2009 (8) TMI 710 - HC - Companies Law

Temporary injunction application seeking a restraint upon the plaintiff s going ahead with its proposed rights issue, whereby it intends to offer 1,50,30,003 shares of the face value of ₹ 10, at a premium of ₹ 30, thus, proposing to realise ₹ 60 crore. Held that - The court discerns no infirmity in the plaintiff s proposal of a rights offer, with the premium suggested. In respective of the final outcome of the suit, the amounts would enrich the company; the applicant-defendants being significant shareholders, would also benefit. It is ultimately their choice of either exercising whatever their rights are, in that issue. The proposals for upgrading the business, and purchase of various equipment, renovations, etc., may not fall within the description of section 78(2), i.e., (1) unissued securities, to be issued to its members as fully paid bonus shares ; (2) writing off its (the company s) preliminary expenses ; (3) writing off the expenses of or the commission paid or discount allowed on any issue of securities or debentures of the company, or (4) the provision for the premium payable on the redemption of any redeemable preference securities or any debentures of the company. In the circumstances, the court is of opinion that the plaintiff would have to approach and seek approval under sections 100 and 101 of the Act. As a result of the above discussion, it is held that though the application is maintainable, the defendant cannot be granted the relief of injunction, as sought. However, in view of section 78, the plaintiff is directed to seek approval, in accordance with law, in respect of the expenditure proposed by it, for the purposes which do not fall within section 78(2). The plaintiff shall file an undertaking, and also cause an undertaking to be filed by the company (which is a party to the present suit, and of which the plaintiffs are in control at present), to comply with these directions, in the form of affidavits, within one week.

Issues Involved:
1. Temporary injunction to restrain the plaintiff from proceeding with a proposed rights issue.
2. Determination of whether HQRL is a private or public limited company.
3. The impact of the proposed rights issue on the equity shareholding and management control.
4. Compliance with provisions of the Companies Act, specifically sections 78, 100, and 101.

Issue-Wise Detailed Analysis:

1. Temporary Injunction to Restrain the Plaintiff from Proceeding with a Proposed Rights Issue:
The defendants sought a temporary injunction to prevent the plaintiff from proceeding with a proposed rights issue, which intended to offer 1,50,30,003 shares at a premium, aiming to raise Rs. 60 crore. The defendants argued that the rights issue was decided hastily and would alter the equity shareholding irreversibly, thus prejudicing them. The court noted that the defendants, holding 89% equity, would face dilution of their shareholding if they could not raise the required amount to subscribe to the new shares. The court found no infirmity in the plaintiff's proposal to offer shares at a premium, given the market value of the shares. The court rejected the injunction but directed the plaintiff to seek approval under sections 100 and 101 of the Companies Act for expenditures not covered under section 78.

2. Determination of Whether HQRL is a Private or Public Limited Company:
The court examined whether HQRL was a private or public limited company, a crucial issue for determining the voting rights of Hill Crest Realty. The Division Bench had observed that a special resolution passed on 30-9-2002 intended to convert HQRL into a public company, and this had not been withdrawn. The Supreme Court affirmed this view, noting that by virtue of the resolution, HQRL had become a public company, thereby granting Hill Crest Realty voting rights under sections 87(2)(b) and 44 of the Companies Act. The final decision on the company's status was left for trial.

3. The Impact of the Proposed Rights Issue on the Equity Shareholding and Management Control:
The defendants contended that the proposed rights issue, by altering the equity base, would change the management control, pushing the plaintiff to become the single largest equity shareholder. The court acknowledged the defendants' concerns about irreversible changes in shareholding but noted that the proposed rights issue was necessary for the company's financial health and modernization. The court emphasized that the defendants, as significant shareholders, would benefit from the company's enrichment and had the choice to exercise their rights in the issue.

4. Compliance with Provisions of the Companies Act, Specifically Sections 78, 100, and 101:
The court examined the compliance with sections 78, 100, and 101 of the Companies Act regarding the use of the premium from the proposed rights issue. Section 78 mandates that the premium amounts be transferred to a securities premium account and used for specific purposes. The court observed that the proposed expenditures for upgrading the business might not fall within the permissible uses under section 78(2). Consequently, the court directed the plaintiff to seek approval under sections 100 and 101 for such expenditures, ensuring compliance with the statutory requirements.

Conclusion:
The court disposed of the application for a temporary injunction, allowing the plaintiff to proceed with the rights issue but requiring compliance with sections 100 and 101 of the Companies Act for expenditures not covered under section 78. The court emphasized the need for maintaining the equities and protecting the interests of all shareholders while ensuring the company's financial health and modernization.

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