2015 (9) TMI 1692 - Board - Companies Law

Oppression and Mismanagement - Stay on increase in authorized Share Capital - Whether any stay is to be granted over an item for increase of authorised share capital in the AGM to be held on 23.09.2015? - HELD THAT - It is evident that the respondents are in management they have been continuing in the management without any disputes for last several years, the only objection to the petitioners now is company should not go for rights Issue. The company has been doing its business well; the petitioners have been getting revenue to their company SADL by selling its milk to R1 Company. That being the position, I don't see any point in the argument of the petitioners that company has not been giving any dividend to the shareholders. When the petitioners, through their own company, get revenue from R1 Company, they could not have said that the petitioners have been reinvesting the profits into R1 Company without any returns to the shareholders - The petitioners cannot say that company should alone go for debt not for rights issue. The minority cannot opt for the right under section 397 398 of the Act 1956 to stall the functioning of the company, when the act of the management is in the interest of the company. Since there is a decision to purchase dryer costing around ' 100 crores, it can't be said that there is no need to raise fund. Therefore, the argument of the petitioners counsel saying that there is no need for raising fund has no merit. However since the respondents categorically mentioned that they will not invoke allotment of shares under B Class, the shareholding of the petitioners will not come down to 20% as stated by them, when the respondents have come forward saying that they will not allot any shares as B Class shares, there cannot be any more equity than this - here, in the case, the directors in the management indulged in all sorts of malafide acts and irregularities to dilute the aggrieved, therefore this cannot be applicable to the given facts of the case. There are no merit to stay the agenda for increase of authorised share capital of R1 Company, this Bench hereby rejects interim relief seeking stay of the Agenda over increase of authorised share capital and also over other interim reliefs in respect of stay on minutes drawn on 16.07.2015 - the respondents are directed to file reply within 6 weeks hereof, rejoinder, if any, within 6 weeks thereof in the main petition.

Summary

Issues Involved:
1. Allegations of mismanagement and oppression by R2 and its nominee directors.
2. Dispute over the decision to raise funds through equity financing versus debt financing.
3. Petitioners' concern over dilution of their shareholding through rights issue.
4. Interim relief sought to stay the resolution to increase authorized share capital and the implementation of Board Meeting Minutes dated 16.07.2015.

Issue-wise Detailed Analysis:

1. Allegations of Mismanagement and Oppression:
The petitioners filed a Company Petition under Sections 397, 398 read with Sections 402, 403, and 406 of the Companies Act, 1956, alleging that R2 and its nominee directors (R3 to R6) were conducting the affairs of R1 company prejudicially to the interests of the petitioners. The petitioners claimed that R2, a foreign company with 51% shareholding, was making decisions detrimental to the petitioners, who held 49% shareholding. The petitioners highlighted that R2's actions, such as stopping additional payments to SADL for milk supply and proposing equity financing, were oppressive and constituted mismanagement.

2. Dispute Over Fundraising Method:
The core dispute was whether R1 should raise funds through equity financing or debt financing to purchase a specialized dryer from Nestle. The petitioners argued that Rabobank was ready to provide a loan, making debt financing a viable option. They contended that equity financing would dilute their shareholding and was unnecessary given the availability of debt financing. Conversely, R2, holding a majority, preferred equity financing, asserting that it was a prudent commercial decision to avoid further debt burden, especially considering the company's past financial distress and recovery from BIFR.

3. Concern Over Shareholding Dilution:
The petitioners expressed concern that the proposed rights issue would reduce their shareholding below 25%, effectively diminishing their control and influence in R1. They argued that the equity financing proposal was a strategic move by R2 to dilute their shareholding. The petitioners highlighted an Article Agreement that allowed R2 to subscribe to additional shares not taken up by the petitioners, potentially issuing B Class shares with disproportionate voting rights, further exacerbating the dilution of their shareholding.

4. Interim Relief Sought:
The petitioners sought interim relief to stay the resolution to increase the authorized share capital from Rs. 120 Crores to Rs. 240 Crores and to prevent the implementation of the Board Meeting Minutes dated 16.07.2015. They argued that the decision to raise funds through equity financing was not bona fide and was aimed at diluting their shareholding. The respondents countered that the decision to increase the authorized share capital and pursue equity financing was in the company's best interest, emphasizing that the petitioners had previously agreed to the purchase of the dryer.

Judgment Analysis:
The judgment highlighted that R2, as the majority shareholder, had been managing R1 without disputes for several years. The petitioners' objections were focused on the method of fundraising rather than the necessity of the funds. The judgment noted that commercial decisions, such as choosing between equity and debt financing, are typically within the purview of the majority shareholders and should not be interfered with unless there is clear evidence of oppression or mismanagement.

The judgment also addressed the petitioners' concern about shareholding dilution, noting that R2 had assured that no B Class shares would be issued, preventing the petitioners' shareholding from falling below 20%. The court found no merit in the petitioners' argument that equity financing was unnecessary, given the company's need to raise funds for the dryer purchase.

Conclusion:
The court concluded that the petitioners had not demonstrated a prima facie case of oppression or mismanagement warranting interference. The decision to raise funds through equity financing was deemed a commercial decision within the majority shareholders' rights. Consequently, the court rejected the interim relief sought by the petitioners to stay the resolution to increase the authorized share capital and the implementation of the Board Meeting Minutes dated 16.07.2015. The respondents were directed to file a reply within six weeks, with the petitioners granted six weeks thereafter to file a rejoinder. The court allowed the parties to mention any urgency for hearing as needed.