Company Law Board
Standard Distilleries And Breweries ... vs Shoe Specialities Pvt. Ltd. And Ors. on 8 June, 1994
Equivalent citations: [1995]83COMPCAS727(CLB)
ORDER
1. This is a petition filed under Section 397/398 of the Companies Act, 1956 (hereinafter referred to as "the Act"), alleging acts of oppression and mismanagement in the matter of Shoe Specialities Pvt. Ltd. (hereinafter referred to as "SSPL") by the four petitioners of which petitioner No. 1, Standard Distilleries and Breweries Pvt. Ltd. (Standard) and Stridewell Leathers Pvt. Ltd. (Stridewell) are corporate shareholders and petitioner No. 3, Shri R. D. Chhabria, and petitioner No. 4, Shri M. D. Chhabria, purporting to hold control over petitioner No. 1 and petitioner No. 2.
2. While the company is the first respondent, respondents Nos. 2, 3, 4, 5 and 6 are directors in respondent No. 1 company. The seventh respondent, Bhankerpur Simbhaoli Beverages Pvt. Ltd. (Bhankerpur), is a shareholder in respondent No. 1 company and the eighth respondent, Shaw Wallace and Co. Ltd., is a corporate entity.
3. According to the petitioners, the total subscribed and paid-up capital of SSPL is Rs. 50,000 which is purported to have been increased illegally to Rs. 2.5 lakhs on June 5, 1992, and it is also stated in the petition that the increase of Rs. 2 lakhs in the share capital has been struck down by the Company Law Board by its order dated May 28, 1993. As such the present paid-up capital of the company is only Rs. 50,000 and in view of petitioner'No. 1 holding 1,000 shares and petitioner No. 2 holding 2,000 shares constituting 60 per cent, of share capital in the company, it is claimed that they are eligible to present this petition. The main cause of action for this petition, according to the petitioners, is the mala fide refusal of the respondents particularly the directors of SSPL who are instrumentalities of Shaw Wallace and Co. Ltd. (SWC)/Shri M. R. Chhabria (MRC), to call for an extraordinary general meeting of SSPL requisitioned by the first petitioner for removal of the existing directors on the board of SSPL. It has been further averred in the petition as follows :
4. Standard requisitioned an extraordinary general meeting of the company through a requisition on June 30, 1993. However, the requisition was rejected by the company on the pretext that the resolution of the board authorising Mr. U.K. Ganguly, a director of Standard who had signed the requisition, had not been received by SSPL along with the requisition. Such insistence on the board resolution is mala fide as the same is not required by law. It is apparent on the face of the requisition that the board of directors of Standard had authorised the requisitioning of an extraordinary general meeting of SSPL. The main object of the refusal is only to exercise the voting power of 12.73 per cent, shares held by SSPL in Gordon Woodroffe Ltd. (GWL) at the annual general meeting to be held on August 24, 1993. The respondents rejected the requisition on flimsy grounds instead of refusing or failing to call extraordinary general meeting as, in such a case, petitioned No. 1 holding 20 per cent, paid-up capital in SSPL itself would have convened the extraordinary general meeting and removed the directors of SSPL well before the annual general meeting of GWL. If the petitioners controlled the board of SSPL, then with the strength of 12.73 per cent, voting power in GWL, the KRC group would have been in a position to exercise, in all, over 36 per cent, votes in GWL which the respondents tried to prevent by not acting under the requisition by Standard.
5. It is further averred in the petition that petitioners Nos. 1 and 2 had earlier filed a requisition for an extraordinary general meeting of the company on June 12, 1992, seeking to remove the board of directors of SSPL as then constituted so as to bring the composition of the board in conformity with the will of the shareholders. At that time the board of directors of SSPL called an extraordinary general meeting immediately even though the same had been requisitioned by Shri M. D. Chhabria without any copy of the resolution authorising him to do so, because it suited the then board of directors as they had, by then, issued additional shares and reduced the petitioners to a minority. With this illegitimate majority, they defeated all the proposals of the petitioners and the directors of the board who were sought to be removed and are still continuing as such and the same persons have, now, on flimsy grounds, rejected the requisition for calling the extraordinary general meeting lodged by petitioner No. 1 after the Company Law Board had set aside the allotment of additional shares. Thus, the will of the majority shareholders is frustrated by the directors on the board of SSPL who have no stake in the company and as such, this act itself constitutes an act of grave oppression to the petitioners.
6. Accordingly, the petitioners have prayed that the present board of directors of SSPL be superseded and till a new board is elected, a committee of management be constituted to conduct the affairs of the company. They have further prayed for directing the SSPL to forthwith call an extraordinary general meeting as requisitioned to conduct the business detailed in the requisition. They have further prayed, as an interim measure, to restrain the present board of SSPL from representing at the ensuing annual general meeting of GWL.
7. Further, in the petition they have given full details of the order passed by us in the Company Petition No. 29 of 1992, in which we had set aside the issue of shares worth Rs. 2 lakhs in SSPL and allotted to Bhankerpur which were later pledged to Malleswara Finance and Investment Co. Pvt. Ltd. (Malleswara). They have also made a reference to our order in Company Petition No. 19 of 1992, relating to the proceedings under Section 247/250.
8. Respondents Nos. 1 to 6, in their common reply, have given a full narration of how the shareholding in SSPL changed from hand to hand, how petitioners Nos. 1 and 2 happened to hold 1,000 and 2,000 shares respectively and respondent No. 7, 2,000 shares in SSPL. These shares were transferred in the name of three corporate entities only because they were all under the control of SWC which had undertaken the revival of GWL and the board of SSPL always consisted of persons under the effective control of SWC. They have also made certain allegations against K. R. Chhabria and have narrated about the issue of additional 20,000 shares in SSPL and how finally they happened to be pledged to Malleswara. It is further stated in the reply that the board of directors of SSPL acted in accordance with the earlier requisition to convene an extraordinary general meeting as requisitioned by the petitioners on June 23, 1992, and in the meeting held on July 28, 1992, none of the resolutions proposing to remove the then existing directors were carried and these persons are still continuing as directors in SSPL. It is further stated in the reply that petitioners Nos. 1, 3 and 4 had instituted a Suit No. 966 of 1992, in the Madras High Court seeking various reliefs including nullifying the resolutions passed by SSPL on June 5, 1992, for issue of 20,000 equity shares, transfer of the same in favour of Malleswara and the case is still pending. It is a fact, it is further averred, that, after the Company Law Board declared the allotment of shares as null and void, petitioner No. 1 issued a notice on June 30, 1993, requisitioning an extraordinary general meeting of SSPL for removal of respondents Nos. 2, 3, 4, 5, and 6 as directors of SSPL and also for appointment of petitioner No. 4, one Shri A. K. Jain and four other persons as directors in SSPL. The company could not act on that requisition since the resolution authorising Shri U. K. Ganguly, who had signed the said notice, had not been received along with the requisition and as such it was incomplete and defective. It is also stated in the reply that the order of the Company Law Board to set aside the allotment of 20,000 shares had been challenged in the High Court of Delhi under Section 10F of the Companies Act and the High Court of Delhi ruled that it had jurisdiction to entertain the appeal and the order of the High Court has been challenged in the Supreme Court and the same is pending. It is also stated that'another Appeal No. 743 of 1993, has been filed in the Madras High Court and the same is pending.
9. The respondents have raised various objections including that the petition is in the nature of a directorial complaint which cannot be the subject-matter of proceedings under Section 397/398. The Company Law Board had not passed any order in Company Petition No. 29 of 1993, when a specific prayer to supersede the board of directors of respondent No. 1 had been sought and that cannot be reopened in a fresh petition ; petitioners Nos. 3 and 4 not being shareholders of SSPL have no locus standi to present the petition and there are no grounds made out under Section 397/398 of the Act.
10. On the merits, it is stated, that the requisition for the extraordinary general meeting was rejected on proper and valid grounds. In view of the fact that the Company Law Board did not grant any relief relating to supersession of the board of directors in the earlier petition, the same cannot be done now. Since the impugned order is already under challenge in the Delhi High Court and the Madras High Court, it would be improper to call for an extraordinary general meeting under the orders of the Company Law Board. It is not correct, as alleged in the petition, that the purpose of rejecting the requisition was to ensure exercising 12.73 per cent, voting rights in the ensuing GWL's annual general meeting. As a matter of fact it is the petitioners who have sought the extraordinary general meeting to gain control over the voting rights in GWL. Under the circumstances, it is prayed that the Company Law Board should not exercise any jurisdiction in the matter and the orders as prayed for by the petitioners are not to be passed.
11. In the rejoinder it is stated that while the writ petition in the Karnataka High Court by Malleswara had been withdrawn, neither the Madras High Court nor the Delhi High Court has given any interim orders. Civil Suit No. 966 of 1992 has already been withdrawn by the petitioners and supersession of the board of directors, now being asked for, is not on the basis of the cause of action which has been concluded in Petition No. 29 of 1992, but as a consequence of fresh cause of action arising out of the present petition. Under these circumstances, the petitioners have prayed for relief sought for in the petition.
12. The case was heard on a number of days along with Petition No. 45 of 1993 filed by Tracstar Investments Pvt. Ltd. in the matter of Gordon Woodroffe Ltd. which is yet to be concluded. Shri K. S. Cooper, senior advocate, narrated the series of events from the filing of the petition under Section 247/250 in the matter of Gordon Woodroffe Ltd.--the petition under Section 397/398 in the matter of SSPL-the filing of petition in the City Civil Court at Bangalore, etc. According to him, the crux of the issue is the control of 12.73 per cent. shares held by SSPL in GWL. Shri G. Rama-swamy also appearing on behalf of the petitioners mentioned that in the SLP filed relating to the issue of jurisdiction of the High Courts against the orders of the Company Law Board, the petitioners have given an undertaking not to requisition the extraordinary general meeting. The petitioners filed Company Application No. 198, but in view of the fact that in the connected GWL matter, the parties have agreed to postpone the annual general meeting of GWL convened on August 24, 1993, no further order was passed on this application.
13. Another application being C. A. No. 308 of 1993 was filed seeking our permission for passing the annual accounts as well as the appointment of auditors which we permitted with the stipulation that the voting in respect of these resolutions should be recorded member-wise separately and no other business other than the two proposed shall be transacted. Shri Cooper detailed the various pleadings made in the petition referring to our order in Company Petition No. 29 of 1992, etc., wherein allotment of 20,000 shares in SSPL had been set aside. He complained that MRC, through Shaw Wallace, controls SSPL inasmuch as the directors of SSPL were associates of SWL. According to him the MRC group has always been trying to prevent the legitimate shareholders of SSPL to have their own say in the affairs of the company. According to him, wrong attempts were made by the respondents to see that SSPL remains under their control.On May 13, 1992, an application was made for freezing the voting rights of SSPL in GWL failed ; on May 20, 1992, a suit was filed in the Bangalore City Civil Court to prevent Tracstar directors from acting and failed ; on May 20, 1992, GWL turned down the share transfer applications of Trident, the beneficial interest being with Tracstar and on June 5, 1992, bogus shares were issued ; a requisition resolution defeated by this process. Even the orders of the Company Law Board in Company Petition No. 29 of 1992 were not obeyed by the respondents and they took very active steps to get the orders set aside as indicated below ;
(1) Bhankerpur filed an appeal in their name under Section 10F in the Delhi High Court.
(2) SSPL filed an appeal in the Madras High Court but no stay had been granted.
(3) Malleswara filed a writ petition in the High Court at Bangalore-No stay was granted and hence, withdrawn.
(4) Malleswara filed a writ petition on October 25, 1993, in the Madras High Court--ex parte interim stay granted.
14. He further elaborated the sequence of events of requisitioning the extraordinary general meeting under Section 169 of the Act by a notice on June 13, 1993. He submitted that the main prayer in this petition was to supersede the board of directors even though the orders of the Company Law Board dated May 28, 1993, have been stayed by the Madras High Court, the same has no effect on the findings of the Company Law Board. As the findings of facts are not disputed, the Company Law Board has powers to remove the directors or restrain them from acting in order to give protection to the petitioners especially when all the directors of SSPL are employees of SWC. Since SWC has no stake in the company, it has no right to have its own persons as directors. He further stated that the company is on paper only and that the factory of SSPL has been closed down, the employees have been retrenched and the registered office of the company has been shifted. The only assets of SSPL are the shares in GWL. No prejudice would be caused to the respondents as no business is being'carried on by SSPL now, if the board is superseded.
15. He further stated that Standard lodged another requisition notice dated October 8, 1993, with a proper resolution to call for an extraordinary general meeting of SSPL. However, the respondents have not called the extraordinary general meeting on the ground that since the register of members had not been rectified by deleting the name of Malleswara, Standard did not have the requisite holding to call for an extraordinary general meeting. As SSPL failed to call the extraordinary general meeting on November 4, 1993, Standard itself called the extraordinary general meeting under Section 169(6). This act of Standard had been construed as contempt of the orders of the High Court and as such a contempt application against Standard has been filed. He further referred to our order in Company Petition No. 29 of 1992, and drew our attention to various observations we had made therein relating to the issue of 20,000 shares. He alleged that the respondents are unnecessarily litigating. According to him, the Company Law Board orders should have been implemented by Bhankerpur paying off Malleswara but it has not been done deliberately as both belong to the SWC group. Therefore, he pleaded that the presently constituted board does not represent the shareholders and it is acting against the interests of the shareholders and as such should be superseded either by a new board or by an administrator till Malleswara's appeal is decided or at least the directors should be restrained from acting as directors. He refuted the contention of the respondents in their reply that the complaint is a directorial complaint. According to Shri Cooper it is the shareholders' right in the company to have their own directors especially when they control the majority of shares. Denying them this right is an act of grave oppression. This is the reason the petitioners have moved the Company Law Board, he stated.
16. Senior counsel for the respondents Shri R. F. Nariman argued that in the writ filed by Malleswara, a stay has been granted by the Madras High Court. The said stay operates as a blanket stay against the entire order of the Company Law Board and as such it is right and correct that the Company Law Board should stay its present proceedings, if not at least it should desist from passing an order.
17. Shri Ashok Sen, senior advocate, appearing for respondent No. 1 submitted that even though the Company Law Board by its order dated May 28, 1993, struck the name of Malleswara from the register of members, it had rejected the prayer to dismiss the board of directors. The only oppression as complained of by the petitioners, he further stated, relates to the action taken by SSPL on the requisition notice. SSPL's demand for a copy of the authority given to the petitioner to requisition an extraordinary general meeting cannot be considered to be an act of oppression, If the Company Law Board is satisfied, the respondents are willing to concede the legality of the notice hut it is necessary to note that the order of the Company Law Board dated May 28, 1993, is in appeal before the Madras High Court. As far as the affairs of SSPL are concerned, the issue relating to closure of the factory is before the Labour Commissioner and even this closure was only because of recession in the demands for the products of the company. The closure of the factory was a prudent business decision and even assuming it is an oppression it is not an oppression against the shareholders but only against the workmen. He further stated that they have not yet retrenched any workmen. He further stated that in the Delhi High Court, Shri F. S. Nariman has conceded that no change will be brought and the Company Law Board orders would not be implemented till the appeal is disposed of and in the Madras High Court there is an interim stay pending disposal of the petition and no application has been made in that court seeking any interim order. Instead of invoking the provisions of Section 634A of the Act for enforcement of the orders of the Company Law Board, the petitioners have chosen the remedy through an extraordinary general meeting by requisition. He further argued that in case the petitioners desire to have representation on the board, they can come with a fresh application as the same does not form part of the petition. He further stated that even though the petition is under Section 397/398, no act of mismanagement more so relating to defalcation of the funds of SSPL has been alleged in the petition. According to him the proper course of action for the Company Law Board is either to dismiss the petition as not maintainable or to wait till the disposal of the appeal in the Madras High Court or at least wait till the writ filed by Malleswara in the Madras High Court is finally decided by that court.
18. Even though, Shri Cooper initially strongly advocated the issue of certain interim orders, he also finally stated that the proper course of action would be to wait till the disposal of the writ filed by Malleswara in the Madras High Court.
19. In view of the fact that our order dated May 28, 1993, by which Malleswara's name was to be deleted from the register of members has been stayed by the Madras High Court, we had informed the parties that we would release our order on the petition only after the disposal of Malleswara's case by the Madras High Court. The advocate on record for the petitioners filed with us a copy of the order of the Madras High Court in Malleswara's case wherein the High Court has dismissed the petition. In view of this we are passing the following order.
20. As has been elaborated in the petition and argued by counsel for the petitioners, the main cause of action in this petition is inaction on the part of the board of directors of SSPL to call an extraordinary general meeting as requisitioned by the petitioners. As per Sub-section (6) of Section 169 of the Companies Act, the requisitionists by themselves can convene an extraordinary general meeting in case the board of directors does not, within 21 days from the date of deposit of a valid requisition, proceed to call a meeting on a date not later than 45 days from the date of the deposit of the requisition. In other words, the failure of SSPL entitled the requisitionists to call such extraordinary general meeting provided a valid requisition is lodged. In the present case, the board of SSPL considered the requisition as not valid in the absence of forwarding therewith a copy of the board resolution authorising the requisitionists to requisition such a meeting. The allegation is, therefore, that the demand for such authorisation is mala fide only with a view to denying the rights of a member to call for an extraordinary general meeting. While it may be so with reference to the requisition lodged by the first petitioner on June 30, 1993, during the hearing it transpired that the first petitioner had, on October 8, 1993, lodged a valid notice of requisition for an extraordinary general meeting and on the failure of SSPL to call the same within the prescribed time limit, Standard itself called the extraordinary general meeting by a notice on November 4, 1993, and this could not be acted upon in view of the contempt proceedings filed against that notice. Not only has the contempt application already been disposed of, even the main petition filed by Malleswara has been dismissed. In other words, there is no legal impediment today in the company acting on the requisition given by the petitioner on October 8, 1993. We are of the view that it may not be appropriate to look into the bona fides of SSPL in rejecting the requisition by the first petitioner at this distant ppint of time and consider the prayer for removal of the board of directors especially when the petitioners Nos. 1 and 2 having become majority shareholders in view of our order dated May 28, 1993, and can effectively exercise their majority right to elect their own directors on the board of SSPL.
21. Accordingly, we dispose of this petition with the directions to the board of directors of SSPL to act on the requisition lodged by petitioner on October 8, 1993, as per the provisions of Section 169 of the Companies Act as if requisition has been lodged with SSPL on June 21, 1994. Both the parties are at liberty to approach us in case of any difficulty in convening the extraordinary general meeting. Till the extraordinary general meeting is convened, the present board will not take any decision except relating to the said requisiton.