2005 (9) TMI 621 - HC - Companies Law

Oppression and mismanagement - determination of the fair value of shares - additional share capital by the Managing Director in his own favor - Whether direction can be issued u/s 402 of the Act for change of the name of the company - challenged the directions given by the CLB qua the nature of relief - Power of Tribunal on application under sections 397 and 398 - HELD THAT - We have already expressed our view that the rights shares were issued in the instant case in order to comply with the legal requirements, which, apart from being obligatory as the only viable course open to the Directors, was for the benefit of the company since, otherwise, its developmental activities would have stood frozen as of December 31 1973. The shares were not issued as a part of a takeover war between the rival groups of shareholders. The willingness of the Indian shareholders to pay a premium on the excess holding or the rights shares is a factor which, to some extent, has gone in their favor on the question of oppression. Having had the benefit other stance, they must now make it good. Besides, it is only meet and just that the Indian shareholders, who took the rights shares at par when the value of those shares was much above par, should be asked to pay the difference in order to nullify the unjust and unjustifiable enrichment at the cost of the Holding Company. We must make it clear that we are not asking the Indian shareholders to pay the premium as a price of oppression. We have rejected the plea of oppression and the course which we ae now adopting is intended primarily to set right the course of justice, in so far as we may. Even when it was found that there was a justification in issuing rights share, the Court, in order to do substantial justice, restored the earlier balance in given fact situation. In the facts of this case even one such act would be sufficient to constitute oppression and mismanagement as it disturbs the equity stakes decisively by bringing down the equity share of petitioners from 32% to 18% (which would have relevance in taking many managerial decisions where majority of 75% or more is required). However, it may be noted that in the present case this was not the solitary instance alleged in the petition filed by the petitioner and many acts of oppression and mismanagement were alleged. Thus, in so far as the respondents' Co.A. is concerned, I do not find any merit therein and dismiss the same. Whether it is legally permissible and such directions can be given under Section 402 of the Companies Act? - It is a matter of record that till the disputes started between the parties, the Indian company had published only those titles copyright whereof was with the petitioner and permission was given by the petitioner to the company to publish and sell those titles. Therefore, the CLB is not right in observing that it is not clear as to whether the consent to use the words Prentice Hall was because of the shareholders' holding in the company and association with the management or because the company was to publish the titles of the petitioner. It has already been observed that as far as the shareholding is concerned, its pattern changed from time to time to comply with the Government regulations. Moreover, even the agreement to publish the titles of the petitioner has since been terminated. Jurisdiction of the CLB (and ultimately of this Court in appeal) under Sections 397/398 and 402 is much wider and direction can be given even contraryo the provisions of the Articles of Association. It has even right to terminate, set aside or modify the contractual arrangement between the company and any person see Section 402(d) and (e) . Section 397 specifically provides that once the oppressiois established, the Court may, with a view to bringing to an end the matters complained of, make an order as it thinks fit. Thus, the Court has ample power to pass such orders as it thinks fit to render justice and such an order has to be reasonable. It is also an accepted principle that just and equitable provision in Section 402(g) is an equitable supplement to the common law of the company to be found in its Memorandum and Articles of Association. In the facts of this case, as already observed by me, equity is in favor of the petitioner. Such a situation should not be allowed where the petitioner/Prentice Hall is not associated with the company but the company carries on with its name. It is an exceptional kind of a case where the petitioner who is responsible for the incorporation of the Indian company is driven out of the company but the company continues to adopt its name and wants to continue to ride on its goodwill without being assocated with it. Such unprecedented situation would call for unprecedented solution and in my opinion the second alternative suggested by the petitioner that in case the petitioner has to go out from the company it is willing to do so provided the words Prentice Hall are also dropped from its name, is not something which is unreasonable. In such a situation, the argument of the learned counsel for the respondent that the company is a separate entity and the appellant's attempt is to identify it selfith the company, may also be of no relevance. No doubt, the company has separate legal entity. But we are here concerned with the proceedings under Section 397/398 of the Act and in the process the issue being discussed is as to whether direction can be issued u/s 402 of the Act for change of the name of the company. Such a direction would be permissible in the facts of this case where the petitioner brought this corporate vehicle to India and gave its name is now asked to pull apart and breaoff and would be no longer associated with it. Width and amplitude of CLB's powers u/s 402 is already delineated above. That apart, if the entity of the company has to be maintained as it is, the 2nd respondent should accept the first alterntive by selling his stakes in the company to the petitioner. He cannot be allowed to create a situation of having a cake and eat it too . Once the power to issue such a direction is found in Section 402, pendency of other suit shall not deter the Court to pass appropriate direction in these proceedings. More so, when the issue of copyright is to be examined on different parameters and the suit was filed when the petitioner was a shareholder in the company. Here, we are discussing the modalities of parting the ways. Whether giving of such a direction would be against the interest of the company, as found by the CLB - To my mind, even de hors the agreement, dated 6th June 1963 between the petitioner and the company the very conceptualization of the company was because of the permission of the petitioner to the company to use its name and to use it so long as the foundation and the basic understanding of the arrangement remains, namely, the petitioner allows the company to publish and sell the books in which company has the copyright. Therefore, it is either the petitioner who should be allowed to continue to control the company and as a result the respondent No. 2 should sell its shareholding to the petitioner o, in the alternative , if the petitioner is to be forced out of the company, it has right to take away its name with it, which it lent to the petitioner. Thus, the respondent cannot raise the plea that such a course would not be in the interest of the company. I do not agree with the contention of the respondents that present petition is filed for collateral purpose and oblique motives and, therefore, the same was not maintainable and should have been dismissed by the CLB. Thus, the nature of relief, as granted by the CLB, is hereby set aside. The appeal filed by the petitioner is allowed in the following terms - A) An opportunity is granted to the second respondent and his group to exercise his option to accept one of the two alternatives suggested by the petitioner, namely, either to come out of the company and sell the shareholding to the petitioner or to by the shares held by the petitioner in the company;(B) In case first option is exercised, the petitioner shall pay a sum of ₹ 20 crores to the second respondent and his group. If according to the second respondent, the shares held by him have higher value, in that eventuality he may approach the CLB for appointment of an expert for the valuation of the shares;(C) In case second alternative is accepted by the petitioner, the petitioner shall transfer all its shares in favor of the second respondent without any consideration (as per its own offer) and the second respondent in that eventuality take steps for change of the name in the Indian company by dropping the words Prentice Hall . (D) 2nd respondent is given 30 days time to exercise his option. If the option is not exercised within 30 days, it would be open to the petitioner to exercise its option either to accept the first alternative or the second alternative. There shall be no orders as to costs

Summary

Issues Involved:
1. Whether the petition was filed with oblique motives.
2. Locus standi of Pearson to file the petition and the authorization of Sh. Ravi Oberoi to file the petition.
3. Legality of the further issue of shares in 2000 and whether it was bona fide.
4. Petitioner's right to appoint its nominee on the Board of the company.
5. Allegations regarding non-receipt of notices and documents by the petitioner.
6. Allegations about the increase in the remuneration of the second respondent, appointment of his wife and daughter, and dealings with M/s. Mediamatics.
7. Nature of relief to be granted by the Company Law Board (CLB).

Issue-wise Detailed Analysis:

1. Whether the petition was filed with oblique motives:
The CLB found that the petition was not filed with oblique motives. The civil suits pending in the Delhi High Court were related to the contract between the company and the petitioner, while the company petition filed before the CLB was alleging oppression and mismanagement. Reliefs for such allegations could only be granted in these proceedings and not in the civil suits.

2. Locus standi of Pearson to file the petition and the authorization of Sh. Ravi Oberoi to file the petition:
The CLB rejected the preliminary objections of the respondents, holding that with the change of the name from Prentice Hall Inc. to Pearson, the entity remained the same, and therefore, Pearson was the shareholder of the company. It was also found that Sh. Ravi Oberoi had a proper and valid power of attorney executed in his favor by the petitioner to file the petition. The objections regarding the affidavit verifying the petition were also turned down.

3. Legality of the further issue of shares in 2000 and whether it was bona fide:
The CLB found that the further issue of shares in 2000 was not bona fide. The company was making good profits and did not require an increase in working capital. The offer letter was addressed to the petitioner at a wrong address deliberately, and the issue was made during the pendency of civil suits between the parties. The CLB directed that the shares issued in 2001 be canceled if the petitioner chose to remain in the company.

4. Petitioner's right to appoint its nominee on the Board of the company:
The CLB acknowledged that the petitioner had a right to appoint its nominee on the Board of the company in terms of Article 82. However, due to strained relations between the parties, pending civil proceedings, and the petitioner having its own business in competition with that of the company, the CLB did not find it proper to have the petitioner's nominee on the Board as it would result in a conflict of interests and would not be in the interest of the company.

5. Allegations regarding non-receipt of notices and documents by the petitioner:
Without going into the allegations of the petitioner that it was not receiving notices of the meetings and various documents like Annual Reports, the CLB directed that all notices should be sent to the petitioner at the address given by it at least 30 days in advance and the company should also supply all documents sought by the petitioner.

6. Allegations about the increase in the remuneration of the second respondent, appointment of his wife and daughter, and dealings with M/s. Mediamatics:
The CLB did not find any substance in the allegations about the increase in the remuneration of the second respondent, appointment of his wife as Director, and his daughter as Marketing Coordinator, as well as dealing of the company with M/s. Mediamatics, a proprietary concern of the wife of the second respondent.

7. Nature of relief to be granted by the Company Law Board (CLB):
The CLB noted that it was a closely held company run on a quasi-partnership basis. Due to differences in relations, it was not possible for both the petitioner and the second respondent to continue together, and parting ways was the only plausible solution. The petitioner suggested two alternatives: (i) the petitioner could purchase the shares held by the second respondent and his group, and (ii) the petitioner was willing to go out of the company and sell its shareholding to the second respondent only if the second respondent omitted the words "Prentice Hall" from the name of the company. The CLB did not find favor with the first alternative. However, it found the second option inequitable and left it to the petitioner's choice to either continue with the company as a shareholder or go out of the company. If the petitioner opted to remain in the company, the shares issued in 2001 were to be canceled. If the petitioner chose to go out, the fair value of the shares was to be determined by an independent valuer based on the balance sheet as on 31st March 2003.

Appeal Analysis:

Co.A. (B) No. 21/2004:
The respondents challenged the CLB's finding about the issue of further share capital. The court upheld the CLB's decision, noting that the respondents failed to justify the need for issuing further share capital and that the notice was sent to the petitioner at an incomplete address deliberately. The court dismissed the respondents' appeal.

Co.A. (B) No. 20/2004:
The petitioner challenged the nature of relief granted by the CLB. The court found that the petitioner had a legitimate expectation to gain control of the company after the government embargo was removed. The court held that the petitioner should be allowed to have control of the company or, if forced out, the company should drop the words "Prentice Hall" from its name. The court set aside the CLB's relief and directed the second respondent to choose between selling his shares to the petitioner or buying the petitioner's shares and changing the company's name.

Conclusion:
The court provided the second respondent 30 days to exercise his option. If the option was not exercised within 30 days, the petitioner could exercise its option to either accept the first alternative or the second alternative. No orders as to costs were made.