2007 (9) TMI 415 - HC - Companies Law

Oppression and mismanagement - suppression of material information - lack of probity and loss of confidence - misrepresentation and fraud - Validity of circular resolution - Appointment of the managing director - Compliance with section 402(e) of the Companies Act, 1956 - Joint venture agreement - entitlement to get the 155 million shares in terms of the agreements - formation and recording of opinions on the three conditions mentioned in section 397(2) - pleading and proof - doctrine of legitimate expectatio. Entitlement to get the 155 million shares in terms of the agreements - HELD THAT - In my view, the question is whether regarding the question of transfer of the said 155 million shares by the WBIDC in terms of the agreement dated January 12, 2002, the HPL was competent or supposed to do anything ; and if the answer is in the affirmative, then it must be held that it was one of its affairs. Mr. Bimal Chatterjee, in my opinion, is right in saying that though the HPL was a party to the agreement dated January 12, 2002, it was not competent or supposed to take any decision or to do any other thing regarding the question of transfer of the said 155 million shares by the WBIDC to the CP(M)C, or to its nominee the CP(I)PL that entered into a separate agreement dated March 8, 2002, with the WBIDC. The agreement dated March 8, 2002, was not an agreement between shareholders of the HPL, the CP(I)PL that was deemed to have pledged the deemed transferred and delivered shares was not a shareholder of the HPL. Simply because the HPL subsequently wrote letters seeking confirmation from the WBIDC whether it had transferred those shares, and seeking the IDBI s decision regarding approval of the transfer, I do not think it can be said that the matter became an affair of the HPL. To my mind, the Board committed an error of law by holding that the question of transfer of the said 155 million shares was an affair of the HPL. Counsel for the GoWB and the WBIDC have rightly said that in the final adjudication process the Board was not justified in recording a finding of fact taking exception to the submissions made at the admission stage. Counsel for the GoWB and the WBIDC were entitled to resist the prayer for interim relief on the basis of the case made out in the company petition by the petitioners themselves. Though the said 155 million shares had never actually been acquired by the CP(I)PL and in reality the Chatterjee group was not the majority shareholders in the HPL, the petitioners in the company petition claimed that having acquired those shares they had become the majority shareholders in the HPL. That was an absolutely incorrect statement of fact. They were fully aware of the fact that as from October 14, 2004, the HPL had become a section 619B company. Whatever may be the effect of the agreements dated January 12, 2002 and March 8, 2002, read with the agreement dated July 30, 2004 (I say so because their enforceability, validity and legality were questioned before the Board and also before me, and I do not think it is necessary for me to examine those aspects), the fact remains that the Chatterjee group never held the majority of the HPL shares. In my opinion, it is not permissible to substitute submissions of counsel for a party or defence of a party pleaded in the affidavit, for any statutory requirement. When the act of oppression was to be pleaded in the company petition by the petitioners therein and the Board was to decide that complaint, it was not permissible for it to substitute submissions of counsel for the GoWB and the WBIDC and their defence pleaded by them in their counter for the absentee pleadings in the company petition. When there was no case of oppression pleaded in the company petition that unless the said 155 million shares were actually transferred by the WBIDC, with the IOC allotment the petitioners therein would stand converted from the majority into a minority, it was not permissible for the Board to hold that because of counsel s submissions and defence taken in the counter and the possibility of WBIDC not transferring the said 155 million shares of its own accord, a case of oppression stood established. The petitioners in the company petition were required to plead and prove the act or acts of oppressions, and an act or case of oppression was not to be searched out somehow by the Board ; it was just to be apparent, having been established. I am unable to agree with counsel for the Chatterjee group that the findings of oppression recorded by the Board, tying up the IOC allotment and the question of transfer of the said 155 million shares, being a pure finding of fact cannot be interfered with. I hold that the finding of the Board regarding oppression is perverse, and hence the impugned order entirely based on such finding is liable to be set aside. The Board applied the concept ignoring many aspects of constitution and functioning of the HPL. In my judgment, on the facts it is very difficult to apply the concept of quasi partnership to the HPL, and I hold that the Board was not justified in applying the concept, particularly when for deciding the case made out in the company petition it was not necessary to decide whether the HPL was actually in the nature of a quasi-partnership only between the GoWB and the WBIDC and the CP(M)C, since the Tatas did not claim that it was in the nature of a quasi partnership, and it could not be held that the other shareholders, namely, Winstar and IT(M)L, were partners of the existing shareholders, i.e., WBIDC and the CP(M)C. In my view, the Board was not right in making the doctrine of legitimate expectation as the sole basis for exercising its jurisdiction. Legitimate expectation of the petitioners in the company petition, if there was any, could be considered relevant only for the purpose of making order after the threshold jurisdictional questions were decided in their favour, i.e. only after forming and recording affirmative opinions regarding oppression, unfair prejudice for winding up, and facts justifying a winding up order on just and equitable ground, all required by section 397(2), the Board could consider the question of existence of legitimate expectations, if any, of the petitioners in the company petition for making an appropriate order in their favour. It was not empowered to permit the unfair prejudice proposition and the legitimate expectation doctrine to eclipse the provisions in section 397(2), i.e., those two things could not be substituted for the three statutory conditions mentioned in section 397(2). In none of the authorities given to me it was held that only on the basis of legitimate expectation an order granting relief can be made under section 397 of the Companies Act, 1956. Misrepresentation and fraud - The allegations of misrepresentation and fraud were made without giving any particulars whatsoever. Who made the misrepresentation and when and how it was made nothing was said in the company petition. It has been rightly said that such a bald and vague allegation of fraud as was made in the case is not to be noticed at all. Admittedly, after discovering the alleged fraud PC did not disclose his reaction, and he rather took steps for getting the benefit of the fraud. Mr. Sarkar has explained this by saying that even after discovering the fraud PC did not react, because he was not bothered at all when the IOC was going out and the balance HPL shares of WBIDC were almost in his pocket. Validity of Circular Resolution - Once the board decision dated November 2, 2004, was approved by the special resolution dated January 14, 2005, and the offer made by letter dated January 28, 2005, was accepted by the IOC, the only thing that was to be done was to issue the share certificates. PC was obstructing that, and for no valid reason. Although his activities exposed all concerned to threatened civil and criminal actions, he remained unmoved. The HPL s interests were at stake. Hence it cannot be said that the chairman was unjustified in proposing the circular resolution. I find no merit in the argument that the legal opinion with connected papers were not disclosed with the proposed resolution. Case u/s 398 of the Companies Act, 1956 - There is absolutely no reason to say that the GoWB and the WBIDC with their associates, if there were any, were conducting the affairs of the HPL in any manner prejudicial to the HPL s interests. Whatever changes the IOC allotment and allotment of shares to the lenders in terms of the debt restructuring package and the refinancing scheme were to bring about were in the HPL s interests, as had been decided by its board of directors from time to time. The IOC came in according to terms and conditions of the debt restructuring package. It seems to me that without any real basis for making any complaint the petitioners in the company petition referred to the provisions in section 398 There is absolutely no reason to make any order granting relief under that section. Hence the Board was fully justified in not making any order by making any reference to the provisions in section 398. Appointment of the managing director in the HPL - I do not find any reason to say that the Board was wrong in its opinion on the question of validity of appointment of the managing director. I agree with Mr. Bimal Chatterjee that having participated in the meeting dated March 29, 2005 and voted in favour of appointment of the managing director, the petitioners concerned in the company petition were not entitled to question the appointment. As rightly said by Mr. Chatterjee, the concept of ultra vires, legality or illegality does not apply to interpretation of articles of association which are mere terms of contract and to which law of estoppel applies with full force, and if at all, question of prejudice or non-performance of contract can arise. In my opinion, the Board was justified in not interfering with the matter chiefly on the ground that the petitioners concerned in the company petition being some of the creators of the situation were estopped from questioning the appointment. In any case, I do not see how order granting relief u/s 397 could be made, even if the HPL board acted illegally in appointing the managing director ; for that could not be considered an act of oppression. Compliance with section 402(e) of the Companies Act, 1956 - There is nothing to show that in the course of hearing of the section 397 application for its final disposal or before making the order giving the directions, IDBI was actually noticed and heard. The Board rather presumed that IDBI would not raise any objection to the order, since before filing of the company petition it had signified its consent in writing to the transfer of the said 155 millions and all other HPL shares held by WBIDC to the CP(I)PL, the CP(M)C or its nominee. To my mind, there was no valid reason for the Board to proceed on the basis of a presumption. Hence I agree with Mr. Chatterjee that the Board made the order in clear contravention of the provisions in section 402(e). The order of the Board is liable to be set aside on this ground as well. But then there is no reason to remit the matter, since I have found that the company petition itself is liable to be dismissed on the ground that the petitioners therein failed to make out and establish any case of oppression, a must for getting relief under section 397 of the Companies Act, 1956. In view of the rules governing the proceedings, the Board was supposed to consider only those documents which were brought on record as part of the pleadings of the parties. It has also been said that the case of the petitioners in the company petition stated in their written argument was completely different from the one made out in their pleadings. I do not think these questions require any further close examination, since I have found that on merits the order of the Board cannot be sustained. Thus, the order of the Board is liable to be set aside and the company petition should be dismissed. Accordingly, I allow the three appeals filed by GoWB, WBIDC and IDBI, and dismiss all the eight cross-objections and the appeal filed by the petitioners in the company petition. The order of the Board (Chatterjee Petrochem (Mauritius) Co. v. Haldia Petrodhemicals Ltd.) is set aside and the company petition is hereby dismissed. All the pending interlocutory applications shall be deemed to be disposed of. There shall be no order for costs in the proceedings.

Summary

Issues Involved:
1. Jurisdiction of Company Law Board (CLB) and its powers under Section 397 of the Companies Act, 1956.
2. Validity of the allotment of shares to Indian Oil Corporation (IOC).
3. Allegations of oppression and mismanagement.
4. Interpretation and application of the doctrine of legitimate expectation.
5. Validity of the circular resolution for allotment of shares.
6. Requirement of notice to Industrial Development Bank of India (IDBI) under Section 402(e).
7. Procedural fairness in the proceedings before the CLB.

Summary:

1. Jurisdiction of Company Law Board (CLB) and its powers under Section 397 of the Companies Act, 1956:
The High Court held that the CLB must form and record opinions on the three conditions mentioned in Section 397(2) before making an order granting relief. The CLB failed to record opinions on all three conditions, thus vitiating its order by an incurable jurisdictional error. The CLB also erred in considering the question of transfer of the 155 million shares by WBIDC to CP(I)PL as an affair of HPL, which was beyond its jurisdiction.

2. Validity of the allotment of shares to Indian Oil Corporation (IOC):
The High Court upheld the CLB's finding that the allotment of 150 million shares to IOC was not conducted in a manner oppressive to the petitioners. There was no clandestine agreement between GoWB, WBIDC, and IOC. The non-disclosure of certain letters was not material as there was no binding arrangement affecting the petitioners' rights.

3. Allegations of oppression and mismanagement:
The High Court found that the petitioners failed to establish a case of oppression or mismanagement. The petitioners' claim of being the majority shareholders was based on incorrect facts, and their allegations of fraud and misrepresentation were unsupported by evidence. The CLB's finding of oppression was deemed perverse and unsustainable.

4. Interpretation and application of the doctrine of legitimate expectation:
The High Court held that the CLB wrongly applied the doctrine of legitimate expectation. The doctrine could not override the express terms of the agreements and articles of association. The petitioners' claim for specific performance of the agreements under the guise of legitimate expectation was not permissible.

5. Validity of the circular resolution for allotment of shares:
The High Court found no merit in the argument that the circular resolution was adopted in a manner oppressive to the petitioners. The resolution was necessary to protect the interests of HPL and its directors from threatened legal actions by IOC. The CLB's comments on good corporate governance were uncalled for.

6. Requirement of notice to Industrial Development Bank of India (IDBI) under Section 402(e):
The High Court held that the CLB's order was made in contravention of Section 402(e) as no notice was given to IDBI before modifying the terms and conditions of various agreements. This procedural lapse further vitiated the CLB's order.

7. Procedural fairness in the proceedings before the CLB:
The High Court criticized the CLB for considering numerous documents not forming part of the pleadings and for the petitioners' written arguments deviating from their original pleadings. This improper procedure contributed to the unsustainability of the CLB's order.

Conclusion:
The High Court allowed the appeals filed by GoWB, WBIDC, and IDBI, dismissed the cross-objections and appeal filed by the petitioners, set aside the CLB's order, and dismissed the company petition.