2011 (2) TMI 1280 - HC - Companies Law

Court rules against petition under Companies Act, finding no oppression or mismanagement. Conversion refusal not grounds for relief.

Orissa Sponge Iron & Steel Ltd. Versus Bhushan Energy Ltd.

The High Court dismissed the petitions under Sections 397 and 398 of the Companies Act, ruling that the allegations of oppression and mismanagement were ... Writ petition - Oppression and mismanagement – refusal of company to convert warrants into equity shares - alleged in the petition that the present management and the promoters holding the controlling stake in the company are trying to dispose of the said unit by way of transferring its shareholding to a 3rd party without the consent and approval of the shareholders – Held that:- Mere fact that it was decided to offer shares to others and not to the existing shareholders would not therefore necessarily mean oppression of the minority shareholders - petition under Sections 397 and 398 of the Companies Act is not maintainable as it is filed for an isolated alleged act of oppression and mismanagement - refusal of OSIL to convert warrants held by Bhushan Energy Limited into equal number of equity shares may amount to a breach of contract but such breach of contract cannot constitute the ingredients of a complaint under Sections 397, 398, 402 and 403 of the Companies Act - petitioners before the Company Law Board who are respondents in this appeal have failed to establish mismanagement and oppression on the part of the management and for conversion of warrants into equity shares in an application under Section 397/398 of the Companies Act is not contemplated Issues Involved:1. Allegations of oppression and mismanagement.2. Financial transactions violating Section 77 of the Companies Act.3. Refusal to convert warrants into equity shares.4. Validity of petitions under Sections 397 and 398 of the Companies Act.5. Collateral purposes behind filing the petitions.6. Interim applications and their relevance to the main petition.7. Just and equitable grounds for winding up the company.8. Breach of contract and its relevance to Section 397/398 petitions.Detailed Analysis:1. Allegations of Oppression and Mismanagement:The Company Law Board (CLB) examined the allegations of oppression and mismanagement, which included claims that the management of Orissa Sponge Iron and Steel Ltd. (OSIL) was attempting to defraud shareholders by transferring control to a third party. The petitioners alleged financial mismanagement and the diversion of funds, arguing that these actions were prejudicial to the company and its members.2. Financial Transactions Violating Section 77:The petitioners claimed that OSIL indirectly provided financial assistance to Torsteel Research Foundation in India (TRFI) for acquiring shares, violating Section 77 of the Companies Act. The CLB found that the transactions in question did not involve direct financial assistance from OSIL to TRFI. Loans were provided by UTI Bank to Torsteel Services Pvt. Ltd., which were then used by TRFI to purchase shares. The CLB concluded that OSIL did not contravene Section 77 as the transactions were not directly funded by OSIL.3. Refusal to Convert Warrants into Equity Shares:The refusal of OSIL to convert 35,00,000 warrants held by Bhushan Energy Ltd. into equity shares was a central issue. The CLB initially directed OSIL to convert these warrants. However, it was argued that the refusal was based on the apprehension that Bhushan Group intended to take over the company, which was supported by their public announcement indicating such intentions. The High Court found that the refusal did not amount to oppression or mismanagement warranting relief under Section 397/398.4. Validity of Petitions under Sections 397 and 398:The High Court reiterated that petitions under Sections 397 and 398 require continuous acts of oppression or mismanagement, not isolated incidents. The Court cited precedents indicating that relief under these sections is not available for every act of omission or commission by the Board of Directors. The refusal to convert warrants, being an isolated incident, did not justify winding up the company on just and equitable grounds.5. Collateral Purposes Behind Filing the Petitions:The High Court examined whether the petitions were filed for collateral purposes, such as facilitating a takeover by Bhushan Group. The Court noted that the intention behind the petitions appeared to be to increase Bhushan Group's shareholding and control over OSIL, which was not a legitimate ground for invoking Sections 397 and 398.6. Interim Applications and Their Relevance to the Main Petition:The Court addressed the issue of whether allegations made in interim applications (company applications) could be considered part of the main petition. It was held that such allegations must be incorporated into the main petition through amendment. The High Court found that the allegations in the interim applications did not form part of the main petition and thus could not be considered.7. Just and Equitable Grounds for Winding Up:The Court emphasized that for relief under Section 397, there must be grounds justifying the winding up of the company, which were not present in this case. The refusal to convert warrants did not meet the threshold for winding up on just and equitable grounds.8. Breach of Contract and Its Relevance to Section 397/398 Petitions:The High Court concluded that the refusal to convert warrants might constitute a breach of contract but did not amount to oppression or mismanagement under Sections 397 and 398. Such breaches should be addressed under contract law, not company law.Conclusion:The High Court dismissed the petitions under Sections 397 and 398 of the Companies Act, finding no substantial evidence of continuous oppression or mismanagement. The refusal to convert warrants into equity shares was not deemed sufficient to warrant relief under these sections. The Court allowed the appeal by OSIL, setting aside the CLB's order directing the conversion of warrants into equity shares. The petitions were partly allowed, with the specific relief sought by Bhushan Energy Ltd. being denied.