Company Law Board
Herbertsons Ltd. vs Kishore Rajaram Chhabria And Ors. on 9 March, 1999
Equivalent citations: [1999]97COMPCAS429(CLB)
ORDER
S. Balasubramanian, Actg. Chairman
1. In this order we are considering C. A. No. 316 filed by M. D. Chhabria, respondent No. 2 seeking deferment of the hearing of the petition--C. P. No. 67 of 1998 and C. As. Nos. 315 and 317 of 1998 filed by Sringray Traders Private Limited seeking dismissal of the petition and for impleadment as a party to the proceedings in C. P. No, 67, respectively.
2. The prayer in C. A. No. 317 of 1998 has raised an important and interesting question of law in relation to the powers of the board of directors vis-a-vis the rights of shareholders. The applicant is a shareholder of Herbertsons Limited, which has filed C. P. No. 67 of 1998, alleging acts of oppression and mismanagement in the affairs of BDA Limited. The applicant is not a shareholder of BDA, which is a wholly owned subsidiary of the petitioner-company. According to the applicant, besides its holding of about 3.5 per cent. shares in the petitioner-company, it has also the support of shareholders holding further about 40 per cent. shares in the petitioner-company. The contention of the applicant is that the petition has been filed by the petitioner-company without taking into confidence the shareholders holding substantial shares in the company and as such the applicant should be impleaded as a party to the proceedings to bring out relevant facts.
3. Shri Subramanian, advocate appearing for the applicant, viz., Sringray Traders Private Ltd., submitted that the applicant together with supporters control majority voting power in the petitioner-company and the petition has been filed by the board, controlled by minority shareholders holding about 36 per cent. shares for collateral purposes. The applicant and the supporters are not supporting the petition as many relevant facts have either been concealed or not disclosed and the applicant if impleaded as a respondent, would be in a position to assist the Company Law Board in adjudicating the disputes. He submitted that even though the applicant is not a shareholder of BDA, yet, being a shareholder of the petitioner-company, being the holding company of BDA, it has every right to be impleaded as a party in a proceeding against the subsidiary. Drawing our attention to the averment in the petition wherein the petitioner-company has averred that the petition was being filed in the interest of the shareholders of Herbertsons, he stated that his client being a shareholder of Herbertsons should have every right to participate in the proceedings to establish that the petition is not in the interests of the shareholders of the petitioner-company.
4. Shri Sarkar, senior advocate for respondent No. 11, supporting the application, submitted that, when the board of directors of a company act against the interest of the shareholders, then the shareholders by virtue of residuary powers conferred on them, can intervene in the matter. For this proposition, he relied on Balmford v. Balmford [1969] 1 All ER 969 (CA). According to him, when the shareholders, without the approval of the general body institute proceedings in the company's name, the court shall not entertain such proceedings as decided in Satyacharan Law v. Rameshwar Prosad Bajoria [1950] 20 Comp Cas 39 ; AIR 1950 FC 133. In the same way, the corollary that a board cannot do something without the shareholders' consent has also to be held to be true. If it is so, then, the petition filed by the petitioner-company in its own name without the consent of majority shareholders can be opposed by such shareholders.
5. Shri Andhyarujina, senior advocate appearing for the petitioner company, submitted that the applicant has no locus standi to seek impleadment as it is not a shareholder of BDA against which the main petition has been filed. According to him, the petitioner is a stranger to BDA. Referring to Section 291 of the Companies Act, he submitted that the board of a company is entitled to exercise all powers and to do all such acts as the company is authorised to exercise and do. He submitted that article 161 of the articles of association of the company confers specific power on the board to institute proceedings in the name of the company. Under these circumstances, he submitted that no shareholder can require the board to do or not to do something. The board of the petitioner-company, being the holding company, has taken a decision to file the petition and the wisdom or otherwise of the board cannot be questioned by a shareholder. He submitted that for being a party to the instant proceedings, such a person should be either a shareholder of BDA or against whom certain reliefs have been sought in the petition. The applicant is neither a shareholder of BDA nor any relief has been sought against the applicant or its supporters. He also referred to Virbhadrappa Shilvant v. Shekabai Harun Sayed Ahmed Arab, AIR 1939 Bom 188, and Aiyasha Begum v. Kapurchand Rahmal, AIR 1972 Bom 145, to point out the circumstances under which one could be considered to be either a necessary or a proper party. According to him, the applicant does not satisfy the requirements of either being a necessary or a proper party and as such has no locus standi to get impleaded in the proceedings.
6. We have considered the arguments of counsel. It is an admitted position that the applicant is not a shareholder of BDA against which this petition has been filed. The main claim of the applicant is that being a substantial (majority) shareholder of the petitioner-company, it has every right to participate in the proceedings instituted against the subsidiary, especially when the majority shareholders feel that the action of the board in initiating the proceedings is mala fide and that the petition is not in the interest of the majority shareholders. The stand of the applicant has to be examined with reference to whether it has a right to participate, and if not, whether as a necessary or proper party, it should be impleaded.
7. In regard to whether the applicant is a necessary or a proper party, Shri Subramanian submitted that this issue has to be examined only in the case of a suit in terms of Order 1, Rule 1 of the Civil Procedure Code and since the proceedings before the Company Law Board are under Section 397/398, there is no need to apply this test. In regard to the right to participate, the main argument of the applicant is that, it, along with its supporters holds substantial (majority) shares in the company and these shareholders do not approve of the action taken by the board as it is not in the interest of the members. In the case of oppression/mismanagement in the affairs of a company, shareholders of that company, satisfying the requirements of Section 399, can apply to the Company Law Board under Section 397/398. The present proceedings before us relate to the affairs of BDA and if the applicant is a shareholder of BDA, then, his claim to participate in the proceedings may have to be sustained. However, the applicant is not a shareholder of BDA. It is a shareholder of the petitioner-company. It questions the wisdom of the board pf directors of the petitioner-company in filing this petition against its fully owned subsidiary on the ground that this petition is mala fide and that the applicant together with its supporters holding substantial shares (majority) do not approve of the action of the board. If, as a general proposition, it is claimed that the majority shareholders can question the action of the board of directors of a company in initiating proceedings, we are afraid such a proposition cannot stand in terms established and codified legal framework. In the scheme of management of a company, not only the Companies Act but also the articles of a company specify the powers which could be exercised by the board independently, those which could be exercised with the approval of the general body and those which are in the exclusive domain of the general body. Initiating legal proceedings is within the independent powers of the board. Further, not only the Companies Act but all other statutes dealing with incorporated companies, whether criminal or civil, always recognise the board of directors as the one responsible for conducting the affairs of a company. As rightly pointed out by learned counsel for the petitioner-company, not only Section 291 of the Companies Act authorises the board to do every thing in the name of a company, article 161 specifically empowers the board to initiate proceedings in the name of the company. Shri Sarkar's reference to Balmford v. Balmford [1969] 1 All ER 969 (CA) and submission that as a corollary, action taken by the board without the shareholders' approval can also be questioned, we are afraid cannot be accepted since the members of the board are the elected representatives of the shareholders and whatever powers the board enjoys in terms of the provisions of the Act and articles, the same cannot in normal circumstances be questioned. If the members of a company have lost confidence in the board, the Act itself contains provisions for removal of such directors. Further, Shri Subramanian, who repeatedly argued that the petition is not in the interest of the members, could not elaborate as to how it is prejudicial to the interest of the members. Therefore, as a general proposition, the contention of the applicant that the shareholders can impugn the decision of the board to institute judicial proceedings, cannot be sustained.
8. However, if the contention is that since the petition is against the wholly owned subsidiary, and as a member of the holding company, the applicant has a right to participate in the proceedings, then, the issue has to be examined differently. Both Section 397/398 give a right to apply under these sections only to the members of the company against which proceedings are initiated. The same is the position in Section 399 also. There is no special provision in the Act regarding the rights of members of a holding company in the matter of a subsidiary company except in Section 214(2) by which the members of a holding company could be treated as members of a subsidiary to exercise the rights under Section 235. This provision in Section 214(2) makes it abundantly clear that the Legislature is conscious of the rights of members of a holding company in relation to the affairs of a subsidiary company and that such rights have been restricted only in regard to the provisions of Section 235. In other words, the Legislature does not seem to have intended to bestow similar rights on the shareholders of a holding company to file a petition under Section 397/398 against a subsidiary company. Such being the position, it emerges that the shareholders of a holding company cannot file a petition against a subsidiary company by virtue of their shareholding in the holding company. No case law or precedent has been placed before us to establish that there are exceptions to this general legal position. Thus, the applicant has not convinced us that either in law or in facts, its participation in the proceedings is essential and as such we dismiss this application along with C.A. No. 315 of 1999.
9. In regard to C. A. No. 316 of 1998 in which the prayer is that we should defer the proceedings till the issue relating to the management and control of the petitioner-company is decided in the Bombay High Court, Shri Faizullabhoy, advocate appearing for the applicant, submitted that in the last annual general meeting of the petitioner-company, resolutions have been moved for removing some of the directors and for induction of directors from the applicant's group and votes polled in respect of these resolutions have been kept in a sealed cover as per the directions of the Bombay High Court and that the matter is coming up before that court in the first week of March, 1999. Since the applicant and his associates hold majority shares in the company and have voted in respect of all these resolutions, on declaration of the results, the applicant group will become majority directors in the petitioner-company and they may not like to pursue the petition. Therefore, he submitted that the hearing of the petition be deferred till the outcome of the Bombay proceedings is known.
10. Shri Andhyarujina, senior advocate, submitted that in the Bombay proceedings, BDA is not a party and that the only issue under challenge in those proceedings is about the legality of acquisition of shares by the applicant and his group and as such there is no need to keep the petition pending till the disposal of the Bombay proceedings. He further submitted that whatever may be the outcome of the proceedings, the same is likely to be taken on an appeal and if the present proceedings are to be deferred, it would be indefinite. Therefore, he submitted that the present proceedings should go on notwithstanding the fact that certain proceedings are pending in the Bombay High Court.
11. As far as this application is concerned, it is an admitted position that the affairs of BDA are not before the Bombay High Court while the present proceedings relate to the affairs of BDA. Deferment of proceedings would arise if the subject-matter covered in both the proceedings were the same so that there is no conflict in decisions. Learned counsel for the applicant pointed out, more than once, that in view of pending Securities and Exchange Board of India inquiries, the Western Region Bench of the Company Law Board has deferred the hearing of a Section 111A petition filed in respect of the petitioner-company and as such the same view should be taken by this Bench also. It is to be pointed out that the subject-matter of the pending inquiry by the Securities and Exchange Board of India and the Section 111A petition related to one and the same subject-matter and, therefore, the Western Region Bench deferred the hearing of the Section 111A petition and that too only upto a particular period and not indefinitely. Therefore, this analogy is not applicable in the present case seeking indefinite adjournment. As rightly pointed out by learned counsel for the petitioner-company, if we are to defer the present proceedings till the outcome of the Bombay proceedings, it would only mean indefinite deferment which, we are of the view, cannot be done. However, now that we are fixing the dates of hearing of the petition on immediately available dates in June, 1999, it is quite probable that by that time the Bombay proceedings might come to an end. Even otherwise, the matter will be heard on June 21, 22, and 23, 1999, at 10.30 a.m. each day. We find that some of the respondents have filed their replies to the petition. Those who have not filed their replies are at liberty to do so by April 15, 1999, and rejoinders will be filed by May 15, 1999. The petitioner has filed C. A. No. 52 of 1999 seeking amendment to the original petition. Without prejudice to the contention of the respondents on the maintainability of the application, to avoid delay in the proceedings, they may file their replies to the application by April 15, 1999, with liberty to the petitioner to file its rejoinder by May 15, 1999.