2022 (3) TMI 1175 - HC - Companies Law

Restraint on shareholders of Zee Entertainment Enterprises Limited from calling for and holding an Extra Ordinary General Meeting - alleged illegalities in the resolutions proposed - Section 100(2)(a) of the Companies Act, 2013 - HELD THAT - On a literal and plain reading of Sections 98 and 100, there are no discretion / power vested with the Board of a Company to sit in judgment over any matter for consideration of which the meeting is requisitioned. On a plain reading, the Board of a Company is mandatorily obliged to requisition a meeting if the requirements specified in sub-sections (2) and (3) of Section 100 are satisfied. Needless to state, whether or not the proposed requisition should be given effect to, is to be decided by the shareholders at the general meeting - the language used in the aforesaid Sections aid corporate democracy and protect the rights of shareholders. Section 100(4) in fact provides shareholders with an additional right to proceed to call for and hold an EGM despite an unwilling Board. This intent and object of the legislature cannot be ignored whilst construing the relevant provisions of the Act. The decision in Cricket Club of India vs. Madhav L. Apte 1974 (8) TMI 75 - HIGH COURT OF BOMBAY applies squarely to the facts of this present case, where it was held that this Court has opined is that the word valid is restricted only to the satisfaction of the numerical and procedural requirements. Further, and more importantly, that the word or the adjective valid in Section 169 has no reference to the object of the requisition but rather to the requirements in that Section itself. Lastly and most importantly, that even if the requisition was illegal or invalid, the Board was still obliged to call for the meeting. Whether or not an Injunction could be passed against a shareholder restraining the holding of an EGM? - HELD THAT - The Ld. Single Judge has restrained a shareholder of a Company from calling or holding an EGM. Such an injunction is in the teeth of the decision of the Supreme Court in LIC vs. Escorts 1985 (12) TMI 289 - SUPREME COURT - the Ld. Single Judge could not have deviated from the law laid down by the Supreme Court in LIC vs. Escorts and proceeded to restrain a shareholder by way of an injunction from calling or holding an EGM. Consequences of interfering with Corporate Democracy - HELD THAT - In the present case itself, the Appellants, being shareholders of Zee, have been unable to call for and hold an EGM despite the Requisition being addressed as early as on 11th September, 2021, i.e., over 6 months ago. For the past 6 months, the contesting parties have been arguing the alleged illegalities contained in the Requisition, whilst shareholders of Zee suffer an injunction - there are no precedent resulting in such drastic consequences derailing the democratic functioning of Companies across India owing to the non-cooperative and obstructive conduct of the Board of Directors. Jurisdiction - HELD THAT - In the face of the absolute bar contained in Section 430, we cannot appreciate how the Ld. Single Judge could have granted the present injunction. The scheme of Sections 96 to 100 makes it clear that the subject of calling of a meeting of a Company has exhaustively been treated under them. So far as meetings of Companies other than Annual General Meetings are concerned, the law is governed by Section 98, which kicks in if it is for any reason impracticable to call such meeting. Section 100 gives a right to the requisitionists of an EGM to themselves call a meeting for consideration of the matter of their requisition, if the Board does not, within twentyone days, proceed to call a meeting. In the case on hand, as the facts have transpired, it is now clearly a case of the Appellants in the face of the Board s stand vis- -vis their Requisition, though they would be within their rights to call and hold the requisitioned EGM, it is impracticable for them to hold such meeting and accordingly, they pray for an order of the NCLT to do so under Section 98 - We do not see how such a matter would not fall within the purview of the NCLT and if it does, how a Civil Court could interfere by passing an order of injunction, which would have the effect of preventing the NCLT from considering the Appellants prayer. We find no credence on the reasoning based on the NCLT Rules or Schedule of Fees. Considering that the Impugned Judgment has in effect restrained a shareholder of a Company from calling for and holding an EGM, which injunction is in the teeth of the decision of the Supreme Court in LIC vs. Escorts, the appeal is allowed. Alleged illegalities in the proposed Resolutions - HELD THAT - The law as prevalent in India does not entitle the Board of a Company to refuse a requisition calling for an EGM if such requisition satisfies the numerical and procedural requirements set-out under Section 100 of the Act - Zee takes advantage of its own wrong and argues that in the absence of such permission, the proposed resolutions are illegal and therefore, an injunction must be granted. This is another illustration as to why Courts must uphold corporate democracy and not indulge incumbent Boards in restricting the democratic functioning of Companies. The procedure for appointment of Independent Directors - HELD THAT - The Requisition proposes the appointment of 6 persons as Independent Directors. To this, Mr. Chinoy objects by submitting that the provisions of the Act make detailed provisions which are mandatorily required to be followed for appointment of an Independent Director and these provisions make it clear that a member cannot propose himself or someone else for appointment as an Independent Director, merely by giving notice in writing of his candidature, or of his intent to propose another member as candidate for election as an Independent Director at the general meeting - In the present case, the proposed resolutions under the Requisition are to appoint ordinary Directors and not additional or alternate Directors. Therefore, from a reading of Sections 150(2) and 152(2), even in case of an Independent Director of a listed Company, the appointment will be made at the general meeting and not by the Board of Directors. The power given to shareholders of a Company by Section 160 and more importantly, the proviso thereto, cannot go unnoticed. In the teeth of the aforesaid provision, we cannot appreciate how the Ld. Single Judge agreed on all counts with Zee s submission that In the scheme of the Companies Act, shareholders do not get to choose individual independent directors. - Section 160 does not make any distinction whatsoever between an Independent Director or otherwise. On a plain reading of Section 160, a shareholder of a Company clearly has the right to propose the appointment of an Independent Director. Zee s submission cannot be accepeted by defeating corporate democracy and ignoring the safeguards provided to shareholders under Section 160 and 169 of the Act. Regulation 17 of the SEBI LODR - HELD THAT - The expression optimum combination means the presence of one woman director and at least fifty percent of the Board of Directors shall comprise of non-executive Directors. Regulation 17 does not prescribe the maximum number of non-executive Directors but only the maximum number of executive Directors. Likewise, Section 149 of the Act provides that a listed company must have at least one-third of its Board comprising of Independent Directors. No other Regulation of the SEBI LODR or Section of the Act has been brought to our notice that prescribes a maximum number of Independent Directors. Thus, the proposed resolutions contained in the Requisition are neither illegal nor incapable of being lawfully implemented and consequently, set-aside all of the Ld. Single Judge s findings in this regard on all counts. Appeal disposed off.

Summary

Issues Involved:
1. Jurisdiction of the Civil Court.
2. Validity of the Requisition.
3. Alleged illegalities in the proposed resolutions.

Issue-wise Analysis:

1. Jurisdiction of the Civil Court:
The primary issue was whether the Civil Court had the jurisdiction to entertain the suit filed by Zee Entertainment Enterprises Limited (Zee) challenging the requisition notice issued by the shareholders for an Extraordinary General Meeting (EGM). The court examined Sections 98 and 100 of the Companies Act, 2013, and the bar under Section 430 of the Act. Section 430 states that no civil court shall have jurisdiction over matters which the National Company Law Tribunal (NCLT) is empowered to determine. The court concluded that the injunction granted by the Single Judge was in violation of Section 430, as the NCLT has jurisdiction over the matter under Sections 98 and 100 of the Act. The court emphasized that the statutory right of shareholders to call for an EGM cannot be restrained by a civil court, aligning with the Supreme Court's ruling in LIC vs. Escorts & Ors.

2. Validity of the Requisition:
The court examined whether the requisition notice issued by the shareholders was valid. It was noted that the requisitionists collectively held 17.88% of Zee's share capital, satisfying the numerical requirements under Section 100 of the Companies Act. The court referred to the Supreme Court's decision in LIC vs. Escorts & Ors., which held that a shareholder cannot be restrained from calling an EGM and that the reasons for the resolutions proposed are not subject to judicial review. The court also relied on the precedent set by Cricket Club of India vs. Madhav L. Apte, which stated that the validity of a requisition is limited to numerical and procedural compliance. Consequently, the court ruled that the requisition was valid and the Board of Zee was obligated to call the EGM.

3. Alleged Illegalities in the Proposed Resolutions:
The court addressed the alleged illegalities in the proposed resolutions under the requisition notice. Zee and Respondent No.2 argued that the resolutions would violate various laws, including the Ministry of Information & Broadcasting (MIB) Guidelines, the Companies Act, and SEBI Listing Obligations and Disclosure Requirements (LODR) Regulations.

a. MIB Guidelines:
The court interpreted Clause 5.10 of the MIB Guidelines, which requires prior permission from the MIB before effecting any change in the Board of Directors. The court found that the MIB's permission is required only for appointments, not for the removal or resignation of a director. The court noted that Zee had not sought MIB approval for the resignations of two directors, indicating that prior permission was not necessary for removals.

b. Procedure for Appointment of Independent Directors:
The court examined the provisions of the Companies Act related to the appointment of Independent Directors, including Sections 149, 150, and 152. The court concluded that there is no bar on shareholders proposing the appointment of Independent Directors. The court emphasized that Section 160 of the Act allows shareholders to propose candidates for directorship, including Independent Directors, and that the Board's refusal to act on the requisition was obstructive.

c. Regulation 17 of SEBI LODR:
The court addressed the argument that the removal of Mr. Punit Goenka, the only executive director, would result in non-compliance with Regulation 17 of SEBI LODR, which requires an optimum combination of executive and non-executive directors. The court found that Regulation 17 does not mandate a specific number of executive directors and that the resultant vacancy can be filled within six months as per Section 203(4) of the Companies Act.

Conclusion:
The court allowed the appeal, setting aside the Single Judge's judgment and ruling in favor of the appellants on all counts. The court held that the requisition was valid, the proposed resolutions were not illegal, and the Civil Court lacked jurisdiction to grant an injunction restraining the shareholders from calling and holding an EGM. The court emphasized the importance of upholding corporate democracy and the statutory rights of shareholders.