2015 (3) TMI 623 - HC - Companies Law

Proceedings under Section 397 and 398 of Companies Act, 1956 - it has been specifically stated that the MPJ Group should have been given the option to purchase the shares as it is the majority group. - Held that - By the order dated 3rd July, 1996 BPJ Group was given the 1st option to purchase the shares of the MPJ Group and if such option was not exercised then the MPJ Group could have exercised the option and purchased the shares. In appeal the order was modified and the MPJ Group was directed to purchase the shares of the BPJ Group. The said order was passed on the premise that the MPJ Group was the majority share-holder. There is no default clause in the order dated 18th September, 1998 and on a reading of the order the reason for modifying the order of the Trial Court dated 3rd July, 1996 is that the MPJ Group held 52.2% shares while the BPJ Group held 47.50% shares and the discretion exercised by the Trial Court was on a wrong legal principle in not directing the majority, to purchase the shares of the minority and although the relief granted in the order dated 3rd July, 1996 is not unknown in law but an exceptional case ought to have been made out for granting such relief. In the instant case too the MPJ Group which was in management was to purchase the shares of the BPJ Group as will appear from the decree dated 18th September, 1998, and there was no scope for exercise of option by the BPJ Group. This will be evident from the modified decree itself which mandates sale of the shares by the BPJ Group to the MPJ Group by user of the phrase shall sell . It was on the basis of the aforesaid that the appeal of MPJ Group was allowed. By virtue of the aforesaid the requirement of exercise of option was rendered otiose. The aforesaid will, therefore, entitle the decree-holder to execute the decree dated 18th September, 1998, accordingly, there will be an order in terms of prayer (g) of Column 10 of the Tabular Statement, after advertisement in leading newspapers for which purpose Ms. Ipsita Banerjee Advocate is appointed Special Officer at an initial remuneration of 300 Gms. Let such advertisement be published within six weeks from the date of receipt of the order. The sale will be subject to confirmation by this Court.

Summary

Issues:
Execution of order dated 18th September, 1998 in proceedings under Sections 397 and 398 of the Companies Act, 1956.

Detailed Analysis:
The application for execution of the order dated 18th September, 1998 was filed by Bajrang Prasad Jalan (BPJ) following proceedings under Sections 397 and 398 of the Companies Act, 1956. The original decree granted BPJ or his nominees the first option to purchase shares of respondent no.4, with a valuation by Price Waterhouse Chartered Accountants. An appeal modified this option, directing BPJ Group to sell shares to Mahabir Prasad Jalan (MPJ) Group. MPJ Group argued that majority shareholders should buy out the minority in deadlock situations, and subsequent proceedings confirmed this stance. The MPJ Group's acceptance of the modified decree was evident in their pleadings and actions before the Supreme Court. The valuation report by Ernst & Young Pvt. Ltd. was not challenged, and the MPJ Group's attempt to challenge it in execution proceedings was deemed unfounded.

In response, BPJ Group contended that the main aim of Sections 397 and 398 proceedings was to resolve management deadlocks, emphasizing that the decree was clear and unambiguous. They argued against challenging the valuation report and highlighted the lack of cooperation from the Company in the valuation process. The decree dated 3rd June, 1996 initially granted BPJ Group the option to purchase shares, which was later modified in favor of the MPJ Group due to majority shareholding status. The absence of a default clause in the modified order supported the MPJ Group's obligation to purchase shares, as per the judgment's rationale.

The judgment emphasized that in cases under Sections 397 and 398, the majority shareholders typically buy out the minority to address oppression and mismanagement allegations. The decree mandated the sale of shares by the BPJ Group to the MPJ Group, eliminating the need for BPJ Group to exercise an option. The phrase "on same terms and conditions" did not imply an option exercise but related to procedural aspects. The withdrawal of Special Leave Petitions finalized the order dated 18th September, 1998, enabling the decree-holder to execute the decree as per the specified terms. The judgment outlined further steps for execution, including advertisement and confirmation of sale.

In conclusion, the judgment clarified the obligations arising from the modified decree dated 18th September, 1998, in the context of Sections 397 and 398 proceedings, emphasizing the majority shareholders' duty to buy out the minority in cases of deadlock, and validated the decree-holder's right to execute the decree accordingly.