2002 (2) TMI 1343 - Board - Companies Law

Summary

Issues Involved
1. Change in the ownership of shares.
2. Appointment of the 1st respondent as Chairman and Managing Director (CMD).
3. Extension of the life of detachable warrants.
4. Prejudice to the interest of the company.

Detailed Analysis

1. Change in the Ownership of Shares
The petitioner argued that there has been a change in the ownership of shares due to the 1st respondent's acquisition of control over the 4th respondent company, which holds 26.2% shares in the company. This change, according to the petitioner, satisfies the provisions of Section 409 of the Companies Act, 1956. The petitioner also contended that the acquisition of shares by the 1st respondent was clandestine and illegal, violating the will of Shri R.C. Oswal, which stated that the petitioner should control the company.

The respondents countered that Section 409 requires a direct change in the ownership of shares held in the company, which was not the case here. The change in control of the 4th respondent does not equate to a change in the ownership of shares in the company. They cited the case of Shaw Wallace & Co. Ltd., where the acquisition of a foreign company holding shares in Shaw Wallace did not amount to a change in ownership of Shaw Wallace shares.

The judgment held that the acquisition of control of the 4th respondent by the 1st respondent does not constitute a change in the ownership of shares within the meaning of Section 409. The shares are still held by the 4th respondent, and no transfer or transmission of shares in the company has occurred.

2. Appointment of the 1st Respondent as Chairman and Managing Director (CMD)
The petitioner claimed that the appointment of the 1st respondent as CMD was a change in the board composition and was done to dilute the petitioner's powers. The petitioner argued that this appointment was invalid as it was done without amending the articles of the company and while the 1st respondent was still holding managerial positions in other companies.

The respondents argued that the appointment of the 1st respondent as CMD was done in a board meeting and did not constitute a change in the board's composition. They also contended that the provisions of Section 409 are preventive and cannot be used to challenge past acts of the board.

The judgment concluded that the appointment of the 1st respondent as CMD does not constitute a change in the board's composition. A change in designation or powers of an existing board member does not amount to a change in the board under Section 409. The legality of the appointment was not within the scope of inquiry under Section 409.

3. Extension of the Life of Detachable Warrants
The petitioner argued that the extension of the life of detachable warrants was done to benefit Mahavir Spinning Mills Ltd., controlled by the 1st respondent, and would result in a further change in the ownership of shares.

The respondents countered that the extension of the life of the warrants was done with the approval of the general body and SEBI. They argued that the extension does not amount to a change in the ownership of shares within the meaning of Section 409.

The judgment held that Section 409 does not cover situations of change in ownership of shares arising from future shares to be issued. Therefore, the extension of the life of the detachable warrants does not constitute a change in the ownership of shares.

4. Prejudice to the Interest of the Company
The petitioner argued that the 1st respondent's actions, including diverting funds and making financial decisions that resulted in losses, were prejudicial to the company's interest. The petitioner claimed that the consolidation of powers with the 1st respondent as CMD would ruin the company.

The respondents argued that the 1st respondent has been on the board for a long time and has contributed to the growth of the company. They contended that the allegations of prejudice were not substantiated and that the 1st respondent's association with the company was beneficial.

The judgment concluded that since there was no change or likely change in the ownership of shares or the board, there was no need to examine whether such a change would be prejudicial to the company's interest.

Conclusion
The petition was dismissed as not maintainable under Section 409 of the Companies Act, 1956. The petitioner failed to establish that there had been either a change or likely change in the ownership of shares held in the company, which is the foundation for making further inquiries under Section 409. All interim orders were vacated.