2005 (9) TMI 673 - Board - Companies Law

Company Law Board rules lack of jurisdiction in share allotment case, allows separate actions for mismanagement

S.S. Organics Limited and V.N. Sunanda Reddy Versus B. Subba Reddy

The Company Law Board (CLB) held that it lacked jurisdiction to set aside the allotment of 20 lakh shares as it fell under the authority of the Board for ... - Issues Involved:1. Jurisdiction of the Company Law Board (CLB) to set aside the allotment of 20 lakh shares.2. Permissibility of bifurcation of the subject matter of the company petition.Issue-wise Detailed Analysis:Issue No. 1: Jurisdiction of the Company Law BoardThe petitioner challenged the allotment of 20 lakh shares, alleging it was done under the guise of a BIFR-sanctioned scheme without actual infusion of funds and in exclusion of the petitioner. The respondents contended that the petitioner had disassociated from the company and was not interested in further acquiring shares.The scheme sanctioned by BIFR on 12.02.2002 included several key provisions:- Payment schedules to IDBI and State Bank of India.- Interest-free unsecured loans.- Personal guarantees from the petitioner and the second respondent.- Further unsecured loans of Rs. 60 lakhs by promoters.- Conversion of Rs. 200 lakhs of unsecured loans into equity capital.- Exemptions from Section 81 of the Companies Act, 1956, SEBI, and Stock Exchanges for the issue of equity shares.- Maintaining existing shareholding patterns with a cut-off date of 31.03.2001.BIFR declared the scheme failed on 19.06.2003. However, the company convened an extraordinary general meeting on 27.02.2003 and passed a special resolution under Section 81(1A) to convert unsecured loans into equity, leading to the disputed allotment. The petitioner claimed this was illegal and unauthorized by BIFR, citing several reasons, including non-compliance with SEBI regulations, misrepresentation in explanatory statements, and exclusion of the petitioner despite his unsecured loans.The petitioner filed an appeal before AAIFR against the BIFR's order, raising issues related to the disputed allotment. The grounds of appeal included allegations of book entries without actual funds infusion and changes in shareholding patterns violating BIFR's order. The petitioner sought AAIFR's intervention to declare the earlier scheme failed, which would nullify the allotment.The CLB concluded that it lacked jurisdiction to adjudicate the disputed issue of conversion of unsecured loans into equity and the consequent allotment of shares, as it fell under BIFR/AAIFR's authority. The petitioner could not pursue parallel proceedings based on the same allegations and for similar reliefs. The issue was answered in the negative.Issue No. 2: Permissibility of Bifurcation of the Subject MatterShri R. Murari argued that Section 26 of SICA does not allow bifurcation of the subject matter, while Shri Arvind Pandian contended that the bar of jurisdiction under Section 26 is inapplicable to the CLB.Section 26 of SICA bars civil courts from jurisdiction over matters empowered to BIFR or AAIFR under SICA. The CLB, interpreting Section 26 in Priyanka Overseas Private Limited v. Pasupathi Fabrics Limited, held that it would not interfere with BIFR's jurisdiction regarding matters arising from a sanctioned scheme.The CLB found that the allotment of 20 lakh shares was a substantial issue in the appeal pending before AAIFR. The CLB concluded that acts of mismanagement and statutory violations could be bifurcated and dealt with separately, allowing the Bench to exercise jurisdiction over these issues. The parties were directed to file counter and rejoinder by specified dates, and the company petition would be heard on the alleged acts of mismanagement and statutory violations.The application was disposed of with these directions.