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2013 (12) TMI 1691
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....ncluding but not limited to the reliefs prayed for herein. (b) To appoint a fit and proper person as the administrator of Respondent No. 1 to manage and control the affairs of Respondent No. 1. (c) To appoint a fit and proper person as an independent Director on the Board of Respondent No. 1. (d) To pass an order of permanent injunction thereby restraining the Respondents from alienating, encumbering, selling, disposing of, and/ or creating any third party rights of any nature whatsoever in respect of the undertaking of Respondent No. 1 at Plot No. 2, Nandesari Industrial Estate, P.O. Nandesari, District Vadodara, Gujarat 391 340. (e) To pass an order of injunction thereby restraining the Respondents from increasing the remuneration of Respondent Nos. 3 and 4, in the manner as proposed by the notice dated 3rd September, 2013. 2. In order to crystallize the points in dispute for determination, it may be useful to refer relevant facts as set out in the petition are herein as under:- 2.1 That the Rl Company was incorporated on or about is 21/05/1960. The father of the Petitioner was the Chairman of Rl Company. However, during the lifetime of t....
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....ff the land at Haribhatki in Vadodara and cleared the dues of the IDBI, which was the only significant secured lender. 2.5 That, for the last 5 years, Rl Company was consistently making profits and the sale turnover of Rl Company increased from approximately Rs. 31 crore in the year ended 31/03/2008 to Rs. 53 crore in the year ended 31/03/2013. Rl Company was thus making substantial profits from the year ended 31/03/2009 to the year ended 31/03/2012. 2.6 That, in the year ended 31/03/2013, Rl Company claims to have incurred a loss of Rs. 43.55 lakh. A comparison of the figures of Profits/ losses from 2009 to 2013 would show that the year ended 31/03/2013 is the first and only year in which Rl Company has incurred any loss from its operations. A significant portion of the loss incurred by Rl Company is in fact on account of depreciation and amortization of expenses and the Rl Company has admittedly not incurred any cash loss even in the year ended 31/03/2013. In fact, the carried forward losses in the books or the Rl Company have been reduced from approximately Rs. 16 crore in the year ended 31/03/2008 to approximately Rs. 5.44 crore in the year ended 31/03/2013. 2.7 That o....
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....reholders of the Rl Company. 2.12 That, the reasons purported to be given by R3 in the notice dated 3/09/2013 and the explanatory statement thereto, are contrary to the facts on record and the annual accounts of Rl Company, which had been prepared under the supervision and guidance of the R3 to R8. In fact, it is clear from the Annual Accounts for the year ended 31/03/2013, as well as the earlier years that there is no reason for disposal of the Company's undertaking. 2.13 That, the acts of oppression and mismanagement of Rl Company are so serious that they would justify the making of and an order of winding up against Rl Company. The Petitioner states that to wind up Rl Company would unfairly prejudice the interest of the members of Rl Company and hence this Petition. 3. Respondent No.l appeared and filed its reply. The Rl Company has stated that the Petitioner has wrongfully sought to approach this Board based on 25% of his shareholding in R2 which in turn holds 44% on Rl Company. It is further stated that the share of Mr. Bhuva has been transferred to the name of the Petitioner. 3.1 At the outset, the Rl in its reply has raised a preliminary objection thereby cha....
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....d their respective reply(s) in which they have reiterated the same pleas taken by the Rl Company in its reply referred to above. 5. The Petitioner has filed rejoinder to the reply reiterating the pleas taken in the original petition. 6. I have heard both the sides at length and perused the record. Both the Parties have filed their Written Submission. I have also examined the same and gone through the various decisions referred to and relied upon by the ld. Counsel appearing for the respective Parties. 7. At the outset, it is pertinent to mention that in the course of hearing in respect of the interim reliefs, on the suggestion of the Board, the ld. Counsel appearing for both the sides agreed that the petition may be decided finally on the basis of the pleadings and the material available on record. The ld. Counsel appearing for the Respondents submitted that the other Respondent Nos. 2 to 4 and 9 to 12 who have filed their short reply hereby adopt the reply filed on behalf of Rl Company for the said purpose. I, therefore, with the consent of the parties, proceed to decide the C.P on merits. 8. Before, I proceed to consider the scope of the arguments advanced on behalf o....
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....niam submitted that the decision had been taken by the shareholders holding approx. 97% shareholding in the company. It is submitted that in view of the doctrine of corporate governance, it is for the Board of Directors of the Company and /or its shareholders to take such decision on majority basis and such decision being commercial cannot be questioned in the Court of law in a petition under Section 397/398 of the Act. According to the ld. Counsel, the Hon'ble High Courts time and again has held that as a general rule, the Court would not interfere with the internal management of the company. He added that it is for the Board of Directors to decide the manner in which the affairs of the Company are to be carried on. According to the ld. Counsel, the Courts determine question of law and adjudicate the question of facts and not the question related to any of its business decisions. The ld. Counsel urged that even a commercial misjudgment does not amount to oppression of mismanagement. According to him, the Board of Directors may commit error but every error cannot be a ground for action as the Court is not a correctional body for all the errors. He therefore submitted that a sha....
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....mpany to utilise the sale proceeds for reducing the financial liabilities of the company. The board of directors has therefore authority to take appropriate decision for the purpose of sale when acceptable proposal is received.... 33. The board of directors as a working organ of the company are entrusted with the management of the company by the general body for taking various decisions so as to safeguard the interests of the shareholders, creditors etc. The board of directors could effect sale of the immovable property only with the sanction of the general body under Section 293(1) of the Companies Act and sanction was accorded by the general body in its meeting on December 7, 2001. The general body of the company examined the decision taken by the board of directors and felt in the facts and circumstances the only feasible option was to sell some of the immovable properties and utilise the sale proceeds for meeting the financial obligations particularly to the banks and financial institutions. Once necessary sanction has been obtained from the general body and a business decision has been taken by the board of directors, an ordinary shareholder has no power to question t....
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....e to sell the assets at under price and thereby making wrongful gain to themselves and wrongful loss to the company which by all means amounts to a prejudicial act not only to the company but to its minor shareholders as well and therefore, disputed resolutions is bad in law and liable to be set aside. In support of his submission, the ld. Counsel appearing for the Petitioner has relied upon a decision of the Hon'ble High Court in the case of Firestone Tyre & Rubber Co. v. Synthetics & Chemicals Ltd. [1971] 41 Comp. Cas. 377 (Bom.) wherein the Hon'ble Bombay High Court has held as follows: - "The object underlying section 173(2) is that the shareholders may have before them all facts which are material to enable them to form a judgment on the business before them. Any fact which would influence them in making up their minds, one way or the other, would be a material fact under section 173(2) and had to be set out in the explanatory statement to the notice of the meeting. The views expressed by the Company Law Board would have certainly played a part, and perhaps an important part, in enabling the company's shareholders to make up their minds whether to....
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....ement is fair and gives, as far as possible, all information reasonably necessary for the shareholders to understand and appraise the proposal, such a statement would satisfy the requirements of Section 173(2) of the Act, provided it does not conceal or suppress or withhold relevant information or facts and does not make any false suggestion. As long as the explanatory statement contains sufficient, true and correct information to enable the general body to intelligently appraise the proposal, the explanatory statement should be considered to be fulfilling the requirements of Section 173(2) of the Act. In the present case, the proposal was for the sale of a unit of the company. Therefore, in the case, the material farts could comprise the reasons for the sale, whether sale would affect the interest of the company, to whom the sale is being effected, the consideration for the sale, how and by whom the consideration was assessed, whether the directors have any interest in the sale, whether all statutory clearances have been obtained etc These material facts, we feel would enable the shareholders to decide on the issue.' 17. The ld. Counsel for the Petitioner has relied further....
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....holders so that the material facts concerning the item of business to be transacted at the meeting are before the shareholders and they also know what is the nature of the concern or interest of the management in such item of business, the idea being that the shareholders may not be duped by the management and may not be persuaded to act in the manner desired by the management unless they have formed their own judgment on the question after being placed in full possession of all material facts and apprised of the interest of the management in any particular action being taken. Having regard to the whole purpose and scope of the provision enacted in section 173, I am of the opinion that it is mandatory and not directory and that any disobedience to its requirements must lead to nullification of the action taken. If, therefore, there was any contravention of the provisions of section 173, the meeting of the company passed held on 5 September, 1961, would be invalid and so also would be the resolution passed at that meeting be invalid." It is relevant to note that the learned Judge has followed the law laid down by the single Judge of this court in the earlier mentioned judgm....
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....er. In our opinion, the trial court has committed an error of law in not considering the fact that every shareholder of the company has a right to participate in the meeting of general body and in the aforesaid meeting, the shareholder has a right to object about the decision of the Board of Directors of the company in regard to disposal of the property of the company because in accordance with Section 293 of the Companies Act without approval of the General Body, the substantial portion of the property of the Company could not be disposed of by the Board of Directors. The statutory provisions of Section 293 of the Companies Act override the provisions of Memorandum of Association of the company. 13. Hon'ble Supreme Court in the case of R.C. Cooper v. Union of India AIR 1970 SC 564 has held as under in regard to jurisdiction of the court to grant relief if the rights of the individual civil holders are impaired:- "Jurisdiction of the Court to grant relief cannot be denied, when by State action the rights of the individual shareholder are impaired, if that action impairs the rights of the Company as well. The test in determining whether the shareholder's ri....
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....on either in writing nor raised any oral objection in the course of the meeting. Giving the background of the previous litigations filed by the Petitioner against the Respondent Group, the ld. Counsel tried to show the misconduct and malafides on the part of the Petitioner and argued that the sole motive of the Petitioner to file the instant petition is to create hurdles in the smooth functioning of the Rl Company. 21. It was further argued by the ld. Counsel that non-compliance of the provisions contained in Section 173 (2) does not constitute an act of oppression as alleged by the Petitioner. According to him, it is merely an irregularity and is curable by passing another resolution. It was therefore contended that this single alleged act of oppression which has no more continuing effect cannot be held as an act of oppression within the meaning of 397 of the Act. In support of contention the ld. Counsel has referred the decisions in the case of Maharani Rajya Lakshmi v. Indian Motor Co. AIR 1962 Cal 127 (DB), where it has been held as under :- "18. Now the second answer is on the law on this branch of the appellant's argument Section 173 of the Companies Act conce....
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....rmed decision. According to him, the requirement of stating material facts is to enable the shareholders to take an informed decision of the agenda of the meeting and thereafter decide whether to attend the meeting or not. It is submitted that intention of the legislature is that the Explanatory Statement must include material facts, but not detailed particulars as held in the case of East India Commercial Co. (P.) Ltd. v. Raymon Engineering Workers Ltd. AIR 1966 Cat 232 (DB), it has been held as under:- "In my opinion, all the material facts necessary for the purpose of the proposed special resolution has been given in the Explanatory Statement. It is not the function of an Explanatory Statement to travel beyond the proposed resolution, Material facts have to be given, but not detailed particulars. So far as the purely technical part of the collaboration is concerned that is a matter which is within the province of the Directors of the Company, It is the Directors who have been entrusted by the shareholders to carry on the administration of the Company. Therefore, the technical details of the Company's work and administration, including the question as to where certai....
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....sed increase. A shareholder, after reading this information, can certainly form an intelligent judgment and make up his mind one way or the other. He may either choose to attend the meeting or leave it to the good sense of the majority of the voters. As the plaint does not show it what the explanatory statement is defective, there is no reason to further examine the so-called defect pointed out by Mr. Thakkar. Mr. Nariman's distinction between known and unknown reasons is also very far from convincing. One acts only for known reasons. Acting without reasons is a leap in the dark and, therefore, there is never any occasion for giving unknown reasons, But, I must make it clear that under section 173(2) material facts will not necessarily include the reasons. It will all depend upon the nature of the subject-matter which constitutes the special business. Sometimes the facts stated are sufficiently eloquent and there is no need to justify the proposed action by giving reasons. In the absence of sufficient pleadings, the plaintiffs in the present case cannot challenge the statements contained in the notice and the explanatory statement on the ground that the particulars are insuffic....
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.... point of this decision is that in construing the provisions like Section 173(2) too rigid an interpretation should not be made as to "hamper the conduct of business". Section 173(2) of the Companies Act means a notice and explanatory statement which should give notice of the essence and substance of the transaction intended to be passed at the meeting. It is a business document. It must be used in a commonsense business way. So long as that standard is satisfied this Court should not be astute to find legal and technical points to defeat the notice and the explanatory statement. Even applying the test laid down by Kekewich, J., that "the man I am protecting is not the dissentient but the absent shareholder" as applied in the decision of Biswanath. Prasad Khaitan v. New Central Jute Mills Co. Ltd. [1960] 64 CWN 970), the instant case does not come within the meaning of that test." 27. In addition to the above, it was also argued by the ld. Counsel for the Respondent that a single shareholder cannot question the decision of the Board of Directors approved by the Shareholders in the General Meeting and for this reason also the petition is liable to be dismissed as held in the case....
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....l Co. Ltd. Continuation Sheet. FXPLANATORY STATEMENT (Pursuant to Section 173(2) of the Companies Act, 1956) Item 4: Company has a plan at Vadodara for manufacturing variety of chemicals. Due to increase in costs, competition from unorganized sector and cheap imports the operations at the plant are incurring continuous losses. For these reasons, in spite of all-out efforts of the management, the operations at the plan cannot reach break-even, recurrence of losses on continuous basis is adversely affecting finances, due to which Company is facing shortage of funds even for investing in its pr....
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....es & other income 5494.60 Profit/Loss before Tax (72.92) Profit/ Loss after Tax (43.55) Share capital 200 Net worth (140.49) Capital Employed 363.40 4. Export performance and foreign exchange earned during the year 2012-13:- Rs. 1806.54 lakh 5. Foreign investment and collaboration if any:- Not Applicable Information about the Appointee:-a Name P.I. Bhuva H.L Bhuva Background Qualification Bachelor of Engineering from (Chemical) from Kinki University, Japan Bachelor of Commerce University of Mumbai Past Remuneration Rs. 4,08,900 per annum net Rs. 4,54,734 per annum net Job Profile Overall in-charge of production & running of the company & sales of raw materials & policy decisions Overall in-charge of purchase & sales of raw materials & finished products & finance Proposed Remuneration Rs. 18 lakh gross Rs. 18 lakh gross Other information:- (a) Reasons for loss, if any or inadequate profits:- Due to increase in overall costs, competition from unorganized sector and cheap imports. (b) Steps taken or proposed to be taken for the improvement:- Disposal of l....
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....for the following reasons: "i. The said judgment is based on the factual matrix of that case and has no applicability in the facts of the instant case. ii. The said judgment was delivered in a suit and not in a proceeding under sections 397 and 398 of the Companies Act, 1956. iii. In the said case, the Solicitor Director was interested in the impugned resolution. iv. In the said case, the Company Law Board had directed that certain provisions of the sole selling agency agreement when it is to be renewed which were not in the interests of the company to be borne in mind. This view of the CLB was not placed before the general body, finding no mention in the explanatory statement. It is on this ground that the Court held that the Explanatory Statement did not contain material particulars. v. The said judgment is also based on the interpretation of section 314 of the Companies Act, 1956." 34. Similarly, the distinctive facts pointed out by the ld. Counsel in the case of B.A Mendonca (supra) are also without any substance. The conclusion therefore is that the impugned notice purportedly issued by the Respondents under section 173 (2) of th....
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....re enabling resolution which only authorizes a person at least to initiate negotiation with the intending buyers. Needless to say that a Company being juristic person itself can't enter into any negotiations. The Company always acts through its Board of Directors and therefore, the authorizing Board of Directors by impugned resolution cannot be said a oppressive act. 38. Further, as mentioned hereinabove, the arguments advanced by Mr. Subramaniam the ld, Sr. Counsel appearing on behalf of the Rl Company that as soon as the buyer is identified and other terms and condition of the sale are finalized, the Rl Company will hold another meeting and will furnish all the details to the Petitioner which in my view is enough to protect the interest of the Petitioner. In my considered view, this brings the acts complained of to complete end. However, I may further add here that to ensure that the proposed sale of the subject undertaking of Rl Company goes smoothly to the satisfaction of the Petitioner, the Respondents may allow him a reasonable time to bring a better buyer on the same terms and conditions. In case, he succeeds to bring a better buyer before holding the EOGM, the Compan....
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....s appropriate orders thereafter." b. Kamal Kumar Dutta v. Ruby General Hospital Ltd. [2006] 70 SCL 222, wherein it has been held as under :- "30. As per Section 397, any person who is eligible to apply under Section 399, can apply before the CLB 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 and that to wind up the company would unfairly prejudice such member or members, but that otherwise the facts would justify the making of a windingup order on the ground that it was just and equitable that the company should be wound up. If the Tribunal is satisfied that there exists a situation where the business of the company is being conducted in a manner prejudicial to the interest or in a manner oppressive to any member or members and that winding up of 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, it may with a view to bringing to an end the matters complained of, make such order as it deems fit. Therefo....