Company Law Board
Priyanka Overseas Private Limited And ... vs Pasupati Fabrics Limited And Ors. on 24 August, 2005
Equivalent citations: [2006]132COMPCAS55(CLB), (2006)2COMPLJ389(CLB), [2006]71SCL239(CLB)
ORDER
S. Balasubramanian, Chairman
1. M/S Pasupati Fabrics Limited (the company) is a listed company incorporated in 1991 with an authorized capital of Rs. 90 crores. The company has set up a 100% EOU composite textile mill in Kosikalan, UP. Due to various reasons, the net worth of the company stood eroded as on 31st March, 2002 and as such it made a reference to BIFR under Section 15(1) of SICA. In November, 2002, the BIFR declared the company as sick and appointed IDBI as the operating agency. The BIFR sanctioned a scheme on 2.4.2004. In terms of this scheme, the company was to reduce its equity shares by 35% and in its place to issue 0.0001% redeemable preference shares redeemable at par in two years in 8 equal quarterly installments commencing from April, 2015. The scheme also provided for issue of equity shares worth Rs. 23 crores to IDBI as a part of overall settlement of its dues from the company. The promoters were given the option to buyback these shares in three installments commencing from the 5th year stipulating therein that IDBI would have the right to sell the shares in the market with the promoters having first right of refusal.
2. In pursuant to the scheme sanctioned by BIFR, in an AGM held on 29th November, 2004, resolutions were passed for restructuring the authorized capital of the company, reduction of equity shares by 35%, issue of 0.0001% redeemable preference shares and also for preferential allotment of equity shares worth Rs. 23 crores at par to IDBI. In a Board Meeting held on 1.1.2005, equity shares worth Rs. 23 crores were allotted to IDBI.
3. The petitioners collectively holding 49.38% shares in the company have filed this petition alleging various acts of oppression and mismanagement in the affairs of the company and have sought for various reliefs more particularly seeking for cancellation of shares worth Rs. 23 crores allotted to IDBI, the 8th respondent or in the alternative direct the 8th respondent to sell proportionate shares to the petitioners. While the company has filed its reply, respondents 3,4,5,and 6 have filed affidavits adopting the reply of the company. 7th respondent did not file any reply nor was represented in the hearings. 8th respondent, instead of filing a reply, filed an application seeking for a decision at the first instance on the maintainability of the petition. Since the maintainability could not be decided without going into the merits of the case, it was decided that both the maintainability and the merits would be argued together and a common order would be passed.
4. Shri Sundaram appearing for the petitioners submitted: The 5th petitioner who is controlling petitioners 1 to 4, promoted the company and they collectively have been the largest shareholders right from the beginning holding 49.38% shares with an investment of over Rs 29 crores. The 2nd respondent is the brother of the 5th petitioner and with a view to ensure that the 2" respondent was gainfully employed, the 5th petitioner made the 2nd respondent as the MD of the company. The 2nd respondent holds only 0.74% shares in the company with an investment of Rs 52 lakhs and the companies under his control viz respondents 3 to 6 hold collectively=====. The shareholding position would indicate that but for the support of the petitioners' group, the 2nd respondent could have never been appointed as the MD of the company. In spite of the faith and confidence that the 5th petitioner had reposed on the 2nd respondent, he has been mismanaging the affairs of the company including siphoning of funds due to which the company had become sick and had to be referred to BIFR.. In addition, the 2nd respondent had fraudulently represented before the BIFR that he was lone the promoter of the company notwithstanding the fact that the petitioners have also been named as promoters in the, Prospectus issued at the time of publication. In addition, persons from the petitioners' group are also signatories to the Memorandum. Further, the petitioner companies had even given non disposal of shares undertaking to various financial institutions from which the company has availed financial assistance. If the petitioners were not promoters, there was no need for them to invest huge funds in the shares of the company and also give undertakings for loans availed by the company. Even otherwise, the petitioners fall within the definition of promoters in terms of Regulation 2(h) of SEBI (Substantial Acquisition of Shares and take over) Regulations 1997. However, by misrepresenting himself as the promoter and getting the approval of BIFR to buyback Rs. 23 crores worth of shares from IDBI, the 2nd respondent would become a majority shareholder after such purchase. In other words, the 2nd respondent, holding less that 1% shares in the company, by misrepresenting himself as the lone promoter, is trying to create a new majority and it is a settled law that creation of a new majority is an act of oppression against the existing majority shareholders.
5. The learned counsel further submitted: The company has acted ultra vires its Memorandum. In terms of the scheme of BIFR, share capital reduction to the extent of 35% was to take place first where after shares worth Rs. 23 crores were to be allotted to IDBI. In the original scheme, BIFR had stipulated that the Company Law Board would consider exempting the company from complying with the provisions of Section 81(1), 100,101, 102 & 103 of the Companies Act, 1956. In other words, the company should have applied for and obtained exemption from complying with these provisions which relate to reduction of share capital. However, without doing so, the company allotted Rs. 23 crores worth of shares on 1.1.2005, with the result, its total issued share capital on that day exceeded the authorized capital. In terms of BIFR scheme, general body's approval was obtained to increase the authorized capital to Rs. 100 crores comprising of equity shares of Rs. 75 crores and preference shares of Rs. 25 crores. As against Rs. 75 crores of authorized equity capital, by allotment of the impugned shares before reduction of share capital, the issued capital came to be Rs. 93.69 crores. Therefore, it is abundantly clear that equity shares issued and paid up of Rs. 93.69 crores was much in excess of the authorised equity capital of s 75 crores. . Such allotment of shares beyond the authorized capital being ultra vires is null and void and as such has to be set aside. However, without the knowledge of the shareholders and particularly the petitioners, the company applied to BIFR by a letter dated 21.5.2004 seeking for exempting the company from the applicability of the provisions of the Companies Act and SEBI Guidelines. IDBI also, by a letter dated 18.1.2005 i.e. after the allotment of shares by the company to IDBI, made a similar prayer before BIFR. While doing so, IDBI did not disclose the fact that shares had already been allotted to it. By an order dated 28.1.2005, BIFR exempted the company from the applicability of the provisions of the Companies Act. Therefore, any share issued before the date of reduction has to be declared as null and void as such issue of shares would be beyond the authorized capital of the company.
6. Shri Sundaram further submitted: The petitioners are not seeking any order from this Bench either in modification or in contravention of the scheme given by BIFR as the petitioners are aware that this Board has no jurisdiction to do so. The petitioners only desire strict compliance with the scheme framed by BIFR. The petitioners' grievance is that the company has not acted in accordance with the scheme of BIFR and by not following the scheme of BIFR, the company has acted ultra vires. Whenever a company acts ultra vires, the same can be remedied only through this Board and that is why the petitioners have approached this Board. The conduct of IDBI would indicate that it is siding with the 2nd respondent notwithstanding the fact that the petitioners are the real promoters of the company. Even though, the petitioners approached IDBI by a letter dated 31st March, 2005 pointing out that they were the promoters of the company and that they were willing to purchase the impugned shares immediately, yet, IDBI did not respond to the said offer. The very fact that the counsel for IDBI is opposing the petition would indicate that IDBI is siding with the 2nd respondent. The concern of the petitioners is that the company should strictly abide by the scheme sanctioned by BIFR and after cancellation of the shares as sought for by the petitioners, let the company act in accordance with the BIFR scheme.
7. The learned counsel further submitted: It is crystal clear from the Prospectus, Memorandum and Undertakings given by the petitioner companies that the petitioners' group is also a promoter of the company In The Prospectus, it has been specifically mentioned " PFL has been promoted by Shri Vijay Kumar Jain along with his two brothers, Shri Ramesh Kumar Jain and Mukesh Kumar Jain and their associates'' . A plain and literal reading of the above would indicate that the associates are also promoters of the company. In me Prospectus, the names of the petitioner companies together with their financial highlights have been indicated clearly evidencing that they are also promoters of the company. At the time when the resolutions were passed in the AGM on 29.11.2004, the petitioners supported the resolution regarding preferential allotment to IDBI only because it was indicated in the Explanatory Statement that "promoters" would buy back the shares from IDBI. The petitioners had believed that they were also part of the promoters. Only later on, the petitioners came to know that the 2nd respondent had styled himself as the only promoter of the company before the BIFR. Even though, the petitioners are major shareholders in the company, the 2nd respondent never discussed with the 5th petitioner, any of the proposals made before the BIFR and with a view to gain control of the company, he misled the BIFR that he alone was the promoter of the company notwithstanding the fact he has less than 1% shares in the company. He cleverly showed "real promoters" as "promoters' associates" and thus fraudulently got the right to purchase the shares allotted to IDBI. The very act of denying the fact of the petitioners being promoters itself is an act of grave oppression against them. By doing so, the 2nd respondent, has completely breached the trust and confidence that the petitioners had in him.
8. The learned counsel further submitted that the 2nd respondent is guilty of siphoning of funds of the company. Since the company was new, it was entitled to free export quotas from the Government. The 2nd respondent sold all these free quotas to third parties and thereafter purchased quotas from his own benami companies at huge cost. Annexure D to the petition are some of the invoices indicating purchase of quotas from two benami companies - Bhabya Trading and Bhabya Exports. Payment against these invoices had been approved by the 2nd respondent himself. The address of both the companies and the phone numbers are the same. Further, the 2nd respondent is selling prime products of the company as defective products in the Indian market and is siphoning of huge money. Likewise, he is also buying chemicals at exorbitant prices compared to the market rates only from one particular source. Even though, no construction work is being carried on by the company, yet, the 2nd respondent reportedly purchased 4000 mt. tonnes of steel in 2002-2004. The petitioners apprehend that no supply of steel was made and the 2nd respondent has siphoned of this money. This is the main reason why the company became sick. In his reply, the 2nd respondent has not denied any of these allegation relating to siphoning of funds of the company.
9. Shri Sawhney, Sr. Advocate appearing for the company submitted: The primary issue for consideration is whether when a company is before BIFR, a petition under Sections 397/398 of the Act can be maintained. From the Statement of Objects of SICA, it could be seen that various provisions in that Act have been enacted to prevent dissipation of the wealth of the Nation by providing means to ensure revival of sick companies. That is why, under the various provisions of the Act, it has been specifically provided that the provisions of this Act will have overriding effect on all other Acts. A perusal of the provisions of various sections would indicate that the BIFR has the power to decide on the composition of the management, to direct amalgamation, reduction of share capital, issue of shares etc. Section 18(2) of SICA clothes BIFR with extensive powers with a view to ensure revival of a sick company. In addition, Section 22 of that Act clearly provides for suspension of other legal proceedings, contracts etc. connected with the sick companies and it is specifically provided that no proceeding for winding up of a sick company which is under the purview of BIFR can be initiated. When SICA prohibits any proceeding relating to winding up, a petition under Sections 397/398 cannot be maintained. Once a company is registered with the BIFR as a sick company, all rights of shareholders under the Companies Act stand suspended and as such no shareholder can file a petition under Sections 397/398 of the Act. Further, in the petition there is no averment in terms of Section 397(2)(b) of the Act that the facts of the case would justify the winding up of the company on just and equitable grounds but such winding up would not be in the interest of the members. In the petition, there are allegations of siphoning of funds by the 2nd respondent. All these allegations pertain to the period before the company was registered with BIFR and therefore in terms of Section 24 of SICA, only BTFR has the power to deal with these allegations. Section 26 of SICA bars jurisdiction of any court in respect of any matter which either BIFR or AAIFR is empowered to determine. Further in terms of Section 32 of SICA, the provisions of that Act and also the Scheme made there under shall have effect notwithstanding anything inconsistent therewith contained in any other law or the Memorandum or Articles of the company. A combined reading of all these provisions would indicate that this Board has no jurisdiction to deal with this petition and this petition is not maintainable and as such has to be dismissed.
10. Dealing with the merits of the case, the learned counsel submitted: The contention of the petitioners that they are the promoters is wrong. Reference to BIFR was specifically indicated in the Annual Report for 2000-2001 and as such the petitioners were fully aware that the company had become a sick company. The draft scheme was placed before the Board when the nominee of the petitioners viz. Ms Poonam was present in the meeting and in that draft report ''promoters" and "associates " had been separately mentioned. The same draft was also published seeking for objections but the petitioners never objected nor they approached the BIFR to include them as promoters. Having accepted the scheme, the petitioners cannot now protest. The petitioners having known about the scheme and having kept quite, have thus, abandoned their rights. Further, whether the petitioners are promoters or not has to be decided by BIFR and as a matter of fact their application before BIFR to include them as promoters had been dismissed by BIFR by an order dated 7.7.2005. This issue having reached a finality cannot be reopened and the CLB has no jurisdiction to decide this issue.
11. As far as allotment of shares to IDBI is concerned, the learned counsel submitted: On the basis of the resolutions passed by the general body in accordance with the scheme approved by BIFR, shares were allotted to IDBI on 1.1.2005. Even though, originally, BIFR had directed compliance with the provisions of Section 100 etc, later on. BIFR had exempted the company by an order dated 28.1.2005 from obtaining any approval. Even though, the petitioners contend that by allotment of the impugned shares, the authorized capital was exceeded, they have not shown how the same is prejudicial to their interest. As a matter of fact, the nominee of the petitioners viz. Miss Poonam Manshani was the Chairman of the Board Meeting on 1.1. 2005 when the shares were allotted to IDBI. Further, the petitioners have not filed any appeal against the scheme proposing to allot shares to IDBI and as such IDBI had to be allotted the shares and as such any lapse in the allotment should be considered only as a technical lapse and the company should be facilitated to rectify the same. Even assuming that there had been a procedure lapse or infirmity in the allotment of shares, this Board should try to cure the same and cannot declare the allotment as invalid. The petitioners have taken a stand that without complying with the provisions of Section 103(2), the shares could not have been allotted. The provisions of Section 103(2) of the Act would apply only in cases where the confirmation of the High Court has to be obtained. In the present case, since BIFR had exempted the company from obtaining any approval, the provisions of Section 103(2) of the Act will not apply. Even otherwise, the company has filed necessary documents with the ROC on 2.3.2005. Further, if there is any irregularity in implementing the scheme, the petitioners should approach only the BIFR and not this Board. The motive for seeking for cancellation of the shares is only to get the 2nd respondent removed as the managing director of the company to which the petitioners have already given a notice for convening an EOGM. It is on record that in terms of the scheme, the 2nd respondent has undertaken a number of personal obligations like giving persona] guarantees etc. while the petitioners have no such obligations. Further, the petitioners fully supported the appointment of the 2nd respondent as the MD in the AGM held on 29th November; 2004 and within a year, they cannot seek for his removal. In terms of SICA, the composition of the Board of a sick company is within the jurisdiction of BIFR and as such the petitioners cannot remove the 2nd respondent without the approval of BIFR. If he were to be removed, the whole rehabilitation scheme would be frustrated.
12. Summing up his arguments, Shri Sawhney submitted: The petition is a malafide petition and the petitioners are guilty of forum shopping. Having failed in their attempt before the BIFR and during the pendency of their appeal before AAIFR, they have chosen to file the present petition. In addition, one of the associate companies of the petitioners has filed a suit in Delhi High Court seeking for a declaration that allotment of the impugned shares was null and void, ineffective and inoperative. Earlier, they had also filed a petition before the Northern Region Bench of the CLB under Section 111A for rectification of the Register of Members by deleting the name of IDBI in respect of the impugned shares. Further, all the resolutions -reduction of share capital, increase in the authorized capital, allotment of shares to IDBI, appointment of 2nd respondent as MD etc. were all proposed by the nominees of the petitioners in the AGM and the petitioners are now challenging the same only with an oblique motive. Therefore, this petition should be dismissed.
13. Shri Haksar, Sr. Advocate appearing for the 2nd respondent while adopting the arguments of Shri Sawhney cited the following decisions: Mohan Lal Ganpatram v. Sayaji Juiblee Cotton & Jute Mills Co. Ltd. to the proposition that even if there is illegality, unless it is established that the same is oppressive or prejudicial to the interest of the company, the same cannot be agitated in a petition under Sections 397/398 of the Act. (Para 49). CIT v. Om parkash Mittal 2005 2 SCC 75J: In this case, the Supreme Court has held that if an order from the Income Tax Settlement Commission had been obtained on fraud or misrepresentation, any aggrieved party should approach that Commission and that the Commission has the power to review its earlier order. Likewise, in the present case, if the contention of the petitioners that the scheme of BIFR was obtained on misrepresentaion, then the petitioners should approach BIFR which they had actually done and BIFR has already rejected their application. State of West Bengal v. Hemant Kumar Bhattacharjee : A wrong decision by a court having jurisdiction is as much binding between the parties as a right one and may be superceded only by appeals to higher tribunals or other procedure like review which the law provides. State of Kerala v. M.K. Kunhikannan Nambiar : Even a void order or decision rendered between parties cannot be said to be non existent and such an order will be effective inter-partes until it is successfully avoided or challenged in a higher forum.
14. Shri U.K. Choudhary, Sr. Advocate appearing for IDBI (8th respondent) submitted: The petitioners cannot be considered to be promoters. The definition of promoters as per Take Over Code cannot be applied except in case of takeovers. In a scheme approved by BIFR, the promoters have specific obligations which cannot be imposed on non promoters or associates. Therefore, the definition for the purpose of BIFR proceedings is restrictive and cannot be compared with the definition in the Take Over Code. Right from the beginning, the 2nd respondent and his son have been shown as promoter directors while the nominee of the petitioners viz. Ms. Poonam Manshani has been shown only as an independent director, The petitioners are only investors and they were never either termed as promoters nor treated as such. In terms of Section 15 of SICA, the Board of Directors is bound to make a reference to BIFR in Form 'A'. In Form 'A', the petitioners have been shown only as associates and at the time of approving the reference to BIFR, Ms. Poonam was present in that meeting and never raised any objection. In the BIFR scheme, the same information given in Form 'A' in respect of shareholding has been repeated and as such it is nothing but factual information. In the Prospectus, the companies controlled by the 2nd respondent are separately shown as promoters' companies and the petitioner companies are only shown as associate companies. It is an after thought that the petitioners are claiming themselves to be promoters. The petitioners were always aware that they had not been considered as promoters but only as associates. Their claim before BIFR that they should also be considered as promoters has been rejected. As far as IDBI is concerned, it is bound by the scheme given by BIFR and as such it is bound to sell the shares in terms of the scheme only to the promoter as specified in the scheme. If it were to offer the shares to the petitioners, IDBI would be committing contempt of the order of BIFR and would be liable for action in terms of Section 33 of SICA. Therefore, it cannot be alleged that IDBI is colluding with the 2nd respondent. As far as allotment of shares to IDBI is concerned, there is no illegality or irregularity. In the AGM held on 29.11.2004, Resolution Item No. 8- related to reduction of equity shares by 35% and issue of 0.0001% redeemable preference shares in its stead. Item No. 9 related to issue of equity shares to IDBI. When the resolution was passed for reduction of equity shares, it took effect immediately on 29.11.2004 and shares were allotted to IDBI only on 1.1.2005. The contention of the petitioner that the reduction takes effect only after registration with ROC in terms of Section 103(2) of the Act is not correct. Since BIFR has exempted the company from complying with the provisions of Companies Act, the scheme overrides the provisions of this Section and the exemption related back to the date of resolution. Therefore, there is no illegality in the allotment of shares to IDBI. In Vasanta Mills Ltd. v. IRBI 83 CC 216 Mad, the High Court has held that once a scheme is framed by BIFR, it cannot be challenged in a collateral proceeding as Section 26 of SICA bars the jurisdiction of any court in respect of any action taken or to be taken in pursuance of any power conferred by or under the Act. Likewise, in Union of India v. Krishna Mills Ltd. 81 CC 50 Rajasthan, it has been held that in terms of Section 32 of SICA, the provisions of this Act rules and scheme made there under would prevail not withstanding anything inconsistent with the provisions of any other law. Since the company has acted in terms of the scheme, no other law is applicable.
15. Shri Ganda appearing for respondents 3 to 6 submitted: In terms of the order passed by BIFR, the effective date of the scheme is 31.5.2003 and therefore all steps that are taken in terms of the scheme are only procedural. Therefore, the order of the BIFR for reduction of share capital is final and no further action is necessary. Registration under Section 103(2) of the Act with the ROC is not required. Even if it is required, it relates back to the date of resolution of reduction of share capital which was passed prior to the date of allotment of shares to IDBI and therefore there is no illegality in the allotment. As far as the contention of the petitioners that they are also promoters is concerned, it cannot be accepted. Promoter under SICA is different from that under the SEBI Take Over Code. In the prospectus, the term "Promoters" does not include "associates". Right from the beginning, only the respondents have been shown as promoters. It is only the respondents who have given personal guarantees as indicated in the Annual Report for the year 2000-2001 (Page 15) and none ot the petitioners has done so. In the Annual Report for 2001-2002, at Page 18, the shareholdings of the promoters and the associates have been separately given. In 2002-2003, at Page 9, only directors from the respondents' group have been shown as promoter directors while Ms. Poonam Manchani, the nominee of the petitioners is shown only as a non executive director. Therefore, it is evident that at no time, the petitioners were considered to be a pan of the promoters' group.
16. In rejoinder, Shri Sundaram submitted: Two nomenclature have been used - promoters and associates. The question is whether the term -"promoters" includes "associates". All along, the petitioners believed that they were also promoters and that is the reason why the petitioners supported all the resolutions in the AGM held on 29.11.2004 including the one relating to the appointment of the 2nd respondent as the managing director. The nominee of the petitioners also consented to all the resolutions passed in connection with the scheme only with the bonafide belief that the petitioners were a part of promoters. Only in Feb. 2005, the petitioners came to know that IDBI, in collusion with the respondents, declined to treat the petitioners as promoters. For good reasons, the petitioners believed that they were also promoters. For instance, in the lst para of the draft scheme published under Section 18 of SICA, it is mentioned that the company was promoted by Shri Vijay Kumar Jain & Associates. This would indicate that 'Associates" are also promoters: In the Board resolution dated 9th Dec. 1991, it is stated that the preliminary expenses had been incurred by Ms. Poonam Manchani, promoter (Annexure 'B'). Ms Poonam is a part of the petitioners group and she has been representing that group in the Board. In the Prospectus, at page 12, it is stated that the promoters' will hold 52.10% of the post issue capital. But for taking into account the shares held by the petitioners, the percentage of promoters' holding would not be 52.10%. Therefore, whether the petitioners are promoters or not is a question of fact. The petitioners have invested more that Rs. 29 crores in the share capital of the company and to contend that they are not part of promoters is a grave act of oppression. But for their being promoters, there was no need for them to give non disposal undertaking. Both the 2nd respondent and IDBI were always aware that the petitioners were also promoters of the company as is evident from various documents. In his letter dated 25.8.2001 to IDBI, the 2nd respondent informed IDBI that he had discussed with the petitioners and other promoters holding more than 55% shares regarding rehabilitation scheme and suggesting that 20% the term loans could be converted into equity shares which could be purchased by the promoters after 7 years. He had not mentioned that he would alone purchase the shares. Again in its letter to IDBI dated 18.7.2002, the company had given the shareholding position as on 31.3.2001 in which the petitioner companies have been shown under the heading "promoters". Again, in the list of shareholding furnished 10 IDBI as on 31st March, 2003, the petitioner companies have been shown under the head "promoters" and promoters' holding had been shown as 79.56%. In the same. note, it also indicated "promoters defined in Regulation 2(h) of SEBI(Substantial Acquisition of Shares & Takeover) Regulation, 1997. The promoters include associates and relatives also ". Thus, it is quite clear that all along the respondents have treated the petitioners as promoters and the petitioners also considered themselves as the promoters and no difference was made between "promoters" and "associates". Shri Chaudhary submitted that the share holding details given in the scheme is a repetition of what had been indicated in Form A filed on 5.9.2001. This contention is wrong as in the Form A, the collective holding of the promoters and associates had been shown at 79.42%. The respondents have relied on the draft rehabilitation scheme published under Section 18 of SIC A to state that the petitioners had the knowledge that they were shown only as associates. Actually, in the draft, it is indicated "Pasupati Fabrics Limited incorporated on November, 27, 1991, was promoted by Shri Vijay Kumar Jain and associates ". From this, it is amply clear that associates also are promoters and therefore there was no occasion for the petitioners to protest against the scheme. Further, in the draft, it is also indicated that the promoters had to cover the gap in the public issue and it is a fact that only the petitioners, being the promoters, covered this gap. Even assuming that the contention of the respondents that the petitioners, being only associates, cannot be considered to be promoters, the fact is that Shri Ramesh Kumar Jain has been shown as a promoter director in the BIFR scheme and therefore, he should have the right to purchase 50% of the shares from IDBI. However, when he wrote to IDBI by a letter dated 14.3.2005 seeking for buying back 50% shares, IDBI declined. Similarly, when the 5th petitioner wrote to IDBI on 5th April, 2005, proposing a one time settlement including purchase of the shares, it did not react to the proposal. This would clearly establish collusion between IDBI and the 2nd respondent. IDBI, being a financial institution should he interested in getting its money at the earliest rather than siding with a particular individual. The contention of the respondents that once BIFR has dismissed the application ot the petitioners, this Board cannot reopen the issue is baseless. BIFR has not dismissed the application on merits but dismissed the same on the ground of delay and latches. If IDBI has to choose from the promoters, it should have sought clarification from BIFR instead of colluding with the 2nd respondent in denying the right of the petitioners to purchase the shares back from IDBI.
17. The learned counsel further submitted: As far as allotment of shares to IDBI is concerned, the petitioners are questioning the same only on the basis that, the shares having been allotted prior to reduction of share capital, the company has acted ultra vires its. memorandum as the issued capital exceeded the authorized capital. The scheme specifically stipulates reduction of share capital before allotment of shares to IDBI. The original scheme envisaged approval from CLB (which should be High Court) for reduction of share capital and only on 28.1.2005, BIFR exempted the company from getting any approval. In other words, shares could not have been allotted before this date. Therefore, allotment made on 1.1.2005 resulted in the issued capital of the company being more than the authorized capital. Further, the order of BIFR dated 28.1.2005 was not placed before the shareholders as the earlier approval given by the shareholders was conditional. If this order had been placed before the general meeting, the petitioners would have approached the BIFR. The contention of the respondents that the order of BIFR dated 28.1.1005 related back to the date of resolution of reduction of capital is not correct. In a Board meeting on 22.3.2005, the Board had decided 11.4.2005 as the record date for reduction of share capital and therefore, the reduction of share capital would be effective only from 11.4.2005. However, in law, the resolution approving reduction of share capital becomes effective only when the same is registered with ROC in terms of Section 103(2) of the Act. The BIFR order does not exempt the application of the provisions of this section. Issue of shares beyond the authorized capital is not a procedural irregularity but is ipso facto void ab-initio. Because of the void act, the petitioners seek cancellation of the allotment and not with a view to facilitate removal of the 2nd respondent as a director. The right of shareholders to remove a director of a company registered with the BIFR, is not in any manner curtailed. The 2nd respondent is not a director either nominated or appointed by BIFR in terms of Section 18(2)(c) of SICA. He was only appointed by the shareholders and as such they have the right to remove him. The very fact that he came up for election would indicate that he is also liable for removal by the share holders. Companies Act and SICA are both special Acts having independent jurisdiction and only in case of inconsistency, the provisions of SICA will prevail. There is nothing in SICA barring removal of a director of a sick company. Further, the petition also contains allegations of financial mismanagement by the 2nd respondent the adjudication of which which is solely withhin the jurisdiction of this Board.
18. Shri Haksar, in reply to the arguments of Shri Sundaram submitted: If the petitioners claim to be promoters, there was no need for them to seek clarification from BIFR. Further, if it is IDBI which is refusing to recognize them as promoters, then they cannot hold the 2nd respondent guilty of oppression. The 2nd respondent never excluded the petitioners as promoters. When BIFR had declined to declare the petitioners as promoters, the question of this issue being decided by this Board does not arise. As far as allotment of shares is concerned, the petitioners have not indicated how they are prejudicially affected by the alleged illegal allotment. As a matter of fact, it is under the Chairmanship of Ms. Poonam that the Board allotted shares to IDBI and as such having been a party to the allotment, the petitioners cannot allege illegality. In so far as applicability of Section 103 (2) of the Act is concerned, the registration is only a ministerial act and the ROC has no jurisdiction either to delay or deny registration. He acts only as a mere rubber stamp and as such non registration is of no consequence. Further, when the BIFR has given the exemption, the effect of the order related back to the date of passing of the resolution.
19. Shri Ganda submitted: The resolution relating to reduction of share capital took effect on the date of passing of the resolution just like in the case of declaration of dividend in which case the liability to pay the dividend crystallizes on the day the general body approves the dividend and the record date is fixed only to determine the eligible shareholders. Like wise, in the present case, the record date of 11.4.2005 has been fixed only for the purpose of issue of preference shares in place of the reduced equity shares. Therefore to contend that the share capital was reduced only on 11.4.2005 is incorrect. Further, the orders of BIFR had been filed with the registrar on 3.32005 and the same had been registered on 21.4.2005. As already submitted the reduction of share capital having been effected on the date of passing of the resolution on 29.11.2004 became effective on that date and therefore, the allotment made only on 1.1.2005 was within the authorized capital of the company.
20. Shri Nawhney submitted. When the BIFR itself has differentiated between promoters and associates and has recognized the 2nd respondent as the promoter with the responsibility to revive the company, the question of treating the petitioners as promoters does not arise. As far as reduction of share capital is concerned, the provisions of Section 103(2) of the Act would arise only if the reduction had been effected is in terms of Section 100 of the Act. The reduction ordered by BIFR in the scheme is under Section 18(2) of the Act and therefore the provisions of Section 103(2) of the Act are not applicable. In the petition, the petitioners have sought for, on the one hand, cancellation of the allotment and on the other hand, they have sought for directions to IDBI to sell the shares to the petitioners, If the shares had been illegally allotted, as alleged by the petitioners, they cannot seek tor sale of the shares by IDBI to them. As a matter of fact, this Board has no powers to direct IDBI to sell the shares to the petitioners as IDBI is bound by the BIFR directions. One of the associates of the petitioners viz. Bishwanath Industries Limited have filed a suit seeking for a declaration that the allotment to IDBI is void. This being the case, the petitioners cannot seek similar relief before this Board. It is a settled law as propounded by Supreme Court in Chetak Construction Ltd v. Om Prakash 1998 SC 1855 that forum shopping must be crushed with a heavy hand. If the petitioners are aggrieved by the directions given by the BIFR that the shares should be sold back by IDBI only to the 2nd respondent, they have to move the AAIFR on appeal and cannot agitate that issue before this Board.
21. Shri Rishi Agarwala, Advocate for the petitioners pointed out that it is wrong to contend that the resolution relating to reduction of share capital became ettective on 29.11.2004. In terms of the resolution, the consent of the company was accorded to the Board for reduction of equity shares by 35% and therefore the earliest effective date of reduction of the share capital could be only when the Board passed a resolution. Such a Board Meeting was held only on 19.3.2005. He further pointed out that even though IDBI did not react to the proposal given by the 5th petitioner on 27.5.2005 for a one time setlement, IDBI responded by a letter dated 7th July, 2005 to the proposal given by the 2nd respondent for a one time settlement. This itself would indicate that IDBI is colluding with the 2nd respondent in denying the right of the petitioners to acquire at least the proportionate shares from IDBI.
22. I have considered the pleadings and arguments of the counsel. Mainly there are three allegations/grievances of the petitioners in the petition. One is that by representing himself as the lone promoter of the company, the 2nd respondent is trying to gain majority in the company which would result in the petitioners being reduced to a minority, the second is that by allotting shares to IDBI before the reduction of share capital became effective, the company has acted ultra vires its memorandum and the third is that the 2nd respondent is guilty of financial mismanagement and siphoning of funds of the company.
23. Before dealing with these allegations, it is necessary, in view of various objections raised by the respondents on the maintainability of the petition, to consider the same. The objections are: once a company is registered with BIFR and a scheme has been framed by it, share holders' rights stand suspended and as such this petition cannot be filed by the petitioners; when Section 22 of SICA bars filing of a petition for winding up of a sick company, no petition under Section 397 can be entertained: there is no averment in the petition in terms of Section 397(2)(b): granting of the prayers in the petition would amount to interference with the scheme sanctioned by the BIFR, which is expressly barred by Section 32 of SICA: the petitioners are guilty of forum shopping since a member of the petitioners group has filed a civil suit seeking for cancellation of allotment of shares to IDBI, that 5th petitioner has filed an appeal before the AAIFR against the order of BIFR dated 28.1.2005 and earlier they had filed a petitionunder Section 111A of the Act seeking for removal of the name of IDBI from the register of members.
24. Shri Sawhney referring to various provisions of SICA, contended that once a company is registered with BIFR, the rights of shareholders under the Companies Act stand suspended. However, later on, he conceded that such rights are suspended only in so far as the matters covered by the provisions of SICA or the scheme sanctioned by BIFR. The overriding effect of Section 32(1) of SICA has been summed up by the apex court in its judgment in para 21 of Mewar Sugar Mills Ltd. case (supra) "The non-obstente clause contained in Sub section (1) of Section 32 of SICA does not give the SICA a blanket overriding effect on all other laws; the overriding effect is given to the provisions of SICA, rules or schemes made hereunder only to the extent of inconsistency therewith contained any other law excepting a few exceptions enumerated therein ". The same proposition has been laid down in Krishana Mills case cited by Shri Chaudhary. Neither in SICA nor in the rules or in the scheme, there is anything inconsistent with the provisions of Sections 397/398 of the Act to contend that once a company is registered with BIFR, shareholders cannot initiate a proceedings under Sections 397/398 of the Act. His second contention was that when SICA prohibits, in terms of Section 22, initiation of proceedings for winding up of a company registered with BIFR, a petition under Sections 397/398 of the Act cannot stand. It is to be noted that provisions of Section 397 being alternative to winding up, has been enacted with the view to ensure survival of a company even if it deserves to be wound up on just and equitable grounds just like the provisions of SICA which also ensure survival of a sick company through a revival scheme. In this connection, I may refer to a recent judgment of Bombay High Court in National Organic Chemical Industries Ltd. v. Nocil Employees Union 2005 67 CLA 145 wherein that court considered whether in respect of a sick company registered with BIFR, the High Court could sanction a scheme under Sections 391/394 of the Act. The Court has observed " The provisions of Sections 75 1o 19 of the SICA provide a scheme where a company which has become sick can register itself with BIFR which is vested with the power under the provisions of the said Act which shall after making enquiry may provide for package for rehabilitation of the company and/or make the company viable to that the business of the company can continue. The provisions of Section 391 to 394 of the Act also similarly provide for rearrangement of the company's business by way of granting amalgamation, demerger and/or by sanctioning of the scheme of compromise which also has the same purpose and object to revive and/or make the company more viable and efficient. The provisions of the Act though provide for different methods of doing so, they are not inconsistent with each others.... In my view since there is no inconsistency between the provisions of Section 32 of the SICA and the provisions of Sections 391 and 394 of the Act, there is no question of the provisions of Section 32 of the SICA being made applicable to the present case". This observation is squarely applicable even to a proceeding under Sections 397/398. Thus, I do not find any legal impediment in filing of a petition under Sections 397/398 of the Act in respect of a sick company registered with BIFR.
25. Shri Sawhney also contended that there is no averment in the petition in terms of Section 397(2)(b) of the Act which is mandatory. Section 397(2) reads "If on any application under Sub section (1), the Company Law Board is of the 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 Company Law Board with a view to bringing to an end the matters complained of, make such order as it thinks fit". A reading of Sub section (2) would indicate that it is for this Board to form a opinion in terms of Sub section 2(b) and 1 do not find any requirement in that Section that there should be an averment in the petition in terms of Sub section 2(b) Even if there were to be an averment to that effect, it is for this Board to form an opinion in terms of Sub section 2(b). Therefore, the absence of such an averment in the petition is not fatal to the petition.
26. Another objection relates to the petitioners prosecuting parallel proceedings and as such they are guilty of forum shopping. The learned counsel for the respondents cited the judgment of Supreme Court in Chetak Industries Ltd case wherein the Court has held forum shopping should be crushed with heavy hand. One would be guilty of forum shopping if on the same cause of action and for the same reliefs, he goes from one forum to another forum either one after the other or simultaneously. For alleging forum shopping, the respondents have referred to the appeal filed by the petitioners before AAIFR against the order dated 28.1.2005, their earlier petition under Section 111A before this Board and also the civil suit filed by M/s Bishwanath Industries Ltd. The matter in appeal before AAIFR. being against the order of BIFR dated 28.1.2005, is not an issue agitated in the present proceeding, filed in terms of SICA. The petition under Section 111A which was limited to the impugned shares, was withdrawn, as undertaken, during the pendency of the present proceeding which is not restricted only to the impugned shares. As far as the suit is concerned, it is also against the order of the BIFR dated 28.1.2005 and seeking for quashing that order and consequently also seeking for cancellation of the shares allotted to IDBI. However, after the conclusion of the hearing, the 5th petitioner filed an affidavit on 16th August, enclosing therewith an application made by M/s Bishwanath Industries Ltd. before Delhi High Court seeking for Withdrawal of the said suit. The company filed an application CA 188/2005 on 18.8.05 questioning the propriety of the petitioners in filing the affidavit on various grounds including the contents of the affidavit. This application was heard on 19.8.2005 when Shri Ganda. Advocate appearing for the company pointed out that the contents of the affidavit are full of contradictions, misleading and mischievous. In the affidavit, it is stated that the certificate issued' by the statutory auditors of the company that M/S Bishwanath Industries Ltd. is under the control of the 5th petitioner is incorrect; if so, the petitioners had filed the same fraudulently before BIFR and this Board to take advantage. The affidavit further says that Biswanth Industries is supporting the petitioners as it has a huge stake in the company and therefore it is against the respondents who is trying to misappropriate the company that is why it filed a suit before Delhi High Court independently for challenging the order dated 28.1.2005 of the BIFR. The affidavit also says that in view of the respondents' stand that the suit is without jurisdiction, Biswanath Industries has withdrawn the suit. According to the learned counsel, the petitioners have no locus to make such averments when M/S Bishwanath Industries Ltd, is the 8th respondent and which has never bothered to represent itself before this Board. Further, in the application for withdrawal of the suit, the proceedings before this Board has not been referred to. According to him. since this Board exercises equitable jurisdiction, the misleading statements made by the petitioners would disentitle them to seek, any relief and as such this petition itself should be dismissed and proceedings under Section 406 of the Act should be initiated against them as they have used the Chartered Accountant's Certificate showing Bishwanath Industries as a part of petitioners' group in the BIFR proceedings while denying the same in the present proceedings. As far as this application is concerned, it is on record that in the rejoinder filed by the petitioners, there are averments relating to Biswanath Industries Ltd more or less similar to that of in the affidavit dated 16.8.2005. In paragraph 13 of the rejoinder it is stated " The petitioners have no concern with the civil suit filed before that High Court since the plaintiff in the said civil suit is not at all connected to the petitioners or is promoted by Mr Raj Kumar Jain. The plaintiff in the suit is an independent company having no relation to the petitioners. The petitioner submits that the very fact that an independent company has also challenged the. issuance of the IDBI shows the illegality of the shares being issued to IDBF". In view of this averment in the rejoinder, the respondent cannot allege that the petitioners have introduced new facts after the conclusion of the hearing. At the time of hearing itself the counsel for the petitioners pointed out that by mistake the Chartered Accountant had added the name of Biswanath Industries as a part of petitioners group. The purpose of the affidavit appears to bring to the notice of this Board that the civil suit has been withdrawn. Further, no matter relating to Biswanth Industries is an issue to be decided in the present proceeding on which this affidavit would have a bearing. Even otherwise, as I have already mentioned, even though in the suit, the plaintiff had sought for reliefs in relation to the shares allotted to IDBI, the challenge in that suit mainly relates to the order of BIFR dated 28.1.2005. Thus, even assuming that the affidavit filed on 16.8.2005 informing this Board of the withdrawal of the suit has to be ignored as having been filed after the conclusion of the hearing, yet, the grounds on which the present petition has been filed are completely different from those in the suit. Thus, the contention of the respondents that the petitioners are pursuing parallel proceedings and are guilty of forum shopping does not survive. Accordingly, I find that none of the contentions of the respondents on the maintainability of the petition can be sustained and as such I hold that this petition is maintainable.
27. Having dealt with the maintainability of the petition, I shall now deal with the merits of the case. The main complaint of the petitioners is that by denying the petitioners as a pun of promoters, the 2nd respondent is trying to gain majority in the company by purchasing the shares allotted to IDBI and such an act is oppressive to the petitioners who are presently the majority shareholders. The counsel for the respondents have contended that in view of the dismissal of the application filed by the petitioners before BIFR seeking to consider them as promoters, this Board has no jurisdiction to decide this issue. As rightly pointed out by Shri Sundaram, BIFR has not dismissed the application on merits but dismissed the application on the ground of delay and latches. Further, since the allegation of the petitioners is that by denying the fact of the petitioners also being promoters, the 2nd respondent is trying to gain control over majority of the shares, my examination will be restricted only to find out whether petitioners have established this allegation.
28. While according to the petitioners, they are also promoters of the company, according to the respondents, the petitioners were never treated as promoters but only as associates. Whether the term "associates" includes the petitioners also as promoters i,e joint promoters or to be treated only as non promoter associates is purely a question of fact to be asceitamed from documents, conduct of and understanding between the parties. The petitioners' claim that they are also promoters is based on the following: The 5th petitioner who is control of the first 4 petitioners, is the brother of the 2nd respondent. Ms Poonam Manshani is part of the petitioners' group. She was a signatory to the Memorandum and was also shown as one of the first directors of the company in the Articles. In the first Board meeting held on 9.12.1991, it is recorded that the amount of preliminary expenses incurred by Ms Poonam Manshani, promoter, of Rs 26,820 out of Rs 45,000 in connection with the formation of the company was approved. This would indicate that major portion of the preliminary expenses had been incurred by the petitioners. In the prospectus in connection with the public issue in 1996, at page 18 under the heading "Promoters, their background and group companies", it was stated "PFL has been promoted by Shri Vijay Kumar Jain along with his two brothers, Shri Ramesh Kumar Jain and Mukesh Kumar Jain and their associates". A plain reading of this statement would undoubtedly indicate that associates are also a part of promoters. Thus, the company had made a the public statement that the petitioners were also part of promoters. It was also indicated in the prospectus that post public issue, the promoters would hold 52.10% shares in the company. Without taking into account the shares held by the petitioners, the percentage of shares held by the 2nd respondent/his group as the only promoters would not be 52.1%. In terms of the prospectus, the promoters were to invest Rs 38 49 crores as equity share capital and according to the petitioners, they had contributed over Rs 29 crores. In 1994, the lst 2nd and 3rd petitioner companies not only gave an undertaking to IDBI not to dispose of the shares held by them in the company but also gave an undertaking to meet the short fall or overrun in the cost of the project. Only a promoter would give such an undertaking to meet the overrun in the cost of the project. These facts would indicate without any shadow of doubt that the petitioners are also part of the promoters of the company. Further, in the correspondence with IDBI, the company has shown the petitioners as part of promoters. In his letter dated 25.8.2001 to IDBI, the 2nd respondent informed IDBI that he had discussed with the petitioners and other promoters holding more than 55% shares regarding rehabilitation scheme and suggesting that 20% the term loans could be converted into equity shares which could be purchased by the promoters after 7 years. Again in its letter to IDBI dated 18.7.2002, the company had given the shareholding position as on 31.3.2001 in which the petitioner companies have been shown under the heading "promoters". Again, in the list of shareholding furnished to IDBI as on 31st March, 2003, the petitioner companies have been shown under the head "promoters" and promoters' holding had been shown as 79.56%, which obviously included the holding of the petitioners. In the form A filed before BIFR by the company, the percentage of shares held by the Promoters & Associates is collectively shown as 79.42% and not separately as contended by Shri Choudhary. In the draft scheme published in terms of Section 18 of SICA, it is indicated "Pasupati Fabrics Limited incorporated on November, 27, 1991, was promoted by Shri Vijay Kumar Jain and Associates" and this would indicate that the company had been promoted jointly by the promoters and the associates.
29. The respondents' contention that the petitioners are not promoters but are only associates is based on the following: In the prospectus, while the companies of the promoters have been shown separately, the petitioner companies have been shown separately only as associate companies of the promoters. The draft scheme showing the shareholdings of promoters and associates shown separately was approved in a Board Meeting attended by Ms. Poonam. Right from the beginning, the 2nd respondent and his son have been shown as promoter directors while Ms. Poonam was shown only as an independent director. In Form 'A', against the name of promoters, only the name of the 2nd respondent has been furnished. Even if the scheme sanctioned by BIFR, only the 2nd respondent and his son have been shown to represent the promoters' group and against promoters' shareholding, only 0.74% has been indicated. In the Annual Report for 2002 2003 and 2001-2004, the shareholdings of promoters and associates have been shown separately. Thus, the petitioners were always aware and accepted the position that they were only associates of promoters and not joint promoters. Having accepted this position, they are barred from claiming that they are also part of promoters. Further, it is the 2nd respondent who has given personal guarantees as promoter of the company. Even BIFR has declined to declare the petitioners as promoters.
30. As 1 have already observed, whether a person could be considered to be a promoter or not depends on the facts of a case. In the present case, the disputes between the parties have arisen in interpreting the term "promoters" with reference to the BIFR scheme wherein it is stipulated "promoters to buyback the shares from their own sources" of the shares worth Rs. 23 crores to be allotted to IDBI in terms of the scheme. While the petitioners represented by the 5th petitioner claim that they are also entitled to buyback the shares as promoters, the 2nd respondent contends that he alone has the right to buyback the shares as the promoter. While this Board has no jurisdiction to determine this issue, as it is within the sole jurisdiction of BIFR, I am mentioning this only because this issue appears to be the sole cause of disputes between the parties who have been smoothly carrying on together for nearly 15 years. I find overwhelming documentary evidence to show that the petitioners have always been treated as a part of promoters i.e. as joint promoters even though in some places they are shown as "associates" and in some places they are shown as "promoters". The various documents referred to by Shri Sundaram wherein the 2nd respondent/the company had been, till the disputes started, showing the petitioners as a part of promoter. The documents reflecting the same have been referred to in paragraph 28 ante and 1 am in full agreement with interpretations made by Shri Sundaram in respect of each of such documents. The only substantive stand taken by the respondents is that the petitioners were always aware that they were only associates and having accepted this position, they cannot now claim to be promoters. On this, Shri Sundaram pointed out that all along the petitioners considered themselves as a part of promoters and that is why they supported all the resolutions including appointment of the 2nd respondent as the managing director and they came to know that they were not being treated as promoters when IDBI in collusion will) 2nd respodent declined to accept the proposal given by the petitioners to buyback the shares. I find substance in the stand of Shri Sundaram. I find from the statement of shareholding of promoters given to IDBI as on 31st March. 2001. the promoters were shown to hold 79.42% shares in the company. Out of this, first three petitioners collectively held 52.65% shares while the 2nd respondent together with respondents 5 to 6 held 23.59% shares. 2.82% shares were held by the 8th respondent, M/S Bishwanath Industries Limited which according to the respondents belong to the petitioners' group while according to petitioners, it is an independent company. Either way, it is obvious that the petitioners hold more than double of the shares held by the respondents. It is inconceivable, therefore, in the presence of overwhelming documents and with such a large percentage of shareholding held by the petitioners that they cannot be considered as a part of promoters. Further, even though, initially the counsel representing the respondents vehemently argued that their clients have never recognized the petitioners as promoters, in the reply to rejoinder to the arguments of Shri Sundaram, Shri Haksar appearing for the 2nd respondent submitted that the 2nd respondent never excluded the petitioners as promoters and if it was IDBI which was refusing to recognize the petitioners as promoters, they cannot hold the 2nd respondent responsible for oppression. Therefore, on an overall appreciation of the facts, I hold that the petitioners, even though are styled as associates, are also part of promoters of the company and the IDBI was fully aware of the same. By denying the fact of the petitioners being a part of promoters, the 2nd respondent could ultimately gain majority shares in the company by buyback of the shares held by IDBI. Creation of a new majority is always considered to be a grave act of oppression and the petitioners, who hold the largest percentage of shares in the company, have established act of oppression against the 2nd respondent. This company has been promoted by two groups of shareholders and therefore I am of the opinion, any attempt to create a new majority by one group would justify the winding up of the company on just and equitable grounds and since the company is in the process, of revival, such winding up would not be in the interest of the company or the shareholders nor is permissible in view the company under the purview of BIFR. The main relief, on the ground that they are also promoters, which I have held to be so, that the petitioners have sought, that IDBI should be directed to sell proportionate shares to the petitioners. As I have already observed, it is not within the jurisdiction of this Board, not withstanding its finding that the petitioners are also promoters of the company, to direct IDBI to sell proportionate shares to the petitioners as it is within the exclusive jurisdiction of BIFR to decide the same and Section 26 of SICA expressly bars the jurisdiction of any other judicial forum in interfering with a scheme framed by BIFR. On this point Shri Chaudhary also referred to the case of Vasantha Mills case. In view of the legal position, other than taking note of, I cannot adjudicate on the allegations of the petitioners that IDBI had colluded with the 2nd respondent in misrepresenting before BIFR about the promoters or that it is colluding with the 2nd respondent in refusing to sell the shares to the petitioners or that IDBI is proposing to enter into a one time settlement with the 2nd respondent in exclusion of the petitioners. However,
31. As far as allotment of shares to IDBI on 1.1.2005 is concerned, the allegation of the petitioners is that by this allotment, the issued equity capital has exceeded the authorized equity capital and as such the company has acted ultra vires its memorandum. Ultra vires means an act which, though may not be illegal, is beyond the company's powers as circumscribed by its memorandum. It is a settled law that no company can act beyond the scope of the morandum and any departure will be invalid and void ab-initio and cannot be validated even if all the members of the company give heir assent. The authorized capital as prescribed in the memorandum of a company sets the limit of capital available for issue and the issued capital can never exceed the authorized capital. If it does so, it would amount to ultra vires the memorandum. Even though the counsel for the respondents contended that there was no irregularity in the allotment of shares, yet, they also contended that unless and until the petitioners establish as to how the alleged irregular allotment is prejudicial to their interest, they cannot challenge the same. It is a settled law that any act by,a company which ultra vires the memorandum, the same can be challenged by any shareholder and the law docs not mandate that prejudice to such member should be established. Shri Haksar referred to the Gujarat High Court Judgment in Mohan Lal Ganpatrai (supra) to the proposition that even if there is illegality, unless it is established that the same is oppressive or prejudicial to the interest of the company, the same cannot be agitated under Sections 397/398 of the Act. In that case, the issue related to passing of a resolution in a board meeting allegedly in contravention of the provisions of Section 299 and 300 of the Act and that there was no quorum present in that board meeting: Therefore, the issue in that judgment did not relate to an 'ultra vires act. The counsel for the respondents also contended that even if there is some irregularity in the allotment, this Board should attempt at curing the irregularity. Any act which ultra vires its memorandum is not a procedural irregularity but null and void ab-initio and is incapable of being cured even if all the shareholders desire to rectify the same. Therefore, the only issue for consideration is whether by the the allotment of the impugned shares to IDBI, the issued capital exceeded the authorized equity share capital of the company on the day of allotment of shares to IDBI.
32. In terms of the scheme sanctioned by BIFR that shareholders were to agree to write down the present equity shareholding in the company and to accept redeemable preference shares, in the AGM held on 29th November, 2004, three resolutions were passed in relation to share capital. Resolution No. 7 related to alteration of the authorized capital. The authorized capital was raised from Rs. 90 crores (all of equity shares) to Rs. 100 crores consisting of equity shares of Rs. 75 crores and redeemable preference shares of Rs. 25 crores. By Resolution No. 8. the consent of the company was accorded to the Board for reduction of equity shares by 35% of the existing equity capital and consequent upon such reduction, for creation of 24743030 number of redeemable preference shares. By Resolution No. 9, the consent of the company was accorded to the Board to create, issue and allot equity shares worth Rs. 23 crores as fully paid up to IDBI after writing down of existing equity capital. In view of the wording in the resolution No 7 "the authorized share capital of the company be and is hereby increased and reclassified" and "consequently, the existing Clause V of the Memorandum of Association and Clause 5 of the Articles of Association of the company relating to share capital be and hereby altered", the authorized equity capital of the company became Rs. 75 crores as on 29.11.2004 itself. In other words the alteration of the authorized capital became effective on the same day of passing the said resolution i.e on 29.11.2005. Shares worth Rs. 23 crores were allotted to IDBI on 1.1.2005. There is a controversy as to when the reduction of share capital in terms of resolution No. 8 became effective as this date would determine whether the issued equity capital exceeded the authorized equity capital on 1.1.2005. If the reduction of share capital had not become effective before the allotment of shares to IDBI, the total issued equity capital as on 1.1.2005 would be Rs. 96.8 crores, thus, exceeding the authorized equity capital of Rs. 75 crores. If reduction had become effective before allotment of shares to IDBI, then the issued equity shares Rs. 70.97 crores would be well within the authorized equity capital of Rs. 75 crores. Therefore, the crucial question is the date as to when the share capital reduction became effective. While according to the respondents, it became effective on the day of passing of the resolution on 29.11.2004, according to the petitioners, it became effective much later after the shares to IDBI were allotted.
33. Before examining the allegation of ultra-vires, I would like to make it abundantly clear, that, I shall not be examining the same with reference to the scheme sanctioned by BIFR but only with reference to the facts of the case and law on the subject as any allegation relating to non compliance with the scheme has to be agitated before the BIFR in terms of the provisions of SICA. But at the same time, in view of the stand taken by the parties referring to the scheme, I have to, inevitably, refer to the scheme wherever necessary. Another observation that I would like to make is that all the counsel have made arguments on the premise that the effective date of the resolution No 8 and the effective date of reduction of share capital would be the same date. As elaborate by me later in this order, in the present case, the effective date of the resolution and the effective date of reduction of share capital cannot be the same date. However, since the arguments have been made on the premise that the effective date for both is the same, I am giving my findings on the same premise, not withstanding the fact that such findings would have no influence on the final decision.
34. Two stipulations made in the scheme sanctioned by BIFR, referred to by the parties require to be noted. One is: IDBI to accept the equity shares of the company of Rs 2300 lakhs in demat form only (after writing down of existing equity share capital by 35%) the second is "Company Law Board -to consider exempting the company from the provisions of Sections 81(1), 100, 101,102,103 of the Companies Act for its revival and implementation of terms of the revival package. To consider providing any other exemptions to the company during rehabilitation period for smooth implementations of the sanctioned scheme". In terms of the second stipulation, the reduction of share capita] could effected only when the requisite exemption as envisaged therein had been obtained. On 1.1.2005, when the shares were allotted to IDBI, no exemption from applicability of the various provision of the Act in relation to reduction of share capital was available and as such the issued share capital remained as it was i.e Rs 73.8 crores and by allotment of shares worth Rs 23 crores, the issued equity capital as on 1.1.2005 came to be Rs 96.8 crores resulting in the issued capital being more than the authorized equity capital of Rs 75 crores. On an application made by the company to BIFR seeking for exemption from this clause, the BIFR passed an order on 28.1.2005 providing "The company is accordingly permitted 10 proceed with the implementation of the Clauses 8(c)(i) and (ii) and all other provisions of SS-2004 without seeking any further exemptions/permission from the Department of Company Affairs or SEBI or any other authority concerned so as to revive its status as an industrial company and make its net worth positive simultaneously". Shri Ganda contended that this order would relate back to the date of the scheme and on passing of the resolution for reduction of share capital on 29.11.2004, the reduction became effective on that date. I do agree that any modification made in an order would relate back to the date of the original order, but whether such relating back would ratify any thing done contrary order is doubtful without any specific direction to that effect in the subsequent order, if the contention of Shari Ganda that the reduction in share capital had become effective on 29.11.2004. Normally, even an a defective order would continue to prevail till such time it is modified either on review or on appeal. Shri Haksar cited two cases and (supra). Both these cases lay down the same principle. Shri Swahney referred to the judgment of Supreme Court in LIC v. Escorts Ltd. wherein the Supreme Court has held that if shares are acquired without obtaining permission of RBI in terms of Section 29 of FERA, subsequent permission given by RBI would validate the acquisition. Likewise, according to him, in the present case, since BIFR has exempted the company from obtaining approval, it would relate back to the date of the resolution. I am unable to accept this contention as in Escort's case, the violation was in respect of a statutory provision, while in the present case the violation would be against a subsisting order of a Tribunal. Further, the wordings in the order of BIFR dated 28.1.2005 "permitted to proceed with the implementation" would indicate that it was to have prospective application. As a matte of fact, in the BIFR order dated 28.1.2005 it is mentioned that by a letter dated 18.1.2005, IDBI had brought to the notice of BIFR that in terms of the scheme, the company had passed necessary resolutions and to give effect to these resolutions, exemptions be granted from the applicability of the provisions of the Companies Act. There is no disclosure to the BIFR about the allotment made to IDBI on 1.1.2005 itself, to presume that the order dated 28.1.2005 made the 29.11.2004 as the effective date of reduction of share capital. However, according to the counsel for the petitioners, the resolution effecting reduction would become effective only when ROC registers the order of BIFR in terms of Section 103(2) of the Act or in the alternative only on the day when the Board passed a resolution in terms of the general body approval. The learned counsel for the petitioners further submitted that the effective date of reduction could be the record date fixed by the Board i.e.. on 11.4.2005. Shri Swahney pointed out that the provisions- of Section 103(2) of the Act would apply only when the share capital is reduced in terms of Section 100 of the Act and High Court order is obtained confirming the reduction. According to him, the provisions of Section 103(2) are not applicable in a case of reduction of share capital authorized by BIFR in terms of Section 18(2)(f) of SICA which has been specifically mentioned by BIFR in its order dated 28.1.2005. Even otherwise, according to him, filing with and registration by ROC are only a ministerial acts and non registration would not invalidate the reduction of share capital. Section 103(2) of the Act reads: "On the registration of the order and minute, and not before, the resolution for reducing share capital as confirmed by the order, shall take effecf". The terms "order and minute" used in the provisions relate to the order of the High Court confirming in terms of Section 102, the reduction of share capital. From the wording of this provision, it is apparent that the resolution for reduction of share capital shall take effect only on registration of the order and the minute. In other words, in view of the negative words "and not before", it is a mandatory provision. It is to be noted that in the order dated 28.1.2005, even though BIFR has noted the provisions of Section 18(2)(f) of SICA, it has permitted the company to proceed with the implementation of Clauses 18(c)(i)(ii) without seeking any further exemptions and permission from various authorities. Exemption from obtaining permission cannot be deemed to mean exemption from complying with the provisions of Section 103(2) of the Act in the absence of specific direction to that effect. It is also to be noted that when Section 103(2) was enacted, BIFR was not in existence and there is no specific provision in the SICA or in the scheme relating to registration, which is inconsistent with Section 103(2). The requirement of registration is not a mere formality or a ministerial act as contended by Shri Swahney. It has a specific purpose as is evident from Sub section (4) which provides that the registration certificate given by ROC shall be conclusive evidence that all requirements in relation to reduction of share capital have been complied with. In other words, once the registration is done, none can challenge the reduction of share capital. Therefore, I am of the view that the provisions of Section 103(2) of the Act- would apply to reduction of share capital in term of BIFR also.
35. Even assuming that registration with ROC in terms of Section 103(2) of the Act is not necessary and that the order of BIFR dated 28.1.2005 would relate back to the date of original order as contended by the counsel for the respondents, the effective date of reduction of share capital should be the one as approved by the shareholders. It is relevant to note that in the BIFR scheme, it is stated that the existing shareholders were to agree to write down the present equity capital of the company. In other words, the shareholders were to agree, which they did by passing a special resolution on 29.11.2004 vide item No 8. While doing so, they had authorized the Board to reduce the equity shares by stating "consent of the company is hereby accorded to the Board for reduction of the equity shares by 35% of the existing equity share capital". Like wise, in relation to allotment of shares to IDBI vide resolution No 9, the general body passed a resolution stating "the consent of the company is accorded to the Board to create, issue and allot equity shares worth Rs. 23 crores as fully paid up to IDBI after writing down of existing equity capital "(emphasis by me). A reading of these two resolutions together would indicate that by way of the first resolution the Board was authorized to write down the share capital and in the second resolution, the Board was authorized to allot shares after writing down. If the contention of the respondents that on passing of the resolution to reduce capital, the reduction had become effective, the words "after writing down of existing equity capita" in the resolution No 9 would be redundant. A reading of the resolution No 8 relating to reduction of share capital would indicate that it is only an enabling resolution for the Board to reduce the share capital in conta to the resolution No 7 by which the general body itself altered the authorized capital. Resolution 8 became effective on 29.11.2004 only in so far as clothing the Board to take the decision to reduce the capital and the Board could have passed a resolution reducing the share capital at any time there after. By passing the resolution as worded, the genera] body had not reduced the share capital to contend that it became effective on 29.11.2004. The effective date of reduction has necessarily to be a subsequent date as and when the Board passed a resolution 10 thai effect. Therefore, it is crystal clear that till the Board passed a resolution in terms of the general body resolution, the reduction of share capital would not become effective. There does not appear to be any Board Resolution in terms of the general body resolution.Instead in the agenda for shareholders/investors grievance commitee meeting of the Board convened on 22nd March,2005 it is noted "The Committee may recall that as per the Rehabilitation Scheme sanctioned by the BIFR vide its orders dated 2.4.2004 and as amended vide its order dated 28.1.2005 the existing equity share capital of the company has been reduced from Rs 70,69,43,700 to Rs 45,95,13,400 and in lieu thereof 0.0001% Redeemable Preference shares of Rs 10 each were to be issued and allotted to the said shareholders". No date is indicated as to when the share capital was reduced by a board resolution. In the written submissions, the respondents have annexed an extract of the minutes of a Board meeting reportedly held on 21st February 2005 wherein the Board had noted the order of BIFR dated 28.1.05. This extract does not appear to have been filed during the hearing. Mere noting of the order of BIFR date 28.1.2005 does not amount to passing of a resolution in terms of Resolution 8 of the general meeting. Further, the company is a listed company and therefore, if the share capital reduction had taken place on 29.11.2004 as contended by the respondents, the Stock Exchanges should have been notified of the same but there is nothing on record that such a notification was made. Some time in April 2005 only the Stock exchanges were informed fixing the record date as on 11.4.2005 and the NSE has issued a circular on 11.4.2005 stating that "the capital of the company will be reduced by 35% of the existing capital by reducing number of equity shares from---". Thus the understanding of NSE appears to be that the capital reduction will be on 11.4.2005. From the narration of these various dates, and the documents on record, it appears to me that till today no reduction of share capital seems to have taken place in terms of resolution No. 8. Even assuming it has taken place, it is difficult to pin point the date on which the reduction took place except that it did not definitely take place before allotment of shares to IDBI on 1.1.2005. Therefore, I am of the firm view that by allotting the impugned shares to IDBI before effecting reduction in the share capital, the Board of the company had acted ultra vires the Memorandum as by this allotment, the issued equity capital exceeded the authorized equity capital . It was contended that Ms Poonam, who belongs to the petitioners' group, presided over the meeting when the shares were allotted as such, the petitioners cannot question the same. When a Board of a company acts ultr-vires the Memorandum, it is immaterial as who presided over the meeting. Referring to the prayers in the petition, it was also contended by the counsel for the respondents that the petitioners cannot allege illegality in the issue of shares to IDBI and at the same time seek for a direction to IDBI to sell the shares to the petitioners, I have seen the prayers. The petitioners, while seeking for cancellation of the share have only made an alternate prayer also that IDBI should be directed to sell the shares to the petitioners in me event if the shares are not cancelled. The respondents have also contended that the petitioners are seeking for cancellation of the shares allotted to IDBI only with the view to remove the 2nd respondent as the MD and in view of the company being under the purview of BIFR, he cannot be removed and that his removal would jeopardize the entire revival scheme. When an act is as ultra vires, the motive becomes immaterial. As far as the issue whether the MD could be removed when a revival scheme is in the process is concerned, I am in full agreement with the submissions made by Shri Sundaram in this regard.
36. In view of my finding that allotment of shares to IDBI is ultr vires the memorandum, I declare the allotment to IDBI as null and void and that IDBI cannot exercise any right over the shares. It is to be noted that on the day when the shares were allotted to IDBI on 1.1.2005, the scheme providing for seeking exemption from the provisions of Section 100 of the Act etc. was in force. IDBI being a party to the scheme was fully aware of the requirement to seek exemption. Therefore, IDBI cannot considered to be a bonafide allottee of the shares without notice and therefore even the doctrine of indoor anagement, if at all could be claimed, cannot be applied. In the written submissions, it is pleaded that if the allotment of shares to IDBI were to be cancelled, it would prejudicially affect the company. I am fully conscious of this fact and that is why even though I have declared the allotment of shares to IDBI on account of such allotment being ultra vires its memorandum as void, I also declare, as pointed out by Shri Sundaram repeatedly, that the company is free to make fresh allotment to IDBI in accordance with the scheme after, getting the approval of the general body by placing before it the order of BIFR dated 28.1.2005.
37. According to the petitioners, the company became sick only due to the financial mismanagement and siphoning of funds by the 2nd respondents. The have cited a few instances of alleged siphoning of funds by the 2nd respondent: that that the 2" respondent sold free quotas to third parties and bought quotas from his benami companies at huge costs, that he is selling prime products of the company as defective products in the Indian market that he is buying chemicals at exorbitant prices compared to the market prices from a single source and that he had purchased 4000 tons of steel during 2002-2004 even though no construction work was going on in the company. Shri Sundaram contented that since there is no specific denial of any of these allegations, the same should be held to have been admitted. I do not find much substance in the stand of the petitioners that the company became sick due to financial mismanagement by the 2nd respondent. The Scheme of BIFR elaborates the causes and reasons for the company becoming sick and the alleged financial mismanagement is not one of the reasons. In so far as the alleged siphoning of funds is concerned, as rightly pointed out by the counsel for the respondents, the allegations other than the purchase of steel relate to periods before 2000 and from the delegation of powers to Ms Poonam, it is seen that she was involved in all day to affairs of the company and the accounts of the company have been audited and adopted by the shareholders without any reservations. Further, on the basis of a few instances of alleged financial mismanagement that took place a number of years back, it is not possible to conclude that the 2nd respondent is guilty of siphoning of funds. In so far as purchase of steel is concerned, while the petitioners have stated that 4000 MT were purchased during 2002-04 when no construction work was going on, according to the respondents, only about 625 MT were purchased and they have also indicated the value of construction work carried out during this period. The petitioners have not established with details as to how they claim that 4000 MTs of steel were purchased to allege that money has been siphoned of Thus, as far as the financial mismanagement on the part of the 2nd respondent, the petitioners have failed to establish the same.
38. The petition is disposed of with the findings that the 2nd respondent has acted in an oppressive manner against the petitioners by denying that they are also promoters of the company with the view to create a new majority with the right to buy back the shares from IDBI and that by allotting the shares to IDBI on 1.1.2005 before effecting reduction of share capital, the company/Board had acted ultra vires the Memorandum and as such the allotment is null and void and IDBI cannot exercise any right over the shares.
39. No order as to costs.