original shares to BDPL
on 30th October, 1987 and thereupon TKG ceased to have any beneficial interest
in the original shares or any part or portion thereof subject to the other
provisions hereof”.
“1.3 It is further recorded that in view of the sale of the said
original shares, the loan granted by BDPL to TKG on the terms as recorded in
the agreement dated 10-11-1986 shall be deemed to be repaid and adjusted and
nothing remains due and payable by TKG to BDPL either on account of Principal
or interest thereon”.
“1.5 It is declared by the parties that the original shares are
lying with BDPL. It is further declared by TKG that the first bonus shares are
lying with him and second bonus shares have not been delivered by Peerless to
TKG in view of injunction order in the Civil Suit. It is also declared by TKG
that he has not obtained any duplicate certificate of the said shares from
Peerless. It is therefore represented by TKG that as a Registered holder of the
said shares he has not created any charge, encumbrances nor pledged, sold or
entered into any agreement for transfer of rights of the original shares, first
bonus shares and second bonus shares or any part or portion thereof in favour
of any other person or persons. If however BDPL has created any charge or
pledge, attachment, lien or dealt with or encumbered the original shares in any
way TKG shall not be liable or held responsible for the same”.
“2.1 Notwithstanding anything contained anywhere in this document,
it is agreed that TKG shall be entitled to retail as absolute owner the
dividend on the entire shares up to the accounting year 1989-90 amounting to
Rs. 8,64,850 (Rupees eight lakh sixty-four thousand eight hundred fifty only)
(including the benefit of the TDS deducted) as part of consideration for the
settlement and which has been received and encashed by him save and except a
sum of Rs. 28,522.40 p. (Rupees twenty-eight thousand five hundred twenty-two
and paise forty only) which has been made over by TKG to BPL. Save as
aforesaid, TKG shall not be entitled to any other claim on account of dividend
in respect of the entire share nor shall BDPL claim any right, title or
interest in the dividend already received and so retained by TKG”.
“3.3 TKG shall co-operate with BDPL and execute an irrevocable Power
of Attorney in favour of nominees of BDPL and also execute all other documents,
transfer deeds as may be required by BDPL to enable BDPL to get the entire
shares transferred and registered in its name or in the name of it is nominees
and/or assigns and also to exercise all rights and powers in respect of the
entire shares and all entitlements thereon including Dividend, Bonus Shares,
Right Shares, Debentures, Warrants etc. in the name and on behalf of TKG
subject to the conditions that all costs and expenses in connection therewith
shall be borne and paid by BDPL or its nominees and/or assigns and TKG shall
have no liability financial or otherwise”.
“5. In further consideration of the aforesaid, BDPL has this day
paid a further sum of Rs. 10,00,000 (Rupees ten lakhs only) to TKG by pay order
No. 397744 dated 21-11-1994 drawn on Federal Bank, 8, C.R. Avenue, Calcutta in
full and final settlement of all its right, title, interest and claim in the
matter, the receipt whereof, TKG hereby admits and acknowledges as also by the
Memo of Consideration recited hereunder”.
15. Consequently,
on November 28, 1994 the learned Civil Judge at
16. On
December 12, 1994 Bhagwati lodged the transfer deeds in respect of the said
14120 (fourteen thousand one hundred twenty) shares with Peerless for transfer.
17. On
February 8, 1995 Peerless refused to register the said shares in favour of
Bhagwati, inter alia, on the ground that the said transfer of shares by Tuhin
in favour of Bhagwati was in violation of the provisions of the Securities
Contracts (Regulation) Act, 1956 since the contract for sale of shares was not
on spot delivery basis. It was, further, stated that the signatures of Tuhin
differed from the signatures on the record of Peerless and the stamps affixed
on the instruments of transfer had not been cancelled.
18. On
February 14, 1995 Bhagwati re-lodged the shares for transfer and registration.
As Peerless did not register those shares in the name of Bhagwati, Bhagwati
filed an application under section 111 of the Companies Act, 1956 before the
Company Law Board, Eastern Region Bench.
19. By
the order impugned dated August 25, 1998 the Company Law Board dismissed the
petition holding, inter alia, that the transfer of the shares in favour of
Bhagwati was against the provision of the Securities Contracts (Regulation)
Act, 1956 relating to spot delivery contract and as such was illegal in terms
of sections 13 and 16 of the said Act. Therefore, Peerless was within its power
to refuse registration of transfer.
20. Being aggrieved
Bhagwati has come up with this appeal under section 10F of the Companies Act,
1956.
21. Any
person aggrieved by an order or decision of the Company Law Board is entitled
to maintain an appeal in the High Court under section 10F of the Companies Act,
1956 on any question of law arising out of such order. Therefore, the
jurisdiction of the High Court in an appeal arising out of an order passed by
Company Law Board is confined to the determination of any question of law
arising out of such order. As a consequence thereof a finding of fact recorded
by the Company Law Board is final and cannot be reversed by the High Court.
22. The
only point that was raised before the Company Law Board was that the
transaction between Bhagwati and Tuhin was a case of spot delivery contract.
Bhagwati heavily relied upon the contract between Bhagwati and Tuhin dated
October 30, 1987 by which Tuhin agreed to transfer the said shares to Bhagwati
on account of repayment of loan received by Tuhin as also the agreement between
Tuhin and Bhagwati dated November 21, 1994.
23. I
have quoted hereinabove the relevant terms from the said agreement dated
November 21, 1994. It appears to me from the said agreement dated November 21,
1994, on the basis of which a compromise decree was passed by Allahabad Court,
that although Tuhin sold the said 3530 (three thousand five hundred thirty)
shares of Peerless in favour of Bhagwati on October 30, 1987, but a part of
consideration therefore has been passed only on November 21, 1994. It has been
recorded in the said agreement that in further consideration of the aforesaid
Bhagwati paid a further sum of Rs. 10,00,000 (Rupees ten lakh) only on November
21, 1994 in full and final settlement of all its right, title and interest and
claim in the matter. The said payment was admitted and acknowledged by Tuhin.
Moreover, under the said agreement Tuhin retained as absolute owner the
dividends paid in respect of the said shares up to the accounting year 1989-90
as a part of consideration.
24. In
the aforementioned background it is necessary, in my view, to note the findings
of fact arrived at by the Company Law Board. The Company Law Board found, as
findings of fact, that the provisions of the Securities Contracts (Regulation)
Act, 1956 would be applicable to public limited company even though it’s shares
might not be listed on any recognised stock exchange. It was, further, held
that it was obvious that the part of consideration for the sale of shares
passed on much after the date on which the sale of shares took place on October
30, 1987. The payment of Rs. 10,00,000 (Rupees ten lakh) only by Bhagwati to
Tuhin on November 21, 1994 was a part of consideration for the sale of the said
shares and, further, it was agreed between the Bhagwati and Tuhin that Tuhin
would be entitled to retain as absolute owner of the dividends on the entire
shares including the bonus shares up to the accounting year 1989-90 as part of
consideration. The transaction did not satisfy the definition of a spot
delivery contract since part of the consideration passed on much after the
transfer of shares on October 30, 1987. Moreover, the shares transfer forms
were all dated November 21, 1994, that is, on the date on which the
consideration of Rs. 10,00,000 (Rupees ten lakh) only passed from the Bhagwati
to Tuhin. Therefore, the transfer of shares in question was hit by the
provisions of the sections 13 and 16 of the Securities Contracts (Regulation)
Act, 1956 and, therefore, was illegal, void and a nullity.
25. In
view of the language of section 10F of the Companies Act, 1956 appeal lies to
the High Court only on a question of a law arising from any decision or order
of the Company Law Board. The High Court, therefore, has no jurisdiction to
reverse any conclusion of fact except to see if there is material evidence on
record to justify such findings and that whether proper legal tests have been
correctly applied. Even a finding of fact cannot be reversed if there is
possibility of a different conclusion on evidence and, in such circumstances,
the findings of fact should be accepted without further enquiry. The Company
Law Board has considered all the materials placed before it and, thereafter, arrived
at the findings of fact that the impugned transactions is hit by the provisions
of the Securities Contracts (Regulation) Act, 1956 and the guidelines issued by
the Government of India. The Company Law Board correctly formulated the points
for determination before it and the decision of the Company Law Board cannot be
termed as perverse in the sense that no normal person would have arrived at.
The Company Law Board found, as findings of fact, that the consideration for
transfer of shares included Rs. 10,00,000 (Rupees ten lakh) only paid by
Bhagwati to Tuhin on November 21, 1994. The said findings is sustainable from
the reasoning given by the Company Law Board and, therefore, cannot be
interfered with in this appeal.
I, therefore, do not find any merit in this appeal. The appeal is,
accordingly, dismissed.
I direct the parties to bear their respective costs in this appeal.
companies act
[2005] 59 scl 27 (mad.)
HIGH COURT OF
v.
PPN (
K. GOVINDARAJAN AND N.
KANNADASAN, JJ.
C.M.A.N.P.D. (B) NO.
2101 OF 2004
OCTOBER 8, 2004
Section 10F of the Companies Act, 1956, read
with section 11 of the Code of Civil Procedure, 1908 - Company Law Board - Appeal
against orders of - Appellant-company entered into a Power Purchase Agreement
(PPA) with Tamil Nadu Electricity Board (TNEB) - Despite TNEB having failed to
discharge their obligation regarding payment for security mechanism under said
PPA and failed to pay certain sum towards power supplied by company,
appellant’s management took no legal action against them - Since right to
recover money from TNEB would become time-barred, respondent Nos. 1 and 2,
being minority shareholders of appellant-company, approached board of
appellant-company to pass resolutions to recover amount - Having failed in
their attempt, they filed petition under section 397/398 claiming several
reliefs including initiation of proceedings against TNEB in terms of PPA - They
also sought interim relief for appointing administrator for appellant-company
with powers to initiate proceedings against TNEB - CLB rejected request for
interim relief - Therefore, respondents, of their own, initiated proceedings
invoking arbitration clause in PPA before ICC International Court of
Arbitration - Thereupon, appellant prayed for grant of interim injunction
restraining respondents from further proceeding with their ICC case but CLB
declined same - Whether since respondent Nos. 1 and 2 had approached only ICC,
Arbitral Tribunal which was forum of parties’ choice in which exclusive
jurisdiction was created, proceedings before said Tribunal could not per se be
treated as vexatious or oppressive, nor said Tribunal be said to be forum
non-conveniences - Held, yes - Whether in view of fact that ICC Arbitral
Tribunal was having natural and exclusive jurisdiction and a forum of choice of
parties, no anti-suit injunction could be granted in respect of proceedings
taken before it by CLB, especially when in view of PPA, CLB was not even having
concurrent jurisdiction to decide issue in question - Held, yes - Whether,
therefore, CLB had not committed error in not granting injunction as prayed for
by appellant-company - Held, yes - Whether moreover, respondent Nos. 1 and 2
were having two kinds of rights to get redress; with respect to breach of any
clause in PPA, as minority shareholders of company, they could approach company
to proceed against TNEB for breach and if it was not acceded to by company,
then as minority shareholders they could invoke their right in that capacity to
get relief for benefit of company by way of derivative action - Held, yes -
Whether, therefore, orders passed by CLB rejecting request of respondent Nos. 1
and 2 to direct company to initiate proceedings against TNEB could not stand in
way of respondent Nos. 1 and 2 to take derivative action to safeguard their
interest as minority shareholders - Held, yes
Facts
The appellant-company having established a
power generation plant in the
On appeal :
Held
The High
Court can interfere with the order of the CLB only if discretionary/inherent
powers of the CLB, are exercised arbitrarily or capriciously or perversely or
ignoring the settled principles of law in granting interlocutory injunction. It
can also interfere with the order if it is able to conclude that the CLB has
not exercised its power in granting injunction in spite of the availability of facts
which are prima facie established by overwhelming evidence and material
available on record justifying the grant thereof and occasioned failure of
justice and thereby the appellant sustained irreparable injury, but at the same
time the Appellate Court cannot reassess the material and reach a conclusion
different from the one reached by the CLB solely on the ground that if it had
considered the material in a particular manner, it would have come to a
contrary conclusion. While reversing the order of the CLB, the Court must come
into close quarters with the reasonings assigned by the CLB and then the Court
has to assign its own reasonings in arriving at a different conclusion. [
As per the
decision of the
In the
instant case, the appellant’s claim before the CLB was not on the basis of
cause of action that arose in the company petition or incidental to it. The
prayer in the company petition was on the basis of mismanagement. Incidentally
respondent Nos. 1 and 2 had sought for direction to the administrator to invoke
the arbitration clause available in the PPA. But the appellant sought an order
of injunction to stall the proceedings taken in a different capacity which had
nothing to do with the prayer sought for in the main company petition. [
Though the
relief of injunction as sought for against respondent Nos. 1 and 2 was amenable
to personal jurisdiction of the CLB, on that basis only it could not be said
that the CLB was not correct in rejecting the petition seeking for anti-suit
injunction. Since respondent Nos. 1 and 2 initiated arbitration proceedings
only in the interest of the company to recover the dues from the TNEB and also
as contemplated in the PPA entered into between the appellant-company and the
TNEB and not for personal interest or gain of respondent Nos. 1 and 2, it could
not be said that the ends of justice would be defeated by not granting
injunction as sought for. But if injunction was granted, injustice would be
perpetuated as the appellant-company had sought for injunction against
respondent Nos. 1 and 2 from proceeding with arbitration proceedings even by
taking derivative action as minority shareholders permanently, which amounted
to preventing respondent Nos. 1 and 2 from exercising their common law right
which was available to them. Moreover, the appropriate forum to invoke
arbitration proceedings under clause 16.2 of the PPA was the ICC Arbitral
Tribunal in view of the specific contract between the appellant-company and
TNEB and no such proceeding could be taken in
From the
facts, it was also clear that by taking the said proceedings, respondent Nos. 1
and 2 tried to get direction from the CLB to invoke alternative dispute
resolution mechanism either by the administrator or by the directors of the
company though such directors were nominee-directors of respondent Nos. 1 and
2. The administrator, if appointed, would amount to replacing the board and so
the abovesaid prayers and orders passed by the CLB could not be construed as if
respondent Nos. 1 and 2 had come forward with the plea that they should be
permitted to invoke alternative dispute resolution mechanism and so the action
of respondent Nos. 1 and 2 in initiating such proceedings could not be allowed
to proceed further. The action, that was sought to be taken against the TNEB,
was a right conferred under clause 16.2 of the PPA. Respondent Nos. 1 and 2 had
approached the CLB for the abovesaid reliefs and they had not sought for the
relief to proceed with the alternate dispute resolution mechanism by themselves
as minority shareholders. The proceedings in question taken by respondent Nos.
1 and 2 invoking arbitration clause under the PPA before the ICC Arbitral Tribunal
was in a different capacity and in their own right. The proceedings pending
before the CLB was not for recovering money from the TNEB itself. So merely
because on the basis of the same facts respondent Nos. 1 and 2 had taken
proceedings before the ICC Arbitral Tribunal, it could not be said that the
orders passed by the CLB would prevent respondent Nos. 1 and 2 from exercising
their independent right as minority shareholders. [
Respondent
Nos. 1 and 2 were having two kinds of rights to get redress. With respect to
breach of any clause in PPA, as minority shareholders of the company, they
could approach the company to proceed against the TNEB for the breach. If it
was not acceded to by the company, then as minority shareholders they could
invoke their right in that capacity to get the relief for the benefit of the
company by way of derivative action. [
So, the
orders passed by the CLB rejecting the request of respondent Nos. 1 and 2 to
direct the company to initiate proceedings against the TNEB either through
administrator or through directors could not stand in the way of respondent
Nos. 1 and 2 to take derivative action to safeguard their interest as minority
shareholders. Even in the request for arbitration filed before the ICC Arbitral
Tribunal it was stated that such a proceeding had been taken to protect the
interest of the company by the minority shareholders. [
The TNEB had
not raised any objection to arbitration. As a matter of fact, they had
appointed their arbitrator and no proceedings before the CLB or Court were
taken by the TNEB, questioning the invoking of arbitration proceedings by
respondent Nos. 1 and 2. [
Hence, there
was no bar for respondent Nos. 1 and 2 to take proceedings to invoke the
arbitration clause as minority shareholders by way of derivative action. [
The maxim ‘no
man should be vexed twice over the same cause’ is recognised to be a principle
of law which has to be given effect to and followed without being unduly
restricted by the terms of the statute as enacted in section 11 of the Code of
Civil Procedure. The plea of res judicata will apply only to the orders of the
Court or forum having concurrent jurisdiction to stay the subsequent
proceedings, if the order or judgment of the Court of exclusive jurisdiction
was directly on the point, and the same matter between the parties. It is
conclusive upon the same or between the same parties if the issue goes before
another Court even for a different purpose. [
It was clear
that the appellants had not satisfied any one of the conditions of the res
judicata to sustain their claim that the respondents were to be estopped from
taking proceedings before the ICC Arbitral Tribunal in view of the order passed
by the CLB. [
The appellant-company
had not made out a case for anti-suit injunction and so, the order of the CLB
rejecting the prayer for anti-suit injunction need not be interfered with. [
Hence, the
appeal as well as the miscellaneous petitions were to be dismissed. [
Cases referred to
Foss v. Harbottle 1843 (2) Hare 461 (para 11),
Modi Entertainment Network v. W.S.G. Cricket (P.) Ltd. 2003 (4) SCC 341 (para
12), Laxmikant V. Patel v. Chetanbhat Shah AIR 2002 SC 275 (para 19), Wander
Ltd. v. Antox India (P.) Ltd. 1990 (Supp.) SCC 727 (para 20), Santosh Hazari v.
Purushottam Tiwari 2001 AIR SCW 723 (para 21), J.M.D. Syndicate v. I.T. Commr.
AIR 1971 SC 1348 (para 28), Newabganj Sugar Mills Co. Ltd. v. Union of India
AIR 1976 SC 1152 (para 29), Manohar Lal v. Seth Hiralal AIR 1962 SC 527 (para
30), Dalpat Kumar v. Prahlad Singh 1992 (1) SCC 719 (para 31), Debi Jhora Tea
Co. v. Barendra Krishna Bhowmick 1980 (50) Comp. Cas. 771 (para 32), Grindlays
Bank Ltd. v. Central Government Industrial Tribunal 1980 (Supp.) SCC 420 (para
33), Union of
Udaya Holla, Aravind Dattar, Chitra Narayanan and Rishi Kumar Dugar for the
Appellant. Dr. A.M. Singhvi, Man Mohan, Mrs. Ritu Bhalla, Balaji Sathish
Parasaran and Rahul Balaji for the Respondent.
Order
K. Govindarajan, J. - The appellant having aggrieved by the order
dated 5-7-2004, passed by the Company Law Board (hereinafter called “CLB”),
rejecting their application filed in C.A. No. 62/2004 in C.P. No. 8/2004,
preferred the above appeal.
2. The
appellant-company established a gas and naphtha fired combined cycle power
generation plant at Pillaiperumalnallur in Government of Tamil Nadu.
Respondents 1 and 2 are having 46% paid-up capital of the Company (26% and 20%
respectively). The 3rd respondent-Company and the 4th respondent are holding
28% and 26% paid up capital respectively. The 5th respondent is the Managing
Director of the appellant-Company. Respondents 6 to 8 are Directors of the
appellant-Company nominated by the 3rd respondent herein. Respondents 9 and 10
are the Directors nominated by the 4th respondent herein. The financing
companies, namely, IDBI, and LIC, have nominated one Director each. They are
not parties to the proceedings. Since the dispute is only between the
appellant-Company and respondents 1 and 2, the appellant-Company has given up
respondents 3 to 11, though they have been added in the appeal as respondents.
3. The
appellant-Company entered into a Power Purchase Agreement, (hereinafter called
“PPA”), with the Tamil Nadu Electricity Board (hereinafter called “TNEB”) on
3rd January, 1997, as the appellant-Company has to sell to the TNEB, capacity
and net electrical output of the power generating facility pursuant to the
terms and conditions set forth in the said agreement.
4. The PPA among other clauses provides payment
security mechanism as follows :
“(a) direct payments;
(b) letter of credit;
(c) An Escrow Account and hypothecation of
TNEB’s receivables deposited in such account;
(d) guarantee by the State of
According to respondents 1 and 2, TNEB has not
only failed to discharge their obligation under the agreement regarding payment
security mechanism but also failed to pay a sum of Rs. 468.88 crores
(approximately) as on 31st January, 2004 towards supply of power by the
appellant-Company. Since November, 2001, the appellant-Company had written to
TNEB, regarding letter of credit and escrow accounts but no response had been
received. In spite of that, the management of the appellant-Company did not
take any legal action against the TNEB. Since the Company’s right to recover
the money would become time-barred at the end of 3 years from 26th March, 2001,
an issue was raised by the nominee director of the 2nd respondent at the 50th
Board meeting held on 30th December, 2003.
5. Stating
that there are some acts of omission and commission and mismanagement of the
Company, Company Petition in C.P. No. 8/2004 was filed claiming several reliefs
as sought for in the petition. Suffice to mention the following relief alone
for the purpose of the present case :
“a(ii) initiating and continuing proceedings qua
TNEB and Government of Tamil Nadu for and on behalf of the Company with respect
to the Company’s right under the PPA and GOTN guarantee.”
The interim relief also is sought
for which is as follows :
“a(i) Invoke the alternate dispute resolution
remedy clause, PPA dated 3-1-1997 for and on behalf of the Company and
forthwith initiate the proceedings as contemplated therein”. Such a prayer is sought
for to enforce clauses 16.1 and 16.2 of the PPA. The CLB in the order dated
9-3-2004 declined to grant the interim relief and accepting the contentions of
the appellant-Company that any extreme measures against TNEB would have
disastrous effects on the very business prospects of the Company and also on
the basis of sequence of events which show the cautious approach of the Board
of Directors of the Company.
6. On the
ground that the Company’s right would become time-barred at the end of 3 years
from 26th March, 2001, the nominee directors of respondents 1 and 2 proposed
two resolutions in their letter dated 12th March, 2004 for the 51st Board of
Directors meeting scheduled for 20th March, 2004 wherein they proposed as
follows :
“Resolved that the Company do
hereby invoke the Alternate Dispute Resolution provisions under the PPA dated
3-1-1997 for and on behalf of the Company and issue the invocation letter on or
before March 26, 2004 with respect to the issuance of the Letter of Credit, the
implementation of the Escrow Account and all unpaid amounts owing by TNEB under
the PPA;
Resvolved further that the
Managing Director be and are hereby authorized and directed to forthwith
initiate the proceedings as contemplated thereunder.”
Though the said resolutions were taken up for
discussion and at the Board meeting the said nominee directors placed on record
for the consideration of the Board the legal opinions obtained by them
regarding limitations, the majority of the Directors of the Board refused to
invoke the legal remedies available to the Company and the resolution proposed
were defeated by a vote of 8:5.
7. So, again
respondents 1 and 2 herein moved interim application No. 38/2004 before the CLB
in C.P. No. 8/2004 seeking the following prayer:
“a. Authorise Mr. Jenson and Mr. Sirse,
directors of the Company sufficiently within the period of limitation expiring
on 26-3-2004 as stated hereinabove to represent the Company and forthwith
initiate, institute and prosecute the dispute resolution mechanism under the
PPA on behalf of the Company against TNEB seeking redressal and remedies for
all breaches of the PPA by TNEB;
b. Direct the Company to render all
assistance as required and asked for by the afore-named Directors to give
effect to prayer (a) above;
c. Direct the Company to bear the costs and
expenses incurred by Mr. Jensen and Mr. Sirse in respect of prayer (a) above;
d. Grant ad interim relief in terms of
prayers (a) to (c) above, and confirm the same on return of notice;
e. Award costs of this Application to the
petitioners; and
f. Pass such further orders as this Hon’ble
Tribunal may deem fit.”
The CLB in the order dated 25th March, 2004,
refused to grant interim relief as sought for. Such a refusal was on the basis
that the CLB cannot interfere with the business, judgment and decision of the
Directors, unless there is evidence that they acted in bad faith or no sensible
Board of Directors would reasonably have come to the decision which the Company
Directors reached. The decision of the majority of Directors not to bring
proceedings to enforce obligation of TNEB in favour of the Company is not
attributed to the Directors’ inaction on account of mala fide reasons and it is
not for the CLB to interpret the validity period of the PPA with reference to law
of limitation, as TNEB is not bound for any such interpretation. It is
represented that aggrieved by that order, an appeal was filed, but it has to
see the light of the day.
8. On the
same day, namely, 25-3-2004, respondents 1 and 2 initiated proceedings invoking
arbitration clause in the PPA by filing the request for arbitration in
accordance with Article 3 of ICC Rules of Arbitration. It is relevant to
mention here that such a proceeding was taken by respondents 1 and 2 in the
name of the appellant-company. Pursuant to the same, a letter was sent to TNEB
on 31-3-2004 to provide their comments on or before 30th April, 2004. Knowing
the same, the appellant-Company sent a communication on 14-4-2004 stating that
respondents 1 and 2 have made the request which is unauthorised and invalid and
the appellant-Company has not made any request for any arbitration and so the
arbitration proceedings need not be proceeded with. Thereafter, the
appellant-Company filed Company Application in C.A. No. 62/2004 in C.P. No.
8/2004 seeking prayer as follows :
“(a) to grant interim
injunction restraining the Respondents/Petitioners from further proceeding with
ICC Case No. 13218/MS now pending on the file of the ICC International Court of
Arbitration, Paris.”
Though the CLB granted interim order initially
not to proceed with the arbitration proceedings pending Application, in the
order dated 5-7-2004, dismissed the petition holding that the nature of
proceedings and the relief claimed at the CLB are distinct from those made before
ICC Arbitral Tribunal and the appellant-Company did not prove the prima facie
case or the balance of convenience and established any irreversible prejudice
that may be suffered by the appellant-Company in the event of not granting any
such injunction. Aggrieved against the same, the appellant-Company has
preferred the above Appeal.
9. Mr. Udaya
Holla, Learned Senior Counsel appearing for the appellant submitted that the
Company could not take derivative action against the TNEB to recover the amount
payable by them and also to insist to provide payment security mechanism in a
stringent manner as claimed by the minority shareholders taking into
consideration the fact that they have to solely rely on the TNEB to sell the
power and the TNEB is the sole purchaser of the power generated by the Company.
Though the IDBI and the LIC have extended the loan facility exceeding 1,000
crores and nominees of those lenders in the Board also supported the decision
of other Directors except the nominee Directors of respondents 1 and 2,
considering the consequences of any action against the TNEB which would ruin
the Company and affect the working relationship of the appellant-Company with
the TNEB. Learned Senior Counsel further submitted that if the TNEB
discontinued the purchase of power from the appellant-Company, it would neither
be possible to get third party purchaser for 300 Mega Watts of power generated
by the Company. According to the learned Senior Counsel, such a decision by the
Board taken not to proceed against the TNEB, was a commercial decision
considering the divergent opinions available before them. Though there is a
delay in settlement of the outstanding by the TNEB, according to the learned
Senior Counsel, there is no allegation of misappropriation of the Company’s
fund. It is his further submission that the Courts cannot interfere with the
business, judgment and decisions of the Directors unless it is established that
the Board of Directors acted in bad faith or such a decision was not taken
reasonably. It cannot be said that the Directors of the Company have committed
breach of their duties in taking such decision. Respondents 1 and 2 have also
not questioned the bona fides of the Directors in deciding so. Referring to the
50th and 51st Board meeting, learned Senior Counsel further submitted that the
Board of Directors approached the issue cautiously after weighing the pros and
cons of any far reaching recovery measure against the TNEB and took a decision
that such a derivative action against TNEB, cannot be taken and rejected the
request of the nominee Directors of respondents 1 and 2. On earlier occasion
the CLB on the basis of the said decision, refused to interfere with the said
decision of the Board of Directors.
10. Pointing out
the prayer in the Company Petition No. 8/2004 and interim relief sought for
seeking permission to invoke GOTN guarantee for and on behalf of the Company
and to forthwith initiate any proceedings and the order dated 9-3-2004, the CLB
refusing to grant interim order and the order in Application No. 38/2004 dated
25-3-2004 in which the CLB rejected finally the interim relief as sought for by
the Applicant, the learned Senior Counsel appearing for the appellant submitted
that having suffered such an order, respondents 1 and 2 should not have
initiated arbitration proceedings before the International Court of Arbitral
Tribunal (hereinafter called “ICC”) on the same day contrary to the decision of
the CLB and so such a proceeding is oppressive in nature and cannot be allowed
to proceed further. Referring to the order of the CLB, on merits, learned
Senior Counsel submitted that though prima facie case and balance of
convenience are also established, the CLB erroneously rejected the application
seeking an order of anti-suit injunction. Learned Senior Counsel also referred
to clause 14.3 of the shareholders agreement dated 24-11-1995 in support of his
submission that the shareholders are prohibited from taking any action in the
name of or on behalf of any party to the agreement, as the parties to the
agreement on independent entities engaged in the conduct of other one’s
business. On that basis, learned Senior Counsel submitted that respondents 1
and 2 cannot initiate arbitration proceedings in the name of the appellant-Company
without even getting authorisation for the same. According to the learned
Senior Counsel, the findings of the CLB that the relief sought for in the
Company Petition filed under section 398 read with sections 402, 403 and 235 of
the Companies Act and the dispute raised before the ICC Arbitral Tribunal are
distinct cannot be sustained in law. According to him, such finding is given
without properly understanding the relief sought for in the main Company
Petition. If ultimately, the Tribunal comes to the conclusion that no such
proceeding need be taken against the TNEB, then the proceedings taken before
the ICC Arbitral Tribunal cannot have any legal sanction. Learned Senior
Counsel further submitted that the Tribunal is not correct in holding that there
is no prima facie case or the balance of convenience in favour of the appellant
and they had not established any irreversible prejudice that may be suffered by
the applicant in the event of not granting any such injunction. With respect to
the jurisdiction of the CLB, learned Senior Counsel referred to Regulation 44
of the CLB Regulation 1991 and powers vested under section 403 of the Companies
Act to grant an order of anti-suit injunction. He further submitted that
anti-suit injunction is only against the party and it cannot be construed as
injunction granted against the ICC Arbitral Tribunal. Learned Senior Counsel
has cited a number of decisions which would be dealt with hereunder in support
of his submission regarding the scope of anti-suit injunction and the powers of
the CLB to grant such relief.
11. The learned
Senior Counsel further submitted that the respondents have invoked the
arbitration proceedings on the same basis on which the Company Petition was
filed and arbitration proceedings have not been taken in the name of minority
shareholders to invoke the exception to the principles laid down in Foss v.
Harbottle 1843 (2) Hare 461 : 67 ER 189, but only on behalf of the Company as
if the Company has invoked arbitration proceedings. While dealing with the
power of the appellate Court, he submitted that the appellate Court cannot
close its eyes even if the order of the CLB cannot be sustained in law. He
further submitted that arbitration proceedings which is taken without the
consent of the appellant-Company is detrimental to the interest of the Company.
When the respondents 1 and 2 are ignoring the earlier orders of the CLB, the
appellant-Company is entitled to get an order of injunction against the
respondents 1 and 2 from proceeding further with respect to the arbitration
proceedings. Even if such injunction is granted, no prejudice would be caused
to the respondents 1 and 2 as they have already initiated the proceedings
within time to avoid expiry of period of limitation even according to their calculation.
Further, due to subsequent developments, namely, a communication dated
30-8-2004, the period of limitation is extended.
12. Dr. Singhvi,
learned Senior Counsel appearing for the respondents 1 and 2 submitted that the
actions, namely, the earlier actions by the respondents 1 and 2 approaching the
Board of Directors and the CLB are different and distinct actions and cannot be
relied upon to contend that respondents 1 and 2 are estopped from invoking the
arbitration clause under clause No. 16.2 of the PPA, before the ICC Arbitral
Tribunal. According to him, before the Board, the respondents requested to take
action against the TNEB to recover the amount and to insist the compliances of
the Clauses in the agreement regarding payment security mechanism. Even before
the CLB, the respondents have approached them, only as Directors of the
Company, but the said action cannot take away the substantial right under the
Common Law remedy to recover the amount from the TNEB by way of derivative
action by minority shareholders. According to the learned Senior Counsel,
unless such action is not taken, the claim would become time-barred, and merely
because the CLB passed the order on 25-3-2004, it cannot be said that the
respondents proceeded with the arbitration proceedings on the same day as if
the respondents waited for that order. According to the learned Senior Counsel,
if such action is not taken immediately, the proceedings would become time-
barred. Learned Senior Counsel also submitted that in view of the exception to
the principles laid down in Foss’s case (supra), the minority shareholders are
entitled to sue the arbitration proceedings in the name of the Company as the
majority shareholders are not willing to take such proceedings. It is also
submitted that such proceedings were taken only in the interest of the Company
to recover the arrears of Rs. 468.88 crores especially when the TNEB has not
complied with the payment security mechanism contemplated under the PPA. He
further submitted that in spite of the order passed by the CLB, respondents 1
and 2 can go for arbitration, as such proceedings have been taken only in the
capacity as minority shareholders and also on the basis of the exception to the
principles laid down in Foss’s case (supra). He also pointed out that parties
in the arbitration proceedings are different from the parties before the CLB
and the CLB cannot adjudicate such a claim which was made before the ICC
Arbitral Tribunal. He also pointed out that the TNEB has not raised any
objection regarding the sustainability of the arbitration proceedings except
the objections regarding the maintainability of the arbitration proceedings by
minority shareholders and the ICC Arbitral Tribunal has also framed an issue
regarding the same which has to be decided only by the ICC Arbitral Tribunal.
In view of clause 16 of the PPA, the ICC alone is having sole and exclusive
natural jurisdiction to decide the issue raised before the ICC Arbitral
Tribunal. So, the CLB which is not having jurisdiction to decide such issue is
an unnatural forum and hence it cannot grant anti-suit injunction against
exclusive and natural forum as held in Modi Entertainment Network v. W.S.G.
Cricket (P.) Ltd. 2003 (4) SCC 341. Learned Senior Counsel further submitted
that the argument made on behalf of the appellant to the effect that if the
Company proceeds against the TNEB, TNEB will stop purchase of power and thereby
they have to close the industry, is not based on any pleading or material.
Learned Senior Counsel further submitted that even otherwise, the TNEB can stop
purchase of power if they are able to get power for lesser price from others
and only to avoid the same, respondents 1 and 2 have insisted the Company to
change over to the method of production of power and since the same has not
been considered, the respondents have filed the Company Petition under section
398 of the Companies Act. While replying to the submission of the learned
Senior Counsel appearing for the appellant that other Companies supplying power
to the TNEB are not insisting the dues and also to implement the payment
security mechanism, learned Senior Counsel submitted that the appellant-Company
has the highest outstanding with the TNEB, namely 76% of the outstanding and
merely because others are not taking steps to secure the outstanding, it cannot
be said that the appellant-Company has to keep quiet.
13. With respect
to the inherent power of the CLB, Learned Senior Counsel appearing for
respondents 1 and 2 submitted that such a power cannot be used against the
natural forum and also the proceedings taken by the respondents 1 and 2 was
only in the interest of the Company and not to make gain by the respondents 1
and 2 themselves. It is also submitted that the inherent power can be used only
with respect to unoccupied field. But, in the present case, the right to
proceed with the arbitration proceedings is on the basis of Clause 16.2 of the
PPA and so it is occupied by contract and thereby the CLB cannot exercise its
discretion. Even if direction as sought for by respondents 1 and 2 to take
arbitration proceedings by the CLB was given, such proceedings would be only
regular action in appointing arbitrator under the agreement by the
appellant-Company and it cannot be construed as a derivative action by minority
shareholders. Since the present action taken by respondents 1 and 2 is nothing
but derivative action on the basis of the exception to the principles of the
case in Foss (supra), for which the permission of the CLB need not be obtained.
He further submitted that in the Company Petition filed by the respondents 1
and 2, the appellant cannot sustain their Application to get orders against the
respondents 1 and 2. If the prayer is granted by the CLB as sought for by the
appellant, it is of permanent nature and thereby the remedy for the minority
shareholders are prevented in perpetuity to pursue their remedy to safeguard
their interest. He also pointed out that the prayer ‘b’ in the Application is
not the subject- matter in the Company Petition. It is his further case that
the appellants have not made out any pleading which is required to grant
anti-suit injunction as mentioned in the decision in Modi Entertainment
Network’s case (supra). He also pointed out the portions in the petition filed
by the appellants in support of his submission that the appellants have
admitted that the action now taken by the respondents is derivative action.
According to the learned Senior Counsel, such derivative action by the minority
shareholders can be taken only if the CLB refuses to grant permission to
proceed with the arbitration proceedings. Since the Company itself has taken
arbitration proceedings, though at the instance of minority shareholders, if
injunction is granted as sought for, even the Company itself cannot invoke Clause
16.2 of the PPA.
14. With
reference to the scope of appeal, learned Senior Counsel appearing for
respondents 1 and 2 submitted that if the CLB has given reasonings based on
materials, this Court cannot substitute another reason to reverse the orders of
the CLB though such exercise is possible. Learned Senior Counsel further
submitted that even under the provisions of the Arbitration and Conciliation
Act, 1996, stay cannot be granted to stall the arbitration proceedings.
Referring to clause 14.3 of the PPA, learned Senior Counsel submitted that the
same is not applicable to the present proceedings and such a clause is
available only in the different agreement entered into between the
shareholders, whereas the right to take arbitration proceedings is available in
the PPA. According to the learned Senior Counsel, even if such a clause is
available, the respondents 1 and 2 can invoke their common law right to take
arbitration proceedings. The appellate Court can interfere with the order of
the CLB only if the findings given by the CLB are reversible or perverse.
Referring to the letter dated 30-8-2004 produced by the Learned Senior Counsel
appearing for the appellant, Dr. Singhvi, learned Senior Counsel appearing for
respondents 1 and 2 submitted that it is only a self-serving document and the
same has been produced in the midst of arguments and the said document cannot
make the present application infructuous.
15. The question of law raised in this case can be
captioned as follows :
(1) Whether the CLB is having any inherent
powers to grant anti-suit injunction and if it is so whether such power was not
properly exercised in the present case on the basis of established principles?
(2) Whether the respondents 1 and 2 are
prohibited under Clause 14.3 of the shareholders agreement dated 24-11-1998 or
barred by the principles of res judicata to invoke the arbitration proceedings
before the ICC Arbitral Tribunal under clause 16.2 of the PPA?
(3) Whether the petition in C.A. No. 62/2004
filed by the appellant is sustainable in law?
(4) Whether the order of the CLB rejecting
the request for anti-suit injunction is sustainable in law?
16. Before
dealing with the above questions, we are inclined to extract the findings given
by the CLB Additional Principal Bench, Chennai, to reject C.A. No. 62/2004 in
the order impugned dated 5-7-2004, for anti-suit injunction as sought for by
the appellant on the following grounds :
(i) The orders dated 9-3-2004 and 25-4-2004
passed by the CLB in interim application and in Company Application No. 38/2004
are not a bar to initiate a derivative action by the minority shareholders in
the name of the Company before the ICC Arbitral Tribunal against the TNEB
invoking arbitration clause No. 16.2 in the PPA, as such a right was not at all
invoked before the CLB, nor argued nor considered nor prohibited by the CLB,
while declining the interim reliefs, on 9-3-2004 and 25-3-2004;
(ii) As laid down in Modi Entertainment
Network’s case (supra), the CLB is not having natural jurisdiction to deal with
the matter pending before ICC Arbitral Tribunal and so it cannot grant
injunction against the party who took the proceedings before the forum having
natural and exclusive jurisdiction and in the foreign Court of choice of
parties;
(iii) The CLB has no interest nor connection
with the dispute in relation to the PPA to justify the interference with the
ICC Arbitral Tribunal;
(iv) There is neither comity nor commonality
of parties in the proceedings before the CLB and the ICC Arbitral Tribunal;
(v) The parties in dispute have exclusively
entrusted the jurisdiction in relation to any dispute arising out of the PPA in
favour of the ICC Arbitral Tribunal explicitly excluding the jurisdiction of
the Indian Courts as well as the Indian Arbitration Law and any dispute in
relation to the PPA has been kept outside the purview of the CLB;
(vi) While the exclusive jurisdiction of the
ICC Arbitral Tribunal to adjudicate any dispute in relation to the PPA,
including the issue as to whether the respondents 1 and 2 as minority shareholders,
are entitled to invoke any derivative action in the name of the Company against
the TNEB, is far from the doubt, the CLB can have no domain or concurrent
jurisdiction over the resolution of any dispute arising out the PPA;
(vii) While considering the scope of clause
14.03 of the shareholders agreement, it is found that the prohibition sought to
be enforced among the shareholders is only in relation to the conduct of their
own business and it cannot override the established common law right available
to minority actions as derivative action under the rule of exception to the
principles in Foss’s case (supra);
(viii) The CLB which is not being vested with
natural jurisdiction can neither exercise the inherent powers under Regulation
44 of the CLB Regulations, 1991 nor powers vested under section 403 of the
Companies Act to grant any anti-suit injunction, especially when the discretion
has to be exercised according to the Rules of reason, justice and law, without
any violation of the principles of the Companies Act;
(ix) While the reliefs under sections 397 and
398 of the Act as sought for in the Company Petition are statutory reliefs, the
reliefs which may be granted by the ICC Arbitral Tribunal are pursuant to the
contractual obligations between the parties;
(x) The nature of the proceedings and the
reliefs claimed at the CLB are separate and distinct from those proceedings
made before the ICC Arbitral Tribunal;
(xi) The appellant-Company herein have not established
that there is any prima facie case or the balance of convenience in favour of
the applicant before the CLB nor established any irreparable prejudice that may
be suffered by the appellant-Company in the event of non-grant of anti-suit
injunction.
17. Again,
before dealing with the issues raised in the present case, the scope, the power
and jurisdiction of this Court to deal with the appeal has to be gone into.
18. The above
appeal is preferred under section 10F of the Companies Act, 1956. Under the
said provision, any person aggrieved by the decision or order of the CLB is
given liberty to prefer an appeal to the High Court on any question of law
arising out of that order. So, now we have to decide on the basis of the
abovesaid provision, regarding the scope of our jurisdiction while dealing with
the order of the CLB, dated 5-7-2004. Even according to the learned Senior
Counsel appearing for the appellant, the CLB is only exercising its inherent
and discretionary power either to grant or reject the prayer for injunction.
Only if it is established that the CLB exercised such power arbitrarily or
capriciously or perversely or contrary to the settled principles of law
regulating grant or refusal of interlocutory injunction, this Court can
interfere with the said order. But if such power was exercised reasonably and
in a judicial manner by the CLB, the Appellate Court is not justified in
interfering with the said order by taking a different view.
19. This view of
ours is supported by the decision of the Apex Court in the decision in
Laxmikant V. Patel v. Chetanbhat Shah AIR 2002 SC 275, in which it is held as
follows :—
“17. We are conscious of the
law that this Court would not ordinarily interfere with the exercise of
discretion in the matter of grant of temporary injunction by the High Court and
the trial Court and substitute its own discretion therefor except where the
discretion has been shown to have been exercised arbitrarily or capriciously or
perversely or where the order of the Court under scrutiny ignores the settled
principles of law regulating grant or refusal of interlocutory injunction. An
appeal against exercise of discretion is said to be an appeal on principle.
Appellate Court will not reassess the material and seek to reach a conclusion different
from the one reached by the Court below solely on the ground that if it had
considered the matter at the trial stage it would have come to a contrary
conclusion. If the discretion has been exercised by the trial Court reasonably
and in a judicial manner the fact that the Appellate Court would have taken a
different view may not justify interference with the trial Court’s exercise of
discretion. However, the present one is a case falling within the well accepted
exceptions. Neither the trial Court nor the High Court have kept in view and
applied their mind to the relevant settled principles of law governing the
grant or refusal of the interlocutory injunction in trademark and trade name
disputes. A refusal to grant an injunction in spite of the availability of
facts, which are prima facie established by overwhelming evidence and material
available on record justifying the grant thereof, occasion a failure of justice
and such injury to the plaintiff as would not be capable of being undone at a
later stage. The discretion exercised by the trial Court and the High Court
against the plaintiff is neither reasonable nor judicious. The grant of
interlocutory injunction to the plaintiff could not have been refused,
therefore, it becomes obligatory on the part of this Court to interfere.” (p.
281)
20. In the
abovesaid decision, the earlier decision of the
“13. On a consideration of the
matter, we are afraid, the appellate Bench fell into error on two important
propositions. The first is a misdirection in regard to the very scope and nature
of the appeals before it and the limitations on the powers of the appellate
Court to substitute its own discretion in an appeal preferred against a
discretionary order. The second pertains to the infirmities in the
ratiocination as to the quality of Antox’s alleged user of the trademark on
which the passing-off action is founded. We shall deal with these two
separately.
14. The appeals before the
Division Bench were against the exercise of discretion by the Single Judge. In
such appeals, the appellate Court will not interfere with the exercise of
discretion of the Court of first instance and substitute its own discretion
except where the discretion has been shown to have been exercised arbitrarily,
or capriciously or perversely or where the Court had ignored the settled
principles of law regulating grant or refusal of interlocutory injunctions. An
appeal against exercise of discretion is said to be an appeal on principle.
Appellate Court will not reassess the material and seek to reach a conclusion
different from the one reached by the Court below if the one reached by that
Court was reasonably possible on the material. The appellate Court would
normally not be justified in interfering with the exercise of discretion under
appeal solely on the ground that if it had considered the matter at the trial
stage it would have come to a contrary conclusion. If the discretion has been
exercised by the trial Court reasonably and in a judicial manner the fact that
the appellate Court would have taken a different view may not justify
interference with the trial Court’s exercise of discretion. After referring to
these principles Gajendragadkar, J., in Printers (
“. . .These principles are well
established, but as has been observed by Viscount Simon in Charles Osenton
& Co. v. Jhanaton 1942 AC 130, ‘...the law as to the reversal by a Court of
appeal of an order made by a Judge below in the exercise of his discretion is
well established, and any difficulty that arises is due only to the application
of well settled principles in an individual case’.”
The appellate judgment does not seem to
defer to this principle.
21. The
“13. In Deputy Commr. Hardoi,
In-Charge Court of Wards, Bharawan Estate v. Rama Krishna Narain, AIR 1953 SC
521, also it was held that a question of law of importance to the parties was a
substantial question of law entitling the appellant to certificate under (the
then) section 110 of the Code.
14. A point of law which admits
of no two opinions may be a proposition of law but cannot be a substantial
question of law. To be ‘substantial’ a question of law must be debatable, not
previously settled by law of the land or a binding precedent, and must have a material
bearing on the decision of the case, if answered either way, insofar as the
rights of the parties before it are concerned. To be a question of law
‘involving in the case’ there must be first a foundation for it laid in the
pleadings and the question should emerge from the sustainable findings of fact
arrived at by Court of facts and it must be necessary to decide that question
of law for a just and proper decision of the case. An entirely new point raised
for the first time before the High Court is not a question of law involved in
the case unless it goes to the root of the matter. It will, therefore, depend
on the facts and circumstances of each case whether a question of law is a
substantial one and involved in the case, or not; the paramount overall
consideration being the need for striking a judicious balance between the
indispensable obligation necessity of avoiding prolongation in the life of any
lis.
15. A perusal of the judgment
of the trial Court shows that it has extensively dealt with the oral and
documentary evidence adduced by the parties for deciding the issues on which
the parties went to trial. It also found that in support of his plea of adverse
possession on the disputed land, the defendant did not produce any documentary
evidence while the oral evidence adduced by the defendant was conflicting in
nature and hence unworthy of reliance. The first appellate Court has, in a very
cryptic manner, reversed the finding on question of possession and
dispossession as alleged by the plaintiff as also on the question of adverse
possession as pleaded by the defendant. The appellate Court has jurisdiction to
reverse or affirm the findings of the trial Court. First appeal is a valuable
right of the parties and unless restricted by law, the whole case is therein
open for rehearing both on question of fact and law. The judgment of the
appellate Court must, therefore, reflect its conscious application of mind, and
record findings supported by reasons, on all the issues arising along with the
contentions put forth, and pressed by the parties for decision of the appellate
Court. The task of an appellate Court affirming the findings of the trial Court
is an easier one. The appellate Court agreeing with the view of the trial Court
need not restate the effect of the evidence or reiterate the reasons given by
the trial Court, expression of general agreement with reasons given by the
Court, decision of which is under appeal, would ordinarily suffice (See
Girijanandini Devi v. Bijendra Narain Choudhary AIR 1967 SC 1124). We would,
however, like to sound a note of caution. Expression of general agreement with
the findings recorded in the judgment under appeal should not be a device or
camouflage adopted by the appellate Court for shirking the duty cast on it.
While writing a judgment of reversal the appellate Court must remain conscious
of two principles. Firstly, the findings of fact based on conflicting evidence
arrived at by the trial Court must weigh with the appellate Court, more so when
the findings are based on oral evidence recorded by the same presiding Judge
who authors the judgment. This certainly does not mean that when an appeal lies
on facts, the appellate Court is not competent to reverse a finding of fact
arrived at by the trial Judge. As a matter of law if the appraisal of the
evidence by the trial Court suffers from a material irregularity or is based on
inadmissible evidence or on conjectures and surmises, the appellate Court is
entitled to interfere with the finding of fact (See Madhusudan Das v. Smt.
Narayani Bai AIR 1983 SC 114). The rule is - and it is nothing more than a rule
of practice - that when there is conflict of oral evidence of the parties on
any matter in issue and the decision hinges upon the credibility of witnesses,
then unless there is some special feature about the evidence of a particular
witness which has escaped the trial Judge’s notice or there is a sufficient
balance of improbability to displace his opinion as to where the credibility
lies, the appellate Court should not interfere with the finding of the trial
Judge on a question of fact (See Sarju Pershad Ramdeo Sahu v. Jwaleswari Pratap
Narain Singh AIR 1951 SC 120). Secondly, while reversing a finding of fact the
appellate Court must come into close quarters with the reasoning assigned by
the trial Court and then assign its own reasons for arriving at a different
finding. This would satisfy the Court hearing a further appeal that the first
appellate Court had discharged the duty expected of it. We need only remind the
first appellate Courts of the additional obligation cast on them by the scheme
of the present section 100 substituted in the Code. The first appellate Court
continues, as before, to be a final Court of facts; pure findings of fact
remain immune from challenge before the High Court in second appeal. Now the
first appellate Court is also a final court of law in the sense that its
decision on a question of law even if erroneous may not be vulnerable before
the High Court in second appeal because the jurisdiction of the High Court has
now ceased to be available to correct the errors of law or the erroneous
findings of the first appellate Court even on questions of law unless such
question of law be a substantial one.”
22. From the
abovesaid decisions, it is clear that this Court can interfere with the order
of the CLB only if discretionary/inherent powers of the CLB, is exercised
arbitrarily or capriciously or perversely or ignored the settled principles of
law in granting interlocutory injunction. We can also interfere with the order
if we are able to conclude that the CLB has not exercised its power in granting
injunction in spite of the availability of facts which are prima facie
established by overwhelming evidence and material available on record
justifying the grant thereof and occasioned failure of justice and thereby the
appellant sustained irreparable injury, but at the same time the appellate
Court cannot reassess the material and reach a conclusion different from one
reached by the CLB solely on the ground that if it had considered in a
particular manner, it would have come to contrary conclusion. While reversing
the order of the CLB, this Court must come into close quarters with the
reasonings assigned by the CLB and then this Court has to assign its own
reasonings in arriving at a different conclusion.
23. Dr. Singhvi,
learned Senior Counsel appearing for respondents 1 and 2, in his own style,
while explaining the power of the Appellate Court to interfere with the
discretionary order of the CLB, relied on the “Carpet Theory”, as he mentioned.
According to him, if the lower forums have walked through carpet without
stepping down from the same, the appellate Court cannot interfere with the
order of the said forum. It is not the matter, such a walking is straight or zig-zag.
It is only for the appellate Court to see whether the said forum had walked on
the carpet or stepped down from the carpet. He refers the carpet to its power
or jurisdiction of the forum for disposing of the application for injunction.
We have to find out hereinafter whether the CLB had walked through the carpet
or stepped out.
24. Now on the
basis of the above settled principles of law regarding the power of this Court
to deal with the appeal, we are inclined to deal with the case on the basis of
the pleadings and argument advanced by the respective learned Senior Counsel.
25. Before
dealing with Point No. 1, it is beneficial to deal with the scope of “anti-suit
injunction” in general which are culled out from various decisions. The same is
not defined or dealt with in the Code of Civil Procedure:
(i) When a Court restrains a party to a
suit/proceedings before it from instituting or prosecuting a case in another
Court, including a foreign Court, it is called “anti-suit injunction”.
(ii) Anti-suit injunction
can be issued on the ground of “equity and good conscience”.
(iii) Anti-suit
injunction can be granted “to avoid injustice”.
(iv) If foreign proceedings are “oppressive or
vexatious” such anti-suit injunction can be granted.
(v) To prevent the administration of justice
being prevented for unjust ends of justice, anti-suit injunction can be granted
with respect to foreign proceedings.
(vi) There must be an equity which entitles
one party as against the other, to an injunction to restrain the other from
proceeding in the foreign Court.
(vii) To protect the
Courts’ own proceedings and process, anti-suit injunction can be granted.
(viii) If the bringing of the legal proceedings
involved unconscionable conduct or unconscientious exercise of legal right,
such anti-suit injunction may be granted.
(ix) Though the international anti-suit
injunction operates only against parties, it effectively restricts the
jurisdiction of a foreign sovereign’s Courts.
(x) International anti-suit injunction can
be granted whenever there is a duplication of parties and issues and the Court
determines with the prosecution of simultaneous proceedings would frustrate the
speedy and effective determination of the case.
(xi) There is no
precious Rules governing the anti-suit injunction.
(xii) Only in the most compelling circumstances, a court should
exercise its discretion to issue an anti-suit injunction.
(xiii) Such injunction is required to prevent
irreparable and miscarriage of justice and to prevent the litigants’ evasion of
the important public policies of the forum.
(xiv) The Court should exercise such a power
granting anti-suit injunction to enjoin foreign suits sparingly and only in
very special circumstances.
26. Point Nos. 1
and 4 : The appellant-Company filed Application in C.A. No. 62/2004 invoking
powers under Regulation 44 of the Company Law Board Regulations, 1991, which
reads as follows :
“44. Saving of inherent power
of the Bench.—Nothing in these rules shall be deemed to limit or otherwise
affect the inherent power of the Bench to make such orders as may be necessary
for the ends of justice or to prevent abuse of the process of the Bench.”
The CLB is vested with inherent power to
exercise even under section 402(g) of the Companies Act, which reads as follows
:
“402. Powers of.—Without
prejudice to the generality of the powers of the Tribunal under section 397 or
398, any order under either section may provide for—
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(a) ** |
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(b) ** |
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(c) to (f) ** |
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(g) any other matter for which in the opinion
of the (Tribunal) it is just and equitable that provision should be made.”
27. Regulation
No. 44 is in pari materia to section 151 of the Code of Civil Procedure. Section
151 of the Code reads as follows :
“151. Saving of inherent powers
of Court.—Nothing in this Code shall be deemed to limit or otherwise affect the
inherent power of the Court to make such orders as may be necessary for the
ends of justice or to prevent abuse of the process of the Court.”
From the abovesaid Regulation No. 44 and the
section 402(g) of the Companies Act, it is clear that the inherent power can be
exercised by the CLB to meet the ends of justice and to prevent abuse of the
process of the CLB.
28. Courts have
held that such inherent power can be exercised in the absence of any express
prohibition. In the decision in J.M.D. Syndicate v. I.T. Commr. AIR 1971
SC 1348, the
“5. . . . In exercising
inherent power, the Courts cannot override the express provisions of law. Where
however, as in the present case, there is no express or implied prohibition in
recalling an earlier order made because of the absence of the party and to
directing the disposal of the reference on merits, the Courts, in our opinion,
should not be loath to exercise such power provided the party concerned
approaches the Court with due diligence and shows sufficient cause for its
non-appearance on the date of hearing.”
29. Even in the
decision in Newabganj Sugar Mills Co. Ltd. v. Union of India AIR 1976 SC 1152,
the Apex Court while dealing with the limitation on the powers of the Court in
exercising inherent powers, has held as follows :
“6. Rejecting, therefore, the
recommendations for solution of the problem arising here, as put forward by
counsel for the appellants, we have to devise other measures.We are aware of
our limitations :
‘The judge, even when he is
free, is still not wholly free. He is not to innovate at pleasure. He is not a
knight-errant roaming at will in pursuit of his own ideal of beauty or of
goodness. He is to draw his inspiration from consecrated principles. He is not
to yield to spasmodic sentiment, to vague and unregulated benevolence. He is to
exercise a discretion informed by tradition, methodized by analogy, disciplined
by system and subordinated to ‘the primordial necessity of order in social
life’. Wide enough in all conscience is the field of discretion that remains.’
The difficulty we face here
cannot force us to abandon the inherent powers of the Court to do. “The
inherent power has its roots in necessity and its breadth is coextensive with
the necessity”. Certainly, we cannot go against any statutory prescription. . .
.” (p. 1154)
30. Even in the
decision in Manohar Lal v. Seth Hiralal AIR 1962 SC 527, it is held that the
inherent power has not been conferred upon the Court; it is a power inherent in
the Court by virtue of its duty to do justice between the parties before the
Court. It is also held that when the Code itself recognises the existence of
the inherent power of the Court, there is no question of implying any powers
outside the limits of the Code.
31. In the
decision in Dalpat Kumar v. Prahlad Singh 1992 (1) SCC 719, it is held that
grant of injunction is a discretionary one. While holding so, the
“4. (1) there is a serious disputed
question to be tried in the suit and that an act, on the facts before the
Court, there is probability of his being entitled to the relief asked for by
the plaintiff/defendant;
(2) the Court’s interference is
necessary to protect the party from the species of injury. In other words,
irreparable injury or damage would ensue before the legal right would be
established in trial; and
(3) that the comparative
hardship or mischief or inconvenience which is likely to occur from withholding
the injunction will be greater than that would be likely to arise from granting
it.”
It is also held that the burden is on the
plaintiff to prove that there is “prima facie” case in his favour and also has
to satisfy that not granting such an order of injunction by the Court would
result in “irreparable injury”.
32. The learned
Senior Counsel appearing for the appellant relied on the decision of the
Calcutta High Court (Division Bench) in Debi Jhora Tea Co. v. Barendra Krishna
Bhowmick 1980 (50) Comp. Cas. 771, in support of his submission that there can
be no limitation on the Court’s power while acting under sections 397, 398 and
402 of the Companies Act, 1956, with respect to the power of the CLB to grant
injunction. Even in the said decision, it is only held that the intention of
the Legislature is to confer wide and ample powers upon Courts for the
regulation of the conduct of the Company’s affairs and to provide for any other
matter which the Court thinks just and equitable to provide for, in the
interest of the corporate body and general public.
33. Even in the
decision in Grindlays Bank Ltd. v. Central Government Industrial Tribunal 1980
(Supp.) SCC 420, regarding the availability of the power of the Tribunal in the
absence of any express provision, it is held as follows :
“6. We are of the opinion that
the Tribunal had the power to pass the impugned order if it thought fit in the
interest of justice. It is true that there is no express provision in the Act
or the rules framed thereunder giving the Tribunal jurisdiction to do so. But
it is a well known rule of statutory construction that a Tribunal or body
should be considered to be endowed with such ancillary or incidental powers as
are necessary to discharge its functions effectively for the purpose of doing
justice between the parties. In a case of this nature, we are of the view that
the Tribunal should be considered as invested with such incidental or ancillary
powers unless there is any indication in the statute to the contrary. We do not
find any such statutory prohibition. On the other hand, there are indications
to the contrary.” (p. 423)
34. Similar view
has been taken by the
“8. There is no doubt that the
Tribunal functions as a Court within the limits of its jurisdiction. It has all
the powers conferred expressly by the statute. Furthermore, being a judicial
body, it has all those incidental and ancillary powers which are necessary to
make fully effective the express grant of statutory powers. Certain powers are
recognised as incidental and ancillary, not because they are inherent in the
Tribunal, nor because its jurisdiction is plenary, but because it is the
legislative intent that the power which is expressly granted in the assigned
field of jurisdiction is efficaciously and meaningfully exercised. The powers
of the Tribunal are no doubt limited. Its area of jurisdiction is clearly
defined, but within the bounds of its jurisdiction, it has all the powers
expressly and impliedly granted. The implied grant is, of course, limited by
the express grant and, therefore, it can only be such powers as are truly
incidental and ancillary for doing all such acts or employing all such means as
are reasonably necessary to make the grant effective. As stated in Maxwell on
Interpretation of Statutes (11th Edn.) “where an Act confers a jurisdiction, it
impliedly also grants the power of doing all such acts, or employing such
means, as are essentially necessary to its execution.” (p. 457)
35. In the
decision of the
“3. Our attention was invited
to the judgment of this Court in ITO v. M.K. Mohammed Kunhi 1969 (71) ITR 815 :
AIR 1969 SC 430, where the question related to the powers of the Income Tax
Appellate Tribunal under section 254 of the Income Tax Act, 1961. Reliance was
placed upon Sutherland’s Statutory Construction, Third Edn., Domats Civil Law, Vol.
I, and Maxwell on Interpretation of Statutes, 11th Edn., to hold that it was a
firmly established rule that an express grant of statutory power carried with
it, by necessary implication, the authority to use all reasonable means to make
such grant effective. The powers which had been conferred upon the Tax
Appellate Tribunal were of the widest possible amplitude and carried with them,
by necessary implication all powers and duties incidental and necessary to
make, the exercise of those powers fully effective. Having regard to its powers
under section 254, it was held that the Tax Appellate Tribunal had impliedly
been granted the power of doing all such acts and employing such means as were
essential and necessary to its ends. The statutory power carried with it the
duty in proper cases to make such order for staying proceedings as would
prevent the appeal, if successful, from being rendered nugatory.” (p. 94)
From the abovesaid decisions, though it is
held that even in the absence of any specific provision, the Courts are having
inherent power to grant injunction and such inherent power has been conferred
upon the Court by virtue of its duty to do justice. We need not go into the
said aspect in this case, as Regulation No. 44 and section 402 of the Companies
Act contemplate such power on the CLB. So there cannot be any difficulty in
accepting the proposition that the CLB is having such inherent power to grant
injunction in a given case if it has jurisdiction to deal with the same.
36. But we have
to deal with the question whether the CLB is having power to grant injunction
as sought for by the appellant-Company to stall the arbitration proceedings
initiated by respondents 1 and 2 as minority shareholders by way of derivative
action initiated before the ICC Arbitral Tribunal, which alone is having
jurisdiction to deal with the arbitration proceedings in view of clause 16.2 of
the PPA.
37. Learned
Senior Counsel appearing for the appellant submitted that it cannot be said
that the CLB is not having jurisdiction to grant injunction with respect to
arbitration proceedings in question. According to him, it also cannot be said
that Courts cannot grant injunction at the instance of Indian Firm restraining
the arbitration proceedings initiated in foreign country.
38. In support
of his submission, learned Senior Counsel appearing for the appellant relied on
the decision in V.O. Tractoro Export v. Tarapore & Co. 1969 (3) SCC 562. In
the said case, the appellant before the Supreme Court initiated arbitration
proceedings before Foreign Trade Arbitration Commission of the U.S.S.R. Chamber
of Commerce, Moscow. Before initiation of such proceeding, the respondents
before the Apex Court filed a suit on the Original Side of the Madras High
Court. After initiating the arbitration proceedings, the appellant entered
appearance and contested the suit and filed an application for stay of the
suit. Respondents also filed another application for injunction restraining the
appellant from taking any part in the arbitration proceedings in Moscow.
Learned Single Judge dismissed the application for stay of the suit and granted
injunction restraining the appellant from taking part in the proceedings in
Moscow. The Division Bench also confirmed the decision of the learned Single
Judge. On appeal, the Apex Court found that no case for injunction has been
made out and set aside the orders of the High Court and allowed the appeal
filed before them. While dealing with the question whether the High Court was
justified in granting interim injunction restraining the Russian Firm from
proceeding with the arbitration in Moscow, the Apex Court has held as follows :
“23. The next question is
whether the High Court was justified in granting an interim injunction
restraining the Russian Firm from proceeding with arbitration at Moscow. The
position of the Russian Firm is that neither it nor the Foreign Trade
Arbitration Commission of the U.S.S.R. Chamber of Commerce which is seized of
the arbitration proceedings is amenable to the jurisdiction of the Courts in
India. The presence in India of the party sought to be injuncted is a condition
pre-requisite for the grant of an injunction. Alternatively, the Indian Firm
has been guilty of breach of the agreement to refer the matter to arbitration
at Moscow and therefore, it has disentitled itself to the exercise of the
Court’s discretion in its favour in the matter of granting an injunction.
24. Now, it is common ground
that the point about the Russian Firm having no representative in India was not
agitated before the High Court. The position taken up in the plaint was that
the Russian Firm was carrying on business in the U.S.S.R. and at Madras. The
controversy before the High Court appears to have been confirmed only to what
is stated in Para 5 of the counter-affidavit of the Russian Firm, namely, that
in the presence of the Arbitration agreement in the contract entered into
between the parties, the only proper remedy for the Indian Firm was to submit
the disputes to the arbitration Tribunal at Moscow.
25. The rule as stated in
Halsbury’s Laws of England, Vol. 21, at page 407, is that with regard to
foreign proceedings, the Court will restrain a person within its jurisdiction
from instituting or prosecuting suits in a foreign Court whenever the
circumstances of the case make such an interposition necessary or proper. This
jurisdiction will be exercised whenever there is vexation or oppression. In
England, Courts have been very cautious and have largely refrained from
granting stay of proceedings in foreign Courts (Cheshire’s Private Industrial
Law, 7th Ed., pages 108-110). The injunction is, however, issued against a
party and not a foreign Court.
26. Although it is a moot point
whether section 35 of the Arbitration Act, 1940, will be applicable to the
present case in Shiva Jute Baling Ltd. v. Hindley & Co. Ltd. 1960 (1) SCR
569, it was assumed that section 35 applied to protocol arbitration and the
principle embodied in that section cannot be completely ignored while
considering the question of injunction. According to that section no reference
nor award can be rendered invalid by reason only of the commencement of legal
proceedings upon the subject of the reference, but when legal proceedings upon
the whole of the subject-matter of the reference have been commenced between
all the parties to the reference and a notice thereof has been given to the
arbitrators or umpire, all further proceedings in a pending reference shall,
unless a stay of proceedings is granted under section 34, be invalid.
27. If the venue of the arbitration
proceedings had been in India and if the provisions of the Arbitration Act of
1940, had been applicable, the suit and the arbitration proceedings could not
have been allowed to go on simultaneously and either the suit would have been
stayed under section 34 or if it was not stayed, and the arbitration were
notified about the pendency of the suit, they would have had to stay the
arbitration proceedings because under section 35 such proceedings would become
invalid if there was identity between the subject-matter of the reference and
the suit. In the present case, when the suit is not being stayed under section
3 of the Act it would be contrary to the principle underlying section 35 not to
grant an injunction restraining the Russian Firm from proceeding with the
arbitration at Moscow. The principle essentially is that the arbitrators should
not proceed with the arbitration side by side in rivalry or in competition as
if it were a Civil Court.” (p. 574)
39. As per the
above decision, there cannot be any doubt that order of injunction can be
granted even with respect to arbitration proceedings. But, even from the
abovesaid decision, it is clear that the petition for injunction was
entertained in a suit and such an order of injunction was granted only because the
action of the respondents therein was vexation or oppression and it is held
that while granting such order, Courts should be very cautious and have largely
refrained from granting stay of proceedings of foreign Courts. The Apex Court
also found that such an order is necessary on the basis of the principle that
the arbitrators should not proceed with the arbitration, side by side in
rivalry or on competition as if it were a Civil Court. In the present case,
such a situation is not available. The proceedings taken by the respondents 1
and 2 cannot be said as vexation or oppression. It is relevant to mention here
that the amount which is due from the TNEB, is not in dispute and availability
of clause 16.2 in the PPA to invoke the arbitration proceedings is also not in
dispute. The respondents, as minority shareholders, took derivative action
initiating arbitration proceedings in accordance with clause 16.2 of the PPA,
that too, only after the Company failed to invoke such arbitration proceedings,
though such right is given under clause 16.2 of the PPA especially when the
TNEB failed to pay the amount and also not complied with payment security
mechanism as contemplated under the PPA to recover the money to the
appellant-Company which is due from the TNEB. There is no parallel proceeding
with respect to the same, is pending in India so as to prevent the respondents
for initiating arbitration proceedings. So, the decision reported in the
decision in V.O. Tractoro Export’s case (supra) cannot be relied on to say that
in the present case CLB should have granted injunction.
40. In the
decision in Modi Entertainment Network’s case (supra), the Apex Court had dealt
with similar issue regarding the power of issuing anti-suit injunction to
restrict the proceedings in foreign Court. In para 24 of the decision, the Apex
Court has laid down the principles in exercising the discretion to grant
injunction which read as follows :
“24. From the above
discussion the following principles emerge :
(1) In exercising discretion to grant an
anti-suit injunction the Court must be satisfied of the following aspects :
(a) the defendant, against whom, injunction is
sought, is amenable to the personal jurisdiction of the Court;
(b) if the injunction is declined, the ends of
justice will be defeated and injustice will be perpetuated; and
(c) the principle of comity - respect for the
Court in which the commencement or continuance of action/proceeding is sought
to be restrained - must be borne in mind.
(2) In a case where more forums than one are
available, the Court in exercise of its discretion to grant anti-suit
injunction will examine as to which is the appropriate forum (forum conveniens)
having regard to the convenience of the parties and may grant anti-suit
injunction in regard to proceedings which are oppressive or vexatious or in a
forum non-conveniens.
(3) Where jurisdiction of a Court is invoked
on the basis of jurisdiction clause in a contract, the recitals therein in
regard to exclusive or non-exclusive jurisdiction of the Court of choice of the
parties are not determinative but are relevant factors and when a question
arises as to the nature of jurisdiction agreed to between the parties the Court
has to decide the same on a true interpretation of the contract on the facts
and in the circumstances of each case.
(4) A Court of natural jurisdiction will not
normally grant anti-suit injunction against a defendant before it where parties
have agreed to submit to the exclusive jurisdiction of a Court including a
foreign Court, a forum of their choice in regard to the commencement or
continuance of proceedings in the Court of choice, save in an exceptional case
for good and sufficient reasons, with a view to prevent injustice in
circumstances such as which permit a contracting party to be relieved of the
burden of the contract; or since the date of the contract the circumstances or
subsequent events have made it impossible for the party seeking injunction to
prosecute the case in the Court of choice because the essence of the jurisdiction
of the Court does not exist or because of a vis major or force majeure and the
like.
(5) Where parties have agreed, under a
non-exclusive jurisdiction clause, to approach a neutral foreign forum and be
governed by the law applicable to it for the resolution of their disputes
arising under the contract, ordinarily no anti-suit injunction will be granted
in regard to proceedings in such a forum conveniens and favoured forum as it
shall be presumed that the parties have thought over their convenience and all
other relevant factors before submitting to the non-exclusive jurisdiction of
the Court of their choice which cannot be treated just as an alternative forum.
(6) A party to the contract containing
jurisdiction clause cannot normally be prevented from approaching the Court of
choice of the parties as it would amount to aiding breach of the contract; yet
when one of the parties to the jurisdiction clause approaches the Court of
choice in which exclusive or non-exclusive jurisdiction is created, the
proceedings in that Court cannot per se be treated as vexatious or oppressive
nor can the Court be said to be forum non-conveniens.
(7) The burden of establishing that the
forum of choice is a forum non-conveniens or the proceedings therein are
oppression or vexatious would be on the party so contending to aver and prove
the same.” (p. 360)
41. The learned
Senior Counsel appearing for the appellant-Company submitted that the Apex
Court in the above case has come to the conclusion that there is no valid reason
to grant anti-suit injunction and such conclusion is on the basis of the facts
of that case, and also no valid reason was given or merits were not made out to
grant such injunction. But the principles laid down in Modi Entertainment
Network’s case (supra), have to be relied on, regarding the issuance of
anti-suit injunction and the same have to be applied to test the correctness of
exercise of discretion by the CLB.
42. Learned
Senior Counsel appearing for the appellant relied on the decision in O.N.G.C.
v. Western Co. of North America 1987 (1) SCC 496, in which the Apex Court,
relying on the decision in V.O. Tractoro Export’s case (supra) and other
decisions found, on the basis of the facts of that case, that the said case was
one of those rare cases where the Court would be failing in its duty if it
hesitates in granting the order. On that basis, learned Senior Counsel
appearing for the appellant submitted that applying the said principle, the
Company Law Board should have granted injunction as sought for. In the said
case before the Apex Court, the respondent was restrained from proceeding
further with an action instituted by it before the U.S. Court against the
appellant-O.N.G.C. The appellant and the respondent entered into a drilling
contract. The said contract provided for arbitration for any difference arising
out of the agreement being referred to arbitrators, which is governed by the
Indian Arbitration Act, 1940. In view of certain disputes, two Arbitrators and
an Umpire were appointed. The Arbitrators informed the Umpire that they were
unable to agree on the matters raised and consequently the Umpire entered into
the arbitration and proceeded to declare his non-speaking award and passed the
interim award. The respondent requested the Umpire to authorise one D.C.
Singhania to file the award in the appropriate Court in India. Such
authorisation was granted and the award rendered by the Umpire was lodged in
the Bombay High Court. Subsequently, the Umpire rendered a supplementary award
as the final award. The same also was lodged in the High Court of Bombay by the
Umpire at the instance of the respondent. The respondent lodged a plaint in the
US District Court seeking an order of confirmation of the awards and a judgment
for payment of interest until the date of the judgment and costs by ONGC. The
appellant-ONGC filed a petition under sections 30 and 33 of the Indian
Arbitration Act, 1940 for setting aside the awards rendered by the Umpire and
prayed for an interim injunction restraining the respondent from proceeding
further with the action instituted in the US Court. The Bombay High Court
originally granted an ex parte interim injunction but subsequently vacated the
same after hearing the parties. Aggrieved against the same, the ONGC approached
the Apex Court and the Apex Court while dealing with the said case, has held as
follows :
“18. In the result we are of
the opinion that the facts of this case are eminently suitable for granting a
restraint order as prayed for by ONGC. It is no doubt true that this Court
sparingly exercises the jurisdiction to restrain a party from proceeding
further with an action in a foreign Court. We have the utmost respect for the
American Court. The question however is whether on the facts and circumstances
of this case it would not be unjust and unreasonable not to restrain the
Western Company from proceeding further with the action in the American Court
in the facts and circumstances outlined earlier. We would be extremely slow to
grant such a restraint order but in the facts and circumstances of this matter
we are convinced that this is one of those rare cases where we would be failing
in our duty if we hesitate in granting the restraint order, for, to oblige the
ONGC to face the aforesaid proceedings in the American Court would be
oppressive in the facts and circumstances discussed earlier. But before we pass
an appropriate order in this behalf, we must deal with the plea that the High
Court does not have the jurisdiction to grant such a restraint order even if
the proceeding in the foreign Court is considered to be oppressive. Counsel for
the respondent has placed reliance on Cotton Corporation of India v. United
Industrial Bank 1983 (3) SCR 962 : 1983 (4) SCC 625 : 1984 (55) Comp. Cas. 423,
in support of this plea. In Cotton Corporation’s case, the question before the
Court was whether in the context of section 41(b) of the Specific Relief Act,
the Court was justified in granting the injunction. The said provision runs
thus :
41. An injunction cannot
be granted—
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(b) to restrain any person from
instituting or prosecuting any proceeding in a Court not subordinate to that
from which the injunction is sought; (emphasis added)
This provision, in our opinion,
will be attracted only in a fact-situation where an injunction is sought to
restrain a party from instituting or prosecuting any action in a Court in India
which is either of co-ordinance jurisdiction or is higher to the Court from
which the injunction is sought in the hierarchy of Courts in India. There is
nothing in Cotton Corporation’s case which supports the proposition that the
High Court has no jurisdiction to grant an injunction or a restraint order in
exercise of its inherent powers in a situation like the one in the present
case. In fact this Court had granted such a restraint order in V/O
Tractoroexport, Moscow v. M/s. Tarapore & Company 1970 (3) SCR 53 : 1969
(3) SCC 562 : AIR 1971 SC 1, and had restrained a party from proceeding with an
arbitration proceedings in a foreign country (in Moscow). As we have pointed
out earlier, it would be unfair to refuse the restraint order in a case like
the present one for the action in the foreign Court would be oppressive in the
facts and circumstances of the case. And in such a situation the Courts have
undoubted jurisdiction to grant such a restraint order whenever the
circumstances of the case make it necessary or expedient to do so or the ends
of justice so require. The following passage extracted from paragraph 1039 of
Halsbury’s Laws of England, Vol. 24 at page 579 supports this point of view :
“With regard to foreign
proceedings, the Court will restrain a person within its jurisdiction from
instituting or prosecuting proceedings in a foreign Court whenever the
circumstances of the case make such an interposition necessary or expedient. In
a proper case the Court in this country may restrain a person who has actually
recovered judgment in a foreign Court from proceeding to enforce that judgment.
The jurisdiction is discretionary and the Court will give credit to foreign
Courts for doing justice in their own jurisdiction.”
It was because this position
was fully realized that it was argued on behalf of the respondent that the
action in the US Court could not be considered as being oppressive to the ONGC.
We have already dealt with this aspect and reached a conclusion adverse to
Western Company. There is no merit in the submission that the High Court of
Bombay has no jurisdiction in this behalf.”
In the abovesaid decision, the Apex Court has
come to the conclusion that the order of injunction should be granted
restraining the respondent from proceeding with in US Court, on the ground that
the Indian Court had exclusive jurisdiction to grant such injunction and action
taken by the respondent in the foreign Court would be oppressive in the facts
and circumstances of that case. The American Court had no jurisdiction in the
facts and circumstances of the case. Moreover, the action by the respondent
before American Court is in violation of the arbitration clause. Even in Modi
Entertainment Network’s case (supra), the Apex Court had referred to ONGC’s
case (supra) and accepted the principles laid down in ONGC’s case (supra) and
discussed the reason for the conclusion of the Apex Court in favour of granting
injunction. So, the principles laid down even in ONGC’s case (supra) cannot
lend any help to the appellant-Company to substantiate their stand for getting
injunction in the present case.
43. Even in SNI
A’erospatiale v. Lee Kul Jak 1987 All E.R. (3) 510, similar view has been taken
and the said decision has also been referred to and discussed in Modi
Entertainment Network’s case (supra). The Privy Council in the said case had
also laid down the principles to be applied by the Court while granting
injunction restraining foreign proceedings. In the said case, there was no
jurisdiction agreement for resolution of disputes. In para 17 of the judgment
in Modi Entertainment Network’s case (supra) the Apex Court has dealt with the
said judgment and so the facts of that case and the principles laid down
therein supports the reasoning given by the CLB to reject the injunction as
sought for by the appellant.
44. In the
decision in CSR Ltd. v. Cigna Insurance Australia Ltd. 1997 (146) ALR 402, (HC)
it is held that the inherent power to grant anti-suit injunction is to be
exercised when the administration of justice so demands or, in the context of
anti-suit injunctions, when necessary for protection of Courts’ own proceedings
or processes and with respect to the same subject-matter filed in this country
and apart from that, a Court may, in exercise of the power deriving from the
Chancery Court, make orders in restraint of unconscionable conduct or the
unconscientious exercise of legal rights. If the bringing of legal proceedings
involves unconscionable conduct or the unconscientious exercise of a legal
right, an injunction may be granted by a Court in the exercise of its equitable
jurisdiction in restraint of those proceedings. The said decision also has been
referred to and dealt with by the Apex Court in Modi Entertainment Network’s
case (supra). If the facts of the present case are applied to the principles
laid down in that case, the CLB is correct in holding that there is no necessity
for protection of its own proceeding or process as it has no jurisdiction to
deal with the issue raised before the ICC Arbitral Tribunal. Learned Senior
Counsel appearing for the appellant relying on the relevant prayers regarding
arbitration proceedings in the Company Petition submitted that when the CLB was
asked to decide about the necessity to invoke the arbitration clause, namely,
16.2 of the PPA, the present action by the respondents is nothing but
oppressive and the same issue is pending before the CLB. But the prayer sought
for before the CLB is only to direct the Administrator to invoke clause 16.2 of
PPA which means the Company has to initiate arbitration proceedings. But the
proceeding taken by respondents 1 and 2 before the ICC Arbitral Tribunal is as
a derivative action as minority shareholders. So, even if any order is passed,
as suggested by the learned Senior Counsel appearing for the appellant, in the
Company Petition, it does not affect the present proceedings taken by the
respondents.
45. In the
decision in Laker Airways Ltd. v. Sabena, Belgian World Airlines 1984 U.S. App.
LEXIS 24811, the United States Court of Appeals for the District of Columbia
Circuit, while dealing with the limits of Federal Court’s power to conserve its
adjudicatory authority over a case filed with the Court, instead of actively
raising all defensive claims in the Federal Court, the named defendants
initiated suits in foreign Tribunals for the sole purpose of terminating the
federal Court’s adjudication of the litigation. It is also found that the issue
raised in two different Courts represents a head-on collision between the
diametrically opposed antitrust policies of the United States and United
Kingdom. While analysing the said situation, it is held as follows :
“It is well-settled that
English and American Courts have power to control the conduct of persons
subject to their jurisdiction to the extent of forbidding them from suing in
foreign jurisdictions. However, the fundamental corollary to concurrent
jurisdiction must ordinarily be respected. Parallel proceedings on the same in
personam claim should ordinarily be allowed to proceed simultaneously, at least
until a judgment is reached in one which can be pled as res judicata in the
other. The mere filing of a suit in one forum does not cut off the preexisting
right of an independent forum to regulate matters subject to its prescriptive
jurisdiction. For this reason, injunctions restraining litigants from
proceeding in Courts of independent countries are rarely issued.
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A second reason cautioning
against exercise of the power is avoiding the impedance of the foreign
jurisdiction. Injunctions operate only on the parties within the personal
jurisdiction of the Courts.
However, they effectively restrict
the foreign Courts ability to exercise its jurisdiction. If the foreign Court
reacts with a similar injunction, no party may be able to obtain any remedy.
Thus, only in the most compelling circumstances does a Court have discretion to
issue an anti-suit injunction.
There are no precise rules
governing the appropriateness of anti-suit injunctions. The equitable
circumstances surrounding each request for an injunction must be carefully
examined to determine whether, in light of the principles outlined above, the
injunction is required to prevent an irreparable miscarriage of justice.
Injunctions are most often necessary to protect the jurisdiction of the
enjoining Court, or to prevent the litigant’s evasion of the important public
policies of the forum.”
The abovesaid decision was referred to by the
United States Court of Appeal for the First Circuit in Hans A. Quaak Et AL v.
Klynveld Peat Marwick Goerdeler Bedri Jfsrevisoren 2004 US App. LEXIS 4352. In
the said decision, two basic views, namely, liberal approach and the
conservative approach in granting anti-suit injunction with reference to
International proceedings have been discussed. While doing so, it is observed
as follows :
“We reject the liberal
approach. We deem international comity an important integer in the decisional
calculus - and the liberal approach assigns too low a priority to that
interest. In the bargain, it undermines the age-old presumption in favour of
concurrent parallel proceedings - a value judgment that leaves us uneasy - and presumes
that public policy always favours allowing a suit pending in an American Court
to go forward without any substantial impediment. To cinch matters, this
approach gives far too easy passage to international anti-suit injunctions. We
understand that the judicial process is a cornerstone of the American way of
life - but in an area that raises significant separation of powers concerns and
implicates international relations. We believe that the law calls for a more
cautious and measured approach.
The conservative approach has
more to commend it. First, it recognizes the rebuttable presumption against
issuing international anti-suit injunctions (and, thus, honours the presumption
favouring the maintenance of parallel proceedings). Second, it is more respectful
of principles of international comity. Third, it compels an inquiring Court to
balance competing policy considerations. Last - but far from least - it fits
snugly with the logic of Canadian Filters, in which we said that issuing an
international anti-suit injunction is a step that should “be taken only with
care and great restraint” and with the recognition that international comity is
a fundamental principle deserving of substantial defence.
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In order to provide guidance for
the District Courts, we spell out the manner in which our preferred approach
operates. The gatekeeping inquiry is, of course, whether parallel suits involve
the same parties and issues. Unless that condition is met, a Court ordinarily
should go no further and refuse the issuance of an international anti-suit
injunction. See e.g., China Trade, 837 F.2d at 36, Laker Airways, 731 F.2d at
928; see also George A. Bermann. The Use of Anti-Suit Injunctions in
International Litigation, 28 Colum, J. Transnat’l L. 589, 626 (1990) (stating
that Courts generally “will not consider issuing anti-suit injunctions” unless
there are “parallel local and foreign actions between the same parties over the
same claim”). If - and only if - this threshold condition is satisfied should
the Court proceed to consider all the facts and circumstances in order to
decide whether an injunction is proper. In this analysis, considerations of
international comity must be given substantial weight - and those
considerations ordinarily establish a rebuttable presumption against the
issuance of an order that has the effect of halting foreign judicial
proceedings.”
46. Learned
Senior Counsel appearing for the appellant submitted that the appellant-Company
can sustain their petition for injunction even without filing a counter-claim.
In support of his submission, learned Senior Counsel relied on the decision of
the learned Single Judge of the Karnataka High Court reported in Suganda Bai v.
Sulu Bai AIR 1975 Kar. 137, in which it is held as follows:
“3. Now the principles, under
which a defendant may seek and obtain an order of temporary injunction against
the plaintiff, are stated in Collison v. Warren, 1901 (1) Ch 812 where Buckley,
J., after referring to a number of earlier decisions of the English Courts,
quoted Lopes, LJ, in (1824) 2 Ch 541 at p. 545 :
‘The question is this - whether
the defendant can move for an injunction against the plaintiff without filing a
counter-claim or issuing a writ in a cross-action. In my opinion, he can in
some cases, but only in cases where the defendant’s claim to relief arises out
of the plaintiff’s cause of action, or is incidental to it.’
Buckley, J., also
referred to the decision of Davey, L.J., in the same case wherein it is stated
thus:—
‘In my opinion, it must be
relating to or arising out of the relief sought in the action which is before
the Court, and that any other injunction cannot properly be granted in the
action.’
The principles stated in the
above decision have been followed by this Court and it is only in cases where
the defendants’ claim to relief arises out of the plaintiff’s cause of action
or is incidental to it that he can ask for a temporary injunction against the
plaintiff.
4. In the instant case, the
cause of action for the plaintiff’s suit, as stated earlier arose in the year
1970, whereas the cause of action for the defendants arose in the year 1973.
The two causes of action are different. Therefore, the Courts below were wholly
in error in granting temporary injunction prayed for by defendant 1.” (p. 137)
47. Learned
Senior Counsel appearing for the appellant also relied on the decision in
Ramaiah v. Godappa 1989 (1) Kar. L.J. 210, to substantiate the same contention
as stated above. The decision in Suganda Bai’s case (supra) in the earlier
paragraph has been referred to and the Division Bench in the decision in
Ramaiah’s case (supra) has agreed with the view of the learned Single Judge
rendered in Suganda Bai’s case (supra).
48. In the
present case, the appellant’s claim before the CLB is not on the basis of cause
of action arose in the Company Petition or incidental to it. As discussed
above, the prayer in the Company Petition is on the basis of mismanagement.
Incidentally respondents 1 and 2 have sought for direction to the administrator
to invoke the arbitration clause available in the PPA. But the appellant now
seeks an order of injunction to stall the proceedings taken on different
capacity which is nothing to do with the prayer sought for in the main Company
Petition and so the said decisions cannot be relied on to support the
appellant’s case in this appeal.
49. Now we have
to consider the issue raised here on the basis of the principles laid down in
various decisions as to whether the CLB erred in not granting anti-suit
injunction as prayed for by the appellant-Company, restraining the respondents
1 and 2 from proceeding with the arbitration proceedings initiated by them
before the ICC Arbitral Tribunal.
50. Though the
relief of injunction as sought for against respondents 1 and 2 is amenable to
personal jurisdiction of the CLB, on that basis only it cannot be said that the
CLB is not correct in rejecting the petition seeking for anti-suit injunction.
Since respondents 1 and 2 initiated arbitration proceedings only in the
interest of the Company to recover the dues from the TNEB and also as
contemplated in the PPA entered into between the appellant-Company and the TNEB
and not for personal interest or gain of respondents 1 and 2, it cannot be said
that ends of justice would be defeated by not granting injunction as sought
for. But, if injunction is granted, injustice would be perpetuated as the
appellant-Company has sought for injunction against respondents 1 and 2 from
proceeding with arbitration proceedings even by taking derivative action as
minority shareholders permanently, it amounts preventing respondents 1 and 2
from exercising their common law right which is available to them. Moreover,
the appropriate forum to invoke arbitration proceedings under clause 16.2 of
the PPA is the ICC Arbitral Tribunal in view of the specific contract between
the appellant-Company and TNEB and no such proceeding can be taken in India as
it has been specifically excluded. To appreciate the above reasons, it is
relevant to extract clause 16.2 of the PPA which reads as follows :
“16.2 Arbitration of Disputes :
In the event the Parties are unable to resolve any dispute pursuant to section
16.1, then:—
(a) Except as otherwise provided in this
Agreement, any dispute, controversy, or claim arising out of or relating to
this Agreement, or breach, termination or validity thereof, shall be finally
settled by arbitration in accordance with this section 16.2.
(b) Notwithstanding section 17.8 the
arbitration shall be conducted in accordance with the Rules of Conciliation and
Arbitration of the International Chamber of Commerce (the “ICC”) in effect on
the date of this Agreement (the “Rules”).
(c) There shall be three arbitrators of whom
each Party shall select one. The two arbitrators thus appointed shall select the
third arbitrator to act as chairman of the Tribunal within thirty (30) days of
selection of the second arbitrator. If the two Party-appointed arbitrators
fails to agree on a third arbitrator, the ICC Court of Arbitration shall make
such appointment.
(d) At any oral hearing of evidence in
connection with the arbitration, each Party thereto or its legal counsel shall
have the right to examine its witnesses and to cross-examine the witness of an
opposing Party. No evidence of any witness shall be presented in written form
unless the opposing Party or Parties shall have the opportunity to
cross-examine such witness, except as the Parties to the dispute otherwise
agree in writing or except under extraordinary circumstances where the interest
of justice require a different procedure.
(e) The arbitration shall be held in London,
England. Notwithstanding section 17.8 the laws of England shall govern the
validity, interpretation, construction, performance and enforcement of the
provisions contained in this section 16.2. The arbitration proceedings shall be
conducted, and the award shall be rendered, in the English language.
(f) This Agreement and the rights and
obligation of the Parties shall remain in full force and effect pending the
award in any arbitration proceedings hereunder.
(g) The costs of arbitration shall be
determined by the Arbitral Tribunal in accordance with the Rules.
(h) The Indian Arbitration Act [Act No. X (10)
of 1940] : The Arbitration and Conciliation Act, 1996, shall not be applicable
to this arbitration provision, to any arbitration proceeding or award rendered
hereunder, or to any dispute or difference arising out of or in relation to
this Agreement. Any award rendered hereunder shall be a “foreign award” within
the meaning of the Indian Foreign Awards Act, 1961.
(i) The Parties hereby waive any rights of
application or appeal to the Courts of India to the fullest extent permitted by
law in connection with any question of law arising in the course of arbitration
or with respect to any award made.”
Since respondents 1 and 2 had approached only
the ICC Arbitral Tribunal which is the forum of parties choice in which the
exclusive jurisdiction is created, the proceedings before the ICC Arbitral
Tribunal cannot per se be treated as vexatious or oppressive, nor the ICC
Arbitral Tribunal be said to be the forum non-conveniens and in view of the
abovesaid clause 16.2 of the PPA, CLB cannot decide the said issue which has
been raised before the ICC Arbitral Tribunal and so the CLB is not having jurisdiction
to decide the said issue. In view of the fact that the ICC Arbitral Tribunal is
having natural and exclusive jurisdiction and a forum of choice of the parties,
no anti-suit injunction can be granted in respect of proceedings taken before
the natural and exclusive jurisdiction of the forum of choice of parties by the
forum, namely, the CLB, which is not having jurisdiction to decide the issue
raised before the ICC Arbitral Tribunal especially when the CLB is not even
having concurrent jurisdiction to decide that issue in question. If injunction
as sought for is granted, it amounts to aiding breach of contract, namely,
clause 16.2 of the PPA, as the proceedings have been taken before the ICC
Arbitral Tribunal which is having natural and exclusive jurisdiction for which
the parties have specifically consented and the CLB which is not having natural
jurisdiction with respect to the issue raised before the ICC Arbitral Tribunal.
When the CLB is not having jurisdiction to decide the issue raised before the ICC
Arbitral Tribunal, the question of protecting the CLB’s own proceeding and
process does not arise. On the basis of the facts set out earlier, it is clear
that there is no duplication of parties and issues both before the CLB and
before the ICC Arbitral Tribunal. As rightly found by the CLB, TNEB is not a
party before the CLB, but it is a party before the ICC Arbitral Tribunal.
Moreover, TNEB cannot be a party before the CLB, as no relief can be granted by
the CLB against the TNEB. Furthermore, the Courts have taken the views that the
arbitration proceedings should not be stopped from proceeding further, but, on
the other hand, the said proceedings should be completed at an early date. So,
seeking an anti-suit injunction by the appellant-Company is contrary to the
settled principles of law. In view of the reasons given, there cannot be any
irreparable or miscarriage of justice if injunction is granted. As respondents
1 and 2 have proceeded with the arbitration proceedings only for the benefit of
the Company and consequently of the shareholders, by taking steps to recover
huge amount from the TNEB, they are not asking any personal benefit out of the
same. Respondents 1 and 2 have taken steps, which would have been taken by the
Company. In the present case, it cannot be said that there is a multiplicity of
proceedings both before the CLB and ICC Arbitral Tribunal as the scope of the
proceedings before them are different and each proceeding was taken with the
respective forum which is having exclusive jurisdiction on the subject raised
before it. Moreover, the appellant-Company has not come forward with necessary
pleadings to grant anti-suit injunction by the CLB, which are required to
establish the necessary facts to grant such order. In view of the above, it cannot
be said that the CLB has committed error in not granting injunction as prayed
for by the appellant-company. The CLB had rightly exercised its discretion in
not exercising its inherent power in favour of the appellant-company and
travelled on the carpet provided for it and so no interference is warranted by
this Court.
51. Point No. 2
- Though this issue is not very much relevant in view of the findings given
earlier regarding jurisdiction of the CLB, we are inclined to deal with the
same as the same has been argued elaborately. A share-holders’ agreement was
entered into on 24th November, 1998 among respondents 1 to 4, and the
appellant-company. Clause 14.3 of the said agreement which is put against
respondents 1 and 2 reads as follows :
“14.3 It is understood that the
Parties are independent entities engaged in the conduct of their own business.
Except as expressly provided for herein, this Agreement shall not constitute
any Party as the legal representative or agent of any other party for any
purpose whatsoever, and no Party shall have the right or authority to assume,
create, or incur any liability or obligation of any kind, express or implied,
in the name of or on behalf of any other Party. If any party provides services
or supplies products or technology to the Company or to the any Party, such
Party does so as an independent contractor engaged in its own business.”
The abovesaid clause prohibits any party to
act as a legal representative or agent or any other party for any purpose
whatsoever and no party shall have the right to assume, create or incur any
liability or obligation of any kind express or implied in the name of or on
behalf of any other party. This clause is relied upon by the appellant-company
to say that respondents 1 and 2 have no authority or they are prohibited to
take arbitration proceedings in the name of the appellant-company. The CLB
rightly rejected the case of the appellant-company on the ground that the said
clause cannot override the established common law right of the minority
shareholders to take derivative action. Moreover, the issue regarding
maintainability of request for arbitration at the instance of respondents 1 and
2 is pending before the ICC Arbitral Tribunal and so we are not inclined to
deal with the issue on the basis of clause 14.3 of the shareholders agreement
in detail in this appeal, as the CLB is not going to decide the same in the
Company Petition filed by respondents 1 and 2 and they have proceeded with the
arbitration proceedings not on the basis of a right arises under an agreement.
52. Learned
Senior Counsel appearing for the appellant submitted that having sought for
similar relief in the Company Petition and having failed in their attempt in
getting interim orders to permit them to proceed with the arbitration
proceedings, the Tribunal should have granted anti-suit injunction as prayed
for by the appellant-Company, as the respondents 1 and 2 have taken the
arbitration proceedings in spite of the orders rejecting their request for the
same. On the contrary, Dr. Singhvi, learned Senior Counsel appearing for the
respondents 1 and 2 submitted that the relief sought for in the Company
Petition and the relief sought for by way of interim relief and also in C.A.
No. 38/2004 are only to direct the Administrator/directors to initiate
arbitration proceedings. The proceedings now taken by the ICC Arbitral Tribunal
is only a derivative action by minority shareholders applying the exception to
the principles laid down in Foss’ s case (supra), and so it cannot be said that
the orders of the CLB either stand in the way of the respondents 1 and 2 or
prohibit to take such proceedings, especially when no positive direction is
given not to proceed with the arbitration proceedings.
53. Respondents
1 and 2 are minority shareholders in the appellant-company having 46 per cent
of shares. The TNEB owes money to the appellant-company towards supply of power
generated by the appellant-company. It is not in dispute that the TNEB has not
provided the multi-layered payment security mechanism as mentioned in the PPA.
Respondents 1 and 2 filed C.P. No. 8/2004 before the CLB, Additional Principal
Bench, Chennai, under section 398, read with sections 402, 403 and 235 of the
Companies Act, 1956. It is no doubt true that in the said Company Petition,
respondents 1 and 2 have come forward with the pleadings regarding
non-compliance of the clauses mentioned in the PPA regarding the payment
security mechanism by the TNEB and also the outstanding of a sum of Rs. 468.88
crores (approximate) as on 31-1-2004. It is relevant to mention here that
before filing the said Company Petition, the 1st respondent-Company moved the
Board for passing resolution to take action to recover money. Since they failed
in their attempt, they approached the CLB. Apart from the abovesaid fact,
various averments regarding mismanagement have been averred in the Company
Petition. On that basis, they have sought for appointment of an administrator
for the appellant-company and also to vest with the powers to the said
administrator to initiate and continue the proceedings against the TNEB for and
on behalf of the Company with respect to the Company’s right under the PPA.
Even while seeking for interim order, respondents 1 and 2 have prayed only to
give direction to the administrator to invoke alternative dispute resolution
mechanism. No doubt, in the order dated 9-3-2004, the CLB rejected such request
for interim relief as sought for. Even in C.A. 38/2004, respondents 1 and 2
prayed before the CLB to authorise the Directors of the Company who are the
nominee Directors of respondents 1 and 2, to represent the Company to initiate,
institute and prosecute the alternate dispute resolution mechanism under the
PPA on behalf of the Company against the TNEB. From the abovesaid facts, it is clear
that by taking the said proceedings, respondents 1 and 2 tried to get direction
from the CLB to invoke alternative dispute resolution mechanism either by the
administrator or by the directors of the company though such directors are
nominee directors of respondents 1 and 2. The administrator, if appointed,
would amount to replacing the Board and so the abovesaid prayers and orders
passed by the CLB cannot be construed as if respondents 1 and 2 have come
forward with the plea that they should be permitted to invoke alternative
dispute resolution mechanism and so the action of respondents 1 and 2 in
initiating such proceedings cannot be allowed to proceed further. The action
that was sought to be taken against the TNEB is a right conferred under clause
16.2 of the PPA. Respondents 1 and 2 have approached the CLB for the above said
reliefs and they have not sought for the relief to proceed with the alternate
dispute resolution mechanism by themselves as minority shareholders. The
proceedings in question taken by respondents 1 and 2 invoking arbitration
clause under the PPA before the ICC Arbitral Tribunal is on different capacity
and on their own right. The proceedings pending before the CLB is not for
recovering money from the TNEB itself. So merely because on the basis of the
same facts respondents 1 and 2 have taken proceedings before the ICC Arbitral
Tribunal, it cannot be said that the orders passed by the CLB would prevent
respondents 1 and 2 from exercising their independent right as minority
shareholders. We are not going into the question whether they can sustain the
petition before the ICC Arbitral Tribunal as minority shareholders, as such, an
issue has already been framed and it has to be gone into and decided by the ICC
Arbitral Tribunal.
54. Respondents
1 and 2 are having two kinds of right to get redress. With respect to breach of
any clause in the PPA, as minority shareholders of the Company, they can
approach the Company to proceed against the TNEB, for the breach. If it is not
acceded to by the Company, then as minority shareholders, they can invoke their
right in that capacity to get the relief for the benefit of the Company by way
of derivative action. As rightly submitted by Dr. Singhvi, learned Senior
Counsel appearing for respondents 1 and 2, only if the request made by
respondents 1 and 2 to the Company to proceed against the TNEB is rejected,
respondents 1 and 2 can invoke their right as minority shareholders.
55. So, the
orders passed by the CLB rejecting the request of respondents 1 and 2 to direct
the Company to initiate proceedings against the TNEB either through
administrator or through directors cannot stand in the way of respondents 1 and
2 to take derivative action to safeguard their interest as minority
shareholders. Even in the request for arbitration filed before the ICC Arbitral
Tribunal, the copy of which is produced before us, it is stated that such a
proceeding has been taken to protect the interest of the Company by the
minority shareholders. Even in the petition filed in C.A. No. 62/2004, in para
8, it is admitted that such action by the appellant-company was by way of
derivative action. Learned Senior Counsel appearing for the appellant tried to
impress upon this Court that a party who was not able to get permission from the
CLB cannot be permitted to proceed with the same proceedings ignoring the
orders passed by the CLB. If such a party, in this case, respondents 1 and 2,
is given right to invoke such arbitration proceedings on different capacity and
exercising different right, it cannot be said that the proceedings before the
CLB seeking relief differently, cannot be put against respondents 1 and 2 as if
they have ignored the orders of the CLB and proceeded with the proceedings
before the ICC Arbitral Tribunal invoking arbitration clause under the PPA.
56. We are not
now dealing with the maintainability of the request for arbitration in the name
of the Company and not in the name of minority shareholders, as the said issue
is pending before the ICC Arbitral Tribunal at the instance of the TNEB. It is
also relevant to mention here that the TNEB has not raised any objection for
arbitration. As a matter of fact, they have appointed their arbitrator and no
proceedings before the CLB or Court are taken by the TNEB, questioning the
invoking of arbitration proceedings by respondents 1 and 2.
57. In view of
the above, we are of the considered view that there is no bar for respondents 1
and 2 to take proceedings to invoke the arbitration clause as minority
shareholders by way of derivative action.
58. Against the
orders passed by the CLB, it is informed that respondents 1 and 2 have
preferred appeal before this Court, but it was not prosecuted. Even then, in
view of the abovesaid discussion, the said fact cannot have so much importance.
59. The Rule in
Foss’ s case (supra) is to the effect that the Court will not interfere with
the ordinary management of a Company acting within its powers and has no
jurisdiction to do so at the instance of the shareholders. A shareholder is
entitled to institute a suit to enforce his individual rights against the
Company such as his right to vote, or his right to stand as a director of a
Company at an election. If the shareholder however intends to obtain redress in
respect of a wrong done to the Company or to recover monies as damages alleged
to be due to the Company, the action should ordinarily be brought by the
Company itself. So to enable a shareholder to institute a suit in the name of
the Company in such a case, there must be the sanction of the majority for
corporate action. This principle implies supremacy of the will of the majority.
If the majority acts in an oppressive manner, it is not as if the minority are
without a remedy. In the abovesaid Foss’ s case (supra), Sir James Wigram, Vice
Chancellor who delivered the judgment, observed as follows :
“If a case should arise of
injury to a corpn., by some of its members, for which no adequate remedy
remained, except that of a suit by individual corporators in their private
characters, & asking in such character the protection of those rights to
which in their corporate character they were entitled, I cannot but think that
the principle so forcibly laid down by Lord Cottenham In Wallworth v. Hot 1841
(4) Myl & Cr. 619: (41 ER 238) & other cases would apply, & the
claims of justice would be found superior to any difficulties arising out of
technical rules respecting the mode in which corpns., are required to sue.”
Subsequently, various decisions have
recognised exceptions to what is conveniently known as the Rule of Foss’ s case
(supra). The Division Bench of this Court in the decision in Nagappa v. Madras
Race Club AIR 1951 Mad. 831, held as follows :
“(9) The later decisions
however have recognised exceptions to what is conveniently known as the rule in
Foss v. Harbottle 1843 (2) Hare 461 : 67 ER 189. James L.J., in Mac Dougall v.
Gardiner 1875 (1) Ch. D. 13 : 45 LJ Ch 27 considered the rule & stated the
exceptions in the following passages at p. 21 which has since become classic:
‘I think it is of the utmost
importance in all these companies that the rule which is well known in this
Ct., as the rules in Mozley v. Alston [1847] 1 Ph 790: (61 LJ Ch 217); &
Lord v. Copper Miners’ Co., [1898] 2 Ph 740 : 2 De G & S 308) & Foss v.
Harbottle 1843 (2) Hare 461 : 67 ER 189 should be always adhered to; that is to
say, that nothing connected with internal disputes between the shareholders is
to be made the subject of a bill by someone shareholder on behalf of himself
& others, unless there be something illegal, oppressive, or fraudulent -
unless there is something ultra vires on the part of the Co., qua Co. or on the
part of the majority of the Co., so that they are not fit persons to determine
it; but that every litigation must be in the name of the Co., if the Co.,
really desire it.’
From this it follows that a
shareholder or shareholders are entitled to bring an action; (1) in respect of
matters which are ultra vires the Co., & which the majority of shareholders
were incapable of sanctioning; (see Burland v. Earle 1902 AC 83 : (71 LJ PC 1);
(2) where the act complained of constitutes a fraud on the minority, & (3)
where the action of the majority is illegal. The decisions in Baillie v.
Oriental Telephone & Electric Co. Ltd. 1915-1 Ch 503 : (84 LJ Ch 409) &
Cotter v. National Union of Seamen 1929-2 Ch 58 : (98 LJ Ch 323) recognised a
fourth exception where a special resolution was required by the Articles of the
Co. & Co., obtained the assent of the majority to such special resolution by
a trick, or even where a Co., authorised to do a particular thing only by a
special resolution, does it without a special resolution duly passed as in such
a case to deny a right of suit to the shareholders without using the name of
the Co., would in effect result, the Co., doing the thing by an ordinary
resolution. . . .”
Though the learned Senior Counsel appearing
for the appellant submitted that the request for arbitration was not filed on
behalf of the minority shareholders and it is only by the appellant-Company and
so respondents 1 and 2 cannot maintain such a petition, as stated already, the
maintainability of such petition at the instance of respondents 1 and 2 need
not be gone into, as the very question is raised before the ICC Arbitral
Tribunal and pending. But the fact remains, the proceedings were taken by way
of derivative action by minority shareholders, namely, respondents 1 and 2,
which is permissible in law, though we are not going into the correctness of
the form in which such a request for arbitration was made.
60. The learned
Senior Counsel appearing for the appellant-Company relied on the principle of
res judicata in support of his submission that the proceedings taken by
respondents 1 and 2 before the ICC Arbitral Tribunal cannot be allowed to proceed
with. The principles of res judicata is based on the need of giving a finality
to the judicial decisions. What it says that once a res judicata is judicata,
it shall not be adjudged again. This principle of res judicata is embodied in
relation to suits under section 11 of the Code. But, even where section 11 of
the Code does not apply, the principles of res judicata has been applied by
Courts for the purpose of achieving finality in litigation.
61. To rely upon the principles of res judicata,
the following conditions should exist :
(a) The matter directly and substantially in
issue in the subsequent proceedings must be directly and substantially in issue
in the former proceedings;
(b) The former proceeding must be between
the same parties or between the parties under whom they or any of them claim;
(c) Such a party must
be litigating under the same title in the former proceeding;
(d) If the Court which dealt with the
earlier proceeding is not competent to decide the subsequent proceedings for
want of pecuniary jurisdiction till it cannot be a ground for holding that the
decision of the former Court is not res judicata;
(e) Such a matter in issue in the subsequent
proceeding must have been heard and finally decided in the earlier proceeding.
Unless the above conditions are satisfied, it cannot be said that the
subsequent proceedings taken by the respondents 1 and 2 do constitute res
judicata. In the present case, as rightly submitted by the learned Senior
Counsel appearing for the respondents 1 and 2, there is no specific plea
regarding res judicata and the CLB cannot deal with the issue raised before the
ICC Arbitral Tribunal, and the TNEB is also not a party before it. Moreover,
even according to clause 16.2 of the PPA, only the ICC Arbitral Tribunal alone
can deal with the arbitration and Indian Courts have been specifically excluded
the jurisdiction. Such a clause of exclusive jurisdiction with the ICC Arbitral
Tribunal with reference to arbitration was agreed upon between the appellant
and the TNEB.
62. The maxim
“no man should be vexed twice over the same cause” (memo debt bis vexari prouna
et eadem causa) is recognised to be a principle of law which has to be given
effect to and followed without being unduly restricted by the terms of the
statute as enacted in section 11 of the CPC. The plea of res judicata will
apply only to the orders of the Court or forum having concurrent jurisdiction
to stay the subsequent proceedings, if the order or judgment of the Court of
exclusive jurisdiction was directly on the point, and the same matter between
the parties. It is conclusive upon the same or between the same parties if the
issue goes before another Court even for a different purpose.
63. In the
decision in Satyadhyan Ghosal v. Smt. Deo Rajin Debi AIR 1960 SC 941, the Apex
Court has dealt with the principle of res judicata, as follows:
“(7) The principle of res
judicata is based on the need of giving of finality to judicial decisions. What
it says is that once a res judicata, it shall not be adjudged again. Primarily
it applies as between past litigation and future litigation. When a matter -
whether on a question of fact or a question of law - has been decided between
two parties in one suit or proceeding and the decision is final, either because
no appeal was taken to a higher Court or because the appeal was dismissed, or
no appeal lies, neither party will be allowed in a future suit or proceeding
between the same parties to canvass the matter again. This principle of res
judicata is embodied in relation to suits in section 11 of the Code of Civil
Procedure; but even where section 11 does not apply, the principle of res
judicata has been applied by Courts for the purpose of achieving finality in
litigation. The result of this is that the original Court as well as any higher
Court must in any future litigation proceed on the basis that the previous
decision was correct.
(8) The principle of res
judicata applies also as between two stages in the same litigation to this
extent that a Court, whether the trial Court or a higher Court having at an
earlier stage decided a matter in one way will not allow the parties to
re-agitate the matter again at a subsequent stage of the same proceedings. Does
this however mean that because at an earlier stage of the litigation a Court
has decided an interlocutory matter in one way and no appeal has been taken
there from or no appeal did lie, a higher Court cannot at a later stage of the
same litigation consider the matter again?” (p. 943)
64. Even in the
decision in Dhanwanti Joshi v. Madhan Unde 1998 (1) SCC 112, the Apex Court had
applied the principles of res judicata to the interlocutory orders and held as
follows:
“21. It is no doubt true that
orders relating to custody of children are by their very nature not final, but
are interlocutory in nature and subject to modification at any future time upon
proof of change of circumstances requiring change of custody but such change in
custody must be proved to be in the paramount interests of the child - Rosy
Jacob v. Jacob A. Chakramakkal 1973 (1) SCC 840. However, we may state that in
respect of orders as to custody already passed in favour of the appellant the
doctrine of res judicata applies and the Family Court in the present
proceedings cannot re-examine the facts which were formerly adjudicated between
the parties on the issue of custody or are deemed to have been adjudicated.
There must be proof of substantial change in the circumstances presenting a new
case before the Court. It must be established that the previous arrangement was
not conducive to the child’s welfare or that it has produced unsatisfactory
results. Ormerod, L.J., pointed out in S v. W 1981 (11) Fam Law 81 [Fam Law at
p. 82 (CA)] that “the status quo argument depends for its strength wholly and
entirely on whether the status quo is satisfactory or not. The more
satisfactory the status quo, the stronger the argument for not interfering. The
less satisfactory the status quo, the less one requires before deciding to
change.’.”
65. The
respondents 1 and 2 have not sought for any relief similar to the relief sought
for before the ICC Arbitral Tribunal. To take derivative action by minority
shareholders, no permission from CLB is necessary as the said action is
distinct and separate from the proceeding pending before the CLB. The
respondents 1 and 2 have come forward with the prayer seeking a direction to
appoint administrator for the purpose of invoking clause 16.2 of the PPA or to
permit the directors mentioned in the petition to invoke clause 16.2 of the
PPA. They have not sought for, before the CLB, to appoint arbitrator, which can
be done only as per clause 16.2 of the PPA. All these steps are being taken by
respondents 1 and 2 only to safeguard the interest of the appellant-Company and
according to respondents 1 and 2, if the proceedings are not initiated in time,
it would become time-barred. Though there is dispute regarding the period of
limitation, we need not decide the said issue in this appeal. From the above,
it is clear that the appellants have not satisfied any one of the conditions
mentioned above to sustain their claim that the respondents are estopped from
taking proceedings before the ICC Arbitral Tribunal in view of the order passed
by the CLB.
66. The learned
Senior Counsel appearing for the appellant referred to an example more than
once in support of his submission that the respondents 1 and 2 shall not be
permitted to proceed with the proceedings pending before the ICC Arbitral
Tribunal. According to him, if a petition is filed by a person seeking permission
to go to Bombay and if it is refused, he cannot go to Bombay at all. But, we
have to see on what capacity he sought for permission. If he sought for
permission to go to Bombay in his individual capacity and even if it is
refused, it cannot be said that there is a prohibition against him to go to
Bombay, if he goes to Bombay on different capacity. So, the said example is not
applicable to the facts of the present case.
67. In the
present case, two remedies are available to the respondents: (1) Seeking a
direction to take arbitration proceedings by the Company (either through
administrator or directors) itself as a regular and normal action under the PPA
and (2) as minority shareholders by way of derivative action invoking
arbitration clause. In this case, the respondents 1 and 2 have invoked their
first right before the CLB and the second right before the ICC Arbitral
Tribunal.
68. Moreover,
the appellant-Company did not file Application in C.A. No. 62/2004 on the ground
that respondents 1 and 2 have violated the orders of the Tribunal and so the
injunction should be granted. The appellant-company mentioned the said facts
regarding the orders passed by the CLB only as a passing reference.
69. In view of
the above, the submission made by the learned Senior Counsel appearing for the
appellant on the ground of res judicata, we are not inclined to interfere with
the order passed by the CLB on that ground.
70. Point No. 3 -
It is relevant to mention here that the respondents 1 and 2 filed a Company
Petition in C.P. No. 8/2004 under section 398, read with sections 402, 403 and
235 of the Companies Act seeking various reliefs as mentioned in the petition.
The appellant-company filed C.A. No. 62/2004 seeking an order of injunction
restraining the respondents 1 and 2 from proceeding with the ICC Case No.
13218/MS, pending before the ICC Arbitral Tribunal, Paris and restraining the
respondents 1 and 2 from initiating any derivative action on behalf of the
appellant-company. The said petition, namely, C.A. No. 62 of 2004 is filed in
C.P. No. 8/2004, filed by the respondents 1 and 2. The main reason set out in
the application is, even before the main Company Petition in C.P. No. 8/2004 is
not disposed of, respondents 1 and 2 have initiated derivative action against
the TNEB, that too in the name of the appellant-company without any appropriate
authorisation as per the statutory requirement and so the Civil Court can
restrain a party from instituting proceedings in foreign jurisdiction when a
particular issue is already pending before the Courts of India and the CLB
would have the same power as the Civil Court to grant anti-suit injunction
where proceedings initiated in a foreign jurisdiction are wholly illegal and
cause serious prejudice to the interest of the Company. From the above
pleadings in C.A. No. 62/2004, we can set out the basis on which the said
application is filed:
(1) The minority shareholders/respondents 1
and 2 initiated derivative action against the TNEB, in the name of the
appellant-company without any appropriate authorisation as per the statutory
requirement;
(2) Civil Courts are having jurisdiction to
restrain such a party to institute proceedings in foreign jurisdiction;
(3) Such a derivative action cannot be taken
when the decision of the Board of Directors was not to initiate proceedings
against the TNEB;
(4) Since the proceeding initiated in the
foreign jurisdiction are wholly illegal and cause serious prejudice to the
interest of the Company, the injunction should be granted.
The above said basis on which the application
is filed is only relying on the facts which has been done subsequent to the
filing of the Company Petition. The cause of action to file the above C.A. No.
62/2004 arises after the filing of C.P. No. 8/2004 and orders passed in the
Company Petition and Company Application. Even on this ground, the
appellant-company cannot sustain their petition.
71. In C.P. No.
8/2004, by way of passing reference, the orders dated 9-3-2004 and 25-3-2004
have been mentioned and the appellant-company has not relied on the said orders
heavily to insist before the CLB to grant anti- suit injunction. But the
appellant-company has put forth the case mainly on the ground that the Board of
Directors have decided to keep cordial relationship with the TNEB, without
taking any action regarding arbitration and not to insist the payment security
mechanism and so the proceedings initiated by the respondents 1 and 2 are
illegal and cause serious prejudice to the interest of the Company. Mainly on
that basis, the injunction was sought for. The subject-matter in the said
application is nothing to do with the main Company Petition. Therefore the
appellant-company should have taken separate proceedings if they are entitled
in law and they should not have approached the CLB by way of interlocutory
application that too in the Company Petition filed by the respondents. Though
the learned Senior Counsel appearing for the appellant during the course of
arguments has mainly submitted that respondents 1 and 2 have ignored the orders
of the CLB, they have approached the CLB for injunction, not on the basis of
any such pleading in the Company Application, except to the extent as stated
above.
72. Moreover,
the nature of prayer sought for in the application in C.A. No. 62/2004 is not
temporary in nature but it is of permanent nature. Even with respect to clause
(b) of the prayers, the same cannot be entertained and if such prayers are
granted, it would amount to taking away the valuable right of respondents 1 and
2 as minority shareholders. If such reliefs sought for are given, respondents 1
and 2 would become remediless. So such prayers cannot be construed as interim
prayers and such petition in C.P. No. 8/2004 before the CLB cannot be
sustained.
73. Even with
respect to the prejudice of the Company if the arbitration is allowed to be
proceeded with, Mr. Udaya Holla, the learned Senior Counsel appearing for the
appellant submitted that respondents 1 and 2 should not be allowed to proceed
with the arbitration proceedings which are detrimental to the interest of the
Company. According to him, when the Company is not willing to take arbitration
proceedings on the basis of commercial decisions, minority shareholders cannot
be allowed to take arbitration proceedings. According to him, even other
creditors of the Company are supporting the decision of the Company in this
regard. He also submitted that since the TNEB is the sole purchaser of power
supply generated by the appellant, if the appellant-company antagonise the
TNEB, there is a possibility of refusing to purchase the power from the TNEB
and thereby the appellant-company has to close down the industry. Learned
Senior Counsel cited some of the example regarding such action taken by the
TNEB in various States. But, as rightly submitted by Dr. Singhvi, learned
Senior Counsel appearing for the respondents 1 and 2, in the Application filed
in C.A. No. 62/2004, it is only stated as follows:
“The Hon’ble Board would have
the same power as Civil Courts to grant anti-suit injunction where the
proceedings in a foreign jurisdiction are wholly illegal and ‘cause serious
prejudice to the interest of the Company’.”
Except the said averment, no other pleading is
available in the Application as suggested by the learned Senior Counsel
appearing for the appellant-company. Even in the grounds filed before this
Court, such a plea has not been made. So such a factual submission made by the
learned Senior Counsel appearing for the appellant-company cannot be taken into
consideration to decide the issue in question for want of pleadings.
74. We,
therefore, find ourselves in agreement with the view taken by the CLB as the
appellant-company has not made out a case for anti-suit injunction and so the
order of the CLB rejecting the prayer for anti-suit injunction need not be
interfered with.
75. For all the
reasons stated above, this Appeal is dismissed. But, there shall be no order as
to costs. C.M.P. Nos. 12274 to 12276 of 2004 are also dismissed.
Karnataka High Court
RBI
Act
[2002]
36 SCL 151 (Kar.)
HIGH COURT OF KARNATAKA
v.
Company Law Board
Tirath
Singh Thakur and D.V. Shylendra Kumar, JJ.
M.F.A.
Nos. 1530 and 2030 of 2000
And
O.S.A. No. 2 of 2000
June 29,
2001
Section 45QA, read with section 45-I(bb), of
the Reserve Bank of India Act, 1934 - Company Law Board - Power to order
repayment of deposits - Consequent to failure of KIF, a non-banking financial
company, to repay deposits and depositors approaching Company Law Board (CLB),
an order was passed under section 45QA directing KIF to repay deposits in
accordance with guidelines and scheme formulated by CLB - Appellant-bank,
being secured creditor of KIF, appealed against said order on ground that
implementation of said order would adversely affect its interest as secured
creditor - Whether amounts advanced by appellant-bank and other such banks
could be said to be ‘deposits’ within meaning of section 45-I(bb), read with
section 45QA - Held, no - Whether, therefore, no question of directing
repayment of any such amounts to applicant-bank could arise - Held, yes -
Whether it could be said that directions issued by CLB jeopardised interest of
appellant-bank as secured creditor of KIF when CLB had while directing
repayment of deposits noticed submissions made before it by applicant-bank and
held that secured creditors were entitled to claim appropriate relief before
competent court of law - Held, no
Section 10F of the Companies Act, 1956 -
Company Law Board - Appeal against orders of - Whether on facts stated under
heading, “Company Law Board - Power to order repayment of deposits”, appeal was
filed by KIF against CLB’s order on ground of same being unrealistic or
unworkable having regard to financial conditions of KIF, could possibly be
construed as giving rise to a question of law so as to entitle KIF to maintain
appeal or justify interference with repayment schedule as drawn up by CLB -
Held, no
Facts
KIF, a non-banking financial company, had
accepted deposits from a large number of depositors. After its failure to repay
the deposits after maturity, over one thousand applications were moved before
the CLB seeking its intervention in terms of section 45QA. Accordingly, the CLB
issued directions to KIF for repayment of the deposits in accordance with the
guidelines and the scheme formulated by it. The applicant-bank (UW), a secured
creditor of KIF, appealed against the order of the CLB on the ground that
implementation of said order would adversely affect its interest. It also
claimed that proceedings initiated for recovery of debt before the Debt Recovery
Tribunal (DRT) would prove insufficient unless the CLB’s order was suitably
altered. The claim was opposed on the ground that CLB had considered the
submissions made before it by the applicant-bank, and in specific terms
reserved liberty for it to enforce its’ claims before the competent court of
law. KIF also appealed against the said order of the CLB.
Held
A plain reading of section 45QA of the Reserve
Bank of India Act shows that the same enjoins a duty upon every non-banking
financial company to repay every deposit accepted by it in accordance with the
terms and conditions of such deposit. In the event of the failure of a
non-banking financial company to discharge that obligation, the CLB is in terms
of sub-section (2) empowered to issue appropriate directions for repayment of
such deposits or part thereof forthwith in such time and subject to such
conditions as may be specified in the order. The provision, does not envisage
any directions by the CLB for liquidation of any liability that a non-banking
financial company may owe to a bank or other institution. That is because the
amounts payable to such banks do not constitute deposits within the meaning of
section 45QA. The term ‘deposit’ has been defined in section 45-I to include
all receipts of money by way of deposit or loan excluding among other amounts
received from a scheduled bank or a co-operative bank or any other banking
company as defined in clause (c) of section 5 of the Banking Regulation Act,
1949. Amounts received from the Development Bank, the State Financial
Corporation or any financial institution referred to in clause (4) of section
45-I(bb) are also excluded from the definition of the term “deposit”.
The amounts advanced by the appellant-bank and
other members of the consortium did not therefore qualify as deposits within
the meaning of section 45-I(bb) read with section 45QA. The question of
directing repayment of any such amounts to the appellant-bank or to other
members of the consortium therefore did not arise.
The next question was whether the direction
issued by the CLB in any was jeopardised the interest of the banks as secured
creditors of the company. The CLB had while directing repayment of the deposits
noticed the submissions made before it by the banks and observed that the banks
being secured creditors, were entitled to claim appropriate relief before the
competent court of law. The fact that the appellant-bank had already instituted
proceedings for the recovery of the outstanding amount before the DRT not being
in dispute, the rights of the bank qua the securities furnished to it could be
adequately protected in the said proceedings. There was no gainsaying that the bank
was at liberty to seek such redress as might be legally permissible in this
regard before the Tribunal to safeguard its rights and interests. The
apprehension that the Tribunal may not in the light of the order made by the
CLB, issue any interim or final directions for the protection of the banks’
interest appeared to be premature, for the Tribunal had not expressed any final
opinion on the subject so far. Needless to say that in case the Tribunal
declined to exercise its powers, it was open to the appellant-bank to seek
appropriate remedy against the same in appropriate proceedings and before the
appropriate forum. In the light of above, the appeal was without any merit.
Regarding the company’s appeal against the CLB
order, it is evident from a bare reading of section 10F of the Companies Act
that an appeal against any decision or order of the CLB is maintainable only on
a question of law arising out of such order. As to what would constitute a
question of law, the proper legal effect of a proved fact is necessarily a
question of law, so also the question of admissibility of evidence and the
question whether any evidence has been offered on one side or the other; but
the question whether a fact has been proved, when evidence for and against has
been properly admitted, is necessarily a pure question of fact. A finding of
fact, which is recorded without any evidence to support it or which is otherwise
perverse would constitute a question of law. So also a decision as to the legal
effect of a finding of fact is a question of law. The interpretation of a
statute or a document too is a question of law. A finding of fact based on
proven facts is not however a question of law nor is the mere possibility of
the High Court coming into a different conclusion on the facts a ground for
interference in cases where an appeal lies only on a question of law.
In the instant case, the challenge to the
order made by the CLB did not involve the interpretation of any provision of
law or document. It was also not a case, where the order could be said to be
vitiated by perversity or irrationality of any kind. The challenge was not
based even on the ground that the order was without any evidence or material in
support of the same. The substance of the grievance against the order as was
evident from a reading of the grounds urged in the memo of appeal was that the
scheme formulated by the CLB for repayment of the deposits was unrealistic and
incapable of implementation. The appellant’s case appeared to be that while it
was genuinely interested in repaying the deposits it was incapable of doing so
on account of its limitations, arising from adverse business conditions and the
losses suffered by it generally due to a slump in the real estate market and a
general industrial recession. This ground could not possibly be construed as
giving rise to a question of law so as to entitle the appellant-company to
maintain the appeal or justify interference with the repayment schedule as
drawn up by the CLB. Whether or not the cash flow anticipated by the company
would suffice for repayment of the deposits and whether or not the company’s
financial position justified a direction for repayment within the time-frame
stipulated by the CLB, or matters which were considered by the CLB. Any fresh look
at the same was to necessarily involve an appreciation of the facts and the
financial implications arising out of the same. The Board having considered all
the attendant circumstances including the company’s resources, the direction
issued by it for repayment could not be said to be either perverse or
irrational. Even assuming that the court was upon a fresh evaluation of the
relevant factors and material to come to a conclusion different from the one
arrived at by the Board, the same would not have in itself constituted either a
question of law or justify substitution of the view taken by the CLB by the
conclusion that the court might arrive at. The time-frame fixed by the CLB for
repayment of the deposits, the rate of interest stipulated by it, the priorities
determined in the matter of refund of the deposits, the classifications made
between different categories of deposits, could not be interfered with only
because according to the appellant-company, the same was unrealistic or
unworkable having regard to the financial conditions of the company or the
difficulties which it was facing. So also the argument that the CLB should not
have directed refunds to be made by way of bank drafts to be sent by post only
because the said mode of repayment would involve certain additional
expenditure towards bank and postal charges could not be a sound much less a
compelling reason for the court to intervene. The said direction was justified
to ensure that the depositors,who had already waited for a sufficiently long
period did not have to face the prospect of the cheques issued by the company
getting dishonoured or delivered to persons other than the depositors. It was
also noteworthy that the depositors had not made any grievance against the
repayment schedule drawn up by the CLB, the rate of interest stipulated by it
or the mode or the manner of payment thereof. In the absence of any complaint
from the depositors against any discrimination vis-a-vis other depositors
falling in one or the other category, it was not open to the company to urge
that the classification made or the mode of payment directed by the CLB did not
protect the interest of any class or category of depositors. The order made by
the CLB did not suffer from any error of jurisdiction, law or other infirmity
so as to warrant interference with the same.
Section 45MC of the Reserve Bank of India
Act, 1934 - Non-banking financial institutions - Powers of Bank to file winding
up petition - RBI had rejected application of KIF, a non-banking financial company,
for grant of registration as required under section 45-IA and had also prohibited
KIF from accepting fresh deposits and alienating its assets - RBI filed winding
up petition under section 45MC(1) claiming conditions of said section were
satisfied - Proceedings in said petition were stayed on ground that RBI’s order
rejecting application under section 45-IA was before appellate authority and
had not attained finality and a proceeding under section 45QA was also pending
against KIF - Whether there was any impediment for resumption of proceedings in
said petition after both proceedings referred to above had attained finality -
Held, no - Whether even otherwise stay order was unsustainable since RBI having
considered relevant factors and come to conclusion that KIF was unable to pay
its debts and had been prohibited from receiving deposits for a period of not
less than three months, was entitled to maintain a petition for winding up of
KIF and take same to its logical conclusion - Held, yes
Facts
KIF, a non-banking financial company, made an
application for the grant of a certificate of registration as required under
section 45-IA. During pendency of application, the RBI passed an order under
section 45MB(1), prohibiting KIF from accepting fresh deposits and from
alienating its assets and also appointed a special officer for the purpose.
Thereafter, above application was rejected against which KIF approached the
appellate authority. A proceeding was also pending before the CLB under
section 45QA against KIF. The RBI filed petition under section 45MC(1) for
winding up of KIF and for appointment of a provisional liquidator. The
proceedings in the petition were stayed on the ground that the order rejecting
KIF’s application for grant of registration as well as proceedings under
section 45QA had not attained finality and thus it could not be said that
requirements of section 45MC(1) were satisfied.
On appeal :
Held
The single judge had stayed the proceedings
only on account of the pendency of the proceedings before the appellate
authority and the CLB. Those proceedings had admittedly attained finality
during hearing of appeal. Consequently, there was no impediment as on date for
resumption of the proceedings in said company petition.
Even otherwise, the stay of the proceedings
might not have been justified having regard to the fact that the petition was
filed not only on the ground that the company had become disqualified to carry
on its business on account of rejection of its application for registration, but
also on the ground that it was unable to pay its debts. The continuance of the
company was also, in the opinion of the Reserve Bank, detrimental to public
interest and the interest of the depositors having regard to the company’s
financial position and its capacity to carry on its business in a satisfactory
manner. Such being the position, the proceedings in said company petition would
not have been stayed only because of pendency of the appeal against refusal of
registration or the pendency of the proceedings before the CLB under section
45QA. The appellant-bank having considered the relevant factors and come to the
conclusion that the company was unable to pay its debts and had been prohibited
from receiving deposits for a period of not less than three months, was
entitled to maintain a petition for winding up of the company and take the same
to its logical conclusion. Therefore, the order of stay of the proceedings
passed by the company judge was even on the merits unsustainable.
Cases referred to
Nafa Chandra Pal v. Shukur [1918] 45-IA
183(PC), Deity Pattabhiramaswamy v. S. Hanymayya AIR 1959 SC 57, Sri Sinha
Ramanuja Jeer alias Sri Vanamamalai Ramanuja Jeer Swamigal v. Sri Ranga
Ramanuja alias Emberumanar Jeer AIR 1961 SC 1720, Mattulal v. Radhe Lal AIR
1974 SC 1596, Gappulal v. Thakurji Shriji Dwarkadheeshji AIR 1969 SC 1291 and
Sree Meenakshi Mills Ltd. v. CIT [1957] 31 ITR 28 (SC).
G.K.V. Murthy, R.V. Shinde, Belagali S.V.,
K.V. Shivangi, K. Sriram, G.S.
Bhat, R.V.S. Naik, K.C. Shivasubramanian, K.G. Raghavan, J.S. Shetty, Smt. T.S.
Prabha, S.G. Bhat, B. Manjunath, S.N. Rajendra, Smt. Jayalakshmi and K.V.
Shivaraj for the Appearing Parties.
Judgment
Thakur, J.—Nearly sixty thousand depositors, most of them senior citizens, have
waited endlessly for the repayment of the deposits made by them with Kirloskar
Investments & Finance Ltd., a non-banking financial institution. Demands
for repayment of the deposits having failed to evoke any response from the
company, over one thousand applications were moved before the CLB seeking its
intervention in terms of section 45QA of the Reserve Bank of India Act, 1934
(‘the Act’). The said provision, inter alia, empowers the CLB to direct
repayment of any deposit or part thereof in accordance with the terms and conditions
of such deposit if it is satisfied that it is necessary so to do to safeguard
the interest of the company, the depositors or the public in general. Upon
consideration of the applications received by the Board, it has in terms of an
order dated 21-3-2000, issued directions to the company for repayment of the
deposits in accordance with the guidelines and the scheme formulated by it.
2. Aggrieved
by the said directions, United Western Bank Ltd., a secured creditor of the
company, has filed MFA No. 1530 of 2000 while the company has preferred MFA No.
2030 of 2000 challenging the said order on a variety of grounds. OSA No. 2 of
2000 filed by the Reserve Bank of India, in turn assails the correctness of an
order dated 14-6-2000, made by the company judge, in Company Petition No. 2 of
2000 and Company Application Nos. 3 and 307 of 2000, whereby proceedings in
Company Petition No. 2 of 2000 filed by the Reserve Bank of India for winding
up of Kirloskar Investments and Finance Ltd. (‘KIF Ltd.’) have been stayed and
Company Application No. 3 for appointment of a provisional liquidator and
Company Application No. 307 of 2000 seeking stay of the proceedings in the
company petition disposed of.
3. Appearing
for the appellant in MFA No. 153 of 2000, Mr. G.K.V. Murthy argued that the
order made by the CLB directing repayment of the deposits was illegal inasmuch
as the same does not take into consideration the interest of the appellant-bank
or nine other banks constituting a consortium for granting various facilities
to the company. He submitted that the direction issued by the CLB if allowed to
continue and be implemented will adversely affect the interest of the
appellant-bank and other members of the consortium inasmuch as the same would
authorise the company to utilise the available funds over which the banks have
the first charge as secured creditors. He argued that although the
appellant-bank had initiated proceedings for recovery of the amount payable by
the company before the Debt Recovery Tribunal, yet unless the order made by the
CLB was suitably altered to protect the interest of the bank, the pendency of
the proceedings before the Tribunal will prove insufficient to safeguard the
interest of the bank.
4. Mr. Naik,
counsel appearing for the Reserve Bank of India and S.G. Bhat, K.G. Raghavan,
R.V. Shinde, S.V. Belagali, K.V. Shivangi, K. Sriram, T.S. Prabhu, B.
Manjunath, S.N. Rajendra, Smt. Jayalakshmi, S.V. Shastry, T.S. Chandraprabha,
M. Raghavendra Achar, M.R. Kirshnamurthy, appearing for the depositors on the
other hand, contended that the apprehension expressed by the appellant-bank was
wholly unfounded having regard to the fact that the CLB had considered the
submissions made before it by the banks and in specific terms reserved liberty
for them to enforce their claims before the competent court of law. They urged
that section 45QA invoked by the depositors was not available to either the
appellant-bank or other members of the consortium for any direction regarding
the liquidation of any outstanding liability qua such banks. The said
provision was meant only to protect the interest of the depositors and had been
rightly invoked by the Board to issue the impugned directions. Section 45QA of
the Act runs thus:
“Power of Company Law Board to order repayment
of deposit.—(1) Every deposit accepted by a non-banking financial company,
unless renewed, shall be repaid in accordance with the terms and conditions of
such deposit.
(2) Where a non-banking financial company has
failed to repay any deposit or part thereof in accordance with the terms and
conditions of such deposit, the Company Law Board constituted under section
10E of the Companies Act, 1956 (1 of 1956) may, if it is satisfied, either on
its own motion or on an application of the depositor, that it is necessary so
to do to safeguard the interests of the company, the depositors or in public
interest, direct, by order, the non-banking financial company to make repayment
of such deposit or part thereof forthwith or within such time and subject to
such conditions as may be specified in the order :
Provided that the Company Law Board may,
before making any order under this sub-section, give a reasonable opportunity
of being heard to the non-banking financial company and the other persons
interested in the matter.”
5. A plain
reading of the above would show that the same enjoins a duty upon every
non-banking financial company to repay every deposit accepted by it in
accordance with the terms and conditions of such deposit. In the event of the
failure of a non-banking financial company to discharge that obligation, the
CLB is in terms of sub-section (2) empowered to issue appropriate directions
for repayment of such deposits or part thereof forthwith or within such time
and subject to such conditions as may be specified in the order. The provision,
it is obvious, does not envisage any directions by the Board for liquidation of
any liability that a non-banking financial company may owe to a bank or other
institution. That is because the amounts payable to such banks do not
constitute deposits within the meaning of section 45QA. The term ‘deposit’ has
been defined in section 45-I of the Act to include all receipts of money by way
of deposit or loan excluding among other amounts received from a scheduled bank
or a co-operative bank or any other banking company as defined in clause (c) of
section 5 of the Banking Regulation Act, 1949. Amounts received from the
Development Bank, the State Financial Corporation or any financial institution
referred to in clause (4) of section 45-I(bb) are also excluded from the
definition of the term ‘deposit’. The amounts advanced by the appellant-bank
and other members of the consortium do not therefore qualify as deposits within
the meaning of section 45-I(bb) read with section 45QA. The question of
directing repayment of any such amounts to the appellant-bank or to other
members of the consortium therefore did not arise.
6. The next
question is whether the direction issued by the Board in any way jeopardizes
the interest of the banks as secured creditors of the company. The grievance of
the appellant that it does, appears to be wholly untenable. We say so because,
the CLB has while directing repayment of the deposits noticed the submissions
made before it by the banks and observed that the banks being secured
creditors, are entitled to claim appropriate relief before the competent court
of law. The fact that the appellant-bank has already instituted proceedings for
the recovery of the outstanding amount before the DRT not being in dispute, the
rights of the bank qua the securities furnished to it can be adequately
protected in the said proceedings. There is no gainsaying that the bank will
be at liberty to seek such redress as may be legally permissible in this regard
before the Tribunal to safeguard its rights and interests. The apprehension of
Mr. Murthy that the Tribunal may not in the light of the order made by the CLB
issue any interim or final directions for the protection of the banks’
interest appears to us to be premature, for the Tribunal has not expressed any
final opinion on the subject so far. Needless to say that in case the Tribunal
declines to exercise its powers, it shall be open to the appellant-bank to seek
appropriate remedy against the same in appropriate proceedings and before the
appropriate forum. MFA No. 1530 of 2000 is in the light of the above, without
any merit and shall have to be dismissed.
7. In MFA No.
2030 of 2000, the company has assailed the order made by the Board on several
grounds and prayed for modification of the said order to the extent indicated
in para. 18 of the memo of appeal. A preliminary objection to the
maintainability of this appeal was raised on behalf of the respondents. It was
argued that an appeal under section 10F of the Companies Act, 1956 was
maintainable only on a question of law arising out of the order under challenge
and not otherwise. No question of law, argued counsel for the respondents,
arose from out of the impugned order so as to warrant interference by this Court.
8. Section 10F of the Companies Act reads as
under :
“Appeals against the orders of the Company Law
Board.— Any person aggrieved by any decision or order of the Company Law Board
may file an appeal to the High Court within sixty days from the date of communication
of the decision or order of the Company Law Board to him on any question of law
arising out of such order:
Provided that the High Court may, if it is
satisfied that the appellant was prevented by sufficient cause from filing the
appeal within the said period, allow it to be filed within a further period not
exceeding sixty days.”
9. It is
evident from a bare reading of the above that an appeal against any decision or
order of the CLB is maintainable only on a question of law arising out of such
order. As to what would constitute a question of law has been examined in
various judicial pronouncements. In Nafa Chandra Pal v. Shukur [1918] 45-IA
183, the Privy Council observed that questions of law and of fact are sometimes
difficult to disentangle. The proper legal effect of a proved fact is
necessarily a question of law, so also the question of admissibility of
evidence and the question whether any evidence has been offered on one side or
the other; but the question whether a fact has been proved, when evidence for
and against has been properly admitted, is necessarily a pure question of
fact. A finding of fact, which is recorded without any evidence to support it
or which is otherwise perverse would constitute a question of law. So also a
decision as to the legal effect of a finding of fact is a question of law. The
interpretation of a statute or a document too is a question of law. A finding
of fact based on proven facts is not however a question of law nor is the mere
possibility of the High Court coming into a different conclusion on the facts a
ground for interference in cases where an appeal lies only on a question of
law—Deity Pattabhiramaswamy v. S. Hanymayya AIR 1959 SC 57, Sri Sinha Ramanuja
Jeer alias Sri Vanamamalai Ramanuja Jeer Swamigal v. Sri Ranga Ramanuja Jeer
alias Emberumanar Jeer AIR 1961 SC 1720, Mattulal v. Radhe Lal AIR 1974 SC
1596, Gappulal v. Thakurji Shriji Dwarkadheeshji AIR 1969 SC 1291 and Shree
Meenakshi Mills Ltd. v. CIT [1957] 31 ITR 28.
10. In the
instant case, the challenge to the order made by the Board does not involve the
interpretation of any provision of law or document. It is also not a case,
where the order can be said to be vitiated by perversity or irrationality of
any kind. The challenge is not based even on the ground that the order is
without any evidence or material in support of the same. The substance of the
grievance against the order as is evident from a reading of the grounds urged
in the memo of appeal is that the scheme formulated by the Board for repayment
of the deposits is unrealistic and incapable of implementation. The appellant’s
case appears to be that while it is genuinely interested in repaying the
deposits it is incapable of doing so on account of its limitations, arising
from adverse business conditions and the losses suffered by it generally due to
a slump in the real estate market and a general industrial recession. This
ground, we are afraid, cannot possibly be construed as giving rise to a
question of law so as to entitle the appellant-company to maintain the appeal
or justify interference with the repayment schedule as drawn up by the Board.
Whether or not the cash flow anticipated by the company would suffice for
repayment of the deposits and whether or not the company’s financial position
justified a direction for repayment within the time-frame stipulated by the
Board, or matters, which were considered by the Board. Any fresh look at the
same would necessarily involve an appreciation of the facts and the financial
implications arising out of the same. The Board having considered all the
attendant circumstances including the company’s resources the direction issued
by it for repayment cannot be said to be either perverse or irrational. Even
assuming that this Court was upon a fresh evaluation of the relevant factors
and material to come to a conclusion different from the one arrived at by the
Board, the same would not in itself constitute either a question of law or
justify substitution of the view taken by the Board by the conclusion that the
Court may arrive at. It follows that the time-frame fixed by the Board for
repayment of the deposits, the rate of interest stipulated by it, the
priorities determined in the matter of refund of the deposits, the classifications
made between different categories of deposits, cannot be interfered with only
because according to the appellant-company, the same was unrealistic or
unworkable having regard to the financial conditions of the company or the
difficulties which it is facing. So also the argument that the Board should not
have directed refunds to be made by way of bank drafts to be sent by post only
because the said mode of repayment would involve certain additional
expenditure towards bank and postal charges cannot be a sound much less a
compelling reason for this court to intervene. The said direction was in our
opinion justified to ensure that the depositors, who have already waited for a
sufficiently long period do not have to face the prospect of the cheques
issued by the company getting dishonoured or delivered to persons other than
the depositors. It is also noteworthy that the depositors have not made any
grievance against the repayment schedule drawn up by the Board, the rate of
interest stipulated by it or the mode or the manner of payment thereof. In the
absence of any complaint from the depositors against any discrimination
vis-a-vis other depositors falling in one or the other category, it will not be
open to the company to urge that the classification made or the mode of payment
directed by the Board does not protect the interest of any class or category of
depositors. Suffice it to say that the order made by the Board does not in our
opinion suffer from any error of jurisdiction, law or other infirmity so as to
warrant interference with the same. Consequently MFA No. 2030 of 2000 also has
to fail and be dismissed accordingly.
11. That brings
us to OSA No. 2 of 2000 filed by the RBI against an order made by the learned
company judge in Company Petition No. 2 of 2000 and CAs Nos. 3 of 2000 and 307
of 2000. The said appeals arise in the following circumstances.
12. Consequent
upon the amendment of the Reserve Bank of India (Amendment) Act, 1997, KIF Ltd.
made an application for the grant of a certificate of registration as required
under section 45-IA. While the said application was pending consideration the
bank passed an order dated 13-8-1999, under section 45MB(1), prohibiting the
company from accepting fresh deposits and from alienating its assets. The bank
also in terms of another order dated 1-9-1999, appointed a special officer to
oversee the activities of the company and ensure compliance with the statutory
provisions. The application moved by the company for registration was eventually
rejected by the bank by an order dated 21-9-1999, which was assailed by the
company in an appeal before the prescribed appellate authority. Shortly
thereafter, the bank filed Company Petition No. 2 of 2000 before this Court
for winding up of the company under section 45MC(1) and moved CA No. 3 of 2000
for appointment of a provisional liquidator. The company judge in terms of his
order dated 14-1-2000, has stayed the proceedings in Company Petition No. 2 of
2000 and disposed of CA No. 3 of 2000. Aggrieved by the said order, OSA No. 2
of 2000 has been preferred by the bank as already noticed earlier.
13. Section
45MC, under which Company Petition No. 2 of 2000 was filed by the Reserve Bank
of India reads as under :
“Power of bank to file winding up petition.—(1)
The bank, on being satisfied that a non-banking financial company,—
(a) is unable to pay its debt; or
(b) has by virtue of the provisions of section 45-IA become
disqualified to carry on the business of a non-banking financial institution; or
(c) has been prohibited by the bank from receiving deposit by an
order and such order has been in force for a period of not less than three
months; or
(d) the continuance of the non-banking financial company is
detrimental to the public interest or to the interest of depositors of the
company, may file an application for winding up of such non-banking financial
company under the Companies Act, 1956 (1 of 1956).
(2) A non-banking financial company shall be
deemed to be unable to pay its debt if it has refused or has failed to meet
within five working days any lawful demand made at any of its offices or
branches and the bank certifies in writing that such company is unable to pay
its debt.
(3) A copy of every application made by the
bank under sub-section (1) shall be sent to the Registrar of Companies.
(4) All the provisions of the Companies Act,
1956 (1 of 1956) relating to winding up of a company shall apply to a winding
up proceeding initiated on the application made by the bank under this
provision.”
14. The bank had after setting out the relevant
facts, stated thus in para. 16 of the petition :
“It is also submitted that on the facts and in
the circumstances of the case, the petitioner is satisfied that the conditions
in clauses (a), (b) and (d) of section 45MC(1) are satisfied in the instant
case. It is also submitted that in view of the prohibition imposed by the
petitioner on the respondent-company from accepting deposits from the public
and the said prohibiting order being in force for more than three months,
clause (c) of section 45MC(1) is also satisfied. Therefore, the petitioner has
decided to apply for winding up of the respondent-company in exercise of the
powers conferred on it under section 45MC of the Act. It is respectfully
submitted that under the circumstances mentioned above, it is just, proper,
equitable, in public interest and in the interest of justice that the
respondent-company be wound up by this honourable court.”
15. The learned
company judge was of the view that since the order passed by the bank rejecting
the company’s application for grant of registration had been challenged before
the appellate authority, the said order could not be said to have attained
finality. The company court felt that if the appeal was allowed by the appellate
authority, none of the grounds raised by the bank for winding up of the company
would be available to it. It was of the opinion that since proceedings under
section 45QA were also pending before the CLB, in which no final orders had
been passed by the Board, it was not in the interest of the parties or the
public to proceed further with the company petition. Proceedings in C.P. No. 2
of 2000 were accordingly stayed pending final disposal of the proceedings
before the appellate authority and the CLB. Liberty was however given to the
parties to file a memo for resumption of the proceedings after the appellate
authority and the CLB disposed of the matters pending before them.
16. Mr. Naik,
the counsel appearing for the appellant-bank submitted that both the
contingencies envisaged by the impugned order for resumption of the winding up
proceedings had been satisfied. He urged that the CLB had already passed a
final order under section 45QA and that the appeal preferred by the company
before the appellate authority declining registration to the company under
section 45-IA had also been dismissed. There was, therefore, as on date no
impediment for the resumption of the proceedings in Company Petition No. 2 of
2000. Alternatively, he submitted that even if the contingencies referred to
above had not occurred, the order passed by the learned company judge staying
the proceedings would not be justified in the facts and circumstances of the
case. He urged that the winding up of the company was sought not only on the
ground that the company had been disqualified to carry on business as a
non-banking financial institution but also on the ground that it was unable to
pay its debts and its continuance was detrimental to public interest or the
interest of the depositors of the company.
17. We find
considerable merit in both these submissions. The learned single judge had
stayed the proceedings in Company Petition No. 2 of 2000 only on account of
the pendency of the proceedings before the appellate authority and the CLB.
Those proceedings have admittedly attained finality as pointed out by Mr.
Naik. Consequently, there is no impediment as on date for resumption of the
proceedings in Company Petition No. 2 of 2000. Even otherwise, the stay of the
proceedings in Company Petition No. 2 of 2000 may not have been justified
having regard to the fact that the petition was filed not only on the ground
that the company had become disqualified to carry on its business on account of
rejection of its application for registration, but also on the ground that it
was unable to pay its debts. The continuance of the company was also, in the
opinion of the Reserve Bank, detrimental to public interest and the interest
of the depositors having regard to the company’s financial position and its
capacity to carry on its business in a satisfactory manner. Such being the
position, the proceedings in Company Petition No. 2 of 2000 would not be stayed
only because of pendency of the appeal against refusal of registration or the
pendency of the proceedings before the CLB under section 45QA. The
appellant-bank having considered the relevant factors and come to the
conclusion that the company is unable to pay its debts and had been prohibited
from receiving deposits for a period of not less than three months was entitled
to maintain a petition for winding up of the company and take the same to its
logical conclusion. We have, therefore, no hesitation in holding that the
order of stay of the proceedings passed by the learned company judge was even
on the merits unsustainable. We however find no reason to interfere with the
order under challenge to the extent the same declined the appointment of a
provisional liquidator, for, in the words of the learned company judge no case
was made out for appointment of a provisional liquidator ‘at this stage’.
18. Mr. Naik
next argued that it was necessary to issue certain consequential directions
regarding the alienation of property and disbursement of amounts by the company
from out of the available deposits and resources. He submitted that this Court
had in the connected MFA No. 1530 of 2000 passed an order on 13-4-2000,
restraining the company from making any payment other than payments towards
salaries and establishment expenses without obtaining the prior written
permission of the special officer appointed by the RBI. He submitted that with
the disposal of the appeals, the said order shall stand vacated, thereby giving
to the company an opportunity to indulge in diversion and malversation of funds
and property held by it to the grave detriment of the depositors, who have been
waiting for the refund of their money. He also drew our attention to a
preliminary report submitted by the committee appointed by this Court in terms
of order dated 22-2-2001, comprising Justice S. Venkataraman, former judge of
this Court, according to which the funds available with the company could be
utilised towards payment of one-fifth of the principal amount due to the
depositors while disbursing to the secured creditors a sum of Rs. 5,00,000. We
do not think that, having regard to the number of depositors and the order made
by the CLB fixing the mode of repayment, it is necessary for this Court or for
that matter the committee aforementioned to monitor the disbursement of the
amounts available with the company to the depositors either in full or part. We
however see considerable merit in the submission made by Mr. Naik that the
interim directions to the effect that the company shall not make any payment
without prior written permission from the special officer from the RBI except
for payment of salary and other establishment expenses deserve to be continued
till such time the learned company judge considers and finally disposes of an
application which the RBI proposes to make for issue of similar relief before
him.
19. In the result, MFAs Nos. 1530 of 2000 and 2030 of 2000 fail and are hereby dismissed. OSA No. 2 of 2000 however succeeds and order dated 14-1-2000 made by the learned company judge to the extent the same stays the proceedings in Company Petition No. 2 of 2000 is set aside. Consequently, Company Petition No. 2 of 2000 shall be proceeded with in accordance with law. We further direct that pending disposal of an application which the RBI may move before the company judge within the next four weeks for interim directions, the company shall not pay any amount without obtaining the prior written permission from the special officer of the RBI except payment of salaries and other establishment expenses. A report regarding expenditure incurred on salaries and establishment expenses shall also be submitted to the said officer on a weekly basis. The company shall within four weeks from today pay a sum of Rs. 9,000 to Justice S. Venkataraman, former judge of this Court, towards fee for the services rendered pursuant to the order of this Court dated 22-2-2001. No costs.
[2001] 104 COMP. CAS. 404 (GAU.)
HIGH COURT OF GAUHATI
v.
Santosh Mohan Dev and Others
D.N. CHOWDHURY J.
COMPANY APPEAL NO, 13 OF 1999.
JANUARY 5, 2000
R.
Gogoi and S. Bhuyan for the Appellant.
Utpal Bose,
P.K. Jhunjhunwala, H. Das and R. Pathak for the Respondents.
D.N.
Chowdhury J.—This appeal is
directed against the two orders passed by the Company Law Board in Company
Petition No. 52 of 1998 under section 397/398 of the Companies Act which has
arisen in the following circumstances.
Crozier's
Agency Private Limited, pro forma respondent No. 6, is a company belonging to
one family consisting of three brothers each with shareholding" in the
proportion of one third. Two of the brothers, who are respondents in this
proceeding, brought an action before the Company Law Board (hereinafter
referred to as "the CLB") alleging, inter alia, that the shareholding
position has altered by issue of additional shares in favour of the appellant
group and that one of the respondents was removed from the office of the
director. Considering all the aspects of the matter, the Company Law Board
suggested the parties for resolving the dispute amicably. The Company Law Board
accordingly passed an order on December 16, 1998, suggesting for restoration of
parity in the shareholding and ordering one of the petitioners to continue in
the board of directors along with the independent nominee of the Company Law
Board. The Company Law Board also appointed M/s. Batliboi and Co. of M/s. Price
Waterhouse to verify the accounts of the company and to ascertain the amounts
invested by the appellant into the company. It was further ordered that on
completion of the audit and on restoring the parity in the shareholding in the
original level the parties should discuss the method of settlement of the
entire family properties including the company. The Company Law Board with the
consent of the parties passed a consent order and disposed the petition
accordingly vide order dated May 25, 1999. The appellant thereafter submitted
an application seeking for recalling of the consent order that was passed on
May 25, 1999, before the Company Law Board, which was numbered as Company
Petition No. 52 of 1998, alleging, inter alia, that because of the obdurate
conduct of one of the respondents the order of the Board became unworkable. The
Company Law Board after hearing the parties and considering the respective
claims of the parties and on evaluation of facts turned down the application
vide order dated July 22, 1999, and reached the following conclusion:
"8. It
is an admitted position as revealed from the various orders that we have
issued, that both the parties expressed their desire, more particularly the
second respondent, to resolve the disputes amicably. The liberty granted to the
parties to apply in case of any difficulties in working out the consent order
was only with a view to assist the parties in case of any difficulty faced by
them in implementing the said order. This liberty cannot extend to pray for
recalling of the consent order. Once a consent order is passed, as pointed out
by Shri Kapur, cannot be recalled unless and otherwise all the parties agree.
As pointed out by him, the petitioners have discharged their obligations under
the consent terms by bringing necessary funds to the company to pay off the
second respondent and after which other terms in that order like issue of
shares to the petitioners holding of an EOGM and amending the articles have
also been completed. It is a well settled law that once parties have entered
into terms of consent and obtained an order incorporating the consent terms,
then, such an order becomes binding on the parties unless and otherwise the
same is assailed on the grounds of fraud, coercion, mistake or fraudulent
misrepresentation or being illegal or being against the provisions of law or
other similar grounds which would invalidate a private agreement. In the
present case, the respondents do not question the validity of the terms of
consent but they are seeking recalling of the order only on the grounds of
subsequent conduct of the third petitioner that after the consent order was
passed, the third petitioner has acted against the interest of the second
respondent, by writing a letter to the bank and taking away the letter heads,
etc. While we feel that the third petitioner had not acted in any way
prejudicial to the interest of the respondents/company in writing a letter to
the bank to honour only those cheques jointly signed both by himself and the
second respondent, we also feel that the second petitioner need not have taken
possession of letter heads, etc. without the consent of the second respondent.
We feel that the third petitioner should have had the mandate of the interim
Board before taking any action in furtherance to the consent order. The same
way we also feel that the second respondent has also overacted by lodging a
police complaint as well as by filing a criminal case against the third
petitioner. The real outcome of the consent order is the restoration of the
status quo ante before the disputes started and has not brought about any new
relationship between the parties. As a matter of fact, this order provides
safeguards against possible allegations of oppression by providing for right
issue of further shares and for proportional representation of the Board. There
is nothing in the consent terms governing the subsequent conduct of the parties
nor the respondents have alleged that the petitioners have acted against the
terms of the consent. Therefore, we do not find any justification to recall the
consent order and as such we dismiss CA No. 153 of 1999."
Hence the
appeal challenging the legality and validity of the orders dated May 25, 1999,
and August 11, 1999.
Mr. R. Gogoi,
learned senior counsel appearing on behalf of the appellant, questioned the
legitimacy of the consent order dated May 25, 1999, and submitted that the
impugned consent order is prejudicial to the interest of the company. Mr.
Gogoi, learned senior counsel more specifically referred to the resolution of
the board of directors seeking to liquidate the loan of Rs. 54,66,700 along
with interest thereon from the equity capital. Learned counsel submitted that
if the unsecured amount of Rs. 54,66,700 together with interest is repaid to
M/s. S.M Dev & Associates from the capital of the company it will affect
the credibility and interests of the company which may in turn compel the
banker of the company to recall the loan amount advanced to the company for the
hotel project. Learned counsel submitted that the Company Law Board refusing to
recall the order fell into serious error which affected the ultimate decision
of the Company Law Board.
The company
petition was seriously contested by the respondents. Mr. U. Bose, learned
counsel appearing on behalf of the respondents raised the preliminary objection
questioning the maintainability of the appeal. Mr. Bose, learned counsel first
questioned the consolidated appeal in which the appellant challenged the orders
dated May 25, 1999, and August 11, 1999. The appeal questioning the order dated
May 25,1999, and August 11, 1999, was preceded by two consent orders namely,
the order dated December 16, 1998, and May 25, 1999. Learned counsel submitted
that no appeal is maintainable against a consent order. The appellant is
estopped from challenging the consensual order to which he was a party. Learned
counsel for the respondents also submitted that appeal under section 10F is
maintainable only on the question of law. The jurisdiction of the High Court in
appeal is to be confined to the determination of any question of law and not
against any finding of fact. Mr. Bose lastly submitted that even otherwise the
Company Law Board did not commit any error requiring interference with the
discretion of the Company Law Board.
An appeal is
a process before the superior court for reversing, varying or setting aside an
order, determination or award by an interior court in the hierarchy of the
courts and tribunals on the ground that the subordinate authority acted
illegally/unlawfully or in violation of some established principles of law. An
appeal is the right for entering a superior court calling upon its aid and
intervention for redressal of the error committed by the court below. There is
no inherent right to appeal. It is only a creature of the statute. An appeal
under section 10F of the Companies Act, 1956 (for short "the Act,
1956") is maintainable against any decision or order of the Company Law
Board on any question of law arising out of such order within sixty days from
the date of communication of the decision or order. Under the proviso to
section 10F the aforesaid period can be elongated further up to sixty days
where the High Court is satisfied that the appellant was prevented by
sufficient cause for filing the appeal within the aforesaid period. One of the
orders of the Company Law Board, which is also a subject matter in this appeal,
is passed on May 25, 1999. The present appeal was presented in the court on
August 23, 1999. The appeal against the order dated May 25, 1999 is, therefore,
time barred. The appellant has not also pleaded sufficient cause for not
preferring the appeal earlier indicating any event of circumstances which
prevented it from preferring the appeal in time. That apart, the order dated
May 25, 1999, is an order sequel to the order dated December 16, 1998, which
was also a consensus order which reads as follows:
"In view of the fact that
the company is a family we have suggested to the parties that the disputes
should be resolved, amicably and the parties have also expressed the same
desire to do so in the following manner:
(1) The percentage shareholding of the parties would
be restored as prevailed before the issue of the new shares and the method of
doing so will be decided after the audit of the accounts of the company are
completed.
(2) One of the representatives of the
petitioners will be inducted into the board with immediate effect along with an
independent person Shri Anil Kumar Sen, retired Chief Justice of the Calcutta
High Court who will function as the nominee of the Company Law Board and the
sitting fees payable to him will be decided in consultation with him.
(3) M/s. Batliboi and Co. or M/s. Price
Waterhouse will conduct the audit of the accounts of the company for the years
1996-97 and 1997-98 and they will also particularly examine the amounts
invested by respondent No. 2 into the company till December 31, 1998. The
petitioners group will negotiate with these firms and the fees for the audit
will be paid by the petitioners. The audit should be completed by March 31,
1999.
(4) Once the audit is completed and the parity
in the shareholding is brought to the original level, the parties will discuss
the method of settlement of the entire family properties including the
company."
On the basis
of the above order, the Company Law Board appointed M/s. Batliboi and Co. to
verify the accounts of the company, more particularly, in reference to the
endorsement made by the appellant. The matter further came up before the
Company Law Board and on terms agreed by the parties the Company Law Board
passed further order on May 25, 1999, and disposed of the company petition in terms
of resolution between the parties. The order passed by the Company Law Board is
since an order that was agreed to by the parties, in the absence of anything
more like fraud, coercion, etc. there cannot be any ground for interfering on a
consent order on appeal. The order is based on consent and consent operates as
an estoppel. Since both the parties have agreed as to the nature of the order
such an order is to be given due effect. There is/was no grievance as to the
genuineness and voluntariness of the consent. The Company Law Board passed its
order on considering all the relevant aspects of the matter. The powers
conferred on the Company Law Board under section 402 are wide and discretionary
in nature. Section 397/398 along with section 402 of the Act, 1956, clothed the
Company Law Board with ample jurisdiction to achieve the object set out in the
statute. The only limitation on the exercise of power is that a nexus must
exist between the orders that may be passed by the object sought to be attained
through section 397/398/402 of the Act, 1956 and the Companies (Court) Rules.
It may further be remembered that where an order is made by the authority
within its discretion the appellate court in the matter arising out of the
discretionary power will not interfere with its exercise unless the appellate
court found that the discretion has been exercised on wrong principle or that
there is failure of justice. In this context it would be worthwhile to recall
the following statement of law from Halsbury's Laws of England.
"656.
Appeal from the exercise of a judge's discretion.—Where the order of a judge in
chambers is made within his discretion, the appellate court, whether it be the
Court of Appeal or the House of Lords, will not interfere with its exercise
unless it is shown that the discretion has been exercised on a wrong principle
or not at all, or that there has been a miscarriage of justice. The appellate
court is not to exercise an independent discretion of its own, but must defer
to the judge's exercise of his discretion and must not interfere with it merely
upon the ground that the members of the appellate court would have exercised it
differently."
The Supreme
Court of India while considering the power of the appellate court against an
order under section 34 of the Arbitration Act, 1940, in the case of U.P.
Co-operative Federation Ltd. v. Sunder Bros., AIR 1967 SC 249, held as follows
(page 253):
"8. It
is well established that where the discretion vested in the court under section
34 of the Indian Arbitration Act has been exercised by the lower court the
appellate court should be slow to interfere with the exercise of that
discretion. In dealing with the matter raised before it at the appellate stage
the appellate court would normally not be justified in interfering with the
exercise of the discretion under appeal solely on the ground that if it had
considered the matter at the trial stage it may have come to a contrary
conclusion. If the discretion has been exercised by the trial court reasonably
and in a judicial manner the fact that the appellate court would have taken a
different view may not justify interference with the trial court's exercise of
discretion. As is often said, it is ordinarily not open to the appellate court
to substitute its own exercise of discretion for that of the trial judge; but
it if appears to the appellate court that in exercising its discretion the
trial court has acted unreasonably or capriciously or has ignored relevant
facts then it would certainly be open to the appellate court to interfere with
the trial court's exercise of discretion."
A similar
view was taken by the Supreme Court in interpreting Order 39, rule 1 and Order
43, rule 3 in Wander Ltd. v. Antox India (P.) Ltd. [1990] Suppl. SCC 727, the
court observed that in an appeal against the exercise of discretion the
appellate court will not interfere with the exercise of discretion of first
instance and substitute its own discretion except where the discretion has been
shown to have been exercised arbitrarily or capriciously or adversely or where
the court has ignored the relevant facts. The Supreme Court observed that (page
733): "an appeal against such exercise of discretion is said to be an
appeal on principle. The appellate court will not reassess the material and seek
to reach a conclusion different from the one reached by the court below if the
one reached by that court was reasonably possible on the material. The
appellate court would normally not be justified in interfering with the
exercise of discretion under appeal solely on the ground that if it had
considered the matter at the trial stage it would have come to a contrary
conclusion...."
In the
instant case the Company Law Board for resolving the issues between the parties
passed the impugned orders as mentioned above. The Company Law Board exercised
discretion within its limit which cannot be said to be unreasonable or
injudicious. In the circumstances the decision making process of the Company
Law Board cannot be held to be unlawful requiring interference from this court.
For the
reasons stated above the appeal stands dismissed, but without any order as to
costs.
Bombay High Court
companies
act
[2004]
50 SCL 440 (bom.)
HIGH COURT OF
v.
Dabhol Power Co.
H.L.
Gokhale and R.S. Mohite, JJ.
Appeal (L) No. 798 of 2003 in Company Appeal (L) Nos. 4 and 6 of 2003
and Company Petition No. 45 of 2002
October
10, 2003
Section 10F, read with section 483, of the Companies
Act, 1956 read with section 100A of the Code of Civil Procedure, 1908 - Company
Law Board - Appeals against orders of - Respondent objected to maintainability
of appeal filed by appellant against an order of Single Judge, by virtue of
section 100A of CPC abolishing further appeals in certain cases - Whether
section 100A of CPC is specific provision to contrary within meaning of section
4(1) of CPC which limits or otherwise affects right of appeal provided under
section 483 of 1956 Act which would be special law applicable - Held, no -
Whether Company Court exercising power under section 10F neither passes
judgment and decree nor is sitting in appeal from an original decree and order
which is the first requirement of section 100A of CPC, and, therefore, in
absence of any other provision to limit or affect right under section 483
instant appeal was to be admitted - Held, yes
Facts
In the instant
appeal, the appellant had challenged the order passed by a Single Judge under
section 10F. The respondent however, raised a question with respect to its
maintainability on the ground that section 100A of the CPC abolishing further
appeals against the decision of a Single Judge had come into force with effect
from 1-7-2002, and, therefore, the appeal of the instant kind would not lie.
The appellant, on the other hand, submitted that the order on an application
under section 397 would be an order made or decision given in the matter of
winding up of a company and appealable under section 483, and, therefore, an appeal
would lie from such an order of a Single Judge to a Division Bench. According
to the appellant, even if the jurisdiction under sections 397 and 398 was given
to the CLB and even if an appeal was provided to a Judge under section 10F,
that would not take away the remedy under section 483.
Held
A straight
reading of section 100A of the CPC prohibits any further appeal in certain
cases whereas section 4(1) saves the remedies under special laws. Section 4(1),
however, has a clause at the beginning, which provides that it is in the
absence of any specific provision to the contrary. Thus, in the absence of any
specific provision to the contrary, the provision in the special laws will
survive. [
Though section
100A was brought into the statute book and brought into force, section 4(1) has
been left undisturbed. Therefore, there has to be a specific provision to
remove the appeal provision, which is otherwise available under the special
law. An appeal is a substantive right and not merely a procedural one. [
It cannot be
accepted that section 100A of the CPC is the specific provision to the contrary
within the meaning of section 4(1) of the said Code which limits or otherwise
affects the right of appeal provided under section 483 which would be the
special law applicable. Firstly, what section 100A of the CPC bars is an appeal
from the judgment and decree of a Single Judge. In the instant case, the
Thus, there was
no merit in the objection to the maintainability of the appeal. On the other
hand, on the merits of the appeal there were arguable points. Hence, the appeal
was to be admitted. [Para 23]
Cases referred to
Bnenoy G.
Dembla v. Prem Kutir (P.) Ltd. [Appeal No. 354 of 2003 dated 30-6-2003] (para
5), Nasik Hing Supplying Co. v. Annapurna Gruh Udyog Bhandar 2003 (2) Vol. 44
G.L.R. 926 (FB) (para 6), Salem Advocate Bar Association v. Union of India AIR
2003 SC 189 (para 7), Smt. Arati Dutta v. Eastern Tea Estate (P.) Ltd. AIR 1988
SC 325 (para 10), Shankarlal Aggarwala v. Shankarlal Poddar AIR 1965 SC 507
(para 10), Rev. C.S. Joseph v. T.J. Thomas [1987] 62 Comp. Cas. 504 (Ker.)
(para 10), Nicolle v. Nicolle 1922 (1) AC 284 (para 12), Union of India v.
Mohindra Supply Co. AIR 1962 SC 265 (para 15), Bachharaj Factories Ltd. v.
Hirjee Mills Ltd. AIR 1955 Bom. 355 (para 16), Municipal Corpn. of Brihanmumbai
v. State Bank of India AIR 1999 SC 380 (para 19], Abdul Rahman v. Prasony Bai
[2003] 1 SCC 488 (para 20) and T.K. Lathike v. Seth Karsandas Jamnadas [1999] 6
SCC 632 (para 20).
T.R.
Andhyarujina, N.H. Seervai, Rahul Chitnis, S.H. Merchant, Chakranani Misra,
Shailesh Dalvi and Ms. Rifat Merchant for the Appellant. J.
Dwarkadas, B.K. Girdharlal, Kapil Sibal, Manmohan, Abhinav Vashishta, C.D.
Mehta, Ms. Rashmi Kapthalia, Mrs. Vinita Honbalkar, D. Liladhar and S.H.
Doctor for the Respondent.
Judgment
H.L.
Gokhale, J. - Heard Mr. Andhyarujina for the Appellants, and Mr. Sibal for
Respondent Nos. 2 to 5.
2. We have gone
through the impugned order. Mr. Andhyarujina submits that it is erroneous on
facts as well as on law. Mr. Sibal, learned counsel appearing for Respondent
Nos. 2 to 5, submits that the impugned order is primarily on facts and correct
one. We are, however, of the view that there are important questions of law
which are as well involved in this matter.
3. Mr. Sibal has raised a question
with respect to maintainability of this Appeal.
4. This Appeal under
section 483 of the Companies Act seeks to challenge the order dated 2nd
September, 2003 passed by a learned Single Judge under section 10F of the
Companies Act in Company Law Board and petition initiated by the Appellants
under sections 397 and 398 of the Companies Act.
5. Mr. Sibal and Mr.
Dwarkadas, learned counsels appearing for the respective Respondents, submit
that section 100A of the Code of Civil Procedure abolishing further appeals in
certain cases has come into force with effect from 1st July 2002 and thereafter
the appeal of the present kind would not lie. Mr. Sibal submits that a Division
Bench of this Court in an unreported judgment in the case of Bnenoy G. Dembla
v. Prem Kutir (P.) Ltd. [Appeal No. 354 of 2003 dated 30-6-2003], has taken the
view that against the decision of a Single Judge under section 10F of the
Companies Act, there is no express conferment of a further right of appeal. He
referred to para 13 of this judgment in that behalf. The Division Bench has
observed in paragraph 8 of the said judgment, that as per the object behind
introducing section 100A of the Code of Civil Procedure, where an appeal from
original or appellate decree is decided, by a Single Judge after 1st July 2002,
no further appeal would be maintainable.
6. The Division Bench
referred to and relied upon a Full Bench judgment of the Gujarat High Court in
Nasik Hing Supplying Co. v. Annapurna Gruh Udyog Bhandar 2003 (2) Vol. 44
G.L.R. 926. The Full Bench of the Gujarat High Court was concerned with the
right of appeal under section 109(5) of the Trade and Merchandise Act, 1958
whereunder a further appeal is available to a Bench of High Court against an
appellate decision of a Single Judge. The Full Bench held that the non obstante
clause under section 100A of the Code of Civil Procedure is not in derogation
of the express provisions of a special law conferring a substantive right of
appeal against the decision of a Single Judge. Mr. Sibal submits that as
observed in Bnenoy G. Dembla’s case (supra), after the introduction of section
100A of the Code of Civil Procedure, unless a special statute confers a right
of appeal, no such appeal would lie. He points out that the Division Bench has
held in paragraph 13 of its order that there was no appeal specifically
provided against an order of a Single Judge passed under section 10F of the
Companies Act, and, therefore, the present appeal would also not be
maintainable.
7. Mr. Sibal drew our
attention to the judgment of the Apex Court in Salem Advocate Bar Association
v. Union of India AIR 2003 SC 189, and particularly paragraph 15 thereof, and
submitted that the idea in introducing section 100A of the Code of Civil
Procedure was to reduce the intra-court appeals and that unless there is
specific statutory appeal, such construction to increase the number of appeals
is not expected. He therefore submitted that the appeal ought to be dismissed
in limine.
8. Mr. Sibal further
pointed out that prior to 31st May 1991, the jurisdiction under sections 397
and 398 of the Companies Act used to be with the Company Court. After 31st May
1991, the jurisdiction is now vested with the Company Law Board and appeal
against its decision is made available under section 10F of the Companies Act
to a Single Judge of the High Court. In his submission, even under the dicta of
the Division Bench in Bnenoy G. Dembla’s case (supra), there has to be an
express provision providing for a second appeal against the order of a Single
Judge in the statute itself. An appeal specifically provided could alone be
saved after introduction of section 100A of the Code of Civil Procedure and not
otherwise.
9. Mr. Andhyarujina,
learned counsel appearing for the Appellants, on the other hand, pointed out
that the present appeal was under section 483 of the Companies Act. It provides
for an appeal from an order made by a court in the matter of winding up of a
company to the same Court. He emphasized the clause in the matter of winding up
as occurring in this section and then submitted that such an order of the
Single Judge covered the orders passed under sections 397 and 398 of the
Companies Act. He particularly emphasized the provision of section 397(2)(b) of
the Act. Section 397(1) provides that if any member of a company complains that
the affairs of the company are being conducted in a manner prejudicial to
public interest, or in a manner oppressive to the member, such member may apply
to the Company Law Board for an appropriate order. Sub-section (2) provides
that (a) if the Company Law Board forms an opinion that the affairs of the
company are being conducted in a manner prejudicial to public interest or in
the manner oppressive to the members, (b) and to wind up the company would unfairly
prejudice such members but otherwise facts would justify that such an order was
just and equitable, then the Company Law Board may make such an order as it
deems fit. Thus an application drawing attention to the case of oppression
under section 397 of the Companies Act based on facts which would justify the
making of a winding up order on the ground of being just and equitable could
lead to an appropriate order in lieu of a winding up. The order on an
application under section 397 would be an order made or decision given in the
matter of winding up of a company and appealable under section 483 of the
Companies Act. Therefore, an appeal would lie from such an order of a Single
Judge to a Division Bench. Now, even if the jurisdiction under sections 397 and
398 is given to the Company Law Board, and even if an appeal is provided to a
judge under section 10F of the Companies Act, that would not take away the
remedy under section 483 of the Companies Act.
10. Mr. Andhyarujina
referred to a decision of the Apex Court in the case of Smt. Arati Dutta v.
Eastern Tea Estate (P.) Ltd. AIR 1988 SC 325. This judgment in turn referred to
an earlier judgment in the case of Shankarlal Aggarwala v. Shankarlal Poddar
AIR 1965 SC 507 with approval. In Shankarlal Aggarwala’s case (supra), the Apex
Court had held overruled the preliminary objections and held that the order
passed by the Company Judge under section 397 or section 398 was one which was
passed in lieu of winding up and hence it was in the matter of winding up and, therefore,
it was appealable under section 483 of the Companies Act. In the particular
case of Smt. Arati Dutta (supra), the matter came from Guahati High Court where
there was no procedure to file an appeal from the decision of a Single Judge.
Still the Apex Court held that the absence of the procedure rules do not take
away the litigant’s right to file such appeals when the statute confers such a
right specifically (end of paragraph 8 of the judgment). Mr. Andhyarujina drew
our attention to a judgment of a Division Bench of Kerala High Court in the
case of Rev. C.S. Joseph v. T.J. Thomas [1987] 62 Comp. Cas. 504, where also
the Division Bench (Per Balakrishnan, J., as His Lordship then was in that
Court) took the similar view.
11. When we consider
the rival submissions, we have to note that section 100A in the Code of Civil
Procedure, has now provided that no further appeal is available notwithstanding
anything contained in any Letters Patent or any other law for the time being in
force. However, section 4(1) of the Code of Civil Procedure provides as
under :—
“In the absence of any specific provision to
the contrary, nothing in this Code shall be deemed to limit or otherwise affect
any special or local law now in force or any special jurisdiction or power conferred,
or any special form of procedure prescribed by or any other law for the time
being in force.”
It is seen
that section 483 of the Companies Act has been interpreted by the Apex Court as
providing an appeal against the order of a Single Judge to the Division Bench.
This has been done by reading sections 397 and 398 along therewith. The
question is whether section 4(1) of the Code of Civil Procedure saves this
further appeal under section 483 of the Companies Act in the teeth of section
100A of the Code of Civil Procedure introduced from 1st July 2002. A straight
reading of section 100A prohibits any further appeal in certain cases, whereas,
section 4(1) saves the remedies under special laws. This section 4(1), however,
has a clause at the beginning, which provides that it is in the absence of any
specific provision to the contrary. Thus, in the absence of any specific
provision to the contrary, the provision in the special laws will survive. What
is the effect of joint reading of section 100A and section 4(1) of the Code of
Civil Procedure on the provisions of section 483 read with sections 397 and 398
of the Companies Act? A decision on this question becomes crucial for deciding
the maintainability of this appeal.
12. Mr. Andhyarujina,
learned counsel appearing for the Appellants, referred to paragraph 20 of the
above-referred Full Bench judgment of the Gujarat High Court. The Full Bench
has observed that the settled legal position is that a prior particular or
special law is not readily held to be repealed by a latter general enactment.
This paragraph quotes with approval the observation of Lord Philimore in
Nicolle v. Nicolle 1922 (1) AC 284 to the following effect:
“‘...Where general words in a latter Act are
capable of reasonable and sensible application without extending them to
subjects specially dealt with by earlier legislation, that earlier and special
legislation is not to be held indirectly repealed, altered, or derogated from
merely by force of such general words, without any indication of a particular
intention to do so.’” [p. 944]
13. The judgment of the
Division Bench in Bnenoy G. Dembla’s case (supra) is concerning the original
proceedings under section 111 of the Companies Act which provides for an
application to the Company Law Board against refusal of company to register
transfer of shares. Against the decision of the Company Law Board in such a
matter an appeal is available under section 10F of the Companies Act to a
Single Judge of the High Court. However, there is no specific appeal provided
thereafter unlike the one under section 483 of the Companies Act with which we
are concerned in the present matter. It is material to note that this right of
appeal under section 483 against the order of a Single Judge was specifically
noted by the Apex Court in the above-referred Smt. Arati Dutta’s case (supra)
to observe that if there is an appeal under the statute, it has got to be made
available, even though under the rules, there is no provision for the same.
14. If the submissions
of Mr. Sibal are accepted, it will lead to repealing of special provisions such
as section 109(5) of the Trade and Merchandise Act merely because of the
bringing into force of section 100A of the Code of Civil Procedure. This will
be so in spite of the provision under section 4(1) of the Code of Civil
Procedure which protects the jurisdiction, powers and special forms of
procedure under the special law and although there is no specific contrary
provision in any manner as required by the first part of section 4(1) of Code
of Civil Procedure. It is also material to note that though section 100A was
brought into the statute book and brought into force, section 4(1) has been
left undisturbed. Therefore, there has to be a specific provision to remove the
appeal provision, which is otherwise available under the special law. It is
also necessary to note that an appeal is a substantive right and not merely a
procedural one.
15. As an example of a
case where there is a specific curtailing provision, Mr. Andhyarujina referred
to the judgment in the case of Union of India v. Mohindra Supply Co. AIR 1962
SC 256. This judgment dealt with the provisions of sections 39(1) and (2) of
the Arbitration Act, 1940. Sub-section (1) conferred a right of appeal before a
Single Judge of the High Court, but sub-section (2) expressly prohibited second
appeal from an order under sub-section (1). It was contended before the Apex
Court that what was prohibited was a second appeal under section 100 of Code of
Civil Procedure and not the appeal under clause 10 of the Letters Patent. The
Apex Court negatived the contention by noting that the Legislature had plainly
expressed itself that the right of appeal against the orders passed under the
Arbitration Act may be exercised only in respect of certain orders. The
judgment is referred and quoted with approval in paragraph 16 of the above
referred judgment of the Gujarat High Court.
16. Mr. Andhyarujina
then referred us to a Division Bench judgment of this Court in Bachharaj
Factories Ltd. v. Hirjee Mills Ltd. AIR 1955 Bom. 355 (per Chagla, CJ.). The
Court was concerned with section 202 of the Companies Act, 1913 in that matter
which is by and large pari materia with section 483 of the Companies Act, 1956.
This section 202 read as follows:—
“202. Appeals from orders.—Re-hearings of, and
appeals from, any order or decision made of given in the matter of the winding
up of a company by the Court may be had in the same manner and subject to the
same conditions in and subject to which appeals may be had from any order or
decision of the same Court in cases within its ordinary jurisdiction.”
The Division Bench interpreted this section 202 as follows:
“5. Therefore, in our opinion, the proper
construction to put upon section 202 is this. The first part of that section confers
a substantive right upon a party aggrieved by an order made or a decision given
by a Company Judge in winding up. The second part of section 202 does not in
any way cut down or impair the substantive right already conferred by the first
part of section 202. The second part which deals with the manner and the
conditions in which an appeal may be preferred only refers to the procedural
aspect of an appeal and the forum to which the appeal would lie.” (p. 357)
Thus, the
Division Bench noted that the section was in two parts; first part provided a
substantive right of appeal whereas the second part provided the procedural
aspect of the matter. Mr. Andhyarujina pointed out that this judgment and
approach to section 202 therein has been specifically approved by the Apex
Court in the above referred case of Shankarlal Aggarwala (supra). The Apex
Court in terms held that the orders passed by the District Court or by a Single
Judge in the matter of winding up petition are appealable under section 202
independently of the provisions of sections 96 and 104 of Code of Civil
Procedure, 1908 or that of clause 15 of Letters Patent. Mr. Andhyarujina,
therefore submitted that it was a right granted by special statute and not
governed under the Code of Civil Procedure, it could not be reduced by any such
provision like section 100A introduced in Code of Civil Procedure. He further
pointed out that the provision of section 4(1) of the Code of Civil Procedure
has been as it is although out and it was so in any case at the time when
Aggarwal’s case was decided.
17. Mr. Andhyarujina
further submitted that the word ‘Court’ under section 483 of the Companies Act
will have to be read in the context in which it is defined under section 2(11)
and section 10 of the Companies Act. It includes the District Court or the High
Court on its Original Side exercising company jurisdiction. Section 483
provides for an appeal from order made by the Court to the same Court. May be,
the jurisdiction under sections 397 and 398 is now vested with the Company Law
Board, the order passed in an appeal under section 10F is the order passed by
the Court which is appealable under section 483.
18. Mr. Manmohan,
learned counsel appearing with Mr. Sibal, submitted in rejoinder that the
provision in the first part of section 4(1) will have to be read as referring
to a provision to the contrary in the Code of Civil Procedure only and section
100A was this contrary provision which has been brought in to reduce further
appeal. He submitted that in any case the wording in section 4(1) required a
specific provision. Even the Division Bench of this Court in its judgment in
Bnenoy G. Dembla’s case (supra) had stated so in paragraph 12 of the judgment.
An interpretation given by a Division Bench would not be overlooked by this
Court. He submitted that when Smt. Arati Dutta’s case (supra) was decided, the
jurisdiction under section 397 was not transferred to the Company Law Board.
Code of Civil Procedure is the special law for the purposes of intra-court
appeals and section 100A was the contrary provision reducing the further
appeals.
19. Mr. Dwarkadas
learned counsel appearing for some of the Respondents, submitted that the
Gujarat High Court had not considered the provisions of first part of section
4(1) of Code of Civil Procedure and, therefore, according to him, its decision
on section 109(5) of the Trade & Merchandise Act was not a correct one. He
referred to a judgment of the Apex Court in Municipal Corpn. of Brihanmumbai v.
State Bank of India AIR 1999 SC 380, where the Apex Court held that the Bombay
Municipal Corporation Act itself provided for two appeals under the concerned
provisions. One was under section 217(1) of the Bombay Municipal Corporation
Act, 1888 in the matter of ratable value or tax to the Chief Judge of the Small
Causes Court and the second one was to the High Court under section 218D of the
Act. The Apex Court held that there could not be any further appeal in view of
section 100A of the Code of Civil Procedure.
20. Mr. Doctor, learned
counsel appearing for some of the Respondents, submitted that the question of
maintainability be decided as a preliminary issue before deciding the admission
of the appeal on merits. He referred to two judgments of the Apex Court in this
behalf. Firstly, he drew our attention in the case of Abdul Rahman v. Prasony
Bai [2003] 1 SCC 488, wherein in paragraph 21, the Court observed that when the
facts are admitted in a matter, and particularly when the suit can be disposed
of on a preliminary issue, the maintainability of the suit can be adjudicated
upon as preliminary issue. The observations in paragraph 9 in the case of T.K.
Lathika v. Seth Karsandas Jamnadas [1999] 6 SCC 632 were also shown to us where
the Apex Court observed that the High Court should have first decided the
question of maintainability and only when said question was found in the
affirmative, the merits could have been gone into.
21. Now, as far as the
submission of Mr. Doctor is concerned, we will be and are giving our reasons in
this order while considering the admission of the appeal. Hence, no separate
order on this objection itself is required. The authority relied upon by Mr.
Dwarkadas, viz., Municipal Corpn. of Brihanmumbai’s case (supra) does not help
him much because there is no specific second appeal against the order of the
Single Judge passed under section 218-D of the Bombay Municipal Corporation Act
unlike section 483 of the Companies Act. The submission of Mr. Dwarkadas on
Trade and Merchandise Act is contrary to section 4(1) of the Code of Civil
Procedure. With reference to submission of Mr. Manmohan, it is not possible to
accept that section 100-A of the Civil Procedure Code itself is the contrary
provision. Besides, as explained by us, the view being taken by us is not
contrary to the ratio of the Division Bench in Bnenoy G. Dembla’s case (supra).
22. We are also not
inclined to accept that section 100-A of the Code of Civil Procedure is the
specific provision to the contrary within the meaning of section 4(1) of the
said Code which limits or otherwise affects the right of appeal provided under
section 483 of the Companies Act which would be the special law applicable.
Firstly, what section 100-A bars is an appeal from the judgment and decree of a
Single Judge. In the present case, the Company Court exercising power under
section 10-F, passes no judgment and decree. The Company Court exercising
jurisdiction under section 10F, in the first place, is not sitting in appeal
from an original decree and order as is the first requirement of section 100A.
The term ‘order’ in this context must mean an order defined under section 2(14)
of the Code which requires it to be that of the Civil Court. The Company Law
Board exercising jurisdiction under sections 397 and 398 of the Companies Act
is not a Civil Court. Secondly, the order of the Company Judge in section 10F
Appeal is not a judgment and decree within the meaning of the Code of Civil
Procedure. No other provision to limit or affect the rights under section 483
is shown to us.
23. For the reasons stated
above, we do not find any merit on the objection to the maintainability of this
Appeal on the points raised by Mr. Sibal. On the other hand, on the merits of
the appeal we find arguable points. Hence, the Appeal is admitted.
24. All the necessary papers
are already filed and hence, no further separate paper-book is required.
Printing of paper-book is dispensed with.
25. Advocates
instructing the Counsel appearing for all the Respondents waive service on
behalf of respective parties.
26. Hearing expedited.
27. All the Counsel
request that considering the important questions of law involved in this
matter, the same be heard early. The request will be considered by the
concerned Bench.
28. Appeal to be listed
before the concerned Bench on 5th November 2003 for direction for considering
fixing a date of hearing.
[1999] 95 COMP. CAS. 368 (GAU.)
v.
D.N. CHOWDHURY, J.
O.J. (COMPANY APPEAL) NO. 19 OF
1998
JUNE 17, 1998
A.K.
Bhattacharyya, Ms. U. Barua, A. Sarma and A.K. Sarma for the Appellant.
J.M.
Choudhury and P. Kataki for the Respondent.
D.N.
Chowdhury, J.—The appeal
under section 10F of the Companies Act is arising out of and directed against
an order passed by the Company Law Board ("the CLB in short"),
Principal Bench,
"The unsecured loans provided by the respondents
which according to them is of the order of Rs. 27.5 lakhs and subject to
verification by the statutory auditors, shall also be paid during this period.
All the payments shall be by way of demand drafts in the name of Shri C.M.
Pincha, and shall be handed over to L.P. Agarwala and Co., advocates on record,
under acknowledgment. Should there be any default in making the payment of
either the first instalment on the stipulated date or balance on or before
August 11, 1998, as stipulated in our order dated June 9, 1997, the respondents
will be at liberty to purchase the shares of the petitioners at Rs. 7,771 as
offered by them.
The present board of directors will cease to function
with immediate effect and the board as referred to by us in the second
paragraph will assume charge of the management of the company. Should there be
any default in payment of the first instalment on July 2, 1998, or the final
payment by August 11, 1998, the respondents are at liberty with notice to the
other side, to mention the same before us for further directions. No further
extension beyond August 11, 1998, will be allowed for making the full payment.
The present board of directors shall hand over all the documents and other
connected papers to the petitioners' group within a week's time.
We also appoint Shri Mohanty, Bench Officer,
The newly constituted board shall be at liberty to
take all decisions relating to operation of bank accounts and all other earlier
instructions to the banks by earlier board of directors shall cease to be in
force. The banks will act on the authority of this order.
In case the other minority shareholders wish to sell
their shares to the petitioners, they may do so as the same price of Rs. 11,004
per share and this amount shall be paid in one or more instalments within a
period of six months from the date of sale.
All interim orders are vacated except the one
relating to keeping in abeyance the decision taken in the recently held EOGM.
The above directions have the concurrence of the
parties and dictated in their presence."
Mr. Anil Kumar. Bhattacharyya, learned senior
counsel, assisted by Ms. Usha Barua, Mr. Apurba Sarma, Mr. Arup Kumar Sharma,
for the appellants assailed the above order mainly on the ground that the
Company Law Board erred in law in handing over the management of the company to the respondents without any
consideration against the shares held by the appellants. Mr. Bhattacharyya,
learned counsel, found fault with the order of the Company Law Board for not
ensuring the full payment payable by the respondents to the appellants prior to
handing over of the management. Mr. Bhattacharyya, learned senior counsel, in
course of his lengthy argument, invited my attention to the order of the Debt
Recovery Tribunal restraining the respondents from dealing with their personal
assets. Mr. Bhattacharyya expressed his misgiving and mistrust about the
ability of the respondents in raising funds to clear the stipulated sum as per
the order of the Company Law Board.
Mr. Jatindra
Mohan Choudhury, the learned senior counsel, assisted by Mr. Pallab Kataki,
advocate, appearing on behalf of the respondents, seriously questioned the
maintainability of the appeal both on the facts as well as in law. Mr.
Choudhury, learned senior counsel submitted that the present order in fact is
passed as a sequel to the earlier judgment and order of the Company Law Board
dated January 10, 1997, which was subsequently upheld by the company judge in
appeal and thus attained its finality.
A right of
appeal is neither a natural nor an inherent right. A right of appeal is only a
creature of the statute.
"The
remedy or procedure by appeal is of civil law origin, and was introduced
therefrom into courts of equity and admiralty. It was entirely unknown to the
common law.
Consequently,
the remedy by appeal in actions at law and in equity is purely of
constitutional or statutory provision...."(14, Corpus Juris Secundum,
Volume 4)
The right of
appeal/except when secured by the Constitution, so as to have become a
constitutional right, is dependent entirely on statute and subject to the
control of the Legislature.
"Although
it has been said that appeal exists by grace of statute or court rule, a right
of appeal cannot be conferred by court rule, or broadened by court rule. Where
the Legislature has prescribed limitations on the right, such limitations
cannot be enlarged by a court." (14 Corpus Juris Secundum, Volume 4).
The order
impugned here now is only a step in aid in implementation of the earlier order
of the Company Law Board which has already attained its finality. The parties
acted upon the order passed by the Company Law Board on January 10, 1997, and
offered their respective bids. The impugned order contains the working
arrangement to make workable the earlier judgment of the Company Law Board. The
interests of the appellants were taken care of. Shares of the appellants will
stand transferred to the respondents or their nominees only on payment of the
consideration money. The Company Law Board passed the order with the consent of
the parties. Section 96(2) of the Civil Procedure Code envisions that no appeal
shall lie from a consent decree. At any rate, consent operates as an estoppel.
Under section 107 of the Code of Civil Procedure (sic) provides for an appeal
to the High Court only on any question of law arising out of such order. An
erroneous finding of fact recorded by the Company Law Board is not appealable.
No appeal lies against mere finding of fact for tile reason that the statute
does not provide for such appeal. Where the Legislature has defined the limits
on the right, such perimeter or bounds cannot be enlarged by a court of law.
All errors thus are not reviewable on appeal.
The mere fact
that the High Court Would have come to a different conclusion on the facts and
circumstances of the case, does not make the matter appealable: Gappulal v.
Thakurji Shriji Dwarkadheeshji, AIR 1969 SC 1291; Mattulal v. Radhe Lal, AIR
1974 SC 1596.
On an overall
consideration of the matter in its entirety and for the reasons as stated above,
the appeal is dismissed. It will, however, be open to the appellants to move
the Company Law Board seeking for any directions or orders for the protection
of their interests as and when occasion arises and the Company Law Board will
be free to pass such orders or directions as per law.
The appeal
thus stands disposed of. There shall be no order as to costs.
High
Court of
v.
Harbanslal Malhotra & Sons Ltd.
Smt. Ruma Pal and Mahemmad Habeeb Shams Ansari, JJ.
civil
appellate jurisdiction ACO No. 167 of 1998
Section 10F of the Companies Act, 1956 -
Company Law Board - Appeal against orders of - In an application under section
397/398, appellants alleged inter alia, that respondents were holding meetings
with G, a foreign company, to sell their holdings in company and pass on
control to outsiders, and that transfer was being made surreptitiously in
violation of articles of association - Appellants also sought to bring on
record apprehended collaboration agreement of company with G and prayed to add
G as a party - G was impleaded but on submission that neither it had
collaboration agreement nor it had any intention or interest to enter into any
collaboration agreement, its name was deleted - Thereafter, on basis of a fax
from G to respondents regarding joint venture proposal, appellants sought
recall of said order but Company Law Board rejected prayer - Whether Company
Law Board erred in law in finding facts not pleaded and in rejecting
un-controverted statements of appellants - Held, yes - Whether question as to
construction of CLB’s order to determine basis for deleting G’s name as
respondent was a question of law, referable under section 10F - Held, yes
[Matter remanded to Company Law Board for fresh decision]
Facts
The shareholding of the company in question
was divided equally between the appellant and his group and the respondents and
their group. The appellant filed an application alleging that the respondents
were holding regular meetings with one Gill, the managing director of G, a
foreign company, to sell their holdings in the company and to pass on the
control to outsiders. G was a multinational company which also manufactured,
and traded in, inter alia, the same products as the company. The appellant also
sought to bring on record the apprehended collaboration agreement of the
company with G. The appellant also prayed that G should be added as a party to
the application under sections 397/398. The CLB was of the view that it could
not adjudicate on the allegations without the presence of G and, accordingly,
it allowed the prayer to implead G as a party. G made an application before the
CLB for striking out its name from the petition on the ground that there was no
current or pending arrangement regarding supply of technology to the respondent
company. The application of G was allowed on 18-2-1998 by the CLB holding that
G had no further intention of either seeking further extension of the FIPB
approval nor it had any interest to enter into any collaboration with the
company. On 10-6-1998, however, a fax message from Gill of G was obtained by
the appellant which showed that a discussion had been held regarding a joint
venture between G and, inter alia, the company enclosing a proposal outlining
the concept of said joint venture. It was prayed that in view of the above
facts, the order dated 18-2-1998 and the direction to delete G as respondent,
should be recalled.
The CLB, however, dismissed the application
holding that on the basis of the fax, without any other material, ‘G’ could not
be impleaded as a party.
On appeal :
Held
As long as the allegations against G remained
on the record, it was debatable whether the truth or falsity of that allegation
could be decided at an interim stage of the proceedings.
However, the parties did not question the
order dated 18-2-1998, and the propriety of that order could not be determined
in this proceeding. But the fact remained that the grounds on which ‘G’ was
impleaded as a party continued to remain on record; namely an apprehended
collaboration between ‘G’ and the company to the detriment of the company. The
CLB deleted G’s name as respondent not only on the finding that there was no
collaboration agreement but also that G had no further intention or any
interest to enter into any collaboration agreement with the company. That was
also the basis on which G’s addition was upheld by the appeal court. According
to the appellate court, a definite case had been made out that the affairs and
conduct of the company had gone in such a way so as to create prejudice to the
interest of the minority group of shareholders and in the event the minority
group came up before the Board and informed that there was a existing
collaboration agreement or likelihood of there being a collaboration agreement
which would undoubtedly prejudice the interest of the company, question of
declaring the order of impleadment as perverse did not and could not arise.
‘No further interest’ on the part of G to
collaborate in plain English meant ‘for all times to come’. The statements
contained in the appellant’s petition certainly belied this. If the statements
contained in the appellant’s application were correct, at least this basis for
deleting G as a respondent would disappear and the order dated 18-2-1998 could
be said to have been obtained in abuse of process.
G, however, argued that subsequent events
could not be taken note of. This may be so if the Board were exercising a power
of review on the principles of order 47 of the Code. But it was not. It was
considering the exercise of its power for recall under its inherent powers.
That the CLB could consider the subsequent
event was assumed by the Board itself. It considered and rejected the facts
stated in the petition. Undoubtedly, a Court under section 10F cannot go into a
pure question of fact as found by the CLB but where the finding is erroneous or
perverse, it can. The allegations against G by the appellants in their main
application under sections 397 and 398 were still on record. Their grievance
was in respect of any collaboration between the company and G. The earlier
agreement was evidence of the intention of the company and G to collaborate.
In the last application by the appellants, they had reiterated the stand. No
affidavit had been filed controverting the statements in the appellant’s
petition. There was, therefore, an uncontroverted statement in the petition of
the company’s and G’s intention to collaborate. The fax had been relied as evidence
of such intention. The CLB was under a duty to find out the truth. It was
incumbent upon it to ascertain the truth after the filing of affidavits. No
case could be argued by G either that Gill was not an executive of G or that
there was no intention to collaborate in the absence of any pleading to that
effect by G. The CLB came to such finding on its own. The CLB erred in law in
coming to a finding of fact in the absence of any pleading.
This was one of the questions of law which
arose out of the order under appeal. Besides, when G had preferred an appeal
from the order adding it as a respondent, the appellant then raised a question
as to the appealability of the order under section 10F on the ground that no
question of law was involved. The appeal court negatived this submission and
held that the “point as to the addition of party, is a question of law”. It was
also held that the language of section 10F should not be given a restrictive
meaning to defeat the purpose and concept of justice. The question as to the
construction of order dated 18-2-1998 to determine the basis for deleting G’s
name as respondent was also a question of law.
Hence, the appeal was allowed and the matter
remanded to the CLB for decision on the basis of affidavits filed.
Cases referred to
R.M. Subramaniam v. N. Sundaram AIR 1963
Judgment
Ruma Pal, J. - Harbanslal Malhotra & Sons Ltd. (‘the Company’) carries on
business, inter alia, as manufacturer and dealer in safety razor blades, razor
blades, safety razors, electrical shavers, and cosmetics. The shareholding of
the company is divided equally between the appellant No. 1 and his group, the
respondent No. 2 and his group and the respondent No. 3 and his group. The
appellant No. 1, the respondent No. 2 and the respondent No. 3 are brothers.
2. On 30-9-1992 the appellants filed an
application under sections 397 and 398 of the Companies Act, 1956 (‘the Act’)
against the respondents alleging that the respondents had totally excluded the
appellant from the management of the company and were keeping the appellant in
the dark about the management and business affairs of the company. It is not
necessary to go into all the particulars pleaded in support of this case for
the purpose of this appeal. The relevant allegation in the petition made is
that the respondent Nos. 2 and 3 and their group were intending to sell their
shareholding in the company and pass on the control of the company to certain
outsiders. According to the appellant’s petition, transfer of shares would
tantamount to selling of assets of the company which included valuable
immovable properties and that the transfer was being made surreptitiously in
violation of the articles of association. It was alleged :
“The respondent Nos. 2 and 3 are holding
regular meetings with Mr. G.S. Gill, the managing director of Indian Shaving
Products Ltd. an Indian subsidiary of Gillette and Mr. J.C. Ribera, group vice
president of Gillette in charge of operations in Africa,
3. Gillette International
Ltd. (‘Gillette’) is a foreign multinational company which also manufactures
and trades in, inter alia, the same products as the company.
4. According to the
appellants, the appellant No. 1 protested against sale or transfer of shares to
Gillette but without any response from the respondents.
5. An application
was made by the appellant for interim relief, inter alia, praying for orders to
restrain the respondent Nos. 2 and 3 and their groups from transferring,
selling or disposing of, alienating, dealing with and/or creating any third
party rights in any of the shares belonged to them. An affidavit in opposition
was filed by the company denying the allegations regarding negotiations with
Gillette.
6. In 1993 the
appellants filed an application specifically praying for an order restraining
the company from entering into any collaboration agreement or further agreement
with Gillette or any of its subsidiaries/associates. When the application came
up before the Company Law Board (‘the CLB’), a statement was made on behalf of
the company that “there is no intention to transfer those shares nor the
company has authorised anybody to negotiate for alienation of the properties of
the company”. This was recorded by the CLB in its order dated 9-2-1993, who,
in view of this categorical statement made by the respondent, did not find it
necessary to issue at that stage any direction on the company as prayed for by
the appellants.
7. The appellants
filed another application (CA No. 258 of 1993) and sought to bring on record an
application dated 18-8-1993 from Gillette as well as a letter dated 17-8-1993
from the company to the Chairman, Foreign Investment Promotion Board (FIPB) for
permission in connection with a collaboration between the company and Gillette.
The CLB expressed its displeasure about the respondents’ failure to disclose
the full details of the development with regard to Gillette the collaboration
with Gillette and by an order dated 20-10-1993, the CLB restrained the company
from issuing any further shares in the company without the approval of the
general meeting after giving 25 day’s clear notice to the appellants.
Directions were also given on the company to disclose full particulars of the
collaboration with Gillette.
8. The company
challenged the order dated 20-10-1993 by way of an application under article
226 of the Constitution. An ex parte ad interim order was obtained on 8-12-1993
staying the operation of the order dated 20-10-1993.
9. The appellants
sought special leave to appeal before the Supreme Court from the order dated
8-12-1993 passed by the writ court. The Supreme Court disposed of the special
leave petition by setting aside the order of the writ court on the basis that
the CLB had not interdicted preparatory before the actual issuance of shares.
The Supreme Court, accordingly, disposed of the special leave petition as well
as the writ application filed clarifying that the direction of the CLB in the
order dated 20-10-1993 could not be construed as coming in the way of the respondents
taking preparatory steps for issuing shares to the collaborators.
10. The appellants
then made an application for amendment of the sections 397 and 398 application.
The appellants sought to bring on record the apprehended collaboration
agreement of the company with Gillette. It was also alleged that in fact
Gillette had concluded a deal with the company for equity participation by
Gillette and that FIPB had cleared the proposal of the respondent Nos. 2 and 3
for such equity participation in NVI Engg. (P.) Ltd., which holds shares in the
company. It was also stated that the induction of Gillette would change the
structure of the company. It was stated that the agreement between Gillette and
the company was contrary to the orders passed by the CLB, the submissions made
to the Board, the articles of association of the company as well as the
provisions of the Act. Without prejudice to this submission, it was stated that
the company was already in possession of requisite knowledge for manufacture
of blades and that any collaboration between the company and Gillette would not
be in the interest of the company. It was alleged that Gillette was seeking to
pass on old machinery and outdated technology to the company. It was also
stated that a collaboration with Gillette would result in loss of royalty to
the company, loss of marketing shares and loss of the Indian brands. It was
alleged that the chief competitor of Gillette in
11. The respondent
resisted the prayer for impleading Gillette contending that Gillette was
neither a necessary nor a proper party as there was no subsisting agreement
between the company and Gillette. By an order dated 25-5-1995, the CLB allowed
the prayer for amendment and rejected the submission of the respondents. The
CLB was of the view that it could not adjudicate on the allegations without the
presence of Gillette and accordingly, allowed the prayer to implead Gillette as
a party.
12. On 2-9-1995 an
application was made by Gillette to the CLB for recalling the order dated
25-5-1995 on the ground, inter alia, that no opportunity had been given to it
of being heard before it was added as a party.
13. Accepting the
submission of Gillette, the application was allowed on 11-11-1996 in exercise
of the inherent powers in regulation 44 of the Company Law Board Regulations,
1991 (‘the Regulations’).
14. Gillette was
thereafter heard. It was contended before the CLB by Gillette that it was a
necessary or proper party as there was no existing agreement between the
company and Gillette. After considering the submissions of the parties at great
length, the CLB held that the facts clearly showed an intention of the company
and Gillette to enter into a collaboration. Whether the allegations regarding
the nature of the technology as made in the amended petition were correct or
not was to be examined and that the CLB could not pass an effective order on
this question in the petition without a proper affidavit from Gillette through
impleadment.
15. Gillette
challenged the decision of the CLB to implead it as the party before the High
Court under section 10F of the Act. The appeal was dismissed by a judgment
dated 4-9-1997.
16. In November 1997,
Gillette again made an application before the CLB. This time for striking out
its name from the petition on the ground that :
“There is no current or pending arrangement
regarding supply of technology to the respondent-company as had been alleged
while impleadment of the application as a party respondent was being sought,
since there is no commitment and no further interest on the part of the
applicant to that effect and since the validity of the approval by FIPB had
lapsed and the matter of any extension of any such approval is not being
proceeded with.”
17. The application of Gillette was allowed on
18-2-1998 by the CLB as :
“The grounds on which we decided to direct
Gillette to be impleaded no longer subsist. Further, we also note that the
applicant has no further intention of either seeking further extension of the
FIPB approval nor it has any interest to enter into any collaboration with the
company. In view of this, we do not consider it necessary to continue the
applicant as a respondent as such, we direct that its name be struck off from
the array of respondents. This is, however, without prejudice to the rights of
the petitioner to move us in future should any occasion arise needing to
implead Gillette.”
18. According to the
appellants, no appeal was preferred from this order by the appellants in view
of the categorical statement of Gillette that it had no interest in
collaborating with the company any further.
19. On 10-6-1998,
however, a fax message from Mr. D Gill of Gillette, UK to the respondent No. 3,
was obtained by the appellants which showed that a discussion had been held
regarding a joint venture between Gillette and, inter alia, the company and
enclosing a proposal outlining the concept of such joint venture. According to
the appellants, under this proposal the shares of various holding companies of
the company were sought to be purchased by Gillette, thus, giving it effective
control in the company. An application was accordingly made to the CLB stating
that the CLB has been misled to pass the order dated 18-2-1998 as the statement
of Gillette that it was not interested in entering into any agreement with the
company was false. It was, accordingly, prayed that in view of the facts, the
order dated 18-2-1998 should be recalled and the direction to delete Gillette
as respondent should be recalled.
20. This application
was rejected by the CLB on 27-8-1998. The CLB held that the addition of
Gillette had been made on the allegation of the collaboration for which the
FIPB’s approval had been obtained and under which Gillette was alleged to pass
out-dated technology. According to the CLB the facts did not show that Gillette
intended to revive the old collaboration.
According to the CLB, the facsimile message
only recorded the terms of a discussion between an ‘alleged executive’ of
Gillette and the respondent No. 3 that the same was entirely a different
proposal, which was only at a conceptual stage. However, the CLB said :
“On the basis of the fax, without any other
material, it would not be proper to order impleadment of Gillette as a party
and as such we dismiss the application with liberty to the petitioners to
approach us with full and proper particulars.”
21.This order is the subject-matter of appeal before us.
22. The arguments of the parties can be resolved into the following broad
questions :
(a) Whether the application of the appellant
for recall of the order dated 18-2-1998 was maintainable ?
(b) Whether the impugned order was
appealable ?
(c) Whether any question of law had been
raised under section 10F ?
(d) Whether the discretion of the CLB warranted interference
particularly in view of the order of the Supreme Court dated 20-10-1993 ?
23. At the outset we
note that the respondents conceded that the appellants could have made a fresh
application for impleading Gillette as a respondent but could not apply for
review of the order deleting Gillette as a respondent. In essence, a prayer for
recalling the order deleting Gillette as a respondent is a prayer that Gillette
should be a respondent. Besides, the appellants did not contend that the CLB
has the power to review its earlier order. Therefore, the several decisions on
order 47 of the Code of Civil Procedure, 1908 (‘the Code’) cited by the
respondents in support of their submission that the CLB did not have the competence
to review its earlier order, or that even if it did, the power could not be
exercised in the facts of the case, are not considered.
24. The appellants
submitted that their application for recall was maintainable under the CLB’s
inherent powers under Regulation 44 of the Regulations. Regulation 44 reads :
“Saving of inherent power of the Bench. -
Nothing in these rules shall be deemed to limit or otherwise affect the
inherent power of the Bench to make such orders as may be necessary for the
ends of justice or to prevent abuse of the process of the Bench.”
25. The Board acted in
exercise of the power under regulation 44 to recall the order dated 25-5-1995
by which Gillette was originally impleaded as a party. Then the roles were
reversed. The appellants had contended that Gillette’s application would amount
to review of the earlier order and relied on the very same decisions relied upon
by the respondents before us to submit that the application fell outside the
scope of order 47 of the Code. Gillette justified the application for recall
under regulation 44. The CLB rejected the submissions of the appellants and
said :
“As a quasi-judicial body, we are not bound by
the Civil Procedure Code and we have the power to regulate our own procedures.
The procedure to be followed by us is spelt out in sub-section (6) of section
10E which provides that the CLB shall have the power to regulate its own
procedure. Sub-section (5) lays down the two guiding principles for the CLB,
namely, (a) principle of natural justice and (b) acting on discretion.”
26. The CLB noted that
it would be guided by the provisions of the Code but were not bound by it. Significantly,
even while considering the appellants last application, the CLB did not reject
the appellant’s application on the ground that it was not maintainable.
27. The provision of
section 151 of the Code has been reproduced mutatis mutandis in regulation 44.
There are two separate bases for exercises of these inherent powers, namely,
the ends of justice and the prevention of abuse of process. The appellants
argued that Gillette had made a false statement that it had no interest to
collaborate with the company on the basis of which the CLB was misled into
deleting the name of Gillete as a respondent. It claimed that Gillette still
had the intention to enter into collaboration with the company.
28. The order dated
18-2-1998 speaks for itself whatever may be the construction put on it by the
CLB on 27-9-1998. It must be observed in passing that as long as the
allegations against Gillette remain on the record, then it is debatable whether
the truth or falsity of that allegation can be decided at an interim stage of
the proceeding. However, the parties did not question the order dated 18-2-1998
by way of appeal and we refrain from determining the propriety of that order in
this proceeding. But the fact remains that the grounds on which Gillette was
impleaded as a party continue to remain on record, namely, an apprehended
collaboration between Gillette and the company to the detriment of the company.
The CLB deleted Gillette’s name as respondent not only on the finding that
there was no collaboration agreement but also that Gillette had no further
intention nor any interest to enter into any collaboration agreement with the
company. That was also the basis on which Gillette’s addition was upheld by the
appeal court. In dismissing Gillette’s appeal from the order impleading it as a
party, this is what the appellate court said :
“The matter in issue before the Board pertains
to affairs of Harbans Lal Malhotra & Sons and a definite case has been made
out that the affairs and conduct of the company has gone in such a way so as to
create prejudice to the interest of the minority group of shareholders and in
the event the minority group comes up before the Board and informs that there
is a existing collaboration agreement or likelihood of there being a
collaboration agreement which would undoubtedly prejudice the interest of the
company, in our view, question of declaring the order of impleadment as
perverse does and cannot arise.”
29. ‘No further
interest’ on the part of Gillette to collaborate in plain English means ‘for
all times to come’. The statements contained in the appellants’ petition
certainly belies this. If the statements contained in the appellants’
application are correct, at least this basis for deleting Gillette as a
respondent would disappear and the order dated 18-2-1998 would have been
obtained in abuse of process.
30. Gillette, however,
argued that subsequent events could not be taken note of. This may be so if the
Board were exercising a power of review on the principles of order 47 of the
Code. But it was not. It was considering the exercise of its power for recall
under its inherent powers.
31. In R.M.
Subramaniam v. N.Sundaram Iyer AIR 1963 Mad. 217 the Full Bench of the Madras
High Court in construing the ambit of section 151 of the Code said:
“... The discretion of the Court under its
inherent powers, to adjust the rights of parties on the basis of events
happening after the starting of the action, is well recognised and accepted as
a rule of justice, equity and good conscience. In some cases, it is almost the
duty of the Court to avert to the subsequent events brought to its notice lest
it should fail to do substantial justice between the parties.” (p. 217)
32. That the CLB could
consider the subsequent events was assumed by the Board itself. It considered
and rejected the facts stated in the petition.
33. Undoubtedly, a
Court under section 10F cannot go into a pure question of fact as found by the
CLB - Gappulal v. Thakurji Shriji Dwarkadheeshji AIR 1969 SC 1291 but where
the finding is erroneous or perverse, it can. Accepting the submission of the
respondents that the power of this Court under section 10F is similar to the
power of the High Court under section 100 of the Code, the following
observations of the Supreme Court in Mattulal v. Radhe Lal AIR 1974 SC 1596 are
apposite:
“... It is only an error of law which can be
corrected by the High Court in exercise of its jurisdiction in second appeal.
If the finding recorded by the lower appellate Court is one of law or of mixed
[question of] law and fact, the High Court can certainly examine its
correctness, but if it is purely one of fact, the jurisdiction of the High
Court would be barred and it would be beyond the ken of the High Court unless
it can be shown that there was an error of law in arriving at it or that it was
based on no evidence at all or was arbitrary, unreasonable or perverse...” (p.
1601)
34. The allegations
against Gillette by the appellants in their main application under sections 397
and 398 are still in record. Their grievance was in respect of any
collaboration between the company and Gillette. The earlier agreement was
evidence of the intention of the company and Gillette to collaborate. In the
last application by the appellants, they have reiterated the stand. No affidavit
has been filed controverting the statements in the appellants’ petition. We
have, therefore, an uncontroverted statement in the petition of the company’s
and Gillette’s intention to collaborate. The fax has been relied as evidence
of such intention. The CLB was under a duty to find out the truth. It was
incumbent upon it to ascertain the truth after the filing of affidavits. No
case could be argued by Gillette either that Gill was not an executive of
Gillette or that there was no intention to collaborate in the absence of any
pleading to that effect by Gillette. The CLB came to such finding on its own.
The CLB erred in law in coming to a finding of fact in the absence of any
pleading - Gappulal’s case (supra).
35. Gillette’s
submission that it was not necessary to add Gillette as a party because
sufficient protection had been given to the appellants by the Supreme Court’s
order dated 20-10-1993 appears to be concluded against the respondents and
Gillette. The Supreme Court order passed on
20-10-1993 was operative when Gillette was added as a party by the CLB firstly
on 25-5-1995 and again on 19-2-1997. The CLB clearly did not consider the existence
of the order dated 20-10-1993 material to the issue of impleadment of Gillette.
36. The submission of
the respondents that the order having been passed on an application for review
is not appealable by virtue of the provisions of order 47 rule 7 of the Code is
misconceived for the reasons stated earlier. Furthermore, the question of
appeal from and order of the CLB to this High Court is governed by section 10F
which allows :
“Appeal against the orders of the Company Law
Board. - Any person aggrieved by any decision or order of the Company Law Board
may file an appeal to the High Court within sixty days from the date of
communication of the decision or order of the Company Law Board to him on any
question of law arising out of such order.”
37. We have already
held that the CLB erred in law in finding facts not pleaded and in rejecting
the uncontroverted statements of the appellants. This is one of the questions
of law which arises out of the order under appeal. Besides, when Gillette had
preferred an appeal from the order adding it as a respondent, the appellant
then raised a question as to the appealability of the order under section 10F
on the ground that no question of law was involved. The appeal Court negatived
this submission and held that the “point as to the addition of party - is a
question of law”. It was also held that the language of section 10F should not
be given a restrictive meaning to defeat the purpose and concept of justice.
The question as to the construction or order dated 18-2-1998 to determine the
bases for deleting Gillette’s name as respondent is also a question of law.
38.In the circumstances, we answer the questions framed by us at the outset
in the manner following:
Question (a) in the affirmative.
Question (b) in the affirmative.
Question (c) in the affirmative.
Question (d) in the affirmative.
39. The appeal
is, accordingly, allowed and the order under appeal is set aside. The matter is
remanded back to the CLB for being decided on the basis of affidavits filed.
There will be no order as to costs.
Andhra Pradesh High Court
Companies
Act
[2002]
36 scl 361 (ap)
HIGH COURT OF ANDHRA PRADESH
Sri
Ramdas Motor Transport Ltd.
v.
Karedla Suryanarayana
B.S.A.
Swamy, J.
Company
Appeal Nos. 4 and 5 of 1999
October
18, 2001/December 3, 2001
Section 397, read with sections 398 and 402, of the Companies Act, 1956 - Oppression and mismanagement - Respondent-company carried on business as carriers of passengers, freight and mails, and parcel lorry service - It had a turnover of more than Rs. 100 crores - 51 per cent of its shares were held by second respondent (Managing Director), his family members and supporters - 11 per cent of shares were held by 9th petitioner (son-in-law of second respondent) and his family members - Some disputes arose between 2nd respondent and 9th petitioner and latter was removed from positions held by him in subsidiaries of company and as a director in respondent-company - In a petition under section 397 several acts of oppression and mismanagement were alleged - Further it was alleged that during pendency of proceedings before the CLB, some information was not furnished to petitioners as demanded by them for purpose of arguing their case - Respondents filed voluminous material as evidence but none of those documents was original but were xerox copies - CLB did not seek production of original copies although it was prayed for by petitioners - Though according to CLB oppression and mismanagement was not proved, it directed respondents to purchase shares held by minority shareholders - Whether CLB is having inherent powers under regulation 44 of Company Law Board Regulations, 1991 to do substantial justice to parties - Held, yes - Whether even assuming that CLB is not having inherent powers, it is fully competent to pass orders under section 402 if acts of mismanagement alleged against majority shareholders create an apprehension in minds of minority shareholders even if they fail to establish allegations levelled against them - Held, yes - Whether it can be said that provisions of Code of Civil Procedure are not applicable to proceedings of CLB - Held, no - Whether even if CLB is exercising quasi-judicial powers, it has to follow not only rules of procedure prescribed in CPC but also principles of natural justice - Held, yes - Whether therefore, order of CLB was ab initio void since it simply extracted arguments on basis of xerox copies of documents and recorded its findings without even discussing oral evidence of 9th petitioner by holding that evidence was incomplete and even without looking into annual reports filed by petitioners to prove that huge amounts were swindled - Held, yes - Whether there was merit in contention that subsequent events that had taken place after filing of the petition could not be taken into consideration, more so, when the subsequent events were brought to the notice of the CLB even before the case was taken up for hearing, i.e., when the petition was still at the preliminary stage of completing the formalities before taking up the petition for trial - Held, no - Whether, even on merits, on perusal of materials on record, there was no manner of doubt that petitioners were able to prove acts of mismanagement as well as acts of oppression and they were being continued unendingly even after company petition was filed - Held, on facts, yes - Whether there was any merit in contention of respondents that since majority directors on the board as well as the shareholders and, at times, the petitioners also approved the actions of mismanagement as well as the acts of oppression, the question of granting any relief to the petitioners did not arise - Held, no - Whether if decisions taken by the board or general body are in contravention of the laws of the country and prejudicial to public interest, it cannot be said that the will of the majority will prevail rather than laws of the lands - Held, yes - Whether further under Chapter VI of the Act, a right is conferred on the minority shareholders seeking relief against not only acts of oppression but also on the actions of majority shareholders that are prejudicial to public interest apart from acts of mismanagement of the affairs of the company and hence, the respondents could not take shelter, if the actions of the company were not in accordance with law, by contending that such action was having the approval of majority shareholders - Held, yes - Whether therefore, findings recorded by CLB on issues in controversy were liable to be set aside - Held, yes - Whether in circumstances of instant case, only order that could be passed was to direct the respondent-company itself or any one of the shareholders of the company including Respondents 2 and 3 to purchase the shares of the minority shareholders - Held, yes - Whether, therefore, the directions given by the CLB were proper and just in the circumstances of the case and hence, though High Court did not agree with the findings of the CLB on the merits of the case, it was in full agreement with the end result - Held, yes
Section 10F of the Companies Act, 1956 -
Company Law Board - Appeal against orders of - Whether where the CLB passed the
impugned order in a manner unknown to law and in an arbitrary manner apart from
the fact that the findings recorded by it on merits of the case were not only
perverse but unknown to adjudicatory process of the land, there being an error
apparent on the face of the order of the CLB, definitely a question of law
arose from out of the order of the CLB - Held, yes
Facts
The respondent-company mainly carried on
business as carriers of passengers, freight and mails by using motor vehicles,
etc., and had acquired name and fame as a reputed parcel lorry service. It was
having six subsidiary companies under its management and its annual turnover
exceeded Rs. 100 crores. 51 per cent of the shares were held by the 2nd
respondent, his family members and his supporters and 11 per cent of the shares
were held by the 9th petitioner (son-in-law of 2nd respondent) and his family
members. The 9th petitioner held shares jointly with one ‘A’ who had died.
While the 2nd respondent was the managing director of the company, his son
being third respondent and the 9th petitioner was directors. The 9th petitioner
was also heading some of the subsidiary companies/firms. Some disputes arose
between 2nd respondent and the 9th petitioner allegedly in respect of sale of lorries
and closure of parcel offices. The efforts made by well wishers of the family
did not yield fruitful results and misunderstanding reached a stage of no
return. While the majority of shareholders aligned with the 2nd respondent, a
few shareholders aligned with the 9th petitioner and his family members. As and
when some information with regard to the management of the affairs of the
company was sought by the minority shareholders, the Company Secretary refused
to furnish the same on the ground that he was not under an obligation to
furnish any information. Ultimately the 9th petitioner was not only removed
from positions held by him in the subsidiary companies but also as director of
the respondent-company in its general body meeting. In those circumstances a
petition was filed before the (CLB) alleging oppression and mismanagement. It
was alleged that parcel offices were closed without the permission of the board
of directors (BOD) and lorries attached to those offices were also sold at
throw away price. The petitioners alleged that books showed lower amount as
compared to actual sale consideration of lorries, the excess having been
pocketed by the respondents. It was also alleged that the 9th petitioner was
removed as a director in an illegal manner and funds of the company were
diverted to other companies/trust managed by the former employees, for personal
gains. There was allegation also about the fabrication of board’s minutes. The
CLB’s suggestion to settle the disputes amicably was rejected by the respondents.
During the hearing the petitioners brought to the CLB’s notice further acts of
mismanagement such as discrepancies in the valuation of stocks and payment of
huge commission to sole-selling agents. It was also submitted that the
petitioner could not produce all the witnesses since false criminal cases were
filed against them and also company refused to furnish information which was
required for arguing the case. The CLB came to the conclusion that allegations
of oppression and mismanagement were not proved. However, it directed the
respondents to purchase shares held by minority shareholders. The respondents
approached the High Court contending mainly that when acts of oppression and
mismanagement were not proved, the CLB was not empowered to order relief under
section 402. The petitioners also approached the High Court on the ground that
the CLB did not sought originals of the documents submitted by the respondents
and further claimed that the CLB was unjustified in holding that no acts of
oppression and mismanagement were proved.
Held
The power to deal with the allegations of
oppression of minority shareholders and mismanagement of the affairs of the
company under Chapter VI of the Act were originally vested in the High Court
till the Companies (Amendment) Act, 1988 came into force whereunder the said
power was conferred on the CLB. Even if the CLB is not court in the strict
sense, it is definitely a quasi-judicial Tribunal and it has to follow the
procedural laws to the extent possible and it cannot act at its whims and
fancies while discharging judicial functions.
Under section 402, on an application filed
under section 397 or 398 the CLB is competent to pass any of the orders
specified in that section without prejudice to the generality of the powers of
the CLB to pass any order under either section 397 or 398. Section 402( b)
deals with the purchase of shares or interest of any member of the company by
any other members thereof or by the company. In other words, the CLB is
competent to pass orders directing the majority shareholders or the company to
purchase the shares of minority shareholders. Even if minority shareholders has
failed to establish the acts of mismanagement complained of by them, a reading
of section 398 of the Act makes it clear that even an apprehension in the minds
of minority shareholders is sufficient to cloth the Board to give directions
under section 402 as the provisions of sections 397, 398 and 402 are
interrelated and they should not be read in isolation.
A combined reading of the aforesaid three
sections clearly brings out two aspects; first, the very wide nature of the
power conferred on the CLB and, secondly, the object sought to be achieved by
the exercise of such power. The only limitation that could be impliedly read on
the exercise of the power would be that nexus must exist between the order that
may be passed thereunder and the object sought to be achieved by these sections
and beyond this limitation which arises by necessary implication, it is
difficult to read any other restriction or limitation on the exercise of the
court’s power. While sections 397 and 398 are intended to protect the minority
shareholders from acts of oppression and mismanagement or preventing its
affairs from being conducted in a manner prejudicial to public interest or the
interests of the company while avoiding winding up of the company if possible
and keep it going and the powers of the CLB under section 402 are wide enough
to enable the court to put an end to the acts complained of. Likewise while
exercising the powers under sections 397 and 402 the CLB is considering not
only the relief that is sought for but also considers as to what is the nature
of the complaint and how the same has to be rectified. It is the interest of
the company that is being considered and not the individual dispute between the
minority shareholders and majority shareholders. In other words, the interest
of the company requires that the majority shareholders must have their say in
the management.
The purpose and object of sections 397 and 398
is to put an end to acts of oppression and mismanagement promptly and speedily
rather than allow the parties to be involved in a costly and protracted
litigation. If the facts justify interference by the court in the exercise of its
powers under the two sections and if the conditions prescribed by the sections
are fulfilled, the court ought not to relegate the parties to a series of
protracted and costly litigation.
Though the party approaching the CLB seeking
relief against acts of oppression is bound to prove the allegations levelled
against the majority shareholders. As far as the relief in case of
mismanagement under section 398 is concerned, the CLB is competent to make any
order as it thinks fit with a view to bring to an end or preventing the matters
complained of or apprehended. The CLB is having inherent powers under
regulation 44 of the Company Law Board Regulations, which are akin to the
inherent powers of Civil Court under section 151 of the Code of Civil Procedure
to do substantial justice to the parties. Even assuming for a moment that the
CLB is not having inherent powers, the CLB is fully competent to pass orders
under section 402 if the acts of mismanagement alleged against the majority
shareholders creates an apprehension in the minds of the minority shareholders
even if they fail to establish the allegations levelled against them.
When the CLB exercises judicial functions, the
elementary principle of adjudicatory process is observance of rules of
procedure, (i.e.,) pleadings supported by oral, and documentary evidence and
respective parties have to get into the witness box to prove their case and
also subject themselves for cross-examination to test the correctness or the
veracity of his case apart from proving the authenticity of the documents.
Keeping the above principles in mind if one looked into the facts of the
instant case it was seen serious allegations were made in the management of the
affairs of the company as well as oppression of minority share holders by respondents
2 and 3. But the CLB simply extracted the arguments on the basis of xerox
copies of the documents and recorded its findings without even discussing the
oral evidence of the 9th petitioner by holding that the evidence was incomplete
though it was not the case of the respondents and even without looking into the
annual reports filed by the petitioners to prove that huge amounts were
swindled by not bringing all the spare parts manufactured by the company into
account books. The CLB had neither summoned the original documents and audited
accounts of the company nor gave opportunity to the petitioners to peruse the
records to prove the allegations of mismanagement and pronounced the impugned
order.
Even assuming without admitting that the
evidence on behalf of the petitioners was incomplete, no evidence on behalf of
the respondents was recorded and the impugned order was pronounced. The
respondent-company having taken an irrevocable stand that the provisions of the
Code were applicable and chief examination followed by cross-examination was a
must, could not take a round about turn to justify the illegal order by
contending that the CLB being an administrative body the provisions of Code of
Civil Procedure, 1908 are not applicable to the CLB. Hence it cannot be said
that the provisions of the Code of Civil Procedure are not altogether
applicable to the proceedings of the Board. On the other hand, to the extent
possible these Tribunals are guided by those principles when they are involved
in the adjudicatory process.
Even if the CLB is exercising
quasi judicial powers it has to follow not only the rules of procedure
prescribed in the Code of Civil Procedure but it can also travel beyond it, in
furtherance of cause of justice subject to observance of principles of justice
and ordinarily there must be personal hearing and party must be given an
opportunity of put-forthing his own case and cross-examining any witness called
by the other side. Observance of principles of natural justice operates in
areas not covered by any law validly made and they do not supplant the law of
land but supplements it. Even assuming that the CLB is only an Administrative
Tribunal and need not follow the rules of procedure, in a system governed by
rule of law discretion when conferred on the authorities must be confined
within defined limits and if a decision is taken without any principle or
without any rule, it is unpredictable and such a decision is anti-thesis to a
decision to be taken in accordance with rule of law.
Even assuming for a moment that
the CLB is competent to regulate its own procedure and it has to be guided by
the principles of natural justice, it does not clothe the CLB to act illegally,
irregularly or irrationally without observing the rudiment of law more so while
discharging quasi-judicial functions and it cannot function as it wishes. Any
procedure prescribed or followed should be in consonance with the law of the
land. It was beyond anybody’s comprehension that the CLB will deliver orders
even without looking into the original records when the petitioners complained
that the respondents had fabricated the records, which resulted in miscarriage
of justice. Observance of the principles of natural justice does not mean that
the CLB can pass orders on the basis of xerox copies or typed copies, which
were filed before the CLB even without attestation.
Keeping the above principles in
mind the order of the CLB evidently suffered from serious infirmities and the
order was ab initio void.
Admittedly in the instant case, the
affidavits of the third parties filed by the respondents were not verified. But
the CLB acted on these affidavits. At the same time, the CLB did not refer to
the affidavits filed by the petitioners, which were very much available on its
file.
From the above whatever documents
were relied on by the respondents they being only the xerox copies, they were
not admissible in evidence. With the result, the respondents did not produce
any evidence whatsoever either oral or documentary in support of their pleadings,
and at the same time the CLB did not consider the oral/affidavits/documentary
evidence filed by the petitioners.
Under section 114 of the Evidence
Act the Court has to draw a presumption with regard to the existence of any
fact which it thinks likely to have happened regard being had to the common
cause of natural events, human conduct and public and private business, in
their relation to the fact of the particular case. As per Illustration (g) of
section 114, the evidence, which could be, and is not produced, would, if
produced, be unfavourable to the person who withholds it the Court is expected
to draw an adverse inference against the person who is in possession of the
information and failed to produce the evidence.
The respondents having file xerox
copies were bound to prove the authenticity of the documents filed by him in a
manner known to law. If such a course was not adopted by the respondents, the
CLB was expected to eschew the documents filed by the respondents. But the CLB
acting on such inadmissible evidence dismissed the application.
In the instant case the CLB under
the guise of following its own procedure in adjudicating the dispute, passed
the order under challenge without following any of the well known rules of
procedure and the order was the result of non-application of mind to the issues
in controversy with reference to the original records. Had the CLB seen the
original records it was evident to the naked eye that the resolutions of the
Board of Directors were tampered by the respondents.
Regarding oral evidence the
respondent company having vehemently contended before the CLB, that examination
in chief is a must followed by cross-examination in view of the allegation of
misconduct and fraud did not chose to examine the witnesses on his side before
the CLB.
During proceedings before the CLB,
fresh act of oppression and mismanagement were brought to the notice of the CLB
and the 9th petitioner’s evidence was complete on the main allegations in the
company petition. It was not known why he was not examined on those aspects
though he was conducting the case. But the CLB brushed aside his evidence by
observing that it was incomplete. The law of the land is that when no rebuttal
evidence is produced by the opposite party and the version spoken by the
witness remained undisturbed, the natural presumption that arises is that
whatever the witness spoke should be regarded as true and an adverse inference
has to be drawn against the opposite party who did not choose to go into the
witness box and subject himself to the cross-examination on the documents and
material relied on by him before the Court.
In the light of the foregoing
discussion, there was no substance in the contention of the respondent that the
petitioner had given up his plea for summoning the original documents.
As regards the respondents‘
contention that even if the CLB failed to follow the procedure known to law, it
could not be said that any question of law arose for consideration in the
appeals under section 10F before the High Court, it was to be held that the
order passed by the CLB was neither in accordance with the rules of procedure
prescribed under the provisions of Civil Procedure Code nor based on the
principles of natural justice. Whether where the Board passed the impugned
order in a manner unknown to law and in an arbitrary manner apart from the fact
that the findings recorded by it on merits of the case were not only perverse
but unknown to adjudicatary process of the land. There being an error apparent
on the face of the orders of the CLB definitely a question of law had arisen
from out of the order of the CLB to be decided by the High Court under section
10F.
Even with the scant evidence that
was available on record in the instant case, whether admissible or inadmissible,
the dispute could be adjudicated without remanding the matter for fresh
disposal to the CLB by verifying the xerox copies of the records by summoning
the originals, more so in the light of the submission of 9th petitioner that
their group was satisfied with the direction given by the CLB though in the
normal course the matter would have been remanded to the CLB.
Regarding the issue of raising of
subsequent events it was too late to contend that subsequent events that had
taken place after filing of the petition could not be taken into consideration,
more so, when the subsequent events were brought to the notice of the CLB even
before the case was taken up for hearing, i.e., when the petition was still at
the preliminary stage of completing the formalities before taking up the
petition for trial.
The respondents also contended
that the allegations of oppression and mismanagement were very vague and the
petitioners had not given full particulars of the acts alleged by them and
hence the company appeal was liable to be dismissed. However it was to be held
that sufficient details of the allegations of oppression and mismanagement were
given in the petition. The 9th petitioner not only deposed on those allegations
but he was also subjected to cross-examination.
From the written arguments
submitted by the respondents and the order of the CLB, it was seen that both
the parties addressed arguments very elaborately and the CLB recorded findings
on some of the issues and reference was made to some other issues without
giving a finding and certain other issues were not at all considered for
reasons best known to it. Hence there was no vagueness in the allegations in
the petition, at any rate, parties addressed arguments on all the issues
knowing fully well the issues in controversy and in fact the CLB recorded
findings adverting to their arguments.
The respondents’ contention that
if any of the actions of the board of directors was illegal or invalid, the
appropriate remedy for the shareholders was to question the validity of such
action in a Court of law, but a petition under section 397/398 was not
appropriate, was not acceptable. In the instant case not only a series of acts
of mismanagement but also acts of oppression were alleged and if the
petitioners were able to prove them, the case would have definitely attracted
the provision of sections 397, 398 and 402.
The next contention of the
respondents was that out of nine directors, only the managing director and
Joint managing director were impleaded and as the board had to be treated as an
independent one and as all the decisions were taken by the board a petition
under sections 397 and 398 was not maintainable without impleading them as
party respondents to the proceedings. Admittedly, in the instant case, the
company the juristic person having been incorporated under the provisions of
the Act, it was a juristic person and the same was represented by its
Secretary. In fact the managing director and the Joint managing director who
were responsible in conducting the affairs of the company, according to the
petitioners, in bad faith were also impleaded as an abundant precaution. Hence
the said contention was to be rejected.
Next it was contended that the
petitioners did not raise any objection for the procedure followed by the CLB
even in the grounds of appeal and, therefore, the High Court was not justified
in interfering with the order of the CLB on the ground of procedural lapses, at
any rate the same could not be a ground for interference by the Appellate
Court. It was true that the petitioners did not question the procedure followed
by the CLB specifically. But at the same time, when it had come to the notice
of the Court that the orders suffered from serious infirmities, and the CLB
committed a manifest error which vitiated the entire proceedings before the CLB
and that being a pure question of law, the Court was expected to take judicial
notice and rectify the same to prevent miscarriage of justice. Even on merits,
the findings recorded by the CLB were perverse and contrary to the record.
Hence, the order suffered from serious infirmities in not following the well
established procedure in adjudicating the disputes apart from the fact that the
findings recorded by the CLB could not be sustained in law. Hence this contention
was also to be rejected.
Under section 169, on receipt of
requisition meeting notice received from the members of the company, the board
of directors shall proceed to call for extraordinary general body meeting of
the company. Though the board at its meeting decided to call for the
extraordinary meeting, neither notice calling for the meeting nor the
explanation of 9th petitioner appended to the notice and the resolution passed
in the general body meeting were produced either before the CLB or the High Court
to find out whether the statutory requirement was satisfied in convening the
meeting or the contents of the telegram, to know whether it could be treated as
an explanation and whether the resolution adopted by the general body reflected
the application of mind by the members to the telegram in removing the
petitioner No. 9 as director.
Be that as it may, even assuming
that the company complied with statutory requirements in convening the meeting,
under section 294(3), the director is entitled to be heard on the resolution at
the meeting. As the deposition of the petitioner that he was not allowed to
enter the meeting hall to explain his stand, remained unrebutted, there was no
option except to hold that the resolution adopted by the general body at its meeting
was in contravention of section 284 .
When fraud or improper conduct is
alleged against the majority shareholders, the CLB is expected to lift the
corporate veil to see whether the majority shareholders acted in violation of
the statutory provisions, whether any element of public interest is involved
and whether any of the parties are affected by their actions and whether the
resolution is moved in good faith. But the CLB without seeing whether the
removal of the petitioner by the general body was in good faith or at the
dictates of R2 and R3, who were controlling the majority shareholders and even
without looking into statutory provisions whether the resolution passed by the
general body satisfied the test laid down in section 284, simply held that the
removal of 9th petitioner as director did not suffer from any legal infirmity.
Hence, it was rather difficult to
hold that the procedure prescribed for removal of the petitioner No. 9 as a
director under section 284 was followed. As such the finding of the CLB that
section 169 has to be read independently from section 284 and no explanatory
statement need be enclosed in case of meetings, convened on requisition and
that the provisions of section 190 are applicable only in connection with the
Annual General Body Meeting and not in respect of a requisition for the
extraordinary general body meeting, ran counter to the provisions of the Act
and there was no manner of doubt to hold that the findings of the CLB were not
in consonance with the provisions of the Act.
The 9th petitioner in his
affidavit filed before the CLB had also brought various instances of criminal
intimidation and lodging of false criminal cases against him and his supporters
to the notice of the CLB with documentary evidence. The company did not produce
any rebuttal evidence on any of the above aspects. Though such a voluminous
material was placed before the CLB it did not discuss whether the above actions
on the part of R2 and R3 amounted to oppression of the minority shareholders or
not.
From the above documentary and
oral evidence available on record, there could be no hesitation to hold that
the petitioner placed sufficient material explaining not only his inability in
not getting the list witnesses to give evidence but also proved that R2 and R3
were creating fear psychosis among the list witnesses, that if any one helped
9th petitioner or raised his voice against the activities of R2, the first and
foremost thing would be, that he would be arrested by the Police under S.C.
& S.T. Prevention of Atrocities Act. Secondly, these incidents, both before
and after filing of the Company Petition were clearly intended to prove to the
outside world that a man who incurred the wrath of R2 even if he was his own
son-in-law would not be spared so easily and the persecution would continue
till he was crushed.
At this stage the court was
expected to take judicial notice of the fact that in the entire District, the
respondent-company was the biggest industrial house with assets worth more than
100 crores and one could imagine how much political clout the managing director
of such a company would wield not only in the town, but also in the entire
District leave apart the State.
Hence, all the above incidents
clinchingly established that as the majority of directors and majority of the
shareholders in the respondent-company hailed from the family of R2 they would
go to any extent to silence the minority shareholders by using their brute
majority in the company and also by using the political clout and physical
force at their command to suppress any dissent voice against his illegal
activities.
During hearing before the High
Court, R3 was physically present in the court most of the time apart from the
employees of respondent-company and every day having pointed out the glaring
illegalities committed by the CLB the Court went on suggesting that this matter
had to be settled amicably and the shares held by the petitioners could be
purchased by the company instead of inviting a judgment on merits. But the
respondents flatly refused to purchase the shares by contending that the
financial position of the company would not permit such a measure. The annual
turn over of the company was more than 100 crores and it was having sufficient
reserves. Further even according to respondents an amount of Rs. 1.5 crores
were raised through rights issue and how this amount was invested was not
explained by the company. Further, in the Extraordinary General Body Meeting,
the shareholders with a view to diversify the activities of the company and to
carry on the business of generating, selling, transmitting, distributing,
supplying electric power and host of other activities including floriculture,
horticulture, not only amended the objects clause, but also authorised the
board of directors to borrow any sum or sums of money exceeding the aggregate
of the paid up capital of the company and its free reserves, provided, however
the total amount so borrowed was not to exceed Rs. 100 crores at any time.
Could it be said that a company of this magnitude was not having financial
resources at its command and was not in a position to purchase the share
holdings of the minority shareholders whose share holding was less than 10 per
cent as on that day. Such an action on the part of the respondent-company was
nothing but victimisation and persecution of the petitioner No. 9 and other
shareholders supporting him. It might be the intention of the respondents 2 and
3 to show to others that if they raised their voice against their mismanagement
they would meet the same fate as petitioner No. 9 who was no other than the
son-in-law of respondent No. 2. This conduct of the R2 and R3 was yet another
act of oppression of minority shareholders.
When the petitioner made a request
to furnish information from the Register of contracts as they were required for
arguments before the CLB, the Company Secretary stated in reply that the
Register of contracts of which the petitioner required copies were not
traceable. Hence furnishing the copies of register of contracts for the
concerned period was not possible. From the above it was seen, while admitting
that the matter was posted for reply arguments, the Company Secretary stated
that no fresh documents or facts could be introduced in the reply. It was not
known how the petitioners were precluded from substantiating their plea, in
reply to the arguments of respondents by securing fresh material relevant to
the issues that had cropped up for adjudication, more so, when the tribunal did
not follow any known procedure like marking of documents as exhibits recording
oral evidence, etc. Further, if more evidence was collected on the plea already
raised, through the documents sought for, it was always open to the petitioner
to file an application to reopen the hearing for receiving the documents as
additional evidence at any time before the CLB pronounced the orders and even
at the appellate stage in support of his plea. Be that as it may, the Secretary
flatly refused to furnish the information sought for and questioned the petitioner
under what provision he was asking the information.
From the provisions of sections
163, 209 and 219 coupled with the law enunciated by the Supreme Court, the
shareholders in a company are having every right to seek information in order
to safeguard their rights and interests in the company and to know whether the
management of the affairs of the company are in the larger interest of the
shareholders or not. As the annual reports deal with the assets and liabilities
of the company broadly and as they do not contain the details, generally the
shareholders cannot raise the issue in the Annual General Body Meeting. In the
instant case when the majority shareholders supporting R2 were not allowing the
minority shareholders to raise any issue by creating a hostile atmosphere and
the minority shareholders were afraid to attend the meeting of the office, the
only way left for them was to get details, for the information furnished in the
report by applying for certified copies of the extracts. They could not make a
grievance without getting required information. In a case of this nature where
a right is conferred on the minority shareholders to approach the CLB seeking
relief against acts of oppression and mismanagement they are entitled to have
copies of the documents sought for, to prove their case. Otherwise, the right
to see relief against acts of oppression and mismanagement given to the
minority shareholders under the statute will be a futile exercise, if the
required information sought for is neither provided by the company nor called
for by the CLB.
The whole misfortune in the
instant case was that the CLB had not chosen to summon the original record and
provided an opportunity to the petitioners to go through the records of the company
by summoning the records. The CLB did not choose to pass any orders to that
effect in spite of their specific prayer in the main petition. When they
approached the company, it was refusing to furnish information required to
prove their allegations by questioning them under what provision a shareholder
was entitled to that information having removed him as director of the company.
While the action of the CLB was
wholly unsustainable in law, the action of the respondent-company was intended
not only to oppress the minority shareholders, but also intended to withhold
the information to prove their case and the CLB ought to have drawn an adverse
inference against the respondents for withholding the information available
with them. But unfortunately the CLB did not advert to this aspect.
As regards the contention of the
respondents that since majority directors of the CLB as well as the
shareholders and at times the petitioners also approved the actions of
mismanagement as well as the acts of oppression the question of granting any
relief to the petitioners did not arise, it may be noted that if the decision
taken by the board or general body is in contravention of the laws of the
country and prejudicial to public interest, it cannot be said that the will of
the majority will prevail, but not the laws of the lands. Further, for the
various reasons, the majority of the shareholders in the company might have not
dared to open their mouth against the illegal actions of respondent No. 2
having seen the plight of the petitioner, who was no other than the son-in-law
of the 2nd respondent and brother-in-law of the 3rd respondent; on that ground
the respondents could not contend that if their actions were clearly in
violation of the laws of the land like the Companies Act, Income-tax Act, so on
and so forth, their decisions would prevail over the law of the land.
Further under Chapter VI of the Act, a right
is conferred on the minority shareholders seeking relief against not only acts
of oppression but also on the actions of majority shareholders that are
prejudicial to public interest apart from acts of mismanagement of the affairs
of the company. Hence, the respondents could not take shelter, if the actions
of the company were not in accordance with law, by contending that such an
action was having the approval of majority shareholders.
In the light of the foregoing discussion on
various issues in controversy there was no manner of doubt in holding that the
petitioners were able to prove the acts of mismanagement as well as the acts of
oppression and they were being continued, unendingly, even after Company
Petition was filed, even though the procedure followed by the CLB was unknown
to law and the findings recorded by the CLB were not supported by any evidence
and they were perverse. The scales of justice before the CLB heavily swung in
favour of the respondents.
Hence, the findings recorded by the CLB on the
issues in controversy, were set aside and it was held that the allegations
levelled by the petitioners were proved, at any rate, a prima facie case was
made out by the petitioners for grant of relief under Chapter VI of the Act.
The petitioners were satisfied with the
directions given by the CLB and as the series of acts of mismanagement as well
as acts of oppression were proved by petitioners, the question was what should
be the relief that could be granted in the circumstances of the case. The
differences between the groups had reached an irrevocable point of no return
and any direction or directions for keeping the company with present holding
intact would not serve in the company and at the same time ordering winding up
of a company, which was otherwise solvent was not proper. Hence the only
equitable and just relief that could be granted was to direct either of the
parties to purchase the shareholdings of other group. But in the instant case,
as the majority shareholders were on the side of the 2nd respondent, it was not
proper to direct the majority shareholders to sell their shares to the minority
shareholders. Hence the only order that could be passed in the instant case was
to direct the respondent-company itself or any one of the shareholders of the
company including Respondents 2 and 3 to purchase the shares of the minority
shareholders.
Accordingly the directions given by the CLB
were proper and just in the circumstances of the case and hence, though the
High Court did not agree with the findings of the CLB on the merits of the case
it was in full agreement with the end result.
Per Court :
Before parting with the case, I feel that it
is my bounden duty to bring to the notice of the authorities concerned, that
grave miscarriage of justice has taken place in this case as the CLB failed to
observe fundamental principles of procedural laws. But the counsel appearing
for respondents submitted that the CLB is following the same procedure from its
inception. I am afraid, that if the CLB is allowed to function in this manner,
grave injustice will be done to the litigant public. Since the CLB is vested
with discharge of judicial functions and being an institution of public trust,
it is expected to act fairly, objectively and dispassionately, but not
whimsically, fancifully or arbitrarily. If the individual members/Benches of
the CLB are allowed to follow their own procedure giving a go by to the laws of
procedure, the very faith and belief of the litigant public will be eroded.
Hence, it is high time that either, the CLB should frame regulations on the
procedure to be followed without ambiguity or the Government in exercise of its
rule making power shall frame rules with regard to the procedure to be followed
by the Board instead of leaving the issue to the individuals occupying position
in the CLB which will go a long way in gaining creditability by the
institution.
Cases referred to
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C. Srihari Rao v. Sri Ramdas Motor Transport Ltd. [1999] 97 Camp. Cas. 685
(AP), Prakash Timbers (P.) Ltd. v. Smt. Sushma Shingla AIR 1996 All. 262,
Suresh Kumar Sanghi v. Supreme Motors Ltd. [1983] 54 Camp. Cas. 235 (Delhi),
Shoe Specialities Ltd. v. Standard Distilleries & Breweries (P.) Ltd.
[1997] 1 Camp. LJ 243 (Mad.), Standard Industries Ltd. v. Mafatlal Services
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[1992] 3 Camp. LJ 119 (CLB), Yashovardhan Saboo v. Groz Beckert Saboo Ltd.
[1993] 1 Camp. LJ 20 (CLB), R. Khemka v. Deccan Enterprises (P.) Ltd. [1998] 16
SCL 1 (AP), Re.H.R. Harmer Ltd. [1958] 3 All E.R. 689, Needle Industries
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Dwaraka Nath v. ITO AIR 1966 SC 81, Jhabarmull Agarwalla v. Kashiram Agarwalla
[1969] 71 ITR 269 (Cal.), Industrial Credit & Investment Corpn. of India
Ltd. v. Grapco Industries Ltd. [1999] 4 SCC 710, A.K. Kraipak v. Union of India
AIR 1970 SC 150, Fort William Jute Mills Co. Ltd. v. First Labour Court 1963(1)
LLJ 734 (Cal.), Delhi Transport Corpn. v. DTC Mazdoor Congress AIR 1991 SC 101,
A.K.K. Nambiar v. Union of India AIR 1970 SC 652, M.I. Builders (P.) Ltd. v.
Radhey Shyam Sahu AIR 1999 SC 2468, Span Resort [1997] 1 SCC 388, Badrunnisa
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Mathildasice v. Fritz Gaebele AIR 1926 Mad. 955, Ishwar Dass Jain v. Sohan Lal
AIR 2000 SC 426, United India Assurance Co. Ltd. v. Satyanarayana Ghee Trading
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Mahadev Channabasappa [2000] 6 SCC 120, Habeeb Khan v. Valasula Devi 1996 (2)
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745 (AP).
R. Raghunandan for the Applicant. Keerthi Prabhakar
and T. Rajendra Prasad for the Respondent.
Judgment
1. To my mind
if the parties adopted give and take policy, the issue would have been amicably
settled by the well wishers of both the parties. As the 2nd respondent is
adamant and not heeding to the advice of the well-wishers and the judicial
Forums as well, the parties are in the courts for nearly a decade wasting the
precious time of the Court. Even in this Court the respondents did not heed to
the advice given to them and invited judgment on merits.
2. To put
forth their case both the parties engaged counsel from Madras and arguments in
these appeals were heard for nearly three weeks.
Before considering the merits of the case, I
feel it appropriate to refer to certain observations made by Honourable Justice
Chinnappa Reddy exposing how corporate gains rush to Courts and how they are
converting the Court rooms as their battle ground and fight under the
attractive banners of fair play and public interest. While considering the
conduct of the board of directors in LIC of India v. Escorts Ltd. AIR 1986 SC
1370. His Lordship observed as follows :
“2. In the case before us, as if to be fit the might of the
financial giants involved, innumerable documents were filed in the High Court,
a truly mountanous record was built up running to several thousand pages and
more have been added in this Court. In deed, and there was no way out, we also
had the advantage findings of listening to learned and long drawn-out, intelligent
and often ingenious arguments, advanced and dutifully heard by us. In the name
of justice, we paid due homage to the causes of the high and mighty by devoting
precious time to them, reduced, as we were, at times to the position of
helpless spectators. Such is the nature of our judicial process that we do this
with the knowledge that more worthy causes of lesser men who have been long
waiting in the queue have been blocked thereby and the queue has consequently
lengthened. . . .” [Emphasis supplied] (p. 1375)
I am in a worse position than their Lordships
of the Supreme Court in that case, in hearing marathon arguments addressed by
the counsel for the respondents on technicalities to injunct me from going into
the merits of the case knowing fully well that he is having a bad case on
merits, over three weeks referring to voluminous record and the case laws cited
before me and the number of days for which I was forced to burn mid night oil
in assimilating the arguments and rendering the judgment running into several
pages. Even then I cannot say that I have referred to each and every document
or pages referred to by both the parties. I feel that I have considered the
documents and case laws to the extent of relevancy on the issues that have
cropped up for consideration.
Both the appeals were filed against the order
passed by the Company Law Board (‘the Board’) in C.P. No. 15 of 1994 filed
under sections 397 and 398 of Companies Act, 1956 (‘the Act’) alleging oppression
of the minority shareholders and mismanagement of the affairs of the company,
to the extent the order went against their interests. Hence both the appeals
can be disposed of by a common order.
For the sake of convenience the parties are
referred to in this order as they are arrayed in the company petition.
3. Company
Appeal No. 4 of 1999 is filed by the respondents in C.P. No. 15 of 1994, i.e.,
Sri Ramdas Motor Transport Ltd. (Respondent No. 1), its managing director Mr.
K.V.R. Choudary (2nd respondent), its Joint Managing Director Mr. Saradhi (3rd
respondent), son of the 2nd respondent and the Company Secretary Mr. S.
Rajeasekhara Rao (4th respondent), aggrieved by the order of the Board
directing the company or the party respondents to purchase the shares held by
the petitioners having held that the petitioners have not been able to
establish any of the allegations meriting grant of any of the prayers.
4. Company
Appeal No. 5 of 1999 is filed by the petitioners 4 to 9 in C.P. No. 15 of 1994
in dismissing their application by holding that some of the allegations have
been made on mere suspicion and others have not been established.
5. Having
opined that the disposal of the company petition by the Board is not in
accordance with the provisions of the Act and unknown to common parlance of
law, I repeatedly suggested that it is an imminently fit case for compromise
and to settle the disputes amicably keeping the proximity of the relationship
between the parties. Mr. K.V.R. Choudari (hereinafter referred to as “2nd
respondent”), Managing Director of the company, happened to be the father of
Chundru Manorma (Petitioner No. 7), grand-father of Chundru Padma Chaitanya
(Petitioner No. 8) and Nandamuri Satya Lavanya (Petitioner No. 6) and
father-in-law of Chundru Sri Hari Rao (hereinafter referred to as “9th
petitioner”). When the counsel for the 2nd respondent conveyed the anguish of
his client against his son-in-law i.e., the 9th petitioner in dragging the
affairs of the company to the streets, may be because of the precarious
situation in which he is placed, his son-in-law the 9th petitioner has gone to
the extent of submitting before the Court that he is prepared to give a written
apology if the company purchases the shares held by the petitioners as directed
by the Board and pay the amounts that are due to them and if they are relieved
of their agony to which they are subjected to for over ten years. But the offer
was rejected outright and the father-in-law invited a judgment on merits in
this case. Hence I am left with no option except to proceed with the case and
deliver the judgment on merits.
6. Before
adverting to various contentions raised by the parties, it is useful to refer
to the factual background of the case. Sri Ramdas Motor Transport Ltd. was
incorporated as a private limited company on 1-12-1944 under the provisions of
the Act mainly to carry on the business as carriers of passengers, freight and
mails by using motor vehicles etc., and in the course of time it not only
acquired name and fame as a reputed parcel lorry service in the State of A.P.
but also diversified its activities to other fields. As on to-day it is having
six subsidiary companies under its management and its annual turn over exceeded
to Rupees 100 crores. It became a deemed public company in terms of the
provisions of section 43A(1A) of the Act. While 51 per cent of the shares were
held by the 2nd respondent, his family members and his supporters, 11 per cent
of the shares were held by the 9th petitioner, and his family members. The 9th
petitioner held the shares jointly with Annapurna Devi who died in the year
1984. The non-aligned members held the remaining 40 per cent shares. It is also
in the evidence of the 9th petitioner that the 2nd respondent having joined as
an employee for Rs. 250 per month rose to the level of Managing Director of the
company very soon and as on today himself and his family members are holding
majority shares in the company. From the above it is seen that majority of
shares are held by the 2nd respondent and his associates including the 9th
petitioner till the disputes have arisen between them. As per Article 11 of
articles of association that were in force as on the date of dispute, the
number of directors of the company shall not be less than three and shall not
exceed nine. At the time of dispute, company was having seven directors out of
whom four directors are from 2nd respondent’s family. From this it is seen that
the 2nd respondent’s family is in full control of the affairs of the company.
While the 2nd respondent continued to be the Managing Director of the main
company, the 9th petitioner was heading some of the subsidiary companies or
firms (1) Chairman of Bhavani Castings, (2) Managing Partner of Padmamalaya
Finance, (3) Director of K.V.R. Forgings having resigned to the post of
Managing Director on his election as Member of Parliament in 1984, (4) Managing
Director of Vijaya Engg. Works and (5) Director in the main company. From the
above it is seen that the 9th petitioner was looking after the affairs of most
of the subsidiary companies and enjoying the powers on par with his
father-in-law, i.e., the 2nd respondent in the 1st respondent-company. In and
around 1993, some disputes seemed to have arisen between these two individuals.
While it is the case of the 9th petitioner that disputes have arisen when he
raised the issue of sale of lorries and closure of parcel offices in the board
meeting held on 3-3-1993, the case of the respondents is that disputes have
arisen between them as he refused to finance for his political activity, I feel
that both the versions may be far from truth. The efforts made by the
well-wishers of the family did not yield fruitful results. On the other hand,
misunderstanding developed between the father-in-law and the son-in-law, i.e.,
the 2nd respondent and the 9th petitioner, reached a stage of no return. While
majority of the shareholders aligned with the 2nd respondent, a few
shareholders who figured as petitioner Nos. 1 to 5 in C.P. No. 15 of 1994
aligned with the 9th petitioner and his family members (Petitioner Nos. 6 to
9). As and when some information with regard to the management of the affairs
of the company was sought by the minority shareholders, the company secretary
refused to furnish the same on the ground that he is not under an obligation to
furnish any information. Ultimately the 9th petitioner was not only removed
from positions held by him in the subsidiary companies but also as director of
the main company in its general body meeting held on 21-1-1994. In those circumstances
the minority shareholders filed C.P. No. 7 of 1994 on 24-2-1994 on the file of
the board under sections 394, 398, 403, 406 read with schedule 11 and sections
539 to 544 and other applicable provisions of the Act for a relief against
oppression and mismanagement of the affairs of the 1st respondent company and
the 9th petitioner did not join as petitioner in this petition. The respondents
seemed to have raised an objection as to the maintainability of the petition on
the ground that the petition was filed without obtaining the consent of the
petitioners in writing. In those circumstances, the Board gave liberty to
withdraw that petition and file a fresh petition and accordingly nine
shareholders of the company filed C.P. No. 15 of 1994 on 11-4-1994. The main
allegation of oppression and mismanagement of the affairs of the company
relates to closure of parcel offices, sale of lorries and vehicles, removal of
the 9th petitioner as director of the company, diversion of funds of the
company to the other companies managed by the former employees, for personal
gains and fabrication of board’s minutes by the respondents 2 and 3. The
petitioners in the said company petition have sought the relief of
suppersession of the Board and a declaration that the respondents 2 and 3 are
not fit to hold the post of directors of the company. Some other Company
Appeals were also filed by the petitioners during the pendency of company
petition and they will be referred to later in the judgment.
7. During the
pendency of the petition, the petitioners filed C.A. No. 134 of 1995 seeking
permission of the Board to lead evidence by way of affidavit as per Order-19 of
Code of Civil Procedure, 1908 (‘the Code’). This application was contested by
the counsel for the respondent stating that Order-19 is applicable only when
specific fact has to be established but cannot be relied for all purposes and
examination in chief is must followed by cross-examination in view of the
allegations of misconduct and fraud. Accepting the contention of the
respondents’ counsel the petition was dismissed by observing that if the
counsel for the petitioner desires to lead any evidence by petitioners it may
be done through personal appearance of such petitioners.
8. After some
time, petitioners filed C.A. No. 65 of 1996 on 12-1-1996 seeking appointment of
an administrator for a period of five years and for production of minute books,
account books along with the vouchers for the period from 1992-1995. In the
said application, the petitioners have given some more instances relating to
oppression of minority shareholders and mismanagement of the affairs of the
company. Subsequently with the permission of the Board the petitioners filed
another application, i.e., C.A. No. 115 of 1997 on 13-3-1997 seeking permission
to amend C.A. No. 65 of 1996 by adding paragraphs 18A, 18B and 18C. The
respondents contested these applications by contending that the petitioners
cannot travel beyond the allegations made in the main petition and the
subsequent events cannot be taken into consideration for considering the relief
sought for in the main petition.
9. Having heard the arguments on both sides, the
Board passed the following order on 18-12-1997 :
“A 397/397 petition has to stand on its own on
the basis of allegations contained in the petition. Subsequent events brought
on record alone in case the main petition fails on merits cannot entitle a
person to any relief. In case the allegations in the main petition are proved
then the subsequent events may be taken into consideration by the Board in
moulding suitable relief.”
10. When the
matter came up for hearing on 5-9-1997 the Board suggested to the parties to
settle the disputes amicably and the respondents should inform the Board by
21-9-1997 whether they are agreeable for the appointment of an independent
valuer to value the shares in respect of not only the two companies that are
before the Board but also the other four companies in which the 9th petitioner
is a shareholder. On 29-9-1997, the learned counsel appearing for the 2nd
respondent sought for more time on the ground that other members of the board
have to be consulted and the case was adjourned to 27-11-1997. But the
respondents did not agree for the proposal of the Board. Arguments on both the
sides in C.A. No. 65 of 1996 were completed before the Board at its meeting
held on 28-11-1997 and the Board passed the following docket order.
“Arguments on the application concluded. The
petition will be heard on 30th and 31st March and 15th April, 1998 and also
27th, 28th, and 29th August, 1998 at 10.30 a.m. each day.”
11. By an
order-dated 18-12-1997 in C.A. No. 65 of 1996, the Board rejected the prayer
for appointment of an Administrator for the reasons stated therein. In the said
order having recorded a finding that the discrepancies in the stock as pointed
out by the learned counsel for the petitioner could not be taken as an act of
such grave misconduct that would warrant appointment of an administrator at the
interim stage, when the petition is still to be heard and the Board directed
the company to furnish a statement of reconciliation on the discrepancies in
stocks pointed out by the petitioners during the next hearing, as undertaken by
the learned counsel for the company, to enable them to take a view on this allegation.
The 9th petitioner carried the matter in appeal to this Court by filing C.A.
No. 4 of 1998 and the same was dismissed by a Division Bench of this Court in
its order dated 26-8-1998 in C. Sri Hari Rao v. Sri Ramdas Motor Transport Ltd.
[1999] 97 Comp. Cas. 685. The Court held as follows :
“(1) None of the issues raised in the appeal
can be said to be a question of law arising out of the order of the Company Law
Board and as such the question of entertaining appeal under section 10F of the
Act does not arise; (2) the order under challenge is an interlocutory for
purpose of appointment of Administrator at the interim stage and the Company
Law Board in the contextual facts have exercised discretion and the user of
discretion cannot by any stretch be deemed to be so perverse in any event so as
to warrant interference or intervention of the appellate court and (3) directed
the Board to dispose of the matter with utmost expedition.”
12. The S.L.P. No. 16705 of 1998 filed against the
said order was also dismissed on 3-11-1998.
13. Since the
proceedings of the Board were not stayed during the pendency of the appeal, the
following docket order was passed by the Board on 1-4-1998 :
“Witnesses will be examined on 18th April,
1998 at 9.30 a.m. at Chennai. Petition will be heard on merits as already fixed
on 27th, 28th, and 29th August, 1998 at New Delhi at 10.30 a.m. each day.”
At this stage the petitioner No. 9 filed an
affidavit dated 13-5-1998 before the Board stating that though the Board handed
over the summons to him on 31-3-1998 to be served on the list witnesses
submitted by him for giving evidence on 18-4-1998, in the summons the date was
shown as 18-3-1998, and the witnesses refused to take the summons apprehending
that they may be taken to task for not appearing before the Board on the date
mentioned in the summons for their appearance i.e., 18-3-1998. In the mean time
the respondent Nos. 2 and 3 started creating a fear psychosis among the
witnesses by implicating them in false criminal cases and also tried to assault
him when he attended the annual general body meeting of the 1st respondent
company held on 25-9-1996. He brought to the notice of the Board not only
various violent acts that were committed by the respondents on him but also
filed documentary evidence to show that himself and the list witnesses were
implicated in criminal cases. He also filed the orders passed by the High Court
in W.P. No. 27324 of 1997 filed by him complaining on the inaction on the part
of the police in not taking action on his complaint and the bail orders granted
by this Court to one of the list witness. In the last paragraph he stated as
follows :
“In this background our witnesses have been
terrorized and persuaded in all possible ways by the Managing Director and the
Joint Director of the 1st respondent and their followers. The said witnesses
are totally refusing to attend and give evidence before this Hon’ble Bench on
9-6-1998 at Chennai for fear of retaliation on the part of respondents 1 and 2.
I am placing all these facts before this Hon’ble Bench so that it can
appreciate the conduct of the respondents.”
It is also seen from record that the 1st
petitioner late Karedla Suryanarayana filed an affidavit dated 13-10-1995
during his life time how R. 2 and his men tried to silence him in A.G. Body
meeting held on 27-9-1995.
14. The learned
counsel for the respondent did not bring to my notice that the allegations made
in this affidavit were denied by the respondents by filing rebuttal evidence.
Thereafter when the matter was taken up for
hearing on 8-9-1998, it was reported that the 1st petitioner died and his legal
representatives were to be brought on record. But they have not chosen to come
on record. On the next date of hearing, i.e., 2-12-1998 the Board straightaway
started hearing the arguments on the petition without completing the evidence
of the 9th petitioner and without recording any evidence on the respondents
side and without verifying the xerox copies of the documents filed by the
respondents with the original records more so in the light of the allegations
made by the petitioners that the 2nd and the 3rd respondents fabricated the
minutes of the board meetings etc., and completed the arguments by 22-3-1999.
The Board by an order dated 15-6-1999 while dismissing the petition by holding
that the petitioners have not been able to establish any of the allegations
meriting the grant of any of the prayers in the petition, gave a direction
under section 402 of the Act to the 1st respondent-company to purchase the
shares held by the petitioners by itself or the private individuals as may be
decided by the respondents. Though I could not see from the attendance sheets
that any one was examined in this case at any point of time both the parties
agreed that the 9th petitioner (Chundru Srihari Rao) was examined before the
Board and relied upon the oral evidence given the 9th petitioner before this
Court. The date on which the evidence of the 9th petitioner commenced is not
seen anywhere but his cross-examination was completed on 18-10-1995. If gives
me an impression that the Board started recording evidence after C.A. No. 134
of 1995 was dismissed and before C.A. No. 65 of 1996 was filed. From the
evidence it is seen that his cross-examination was completed on the allegations
in the main petition on 18-10-1995.
From the above factual narration,
the first issue that falls for consideration of this Court would be :
“Whether the procedure followed by the board
in disposing of C.P. No. 15 of 1994 is in accordance with law ?
15. The power to
deal with the allegations of oppression of minority shareholders and
mismanagement of the affairs of the company under Chapter VI of the Act were
originally vested in the High Court till the Companies (Amendment) Act, 1988
came into force with effect from 31-5-1991 where under the said power was
conferred on the Board.
16. The learned
counsel for the petitioners contends that the functions of the Board are akin
to the functions of a Court having stepped into the shoes of the High Court
while discharging judicial functions, at worse a quasi-judicial authority and
it is expected to follow the rules of procedure while adjudicating the lis. On
the other hand, the learned counsel for the respondent-company strenuously
contends that the Board being an administrative body not vested with the
judicial powers it need not follow the procedure prescribed in the Code of
Civil procedure and it is at liberty to follow its own procedure as per section
10E(6) of the Act.
Aims and objects of the Act
17. To appreciate
the rival contentions, we have to look in to the aims and objects underlying
the amending Act and the provisions introduced by the Amendment Act, 1988.
Prior to the Amendment Act, 1988, the judicial
and quasi-judicial functions vested in the Central Government under sections
17, 18, 79 and 144 were being exercised by the Board as its delegate apart from
discharging statutory functions and the composition of the Board was from among
the officers of the Central Government and the High Court was exercising powers
under Chapter VI in granting relief against the acts of oppression and
mismanagement of the affairs of the company apart from other powers conferred
on it.
18. In the light
of the overwhelming representations received from all the organizations and
individuals for constitution of an independent Board without interference of
the Central Government, the Central Government constituted “Sachar Committee’
to consider those representations and suggest suitable amendments to the Act.
Having considered the representations of several organizations, the committee
made the following recommendations :
“We therefore, feel that appropriate solution
would lie in statutorily constituting an independent quasi-judicial Company Law
Board broadly on the lines of the Income-tax Appellate Tribunal, as provided in
section 252 of the Income-tax Act.” [Emphasis supplied]
The Committee also recommended modifications
to the existing provisions relating to the constitution and function of the
Board. Under clause (c) it recommended that the Board including its Regional
Benches shall have powers of the Court under the Code of Civil Procedure not
only in respect of matters specified in the present sub-sections (4C) and (4D)
of section 10E, but also in respect of the powers conferred upon it or the
Regional Benches by the Act.
19. Accepting
the recommendations of the Committee, the Central Government amended the Act in
1988 and established an independent Board to exercise judicial and quasi-judicial
functions hitherto exercised by the Court or the Central Government till then
besides the statutory powers vested in the Board by the Amendment Act, 1974.
But the second recommendation of the Committee did not find a place in the
amending act. From the above, it can be safely concluded that the Board at the
work has to be declared as quasi-judicial functions while discharging functions
under Chapter-VI of the Act.
But the learned counsel for the
respondent-company in support of his case cited a judgment in Prakash Timbers
(P.) Ltd. v. Smt. Sushma Shingla AIR 1996 All. 262, while considering the
status of the Board, their Lordships of the Allahabad High Court held as
follows :
“24. . . . The Board has to perform the
functions under the various provisions of the Act. Some of them are judicial in
nature and some of them are quasi-judicial and some of the functions are more
in the administrative nature. . . .” (p. 269)
“25. Broadly speaking, the Company Law Board
has trappings of a Court in the sense that it has to determine a matter placed
before it judicially, give fair opportunity of hearing to the parties who may
be affected by the order, to accept the evidence and also to order for
inspection and discovery of documents, compel the attendance of the witnesses
and in the last, to pass a reasoned order which gives finality to its decision
subject to right of appeal to a party under section 10F of the Act or such
other legal remedy which is available under law to a party.” (p. 269)
The Court then considering the scope,
functions and jurisdiction conferred on the Board concluded that the Board can
only be regarded as a Tribunal and not a Court.
Even as per this judgment, the Tribunal is
exercising judicial functions. Hence even if the Board is not Court in the
strict sense, it is definitely a quasi-judicial Tribunal and it has to follow
the procedural laws to the extent possible and it cannot act at its whims and
fancies while discharging judicial functions.
20. Though the
Apex Court interpreted the words ‘observance of principles of natural justice
to be followed by Quasi Judicial/Administrative Bodies’ to mean that even if
the procedure laws prescribed in the Code need not be strictly followed, yet
they have to be guided by those provisions in discharge of their functions. But
as the learned counsel addressed marathon arguments justifying the procedure
followed by the Board, I am forced to refer to his contentions to avoid
criticism that the Court did not consider various contentions raised on behalf
of the respondents.
Now the question to be considered is :
Whether the Board is having inherent powers ?
21. It is seen
that an independent Board is established to exercise judicial and
quasi-judicial functions exercised by the courts or the Central Government till
then and is not subjected to control of the Central Government. Under
sub-section (4C) of section 10E of the Act, the powers of the Civil Court under
the Code of Civil Procedure while trying a suit were conferred on the Board to
the extent indicated therein. Under sub-section (5) without prejudice to the
provisions of sub-sections (4C) and (4D), the Board in discharge of its
functions under the Act or any other law is ‘to be guided by principles of
natural justice’ and shall act in its discretion and under sub-section (6)
‘subject to the foregoing provision of this section, the Board shall have the
power to regulate its own procedure’. In exercise of this power the Board
framed Company Law Board Regulations, 1991. Under Regulation 44, the Board is empowered
to exercise the inherent powers which are akin to section 151 of the Code and
which were till then exercised by the Courts under rule 9 of the Company’s
(Courts) Rules, 1959 while dealing with the company matters. As the language
used in regulation 44 and rule 9 of the Courts Rules being one and the same, it
is useful to extract the above provisions to know the scope, ambit and powers
of Tribunal. Regulation 44 of Company Law Board Regulations, 1991 reads as
under :
“Saving of inherent power of the
Bench.—Nothing in these rules shall be deemed to limit or otherwise affect the
inherent power of the Bench to make such orders as may be necessary for the
ends of justice or to prevent abuse of the process of the Bench.”
Further these regulations deal with regard to
the procedure to be adopted for regulating the business of the Board. The
regulations postulate that a fair opportunity should be given to the party who
may be affected by the order and also to the person who files a petition before
it.
22. Nextly, it
is seen that under section 402, on an application filed under section 397 or
398, the Board is competent to pass any of the orders specified in that section
without prejudice to the generality of the powers of the Board to pass any
order under either section 397 or 398. Section 402(b) deals with the purchase
of shares or interest of any member of the company by any other members thereof
or by the company. In other words, the Board is competent to pass orders
directing the majority shareholders or the company to purchase the shares of
minority shareholders. But Mr. Raghavan strenuously contended that the Board
having dismissed the case on merits is not expected to give the above
directions. He placed reliance on a Judgment reported in Suresh Kumar Sanghi v.
Supreme Motors Ltd. [1983] 54 Comp. Cas. 235 (Delhi), wherein it was held that
jurisdiction under section 402 to make an order would arise only when the Board
records a finding that the requirement of sections are fulfilled, but not
otherwise. To my mind even if minority shareholders failed to establish the
acts of mismanagement complained of by them, a reading of section 398 of the
Act makes it clear that even an apprehension in the minds of minority
shareholders is sufficient to cloth the Board to give directions under section
402 as the provisions of sections 397, 398 and 402 are interrelated and they
should not be read in isolation. A combined reading of the aforesaid three
sections clearly brings out two aspects; first, the very wide nature of the
power conferred on the Court and, secondly, the object sought to be achieved by
the exercise of such power. The only limitation that could be impliedly read on
the exercise of the power would be that nexus must exist between the order that
may be passed there under and the object sought to be achieved by these
sections and beyond this limitation which arises by necessary implication, it
is difficult to read any other restriction or limitation on the exercise of the
court’s power. While sections 397 and 398 is intended to protect the minority
shareholders from acts of oppression and mismanagement or preventing its
affairs from being conducted in a manner prejudicial to public interest or the
interests of the company while avoiding winding up of the company if possible
and keep it going and the powers of the Board under section 402 are wide enough
to enable the court to put an end to the acts complained of. Likewise while
exercising the powers under sections 397 and 402, the court is considering not
only the relief that is sought for but also considers as to what is the nature
of the complaint and how the same has to be rectified. It is the interest of
the company that is being considered and not the individual dispute between the
minority shareholders and majority shareholders. In other words, the interest
of the company requires that the majority shareholders must have their say in
the management.
23. The purpose
and object of sections 397 and 398 is to put an end to acts of oppression and mismanagement
promptly and speedily rather than allow the parties to be involved in a costly
and protracted litigation. If the facts justify interference by the court in
the exercise of its powers under the two sections and if the conditions
prescribed by the sections are fulfilled, the Court ought not to relegate the
parties to a series of protracted and costly litigation.
24. Though the
party approaching the Board seeking relief against acts of oppression is bound
to prove the allegations levelled against the majority shareholders. As far as
the relief in case of mismanagement under section 398 is concerned, the Board
is competent to make any order as it thinks fit with a view to bring to an end
or preventing the matters complained of or apprehended. From this it is seen
that as far as acts of mismanagement is concerned, mere apprehension in the
mind of any prudent person is sufficient for the Board to pass any of the
orders specified in section 402.
He also conceded that if the Court comes to
the conclusion that the Board is having powers to give such a direction, he has
no case in his appeal. In the light of the foregoing discussion, I hold that it
is open to the Board to make just and equitable provision if situation demands
apart from the orders that can be passed under section 402 itself.
25. Even
assuming for a moment that the Board cannot exercise its powers under section
402 without proving the acts of oppression and mismanagement, under regulation
9 the Board is fully empowered to exercise the inherent powers vested in it to
do substantial justice and to put an end to the acts complained. I am fortified
in my view by the dicta laid down in the following cases.
26. In Shoe
Specialities Ltd. v. Standard Distilleries & Breweries (P.) Ltd. [1997] 1
Comp. LJ 243 a Division Bench of Madras High Court held as follows :—
“Regulation 44 of the Company Law Board
Regulations, 1991, saves the inherent power of the Board and it correspondents
to section 151 of Civil Procedure Code. It is settled law that, under the
inherent powers, the court can pass any order to prevent the abuse of process
and also to meet the ends of justice. . . .
When a case of oppression is made out, it is
only within the power of the Company Law Board to end the matter complained of
and to make such order as it thinks fit. While considering to end the matters
complained of and when it is given the power to make any such order as it
thinks fit to rectify the same, the Company Law Board is empowered to remove
the Board of directors so that the affairs of the company can be set right. . .
.” (p. 244)
27. In Standard
Industries Ltd. v. Mafatlal Services Ltd. [1994] 80 Comp. Cas. 764 (CLB) the
Principal Bench of the Board at New Delhi held that the modus operandi adopted
by the Majority shareholders fully subscribing rights issue is intended to
reduce voting of the petitioners by reducing their share holding from 48 per
cent to 12 per cent, and suffers from lack of probity and fair play as
evidenced by their resolution and in exercise of its powers under section 402
the Board observed that most equitable proposition is that the respondents
should buy the shares of the petitioners so that their grievance of oppression
was redressed and at the same time that the company’s paid up capital was also
maintained. In this judgment, the Board observed that it was not the legality
of the rights issue but the modus operandi adopted by the respondents that was
the real issue.
28. In Daulat
Makanmal Luthria v. Keshav S. Naik [1992] 3 Comp. LJ 119 (CLB) again the Principal
Bench of the Board having noticed that a stage had come where the petitioners
and the respondents had lost mutual trust necessary for working together in
managing the affairs of the company under the circumstances it has become
impossible for the petitioners and the respondents to work together even if an
independent chairman was appointed. In those circumstances, the Board passed
order under section 402 directing the respondents to purchase the shares of the
petitioners or sell their shares to the petitioners so that the company came
under the exclusive control and management of either the respondents or the
petitioners.
Again the Principal Bench of the Board in
Yashovardhan Saboo v. Groz Beckert Saboo Ltd. [1993] 1 Comp. LJ 20 (CLB),
observed that “on the facts of the case though the petitioners had failed to
establish a case of oppression, yet reconciliation between the parties being
difficult, with a view to do substantial justice between them and also to put
an end to the dispute, the majority group was asked to pay the price for the
shares of minority group on fair terms in view of settled law that majority
should never be forced to sell their shares to the minority in exercise of its
powers under section 402 of the Act.”
29. A learned
single Judge of this Court in R. Khemka v. Deccan Enterprises (P.) Ltd. [1998]
16 SCL 1 (AP) held that though the case of oppression and mismanagement was not
made out but on facts, the petitioner could be directed to sell shares to
respondent and on failure of respondent to purchase he could be directed to
sell his share to petitioners in interest of company. The said judgment was
confirmed by a Division Bench of this Court reported in R. Khemka’s case
(supra).
30. In Re. H.R.
Harmer Ltd. [1958] 3 All ER 689, Lord Denning in his separate judgment having
observed that the object of the remedy under section 210 of the English Act,
1948 similar to that of section 397 of our Act is to bring to an end the
matters complained of, i.e., oppression and one of the most useful orders
mentioned in the section which will enable the Court to do justice to the
injured shareholders is to order oppressor to buy their shares at fair price.
31. In Needle
Industries (India) Ltd. v. Needle Industries Newey (India) Holdings Ltd. AIR
1981 SC 1298 their Lordships of the Supreme Court at paragraph No. 172 held as
follows :
“172. Even though the company petition fails
and the appeals succeed on the finding that the Holding Company has failed to
make out a case of oppression, the Court is not powerless to do substantial
justice between the parties and place them, as nearly as it may, in the same
position in which they would have been, if the meeting of 2nd May were held in
accordance with law. . . .” (p. 1360)
32. In fact the
Board relying on this judgment gave a direction to the respondent-company to
purchase the shares of the minority shareholders.
33. The
complaint of the learned counsel for the respondents is that the Supreme Court
while exercising the inherent powers/plenary powers vested in it, has given
such direction and the Board not being a regular civil court is not empowered
to exercise the inherent powers. In the light of the foregoing discussion, the
contention of the respondents falls to the ground more so in the light of the
judgment of the Madras High Court, which is directly on the issue apart from
the other judgments referred above.
34. Nextly, Mr.
Raghavan contended that having dismissed the case on merits, the Board is not
expected to give the directions and he further contended that the Board misread
the Judgment of the Supreme Court in Needle Industries (India) Ltd.’s case
(supra).
35. In support
of his case, he relied on a Judgment of the Delhi High Court in Suresh Kumar
Sanghi’s case (supra), wherein Justice Kirpal, as he then was, held that “the
petitioner has not proved or shown that there has been any continuous acts of
oppression by the majority on the minority shareholders and as such no relief
can be granted under section 397 of the Act. In that petition, the petitioner claimed
oppression on the basis of a solitary incident of removing him from the
management of the Company.”
36. Firstly, the
facts of the case on hand are different from the facts of that case. A series
of acts of oppression as well as mismanagement were alleged against R. 2 and
his group in this application. Further in this case nowhere it was held that
the Board is not having inherent powers to do substantial justice between the
parties. The relief sought for was simply refused on the ground that a solitary
instance cannot form basis for invoking the jurisdiction of the Court under
section 397. Hence, this Judgment would not come to the rescue of the
respondents.
To sum up the discussion on this aspect, I
hold that the Board is having inherent powers under regulation 44 of the
Regulations, which are akin to the inherent powers of Civil Court under section
151 of the Code to do substantial justice to the parties. Even assuming for a
moment that the Board is not having inherent powers, the Board is fully competent
to pass orders under section 402 if the acts of mismanagement alleged against
the majority shareholders creates an apprehension in the minds of the minority
shareholders even if they fail to establish the allegations levelled against
them.
Whether the procedure followed by the board
can be sustained in law
37. Now let me
examine the legal position to see whether the procedure followed by the Board
can be sustained in law. In the main petition as well as in C.A. No. 69 of 1994
the petitioner prayed for summoning the records but the Board did not pass
orders. In fact in C.A. No. 65 of 1996 also similar prayer was made. But the
counsel might have felt that he will be in a position to convince the Board
without summoning the originals, he did not press for summoning the originals
at that stage. That does not mean that the Board can act arbitrarily at its
whims and fancies.
Whether provisions of C.P.C. are applicable to
the proceedings before the Board ?
38. To my mind
when the Board exercises judicial functions the elementary principle of
adjudicatory process is observance of rules of procedure, i.e., pleadings
supported by oral, and documentary evidence and respective parties have to get
into the witness box to prove their case and also subject themselves for
cross-examination to test the correctness or the veracity of his case apart
from proving the authenticity of the documents. Keeping the above principles in
mind if one look into the facts of the case it is seen serious allegations as
extracted supra are made in the management of the affairs of the company as
well as oppression of minority share holders by respondents 2 and 3. But the
Board simply extracted the arguments on the basis of xerox copies of the
documents and recorded its findings without even discussing the oral evidence
of the 9th petitioner by holding that the evidence is incomplete though it is
not the case of the respondents and even without looking into the annual
reports filed the petitioners to prove that huge amounts were swindled by not
bringing all the spare parts manufactured by the company into account books.
The Board has neither summoned the original documents and audited accounts of
the company nor gave opportunity to the petitioners to peruse the records to
prove the allegations of mismanagement and pronounced the impugned order.
39. The
attendance sheets maintained in the case and the order of the Board dated
21-7-1975 in C.A. No. 134 of 95 clinchingly establish that till 4-12-1998 the
Board as well as the respondents took the stand that the provisions of the Code
are applicable and recording of evidence is a must in the case. The petitioner
might have expressed his inability in securing the presence of list witnesses,
but he never stated that he is not available for examination on the subsequent
acts of mismanagement as the evidence of the 9th petitioner is complete in all
respects on the allegations made in the main petition. Even assuming without
admitting that the evidence on behalf of the petitioners is incomplete, no
evidence on behalf of the respondents was recorded and pronounced the impugned
order. The learned counsel for the respondent-company having taken an
irrevocable stand that the provisions of C.P.C. are applicable and chief
examination followed by cross-examination is a must, cannot take a round about
turn to justify the illegal order by contending that the Board being an
administrative body the provisions of Code of Civil Procedure not applicable to
the Board.
40. I am fortified
in my view by a Judgment of the Honourable Supreme Court reported in Dwarka
Nath v. ITO AIR 1966 SC 81 Justice K. Subba Rao speaking for the Constitution
Bench having held that the jurisdiction conferred under section 33A(2) of the
Act prima facie is a judicial one and having reviewed the case law held that if
an administrative body is empowered to determine questions affecting the rights
of subjects and if it is having a duty to act judicially it is a clear case of
judicial act and held as follows :
“. . . In all these cases the Government, the
Examination Committee and the Board of Revenue were administrative bodies, but
the acts impugned were quasi-judicial ones, for they had a duty to act
judicially in regard thereto. The law on the subject may be briefly stated thus
: The provisions of a statute may enjoin on an administrative authority to act
administratively or judicially. If the statute expressly imposes a duty on the
administrative body to act judicially, it is a clear case of a judicial act.
But the duty to act judicially may not be expressly conferred but may be
inferred from the provisions of the statute. It may be gathered from the
cumulative effect of the nature of the rights affected the manner of the
disposal provided, the objective criterion to be adopted, the phraseology used,
the nature off the power conferred, of the duty imposed on the authority and
other indicia afforded by the statute. In short, a duty to act judicially may
arise in widely different circumstances and it is not possible or advisable to
lay down a hard and fast rule or an inflexible rule of guidance.” (p. 86)
41. Under section 141 of the Code the procedure provided in the code in
regard to suits shall be followed, as far as it can be made applicable, in all
proceedings in any Court of Civil jurisdiction and in the light of the above
Judgment the Supreme Court, the procedure prescribed in the Code in regard to
suits shall be followed, as far as it can be made applicable at least to the
extent of pleadings, receiving documentary evidence and recording oral evidence
in support of the case of the respective parties.
42. In Jhabarmull Agarwalla v. Kashiram Agarwalla [1969] 71 ITR 269 wherein
Division Bench of Calcutta High Court while considering the effect of section
131 which is in pari materia to section 10E(4C) of the Act dealing with the
powers of the Officers of the Income-tax Department, held as follows :—
“. . . The powers conferred on the
Income-tax Officer under section 131(1) of the Act have not been specified with
reference to particular provision of the Code of Civil Procedure but all the
powers which the civil court has under the Code have been conferred on the
Income-tax Officer on some specified matters. One such matter is ‘compelling
the production of books of accounts and other documents’. Section 131(1) must,
therefore, be construed to confer on the Income-tax Officer all the relevant
powers, which the Civil Courts have under the Code of Civil Procedure regarding
the production of books of account and other documents. Since Order XIII, rule
10, confers such power on the Civil Court to call for documents from other
courts, the Income-tax Officer too has such powers under section 131(1) of the
Act. . . .” (p. 271)
From section 131(1), it is seen
that the Officers of the Income-tax Department while exercising the powers of
an Administrative Tribunal were conferred with the powers of a civil court for
certain purposes which are in pari materia the same as in section 10E(4C). But
in this case, admittedly the Board is exercising judicial functions at worse,
quasi-judicial functions.
43. Even in Prakash Timbers (P.) Ltd.’s case (supra) Lordships of Allahabad
High Court did not observe that the Board need not follow rules of procedure
while discharging judicial functions.
44. Hence it cannot be said that the provisions of the Code of Civil
Procedure are not altogether applicable to the proceedings of the Board. On the
other hand, to the extent possible these Tribunals are guided by those
principles when they are involved in the adjudicatory process.
The Board can regulate its own
procedure subject to observance of rules of natural justice under section
10E(5) & (6) - What does it mean ?
45. The
contention of the learned counsel for the respondent, that the Board is entitled
to regulate its own procedure and it is not under an obligation to follow
strict rules of evidence is answered by their Lordships of the Supreme Court in
Industrial Credit & Investment Corpn. of India Ltd. v. Grapco Industries
Ltd. [1999] 4 SCC 710. Their lordships of the Supreme Court while considering
the procedural powers of a Debt Recovery Tribunal under section 22 of Recovery
of Debts Due to Banks and Financial Institutions Act, 1993 held as follows :
“. . . When section 22 of the Act says that the
Tribunal shall not be bound by the procedure laid down by the Code of Civil
Procedure, it does not mean that it will not have jurisdiction to exercise
powers of a Court as contained in the Code of Civil Procedure. Rather, the
Tribunal can travel beyond the Code of Civil Procedure and the only fetter that
is put on its powers is to observe the principles of natural justice. . . .”
(p. 716)
Further, their Lordships of the Supreme Court
while considering the powers of Adjudicating Officer and the Appellate Board to
summon witnesses, under section 53 of the Foreign Exchange Regulation Act, 1973
held as follows :
“. . . there are no limitations on the powers
of the Tribunal under the Act, the Legislature has thought fit to restrict the
powers of the authorities under various enactments while exercising certain
powers under those enactments. We have to give meaning to section 22 of the Act
as here the Tribunal is exercising powers of a civil court while trying a money
suit. . . .” (p. 717)
Observation of principles of natural justice -
meaning
46. Their
Lordships of the Supreme Court in A.K. Kraipak v. Union of India AIR 1970 SC
150 held in para 20 as follows :
“20. The aim of the rules of natural justice
is to secure justice or to put it negatively to prevent miscarriage of justice.
These rules can operate only in areas not covered by any law validly made. In
other words they do not supplant the law of the land but supplement it. The
concept of natural justice has undergone a great deal of change in recent years.
In the past it was thought that it included just two rules, namely (1) no one
shall be a judge in his own cause (Nemo debet esse judex propria causa), and
(2), no decision shall be given against a party without affording him a
reasonable hearing (audi alterm partem). Very soon thereafter a third rule was
envisaged and that is that quasi-judicial enquiries must be held in good faith,
without bias and not arbitrarily or unreasonably. But in the course of years
many more subsidiary rules came to be added to the rules of natural justice.
Till very recently it was the opinion of the courts that unless the authority
concerned was required by the law under which it functioned to act judicially
there was no room for the application of the rules of natural justice. The
validity of that limitation is not questioned. If the purpose of the rules of
natural justice is to prevent miscarriage of justice one fails to see why those
rules should be made inapplicable to administrative enquiries. Often times it
is not easy to draw the line that demarcates administrative enquiries from
quasi-judicial enquiries. Enquiries which were considered administrative at one
time are now being considered as quasi-judicial in character. Arriving at a
just decision is the aim of both quasi-judicial enquiries as well as
administrative enquiries. An unjust decision in an administrative enquiry may
have more far reaching effect than a decision in a quasi-judicial enquiry. . .
.” (p. 156)
47. In Fort William Jute Mills Co. Ltd. v. First Labour Court 1963 (1) LLJ
734 (Cal.) the Calcutta High Court ruled that “though the strict rules of law
of evidence are not to be applied this does not mean that the proceedings can
be held in an arbitrary manner. The rules of natural justice must be applied.
Ordinarily, there must be a personal hearing. If a person is entitled to show
cause he is entitled to a hearing and if he is entitled to hearing, he must be
given an opportunity of being personally heard of calling his own evidence and
cross-examining any witness called by the prosecution.”
48. In Delhi Transport Corpn. v. D.T.C. Mazdoor Congress AIR 1991 SC 101,
wherein their Lordships while considering the validity of regulation 9-b of
Delhi Road Transport Authority (Conditions of Appointment and Service) Regulations,
1952 which provides removal of employees from service without assigning any
reasons, observed that “in a system governed by rule of law, discretion, when
conferred upon executive authorities, must be confined within the defined
limits. The rule of law form this point of view means that decisions should be
made by the application of known principles and rules and, in general, such
decisions should be predictable and the citizen should know where he is. If a
decision is taken without any principle or without any rule it is unpredictable
and such a decision is the antithesis of a decision taken in accordance with
the rule of law.”
From the above decisions, it can
be safely held that even if the Board is exercising quasi-judicial powers it
has to follow not only the rules of procedure prescribed in the Code of Civil
Procedure but it can also travel beyond it, in furtherance of cause of justice
subject to observance of principles of justice and ordinarily there must be
personal hearing and party must be given an opportunity of put-forthing his own
case and cross-examining any witness called by the other side. Observance of
principles of natural justice operates in areas not covered by any law validly
made and they do not supplant the law of land but supplements it. Even assuming
that the Board is only an Administrative Tribunal and need not follow the rules
of procedure, in a system governed by rule of law discretion when conferred on
the authorities must be confined within defined limits and if a decision is
taken without any principle or without any rule, it is unpredictable and such a
decision is antithesis to a decision to be taken in accordance with rule of
law.
49. Even assuming for a moment that the Board is competent to regulate its
own procedure and it has to be guided by the principles of natural justice as
conceded by the learned counsel. It does not clothe the Board to act illegally,
irregularly or irrationally without observing the rudiment of law more so while
discharging quasi-judicial functions and it cannot function as it wishes. Any
procedure prescribed or followed should be in consonance with the law of the
land. It is beyond anybody’s comprehension that the Board will deliver orders
even without looking into the original records when the petitioners complained
that the respondents have fabricated the records, which resulted in miscarriage
of justice. Observance of the principles of natural justice does not mean that
the Board can pass orders on the basis of xerox copies or typed copies, which
were filed before the Board even without attestation.
Keeping the above principles in mind if one
look at the order of the Tribunal it is evident that the order suffers from
serious infirmities and the order is ab initio void.
Board is following the same procedure
50. Nextly, the
learned counsel for the 2nd respondent having conceded that the procedure
followed by the Board is not within the parameters of the procedural laws of
the land, he tried to justify the conduct of the Board by contending that the
Board is following this procedure for a long time. At the same time, the
Supreme Court deprecated such a practice followed even by the Courts way back
in 1981 the counsel placed reliance on the observations of the Supreme Court.
51. In Needles Industries (India) Ltd.’s case
(supra) the Supreme Court held as follows :—
“63. We appreciate that it is generally
unsatisfactory to record a finding involving grave consequences to a person on
the basis of affidavits and documents without asking the person to submit to
cross-examination. It is true that men may lie but documents will not and
often, documents speak louder than words. But a total reliance on the written
word, when probity and fairness of conduct are in issue, involves the risk that
the person accused of wrongful conduct is denied an opportunity to controvert
the inferences said to arise from the documents. But then, Sri Nariman’s
objection seems to be a belated attempt to avoid an inquiry into the conduct
and motives of Devagnanam. The Company Petition was argued both in the trial
court and in the Appellate Court on the basis of affidavits filed by the
parties, the correspondence and the documents. The learned Appellate Judges of
the High Court have observed in their judgment that it was admitted, that
before the learned trial Judge, both sides had agreed to proceed with the
matter on the basis of affidavits and correspondence only and neither party
asked for a trial in the sense of examination of witnesses. In these
circumstances, the High Court was right in holding that, having taken up the
particular attitude, it was not open to Devagnanam and his group to contend
that the allegation of mala fides could not be examined, on the basis of
affidavits and the correspondence only. There, is ample material on the record
of this case in the form of affidavits, correspondence and other documents, on
the basis of which proper and necessary inferences can safely and legitimately
be drawn.” (p. 1323)
In that case their Lordships of the Supreme
Court upheld the procedure followed by the Trial Court as well as the High
Court in deciding the case on the basis of affidavits and documentary evidence
as both the parties agreed to proceed with the matter on the basis of
affidavits and correspondence and neither of the parties asked for a trial in
the sense of examination of witnesses. Their Lordships further held that there
is ample material on record, i.e., affidavits, correspondence and other
documentary evidence on the basis of which proper and necessary inferences can
safely and legitimately be drawn.
But in this case, the Board itself by an order
dated 21-7-1995 rejected the request of the petitioners to lead affidavit
evidence by observing that if the learned counsel for the petitioner desires to
lead any evidence by petitioners it may be done through personal appearance of
such petitioners. It is interesting to see from the order of the Board that the
learned counsel for the respondents strenuously contended that Order-19 is
applicable only when specific fact has to be established but cannot be used for
all purposes. Examination in chief is a must followed by the cross-examination
in view of the allegations of misconduct and fraud. The Board upheld the
objection raised by the respondent’s counsel. But before this Court the learned
Counsel for the respondent-company has taken a round about turn and started
pleading that the Board is justified in passing the orders without there being
any oral evidence by respondents in support of their plea and without proof
untested xerox copies of the documents.
52. In A.K.K.
Nambiar v. Union of India AIR 1970 SC 652, their Lordships of the Supreme Court
while considering clause (f) of section 10E where under the Bench is empowered
to receive evidence on affidavits held that that the affidavits without
verification are not admissible in evidence. Their Lordships of the Supreme
Court emphasized the need for verification of the affidavits as hereunder :
“The reasons for verification of affidavits
are to enable the court to find out which facts can be said to be proved on the
affidavit evidence of rival parties. Allegations may be true to knowledge or
allegations may be true to information received from persons or allegations may
be based on records. The importance of verification is to test the genuineness
and authenticity of allegations and also to make the deponent responsible for
allegations. In essence verification is required to enable the Court to find
out as to whether it will be safe to act on such affidavit evidence.” (p. 652)
Admittedly in this case the affidavits of the
third parties filed by the respondents are not verified. But the Board acted on
these affidavits. At the same time, the Board did not refer to the affidavits
filed by the petitioners, which are very much available on its file.
From the above whatever documents were relied
on by the respondents they being only the xerox copies, they are not admissible
in evidence. With the result, the respondents did not produce any evidence
whatsoever either oral or documentary in support of their pleadings, and at the
same time the Board did not consider the oral/affidavits/documentary evidence
filed by the petitioners.
53. In the
adjudicatory process if the authorities do not follow the procedural laws of
the land and the basic principles of adjudication of disputes as stipulated
under section 10E(4C), the common man will loose faith in the very system of
administration of justice. I understand that a retired High Court Judge is
heading the Board. I am sure that had the Board observed minimum procedural
laws and considered the case of the parties on merits dispassionately the
result would have been otherwise.
54. In M.I.
Builders (P.) Ltd. v. Radhey Shyam Sahu AIR 1999 SC 2468, their Lordships of
the Supreme Court held that “. . . the discretion cannot be exercised which
encourages illegality or perpetuates an illegality. Judicial discretion cannot
be guided by expediency. Courts are not free from statutory fetters. Justice is
to be rendered in accordance with law. Judges are not entitled to exercise
discretion wearing robes of judicial discretion and pass orders based solely on
their personal predilections and peculiar dispositions. Judicial discretion
wherever it is required to be exercised has to be in accordance with law and
set legal principles. . . .” (p. 2505)
While considering the duty of Mahapalika, a
body corporate constituted under U.P. Municipal Corporation Adhiniyam, 1959, to
construct and maintain public places, parks and plant trees, their Lordships
held that Mahapalika a body corporate constituted under the act being a trustee
is under an obligation and duty to maintain public places, parks and plant
trees. When the nature of the park, as it existed, is destroyed it would be
violative of the doctrine of public trust as expounded by this Court in Span
Resort case [1997] 1 SCC 388. Public Trust doctrine is part of Indian Law.
Viewed from the above angle, the Board is
bound to exercise its powers in a manner known to law. But it cannot act
whimsically, fancifully and arbitrarily and adopt a procedure of its own
unknown to law. It is the public trust reposed in the institution. If the Board
acts inviolation of the doctrine of public trust, it amounts to destroying the
public confidence in the institution.
55. Further the
Board as well as the respondents having proceeded on the assumption that the
provisions of the Code are applicable as seen from the order of the Board dated
21-7-1995 in C.A. No. 134 of 1995 till 2-12-1998 the day on which the Board
started hearing the matter cannot dispense with the procedure, they thought of
at the initial stage, more so without assigning any reasons. As stated supra
the Board is expected to be guided by the provisions of the Code in discharge
of its judicial functions, though it need not follow all the provisions of the
code in its strict sense. If it is not following the law of the land it is
committing gravest illegality in discharge of its judicial functions. Even if
it is following an illegal procedure for a long time the same cannot turn to be
legal, and at the earliest it needs rectification. Otherwise, the interest of
the litigant public will be completely jeopardized as seen in this case.
Accordingly this contention is also rejected.
Documentary evidence
56. Under
section 61 of Indian Evidence Act, 1872 the contents of documents may be proved
either by primary or secondary evidence; under section 62 primary evidence
means document itself produced for the inspection of the Court; section 63
deals the secondary evidence and under section 64 all the documents must be
proved by primary evidence except in cases mentioned in section 65 of the
Evidence Act for which necessary foundation has to be laid in the pleadings
itself for leading secondary evidence.
In this case only xerox copies of the documents
were filed and it is not the case of the respondents that they are not having
the original documents or the records with them.
On the other hand the petitioners have not
only filed the original documents in their possession but also filed applications
for summoning of the original records from the respondent-company. On behalf of
the petitioners, petitioner No. 9 has gone to the witness box and spoke on all
the allegations made in the main application. But at the same time the
respondent neither filed the original records nor entered into the witness box
to give evidence in support of their case.
57. Under
section 114 of the Indian Evidence Act, the Court has to draw a presumption
with regard to the existence of any fact which it thinks likely to have
happened regard being had to the common cause of natural events, human conduct
and public and private business, in their relation to the fact of the
particular case. As per Illustration (g) of section 114, the evidence, which
could be, and is not produced, would, if produced, be unfavourable to the
person who withholds it the Court is expected to draw an adverse inference
against the person who is in possession of the information and failed to
produce the evidence.
58. Coming to
the provisions of the Code, under order-13, rule-1, all parties shall produce
all the documentary evidence of every description in their possession or power,
on which they intend to rely, and which have not already been filed in Court,
and all the documents, which the Court has ordered to be produced. Under
order-39, rule-4, the Court should endorse on every document, which has been
admitted in evidence in the suit with the particulars contained therein. Under
order-13, rule 5(3), where a copy of an entry is furnished, the Court shall,
after causing the copy to be examined, compared and certify in the manner
mentioned in order XIII rule-17, mark the entry and cause the book, account or
record in which it occurs to be returned to the person producing it.
59. A Division Bench
of this Court in Badrunnisa Begum v. Mohamooda Begum [2001] (3) ALD 11 D.B.
held that a copy of the agreement without there being comparison of it with
original document, is not admissible in evidence as secondary evidence. Having
considered the scope of section 63 of the Evidence Act dealing with secondary
evidence, their Lordships observed as follows :—
“The learned counsel for the appellant submits
that under illustration (c) a copy transcribed from a copy but compared with
the original is secondary evidence but the copy not so compared is not
secondary evidence of the original although the copy from which it was
transcribed was compared with the original. Now, if one goes by this
illustration in the light of the evidence that is on record, one finds that
there is no evidence whatsoever showing thereby that the copy taken from the
copy was compared with the original. L what the plaintiff has tried to do is
that, she has tried to prove comparison of the copy with the copy by exhibiting
Ex. A32 which is a photo copy along with the negatives. The requirement of
illustration (c) was that the copy taken from the copy should have been
compared with the original. That could have not been done in view of the
pleadings of the plaintiff herself as the original was not with her.”
Even assuming that the counsel did not object
to the procedure, the respondents having filed xerox copies are bound to prove
the authenticity of the documents filed by him in a manner known to law. If
such a course is not adopted by the respondents, the Board is expected to
eschew the documents filed by the respondents. But the Board acting on such
inadmissible evidence dismissed the application.
60. In Roman
Catholic Mission v. State of Madras AIR 1966 SC 1457, wherein the District
Judge took into consideration the certified copies of certain leases from the
record of an old case, i.e., O.S. No. 124 of 1944 on the file of the Sub-Court,
Madurai. The Supreme Court while interpreting section 65 of the Evidence Act
held that that copies of the documents are not admissible in evidence, held
that both Mailavaram and Kudivaram rights were included in Inam. Commenting on
the act of District Judge, their Lordships observed thus :
“. . . These documents undoubtedly should have
thrown light upon the matter but they were not admissible because they were
only copies. The originals were not produced at any time nor was any foundation
laid for the establishment of the rights to give secondary evidence. The High
Court rejected them and it was plainly right in so doing . . . .” (p. 1461)
61. In Pradeep
Kumar Sarkar v. Luxmi Tea Co. Ltd. [1990] 67 Comp. Cas. 491 the learned Judge
of Calcutta High Court held as follows:
“since the audited accounts for the relevant
period were not placed before the Court for its perusal and for refusing the
allegations of depressing the working results of the company, prima facie the
allegation of the mismanagement of working results stood un-rebutted and in
such an event the Court is empowered to supersede the Board of Directors if
found to have acted illegally and appoint a Receiver for a limited period and
purpose.
62. In Abdul
Rasheed v. Abdul Hakeem [1998] (6) ALD 682 a learned Single Judge of this Court
held that the entries in the accounts book in favour of a party producing it
has to be strictly proved. In a suit for specific performance filed on the
basis of an oral agreement, the plaintiff therein produced a note book (Ex.
A44) maintained by him to show that he paid an amount of Rs. 10,000 to the
defendant as advance and the version of the plaintiff was disbelieved by the
learned Judge by giving the following reasons :
“(1) in the first place the entries are
unsound; (2) the entries as such are not marked; (3) the accountant who made
the entries was not examined. Thus observing the learned Judge held that the
entries in the note book relied upon by the plaintiff to prove the alleged
payment of Rs. 10,000 as advance were not proved.”
63. In arriving
at the conclusion, his lordship relied upon a judgment in Mathildasice v. Fritz
Gaebele AIR 1926 Mad., 955. In the said case their Lordships of the Madras High
Court held that :
“mere laying down the account books without
more does not prove anything and that it is for the party who prepared the
accounts to explain them and support them in such a way as to convince the
Judge that there is a probability of their occupancy as to make out reasonable
proof for a prudent man to accept them. The law requires the proof of not only
account books generally but of each item that is in the interest of the person
producing the book but with regard to admissions (i.e.,) entries against the
producers own pecuniary interest, the law dispenses with all proof save that
the book has been kept by or under the authority of the producers.”
From this it is seen that except in a case
where the entries are against the interest of the producers of the account
book, the law require proof of not only account books generally but of each
item. Admittedly that was not done in this case.
64. In Ishwar
Dass Jain v. Sohan Lal AIR 2000 SC 426, their Lordships of the Supreme Court
while considering the admissibility of the extracts from the account books,
held that “the extracts from accounts are not ‘account books’ falling within
section 34 of the Evidence Act and are inadmissible. Sanctity is attached in
the law of evidence to books of account if the books are indeed ‘account
books’, i.e., in original and if they show, on their face, that they are kept
in the ‘regular course of business’. Such sanctity, cannot attach to private
extracts of alleged account books where the original accounts are not filed
into Court. This is because, from the extracts, it cannot be discovered whether
the accounts are kept in the regular course of business or if there are any
interpolations or whether the interpolations are in different ink or whether
the accounts are in the form of a book with continuous page numbering. Hence,
if the original books have not been produced, it is not possible to know
whether the entries relating to payment of rent are entries made in the regular
course of business. It is only in the case of Bankers’ Books Evidence Act, 1891
that certified copies are allowed or the case must come under section 65(f) or
(g) of the Evidence Act. Private extracts of accounts in other cases can only
be secondary evidence and unless a proper foundation is laid for adducing such
secondary evidence under section 65 or other provisions of the Evidence Act,
the privately handwritten copies of alleged account books cannot be themselves
be treated as secondly evidence.” (p. 426)
65. In United
India Assurance Co. Ltd. v. Satyanarayana Ghee Trading Co. [1999] (6) ALD 4,
this Court held thus:
“merely because the accounts are kept in
regular course of business and entries have been made therein they cannot have
any binding nature vis-a-vis the insurer against whom the plaintiff is making
now the claim. In other words the respondent firm has to prove the entries
separately by independent evidence apart from the proof required under section
34 of the Indian Evidence Act to the effect that the accounts have been kept in
regular course of business inasmuch the element of interestedness cannot be
ruled out. The distinction between the relevancy and proof of entries and
probative value thereof cannot be lost sight of”.
66. In National
Insurance Co. Ltd. v. Jugal Kishore AIR [1988] SC 719 their Lordships of the
Supreme Court while commenting on the conduct of the Insurance Company in not
filing the copy of the policy before the Tribunal or before the High Court held
as follows :
“. . . This Court has consistently emphasised
that it is the duty of the party which is in possession of a document which
would be helpful in doing justice in the cause to produce the said document and
such party should not be permitted to take shelter behind the abstract doctrine
of burden of proof. . . .” (p. 723)
On the facts of the case, their Lordships held
that “we accordingly wish to emphasise that in all such cases where the
Insurance Company concerned wishes to take a defence in claim petition that its
liability is not in excess of the statutory liability it should file a copy of
the insurance policy along with its defence.”
From the above it is seen that a party to a
judicial proceeding in whose possession the document is, has to produce the
same and having failed to do so, it cannot be permitted to take shelter behind
the abstract doctrine of burden of proof.
67. In the case
on hand, the Board under the guise of following its own procedure in
adjudicating the dispute, passed the order under challenge without following
any of the well known rules of procedure and the order is the result of
non-application of mind to the issues in controversy with reference to the
original records. Had the Board seen the original records, it is evident to the
naked eye that the resolutions of the board were tampered by the respondents.
68. A reading of
the order shows that whatever is stated by the respondent is treated as Gospel
truth and the Board even went to the extent of placing reliance on the
affidavits of the third parties without verification filed by the respondents
retracting from the earlier affidavits given to the petitioners having held
that the Board is not going to rely on the affidavit evidence in its order
dated 28-11-1997. At the same time the Board did not consider the affidavits
filed by the petitioners, for reasons best known to it though the respondents
did not choose to rebut the same either by filing affidavits or by oral
evidence. This action of the Board proves beyond doubt that it treated the
parties differently and it has not acted dispassionately and good faith. In one
word the scales of justice heavily swung in favour of the respondents.
69. It is not
the case of the respondents that the Board has at least followed the rudiments
of law by summoning the original records and verify with the documentary
evidence filed by the respondents to test the veracity of the statements of the
petitioners that the records were tampered by the respondents or not. As stated
supra, having summoned the original records and seen them I have no hesitation
to hold that the records were tampered by the respondents.
Petitioners themselves gave up the prayer for
summoning the records in C.A. No. 65 of 1996
70. Nextly, the learned
counsel for the 2nd respondent contended that though the 9th petitioner filed
C.A. No. 65 of 1996 for appointment of interim administrator and sought for
production of the minutes books, account books along with the vouchers for the
period 1992-1995 from the respondent company, before the Board for
verification, he did not press for the same as is evident from the order of the
Board. He has drawn my attention to a passage in the order of the Board dated
8-12-1997 passed in the above C.A. wherein it was observed that—
“Dr. Prasad Paul, Sr. Advocate appearing for
the petitioners, even though application contains various allegations,
restricted his arguments on the following two allegations only for the
appointment of an administrator” and contends that the 9th petitioner gave up
his plea for summoning the records in the case.
Countering the above argument, the counsel for
the petitioners brought to my notice the observations of this Court in C. Sri
Hari Rao’s case (supra). In this case itself on appeal filed by the petitioner
No. 9 against the order of the Board in C.A. No. 65 of 1996, this Court
observed that the order under challenge is only an interlocutory order for
purpose of appointment of an administrator at the interim stage. Exercise of
discretion by the Board cannot by any stretch be termed as so perverse.
71. Admittedly,
the prayer for appointment of an administrator is only as an interim measure
till the disposal of the main case but not in the main case, (i.e.), C.P. No.
15 of 1994. Passing of interim order being a discretionary one, the learned
counsel might have felt that summoning of the records is a time consuming
process more so when the respondents are not cooperating with the Board for the
disposal of the case. It is seen from the record that though the C.P. was filed
in the year 1994 there was no much progress in the case.
72. The
intention and purport of interim order to be passed during the pendency of a
case is to protect the interests of both the parties pending final adjudication
of the dispute. Hence, on that ground the Board cannot give up the procedure to
be followed by a Court in adjudicating a lis more so without passing any orders
on the prayer in the main petition as well as C.A. No. 69 of 1994 to call for
the records.
73. In Kanshi
Ram v. Bansi Lal AIR 1977 HP 61, his Lordship Chief Justice Pathak, speaking
for the Bench held as follows :
“In every application for an interim
injunction in a pending suit, it is necessary for the court to enter, to some
degree, into the merits of the case in order to determine whether a prima facie
case exits. To what degree the court will enter will vary with the facts of
each case. When the court declares that a prima facie case exists, it intends
to say that the case of the plaintiff is not without merit. It is an opinion
rendered on the state of the evidence then existing on the record, and it is
open to the trial court to take a different view when all the evidence has been
let in and the suit itself has to be decided. In some cases, a pure question of
law alone may arise in the suit. In such a case when the Court expresses an
opinion on the question in order to determine in an injunction application
whether a prima facie case exists, an impression can conceivably be gathered
that the suit itself has been disposed of. But when the matter is considered in
deeper perspective, it will be evident that the impression is a false one. The
finding is limited to the context in which it has been given. It is a finding
on an application for interim relief only. Any opinion expressed by the court,
whether it be of the trial court or an appellate court or revisional court,
cannot in law preclude the trial court from considering the issue afresh when
deciding the suit, and for that purpose it must have regard to all the material
then before it. In deciding that issue, it will properly have no regard to the
finding rendered on the point while disposing of the application for interim
injunction. No matter how superior the court rendering that finding and we would
include this court the trial court is bound in the proper discharge of its
duties to ignore the finding when it proceeds to dispose of the suit and to
apply its mind independently to the decision of the issue. The trial court will
bear in mind that the opinion expressed on the merits of the suit when deciding
an application for interim injunction does not operate as res judicata. Even in
a case where the suit calls for the decision of a pure question of law alone,
the trial court would be entitled to, and indeed is bound to, express its
independent opinion on the issue of law and dispose of the suit accordingly. .
. .” (p. 63)
74. In recent
case in Amresh Tiwari v. Lalta Prasad Dubey [2000] 4 SCC 440, the Supreme Court
at para 10 held as follows:—
“10. We have heard the parties at length. In
our view the High Court has committed an error in setting aside the order of
the Magistrate on the basis that the earlier order was final and binding. The
earlier orders were interim orders. They were passed before any evidence or
statements had been recorded. Those orders were passed only on the basis of the
contention of the parties. At that stage the 1st respondent had contended that
the civil proceedings did not relate to the same properties in respect of which
the proceedings under section 145 of the Criminal Procedure Code were adopted.
Thereafter statements were recorded in the section 145 proceedings. In her
statement the 1st respondent admitted that proceedings under section 145 of the
Criminal Procedure Code were in respect of property which formed the subject
matter of the civil suit and in respect of which an order for maintenance of
status quo had been passed by the civil court. The SDM was bound to take a
decision afresh based on the statements before him. It is settled law that
interim orders, even though they may have been confirmed by the higher courts,
never bind and do not prevent passing of the contrary order at the stage of
final hearing. The learned Single Judge of the High Court appears to have lost sight
of this.” (p. 445)
75. In PDR.B.L.
Anand v. Jaffar Hussain [1998] (6) ALD 794 (DB), a Division Bench of this Court
while considering the plea whether an interlocutory order operates as res
judicata held in para 7 as follows :
“7. No doubt, the appellate court while
considering an appeal has power to alter or modify an interlocutory order which
does not decide the merits of the controversy in issue in the suit, but is only
a step in reaching the decision in the dispute. In other words, all interlocutory
orders will not operate as res judicata within the meaning of section 11 of
Civil Procedure Code. For example, orders relating adjournment of the case,
appointment of Receiver or Commissioner, stay of proceedings, casting of
issues, summoning witnesses, calling for documents, remanding the case and many
more such orders cannot operate as res judicata since they do not decide any
matter in dispute arising in the suit. Even the same Court in respect of such
orders has power to alter or vary them by subsequent applications on proof of
new facts and subsequent events.”
76. In Palika
Sathi Raju v. Pydah Soma Malleswara Rao [1999] (5) ALD 472, a learned Single
Judge of this Court while considering the effect of interim order, held “that
the finding given by the Courts in interlocutory applications are euphamary and
are coterminus with the result of main proceedings and as such no importance
can be attached to those findings since those findings have been arrived at in
a summary proceedings.”
Accordingly this contention is
rejected as devoid of merits.
Oral evidence
77. Under
section 59 of the Evidence Act all facts except the contents may be proved by
oral evidence; under section 60 any oral evidence must be direct in all cases.
Under section 101 of the Evidence Act whoever desires any Court to give
judgment as to any legal right or liability dependent on the existence of
facts, which he asserts, must prove that those facts exist. When a person is
bound to prove the existence of any fact, it is said that the burden of proof
lies on that person. Under section 102 of the Evidence Act the burden of proof
in a suit or proceeding lies on that person who would fail if no evidence at
all were given on either side.
78. Under
Order-18, rule 2(1) on the day fixed for the hearing of the suit or on any
other day to which the hearing is adjourned the party having the right to begin
shall state his case and produce his evidence in support of the issues, which
he is bound to prove. Sub-rule 2 of rule-2 says that the other party shall then
state his case and produce his evidence (if any) and may then address the
Court, generally on the whole case. Sub-rule (3) says that the party beginning
the case may then reply generally on the whole issue. Under sub-rule (4)
notwithstanding anything contained in this rule, the court may, for reasons to
be recorded, direct or permit any party to examine any witness at any stage.
To the surprise of the Court, the learned
counsel for the respondent Company having vehemently contended before the
Board, that examination in chief is a must followed by cross-examination in
view of the allegations of misconduct and fraud did not chose to examine the
witnesses on his side before the Board.
79. In Palika
Sathi Raju’s case (supra), this Court held “that under section 102 of the
Evidence Act even if there is no evidence on the side of the plaintiff, if the
defendant fails to prove the specific plea taken by him he would fail.”
80. In Iswar
Bhai C. Patel v. Hari Har Behera [1999] (2) ALD (SCSN) 19, their Lordships of
the Supreme Court while considering the effect of section 114 (g) of the
Evidence Act observed that “if the defendant fails to appear as witness to
substantiate his evidence, it can be presumed that his pleas in the written
statement are not established and suit can be decreed on the basis of the
evidence adduced by the plaintiff.”
In that case, the respondent No. 2, father of
the 1st respondent, issued a cheque for a sum of Rs. 7,000 from the account of
his son as a loan to the appellant. When the amount was not repaid, the son
filed a suit. The trial Court dismissed the suit against the borrower, but
decreed against the father. On an appeal, the High Court decreed the suit
against the borrower also. Aggrieved by the said decree and judgment, the appellant
(borrower) approached the Supreme Court. Their Lordships of the Supreme Court
held “that since the appellant did not enter into the witness box nor made any
statement on oath in support of his pleading, an adverse presumption has to be
drawn against him.”
81. Even after
passing of the order in C.A. No. 65 of 1996, the Board in its meeting held on
1-4-1998, passed the following order :
“Witnesses will be examined on 18th April,
1998 at 9.30 a.m. at Chennai. The petition will be heard on merits as already
fixed on 27th, 28th and 29th of April, 1998 at New Delhi.”
82. On 27-4-1998
also the Board observed that oral evidence will be taken on 9-6-1998 at 10.30
a.m. at Chennai. I do not know-how the Board can hear the petition on merits even
without completion of trial.
Thereafter the Board started hearing the
matter on 4-1-1998 without recording any evidence, perhaps on the basis of an
affidavit filed by the petitioner No. 9, dated 13-5-1998 wherein he expressed
his inability to produce list witnesses as they are being terrorized and
pressurized in all possible ways by respondents 2 and 3 by the money power at
their command and taking advantage of their position as managing director and
Joint managing director of the 1st respondent-company. It has not considered
even the oral evidence that was adduced on behalf of the petitioners by
observing that it is incomplete. The Board recorded the evidence of the 9th
petitioner prior to filing of Application No. 65 of 1996 he did not depose on
the subsequent events. But at the same time as he is very much conducting the
case personally, and it is not known why he was not examined on subsequent
events and the attendance sheets of the Board do not throw on this aspect any
light having posted the case for adducing evidence after disposing C.A. No. 65
of 1996. Be that as it may it is not known why the respondents were not
examined to prove their case more so to prove the authenticity of the xerox
documents on which they placed reliance.
83. As the
examination of the 9th petitioner was prior to the filing of C.A. No. 65 of
1996 wherein fresh acts of oppression and mismanagement were brought to the
notice of the Board, his evidence is complete on the main allegations in the
company petition. It is not known why he was not examined on those aspects
though he is conducting the case. But the Board brushed aside his evidence by
observing that it is incomplete. At the same time, Mr. Raghavan tried to defend
his client’s case by relying on that evidence. The law of the land is that when
no rebuttal evidence is produced by the opposite party and the version spoken
by the witness remained undisturbed, the natural presumption that arises is
that whatever the witness spoke should be regarded as true and an adverse inference
has to be drawn against the opposite party who did not choose to go into the
witness box and subject himself to the cross-examination on the documents and
material relied on by him before the Court as held by the Supreme Court in
Iswar Bhai C. Patel’s case (supra).
84. While confirming the Judgment of the High Court, that the findings of
the First Appellate Court were not based on proper appreciation of evidence,
their Lordships of the Supreme Court in Rajappa Hanamantha Ranoji v. Mahadev
Channabasappa [2000] 6 SCC 120, observed that :
“Though the High Court has observed that
findings arrived at by the first appellate court are not based on proper
appreciation of the evidence on record and the same are set aside but for all
intents and purposes and in substance the conclusion of the High Court is that
the decision of the first appellate court is based on no evidence and is
perverse. The High Court has rightly drawn an adverse inference on account of
non-examination of Respondent 4, the tenant, as a witness by the appellant. On
the facts and circumstances of the case that was vital and was rather the heart
of the entire matter going to the root of the whole case. There was no
explanation for non-examination of Respondent 4. Clearly, the decree of the first
appellate court is based on no evidence and is perverse” (p. 121)
85. In Habeeb Khan v. Valasula Devi [1996] (2) ALD 822, this Court drew an
adverse inference against the defendant/appellant for withholding important and
material witnesses viz., the 4th defendant Shahbaz Khan and their employee,
Abdul Ahmed. In recording the above finding, the learned Single Judge relied
upon a Judgment of the Supreme Court in Gopal Krishnaji Ketkar v. Mohd. Haji
Latif AIR 1968 SC 1413 and Patel Naranbhai Marghadhai v. Dhualbhai Galpabhai
AIR 1992 SC 2009. In this case, neither the respondents have gone into the
witness box nor their employees who maintained the records were made to depose
to prove the documents filed by the respondents.
In the light of the foregoing
discussions, I find that there is no substance in the contention of the learned
counsel for the respondent that the petitioner has given up his plea for
summoning the original documents in this case forgetting the prayer in the
company petition and C.A. No. 68 of 1994 for the purpose on which the Board did
not pass any orders.
86. To my mind to the extent of allegations in the main petition the
evidence of the 9th petitioner stood un-rebutted and in the normal course the
petition would have been allowed.
Any amount of proof cannot
substitute the pleadings
87. Nextly, the counsel for respondents contended that any amount of proof
on a plea not raised in the pleadings can substitute pleadings, which are the
foundation of the claim of a litigating party and he placed reliance on
Abubakar Abdul Inamdar v. Harun Abdul Inamdar AIR 1996 SC 112 and a Judgment of
the Privy Council reported in Pir Sidik Mahomed Shah v. Masammat [1958] Mad. LJ
7.
I have gone through these
judgments and I have no hesitation to reject the contention of the counsel, as
these two decisions referred to a situation, where evidence was let in without
there being a basic foundation in the pleadings. But, the facts of this case
are converse to the facts of those cases. Here pleadings on both the sides are
complete, while some evidence was let in by the petitioners apart from filing
original documents in their possession, and requested the Board to call for the
original record from the company the respondents simply filed xerox copies of
the documents on which they are placing reliance and no one was examined on
their behalf to prove their case. Hence the above Judgments cannot come to the
aid of the respondents.
Non-examination of respondents is not fatal as
no documents were marked on behalf of the petitioners
88. The Counsel
for the respondents contended that the 9th petitioner though was examined on
behalf of the petitioners did not speak to a single document filed on behalf of
the petitioner and as such the non-examination of the witnesses on behalf of
the respondents is not fatal. It is true that the documents were not marked and
it is definitely a lapse on the part of the Board as well as the counsel who
are expected to know the procedural laws. I have no manner of doubt, had the
counsel for the petitioners conducted the case properly; the hands of the Board
would have been tied in this case. It is not known whether the counsel for the
petitioners is a party to the grave illegalities committed by the Board
wantonly or otherwise. But at the same time, the 9th petitioner spoke in
crystal clear terms in his evidence on the acts complained by the petitioners
and in fact the learned counsel appearing for respondents could not and did not
elicit anything contrary to what the 9th petitioner has spoken in his chief
examination and he stuck to his version except some minor discrepancies which
did not matter much. Even the respondents’ counsel did not cross-examine the
witness with reference to the documents. He being sufficiently a senior
counsel, at least he would have cross-examined the witness with reference to
documents filed by him or examined his witnesses in the manner in which the
counsel for the petitioners examined his witness. That was also not done.
Having pleaded before the Board that recording oral evidence is a must he
cannot now turn round and contend at this belated stage that as the petitioner
failed to mark the documents, non-examination of witnesses by the respondents
is not fatal to the case.
89. In counter
to these arguments of the petitioners, the learned counsel for the
respondent-company contended that the order of the Board can not be held as bad
on the ground that the procedural law is not followed and relied upon a
Judgment of the Supreme Court in Union of India v. T.R. Varma AIR 1957 SC 882,
wherein their Lordships observed as follows :
“10. Now, it is no doubt true that the
evidence of the respondent and his witnesses was not taken in the mode
prescribed in the Evidence Act; but that Act has no application to enquiries
conducted by tribunals, even though they may be judicial in character. The law
requires that such tribunals should observe rules of natural justice in the
conduct of the enquiry and if they do so, their decision is not liable to be
impeached on the ground that the procedure followed was not in accordance with
that, which obtains in a Court of Law.
** ** **
If these rules are satisfied, the enquiry is
not open to attach on the ground that the procedure laid down in the Evidence Act
for taking evidence was not strictly followed. . . .” (p. 885)
But this contention of the learned counsel
runs counter to his argument addressed before the Board in C.A. No. 134 of 1995
to the effect that the provisions of Code of Civil Procedure are applicable
before the Board, which were already referred supra. In this appeal having
contended that the Board need not follow the rules of procedure, now contends
that non-examination of respondents is not fatal as no documents were marked on
behalf of the petitioners. This conduct of the respondents is nothing but
blowing hot and cold; more so in a Judicial Forum and it is nothing but abuse
of process and a vexatious litigation.
90. In Lohia
Properties (P.) Ltd., v. Atmaram Kumar [1993] 4 SCC 6, their Lordships of the
Supreme Court considered the effect of Order-8, Rule-(5)(1), where under the
defendant is duty bound to deny the plaint allegations specifically or by
necessary implication, and held as follows:
“13. Order 8 Rule 5(1) reads as
follows:
Every allegation of fact in the plaint, if not
denied specifically or by necessary implication, or stated to be not admitted
in the pleading of the defendant, shall be taken to be admitted except as
against a person under disability :
Provided that the court may in its discretion require any fact so admitted to be
provided otherwise than by such admission.
14. What is stated in the above is, what
amounts to admitting a fact on a pleading while Rule 3 of Order 8 requires that
the defendant must deal specifically with each allegation of fact of which he
does not admit the truth.
15. to 18. ** ** **
19. Non-traverse would constitute an implied
admission. In the facts of this case the findings of the trial court and that
of the first appellate court could be upheld on this admission. Thus, we find
the High Court was wrong in interfering with this finding. Accordingly, the
appeal will stand allowed. No costs.”
91. In Maseem
Bano (Smt.) v. State of U.P. [1993] Supp. (4) SCC 46, their Lordships of the
Supreme Court held that since the respondents did not dispute that 40 per cent
of the total number of posts had not been filled up by promotion, as pleaded by
the appellants, inasmuch as the said averments had not been controverted, the
High Court should have proceeded on the basis that the said averments had been
admitted by the respondents.
In this case, except filing the written
statement and some xerox copies of the records, no semblance of fair trial has
taken place. Even assuming what the learned counsel for the respondents submits
is true, the Board is expected to observe the rules of natural justice. What is
meant observance of rules of natural justice was considered by the Supreme
Court in A.K. Kraipak’s case (supra) and Industrial Credit & Investment
Corpn. of India Ltd.’s case (supra).
Summary of the lapses
92. Now I sum up
the procedural illegalities or lapses committed by the Board and the manifest
errors evident on the face of the record are :
(1) The Board having taken the stand that the averments made by
the parties in the petition and the counter have to be proved by letting oral
evidence on both sides and the provisions of the Code are applicable to the
proceedings, without giving any reasons, the Board heard the arguments on
4-12-1998 and 16-2-1999 and pronounced orders on 22-3-1999. I have carefully
examined the order passed by the Board as well the attendance sheets to know
the mind of the Board why it has changed its attitude and pronounced the orders
by hearing the learned counsel on both sides. Neither I could cull out anything
from the record nor the respondent’s counsel who appeared before the Board was
able to offer any explanation for the sudden change in the mind of the members
of the Board. To my mind, the procedure followed by the Board, completely vitiated
the proceedings.
(2) Nextly it is seen that in the main petition itself the
petitioners prayed for summoning the original records. In fact in the notice
served on the respondents, it is clearly stated that they shall appear with
original records to answer the allegations but the respondents filed only xerox
copies of the records. When the records have not been produced by the
respondents after receiving the summons, the petitioners filed another
application, (i.e.) C.A. No. 69 of 1994 on 11-4-1994 to summon these records.
Without calling for original records, the Board passed the orders even after
the petitioners brought to the notice of the Board, by filing documentary
evidence, that the respondents are refusing to furnish information by stating under
what law they are entitled for the information. It is yet another illegality.
(3) The petitioner No. 9 went into the witness box and his
cross-examination was completed on 18-10-1995. This evidence is complete on all
aspects on the allegations made in the main petition. The Board started hearing
the case without completing his evidence.
(4) Be that as it may only to the extent of subsequent
allegations, though he did not depose, he proved the allegations by filing
necessary documents. But his evidence was discarded stating that it is
incomplete.
(5)
On the other hand, the respondents
completely failed to prove their case in a manner known to law.
(6) The Board relied on xerox copies of documents, which are not admissible
in evidence in dismissing the case of the petitioners without summoning the
original records though serious allegations of fabrication of documents and
accounts etc., are made against the respondents.
(7) Assuming for a moment that the petitioner failed to examine
the witnesses, under section 59 of the Evidence Act, the respondents are
expected to lead oral evidence in support of their contentions. Further, under
section 102 of the Evidence Act, the burden of proof lies on the respondents to
prove that there is neither mismanagement in running the affairs of the company
prejudicial to the public interest nor there is oppression of the minority
shareholders as alleged in the petition with documentary as well as oral
evidence. That was also not done in this case.
(8) Under section 114(g) of the Evidence Act, the Board is
expected to draw adverse inference against the respondents for not leading any
evidence and also for not producing original records, which are in their
possession before the Board.
(9) The Board having rejected the plea of the petitioners to lead
evidence by affidavits, relied on the retracted affidavits of those persons who
initially gave affidavits in favour of the petitioners, filed by the
respondents, more so without verification in dismissing the case of the
petitioners without reference to the affidavits filed by the petitioners in
support of their plea.
(10) The petitioner No. 9 filed affidavit expressing his inability to
secure the presence of the list witnesses by stating that the respondents 2 and
3 started influencing the witnesses with the money power at their end and also
falsely implicated him as well as others in criminal cases with documentary
evidence. The Board failed to consider whether the acts of the respondents
constitute acts of oppression of minority shareholders or not.
(11) The other illegalities committed by the Board will be considered
while dealing with the merits of the case.
Question of law
93. Nextly, the
learned counsel for the respondents strenuously contended that under section
10F, the High Court can entertain an appeal only on a question of law arising
out of the order and this provision is more stringent than that of section 100
of the Code where under the High Court can entertain the second appeals only on
questions of law. It is further contended that even if the Board failed to
follow the procedure known to law, it cannot be said that any question of law
will arise for consideration in the appeals before the Court and they are
liable to be dismissed. In support of his contention, he cited plethora of
decisions on this aspect.
(1) In CIT v. Scindia Steam Navigation Co. Ltd. [1961] 42 ITR 589
(SC), wherein their Lordships of the Supreme Court while considering section
66(1) of the Act, which is in para materia the same as section 10F to find out
whether a question of law has arisen out of the order or not summarized the
discussion in the Judgment at page 611 as hereunder :
The result
of the facts and circumstances of the case
“(1) When a question of law is raised before
the Tribunal, is dealt with, it is clearly one arising out of its order.
(2) When a question of law is raised before
the Tribunal, but the Tribunal fails to deal with it, it must be to have been
dealt with by it and is therefore even arising out of its order.
(3) When a question of law is not raised
before the Tribunal, but the Tribunal dealt with it, that it will also be a
question arising out of its order.
(4) When a question of law is neither raised
before the Tribunal nor considered by it, it cannot be a question arising out
of its order not-withstanding that it may arise.”
This case cannot be an authority
for the proposition that whether the procedural illegalities committed by the
Tribunal constitute a question of law arising out of the order of the Board or
not.
(2) In T.R. Varma’s case (supra) their
lordships of the Supreme Court having held the Evidence Act is not applicable
to the enquiries conducted by Tribunals even though they may be judicial in
character observed “The law requires that such Tribunal should observe the
rules of natural justice in the conduct of the enquiry and if they do so their
decision is not liable to be impeached on the ground that the procedure
followed is not in accordance with that which obtains in a court of law”.
(3) Malleswara Finance & Investment Co.
(P.) Ltd. v. CLB [1995] 82 Comp. Cas. 836, wherein the Madras High Court in
para 124 of the judgment held that “an appeal under Section 10F of the Companies
Act before this court can be entertained only on a question of law which arises
from that order”.
(4) C. Sri Hari Rao’s case (supra), this
court in the same case, on an appeal filed by the petitioners against the order
of the Board in C.A. No. 65 of 1996 held when the matter is pending before the
Board for final adjudication of the disputes, we do not see any reasons to
entertain an appeal in view of the provisions of section 10F.
None of the above cases can be
considered as an authoritative pronouncement on the issue before this Court,
i.e., whether the procedure adopted by the Board and the perverse finding
recorded by it can be sustained in law. If not whether a question of law will
arise for consideration by the Court from out of the order of the Board.
94. On the other hand a constitution Bench of the Supreme Court in Printers
(Mys.) (P.) Ltd. v. Pothan Joseph AIR 1960 SC 1156 while holding that the
discretion vested in the Court to grant stay is judicial, made the following
observations :
“. . . If the discretion has been exercised by
the trial court reasonably and in a judicial manner the fact that the appellate
court would have taken a different view may not justify interference with the
trial court’s exercise of discretion. As is often said, it is ordinarily not
open to the appellate court to substitute its own exercise of discretion for
that of the trial judge; but if it appears to the appellate court that in
exercising its discretion the trial court has acted unreasonably or capriciously
or has ignored relevant facts and has adopted an unjudicial approach then it
would certainly be open to the appellate court - and in many cases it many be
its duty - to interfere with the trial court’s exercise of discretion. In cases
falling under this class the exercise of discretion by the trial court is in
law wrongful and improper and that would certainly justify and call for
interference from the appellate court. These principles are well
established...” [Emphasis supplied] (p. 1159).
The Supreme Court has taken a similar view
with regard to the observance of principles of natural justice by Tribunals
exercising quasi-judicial powers in a decision reported in A.K. Kraipak’s case
(supra).
95. In Bhagwan
Sharma v. Smt. Bani Ghosh AIR 1993 SC 398 a Constitution Bench of the Supreme
Court held “that the High Court is certainly entitled to go into the question
as to whether the findings of fact recorded by the first appellate court which
was the final court of fact were vitiated in the eye of law on account of
non-consideration of admissible evidence of vital nature...” (p. 398).
To the same effect is the judgment of the
Supreme Court in Ishwar Dass Jain’s case (supra), their Lordships of the
Supreme Court held :
“(that) the Court (the first appellate Court)
is under a duty to examine the entire relevant evidence on record and if it
refuses to consider important evidence having direct bearing on the disputed
issue and the error which arises as of a magnitude that it gives birth to a
substantial question of law, the High Court is fully authorized to set aside
the finding. This is the situation in the present case.” (p. 429) Their
Lordships further held “that where the findings by the Court of facts is
vitiated by non-consideration of relevant evidence or by an essentially
erroneous approach to the matter, the High Court is not precluded from
recording proper findings.” (p. 429)
96. Nextly in
Dilbagrai Punjabi v. Sharad Chandra AIR 1988 SC 1858 their Lordships of the
Supreme Court held that “the Court is under a duty to examine the entire
relevant evidence on record and if it refuses to consider important evidence
having direct bearing on the disputed issue and the error which arises is of a
magnitude that it gives birth to a substantial question of law, the High Court
is fully authorized to set aside the finding.”
97. Similar is
the view taken by the Supreme Court in Sundra Naicka Vadiyar v. Ramaswami Ayyar
AIR 1994 SC 532, wherein it held that “ignoring some of the documents which are
vital for deciding the question of possession also vitiated the finding on the
question of possession recorded by the Trial Court as well as the first
Appellate Court.”
98. In Sree
Meenakshi Mills Ltd. v. CIT AIR 1957 SC 49. Their Lordships of the Supreme
Court while interpreting section 66(1) and (2) of the Indian Income-tax Act,
1922, under which a reference has to be made to the High Court only on question
of law, observed that “(1) finding on a question of fact is open to attack as
erroneous in law only if it is not supported by any evidence or if it is
unreasonable and perverse; (2) when a conclusion has been reached on an
appreciation of a number of facts established by the evidence, whether that is
sound or not must be determined not by considering the weight to be attached to
each single fact in isolation, but by assessing the cumulative effect of all
the facts in their setting in the picture as a whole. [Emphasis supplied]
99. Lastly their
Lordships observed “inference from the facts would be a question of fact or of
law according as the point for determination is one of pure fact or mixed
question of law and fact... Under section 66(1) of the Act is it only a
question of law that can be referred for decision of the Court and it is
impossible to argue that the conclusion of the Tribunal is nothing but one of a
fact, it has been held on the corresponding provisions in English Income-tax
statutes that finding on a question of fact is open to attack as erroneous in
law only if it is not supported by any evidence or if it is unreasonable and
perverse.”
100. In Kondiba
Dagadu Kadam v. Savitribai Sopan Gujar [1999] 3 SCC 722, their Lordships of the
Supreme Court while interpreting section 100 of the Code held that the High
Court cannot substitute its opinion for the opinion of the first appellate
court unless it is found that the conclusions drawn by the lower appellate
court were erroneous being contrary to the mandatory provision of laws
applicable or its settled position on the basis of pronouncements made by the
Apex Court, or was based upon inadmissible evidence or arrived at without
evidence.
101. In Ashwinkumar
K. Patel v. Upendra J. Patel [1999] 3 SCC 161 their Lordships of the Supreme
Court posed a question and answered as follows:
“7. The point for consideration is whether the order of the High Court
in remitting the matter to the trial court was necessary. Question also is
whether this Court should remand the case to the High Court in the event of
this Court holding that the remand by the High Court was not called for. If not,
whether the order of the trial court is to be sustained.
8. In
our view, the High Court should not ordinarily remand a case under Order 41
Rule 23 CPC to the lower court merely because it considered that the reasoning
of the lower court in some respects was wrong. Such remand orders lead to
unnecessary delays and cause prejudice to the parties to the case. When the
material was available before the High Court, it should have itself decided the
appeal one way or the other. It could have considered the various aspects of
the case mentioned in the order of the trial court and considered whether the
order of the trial court ought to be confirmed or reversed or modified. It
could have easily considered the documents and affidavits and decided about the
prima facie case on the material available. In matters involving agreements of
1980 (and 1996) on the one hand and an agreement of 1991 on the other, as in
this case, such remand orders would lead to further delay and uncertainty. We
are, therefore, of the view that the remand by the High Court was not
necessary.
9. We
have also considered whether, on that account, we should send back the matter
to the High Court for consideration of the appeal. We are of the view that on
the facts of this case, this Court can decide whether the temporary injunction
granted by the trial court should be confirmed or not. We are, therefore, not
remitting the matter to the High Court because a further remand would lead to
delay and perhaps one more special leave petition to this Court.” (p. 164)
102. In the light
of the preponderant view of the Supreme Court, I have no hesitation to hold
that the order passed by the Board is neither in accordance with the rules of procedure
prescribed under the provisions of Civil Procedure Code nor based on the
principles of natural justice. The Board passed the impugned order in a manner
unknown to law and in an arbitrary manner apart from the fact that the findings
recorded by it on merits of the case are not only perverse but unknown to
adjudicatory process of the land as discussed below. There being an error
apparent on the face of the orders of the Board, as pointed supra, definitely a
question of law has arisen from out of the order of the Board to be decided by
this Court under section 10F.
Whether matter to be remitted back for fresh
disposal in accordance with law
103. In the normal
course, the matter has to go back to the Board for fresh disposal in accordance
with law. If I adopt such a course, a dispute pending for over a decade will be
in the Courts for another decade or two as there is every possibility of
carrying the matter in appeal till all the forums that are involved in the
adjudicatory process are exhausted by one or the other party.
104. Secondly, 9th
petitioner in the open Court expressed that he is not even being paid dividends
all these years and he will be satisfied if the value of the shares held by his
family members and his friends is paid to them and they are not interested in
continuing as shareholders in the 1st respondent-company and it is for R. 2 to
administer the affairs of the company in a manner he likes as long as the
majority shareholders approve his actions. In opposition of the claim of petitioners,
the counsel for R. 2 strenuously contended that the direction given by the
Board is not supported by any reasons and as such the Company cannot be
compelled to purchase the shares. In the light of this contention, I directed
the counsel to argue the case on merits to find out whether cogent reasons can
be given for the direction given by the Board on the basis of the material
available on record including the documents, which were not looked into by the
Board. I am fortified in my view by several judgments of the superior Courts.
105. In Bechan
Pandey v. Dulhin Janki Devi AIR 1976 SC 866, their Lordships of the Supreme
Court while considering the plea of the plaintiff/appellant for remand of the
case, in a suit for declaration of title and possession, partly decreed by the
trial court, but was dismissed in its entirety by the High Court, held as
follows :
“. . . to remand the suit to the trial court
would necessarily have the effect of keeping alive the strife between the
parties and prolonging this long drawn litigation by another round of legal
battle in the trial court and thereafter in appeal. It is time, in our opinion,
that we draw the final curtain and put an end to this long meandering course of
litigation between the parties. If the passage of time and the laws of nature
bring to an end the lives of men and women, it would perhaps be the demand of
reason and dictate of prudence not to keep alive after so many years the strife
and conflict started by the dead. To do so would in effect by defying the laws
of nature and offering a futile resistance to the ravage of time. If human life
has a short span, it would be irrational to entertain a taller claim for
disputes and conflicts which are a manifestation of human frailty. The Courts
should be loath to entertain a plea in a case like the present which would have
the effect of condemning succeeding generation of families to spend major part
of their lives in protracted litigation....” (p. 869)
106. In Ashwani
Kumar v. Upender J. Patel AIR 1996 SC 1125, their Lordships of the Supreme
Court held as follows :
“that the High Court should not ordinarily
remand a case under Order-41, Rule-23 CPC to the lower court merely because it
considered that the reasoning of the lower Courts in some respects was wrong. Such
remand orders lead to unnecessary delays and cause prejudice to the parties to
the case. When the matter was available before the High Court; it should have
itself decided the appeal one-way or other. It could have considered the
various aspects of the case mentioned in the order of the trial court, ought to
be confirmed or reversed or modified. It could have easily considered the
documents and affidavits and decide about the prime facie case on the basis of
the material available on record.”
107. In Shri Bhagwan Sharma’s case (supra), their
Lordships of the Supreme Court held as follows:
“The High Court is certainly entitled to go
into the question as to whether the findings of fact recorded by the first
appellate court which was the final court of fact were vitiated in the eye of
law on account of non-consideration of admissible evidence of vital nature.
But, after setting aside the findings of fact on that ground the Court had
either to remand the matter to the first appellate court for a rehearing of the
first appeal and decision in accordance with law after taking into
consideration the entire relevant evidence on the records, or in the
alternative to decide the case finally in accordance with the provisions of
section 103(b). If in an appropriate case the High Court decides to follow the
second course, it must hear the parties fully with reference to the entire
evidence on the records relevant to the issue in question and this is possible
if only a proper paper book is prepared for hearing of facts and notice is
given to the parties. The grounds which may be available in support of a plea
that the finding of fact by the court below is vitiated in law does not by
itself lead to the further conclusion that a contrary finding has to be finally
arrived at on the disputed issue. On a reappraisal of the entire evidence the
ultimate conclusion may go in favour of either party and it cannot be
prejudged.” (p. 398)
108. In Sundra
Naicka Vadiyar’s case (supra), their Lordships of the Supreme Court held that
“Concurrent findings of fact - Re-appreciation - Findings on possession by
ignoring documents evidencing the compromise documents pertaining recitals of
surrender of possession and other material evidence, such as dismissal of
eviction proceedings between same parties in terms of compromise before the
Revenue Court - Interference in Second Appeal justified.”
109. In Dilbagrai
Punjabi’s case (supra), their Lordships of the Supreme Court observed that “...
The Court is under a duty to examine the entire relevant evidence on record and
if it refuses to consider important evidence having direct bearing on the
disputed issue and the error which arises is of a magnitude that it gives birth
to a substantial question of law, the High Court is fully authorised to set aside
the finding....”
110. In Bhairab
Chandra Nandan v. Ranadhir Chandra Datta [1988] SCC 383 their Lordships of the
Supreme Court held that “even though formally an issue not framed but if
parties went to trial and adduced evidence keeping that issue in mind and drew
attention of Court in that regard, appeal need not be remanded for a finding on
that question.”
111. In Thamma
Ramachandra Rao v. The Madras State [1956] ALT 24 (NRC), it is held that an
Appellate Court is not bound to remand the case for trial of an issue on which
no finding was recorded but is entitled to give its own decision, if the
evidence on record is sufficient.
112. I am satisfied
that even with the scant evidence that is available on record in this case,
whether admissible or inadmissible, the dispute can be adjudicated without
remanding the matter for fresh disposal by the Board by verifying the xerox
copies of the records by summoning the originals, more so in the light of the
submission of 9th petitioner that their group is satisfied with the direction
given by the Board.
But, the counsel for the respondents contended
that if the Court feels that the order of the Board is cryptic, it has to
remand the matter. In support of his plea, he placed reliance on Shree
Consultations & Services Pvt. Ltd. v. K.N. Sankaranarayanan [1995] 84 Comp.
Cas. 473[`1] (Mad.), wherein
their Lordships of the Madras High Court held as follows :
“We have carefully considered the submissions
of learned counsel appearing on either side. A perusal of the memorandum of
grounds of appeal filed in this court against the order of the Company Law
Board also shows that the appellants before the learned single judge
(respondent Nos. 1 and 2 before us) were equally aggrieved against the manner
of disposal of the preliminary objection and contended that the Company Law
Board ought not to have decided the issue in such a summary fashion and the
laconic order passed without objective consideration or assigning any reasons
therefore cannot be sustained. That apart, several factual issues such an
discrepancies in the signatures found in the consenting letter, the varying
numbers of such persons who subscribed their signature to the letter of consent
are very serious as also vital questions of fact which deserve a proper and
effective enquiry or trial at the hands of the Company Law Board. That apart,
the locus standi or authority of Mr. C.P. Sodhani, to present the application
in the absence of a resolution of the board of directors authorizing him to do
so was also raised. We also find from the order of the Company Law Board
challenged on appeal before the learned single judge that the Company Law Board
has passed a cryptic order holding that after carefully considering the views
of both counsel and the facts of the case they came to the conclusion that the
consent given in annexure 2 meets the requirement of section 399 and,
therefore, the petition was maintainable. No reasons or judicious discussion or
consideration of any of the contentions or the facts and circumstances of the
case have been assigned or made in the order which involve serious
consequences. In the background of such contentions and serious lapse and
omission on the part of the Company Law Board the learned single judge ought to
have in our opinion, set aside the order of the Company Law Board and remitted
the matter for fresh consideration of the Company Law Board instead of
undertaking an adjudication of some of the legal issues which depend very much
on vital issue of fact....” (p. 485)
I have already recorded the reasons for
re-appreciating the evidence on record. Hence, this contention is also
rejected.
Subsequent events
113. The counsel
for the respondents nextly contended that the Court must confine itself to the
case as made out in the petition and the subsequent events, if any, brought to
the notice of the Court cannot be looked into. In support of his plea, he
relied on a Judgment of the Supreme Court in Venkataramana Devaru v. State of
Mysore AIR 1958 SC 255. In that case the counsel for the appellants raised a
new plea stating that the subject temple was originally found for the benefit
of five families of Gowd Saraswth Brahmins and it cannot be treated as a public
institution by contending that it is purely a question of law. Rejecting the
contention of the counsel their Lordships of the Supreme Court held that we are
unable to agree with the submission. “The object of requiring a party to put
forward his pleas in the pleadings is to enable the opposite party to
controvert them and to adduce evidence in support of his case. And it would be
neither legal nor just to refer to evidence adduced with reference to a matter,
which was actually in issue and on the basis of that evidence, come to a
finding on a matter which was not in issue and decide the rights of parties on
the basis of that finding.” (p. 256)
I have no manner of doubt that the above
Judgment cannot be pressed into service by the counsel for the simple reason
that the issue was sought to be raised at the level of the Apex Court without
there being any foundation in the pleadings and without adducing any evidence
on that aspect. The facts of this case are altogether different. The subsequent
events were brought to the notice of the Board, before it has taken up the Company
Petition for hearing.
He also relied on a Judgment of Calcutta High
Court in Mohta Bros. (P.) Ltd. v. Calcutta Landing & Shipping Co. Ltd.
[1970] 40 Comp. Cas. 119, wherein the Division Bench of the Calcutta High Court
held “that when dealing with a petition for relief from the oppression or
mismanagement made under sections 397 and 398 of the Companies Act, 1956, the
Court must confine itself to the case as made out in the petition and to the
allegations made therein and the supporting affidavits and not to look at the
other evidence with regard to events that might have happened subsequent to the
petition.” (p. 119)
114. I am not
inclined to agree with the reasoning given by the Calcutta High Court for the
reason that the Apex Court in many a case held that the Court is bound to take
subsequent events into consideration even at the appellate stage as the
proceedings being a continuous one and should mould the relief.
115. In Pasupuleti
Venkateswarlu v. Motor & General Traders AIR 1975 SC 1409, Justice V.R.
Krishna Iyer speaking for the Full Bench, while rejecting the argument of the
counsel for the appellant that the High Court committed illegality in taking
cognizance of subsequent events, disastrous as they proved to be, summarized
the legal position as hereunder :
“4. We feel the submissions devoid of
substance. First about the jurisdiction and propriety vis-a-vis circumstances
which come into being subsequent to the commencement of the proceedings. It is
basic to our processual jurisprudence that the right to relief must be judged
to exist as on the date a suitor institutes the legal proceedings. Equally
clear is the principle that procedure is the handmaid and not the mistress of
the judicial process. If a fact, arising after the lis has come to court and
has a fundamental impact on the right to relief or the manner of moulding it,
is brought diligently to the notice of the tribunal, it cannot blink at it or
be blind to events which stultify or render inept the decretal remedy. Equity
justifies bending the rules of procedure, where no specific provision or
fairplay is violated, with a view to promote substantial justice-subject, of
course, to the absence of other disentitling factors or just circumstances. Nor
can we contemplate any limitation on this power to take note of updated facts
to confine it to the trial court. If the litigation pends, the power exists,
absent other special circumstances repelling resort to that course in law or
justice. Rulings on this point are legion, even as situations for applications
of this equitable rule are myriad. We affirm the proposition that for making
the right or remedy claimed by the party just and meaningful as also legally
and factually in accord with the current realities, the court can, and in many
cases must, take cautious cognisance of events and developments subsequent to
the institution of the proceedings provided the rules of fairness to both sides
are scrupulously obeyed. On both occasions the High Court, in revision, correctly
took this view. The later recovery of another accommodation by the landlord,
during the pendency of the case, has as the High Court twice pointed out, a
material bearing on the right to evict, in view of the inhibition written into
section 10(3)(iii) itself. We are not disposed to disturb this approach in law
or finding of fact.” (p. 1410)
116. In fact, the
Board itself in its order dated 18-12-1997 held that since now the matters
relating to section 397 or 398 are solely within the jurisdiction of the Board,
we would like to settle this issue once for all in the following terms :
(a) Section 397 or 398 of the Act has to stand on its own on the
basis of the allegations contained in the petition. Subsequent events brought
on record alone, in case the main petition fails on merits, cannot entail a
person to any relief. In case the allegations in the main petition are placed,
then subsequent events may be taken into consideration by the Board in moulding
the suitable relief.
117. From this it
is seen that the Board did not close the doors for 9th petitioner to raise
subsequent events also during the course of the arguments in the main case. In
fact the Board considered these two new issues that were brought to the notice
of the Board in C.A. No. 65 of 1996 in the impugned orders. Hence, it is too
late in the day to contend that subsequent events that have taken place after
filing of the petition cannot be taken into consideration, more so, when the
subsequent events were brought to the notice of the Board even before the case
was taken up for hearing, i.e., when the petition is still at the preliminary
stage of completing the formalities before taking up the petition for trial.
Hence, the contention of the counsel that subsequent events brought to the
notice of the Board in C.A. No. 65 of 1997 cannot be looked into for moulding
the relief has no legs to stands.
Vague allegations
118. The learned
counsel for the respondents strenuously contended that the allegations of
oppression and mismanagement are very vague and the petitioners have not given
full particulars of the acts alleged by them. Hence the company appeal is
liable to be dismissed. In support of his contention, he placed reliance on a
judgment of Calcutta High Court in Mohta Bros. (P.) Ltd.’s case (supra),
wherein it was held that “vague and uncertain allegations of oppression and
mismanagement although they may constitute grounds for suspicion, do not
entitle a person to ask the court to embark upon an investigation into the
affairs of a company in the hope that, in consequence of such investigation,
something will turn up which will enable the court to grant relief to the
petitioner and the petitioner must prove prima facie, at any rate that an
investigation is called for.”
119. In R. Khemka’s
case (supra) at para 93 after considering the case law, a learned Judge of this
Court observed that “...it is now beyond controversy that in a petition under
sections 397 and 398, it is to be specifically pleaded and established by the
party not only the existence of circumstances warranting winding up of the
company under the ‘just and equitable’ clause, but also it should be further
established that winding up order if passed would act adverse to the interest
of the shareholders. Further, when this clause is invoked, there must be
material to show that it is just and equitable not only for the persons
applying for winding up but also to the company and all its shareholders. Even
in certain cases, violation of statutory provisions was held to be not
oppressive act warranting interference under section 402 of the Companies Act.”
(p. 152)
120. In
Venkataramana Devaru’s (supra), the Supreme Court held that “the object of
requiring a party to put forward his pleas in the pleadings is to enable the
opposite party to controvert them and to adduce evidence in support of his case
and it would be neither legal nor just to refer to evidence adduced with
reference to a matter which was actually in issue and on the basis of that
evidence....” (p. 256)
121. In S.
Seetharaman v. Stick Fast Chemicals (P.) Ltd. [1998] 93 Comp. Cas. 507[`2] (Mad.) the Madras
High Court held that in a petition filed under section 397 of the Companies
Act, 1956, the petition should contain all material facts. In the case of
fraud, mismanagement, oppression, etc., full and complete particulars must be
alleged in the petition. Subsequent affidavits are not enough. The petitioner
must plead all material facts necessary for granting the relief as prayed for.
122. Countering the
arguments of the counsel for the respondents, the counsel for the petitioners
placed reliance in M. Harichandra Prasad v. Chitturi Krishnamurthy 1997 (1) ALD
330, wherein this Court as follows :
“Pleading should receive a liberal
construction. There may be many instances wherein the pleadings are incomplete,
but during trial the parties place many materials before the Court either
directly touching the actual controversies between them or incidentally
touching upon such questions, where the Court could draw inferences and render
justice. If a plea is not specifically made and yet it is covered by an issue
by implication and the parties knew that the said plea was involved in the
trial then the mere fact that the plea was not expressly taken in the pleadings
would not necessarily disentitle a party from relying upon it if it is
satisfactorily proved by evidence. That is how even by invoking its powers
under Order VI, Rule 2 of CPC the Court will would the relief taking the
subsequent events as judicial notice.”
123. In
Hari Singh v. Kanhaiya Lal AIR 1999 SC 3325, the Supreme Court reversed the
concurrent findings of the Courts below on the ground of lack of details in
pleadings. Their Lordships of the Supreme Court observed, “it is not in dispute
that there is pleading that the disputed premises was sub-let. Details if any
can be supplemented through evidence. Mere lack of details in pleadings cannot
be reason to set aside concurrent finding of facts.”
124. In Mir
Niyamath Ali Khan v. Commercial & Industrial Bank Ltd. AIR 1969 AP 294, a
Division Bench of this Court held that “normally the Court will not grant the
relief to the plaintiff on a case for which there was no foundation laid in the
pleadings and which the defendant was not called upon to met. But when the
alternative case which the plaintiff could have made was admitted by the
defendant either in his written statement or in his evidence and the parties
adduced evidence relating to such an alternative claim, there would be nothing
improper in giving the plaintiff a decree upon such alternative plea.”
125. In Kalka
Prasad Ram Charan v. Harish Chandra AIR 1957 All. 25, the Allahabad High Court
held that “even though no issue was framed on certain point by the court below
when both parties adduced evidence relating to it, each party known what its
case is and avails of the opportunity of producing evidence on the point, High
Court can, in an appeal from the decision, record a finding on the point under
Order 41 Rule 24 of C.P.C.”
I have seen the order of the Board, evidence
and the written arguments submitted by both the parties. I have no hesitation
to hold that sufficient details of the allegations of oppression and
mismanagement were given in the petition. The 9th petitioner not only deposed on
those allegations but he was also subjected to cross-examination by the counsel
for the respondents.
126. From the
written arguments submitted by the counsel for the respondents and the order of
the Board it is seen that both the counsel addressed arguments very elaborately
and the Board recorded findings on some of the issues and reference was made to
some other issues without giving a finding and certain other issues were not at
all considered for reasons best known to it. Hence I hold that there is no vagueness
in the allegations in the petition, at any rate, parties addressed arguments on
all the issues knowing fully well the issues in controversy and in fact the
Board recorded findings adverting to their arguments. To my mind the
respondents are blowing hot and cold in the judicial proceedings. With regard
to the findings of the Board that are in their favour they are trying to take
advantage of it knowing fully well that the Board conducted the proceedings in
very shabby manner unknown to law and on the findings that are inconvenient to
them they are raising all sorts of pleas. In the result, I do not find any
substance in this contention.
If the action of the board is illegal the same
has to be questioned in a court of law and petition under sections 397 and 398
of the Act is not an appropriate remedy
127. Nextly, the
counsel for the respondents contended that if any of the actions of the Board
of directors is illegal or invalid, the appropriate remedy for the shareholders
would be to question the validity of such action in a Court of law, but a
petition under sections 397 and 398 of the Act is not an appropriate action for
the purpose. In support of his contention the learned counsel relied on a
decision of Delhi High Court reported in Suresh Kumar Sanghi’s case (supra).
His Lordship Justice Kripal as he then was, observed that “the powers of the
Court while deciding a petition under section 397 or section 398 of the Act,
are very wide and in exercise of the powers under these sections, the Court has
further been given powers to pass orders in terms of section 402 of the Act.
However no orders under section 402 of the Act can be issued or relief granted
under section 397 or 398 of the Act unless the case can be brought by the
petitioner within the ambit of section 397 or 398 of the Act. His Lordship
further held that relief under section 398 of the Act can be obtained only if
(1) the affairs of the company are being conducted in a manner prejudicial to
public interest or the interests of the Company, or (2) if there is a material
change which has taken place in the management or control of the Company in the
manner set out in the said section, and that by reason of such change it is
likely that the affairs of the company will be conducted in a manner prejudicial
to public interest or in a manner prejudicial to the interest of the company.
Section 397 of the Act would be applicable only in the case of oppression by
the majority shareholders on the minority shareholders. Section 397 of the Act
does not come into play in the case of wrongful acts being done by the
management. That may be a ground for winding up. One of the pre-requisites of
the applicability of section 398 of the Act is that the complaint of oppression
has to be by the minority shareholders. If an action of the directors is
illegal or invalid then the company or the shareholders may take appropriate
action in a Court of law by challenging the validity of such an action, but a
petition under section 397 or section 398 of the Act is not an appropriate
remedy for the purpose. In order constitute oppression within the meaning of
section 397 of the Act there must be continuous acts on the part of the
majority shareholders, continuing up to the date of the petition, showing that
the affairs of the company were being conducted in a manner oppressive to some
part of the members.” (p. 235)
“The conducting of affairs prejudicial to the
interests of the company by the persons who are in the control or the management
gives the court jurisdiction to pass appropriate orders to bring to an end the
matter complained of. Neither section 398 of the act nor section 402 of the act
provides that only such orders can be passed which will result in handing over
the management of the company to the aggrieved persons, in granting relief
under section 398 and section 402 of the Act not only is the interest of the
company to be kept in view, but also other equitable considerations have to be
taken into account.” (p. 236)
From the above, it is seen that while certain
actions of the directors are illegal or invalid, the shareholders can question
the validity of such an action in a court of law. But section 397 comes into
play when minority shareholders allege oppression by the majority shareholders
and section 398 comes into play when the affairs of the company are being
conducted in a manner prejudicial to the public interest and not in the
interest of the company. To constitute oppression within the meaning of section
397 the acts must be continuous on the part of the majority shareholders and
continuing up to the date of the petition. From the pleadings, it is seen that
a series of instances, not only continuous acts of oppression, but also the
acts of mismanagement were alleged. I have absolutely no quarrel with the
proposition laid down in this case. But, I would like to see whether my
investigation into the facts of the case satisfy the tests laid down in various
cases referred supra on acts of suppression.
To the same effect the counsel cited another
judgment of the Gujarat High Court in Sheth Mohanlal Ganpatram v. Shri Sayaji
Jubilee Cotton & Jute Mills Co. Ltd. [1964] 34 Comp. Cas. 777. In that case
a textile mill run by the company having entered into an adat agreement with a
firm for supply of working capital for running the mill and to purchase yarn
for the company on commission basis. The mill run by the company started
incurring losses and the majority of the shareholders sold the mill both on the
ground of losses incurred by the company and also on the ground that machinery
of the mill became old and obsolete. After the sale was concluded, a minority
of shareholders of the company applied to the court under sections 397 and 398
alleging that the termination of the adat agreement and sale of the mill were
oppressive acts, prejudicial to the interests of the company and claimed that
the sale should be set aside. His Lordship justice Bhagawati, as he then was,
ruled “neither the termination of adat agreement nor sale of assets of the mill
are prejudicial to the interests of the company and it could not be said to be
a continuing wrong, hence, a petition to set aside the sale under sections 397
and 398 of the Act is not maintainable.”
In this case the minority shareholders complained
against a solitary act of mismanagement, that too selling the mill as it is
continuously incurring losses.
But in this case not only a series of acts of
mismanagement but also acts of oppression were alleged and if the petitioners
are able to prove them, this case will definitely attract the provisions of
sections 397, 398 and 402. Hence any of the cases cited by him will not come in
aid of his contention. Accordingly, this contention also has no legs to stand
and accordingly rejected.
All the directors were not made party
respondents
128. The next
contention of the counsel was that out of nine board of directors, only the
managing director and joint managing director were impleaded and as the Board
has to be treated as an independent one and as all the decisions were taken by
the Board, apart from R2 and R3 a petition under sections 397 and 398 is not
maintainable without impleading them as party respondents to the proceedings.
This contention is answered by their Lordships
in a case reported in Shoe Specialities Ltd.’s case (supra), wherein their
Lordships of the Madras High Court held as follows :
“We are not hampered by such rigid
technicalities of procedure and if the minority in a company complains of an
oppression and discloses certain grounds of complaint in the petition which are
made the basis for the relief, we would hold that the court should ordinarily
investigate the charges. Such investigations may in certain cases, be necessary
even to regulate the future conduct of the company for providing against
recurrence of such abuses of power by majority. We are, therefore, of opinion
that notwithstanding the omission in the petition to pray for relief against
the delinquent directors, an enquiry into the charges against them was properly
within the scope of the petition. Sections 402 and 406 of the Indian Companies
Act give ample jurisdiction to the court to dispose of the matter in the larger
interest of the company.
129. In Nalam Satya
Prasada Rao v. Vinupamula Lakshmi Narasimha Sastry [1991] 70 Comp. Cas. 303,
this court adverting to the preliminary objection of the respondents 1 to 4 as
to the maintainability of the company Petition in view of the death of 1st
respondent during the pendency of the Company Petition having held that
respondents 2 to 4 who are already on record represented the 1st respondent,
observed as follows :
“. . . At any rate, the relief prayed for
under sections 397 and 398 of the Act is against the company as such there can
be no variation in the number of shares. Even assuming that the unmarried
daughter of the 1st respondent is entitled to any shares, the estate of the
deceased 1st respondent is amply represented by respondent Nos. 2 to 4 who are
already on record, and hence I hold that the interests of the 1st respondent
are amply safeguarded. As such, the decision of the Allahabad High Court in
J.K. Investment Trust Ltd. v. Muir Mills Co. Ltd. [1962] 32 Comp. Cas. 893, has
no application because, the alleged acts of oppression and mismanagement are
directed not merely against the 1st respondent but against respondent Nos. 2 to
4 also. In as much as respondent Nos. 2 to 4 were already on record in the
company petition, I hold that their can be no objection to continuing the
proceedings against them. I, therefore, hold that this objection cannot be
sustained. (p. 310)
130. In Malleswara
Finance & Investment Co. (P.) Ltd.’s case (supra), the question that fell
for consideration before the Madras High Court was whether the order of the
Board passed on an application filed by respondents 4 to 7 under sections 397
and 398 was violative of principles of natural justice as the petitioner was
not given an opportunity to present its case. Answering to the said contention,
a Division Bench of the Madras High Court held as follows :
“In a proceeding under sections 397 and 398 of
the Companies Act, the only question to be decided is, whether the affairs of
the company are being conducted in a manner prejudicial to the interest of the
company or in any manner prejudicial to its member, or whether there is any
material change that has taken place in the management and control of the
company, and whether such constitution has affected or (is) likely to affect
the affairs of the company. When we read these two sections, it is clear that the
Company Law Board has taken into consideration how the company has been
managed. It is not the individual’s right or the right of the
individual/shareholder or creditor that is the subject matter of the
litigation. The proceedings under sections 397 and 398 are like a declaratory
suit. It is for that reason, the Companies Act, provides that any person who is
not a party can get himself impleaded in the proceedings. Section 405 of the
Companies Act says :—
‘If the managing director or any other
director, the managing agent, secretaries and treasurers or the manager, of a
company, or any other person, who has not been impleaded as a respondent to any
application under section 397 or 398 applies to be added as a respondent
thereto, the Company Law Board shall, if it is satisfied that there is
sufficient cause for doing so, direct that he may be added as a respondent
accordingly.’
A reading of the said section will make it
clear that if sufficient cause is shown, any person who has not been impleaded
as a respondent to any application under section 397 or 398 can get himself
impleaded, if he desires.....” (p. 855) (82 Comp. Cas.)
Further under Order 29 Rule 1 of CPC, a
company being a juristic entity it can sue and be sued in its own name. In
United Bank of India v. Naresh Kumar AIR 1997 SC 3, the Supreme Court held as
follows :
“It cannot be disputed that a company like the
bank can sue and be sued in its own name. Under order 6, rule 14 of the CPC, a
pleading is required to be signed by the party and its pleader, if any. As a
company is a juristic entity it is obvious that some person has to sign the
pleadings on behalf of the company order 29, rule 1 of the CPC, therefore,
provides that in a suit by or against a corporation the Secretary or any
Director or other principal Officer of the corporation who is able to depose to
the facts of the case might sign and verify on behalf of the company, Reading
Order 6, Rule 14 together with Order 29, Rule 1 of the Code of Civil Procedure
would appear that even in the absence of any formal letter of authority or
power of attorney having been executed a person referred to in Rule 1 of Order
29 can, by virtue of the office which he holds, sign and verify the pleadings
on behalf or the corporation. In addition thereto and de hors Order 29, Rule 1,
as a company is a juristic entity, it can duly authorize any person to sign the
plaint or the written statement on its behalf and this would be regarded as
sufficient compliance with the provisions of Order 6 Rule 14......” (p. 4)
From the above it is seen that the 1st
respondent-company having been incorporated under the provisions of the
Companies Act and being the corporate body it can sue and be sued in its name
and it can duly authorize any person to sign the plaint or written statement on
its behalf and it should be regarded as sufficient compliance under the
provisions of order 6, rule 14 of the Code. Secondly, any application filed
under sections 397 and 398 the only question that falls for consideration is
whether the affairs of the company are being conducted in a manner prejudicial
to the public or the interests of the company itself or in a manner oppressive
to the minority shareholders.
131. Admittedly, in
this case, the company the juristic person having been incorporated under the
provisions of the Act, it is a juristic person and the same is represented by
its Secretary. In fact the managing director and the Joint managing director
who are responsible in conducting the affairs of the company, according to the
petitioners, in bad faith were also impleaded as an abundant precaution. Hence
the contention of the learned counsel for the respondents that the company
petition is not maintainable on the ground that all the Board Directors were
not made parties to the proceedings has no legs to stands. Accordingly, this
contention was also rejected.
The procedure followed by the Board was not
questioned in the appeal
132. Nextly, Mr.
Raghavan contended that the petitioners did not raise any objection for the
procedure followed by the Board even in the grounds of appeal and therefore,
this Court is not justified in interfering with the order of the Board on the
ground of procedural lapses, at any rate the same cannot be a ground for
interference by the Appellate Court. It is true that the petitioners did not
question the procedure followed by the Board specifically. But at the same
time, when it has come to the notice of the Court that the orders suffers from
serious infirmities, and the Board committed a manifest error which vitiated the
entire proceedings before the Board and that being a pure question of law, the
Court is expected to take judicial notice and rectify the same to prevent
miscarriage of justice. Even on merits, I have no hesitation to hold that the
findings recorded by the Board are perverse and contrary to the record. Hence,
the order suffers from serious infirmities in not following the well
established procedure in adjudicating the disputes apart from the fact that the
findings recorded by the Board cannot be sustained in law. In fact, the
respondents did not raise the objection with regard to maintainability of C.C.
on the ground that all the directors were not made party respondents either
before the Board or in the appeal filed by them in this Court. Even then I permitted
the counsel to raise the issue and answered the same.
133. I am fortified
in my view by a Judgment of the Honourable Supreme Court in Kondiba Dagadu
Kadam’s case (supra), wherein there Lordships of the Supreme Court :
“3. After the amendment a second appeal can be
filed only if a substantial question of law is involved in the case. The
memorandum of appeal must precisely state the substantial question of law
involved and the High Court is obliged to satisfy itself regarding the
existence of such a question. If satisfied, the High Court has to formulate the
substantial question of law involved in the case. The appeal is required to be
heard on the question so formulated. However, the respondent at the time of the
hearing of the appeal has a right to argue that the case in the court did not
involve any substantial question of law. The proviso to the section
acknowledges the powers of the High Court to hear the appeal on a substantial
point of law, though not formulated by it with the object of ensuring that no
injustice is done to the litigant where such a question was not formulated at
the time of admission either by mistake or by inadvertence.” (p. 724)
Hence, this
contention is also rejected.
Whether one tenth of the shareholders
should be there to continue the proceedings
134. Nextly, the counsel tried to make a feeble attempt by contending that
unless one tenth of the shareholders join the Appeal, the same is not
maintainable by pointing out that some of the petitioners withdrew from the
petition. While the counsel admits the fact that on the day when the
application was filed, the petitioners in the petition were holding more than
11 per cent shares, contends that after withdrawal of the legal representatives
of the 1st petitioner and the other two petitioners, the shares held by the
petitioners fell short of 10 per cent of the shares. But the counsel himself
conceded that there would not be any impediment for continuing the proceedings
even if the shareholding of the petitioners is less than 10 per cent of the
shareholding of the company.
135. Be that as it may, this issue is covered by a Judgment of the Supreme
Court in A. Rajahmundry Electric Supply Corpn. Ltd. v. A. Nageshwara Rao AIR
1956 SC 213. In the above case, while considering the objections of the
Chairman of the company that, though the petitioner stated that he obtained
consent of 80 shareholders for filing an application under section 162(vi) of
the old Act for winding up of the company, only 52 persons consented for filing
of the applications and therefore the condition laid down in section
153(c)(3)(a)(i) of the old Act is not complied with. Repelling the said
contention their lordships of the Supreme Court held “that the validity of a
petition must be judged on the facts as they were at the time of its
presentation, and a petition which was valid when presented cannot, in the
absence of a provision to that effect in the statute, cease to be maintainable
for reason of events subsequent to its presentation. Thus, where the applicant
under section 153C of the Act has obtained the consent of not less than
one-tenth of the members of the company and has presented the application, the
withdrawal of consent by some of those members subsequent to the presentation
of the application cannot affect either the right of the applicant to proceed
with the application or the jurisdiction of the Court to dispose of it on its
own merits.” (p. 213)
This contention was not pressed by
the counsel, though he raised the same initially. Accordingly this contention
is also rejected.
Issues in controversy
136. Now coming to
the controversy apart from seeking the relief of winding up of the company for
its mismanagement, under Chapter-VI, the minority shareholders are given the
right to complain to the Board that the affairs of the company are being
conducted in a manner prejudicial to public interest or in a manner oppressive
to any member or members provided they hold not less than one tenth of the
total number of the shares and if the Board is of the opinion that the affairs
of the company are being conducted, as aforesaid. Under section 402 without
prejudice to the generality of the powers of the Board, the order to be passed
under section 397 or 398 may grant one or more reliefs mentioned in this
section including the purchase of the shares or interests of any members of the
company by other members thereof or by the company itself with a view to bring
to an end or prevent the matters complained or apprehended. The other reliefs that
can be granted under section 402 are not being referred to, as 9th petitioner
is satisfied with the relief given by the Board, which is being opposed by the
respondents.
In the light of serious contest put forth by
the respondents, it has to be seen whether the directions given by the board
can be sustained in law or not.
137. Now I would
proceed to examine whether the findings recorded by the Board on the alleged
acts of oppression and mismanagement can be sustained in law. Even if the
findings of the Board cannot be sustained whether the acts alleged by the
minority shareholders against the majority shareholders can constitute an
apprehension in the mind of a prudent person so as to enable the Board to
exercise the powers vested in it. The issues in controversy are referred in
seriatum.
Merits of the case :
Mismanagement :
I. Closure of parcel offices :
(a) Fabrication of the minutes of the Board
meeting dated 7-8-1992 :
138. The case of
the petitioners is that during the year 1992, the respondents 2 and 3 closed as
many as sixty parcel offices without the knowledge or sanction of the board of
directors. The motive behind such closure is to release the lorries connected
to these parcel offices and to dispose of them and pocket the sale proceeds by
showing nominal price, i.e., around the book value in Books of Account. When
the issue was raised by the petitioner No. 9 at the board meeting held on
3-3-1993, the respondents not only fabricated the resolutions of the meeting of
the board of directors dated 7-8-1992 to show that the closure of parcel
offices was effected as per the resolution under Item 12.2 i.e., under any
other item with the permission of the chair and also replaced the minutes of
the board of directors held on 3-3-1993 as if the Board meeting was held on
27-2-1993.
139. The case of
the company is that it is having about 300 parcel offices all over the country
and that the Board at its meeting held on 7-8-1992 under item 12.2, i.e., under
any other subject with the permission of the Chairman the Board has taken a
decision to close down the uneconomic parcel offices as per the details
furnished by the Chairman with immediate effect for efficient running of the
company and to reduce further losses from the branches in future. The board
further resolved to authorise the Chairman to affect the closure of uneconomic
branches. Unfortunately though the issue was very much raised in the pleadings
and 9th petitioner spoke about the fabrication of the minutes of the meeting
dated 7-8-1992 for reasons best known to the Board, it has given a clean chit
by stating that “we are not in a position to doubt the genuineness of the
resolution in as much as in the next Board meeting held on 29-9-1992 which the
petitioner attended, the minutes of the meeting held on 7-8-1992 were
reportedly confirmed” without taking into consideration the explanation offered
by the petitioner that generally such a resolution will be adopted without
reading out the details of the resolutions adopted in the previous meeting, in
his oral evidence. The fallacy of the reasoning is exploded from the replies
given by the company to the letters of the petitioners stating that it was a
managerial act, during day to day business. If the parcel offices were closed
under a resolution of the Board nothing prevented them from stating so while
giving reply to the 1st petitioner. For the first time the respondents came up
with this plea in the counter filed before the Board.
140. Firstly from
the agenda for the Board meeting it is seen that closure of parcel offices was
not included in the agenda for discussion. The minutes of this meeting was
recorded from page 248 onwards to 262 in the minutes book from 24-6-1986 to
7-8-1992 and pages 263 to 272 were left blank. For the next Board meeting new
book was opened. While the first pages of the minutes, i.e., 248 to 250 were
written with one pen, the minutes from page 251 from where the new form of 16
pages started in the book, the minutes were written with a separate pen and the
same is visible to the naked eye. Further this form is re-stitched with the
support of a piece of a cloth. While it is the case of 9th petitioner that this
form was introduced by removing the original form, the company says that as the
binding has become loose in the ordinary course of business this form was
re-stitched by using the cloth for strength. In the normal course this version
of the respondents was to be proved by adducing oral evidence. As the record is
speaking for itself, I am proceeding to test the veracity of the statement.
From the resolution of the Board dated 7-8-1992 it is seen not only a decision
was taken to close down the un-remunerative parcel offices with immediate
effect as per the statement given by the Chairman, but also authorized him to
take decision with regard to closure of uneconomic branches. But it is not
known for what purpose this subject was again included in the Agenda for
discussion in the notices for the meetings dated 19-12-1992 and 3-3-1993/27-2-1993
nearly seven months after the Board passed the resolution. Nextly, it is the
case of the Respondents that at the meeting of the Board dated 27-2-1993
eighteen parcel offices including the offices at Mandya and Gobichettipalyam in
the State of Karnataka were closed. While going through the original minutes
book I found that these two parcel offices were closed under item No. 5(e) in
the Board meeting held on 19-12-1992. When these offices were closed under an
earlier resolution, how these two offices again figured in the meeting dated
27-2-1993 and they were closed again. Nextly it is seen that in the minutes of
the Board held on 29-12-1992 and 27-2-1993 the names of the offices that were
closed were specified. But in the resolution dated 7-8-1992, the list of
offices closed was not mentioned. Further it is seen such an important issue
was taken up for discussion under any other subject with the permission of the
chair. Nextly the note said to have been submitted by the Chairman to the Board
has not seen the light either before the Board or this Court. Likewise, no
information was placed before the Board when each of the parcel office was
opened, the extent of losses the company suffered, more so, when 20 per cent of
the parcel offices relating to one of the main activities of the company are
sought to be closed.
141. As per the
version of 9th petitioner in the Annual General Body meeting held on 25-11-1993
himself and late K. Suryanarayana raised the issue and sought for the list of
parcel offices that were closed. Further, it is not in dispute that late K.
Suryanarayana as well as 9th petitioner in their letters dated 2-11-1993 and
10-11-1993 specifically addressed letters to the company as well as the other
board of directors to furnish the list of places where the offices were closed
with full reasons for closing the parcel offices and from which date they were
closed. The reply of the Company Secretary dated 3-12-1993 sent to K.
Suryanarayana is interesting and it will be useful to extract the same.
“Dear Sir, we have received your letter dated
2-11-1993 and the contents have been noted. The matters referred to by you are
matters to be dealt with the Management during the day-to-day business. Hence,
we are unable to accede to your request.” If closure of offices relates to day
today business of the company, why the same was placed in the Board meeting
dated 7-8-1992 more so under any other item and in other meetings as discussed
above having taken blanket authority to close down the offices. Nextly, when
the Board passed resolution way back on 7-8-1992, how the company failed to
inform the shareholder that under a resolution of the Board, the parcel offices
were closed. Yet the same time no reply was sent to 9th petitioner to his
letter. As he happened to be the director of the company on that day, and they
cannot refuse to give information to him, before the Board a photostat copy of
the acknowledgement which is said to have been signed by 9th petitioner on
27-12-1993 is filed as Annexure-6B by stating that a reply was sent to him on
3-12-1993 asking him to come to office and inspect the same during 2.00 p.m. to
4.30 p.m. on any working day with prior intimation to them. 9th petitioner in
the above letter not only asked for the information, but also requested R2 to
convene Board meeting or put those issues on the agenda at the ensuing Board
meeting for discussions and proper considerations thereon and they reply of R1
do not throw any light on this aspect. It is his specific case that he has not
received any reply from the respondent-company to his letter (Ans. to Q. 131 in
cross). The falsity of the case of R2 is exposed from the fact that the
registered letter sent on 4-12-1993 remained undelivered till 27-12-1993 in the
same town. As per postal rules, if a registered letter remained undelivered for
seven days, it has to be redirected to the sender. It is not known how this
letter remained undelivered in the same town for about 23 days. Further, the
respondent-company did not file the original acknowledgement before the Board
to prove that this acknowledgement relates to the registered letter emanated
from the company on 4-12-1993 and addressed to 9th petitioner. A photostat copy
of one side of the acknowledgement containing the signature of 9th petitioner
was filed but not the reverse side of the acknowledgement, wherein the
addresses’ name is shown but not the sender’s name.
From the above discussion, I have no manner of
doubt in holding that the minutes of the Board meeting dated 7-8-1992 are
fabricated with a view to take shelter under the Board resolution and to see
that the Board may not hold against the respondents by rejecting their
contention that closure of parcel offices cannot be termed as managerial
function in the day to day business of the company as contended by the
respondents.
(B) Whether the board meeting was held or
3-3-1993 on 27-2-1993?
142. While the case
of the petitioners is that the meeting of board of directors was held on
3-3-1993 and the minutes of the Board meeting held on 3-3-1993 were replaced
with new minutes and the case of respondents is that the meeting slated to
3-3-1993 is pre-poned and it was held on 27-2-1993 and no meeting took place on
3-3-1993 as contended by the petitioners. The Board held that the meeting was
held on 27-2-1993 and 9th petitioner applied for leave.
143. Under section
286 of the Act notice of every meeting of the Board shall be given in writing
to every director at his usual address.
144. The company
seemed to be not in the practice of sending notices by registered post or
maintaining notice register to prove that the notices were served on the board
of directors in a manner known to law. The specific case of 9th petitioner is
that he received the notice on 20-2-1993 saying that the Board meeting will be
held on 3-3-1993 and he attended the meeting and signed in the minutes book. It
is his case that he raised the issue of closure of parcel offices and sale of
lorries, which lead to misunderstanding between him and R2. On the other hand,
the case of R2 is that on the same day, i.e., 20-2-1993 another meeting notice
was sent pre-poning the Board meeting to 27-2-1993 and 9th petitioner applied
leave from attending the meeting. At the same time, 9th petitioner denied the
receipt of the notice pre-poning the meeting to 27-2-1993 and the leave letter
pressed into service by respondents is a fabricated one. It is his specific
case that while he was functioning as Member of Parliament he left blank signed
papers with the Manager at Hyderabad for railway reservation purpose and on one
such paper the leave letter was brought into existence. A xerox copy of the
letter seemed to have been produced before the Board and the Board without
summoning the original came to the conclusion that 9th petitioner applied for
leave.
To know the truth or otherwise of the rival
contentions, I directed the respondents to produce the original leave letter.
It is not original but only a carbon copy. The respondents did not offer any
explanation for not producing the original leave letter.
145. Be that as it
may, for better appreciation of the contentions of the parties, the letter in
dispute was scanned below.
From :
Ch. Srihari Rao,
Kakinada
To
The Board of Directors, Ms.
S.R.M.T. Ltd.
P.B. No. 42, Subhash Road,
Kakinada - 533 001.
Dear Sirs,
Due to pre-occupation I will not be able to
attend the Board Meeting of the Company to be held on 27-2-1993 at 10 a.m.
I, therefore, request you to
kindly grant me leave of absence for the said Board Meeting.
Thanking you,
|
|
Yours faithfully |
|
Station : Kakinada |
Sd/- |
|
Date : 23-2-1993 |
|
From the above it is seen while the body was typed on one
typewriter ‘Mr. Sri Hari Rao’ and ‘station’ was typed on a different typewriter.
Further, it is seen that the name, station and signature are found in original
and the body of the letter is copied by carbon. Nextly it is seen that the size
of the leave letter and letter head after tearing away the printed portion are
of the same size. 9th petitioner in his evidence categorically stated that the
leave letter was fabricated. In the absence of any rebuttal, the Board ought to
have held that the leave letter is a fabricated one.
146. Having entertained
a doubt whether the minutes of the meeting dated 3-3-1993 were replaced with
the minutes of the meeting said to have been held on 27-2-1993, wherein 9th
petitioner has not participated in the meeting, I have verified the minutes
book maintained by the company from 29-9-1992 to 23-2-1994 and it does not
infuse much confidence and the authenticity of the proceedings could have been
tested with oral evidence. The notices for both the meetings, i.e., 3-3-1993
and 27-2-1993 emanated from R1 office on the same day and there seems to be not
much difference in the agenda. Further the notice for 27-2-1993 meeting did not
say that in supersession of earlier notice convening the Board meeting on
3-3-1993 that notice was issued. At the same time the notice dated 22-12-1993
for the Board meeting held on 27-12-1993 to consider the requisition resolution
for removal of 9th petitioner as director, a note is seen as hereunder:
“Note : The meeting to consider these items
was originally fixed on 18-11-1993 but due to the order of the Principal
Sub-Court, Kakinada in IA 5351/93 and 5352 on 17-11-1993 the same could not be
considered and have been deferred till the disposal of the said petitions.
These petitions are dispose of on 21-12-1993 and the order dated 17-11-1993,
has been vacated. Hence these items are being considered now”
But such a note is not there in the notice for
the preponed meeting. The only suggestion made by the counsel for respondents
for convening the meeting on 27-2-1993 in cross-examination of 9th petitioner
in question Nos. 28 and 29 is that the company has to furnish Board resolution
to the banks for deferred payment guarantee before the end of February 1993.
But the same was denied by 9th petitioner and stated that all the documents and
agenda were forged. The next suggestion made to 9th petitioner is that the
minutes of this meeting was confirmed in the meeting held on 9-6-1993. The
answer given by 9th petitioner to question No. 31 is that the practice is that
agenda used to be discussed and minutes were never discussed. The minutes used
to be noted on a small paper and subsequently they used to be carried out in
the minutes book and he acted in good faith. In the cross-examination the
counsel suggested to 9th petitioner that since no meeting took place on 3rd
March, no sitting fee was paid to him. 9th petitioner said that now and then he
used to be paid the sitting fees and he do not remember for which meeting he
received the sitting fee. While going through the minutes book, I noticed that
the Board at its meeting held on 29-7-1993 in resolution No. 6 resolved to
amend article 13 of the articles of association enabling the company to pay
sitting fee after Amending Act, 1988 came into force. The said resolution is
extracted hereunder:
“Resolved that the existing article 13 of the
articles of association of the Company be and is hereby substituted by the
following Article:
13. The Directors of the company may be paid a
sitting fee not exceeding Rs. 500 per sitting with a daily allowance and
travelling allowance at such rates as the Board may decide in that behalf. If
any Director shall be appointed to advise the Board as an expert or be called
upon to perform extra service or make special exertions for any of the purpose
of the company, the Board may reimburse all his expense and may subject to the
provisions of section 314 of the Act, pay to such Director such special
remuneration as they may think fit, which remuneration may be in the form of
either salary, commission or profits and may be either in addition to or in
substitution of the remuneration specified in the articles.”
In the light of the above resolution the
question of payment of sitting fee to the directors prior to that date does not
arise.
147. Further, it is
the case of 9th petitioner through out that he attended the meeting on 3-3-1993
along with some other directors. In the answer to Q. No. 38 in the
cross-examination he stated that five directors including himself, R2, R3,
Ananda Rao and another director whose name he could not remember attended the
meeting. Neither the managing director nor any of the directors came to the
witness box to disprove the statement of 9th petitioner. In the absence of any
proof to show that the notice for the board meeting dated 27-2-1993 was served
on 9th petitioner and the notice is not in cancellation of the earlier notice
convening the Board meeting on 3-3-1993 and the fabricated letter of leave of
absence alleged to have been given by 9th petitioner throws any amount of
suspicion on the version spoken by the respondents that the Board meeting has
taken place on 27-2-1993. Likewise in the absence of any evidence that the
minutes of the Board meeting dated 27-2-1993 were specifically read over and
then only the minutes were confirmed, the explanation offered by 9th petitioner
in his evidence stands unrebutted and it has to be accepted.
148. In Mrs. Rashmi
Seth v. Chemon (India) (P.) Ltd. [1992] 3 Comp. Law Journal 89 (CLB) the
Principal Bench of (CLB) held “that the action of the company in passing a resolution
that the petitioner consented for transfer of her holding of 50 per cent shares
by fabricating minutes showing her presence, though she did not attend the
meeting and other resolutions passed in such a meeting are null and void and
non-operative.”
149. In the case on
hand also I hold that the alleged leave letter and meeting notice were brought
into existence to cover up the illegal action of R2 in closing the parcel
offices unilaterally without the approval of the Board and they are fabricated.
Likewise, I have no hesitation in holding that the resolutions of the Board
meeting dated 3-3-1993 were replaced with new minutes as if the Board meeting
was held on 27-2-1993. As the resolutions said to have been adopted at the
meeting of the Board held on 27-2-1993 are proved to be fabricated they have to
be declared as null and void.
Sale of lorries
150. It is an
admitted fact that the company sold 22 and 15 vehicles during the financial
years 1992-93 and 1993-94 respectively. The case of the 9th petitioner is that
the company from its inception never sold so many lorries in a span of one or
two years and the respondents 2 and 3 pitched upon the plan to swindle the
monies of the company. Further no auction of lorries even took place to his
knowledge and the auction slips were brought into existence by the respondents
to justify their illegal action in selling the lorries for a through away price
to meet the case of the petitioners. It is also his case that these vehicles
were sold even before the life time of the vehicles as fixed in the Motor
Vehicles Act is over and these vehicles were sold for a song, i.e., from Rs.
18,000 to Rs. 30,000 practically at the book value of the vehicles and as per
the auction slips filed before the Board, mostly ten people participated in the
auctions held on different dates. In support of his case he filed affidavits of
some of the purchasers of the vehicles and also hire purchase agreements
entered into by them with Lakshmi Devi Finance Co. to show that the vehicles
fetched much more higher amounts than the price shown in the auction slips. It
is also his case that if the auction slips are carefully analyzed, the same
party signed differently at different points of time apart from the fact that
only one person written all the auction slips. The auction slips do not contain
any serial number, though the word “Srl. No.” is shown therein. All these facts
will prove that no auctions of lorries have taken place. The respondents admit
that the lorries sold were of ten to eleven years old and the company was in
the habit of selling old and unserviceable vehicles in order to maintain good
fleet. The company is to make additions and deletions to its fleet and the same
is in the normal course of business. Hence it is not correct to contend that
large-scale misappropriation in sale of lorries has taken place. The Board
accepted the plea of the respondents by placing reliance on the retracted
affidavits of the purchasers of the vehicles filed by the respondents and
rejected the contention of the petitioners. At the same time the Board in its
order observed as follows:
“The average price of lorries sold in the
later years was found to be higher by 15 to 20 per cent. Perhaps higher price
was taken on the ground of the direction that we gave that there should be more
transparency in sale of lorries. Any way we do not find the gap to be such a
huge amount of Rs. 1 lakh as alleged by the petitioner ... Since we ourselves
felt that the present system was not a full proof system we advised the Board that
more transparent system should be evolved in disposal of lorries by fixing a
reserve price, getting approval of the Board and giving wide publicity before
conducting the auction. We feel that as far as this allegation is concerned it
is sufficient that we retreated the above advice for future adherence and
accordingly to do so.”
151. The order
neither referred to the directions given nor verified whether the procedure
followed by the company in disposing of the vehicles is in accordance with the
directions given by the Board. Even before this Court, the respondents did not
choose to place the directions as well as the procedure followed by them to
show that the disposal of lorries is in accordance with the directions given by
the Board. The Board expressed satisfaction by observing that the vehicles
fetched 15 to 20 per cent higher price in the subsequent years.
152. Nextly the
Board did not advert to any of the contentions of the petitioners, more so the contention
that the company never sold so many vehicles in a year, that the company never
auctioned the vehicles and the auction slips were brought into existence for
the purpose of this case. The Board did not even look into the auction slips.
153. I have gone
through xerox copies of the auction slips available on record and the facts
emerged on analisation, are given in a tabular form for better understanding of
the case.
S.K.
Ahammed
|
Sl. |
Vehicle |
Model |
Rank |
How he |
Value
|
Comments |
|
No. |
Number |
|
|
signed |
In Rs. |
|
|
1. |
ABP |
1983 |
7th |
English |
30,000 |
Second Highest |
|
|
2318 |
|
Rank |
(Sk. Ahmed) |
|
Bidder as Rs. 29,900 |
|
2. |
ATP 1122 |
1981 |
4th Rank |
English (S.K. Ahmed) |
26,000 |
First Highest Bidder |
|
3. |
MEK 8343 |
1983 |
9th Rank |
|
29,000 |
|
|
4. |
ABP 1202 |
1983 |
10th Rank |
English (S.k.
Ahmed) |
30,000 |
Second Highest Bidder Rs. 29,500 |
|
5. |
AP 5T 3354 |
1988 |
8th Rank |
English (S.K. Ahmed) |
60,000 |
Second Highest Bidder Rs, 59,000 |
|
6. |
ABP 1194 |
1983 |
5th Rank |
English |
25,000 |
Second Highest Bidder Rs. 24,900 |
|
7. |
ADI 9969 |
1981 |
4th Rank |
English |
22,000 |
Second Highest Bidder Rs. 21,950 |
|
8. |
AP 5T 2928 |
1983 |
4th Rank |
English |
28,000 |
Second Highest Bidder Rs. 27,950 |
|
9. |
ABP 1220 |
1983 |
1st Rank |
(Telugu) |
26,000 |
First Highest Bidder |
|
10. |
ABP 1256 |
1983 |
4th Rank |
English |
30,000 |
Second Highest Bidder Rs. 29,970 |
|
11. |
AP 5T 2620 |
1982 |
8th Rank |
English |
29,000 |
Second Highest Bidder Rs. 28,950 |
Shaik Ahammed
|
Sl. |
Vehicle |
Model |
Rank |
How he signed |
Value
|
Comments |
|
No. |
Number |
|
|
|
in Rs. |
|
|
1. |
ATP 1212 |
1981 |
7th Rank |
|
26,000 |
|
|
2. |
MEK 8343 |
1983 |
6th Rank |
English (S.K. Ahmed) |
29,000 |
Second Highest BidderRs. 28,500 |
|
3. |
ABP 1202 |
1983 |
4th Rank |
|
30,000 |
|
|
4. |
AEP 6746 |
1976 |
3rd Rank |
(Telugu) |
25,000 |
First Highest Bidder |
Annexure
- III
M.D.
Gouse
|
Sl. |
Vehicle |
Model |
Rank |
How he signed |
Value
|
Comments |
|
No. |
Number |
|
|
|
in Rs. |
|
|
1. |
ATP |
1981 |
3rd |
|
25,000 |
|
|
|
1455 |
|
Rank |
|
|
|
|
2. |
ATP |
1981 |
1st |
|
25,000 |
|
|
|
1554 |
|
Rank |
|
|
|
|
3. |
ATP |
1981 |
7th |
|
27,000 |
|
|
|
1445 |
|
Rank |
|
|
|
|
4. |
ATP |
1982 |
5th |
|
29,000 |
|
|
|
6979 |
|
Rank |
|
|
|
|
5. |
AP 5T |
1988 |
6th |
|
60,000 |
|
|
|
|
|
Rank |
|
|
|
|
6. |
ATP |
1981 |
4th |
|
22,000 |
|
|
|
1221 |
|
Rank |
|
|
|
|
7. |
ATP |
1982 |
6th |
|
27,500 |
|
|
|
7566 |
|
Rank |
|
|
|
|
8. |
ADI |
1981 |
3rd |
|
22,000 |
|
|
|
9969 |
|
Rank |
|
|
|
|
9. |
AP 5T |
1983 |
1st |
English |
28,000 |
First Highest |
|
|
2928 |
|
Rank |
(M.D. Gouse) |
|
Bidder |
|
10. |
ABP |
1983 |
8th |
English |
25,000 |
Second Highest |
|
|
6286 |
|
Rank |
|
|
Bidder Rs. 24,900 |
|
11. |
ABP |
1983 |
4th |
|
26,000 |
|
|
|
1220 |
|
Rank |
|
|
|
|
12. |
ATB |
1982 |
5th |
|
29,000 |
|
|
|
5234 |
|
Rank |
|
|
|
|
13. |
AP 5T |
1983 |
4th |
|
22,000 |
|
|
|
2612 |
|
Rank |
|
|
|
|
14. |
AP 5T |
1982 |
6th |
|
29,000 |
|
|
|
2620 |
|
Rank |
|
|
|
|
15. |
AP 5T |
1982 |
5th |
|
30,000 |
|
|
|
2230 |
|
Rank |
|
|
|
Annexure - IV
Md. Muneer
|
Sl. |
Vehicle |
Model |
Rank |
How he signed |
Value
|
Comments |
|
No. |
Number |
|
|
|
in Rs. |
|
|
1. |
ADP. 6693 |
1984 |
3rd |
Telugu |
25,000 |
Second Highest |
|
|
|
|
Rank |
|
|
Bidder Rs. 24,900 |
|
2. |
AP 5T |
1981 |
6th |
|
25,000 |
|
|
|
2360 |
|
Rank |
|
|
|
|
3. |
ATP 1554 |
1981 |
6th |
|
25,000 |
|
|
|
|
|
Rank |
|
|
|
|
4. |
ATP 1445 |
1981 |
2nd |
|
27,000 |
|
|
|
|
|
Rank |
|
|
|
|
5. |
ATP 1221 |
1981 |
5th |
Telugu |
22,000 |
Second Highest |
|
|
|
|
Rank |
|
|
Bidder Rs. 21,950 |
|
6. |
ATP 5234 |
1982 |
3rd |
(Telugu) |
29,000 |
Second Highest |
|
|
|
|
Rank |
|
|
Bidder Rs. 28,950 |
Annexure - V
Md. Ayub Khan
|
Sl. |
Vehicle |
Model |
Rank |
How he signed |
Value
|
Comments |
|
No. |
Number |
|
|
|
in Rs. |
|
|
1. |
ATP 969 |
1981 |
3rd |
|
25,000 |
|
|
|
|
|
Rank |
|
|
|
|
2. |
MEK |
1983 |
3rd |
|
29,000 |
|
|
|
8343 |
|
Rank |
|
|
|
|
3. |
ABP 1202 |
1983 |
7th |
|
30,000 |
|
|
|
|
|
Rank |
|
|
|
|
4. |
ABP 1194 |
1983 |
3rd |
|
25,000 |
|
|
|
|
|
Rank |
|
|
|
|
5. |
ADI 9969 |
1981 |
6th |
Telugu |
22,000 |
First Highest Bidder |
|
|
|
|
Rank |
|
|
|
|
6. |
ABP 6286 |
1983 |
5th |
|
25,000 |
|
|
|
|
|
Rank |
|
|
|
|
7. |
AP 5T |
1982 |
4th |
|
24,000 |
|
|
|
2802 |
|
Rank |
|
|
|
Annexure - VI
D. Seetharamaiah
|
Sl. |
Vehicle |
Model |
Rank |
How he signed |
Value
|
Comments |
|
No. |
Number |
|
|
|
in Rs. |
|
|
1. |
ATP |
1981 |
2nd |
|
25,000 |
|
|
|
1554 |
|
Rank |
|
|
|
|
2. |
ATP |
1981 |
8th |
|
27,000 |
|
|
|
1445 |
|
Rank |
|
|
|
|
3. |
ABP |
1983 |
3rd |
|
30,000 |
|
|
|
5424 |
|
Rank |
|
|
|
|
4. |
ATP |
1981 |
1st |
|
26,000 |
|
|
|
1122 |
|
Rank |
|
|
|
|
5. |
ADP |
1984 |
5th |
|
25,000 |
|
|
|
6693 |
|
Rank |
|
|
|
|
6. |
ATP |
1982 |
4th |
|
29,000 |
|
|
|
6979 |
|
Rank |
|
|
|
|
7. |
AP 5T |
1983 |
1st |
Telugu |
25,500 |
Second Highest |
|
|
2226 |
|
Rank |
|
|
Bidder Rs. 25,450 |
|
8. |
AEP |
1976 |
9th |
Telugu |
25,000 |
Second Highest |
|
|
6746 |
|
Rank |
|
|
Bidder Rs. 24,899 |
|
9. |
ABP |
1983 |
3rd |
|
25,000 |
|
|
|
6286 |
|
Rank |
|
|
|
|
10. |
ABP |
1983 |
5th |
|
30,000 |
|
|
|
1256 |
|
Rank |
|
|
|
|
11. |
AP 5T |
1983 |
7th |
Telugu |
22,000 |
Second Highest |
|
|
2612 |
|
Rank |
|
|
Bidder Rs. 21,900 |
|
12. |
AP 5T |
1982 |
3rd |
|
29,000 |
|
|
|
2220 |
|
Rank |
|
|
|
|
13. |
AIQ |
1988 |
1st |
Telugu |
18,000 |
Second Highest |
|
|
5524 |
|
Rank |
|
|
Bidder Rs. 17,900 |
|
14. |
AP 5T |
1982 |
7th |
|
29,500 |
|
|
|
2801 |
|
Rank |
|
|
|
Annexure - VII
K. Ananda Prasad
|
Sl. |
Vehicle |
Model |
Rank |
How he signed |
Value
|
Comments |
|
No. |
Number |
|
|
|
in Rs. |
|
|
1. |
ATP |
1981 |
7th |
English |
25,000 |
Second Highest |
|
|
1455 |
|
Rank |
(K.Anand Prasad) |
|
Bidder Rs. 24,950 |
|
2. |
ATP |
1981 |
4th |
|
25,000 |
|
|
|
1554 |
|
Rank |
|
|
|
|
3. |
ATP |
1981 |
9th |
English |
27,000 |
Second Highest. |
|
|
1445 |
|
Rank |
|
|
Bidder Rs. 26,900 |
|
4. |
ATP |
1981 |
7th |
English |
39,000 |
Second Highest |
|
|
3245 |
|
Rank |
|
|
Bidder Rs. 38,950 |
|
5. |
ABP |
1983 |
3rd |
|
30,000 |
|
|
|
1202 |
|
Rank |
|
|
|
|
6. |
ABP |
1983 |
7th |
|
25,000 |
|
|
|
6286 |
|
Rank |
|
|
|
|
7. |
ABP |
1983 |
6th |
|
26,000 |
|
|
|
1220 |
|
Rank |
|
|
|
|
8. |
AP 5T |
1982 |
5th |
|
29,000 |
|
|
|
2220 |
|
Rank |
|
|
|
|
9. |
AP 5T |
1981 |
1st |
English |
25,000 |
Second Highest |
|
|
2360 |
|
Rank |
|
|
Bidder 24,900 |
|
10. |
AP 5T |
1982 |
7th |
|
29,000 |
|
|
|
2620 |
|
Rank |
|
|
|
|
11. |
AP 5T |
1982 |
6th |
English |
30,000 |
Second Highest |
|
|
2230 |
|
Rank |
|
|
Bidder 29,500 |
Annexure - VIII
B. Rama Rao
|
Sl. |
Vehicle |
Model |
Rank |
How he signed |
Value
|
Comments |
|
No. |
Number |
|
|
|
in Rs. |
|
|
1. |
ATP |
1981 |
5th |
|
27,000 |
|
|
|
1445 |
|
Rank |
|
|
|
|
2. |
ABP |
1983 |
5th |
|
30,000 |
|
|
|
5424 |
|
Rank |
|
|
|
|
3. |
ATP |
1982 |
1st |
|
29,000 |
|
|
|
6979 |
|
Rank |
|
|
|
|
4. |
AP 5T |
1983 |
2nd |
|
25,500 |
|
|
|
2226 |
|
Rank |
|
|
|
|
5. |
ATP |
1982 |
1st |
|
27,500 |
|
|
|
7566 |
|
Rank |
|
|
|
|
6. |
ADI |
1981 |
5th |
|
22,000 |
|
|
|
9969 |
|
Rank |
|
|
|
|
7. |
AP 5T |
1983 |
3rd |
|
28,000 |
|
|
|
2928 |
|
Rank |
|
|
|
|
8. |
ATB |
1982 |
2nd |
|
29,000 |
|
|
|
5234 |
|
Rank |
|
|
|
|
9. |
AP 5T |
1983 |
1st |
|
22,000 |
|
|
|
2612 |
|
Rank |
|
|
|
|
10. |
AP 5T |
1982 |
6th |
|
24,000 |
|
|
|
2802 |
|
Rank |
|
|
|
|
11. |
AP 5H |
|
2nd |
|
2,70,000 |
|
|
|
2552 |
|
Rank |
|
|
|
Annexure - IX
S.K. Anwar
|
Sl. |
Vehicle |
Model |
Rank |
How he signed |
Value |
Comments |
|
No. |
Number |
|
|
|
in Rs. |
|
|
1. |
ATP |
1981 |
6th |
|
39,000 |
|
|
|
3245 |
|
Rank |
|
|
|
|
2. |
AP 5T |
1983 |
2nd |
|
30,000 |
|
|
|
2683 |
|
Rank |
|
|
|
|
3. |
ADP |
1984 |
6th |
|
25,000 |
|
|
|
6693 |
|
Rank |
|
|
|
|
4. |
AP 5T |
1988 |
3rd |
|
60,000 |
|
|
|
3354 |
|
Rank |
|
|
|
|
5. |
AP 5T |
1983 |
4th |
|
25,500 |
|
|
|
2226 |
|
Rank |
|
|
|
|
6. |
AEP |
1976 |
5th |
|
25,000 |
|
|
|
6746 |
|
Rank |
|
|
|
|
7. |
ATP |
1982 |
2nd |
|
27,500 |
|
|
|
7566 |
|
Rank |
|
|
|
|
8. |
AP 5T |
1983 |
2nd |
|
28,000 |
|
|
|
2928 |
|
Rank |
|
|
|
|
9. |
ATB |
1982 |
4th |
|
29,000 |
|
|
|
5234 |
|
Rank |
|
|
|
|
10. |
AP 5T |
1983 |
6th |
|
22,000 |
|
|
|
2612 |
|
Rank |
|
|
|
|
11. |
AP 5T |
1982 |
5th |
|
24,000 |
|
|
|
2802 |
|
Rank |
|
|
|
|
12. |
AP 5T |
1982 |
4th |
|
29,000 |
|
|
|
2620 |
|
Rank |
|
|
|
|
13. |
AIQ 5524 |
1988 |
5th |
|
18,000 |
|
|
|
|
|
Rank |
|
|
|
|
14. |
AP 5T |
1982 |
4th |
|
30,000 |
|
|
|
2230 |
|
Rank |
|
|
|
|
15. |
AP 5T |
1982 |
4th |
|
29,500 |
|
|
|
2801 |
|
Rank |
|
|
|
|
16. |
AP 5H |
|
3rd |
|
2,70,000 |
|
|
|
2552 |
|
Rank |
|
|
|
Annexure - X
K. Satyanarayana Raju
|
Sl. |
Vehicle |
Model |
Rank |
How he signed |
Value |
Comments |
|
No. |
Number |
|
|
|
in Rs. |
|
|
1. |
ATP |
1981 |
5th |
English |
25,000 |
Second Highest |
|
|
1554 |
|
Rank |
(K. Satyanarayana Raju) |
|
Bidder Rs. 24,950 |
|
2. |
ABP |
1983 |
2nd |
|
30,000 |
|
|
|
2318 |
|
Rank |
|
|
|
|
3. |
ATP |
1981 |
6th |
|
26,000 |
|
|
|
1122 |
|
Rank |
|
|
|
|
4. |
ATP |
1981 |
1st |
|
39,000 |
|
|
|
3245 |
|
Rank |
|
|
|
|
5. |
MEK |
1983 |
2nd |
|
29,000 |
|
|
|
8343 |
|
Rank |
|
|
|
|
6. |
ABP |
1983 |
8th |
|
30,000 |
|
|
|
1202 |
|
Rank |
|
|
|
|
7. |
AP 5T |
1988 |
4th |
|
60,000 |
|
|
|
3354 |
|
Rank |
|
|
|
|
8. |
AEP |
1976 |
4th |
|
25,000 |
|
|
|
6746 |
|
Rank |
|
|
|
|
9. |
AP 5T |
1981 |
7th |
|
25,000 |
|
|
|
2360 |
|
Rank |
|
|
|
|
10. |
ADI 9969 |
1981 |
2nd |
|
22,000 |
|
|
|
|
|
Rank |
|
|
|
|
11. |
AP 5T |
1983 |
6th |
|
28,000 |
|
|
|
2928 |
|
Rank |
|
|
|
|
12. |
ABP |
1983 |
2nd |
|
25,000 |
|
|
|
6286 |
|
Rank |
|
|
|
|
13. |
ABP |
1983 |
3rd |
|
30,000 |
|
|
|
1256 |
|
Rank |
|
|
|
|
14. |
AP 5T |
1982 |
2nd |
|
24,000 |
|
|
|
2802 |
|
Rank |
|
|
|
|
15. |
AP 5T |
1982 |
2nd |
|
29,000 |
|
|
|
2620 |
|
Rank |
|
|
|
|
16. |
AIQ 5524 |
1988 |
3rd |
|
18,000 |
|
|
|
|
|
Rank |
|
|
|
|
17. |
AP 5T |
1982 |
1st |
|
30,000 |
|
|
|
2230 |
|
Rank |
|
|
|
|
18. |
AP 5T |
1982 |
5th |
|
29,500 |
|
|
|
2801 |
|
Rank |
|
|
|
|
19. |
AP 5H |
|
4th |
|
2,70,000 |
|
|
|
2552 |
|
Rank |
|
|
|
|
20. |
ATP 969 |
1981 |
4th |
English |
25,000 |
Second Highest |
|
|
|
|
Rank |
|
|
Bidder Rs. 24,975 |
|
21. |
ATP |
1981 |
6th |
English |
26,000 |
First Highest |
|
|
1212 |
|
Rank |
|
|
Bidder |
From the above tables it is seen that (1) several
individuals not only participated in the auction alleged to have been held on
different dates as per the information furnished by the respondents but also
signed differently. (2) From the auction slips it is seen that only the first
two highest bids were given but neither the upset price nor the offers given by
the others were shown in the auction slips - apart from not showing the
progress in the bids in the process of auction and the difference between the
first and the second bidder is marginal and they do not exceed Rs. 100
generally. (3) From the information furnished by the 1st respondent-company the
date of auction of three lorries bearing Nos. ATP 1455, ATP 1212 and ABP 1220
are not tallying with the dates on which auction slips were prepared. (4) In
case of certain lorries originally they were shown as condemned lorries but
later on corrected as old lorries. (5) In the auction slips for Lorries No. ATP
6979 the highest bid amount was corrected. (6) No serial numbers are found on
the auction slips though a column is there.
154. It is not
known how all these people could know of the auction dates though the company
never notified the auctions in any manner. Secondly from the dates of auction,
it is seen that the company was auctioning one lorry at a time in selling about
forty lorries in a span of two years as per the version of respondents a
procedure unknown to corporate sales.
From the above it is seen that there is some
truth in the contention of the petitioners that the auction slips were brought
into existence to meet the case of the petitioners. After differences arose,
both late Suryanarayana and the 9th petitioner in their letters dated 2-11-1993
and 10-11-1993 in respect of sale of lorries sought full particulars of the
vehicles sold like make of the vehicle, model and year of purchase, to whom
they were sold and at what price they were sold, the nature of sale whether it
is by public auction or private sale. While a reply was sent to Suryanarayana
stating that the matters referred to by him are the matters to be dealt with,
by the management during day to day business, the company produced xerox copy
of an acknowledgement dated 27-12-1993 for the alleged registered letter sent
on 4-12-1993. This aspect was already adverted to while considering the closure
of parcel offices. The specific case of the petitioner is that the issue of
sale of lorries came up for discussion in the meeting held on 3-3-1993 under
any other item and when he asked for the information, the same was not
furnished, and he requested that his objection should be noted in the minutes
of the meeting. On that the Chairman informed that the details would be sent
later. It is also his case that in the Board’s meeting held on 23-3-1993 also,
this issue was raised. It is his further case that this issue was raised in the
annual general body meeting held on 25-11-1993. The case of the respondents is
that the sale of lorries is a managerial function while carrying on day to day
affairs of the company. The further case of the company is that on 23-9-1993
the 9th petitioner participated in the board meeting and approved the profit
and loss account as on 31-3-1993 to be placed before the annual general body
meeting. The petitioner categorically stated that no issues were discussed in the
board meeting held on 23-9-1993 (answer to Q. 29 in chief). With regard to the
approval of profit and loss account by the general body, the case of the
petitioners is that when the chairman refused to give information he walked out
of the meeting (answer to Questions 25 to 27 in chief). Be that as it may it is
not known why the company refused to furnish the required information sought
for by the petitioner No. 9 as well as late Suryanarayana in their letters.
When a suggestion (Question No. 136 in cross-examination) was made to him that
he is having every right to inspect the books and records of the company, the
answer given was that since the information asked for was not given, it is not
possible to go through the records of the company and find out the
misappropriation. But at the same time the Court should not miss the fact that
the ill feelings have reached to a point of no return by that time and the
petitioner No. 9 was also manhandled by the employees of the company (Answer to
Question No. 86 in chief). The respondent elicited from the witness that after
29-7-1993 he was given further powers to operate the bank accounts and the
answer given by him is that such a thing was done by the 2nd respondent to see
that he should not oppose him in any manner. From the record it is seen that
some of the shareholders gave notice to convene annual general body meeting to
remove the 9th petitioner as director of the company. In fact he was not only
removed as director at the annual general body meeting dated 21-1-1994, but
also from all the positions held by him in subsidiary companies. It is also
elicited that he signed one transfer form relating to one of the vehicles that
were sold.
155. Coming to the
affidavits, initially the petitioners filed the affidavits of Adigarala
Raghava, Desetti Narayana Rao and J.V., Raghavulu, to prove that they purchased
the vehicles at much higher price and also the hire purchase agreements entered
into by them with the third parties. But later they gave affidavits stating
that they purchased the vehicles for the value shown in the auction slips and
they have raised these loans for effecting massive repairs to the vehicles.
Firstly, the Board having rejected the prayer of the petitioners to lead
evidence by affidavits, it is not known how it can rely on these retracted
affidavits filed by the respondents. Secondly the Board committed grave
illegality in giving credence to the affidavits filed by the respondents when
there are two affidavits of one and the same individual contradicting each
other without examining him. Thirdly, the affidavits are not verified which is
a must as held by the Supreme Court in A.K.K. Nambiar’s case (supra). Fourthly,
as the amount spent for repairs on the vehicles is too high they neither stated
what type of repairs they got done to the vehicles in their affidavits nor at
least filed semblance of evidence in support of their claim. Fifthly, they have
neither stated in their affidavits in which workshop they got their vehicles
repaired nor filed letters given by the workshops to that effect where they got
the vehicles repaired. The specific case of the petitioners is that by
threatening the purchasers and by involving them in criminal cases the company
obtained these affidavits and they filed documents to that effect. Without
going into these aspects when a person gives two affidavits contradicting each
other, in the normal course the respondents having filed the later affidavits
would have produced them before the Board to test which of their statements are
true and would have provided an opportunity to the petitioner to cross-examine
them on the retracted affidavits. If the Board wants to rely on these
affidavits the Board should have directed the respondents to produce these
individuals for examination. That was also not done.
156. Though no
material was placed before the Board that the parties have take loans for
attending to major repairs, the Board simply jumped at the retracted affidavit
and held that they have borrowed the amounts for attending to major repairs of
the vehicles more so in the absence of any evidence that these vehicles have
become so unserviceable.
157. Nextly, it is
seen that though these parties went back on their earlier statement in the
affidavits filed by the respondent-company, the fact remains that they have
borrowed the amounts from the financial company, i.e., Laxmi Devi Finance
Corpn. In the hire purchase agreement they entered with that corporation they
never stated that they are borrowing these monies for effecting repairs. The
9th petitioner in his evidence categorically stated that he obtained hire
purchase documents from Laxmi Devi Finance Corpn. apart from the affidavits
given by the purchasers and the Board in its order did not refer to the hire
purchase agreements at all. Further, it is to be seen generally companies will
be certifying about the roadworthiness of the vehicles and then a paper
advertisement will be given to secure higher price. Both the things were not
done in this case. Nextly, it is to be seen that the company is having
automobile workshop and involved in manufacturing spare parts for over a number
of years apart from being a dealer in spares for TATA vehicles. In this
background have we to presume that the vehicles became so un-roadworthy even
before their life span as fixed under M.V. Act expired though no iota of
evidence on the condition of the vehicles is produced by the
respondent-company? Further if the Board takes judicial note of market trends,
even second hand two wheelers are fetching much more higher price then the
lorries sold by the company. I am sure that even if the lorries were sold as a
scrap, they would have fetched much more higher price. Can it be said that the
company maintained the vehicles in such a worse condition and they are not able
to fetch reasonable price when they were sold in an auction ? If we keep the
market trend in mind though book value of the vehicles comes down year after
year on account of depreciation in reality their value in the market will be
much more high. In fact, the Board also felt that the procedure followed by the
company is not transparent. Further the case of the petitioners is that all the
auction slips were written by one P. Krishna Murthy, the Sales Manager in TATA
show room, and those slips were not even numbered though a column is provided
to that effect. This Krishna Murthy is no other than the father-in-law of the
Managing Director of Hastina Auto Dealers (P.) Ltd., Delhi which was appointed
as sole selling agent for north India for marketing the spare parts of the
company. But neither Narayana Murthy who seemed to have conducted the auction
nor Krishna Murthy who prepared the auction slips were examined to prove that
auctions in fact did take place. Nextly, if there is any truth in the
contention of the respondents that to maintain good fleet the vehicles were
sold, why they have not added even a single lorry during those years though the
company was paying hire charges for private lorries to a tune of Rs. 3 crores.
158. From this the inevitable
conclusion to be drawn is that the sale proceeds of the vehicles shown in the
books of account by the company is in and around the book value of those
vehicles, but not the real price fetched by these vehicles and the inevitable
presumption to be drawn is, the excess amount realized by the company over and
above the amounts shown in the books of account were embezzled by respondents 2
and 3.
Payment of hire charges to private lorries
159. The case of
the petitioner is that, while he was the managing partner of the Padmalaya
Finance Corpn., it used to give its lorries on hire to SRMT and the average
hire charges used to be Rs. 6,000 to Rs. 7,000 per month. But during 1993-94
and 1994-95 an amount of Rs. 2,90,83,525 and Rs. 3,19,37,496 were paid to private
lorry owners towards hire charges as seen from Schedule ‘S’ to 50th Annual
Report for the year 1994-95. The case of the petitioners is that all the
payments to the lorry owners were paid in cash, but not by way of cheques. In
that process, respondents 2 and 3 obtained receipts from the owners for much
higher amounts and the same were misappropriated and in the year 1994-95 there
was a shortfall of Rs. 1.55 crores in the cash flows. The contention of the
respondents is that it is a common trade practice to engage outside vehicles as
and when situation demands. The Board adverted to these contentions of both the
parties on this issue under “Other acts of mismanagement”. But without giving a
finding on the issue expressed its satisfaction over the payment of increased
dividends and recorded the following finding: “An analysis of the allegations
would show, as rightly pointed out by Sri Raghavan, that other than the
allegation relating to issue of right shares, no other acts of oppression qua
shareholders has been agitated in this petition.” This finding runs counter to
the record and the oral evidence of the 9th petitioner who spoke on this issue.
More, so, when the respondent contended that it is a common trade practice in
transport business to engage outside vehicles as and when required in addition
to own vehicles without producing the original records and also without
reference to the letter of the Company Secretary dated 5-3-1999 that the
contracts register to be maintained statutorily under section 301 of the Act
for the years 1989 to 1992-93 are not traceable. Here we should keep in mind
that the company is engaged in parcel lorry service for transportation of goods
in and closed lorries. Closed lorries will not be owned by private persons,
unless they enter into a contract on permanent or semi-permanent basis with
parcel lorry service companies. The company did not place any material with
regard to engagement of number of closed lorries and open lorries. We should
also keep in mind that the vehicles sold are less than ten years i.e., before
the expiry of the life of the vehicles as fixed under the M.V. Act and no
evidence whatsoever was placed before the Board to show that they have become
so unroadworthy and they were damaged to such an extent, that they cannot be
made roadworthy by a company having dealership for spare parts of Tata Vehicles
apart from having an automobile workshop and involved in the manufacturing of
automobile spare parts. From the retracted affidavits of the purchasers of the
vehicles, filed by the respondents they stated that they have taken loans for
repairs of the vehicles. According to them, they spent about a lakh of rupees
for repairs on each of the vehicle. If the respondent-company repaired the
vehicles on their own, they would have saved lot of money not only in effecting
the repairs to the vehicles but also in payment of hire charges to others.
Further, the case of the respondents that the contracts register, containing
the particulars of the vehicles hired, to be maintained statutorily is not
traceable. To my mind the self same vehicles sold might have been hired and the
Contracts Register was purposely withheld by the company. Instead of drawing an
adverse inference against the respondents, the Board observed that this issue
was not raised. Further the Board did not consider the aspect, whether the
respondent-company was subjected to audit and payment of income-tax, can pay
hire charges in crores of rupees in cash though the evidence of the 9th
petitioner on this aspect stood unrebutted (see answers to questions 55, 62,
82, 83 in chief and questions 160 to 165 in cross).
160. The issue can
be looked at from another angle also. One of the main activities of the company
being parcel lorry service and in the absence of denial to the evidence of the
9th petitioner that previously one or two vehicles used to be sold, the company
did not offer any explanation in not purchasing new vehicles having sold
considerable number of alleged old vehicles in those two years, when the case of
the respondents is that addition and deletion of the vehicles is intended to
maintain good fleet. The reason is obvious. Engaging private vehicles and
paying hire charges in cash, serves the interests of the 2nd respondent. Hence
the finding recorded by the Board that no other issue except rights issues was
raised by the petitioners having extracted the contentions of both the parties
is nothing but arbitrary exercise of powers.
In the light of foregoing discussion, I find
sufficient justification in the complaint of the petitioners that the
respondents were obtaining receipts for higher amounts from the owners of the
vehicles and the income derived there from is being misappropriated by
respondents 2 and 3.
Diversion of funds
161. The specific
case of the petitioners is that the 2nd respondent is in the habit of diverting
the funds by way of payment of exorbitant commissions with kick back
arrangements and in a raid conducted in the year 1988 by the Income-tax
Department it was noticed that certain firms in the benami names of these
respondents have been paid substantial commission and as such all this
expenditure was disallowed. Subsequently those firms were dissolved and the
company appointed Hastina Auto Dealers (P.) Ltd., New Delhi for the northern
region in the year 1989 and V.K. Automotive (P.) Ltd., Madras, for southern
region as sole selling agents for the sale of about 400 automobile products
manufactured by the company by a make believe process of selection by private
consultancy agencies and huge commissions are being paid to these companies
whose share capital is in thousands. He has also questioned the genuineness of
the reports filed by the consultant companies.
162. In answer to
these allegations, the learned counsel for the respondent contends that the
Tribunal and the High Court upheld the payment of the commission to those
firms. The fact remains that in the written arguments the company admitted
dissolution of those three partnership firms against whom the income-tax
authorities made adverse comments and that necessitated the company to appoint
new agents. The respondents contend that the above two agents were appointed
validly as per the recommendations of the consultants and the 9th petitioner
was on the board of directors at the time of appointment and he never raised
any objection. Finally the company contended that it can appoint only those on
whom it has confidence. Except making vague allegations, the petitioners have
not furnished any evidence to show that the respondents 2 and 3 have received
kick backs from the commission paid to these companies. The Board held against
the petitioners on the ground that “he was a director of the company for nearly
three years after appointment of these firms as their sole selling agents for
North and South India and the fact that he has not raised this issue in any of
the board meetings during this period, giving us an impression that he has no
grievance in this regard till the same was raised in this petition.”
163. To my mind,
the Board cannot reject the plea of the petitioners solely on the ground that
the 9th petitioner was on the board when the agents were appointed without
examining whether there is any truth or not in the allegations. Even assuming
that the 9th petitioner is a party to the decision of the Board, if the
decision is ultimately found to be illegal the alleged silence on the part of
the 9th petitioner is of no avail and as held by the Supreme Court in B.R.
Kapoor v. State of Tamil Nadu 2001 AIR SCW 3720. Further he might not have visualized
at that point of time that huge amounts will be paid as commission to the
companies whose share capital is only in few lakhs of rupees. The real issue
before the Board is whether the two agencies are benami agencies of respondents
2 and 3 and whether there is transparency required in selecting the agencies
and whether such an action would be prejudicial to public interest. From that
angle I would like to examine the issue in controversy.
Agency for South India
164. V.K.
Automotive (P.) Ltd., was appointed as the sole selling agent of the company
for southern region 28-3-1989. The case of the respondents is that an
advertisement was given in ‘Hindu’ on 21-12-1998 inviting applications for
dealership and Ram Associates was appointed as a consultant to select the
agent.
165. It is not in
dispute that the managing director of V.K. Automotive (P.) Ltd., Madras, Vijaya
Kumar was earlier an employee of the company. From the record it is seen that
while the authorized share capital of V.K. Automotive is Rs. 1,30,200 it was
paid a commission of Rs. 38,23,000 for the financial year 1992-93. I have gone
through the report of Ram Associates filed in the court. In their report they
did not say how many applications they have received and with how many people
they held discussions. The report of the consultant dealing with Vijay Kumar
was only filed in the court. The reasons given for selecting him were that: (1)
he is having inherent strengths; (2) he is having exposure to automobile spares
for over a decade; (3) he is going to form a private limited company with an
authorized capital of Rs. 5 lakhs to give the business adequate capital base;
(4) the serious and methodical way he seems to be going about establishing a
marketing organization lends further credibility. It is useful to extract
preliminary evaluation of this firm.
|
|
Client |
:
SRMT Limited |
|||||||
|
|
Assignment/ Dealership. |
:
Evaluation of Applications for Stockists |
|
||||||
|
|
Name & Address of Applicant |
|
|||||||
|
|
|
Mr. C. Vijayakumar, C-39, LIG Flats, 7th Avenue Ashok Nagar, Madras 600 083. |
|
|
|
||||
|
Present Business and other Relevant Data |
|||||||||
|
Appears to the serious about the business. Has
stated that he is augmenting his resources and stream-lining the
organisation. May be able to devote full time for a major product line like
SRMT and Market its products. To meet for further discussion. |
|||||||||
|
|
|
A |
B |
C |
D |
|
|||
|
|
1. Location |
*** |
|
|
|
|
|||
|
|
2. Present Business |
|
|
*** |
|
|
|||
|
|
3. Intensity of Interest |
*** |
|
|
|
|
|||
|
|
4. Overall |
*** |
|
|
|
|
|||
|
|
(including |
|
|
|
|
|
|||
|
|
Presentation) |
|
|
|
|
|
|||
|
|
Preliminary |
Shortlist for further Discussions |
|
||||||
|
|
Decision |
|
|||||||
|
|
Certified True Copy |
|
|||||||
|
|
|
|
|
|
|
|
|
|
|
The columns relating to corporation, present business,
intensity of interest, over all presentation are shown as nil. As per the
balance sheet of that company that its capital is Rs. 1,30,000 but he was able
to earn Rs. 38,23,000 as commission. It is not known how the consultant felt
that the amount which he is going to invest (i.e., Rs. 5 lakhs would be
sufficient to market about 400 spare parts of the company in whole of South
India. Be that as it may 3 years after its establishment, the share capital of
the company is only Rs. 1,30,200. It is not known whether he established any
shops of his own or appointed dealers all over south for marketing the spare
parts. To my mind the capital invested by him is not sufficient even to
establish one wholesale shop at Madras leave about other places. In the light
of the above factual position, the question that falls for consideration of the
court would be, whether the company with the meager money at its disposal can
earn such a huge commission to a tune of Rs. 38,23,000 (i.e.), practically 36
times more than the capital invested by it. He did not even mobilize Rs. 5
lakhs as undertaken by him before the consultant. In response to the letter to
the 4th petitioner dated 19-9-1996, the 2nd respondent in his letter dated
24-9-1996 informed him that the sales commission includes target commission to
the dealers who directly deal with the company. Target commission varies
between 2 to 10 per cent depending upon the turn over achieved by each dealer.
During the year of account the realization out of the business done through
various dealers have gone up and similarly the dealers who directly deal; with
the company achieved the targets in the higher rate of commission group. Hence
the target commission paid to them was more than that of the last year. The
Company did not place any material with regard to sale of spare parts to this
company and the details of the commission paid to it. The Board completely
missed these aspects. Further it is not known when he resigned his job in the
company. The fact remains that he registered the company after he was selected
and the company was incorporated on the same day under the provisions of the
Act and entered into an agreement with the respondent-company on the same day,
i.e., 28-3-1989.
Agency for North India
166. Likewise the
company appointed Hastina Automobile dealer for North India. The Managing
Direct or of Hastina Automobile Dealers, New Delhi, Mr. P. Venkata Siva
Anjaneya Prasad, is no other than the son-in-law of P. Krishna Murthy, Sales
Manager in the company and who prepared the auction slips for the sale of
lorries. A notification seemed to have been issued in Hindustan Times dated
16-7-1990 and as per the report of Techma Engineers dated 16-10-1990 they have
received thirty one applications and three applicants could meet the evaluation
criteria and rank wise details are given. While Hastina Automobile (P.) Ltd.,
Stands at Sl. No. 1 the other experienced companies like Manik Motor Works
established in 1932 at Calcutta having branch at Kasmiri Gate, New Delhi and
C.S. Arban Singh Sabarwal & Sons with its Head Office at Bombay and having
a branch office at Kasmiri Gate, New Delhi, partnership concerns having vast
experience in the field with abundant money flow and with show room facility at
Delhi were shown at Sl. Nos. 2 and 3 respectively. The list of the other
applicants was not filed before the Court. The consultant recommended the name
of this company with a paid-up share capital of Rs. 4,55,000 though newly
incorporated on the ground that the promoters are well experienced in auto
parts technically as well as marketing wise ignoring the well experienced firms
and this company earned a commission of Rs. 45,56,000 in the financial year
1992-93 as seen from its balance sheet. While the petitioners filed some
letters from the dealers, who according to the respondents, have responded to
the notifications inviting applications both for South India and North India
stating that they never applied for the agency, the respondents got letters
from those dealers saying that they have not given such letters to the
petitioners. I need not go into that controversy.
167. Now it is
evident that this company appointed as the sole selling agent for North India
with paid-up capital is Rs. 4,55,000 received a commission of Rs. 45,56,000, i.e.,
ten times more than it’s share capital while the V.K. Automotive (P.) Ltd.,
sole selling agent for South India earned commission 36 times more than its
share capital investment (i.e.), Rs. 38,23,000. In all the commission paid to
these two companies is Rs. 85 lakhs during 1992-93. To my mind unless the turn
over of these companies is in crores of rupees, such a huge commission cannot
be earned by these companies. Nextly it is seen that appointment of consultants
and selection of candidates is intended to select a person having knowledge and
experience in dealing with automobile spare parts with sufficient financial
resources to meet the magnitude of the agency for substantial areas of the
country and should have wide net work for supply of spare parts throughout the
area for which they are appointed as agents and their marketing skills. While
the managing director of V.K. Automotive (P.) Ltd., was at least an employee of
the respondent-company for some time, the managing director of Hastina
Automobiles (P.) Ltd., is only the son-in-law of one Krishna Murthy Sales
Manager in the 1st respondent-company, without any knowledge in marketing
Automobile Spare Parts. Although the report of the consultant with regard to
Hastina Automobiles (P.) Ltd., says that they are experienced entrepreneurs
nowhere it is stated what type of experience the entrepreneurs had. On the
other hand the company was initially incorporated with two directors, namely,
P.V.A. Prasad and another Smt. Y. Rajeswari, w/o Y.V. Subba Rao on 25-9-1990.
168. Admittedly
though no evidence was produced to show that these directors had any experience
in marketing field or manufacturing automobile spare parts, for reason best
known to the consultants they are recommended to the company for their appointment
as sole agents. Without discussing all these aspects the Board brushed aside
the complaint of the petitioner No. 9 on the ground that he was on the board
for nearly three years after they were appointed as dealers. The Court should
not miss the point that the petitioner No. 9 is no other than the son-in-law of
the managing director of the company and he himself was heading several
subsidiary companies and more or less the whole family including the petitioner
No. 9 was holding about 60 per cent of the shares and other share holders being
individual share holders they cannot raise their voice in the company as it may
be difficult for them to muster necessary strength to oppose the 2nd respondent
and perhaps they might be satisfied with the dividends that are being paid to
them for the investment they made. Now because of the differences between the
family members, these underhand dealings came to light. If they are together
things would not have gone in this manner to the detriment of the interest of the
other share holders apart from causing loss to the exchequer by avoiding
payment of sales tax, excise duty, income-tax, etc. When the acts of
mismanagement brought to the notice of the Court are ignored, it amounts to
giving a seal of approval for the mismanagement of the affairs that are being
conducted by the company which are prejudicial to public interest.
Persons of confidence
169. Coming to the
other contention of the respondents that they can appoint only those on whom
they have confidence, I can only observe that if the respondents want to
appoint people of their confidence, without undertaking any such process they
would have straight away appointed these companies as their sole agents. I have
no manner of doubt in holding that the respondents introduced this make believe
process of selection by inviting applications and appointing consulting
agencies to justify their action in paying huge amounts, before the Income-tax
authorities by taking a stand that they are independent agencies and they have nothing
to do with the company and to save themselves from any criticism from the
Income-tax Department as happened in the case of three firms which were closed
after income-tax raids which necessitated the company in opening these
companies as their sole selling agents. The 9th petitioner brought to the
notice of the public that the managing directors of these two companies are no
other than the blue eyed people that are close and dear to the 2nd respondent
in his underhand dealings.
Donation to a non-existing trust
170. In C.A. No.
65 of 1996 the petitioner brought to the notice of the Board that during the
financial year 1995-96 the company gave a donation of Rs. 10 lakhs to Srinivasa
Charity Trust in which the 2nd respondent and his family members were trustees
which was wound up on 30-5-1992 and in the guise of giving this amount as a
donation the 2nd and 3rd respondents used this amount for their personal
benefits. This contention was refuted by the respondent-company stating that it
is a subsequent event and the Board having dealt with it in C.A. No. 65 of 1996
rejected the said contention, which has become final. Therefore, according to
the respondent-company, the matter cannot be opened now. The said contention of
the respondent found favour with the Board. The law is well settled on this
aspect that any orders passed by a judicial forum at the interlocutory stage is
only intended to make interim arrangements during the pendency of the main case
and any such order is subject to the orders to be passed in the main case. I
have already taken a view that though it is an event that has taken place after
filing of the application the issue can be canvassed as the main petition is
still pending. I have seen the interim order passed by the Board on 28-11-1997.
The Board refused to grant interim relief by holding that it is an existing
trust of the ground basis of (1) the resolution produced by the respondents
wherein the 2nd respondent was authorized to take steps and transfer the assets
to Srinivasa Educational Society, (2) exemption certificate issued by the
income-tax authorities, and (3) the assessment order for the financial year
ending with 31-3-1996 on the basis of a nil return without giving a finding on
the contention of the petitioners, that the later para of the resolution dated
30-5-1992 (Annexure-A) filed along with the counter of the respondents is a
fabricated one. Be that as it may after considering the events the Board
recorded a finding that the application filed under sections 397 and 398 of the
Act has to stand on the allegations contained in the petition and subsequent
events brought on record alone cannot entail any person to a relief in case the
main petition fails. In other words in case the allegations in the main
petition are held proved then the subsequent events may be taken into
consideration by the Board in moulding relief suitably. In the normal course as
the 2nd respondent being the managing trustee of the trust, the Board would
have directed him to produce the original records of the trust to see which of
the resolutions produced by the parties are true and genuine. From the material
available on record and as per the version of the petitioners that the trustees
passed a resolution on 30-5-1992 to wind up the trust and he also filed copy of
the resolution. On the other hand, the case of the respondent is that the trust
resolved to transfer the assets of the Trust to Srinivasa Educational Society
but not to wind up the Trust. It is useful to extract the resolutions filed by
the parties.
Copy of the resolution filed by
the petitioners
“True copy of the resolution passed at the
meeting of the Board of Trustees of Sri Srinivasa Charity Trust, Kakinada, held
on 30th May, 1992 at 20-6-2, Sitapatirao Street, Kakinada-533-1.
The chairman placed before the meeting a
Photostat copy of the registered deed of memorandum and Articles of Association
of Sri Srinivasa Educational Society, Kakinada. The said society was registered
with registrar E.G. District, Kakinada on 24-4-1992.
The chairman suggested that in view of our
trust being not able to achieve the desired objects on its own inspite of best
efforts and also on being satisfied that the said desired objects of our trust
can be attained through Sri Srinivasa Educational Society, Kakinada which was
registered with the similar and identical objects as that of ours, it is
desirable to wind up our trust and pass over the movable and immovable
properties to Sri Srinivasa Educational Society. In this regard he brought to
the notice of members the resolution passed on 20-4-1992 a copy of which is
also placed before the meeting.
After thorough discussion the
following resolution is unanimously passed:
‘Resolved that our trust Sri Srinivasa Charity
trust be and is hereby wound up today i.e., 30-5-1992 and all the assets and
liabilities as on today (list enclosed) be and are hereby transferred/handover
to Sri Srinivasa Educational Society-Regd. Kakinada. Further Sri K.V.R.
Choudary, Managing Trustee be and is hereby authorized to complete the
necessary formalities in this regard.’”
Copy of the resolution filed by
the respondents
Meeting of the Board of Trustees of Sri
Srinivas Charity Trust, Kakinada held on 30th May, 1992 at Ram Nivas,
Sitapatirao Street, Kakinada at 10.00 a.m.
The chairman placed before the meeting a
Photostat copy of the registered deed of Memorandum and Articles of Association
of Sri Srinivasa Educational Society, Kakinada. The said society was registered
with registrar E.G. District, Kakinada on 24-4-1992.
The chairman suggested that in view of our
trust being not able to achieve the desired objects on its own inspite of best
efforts and also on being satisfied that the said desired objects of our trust
can be attained through Sri Srinivasa Educational Society, Kakinada which was
registered with the similar and identical objects as that of ours, it is
desirable to wind up our trust and pass over the movable and immovable
properties to Sri Srinivasa Educational Society. In this regard he brought to
the notice of members the resolution passed on 20-4-1992 a copy of which is
also placed before the meeting.
After discussion the following
resolution is unanimously passed:
‘Resolved that Sri K.V.R. Choudary, Managing
Trustee be and is hereby authorised to take all steps to become a sponsor
patron in M/s Sri Srinivasa Educational Society and for which purpose, do all
such things that are necessary such as advancing/transferring movable and
immovable properties to Sri Srinivasa Educational Society’
Resolved that Sri K.V.R. Choudary, Managing
Trustee be and is hereby authorised to take necessary permission from the
Income-tax authorities and do all acts that are necessary for finally
transferring the properties of our trust to Sri Srinivasa Educational Society’
The meeting terminated with a vote
of thanks to Chairman”
[Emphasis supplied]
From these resolutions, it is seen that while
preamble of both the resolutions are one and the same the resolutions said to
have been adopted are different as per the version of the parties. The Board did
not feel the necessity of summoning minutes book of the trust to find out which
of the resolutions is true. Even as per the version of the respondents
themselves, the managing trustee opined that the trust was not able to achieve
the desired objects on its own in spite of best efforts....and it is desirable
to wind up the trust and pass over the movable and immovable property to
Srinivasa Educational Society. While acceding to the request of the managing
trustee, the trustees resolved to take necessary permission from the income tax
authority and do all acts that are necessary for finally transferring the
property of the trust to Srinivasa Educational Society. It is not known why the
trustees, who are no other than the family members of R. 2 passed such a
resolution, when the managing trustee himself suggested winding up of the
trust.
171. Be that as it
may, on 27-4-1992, the Secretary of Srinivasa Educational Society applied for
permission for establishment of Sri K.V.R. College of Engineering in Kakinada
in an extent of Ac. 31.96 cents of land situated in the backward area of
Ponnamanda village of Kothapally Mandal, East Godavari District. This land was
shown in the name of the Trust in the list of properties of the Trust as on
30-5-1992 with the signature of the 2nd respondent. The Board without examining
the need and purpose in donating Rs. 10 lakhs to this Trust owned by the 2nd
respondent’s family out of a total donation of Rs. 11,01,382 given by the
company during that year, simply upheld the donation on the basis of exemption
certificate granted by the Commissioner on 6-3-1995 for a period of five years
and on the basis of Assessment Order for the assessment year 1995-96 passed on
the basis of nil return. When once a decision was taken to transfer the assets
of the Trust to the society way back in 1992 on the ground that the Trust
failed to achieve the desired results and the society to which the Trust
thought of transferring its assets, started functioning, it is not known why
the 2nd respondent got income tax exemption in 1994 for a period of five years
for a defunct Trust in contravention of the alleged resolution passed by the
Board, where under he was authorized to take necessary permission from
Income-tax Authorities for effecting transfer of properties of the Trust to the
Society. Be that as it may it is not the case of the respondent that this
amount was in any way required for carrying on the activities of the Trust. In
fact they have not shown utilization of this amount in the income tax return.
Nextly it is to be seen that normally the donee will be approaching the donar
for donation by specifying the purpose. There is absolute silence on the part
of the respondents, as to who approached the company for donation or at least
how this donation was utilized by the Trust belonging to the family of the 2nd
respondent. By diverting the funds in this manner to a non-functioning Trust if
not non-existent Trust belonging to the 2nd respondent family, the company
avoided payment of income tax and claimed exemption. The Board has not applied
its mind to the crux of the matter and simply washed of its hands by saying
that the contribution is to an existing Trust. Hence its cannot be said that
the affairs of the company are being run not in a manner prejudicial to the
public interest.
Discrepancies in the stock of finished
products
172. This issue was
not raised in the company petition. But it was raised by filing C.A. No. 65 of
1996 and C.A. No. 115 of 1997 seeking amendment to the main petition. The
allegation of the petitioners is that the respondents 2 and 3 are
misappropriating huge funds of the company by not bringing major quantities of
automobile parts manufactured by the company to the books of account by filing
annual reports of the company for the year 1989-90 to 1995-96. He also filed a
statement pointing the discrepancies in respect of automobiles parts at an
estimated value of Rs. 86.49 crores in a span of 7 years.
173. Unfortunately
the Board not only rejected the plea but also gave a certificate to the company
for the increase in the turn over during the subsequent years and the Board
says that the petitioners themselves agreed that in the subsequent years, the
closing stocks and opening stocks are shown properly. Likewise, the Board
simply believed the version of the respondent-company that this procedure is
being followed for a number of years as gospel truth having observed as follows
:
“The company has unhesitatingly admitted that
the discrepancy in closing stock which was being followed for over a number of
years would have been made more comprehensive than what was shown in the
balance sheet”.
The Board further held:
“The discrepancies have occurred due to
incomplete narration of closing stock in the balance sheet and it is due to
non-supply of full description of closing stock and it cannot be assumed that
there is diversion of spare parts by the company”.
In other words the petitioners have not been
able to establish that the respondent-company are diverting the products of the
company without accounting for the same.
174. In arriving at
this conclusion, the Board relied upon the compilation of entries in the RJI
Register said to have been maintained under the provisions of the Central
Excise Act which contains the day to day particulars of opening stock
production, sales and closing stock together with statement of reconciliation
for the year 1994-95 and it is also the case of the respondent-company that the
entries in the RJI Register are being periodically verified and signed by the
authorities.
175. Now it is to be seen whether the procedure
followed by the Board can be sustained in law.
176. Mr. Raghavan
tries to impress upon the Court that the Board comprises of a Member well
acquainted with the accounts and other experts have approved the explanation
given by the respondent-company. I can only observe that as this country is
having such type of Accounts Officers the black money that is being generated
in the industrial circles of this country is 3 to 4 fold than the real
currency, which is expected to be in circulation as per the version of Reserve
Bank of India. If the members of the Board properly analysed this issue in a
manner known to law and not carried away by extraneous reasons, the result of
the company petition would have been otherwise.
177. The book that
was produced before the Board was produced before this Court also. To my
surprise it is nothing but a compilation prepared by the company. But the
original RJI register was not produced before the Board to prove that the
Central Excise Authorities have verified and signed in the register. Further
the Board did not summon the original RJI register to find out whether the
entries in the compilation book tally with the original register or not. In
fact no central excise officer was examined to prove that the entries in RJI
register are being periodically checked and signed by the Department Officials.
As stated supra none of the entries in the compilation was proved by the
respondent in a manner known to law by examining themselves or their
representatives or the excise officials. Further the members of the board were
carried away with the increased turn over of the company year after year by
completely brushing aside the allegations made by the petitioners.
178. Now the next
question is whether the finding recorded by the Board is sustainable, even if
the perfunctory enquiry conducted by the Board is given any credence in the
light of the documentary evidence.
179. From the
annual reports, it is seen that the company divided the automobile spare parts
that are being manufactured by it into four groups, namely (1) king pins, king
pin units, shackle pins, shackle pin bolts, C & BP tubes; (2) tie-rod ends,
kits and draglinks; (3) UJ Crosses; and (4) piston pins and the production as
well as sales were shown group wise in the annual reports. From the information
culled out from the balance sheet, the discrepancies in the stock were shown
year wise as follows :—
Statement showing the difference of manufacturing items and
its costs as per the price of SRMT
|
1989-90 |
(1) King
Pins |
(2) Tirod
ends |
(3) U.J.
Cross |
(4) Piston |
Total
value |
|
Opening Stock |
1,90,707 |
... |
... |
11,946 |
|
|
Production |
16,93,546 |
1,19,502 |
94,629 |
2,60,254 |
|
|
Sales |
3,43,485 |
... |
... |
1,26,660 |
|
|
Closing Stock |
2,33,978 |
... |
... |
22,020 |
|
|
Discrepancy |
13,06,790 |
1,19,502 |
94,629 |
1,23,520 |
|
|
(Amount Rs.) |
13,06,79,000 |
2,39,00,400 |
2,83,88,700 |
61,76,000 |
1891 |
|
1990-91 |
|
|
|
|
|
|
Opening Stock |
2,33,978 |
... |
... |
22,020 |
|
|
Production |
18,19,083 |
1,58,315 |
1,00,666 |
3,77,958 |
|
|
Sale |
4,02,824 |
... |
... |
1,71,588 |
|
|
Closing Stock |
3,76,565 |
... |
... |
36,336 |
|
|
Discrepancy |
12,73,672 |
1,58,315 |
1,00,666 |
1,92,054 |
|
|
(Amount Rs.) |
12,73,67,200 |
3,16,63,000 |
3,01,99,800 |
96,02,700 |
1988 |
|
1991-92 |
|
|
|
|
|
|
Opening Stock |
3,76,565 |
... |
... |
36,336 |
|
|
Production |
19,17,917 |
1,76,116 |
1,28,738 |
2,03,529 |
|
|
Sales |
4,19,260 |
... |
... |
1,44,354 |
|
|
Closing Stock |
3,27,631 |
... |
... |
24,462 |
|
|
Discrepancy |
15,47,591 |
1,76,116 |
1,28,738 |
71,049 |
|
|
(Amount Rs.) |
15,47,59,100 |
3,52,23,200 |
3,86,21,400 |
36,52,450 |
2321 |
|
1992-93 |
|
|
|
|
|
|
Opening Stock |
3,27,631 |
... |
... |
24,462 |
|
|
Production |
21,93,374 |
1,36,833 |
1,19,927 |
2,01,883 |
|
|
Sales |
4,56,203 |
... |
... |
1,26,948 |
|
|
Closing Stock |
1,90,404 |
... |
... |
5,472 |
|
|
Discrepancy |
18,74,394 |
1,36,833 |
1,19,927 |
93,925 |
|
|
(Amount Rs.) |
1,87,43,400 |
2,73,66,600 |
3,59,78,100 |
46,96,250 |
2554 |
|
1993-94 |
|
|
|
|
|
|
Opening Stock |
1,90,404 |
... |
... |
5,472 |
|
|
Production |
24,89,080 |
1,44,537 |
1,55,651 |
2,75,534 |
|
|
Sales |
5,43,636 |
... |
... |
1,45,434 |
|
|
Closing Stock |
72,048 |
... |
... |
3,942 |
|
|
Discrepancy |
20,63,800 |
1,44,537 |
1,55,651 |
1,31,650 |
|
|
(Amount Rs.) |
20,63,80,000 |
2,89,07,400 |
4,66,95,300 |
65,82,500 |
2885 |
|
1994-95 |
|
|
|
|
|
|
Opening Stock |
72,048 |
... |
... |
3,942 |
|
|
Production |
24,90,943 |
1,83,966 |
1,44,055 |
2,42,725 |
|
|
Sales |
4,88,413 |
... |
... |
1,49,166 |
|
|
Closing Stock |
1,24,385 |
... |
... |
5,394 |
|
|
Discrepancy |
19,50,193 |
1,83,996 |
1,44,055 |
92,107 |
|
|
(Amount Rs.) |
19,50,19,300 |
3,67,99,200 |
4,32,16,500 |
46,05,350 |
2796 |
|
1995-96 |
|
|
|
|
|
|
Opening Stock |
1,24,385 |
... |
... |
5,394 |
|
|
Production |
39,22,383 |
1,67,955 |
1,72,197 |
1,76,316 |
|
|
Sales |
5,72,499 |
... |
... |
1,69,062 |
|
|
Closing Stock |
1,10,969 |
... |
... |
15,672 |
|
|
Discrepancy |
33,63,576 |
1,67,955 |
1,72,197 |
+ 3,024 |
|
|
(Amount Rs.) |
33,63,57,600 |
3,35,91,000 |
5,16,59,100 |
1,51,200 |
4212 |
Total
value of discrepancy since 1989-90 to 1995-96 = Rs. 186.49 crores.
180. The estimated
value of the unaccounted spare parts as per the price list of the company were arrived
at. The total value of the discrepancies of the stocks from 1989-90 to 1995-96
worked out to Rs. 186.49 crores.
181. Though this is
a very serious allegation, the Board neither looked into original annual
reports filed by the petitioners to find any discrepancies in the stocks nor
assessed the value of the missing stocks and expressed their satisfaction on
the explanation given by the respondents without verifying the truth or
otherwise of their plea.
182. The 9th
petitioner to prove his case pointedly has taken one item (i.e.), piston pins
for the year 1994-95. These pins are sold in sets consisting of 6 pieces. The
opening stock of piston pins for the year 1994-95 is 657 sets (3,942 pins) and
the production during the year is 40454 sets (No. 2,42,725 pins). Total number
of sets available for sale are 41,111 and the sets sold are 24,861. The closing
stock of the sets should be 16,250. But the closing balance was shown as 899
and the missing sets are 15,357 whose value works out to Rs. 70,76,811 at the
rate of Rs. 461 per set as per the price list of the respondent-company. To
prove the falsity of the case of the respondents, the petitioners furnished the
account of piston pins for the year 1980, 1994-95 and 1996-97. The table is
extracted hereunder :
Stock position of piston pins in
the Balance Sheets of S.R.M.T.
|
Piston
Pins |
1980 |
1994-95 |
1996-97 |
|||
|
|
Sets |
Production in Nos. |
Sets
|
Production in Nos. |
Sets |
Production in Nos. |
|
Opening Stock |
293 |
1,20,204 |
657 |
2,42,725 |
2612 |
1,43,424 |
|
Production |
20034 |
|
40454 |
|
23904 |
|
|
|
|
6 |
|
6 |
|
6 |
|
Sale |
20327 |
|
41111 |
|
26516 |
|
|
|
18363 |
|
24861 |
|
24223 |
|
|
Closing |
|
|
|
|
|
|
|
Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1964 |
|
16250 |
|
2293 |
|
|
|
1964 |
|
899 |
|
2293 |
|
|
|
0 |
|
15351 |
|
0 |
|
|
Stock Difference value |
Nil |
15351 × 461 Rs. per set = Rs. 7076811 At the time of filing the Petition in the Law Board. |
Nil |
|||
|
|
Before filing the petition in the Law Board |
|
After filing the petition in the Law Board |
|||
When these discrepancies were shown at the time of considering
the plea of the petitioner for appointment of interim Administrator in C.A. No.
65 of 1996 the members of the Board observed that ‘we made a pointed question
to Sri Raghavan whether the company will be in a position to produce a
statement reconciling the figures of production, sales and closing stock to
compare the same with the monetary value of shares shown in the annual
accounts, he readily agreed to do so’. Thereafter at the time of final hearing,
the learned counsel for the respondents filed a statement said to be a
reconciliation statement and the same is extracted herein :
Reconciliation statement of opening
stock, production, sales and closing
STOck for the year 1994-95
|
Group |
Opening Stock |
As per Balance Sheet |
Production |
Sale |
Closing Stock |
As per Balance Sheet |
|
Piston Pins |
657 |
657 |
25,103 |
24,861 |
899 |
899 |
|
King Pins |
32,052 |
|
4,11,862 |
3,77,374 |
66,540 |
|
|
King Pin Units |
2,392 |
|
1,10,751 |
1,11,039 |
2,105 |
|
|
Other |
32,555 |
|
19,68,329 |
21,71,780 |
46,726 |
1,24,385 |
|
M.V. Parts |
|
72,048 |
2,17,622 |
|
|
|
|
& Engine
Parts |
|
|
21,85,951 |
|
|
|
|
U.J. Crosses |
2,876 |
|
1,44,055 |
1,46,390 |
541 |
|
|
Tie Rod |
2,173 |
|
1,83,996 |
1,77,696 |
8,473 |
|
|
Ends, Kits, |
Drag Links |
|
|
|
|
|
|
Grand Total |
72,705 |
72,705 |
30,61,719 |
30,09,140 |
1,25,284 |
1,25,284 |
Note: 1. The narration in respect of ‘Piston Pins’
under the head ‘Production’ in balance sheet is incomplete.
2. Balance
sheet production figures shown against narration ‘Piston Pins’ Nos. 2,42,725
includes other Engine Parts Nos. 2,17,622.
3. In this statement they have been included
under ‘Other M.V. Parts & Engine Parts’.
On the basis of the above statement, the counsel
for respondents contended that the petitioners arrived at the conclusion on the
basis of incomplete narration in the annual reports and the production of
pistons pins includes other engine parts whose number is 2,17,622 and they are
shown in this reconciliation statement. This contention found favour with the
members of the Board. To my mind the explanation is utterly false and far from
truth. For the first time I came across with a contention that the figures
shown in the balance sheet are incomplete and they include some other engine
parts whose identity was not established. If there is any truth in this
reconciliation statement, the respondents would have stated what are the other
engine parts that they are manufacturing, how their production and sales were
shown in the balance sheets of all those years, and how for the first time in
the reconciliation statement they came up with this story that piston pins
include other engine parts. The case of the petitioners is that the automobile
spare parts that are being manufactured by the company are reflected in the
balance sheet and to their knowledge there are no other engine parts that are
being manufactured by the company. Under the caption ‘sales’ after sale of Tata
vehicles for which the company is dealer, sales of SRMT parts were shown and
the sale of other engine parts was not shown in any of the annual reports. The
respondents have not given any explanation how the sale proceeds on other
engine parts are being shown in the balance sheets. Nextly the production of
piston pins for the year 1994-95 was shown as 2,42,225 (40,454 sets) in the
annual report. But in the reconciliation statement the production was shown as
25,103 sets. It is not known from where he got this figure. From the figures
given in the balance sheet the difference is 15351 sets as explained in the
Table. This difference is sought to be explained by stating that the production
includes other Engine Part Nos. 2,17,622, this figure is shown separately along
with other parts whose production, sale and closing stocks were shown
group-wise and though the so-called other engine parts have nothing to do with
either the piston pins account or other parts shown group-wise in the annual
reports. Assuming for a moment that the reconciliation is true, the respondents
have shown other M.V. parts and engine parts under different head and how they
can add these parts to piston pins accounts. The fallacy of this argument can
be exposed from another angle also. The mischief played by the respondents which
missed the eye of the Board, is as follows. The piston pins produced in that
year was 2,42,725. As they are being sold in sets of 6 Nos. the number of sets
will be 40,454. But the respondents mischievously deducted the so-called other
engine parts from total number of pins, (i. e.), 2,42,725-2,17,622 and shown
that 25,103 Nos. piston pins were produced. If this figure is divided by six,
the number of sets will be only 4,184. For this, if the opening stock of 657
sets are added total number of sets available for sale would be 4841 sets. But
the piston pins sold during that year are 24,861 sets while the other figures
relating to piston pins were shown in sets - production was shown in numbers as
explained above. The Board did not apply its mind to these grave discrepancies
that are evident on the face of the reconciliation statement. The falsity in
the plea of the respondent-company can be exposed in another manner also. From
the Annual Reports for the year 1980 and 1996-97 (after Board order in C.A. No.
65 of 1996) it is seen that there are no discrepancies in the stocks of the
piston pins. If other engine parts are included in the piston pins, why the
discrepancies that occurred in the financial year 1994-95 were not there in
those years and where the other Engine parts have gone? I understand in 1980
the company was following the calendar year but the company seemed to have
opted financial year for accounts purpose subsequently.
183. If the
statement of the respondent counsel that the production of piston pins include
other engine parts is true, how they disappeared in the years 1980 and 1996-97
when the respondent-company is following the same pattern of accounts
consistently for last 25 to 30 years as per their version before the Board and
their own letter dated 24-9-1996 addressed to petitioner No. 4 wherein he
stated “that the item-wise tally of each and every part manufactured in the
formula given by you is impracticable because of the large number of items
manufactured and also on account of combination sale and the company has been
consistently following the same pattern of disclosing the quantitative
particulars of production, sales and stock for the last 25 to 30 years.”
From the above it can be safely presumed that
either the details of the spare parts shown for the years 1980 and 1996-97
should be false or the figures shown in the year 1994-95 should be false.
The above discussion exposes the falsity of
the plea of the respondents that the production figure of piston pins includes
other Engine Parts. The Board did not even advert to the discrepancies in the
stock position from 1989-90 to 1995-96 with regard to (1) King Pins, (2) Tirod
ends, (3) U.J. Crosses and (4) Piston Pins whose value seems to be Rs. 186.49
crores as per the price list of the respondent-company.
184. The learned
counsel for the petitioners strenuously contended that as the company is
involved in manufacture of spare parts, the accounts of the company has to be
audited under the Cost Audit (Report) Rules, 1968. On the other hand, the
counsel for the respondents contended that these rules are not applicable to
this company. I am not going into that controversy. From the statement of
discrepancies extracted supra, it is seen that large number of spare parts that
were produced by the company were not brought to the books of account. In fact
the respondents did not dispute seriously on the discrepancies. They simply
tried to get over by saying ‘incomplete information’. At least there is a prima
facie evidence to show that there is large scale embezzlement of funds of the
company and there is large scale evasion of excise duty, sales tax, income tax
etc., and required through investigation.
In the light of the foregoing discussion, I have
no hesitation to hold that the Board in its anxiety to give a clean chit to the
respondent-company has not even looked into the Annual Report of the company as
approved in the Annual General Body meeting of the company to find out whether
there is any truth in the allegation about the large scale misappropriation of
the company funds by not bringing the automobile spare parts that are being
manufactured by the company to the books of account as is evident from the
statement extracted supra and satisfied itself with the statement of the
petitioners that in the subsequent years opening stocks and closing stocks are
being shown properly without reference to large scale evasion of both direct
and indirect taxes apart from excise duty payable to the State as well as
Central Government.
Other Acts of Mismanagement
185. I am not
adverting to the plea of the petitioner with regard to the diversion of
material for construction of a community hall in the name of the mother of the
2nd respondent, Hotel Jaya International, sale of scrap, used oil etc. as no
serious arguments were addressed on these matters before me, though the
petitioners filed some material and deposed on these issues in his evidence
before the Board. I would not like to express any opinion on these aspects.
186. From the
findings recorded by me on the acts complained by the petitioners with regard
to mismanagement, I have no hesitation to hold that the affairs of the company
are being conducted by Respondents 2 and 3 (father and son) as joint managing
directors of the company in a manner not only prejudicial to public interest
but also prejudicial to the interest of the shareholders of the company as
well.
Acts of Oppression
187. The word ‘oppression’ used in section 397 not
defined in the Act.
In Universal Dictionary the word ‘oppression’
is defined as (1) Harsh; tyrannical (2) causing a state of physical or mental
discomfort or weariness.
188. As section 397
being a corresponding section to section 210 of the Old English Act, the
counsel for the petitioner placed reliance both on English decisions as well as
Indian decisions.
189. In Elder v.
Elders Watson’s Ltd. 1952 SCOTT, Cases 49, Lord Keith while considering the
word ‘oppression’ observed that “it is not lack of confidence between
shareholders per se that brings section 210 into play, but lack of confidence
springing from oppression of a minority by a majority in the management of the
company’s affairs, and oppression involves, I think, at least an element of
lack of probity or fair dealing to a member in the matter of his proprietary
rights as a shareholder.” In Scottish Co-operative Wholesale Society Ltd. v.
Meyer 1958 (3) All. ER 66, Lord Viscount Simonde speaking for the majority of
the House of Lords observed, “Oppression under section 210 may take various
forms. It suggests, to my mind, as I said in Elder’s case (supra), a lack of
probity and fair dealing in the affairs of a company to the prejudice of some
portion of its members. The section introduces a wide power to the court to
deal with such a situation in an equitable manner which it did not have in the
case of a company prior to the passing of the Act of 1948". Lord Denning
in a separate Judgment held that the object of the remedy is to bring “to an
end the matters complained of,” that is, the oppression, and this can be done
even though the business of the company has been brought to a standstill...”
190. Five minute
Car Wash Service Ltd., In re [1966] 1 All. E.R. 242, it was held that an act or
omission may also amount to oppressive conduct if it is designed to achieve an
unfair advantage.
191. In Shanti
Prasad Jain v. Kalinga Tubes Ltd. AIR 1965 SC 1535, their lordships of the
Supreme Court observed that “the law, however, has not defined what is
oppression for purposes of this section, and it is left to Courts to decide on
the facts of each case whether there is such oppression as calls for action
under this section.</o:p¾
The question in each case is whether the
conduct of the affairs of the company by the majority shareholders was oppressive
to the minority shareholders and that depends upon the facts proved in a
particular case... It must further be shown that the conduct of the majority
shareholders was oppressive to the minority as members and this requires that
events have to be considered not in isolation but as a part of a consecutive
story. There must be continuous acts on the part of the majority shareholders,
continuing up to the date of petition, showing that the affairs of the company
were being conducted in a manner oppressive to some part of the members. The
conduct must be burdensome, harsh and wrongful and mere lack of confidence
between the majority shareholders and the minority shareholders would not be
enough unless the lack of confidence springs from oppression of a minority by a
majority in the management of the company’s affairs, and such oppression must
involve at least an element of lack of probity or fair dealing to a member in
the matter of his proprietary rights as a shareholder. ...xx xx xx Section 397
unless it be shown that this lack of confidence sprang from a desire to oppress
the minority in the management of the Company’s affairs and that there was at
least an element of lack of probity and fair dealing to a member in the matter
of his proprietary right as a shareholder.”
192. In Gajarabai
Patny v. Patny Transport (P.) Ltd. [1966] 36 Comp. Cas. 745 (AP), this Court
considered the effect of sections 397 and 398 of the Old Act. Justice
Jaganmohan Reddy, as he then was, observed that “where there is discrimination
by the majority of shareholders or by the majority of the directors to the
detriment of minority amounting to oppression, and the affairs of the company
are managed in a manner derogatory to the company’s interest, sections 397 and
398 of the Companies Act can be invoked and the court has unfettered discretion
in such a case to impose upon the parties whatever settlement it considers just
and equitable to remove the oppression.” (p. 745)
On facts of the case, His Lordship held “that
the action of the directors in withholding transfer of shares in favour of the
petitioners, in accordance with the terms of the will, while at the same time
transferring some other shares in the managing agency firm, under the same
will, was vindictive and harsh and unreasonable and amounted to oppression.”
(p. 745)
193. In Needle
Industries (India) Ltd.’s case (supra), their Lordships of the Supreme Court in
para 52 of the Judgment held that “the person complaining of oppression must
show that he has been constrained to submit to a conduct which lacks in
probity, conduct which is unfair to him and which causes prejudice to him in
the exercise of his legal and proprietary rights as shareholder. If this act is
proved, the power of the Company Law Board to invoked section 397 of the
Companies Act will be justified.”
While going through the minutes book I found
two/three important resolutions adopted by the Board which throw sufficient
light on the acts complained by the petitioners against respondents 2 and 3 and
which were not placed before the Board. While dealing with the merits of the
case, I have taken note of the resolutions.
194. In Malleswara
Finance & Investment Co. (P.) Ltd.’s case (supra), the main matter in
dispute was the decision to increase the share capital of the Company so as to
reduce the majority shareholders into minority shareholders. The learned
counsel for the appellant in that case contended that the allotment of the
shares is a matter of internal management of the company and the same is
outside the scope of sections 397 or 398 of the Act. After reviewing the case
law on the subject, the Madras High Court held that “...it is well established
that directors of a company are in a fiduciary position vis-a-vis the company
and must exercise their power for the benefit of the company. If the power to
issue further shares is exercised by the directors not for the benefit of the
company but simply and solely for their personal aggrandisement and to the
detriment of the company, the court will interfere and prevent the directors
from doing so. The very basis of the court’s interference in such a case is the
existence of the relationship of a trustee and cestui que trust as between the
directors and the company...” (p. 886). On the facts of the case, the Court
having observed that there was no necessity to increase the capital since there
was no plant or machinery, why the share capital was increased is not
explained. Accordingly, the Court held that the directors of the fifth
respondent-company did not act in good faith and amounted to act of oppression.
195. In Mrs. Rashmi
Seth’s case (supra), the Principal Bench of (CLB) held that the action of the
company in passing a resolution that the petitioner consented for transfer of
her holding of 50 per cent shares by fabricating minutes showing her presence,
though she did not attend the meeting and other resolutions passed in such a
meeting are null and void and non-operative. As the petitioner continued to
hold 50 per cent shares in the Company and as such she was held to have
fulfilled the criteria prescribed under section 399 for filing a petition under
sections 397 and 398.
In
the above Judgment it was further held that the action of the directors in not
offering shares to all the shareholders, but to one shareholder, such allotment
had the effect of converting majority share holding of the petitioner into
minority share holding and the same amounts to acts of oppression and
mismanagement. The company further held that the directors cannot utilise the
fiduciary powers over the shares purely for the purpose of destroying an
existing majority or creating a new majority and exercise of power to issue
further shares for the purpose of consolidating and improving voting power to
the exclusion of the existing majority shareholder cannot be allowed.
196. In
R. Khemka’s case (supra), this Court observed that the word ‘oppression’ is a
chameleonic word and it changes its colour, content and from time to time,
place to place, event to event, depending on circumstances of the case. His
Lordship also observed while section 397 is intended to protect the interest of
minority shareholders, section 398 intended for maintaining public interest and
interest of the company.
From the above it is seen that if the company
with the support of the majority shareholders creates a state of physical or
mental discomfort to the minority members and tries to alter shareholdings of
the members by fabricating the resolutions as held supra it has to be construed
as an act of ‘oppression’ of the minority by majority. Further, in case of
mismanagement, the minority shareholders need not prove the allegations to be
true. Mere apprehension is sufficient for making an order by the Board with a
view to bring to an end to the disputes, as seen from section 398(2).
197. But
Sri Raghavan appearing for respondents strenuously contended that the Board,
not being a Court and being creature of a statute, whose powers are enumerated
cannot exercise powers in equity as is being done by the High Courts as well as
the Supreme Court.
198. This
Court while considering the series of objections raised by the counsel, this
contention was rejected by holding that the Board is empowered to exercise
inherent powers under rule 44 of the Company Law Board Regulations, 1991 akin
to the inherent powers that are being exercised by the Civil Courts under
section 151 of the Code.
Nextly, from the language of section 398, mere
apprehension in the minds of minority shareholders is sufficient and the allegations
levelled against the majority shareholders need not be proved in the strict
sense for exercise of the powers vested in it under section 402 by the Board.
199. Keeping
the dicta laid down in the cases referred supra, I proceed to examine whether
acts complained by the petitioners constitute acts of oppression.
196. In
R. Khemka’s case (supra), this Court observed that the word ‘oppression’ is a
chameleonic word and it changes its colour, content and from time to time,
place to place, event to event, depending on circumstances of the case. His
Lordship also observed while section 397 is intended to protect the interest of
minority shareholders, section 398 intended for maintaining public interest and
interest of the company.
From the above it is seen that if the company
with the support of the majority shareholders creates a state of physical or
mental discomfort to the minority members and tries to alter shareholdings of the
members by fabricating the resolutions as held supra it has to be construed as
an act of ‘oppression’ of the minority by majority. Further, in case of
mismanagement, the minority shareholders need not prove the allegations to be
true. Mere apprehension is sufficient for making an order by the Board with a
view to bring to an end to the disputes, as seen from section 398(2).
197. But
Sri Raghavan appearing for respondents strenuously contended that the Board,
not being a Court and being creature of a statute, whose powers are enumerated
cannot exercise powers in equity as is being done by the High Courts as well as
the Supreme Court.
198. This
Court while considering the series of objections raised by the counsel, this
contention was rejected by holding that the Board is empowered to exercise
inherent powers under rule 44 of the Company Law Board Regulations, 1991 akin
to the inherent powers that are being exercised by the Civil Courts under
section 151 of the Code.
Nextly, from the language of section 398, mere
apprehension in the minds of minority shareholders is sufficient and the
allegations levelled against the majority shareholders need not be proved in
the strict sense for exercise of the powers vested in it under section 402 by
the Board.
199. Keeping
the dicta laid down in the cases referred supra, I proceed to examine whether
acts complained by the petitioners constitute acts of oppression.
Rights issue
200. The
case of the petitioner is that in January, 1994 the company made rights issue
all of a sudden without any discussion in any Board meeting or the General Body
Meeting, on 25-9-1993 with a view to bring the share holdings of the
petitioners below 10 per cent in order to see that the petitioners would not
approach the Board for reliefs against oppression and mismanagement and the
issue was not for any bona fide business purpose. The petitioner in his chief
examination categorically stated that in the board meeting held on 29-7-1993,
the issue regarding expansion or modernization of company was not in the
agenda. It is also his case that in the annual general body meeting held on
25-9-1993, no discussion about expansion or modernisation of the company took
place. Be that as it may the petitioners having received the offer of rights on
31-4-1994 applied for shares on 8-3-1994 but the shares were not allotted to
the petitioner for a long time on the ground that the form was not signed by
one Aruna Devi who was holding shares jointly along with the petitioner who
died in the year 1980, though the death certificate of Aruna Devi was sent to
the company on 25-5-1994. The case of the respondents is that the additional
share capital was sought to be raised for purpose of expansion and
modernization and replacement through rights issue as per the resolution of the
board in its meeting held on 29-7-1993. The company has not allotted the shares
to the petitioner, as the petitioner did not attach the death certificate of
the joint shareholder along with the application. It is only in 1997 the shares
were allotted to the 9th petitioner.
201. Rejecting
the contention of the petitioners, the Board held that it is beyond their
comprehension as to how the rights issue as long as the that the shares were not allotted to the 9th
petitioner till 1997, i.e., 3 years after the company petition was filed. On
the second contention that the company is not in need of funds, the Board
observed that it was not the first time that the company made such an issue.
Earlier in the 1991 also such an issue was made even without verifying the
minutes of the Board dated 29-7-1993. Ultimately the Board held as follows :—
“Therefore, we cannot subscribe to the view of
the petitioners that the right issue was made with an oblique motive especially
when it will have effect on nearly 90 per cent of the shareholders other than
the petitioners who hold only around 10.6 per cent shares.”
Having taken such a view the Board
surprisingly held :
“However, we find that the grievance of the
petitioner relating to delayed allotment of the shares as substance. We are not
in a position to appreciate the stand of the company that the death of a family
member was not known to the persons in management viz., 2nd respondent for over
three years to allot shares applied for in 1994 in 1997 personal differences
should not come in the way of discharging statutory responsibilities. The
delayed allotment has denied the petitioner the benefit of dividend declared.
Therefore, we are of the view that the petitioner should be compensated at
least to the extent of the dividend that he would have been otherwise entitled
if the shares had been allotted in time. We direct the company to compensate
him by payment of interest at the same rate at which dividends were declared
and paid in respect of delayed period within a period of one month from the
date of receipt of the order.”
202. Now
let me see to what extent the findings recorded by the Board can be sustained.
The case of the respondent is that the Board has taken a decision at its
meeting held on 29-7-1993 admittedly after the disputes started. The agenda
notice for that meeting was filed before the Board as Annexure R. 15 by the
respondents themselves. None of the agenda items relate to expansion or
modernization or replacement of the old machinery. Perhaps they want to take
advantage under the last item “Any other matter with the permission of the
Chair”. But at the same time the resolution adopted at the meeting was not
filed before the Board. I summoned the original minutes book to have a look at
the resolutions adopted by the board. The subject ‘Replacement/Modernization of
machinery was taken up under Item No. 8 (D) in the board meeting held on
29-7-1993 and the resolution adopted under this item is extracted hereunder :
“Resolved that approval of the company be and
is hereby given in principle to take up replacement cum modernization of
machinery and expansion of the plant.
Resolved further that the scheme of funding
and other details be considered at the next board meeting which shall be made
available by the Managing Director.”
From the above resolution it is seen that the
Board did not decide to raise additional amounts through rights issue.
203. Secondly, if
the rights issue was made for the purpose of expansion etc., the respondents
did not state how the additional share capital raised was utilized even at the
time when the case was heard at the fag end of 1998. Further the case of the
respondent is that about Rs. 1.5 crores was raised through rights issue and it
is not known whether the company is not in a position to raise that amount if
it is really needed from other sources. On the other hand, the specific case of
the petitioner is that the company made rights issue only to see that his
shareholdings is reduced to less than 10 per cent thereby preempting him from
approaching the Board under section 397 of the Act. The 9th petitioner spoke
about this issue in detail while giving evidence. From the resolution of the
Board it is seen that the company is having surplus funds and with regards to
raising of additional share capital, the Board having agreed in principle to
the suggestion of the 2nd respondent that about Rs. 7.5 crores may be raised
for the purpose, resolved to consider the scheme of the funding and other
details at the next board meeting which shall be made available by the managing
director. From the above it is seen that the Board did not resolve to raise
additional share capital by rights issues. Further while the estimated amount
for the purpose is Rs. 7.5 crores the amounts raised through Rights issue is
only Rs. 1.5 crores. How the remaining amounts was raised, the company did not
explain. On the other hand, the respondents did not file the copy of these
resolutions before the Board purposely as they will be caught on the wrong
side.
In the light of the foregoing discussion the
conclusion arrived at by the Board that the company decided to raise Rs. 1.50
crores by making rights issue is not based on any material and it is the result
of non-application of mind.
204. Nextly
the Board brushed aside the contention of the petitioner that the company made
rights issue only to see that his shareholding is reduced to less than 10 per
cent to prevent him from approaching the Board Under section 397, by holding
that it is beyond their comprehension as to how rights issue as long as the
offer is accepted would reduce one’s shareholding. The case of the petitioner
is that both in the petition as well as in his evidence that having accepted
the rights issue, he submitted an application dated 8-3-1994 to the Assistant
Secretary, when the company did not allot the shares to the petitioner on the
ground that the joint shareholder, (i.e.), Aruna Devi has not signed the
application, he submitted the death certificate of Aruna Devi on 25-5-1994. The
copy of the letter along with Death Certificate were filed before the Court.
Though the counsel for the respondent-company contended that the company did
not receive the death certificate till 1997, he neither produced any evidence
to show that the death certificate was not received by the company in 1997 nor
he elicited anything contra in the cross-examination of the petitioner that he
has not furnished the death certificate on 25-5-1994. If there is no mala fide
intention on the part of the respondents 2 and 3 it is not known how the shares
remained un-allotted to the petitioner for long three years, more so in the
light of the observation of the Board that “we are not in a position to
appreciate the stand of the company that the death of the family member was not
known to the persons in management”.
205. Mr.
Raghavan in his marathon arguments did not attack this finding of the Board. Be
that as it may, the very finding of the Board that “personal differences should
not come in the way of discharging the statutory responsibilities and awarding
of payment of interest at the rate at which the dividends were declared to
compensate the petitioner”, is sufficient to hold that the respondents 2 and 3
pitched upon the rights issue and withheld the allotment of shares to 9th petitioner
with a view to see that the shareholdings of the petitioner will be less than
10 per cent. Had the other shareholders not joined him, he would not have on
his own approached the Board under section 397 of the Act.
206. In
Malleswara Finance & Investments Co. (P.) Ltd.’s case (surpa) the Madras
High Court held that in the absence of any evidence that the increase in the
share capital was necessary, the issue and allotment of shares is not in good
faith and intended to defeat the rights of shareholders.
207. In
Gajarabai Patny’s case (supra), his Lordship Justice Jaganmohan Reddy as he
then was in this Court held that the action of the directors in withholding
transfer of shares in favour of the petitioners, in accordance with the terms
of the will, while at the same time transferring some other shares in the
managing firm, under the same will, was vindictive, harsh, unreasonable and
amounted to oppression.
208. In
Standard Industries Ltd.’s case (supra), again the Principal Bench of the Company
Law Board held that the action, as evidenced by resolute endeavour to go with
the rights issues in spite of opposition from 48 per cent shareholders in
effect, intended to reduce the petitioners and others to insignificant minority
and suffers from lack of probity and fair play.
Following the dicta laid down in the above
judgments, I hold that withholding of allotment of shares of the 9th petitioner
even after producing the death certificate of joint shareholder late Aruna Devi
along with her letter dated 25-5-1994 for more than four years is only with a
view to preempt the 9th petitioner and his group from approaching the Board
complaining acts of oppression and mismanagement in the affairs of the company
and such an action is vindictive, harsh and unreasonable and amounts to
oppression.
Removal of petitioner No. 9 as
director
209. The
case of the petitioner No. 9 is that he was removed as Director in the
extraordinary general body meeting of the company held on 21-1-1994, without
following the procedure prescribed in the Act. It is also his case that the
petitioners and other shareholders supporting him were not allowed to
participate in the said meeting and he was not accorded any opportunity to
explain his position as envisaged under section 284. His further case is that
once the Board decided to convene the meeting as per the requisition, a special
notice under section 190 must have been issued by the requisitionist. Likewise,
the provisions of section 168 were not followed and the notice for the meeting
did not contain any explanatory statement as envisaged under section 173 and as
such the proceedings of the meeting have to be declared as null and void.
210. The
case of the respondents is that the company received a requisition notice for
removal of the petitioner as director of the company. After the court
litigation initiated by the petitioner on the requisition notice came to an
end, in the extraordinary general body meeting held on 21-1-1994 it was
unanimously decided to remove the petitioner as director. Their case is that
the telegraphic representation sent by the petitioner for the Board Meeting
held on 27-12-1993 was circulated to the members, as the petitioner did not
choose to attend the meeting to make oral representation. The general body
decided to remove him after considering the telegraphic representation and as
such the provisions of section 284 were complied with.
211. With
regard to issuance of special notice under section 190 the case of the
respondent is that the requisition notice received by the company was a
composite one both under section 169 as well as under section 190. Hence, the
removal of the petitioner was in consonance with the above provisions of law
and had the support of all the shareholders who attended the meeting and as
such it cannot be impugned.
212. The
Board, having observed that in a petition under section 397 directorial
complaints cannot be generally agitated, examined the same and held :
“As per record, nine shareholders
requisitioned for convening an extraordinary general body meeting for passing a
resolution to remove the petitioner as a Director. Having taken recourse to the
legal forum, the petitioner is complaining that the provisions of sections 284
and 190 of the Act were not followed in this process.” The Board accepted the
plea of the respondents that “the circulation of telegraphic representation is
sufficient compliance of the provisions of section 284 of the Act.” The other
contention of the petitioner that requisitionist has not issued special notice
of fourteen days before the date of meeting did not find favour with the Board
and they observed that section 169 of the Act has to be read independently from
section 284. Since a notice under section 169 of the Act is received by the
company and the notice indicates the business to be transacted in the meeting
which is to be held within a stipulated time framed as provided under that
section, the question of issuing separate special notice under section 190 does
not arise and the notice of the requisitionist was treated as special notice
under section 190. The Board also held that “the provisions of section 190 of
the Act are applicable only in connection with the Annual General Body Meeting
and not in respect of a requisitioned Extraordinary General Body Meeting.” The
Board also held that “in case of meetings convened on requisition under section
169 of the Act, no explanatory statement need be enclosed. In that view of the
matter, the Board held that the removal of the petitioner as Director does not
suffer from any legal infirmity.”
Before considering the correctness or
otherwise of the Order of the Board, it should be kept in mind that petitioner
No. 9 was given in marriage to Respondent No. 2’s daughter in 1969 and he
became a director of the company in 1970. He was not only a director of this
company, but also actively involved in the management of the affairs of the
various subsidiary companies. He was the (1) Managing Partner of the Padmalaya
Finance Co., (2) Managing Director of Vijaya Engine Volves Ltd., (3) Managing
Director of K.V.R. Forgings, and (4) Chairman of Bhavani Castings. From this it
is clear that the petitioner was holding important positions at least in four
subsidiary companies apart from the post of director in the respondent-company.
After the disputes have arisen between the father-in-law and son-in-law, i.e.,
R2 and 9th petitioner, he was stripped of the positions held by him one after
the other except the post of Managing Director for K.V.R. Forgings which he
seemed to have resigned after he became Member of Parliament in 1984. No
explanation whatsoever is forthcoming as to why he was removed from various
positions held by him for nearly 2½ decades. From the events that have taken
place, it is obvious that he was stripped of all his positions as he has fallen
from the grace of his father-in-law and he started raising his voice against
the mismanagement of the affairs of the company by R. 2. Nextly, as a director
of the company he will be having access to all the records and account books of
the company and as director he is entitled to have the information as a matter
of right unlike a shareholder who has no right to have the information with
regard to the day to day affairs of the company. This is evident from the
alleged letter of the company dated 3-12-1993 addressed to 9th petitioner,
which did not reach him as per the answer given by 9th petitioner to Q. No. 131
in cross-examination. The question (Q. No. 136) put to the 9th petitioner and
the answer given by him in his cross-examination are extracted below :
“Q. 136. You have every right to
inspect the books and records of the Company ?
A. Since the information asked for was not given and it is not
possible to go through the records of the company and find out the mis-appropriation.”
From questions 6 to 10 in the
cross-examination, it is seen that the counsel suggested to 9th petitioner that
as a director he is having access to all the Books, records and accounts.
From this it is evident that petitioner No. 9
is stripped of his directorship, so that he will not have access to the records
and to pre-empt him from approaching the Board seeking relief against acts of
oppression. This answer of 9th petitioner is further fortified from the reply
given by the company to the letters addressed by him seeking information before
and after losing the directorship as well as the replies of the company to the
other petitioners as shareholders.
From this angle, if we look at the notice, nine
shareholders belonging to the R. 2’s family gave the notice after the disputes
have arisen between R.2 and 9th petitioner, the irresistible conclusion that
can be arrived at is that the respondent No. 2 with the power at his command
wants to oppress the voice of the petitioners by not allowing him to have
access to the records, accounts etc. more so, when he tried to find pitfalls in
the administration and tried to expose the misdeeds of R2 prejudicial to public
interest as well as the interest of the company.
213. Coming
to the resolution removing the petitioner No. 9 as Director, the specific case
is that in the Annual General Body Meeting held in September 1993, he raised
the issue of mis-appropriation of Rs. 1.25 crores and as a retaliation the R2 got
requisition notice issued by his family members on 4-11-1993. The requisition
notice is said to have been given under section 169 requesting the managing
director to convene extraordinary general body meeting to consider and pass a
resolution, ‘resolved that Mr. Chundru Srihari Rao be and is hereby removed as
Director of the company’. They also stated that ‘it may be treated as special
notice under section 190 of the Act.’
214. Section
284 deals with removal of directors. Under sub-section 1, a company may, by
ordinary resolution, remove a director before the expiry of his period of
office. Under sub-section 2, a special notice has to be given for passing a
resolution for removal of a director or appoint some one in his place. Under
sub-section 3, on receipt of such a notice, the company shall forthwith send a
copy thereof to the director concerned, and the director shall be entitled to
be heard on the resolution at the meeting. Under sub-section 4, the director
concerned after receipt of the meeting notice may make a representation in
writing to the company and request its notification to members of the company.
While giving notice for general body meeting, the company has to send a copy of
the representation to every member of the company, and if a copy of the
representation is not sent for the reasons stated therein, the director may
without prejudice to his right to be heard orally, require that the
representation shall be read out at the meeting. From the language employed in
sub-sections 3 and 4, I feel that there is some ambiguity with regard to the
time at which notice to be given to the director, i.e., prior to giving notice
for the general body meeting or after the notice for general body is given. I
need not go into the controversy, as both the counsel did not address arguments
on this aspect.
215. Under
section 190, notice of intention to move the resolution shall be given to the
company by not less than fourteen days before the date of meeting at which the
resolution to be moved, excluding the day on which the notice is served or
deemed to be served on the member concerned.
216. Under
section 169 on receipt of requisition meeting notice received from the members
of the company, the board of directors shall proceed to call for Extraordinary
General Body Meeting of the company. Though the Board at its meeting held on
27-12-1993 decided to call for the extraordinary meeting, on 21-1-1994, neither
notice calling for the meeting nor the explanation of 9th petitioner appended
to the notice, and the resolution passed in the general body meeting were not
produced either before the Board or this Court to find out whether the
statutory requirement is satisfied in convening the meeting or the contents of
the telegram, to know whether it can be treated as an explanation and whether
the resolution adopted by the general body reflects the application of mind by
the members to the telegram in removing the petitioner No. 9 as director.
217. Be
that as it may, even assuming that the company complied with statutory
requirements in convening the meeting, under section 294(3), the director is
entitled to be heard on the resolution at the meeting. In the evidence, the
petitioner categorically stated that having received the notice for
Extraordinary General Body Meeting slated on 21-4-1994, he along with his wife
went to attend the meeting at 3.30 p.m., which is scheduled to be held at 4.00
p.m., to explain to the shareholders of the company the reasons why a
resolution is being moved to remove him as a director and to explain them the
stand taken by him for exposing corruption and misappropriation of funds by
R.2, but he was not allowed to enter the meeting hall as the gates were closed
at 3.30 p.m. and the security told him that they were doing so under
instructions. Immediately, he gave a press release, but the same was published
on 27-1-1994 vide answer to Question No. 65 in chief-examination. This
statement of the petitioner stood unrebutted. But the Board accepted the
version of the company and held that the removal of the petitioner as Director
does not suffer from any legal infirmity.
218. Firstly,
I have gone through the order as well as the material papers filed by the
respondents in this regard. From sub-clause (4) of section 284 it is seen that
even if the representation is not circulated to the members of the company, the
director may, without prejudice to his right to be heard, orally require that
the representation shall be read out at the meeting. From this, it is evident
that even if the representation is circulated with the notice, the right of the
director sought to be removed, of being heard is preserved. As the deposition
of the petitioner that he was not allowed to enter the meeting hall to explain
his stand and he gave a press statement to that effect which was published on
27-12-1993, stood unrebutted, I have no option except to hold that the
resolution adopted by the General Body at its meeting held on 21-4-1994 is in
contravention of section 284 of the Act.
219. The
counsel for the respondent strenuously contended that the shareholders cannot
be restrained from calling a meeting and they are not bound to disclose the
reasons while calling for an Extraordinary General Body Meeting to move a
resolution for removal of some directors and appoint others in their place, nor
the reasons for the resolutions are subject to judicial review by placing
reliance on LIC of India’s case (supra). Their Lordships of the Supreme Court
held as follows :
“100. Thus, we see that every shareholder of a
company has the right, subject to statutorily prescribed procedural and
numerical requirements, to call an extraordinary general meeting in accordance
with the provisions of the Companies Act. He cannot be restrained from calling
a meeting and he is not bound to disclose the reasons for the resolutions
proposed to be moved at the meeting. Nor are the reasons for the resolutions
subject to judicial review.
It does not require the shareholders calling a
meeting to disclose the reasons for the resolutions which they propose to move
at the meeting...” (p. 1423)
It is true that the Honourable Judges of the
Supreme Court have taken such a view in upholding the action of the L.I.C. in
seeking removal of non-Executive directors in Escorts Ltd. who resisted
transfer of shares held by the financial institutions in favour of non-resident
Indians with a view to avoid confrontation with the Government and the Reserve
Bank and to adopt more conciliatory approach as per the policy of the
Government, to earn foreign exchange by attracting non-resident individuals of
Indian Nationality or origin to invest in the shares of Indian companies, by
providing incentives to facilitate investment by non-resident of Indian
Nationality or origin in shares of Indian companies and by liberalising the
existing facilities and procedural formalities, and who dragged the issue to
the Court. In arriving at this conclusion, they placed reliance on Companies
Act by Grower who compared the shareholders and board of directors as
legislative and executive organs. Their Lordships opined that the only
effective way the members in general meeting can exercise their control over
the directorate in a democratic manner is to alter the articles so as to
restrict the powers of the directors for the future or to dismiss the directorate
and appoint others in their place. I have no quarrel with the general
proposition laid down by the Honourable Supreme Court.
But the facts and circumstances of that case
are altogether different from the facts and circumstances of this case. Here, the
Board is considering whether the action of the shareholders in calling for an
Extraordinary General Body Meeting to move a resolution for removal of
petitioner No. 9 is bona fide one or tainted with bad faith at the instance of
Respondent No. 2. Though the resolutions are not subject to judicial review,
the Court should not close its eyes to the time and the manner in which the
resolution is sought to be moved by the shareholders, more so, when the
shareholders who have given the notice for convening of the Extraordinary
General Body Meeting are no other than the kith and kin of Respondent No. 2,
apart from the fact that 9th petitioner was stripped of all his positions in
the subsidiary companies which he was holding for more than 2½ decades at the
same time. In fact, in Standard Industries Ltd.’s case (supra) while
considering the action of the majority shareholders fully subscribing rights
issue to the detriment of the petitioners observed that ‘it was not the
legality of the rights issue but the modus operandi adopted by the respondents
that was the real issue’. From the above it is seen that it is not the legality
of the resolution passed by the general body removing the 9th petitioner as
director, but the time, the intention, modus operandi adopted by R2 and R3 in
getting the resolution passed, so that he will not have access to the original
records and account books etc. to see that the 9th petitioner is placed in a
disadvantageous position to expose their misdeeds and also to gain time to
fabricate the documents, which are in their possession, in the event of his
approaching the Board under Chapter-VI of the Companies Act.
220. In
LIC of India’s case (supra) their Lordships of the Supreme Court held “(that)
generally and broadly speaking, we may say that the corporate veil may be
lifted where a statute itself contemplates lifting the veil, or fraud or
improper conduct is intended to be prevented, or a taxing statute or a
beneficent statute is sought to be evaded or where associated companies are inextricably
connected as to be, in reality, part of one concern. It is neither necessary
nor desirable to enumerate the classes of cases where lifting the veil is
permissible, since, that must necessarily depend on the relevant statutory or
other provisions, the object sought to be achieved, the impugned conduct, the
involvement of the element of the public interest, the effect on parties who
may be affected etc.” (p. 1373)
From this judgment it is crystal clear when
fraud or improper conduct is alleged against the majority shareholders, the
Board is expected to lift the corporate veil to see whether the majority
shareholders acted in violation of the statutory provisions, whether any
element of public interest is involved and whether any of the parties are affected
by their actions and whether the resolution is moved in good faith. But the
Board without seeing whether the removal of the petitioner by the general body
is in good faith or at the dictates of R2 and R3, who is controlling the
majority shareholders and even without looking into statutory provisions
whether the resolution passed by the general body satisfied the test laid down
in section 284 simply held that the removal of 9th petitioner as director does
not suffer from any legal infirmity.
221. Hence,
it is rather difficult to hold that the procedure prescribed for removal of the
petitioner No. 9 as a director under section 284 is followed as such the
finding of the Board that section 169 has to be read independently from section
284 and no explanatory statement need be enclosed in case of meetings convened
on requisition and that the provisions of section 190 are applicable only in
connection with the Annual General Body Meeting and not in respect of a
requisition for the extraordinary general body meeting, runs counter to the
provisions of the Act and I have no manner of doubt to hold that the findings
of the Board are not in consonance with the provisions of the Act.
Other acts of oppression not adverted to by
the Board, by not considering the voluminous record :
1. Assault by Krishna
Mohan :
222. While
giving answer to Qs. 77 and 78 in Chief, categorically stated that R. 2 sent
one Krishna Mohan working as manager in S.R.M.T. to his cabin to assault him
and in the assault he received bleeding injuries. With the result he was
treated in the Government Hospital at Kakinada and he also filed a Criminal
Case against the said Krishna Mohan. It seems the case is still pending. On the
other hand, the case of the respondent company is that on a complaint given by
Krishna Mohan, petitioner No. 9 was convicted and a fine was imposed on him.
Rebutting this argument, petitioner No. 9 brought to the notice of this Court
that on appeal the order of the learned Magistrate was reversed. It is not
known how the Magistrate kept the Criminal Case filed by 9th petitioner pending
and disposed of the Criminal Case filed by Krishna Mohan though both the
complaints arose out of the same incident and they being case and counter case.
2. Assault by Mr. M.V.V.
Satyanarayana Rao :
223. Mr.
M.V.V. Satyanarayana Rao, joint managing director of Padmalaya Finance Corpn.
and co-son-in-law of petitioner No. 9 seemed to have caused bodily injuries to
the petitioner No. 9 and he lodged a complaint before the III Town Police
Station, Kakinada, on 9-4-1997. Though a case was registered in Cr. No. 82 of
1997 under section 324, read with section 34 of Indian Penal Code no action
seemed to have been taken by the Police. In those circumstances, the petitioner
No. 9 filed Writ Petition No. 27324 of 1997 questioning the inaction on the
part of the Police. In the counter, the Sub-Inspector of Police while admitting
that the investigation has not been completed went to the extent of saying that
the incident has nothing to do with the disputes between the co-son-in-law. The
learned Judge in his Judgment dated 7-11-1997 recorded a finding as follows :
“It is rather difficult to appreciate as to
how the Investigating Officer could have expressed any opinion whatsoever about
the non-involvement of certain persons whose names are mentioned by the
petitioner.”
In fact this Court directed the Superintendent
of Police to entrust the investigation of the case to another Inspector of
Police by divesting the Sub-Inspector of Police, III Town Police Station, Kakinada.
Even after the Judgment, the result of the investigation has not seen the light
of the day till this date.
3. Criminal cases filed by Satyanarayana Rao, son-in-law
of R. 2.
224. It
is also his case that the said Satyanarayana Rao filed as many as eight
Criminal Cases against him, i.e., C.C. Nos. 434 of 1998, 453 of 1998, 82 of
1999, 93 of 1999, 607 of 1999, 46 of 1999, 56 of 1999 and 94 of 1999. Though
these cases were filed after the Company Petition, the fact remains that the
persecution of 9th petitioner is continuing and the Court has to take judicial
notice of these cases, as the counsel for respondents did not deny the fact of
filing so many criminal cases against 9th petitioner.
4. Criminal cases filed by K.V.V. Prasada Rao, Another
Son-in-law of R.2:
225. Another
co-son-in-law Mr. K.V.V. Prasada Rao filed three Criminal Cases against him
viz., C.C. Nos. 705 of 1999, 706 of 1999 and 707 of 1999.
Again though these cases are subsequent to
filing of Company Petitions, I have taken judicial notice for the reasons given
below :
These cases filed by both the co-brothers of
the 9th petitioner against him are all pending in the Criminal Courts,
Kakinada.
5. Criminal case against E. Satyanarayana Murty - List
witness under 3(1)(E) of S.C., S.T., Attrocities Act, 1989.
226. It
is his further case that (a) at the instance of R. 2 a criminal complaint was
given by one Peter Bala against one E. Satyanarayana Murthy, who worked in
various capacities in the respondent-company, on a suspicion that he is giving
information to petitioner No. 9, stating that he scolded him by his caste name
on 8-8-1995 and the same was registered as Crime No. 55 of 1995 under section
3(1)(E) of S.C., S.T., Attrocities Act, 1989. He was detained in the prison for
more than ten days. Ultimately he was granted bail by this Court in Crl.
Petition No. 3912 of 1995, dated 17-8-1995.
(b) Mr. E.S.N. Murty in his representation dated 7-9-1995 to the
Collector and S.P. stating that the management was harassing him for the reason
that the 9th petitioner cited him as a witness in the company case and not able
to withstand the harassment, he resigned the job. Not being satisfied with
this, the 2nd respondent got him implicated in this false case though he did
not even know the defacto complainant and he requested them to get the case
investigated by a superior Police Officer and to do justice to him. It is also
his case that when the District Authorities did not move in the matter, to save
himself, he left Kakinada and settled in Visakhapatnam. Though the complaint
and representation are of the year 1995 neither the police prosecuted him nor
closed the case till this date.
6. False case against
Y.D. Rama Rao :
It is also his case that the 2nd respondent got
a false criminal case registered against Y.D. Rama Rao, who worked as Manager
in S.R.M.T. for more than 20 years and now Chairman of Super Bazar, Kakinada,
on the ground that he abused and beat one Harijan under section 3(1)(E) of S.C.
S.T. Prevention of Attrocities Act. In proof of the allegation the pamphlet
published by Y.D. Rama Rao explaining the circumstances under which he was
forced to go on hunger strike at Taxi Stand near Balajicheruvu on 23-9-2000 and
also the bail order granted by the I Additional Sessions Judge, East Godavari
on 20th September, 2000, wherein Mr. Rama Rao categorically pleaded that
defacto complainant has been pressed into service by S.R.M.T. Group in order to
foist a false case against him. As this incident is after the Judgment of the
Board, I am not taking into consideration, as the same was not brought to my
notice in a manner known to law. It is suffice to state that Y.D. Rama Rao is
supporting 9th petitioner as seen from the statement of George Babu before
Police on 17-2-1994.
7. Inaction of police against D. George Babu, Security
Guard in S.R.M.T.:
227. The
specific case of 9th petitioner is that when the petitioner and his group of
shareholders are taking steps to file a Company Petition one Mr. D. George Babu,
who is working as a security person in S.R.M.T. followed him to Samalkota
Railway Station on 17-2-1994 and on a complaint given by his men, as he is
leaving for Hyderabad, the Railway Police arrested and handed over him to
regular Police and the said George Babu gave a statement before the Police. As
per his version, while he was in ‘A’ shift from 6.00 a.m. on the fateful day
the Security Officer by name Ch. S.V.S.N. Murthy sent for him at about 2 p.m.
in the noon and he was asked to go in plain dress on the Kinetic Honda bearing
No. AP-5-8656 belonging to the Security Officer and asked him to trace the
whereabouts of petitioner No. 9 and also to see who are the others accompanying
him including Y.D. Rama Rao and he admitted that Shri Hari Rao having seen him
asked Mr. E. Satyanarayana Murthy and Tallapudi Subba Rao who are with him to
hand over him to the Railway Police who in turn handed him over to the local
Police before whom he gave the above statement. No information is forthcoming
whether the police registered a crime or not against George Babu and at what
stage the investigation is. But the receipt given by the Police in proof of
receipt of the complaint given by E. Satyanarayana Murthy and the statement
given by the said George Babu before the Police were filed before the Board.
8. Threat to 9th petitioner by R 2 after Board meeting
dated 3-10-1993 :
228. The
case of the petitioners is that immediately after the Board meeting dated
3-10-1993, wherein the issue of misappropriation was again raised by him, is
over, R 2 threatened him to vacate the premises of SRMT wherein the office of
Padmalaya Finance Corpn. was also located within 24 hours and thereafter having
agreed before the Police not to press for vacation of the premises, removed his
table and placed it outside the company premises on 14-10-1993.
229. The
9th petitioner in his affidavit dated 13-5-1998 filed before the Board not only
brought all these incidents to the notice of the Board with documentary
evidence, but also deposed in his evidence on the incidents that have taken
place till the time of giving evidence (See answers to Q. Nos. 78, 84 and 86 in
Chief).
230. The
company did not produce any rebuttal evidence on any of the above aspects.
Though such a voluminous material was placed before the Board, it did not
discuss whether the above actions on the part of R 2 and R3 amount to
oppression of the minority shareholders or not.
From the above documentary and oral evidence
available on record, I have no hesitation to hold that the petitioner placed
sufficient material explaining not only his inability in not getting the list
witnesses to give evidence but also proved that R 2 and R 3 are creating fear
psychosis among the list witnesses, that if any one helped 9th petitioner or
raised his voice against the activities of R 2, the first and foremost thing
would be, that he will be arrested by the Police under S.C. and S.T. Prevention
of Atrocities Act. Secondly, the series of incidents, referred supra both
before and after filing of the company Petition are clearly intended to prove
to the outside world that a man who incurred the wrath of R 2 even if he is his
own son-in-law will not be spared so easily and the persecution will continue
till he is crushed.
At this stage the court is expected to take
judicial notice of the fact that in the entire District, the respondent-company
is the biggest industrial house with assets worth more than 100 crores and we
can imagine how much political clout the managing director of such a company
will wield not only in the town, but also in the entire District leave apart
the State.
231. We
should also keep in mind that Petitioner No. 9 was member of Parliament when he
was in the good looks of his father-in-law and when the petitioner No. 9 fell
from the grace of his father-in-law, another son-in-law by name Mr. Ravinder is
now Member of Parliament.
232. Hence, all
the above incidents clinchingly establish that as the majority of directors and
majority of the shareholders in the respondent- company hail from the family of
R. 2 and they will go to any extent to silence the minority shareholders by
using their brute majority in the company and also by using the political clout
and physical force at their command to suppress any dissent voice against his
illegal activities.
Compromise Proposals
233. After
the petitioners filed C.A. No. 65 of 1997 seeking appointment of interim
administrator, as the petitioners offered to sell their shares to the
respondent-company at a value determined by an independent Chartered
Accountant, the Board suggested that the matter should be settled amicably in
its meeting held on 5-9-1997 not only relating to the respondent-company-Gopal
Automatic Ltd. but also other four group of companies, in which the petitioner
had some interest and the counsel for the respondent has taken time to find out
the reaction of his clients. Again when the matter came up for hearing on
29-9-1997 he sought for further extension of time by stating that the
shareholding of the respondent- company and its subsidiaries being divergent,
the shareholders have to be consulted before any commitment could be given to
the Board. Though the attendance sheet do not reflect the reaction of the
respondents from the order of the Borad it is seen that the respondents did not
agree for the proposals. Having taken time to consult the shareholders in the
company as well as its subsidiaries no material whatsoever is placed to show
that the views of the shareholders were ascertained either by convening the
general body meetings of these companies or in circulation and they did not
agree for the proposals.
234. In
the appeal, arguments were addressed by the counsel for about three weeks. I
understand R.3 was physically present in the court most of the time apart from
the employees of respondent-company and every day having pointed out the
glaring illegalities committed by the Board, this Court went on suggesting that
this matter has to be settled amicably and the shares held by the petitioners
can be purchased by the company instead of inviting a Judgment on merits. But
the respondents flatly refused to purchase the shares by contending that the
financial position of the company would not permit such a measure. From the
record, it is seen that the annual turnover the company is more than 100 crores
and it is having sufficient reserves. This is evident from Resolution 8-B at
the meeting of the board of directors held on 29-7-1993 in the following
terms :
“8-B : Subject : Authority to invest surplus
funds in Government securities and shares of Company :
Resolution : Resolved that pursuant to the
provisions of section 292(1)(d) and (2) and other applicable provisions of the
Companies Act, 1956 Shri K.V.R. Choudary, Managing Director and Sri K. Sarathi,
Joint Managing Director be and are hereby severally authorised to invest funds
of the company in fixed/term deposits with Banks, Body Corporate and in shares
and/or debentures (convertible and non-convertible) of Companies and other
Government securities (Central or State or semi-Government) provided, however,
that the total amount up to which the funds to be invested as aforesaid shall
not exceed the sum of Rs. two crores (Rupees two crores only) at any one time
until otherwise decided in this regard.”
Further, even according to respondents an
amount of Rs. 1.5 crores were raised through rights issue in 1993 and how this
amount was invested was not explained by the company. Further, in the
Extraordinary General Body Meeting held on 6-12-2000 the shareholders with a
view to diversify the activities of the company and to carry on the business of
generating, selling, transmitting, distributing, supplying electric power and
host of other activities including floriculture, horticulture, not only amended
the objects clause, but also authorised the board of directors to borrow any
sum or sums of money exceeding the aggregate of the paid up capital of the
company and its free reserves, provided, however the total amount so borrowed
shall not exceed Rs. 100 crores at any time. Can it be said that a company of
this magnitude is not having financial resources at its command and is not in a
position to purchase the shareholdings of the minority shareholders whose
shareholding is less than 10 per cent as on today. To my mind, such an action
on the part of the respondent-company is nothing but victimisation and
persecution of the petitioner No. 9 and other shareholders supporting him. It
may be the intention of the respondents 2 and 3 to show to others that if they
raised their voice against their mismanagement they will meet the same fate as
petitioner No. 9 who is no other than the son-in-law of Respondent No. 2. This
conduct of the R2 and R3 is yet another act of oppression of minority
shareholders.
Non-Furnishing of the
Information :
235. On
2-11-1993, 1st petitioner addressed a letter to all the directors seeking
information on the closure of parcel offices and selling of about forty
lorries.
(1) The Secretary in his letter dated 3-12-1993 stated that “the
matters referred to by you are the matters to be dealt with by the Management
during the day to day business. Hence it is not possible to accede to your
request.” If information sought for, relates to day to day business, it is not
known why R.2 has taken a resolution in the meeting of board of directors
alleged to have been held on 7-8-1992 as well as 27-2-1993. When the 9th
petitioner, as director, sought for the information in his letter dated
27-11-1993 the company claimed that a reply was sent on 3-12-1993 stating that
“the books of account and other records are available at the registered office
of the company and he may come and inspect the same during 2.00 p.m. to 4.30
p.m. on any working day with due prior intimation to them”. In proof of service
of notice, they filed acknowledgement dated 27-12-1993 and petitioner No. 9
categorically denied about the receipt of the said letter. In the witness box
also the counsel for the respondents cross-examined the petitioner that he
being a director he is having access to statutory books. The petitioner in his
deposition categorically stated to question No. 86 in chief that R.2 threatened
him to vacate the premises of Padmalaya Finance on 3-10-1993. This issue was
dealt separately apart from the attempted attacks on his body by that time.
(2) The petitioner No. 9 by his letter dated 17-7-1995, i.e.,
after filing of the petition before the Board requested for certified copies of
the registers duly enclosing Banker’s cheque for the purpose and the Company
Secretary by his letter dated 20-7-1995 asked him under what provision of law
he is seeking certified copies of the said registers as he is no more director
by that date.”
(3) Again in the month of September 1997 when the petitioner No. 9
sought for several details with regard to the financial transactions of the
company through registered letter as well as telegram dated 24-9-1997, R.3 -
Joint Managing Director raised the same query “please let us know under what
provisions of the Companies Act a member is entitled to several details which
you sought for”.
(4) Again on 27-2-1999 petitioner No. 9 addressed a letter to
furnish Photostat copies of the (1) Balance sheets of the company for the years
1983-84 to 1986-87; (2) copies of contract Registers for the years 1989-90 to
1992-93; (3) list of bad debts with all particulars for the years 1991-92 to
1996-97; and (4) particulars of the passenger cars possessed by SRMT Ltd. as on
the date with full particulars relating to company make, model and its
registered numbers as they are required for arguments before the board. The
Company Secretary in his letter dated 6-3-1999 taken the stand in the 1st para
“that the submissions on both the parties have completed before the Company Law
Board and the matter is posted to 22-3-1999 for reply of the counsel for the
petitioner and further stated that no fresh documents of facts can be
introduced in the reply” as if he is the authority to decide the admissibility
of the documents in a case pending before the Board.
236. In
the second para, it is stated that “the Company is not required to give the
information sought for” and again questioned the petitioner “under what
provisions of the Act the company is bound to furnish the above.” In the third
para of the letter, the Secretary stated that in September 1994 itself the
company informed that the Register of contracts of which the petitioner
required copies were not traceable. Hence, furnishing the copies of register of
contracts for the period 1989-90 to 1992-93 is not possible. From the above it
is seen, while admitting that the matter is posted for reply arguments to
22-3-1999, the Company Secretary states that no fresh documents or facts can be
introduced in the reply. It is not know how the petitioners are precluded from
substantiating their plea, in reply to the arguments of respondents by securing
fresh material relevant to the issues that have cropped up for adjudication,
more so, when the Tribunal did not follow any known procedure like marking of
documents as exhibits recording oral evidence etc. Further, if more evidence is
collected on the plea already raised, through the documents sought for it is
always open to the petitioner to file an application to reopen the hearing for
receiving the documents as additional evidence at any time before the Board
pronounced the orders and even at the appellate stage in support of his plea.
Be that as it may, in the second para the Secretary flatly refused to furnish
the information sought for and questioned the petitioner under what provision
he is asking the information.
237. As
far as register of Contracts is concerned, under section 301 of the Act, every
company is bound to keep one or more registers in which the particulars of all
the contracts and arrangements covered by sections 297 and 299 have to be
mentioned therein. Under section 297, no director of the company or his
relative can enter into a contract without the express consent of the board of
directors and under section 299 if a director of the company is directly or
indirectly concerned with the contract or arrangement, etc. to be entered into
on behalf of the company, he shall disclose the nature of his concerned or
interest in the meeting of the board of directors and obtain prior approval of
the Board and the same should find a place in the register. This being a vital
register containing the information whether any director or his relative has
entered into contract or arrangement with the company with or without
disclosing the same to the board of directors, the Company Secretary simply
stated that the Register of Contracts for the period 1989-90 to 1992-93 are not
traceable.
(5) Petitioner No. 9 again addressed a letter on 12-9-2000 having
seen that huge amounts were written off as bad debts in the annual reports of
the company, seeking full and accurate information regarding bad debts that
were written of during those five years, and the reply given by R. 2 on
19-9-2000 is that “please let us know under what provisions of the Act a
shareholder is entitled for such elaborate information and any
clarification/explanation will certainly be given at the Annual General
Meeting, if sought for, by the shareholders.” When the petitioner No. 9 is not
being allowed to enter the premises and there is every threat of attacking his
person or implicating him in criminal cases as seen from the record, the
possibility of attending annual general meeting and raising any question with
regard to these bad debts is completely ruled out.
(6) After the Company Petition was filed, as per the letter of P.1
dated 27-9-1995 he attended the Annual General Body Meeting of the company held
on 27-9-1995 and when he sought clarification on certain items listed in the
general business as well as special business on the annual report of the
company for 1994-95, as he happened to be one of the petitioners in the company
petition the followers of R.2 created disturbance and created fear in him as
well as the other shareholders who are also of his view and when he requested
that the proceedings to be noted reflecting true state of affairs, R.2 refused
to do so. Having come out of the meeting he addressed registered letter to R.2
on the happenings at the General Body Meeting on the same day. No reply was
given by the respondents to this letter. On the same day late Karedla
Surayanarayana, petitioner No. 1 in the company petition, addrssed a letter to
all the board of directors to furnish the true reasons for closing parcel
offices and the reasons for selling away the lorries for low prices causing
loss to the company.
The directors of the company
observed silence.
(7) For the letter of P.4 dated 19-9-1996, R2 in his letter dated
24-9-1996 gave reply on similar lines.
238. It
is to be seen to what extent the action of the respondents in not furnishing
information sought for by the shareholder, more so when they filed an
application under section 397 and when the Board failed to call for the
documents can be justified. Under section 163 the registers that are required
to be maintained by the company shall be kept at the registered Office of the
company and they shall be open during the business hours for inspection of the
members at least for two hours subject to reasonable restrictions. Under
sub-section 3, a member, debenture holder or other person is at liberty to make
extracts of the registers that are maintained under section 163 without paying
any fee and under sub-section 3(b) he may require the company to furnish
certified copies of them on payment of the prescribed fee required for copying.
On requisition given by the member, the company is bound to furnish them within
ten days and under sub-section 5 refusal to permit the member to inspect the
records or furnishing of the copies, the company is liable to be punished with
a fine, which may extend up to Rs. 50 for every day. Under sub-section 5(b) the
Board may also, by order, compel an immediate inspection of the document, or
direct that the extract required shall forthwith be allowed to be taken by the
person requiring it and did not move its little finger in the matter.
239. Under
section 209 every company shall keep at its registered office proper books of
account with respect to the aspects enumerated therein and under section 209(a)
the books of account, other books and papers of every company shall be open for
inspection during business hours.
240. Under
section 219 the members of the company are entitled to have a copy of the
balance sheet including profit and loss account, auditors’ report and every
other document required by law to be annexed or attached as the case may be to
the balance sheet, which is to be laid before the company in the general
meeting at least 21 days before the date of the meeting. Under sub-section (2),
any member of the company on demand is entitled to have a copy of the last
balance sheet of the company free of cost with other documents annexed or
attached to the balance sheet. Again if the company refuses to furnish copy of
the documents, the Board by order directs the company to furnish a copy of the
document demanded by person concerned.
241. In
LIC of India’s case (supra) the rights of shareholders are summarised in para
84 of the Judgment as hereunder :
“84. On an overall view of the several
statutory provisions and judicial precedents to which we have referred we find
that a shareholder has an undoubted interest which is represented by his
shareholding. Share in movable property, with all the attributes of such
property. The rights of a shareholder are (i) to elect Directors and thus to
participate in the management through them; (ii) to vote on resolutions at
meetings of the company; (iii) to enjoy the profits of the company in the shape
of dividends; (iv) to apply to the Court for relief in the case of oppression;
(v) to apply to the Court for relief in the case of mismanagement; (vi) to
apply to the Court for winding up of the company; (vii) to share in the surplus
on winding up . . . .” (p. 1412)
242. From
the provisions of sections 163, 209 and 219 of the Act coupled with the law enunciated
by the Supreme Court, the shareholders in a company are having every right to
seek information in order to safeguard their rights and interests in the
company and to know whether the management of the affairs of the company are in
the larger interest of the shareholders or not. As the annual reports deal with
the assets and liabilities of the company broadly and as they do not contain
the details, generally the shareholders cannot raise the issue in the Annual
General Body Meeting. Be that as it may, in this case when the majority
shareholders supporting R. 2 are not allowing the minority shareholders to
raise any issue by creating a hostile atmosphere and the minority shareholders
are afraid to attend the meeting of the office, the only way left for them is
to get details, for the information furnished in the report by applying for
certified copies of the extracts. They cannot make a grievance without getting
required information. In a case of this nature where a right is conferred on
the minority shareholders to approach the Board seeking relief against acts of
oppression and mismanagement they are entitled to have copies of the documents
sought for, to prove their case. Otherwise, the right to seek relief against
acts of oppression and mismanagement given to the minority shareholders under
the statute will be a futile exercise, if the required information sought for
is neither provided by the company nor called for by the Board.
243. The
whole misfortune in this case is that the Board has not chosen to summon the
original record and provided an opportunity to the petitioners to go through
the records of the company by summoning the records. The Board did not choose
to pass any orders to that effect in spite of their specific prayer in the main
petition as well as in C.A. No. 69 of 1994. When they approached the company,
it was refusing to furnish information required to prove their allegations by
questioning them under what provision a shareholder is entitled to that
information having removed R. 2 as director of the company.
244. To
my mind while the action of the Board is wholly unsustainable in law, the
action of the respondent-company is intended not only to oppress the minority
shareholders, but also intended to withhold the information to prove their case
and the Board ought to have drawn an adverse inference against the respondents
for withholding the information available with them. But unfortunately the
Board did not advert to this aspect and did not record a finding whether these
acts on the part of the respondents amounts to acts of oppression or not.
Withdrawal of some of the
petitioners from company petition
245. Coming
to the company petition, originally nine shareholders have filed this
application including the third petitioner - S. Jayaram Reddy, a resident of
Visakhapatnam. He executed general power of attorney along with his subsidiary
shareholders on 4-4-1994 in favour of petitioner No. 9. He also filed an
affidavit on 10-9-1994 confirming the contents of the rejoinder filed by the
petitioners in the case. But on 29-11-1995 he informed petitioner No. 9 that he
executed a revocation deed on 8-11-1995 duly enclosing a copy of the revocation
deed. This letter was sent by registered post from Rajahmundry, though he is a
resident of Visakhapatnam. After the death of the first petitioner -
Suryanarayana, his legal representatives did not choose to come on record. The
petitioner No. 2 Dwarapudi Seetharam did not file appeal along with others. The
case of the petitioner is that respondents 2 and 3 pressurised them either from
not continuing the proceedings or for withdrawing from the proceedings only to
see that petitioner No. 9 is singled out in his fight against the mis-deeds of
R2 and R3. The respondents did not rebut these allegations by any evidence oral
or documentary. From the conduct of R2 and R3 on various acts of oppression
discussed in this Judgment a presumption has to be drawn in favour of the
contention of the petitioners.
Non-recording of minutes of the
general body truly and correctly
246. Likewise
petitioner No. 9 in his letter dated 27-9-1993 alleged that the minutes of the
previous general body meeting are not recorded properly and truly and the issue
referred therein were raised by him in the general body meeting held on 27-9-1993
were wantonly omitted. For this no reply was given by any of the respondents.
The will of the majority shall
prevail
247. The
judgment would not be complete without the answering the she tanker of the arguments
of the learned counsel for the respondents that majority directors of the Board
as well as the shareholders and at times the petitioners also approved the
actions of mismanagement as well as the acts of oppression, the question of
granting any relief to the petitioners in this case does not arise. This issue
was answered by the Supreme Court in B.R. Kapoor’s case (supra), their
Lordships while repelling the arguments of the counsel for the respondents that
the members of the political party commanding majority in the legislative
Assembly are having an unfettered right to elect a person who does not possess
the qualifications enumerated under article 173 or who incurs the
disqualifications enumerated in article 191 held as follows :
“a person
convicted for a criminal offence and sentenced to imprisonment for a period of
not less than two years cannot be appointed as a Chief Minister under Article
164(1), read with (4) and continue to function as such.” Their Lordships
further observed “that such an action on the part of the legislative members
would be subversive of the constitution and would be repugnant to the theory of good governance and
would be contrary to the constitution itself, which constitution has been
adopted, enacted and given to the people of India by the people of India.”
Their Lordships further held thus
:
“Given the present political parties and the
electoral system, it is accepted that following a general election, the party
with a majority of seats in the State legislature or the Parliament will form
the Government. This is what the Constitution postulates and permits. But in
the matter of formation of Government if the said majority political party
elects a person as their leader, whom the Constitution and the laws of the
country disqualifies for being chosen as a member of the Legislative Assembly,
then such an action of the majority elected member would be a betrayal to the
electorates and to the Constitution to which they owe their existence. In such
a case, the so-called will of the people must be held to be unconstitutional
and, as such, could not be and would not be tolerated upon. ... .. .. In other
words, the people of the country, the organs of the Government, legislature,
executive and judiciary are all bound by the Constitution to be suprema lex
or the paramount law of the land and nobody is above or beyond the
Constitution. ... .... This being the position, the action of the majority of
the elected members of a political party in choosing their leader to head the
Government, if found to be contrary to the Constitution and the laws of the
land then the Constitution and the laws must prevail over such unconstitutional
decision, and the argument of Mr. Rao. That the will of the people would
prevail must give way. ... ... it would be a blatant violation of
Constitutional laws to allow her to be continued as the Chief Minister of a
State, howsoever short the period may be, on the theory that the majority of
the elected members of the Legislative Assembly have elected her as the leader
and that is the expression of the will of the people.”
At some other place their Lordships held that
“the Constitution prevails over the will of the people as expressed through the
majority party. The will of the people as expressed through the majority party
prevails only if it is in accord with the Constitution.”
From this it is seen that if the decisions
taken by the Board or general body is in contravention of the laws of the
country and prejudicial to public interest, it cannot be said that the will of
the majority will prevail, but not the laws of the lands.
Further, for various reasons, the majority of
the shareholders in the company might have not dared to open their mouth
against the illegal actions of respondent No. 2 having burnt their fingers once
in 1978 and having seen the plight of the petitioner, who is no other than the
son-in-law of the 2nd respondent and brother-in-law of the 3rd respondent, on
that ground the respondents cannot contend that if their actions are clearly
in violation of the laws of the land like the Companies Act, Income-tax Act,
so on and so forth, their decisions will prevail over the law of the land.
Further under Chapter VI of the Act, a right
is conferred on the minority shareholders seeking relief against not only acts
of oppression but also on the actions of majority shareholders that are
prejudicial to public interest apart from acts of mismanagement of the affairs
of the company. Hence, the respondents cannot take shelter, if the actions of
the company are not in accordance with law, by contending that such an action
is having the approval of majority shareholders.
248. In
the light of the foregoing discussion on various issues in controversy I have
no manner of doubt in holding that the petitioners were able to prove the acts
of mismanagement as well as the acts of oppression and they are being continued
unendingly, even after Company Petition is filed, even though the procedure
followed by the Board is unknown to law and the findings recorded by the Board
are not supported by any evidence and they are perverse. As stated supra the
scales of justice before the Board heavily swung in favour of the respondents.
Hence, I have no hesitation in setting aside
the findings recorded by the Board on the issues in controversy and in holding
that the allegations levelled by the petitioners are proved, at any rate, a
prima facie case was made out by the petitioners for grant of relief under
Chapter VI of the Act.
As stated supra, the petitioners are satisfied
with the directions given by the Board and from that point of view only, I
examined the case of the petitioners to see whether any reasons can be given by
this court in support of the directions given by the Board, as the counsel for
the respondents vehemently argued that the Board having dismissed the case of
the petitioners as devoid of merits, gravely erred in giving such a direction.
Now as I have taken the view that the series of acts of mismanagement as well
as acts of oppression are proved by petitioners, the question would be what
should be the relief that can be granted in the circumstance of the case. The
facts of the case speak for themselves that the differences between the groups
have reached an irrevocable point of no return and any direction or directions
for keeping the company with present holding intact will not serve the purpose
as it is impossible for the parties to continue together in the company and at
the same time or ordering winding up of a company, which is otherwise solvent
is not proper. Hence the only equitable and just relief that can be granted is
to direct either of the parties to purchase the shareholdings of other group.
But in this case, as the majority shareholders are on the side of the 2nd
respondent, it would not be proper for this Court to direct the majority
shareholders to sell their shares to the minority shareholders. Hence the only
order that can be passed in this case is to direct the respondent- company
itself or any one of the shareholders of the company including Respondents 2
and 3 to purchase the shares of the minority shareholders. In fact, the
petitioners expressed their willingness for the said course both before the
Board as well as this Court, but the respondents 2 and 3 contended that the
financial position of the company does not permit the purchase of the share
held by the minority shareholders. As far as the financial position of the
company is concerned, I have clearly taken a view that the financial position
of the company is very sound and it is in a position to purchase the shares of
the minority shareholders. At that stage, I brought to the notice of the
counsel for the respondents Article VI of the Articles of Association where
under any member of the company can transfer his shares to an outside person,
only with prior approval of the board of directors and suggested that in the
light of bad blood flowing between the parties as no one will come forward to
purchase the shareholdings of minority shareholders who incurred the wrath of
the second respondent, that the company itself may select the purchaser of
their choice for transfer of shares of the minority shareholders. Even for this
suggestion also the respondents are not willing.
249. I am
fortified in my view by the following decisions :
In Shanti Prasad Jain’s case
(supra), their Lordships of the Supreme Court held that the provisions of
section 397 is more or less akin to section 210 of the English Companies Act of
1948. It was held that the purpose of introducing section 210 in the English
Companies Act was to give an alternative remedy to winding up of in case of
management or oppression. The law always provided for winding up, in case it
was just and equitable to wind up a company. However, it was being felt for
some time that though it might be just and equitable in view of the manner in
which the affairs of a company were conducted to wind it up, it was not fair
that the company should always be wound up for that reason, particularly when
it was otherwise solvent. That is why section 210 was introduced in the English
Act to provide an alternative remedy where it was felt that though a case had
been made out on the ground of just and equitable cause to wind up a company,
it was not in the interest of the shareholders that the company should be wound
up and that it would be better if the company was allowed to continue under
such directions as the court may consider proper to give. This is the genesis
of the introduction of section 153C in the 1913 Act, and at present section
397 of the Indian Companies Act. Their Lordships further held that the
circumstances must be such as to warrant the interference that “there had been,
at least, an unfair abuse of powers and an impairment of confidence in the
probity with the company’s affairs are being conducted, as distinguished from
mere resentment on the part of a minority at being outvoted on some issue of
domestic policy”.
250. In Daulat Makanmal Luthria’s case (supra), the Principal Bench of the
Board held that in case of deadlock or loss of mutual trust necessary for
working together in managing the affairs of the company and if it becomes
impossible for the petitioner and the respondent to work together even if an
independent chairman was appointed, the only course open to the Board is to
direct either of the parties to purchase the shares of the other party. So that
the company comes under the exclusive control and management of either of the
warring groups.
251. From the
beginning both before the Board as well as this Court, the respondents consistently
exhibited defiant attitude perhaps they are under an impression that they can
resort to acts of oppression of minority shareholders and crush them ruthlessly
by dragging the proceedings to the Apex Court level by availing the services of
corporate lawyers with the riches at their command; so that no one can dare to
raise his voice, in future on administration of the affairs of the company by
Respondent Nos. 2 and 3, as they have already tasted success once in 1978. Of
course, at that time the 9th petitioner was with his father-in-law.
Even assuming that the findings recorded by
this Court are not sound in law on the facts of case will, as I have taken the
view that the Board is empowered to exercise the inherent powers under Regulation
9 of the Boards Regulations to give directions in equity for doing substantial
justice between the parties and pull down the curtain on the acts complained of
by the minority shareholders. I hold that the directions given by the Board
are proper and just in the circumstances of the case. Hence, though I did not
agree with the findings of the Board on the merits of the case, I am in full
agreement with the end result in the case, vide Yashovardhan Saboo’s case
(supra).
Accordingly, C.A. No. 4 of 1999 is dismissed
as devoid of merits and C.A. No. 5 of 1999 is allowed to the extent indicated
above.
Naturally petitioners in C.A. No. 5 of 1999
should not only have the costs but exemplary costs, according to me, against
the respondents. Accordingly, the respondents are directed to pay Rs. 25,000 to
the petitioners towards costs.
252. Having
pronounced the judgment on merits, I am adjourning the matter to 29-10-2001 to
have the views of the parties on the appointment of valuers to value the shares
held by the minority shareholders. Provisionally, I am thinking that both the
parties will nominate one Chartered Accountant each and the Court will be
nominating one Chartered Accountant and the fee for Chartered Accountant
nominated by the Court has to be paid by the company subject to modification
after hearing the parties.
After pronouncing the judgment on merits on
18-10-2001, I adjourned the matter to 29-10-2001 so as to enable both the
parties to nominate one Chartered Accountant from their respective side to be
associated with the Chartered Accountant to be nominated by this Court for
valuation of the shares held by the minority shareholders. The matter underwent
some adjournments due to untimely death of the managing director. Today both
the parties nominated the Chartered Accountants. Accordingly, the following
order is passed constituting the Committee of Chartered Accountants.
253. Mr.
Ch. G. Krishna Murthy, M.A., LL.B., F.C.A., former Member of Law Commission of
India, Ministry of Law & Justice, Government of India (now residing at
H.No. 512/A/2, Road No. 31, Jubilee Hills, Hyderabad, Phones : 3543622 and
4745165 (Res.) is nominated, on behalf of this Court and he will be the
Chairman of the Committee. V. Sankarayya & Co., Chartered Accountant (202-301,
Satyam Cinema Complex, Ranjit Nagar Community Complex, New Delhi - 8) is
nominated as Chartered Accountant by the minority shareholders and S. Daga
& Co., Chartered Accountants, 403, Paigah Plaza Basheer Bagh, Hyderabad -
500063) is nominated as Chartered Accountant by the respondent-company Sri
Ramadas Motor Transport Ltd. and its board of directors. Their postal addresses
are given below the order.
254. The
remuneration payable to the Chartered Accountant nominated by this Court is
fixed at Rs. 1,50,000 in lump sum. He is entitled to claim actual expenses to
be incurred by him towards travelling apart from the above remuneration if he
has to leave Hyderabad. He is given liberty to move this Court if the above
remuneration is not adequate for the work done by him. As far as the Chartered
Accountants nominated by the parties are concerned, both the parties shall bear
the remuneration and travelling expenses payable to their respective Chartered
Accountants.
Both the parties are given liberty
to make their representation before the Committee of Chartered Accountants; and
the Committee of Chartered Accountants shall submit its report to this Court
within three months from the date of receipt of this communication.
255. Before parting with the case, I feel that it is my bounden duty to bring to the notice of the authorities concerned, that grave miscarriage of justice has taken place in this case as the Board failed to observe fundamental principles of procedural laws. But the counsel appearing for respondents submitted that the Board is following the same procedure from its inception. I am afraid, that if the Board is allowed to function in this manner, grave injustice will be done to the litigant public. Since the Board is vested with discharge of judicial functions and being an institution of public trust, it is expected to act fairly, objectively and dispassionately, but not whimsically, fancifully or arbitrarily. If the individual members/Benches of the Board are allowed to follow their own procedure giving a go bye to the laws of procedure, the very faith and belief of the litigant public will be eroded. Hence, it is high time that either the board should frame regulations on the procedure to be followed without ambiguity or the Government in exercise of its rule making power shall frame rules with regard to the procedure to be followed by the Board instead of leaving the issue to the individuals occupying position in the Board which will go a long way in gaining credibility by the institution.