1993 (1) TMI 217 - SC - Companies Law

Supreme Court decision: Appellant can use funds to pay debts, corporate democracy upheld

Assambrook Ltd. Versus Krishen Kumar Kapoor

The Supreme Court allowed the appeals, setting aside the respective orders under appeal and affirmed the order passed by A.N. Ray, J. The ... Whether decisions taken at the extraordinary general meeting dated July 24, 1992, and the offer made by the appellant-company in pursuance thereof-are prejudicial to the interest of the shareholders including the financial institutions ? Held that:- Grievance made by Sri Govinda Mukhoty, learned counsel for Sri Ashok Singh complained that this court should not pass orders even before his client had an opportunity of filing a counter to S.L.P. No. 148 of 1993 unable to see any substance in the said grievance. Firstly, the order under appeal was an ex parte order made without hearing the appellant-company. Secondly, we are not taking into account any other facts than those on record in the appeal (arising from S.L.P. No. 148 of 1993). We have also heard Sri Mukhoty at length who placed all the aspects before us. At the same time, we cannot but observe that Mr. Mukhoty's client chose to rush to the court even without approaching the financial institutions beforehand. It is not as if he first approached them and tried to convince them of the inadvisability of responding to the said offer. The presumption is that every person (including a public financial institution) knows his interest best and until the contrary is established, whether at interlocutory or final stage, orders of restraint may not be advisable. Issues Involved:1. Legality of the extraordinary general meetings.2. Validity of the resolutions passed at the meetings.3. Interim orders and their implications.4. Rights of shareholders and financial institutions.5. Allegations of fraud and ultra vires actions.6. Role and orders of the Securities and Exchange Board of India (SEBI).7. Judicial interference and corporate democracy.Detailed Analysis:1. Legality of the Extraordinary General Meetings:The appellant, a tea company, convened extraordinary general meetings on January 6, 1992, and July 24, 1992, to consider and approve rights offers of convertible/non-convertible debentures. Despite several legal attempts to stop these meetings, the meetings proceeded and special resolutions were passed. The court noted that all three attempts to stop the July 24, 1992, meeting failed.2. Validity of the Resolutions Passed at the Meetings:Special resolutions to increase share capital and offer debentures were passed by a three-fourths majority on January 6, 1992, and by more than 82% on July 24, 1992. Even financial institutions holding substantial equity voted in favor. The court emphasized the principle of 'corporate democracy,' where the opinion of an overwhelming majority should prevail.3. Interim Orders and Their Implications:Multiple interim orders were issued by various courts. For instance, the Calcutta High Court initially restrained the implementation of resolutions passed on January 6, 1992. The court also noted the interim order dated July 23, 1992, was vacated on July 27, 1992. The Supreme Court affirmed the order passed by A.N. Ray, J. on December 16, 1992, and set aside the Division Bench's order dated December 21, 1992. The court also made absolute the order by S.C. Agrawal, J. on December 25, 1992, with modifications.4. Rights of Shareholders and Financial Institutions:Shareholders and financial institutions, including the Life Insurance Corporation of India, were involved in the proceedings. The court heard arguments that the decisions and offers were prejudicial to shareholders' interests. However, the court recognized that even a single shareholder could challenge actions that are ultra vires or fraudulent. The court allowed the appellant-company to use the funds raised to pay off debts to banks and public financial institutions but left the issue of unsecured loans to the Calcutta High Court.5. Allegations of Fraud and Ultra Vires Actions:Respondents alleged that the purchase of tea estates and the rights offer were not prudent and were fraught with fraud. The court refrained from expressing opinions on these allegations, noting that the suits and writs pending in the Calcutta High Court and Alipore District Court would address these issues.6. Role and Orders of the Securities and Exchange Board of India (SEBI):The SEBI permitted the appellant-company to file a letter of offer with stock exchanges, subject to conditions. The court noted the appellant's argument that SEBI guidelines restricted the extension of the offer period, which could expose the company to sanctions. The court did not pass orders on extending the offer period but left it to appropriate authorities or the High Court to consider.7. Judicial Interference and Corporate Democracy:The court balanced judicial interference with corporate democracy, emphasizing that the opinion of an overwhelming majority should prevail. The court noted that interlocutory orders should not unduly restrain corporate actions unless necessary to protect shareholders' interests.Conclusion:The Supreme Court allowed the appeals, setting aside the respective orders under appeal, and affirmed the order passed by A.N. Ray, J. on December 16, 1992. The court permitted the appellant-company to utilize funds raised to pay off debts due to banks and public financial institutions, while leaving the issue of unsecured loans to the Calcutta High Court. The court refrained from passing orders on extending the offer period, leaving it to appropriate authorities or the High Court to decide.