TaxTMI 
TaxTMI 
2005 (9) TMI 621
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.... time for setting up a subsidiary company by a foreign company and prior permission of the Government of India was a requisite precondition for this purpose. It, therefore, sought approval of the Government of India for this purpose. This request of Prentice Hall Inc. was considered by the Government of India and it accorded approval for setting up a company for the aforesaid purpose with the condition that the foreign shareholding in the proposed company would be on a minority basis and not exceeding 49%. This foreign company, therefore, needed an Indian partner and understanding was accordingly arrived at with one Mr. B.D. Laroia for the incorporation of a company. Resultantly, Prentice Hall of India Pvt. Ltd. (hereinafter referred to as the Company) was born when certificate of incorporation was given on or about June 6, 1963. The raison d'etre to incorporate this company was made its primary object viz., to acquire the rights to print, reprint, translate, adapt, publish and sell in India and export to any other Asian or other countries low-cost, standard text books and other books for schools, colleges, universities or other institutions books for any other purpose primaril....
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....sponding increase in the stocks held by the other group. 4. According to Pearson Education Inc., notwithstanding the fact that it was a minority partner only because of the Indian law, it had dominant role in the management of the affairs of the company, as the company was to do the business of publishing the titles of the Prentice Hall Inc. in which Prentice Hall Inc. had copyright and, therefore, the company's business was dependent on the permission of Prentice Hall Inc. to allow the company to publish those titles for which collaboration agreement was also entered. Further, to ensure complete say of the Prentice Hall/Pearson in the management, Article 82 of the Articles of Association of the company provided that as long as it held Rs. 20,000/- worth equity shares in the company it will have the right to nominate the directors on the Board of the company not exceeding 50% of the total strength of the Board. Of the five Directors of the company Prentice Hall Inc. had three of its nominees. For a long time Managing Directors of the company were the persons nominated and approved by Prentice Hall Inc. The company carried on its business by publishing the titles of Prentice ....
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....tice of Board meetings to the nominees of the petitioner. Notices were also not issued in the AGMs and the second respondent kept the petitioner in dark about the affairs of the company. The second respondent also appointed his wife/respondent No. 3 as director and also his own nominee namely, respondent No. 4 Mr. K. Shivarmakrishnan. He also appointed his daughter/respondent No. 5 as Marketing Co-ordinator of the company. By the time the petitioner took control of the Prentice Hall Inc., the second respondent had taken over complete charge and control of the affairs of the company. He increased his remuneration substantially from Rs. 3 lacs in 1994 to Rs. 30 lacs in the year 2000. The second respondent also filed suit against the petitioner for seeking enforcement of the 1983 collaboration agreement because of which the petitioner was also constrained to file suit against the company in regard to the rights of the company to publish the titles of the petitioner. The second respondent also refused to provide various documents/information which the petitioner demanded in terms of Section 163(3) and (4) of the Act. He also shifted all the records of the company from the registered of....
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....complete address deliberately to deny the petitioner of its entitlement. iv) The decision taken to issue further shares, as a right issue, was not bona fide either inasmuch as the company was making good profits and did not require increase in the working capital; 75% of the amount raised as share capital had been paid as dividend within a short period; offer letter was addressed to the petitioner at wrong address deliberately; and that the issue was made during the pendency of civil suits between the parties; v) Although the petitioner had a right to appoint its nominee on the Board of the company in terms of Article 82, in view of strained relations between the parties, pending civil proceedings between the petitioner and the company and the petitioner having its own business in competition with that of the company, the CLB did not find it proper to have the petitioner's nominee on the Board as it would result in conflict of interests and would not be in the interest of the company; vi) Without going into the allegations of the petitioner that it was not receiving notices of the meetings and various documents like Annual Reports etc. or defense of t....
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....on to the company and to the second respondent within one month from the date of the impugned order. It has also been observed in the impugned order that in case the petitioner decides to go out of the company, the CLB would appoint an independent value to determine the fair value of the shares. 9. Pursuant to the impugned order, the petitioner exercised its option vide letter dated 18th August 2004 through its Advocate and decided to remain a shareholder of the company. This was, however, without prejudice to its right to file appeal. As noted above, the petitioner has in the appeal filed by it challenged the directions given by the CLB qua the nature of relief. On the other hand, in the appeal filed by the respondents the primary challenge is to the finding of the CLB about the issue of further share capital. It would be appropriate to first deal with the appeal of the respondents. Co.A. (B) No. 21/2004 10. While holding that the issue of right shares in the year 2001 was not legal, the CLB has given the following reasons:- i) There was no need or justification for making the issue; ii) the notice sent to the petitioner was at incomplete address and, th....
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....rong address was deliberates on the part of the company. The only justification for sending the notice at the given address is that the particular address is the one printed by the petitioner on the books published by it. That is a far fetched explanation. In terms of Section 63 of the Act notices are required to be sent to the addresses which are registered with the company. The CLB has also recorded the finding of fact, which also was not disputed, that the company/second respondent had the knowledge of the correct address of the petitioner. Still the notice was not sent at that address. The CLB was, thus, right in drawing an inference that it was a motivated act, as by sending the letter at another address the motive of the company was to ensure that it is not received the petitioner in time and the petitioner loses its chance to apply for the right shares and the respondents, in fact, succeeded in this mischievous attempt. In the backdrop of the aforesaid findings, would it be permissible for the respondents, in the facts of this case, to argue that the Court gloss over their mala fide and motivated act-even illegal act-of issuing the share capital and refuse to interfere merel....
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....bjectively in order to estimate how critical or pressing, or substantial or, per contra, insubstantial an alleged requirement may have been. If it finds that a particular requirement, though real, was not urgent, or critical, at the relevant time, it may have reason to doubt, or discount, the assertions of individuals that they acted solely in order to deal with it, particularly when the action they took was unusual or even extreme. This was, in their Lordships' view, the course taken by Street J. His conclusion as to the objective situation was expressed in these words: 'It is clear on the evidence that Millers was, as at 6th July 1972, in a position of tight liquidity. It did not have within its own funds sufficient money to cover its present and foreseeable financial commitments. It had, however, been in a position of tight liquidity for many months before 6th July 1972. There is a history of a series of financial crises; but at the same time there is a trend of improvement during the months preceding the meeting of 6th July.... In short, I am satisfied that as at 6th July 1972 there was a need for capital. I am satisfied that this need had been recognised fo....
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.... (see Punt v. Symons and Co.), (1903-2Ch 506) or to enable it to comply with legal requirements as in the instant case. In Hogg v. Cramphorn, (1967-1 Ch 254) Buckley J. (p. 267) agreed with the settlement of law of Byrne J. in Punt. And so did Lord Wilberforce (pp. 835-836) in Howard Smith (1974 AC 821) where he said: "It is, in their Lordships' opinion, too narrow an approach to say that the only valid purpose for which shares may be issued it to raise capital for the company. The discretion is not in terms limited in this way: the law should not impose such a limitation on Directors' powers. To define in advance exact limits beyond which directors must not pass is, in their Lordship's view, impossible. This clearly cannot be done by enumeration, since the variety of situations facing Directors of different type of Company in different situations cannot be anticipated". The Australian decision in Harlowe Nominees (121 CLR 483) took the same view of the directors' power to issue shares. It was said therein: "The principle is that although primarily the power is given to enable capital to be raised when required for the purposes of the company, t....
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....es. The cable and the offer were mentioned before us by Shri Nariman and were not disputed by Shri Seervai. There is no reason way we should not call upon the Indian shareholders to do what they were always willing to do, namely, to pay the Holding Company a fair premium on the shares which were offered to it, which it could neither take nor renounce and which were taken up by the Indian shareholders in the enforced absence of the Holding Company. The willingness of the Indian shareholders to pay a premium on the excess holding or the rights shares is a factor which, to some extent, has gone in their favor on the question of oppression. Having had the benefit other stance, they must now make it good. Besides, it is only meet and just that the Indian shareholders, who took the rights shares at par when the value of those shares was much above par, should be asked to pay the difference in order to nullify the unjust and unjustifiable enrichment at the cost of the Holding Company. We must make it clear that we are not asking the Indian shareholders to pay the premium as a price of oppression. We have rejected the plea of oppression and the course which we are now adopting is intended ....
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.... the respondents' Co.A. (SB) No. 21/2004 is concerned, I do not find any merit therein and dismiss the same. Co.A.(B) No. 20/2004 18. It may be noted that in so far as the appeal of the petitioner is concerned, although number of other findings are also challenged, the learned counsel for the petitioner at the time of arguments confined their arguments to the relief part and, therefore, it is this aspect which I propose to deal with. The admitted position in this case is that it is the Prentice Hall Inc. which wanted to establish its business in India. Indubitably, the purpose and objective of establishing Indian company was printing and publication of books of Prentice Hall Inc. The intention of Prentice Hall Inc. was to set up its subsidiary. For this purpose, as per prevailing law, Prentice Hall Inc. asked for the permission of the Indian Government. However, in view of government regulations that prevailed at that time, while granting this permission in the year 1963, Prentice Hall Inc. was only permitted to set up the Indian company with minority stakes and minority control. As Prentice Hall Inc. had no option in the mater, it took with it 49% shareholding and gave 5....
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....he manner in which the two proposals have been dealt with by the CLB. 21. The first alternative suggested by the petitioner was to take over the company by buying out the shares held by the second respondent and other members of his group. The company was brain child of the Prentice Hall Inc. (predecessor of the petitioner), which gave its name to it as well and also ensured that it does the business of printing and publishing petitioner's title for which it was incorporated. According to the petitioner, this goodwill is the part of the contribution of the petitioner apart from investment in the share capital. The petitioner had, per force, given a particular percentage of shareholding to Mr. Laroia and thereafter to the second respondent and his group because of the Government regulation. Otherwise, it was the intention of the petitioner to create the company as its subsidiary. In these circumstances, it may be the legitimate expectation of the petitioner to now gain control of the company after the embargo by the Government is removed. The very objective of incorporation of the company was to do the business of printing, publication and sale of the titles belonging to the ....
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.... himself and the turnover has gone up from Rs. 3 cores in 1993 to over Rs. 24 crores in the year 2002-03 and it would not be equitable to direct a person, who has nurtured the company very profitably, to go out of the company and give it to the other group. However, what is ignored by the CLB, in the entire discussion, is that the respondent No. 2 has been able to increase the turnover busing the name "Prentice Hall". No doubt, second respondent must have put his best efforts to achieve this. But he could get the entire credit as these strides are made by riding on the goodwill of "Prentice Hall". It would have been a different thing had there been a growth in business without associating this name. It is a common experience that in many cases the products are sold only because of goodwill attached to a particular brand. Therefore, the CLB may not be entirely correct in going total credit to the second respondent for the growth of the company. 24. Be as it may, even if the first alternative is not to be accepted and the second respondent wants to retain the company and want the petitioner to go out, would it be proper in that eventuality, that the company retains with its name t....
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....following reasons in support: i) Although the petitioner had permitted the company to use the words "Prentice Hall" in its name, whether the consent to use the word was because of the association with the management or because the company is to publish the titles of the company is not clear. ii) There is nothing in the Articles to the effect that once the petitioner ceases to be a shareholder, the company would omit the words "Prentice Hall" from its name. On the other hand there is a provision in the Articles that as long as the petitioner holds shares worth Rs. 20,000/-, it would have right to appoint directors. Such a provision regarding name of the company could be incorporated in the Articles as well. iii) Although Agreement dated 6th June 1963 contains a provision to this effect (clause 10 of the agreement), it is only a contractual right which cannot be enforced through a petition under Section 397/398. iv) The petitioner has already filed a civil suit for restraining the company from using the name "Prentice Hall" for enforcing its civil right. The petitioner can seek appropriate relief in the said civil proceedings. v) In a peti....
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....[see Section 402(d) and (e)]. Section 397 specifically provides that once the oppressions established, the Court may, with a view to bringing to an end the matters complained of, make an order as it thinks fit. Thus, the Court has ample power to pass such orders as it thinks fit to render justice and such an order has to be reasonable. It is also an accepted principle that "just and equitable" provision in Section 402(g) is an equitable supplement to the common law of the company to be found in its Memorandum and Articles of Association. Explaining this principle in Ebrahimi v. Wetbourne Galleries Ltd. and Ors., [1972] 2 All.E.R. 492, after taking stock of various judgments of Commonwealth jurisdictions, the House of Lords observed (per Lord Wilberforce):-"My Lords, in my opinion these authorities represent a sound and rational development of the law which should be endorsed. The foundation of it all lies in the words 'just and equitable' and, if there is any respect in which some of the cases may be open to criticism, it is that the courts may sometimes have been too timorous in giving them full force. The words are a recognition of the fact that a limited company is more ....
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....this provision gives the power to supplant the entire corporate management. The relevant observations in that case reads as under:-"It should be borne in mind that when a court passes an order under ss. 397, 398 and 402 as has been done in the instant case there could be no limitation on the court's power while acting under the sections. Instead of the winding up of a company, thcourt under the abovementioned sections has been vested with ample power to continue the corporate existence of a company by passing such orders as it thinks fit in order to achieve the objective by removing any member or members of a company or to prevent the company's affairs from being conducted in a manner prejudicial to the public interest. The court under Section 398 read with Section 402 of the Act has the power to supplant the entire corporate management. Under the aforesaid sections, the court can give appropriate directions which are contrary to the provisions of the articles of the company or the provisions of the Companies Act. "Therefore, there cannot be straight-jacket formula which would fit in all the circumstances. It will depend on the totality of the circumstances as to what kind ....
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....n the company to the petitioner. He cannot be allowed to create a situation of "having a cake and eat it too". 29. Once the power to issue such a direction is found in Section 402, pendency of other suit shall not deter the Court to pass appropriate direction in these proceedings. More so, when the issue of copyright is to be examined on different parameters and the suit was filed when the petitioner was a shareholder in the company. Here, we are discussing the modalities of parting the ways. 30. The only other aspect which has to be gone into is as to whether giving of such a direction would be against the interest of the company, as found by the CLB. No doubt, interest of the company is paramount in proceedings under Section 397-398 of the Act, as held in Nurcombe v. Nurcombe and Anr., 85(1) All. E.R. 65, Mohanlal Ganpatram v. Sayaji Jubilee Cotton and Jute Mills Co. Ltd., . However, wisdom of CLB's remarks was questioned by the learned counsel for the petitioner, and rightly so, by submitting that under the garb that it would be against the interest of the company the company cannot be allowed to take what is not legitimately due to it (for example, trade mark, deposit....