9911796707
TMI Blog1995 (9) TMI 227X X X X Extracts X X X X X X X X Extracts X X X X ..... ng items Nos. 10, 11 and 12 under the caption "special business" in the agenda is illegal, void and unenforceable and for permanent injunction restraining the respondents, their officers, subordinates, etc., from considering and passing resolutions Nos. 10, 11 and 12 set out in the agenda in the notice for the 25th annual general meeting of the first defendant-company under the caption "special business" to be held on September 12, 1994, or any other date. The second appellant has filed the suit for declaring that the notice issued by the first respondent calling for the 25th annual general meeting of the company on September 12, 1994, for the purpose of considering and passing items Nos. 10, 11 and 12 under the caption "special business" in the agenda, as illegal, void and unenforceable, and for a permanent injunction restraining the respondents, their officers, subordinates, etc., from considering and passing resolutions Nos. 10, 11 and 12 set out in the agenda in the notice for the 25th annual general meeting of the first respondent-company under the caption "special business" to be held on September 12, 1994, or on any other future date. The first respondent which was formerl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lding of the second respondent and his associates. According to the appellants, the second respondent, who was in the management of the first respondent-company, wanted to secure control and management of the first respondent-company and exclude any role by the appellants and other companies which were supporting the second respondent's cousin, B.H. Kothari, and which had also allowed various acts of oppression and mismanagement. According to the appellants, when the appellants and other companies had acquired substantial stakes in the company by acquiring about 4,77,560 equity shares approximately amounting to 6.23 per cent, of the equity capital of the company between June, 1991, and September, 1992, the respondents, with a mala fide intention of removing the names of the appellants and other companies from the registers, had moved the Company Law Board for rectification of the share registers, in spite of transfers having duly taken place and rights having accrued in favour of the appellants and other companies. It is the case of the appellants that the attempt of the respondents for rectification of the share register was particularly made with a mala fide and oblique mot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 10, 11 and 12 under the caption "special business" in the agenda for the meeting which was to be held on September 12, 1994, according to the appellants challenging the action of the respondents was illegal, they filed the suits for the reliefs. This court by interim order, dated September 7, 1994 (AR. Lakshmanan J.) in O.A. Nos. 849 and 850 of 1994 in C.S. No. 1128 of 1994 and O.A. Nos. 855 and 856 of 1994 in C.S. No. 1132 of 1994 filed by both the appellants herein found that, prima facie, a case has been made out by them for the grant of interim injunction. But, however, before this court, an undertaking was given by learned counsel who appeared for the respondents that the consideration of resolutions Nos. 10, 11 and 12 set out as special business in the notice for the 25th annual general meeting of the first respondent-company, which was to be held on September 12, 1994, or on any other future date will be deferred until further orders from this court. Accordingly, it was ordered that the meeting will go on with the other resolutions listed for consideration except resolutions Nos. 10, 11 and 12. After giving that undertaking, however, the respondent moved transfer petitio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to permit them to put the said resolution for consideration at any subsequent adjourned meeting of the company and that this court will proceed to pass orders uninfluenced by the order of the Supreme Court, dated September 23, 1994, in so far as resolution No. 12 was concerned. This court was directed to consider expediting the hearing of the matter. Pursuant to the orders of the Supreme Court of India, there was one other consent order passed in respect of voting rights which was passed on January 3, 1995. While matters stood thus, in the meanwhile the respondents filed Applications Nos. 7152 and 7154 of 1994 in C.S. Nos. 1128 and 1132 of 1994 filed by the appellants seeking for permission of this court to hold the adjourned annual general meeting to consider and to put to vote resolution No. 12 of the notice dated August 5, 1994, issued by the respondents to its shareholders by allowing the 11 Reliance companies to exercise their voting rights in the same manner as exercised by them in respect of resolutions Nos. 10 and 11. This court by order dated February 15, 1995, after taking note of the earlier orders passed by the Supreme Court of India and other facts, granted permissio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per the provisions of the Companies Act, to allow the respondents to implement the same. The appellants also took out O.A. No. 220 of 1995 in C.S. No. 1128 of 1994 and sought for injunction restraining the respondents from in any manner proceeding to further implement the beer project or from carrying out any construction for the beer project or from carrying on any manufacturing activities or trading activities either directly or indirectly in beer. One other Application No. 1312 of 1995 in C.S. No. 1128 of 1994 was filed by the first appellant seeking for directing the respondents to keep the monies earmarked for the beer project in a separate bank account pending disposal of the suit and the decision by this court on the legality and validity of resolution No. 10 of he notice dated August 5, 1994, and implementation thereof in the light of the directions of the Supreme Court. All the applications were posted for hearing before the learned judge. Time for filing counter was given by the learned single judge in respect of the application seeking for amendment of the plaints and pleadings and the said applications were adjourned for further hearing after vacation. In the submiss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5,1992. The company failed to produce fund flow statements for the beer project which it was implementing in the State of Andhra Pradesh even during the pendency of the suit and prior to the institution of the suit which would have clearly shown the utilisation of funds and the source for implementation of the beer project. It is contended that the learned judge has not given due weight to the enquiry under section 209A directed to be instituted by the Central Government in respect of the very beer project and has also failed to prove that the company has discharged its burden to the court by showing that there was no diversion of funds by not having kept the money earmarked for the beer project in a separate account from out of the monies collected for a different project. According to Mr. Mohan Prasaran, without the approval of the shareholders the company was in error in proceeding to implement the beer project and even in the counter filed by the respondents in Application No. 220 of 1995 this question about utilisation of the funds for the implementation of the beer project is quite evasive. In so far as resolution No. 11 which pertains to allotment of shares on preferential ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contended that the original adjournment of consideration of item No. 12 itself was clearly illegal and invalid, in view of the fact that the adjournment of the meeting for consideration of item No. 12 was done without there having been any proposal or seconding of the said proposal that the resolutions for adjournment have not been put to vote. Secondly, the decision to adjourn was taken and implemented by the chairman, who himself was biased and interested in respect of resolution No. 12 and such a decision was taken in the light of the financial institutions withdrawing their support for resolution No. 12. Mr. Mohan Parasaran contended that in the present case, the record of the company shows that there were serious allegations of mismanagement and oppression which are the subject-matter of proceedings before the Company Law Board and investigation has been ordered into the accounts of the company under section 209A of the Act by the Central Government. As regards use of funds for productive purposes, the implementation of the beer project in the State of Andhra Pradesh is not feasible and cannot be said to be productive as there is complete prohibition with regard to not only ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cts of mismanagement and allegations of diversions, a duty is cast upon the respondents to keep the monies under a separate account even assuming that section 73(3) of the Companies Act is not attracted. Our attention was drawn to the entire pleadings and the documents filed by both the parties and also the orders passed by this court and the Supreme Court. Our attention was also drawn to certain passages in Companies Act by A. Ramaiya, particularly with reference to the directors' fiduciary duties and the chairman's power to adjourn the meeting and issue of further capital and propriety in rights issue, and also para 7.04 of Law and Practice of Meetings by Shackleton, seventh edition. Mr. Anil Diwan, learned senior counsel and Mr. R. Krishnamurthi, learned senior counsel, appearing on behalf of respondents Nos. 1 and 2, respectively, drew our attention to certain passages in the plaint, counter-affidavits and rejoinders. Mr. R. Krishnamurthi invited our attention to the various findings given by the learned single judge with reference to resolutions Nos. 10 to 12 and argued that the learned judge has gone through the entire records and evidence placed before him and held t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2, 1993, in regard to the utilisation of the proceeds of partly convertible debentures submitted that while considering the request of the first respondent for approval for the change in the scope of the proposal and utilisation of the proceeds of partly convertible debentures of Rs. 1,918 lakhs, the ICICI agreed to the proposed changes as indicated in the annexure subject to certain conditions mentioned in their letter dated November 22, 1993. Mr. Anil Diwan also relied on the letter dated February 23, 1994, sent by the second respondent to the Chairman, Securities and Exchange Board of India, Bombay, requesting him to consider and fix a suitable premium taking into consideration the peculiar circumstances of the case mentioned in the said letter. While answering the argument of Mr. Mohan Parasaran with reference to the letter dated May 1,1995, of the Regional Director of the Department of Company Affairs, learned senior counsel, Mr. Anil Diwan, pointed out that the said letter was not addressed to the first respondent. With regard to the enquiry under section 209A of the Companies Act directed to be instituted by the Central Government in respect of the beer project, learne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r cent, of the shareholders voted in favour of the resolution. While answering the contention of Mr. Mohan Parasaran that there has been diversion of funds for the beer project without the approval of the shareholders, Mr. Anil Diwan contended that the said contention is totally false. According to him, all monies spent for the beer project have been out of the company's own funds and debentures after obtaining the consent of the debenture-holders, and all the facts and materials relating to the beer project were furnished before the learned single judge. In fact, some of the representatives of the appellants have also spoken in the general meeting against resolution No. 10. Despite this, the resolution was passed with 94 per cent, of the votes polled. Therefore, as rightly pointed out by learned senior counsel for the respondents, the arguments of learned counsel for the appellants regarding the implementation of the beer project are totally irrelevant. In fact, it is stated in paragraph 7 of the common counter-affidavit filed on behalf of the respondents dated July 31, 1995, as to how the said resolution was passed by the shareholders in regard to the implementation of the beer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in dispute that the project originally envisaged had to undergo a change in the opinion of the board of directors of the company in view of the developments subsequent to' the issue of letter of offer, which developments have been gone into by the lead institution, viz. , ICICI, before according its approval to the company for the revised utilisation of funds. We have already seen that the change in the utilisation of funds as envisaged in resolution No. 10 has been approved by the lead institution, debenture holders, trustee of debenture holders and the shareholders of the company. As rightly pointed out by Mr. Anil Diwan, it is the duty and responsibility of the company to implement the said resolution in the interests of those who had voted for it and in the interests of the company as well. In our view, the appellants have no legal right to stand in the way of implementation of resolution No. 10. In fact, the implementation of the project commenced immediately after the letter of intent was received by the company in April, 1993, and as per the records placed before us, the company had incurred a total expenditure of Rs. 15.45 crores up to May 16, 1995, and a sum of Rs. 16.4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t by themselves, especially when those who had contributed had given their approval. Mr. Anil Diwan, learned senior counsel, at the time of hearing, in fact, has offered to the appellants to take back the amounts lying in the form of stock invests with their bankers if they are not inclined to approve the beer project. Mr. Mohan Parasaran, learned counsel for the appellants, has not accepted the said offer. In fact, the appellants have rejected the offer of the respondents, vide their letter dated October 10, 1994. It is also not in dispute that certain developments took place politically in the State of Andhra Pradesh subsequent to August 5, 1994, and as a result of the change in the political field, in December, 1994, an ordinance was issued prohibiting the consumption of liquor in the State' of Andhra Pradesh. This ordinance was the subject-matter of challenge before the Andhra Pradesh High Court, which finally held that manufacture of liquor was not banned but only consumption of liquor was banned in the State. It is stated that the matter is in appeal before the Supreme Court and in the meanwhile, the Andhra Pradesh Government had recently issued a fresh Ordinance banning ev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the company and, therefore, the court would not interfere with such commercial decisions. We, therefore, have no hesitation in rejecting the contention of Mr. Mohan Parasaran in regard to resolution No. 10 and upholding the contentions of the respondents for the reasons stated supra. As regards resolution No. 11, it was argued that the said resolution gives approval to the board of directors of the company to issue, offer and allot, by private placement, not exceeding 9,00,000 equity shares of Rs. 10 each at a premium to be calculated in accordance with the guidelines of the Securities and Exchange Board of India dated August 4, 1994, and such other amendments as may be made thereto in respect of calculation of the premium on the shares and to offer such shares to non-resident Indians/overseas corporate bodies as the board in its absolute discretion may decide. In this connection, our attention was drawn to the letter of the second respondent dated February 23, 1994, addressed to the chairman of the Securities and Exchange Board of India, Bombay, and the reply received from the Securities and Exchange Board of India dated March 7, 1994. The letter dated March 7, 1994, was sent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Registrar of Companies, Madras, on June 21, 1995. It is stated that the value of this allotment works out to Rs. 450 lakhs, which is 20 per cent of the original cost of the beer project, viz. , Rs. 22.50 crores, which the company had to raise from abroad in foreign exchange as per the terms and conditions of the letter of intent for the beer project issued to the company, which details have been fully gone into by ICICI, the lead institution and the debenture trustee. It is contended by Mr. Anil Diwan that the issue of preferential shares to non-resident Indians has fetched more foreign exchange to the country. It is not in dispute that the shares have been purchased by non-resident Indians at a very high price of Rs. 68.12 per share when the price of share of the first respondent-company in the secondary market was less than Rs. 40, by which, undisputedly, the company and in turn, its members would be much benefited. The appellants, in our view, have no case in so far as resolution No. 11 is concerned since the said resolution has already been implemented. We also see merit in the contention of learned senior counsel for the respondents and, therefore, we reject the contention ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that the promoters have been permitted to increase their shareholding up to 51 per cent, and it was in pursuance of this policy, resolution No. 12 was proposed. The very fact that 94 per cent, of the shareholders voted in favour of this resolution at the meeting is sufficient rebuttal of the various allegations of the appellants. Mr. Mohan Parasaran contended that the original adjournment of the meeting for consideration of item No. 12 itself was clearly illegal and invalid in view of the fact that the adjournment of the meeting for consideration thereof was done without there having been any proposal or seconding of the said proposal and that the resolutions for adjournment have not been put. to vote. In reply to this contention, Mr. Anil Diwan contended that the appellants and associates did demand a poll on certain resolutions but never asked for a poll on the question of adjournment when the matter was put up to the meeting. Having not raised a demand for poll on the question of adjournment, the appellants cannot raise this point of the adjournment not being legal, before this court. It is contended by Mr. Anil Diwan, learned senior counsel, that the proceedings of the me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company had, by their letter of UTI No. UT/D01/10-36/3219/93-94, dated March 18, 1994, countersigned by LIC and GIC, permitted the company to make a preferential offer to the promoters to increase their equity stake to 51 per cent. It is also seen from the said minutes that poll was demanded for other items. The minutes of the adjourned 25th annual general meeting held on March 20, 1995, at 10 a.m. at Music Academy, Madras, is available at page 181 of the typed set volume 3. The chairman of the company Pradip D. Kothari welcomed the members and informed that since he was personally interested in the proposed resolution, he would not chair the meeting and requested the members to elect a chairman for the meeting. Thereupon, Mr. V. Thirupathi, nominee director of the Industrial Credit and Investment Corporation of India, a shareholder of the company, proposed the name of P.G. Daftary, director as chairman for the meeting, which was seconded by Mr. Halasyam, a shareholder. The proposal was put to vote and Mr. P.G. Daftary was elected unanimously to chair the meeting. Thereupon, Pradip D. Kothari vacated the chair and Mr. P.G. Daftary occupied the chair. In that meeting, Mr. T.V. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e would arrange to file the same with the High Court. The meeting thereafter terminated with the vote of thanks to the chair. In fact, article 79 of the memorandum and articles of association of the first respondent-company provides that a resolution put to the vote of the meeting shall be decided on a. show of hands, unless a poll is demanded in accordance with the provisions of section 179 of the Companies Act. Unless a poll is to be demanded, a declaration by the chairman that a resolution has, on a show of hands, been carried unanimously or by a particular majority or lost and an entry to that effect in the books of the proceedings of the company shall be conclusive evidence of the fact without proof of the number or proportion of the votes recorded in favour of or against that resolution. The further argument of Mr. Mohan Parasaran in regard to calling for fresh proxies is also baseless for the simple reason that fresh proxies ought to be called for as it is a matter of right to the shareholders to change their respective proxies for the adjourned meetings and for the new shareholders to give their own proxies for the adjourned meeting. It is also stated that in order to e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nly an investigation and the Central Government is entitled to investigate into the matter pertaining to any company. Section 176 of the Companies Act deals with proxies. Articles 88, 89 and 90 of the articles of association of the first respondent-company, which deal with proxies, read as follows : "88. On a poll, votes may be given either personally or by proxy. A company or other body corporate entitled to vote may vote in accordance with the provisions of section 187 of the Act. 89. ( a ) The instrument appointing a proxy shall be in writing under the hand of the appointer or of his attorney duly authorised in writing, or if the appointer is a corporation either under the common seal or under the hand of an officer, or attorney so authorised. Any person may act as proxy whether he is a member or not. ( b ) A corporate body (whether a company within the meaning of the Act or not) may, if it is a member or a creditor or a debenture holder of the company by the resolution of its board of directors or other governing body, authorise such person as it thinks fit to act as its representative at any meeting of the company or at any meeting of any class of members of the compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the respondents, such allegations against the resolutions and the meetings are only lame excuses to enable the appellants to continue the proxy litigation in courts. The appellants, in our view, have no case at all, leave alone a prima facie case, for the grant of injunction. The learned single judge had appreciated all the materials, placed before him before deciding the issue involved. It is incorrect on the part of the appellants to state that the learned judge has not appreciated the facts placed before him while coming to the conclusion that resolutions Nos. 10 to 12 are implementable. A perusal of the judgment of the learned single judge would go to show that the learned judge has gone through the entire evidence and records placed before him before deciding the issues involved and has held that each and every institution and authority, both governmental and financial institutions, have approved the proposal for the beer project, and has also elaborately dealt with the various contentions of the appellants. We are also unable to appreciate the contention of Mr. Mohan Parasaran that the implementation of the resolution should be stayed since the proceedings under sections 39 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y of a company in managing its affairs. It is not for this court to restrict the powers of the board of directors. The board of directors in various resolutions have appointed the sixth defendant as executive director, managing editor and chairman. It will not be open to this court to interdict the functions of the board-managed company. As rightly contended by Mr. P. Chidambaram, the learned senior advocate, it will not be open to this court to interfere with the day-to-day functions, management and administration of a company unless it is established that the decisions taken by the board are ultra vires the Act or the articles of association of the company. At this interlocutory stage this court is concerned only with the prima facie case and balance of convenience as disclosed by the documents produced by both parties. It is for the plaintiff to let in oral evidence at the time of trial and establish his case" . We have considered all the contentions urged by the parties on a prima facie view. It is not necessary for us to deal with each and every contention urged by the parties as most of them relate to the merits of the suit. Both sides cited a number of decisions in suppor ..... X X X X Extracts X X X X X X X X Extracts X X X X
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