Gujarat High Court
Euro India Investments Ltd. And Anr. vs Cement Corporation Of Gujarat Ltd. And ... on 23 April, 1991
Equivalent citations: [1993]76COMPCAS691(GUJ), (1992)1GLR329
Author: M.B. Shah
Bench: M.B. Shah
JUDGMENT M.B. Shah, J.
1. Company Petition No. 22 of 1991 is filed under sections 397 and 398 of the Companies Act, 1956 (hereinafter referred to as "the Companies Act"). It is the case of the petitioners that Cement Corporation of Gujarat Ltd. (hereinafter referred to as the "company") was incorporated on March 29, 1973. The nominal capital of the company is Rs. 40 crores divided into 4 crores equity shares of Rs. 10 each. The issued capital of the company is Rs. 30,25,00,000 divided into 3,02,50,000 equity shares of Rs. 10 each. It was floated originally by respondent No. 2, Gujarat Industrial Corporation Ltd. (hereinafter referred to as the "GIIC"). Till 1981, the proposed project for setting up a modern cement plant in Gujarat had not made any worthwhile progress. At that stage Shri Mahendra N. Mehta, the Chairman of the Mehta group of companies, had come to India on a brief visit in the year 1980. The then Chief Minister of Gujarat and the Finance Minister invited him to meet them and asked him to participate in the efforts to attract capital NRI investment in the State of Gujarat. After assurance from the concerned persons Shri Mehta acceded to the request and agreed to participate and become a co-promoter with the GIIC for implementing the project of respondent No. 1 company. It is the say of the petitioners that the Mehta group is having vast and varied operations in various parts of the world in different industries ranging from agro-industries, chemicals, engineering, cables, sugar, cement, plastic, etc., with operations in Kenya, Uganda, Canada, U.S.A., Cameroon, England and Sri Lanka.
2. The Mehta group and the GIIC arrived at an agreement and a memorandum of understanding and thereafter a shareholders' agreement dated April 9, 1981, was executed between the Mehta group and the GIIC which contemplated participation in equity of respondent No. 1 company by respondent No. 2 of 26 per cent. and by the Mehta group and their associates to the extent of 25 per cent. Along with other terms it, inter alia, provides as under :
"(2)(ii) The Mehtas shall also have the right to take up either itself or along with its subsidiary companies or nominees and subscribe at par for 25 per cent. of the equity share capital of the company, provided that the shareholding of the Corporation shall not be less than that of the Mehtas and the Corporation shall have at least one share more than the shares subscribed by the Mehtas.
(v) On every issue of further capital by the company, the Corporation and the Mehtas shall respectively subscribe for equity shares in the ratio mentioned above.
(8) Notwithstanding the provisions of clause 2(iii) hereinabove with regard to the Corporation holding one share more than that of the Mehtas, on and after the date of commercial production the Corporation shall have the right to reduce its equity shareholding from 26 per cent. to 10 per cent. on the following terms :
(i) The right to reduce equity shareholding shall be subject to and in accordance with the guidelines for joint sector projects which may be laid down by the Government of India from time to time.
(ii) The Corporation may sell or transfer its shareholding to thee Government of Gujarat or any institutions, companies or Corporations of the Government of Gujarat without any restrictions, provided such transferees agree to ratify and abide by this agreement.
(iii) If, however, the Corporation intends to sell its equity to the public, the Corporation shall in the first instance offer such shares to the Mehtas and the provisions of clause (22) and (23) shall apply.
Board of directors and management :
(10) The number of directors of the company shall be not more than elevan. The Corporation will be represented by four directors, including a Chairman to be nominated by the Corporation whether rotating or non-rotating (these directors are hereinafter referred to as the "Corporation directors"). The Mehtas will be represented on the board by three directors (these directors are hereinafter referred to as the "Mehta directors"). The managing director of the company shall be appointed by the board of the company as jointly recommended by the Corporation and the Mehtas.
Business Committee :
(15) So long as the Corporation and the Methas hold equity shares in the ratio of 26 per cent. and 25 per cent. respectively and if the board of directors of the company finds it necessary to constitute any committee for formulating policy matters, such committee shall consist of directors represented equally by the Corporation and the Mehtas. The Chairman of the committee shall be from among the Corporation directors and the Chairman shall have the casting vote at the committee meeting".
3. The aforesaid terms and conditions of the shareholders' agreement are also reflected in the memorandum and articles of association of the Cement Corporation of Gujarat Limited. The relevent articles 10(a), (c) and (d) and 11 are as under :
"10(a) Unless otherwise determined in a general meeting and subject to the provision of section 252 of the Act, the number of director of the company shall not be less then three pr more than fifteen excluding debenture, special and Corporation directors, if any. One-third of the total directors shall be non-rotational directors. The Chairman and managing director of the company shall not be liable to retire by rotation. The GIIC and TMIL shall be entitled to nominate non-rotational directors in proportion to their respective equity shareholding.
(c) So long as the GIIC shall continue to hold not less than 26 percent. in the equity share capital of the company, the GIIC shall be entitled to nominate up to four directors including the Chairman (these directors are hereinafter referred to as the 'GIIC' directors). So long as TMIL shall continue to hold not less then 25 per cent. In the equity share capital of the company. TMIL shall be entitled to nominate up to three directors (these directors are hereinafter referred to as "TMIL directors"). In addition, the managing director shall be appointed on the recommendation as stated in article 15 hereinafter.
(d) In the event of appointment of additional directos in the company, the number of additional directors of the GIIC and TMIL shall always be equal.
Business Committee :
11. If the board of directors of the company find it necessary to constitute any committee, such committee shall number of directors from the GIIC, private promoters and outside directors as may be decided by the board and also nominess of financial institutions. The Chairman of the committee shall be among the GIIC's directiors and the chairman shall have a casting vote at committee meetings. The committee shall be delegated with such powers and functions as are decided by the board from time to time."
4. It is the say of the petitioners that they are the subsidiary companies of the Mehta International Ltd. and as a result of the shareholders' agreement between TMIL and the GIIC the petitioners have also subscribed to the share capital of respondent No. 1 company as part of the Mehta group.
5. Various facts are mentioned in the petition why the company failed to start functioning. For our purpose it is not necessary to narrate them as at present I am not required to deal with, in detail, company Petition No. 22 of 1991, which is admitted. But some facts are necessary to be gone into as company Application No. 77 of 1991 is filed for interim directions.
6. It is the say of the petitioners that as a consequence of delay, the entire project was reviewed by the IDBI in September, 1988, and the project cost was revised from Rs. 121 crores to Rs. 167.50 crores. It was proposed to provide for Rs. 46.50 crores as under :
(Rs. in crores) "Addl. Equity 7.56 Interest free deposit from promoters 0.69 Addl. loan from institutions 26.66 Ad hoc loans for funding interest from 9.59 institutions Infra-structural loan 2.00
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Total 46.50
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The equity of Rs. 7.56 crores was to be raised as under :
(Rs in crores)
Respondent No.2 2.86
Mehta group 2.70
IDBI and institutions 2.00
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Total 7.56
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A copy of IDBI's letter dated September 30, 1988, advising the above financing pattern is annexed as annexure "15" to the petition.
7. In this view of the matter, the Mehta group was required to subscribe for equity shares of Rs. 2.70 crores and respondent No. 2 GIIC was required to subscribe for Rs. 2.86 crores. However, GIIC was not prepared to subscribe shares for the aforesaid amount. On September 30, 1988, the managing director of the GIIC wrote letter (annexure "18") to Mr. M. N. Mehta stating that the corporation would contribute to the additional equity towards the over-run subject to the condition that the Mehta group shall buy back this additional equity over a period of one year. Along with the said letter he sent a blank copy of the agreement entered into with Messrs. Golden Tabacco for that purpose. In response to that letter Mr. M. N. Mehta replied by letter dated October 5, 1988 (annexure "19"), wherein it has been, inter alia, pointed out that full support from the GIIC was needed to meet the challenging task and requested him to reconsider and to agree to take full share of the additional equity. Finally as the GIIC was not willing to deal in additional equity, the rights issue was not opened. The mehta group arranged for the Canbank Mutual Fund to subscirbe Rs. 2.70 crores and persuaded the Indian Bank to provide a temporary laon for the said amount by an agreement that the company would reply the principal amount of the loan taken from the Indian Bank soon as equity shares were applied for by Canbank. The board of directors passed a resolution in the meeting held on March 27, 1989, (annexure "26"). As the GIIC was not agreeing to purchase its equity shares, the loan of Rs. 26 crores (as per annexure "15") was not given by the IDBI and other institutions. The petitioner agreed to make alternative arrangements for raising equity towords the GIIC's share by their letter dated December 5, 1989 (annxure "24"). That letter was written to the managing director of the GIIC wherein it is specifically mentioned that TMIL and its associates have decided to take shares of Rs. 2.86 crores which was required to be taken by the GIIC and the necessary arrangement was made with the approval of the IDBI . It is also requested that the company would open the rights issue as soon as all the formalities were completed and requested the GIIC to renounce its rights shares in favour of the TMIL's nominee.
8. The rights issue was opened on January 2, 1990. The IDBI declined to contribute to the rights issue by their letter dated January 29, 1990 (annxure "28") by stating that the IDBI "are reply concerned with the affairs and potential viability of the unit and we are reviewing the options available for reviving the unit. Pending a review, we would not be able to subscribe to the rights issue".
9. Thereafter, the GIIC expressed reservation about the management of Mr. Balsari as managing Director. Without entering into any controversy Mr. Mehta agreed to call back Mr. Balsari and Mr. T. V. Balan was appointed as managing director by letter dated August 4, 1989 (annexure "27"). The petitioners have produced on record the board resolution that for a few days or months staying in the Hotel President in Bombay the company was required to spend more than Rs. 13 lakhs for Mr. T. V. Balan and Mr. A. K. Joshi. Thereafter the IDBI called for review and suggested that over and above Rs. 6.7 crores, further equity of Rs. 11 corres would be required as promoters contribution. The IDBI suggested that further private promoters should be inducted into the management of respondent No. 1 company . Probably from that period the dispute had arisen between the Mehta group and the GIIC. It seems that the Mehta group had suggested various other companies including the Birla Jute and Industries Ltd., and other companies while the GIIC seems, to be interested in Gujarat Ambuja Cements Ltd.
10. Because of this dispute and various acts committed by respondent No. 1 company it is contended by the petitioners that the petitioners who are minority shareholders are oppressed by the respondents with the age of the State Government as the GIIC and the State Government want to hand over respondent No. 1 company to the Gujarat Ambuja Cements Ltd. It has been pointed out that :
(1) the petitioners' right as shareholders to appoint three directors as per articles of association is being jeopardised by all sorts of dubious methods ;
(2) the injunction issued by the City Civil Court is violated with a mala fide intention of not re-appointing Mr. M. N. Mehta as a director of the company and of not putting the name of Mr. Sanat Mehta as a director of the company as nominee of Mehta group :
(3) for the benefit of the company the Mehta group has brought a bridge loan of Rs. 2.86 crores from Indian Bank by giving guarantee. The company has utilised the said amount and yet the question of rights issue is prolonged for various reason;
(4) funds of the company are being squandered due to wrong personal policies, there is a vacuum at the factory site and wrong decisions regarding purchases and production with long term implications are being taken attempts made to cover up irregularities and project itself as a competent management at the cost of the company. The whole approach is based on the desire to oust the Mehta group and induct the Gujarat Ambuja Cement Ltd.
11. Therefore, in Company Petition No. 22 of 1991 the petitioners have prayed as under :
"(a) To pass suitable orders for regulating the management and conduct of the affairs of respondent No. 1-company;
(b) to restrain the respondents from preventing Mr. M. N. Mehta and Mr. Sanat Mehta from functioning as directors of the respondent No. 1 Company;
(c) That agenda notes, minutes and other documents to which access as is sought for by the aforesaid two directors of the petitioners group be given by the respondent No. 10-company, and nominees of the respondents No. 1-company, plant and office;
(d) To declare that the proceedings of the mettings of the board of directors of respondent No. 1-company on December 29, 1990 and March 22, 1991, as also the annual general meeting dated December 29, 1990, are null and void ab initio and of no effect whatsoever;
(e) That steps be taken for nominating a new independent chairman and managing director of the respondent No. 1-company as also a committee of management to supervise the performance and operation of respondent No. 1-company;
(f) An independent chartered accountant be appointed to inquire into the conduct and affairs of the company and to report to his Hon'ble Court the financial irregularities which have been committed by the present management of the respondent No. 1-company;
(g) That the respondents be restrained from inducting any new management from transferring shares without the prior consent of the petitioners;
(h) That the respondents be restrained by an order or injunction from this Hon'ble Court from directly or indirectly permitting any additions or alterations to the board of directors or to the management of respondent No. 1-company without the prior permission of his Hon'ble Court;
(i) That the respondents be directed to close the rights issue, and allot shares for the amount which was received towards satisfying the bridge loan of Rs. 2.70 crores received from the Indian Bank with all incidental charges, etc., immediately;"
12. Pending hearing and disposal of this petition, by taking out a judges summons, the petitioners have prayed for various interim reliefs. One of the main prayers is that the respondents be directed to consider Mr. M. N. Mehta as continuing as director of the respondent No. 1 company. It has also been prayed that the company be directed to consider Mr. Sanat Mehta as director of respondent No. 1-company as a second nominee of the Mehta group. With regard to this prayer, the learned advocates for the respondents vehemently submitted that (a) Mr. Mehta has resigned as a director, (b) after the annual general meeting which was held on December 29, 1990, he was not continuing as a director, and (c) against him enquiry for the various charges is pending. Therefore, no direction as prayed for should be given Mr. Sanat Mehta is not appointed as a director at any time by the company. Therefore, at this stage no direction should be given that Mr. Sanat Mehta should be inducted as a director of the company.
13. As quoted above, the articles of association specifically provide that so long as TMIL (The Mehta International Ltd.) or the Mehta group hold 25% equity share capital, TMIL is entitled to nominate up to three directors. It is an admitted fact that TMIL is at present holding 26 percent of the equity shares and the GIIC is holding approximately 27 per cent. of the equity shares, Yet, prima facie it seems the GIIC is interested in seeing that TMIL does not get its representation on the board of directors.
14. An attempt was made to disqualify Mr. M. N. Mehta from continuing as a director of the respondent No. 1-company in September, 1990 The matter was referred for opinion to the former Chief Justice of the Madras High Court, Shri Chandurkar. This, according to the petitioners, was done with a view to oppress the petitioners' group and to bring about charge in the management which was contrary to the interest of respondent No. 1 company and the petitioners' group. This opinion on justice Chandurkar was sought on the following points :
"1.1. Whether borrowing of Rs. 270 lakhs by the querist company will attract the provisions of section 77(2) of the companies Act, 1956, which prohibits the querist company providing any direct or indirect financial assistance for the purpose of or subscription made or to be made for any shares of the querist company ?
1.2. Since interest on the said bridge loan had to be reimbursed by the SHPL (Sumaraj Holdings Pvt. Ltd.), whether non-reimbursement thereof by SHPL will also fall within the purview of section 77(2) of the Companies Act, 1956 ?
2.1. The querist company has already received the amount of Rs. 270 lakhs from the Indian Bank which has been reported to have been arranged by the SHPL, an associate company of the TMIL. Shri M N. Metha is a director of TMIL as well as SHPL and is also director on the board of the CCGL (the querists). In view of this whether the amount borrowed by the querist company from the Indian Bank which is said to have been arranged by the SHPL towards their advance contribution for the rights shares of the querist company, will amount to indirect loan given by the querist company to the SHPL within the meaning of section 295 of the Companies Act, 1956 ?
2.2 Whether the non-reimbursement of interest amounting at present to approximately Rs. 70 lakhs by the SHPL will fall within the purview of the provisions of section 295 of the Companies Act, 1956 ?
2.3. Whether the adjustment of Rs. 8.39 lakhs whereby the company's funds have been appropriated by the Indian Bank will be treated as indirect loan given by the querist company to the SHPL ? And if so, whether the provisions of section 295 of the companies Act, 1956 will be attracted ?"
After considering all the aspects in detail, the opinion was given that Mr. Mehta was not disqualified to be a director of the company and all other issues were pointed in the negative. That opinion dated November 13, 1990, is at annexure "36".
15. It seems that as Mr. Mehta was insisting that the Gujarat Ambuja Cement Ltd. should not be given shares, the chairman of the respondent No. 1-company who is also the chairman of the GIIC wrote a letter dated December, 1990 (annexure "39"), to the effect that Mr. Mehta should be replaced and the important question which required consideration was that financial commitments in the revival of this company should not be the sole criteria because the financial commitments will depend upon various factors including the sacrifices required by various parties According to his opinion, the important issue was the compatibility of the joint sector partner and his understanding of the culture and ethos of the joint sector partnership in the State of Gujarat. This letter was written by the Chairman of the GIIC and respondent No. 1 to the Chief Secretary, Government of Gujarat. Thereafter in December, 1990, the Mehta International Limited filed Civil Suit No. 6093 of 1990, before the City Civil Court, Ahmedabad, wherein the plaintiff sought enforcement of shareholders agreement dated April 19, 1981, executed between the plaintiff and the defendant No. 1 GIIC. It was prayed that the defendants bound to ensure that the plaintiff's participation in the management defendant No. 2 Company is not in any way altered or obstructed and defendant No. 2 should be directed to act in accordance with the argument at the annual general meeting to be held on December 29, with regard to the re-election of the plaintiff's nominees. It was also pray that defendants Nos. 1 and 2 should ensure that the nominee of the plaintiff, Shri H. N. Mehta, is re-elected as a director of the defenda No. 1-company and is not removed during the pendency of the shareholders agreement. In that suit the court has granted and interim in the following terms :
"You the defendant No. 2, yours servants, agents nominees, hereby restrained by an order of ad interim, injunction from acting contravention of the letter and spirit of the shareholders' agreements date April 9, 1981 at the meeting of the board of directors or the annual meeting or at any other meeting of the defendent No. 1-company or elswhere. If the defendants desire to postpone the annual general meeting it will be open to them to do so and the plaintiff shall to any such postponement desired by the defendants."
It should be noted at this stage that neither of the respondents has moved for vacation of the said injunction order till today.
16. In spite of this injunction order, if is the contention of the respondents that in the meeting which was held on December 29, 1990, the petitioner has resigned as a director or, in the alternative, as he is not re-elected, he ceases to be a director of the company. The respondents have not produced any written resignation given by Mr. M. N. Mehta Even in the minutes of the meeting of the board of directos which was held on December 29, 1990, it is nowhere mentioned that Mr. N M Mehta has tendered his resignation as a director of the company. It is the contention of the petitioners that in the meeting of the board of directors held on December 29, 1990, Mr. M. N. Mehta was shown certain allegations made against him or Jai Mehta or the previous managing director. That item was taken on the agenda as an additional item with the permission of the chair. That was placed by Shri A. K. Joshi, executive director (finance), narrating the alleged irregularities committed by Shri Jai Mehta, executive director, Shri B. M. Balsari, ex-managing director, and Shri M. N. Mehta director of the company. The board, therefore, decided to have a special audit of the company conducted by the chartered accountants firm named Messrs S. D. Bilimoria and Co. at Bombay. In the minutes of the said meeting it has been, inter alia, mentioned that the board was of the opinion that in view of the irregularities involving Shri Mehta Shri Mehta should step down from the aboard as a director of the company pending the enquiry and examination into the said irregularties by the board of directors. It is further mentioned that M. N. Mehta agreed that there were serious issues deserving enquiry and agreed to step down if the board felt so. The board appreciated his gesture. This also nowhere shows that Mr. Mehta has stepped down as a director or has resigned as a director. But from this in no set of circumstances it can be said that Mr. Mehta has resigned as a director of the company.
17. The next question is with regard to re-election of Mr. Mehta as director. As stated above, it is an admitted fact that the Mehta international Ltd. has filed Civil Suit No. 6093 of 1990 before the city Civil Court at Ahmedabad. The court has granted ad interim, relief restraining defendant No. 2, i.e., the GIIC from acting in contravention of the letter and spirit of the shareholders' agreement dated April 8, 1991 at the meeting of the board of directors or at the annual general meeting or at any other meeting of the company or elsewhere. It shoud be noted that the shareholders agreement between the GIIC and the Mehta International Ltd., inter alla provides that the Mehtas shall have a right to take up 25 per cent. of the equity shares of the company; if the GIIC intends to sell its equity the public, the Corporation shall in the first instance offer such shares of the Mehtas; the corporation will be represented by four directors; the Mehtas would be represented on the board by three directors and that the GIIC shall exercise voting rights in respect of the shareholding of the company and in support of the appointment and/or election of directors nominated by the Mehtas. The said agreement further provides that to ensure the proper maintenance, implementation and observance of the terms and provisions contained and the spirit of this agreement, both the parties to the agreement would exercise voting rights in accordance with the agreement and that the parties are entitled to specific performance of the terms of the agreement including obligations contained in the clause as to the exercise of voting rights. Keeping in view the aforesaid agreement the trial court had granted the interim injunction.
18. On December 29, 1990 at 3.30 pm. the annual general meeting of the shareholders of the company was held as per the agenda (annexure "55"). The following business was to be transacted :
"Ordinary business :
1. To receive and adopt the directors' report and audited profit and loss accounts for the year ended March 31, 1990, and balance-sheet as that date (Please see directiors' statement attached herewith).
2. To appoint a director in place of Shri P. G. Ramrakhiani, IAS, who retires by rotatikon, and being eligible offers himself for re-appointment.
3. To appoint a director in place of Sri K Lalit, who retires by rotation, and being eligible offers himself for re-appointment.
4. To appoint a director in place of Shri M. N. Mehta, who retires by rotation and being eligible offers himself for re- appointment.
5. To appoint a director in place of Shri V. P. Kamdar, who retires by rotation and being eligible offers himself for re- appointment."
It is an admitted fact that items Nos. 2, 3 and 5 of the agenda have been transacted Mr. P. G. Ramrakhiani, Mr. K. Lalit and Mr. V. P. Kamdar were re-appointed as directors of the company. It is the say of the respondent No. 1 company that item No. 4 was postponed or adjourned.
19. With regard to Mr. Mehta it has been stated in the draft minutes circulated for the meeting which was held on March 22, 1991 (annexure "56") that the representative of the Gujarat Investment Industrial Corporation Ltd. sought adjournment of the annual general meeting for consideration of the aforesaid specific item and the meeting was adjourned pending the vacation of the interim order. It further provides that Mr. Mehta was due to retire by rotation. Since the item relating to re-appointment by rotation could not be considered in the said annual general meeting, the company has been advised that Mr. Mehta casees to be a director of the company with effect from December 29, 1990, pending his re-appointment in the adjourned general meeting.
20. From the aforesaid record, it seems that to avoid the direction given by the City Civil Court by taking undue advantage of the majority, the chairman of respondent No. 1-company who is also the respondent No. 2 has adjourned the meeting with regard to one agenda item only whereby Mr. M. N. Mehta's name was proposed for re-appointment as a director. The City Civil Court has only stated that if the defendanmts desires to postpone the annual general meeting, it will be up to them to do so and the plaintiffs shall agree to any such postponement.The injunction order passed by the City Civil Court nowhere provides that only one item of the agenda by which Mr. M. N. Mehta's name was proposed for re-appointment as a director should be adjourned. It is to be noted that with regard to the chairman and the other two directors the business was transacted in the said meeting and they were re-appointed as direcors. It seems that the item of the agenda with regard to the re-appointment of Mr. Mehta is adjourned for an ulterior motive because it seems that in the minutes of the 108th meeting of the board of directors of respondent No. 1 company held on December 29, 1990, in item No. 7 it has been specifically stated that the chairman of the state bank of India was of the view that the State Bank of India would be not consider re-examination for providing working capital till such time as the Mehtas remain shareholders in respondent No. 1 company. The minutes further state that it was explained to the chairman of the State Bank of India that the issue of the Mehtas opting out of shareholding will take some time. The entire minutes with regard to item No. 7 reflect that respondent No. 2 is interested in seeking that the Mehta group is ousted. One of the reasons for doing so may be because of the dispute of brining in Gujarat Ambuja Cements Ltd. as another private promoter or because of personal opinion as expressed by Mr. P. C. Ramrakhiani in his letter annexure exhibit "39". It is his view that Mr. M. N. Mehta should be replaced. He has further opined to the Government of Gujarat that for revival of the company a new joint sector partner should be selected in such a way that he culture and ethos of the joint sector partnership in the State of Gujarat. He has further opined that only financial commitments should not be taken into consideration.
21. Considering the aforesaid facts it is apparent that the Mehta group is having some difference of opinion with the GIIC. The GIIC is, therefore, trying to oust the Mehta group.
22. Apart from this aspect, under the provisions of section 256 Mr. M. N. Mehta continues to be director of respondent No. 1-Company. In may view as per sub-section (4) of section 256, Mr. M. N. Mehta is deemed to have been re-appointed after he ceased to be director on December 29, 1990, i.e., after his period was over, for his purpose it would be necessary to refer to sub-section (4) of section 256 which reads as under :
"256. (4)(a) If the place of the retiring director is not so filled up and the meeting has not expressly resolved not to fill the vacancy, the meeting shall stand adjourned till the same day in the next week, at the same time and place, or if that day is a public holiday, till the next succeeding day which is not a public holiday, at the same time and place.
(b) If at the adjourned meeting also the place of the retiring direct is not filled up and that meeting also has not expressly resolved not fill the vacancy, the retiring director shall be deemed to have been appointed at the adjourned meeting unless :
(i) at that meeting or at the previous meeting a resolution the re-appointment of such director has been put to the meeting a lost;
(ii) the retiring director has, by a notice in writing addressed the company or its board of directors, expressed his unwillingness to so re-appointed;
(iii) he is not qualified or is disqualified for appointment;
(iv) a resolution, whether speical or ordinary, is required for appointment or re-appointment in virtue of any provisions of this Act or
(v) the proviso to sub-section (2) of section 263 is applicable the case."
It is an admitted fact that the annual general meeting of respondent No. 1-company was held on December 29, 1990. As per the minutes, annexure "56", the meeting for considering the agenda item of reappointing Mr. M. N. Mehta as a director was adjourned meeting is not held as per the statutory provision.
23. As per clause (a) of sub-section (4) of Section 256 if the place of a retiring director is not filled up and meeting has not expressly resolved not to fill the vacancy, the meeting shall stand adjourned till the same day in the next week, if it is not a public holiday. at the same time and place. Therefore, as per the statutory provision the meeting for re-appointing the director stands adjourned for a week.
24. The question, therefore, is, if that statutory meeting is not held what is its effect ? The answer to this question is provided in clause (b) of sub-section (4) of section 256. It provides for a deeming fiction if certain are fulfilled,. It provides that the retiring director shall be deemed to have been re-appointed at the adjourned meeting if certain conditions are fulfilled. If should be noted that -
(a) there is not injunction against the respondents from calling the annual general meeting for considering agenda item No. 4 for re-appointment of Mr. M. N. Metha as a director of the company :
(b) in the annual general meeting held on December 29, 1990, no resolution has been not to fill up the vacancy of Mr. Mehta :
(c) the resolution for re-appointment of Mr. Mehta has not been put to the meeting ;
(d) Mr. Metha has not given a notice in writing addressed top be company or its board of directors expressing his unwillingness to be re-appointed as a director; and
(e) he is not disqualified for re-appointment.
The respondents have not held the adjourned meeting as required by clause (a) of sub-section (4) of section 256. But by that doubtful device at present the respondents cannot permitted to act in such an oppressive manner as to ignore section 256(4), the injunction order by the City Civil Court and the articles of association which specifically provide that TMIL shall have a right to nominate three directors on the board of director of the company till it holds 25 per cent. of the equity shares. In any set of circumstances, the respondents cannot be permitted to take advantage of their own default in not calling the adjourned meeting as required under sub-section (4).
25. Learned counsel for the petitioners has relied upon the judgment of the Bombay High Court in the case of Lalchand Mengraj v. Shree Ram Mills Ltd., [1968] 38 Comp Cas 606, and submitted that it should be deemed that Mr. M. N. Mehta is re-appointed as a director of the company. In that case a substantive petition under sections 397 and 398 of the Companies Act was filed. Thereafter the petitioners made an application for interim relief under section 403 of the Act on June 1, 1967, just a day prior to the annual general meeting at which the question of re-appointment of the third petitioner as a director was to come up as item No. 3 of the agenda of the said meeting. The Companies Tribunal made on order on June 1, 1967, by which the respondents were restrained from allowing the consideration of item No. 3 of the agenda of the annual general meeting of the shareholders of the company which was to be held on June 2, 1967. At the adjourned annual general meeting of the company on June 8, 1967, item No. 3 of the agenda which related to the re-appointment of the third petitioner as a director was not considered in view of the injunction granted by the Companies Tribunal on June 1, 1967. After considering the various contentions, the Court held that the meeting of June 2, 1967, stood statutorily adjourned to June 9, 1967, by virtue of the Provisions of sub-section (4)(a) of section 256; secondly, that on June 9, 1967 the third petitioner retired by rotation by reason of the provisions of sub-section (1) of section 256 as construed by the High Court in the case of Krishnaprasad v. Colaba Land and Mills Co. Ltd. [1959] 29 Comp Cas 276 (Guj), under which such compulsory retirement takes place even when an annual general meeting is, in fact, not held, and thirdly, that since at that meeting which should have been statutory adjourned to June 9, 1967, the third petitioner's place as a retiring director was not filled up, nor was it resolved that his vacancy was not top be filled up, nor was any resoultion for his appointment put to the meeting and lost the third petitioner must be deemed to have been re-appointed as a director for a further term at that at that adjourned meeting of June 9, 1967.
26. Considering the aforesaid law and the facts of the present case and the fact that since 1981 Mr. M. N. Mehta continues as a director, in my view it would be just and proper to give an interim direction that Mr. M. N. Mehta continues to be a director of the company.
27. In view of the aforesaid direction that Mr. Mehta continues to be a director of respondent No. 1-company, it would not be necessary to pass any order with regard to the prayer that the respondent should be directed to give full access to Mr. Mehta and/or their nominees to the records of respondent No. 1-company because section 209(4) specifically provides that the books of account and other book and papers shall be open to inspection by any director during business hours. Therefore, the aforesaid direction is not required to be given at this stage . Hence the contention of learned counsel for the petitioners that apart from being a director as serious baseless allegations are made against Mr. M. N. Mehta and Mr. Jai Mehta as a shareholder and litigant, he is entitled to inspect the relevant records of the company, is not required to be dealt with.
28. Further, at this stage in my view it would not be proper to give a direction that Shri Sanat Mehta should be considered to be a director of respondent No. 1-company as he was not appointed by respondent No. 1-company at any time as a director as the Metha group's nominee. As per the articles of association it would be open to the petitioner to nominate him as a director as the Mehta group is entitled to nominate three persons on the board of direction of respondent No. 1-company. At present it would also not be necessary to give a direction for appointing him as additional director under section 260 of the Companies Act.
29. The next question is whether any direction is required to be given with regard to the rights issue which is opened since January 2, 1990. It should be noted that the right issue is opened because of the recommendation from the industrial Development Bank of India as per its letter dated September 30, 1988 (annexure "15"). The said letter, interalia, provides that the Lead Institution (IDBI) would provide the facilities mentioned therein if equity share capital of Rs. 756 lakhs is issued on rights basis. It is the contention of the petitioners that the GIIC from the very beginning took up the stand that they will subscribe to the rights issue only if there is substantial alteration in the shareholders 'agreement and the Mehta group buys back the additional equity with in a period of one year. The letter to the aforesaid effect written by the managing director of the GIIC to Mr. M. N. Mehta is at annexure "18". Correspondence followed between the parties, finally by the l;etter dated December 5, 1989 (annuxre "24"), Mr. M. N. Mehta agreed to take the shares of Rs. 286 lakhs of the GIIC By the letter dated January 29, 1990 (annuxre "25") the IDBI expressed its unwillingness to subscribe to the rights issue. Further, it should be noted that in the meeting of the board of directors of the company which was held on March 27, 1989, on behalf of Mehta International Ltd., Messrs. Sumaraj Holdings Pvt. Ltd. had made and arrangement to provide a sum of Rs. 270 lakhs. The arrangement was made with the Indian Bank to provide a sum of Rs. 270 Lakhs to the company directly on their behalf as a temporary loan for a period not exceeding six months. It is the contention of the petitioners that Messrs. Sumaraj Holding Pvt. Ltd. was to pay interest on it at the rate of 18 per cent. for that period. Further as stated earlier, from the document which is placed on record it is apparent that GIIC had not agrred to subscribe for shares of Rs. 2.86 crores. Because GIIC failed to subscribe for it as per the shareholders agreement between the GIIC and TMIL, the shareholders' agreement between the GIIC and TMIL, the Metha group agreed to purchase its shares through its nominee, B.O. I Finance is not the nominee of the Mehta group. As against that, it has been submitted by learned counsel for the petitioners that on behalf of the Mehta group, B. O. I. Finance has sent its application for purchase of shares worth Rs. 2.86 crores. At present the question whether or not B.O.I finance is the nominee of the Mehta Group is not required to be decided. The question which requires decision is whether the rights enquiry issue which is opened on January 2, 1990, should be closed or not The learned counsel for the petitioners submitted that the respondents be directed to close the said issue on or before May 15, 1991, so that the petitioners or the Mehta group nominees can subscribe to the said rights issue. It is agreed that as per the consent given by the Controller of Capital issues the rights issue can be kept open up to June 30, 1991. is also an admitted fact that TMIL has brought Rs. 2.70 crores as a bridge loan from the Indian Bank on April 28, 1989. As the said amount is in paid by respondent No. 1-company or its guarantor, i.e., associates of the Mehta group, the civil suit is filed for recovery of the said amount. Learned counsel for the petitioners, therefore, submitted that the respondent should be directed to close the rights issue on or before May 15, 1990 so that the associates of the Mehta group can subscribe to the equity shares to the tune of Rs. 2.70 crores and the company should be direct to pay back the loan which was brought by the associates of the Mehta group by giving guarantee to the Indian Bank. Further it should be noted that Mr. M. N. Mehta has written a letter to the Chairman of the company on March 16, 1991 (annexure "53"), to the effect that the rights issued was opened on January 2, 1990, and the only subscription so far received is of B.O.I. Finance Ltd. of Rs. 2.5 crores and a few other members from the public. Because of the tripartite the Indian Bank has given a bridge loan to the company on the strength of the buy-back arrangement entered into and the Indian bank has recalled the loan and notices have been issued. It has been also pointed out that Messrs. Sumaraj Holdings Pvt. Ltd. has agreed to bear the interest burden for a period of 3 to 6 moths. In view of the assurance given, the whole issue will be tied up during that period. The company has received the amount and has used it and also executed a promissory note for that purpose. In order to resolve the controversy with the Indian Bank, it was suggested that subscription to the rights issue of Rs. 3 crores from friends and associates was tied up and, therefore, the board of directors should agree to the following courses of action so that Rs. 3 crores can be made available to the company :
"(1) After receipt of this subscription of Rs. 3 crores the rights issue to be closed and shares are to be allotted within four weeks thereafter.
(2) The amount so received to be immediately used for repaying the bridge loan of Rs. 2.70 crores received by the CCGL from the Indian Bank.
(3) As and when the IDBI and the institutions agree to subscribe, a fresh rights issue can be made and the whole matter can be resolved.
You will appreciate that in view of the past controversies, this contribution of Rs. 3 crores can be made only if the issue is immediately closed at the most within a period of one week from the receipt of the money and the amount repaid to the Indian Bank. This would at the least obviate the problems with the Indian Bank.
30. Considering the aforesaid facts, in my view it would be just and proper to direct respondent No. 1-company to accept the amount up to Rs. 3 crores for the rights issue from the Mehta group or its nominee. The said rights issue shall be closed on May 15, 1991, and the shares should be allotted within four weeks thereafter. Respondent No. 1 shall immediately make arrangements for repaying the bridge loan of Rs. 2.70 crores received from the Indian Bank as stated earlier from the aforesaid amount. The necessary application forms shall be given to the petitioners or their nominees by the respondent No. 1-company.
31. With regard to prayer (E), i.e., for restraining respondent No. 2 from transferring the shares in the respondent No. 1-company, Mr. Shah, the learned advocate appearing on behalf of the GIIC, states that the, respondent would act as per the shareholders' agreement without prejudice to the GIIC's right to challenge the shareholders' agreement. It is clarified that the offer for sale of shares as contemplated by the shareholders' agreement by respondent No. 2-company to the Mehfa group shall be in writing.
32. At present the rest of the prayers are not required to be considered at this stage mainly because proceedings are pending before the Board for Industrial and Financial Reconstruction and it is submitted by the parties that the management of respondent No. 1 cannot be changed without its approval. However, considering the apprehension of the petitioners, it is directed that with regard to the alleged charges against Mr. M. N. Mehta or Mr. Jai Mehta or Mr. Balsari, respondent No. 1 shall forward the representation made by Mr. Mehta to the concerned chartered accountants who are appointed for investigating the matter.
33. In the result, the judge's summons is partly allowed.
34. Respondent No. 1-company is directed to consider that Mr. M. N. Mehta continues to be a director of responent No. 1-company.
35. The rights issue which is opened on January 2, 1990, shall be closed on May 15, 1991. Respondent No. 1-company would give the necessary application forms to Mr. M. N. Mehta or his nominee for making application for the rights issue as stated above to the extent of Rs. 2.76 crores or more. The shares shall be allotted within four weeks from May 15, 1991. The amount received from the Mehta group or its associates shall be utilised by the company for repaying the loan to the Indian Bank.
36. The rest of the prayers are rejected. Still, however, it would be open to the petitioners to move a fresh application, if necessary, as per the circumstances.
37. At the request of the learned advocates for the respondents the operation of this order is stayed up to April 29, 1991. Mr. Thakore, the learned advocate appearing on behalf of respondent No. 1-company, states that at present a meeting of the board of directors of the company is not contemplated.