2011 (6) TMI 674 - Board - Companies Law

Whether CLB can shut its eyes to the flagrant violation of the provisions of section 17 Alteration of MOA amendment of the object clause of a mainly cement manufacturing and trading company to deal in securities, instruments By group of shareholders controling 62.9 per cent voting rights, without information to other members - alleged that aforesaid is fraudulent scheme, a mischievous device conceived to defraud the company, its stakeholders and the public to make illicit gains - Held that - CLB, a quasi judicial authority guided by the principles of natural justice may in exercise of its power and discretion grant leave to amend the pleadings provided the party approaching was not acting mala fide - mismanagement in the affairs of the company causing oppression to the minority shareholders, seeking amendment of the object clause of memorandum of association of the company for doing the business already being done, keeping the shareholders in the dark - such an act is sought to be got ratified now by seeking amendment to the object clause of the memorandum, an enquiry into the charges is very much within the scope of interim injunction in the instant matter

Summary

Issues Involved:
1. Urgent interim reliefs due to recent developments.
2. Legality of the proposed amendments to the Memorandum of Association (MoA).
3. Control and voting rights over the 62.9% shares.
4. Allegations of mismanagement and oppression.
5. Compliance with Section 17 of the Companies Act, 1956.
6. Interests of the company and its stakeholders.
7. Jurisdiction of the Company Law Board (CLB).

Detailed Analysis:

1. Urgent Interim Reliefs Due to Recent Developments:
The applicants sought urgent interim reliefs due to the issuance of a postal ballot notice by the company to amend the objects clause of the MoA. The amendments aimed to authorize the company to engage in money market operations and deal in securities, which the applicants argued were ultra vires the Companies Act, 1956, and part of a fraudulent scheme by R-2 to siphon off financial resources for personal gain.

2. Legality of the Proposed Amendments to the MoA:
The proposed amendments included clauses 17-O and 17-P, which aimed to authorize the company to engage in trading commodities, securities, financial instruments, and derivatives. The applicants argued that these amendments were illegal, ultra vires the Act, and contrary to the company's primary business of cement manufacturing. They contended that the proposed new businesses were speculative, risky, and unrelated to the company's existing operations.

3. Control and Voting Rights Over the 62.9% Shares:
The applicants contended that R-2, Harsh Vardhan Lodha (HVL), illegally controlled the voting rights over the 62.9% shares forming part of the estate of the late Priyamvada Devi Birla (PDB). They argued that HVL had no locus standi to exercise these voting rights, as the Calcutta High Court had appointed administrators pendente lite to manage the estate. The court's order restrained HVL from exercising voting rights, and the proposed amendments were seen as an attempt to bypass this restriction.

4. Allegations of Mismanagement and Oppression:
The applicants alleged that the company's management, under R-2's control, was engaged in speculative and risky financial dealings without proper authorization, leading to potential criminal liability. They argued that the proposed amendments were part of a scheme to legitimize these illegal activities and defraud the company and its stakeholders. The applicants highlighted the failure of internal and statutory auditors to disclose these activities, further evidencing mismanagement and oppression.

5. Compliance with Section 17 of the Companies Act, 1956:
The applicants argued that the proposed amendments did not satisfy the mandatory conditions under Section 17 of the Act. They contended that the amendments were not necessary for carrying on the business more economically or efficiently, nor were they related to the company's main purpose. The amendments were seen as an attempt to introduce entirely new and speculative businesses, which were not permissible under the existing statutory framework.

6. Interests of the Company and Its Stakeholders:
The CLB emphasized that the interests of the company and its stakeholders were paramount. The proposed amendments were seen as detrimental to the company's core business and posed significant risks. The CLB noted that the company's main business was cement manufacturing, which constituted 92% of its revenue. The proposed amendments would divert resources into speculative financial activities, jeopardizing the company's stability and profitability.

7. Jurisdiction of the Company Law Board (CLB):
The respondents argued that the CLB lacked jurisdiction to entertain the application, as the proposed amendments were within the shareholders' rights. However, the CLB held that it had jurisdiction to address issues of mismanagement and oppression, and to regulate the conduct of the company's affairs. The CLB emphasized that the statutory provisions of the Companies Act, 1956, had an overriding effect, and any proposed amendments that violated these provisions were void.

Conclusion:
The CLB granted the applicants' interim reliefs, restraining the company from proceeding with the postal ballot and the proposed amendments. The CLB appointed Ernst & Young as investigating auditors to examine the company's financial dealings and directed that the findings be reported to the CLB. The CLB also allowed the applicants to amend their petition to include the new allegations of oppression and mismanagement. The CLB's decision aimed to protect the interests of the company and its stakeholders, ensuring compliance with the statutory provisions of the Companies Act, 1956.