2010 (9) TMI 227 - HC - Companies Law

Whether the Company Law Board passed an order in favour of a third party and against a minority shareholder approaching the board under section 397/398 of the Companies Act, 1956 ? Whether the Company Law Board passed an interim order against the petitioner under section 397/398 of the Companies Act, 1956, without looking at the prima facie case and the evidence adduced ? Whether the Company Law Board justified an order affecting the rights of the petitioner under section 397/398 of the Companies Act, 1956, on the sole ground that the company has other properties too ? Whether the Company Law Board passed an interim order which amounts to giving a determination on the main company petition itself in a proceeding under section 397/398 of the Companies Act, 1956 ? Whether the Company Law Board confined its role to look at the alleged interests of the company alone when apparently larger public interest is involved by allowing the application through the impugned order ? Held that - When the appellant has questioned the sale of company assets to respondents Nos. 6 and 7 herein, viz., to declare that the impugned sale of the land belonging to the company which is an extent of 6.63 acres made under the deed indentures dated December 9, 2005 and December 20, 2003 and sale deed dated July 21, 2007, to respondents Nos. 5 and 6 are illegal, non est and void in law , the first respondent cannot be allowed to proceed with the joint development agreement. In the event of setting aside the sale in favour of respondents Nos. 6 and 7, the joint development agreement entered with the first respondent will be non est. It is not for the first respondent to state that the appellant and the other respondents could work out their remedies out of 36 per cent. of the shares of the company over the constructed area. As stated earlier, even assuming that the appellant can work out his remedy out of 36 per cent. shares of the company over the constructed area, in the event of setting aside the sale deed executed in favour of respondents Nos. 6 and 7, the prospective purchasers of the apartments from the respondents will be made to suffer. The first respondent is not going to proceed with the construction without collecting money from the prospective purchasers of the apartments. Thus, the public money will be involved in the project. Even assuming that the appellant has no right over the assets of the company being the shareholder, he can very well question the sale made by the directors of the company if he is able to establish that the sale is detrimental to the company and its shareholders. Hence, the contention of learned counsel appearing for respondents Nos. 2 to 7 that the appellant being a shareholder, has no right over the affairs of the company and he cannot question the joint development agreement entered into with the first respondent and cannot prevent the first respondent from proceeding with the construction as per the joint development agreement cannot be accepted.

Issues Involved:
1. Maintainability of the application filed by the first respondent under section 403 of the Companies Act, 1956.
2. Interim order passed by the Company Law Board (CLB) without considering prima facie case and balance of convenience.
3. Justification of the CLB's interim order affecting the petitioner's rights.
4. Whether the CLB's interim order amounts to a determination of the main company petition.
5. Role of the CLB in considering larger public interest.

Detailed Analysis:

1. Maintainability of the Application under Section 403 of the Companies Act, 1956:
The appellant contended that the application filed by the first respondent under section 403 of the Companies Act was not maintainable as section 403 does not contemplate such applications. Section 403 allows for interim orders to regulate the conduct of the company's affairs pending final orders under sections 397/398. The first respondent's application sought permission to proceed with a joint development agreement, which does not fall under regulating the company's affairs. The High Court found merit in this contention, noting that the CLB failed to address this issue in its order, thereby rendering the application and subsequent order invalid.

2. Interim Order Passed Without Considering Prima Facie Case and Balance of Convenience:
The appellant argued that the CLB did not consider whether a prima facie case was made out or whether the balance of convenience favored the first respondent. The High Court agreed, stating that the CLB should have evaluated these factors before allowing the application. The court emphasized that the merits of the case, including the alleged undervaluation of property and potential loss to the company, should be thoroughly examined during the final hearing of the company petition.

3. Justification of the CLB's Interim Order Affecting the Petitioner's Rights:
The appellant claimed that the CLB's interim order adversely affected his rights as a substantial shareholder. The High Court noted that the appellant's interest could be significantly impacted if the joint development agreement proceeded, especially if the sale of assets to respondents Nos. 6 and 7 was later found to be illegal. The court highlighted that the CLB should have safeguarded the appellant's interests by not allowing the interim application without a full-fledged trial.

4. Interim Order Amounting to Determination of the Main Company Petition:
The appellant asserted that the CLB's interim order effectively determined the main issues of the company petition without a proper trial. The High Court concurred, stating that granting the first respondent's application to proceed with the joint development agreement preempted the final decision on the legality of the asset sales and the joint development agreement. The court emphasized that such significant decisions should only be made after a comprehensive examination of all evidence and arguments in the main petition.

5. Role of the CLB in Considering Larger Public Interest:
The appellant argued that the CLB confined its role to the interests of the company alone, ignoring larger public interest. The High Court noted that allowing the joint development agreement to proceed could involve public money and affect prospective purchasers. The court stressed that the CLB should have considered these broader implications before making its interim order.

Conclusion:
The High Court set aside the CLB's order dated July 12, 2010, allowing the first respondent to proceed with the joint development agreement. The court directed the CLB to hear the main company petition expeditiously and pass appropriate orders. The appeal was allowed, and the connected miscellaneous petition was closed.

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