1977 (6) TMI 74 - HC - Companies Law

Summary

Issues Involved:
1. Allegations of mala fide decision by the board of directors to raise equity capital.
2. Financial irregularities and fraudulent profits by the Indrasen group.
3. Request for temporary injunctions against holding the annual general meeting and extraordinary general meeting.

Detailed Analysis:

1. Allegations of Mala Fide Decision by the Board of Directors to Raise Equity Capital:
The applicants, in Company Petition No. 20 of 1977, allege that the board of directors of Southern Steelmet and Alloys Ltd. passed a resolution on March 31, 1977, to raise the equity capital by issuing 1,14,000 equity shares of Rs. 10 each, amounting to Rs. 11,40,000. This decision, representing 60% of the existing equity capital, is claimed to be not in the interests of the company but driven by a collateral and oblique motive of acquiring a controlling interest by the Indrasen group. The applicants argue that the decision was made in response to a notice requisitioning an extraordinary general meeting to move resolutions against the board, suggesting an attempt to pre-empt the outcome of that meeting. The applicants also point out the undue haste in allotting shares and accepting applications from non-members before the renunciation deadline, indicating mala fides.

2. Financial Irregularities and Fraudulent Profits by the Indrasen Group:
The applicants further allege financial irregularities and discrepancies in the accounts, accusing the Indrasen group of making fraudulent and secret profits. These allegations are part of the broader claim that the company's affairs are being conducted prejudicially to the interests of the company and its members, necessitating the court's intervention under sections 397, 398, and 402 of the Companies Act.

3. Request for Temporary Injunctions Against Holding the Annual General Meeting and Extraordinary General Meeting:
The applicants seek interlocutory orders, specifically temporary injunctions to restrain the holding of the annual general meeting scheduled for June 23, 1977, and the extraordinary general meeting scheduled for June 24, 1977. They argue that allowing these meetings would result in irreversible illegalities and uncompensatable disadvantages due to the mala fide allotment of shares.

The court, however, considers the principles guiding the grant of interlocutory injunctions, emphasizing that such relief is temporary and discretionary. The court must first determine if the applicant has established a prima facie case, which involves serious matters to be investigated. The balance of convenience between the parties and the potential for uncompensatable disadvantage are also critical considerations.

In this case, the court acknowledges that the petition has been admitted, suggesting a prima facie case. However, it refrains from prejudging the matter by assuming the allotment of shares is void. The court refers to the House of Lords' decision in American Cyanamid Co. v. Ethicon Ltd., which advises against resolving conflicts of evidence or deciding difficult legal questions at the interlocutory stage. The court must weigh the balance of convenience, considering the potential injury to both parties.

The burden of proving greater inconvenience from the refusal of the injunction lies with the applicants. The court finds that the applicants have not demonstrated how irreparable injury would result from holding the annual general meeting. The respondents, on the other hand, argue that the meeting can proceed with the condition that its proceedings be submitted to the court for further orders.

The court decides not to stay the annual general meeting but imposes conditions to ensure fairness. By consent, Sri M.P. Chandrakantaraj Urs is appointed as chairman of the meeting to ensure impartial conduct and report the proceedings to the court. The court also extends the time for depositing proxies until 1:30 p.m. on June 23, 1977, to accommodate shareholders affected by the litigation and previous injunction.

Regarding the extraordinary general meeting scheduled for June 24, 1977, the court, by consent of both parties, orders a stay on the meeting.

Conclusion:
The court disposes of the interim reliefs sought in clauses (n) and (o) of the application, allowing the annual general meeting to proceed under specified conditions and staying the extraordinary general meeting. The court directs the first respondent-company to file its counter by July 4, 1977, and schedules further orders for July 8, 1977. Copies of the order are to be made available to relevant parties before 2 p.m. on June 23, 1977.