TaxTMI 
TaxTMI 
TaxTMI 
2002 (12) TMI 642
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....s "the Indian Block"). Both the petitions have been filed under Sections 397/398 of the Companies Act, 1956 ("the Act") alleging oppression and mismanagement in the affairs of M/s Hydraulics Private Limited (the Company). 2. Before dealing with the merits of these cases, it is necessary to narrate the background in brief. The Company was incorporated in 1953 in the name of M/s Armstrong's Patents (India) Limited and was subsequently changed into the present name in the same year. The main object of the Company is to carry on the business of manufacture etc. of all automobile components and presently the main line of manufacture is shock absorbers and related items for automobiles. The authorized capital of the Company is ₹ 12 crores consisting of 1,19,750 equity shares of ₹ 1,000/- each and 2,500 redeemable cumulative preference shares of ₹ 100/- each. Presently, 1,19,723 equity shares have been subscribed as fully paid. The Foreign Block acquired 3207 shares in 1995 by transfer and was allotted 3763 shares by the Company for a consideration of ₹ 2,600 per share (with a premium of ₹ 1,600/-). The total acquisition cost was of t....
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....ctions to the Indian Block to bring in their proportionate equity contribution. 4. The Indian Block filed CP 19/2002 on 25.2.2002, alleging that the Foreign Block had failed in its commitment to provide management, technology, marketing and Board level support to the Company in accordance with the Shareholders Agreement, which has resulted in the Company's performance going down from 1996 and that the Foreign Block has supplied unsuitable machinery at huge cost which has also resulted in high production cost. Accordingly, they have alleged because of these acts, the Company which was making good profits earlier has started incurring heavy losses. They have also questioned the validity of the Board meeting held on 05.02.2002 in Chicago. With these allegations, they have sought for removal of the nominee directors of the Foreign Block, for a direction to the Foreign Block to purchase the defective machinery costing ₹ 5 crores, for directing the Foreign Block to make a reference to the BIFR and that a declaration that the Foreign Block has no right of claim against the Company in regard to ₹ 11 crores brought in by the Foreign block which was utilized to pay back Bank....
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....g held on 27.11.2001. In this connection, Shri Kapur referred to the correspondence exchange between the Foreign Block and the Indian Block and the minutes of the various Board meetings. The Indian Block has suggested that the Foreign Block should assume the entire burden of the investment in the form of preference capital and also proposed that the indian Block would serve as management consultants to the Company for which they would be paid consultancy fees. The proposal for increasing the authorized capital of the Company from ₹ 12 crores to ₹ 30 crores was rejected by the Indian Block at the said Board meeting. In view of the urgent requirement of funds for the Company, the Foreign Block took steps to convene a Board meeting with a shorter notice in order to sanction the increase in the authorized share capital of the Company and to make a rights issue. Accordingly the meeting was held on 05.02.2002. The Indian Block abstained from the Board meeting compelling the nominees of the Foreign Block to approve the proposal for increasing the authorized capital and issue of shares on rights basis. Accordingly, the Foreign Block brought in additional funds of ₹ 110 mi....
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.... of the Company. According to Article 73, two members personally present shall be the quorum for a general meeting and no business shall be transacted at any general meeting unless the requisite quorum is present at the time when the meeting proceeds to business. According to Article 112, the quorum for meeting of the Board shall be two directors comprising on director nominated by each of the Foreign Block and Indian Block. If within half-an-hour from the time appointed for a meeting a quorum is not present, the meeting shall stand adjourned as stipulated therein, provided that the Board of directors shall not consider the business in relation to any fundamental matter at such adjourned Board meeting. Article 64 provides that the Company may alter the conditions of its Memorandum subject to Article 119A of the Articles of Association. Shri Kapur urged that the various clauses contained in the Shareholders Agreement and the Articles of Association of the Company categorically show that Indian Block is put in equal footing with the Foreign Block. The Company cannot take a decision in any of the fundamental matters without the affirmative voting of the Indian Block. The Company canno....
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....rized share capital of the Company from ₹ 2,50,00,000 to 12,00,00,000 divided into 1,19,750 equity shares of ₹ 1,000/- and 2,500, 11 per cent redeemable cumulative preference shares of ₹ 100/-, each ranking paripasu with the existing shares in the Company. The Board further resolved to alter the Articles of Association of the Company in regard to the clause relating to share capital of the Company. The Board meeting held on 28.06.1999 (page 126 of Additional set of documents by Foreign Block) at Chicago was attended by Mr. Hari Nari and the third respondent. The Board adopted the accounts for the year 1998 and the Company suffered a net loss of ₹ 5,81,61,000. The Board meeting held on 29.11.1999 (page 131 of petition) was chaired by the second respondent. The Board reviewed the performance of the Company for the year 1999. The second respondent reported that excessive interest cost, inefficient material consumption and increasing overheads are responsible for the poor performance of the Company for the three consecutive years. He was concerned with the deceased production in shock absorbers. He also made suggestions for replacing high cost loans with low....
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....d on 27.11.2001, the Foreign Block had presented this plan and proposal for increasing the authorized capital. The Foreign Block was prepared to contribute the entire amount of capital in the event of the Indian Block were not willing to participate in the capitalization subject to proportional dilution of the Indian Block equity interest in the Company. The Indian Block opposed the proposal made by the Foreign Block and suggested that the Foreign Block may invest funds in the form of preference shares and that the Indian Block can serve as management consultants to the Company at a cost. Thus, Indian Block rejected the proposals made by the Foreign Block at the said Board meeting. Later the Foreign Block, by their letter dated 27.12.2001 (Annexure A-15) conceded to the suggestion of the Indian Block to bring additional capital in the form of preference capital carrying divided at the rate of 15 per cent per year and proposed that preference shares could be converted into equity shares at any time after one year following the allotment. The Foreign Block was willing for the Indian Block to purchase from it 49 per cent of its preference shares at any time during the one year period ....
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....or which a special resolution is necessary in the general body meeting. Thus, non cooperation by the minority shareholder with the majority is an act of oppression. In Dr. V. Sebastian v. City Hospital P.Ltd. - (1985) 57 CC 453 - it has been held that Sections 397 and 398 of the Companies Act, 1956 are intended primarily to protect the minority interest. In ordinary cases, the majority will be able to protect itself by controlling the directors at general body meetings. But where majority is prevented from doing so, despite the clear indication in the Articles that majority rule based on the right to demand poll should operate as a correcting influence, the majority becomes an artificial minority entitled to claim protection under Sections 397 and 398. In the present case, unless both the parties cooperate with each other, the business of the Company cannot be carried on. Therefore, when the Indian Block refused to contribute funds for the survival of the Company, the Foreign Block had to necessarily take appropriate decisions to ensure the survival of the Company. That is the reason why they moved this Bench on 7.02.2002 and sought for a direction to convene the general body meeti....
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....essary to wind up any company in view of the fact that the primary consideration should be of general interest of Shareholders. (v) Russell v. Northern Bank Development Corp Ltd - (1992) BCLC 1016 - to show that though a provision in a company's Articles of Association which restricted its statutory power to alter the Articles is invalid an agreement outside the Articles between Shareholders as to how they would exercise their voting rights on a resolution to alter the Articles in not necessarily invalid. (vi) In Re Sindhri Iron Foundary (P.) Ltd. - (1964) Vol.XXXIV Company Cases 510 - to show that if the facts in a case are such as would justify an order for winding up, but an order for winding up would unfairly prejudice the petitioners, relief can be granted under Sections 397 and 398. (vii) Standard Chartered Bank v. Walker - (1992) BCLC 603 - to show that where the conduct of the Shareholders was manifestly injurious to the interests of the company, the Court could intervene and that a failure to approve of the restructuring would result in the end of the company, the court would grant the injunctions sought by the plaintiffs. (viii) (a) Srihari Rao v. Sri Gopal Au....
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....ower. (xiv) Keredla Suryanarayana v. Sri Ramadas Motor Transport Limited - (1993) 3 Comp LJ 422 (CLB) - to show that though the allegations raised in the petition were not established, considering the facts of the case, the CLB may order purchase of shares of one group by the other group in the interest of the company. (xv) Sunil Dev v. Delhi and District Cricket Association - (1994) 80 CC 174 - to show that it is not within the province of the court to interfere with matters concerning the affairs of the company unless there was some malafide action. (xvi) Jagjit Singh Chawla v. Tirath Ram Ahuja Limited - (2002) 2 CLJ 72 - to show that where the petitioners have established oppression, there will be legitimate expectation and denial of such legitimate expectation would be a ground to wind up the company on just and equitable grounds and since the company is financially sound it would not be in the interest of the company or the Shareholders to wind up the company, in which case, the CLB will grant the relief to the petitioners under Sections 397 and 398. (xvii) Shiv Nath Rai Bajaj v. Nafabs India Private Limited - (2002) 1 CLJ 152 (CLB) - to show that if the increase in th....
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....age the affairs of the Company causing prejudice to the interest of the company. Consequently, the requirements of provisions of Section 398 are not satisfied. Shri Raghavan pointed out that there is no pleading in regard to mismanagement and consequently the petition does not lie under Section 398. In regard to acts of oppression, Shri Raghavan pointed out that according to the Foreign Block, the respondents have not infused the funds towards additional equity capital and failed to pay all debts of the Company in terms of the Clause 3.3 of the Shareholders Agreement. The Foreign Block has leveled charges against the Indian Block for not acting in accordance with Clause 3.3 of the Shareholders Agreement. These acts, according to the Foreign Block, are oppressive and burdensome of the Foreign Block. This Clause 3.3, according to Shri Raghavan has to be enforced in a competent court of law. The Foreign Block cannot seek any relief under Section 397 in seeking specific performance of Clause 3.3. The CLB cannot direct the India Block to fulfill their obligations to contribute its proportionate capital contribution in terms of Clause 3.3 of the Shareholders Agreement. The Foreign Block ....
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.... 109(2) of the Articles of Association of the Company, the Managing Director may call at his discretion a meeting of the Board. However, the Board meeting held on 05.02.2002 at Chicago was not convened by the Managing Director. The Indian Block were not given 30 days notice in accordance with Section 109A(a) of the Articles of Association of the Company. The notice sent on by e-mail on 4.2.2002 convening the Board meeting was received by the Indian Block only after the meeting was over. The action of the Foreign Block is not bonafide and the Board was convened with the intention of causing prejudice to the Indian Block. Pursuant to the Board resolution made on 05.02.2002, the Foreign Block brought money and discharged the dues of the Company guaranteed by the Foreign Block, thereby regularizing the illegal transactions. The Indian Block are not sure whether the RBI permission was obtained for bringing foreign funds towards share capital of the Company. Therefore the Foreign Block has not come with clean hands before the CLB. The intention of the Foreign Block as seen from the supplemental agreement dated 28.08.1996 executed between the Foreign Block, Indian Block and the Company (p....
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.... Block never objected to the Foreign Block bringing additional funds by way of preference capital redeemable over a period of seven to ten years, thereby the deadlock could have been avoided. Shri Raghavan pointed out that the Foreign Block has started a new company in violation of the Shareholders Agreement which has not been disclosed to the Indian Block. The Board of directors has neither approved the new venture of the Foreign Block. The statutory auditors of the Company in their report for the year ending 31.03.2001 (Annexure R-13) have declared that the Company had become "sick industrial undertaking" within the meaning of Section 3(1) of the Sick Industrial Companies (Special Provisions) Act, 1985 thereby the Company had already become a sick industrial undertaking as on 31.12.2001, when the balance sheet of the Company as on 31.03.2001 was adopted by the Shareholders of the Company. IT is obligatory on its part to make a reference to the BIFR and the Foreign Block is bound by the statutory obligation and cannot resort to the oppressive method adopted by them. The loss of profitability caused the Company in 1989 to acquire additional capital to continue operations ....
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....emant Mafatlal v. Mafatlal Industries Ltd. - (1987) Vol.LXXXXIX BLR 86 - to show that the expression authorized share capital in the Articles of Association of the company will mean and refer to the nominal share capital of the company and not the issued share capital. (iii) Srikanta Datta Narasimharaja Wadiyar v. Sri Venkateswara Real Estate Enterprises (Pvt.) Ltd. - (1991) 72 CC 211 - to show that the relief under section 397/398 in an equitable relief which is entirely left to the discretion of the company court and, therefore, the requirements of good faith on the part of the petitioner is necessary to grant such an equitable relief. The question of good faith has to be decided by the conduct of the petitioner as reflected not only in the proceedings before the company court, but also in a parallel proceedings in civil courts and other litigations in other courts. The relief under Section 397 and 398 will be granted only to persons who approach the court with a clean record. (iv) Re Fildes Bros. Ltd. (1970) 1 W.L.R. 592 - to show that in considering whether it is just and equitable to wind up a company, the court must have regard to the facts existing at the time of hearing....
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....ent with the Indian Block only in the year 1996. The Foreign Block committed to contribute ₹ 100 crores, whereas the Indian Block contributed some money 50 years back and ₹ 6 crores in the year 1999. He referred to the minutes of Board meeting held on 09.06.1997 (Page 91 of additional set of documents by Foreign Block) to show that the general economic conditions and the temporary recession in the automobile industry are the main factors for poor performance of the Company. He further referred to the minutes of the Board of directors of the Company held on 12.03.1998 (Page 100 of Additional Documents by Foreign Block) to show that the main factor contributing to the loss of the Company was higher interest cost on account of borrowing for expansion activities. The Indian Block at the said Board meeting confessed (Page 104 of Additional Documents by Foreign Block) that there was a lot of scope for exports to Singapore, Malaysia and the Middle East with the help of Tenneco's world wide connections. The minutes of meetings of Board of directors of the Company held on 06.09.1994 (page 16 of Additional Documents by Foreign Block) reveal that the Board reviewed the action ....
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....s. However, if the funds are brought in by way of loan, the Company's net worth will continue to be negative. Moreover, additional interest burden will adversely affect the working of the Company. He further pointed out that the funds brought in by the Foreign Block were used to discharge the liabilities of the Company and that thee is no prohibition to utilize share application money in discharge of liabilities of the Company, which is a listed company. By reducing the debt burden, the Company is benefited and so also the Shareholders including the Indian Block. Shri Kapur categorically stated that the Foreign Block is willing to bring the entire additional equity capital and the Indian Block are at liberty to pick up 49 per cent within a period of one year, so that their interest in taken care. If funds are not infused, the Company as well as 600 employees with their family members will suffer. The Foreign Block in a Memorandum dated 27.12.2001 (Annexure A-15) expressed their willingness to bring the entire additional equity capital on reasonable terms to ensure that the Company does not come under the BIFR jurisdiction. Shri Kapur discounted the statement of the Indian Block....
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.... was heard on 26.02.2002, the earlier order was modified to the extent instead of an amount of ₹ 11 crores treated as a part of share capital, the same shall be treated as share application money. 14. The main complaint of the Foreign Block in their petition is that the Indian Block is not interested in subscribing to the share capital of the Company in spite of the fact that the Company is in dire need of funds. To avoid reference to the BIFR and as such the Foreign Block has sought for directions to issue equity shares at ₹ 11 crores to itself and for directions to the Indian Block to contribute their shares of 49 per cent. It is true that the Company is in need of funds and this fact is not denied by the Indian Block. The Foreign Block had proposed a recapitalisation plan and this was considered in the Board meeting held on 27th November, 2001. In the plan it was proposed induction of ₹ 17.75 crores as additional equity - 51 per cent to be subscribed by the Foreign Block and 49 per cent by the Indian Block. The Foreign Block had also suggested that it could contribute the entire amount if the Indian Block was not in a position to subscribe its share. The India....
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....ics. I am available at 9.00 am on February 5, 2002 and would suggest we meet at that time if this works within your schedule." From the above, it is clear that the issue of recapitalisation had not reached a final stage and was kept open for further discussion on 5th February, 2002. However, by an e-mail dated 04.02.2002, the Foreign Block intimated the Indian Block of a board meeting on 05.02.2002 in Chicago, and held the meeting without the presence of anyone from Indian Block. At the said meeting, the Board of Directors approved the following:- (a) Recapitalisation Plan by infusing a sum of ₹ 177.5 million towards additional capital. (b) Issue of equity shares on rights basis for the amount of ₹ 177.5 million. (c) Increase of the authorized capital of the Company from ₹ 12 crores to ₹ 30 crores subject to approval of the shareholders. 15. In terms of Article 109A(a), the period of notice for any Board meeting is at least 30 days. The said Article also provides for a shorter notice not less than 14 days. In terms of Article 112, no business shall be transacted at any Board meeting unless a quorum is present and that the quorum shall be two dir....
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....ss and in accordance with the provisions of the Articles, the Board should have adjourned the meeting. In this connection, it is relevant to quote Clause 3.3 of the Shareholders Agreement on which heavy reliance was placed by the Foreign Block which reads - "The parties agree to capitalize Hydraulics in order to enable it to meet in a timely and adequate manner, of its application as may be expected by the parties, but not limited to reimbursement of party expenses, funding of capital and operating expenditure through a mix of equity, debt and other sources of finance as determined by the Board." From this provision, it is clear that it is for the Board to determine the nature of the capitalization. It could be either equity or debt or a mix of both. We note that on the earlier occasion when equity was raised there was a consensus among the parties to raise the funds by way of equity capital. In the Board meeting held on 17th February, 1998 the Board recognized the fact that the Company faced liquidity problem at the end of the year and therefore there was a need to infuse further equity by the Shareholders to strengthen the balance sheet and it was also noted that both t....
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....ore the Delhi and Madras High Courts on 4th February, 2002 a day on which the e-mail was sent. The petition, affirmed on 6th February, was filed on the same day before the Principal Bench at Delhi and in this petition, deliberations of the Board meeting on 5.2.2002 have been elaborated as also the fact of remittance of ₹ 11 crores. It is highly impossible to draft a petition of this kind within a day of the meeting, indicating clearly that the Foreign Block had pre-decided to go ahead with the recapitalisation and remittance of money towards equity unilaterally without the consent of the Indian Block, in contravention of the provisions of the provisions of the Articles and the Shareholders Agreement. The claim of the Foreign Block that a deadlock situation had been created by the Indian Block cannot be accepted as the matter relating to recapitalisation had not reached a finality. When the Articles provide for consensus on important mattes, one group having taken a unilateral decision on an issue on which discussions had been inconclusive, cannot complain of oppression and deadlock. Deadlock situation would arise only when a proposal is placed before the Board and in view of ....
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....eign Block for directing the allotment of shares to itself and for direction to Indian Block to subscribe their share to the equity capital of the Company does not arise. 18. As far as the other petition filed by the Indian Block is concerned, the main complaints in that petition are that the Foreign Block had not provided various support in terms of the Shareholders Agreement and also that it had caused huge losses to the Company on account of supply of unsuitable machinery. We have gone through the minutes of the various board meetings, some which are as recorded as a part of the submissions by Shri Kapur. Some of the extracts as below would indicate that the Indian Block never attributed the sub performance of the company to the Foreign Block. The minutes of the Board meeting of the members of the Company held on 28.02.1994 (page 140 of Additional Documents by petitioner) reveal that the net-worth of the Company was eroded more than 50 per cent prior to February 1994 for five financial years and that the Company has to make a reference to BIFR. The minutes of the Board of directors of the Company held on 21.08.1996 (Page 75 of Additional Documents by petitioner) show that t....
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....hese necessitated further infusion of equity. The minutes of the meeting of Board of directors of the Company held on 19.03.1999 (page 118 of Additional Documents by petitioner) and chaired by the second respondent reveal that the Board while reviewing the performance of the Company in the month of January and February, 1999 felt the need of additional funds for tiding over quarterly interest payment to Bank of America. It is observed that the financial support was received from Tenneco to meet this situation. It is further revealed that the petitioner and first respondent have offered to infuse additional capital in order to upgrade the production facilities at Hosur unit and also to offer compensation to the employees who are retiring voluntarily and also for the purpose of meeting the working capital requirements, for which it was resolved to alter capital clause of Memorandum and Articles of Association of the Company raising the authorised capital from ₹ 2,50,00,000 to ₹ 2,47,50,000. The minutes of the meeting Board of directors of the Company held on 3.9.1999 (page 130 Additional Documents by petitioner) and chaired by the second respondent show that the perfo....
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....Block has agreed to support whatever action is taken by the Company in this regard. In other words, the Indian Block has not been able to establish that the losses incurred by the company are due to the mismanagement in the affairs of the Company by the Foreign Block. 20. From the discussion as above on the allegations in both the petitions, it is clear that neither of the parties has been able to establish either oppression or mismanagement in the affairs of the Company by the other side other than establishing that the relationship between the parties has soured and the trust and mutual confidence on which the Shareholders Agreement was entered into no longer exist. In view of the present disputes and in view of the provisions in the Articles relating to quorum in Board meetings and fundamental matters requiring special resolutions in the general meetings, deadlock in future is a definite possibility due to which the parties are unlikely to carry on the affairs of the company jointly in the best interest of the company. Parting of ways would alone be in the interest of the company and as a matter of fact, it was also admitted during the hearings. Shri Kapur cited the case of Nee....
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.... was also in active management of the Company. Therefore, directing the Indian Block which has been associated with the company for a very long time even before the Foreign block became shareholders, to go out of the Company would be unfair to them. In the same way, the Foreign Block has majority shares in the company and also has substantial financial commitment in the Company and has also given guarantee of over ₹ 30 crores and therefore it will be inequitable to direct Foreign Block also to go out of the Company. Considering these facts, this Bench tried to bring out an amicable settlement between the parties during the course of hearing the petitions. The Indian Block was willing to go out of the Company on receipt of a fair consideration for its shares, but the quantum of consideration could not be agreed to between the parties. Both the sides made their own valuation through independent valuers. While as per the valuation done by the Indian Block, the share price came to about ₹ 10,975 per share, as per the valuation done by the Foreign Block it was ₹ 31 per share. Even after the hearing was concluded this Bench held discussions with the parties to explore t....