Company Law Board
P.H. Rao, Managing Director vs Skycell Communication Ltd. on 13 October, 2000
Equivalent citations: [2002]110COMPCAS734(CLB)
ORDER
Banerji, Chairman
1. The petitioner claiming to be the Managing Director of Skyceli Communications Ltd. (First Respondent - the company) has filed this petition praying for certain reliefs under section 409 of the Companies Act, 1956 on the ground that there has been a change in the ownership of shares and that it is likely that there would be a change in the Board of the company which would be prejudicial to the interest of the company.
2. The petition which was filed on 22-8-2000 was mentioned before us on 24-8-2000 when certain interim relief was sought pending final adjudication. The prayer was opposed on behalf of DSS Enterprises (P.) Ltd. (Second Respondent) who sought 5 days time to file a reply. While granting time to the said parties for exchanging their replies we fixed 6-9-2000 for hearing of the interim matter and further directed that till the said date resolution if any passed in the Annual General meeting (AGM) on 23-8-2000 shall be subject to our further orders. On 30-8-2000 the petitioner filed another application praying for certain urgent interim orders in view of some subsequent developments. On 1-9-2000 after hearing the counsel for the parties we ordered that till the matter was heard on 6-9-2000, without prejudice to the rights and contentions, both parlies were restrained from holding any meeting of Board of Directors and general meeting of the company and taking any further steps in pursuance to the resolutions passed in the AGM's of 23rd Aug. and the resolutions passed in the meeting of the Board of Directors on 26-8-2000.
3. On 4-9-2000 the second respondent filed its reply to the petition wherein it has inter alia challenged the maintainability of the petition mainly on the ground that the ingredients of section 409 of the Act are not attracted in the facts and circumstances of the present case. On 6-9-2000 while granting time to the petitioner to fiie a rejoinder it was further directed that the question regarding maintainability and the prayer for interim relief shall be considered on 13-9-2000. The petitioner has filed a short rejoinder mainly in respect of the objection pertaining to the maintainability of the petition and reserved its right to file a detailed rejoinder. Arguments on the maintainability was subsequently heard and concluded on 25-9-2000.
4. Before we consider the respective submissions of the learned counsel for the parties it will be proper to give very briefly the petitioners case as set out in the petition to the extent relevant for deciding the question before us. The first respondent was promoted by four shareholders namely viz. (i) Cromption Greaves Ltd. (CGL) (ii) DSS Enterprises (DSS) (III) Bell South International (Bell South) and (iv) Millicum International (Millicum) and was incorporated as private limited company on 3-3-1992. Their respective shareholding was CGL-40.5% DSS-10.5 per cent. Bell South and Millicum - 24.5 per cent each. Presently, the company is a deemed public company in terms of section 43 A of the Act. CGL entered into an agreement with the fifth respondent (Bharti) on 25-11-1999 for transfer of Us entire holding of 40.5 per cent shares in the company lo Bharti subject to various approvals. This transaction was approved by the Board of Directors of the company on 14-12-1999, and approval/consent was also received from Millicum, DSS, ICICI and ABN Arnro. Approval was also given by Department of Telecommunication (DOT) subject inter alia to the condition that management conirol of licensee company shall remain in Indian hands. In the meeting of the promoters on 3-5-2000 it was decided that DSS and Bell South would also sell their shareholdings and accordingly applied for obtaining necessary approvals from institutions including DOT. The Board of Directors also passed a resolution dated 3-8-2000 by circulation accepting the conditions stipulated in the approval of DOT including the condition that the management and control of the licensee company shall remain in Indian hands. Despite however giving their consent, Bell South and DSS back tracked and in collusion with Millicum raised irrelevant issues prejudicial to the interest of the company and causing it irreparable harm and injury. The transfer of shares held by CGL to Bharti was approved by the Board through a circular resolution on 7-8-2000 and Bharti became a shareholder of the company on that date. The AGM was scheduled to be held on 23-8-2000 and the petitioner and two other directors namely Shri K.K. Nohria and B.M. Suri who were retiring by rotation and had offered themselves for reappointment there is a strong apprehension that the other shareholders holding 59.5% of the equity will act together to keep them out and foreign shareholders nominees would then constitute the majority of the Board and control the company to suit their end without having any regard to the business interest of the first respondent. This may not only jeopardize the licence granted by DOT in favour of Skycell, but might result in the lenders recalling their loans. This petition under section 409 is necessitated as there has been a change in ownership of 40.5 per cent shareholding, resulting in a likely change in the Board of Directors and if such a change is allowed it would prejudicially affect the affairs of the company. It is, therefore, absolutely necessary as well as just and equitable that this Board may pass appropriate orders to insure that no resolution passed or action taken that may affect a change in the Board of Directors of Skycell unless confirmed by the Board. An interim order on the same lines have been sought under section 409(2).
5. The 2nd respondent has raised an issue relating to the maintainability of the petition in terms of section 409 on various grounds. Even though the counsel appearing for the petitioner and other supporting respondents argued that the maintainability of the petition cannot be decided as a preliminary issue without going into the merits of the case, since we prima facie, found that the objections on the maintainability by 2nd respondent merited consideration, we heard the arguments of the counsel on the maintainability.
6. Shri Sawhney, the senior Advocate appearing for the 2nd respondent submitted that the petition is not maintainable as the condition precedent for invoking the provisions of this section has not been satisfied. Since the condition precedent has not been satisfied, the issue of entertaining the petition becomes a jurisdictional issue and as such should be decided at this preliminary stage. According to him, there are three links in section 409 which should be satisfied to maintain the petition - there should be change in the ownership of shares and this change should bring about a change in the Board and that such a change is prejudicial to the interest of the company. In case the change in the ownership of shares does not bring about a change in the Board, this section cannot be invoked. According to him, only when these two conditions are fulfilled then the enquiry relating to whether such a change in the Board would be prejudicial to the company could be examined. He contended that the provisions of section 409 are beneficial provisions to prevent corporate raiders, who, by cornering shares in a company try to take over the management also by changing the Board of Directors, by the strength of the shares so acquired. In this connection, he referred to the explanatory note relating to this section, when the same was incorporated in the Act in 1951. This explanatory note reads "It has come to our notice that in some cases, undesirable elements corner shares in companies and thereafter get themselves elected as directors". This note, according to the learned counsel, would clearly indicate that this section would be applicable only when the acquirer tries to change the Board and not when the existing majority shareholders decide to change the Board. Any order by the CLB preventing the existing majority shareholders to have a say in the compo-
sition of the Board would be against the principles of corporate democracy. It is on record that there was a joint venture agreement among 4 shareholders. CGL being one of the promoters transferred its shares to Bharti and thus Bharti has stepped into the shoes of CGL with 40.5 per cent shareholding. The balance 59.5 per cent shares are held by the promoter respondents. In other words, there is no change in the majority shareholders and this majority could exercise its voting rights in deciding the composition of the Board of Directors irrespective of the fact whether CGL is a shareholder or Bharti. In regard to the facts of this case, he pointed out that the petitioner was appointed as the managing director on 13 -8-1999 in a casual vacancy of a director whose term was to expire in the next AGM. The petitioner and two other directors whose term was to expire in the AGM and who were eligible for reappointment were nominees of CGL, Since his term would have expired on the date of the AGM on 23-8-2000, a resolution was proposed for his appointment as a director. His appointment was to be a fresh appointment for which a notice had been received from a shareholder proposing his name for directorship. The other two nominees of CGL also came up for reappointment. Under the circumstances it is for the shareholders to decide whether the petitioner should be appointed as a director and other directors to be re-elected or not. He urged that the provisions of section 409 do not come into play when in the ordinary course, in terms of the statutory provisions like sections 255, 256 and 257 changes in the Board are brought about. Provisions of section 409 have been enacted to protect the interests of the existing shareholders and their right to have their own Board which the petitioner is challenging by this petition. Further, as per Article 10 of the Joint Venture Agreement (JVA), the managing director is to be a nominee of CGL. Since, CGL is no longer a shareholder, the question of the petitioner continuing as the Managing Director does not arise. Now, the petitioner has joined hands with Bharti and this petition has been filed only to force the other promoter shareholders to sell their shares to Bharti. In other words, this petition has been filed with an ulterior motive to facilitate Bharti to gain control of the company notwithstanding the fact that it is in minority and now it has become a raider and if at all any relief should be given, it should be in favour of the respondent promoters and their Board. As far as the condition of licence that the management of the company has to be in Indian hands, even now the majority shareholders are Indians even though they may have differences among themselves. This condition was imposed only to ensure that the majority of shares are in the hands of Indians. Even otherwise, this question need not be gone into at this stage inasmuch as the petition itself is not maintainable under section 409 in view of non satisfaction of essential ingredient of the change in ownership of shares resulting in change in the Board. Accordingly, this petition deserves to be dismissed in limine and the resolutions passed by the majority shareholders in the AGM held on 23-8-2000 should be allowed to be implemented by vacating the interim orders. He also questioned the locus standi of Shri Dave appearing for the company, inasmuch as, the Board of the company has not authorized any one to appear on behalf of the company. Referring to Nibro Ltd. v. National Insurance Co. Ltd. [1991] 70 Comp. Cas. 388 he pointed out that the CLB should not take any cognizance of the appearance of anyone in the absence of a valid Board resolution of the company. He also pointed out that this company is a deemed public company, yet it is essentially and basically a private company, and as such the provisions of section 409 are not applicable, in view of the exception provided in section 409(3).
7. Shri Haksar, the senior Advocate appearing for the 3rd respondent (Bell South) supplementing the arguments of Shri Sawhney pointed out that the provisions of section 409 are to prevent corporate raiders from taking over the control of a company by acquiring shares and by virtue of shares so acquired, effect change in the Board. Therefore, it is to be first examined, at the threshold, as to whether changes are being brought about by such change in the ownership, as a preliminary issue. In the present case, he pointed out that Bharti, even assuming, is a raider, is only in minority and cannot have a say in the composition of the Board. Tn facts of the case, he contended that the petitioner has not established any cause of aciion and as such this petition is not maintainable. Referring to the decision of the CLB in R. Baba Chandrasekar v. V.R. Textile Ltd. [1992] 2 CLJ 103-CLB, he contended that the provisions of section 409 cannot be utilized for the purpose of preventing the majority from exercising its lawful rights to have a management of its own.
8. Shri Gopal Subramaniam, the Advocate, appearing for the petitioner argued to state that the maintainability of the petition cannot be decided in isolation of the facts of the case and such sought for hearing the petition on merits. He contended that as long as the petitioner is able to establish, prima jade, that there had been change in the ownership of shares and that there is likely to be a change in the Board, he has a cause of action to file a petition under section 409, and the petition becomes maintainable. This section contemplates application by the MD or a director, a change in the ownership of shares and that a likelihood in the change of Board. These three ingredients are the foundation for a petition under section 409 and these conditions have been fulfilled in the present petition and therefore at this stage the CLB has to take a prima facie view on the maintainability. It may be that ultimately the petitioner may not be in a position to satisfy the CLB that such change in the Board is prejudicial to the interest of the company after the merits of the case are gone into, at the final hearing stage. Therefore, the question of dismissing the petition at this stage when the petitioner has prima facie shown satisfaction of the primary requirement to invoke the provisions of section 409, does not arise. The words of the statute have to be interpreted liberally when the language is plain and simple. Chapter VI of the Act of which section 409 forms part deals with exceptions to majority rule and therefore if majority acts in a manner detrimental to the interest of the company, then, the provisions of section 409 could be invoked to seek equitable justice from the CLB. Further, this section also takes care of public interest even if it is against the interest of the majority shareholders. This section does not specify application only in case of a corporate raiders. Essentially, this section is to protect the minority interest and the interest of the company. The only onus on the part of the petitioner lo invoke the provisions of this section is to show that there has been a change in the ownership of shares and that it is likely to result in change in the Board which in his opinion would be prejudicial to the interest of the company. It is for the respondents to establish otherwise. Therefore, without going to the merits of this case, the matter cannot be decided at this preliminary stage and therefore the petition should be heard on merits without any separate order on the maintainability of the petition. He also pointed out that the Supreme Court has held in Needle Industries [1981] 3 SCC 333 that provisions applicable to a public company are applicable to a deemed public company and as such the present petition against the company is maintainable notwithstanding the provisions of section 409(3).
9. Shri Dave, the senior advocate for the company whose appearance for the company has been challenged by the 2nd respondent, submitted as follows : The only issue that could be decided as a preliminary issue in these proceedings is whether the petitioner is the managing director or a director. Once it is found so, the petition has to be heard an merits since various other facts have to be examined before passing a final order on the petition. Since the reply of the 2nd respondent raises various questions of facts, they cannot be looked into at this stage. While interpreting the provisions of a Statute, no words can be added or substituted to the plain meaning and wherever possible beneficial interpretation should be given irrespective of the consequences. Since it is not in dispute that the CLB has jurisdiction lo deal with a matter under section 409, the CLB should not give up its jurisdiction by interpreting the section in a manner not intended by the plain language of the section. The Parliament has not recognized the majority rule while enacting section 409 and if interest of justice demands the majority rule can he given a go-by and the interest of minority could be protected.
10. Shri Rajiv Nayyar, the senior Advocate appearing for the 5th respondent (Bharti) argued as follows : Section 409 postulates enquiry to be conducted by the CLB before a final order is passed. Therefore, once the petition is filed and interim order passed, the enquiry is presumed to have commenced and, therefore, without entering into facts of the case, the petition cannot be dismissed as not maintainable. Dealing with the facts of the case, which according to him is relevant in deciding on the maintainability of the petition, he pointed out that DSS, the Tndian shareholder is under complete control of the other two foreign shareholders and DSS is acting for and on behalf foreign shareholders whose object is to gain control of the management of the company by removing the existing directors. This would be against the conditions of the licence. Further, complicated question of law and facts requiring detailed enquiry cannot be decided at the preliminary stage as held in Scientific Instrument Co. Ltd. v. Rajindera Prasad Gupta [1999] 95 Comp. Cas. 615/119 SCL 451 and MMTC Ltd. v. Inda-French Bio-tech Enterprises Ltd. [2000] 99 Comp. Cas, 112 and Satish Chand Sanwal v. Tinplate Dealers Association (P.) Ltd.
[1998] 93 Comp. Cas. 70/16 SCL 172. Therefore, he urged that the petition should be heard on merits without examining question of the maintainability at this stage.
11. We have considered the arguments of the counsel. This petition was filed on 22-8-2000 and was mentioned on 24-8-2000. In the meanwhile, the AGM which had been convened, through a notice dated 7-7-2000 was held on 23-S-2000. In this meeting resolutions relating to reappointment of two retiring directors and appointment of two new directors had been proposed for consideration. The two new directors including the petitioner had been earlier appointed as directors in casual vacancies of those whose appointments were to come to an end at the AGM and accordingly, their names had been proposed for appointment as directors. There are two versions of what happened in that meeting. According to the petitioner, the said meeting was chaired by the petitioner and resolutions relating to reappointment/appointment as per the notices were carried through, while according to the 2nd respondent, the meeting was chaired by Shri Satwant Singh at a different venue and that the resolutions relating to reappointment of two directors and the appointment of the petitioner as a director were defeated. If the resolutions relating to appointments of directors had been carried through as claimed by the petitioner, then he has no cause of action, since there is no change in the Board. However, if the resolutions had been defeated as claimed by the 2nd respondent, then, there is change in the Board and we have to examine whether the same has been brought out by the change in ownership of shares as contemplated in section 409.
12. We shall first examine whether we should consider the maintainability of the petition as a preliminary issue as sought by the opposing respondents or the same should be considered along with the merits of the case. Normally, we consider an issue as a preliminary issue only when it relates to jurisdiction or capacity of the petitioner. In the present case, it is not in dispute that the CLB has the jurisdiction in relation to section 409 and that the petitioner, being the managing director on the day of the petition, has the capacity to file this petition. Yet, since according to the opposing respondents, the ingredients of the section have not been satisfied and as such this petition is not maintainable we are examining the same as a preliminary issue for two reasons. One is that, If the ingredients of section 409 are not satisfied then considering the petition under that section does not arise and the second is that the maintainability could be determined with reference to the admitted basic facts without traversing to various other disputed facts to which references were made by both the sides. Shri Rajiv Nayyar referred to Scientific Instruments Co. Ltd's case (supra) to state that when disputed questions of law and facts are involved, the maintainability should not be decided at the threshold. In that case, the issue raised was on the locus standi of the petitioner to maintain the petition under sections 397/98 and the mode and the legality of the acquisition of the shares to maintain the petition in terms of section 399 was involved. Similar was the case in Satish Chandra, Sanwala's case (supra) also. In MMTC. Ltd.'s case (supra), the issue was whether the allegations would merit winding up of the company on just and equitable grounds and the CLBheld that to form an opinion to that effect, the merits of the case had to be gone into. In the present case, as already pointed out, we are examining the maintainability on the basis of two admitted facts-change in ownership and change in the Board. We are not required to go into any other matter in the pleadings of the parties to decide the maintainability of the petition. As far as the applicability of the provisions of this section to a deemed public company is concerned, this Board has already decided that it is applicable in R. Babachandrasekar's case (supra).
13. Section 409 reads: (1) Where a complaint is made to the Company Law Board by the managing director or any other director or the manager of a company that as a result of a change which has taken place or is likely to take place in the ownership of any shares held in the company, a change in the Board of Directors is likely to take place which (if allowed) would affect prejudicially the affairs of the company, the Company Law Board may, if satisfied, after such enquiry as it thinks fit to make that it is just and proper so to do, by order, direct that no resolution passed or that may be passed or no action taken or that may be taken to effect a change in the Board of Directors after the date of the complaint shall have effect unless confirmed by the Company Law Board; and any such order shall have effect notwithstanding anything to the contrary contained in any other provision of this Act or in the Memorandum or articles of the company or any agreement with, or any resolution passed in the general meeting by, or the Board of Directors of the company.
14. A reading of the section would show that the order that may be passed by the CLB would have overriding effect of the Act, the memorandum, articles or any resolution passed by the Board or the general body. When such a primacy has been conferred on the order to be passed by the CLB, it is essential to ensure that all the ingredients of the section arc satisfied before passing an order under this section. There are four ingredients in this section. They are : (a) The petition is to be filed by the managing director or a director or the manager; (b) There is a change or likely change in the ownership of shares; (c) Such a change is likely to result in change in the Board; and (d) Such a change in the Board is prejudicial to the company. Normally, in a petition under section 409, enquiry might have to be made as to whether there is or likely to be a change in the ownership of shares, and whether such a change is likely to alter the Board and whether such an alteration is prejudicial to the interest of the company. Every issue may have to be inquired into in the absence of established/ admitted facts. In the present case, a change in the ownership is admitted and the minutes of the AGM chaired by Shri Satwant Singh indicates that there is a change in the Board. Thus, applying the plain language of the section, as contended by the counsel for the petitioner, the petition appears to be maintainable. However, we are not inclined to accept this contention. The ingredients from (b) to (d) are like links in a chain and there should be a casual relationship between one and the other. It is an admitted position that the change in the ownership of shares is to an extent of 40.5 per cent and, therefore, we have to see whether, this change in the ownership of shares has brought about the change in the Board of Directors. In other words, the person who acquires the shares should be in position to alter the Board by the strength of the shares so acquired and unless it is so, there would be no connection between the change in the ownership of shares and the change in the Board and the provisions of section 409 will not be attracted.
15. In this connection, we may beneficially refer to two other provisions in the Act which are more or less part materia to section 409, which would support the view that we have taken. Sections 250(3) and 250(4) also deal with change in the ownership of shares and consequent change in the Board.
"Section 250(3) reads: Where a transfer of shares in a company has taken place and as a result thereof a change in the composition of the Board of Directors of the company is likely to take place and the Company Law Board is of the opinion that any such change would be prejudicial to the public interest, it may, by order, direct that-
(a) the voting rights in respect of those shares shall not be exercisable for such period not exceeding three years as may be specified in the order;
(b) no resolution passed or action taken to effect a change in the composition of the Board of Directors before the date of the order shall have effect unless confirmed by the Company Law Board.
Where the Company Law Board has reasonable ground to believe that a transfer of shares in a company is likely to take place whereby a change in the composition of the Board of Directors of the company is likely to take place and the Company Law Board is of the opinion that any such change would be prejudicial to the public interest, the CLB may, by order, direct that any transfer of shares in the company during such period not exceeding three years as may be specified in the order shall be void."
A perusal of the above twoprovisions would show that both the sections deal with change in the ownership of shares and consequent change in the Board as in section 409. The only difference is that these two sections relate to prejudice public interest while section 409 relates to prejudice to the interest of the company. Thus all the three links as in section 409 arc present in these sections also. The change in the Board is sought to be prevented, in section 250(3), by freezing the voting rights of the shares which have changed hands and in section 250(4), by declaring the transfer of the shares as void. The freezing of the voting rights or declaring the transfer of the shares as void would indicate that the shares in question should influence the change in the Board and to prevent a change in the Board with the strength of the shares so acquired, these orders arc passed. To put it in a simpler language, the voting strength of the shares acquired should influence/cause the change in the Board and that is why these sections provide for giving directions regarding the shares. Section 409 should also, therefore, to be interpreted in the similar manner and if we do so it is clear that there should be nexus between the change in the ownership of shares and the change in the Board. Unless this link is established, the question of enquiring into as to whether such a change in the Board is prejudicial to the interest of the company or not does not arise.
16. If we accept the contention of the petitioner that the language of the section should be applied as such and as long as there is change in the ownership of shares and likely change in the Board, enquiry should start, it is likely to lead to absurd situations. In companies with widely held shareholdings, ownership of shares changes with every transfer of shares. Therefore, whenever a director is proposed to be inducted or removed, any director could invoke the provisions of section 409 irrespective of the quantum or percentage of shares transferred, on the ground that the requirements of this section have been satisfied. Therefore, we are of the firm view that a petition under section 409 is maintainable only when it is shown that the change in the Board has been or about to be brought out by the strength of ihe shares acquired. In other words, the acquirer should be in position to change the Board on the strength oF the shares so acquired. This is what is explained in the notes on clauses also, when this provision was inserted in the Act.
17. In the present case before us, the acquirer is Bharti, and if any of the directors had invoked the provisions of seciton 409 against Bharti, we would have found some substance in the petition and our enquiry would have been to find out whether, Bharti could have, with the strength of the shares acquired, changed the Board. This section is essentially to ward of the take over attempts by an incoming shareholder and not to put fetters in the right of the existing shareholders in changing the Board. By this petition, what the petitioner seeks, is to prevent the existing majority shareholders from exercising their right to constitute the Board, the obvious reason being that he has aligned himself with Bharti, which has acquired the ownership of shares in the company. In the present case, there is no connection between the second link and the third and as such, there is no need to look into the fourth link i.e. whether the change in the Board is prejudicial to the interest of the company. The basic objective of the provisions of section 409 is that an acquirer of shares in a company should not be allowed to change the Board with the strength of the shares so acquired. In the present case, what is sought is that such an acquirer should he allowed to have a say in the composition of the Board against the desire of the existing majority, which according lo us would be contrary to the objective of section 409. Therefore, we find that this petition, in facts of this case, is misconceived and accordingly deserves to be dismissed. In this connection reference may also be made, as rightly pointed out by Shri Haksar to the decision of this Board in R. Baba Chandrasekar's case (supra) wherein it was decided that the provisions of this section cannot be invoked lo bar existing majority shareholders from exercising their right in deciding on the composition of the Board.
18. Accordingly, we dismiss this petition as not maintainable and vacate all the interim orders. No order as to cost.