TaxTMI 
TaxTMI 
2007 (9) TMI 415
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....arya, for Chatterjee Petrochem (Mauritius) Co. and Chatterjee Petrochem (India) P. Ltd., S. B. Mukherjee and S. N. Mukherjee, Ms. Moushmi Bhattacharya, for Winstar. Shakti Nath Mukherjee and S. N. Mukherjee, Chandra Nath Mukherjee for India Trade (Mauritius) Ltd. Anindya Kumar Mitra and Ms. Moushmi Bhattacharya For the Tenth And Twenty-Second Respondents in A. P. O. No. 45 of 2007. S. K. Kapur, S. N. Mitra, S. N. Pyne and Ravi Kapur, for the eleventh and thirteenth respondents in A. P. O. No. 45 of 2007 : Bimal Kumar Chatterjee, Prasanta Kumar Dutta, Soumen Sen and Rupak Ghosh for Haldia Petrochemicals Ltd., Anil B. Divan and Jayanta Kumar Mitra, Tilak Kumar Bose and Susanta Kumar Dutt For the Twentieth And Twenty-First Respondents in A. P. O. No. 45 of 2007 : Pratap Chatterjee, Samit Talukdar, Amit Meheria, Arindam Guho and Sandip Dasgupta, for Indian Oil Corporation Ltd. and IDBI. Soumen Das JUDGMENT JAYANTA KUMAR BISWAS J.- 1. In these four appeals filed under section 10F of the Companies Act, 1956 an order of the Company Law Board, Principal Bench, New Delhi, dated January 31, 2007 (Chatterjee Petrochem (Mauritius) Co. v. Haldia Petrodhemicals Ltd. [2008] 143 Comp Cas 726)....
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.... including the public, financial institutions and banks, etc. balance 41.67 per cent. In article 33(a) it was provided that should WBIDC decide to sell its HPL shares, it would give the CP(M)C first refusal on them and then to the Tatas ; and that WBIDC would enjoy similar first refusal on all HPL shares held by the CP(M)C and the Tatas. 4. In 1997 the project, setting up of a petrochemical complex, was started. Loans were taken from a large number of financial institutions. In the course of time the question of debt restructuring assumed great importance. By a letter to the Chief Minister dated April 23, 2000, PC, while threatened to quit with his dues paid up unless the CP(M)C, going to invest Rs. 150 crores for acquiring the majority position, was given management control, suggested for the IOC participation in HPL that, however, was on the verge of being declared a non-performing asset. Considering the acute fund crisis, the HPL decided on September 6, 2000, to issue rights issue for Rs. 250 crores. While the WBIDC and the Tatas subscribed, the CP(M)C did not invest its share : Rs. 107 crores. In August 2001 commercial production in HPL commenced. The IOC was willing to partic....
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..... But in view of the agreement dated January 12, 2002 and PC's objection to giving management control to the IOC, the GoWB was compelled to close the question of inducting the IOC in HPL. The lenders were demanding steps for immediate debt restructuring, and induction of a strategic investor in the HPL. On January 13, 2003, the IDBI, the lead lender, made a reference to the corporate debt restructuring cell for restructuring debts of HPL. On January 22, 2004, the debt restructuring package was approved. In terms of the package Gas Authority of India Ltd. (in short "the GAIL") was to be inducted in HPL as the strategic investor, and it was to invest Rs. 332 crores within 90 days of package sanction ; and within 180 days of sanction the CP(M)C was to arrange Rs. 268 crores. It was also to replace the HSBC loan amounting to Rs. 107 crores by subscribing to the HPL equity by March 31, 2004. Lenders were to be allotted, by converting Rs. 140 crores rupee loans, the HPL equity at par. The GAIL backed out, and the debt restructuring package was showing all symptoms of a non- starter. This situation led to execution of two agreements both dated July 30, 2004. One was a share subscription a....
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....hase them, they would be offered to the IOC at the same price, and that thereafter it would offer its balance HPL shares first to the CP(M)C, and, if possible, then to the IOC ; and further that failing the process, it would buy out the IOC's HPL holding, should the IOC want that. By a letter dated October 18, 2004, the IOC wanted the GoWB and the WBIDC to obtain waiver from the CP(M)C of its first refusal on all the HPL shares held by the WBIDC . By a reply dated October 19, 2004, the WBIDC informed the IOC that it was not possible to obtain waiver from the CP(M)C. By a letter dated October 21, 2004, the IOC informed the WBIDC that its board would consider the whole matter. On October 23, 2004, the IOC board decided to invest Rs. 150 crore towards the HPL equity at par. Then by a letter dated October 25, 2004, the IOC proposed to the WBIDC that it would make an offer to acquire, at a duly determined fair price, all the HPL shares held by the WBIDC that it would offer its shares first to the CP(M)C, at that price, and that should the CP(M)C decide not to acquire them, then they should be offered to the IOC, and that simultaneously it would acquire fresh 150 million HPL equity share....
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....HPL. It was mentioned that the GoWB had committed to transfer the HPL shares to the CP(M)C as would appear from the agreements dated January 12, 2002, March 8, 2002 and July 30, 2004. Under the circumstances on December 21, 2004, the chairman gave notice fixing the extraordinary general meeting for January 14, 2005. PC was not willing to vote in favour of the proposed special resolution. By a letter dated January 11, 2005, he wanted the WBIDC to sell its entire HPL shareholding to the CP(M)C. In the circumstances on January 14, 2005, he and Dr. Sabyasachi Sen, as representatives of the CP(M)C and the GoWB respectively, signed a document stating that entire HPL shareholding of the WBIDC would be sold by the GoWB to the CP(M)C at a price to be determined by an independent valuer. On the same day the proposed special resolution was passed in the extraordinary general meeting in which the Chatterjee group voted in favour of the resolution. 11. For settling the terms and conditions of the offer letter, the key terms whereof had been communicated by the HPL and accepted by the IOC in November 2004, a committee was constituted. PC and Dr. Sabyasachi Sen were in that committee. On January....
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....holding to the CP(M)C at the agreed price of Rs. 14 per share, since the agreement had been recorded in a letter dated September 30, 1994. On receipt of the demand, the representatives of the GoWB and the WBIDC called on their representatives and represented that their ultimate right to obtain entire HPL shareholding from the WBIDC would be honoured. In furtherance of such representations those representatives invited PC to an immediate meeting. Those representatives also represented that the GoWB and the WBIDC were agreeable to give in writing a commitment that entire HPL shareholding of the GoWB and the WBIDC would be sold to them. In view of such representation PC met the representatives of the GoWB and the WBIDC . 13. On January 14, 2005, an agreement was reached between Dr. Sabyasachi Sen and PC, in the presence of Mr. Tarun Das, and in consideration of that agreement they voted in support of the resolution dated January 14, 2005, to allot 150 million HPL equity shares to the IOC at par. In spite of their letters requesting the GoWB and the WBIDC to act in terms of the agreement dated January 14, 2005, nothing was done, though steps were taken to carry out the resolution date....
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.... the deal should be concluded. On July 27, 2005, PC was surprised and shocked to receive a letter from the GoWB that it had decided to defer the disinvestment proposal. 15. Then, without any valid reason, the GoWB and the chairman of the HPL started taking steps in undue haste. In violation of section 289 of the Companies Act, 1956 the chairman issued a circular resolution dated July 28, 2005, without disclosing material information that had formed part of agenda circulated for board meeting dated July 29, 2005, when that meeting had been cancelled. In terms of the share subscription agreement dated July 30, 2004, ten days' notice of the circular resolution was not given to Winstar. Though the HPL was not in need of fund and allotment of shares to the IOC was totally uncalled for and unwarranted, and when they were ready and willing to subscribe for 150 million equity shares, if were allotted at par, steps were taken for allotting the shares to the IOC on the basis of the circular resolution. They were always ready and willing to conclude the share purchase deal at the agreed price of Rs. 14 per share. For superior bargaining power of the GoWB and the WBIDC they could not implemen....
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....t par. (6) The fourth petitioner shall pay a sum of Rs. 125 crores to the WBIDC towards the balance consideration for the 155 million shares on or before February 28, 2007. (7) On payment of the said amount, without any further deed or act or approval from anyone or production of any instrument of transfer, these shares shall be deemed to have been dematerialised and transferred in the name of the fourth petitioner and the share certificates shall be deemed to have been cancelled. The company shall initiate and complete other legal formalities in this regard immediately thereafter . . . (17) The petitioners are at liberty, as soon as they pay the consideration for the 155 million shares to take control of the day-to-day management of the company, (as they would be holding majority equity shares of 52 per cent.) with the stipulation that no major decisions shall be taken without the approval of the Board. 18. The relevant findings of the Company Law Board are these shares were not allotted to the IOC suddenly, surreptitiously, or with any ulterior motive. The allegation of a secret agreement between the GoWB, the WBIDC and the IOC was a non-issue sought to be magnified by the petit....
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....y petition claimed that at the date of filing the petition, having held over 53 per cent., the HPL shares, they collectively held the majority of the HPL shares, and that that position was confirmed by the GoWB and the WBIDC through their counsel, Sri. Shanti Bhusan, whose submissions were recorded in the order dated August 4, 2005. At the final stage of the proceedings the GoWB, the WBIDC and the HPL took the stand to challenge transfer of the said 155 million shares to the petitioners, and thus the question of transfer of the said 155 million shares, though was not a matter in issue in the company petition, automatically became a matter for decision. The GoWB and the WBIDC in their affidavit against the company petition challenged the ownership of those shares by the Chatterjee group. Consent of the petitioners in the company petition for the IOC allotment had been obtained by misrepresentation that they were owners of the said 155 million shares. 21. The question of transfer of those shares was an affair of the HPL that was not only a party to the agreement dated January 12, 2002, but had also written letters to the lenders for expeditious approval for their registration. In vi....
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....refore evident that the question of transfer of the balance shares by the WBIDC to the Chatterjee group was also an affair of the HPL. 23. Though in terms of the agreement dated January 14, 2005, that revived the legitimate expectation of the petitioners in the company petition to get all the HPL shares held by the WBIDC, the GoWB took all necessary steps appropriately, it was not clear why after the petitioners in the company petition indicated availability of the requisite fund to purchase the shares, the GoWB issued the letter dated July 27, 2005, deciding to defer the proposed disinvestment. There was nothing to show that the decision was taken in public interest. It was rather taken for the reason that the Chatterjee group was insisting that no shares should be allotted to the IOC. The decision to defer disinvestment was taken because of refusal on the part of the Chatterjee group to honour its commitment. Since, there was no ground to cancel allotment of shares to the IOC, there would be no impediment to the transfer of all shares held by the WBIDC in the HPL to the Chatterjee group, and for giving a right decision it was not necessary to examine who was right and who was wr....
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.... the provisions themselves. Mr. Sen has relied on Maharani Lalita Rajya Lakshmi v. Indian Motor Co., (Hazaribagh) Ltd. [1962] 32 Comp Cas 207 ; AIR 1962 Cal 127 ; Shanti Prasad Jain v. Kalinga Tubes Ltd. [1965] 35 Comp Cas 351 ; AIR 1965 SC 1535 ; Westbourne Galleries Ltd., In re [1970] 3 All ER 374 (Ch D) ; World Wide Agencies P. Ltd. v. Mrs. Margaret T. Desor [1990] 67 Comp Cas 607 (SC) ; Hanuman Prasad Bagri v. Bagress Cereals P. Ltd. [2001] 105 Comp Cas 493 (SC) ; Bagree Cereals P. Ltd. v. Hanuman Prasad Bagri [2001] 105 Comp Cas 465 (Cal) ; and Vaishnav Shorilal Puri v. Kishor Kundan Sippy [2006] 131 Comp Cas 690 (Bom). 27. In response, Mr. Sudipto Sarkar, counsel for the CP(M)C and the CP(I)PL, has submitted that it is incorrect to say that the Board made the order without forming any opinion on the conditions mentioned in section 397(2). According to him, once the Board held that the IOC allotment, because of the stand of the GoWB and the WBIDC on the question of transfer of the said 155 million shares to the CP(I)PL, amounted to an act of oppression on the Chatterjee group, the conclusions that winding up of the HPL would unfairly prejudice the Chatterjee group, but that o....
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....mission is that it is unheard of that there can be any statutory requirement that a judgment must aver a particular thing. He has contended that in any case the absence of formal recording of the opinions, though may make the order of the Board vulnerable in appeal, cannot destroy it altogether, and for this he has relied on NEPC Micon Ltd. v. Magma Leasing Ltd. [1999] 1 CHN 617. 29. I find that the provisions in section 397 do not say that the Board must form and record any opinion regarding the things mentioned in sub-section (2) of the section. What they say is that the Board may make order granting relief if it is of the opinion : (i) that the company's affairs are being conducted in a manner prejudicial to public interest or in a manner oppressive to any member or members ; and (ii) that to wind up the company would unfairly prejudice such member or members ; but (iii) that otherwise the facts would justify the making of a winding up order on the ground that it was just and equitable that the company should be wound up. These three things are three different conditions on fulfillment of each of which only the Board, in my reading and understanding of the section, gets jurisdi....
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....cise of power to make order granting relief. It is important to note that in Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd. [1981] 51 Comp Cas 743 ; [1981] 3 SCC 333 the company petition was dismissed on the ground that no case of oppression was made out. That satisfaction regarding fulfilment of the conditions mentioned in section 397(2)(b) is a must for making order under section 397, is also apparent from what the apex court said in World Wide Agencies P. Ltd. v. Mrs. Margaret T. Desor [1990] 67 Comp Cas 607 (SC) (page 620) and Hanuman Prasad Bagri v. Bagress Cereals P. Ltd. [2001] 105 Comp Cas 493 (SC) (page 498). From Sangramsinh [2005] 123 Comp Cas 566 (SC) (paragraphs 181, 183 and 185) it is apparent that order under section 397 can be made only when the three conditions are satisfied. The same appears to be the position of law noticed by the apex court again in Kamal Kumar Dutta v. Ruby General Hospital Ltd. [2006] 134 Comp Cas 678 ; [2006] 5 Comp LJ 511 (paragraph 32.1). 31. But then, it is for what the apex court said in Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd. [1981] 51 Comp Cas 743 ; [1981] 3 SCC 333....
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.... said that the court (in my understanding the apex court), however, was not powerless to do substantial justice between the parties. Then their Lordships gave certain directions. Hence, in my reading and understanding, Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd. [1981] 51 Comp Cas 743 ; [1981] 3 SCC 333 ratio rather is that unless the allegation of oppression is established, no order granting relief under section 397 can be made. Krishan Lal Ahuja [1983] 53 Comp Cas 60 (Delhi), given without considering any of the existing authorities, in my opinion, cannot be considered an authority for holding that order granting relief under section 397 can be made even when no case of oppression is made out. In that order it was made on the peculiar facts of the case. In Shoe Specialities Ltd. v. Standard Distilleries and Breweries P. Ltd. [1997] 90 Comp Cas 1, 29 ; [1997] 1 Comp LJ 243, 261 (Mad) while examining the scope of section 397 the Division Bench of the Madras High Court referred to Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd. [1981] 51 Comp Cas 743 ; [1981] 3 SCC 333, and said (in paragraph 33), "In that case, their....
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.... in view what had been said in Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd. [1981] 51 Comp Cas 743 ; [1981] 3 SCC 333 regarding power of the supreme court available under article 142 of the constitution, and not regarding any power of any other court of the country. I am unable to accept that in Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd. [1981] 51 Comp Cas 743 ; [1981] 3 SCC 333 any uch law as is visualized by counsel for the Chatterjee group was declared. It is therefore not correct to say that today there is no condition precedent for making an order granting relief under section 397. The law has remained the same that was seen in Maharani Lalita Rajya Lakshmi v. Indian Motor Co. (Hazaribagh) Ltd. [1962] 32 Comp Cas 207 ; AIR 1962 Cal 127 and Shanti Prasad Jain v. Kalinga Tubes Ltd. [1965] 35 Comp Cas 351 ; AIR 1965 SC 1535. Hence, I find that the view I have already taken regarding the requirement of formation and recording of the opinions on the three conditions mentioned in section 397(2) for acquiring the jurisdiction and power to make order granting relief under section 397, is not contrary to any authorit....
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.... it must be shown as preliminary to an application under section 397 that there is just and equitable cause for winding up of the company. From Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd. [1981] 51 Comp Cas 743 ; [1981] 3 SCC 333 also it is apparent that order granting relief under section 397 can be made only when the conditions in section 397(2)(b) are fulfilled. The same thing was said in World Wide Agencies P. Ltd. v. Mrs. Margaret T. Desor [1990] 67 Comp Cas 607 (SC) and Hanuman Prasad Bagri v. Bagree Cereals P. Ltd. [2001] 105 Comp Cas 493 (SC). From Sangramsinh P. Gaekwad v. Shantadevi P. Gaekwad [2005] 123 Comp Cas 566 ; [2005] 11 SCC 314 and Kamal Kumar Dutta v. Ruby General Hospital Ltd. [2006] 134 Comp Cas 678 ; [2006] 5 Comp LJ 511, it is clear that only on fulfilment of all the conditions mentioned in section 397(2) order granting relief under section 397 can be made. Here the Board made order granting relief to the petitioners in the company petition without recording how it was satisfied about the two conditions mentioned in section 397(2)(b). NEPC Micon [1999] 1 CHN 617 holding that failure to give reasons in compliance with the pr....
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....upar Chemical (India) P. Ltd. v. Dipak G. Mehta [1999] 4 Comp LJ 474 (Bom) ; Navaneethammal v. Arjuna Chetty [1996] 6 SCC 166 ; Hari Singh v. Kanhaiya Lal AIR 1999 SC 3325 ; and Dale and Carrington Invt. P. Ltd. v. P. K. Prathapan [2004] 122 Comp Cas 161 (SC) ; [2005] 1 SCC 212. While explaining what the expression "any question of law arising out of such order" used in section 10F should mean, Mr. Mitra has referred me to CIT v. Scindia Steam Navigation Co. Ltd. [1961] 42 ITR 589 ; AIR 1961 SC 1633. 39. In that, while deciding the question whether in a reference under section 66 of the Income-tax Act, 1922, the High Court could consider a question which had not been raised before the Tribunal or dealt with by the Tribunal in its order, even though it would be one of law, their Lordships of the apex court said (in paragraph 31 of the report) (page 611 of 42 ITR) : "The result of the above discussion may thus be summed up : (1) When a question is raised before the Tribunal and is dealt with by it, 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 deemed to have been dealt wit....
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..... An application under section 397 can be filed only by a member of the company who has reason to complain about the manner in which the affairs of the company are being conducted. Besides, the member is entitled to file the application only if he has a right so to apply by virtue of section 399. It is, therefore, clear that the CP(I)PL was not entitled to take out or join the petitioners in an application under section 397. This being the position nothing connected with the said 155 million shares to which only the CP(I)PL could, if at all, lay a claim, could be decided by the Board. But the whole foundation of its order under appeal is the question of transfer of the said 155 million shares. In my view, this jurisdictional error also vitiated the order of the Board incurably. 43. Regarding the question whether any case of oppression was made out in the company petition regarding the said 155 million shares, the Board held that the question of transfer of those shares by the WBIDC to the CP(I)PL was not a matter in issue in the company petition. Relying on such findings of the Board, Mr. Sen has contended that the Board was not competent to make the order on the basis of a case n....
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.... March 8, 2002, the GoWB and the WBIDC claimed to be the majority in the HPL. They further said that the statutory records of the WBIDC themselves did not claim after March 8, 2002, that title to the said 155 million shares was held by the WBIDC whose balancesheet did not claim those shares as part of its holding in the HPL, and that they owned and controlled those shares. 45. The Board was therefore right in saying that the question of transfer of the said 155 million shares was not a matter in issue in the company petition. It is only in course of arguments that the issue was raised. Mr. Sarkar and Mr. Mitra are wrong in saying that the Board did not make the order on the basis of a case not made out in the company petition ; this is contrary to the findings recorded in the order by the Board itself. They are also wrong in saying that from all the materials on record the question of transfer of the said 155 million shares became a matter of issue in the company petition. For this Mr. Sarkar has relied on Ramashankar Prosad v. Sindri Iron Foundry P. Ltd. [1966] AIR 1966 Cal 512. I do not think that says that an order granting relief under section 397 can be made on the basis of a....
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.... out in the pleadings taken together, and not a case made out only in the petition, has been clarified by him by saying that the requisite opinions with supporting findings and relief can be given even on the basis of a case made out in the counter or in the rejoinder. The counter cannot make out a case for the petitioner, it denies or disputes or admits his case made out in his petition, and can make out a counter case of the respondent. A rejoinder explains, clarifies, and strengthens the case made out in the petition, it cannot be used to make out a case not made out in the petition. So, when it is said that the case made out by the pleadings is to be considered, it is meant that the case made out in the petition, dealt with in the counter, and explained, clarified, and strengthened by the rejoinder, is only to be considered, not a case not made out in the petition or made out in the rejoinder for the first time. 48. I therefore find that the impugned order, entirely founded on the question of transfer of the said 155 million shares, is vitiated by a very serious jurisdictional error. When the Board was not competent to consider any case regarding those shares, it made a case a....
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....P(I)PL was an affair of the HPL. Relying on V. B. Rangaraj v. V. B. Gopalakrishnan [1992] 73 Comp Cas 201; AIR 1992 SC 453, Mr. S. Pal, counsel for the GoWB, has submitted that disputes arising out of an agreement for transfer of shares between shareholders do not relate to the conduct of the affairs of a company. He has said that the agreement dated January 12, 2002, interfering with the directors' fiduciary duties and obligations was ultra vires the provisions of the Companies Act, 1956, and for this he has relied on Rolta India Ltd. v. Venire Industries Ltd. [2000] 100 Comp Cas 19 ; [2000] 2 Bom CR 241. 50. Mr. Bimal Chatterjee, counsel for the HPL, has said that simply because the HPL was a party to the agreement dated January 12, 2002, things connected with the question of transfer of the said 155 million shares by the WBIDC to the CP(I)PL were not to become affairs of the HPL. He has relied on Leeds United Holdings Plc, In re [1996] 2 BCLC 545, holding (at 559, pl.i) that an expectation that a shareholder will not sell his shares without the consent of some other or other shareholders does not relate in any way to the conduct of the company's affairs. On the other hand Mr. M....
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....uly executed share transfer forms to the CP(I)PL, and the CP(I)PL had never lodged, rather could never lodge, them with the HPL for registration. The board of directors or the shareholders of the HPL were not competent to direct the WBIDC to transfer those shares to the CP(I)PL, though they were free to take note of the developments regarding the question of their transfer. Simply because the board of the HPL was free to take note of or took note of the developments, it cannot be said that the matter became an affair of the HPL. For the purpose of making an application for an order under section 397 the question of transfer of the said 155 million shares by the WBIDC in terms of the agreements dated January 12, 2002 and March 8, 2002, would have been an affair of the HPL, provided the board of the HPL or the WBIDC in the capacity of the holder of the majority of the HPL shares, could decide it in any way by holding meetings of the HPL. It was just not possible, and for not taking any decision regarding the question of transfer of those shares by the WBIDC to the CP(M)C or the CP(I)PL in terms of the agreements in question, the HPL or its directors were not to become responsible in ....
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.... for all lawful purposes, the WBIDC remained the holder of the majority of the HPL shares. On the facts, at best it can be said that the GoWB and the WBIDC permitted the Chatterjee group to manage the day-to-day affairs and control the management of the HPL in such manner as it could, if it were the majority shareholders in the HPL. It is therefore clear that the findings of the Board that with 150 million shares allotted to the IOC, the group was to stand converted from the majority into a minority are absolutely perverse. It is not that in the absence of the IOC allotment the group was to remain the majority. For acquiring that status it needed the said 155 million shares from the WBIDC. These shares had nothing to do with the majority/minority status of the group and the IOC allotment. Hence, I am unable to see how the Board could conclude that the petitioners in the company petition established a case of oppression, since with the IOC allotment upheld, the Chatterjee group would stand converted from the majority into a minority, unless it got the said 155 million shares from the GoWB and the WBIDC. 55. In my opinion, counsel for the GoWB and the WBIDC are right in saying that ....
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.... their counter for the absentee pleadings in the company petition. When there was no case of oppression pleaded in the company petition that unless the said 155 million shares were actually transferred by the WBIDC, with the IOC allotment the petitioners therein would stand converted from the majority into a minority, it was not permissible for the Board to hold that because of counsel's submissions and defence taken in the counter and the possibility of WBIDC not transferring the said 155 million shares of its own accord, a case of oppression stood established. The petitioners in the company petition were required to plead and prove the act or acts of oppressions, and an act or case of oppression was not to be searched out somehow by the Board ; it was just to be apparent, having been established. I am unable to agree with counsel for the Chatterjee group that the findings of oppression recorded by the Board, tying up the IOC allotment and the question of transfer of the said 155 million shares, being a pure finding of fact cannot be interfered with. I hold that the finding of the Board regarding oppression is perverse, and hence the impugned order entirely based on such finding i....
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.... majority shareholder status by making the minimum investment and not to permit any strategic investor to come in with funds for the HPL. I wonder how on the facts of the case a person of reasonable prudence can say that the Chatterjee group was entitled to get benefit of the doctrine of legitimate expectation and the GoWB and the WBIDC were not entitled to raise any question regarding compliance with and due performance of the terms of the agreement dated January 12, 2002, by the CP(M)C. 60. In my view, counsel for the GoWB and the WBIDC are right in saying that the Board should not have made the order directing the GoWB and the WBIDC to sell all shares held by WBIDC in the HPL to the Chatterjee group. The order was not made on the ground that the GoWB and the WBIDC had conducted any affair of the HPL in a manner oppressive to the petitioners in the company petition, and hence an order directing the GoWB and the WBIDC to exit from the HPL was called for. The order was made on the ground that the decision to defer disinvestment had been taken because of refusal on the part of the Chatterjee group to honour its commitment regarding the IOC induction, and since there was no ground t....
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....shares. The Board was also wrong in holding the matter to be an affair of the HPL on the ground that the HPL Board withheld the actual allotment of shares to the IOC pending resolution of the proposed transfer. The HPL was a party to the supplementary agreement dated July 30, 2004, and this fact was also noticed by the Board for reaching the conclusion that the question of transfer of all shares by WBIDC to the CP(M)C was an affair of the HPL. For the same reasons for which I have already said that the question of transfer of the said 155 million shares by the WBIDC to the CP(I)PL in terms of the agreements dated January 12, 2002 and March 8, 2002, could not be an affair of the HPL, I say that the question of transfer of all the HPL shares held by WBIDC to the CP(M)C or to its nominee in terms of understandings recorded in the document dated January 14, 2005, could not be an affair of the HPL as well. 63. The Board made the order granting relief on the basis that the document dated January 14, 2005, revived legitimate expectation of the Chatterjee group to get all the HPL shares held by the WBIDC, and for applying the doctrine of legitimate expectation it held that the HPL was in ....
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....atterjee group, and hence the doctrine of legitimate expectation was to apply. I think Mr. Sen and Mr. Pal are right in saying that in the absence of any pleading in the company petition that the HPL being in the nature of a quasi partnership the petitioners therein were entitled to seek application of the doctrine of legitimate expectation in the context of oppressive act or acts of the GoWB and the WBIDC leading to frustration of assurances and commitments given by the agreements for giving management control of the HPL to the Chatterjee group, the Board should not have accepted the arguments made at the bar. Mr. Sundaram's contention is that what the Board could not do directly, it actually did that indirectly in the sense that by applying the doctrines of quasi partnership and legitimate expectation it granted specific reliefs by enforcing performance of the agreements. 66. Mr. Sen has relied on Hind Overseas P. Ltd. v. Raghunath Prasad Jhunjhunwalla [1976] 46 Comp Cas 91 (SC) ; AIR 1976 SC 565 to show that principle of quasi partnership has a limited application to companies. By giving me Kilpest P. Ltd. v. Shekhar Mehra [1996] 87 Comp Cas 615 (SC) ; [1996] 10 SCC 696, he has....
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....d be applied in line with Blisset and Daniel (68 ER 1024). His submission is that in Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd. [1981] 51 Comp Cas 743 ; [1981] 3 SCC 333, the apex court, while saying that a narrow legalistic view should not be taken and technical pleas should not be permitted to defeat an action under section 397, recognised rights, expectations and obligations outside the company structure and approved Ebrahimi v. Westbourne Galleries Ltd. [1972] 2 All ER 492 (HL) that as an authority to say that the concept of legitimate expectation is not limited to contract and that rights, expectations and obligations outside the corporate structure are also enforceable. He has cited to me Saul D. Harrison and Sons plc, In re [1995] 1 BCLC 14 to show how unfair prejudice requirement of section 459 of the (English) Companies Act, 1985, was examined in the context of legitimate expectation, and has contented that the concept of legitimate expectation under the English law is the same as under the Indian law. Reading out from O'Neill v. Phillips [1999] 97 Comp Cas 807 (HL) ; [1999] 2 All ER 961 he has narrated how the company law seamlessly dev....
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....d. [1998] 92 Comp Cas 120 (SC) and A. K. Bindal v. UOI [2003] 114 Comp Cas 590 (SC) ; [2003] 5 SCC 163. 70. It seems to me that while examining the question whether the HPL was actually a quasi-partnership between WBIDC and the Chatterjee group, the Board proceeded on the basis of a wrong premise. It proceeded on the basis that a personal relationship between PC and the Chief Minister and officials of the GoWB brought the WBIDC and the Chatterjee group in association for working as promoters of the HPL. There is absolutely no evidence to show that there was a personal relationship between the Chief Minister of the State and PC or that the Chief Minister was personally interested in promoting the HPL. It was no doubt a joint venture between public sector and private sector, and not between private sectors or between natural persons having nothing but private interests. Here it was nobody's case that WBIDC participated in the venture for making profit, but there is no reason to say that the Chatterjee group participated for doing charity. While GoWB through its wholly owned company presumably participated in the project in public interest, i.e., for ushering in rapid industrializati....
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....hy a limited company should be considered in the nature of a quasi-partnership between its shareholders, I think the position of law is what was said in Kilpest [1996] 87 Comp Cas 615 (SC) (paragraph 11) (page 622) : "The promoters of a company, whether or not they were hitherto partners, elect to avail of the advantages of forming a limited company. They voluntarily and knowingly bind themselves by the provisions of the Companies Act. The submission that a limited company should be treated as a quasi partnership should, therefore, not be easily accepted". 73. In my view, it is always to be decided on the facts of the case concerned. It may be easy to apply the concept of quasi partnership to a closely held family company or a private limited company. By this I am not saying that the concept cannot be applied to a public limited company. What I mean is that the tests may not be as simple as are applicable to a closely held private limited family company. If a partnership is converted into a company, it may be a case where the concept may be easily applied. But only on the ground that the promoters described themselves as partners, I do not think the concept of quasi partnership ca....
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....any, of the petitioners in the company petition for making an appropriate order in their favour. It was not empowered to permit the unfair prejudice proposition and the legitimate expectation doctrine to eclipse the provisions in section 397(2), i.e., those two things could not be substituted for the three statutory conditions mentioned in section 397(2). In none of the authorities given to me it was held that only on the basis of legitimate expectation an order granting relief can be made under section 397 of the Companies Act, 1956. 76. Besides, there was no reason for the Board to ignore the fact that in the face of article 33(a) of the articles of association and the agreements dated January 12, 2002, March 8, 2002 and July 30, 2004, it was not open to the petitioners in the company petition to seek their specific performance in the section 397 proceedings invoking the doctrine of legitimate expectation, particularly when the GoWB and the WBIDC contended that the CP(M)C, having committed breach of the terms and conditions of the contracts and agreements in more ways than one, was not entitled to enforce any contract for getting any specific relief. It was not a derisory defenc....
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....mmitment made in 1994 that 60 per cent. of its shareholding would be sold to the CP(M)C at the rate of Rs. 14 per share, and that when 150 million shares had been allotted to the IOC at par, there was no reason why its balance 40 per cent. shares should not be transferred to the Chatterjee group at a fair price which was bound to be less than Rs. 10 per share. In the circumstances the principal secretary, commerce and industries Department of GoWB, the managing director of WBIDC, an adviser from L. B. Jha and Co., the accounting firm engaged by GoWB, and PC held a meeting in order to determine the terms and conditions for transfer of the shares held by WBIDC in the HPL to the Chatterjee group. They decided, as were recorded in notes dated April 5, 2005, circulated by the firm, that the shares would be transferred at the rate of Rs. 28.80 per share, and that regarding induction of the IOC into the HPL, GoWB would hold talks with PC and the IOC, for finding out a suitable solution acceptable to all parties. PC was to submit the draft agreement for the Government's approval by April 11, 2005. The draft agreement was found unacceptable by GoWB whose accounting firm gave notes on it on ....
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.... 2005, took note of the several letters and legal notices received from the IOC and observed that the issue needed expeditious resolution. The Board also noticed the approvals accorded by IDBI to transfer of the said 155 million shares by WBIDC to the CP(I)PL, and also to transfer of all its HPL shares by WBIDC to GoWB, and then by GoWB to the Chatterjee group. The Board approved the appointment of the existing managing director (Swapan Bhowmik) as the managing director of the HPL. From the office of the Registrar of Companies, notice dated May 30, 2005, was served on the HPL asking it to give its comments on the IOC complaints. By a letter dated May 31, 2005, the managing director of the HPL sent copies of the complaint and notice from the authority to the principal secretary, commerce and industries Department of GoWB, the chairman of the HPL and PC. By a letter dated June 1, 2005, GoWB told the HPL that cheque issued by the IOC should be encashed and shares should be allotted to it without any further delay so that no regulatory steps were taken by the registrar of companies against the HPL and its directors. 81. By another notice dated June 7, 2005, the Registrar of Companies ....
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....legal action notices have been received from the IOC and their solicitors. The Ministry of Company Affairs have also asked for explanations from the HPL. My informal consultations with legal luminaries indicate that our lack of action is untenable. Meanwhile, there is no conclusion to the promoter issues In these circumstances, and to avoid embarrassment to, and legal action against, the HPL, we need to encash the IOC cheque and issue the shares. I am sure you will agree with this approach because you, most of all, care for the HPL's credibility and image. The HPL management need to be advised to conclude the IOC transaction and I am writing to them accordingly. It was, however, important that I keep you advised. This letter is being faxed to your Mumbai office." 83. By a letter dated July 6, 2005, the CP(M)C informed the GoWB that before completing the buy out transaction the conditions preceden mentioned in the letter must be fulfilled. The conditions mentioned were : "(a) Indian Oil Corporation Ltd. has confirmed in writing that it shall not subscribe to 150 million or any shares in the HPL and shall withdraw all claims in relation thereto. (b) The completion of....
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.... wrote a letter dated July 25, 2005, asking GoWB to take action on the basis of Deutsche Bank's letter dated July 25, 2005, the draft share purchase agreement, and his advocates' (Amarchand Mangaldas) observations made in their letter dated July 25, 2005. He further said that he had substantially completed his steps and was awaiting the RBI approval. 86. In the circumstances, the Principal Secretary, commerce and industries Department of GoWB wrote to PC the letter dated July 27, 2005, which is : "We acknowledge receipt of your letter, and enclosures, of Monday, July 25. The State Government has been continuously committed to the HPL's success and, over the years, has extended complete support to HPL especially in times of great difficulty. It is a matter of satisfaction to the Government that the HPL has now achieved profitability and is clearly poised for further growth, expansion and success. It is in this context that the State Government entered into discussion with you, since January, 2005 to disinvest in your favour. These discussions have continued over several months and, as you are aware, the State Government took several steps in the direction, including applicati....
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.... clear why GoWB took the decision to defer disinvestment. It is more than clear that PC was nowhere near a position to complete the deal. He was, as a matter of fact, asking, as conditions precedent to the deal, for transfer of the said 155 million shares and the IOC's unconditional withdrawal from the HPL. On the facts, GoWB was absolutely justified in taking the decision. The Board was not right in making the order, when there was nothing wrong with the decision, only because it was upholding the IOC allotment. 89. The IOC aspect has been argued at length by counsel for the Chatterjee group while pressing the eight cross-objections and one appeal filed by the petitioners in the company petition, challenging mainly the findings of the Board that there was nothing wrong with the allotment of 150 million HPL shares to the IOC. Mr Mukherjee has said that oppression means conduct which is harsh, burdensome and wrongful; unfair dealing or dealing lacking in commercial probity ; unfair conduct causing prejudice to a shareholder in the exercise of such shareholder's legal and proprietary rights. He has said that oppression can also arise out of inaction. His submissions are that to dete....
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....r an act is oppressive is to be determined on the facts of the case, and that continuous act of oppression of the minority by the majority shareholders is required for getting relief under section 397. He has relied on Hanuman Prasad Bagri v. Bagress Cereals P. Ltd. [2001] 105 Comp Cas 493 (SC), in support of his submission that a single isolated act is insufficient to sustain an allegation of oppression. On the basis of Bagree Cereals P. Ltd. v. Hanuman Prasad Bagri [2001] 105 Comp Cas 465 (Cal (DB)) he has said that the law of oppression and mismanagement is widely different in India and in England, and that in England it is not necessary to prove oppression and just and equitable winding up, it is sufficient to prove unfairness coupled with unfair prejudice. He has given me Vaishnav Shorilal Puri v. Kishor Kundan Sippy [2006] 131 Comp Cas 690 (Bom), in support of his submission that unfair prejudice test as developed in England under section 459 of the (English) Companies Act, 1985 does not apply to a case under section 397, and that in England unfairly prejudicial conduct was substituted for oppression, but that is not so in India. 92. Mr. Pal has relied on Bishundeo Narain v.....
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....t control, it was continuing negotiations with the IOC. 94. At such stage by a letter dated January 7, 2002, IDBI gave an ultimatum to the GoWB that things should be settled by January 14, 2002. This situation brought into existence the agreement dated January 12, 2002, in terms whereof the CP(M)C was to get management control, and it was to ensure investment in the HPL of a minimum of Rs. 500 crores by March 31, 2002. By a letter dated January 17, 2002, IDBI informed GoWB that the lenders who had committed large exposure because of the Government's association and active role in the HPL would like the Government to remain associated, since the track record of the CP(M)C was extremely unsatisfactory. Although the CP(M)C did not ensure investment of any money in the HPL (it only arranged for further loan to make the loan amount Rs. 107 crores), the agreement dated March 8, 2002, came to be executed stating about the deemed transfer and delivery of the said 155 million shares by WBIDC to the CP(I)PL, the deemed payment and acceptance of the price for the transfer, the deemed grant of interest-free loan, repayable in ten years, by WBIDC to the CP(I)PL for an amount equivalent to the ....
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....g necessary steps for induction of the IOC as the strategic investor, though as back as November 2001, the lenders had agreed to extend reliefs and concessions to the HPL with induction of the IOC. It called upon the HPL and its sponsors to act in tandem with the lenders who viewed the IOC's induction as an important matter for the HPL's long-term viability. It gave an ultimatum by saying that unless concrete action was taken immediately, the lenders would be constrained to explore other options for safeguarding their interests. By a letter dated June 26, 2003, IDBI expressed the lenders' apprehensions about the CP(M)C's capability to meet its commitments, it also conveyed the lenders' concern that steps were not being taken for induction of the IOC as a strategic investor, and that the CP(M)C not only did not invest Rs. 107 crores, but also slapped an interest burden for a loan of that amount on the HPL. 97. On February 12, 2004, the debt restructuring package was ultimately approved showing April 1, 2003, as the cut off date. On March 31, 2003, debt was Rs. 3,916 crores. In terms of the package, the GAIL was to infuse Rs. 200 crores by March 31, 2004 ; the CP(M)C was to bring in....
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.... held by the Tatas were given to it, the financial institutions would vote with it on all matters, and, in due course, GoWB would divest in its favour all its HPL shares. The IOC's that letter triggered off a negotiation that kept it in correspondence with the GoWB and the WBIDC till October 25, 2004, when it wrote the last letter. In the process while the IOC wrote further letters dated October 18, 2004, to GoWB and October 21 and 25, 2004, to WBIDC, WBIDC wrote letters dated October 12, 19, and 29, 2004, to the IOC. By its letters the IOC wanted the GoWB and the WBIDC to give it all the HPL shares held by WBIDC after obtaining waiver of first refusal from the CP(M)C. While WBIDC informed the IOC that it was not possible to get any waiver of right from the CP(M)C, it was agreeable to offer all its HPL shares after the IOC's participation and after giving the CP(M)C the first refusal at a fair price in the determination whereof the IOC's suggestions would be considered. The IOC was also told that in case it got no additional shares, then its HPL shares would be purchased by WBIDC so that it might exit from the HPL. 99. In the meantime in its board meeting dated October 11, 2004, t....
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....en offered, these shares would be offered to the IOC at the same price. The price for the transfer of the shares for the purpose of above two offers would be ascertained in the following manner : The IOC would carry out the valuation of the entire block of equity holding of WBIDC by an internationally reputed independent accounting firm to be selected based on mutual agreement between WBIDC and the IOC. The draft valuation report would be discussed with WBIDC and the views of WBIDC would be given due consideration. The IPO price as well as the prevalent market price at the time of valuation would be given due weightage for the purpose of valuation. In case the above series of transactions do not materialise in acquisition of WBIDC's stake as of date in the HPL by the IOC, WBIDC will buy back equity of face value of Rs. 150 crores as infused by the IOC at the original price. WBIDC also undertakes to take over the lock in restrictions, laid down by the HPL in their letter referred to above. Suitable modalities will be worked out mutually by the IOC and WBIDC to effect the above buy back by WBIDC from the IOC. The entire above process would be subject to observance of the ....
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....e extraordinary general meeting was held on January 14, 2005, and the special resolution was adopted approving the board resolution dated November 2, 2004. 103. The allotment of shares to the IOC was questioned on the ground that a clandestine agreement to permit the IOC to participate in the management of the HPL had been concealed. The admitted position is that the petitioners in the company petition failed to produce any such agreement. To be precise, there is no clandestine agreement, and none has seen the light of day till date. In their counters GoWB, WBIDC and the IOC, of their own accord, disclosed all the letters they wrote during the period from September 16, 2004 to November 10, 2004. The September 16, 2004, letter written by GoWB to PC was suppressed in the company petition. Mr. Pal has rightly said that from that letter it is apparent that the IOC, that had previously asked for minimum 26 per cent. equity shares and management control of the HPL, was again asking for something more than just 150 million HPL shares. It wanted GoWB to give it the Tatas' HPL shares. In his reply letter dated September 20, 2004, PC did not say anything regarding that. 104. By the letters....
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....eral meeting dated December 21, 2004, the chairman of the HPL did not disclose the letters written by GoWB, WBIDC and the IOC, though he had full knowledge of them, and hence the notice, vitiated by suppression of material information, being bad in law, the special resolution dated January 14, 2005, was liable to be cancelled. 106. It has been argued that had the Chatterjee group had knowledge of those letters, it would not have voted in favour of the special resolution. Thus, lack of probity and loss of confidence aspects have been introduced in the case. Mr. Sarkar has argued that when the non-disclosure of correspondence between WBIDC and the IOC was an admitted fact nothing more was necessary for showing that the GoWB and the WBIDC acted with total lack of probity in the conduct of the affair of allotment of 150 million HPL shares to the IOC. His argument is that whether the correspondence amounted to entering into a binding arrangement or whether the arrangement was to affect the petitioners in the company petition in any manner is absolutely irrelevant, because what was relevant was the knowledge of those letters, and not how the petitioners in the company petition would hav....
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....the IOC in the HPL was introduced by PC himself at a point of time when the HPL was collapsing for want of fund. From September 2000 till July 30, 2004, the CP(M)C did not bring in its share of Rs. 107 crores against the rights issue, WBIDC and the Tatas duly subscribed their shares. The lenders were making repeated requests for infusion of fund and bringing in a strategic investor. When the IOC was willing to come in a big way, the CP(M)C brought into existence the agreement dated January 12, 2002, and that brought the ongoing negotiations for bringing in the IOC to an end. There was nothing wrong in PC's trying to get majority and management control. But the absolute fact is that he was not trying to get those things by making investment, when he was at liberty to bring in equity up to the permissible limit. 109. Nothing prevented him from bringing in Rs. 500 crores that was men tioned in the agreement dated January 12, 2002, and thus getting majority status in the HPL and its management control. It seems that instead of bringing in funds what he really wanted was to keep any other investor out of the HPL and to ensure that the CP(M)C attained the majority status in the HPL by a....
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....fact there was none. The right given by article 33(a) was not special in any sense, because that was the general right given to both WBIDC and the CP(M)C. The special right of the CP(M)C was, however, created by agreement dated January 12, 2002, in terms whereof it enjoyed the right to call upon WBIDC to sell all its HPL shares to it. That right the CP(M)C never exercised, because it wanted only to get the bare majority by making the minimum investment only for getting the requisite number of shares from WBIDC. That special right was abandoned by it while entering into the supplementary agreement dated July 30, 2004. 111. By then it got the agreement dated March 8, 2002, executed. Very probably, it was of the view that since it had already made certain arrangements for acquisition of the said 155 million shares, and thus advanced towards its goal of attaining the bare majority, there was no need to keep the special right alive. This seems to be the reason why the petitioners in the company petition, in support of their case regarding special right, referred to the letter dated September 30/October 6, 1994, written by GoWB. By that letter GoWB informed the CP(M)C that in due course....
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....HPL became a section 619B company ; it was deemed to be a Government company for limited purposes. There was absolutely no reason to say that the HPL, on induction of the IOC, only a wholly owned central Government company, was to become a Government company within the meaning of section 617 of the Companies Act, 1956. Thus, the objection raised by PC that on induction of the IOC, the HPL would become a Government company, and that that would adversely affect the initial public offer, it seems to me, he himself knew, was of no substance at all. 113. From his conduct and activities it is apparent that PC was proceeding in a calculated way. It is evident that initiatives taken by the lenders and the GoWB and the WBIDC to induct the IOC in the HPL were not to his liking, but he was unable to resist the IOC induction that was essentially required in the interests of the HPL. It seems to me that he wanted to create a situation in which he could ensure the IOC out of the HPL, and at the same time get just the said 155 million shares which, in ordinary course, were not to be at his disposal, even if everything what was said in the agreement dated March 8, 2002, was acted upon by the part....
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....ps taken by PC were nowhere near conclusion of the transaction, he rather very calculatedly created a very complicated situation. On these facts, I have been invited by counsel for the Chatterjee group to hold that it was GoWB, WBIDC, the chairman of the HPL, the financial institutions, and all other persons who had knowledge of the letters exchanged between WBIDC and the IOC, that collectively committed a fraud. I agree with counsel for the parties who are contesting the crossobjections and the appeal of the petitioners in the company petition that such a case of fraud as has been pressed into service must meet an inevitable rejection. 115. Regarding the circular resolution the findings of the board are these. Since the necessary paper, viz., the legal opinion (though in part), connected with the circular resolution proposal was already with the directors, the resolution was not vitiated on the ground of non-compliance with the provisions of section 289 of the Companies Act, 1956. In the circumstances in which the chairman issued the circular resolution, it could not be said that he acted mala fide, though on the facts that route should have been avoided and the matter should hav....
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....ates. 117. I do not find any reason to say that the circular resolution amounted to an act of oppression. It has been rightly said that the resolution, strictly speaking, was not necessary. Once the board decision dated November 2, 2004, was approved by the special resolution dated January 14, 2005, and the offer made by letter dated January 28, 2005, was accepted by the IOC, the only thing that was to be done was to issue the share certificates. PC was obstructing that, and for no valid reason. Although his activities exposed all concerned to threatened civil and criminal actions, he remained unmoved. The HPL's interests were at stake. Hence it cannot be said that the chairman was unjustified in proposing the circular resolution. I find no merit in the argument that the legal opinion with connected papers were not disclosed with the proposed resolution. The relevant part of the opinion was circulated, and anyone needing the whole of it was at liberty to have it. I agree with Mr. Divan that the Board should not have made any comments on good corporate governance. That was not a matter in issue. 118. As to the case under section 398, Mr. Sarkar has submitted that the Board wrongly....
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....he Board was wrong in its opinion on the question of validity of appointment of the managing director. I agree with Mr. Bimal Chatterjee that having participated in the meeting dated March 29, 2005 and voted in favour of appointment of the managing director, the petitioners concerned in the company petition were not entitled to question the appointment. As rightly said by Mr. Chatterjee, the concept of ultra vires, legality or illegality does not apply to interpretation of articles of association which are mere terms of contract and to which law of estoppel applies with full force, and if at all, question of prejudice or non-performance of contract can arise. In my opinion, the Board was justified in not interfering with the matter chiefly on the ground that the petitioners concerned in the company petition being some of the creators of the situation were estopped from questioning the appointment. In any case, I do not see how order granting relief under section 397 could be made, even if the HPL board acted illegally in appointing the managing director ; for that could not be considered an act of oppression. 120. The Industrial Development Bank of India has filed an appeal. Mr. P....