Calcutta High Court
Andrew Yule And Co. Ltd. vs Descon Ltd. And Anr. on 17 November, 2006
Equivalent citations: 2007(3)CHN287
Author: Aniruddha Bose
Bench: Aniruddha Bose
JUDGMENT Aniruddha Bose, J.
1. The present interlocutory motion, being G. A. No. 1745 of 2006 is taken out by the petitioner primarily to prevent the respondent, DESCON LIMITED, from issuing equity shares on preferential basis, upto a limit of 49% of the increased subscribed equity share capital. When this interlocutory motion was taken out, the respondent, whom I shall refer to as DESCON in the later part of this judgment, was contemplating issuing such equity shares on preferential basis in favour of certain venture capitalists, at a premium of not less than Rs. 600/- for every equity share of Rs. 10/- each. An extraordinary general meeting was convened on 9th June, 2006 for taking a resolution for this purpose, and the main prayer in the interlocutory motion was to restrain holding of such meeting.
2. The meeting was, however, held and the shareholders of DESCON appears to have passed a resolution to that effect on 9th June, 2006. This Court, however, by an order passed on 14th June, 2006 directed the respondent not to give effect to that resolution until disposal of the instant interlocutory motion. DESCON has also taken out an interlocutory motion, being G.A. No. 2062 of 2006 for vacation of this interim order. Both these motions were taken up for hearing simultaneously, but arguments were advanced mainly based on pleadings filed in connection with G.A. No. 1745 of 2006. Thus any reference to pleading in this judgment would relate to the pleadings in G.A. No. 1745 of 2006 only.
3. The main controversy involved in the present proceeding arises out of the petitioner's claim that the respondent ought to remain within the fold of "YULE" group, from which the respondent would be dissociated if there is such allotment of equity shares on preferential basis in favour of the venture capitalists. For the purpose of understanding the real scope of the controversy amongst the parties, narration of certain facts are necessary.
4. The petitioner is a Government company, and at present, the Central Government holds 92.15% of the paid up share capital of the petitioner. Originally, the petitioner was owned and controlled by private persons, but its majority shareholding was taken over by the Central Government in the year 1979. Dishergarh Power Supply Co. Ltd. ("DPSL" in short), who has been impleaded in the present proceeding as "proforma respondent", was incorporated in the year 1919 at the behest of the petitioner. The petitioner and two of its group companies has substantial holding in DPSL, and it is the case of the petitioner that the shareholding pattern of this company is so arranged that the petitioner, and ultimately the Central Government retains control of the ownership structure of DPSL.
5. The respondent, i.e. DESCON, was incorporated sometime in the year 1995, it appears, mainly at the initiative of DPSL. The main line of activities of DESCON happen to be providing consultancy and engineering services to power generation, transmission and distribution. In the month of July, 1996, the total paid up capital of DESCON was Rs. 40,10,000/- (Rupees forty lac ten thousand only), comprising of 4,01,000 shares of Rs. 10/- each. Shares representing 79.98% of the paid up capital of DESCON was issued and allotted in favour of the employees of the petitioner and its group companies, including DPSL. The rest of the paid up capital was issued and allotted in favour of DPSL. These shares were issued on a private placement basis, initially with a lock in period of three years from the date of allotment, which was subsequently extended by a further period of two years.
6. The shareholders of DPSL had approved a proposal for issuance and allotment of 28,80,000 shares through a process of initial issue and detachable tradeable warrants which could be converted into equity shares at a later date in that company, on rights basis at an extraordinary general meeting held in the month of March, 1995. The petitioner and two of its group companies, however, renounced its rights in favour of DESCON. In this manner, DESCON has come to gain control of approximately 30.41% of the total paid up capital of DPSL.
7. In a meeting of the Board of Directors of DESCON held on 17th March, 1999, it was decided to enhance the paid up capital of the company and this was to be done by way of issuing 1,73,713 equity shares of face value of Rs. 10/- each at par to the petitioner and 93,412 shares to DPSL on the same terms. This would have had entitled the petitioner and the DPSL shares representing 26% each of the paid up capital of DESCON. This decision of the Board of Directors of the respondent also received the approval of the shareholders of DESCON in an extraordinary general meeting. This proposal was communicated to the petitioner by a communication of 9"' April, 1999.
8. In a Board meeting of the petitioner held on 5th May, 1999, decision was taken to accept the offer, but the matter was to be referred to the Central Government for its approval. It appears that such approval was necessary as per the prevailing regulations and practices.
9. The petitioner claims to have had accepted the offer by a written communication dated 11th June, 1999. The receipt of this communication, however, is denied by the respondent. For two years between June, 1999 and 2001, no development appears to have had taken place with regard to issuance of such shares. The Central Government, however, accorded approval to the petitioner for the contemplated investment on 20th July, 2001. In the meantime, the Board of Directors of DESCON had taken a decision not to issue these shares to the petitioner and a communication to that effect dated 29th June, 2001 was sent to the petitioner. The petitioner protested against such refusal, and there was exchange of correspondences between the petitioner and the respondent, in which both the parties justified and stuck to their respective positions.
10. What prompted institution of the suit by the petitioner, out of which the present proceeding arises, was a proposal for amendment of the Articles of Association of the respondent, by insertion of Article 53A authorising the company to buy back its own shares. The resolution for carrying out such amendment was passed in the Annual General Meeting of the company held on 28th September, 2001. The petitioner found the insertion of the new Article 53A intended to deprive the petitioner's right, which it claimed, accrued on the basis of the offer and alleged acceptance in respect of 1,73, 713 shares of the respondent. Under these circumstances, the suit out of which the present proceeding arises, was instituted in or about 3rd October, 2001. In this suit, the petitioner claimed the following reliefs:
(a) Decree for specific performance of the agreement contained in the letter dated April 9, 1999, issued by the defendant to the plaintiff and the letter dated June 11, 1999, issued by the plaintiff to the defendant being Annexure "B" and "C" respectively;
(b) Declaration that the resolution passed at the Annual General meeting of the defendant held on September 28, 2001, in relation to item No. 6 of the notice convening such Annual General Meeting, is illegal, null, void; if in effect;
(c) Mandatory injunction directing the defendant to forthwith issue and allot shares and of and in the defendant in accordance with the resolution passed at the Extraordinary General Meeting of the defendant held on April 9, 1999.
(d) Perpetual injunction restraining the defendant whether by itself or by its servants or agents or otherwise howsoever from issuing or allotting any further shares of and in the defendant except to the plaintiff and the proforma defendant, in accordance with the resolution passed at the Extraordinary General Meeting of the defendant held on April 9, 1999;
(e) Perpetual injunction restraining the defendant, its servants or agents and assigns from giving any effect or further effect to the resolution passed at the Annual General Meeting of the defendant held on September 28, 2001 in relation to item No. 6 of the agenda in the notice convening such Annual General Meeting;
(f) Perpetual injunction restraining the defendant whether by itself or by its servants or agents or assigns or otherwise howsoever from in any manner exercising any rights as a shareholder of the proforma defendant except in accordance with the instructions of the plaintiff;
(g) Decree for delivery up and cancellation of resolution alleged to have been passed at the Annual General Meeting of the defendant held on September 28, 2001, in relation to Item No. 6 of the agenda in the notice convening such Annual General Meeting;
(h) Perpetual injunction restraining the defendant from dealing with transferring, encumbering and alienating its shareholding in the proforma defendant except to the plaintiff in any manner whatsoever;
(i) Perpetual injunction restraining the defendant, its servants, agents and assigns from giving any effect to the alleged Article 53A in the Articles of Association of the defendant in any manner whatsoever;
(j) Interlocutory injunction;
(k) Receiver;
(l) Costs;
(m) Further and other reliefs.
11. The suit was instituted primarily claiming specific performance of the agreement to sell 1,73,713 shares. The petitioner's case, as made out in the plaint is that there was a concluded contract between the parties, under which the petitioner had become entitled to be allotted these shares, which would have given them control of 26% holding of the paid up capital of DESCON.
12. In connection with the suit, an interlocutory motion, being G.A. No. 3938 of 2001 was taken out, in which the following prayers were made:
a) Injunction directing the respondent to forthwith issue and allot shares of and in the respondent in accordance with the resolution passed at the extraordinary general meeting of the respondent held on April 9, 1999;
b) Injunction restraining the respondent whether by itself or by its servants or agents or otherwise howsoever from issuing or allotting any further shares of and in the respondent except to the plaintiff and the proforma respondent, in accordance with the resolution passed at the extraordinary general meeting of the respondent held on April 9, 1999;
c) Injunction restraining the respondent, its servants or agents and assigns from giving any effect or further effect to the resolution passed at the Annual General Meeting of the respondent held on September 28, 2001 in relation to Item No. 6 of the agenda in the notice convening such Annual General Meeting;
d) Injunction restraining the respondent whether by itself or by its servants or agents or assigns or otherwise howsoever from in any manner exercising any rights as a shareholder of the proforma respondent except in accordance with the instructions of the plaintiff;
e) Injunction restraining the respondent from dealing with transferring, encumbering and alienating its shareholding in the proforma respondent except to the plaintiff in any manner whatsoever;
f) Injunction restraining the respondent, its servants, agents and assigns from giving any effect to the alleged Article 53A in the Articles of Association of the respondent in any manner whatsoever;
g) Ad interim orders in terms of prayers above;
h) Costs of, and incidental to, this application be paid by the respondents; i) Such further or other order or orders be passed and/or direction or directions be given as to this Hon'ble Court may seem fit and proper.
13. An Hon'ble Single Judge of this Court on 3rd October, 2001 passed an ad interim order in the said interlocutory motion restraining DESCON from giving effect to the resolution, through which the amendment to the Articles of Association was sought to be introduced. The ad interim order of injunction was subsequently modified by His Lordship by an order passed on 10th October, 2001. By this order, respondent No. 1 therein, (i.e. DESCON) was directed not to take any step in respect of "buy-back" shares without complying with all steps as provided in Sections 77A and 77B of the Companies Act, 1956. In this order, the following submissions of the learned Senior Counsel for DESCON was recorded:
...Mr. Sen further submitted that if they take any step, that will be in terms of the resolution passed in the Board Meeting on 26th December, 1998.
It is, however, clarified by Mr. Sen that if any steps are being taken by his client, Descon Ltd. they will give notice to the Advocate-on-record of the petitioner.
14. This interlocutory motion, (i.e. G.A. No. 3938 of 2001) was disposed of on 16th July, 2003, confirming the order passed on 10th October, 2001 in that matter.
15. The genesis of the present proceeding (being the interlocutory proceeding initiated by G.A. No. 1745 of 2006) lies in the proposal of DESCON to issue equity shares in favour of venture capitalists on preferential basis upto a limit of 49% of the increased subscribed equity share capital of the company at a premium of not less than Rs. 600/- (Rupees six hundred only) for every further share of Rs. 10/- each. In the extraordinary general meeting which was convened on 9th June, 2006, one of the special businesses to be transacted was issuance of such equity shares. The reason for this proposal, as it appears from the explanatory statement issued by DESCON in pursuance of Section 173(2) of the Companies Act 1956, is to fund various projects of the company. This resolution, it appears, has been passed on 9th June, 2006 by the shareholders of DESCON. However, as indicated in the earlier part of this judgment, on 14"' June, 2006, this Court has passed an interim order directing the respondent not to give effect to such resolution.
16. This interlocutory motion has been contested by DESCON by filing affidavit-in-opposition. The interlocutory motion taken out by DESCON (G. A. No. 2062 of 2006), praying for vacation of the ad interim order has also been contested by the petitioner by filing affidavit-in-opposition. No affidavit has been filed by DPSL, impleaded in this proceeding as the proforma respondent. But Mr. S.B. Mukherjee, learned Senior Advocate, appearing for DPSL has supported DESCON, and advanced arguments opposing passing of, or continuance of the order of interim injunction.
17. On behalf of the petitioner, Mr. Sudipto Sarkar, learned Senior Advocate, assisted by Mr. Soumen Sen, learned Advocate has argued that as per the agreement between the petitioner and the respondent, which was arrived at on the basis of communications of 9th April, 1999 and 11th June, 1999, the petitioner was entitled to have a 26% holding in the paid up equity share capital of the respondent. It is this agreement to enforce which the suit, out of which the present proceeding arises, was instituted. Mr. Sarkar has traced the shareholding pattern of the respondent since its incorporation to contend that respondent at all material times was conceived to be a part of the "Yule group" and could not break off from the fold of the petitioner and its group companies.
18. In support of his submissions, he has brought to my notice to the fact that when DESCON was incorporated in the year 1995 the first subscribers to its Memorandum of Association were the employees of DPSL, the petitioner or its group companies. Further, the decision of the petitioner to renounce the offer of rights shares by DPSL in favour of DESCON was on the understanding that DPSL belonged to the same group. The approval of Securities and Exchange Board of India to this arrangement was also on the basis that the renouncer and renouncee belonged to the same group, and it was an in-house arrangement.
19. Mr. Sarkar has also laid emphasis on two resolutions passed by the shareholders of DESCON in its extraordinary general meeting held on 26th December, 1998 and 9th April, 1999. In the meeting held on 26th December, 1998, a copy of which has been made a part of annexure to the supplementary affidavit filed on behalf of DESCON affirmed by one Debabrata Sanyal on 2nd August, 2006, it was resolved:
Under the above background, the Board observed that the company would not sell its holding of shares in DPS. However, should an exigency arise in future and the company decides to sell its holding of shares in DPS, the Board agree in principle, that the company give its first offer to AYCL, BCCL and KJCCL and if accepted, would sell the same to AYCL, BCCL and KJCCL of their respective renunciated shares in DPS subject to compliance of all applicable laws/regulations.
The entities represented in their acronyms in this resolution are all group companies of the petitioner, AYCL signifying the petitioner itself.
20. The special resolution passed in the extraordinary general meeting held on 9th April, 1999 primarily relates to the offer of DESCON to the petitioner and DPSL to issue 1,73,713 shares and 93,412 shares respectively. This forms the foundation of the petitioner's claim in the suit. Mr. Sarkar's submission is that the main intention behind offering these shares was to ensure that the 'Yule group" retains control of the majority stake in the DESCON. Such odd numbers of equity shares were decided upon to ensure that both the petitioner and DPSL could come to hold 26% each of the paid up equity share capital of DESCON. He has referred to the following portion of the explanatory statement pursuant to Section 173(2) of the Companies Act, 1956, in connection with this resolution:
The existing paid-up share capital of the company is held by Dishergarh Power Supply Co. Ltd. (DPS) the promoter and the employees of AY group. In order to strengthen the holdings of AY group it had been felt desirable that Andrew Yule & Co. Ltd. (AYCL), the parent company should also participate in the share capital of the company and simultaneously further equity shares be also issued to DPS. Accordingly, your Board of Directors has proposed to issue and allot on 'preferential basis' 1,73,713 equity shares of Rs. 10/- each to AYCL and 93,412 equity shares of Rs. 10/- each to DPS for cash at par. With this preferential allotment, AYCL & DPS will each hold 26% of the paid-up share capital of your company.
21. The Central Government also gave approval to this arrangement under a communication dated 20th July, 2001, originating from the Ministry of Heavy Industry, Government of India. The position of the Central Government in this matter appears to be against the preferential allotment in favour of the venture capitalists. The Department of Heavy Industries, in a communication addressed to DPSL dated 8th June, 2006, a copy of which has been made part of Annexure "J" to the petition, has advised.
...
4. Under the circumstances enumerated above, DHI feels that the interest of DPSC Ltd. should be protected and the Board of DPSC Ltd. should advise DESCON not the proceed with holding of the proposed Extraordinary General Meeting and passing of the resolutions, as enumerated in the notice convening the said meeting.
22. The apprehension of the concerned ministry of the Central Government as it appears from this communication is that the contemplated issuing of shares to the venture capitalists instead of issuing fresh shares to DPSL Ltd. on preferential basis would be prejudicial to the interest of DPSL Ltd., since its present holding in DESCON would come down to 10.2% from the existing 20.02% and the holding of DESCON of 30.41% of paid up capital of DPSL was most likely to be disposed of by the venture capitalists on assuming the controlling interest of DESCON.
23. Mr. Sarkar's argument is that the reason for issuing fresh equity shares to venture capitalists was to defeat the petitioner's right of control of 26% paid up equity capital of DESCON, to which the petitioner has acquired vested right. The impact of issuing fresh shares would be to defeat the resolution passed on 9th April, 1999, and also go contrary to the resolution of the Board of DESCON passed on 26th December, 1998, I have referred to this resolution in the earlier part of this judgment.
24. On the aspect of his clients' prayer for interim injunction, Mr. Sarkar's submission is that the petitioner has made out a strong prima facie case for maintaining status quo with regard to the pattern of shareholding in DESCON. Arguing on the aspect of balance of convenience, his contention is that the same tilts in favour of the petitioner since if fresh equity shares are permitted to be issued, the petitioner's claim of control of 26% equity holding of DESCON would stand permanently defeated. That would also run contrary to the SEBI approval. In support of the petitioner's claim for temporary injunction, he has relied on the following authorities:
(i) Transmission Corporation of A.P. Ltd. v. Lanco Kondapaiti Power (P) Ltd. .
(ii) Colgate Palmolive (India) Ltd. v. Hindusthan Lever Ltd. .
(iii) Dorab Cawasji Warden v. Comi Sorab Warden .
(iv) Israel v. Samset Rahaman AIR 1914 Cal 362.
25. Mr. P. C. Sen appearing with and Mr. Pratap Chatterjee, learned Senior Advocates on behalf of DESCON, contested the petitioner's claim for interim relief. Argument has been advanced by Mr. Sen, both on maintainability of the interlocutory motion taken out by the petitioner, as well as on merit. He has prayed for dismissal of the interlocutory motion (G.A No. 1745 of 2006) on the ground that the prayers made therein go beyond the scope of the suit. It is the contention of DESCON that the suit has been instituted by the petitioner challenging the validity of the resolution passed in the Annual General Meeting held on 28th September, 2001 in relation to item No. 6 of the notice convening the meeting. This notice relates to insertion of clause 53A in the Articles of Association of DESCON. In the same suit, the decision of the Board of Directors of DESCON to issue fresh equity shares on preferential basis could not be challenged.
26. The other limb of attack of DESCON on preliminary ground is that since the petitioner has never been a shareholder of DESCON, he does not have the locus standi to question a resolution passed in a duly convened extraordinary general meeting.
27. On merit, the submission of Mr. Sen is that the letter accepting the offer alleged to have been issued by the petitioner was never received by DESCON. On the other hand, the Department of Company Affairs, while conducting an inspection under Section 209A of the Companies Act 1956, opined that the issue of such shares (i.e. 1,73,713 shares) at par was not in the interest of the existing shareholders of DESCON. The Board of Directors of DESCON had resolved at a Board Meeting held on 22nd May, 2001 that the preferential issue at par would not be made in favour of the petitioner. This decision of the Board of Directors of DESCON was taken, it was submitted on behalf of the respondent, in view of such observation of the Department of Company Affairs, and also in view of the fact that there was a lapse of two years since the making of offer for the shares.
28. As regards the proposal to issue fresh equity shares to the venture capitalists, it was sought to be justified on the ground of present financial need of the company. It was submitted the DESCON had undertaken several projects, including an agreement with Railtel Corporation of India Ltd., an arm of Indian Railways for sale of their entire bandwidth in the eastern and north-eastern sector. It was contended that fund requirement of the company for the year 2006-07 itself was for about Rs. 35,00,00,000/- (thirty-five crore), which could be met from the sum received from the contemplated preferential allotment.
29. Mr. Sen's further submission is that the respondent company has the right to issue such shares under Section 81(1A) of the Companies Act 1956, and there had been no illegality in passing the resolution on 9th June, 2006. Reliance has been placed on a decision of the Hon'ble Supreme Court of India in the case of Needle Industries India Ltd. v. Needle Industries Newey India Ltd. , in support of the proposition that if shares are issued for the benefit or larger interest of the company, then minor irregularities ought to be ignored. It is also the contention of DESCON that the petitioner is a sick company and its case has already been referred to the Board for Industrial and Financial Reconstruction (BIFR), constituted under the provisions of Sick Industrial Companies (Special Provisions) Act, 1985 and the petitioner lacked funds necessary for acquiring the shares of DESCON, and they would not be able to fulfil the obligation arising out of the contract, whose existence itself is under serious dispute. As regards, the interim relief which the petitioner may have been entitled to, Mr. Sen's submission is that such claim for interim relief stands settled by the order of this Court passed on 16th July, 2003, while disposing of G.A. No. 3935 of 2001. Mr. Sen submitted that unless the interim injunction passed in the present interlocutory motion was dissolved, the respondent's interest would be seriously prejudiced as it would not be able to make progress with any of its project.
30. Mr. S.B. Mukherjee, learned Senior Advocate appearing for the proforma respondent DPSL has supported the stand of DESCON, and adopted the arguments of Mr. Sen. In addition, he has submitted that the right of the petitioner vis-a-vis its claim over the affairs of DESCON in any case cannot go beyond that of a shareholder. The rights of a shareholder has been laid down by the Hon'ble Supreme Court in the case of L.I.C. v. Escorts reported in AIR 1986 SC 370. which are:
(i) to vote on resolutions at meetings of the Company
(ii) to enjoy the profits of the company in the shape of dividends.
(iii) to apply to the Court for relief in the case of oppression.
(iv) to apply to the Court for relief in the case of mismanagement.
(v) to apply to the Court for winding up of the company.
(vi) to share in the surplus on winding up.
Mr. Mukherjee's argument is that the claim of the petitioner goes far beyond the rights of a shareholder, which they are not entitled to under the law.
30A. So far as the nature of the offer of the shares of DESCON to the petitioner, which forms the foundation of the present suit, Mr. Mukherjee submitted that the offer was for sale of a stipulated number of shares, but not for 26% of the equity holding of DESCON. This Court, while disposing of the first application of the petitioner did not come to a finding as to whether, there was concluded contract vis-a-vis that offer, and hence further relief primarily based on that contract could not be prayed for. As regards the advise of the Central Government to DPSL, Mr. Mukherjee's case is that the same is a mere advise, and cannot be enforced legally. He also referred to the decision of the Hon'ble Supreme Court in the case of Needle Industry (supra) to support the respondent's claim for raising funds by way of issuing equity shares to venture capitalists at a premium.
31. Having considered the pleadings and the rival submissions, I find that two issues emerge for resolution of the present proceeding. The first one is that of maintainability of the interlocutory motion, being G.A No. 1745 of 2006, and the second one is as to whether the petitioner is entitled to an injunction restraining the respondent from giving effect to the resolution passed on 9th June, 2006. I propose to deal with the issue of maintainability of the present proceeding first.
32. The maintainability of the interlocutory motion, (G.A. No. 1745 of 2006) has been assailed by both the respondent and the proforma respondent on two counts. Firstly, it has been contended that the present interlocutory motion goes beyond the scope of the suit. The second ground of attack is that the petitioner, not being a shareholder of DESCON, cannot question the validity of the resolution passed in the extraordinary general meeting of the company. And the petitioner's right, if any, cannot go beyond that which can be exercised by a shareholder as laid down in the Escorts case (supra).
33. On the latter issue, i.e. whether the petitioner not being a shareholder of DESCON can maintain the present petition having regard to the reliefs prayed, I am not inclined to reject the petition at the threshold. I accept the submission of the respondents that if the petitioner was a shareholder of DESCON, it would not have been entitled to apply for the reliefs as prayed for in this petition. After a resolution is passed in an extraordinary general meeting of a company, it may not be open to a shareholder to challenge such resolution unless some illegality or irregularity in such resolution is shown. This position of law seems to be clear and well-established, as no statutory irregularity or illegality has been alleged in the present case. But the petitioner's case is not on breach of any statutory right. It is founded on the basis of equitable right, which it claims, stands vested in it in view of the resolution of 9"' April, 1999, and the ensuing letters of offer and alleged acceptance. In my opinion, if a resolution is passed by a company, the effect of which would be to override or supersede a vested legal or equitable right of another person, then it would be open to the latter to challenge the legality of such resolution. The nature of right the petitioner is seeking to enforce in the present interlocutory motion is not derived from its status of a shareholder or a potential shareholder, but for enforcement of a right which the petitioner claims, has its source in an alleged contract with the respondent. The nature of the right which may be enforced in such a situation may not remain confined to the shareholders' rights as enumerated in the Escorts decision (supra).
34. It has also been contended by the respondent that the instant interlocutory motion (i.e. G.A. No. 1745 of 2006) is not maintainable as the same goes beyond the scope of the suit. To this, the answer of the petitioner appears to be that the intention of the respondent as manifested in the resolution passed on 9th June, 2006 is to defeat the right of the petitioner to have control of 26% of the paid up equity share capital of DESCON, and since the relief claimed in the suit include prayer for perpetual injunction restraining the defendant from issuing or allotting any further shares of the defendant except to the plaintiff and the proforma defendant in accordance with the resolution passed on 9th April, 1999, the present proceeding comes well within the ambit of the suit.
35. The foundation of the claim of the plaintiff in the suit being C.S. No. 504 of 2001 was refusal of the defendant to issue 1.73,713 equity shares of face value of Rs. 10/- each to the plaintiff. The immediate event, or incident which prompted the plaintiff to institute the suit, as it appears from the plaint, was the decision of the Board of Directors of DESCON to amend the Articles of Association of the company by introducing Article 53A therein. The scope of this Article has been discussed in the earlier part of this judgment. It has been pleaded in the plaint that if this Article was incorporated, the same would tantamount to defeating the valuable rights of the company. The interlocutory motion taken out for interim relief in connection with introduction of Article 53A was disposed of by this Court by the order passed on 16th July, 2003.
36. So far as the present interlocutory motion is concerned, this has been triggered by the proposal for issuing fresh equity share capital upto 49% of the paid up share capital of the company at a premium in favour of venture capitalists. It appears that the resolution to give effect to this proposal has been approved by the shareholders of DESCON on 9th June, 2006. The contention of the petitioner is that if this resolution is given effect to that would defeat the rights of the petitioner to control 26% of equity share capital of DESCON.
37. But can this new set of facts be introduced in a proceeding in connection with the suit, the scope of which I have discussed in the proceeding paragraphs? I am of the opinion that it cannot be so. Under the Code the Court has been conferred with jurisdiction to pass interim order directing preservation or maintenance of status quo as regards properly or right whose violation is complained of in any suit, if there is threat wastage or disposal of property or commission of breach of contract or injury to such right.
38. Admittedly, there is no pleading in the plaint as regards the proposal and the ensuing resolution for issuing equity capital to venture capitalists as these events surfaced in the year 2006. The argument of the petitioner, however, is that the issue of the petitioner's claim for control of 26% of equity capital of DESCON is central to the dispute involved in the suit, and if the impugned resolution of 9th June, 2006 is given effect to, the petitioner's right of 26% holding of equity share capital of DESCON would stand permanently defeated. It is the case of the petitioner that its grievance or complaint forming the basis of the present interlocutory motion has direct link to the cause of action of the suit.
39. The claim of the petitioner in the suit, however, is in respect of its entitlement to a certain number of shares; and not over 26% equity holding. This is how the plaint has been framed. The two communications, which the petitioner claims to have concluded the contract relates to issuance of 1,73,713 shares in favour of the petitioner and does not speak of control of 26% equity holding in or of the respondent. Mr. Sarkar, has argued that the real intention of the arrangement amongst the parties which culminated in the resolution passed in the extraordinary general meeting of DESCON held on 9th April, 1999 was that both the petitioner and DPSL would have 26% holding of the paid-up share capital of DESCON. In support of this submission, he has drawn my attention to the explanatory statement to the notice of DESCON in respect of the extraordinary general meeting of 9th April 1999 to which I have made reference earlier.
40. The power or jurisdiction of a Court to grant interim relief in favour of a plaintiff flows from the case made out in the plaint. In the present case, the petitioner is seeking relief on a set of facts that occurred in the year 2006. This set of facts may defeat the petitioner's right to get reliefs claimed in the suit. But this factor cannot alone bring the allegations of the petitioner on the strength of which it has applied for relief in the present interlocutory motion within the scope of the suit. The scope of a suit cannot be judged on the basis of reliefs claimed, but on the basis of statement of facts on the strength of which such reliefs are claimed. If a totally new and independent set of facts emerge subsequent to institution of a suit, in my opinion, fresh interim reliefs cannot be applied for, with the cause of action for the suit, as pleaded in the plaint, remaining unaltered. As regards the portion of the explanatory statement referred to in the preceding paragraph, a plain reading of this suggests that the control of 26% was indicated there more as a consequence of allotting the stipulated number of shares. Such degree of control may have been the idea at that point of time, but that did not get reflected in any concrete action on the part of the parties so as to make 26% control of paid-up equity shares a vested legal right of the petitioner for all time to come, but remained an inchoate arrangement.
41. In the present case, the petitioner is seeking relief on a fresh set of events, independent of the cause of action forming the basis of the suit. Just because the acts of the respondent complained against would have deprived the petitioner the degree of control it would have secured had it been allotted 1,73,713 shares, these acts of the respondent DESCON cannot be brought within the ambit of the same suit. The present interlocutory motion, being G.A. No. 1745 of 2006, thus in my opinion is not maintainable, the same being beyond the scope of the suit (C.S. No. 504 of 2001).
42. As I have already held that the instant interlocutory motion is not maintainable, under normal circumstances it would have been unnecessary to decide the claim of the petitioner for interim relief on merits. But since substantial argument has been advanced on merits as well by the learned Counsels appearing for the parties, I chose to decide the case of the petitioner on merit as well.
43. The argument of the petitioner in support of this application is that it has a strong prima facie case on merit. Such prima facie case is, according to the petitioner, for control of 26% equity capital of the respondent. Mr. Sarkar has laid strong emphasis on the concept of "Yule" group, and the DESCON's obligation to remain within that group. In support of the argument on this aspect, I have been taken through the series of events since incorporation of DESCON. Mr. Sarkar has also argued that while making of the offer, DESCON was quite clear of the fact that the petitioner would have control over 26% of the equity share capital. This gets reflected in the explanatory statement to the notice of extraordinary general meeting of 9th April, 1999 as also in the odd numbers of shares which were offered.
44. I am, however, not satisfied at this prima facie stage of the petitioner's claim of vested right over control of 26% equity-share capital of the respondent. The claim of the petitioner can at best be for 1,73,713 equity shares. There appears to be no legal prohibition and no such argument has been advanced either, on issuance of fresh equity share capital, which forms the subject-matter of the resolution of the shareholders of DESCON in its extraordinary general meeting held on 9th June, 2006. Under the provisions of Section 81(1A) of the Companies Act, 1956 the shareholders. Mandate expressed through a special resolution held in a properly convened meeting would, under normal circumstances, the sole determinant for such a step.
45. The four authorities relied on by Mr. Sarkar in support of the petitioner's case for interim injunction lay down the guideline for grant of temporary injunction. In the case of Transmission Corpn. of A.P. Ltd. (supra), the Hon'ble Supreme Court held:
The interim direction ordinarily would precede finding of a prima facie case. When existence of a prima facie case is established, the Court shall consider the other relevant factors, namely, balance of convenience and irreparable injuries....
46. In the case of Dorab Cawasji Warden (supra), the main issue was granting of an interlocutory mandatory injunction, and in this case the Hon'ble Supreme Court held:
The relief of interlocutory mandatory injunctions are thus granted generally to perserve or restore the status quo of the last non-contested status which preceded the pending controversy until the final hearing when full relief may be granted or to compel the undoing of those acts that have been illegally done or the restoration of that which was wrongfully taken from the party complaining. But since the granting of such an injunction to a party who fails or would fail to establish his right at the trial may cause great injustice or irreparable harm to the party against whom it was granted or alternatively not granting of it to a party who succeeds or would succeed may equally cause great injustice or irreparable harm, Courts have evolved certain guidelines. Generally stated these guidelines are:
(1) The plaintiff has a strong case for trial. That is, it shall be of a higher standard than a prima facie case that is normally required for a prohibitory injunction.
(2) It is necessary to prevent irreparable or serous injury which normally cannot be compensated in terms of money.
(3) The balance of convenience is in favour of the one seeking such relief.
47. In the case of Colgate Palmolive (India) Ltd. (supra), the Hon'ble Supreme Court has laid down a seven point guideline for the purpose of granting of interim injunction. In this judgment, the Hon'ble Supreme Court held:
We, however, think it fit to note hereinbelow certain specific considerations in the matter of grant of interlocutory injunction, the basic being non-expression of opinion as to the merits of the matter by the Court, since the issue of grant of injunction, usually is at the earliest possible stage so far as the time-frame is concerned. The other considerations which ought to weigh with the Court hearing the application or petition for the grant of injunctions are as below:
(i) extent of damages being an adequate remedy;
(ii) protect the plaintiffs interest for violation of his rights though, however, having regard to the injury that may be suffered by the defendants by reason therefor;
(iii) the Court while dealing with the matter ought not to ignore the factum of strength of one party's case being stronger than the other's;
(iv) no fixed rules or notions ought to be had in the matter of grant of injunction but on the facts and circumstances of each case-the relief being kept flexible;
(v) the issue is to be looked at from the point of view as to whether on refusal of the injunction the plaintiff would suffer irreparable loss and injury keeping in view the strength of the parties' case;
(vi) balance of convenience or inconvenience ought to be considered as an important requirement even if there is a serious question or prima facie case in support of the grant;
(vii) whether the grant or refusal of injunction will adversely affect the interest of the general public which can or cannot be compensated otherwise.
48. In the case of Israel v. Samset (supra), an Hon'ble Division Bench of this Court held:
It is quite sufficient if the Court finds that there is a substantial question to be investigated and that matters should be preserved in status quo until that question can be finally disposed of....
The dispute involved in this case was between the co-owners of certain immovable property and in this case also, the Hon'ble Division Bench of this. Court considered the strength of the case, and was satisfied.
49. In all these authorities, the duty of the Court hearing an application for grant of interim injunction to assess the strength of the case of the respective parties has been recognised. In the case of Transmission Corporation of A.P. Ltd. (supra), the assessment of prima facie strength of the plaintiffs case has been held to be the first condition for deciding the question for grant of temporary injunction.
50. The ratio laid down in the case of Needle Industry (supra) is, however, in my view is not applicable in the present case, as the act complained against by the petitioner here is not an irregularity, but breach of rights emanating from an alleged contract.
51. In the present case, I have already observed, I do not think the petitioner has made out a case for grant of temporary injunction. The petitioner's case, at the highest, can be for allotment of 1,73,713 shares, and not permanent control of 26% equity holding of the respondent. So far the communication of the Ministry of Heavy Industries, Government of India is concerned, this appears to be advisory in nature and does not create any legal right in favour of the petitioner. On the argument that there being a 'Yule" group, to which respondent was a necessary constituent, I do not find any legal support. The "group" itself is a nebulous concept in the context of this case and the petitioner cannot have any permanent control over any of its group companies under the law, save by way of establishing controlling interest on them. This is an argument based on historicity, but does not establish any legal right. In fact, the proforma respondent, which on petitioner's own case, is a constituent of the group is contesting the petitioner's claim.
52. On the question of balance of convenience and inconvenience, in my opinion, this aspect largely becomes insignificant as I am of the opinion that the petitioner has failed to make out a prima facie case. For the purpose of grant of temporary relief, requirement to establish a prima facie case is the first and main criteria. If this condition is not satisfied, an applicants' case rested on the aspect of balance of convenience and/or inconvenience or irreparable loss or prejudice stands on a very weak foundation. In the present case, on facts also I do not think the petitioner has made out an outstanding case.
53. Considering all these factors, I dismiss the present interlocutory motion. The interim order passed in this matter accordingly stands vacated.
54. The application of the respondent for vacation of the interim order, being G.A. No. 2062 of 2006 also stands disposed of in the above terms.
55. There shall, however, be no order as to costs.
Later:
56. Learned Counsel for the petitioner prays for stay of operation of the judgment. Such prayer is opposed by Mr. Sen, learned Counsel appearing for the respondent No. 1. Since the interim order is operating from June 14, 2006 there will be stay of operation of the judgment till November 30, 2006.
57. Urgent xerox certified copy of this order, if applied for, be supplied to the parties subject to compliance with all requisite formalities.