2009 (11) TMI 498 - HC - Companies Law

Whether the Company Law Board was fundamentally in error in circumscribing the power of the Board to implead any person under section 405 to only those categories of persons stipulated under section 402(e) of the Act? Held that - This court has come to the conclusion that the interpretation that has been by the Board on the provisions of section 405 is erroneous. Having decided the question of law relating to the interpretation of the section 405, it would be, but appropriate for this Court to remit the proceedings back to the Company Law Board for a decision afresh, on the application for impleadment. The Board is a primary fact finding authority and should be left to determine the question of impleadment in the light of the interpretation that has been placed by this Court on the provisions of section 405. The proceedings are remitted back to the Company Law Board, which shall pass an order upon remand after hearing the parties. All the rights and contentions of the parties are kept open.

Issues Involved:
1. Correctness of the Company Law Board's order dismissing the Appellants' application for impleadment.
2. Interpretation and application of sections 397, 398, 402, and 405 of the Companies Act, 1956.
3. Application of the principle of ejusdem generis.
4. The impact of the Memorandum of Understanding (MoU) on the shareholding pattern and specific performance claims.

Detailed Analysis:

1. Correctness of the Company Law Board's Order:
The Appellants challenged the Company Law Board's order dated 10-12-2008, which dismissed their application for impleadment in proceedings under sections 397 and 398 of the Companies Act, 1956. The Company Law Board held that the Appellants were not entitled to impleadment under section 405, interpreting the term "any other person" in section 405 ejusdem generis with the term "any person" in section 402(e).

2. Interpretation and Application of Sections 397, 398, 402, and 405:
- Section 397: Allows any member of a company to apply to the Board if the company's affairs are conducted in a manner prejudicial to public interest or oppressive to any member.
- Section 398: Similar to section 397, but focuses on affairs conducted prejudicially to public interest or the company's interest.
- Section 402: Provides illustrative reliefs that the Board can grant in petitions under sections 397 and 398, including the regulation of company affairs, purchase of shares, termination of agreements, and setting aside transfers.
- Section 405: Empowers the Board to add respondents to an application under sections 397 or 398 if sufficient cause is shown.

The Company Law Board interpreted "any other person" in section 405 narrowly, limiting it to those categories of persons mentioned in section 402(e). The High Court found this interpretation erroneous, noting that section 405 operates independently and broadly, allowing for the addition of any person whose interests might be affected by the proceedings.

3. Application of the Principle of Ejusdem Generis:
The principle of ejusdem generis, which limits general terms following specific ones to the same kind, was misapplied by the Company Law Board. The High Court clarified that this principle does not apply when interpreting sections 402 and 405, as they operate in different fields. Section 405's broad language ("any other person") should be given its plain and natural meaning, allowing for the inclusion of any affected party, not just those with agreements with the company.

4. Impact of the MoU on Shareholding Pattern and Specific Performance Claims:
The Appellants argued that the MoU dated 18-4-1995, under which they agreed to purchase 1200 equity shares, gave them a majority interest in the company. They claimed that the relief sought in the original petition, particularly the maintenance of the shareholding pattern as of 1-4-1990, would affect their rights under the MoU. The High Court noted that the Company Law Board did not adequately consider this aspect, particularly prayer (e) of the petition, which sought to maintain the status quo of the shareholding pattern.

Conclusion:
The High Court concluded that the Company Law Board's interpretation of section 405 was erroneous and remanded the case for a fresh decision on the application for impleadment. The Board must consider the broad interpretation of section 405 and the potential impact of the MoU on the shareholding pattern. The High Court did not make any findings on the factual aspects of the MoU or the Appellants' entitlement, leaving these issues open for determination by the Company Law Board.

Order:
The High Court set aside the Company Law Board's order dated 13-4-2009 and remitted the proceedings back to the Board for a fresh decision. The appeal was allowed without any order as to costs.

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