2008 (4) TMI 505 - HC - Companies Law

Oppression and mismanagement - whether appellant did not qualify to file the said petition in terms of section 399 of the Act as the appellant held less than 1/10 of the issued share capital ? Held that - Whatever angle one looks at the expression issued share capital of the Company it is very clear that the expression issued share capital can only refer to the preference share capital as well as equity share capital of the Company and the appellant was required to hold one-tenth of the total of this issued share capital before he became eligible to maintain a petition under section 397/398 of the Act. The appellant at no time held more than 2.01 per cent of issued share capital. It did not have it when it became a member or shareholder. It did not have the requisite percentage on the date of filing of the petition. The appellant might be having 14.8 per cent of equity shares but that is not the criterion to make an application. The petition was therefore rightly dismissed.

Issues Involved:
1. Eligibility to file a petition under Section 397/398 of the Companies Act, 1956.
2. Definition and interpretation of "issued share capital" under Section 399 of the Companies Act, 1956.
3. Allegations of oppression and mismanagement.
4. Issuance of preference shares and compliance with SEBI regulations.
5. Jurisdiction and maintainability of the petition.

Detailed Analysis:

1. Eligibility to File a Petition under Section 397/398:
The primary issue in the appeal was whether the appellant qualified to file a petition under Section 397/398 of the Companies Act, 1956. The Company Law Board (CLB) had rejected the appellant's petition on the grounds that the appellant did not hold at least one-tenth of the "issued share capital" as required by Section 399 of the Act. The appellant argued that it held 14.80% of the total issued, subscribed, and paid-up equity share capital, assuming that "issued share capital" referred only to "equity share capital."

2. Definition and Interpretation of "Issued Share Capital":
The court had to interpret the term "issued share capital" under Section 399 of the Companies Act. The appellant contended that "issued share capital" should be interpreted to mean only "issued equity share capital." The CLB, however, concluded that "issued share capital" includes both equity and preference share capital. The court upheld the CLB's interpretation, stating that the term "issued share capital" is a wide expression deliberately used by the Legislature to include both types of share capital. The court emphasized that the literal rule of interpretation should apply, and the term should be understood in its natural, ordinary, or popular meaning.

3. Allegations of Oppression and Mismanagement:
The appellant alleged that the issuance of cumulative preference shares was intended to diminish the voting rights of equity shareholders and violated SEBI regulations. However, the court noted that the CLB had rejected the petition based on the preliminary objection regarding the appellant's eligibility under Section 399. The court did not delve into the merits of the allegations of oppression and mismanagement.

4. Issuance of Preference Shares and Compliance with SEBI Regulations:
The appellant argued that the issuance of preference shares violated SEBI (Substantial Acquisition and Takeover) Regulations, 1997, as it allowed the promoters to hold more than 55% of the voting rights without complying with the requirements specified under the regulations. The court noted that the CLB had not addressed this issue, as it had dismissed the petition based on the preliminary objection. The court stated that the CLB should first determine whether the issuance of preference shares was null and void before addressing the eligibility requirement under Section 399.

5. Jurisdiction and Maintainability of the Petition:
The court upheld the CLB's decision to dismiss the petition on the preliminary issue of maintainability. The court emphasized that the expression "issued share capital" includes both equity and preference share capital, and the appellant did not hold the requisite percentage of the total issued share capital to maintain a petition under Section 397/398. The court also noted that the CLB's consistent view that past and concluded transactions cannot be impugned in a petition under Section 397/398 was correct.

Conclusion:
The court dismissed the appeal, affirming the CLB's decision that the appellant did not qualify to file a petition under Section 397/398 of the Companies Act, 1956, as it did not hold at least one-tenth of the "issued share capital," which includes both equity and preference share capital. The court also upheld the CLB's interpretation of the term "issued share capital" and its decision to dismiss the petition on the preliminary issue of maintainability.

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