Company Law Board
Shri Prashant Modu Timblo And Mrs. ... vs Sociedade De Fomento Industrial Pvt. ... on 26 September, 2005
Equivalent citations: [2007]137COMPCAS390(CLB), [2006]68SCL243(CLB)
JUDGMENT
S. Balasubramanian, Chairman
1. In this order, I am considering, whether in a petition filed under Sections 397/398 of the Companies Act, 1956 (the Act) in respect of a family held private company, a creditor could intervene in the process of amicable settlement among the family members.
2. The facts of the case are that the respondent company is a family company with the mother and her 3 sons holding all the shares in the company. The mother and one of the sons filed a petition under Sections 397/398 of the Act alleging acts of oppression and mismanagement in the affairs of the company by the other two sons. Since the company is a family company, I suggested to the parties that they should try to resolve the disputes amicably. In deference to my advice, they decided to resolve the disputes by which one of the brothers would purchase the shares held by the other two by way of bidding to be held before this Bench with the reserve price of Rs. 63,132 per share. Thereafter, the petitioners and the 2nd respondent entered into agreements by which the petitioners had agreed to sell their shares to the 2nd respondent, thus, leaving the bidding process to only to 2nd and 3rd respondents.
3. The applicants claiming to be creditors of the respondent company to the extent of Rs. 75 crores have filed this application CA 145 of 2005 with a prayer to permit them to intervene in the proceedings and also to permit them to bid for the shares. According to them, the reserve price of Rs. 63,132 per share is too low and the applicant would be willing to offer a much higher price. Thereafter, the applicants filed a supplementary affidavit stating that they were willing to bid at the reserve price of Rs. 1,76,000 per share. Thereafter, they filed an additional affidavit stating that the agreements between the petitioners and the 2nd respondent were unlawful and opposed to public policy and as such the agreements should not be accepted. In the agreement, very paltry consideration had been fixed for the shares which is not in the interest of the creditors including the applicants, and these agreements, the parties are attempting at evasion of capital gain tax. The applicants have a number of claims against the company including one in arbitration. Since the offer of the applicants at Rs. 1.76 lacs per share would amount to a total consideration of Rs. 440 crores for all the shares in the company, their offer should be accepted or in the alternative they should be allowed to participate in the bidding process.
4. Shri Raju Ramachandran, Senior Advocate appearing for the applicants submitted that the applicants have vital interest in the affairs of the company as they are creditors of the company for a substantial amount. When there are a number of allegations of financial mismanagement in the company, the parties cannot be allowed to settle the disputes. Public interest is paramount in a proceeding under Sections 397/398 of the Act and therefore any settlement between the parties would be completely against public interest. When the worth of the company is more than Rs. 400 crores which the applicants are willing to pay, the parties to the proceedings are negotiating for sale of the shares at a very low price which is against the interest of the company as also the creditors. In Sayed Mohamad Ali v. Sundaramurthy AIR 1958 Mad. 587, the court has held that that under Sections 397/398, the interests of the company are paramount and the proceeding should not be conceived as a mere dispute between individuals and any agreement to resolve the disputes cannot be used to stifle the enquiry of the petition. Since in the present petition, a number of allegations relating to financial mismanagement have been elaborated, proper enquiry should be conducted. In Cosmo Steels Private Ltd. v. A. Ramdas Gupta 48 CC 312, the Supreme Court has held that even in a proceeding under Sections 397/398 of the Act, the court should take into consideration the interest of the creditors while giving any direction under Section 402. In view of this decision, the applicants, being creditors of the company, have a locus standi to intervene and seek suitable relief.
5. Shri Sarkar appearing for the petitioners and Shri Rafiq Dada, Senior Advocates appearing for the petitioners and the 2nd respondent respectively opposed impleading the applicants as interveners on the ground that the applicants have no locus standi. Further, according to them, in terms of the Articles of the company, shares cannot be transferred to non members and neither the petitioner nor the 2nd respondent is willing to sell their shares to the applicants whatever might be the price offered by the applicants. Further, they also disputed the fact of the applicants being creditors of the company. Accordingly, they sought for dismissal of the application of the applicants.
6. The application was filed on 15.4.2005 and supplementary application was filed on 1st July, 2005. When the same were called on 12.7.2005none was present on behalf of the applicants and as such the application was dismissed for non prosecution. Thereafter, the interveners filed an additional affidavit on 16.8.2005. In the hearing held on 17.8.2005, the interveners were represented and restoration of the application was sought for. They also filed a formal application on 7.9.2005 seeking for restoration of the application on the ground that their lawyer had, by oversight, noted the time of hearing at 2.30PM instead of 10.30AM on 12.7.2005 when the application was dismissed.
7. I have considered the matter carefully. Whether the applicants, in their capacity as creditors of the company have a locus standi to oppose the settlement between the parties is the issue for consideration. The learned counsel for the applicants relied on Cosmo Steels Private Limited case to urge that creditors have a locus standi in a proceeding under Sections 397/398 of the Act. In that case, the parties settled their disputes amicably and as per the consent terms, the company was to purchase the shares held by the petitioners' group on a valuation to be made by an independent valuer. Certain interveners claiming themselves to be creditors of the company filed an application stating that before any reduction in the share capital of the company is effected, they were entitled to notice as by the reduction, they were likely to be adversely affected. The Supreme Court observed that when an order of purchase of shares by the company is made under Section 402 of the Act, the procedure laid down under Sections 100 to 104 of the Act for reduction of share capital need not be followed and only when a procedure is followed under these sections, notice to creditors, that too if the court so desired, needed to be given. However, the Supreme Court also held that before approving the compromise between the parties, the court must satisfy that the compromise would not adversely affect the interests of the creditors. In the present case, there is no proposal for the company to purchase the shares in which case the creditors may have a say in the matter. The compromise in the present case is that one of the shareholders would purchase the shares held by the other shareholders and as such the funds of the company are not involved. Therefore, the decision in the above case has no application in facts of the present case. The applicants have also alleged-that the shares of the company are being under valued much below their intrinsic value. This objection has also no merits in as much as the shareholders are free to decide the price. The learned counsel for the applicants relied on the decision of AIR 1958 Mad. 587 to the proposition that proceedings under Sections 397/398 are not like suits between the parties which could be compromised any manner they choose and if there are allegations of financial mismanagement, investigation would be necessary. In that case, even though there were allegations of financial mismanagement, majority shareholders approved the disputes being settled on compromise. When the compromise was approved by the Single Judge without notice to the minority shareholders, they appealed against that order and the Division Bench " Proceedings under Sections 397 and 398 of the Indian Companies Act are not like suits between private parties which could be compromised in any manner they choose. Interests of the company are paramount. Under Section 406, there is jurisdiction in court to assess damages against delinquent directors. In such circumstances, the court should have given an opportunity to the dissentient shareholders to become parties to the petition or should have disposed of the matter after notice to them". Ultimately, the Division Bench dismissed the appeal noting that even though the charges required investigation, the directors had denied the charges and no shareholder was anxious to have the investigation carried out. From a reading of the judgment it is evident that the appeal against the consent order was filed by shareholders and not by creditors. In the present case, the respondent directors have denied all the charges and all the shareholders have agreed to settle the disputes amicably. Thus, the above case also does not support the applicants.
8.Thus, I find that that the applicants have no locus standi to oppose the compromise. Further, when the shareholders have expressly declined to part with their shares to an outsider, whatever may be the price offered, the question of the applicants participating in the bidding process does not arise. Accordingly, the application is dismissed.