Company Law Board
Gordon Woodroffe And Company Limited, ... vs Gordon Woodroffe Limited And Ors. on 12 May, 1998
Equivalent citations: [1999]97COMPCAS411(CLB)
ORDER
1. Gordon Woodroffe Limited (U. K.) (petitioner) holding 24.9 per cent. shares in Gordon Woodroffe Limited, Chennai (GWL), have filed this petition under Section 398(1)(b) of the Companies Act, 1956, alleging that material changes have taken place in the shareholding and control of GWL, on account of which it is likely that the affairs of GWL will be conducted in a manner which is likely to be prejudicial to the interests of the company/public interest and seeking grant of suitable reliefs as prayed for in the petition.
2. To appreciate the issues involved, it is necessary to narrate certain admitted facts in the case. The petitioner-company held majority shares in the Indian company, which was reduced to 40 per cent. in view of the Foreign Exchange Regulation Act, some time in 1973. M. R. Chabbria (MRC), a non-resident Indian, acquired the controlling interest in the petitioner-company, some time in 1985. He also acquired about 39 per cent. shares in Shaw Wallace and Company Limited (SWC) and became the largest single shareholder in SWC. By virtue of these large shareholdings, he became the chairman of both SWC and GWL. SWC, while controlling various subsidiaries also controlled the boards of Shoes Specialities Private Limited (SSPL) and Tracstar Investment Private Limited (Tracstar) through its own nominees on the boards of these companies. Three companies under the control of MRC held among themselves 6.89 per cent. shares in GWL. GWL, having become sick in 1987, was referred to the Board for Industrial and Financial Reconstruction. In the Board for Industrial and Financial Reconstruction proceedings in 1988, MRC was treated as a promoter of GWL and IRBI which was appointed as the operating agency, gave a proposal by which SWC, the company controlled by MRC, was to be closely associated with the revival of GWL. In pursuance of the Board for Industrial and Financial Reconstruction's suggestion, the board of SWC decided to invest a sum of Rs. 250 lakhs in the equity of GWL. However, for various reasons, instead of investing the entire amount by way of equity, on a suggestion made by GWL, the Board for Industrial and Financial Reconstruction sanctioned a scheme by which SWC was to invest Rs. 140 lakhs as equity, representing 24.90 per cent. in the expanded equity of GWL. SWC was also to make a loan of Rs. 50 lakhs. However, this proposal did not go through. From 1987 to 1991, SWC had funded GWL to the tune of more than Rs. 300 lakhs by way of loans, etc.
3. GWL came out with a rights issue in May, 1991, with the record date as May 1C, 1991. The three MRC companies holding 6.78 per cent. shares in GWL transferred these shares to Tracstar, and the same were registered in the name of Tracstar on May 25, 1991. The petitioner-company did not take its rights, while Tracstar, in addition to its rights, on the basis of acquisition of shares by transfer, got allotted to itself additional shares, by which its holding in GWL came to about 25 per cent. It also sought and obtained, out of its request for additional shares, allotment of 5 lakhs shares in the name of SSPL which accounted for about 12 per cent. in the capital of GWL.
4. K. R. Chabbria (KRC) is the younger brother of MRC. He became the managing director of SWC when MRC became the chairman. Due to certain family disputes between the two, KRC was removed from the post of managing director. KRC started claiming control of both SSPL and Tracstar. A few proceedings were initiated before us and his control of both SSPL and Tracstar has been confirmed by us. In the meanwhile, Trident, a company under the control of KRC, acquired from the market, further 6.1 per cent. shares in GWL. Thus, presently, KRC controls about 44 per cent. shares in GWL compared to MRC controlling 24.9 per cent. Tracstar/KRC have also submitted certain proposals before the Board for Industrial and Financial Reconstruction for reviving GWL. GWL continues to be under the management of MRC/SWC, even though the KRC group holds larger percentage of shares.
5. In the background of the facts of this case, the petitioner has filed this petition, alleging that any change in the management of GWL at this juncture, when the Board for Industrial and Financial Reconstruction is considering revival of GWL would be against the interests of the company and as a matter of fact, according to the petitioner, even the acquisition of shares by SSPL and Tracstar is illegal and that the gaining control of SSPL and Tracstar has been manipulated by KRC by dubious means. It has also advanced certain arguments, that, if the change in the management takes place, on account of change in control, it is likely that the affairs of GWL will be conducted in a manner prejudicial to the interest of the company/ public interest. Accordingly, the petitioner has prayed for the following reliefs :
(i) That directions be issued, that, there shall be no change in the management of GWL at the instance of Tracstar/SSPL and that the board shall continue to be with the nominees of SWC/the petitioner.
(ii) That directions be issued to Tracstar and SSPL to transfer their holdings from GWL to the petitioner or its nominees.
(iii) Restrain permanently Tracstar and SSPL from exercising any voting or other rights in respect of the shares held by them in GWL.
6. The respondents have raised a preliminary objection to the maintainability of the petition under Section 398(1)(b) on the ground, that, the ingredients/requirements of this section have not been satisfied. In addition to this, they have also raised certain other objections to the reliefs sought for in the petition. When the petition was taken up for hearing, we advised counsel for the parties to argue both on the preliminary objections as well on the merits so that a composite order could be issued.
7. Shri Sarkar, senior advocate, appearing for the contesting respondents, dealing with the provisions of Section 398(1)(b) submitted that the provisions of Section 397/398 are invoked by minority shareholders against majority shareholders complaining, that, the latter are conducting the affairs of a company in an oppressive manner or are mismanaging the affairs of the company. The present case, as per the version of the petitioner itself, GWL is being managed by MRC through SWC. In other words, since MRC is acting on behalf of the petitioner, by alleging oppression or mismanagement in the affairs of the company, it is complaining about MRC/SWC, which situation is not contemplated by Section 397/398. In other words, according to him, people in the management of a company cannot file a petition under this section alleging mismanagement in the affairs of the same company. For this proposition he relied on the Allahabad High Court in Rai Saheb Vishwamitra v. Amar Nath Mehrotra [1986] 59 Comp Cas 854. Citing the decision of the Delhi High Court in Suresh Kumar Sanghi v. Supreme Motors Ltd. [1983] 54 Comp Cas 235, he stated that relief under Section 398 does not necessarily mean that the management of the company should be handed over to the petitioners and on the other hand the interests of the company and oth er equitable consideration have to be taken into consideration. He further submitted, that, a reading of the provisions of the Section 398(1)(b) would show, that, to invoke the provisions of this section, there should have been a material change in the management or control of the company either by alteration in the board or change in the ownership of shares. In the present case, there has been no alteration in the board nor is there a change in the ownership of shares inasmuch as SSPL and Tracstar continue to hold the shares right from the time when they acquired the shares. He also cited the decision of the Calcutta High Court in Bengal Luxmi Cotton Mills Ltd., In re [1965] 35 Comp Cas 187 for the proposition that a material change in the control or management of the company is to arise from certain speci-fied facts as laid down in Section 398(1)(b). Even assuming that the control of these two companies has come under the control of KRC, yet, such changes in the control of a company holding shares in another company cannot amount to change in 'ownership of shares as contemplated under this section. Even otherwise, according to him, the change in the control of these companies has been judicially recognized by the Company Law Board in other proceedings. Dealing with the words "any other manner whatsoever" as used in the section, he submitted that it has to be interpreted "ejusdem generis" and cannot be made use of to widen the import of the section. In short, according to Shri Sarkar, in the absence of any change in the ownership of shares, the management being with the petitioner through MRC/SWC, the petitioner cannot invoke the provisions of the section. He further stated, that, another requirement of the section is that there should be an apprehension that, by reason of the change in control, it is likely that the affairs of the company will be conducted in a manner prejudicial to public interest or the company. He submitted that no material has been placed before the Bench as to how the affairs of the company will be prejudicially conducted, in case the respondents gain control over the management of the company.
8. Shri Ganesh, advocate, appearing for the petitioner, submitted that, Section 398(1)(b) is an exceptional provision, which has to be seen different from Section 397/398(1)(a). The object of Section 398(1)(b) is a benevolent one. He differentiated between the provisions of section 250(3) which also deals with transfer of shares and Section 398(1)(b) to state that while Section 250(3) deals only with transfer of shares, Section 398(1)(b) deals with many other situations by which there could be change in the control of a company. He also referred to Section 409 of the Act, which deals with change in the board of directors on account of a change in the ownership of any shares held in the company to state that the scope of Section 398(1)(b) is wider than Section. 409. Right from the incorporation of SSPL and Tracstar, he stated, these companies were under the control of SWC and with a view to consolidate MRCs holding in GWL, these companies were allowed to acquire shares in GWL. However, the fact is that, the control of these two companies has gone to KRC by which he is in the position to control the shares of GWL held by these companies. Presently, with 39 odd per cent shares held by these companies and further acquisition of about 6 per cent. shares by Trident which is also under the control of KRC, he is now in a position to effect changes in the board of directors of GWL. This is one of the situations which comes under "in any other manner whatsoever" and as such the petitioner has rightly invoked the provisions of this section to come before the Company Law Board. He countered the arguments of Shri Sarkar that, the words "in any manner whatsoever" have to be treated as ejusdem generis, and submitted that the same cannot be accepted.
9. We have considered the arguments of counsel on the maintainability of the petition. Section 398(1) has two sub-clauses. Sub-clause (a) deals with a situation wh,erein the affairs of a company are being conducted in a manner prejudicial to public interest or in a manner prejudicial to the interest of the company. In other words, the action contemplated is against the persons presently in control/management of the company. Sub-clause (b), with which we are concerned presently, deals with the situation Where it is likely that, the affairs of the company will be conducted in a manner prejudicial to the public interest or the company on account of change in the control or management of a company either on account of a change in the board of directors or in the ownership of shares. In other words, this sub-clause provides for a preventive action for an apprehended future mismanagement by persons who have gained control. Rai Saheb's case [1986] 59 Comp Cas 854 cited by Shri Sarkar, was a case under Section 397/398(1)(a) and when the petitioners themselves were in control "of the affairs of the company, the court observed that, "the appellants themselves were in the control of the affairs of the company and the ingredients of Section 397 were not satisfied". Thus, the contention of Shri Sarkar that persons who are in the present management cannot file a petition under this sub-clause does not stand to reason as they can also complain of a possible future mismanagement of the company by persons who gain control over a company. Supreme Motors Ltd.'s case [1983] 54 Comp Cas 235 (Delhi), as cited by Shri Sarkar, has no relevance in this context and the facts of Bengal Luxmi's case [1965] 35 Comp Cas 187 (Cal) are different from the facts of this case. A petition under Section 398(1)(b) is a special dispensation available to the management group as compared to the similar provisions available under Sections 247, 250 and 409 of the Act. What is required is, that, there should be a change in the control of the company and that the persons applying under this section should satisfy the requirements of Section 399.
10. Section 398(1) reads as follows :
"(1) Any members of company who complain . . .
(b) that a material change (not being change brought about by, or in the interests of, any creditors including debenture holders, or any class of shareholders, of the company) has taken place in the management or control of the company, whether by an alteration in its board of directors or manager or in the ownership of the company's shares, or if it has no share capital, in its membership, or in any other manner whatsoever, and that by reason of such change, it is likely that the affairs of the company will be conducted in a manner prejudicial to public interest or in a manner prejudicial to the interests of the company."
11. Section 398(1)(b) has two limbs. The first limb requires satisfaction that there is a material change in control or management. This requirement has to be satisfied to maintain a petition. The second limb requires satisfaction, that, with such a change in control or management, it is likely that the affairs of the company will be conducted in a manner prejudicial to the interest of the company/public interest. The satisfaction of this limb is necessary to grant appropriate relief.
12. This section deals with a material change either in the management or control of a company which could arise either by an alteration in its board of directors or in the ownership of shares or in any other manner what-soever. The contention of Shri Sarkar has been, that, there has been no change in the board of directors and that there has been no change in the ownership of shares also. MRC, through SWC is in management of the company and both SSPL and Tracstar continue to hold the shares. Change in control of SSPL and Tracstar, even assuming that there has been a change, according to him, cannot be construed to be change in ownership of shares. Therefore, he contended that, the essential requirement of either a change in the directors or ownership of shares is absent in the present case and as such the first limb of this section is not satisfied and, therefore, the petition is not maintainable. He also submitted that the words "any other manner whatsoever" has to be read as "ejusdem generis". Therefore, according to him, since this is a company with shares, the words "in any other manner whatsoever" have to be "ejusdem generis" to either a change in the directors or a change in the ownership of the shares. However, he was not in a position to suggest situations, which would fall within these two categories. If we look at the provisions of this section with those of Sections 250(3) and 409, we find that each of these sections deals with a particular instance. The very fact the Legisla-ture has used the words "in any other manner whatsoever" in connection with the preamble to the section that "a material change has taken place in the management or control of the company", after specifying two particular instances, it is clear that the Legislature has intended to include all possible ways in which such a change could take place in the management or control of the company.
13. The scope of the words ejusdem generis has been explained in Law Lexicon-cum-Digest, volume I, by N. M. Milchandani, page 563, 1990 edition as follows : "Ejusdem generis is not a rule of law but a rule of construction which enables a court to ascertain the intention of the Legislature when the intention is not clear and does not warrant the court in subverting or defeating the legislative will by confining the operation of statute within the narrower limits than intended by the law makers. It should be resorted to not for the purpose of defeating the intention of the Legislature but for the purpose of elucidating its words and giving effect to its intention". From the above, it is clear that it is not that, whenever general words follow words of particular or specific meaning, then the general words should always be considered to be "ejusdem generis". The word "whatsoever" makes it abundantly clear, that the Legislature has intended it to be a residual clause, comprehensive and exhaustive, to cover all possible instances of change in control or management of a company.
14. It is also worthwhile to refer to the exceptions that have been provided in the section itself within the parenthesis "not being a change brought about by, or in the interest of any creditors including debenture holders, or any class of shareholders of the company" by which the Legislature has excluded from the purview of this section, certain instances of material changes. Taking this also into consideration, if we examine the words, "in any other manner whatsoever", it will be clear that these words have not been intended to be ejusdem generis. Therefore, if there is a material change in the control of a company holding substantial percentage of shares in another company, then such a change, with reference to the other company, has to be treated as a material change in the control as the same would come within the ambit of the words "in any other manner whatsoever".
15. The contention of the respondent has been, that, by their controlling SSPL and Tracstar, they have not gained control of GWL. The concept of "control" has to be equated with the ultimate person or group of persons who will be taking strategic decisions affecting the destiny of a company. In other words, when we talk of control, we normally look into the persons who ultimately have a say in the management of a company. The admitted position in this case is that, KRC, through Tracstar and SSPL together with Trident holds about 44 per cent. shares in the GWL compared to the holding of MRC through the petitioner-company of about 25 per cent. With this substantive shareholding, we have no doubt, that, KRC is definitely in a position to control the affairs of GWL. As a matter of fact, in C. P. No. 45 of 1993 the main allegation of the present respondents is that MRC/SWC are not allowing the KRC group to manage GWL in spite of their having controlling interest.
16. This being the case, the only issue we have to examine is, whether there has been any change in the control of Tracstar and SSPL. For this purpose, it is irrelevant as to how or in what manner or by what means the change has been brought about. Our inquiry is limited to finding out whether there has been any change in the control of SSPL and Tracstar after they acquired shares in GWL. To examine this, we have to traverse back to the past. It is an admitted position that MRC and KRC were together till 1992. At the time when the shares of GWL were acquired by these two companies, SWC was being managed by a board in which both KRC and MRC were directors. It has been, without any shadow of doubt, proved by voluminous documents, the details of which need no elaboration, that all the companies under the control of MRC/KRC through SWC were being managed by nominee directors of SWC. The decision as to which company should acquire shares in GWL has also been decided by the management of SWC. GWL itself was being managed by nominees of SWC because of its having control over the shareholding companies. Now, the position has changed and SSPL and Tracstar are under the control and management of KRC which means the control of 39 per cent. shares in GWL is with KRC. As a matter of fact, as to who controls these two companies has been a matter of dispute before us and we have held that these two companies are under the control of KRC. Therefore, the change of control of SSPL and Tracstar is apparent and clear. With this change in control, it is also apparently clear that the controlling interest in GWL has come to KRC. In other words, a control, which both KRC and MRC held together through SWC is now with KRC exclusively. Thus, the first limb of Section 398(1)(b) that there is a material change in the control of GWL is satisfied, thus making the petition maintainable.
17. Having held that the petition is maintainable, we shall deal with certain other preliminary objections raised by the respondents. One is that the affidavit accompanying the petition has been signed by one V. Subra-maniam, who was not in any way associated with any of the decisions taken by SWC nor a party to any understanding regarding holding of GWL shares. According to the respondents, in the absence of personal knowledge of Shri Subramanian of the various averments made in the petition, no credence should be given to these averments and since the respondents have, with their personal knowledge denied these averments, their affidavits have more evidential value than that of Shri Subramanian, under the Evidence Act. We do not propose to sustain this objection, inasmuch as, the petitioner has produced voluminous documents of SWC in support of the averments made in the petition. In view of this, the absence of personal knowledge seems to be a mere technical one, which does not warrant dismissal of the petition on this score.
18. Another objection is based on the principle of res judicata inasmuch as the issues raised with regard to SSPL and the investment by Tracstar in GWL have been agitated in various proceedings before the Company Law Board and the findings given by the Company Law Board having become final act as res judicata. According to the petitioner, it was never a party in any of the earlier proceedings before the Company Law Board and that by this petition, it is only exercising its rights conferred by law in Section 398(1)(b). On this score while there is some substance in the stand of the respondents, yet the matters agitated in the earlier proceedings related to the control of GWL. In the present proceedings, recognising that the control of GWL is with KRC, the claim of the petitioner is that, such a change is likely to result in the affairs of the company being managed in a manner prejudicial to the interest of the company/public interest and as such it has sought certain appropriate relief to prevent the same. Therefore the premises under which the petition has been filed and the relief sought are entirely different from the earlier proceedings and as such the earlier decisions cannot be construed to act as res judicata.
19. The second limb of Section 398(1)(b) requires satisfaction, that, with a change in control, it is likely that the affairs of the company will be conducted in a manner prejudicial to the interest of the company/public interest. Only when this requirement is satisfied, then the question of grant of relief would arise. As we have already mentioned this section talks of future apprehended mismanagement unlike Section 398(1)(a) which deals with mismanagement in praesenti. Under Section 398(1)(a), we will be looking into the conduct of persons in charge of the affairs of a company and on the basis of the material placed before us in regard to the same it would be possible for us to decide the matter in one way or the other. However, under Section 398(1)(b), a decision on the apprehended mismanagement would depend on extraneous matters, not necessarily connected with the affairs of the company in question. Under these circumstances, we have to be extremely circumspect in coming to a decision.
20. While arguing as to the likelihood of the affairs of GWL being mismanaged, Shri Ganesh also argued as to why MRC/SWC should continue to have the management of GWL under their control for the benefit of the company. According to him, Tracstar has a paid up capital of only Rs. 5 lakhs and the Karnataka High Court has already passed strictures against this company for non-payment of sales tax arrears. He also, during the hearing, produced certain documents to show that there have been certain income-tax raids in the offices of KRC. He also drew our attention to our order in C. P. No. 18/22A/SCRA/1992 wherein we had upheld the contention of GWL, that a change in the management consequent on the registration of shares in the name of Trident would not be in the interest of the company. He also stated that, even though the revival process of GWL has been going on before the Board for Industrial and Financial Reconstruction from 1989, yet Tracstar/KRC took no interest in the revival of GWL till 1993. He also submitted that in spite of their having control of a substantial percentage of shares in GWL, Tracstar/KRC have not invested even a pie into GWL. He also further submitted that, the conduct of KRC as managing director of SWC should also be taken into consideration to examine whether it would be safe to entrust the management of GWL to KRC. According to him, KRC misused his fiduciary position as a director in SWC and committed various acts, in breach of his fiduciary duties, against the interest of SWC, more particularly relating to acquisition of shares by SSPL/Tracstar.
21. Dealing with the alleged breach of fiduciary duties by KRC, Shri Ganesh submitted that, all along, the desire of MRC was to keep GWL under his/SWC control. This desire manifests from the proceedings before the Board for Industrial and Financial Reconstruction in which originally it was envisaged that SWC would contribute to the share capital of GWL. Subsequently, this proposal had to be given up inasmuch as GWL would then become an interconnected company with SWC, attracting the provisions of the MRTP Act. Therefore, the management of SWC explored various possibilities of consolidating the interests of SWC in GWL and to this end the shares held by the three companies of the MRC group were transferred to Tracstar, since Tracstar was under the management of the nominees of SWC. In furtherance of the said object, the petitioner-company did not apply for the rights shares and Tracstar was allowed not only its rights but also additional shares including allotment of 5 lakh shares to SSPL. KRC, being a part of the management of SWC, was fully aware of the intent and desire of MRC/SWC. However, due to change in the shareholding pattern of Tracstar just before it was allowed to acquire shares in GWL, Tracstar was no longer within the SWC group. This information relating to change in the shareholding pattern in Tracstar, even though was fully known to KRC, had been kept away from SWC/MRC. Had this position been known to SWC/MRC, these three MRC companies would not have been allowed to transfer the shares to Tracstar. KRC, being the managing director of the SWC at the relevant time, knowing that by allowing Tracstar to acquire shares in GWL, the control of MRC/SWC on GWL would be diluted, owed fiduciary duty to disclose this relevant information to the management committee of SWC which he failed to do. Therefore, according to him, to permit KRC to take over GWL would amount to rewarding a person who has breached his fiduciary duties and obligations, which a director owes to a company. Therefore, he contended that the second limb of Section 398(1)(b) is squarely satisfied that there is every likelihood that the affairs of the company will be conducted in a manner prejudicial to the interest of the company/public interest, if, Tracstar/KRC are allowed to gain control of the management of GWL. He also submitted that SWC has pumped in more than Rs. 4 crores into GWL and that SWC has been associated with the revival of GWL for nearly a decade and the Board for Industrial and Financial Reconstruction is likely to sanction a scheme in the next few months. According to him, therefore, rocking the boat at this point of time by allowing change in the management of GWL would greatly prejudice the entire revival scheme, which would not be in the interest of GWL. He also submitted that, the Company Law Board is vested with powers under Section 111 of the Act, to determine the title to shares, and in view of violation of the provisions of Section 372 when Tracstar acquired the shares and other legal infirmities in the transfer of shares by the three MRC companies, the Company Law Board should declare the transfer and allotment of the impugned shares as null and void, and the various reliefs sought for be granted. He cited the following cases to emphasise that the courts are always extremely strict in interpreting the fiduciary duties of directors to protect the interests of a company.
22. Queensldnd Mines Ltd. v. Hudson (18 Australian Law Reports Page 1) ;
23. Cranleigh Precision Engineering Ltd. v. Bryant [1964] 3 All ER 289 ;
24. R. K. Dalmia v. Delhi Administration [1962] 32 Comp Cas 699 ; AIR 1962 SC 1821 ;
25. National Textile Corporation (Maharashtra North) Ltd. v. Khushalchand Bissessardas Daga, AIR 1982 Bom 539, and
26. Industrial Development Consultants Ltd. v. Cooley [1972] 2 All ER 162.
27. Shri Sarkar, rebutting these allegations, stated that Tracstar/KRC are financially sound and as a matter of fact, Tracstar has already deposited a sum of Rs. 1 crore with the Board for Industrial and Financial Reconstruction towards its proposal for revival of GWL. The question whether KRC had breached his fiduciary duties in relation to SWC is not a matter to be gone into under these proceedings, as the same is extraneous to these proceedings. Even otherwise, he submitted that this allegation of KRC having breached his fiduciary duties has been rejected by the Calcutta High Court in another proceeding and the Supreme Court has approved the same also. Therefore, according to him, the claim of the petitioner that Tracstar/KRC would mismanage GWL does not have any basis. According to him, if GWL is continued to be managed by MRC/ SWC, then it is definitely going to be against the interest of the company inasmuch as other companies managed by MRC are in the doldrums. In this connection, he mentioned that the Central Government has already applied to the Company Law Board for appointment of government directors on SWC and that a large number of winding up petitions are pending against SWC as it is unable to pay its debts. He also mentioned about the financial difficulties faced by Dunlop India Limited, another MRC controlled company. He also referred to certain enquiries being made against MRC by the income-tax and the enforcement authorities. Therefore according to him, in the interest of GWL, the earlier the better, that the management of GWL is taken out from MRC/SWC. In regard to the proceedings before the Board for Industrial and Financial Reconstruction, Shri Sarkar stated that Tracstar is actively involved in the revival process before the Board for Industrial and Financial Reconstruction. It is SWC which has stood in the way of the Board for Industrial and Financial Reconstruction considering the proposals made by Tracstar in reviving GWL. He also stated that the performance of GWL during the last three years has not been encouraging clearly indicating that GWL is not being managed properly.
28. The apprehension that the affairs of GWL will be conducted in a manner prejudicial to the interest of the company/public interest, as expressed by Shri Ganesh, is based on the manner in which Tracstar is being managed, KRC's alleged breach of fiduciary duties as managing director of SWC and our own observation in C. P. No. 18/22A/SCRA/1992. Let us first deal with KRC's conduct as managing director of SWC. This allegation has been taken for two reasons. One is that a person of such conduct cannot be entrusted with the management of GWL and the other one is that his breach of fiduciary duties to disclose relevant material by which GWL shares went out of the control of MRC/SWC calls for restoring the shares to the petitioner. We are of the view that in the present proceedings in the matter of GWL, an alleged breach of fiduciary duties in another company cannot be agitated to seek relief. The position would have been different if the alleged breach of fiduciary duties is with reference to GWL. It is clear from all the case law cited by Shri Ganesh, that the alleged breach of fiduciary duties was in companies which were the subject-matter of the petitions and that the persons alleged to have breached the duty had direct nexus with those companies. No case has been brought to our notice to show that in a group of companies, an alleged breach of fiduciary duties in one company is the basis for claiming relief in another group company. Breach of fiduciary duties could, perhaps, be claimed by SWC against KRC in the affairs of SWC, since there is a direct nexus. Therefore, we consider it appropriate that we should refrain from taking any cognizance of this alleged breach of fiduciary duties to SWC in the present proceedings and consider grant of relief on this score.
29. We have another reason to keep ourselves away from this issue. The petitioner along with three MRC companies which had transferred the shares to Tracstar, have already filed a suit, being C. S. No. 1503 of 1993 in the High Court of Madras in which KRC, Tracstar, SSPL and others have been impleaded. This suit was filed prior in time to the filing of the present petition before us. The relief relating to a declaration that the original transfer of shares by the three companies to Tracstar and allotment of right shares/additional shares to Tracstar and SSPL as null and void has also been sought in those proceedings. The alleged breach of fiduciary duties of KRC has also been taken up in those proceedings, along with other points taken by Shri Ganesh that there was violation of the provisions of Section 372 at the time of transfer of shares, that allotment of shares after the book-closure date, etc. In other words, whatever stand the petitioner has taken in the present proceedings for the reliefs relating to the shares, practically the same stand has been taken in the Madras suit. Shri Sarkar, time and again, raised the issue of the petitioner's pursuing parallel proceedings and had also prayed that unless otherwise the said suit is withdrawn, the petitioners should not agitate the same matter before us. Shri Ganesh wanted a categorical decision from us that these issues would be considered by us, as a pre-condition for withdrawing the suit. We declined to give a decision on this in as much as the petitioners' prerogative to choose a forum, i.e., either before us or before the High Court. Since the petitioner has not chosen to withdraw the suit and since the suit, which is a comprehensive one, was filed prior in time, we are of the view that the matter relating to transfer and allotment of shares will have to be pursued in the High Court and we shall not consider the relief relating to setting aside the transfer/allotment of rights and additional shares or direction that the shares be transferred to the petitioner. In view of this, we have not elaborated the arguments of counsel from both sides including citation of cases, on transfer/allotment of shares. Since we have refrained from going into the alleged breach of fiduciary duties, it is not possible for us to take this aspect into consideration in examining whether such a conduct would mean that the affairs of GWL would be mismanaged.
30. The other ground taken by Shri Ganesh is that GWL is likely to be mismanaged by Tracstar/KRC on account of Tracstar's low capital base, its unsatisfactory functioning as revealed by the strictures passed by the Karnataka High Court in the matter of non-payment of sales tax and income-tax raids on KRC. He also drew support for our observation in C. P. No. 18/ 22A/SCRA/1992, that, registering the shares in favour of Trident would not be in the interest of the company. As against this argument, Shri Sarkar pointed out about the unsatisfactory performance of SWC under MRC leading to filing a petition before the Company Law Board for appointment of government directors on SWC and various winding up petitions against SWC. In other words, each claims to be better than the other on the basis of certain pending proceedings against the other. It is to be noted that none of these proceedings has reached a finality. It would not be proper to come to a conclusion on the basis of allegations when the allegations are yet to be established. As we have already pointed out, one has to be extremely circumspect in the matter of coming to a conclusion that the affairs of a company will be mismanaged unless and otherwise, there are proper and sufficient materials to substantiate the same. With certain materials placed before us, which are yet to be substantiated in other proceedings, we are not in a position to come to such a conclusion.
31. However, it is to be noted, as rightly pointed out by Shri Ganesh that in C. P. No. 18/22A/SCRA/1992, we confirmed the decision of the board to refuse registration of shares in the name of Trident on the ground that, such registration, if effected, was likely to result in change in the board of directors and such a change was not in the interest of the company. There has been no change in the circumstances, which were prevailing at that time except that KRC has also subsequently submitted a revival scheme before the Board for Industrial and Financial Reconstruction. The present position is that the company continues to be a sick company and is under the process of revival by the Board for Industrial and Financial Reconstruction. MRC/ SWC have been in the management of the company even though Tracstar/ KRC have controlling interest. Both have submitted schemes of revival to the Board for Industrial and Financial Reconstruction. While as per the orders of the Board for Industrial and Financial Reconstruction, Tracstar has deposited a sum of Rs. 1 crore, a group company of MRC has remitted a similar amount on behalf of SWC. The motivation for MRC to revive the company is because he is in control of management of GWL through SWC, while the motivation for KRC is that he is having controlling interest in GWL even though he is not having the control of management.
32. The basic foundation on which reliefs under Section 397/398/402 have been provided, is for the ultimate benefit and interest of a company. GWL has been under the management of MRC/SWC for over a decade. As per the financial results for 1996-97, the company has turned black with a small profit. The Board for Industrial and Financial Reconstruction has been examining the proposals submitted by both the parties. The choice of the Board for Industrial and Financial Reconstruction between the two would depend upon the viability of the schemes proposed by them. While, normally, in the corporate democracy, the will of the shareholders has to prevail in regard to the management of a company, the situation before us is abnormal. The company is a sick company and there are two contenders, one in the control of management and the other having controlling interest. Ultimately, it is the Board for Industrial and Financial Reconstruction, which would decide to which of the groups the management is to be entrusted to which would be beneficial to the company. In view of this, and also taking into consideration, that the Board for Industrial and Financial Reconstruction is likely to decide the issue in the coming months, we feel, as rightly pointed out by Shri Ganesh, that we should not rock the boat at this stage and allow the respondents to disturb the present management, especially when MRC/ SWC have funded the company with a substantial amount of nearly Rs. 4 crores. We consider inappropriate, at this point of time, to allow a change in the management which may in all probability alienate MRC/ SWC from the revival process, which would not be in the interest of the company especially when the revival scheme submitted by KRC before the Board for Industrial and Financial Reconstruction is under contest in the High Court of Madras. But, at the same time, we are also anxious that the shareholders' right of electing their own directors democratically cannot be withheld indefinitely. We had passed an order in C. P. No. 45 of 1993 restraining GWL from holding its annual general meeting for 1992-93. In view of this, subsequent annual general meetings have not been held. Accordingly, with the hope that the Board for Industrial and Financial Reconstruction proceedings will be completed in the next few months, we continue our order in C. P. No. 45 of 1993 up to December 31, 1998, after which, irrespective of the position of the Board for Industrial and Financial Reconstruction proceedings, within a further period of three months, the company shall convene and hold all annual general meetings due up to that date.
33. With the above directions we dispose of the petition. No order as to costs.