Injunction breach and scheme voting rights: shares allotted contrary to court restraint cannot count toward statutory majority.

The Gujarat HC held that in a scheme-sanction petition under sections 391 and 394 of the Companies Act, the company court may examine ancillary issues that directly affect whether the scheme has the required statutory majority, including the legality and voting effect of disputed share allotments. It found that allotments to NOCIL and the excess allotment to Shushrupad were made in breach of the temporary injunction governing the rights issue. Shares allotted in conscious breach of that injunction could not confer a valid right to participate in the shareholders' meeting or be counted toward the majority for scheme approval, because a party cannot derive legal benefit from disobedience of a court order.

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Issues: (i) Whether the company court, in proceedings for sanction of a scheme under sections 391 and 394 of the Companies Act, 1956, could examine ancillary questions relating to the legality and voting effect of shares allegedly allotted in breach of an injunction order. (ii) Whether the allotment of shares to NOCIL and Shushrupad Investment Limited was contrary to the terms of the temporary injunction governing the rights issue. (iii) Whether shares allotted in breach of the injunction could be treated as valid for participation in the shareholders' meeting and counting the statutory majority for the scheme.

Issue (i): Whether the company court, in proceedings for sanction of a scheme under sections 391 and 394 of the Companies Act, 1956, could examine ancillary questions relating to the legality and voting effect of shares allegedly allotted in breach of an injunction order.

Analysis: Proceedings under sections 391 and 394, read with the Companies (Court) Rules, are governed by the procedural principles applicable to civil adjudication. The court is required to decide issues germane to the main controversy, especially where the question directly affects whether the proposed scheme has obtained the required statutory majority. The legality of the disputed allotments was not an abstract or academic question, but one that bore directly on the voting strength and the validity of approval of the scheme. The court therefore had jurisdiction to examine the effect of the disputed allotments as an ancillary matter necessary for deciding the main issue.

Conclusion: The company court had jurisdiction to decide the ancillary question.

Issue (ii): Whether the allotment of shares to NOCIL and Shushrupad Investment Limited was contrary to the terms of the temporary injunction governing the rights issue.

Analysis: The injunction permitted allotment to applicants in the rights issue subject to the litigation, but restrained allotment from the unsubscribed portion of the rights issue to anyone other than banks and public financial institutions without prior permission of the court. In the context of section 81(1) of the Companies Act, 1956, a rights issue is an offer to existing shareholders in proportion to their holdings, with any unaccepted portion becoming available for disposal by the board only after the prescribed process. NOCIL was not an existing shareholder, and Shushrupad's additional application beyond its entitlement stood in the same position for the excess shares. The allotments therefore fell within the prohibited field of the injunction.

Conclusion: The allotment to NOCIL and the excess allotment to Shushrupad were in breach of the injunction.

Issue (iii): Whether shares allotted in breach of the injunction could be treated as valid for participation in the shareholders' meeting and counting the statutory majority for the scheme.

Analysis: The court rejected the contention that breach of a temporary injunction merely attracts contempt and leaves the transaction otherwise untouched. A party bound by an injunction cannot, consistently with the rule of law and public policy, derive legal advantage from an act done in defiance of the order. The legal effect of a transaction depends on the tenor of the order, the subject-matter restrained, and the consequences that flow from the prohibited act. An allotment made in breach of the injunction could not be treated as conferring a valid right to participate in the meeting or to count toward the requisite majority. Such a transaction, if given effect, would undermine the efficacy of court orders and encourage disobedience.

Conclusion: The impugned shares could not be counted for participation or for determining the statutory majority.

Final Conclusion: The challenged findings were upheld, and the cross-objection failed because the disputed allotments were made in breach of the injunction and could not be relied upon for the scheme approval process.

Ratio Decidendi: A transaction entered into in conscious breach of an operative injunction order may be denied legal effect where giving it effect would defeat the purpose of the order and undermine the rule of law; such a transaction cannot be used to secure rights in furtherance of the very disobedience.

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