TaxTMI 
TaxTMI 
2014 (4) TMI 1213
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....pany Law Board (hereinafter referred to as 'CLB') is maintainable in view of the complaint filed by respondent no.1 before the Securities and Exchange Board of India (hereinafter referred to as 'SEBI'). 3. The relevant facts in brief are as follows:- 3.1 The appellant company is engaged in the business of manufacturing sugar and also in the manufacture and production of alcohol, chemicals and rayon. The appellant company is a public company, listed on the Bombay Stock Exchange Limited with an authorized share capital of `65,00,00,000/- divided into 6,50,00,000 equity shares of `10/- each. On 16.10.2007, the Board of Directors of the appellant company passed a resolution proposing, subject to the approval of the shareholders, an issue of 7,00,000 warrants on a preferential basis with intent to augment the long term working capital of the company. Each warrant was carrying a right to apply for 3 equity shares of `10/- each within 18 months from the date of the allotment of the said warrant. The said warrants were proposed to be issued to six entities, namely, Divine Investments Private Limited, Gentech Chemicals Private Limited, Super Wares Private Limited, Quic....
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....d 227 of the Act. The Appellant filed an application under Order VII Rule 11 of the CPC (being I.A. No.12820/2008) for rejection of plaint on the ground that the suit was in the nature of a petition for oppression and mismanagement of the affairs of the appellant company and therefore, the jurisdiction of the civil court was impliedly barred under the provisions of the Act. By an order dated 25.08.2009, this Court allowed the said application and rejected the plaint. The appeal preferred by respondent no.1 before a Division Bench of this Court was also dismissed. 3.5 On 21.11.2007, respondent no. 1 filed a petition (CP No.192/2007) under Section 397 & 398 of the Act before the CLB inter alia seeking that the notice dated 18.10.2007 calling for the postal ballot and the issuance of 7,00,000 preferential warrants be declared as null and void. The respondent no.1 also prayed for the interim relief, however, the same was declined by the CLB on 27.11.2007. An appeal (Co.A (SB) No.44/2007) preferred against the said order was also dismissed by this Court on 01.02.2008. Subsequently, after the dismissal of the above said civil suit (CS (OS) No.2011/2008), respondent no.1 filed applicat....
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....tain such pleas and the appropriate forum to agitate the matter would be CLB, the same would not disentitle the appellant from contending that the petition before the CLB was not maintainable. It is submitted that the respondent was aware that SEBI lacked the jurisdiction to adjudicate whether the affairs of the appellant company were mismanaged or were carried on in a manner oppressive to the minority shareholders, yet the respondent had taken its chance and contested the matter before SEBI. Thus, the respondent could not re-agitate similar issues before the CLB. 6. It is contended by the learned counsel for the appellant that the proceedings before the CLB are an abuse of process of law as respondent no.1 had agitated its grievance before SEBI and was now inviting findings and seeking adjudication in respect of the very same transaction/instances before the CLB. It was contended that since the proceedings before the CLB amounted to re-litigation, the same were an abuse of process of law. In support of the above contentions, the appellant has relied upon the judgment of the Supreme Court in the case of K.K. Modi v. K.N. Modi: (1998) 3 SCC 573. 7. It is submitted by the learn....
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....s. v. Universal Paper Mills Ltd. & Ors.: (2012) 172 Comp Cas 169. 10. It is contended that the proceedings before the CLB are different in nature and even if the complaint filed before SEBI has been dismissed, the same has no bearing on the adjudication of the proceedings before the CLB. The outcome of the proceedings before the CLB is different and is not dependent on the outcome of the proceedings before SEBI. It is submitted that some acts of the company may amount to violation of statutory rules and regulations and SEBI Act, however, the same may not necessarily amount to the acts of oppression and mismanagement. Conversely, a series of acts may amount to oppression and mismanagement, even though the same are legal. In support of this contention, the respondent placed reliance on the judgment of the Supreme Court passed in the case of Needle Industries (India) Ltd. and Ors. v. Needle Industries Newey (India) Holding Ltd. and Ors.: (1981) 3 SCC 333. 11. It is submitted that several remedies may be available to a party under different statutes from the same set of facts and if the remedies are neither repugnant nor inconsistent with each other nor mutually exclusive, then i....
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....MOTERS OF THE COMPANY who are in control of the management of the company. This benefit needless to mention is not only at the cost and detriment of other public shareholders but also the company as a whole. In view of the above we seek your immediate intervention in the matter and restrain DSIL from proceeding further with the aforesaid preferential issue in the interest of investor protection as it is a clear abuse of the regulatory provisions and above all not a healthy governance practice by a corporate to be allowed." 15. The relevant portion of the complaint dated 01.12.2007 made by the respondent no. 1 to the SEBI is extracted hereinbelow:- "3. It is stated that the process of issuance of seven lakh warrants representing 21 lakh shares is violative of Regulation 11 of the SEBI (Substantial Acquisition of Shares and Takeover) Regulations 1997 ('Takeover Code'). The company has on 30.11.2007 allotted 7 lakh share warrants on a preferential basis which results in an increase of 8.14% in the voting rights of the Promoters/Promoter Group/PAC, i.e. from 32.54% (pre- issue) to 40.68% (post issue). If the unexpanded capital were to be taken into account, the increas....
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.... not intimating the price of Rs. 57/- and thereafter the upward revision to Rs. 90/- to the shareholders. c) the real reason for the issuance, being to increase the shareholding in the Company, rather than to augment long term working capital in the Company. d) not indicating about the Open Offer by Our Client The Promoters/Promoter Group/PAC, and the Company have accordingly committed several acts in violation of the Takeover Code for which they are liable in terms of Regulation45 of the Code. 7. We therefore call upon you to investigate into the matter and restrain the Company from listing the securities underlying the warrants (which are fully paid up) on the Stock Exchange, direct the Company and/or the NSDL and CDSL, to cancel the shares, direct the Company and/or the NSDL and CDSL, not to give effect to the issue/allotment and not to permit the Promoters/Promoter Group/PAC to exercise any voting or other rights attached to such shares." 16. In addition, SEBI also considered the Memorandum of Appeal No.96/2008 filed by respondent no. 1 before the SAT, whereby respondent no.1 had also alleged that the allotment of the warrants is a sham transaction to in....
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....ertain contentions urged by the respondent, as it was persuaded by the appellant to refrain from doing so for the reason that the matter was under consideration before the CLB. The relevant observation of the SEBI in this regard is extracted hereinbelow:- "17. The complainant has also stated (in paragraph IV(xiv) at page 38 of the appeal memorandum) that on November 29, 2007, it again wrote to the company urging it to go for a rights issue and even offered to have the same underwritten. The complainant further stated that it made an offer to subscribe to the warrants proposed to be issued at a price of `120/- per share as against the price of `90/- that had been proposed. It is the grievance of the complainant that its letter was ignored completely and the warrants were allotted to the promoters. In reply, the company has stated that the complainant had pursued the remedy provided under Sections 397/398 of the Companies Act, 1956, alleging oppression and mismanagement by opting for Preferential Issue and not Rights Issue and the matter was pending before the Hon'ble CLB. The company has also informed that the complainant had also filed a Civil Suit before the Hon'ble Del....
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....findings/observations in respect of the same have been recorded in the earlier paragraphs. A summary of such findings/observations are given below: i. The allegation of the complainant that the company, its promoters and directors along with companies, Versa Trading Limited and DCM Hyundai Limited have executed a fraud on the shareholders of the company by way of issuing preferential warrants and underlying shares thereby contravening Regulation 3 of the PFUTP Regulations, has not been substantiated by the findings of the SEBI investigation and from the averments/documents of the complainants. Further, the business activities/decisions of unlisted entities like Versa Trading Limited and DCM Hyundai Limited would be outside the regulatory purview of SEBI unless the same becomes prejudicial to the interest of the investors and the securities market. However, the SEBI investigation and the documents furnished by the complainant could not substantiate that the acts of the said entities had affected the securities market in general and the shareholders of the company in particular. ii. The allegation of violation of Regulation 11(1) of the Takeover Regulations is not p....
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.... in issuing warrants to its promoters, to the exclusion of other shareholders, was in violation of the Takeover Regulations, DIP Guidelines, Listing Agreements and PFUTP Regulations. 21. Aggrieved by the decision of SEBI, the respondent preferred an appeal (Appeal no.86/2011) before SAT on the ground that SEBI has failed to investigate and examine the violations of the DIP Guidelines, Takeover Regulations, PFUTP Regulations and the provisions of the SEBI Act. A preliminary objection was raised by the appellant with regard to the maintainability of the said appeal. SAT decided the preliminary objection in favour of the appellant and by an order dated 25.04.2012, dismissed the said appeal on the ground that the order dated 31.03.2011 does not adversely affect the rights of the respondent and is not an appealable order within the meaning of Section 15T of the SEBI Act. SAT also observed that the respondent was not remediless as respondent was pursuing its remedies before the CLB. 22. Aggrieved by the findings arrived at by SAT, the respondent preferred an appeal before the Supreme Court, inter alia, on the ground that SAT erred in ignoring that SEBI's function under the SEBI....
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....d towards entitling them to acquire equity shares of the Respondent No. 1 Company on a preferential basis, to the exclusion of the rest of the shareholders, and on a favourable price, which is prejudicial to the interests of the Respondent No. 1 Company, clearly reveals the mala fide and dishonest intentions of the Respondent Nos. 2 to 9 and 11 to 15 and their efforts to unjustly enrich themselves by causing grave and irreparable harm and injury to the interests of the Respondent No. 1 Company and its shareholders, including the Petitioner herein. The above mentioned acts of the Respondents are patently illegal and in violation of the rights of the Petitioner and amount to a serious breach of their fiduciary duties towards the Respondent No. 1 Company. xxxx xxxx xxxx xxxx xxxx 38. It is therefore clear that the acts of Respondents 2 to 9 are inspired by and are in furtherance of their ulterior motives to increase their shareholding in the Respondent No. 1 Company as well as to enrich themselves at the cost of the Respondent No. 1 Company and its shareholders including the Petitioner herein. Factors such as the proposal to issue Warrants on a preferential basis only to the Pro....
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....CM Hyundai were in a position to repay the outstanding dues that the two Company, it was incumbent on the Respondent No. 1 Company to collect the amounts as repayment of dues and thereby satisfy the Respondent No. 1 Company's requirement for funds rather than opt for a preferential allotment of warrants which in turn involved additional time and expenditure. (iii) The Explanatory Statement to the Notice dated 18.10.2007 to shareholders did not contain material particulars as required by S. 173 of the Companies Act. The above facts were never disclosed to the shareholders and therefore the Notice was defective and the allotment merits to be set aside on this ground alone. (iv) The Respondents have undertaken this exercise solely for their own benefit and have stated a false and misleading purpose in the Notice to shareholders dated 18.10.2007. (v) The Respondents have gone against the requirement of S. 81 of the Companies Act which provides that the Company must ordinarily raise money only by way of a Rights Issue. (vi) The Respondents have kept the shareholders in the dark with respect to the revisions in the price at which the shares are to be allotted. (vii) Th....
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....s also been entirely written off. (xvii) The facts placed on record show that in fact Versa Trading Ltd. is a subsidiary of the Respondent No. 1 Company. The Boards of Directors of the two companies are working in tandem. Versa Trading Ltd. was in the knowledge of information held by the Board of Directors of the Respondent no. 1 prior to the time when it was made public. (xviii) The facts also show that the Respondent No. 1 Company has waived off dues of Rs. 75 crores owed from DCM Hyundai Ltd. in addition to (a) reducing its equity shareholding by Rs. 10.01.crores, (b) converting loans of an amount of Rs. 13.71 crores into equity and convertible preference shares, and (c) having outstanding loan amount of Rs. 800 lakh, and at the same time allowed it to invest Rs. 20 crores in Versa Trading Ltd. In fact, during the FY ending 31.03.2008, the Respondent No. 1 loaned further sums to DCM Hyundai and in total was to receive outstanding sums of Rs. 1391.94 lakhs (increased from Rs. 800 lakhs as at 31.03.2007). The facts show that DCM Hyundai is also a subsidiary of the Respondent No. 1 Company. (xix) The facts show that over Rs. 100 crores has been written off/ waived by the Resp....
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....pter VI of the Act contains provisions for prevention of Oppression and Mismanagement. Whilst Section 397 of the Act relates to Oppression, Section 398 relates to Mismanagement. The provisions of said Sections are relevant and are quoted below:- "397. Application to Tribunal for relief in cases of oppression.-- (1) Any member of a company who complain that the affairs of the company are being conducted in a manner prejudicial to public interest or in a manner oppressive to any member or members (including any one or more of themselves) may apply to the Tribunal for an order under this section, provided such members have a right so to apply in virtue of section 399. (2) If, on any application under sub-section (1), the Tribunal is of opinion-- (a) 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 (b) that to wind up the company would unfairly prejudice such member or members, but 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, the Tribunal may, with a view to bringing ....
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....r:- "18. .... As has already been indicated, it is not enough to show that there is just and equitable cause for winding up the company, though that must be shown as preliminary to the application of Section 397. It must further be shown that the conduct of the majority shareholders was oppressive to the minority as members and this requires that events have to be considered not in isolation but as a part of a consecutive story. There must be continuous acts on the part of the majority shareholders, continuing up to the date of petition, showing that the affairs of the company were being conducted in a manner oppressive to some part of the members. The conduct must be burdensome, harsh and wrongful and mere lack of confidence between the majority shareholders and the minority shareholders would not be enough unless the lack of confidence springs from oppression of a minority by a majority in the management of the company's affairs, and such oppression must involve at least an element of lack of probity or fair dealing to a member in the matter of his proprietary rights as a shareholder. It is in the light of these principles that we have to consider the facts in this case wi....
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....ntention that respondent no.1 is pursuing "parallel proceedings" must be considered. The expression "Parallel Proceedings" has not been defined. However, the expression has been used in a sense to describe a set of proceedings that a litigant is proscribed to pursue simultaneously. Such set of proceedings either includes proceedings that are identical in effect or a set of proceedings that are inherently inconsistent so as a pursuit of one, negates the other. In the former case, the proceedings must be similar at least in three respects: 1) the parties, 2) the issues involved and 3) the relief claimed. In cases where proceedings are similar in these material aspects, it is obvious that the result of one would render the others meaningless. In such circumstances permitting parallel proceedings would amount to permitting meaningless litigation. The expression "Parallel proceedings" must mean a set of proceedings which are pursued for identical reliefs, are based on the same cause of action and the subject matter of the disputes is similar. However, if the issues involved and the relief available in the proceedings are not substantially identical, the proceedings cannot be considered ....
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....remedies is applicable only where there are two or more coexistent remedies available to the litigant at the time of the election which are repugnant and inconsistent. This rule is upon the theory that, of several inconsistent remedies, the pursuit of one necessarily involves or implies the negation of the others. The rule of irrevocable election does not apply where the remedies are concurrent or cumulative merely, or where they are for the enforcement of different and distinct rights or the redress of different and distinct wrongs." 35. The litigant must elect its position in law and is permitted to only pursue those proceedings, which are available to him in conformity with the position elected by him. In that sense inconsistency of remedies is essentially repugnancy in the set of facts and averments required for seeking the different remedies. If a set of facts, which are relied upon in aid of one remedy is repugnant to the set of facts necessary to seek the other remedy, then pursuing the two proceedings would be impermissible. As a matter of illustration, a landlord may take a position that the premises leased by him are covered under rent control legislation and he would ....
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....eedings before the CLB an abuse of process of law. I am unable to appreciate this contention. Apparently, respondent no.1 is aggrieved on account of the manner in which the affairs of the appellant company are conducted, whether his grievance is legitimate or not is a separate question. However, indisputably, respondent no. 1 has the right to agitate his grievances with regard to the alleged mismanagement and oppression in the conduct of the affairs of the company, before the CLB. The fact that he has filed a complaint before SEBI would not in any manner render the proceedings before the CLB as an abuse of process of law. At this stage, it is also relevant to note that the appellant had contended before SEBI and the SAT that the appropriate forum for respondent no.1 to ventilate its grievance was the CLB. The appellant had also persuaded SEBI and the SAT to refrain from considering certain contentions on the ground that the subject disputes were pending before the CLB. The appellant had also persuaded the High Court to reject the plaint filed by respondent no.1 inter alia on the ground that the CLB would have the jurisdiction to consider the disputes. By an order dated 25.05.2010 p....
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....held that the perception of the learned Single Judge was substantially correct though not entirely so. The appeal from the decision of the learned Single Judge to strike down the plaint was partly allowed and the Supreme Court clarified that to the extent that the suit raised an alternative independent plea, it would not be considered as re-litigation of the same issue or an abuse of process of law. The said decision of the Supreme Court also clearly indicates that the endeavour of the Courts have always been to ensure that litigants are not deprived from availing remedies that are available for the wrong alleged by them. 39. It was contended by the appellant that the respondent no.1 was also barred from pursuing the petition before the CLB on the principle of 'issue estoppel'. It, prima facie, appears that apart from the conclusion that the SEBI Act and the statutory regulations and guidelines framed thereunder have not been violated, it is doubtful whether any other observations made by SEBI would preclude respondent no.1 from ventilating his grievance before the CLB. The order dated 25.04.2012 passed by SAT seems to imply that respondent no.1 is at liberty to agitate ....