1994 (6) TMI 178 - HC - Companies Law

Summary

Issues involved:

1. Continuation of injunction granted by the learned single judge till the company petition under sections 397 and 398 of the Companies Act, 1956, is decided.
2. Alleged breach of fiduciary duty by the directors of SCCIL in purchasing shares of CCGL.
3. Whether SCCIL was a party to the scheme framed by BIFR for the revival of CCGL.
4. Violation of section 372 of the Companies Act, 1956.
5. Balance of convenience for continuing the interim relief granted earlier.

Issue-wise detailed analysis:

I. Continuation of Injunction:

The primary question was whether the injunction granted by the learned single judge should be continued until the company petition filed under sections 397 and 398 of the Companies Act, 1956, is decided. The court referred to the observations made in Life Insurance Corpn. of India v. Escorts Ltd., highlighting the complexity and public interest involved in corporate disputes. The court acknowledged the extensive arguments and documents presented, emphasizing the need for a thorough examination due to the heavy stakes and vexed legal questions.

II. Alleged Breach of Fiduciary Duty:

The court examined whether the purchase of shares in CCGL by SCCIL was per se bad due to the involvement of the Mehtas, who were directors of SCCIL and had a self-interest in maintaining control over CCGL. The court referred to the Privy Council's decision in Howard Smith Ltd. v. Ampol Petroleum Ltd., which established that directors with self-interest cannot assert that their actions were bona fide or in the interest of the company. The court noted that the Mehtas had a fiduciary duty to SCCIL and their actions in transferring their obligation to purchase shares of CCGL to SCCIL constituted a breach of that duty. The court also referred to the Supreme Court's decision in Needle Industries (India) Ltd. v. Needle Industries (Newey) India Holdings Ltd., which supported the principle that directors must act in the interest of the company and not for personal aggrandizement.

III. SCCIL's Participation in BIFR Scheme:

The court examined whether SCCIL was a party to the scheme framed by BIFR for the revival of CCGL. The court noted that the BIFR had rejected the proposal for the merger of SCCIL with CCGL because SCCIL was itself a sick industrial company. The court also observed that there was no resolution passed by SCCIL's board of directors authorizing participation in the BIFR scheme. The court concluded that prima facie, SCCIL was not a party to the BIFR scheme, and the liability under the scheme was that of the promoters (TMIL) and not SCCIL.

IV. Violation of Section 372 of the Companies Act:

The court considered whether the arrangement to purchase shares of CCGL by SCCIL through its subsidiaries was inconsistent with section 372 of the Companies Act, 1956. The court noted that the resolution passed by SCCIL's board of directors to acquire shares of CCGL through its subsidiaries required investigation of facts and could not be conclusively determined at the interim stage. The court decided to leave this question for the final hearing.

V. Balance of Convenience:

The court evaluated the balance of convenience for continuing the interim relief. The appellants argued that continuing the injunction would cause SCCIL to lose a golden opportunity to have control over CCGL and that the purchase of shares was approved by the annual general meeting and financial institutions. They also provided an undertaking to ensure that SCCIL does not suffer any loss. The respondents argued that the purchase of shares was for the personal benefit of the Mehtas and not for SCCIL's commercial purposes. The court concluded that the prima facie case indicated a breach of fiduciary duty by the Mehtas and that the SCCIL was not a party to the BIFR scheme. The court decided to continue the interim relief, noting that the observations and findings were made only for deciding the application for interim relief and were not conclusive.

Conclusion:

The appeals were dismissed, and the interim relief granted earlier was continued. The court emphasized that the detailed discussion was necessary due to the elaborate arguments presented and clarified that the observations and findings were not conclusive.