2010 (12) TMI 1060 - HC - Companies Law

Whether article 157A is repugnant to section 81 of the Companies Act and therefore void? Held that - Any finding which is arrived in the course of interlocutory order can only be tentative and prima facie. We say this to allay the apprehension in the minds of the appellants that when the Company Law Board takes up the matter for final disposal the Company Law Board should not feel bound to follow the reasoning adopted in the interlocutory order. We are of the view that we need not interfere with the order vacating the injunction. We must notice in this regard that article 157A(e) which we have extracted actually prohibits rights issue in favour of Barings or its associates. There is no dispute that what is proposed is a rights issue under section 81(1)(a). We would think that in the facts of this case the appellants have not made out a case for interference with the exercise of discretion by the Company Law Board in vacating the interlocutory order

Issues:
1. Interpretation of article 157A of the company's articles of association.
2. Validity of the decision of the company to raise capital through a rights issue.
3. Allegations of oppression under sections 397 and 398 of the Companies Act.
4. Application for interim injunction against the company's decision.

Interpretation of Article 157A:
The appellants, as original promoters of the respondent company, challenged the decision to raise capital through a rights issue, citing article 157A of the articles of association. The key contention was whether the affirmative vote of a specific party was required for such a decision. The appellants argued that the decision to proceed with the rights issue was in violation of the provisions of the articles of association. The respondents, on the other hand, argued that the rights issue did not fall within the scope of article 157A as it did not alter the shareholding pattern. The Company Law Board found the article to be void, deeming it ultra vires section 81 of the Companies Act.

Validity of Capital Raising Decision:
The Company Law Board analyzed the provisions of section 81 of the Companies Act in relation to the decision to increase subscribed capital. The appellants contended that the decision to raise capital should have been subject to the affirmative vote as per article 157A. However, the respondents argued that the rights issue was a standard practice and did not involve preferential allotment to any specific party. The Board found that no prima facie case of oppression was established apart from the rights issue and that the shares were issued on a pro rata basis to all shareholders.

Allegations of Oppression:
The appellants alleged oppression under sections 397 and 398 of the Companies Act, primarily related to the rights issue decision. The respondents argued that the appellants failed to substantiate any other allegations of oppression beyond the rights issue. The Board emphasized that isolated allegations cannot support a case under sections 397 and 398, and the focus remained on the rights issue controversy.

Application for Interim Injunction:
The appellants sought an interim injunction against the company's decision to proceed with the rights issue. Initially granted by the Board, the injunction was later vacated, allowing the company to proceed with the rights issue. The Court declined to interfere with the Board's decision to vacate the injunction but directed the Board to dispose of the company petition finally within three months, ensuring a fair and expeditious resolution of the matter.

This detailed analysis of the judgment highlights the key legal issues, arguments presented by both parties, the Board's findings, and the Court's directive for the final disposal of the case.

← Previous Next →