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TMI Blog2009 (11) TMI 516X X X X Extracts X X X X X X X X Extracts X X X X ..... higher price and they do not lend any support to the allegation that Rockwool played fraud on the Court. The plea of fraud is, therefore, rejected. Appeal dismissed. - COMPANY PETITION NO. 33 OF 2006, COMPANY APPLICATION NOS. 696 AND 697 OF 2007 - - - Dated:- 6-11-2009 - V.V.S. RAO, J. Chetan G. Cholera and C. Kondaram for the Petitioner. S. Ravi for the Respondent. ORDER 1. The company applications are filed under Order IX Rule 13 of Code of Civil Procedure, 1908 (CPC), read with rules 6 and 9 of the Companies (Court) Rules, 1959 ( the Rules , for brevity). The applicants, who are statedly shareholders of respondent-company, namely, Rockwool (India) Limited (hereafter, Rockwool ), seek to set aside/review the judgment and order dated 28-4-2006 passed in Company Petition No. 33 of 2006. By the said order, this Court confirmed special resolution dated 27-3-2006 of General Body of Rockwool for reduction of capital by cancelling and extinguishing 95,93,137 fully paid-up shares held by promoters of the company, namely, Alghanim Industries (Mauritius) Limited (hereafter, AIM ) and by cancelling and extinguishing 25,25,040 fully paid-up shares held by publi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ok building process on NSE, statedly in accordance with Securities and Ex change Board of India (Delisting of Securities) Guidelines, 2003 (hereinafter, SEBI Guidelines ). The open offer by promoters was in force during the period from 4-7-2005 to 6-7-2005 and success fully completed. The applicants herein, however, did not offer their shares for purchase by AIM. After purchasing the shares by reverse book building process. AIM applied to Hyderabad Stock Exchange (HSE) and BSE and, accordingly, Rockwool shares were delisted from HSE on 14-12-2005 and from BSE on 30-9-2005. AIM made yet another public announcement on 15-12-2005 offering to buy delisted Rockwool shares at the exit price of Rs. 7 each. In this process, AIM as on 31-12-2005 acquired 3,82,89,813 shares or 93.6 per cent of share capital and balance share capital is held by 11,000 small shareholders dispersed all over India. 4. In January 2006, Rockwool engaged Chartered Accountants, M/s. A.F. Ferguson and Company (hereafter, Ferguson ) to study and submit report on restructuring the capital of company keeping in view the need to reduce cost in serving small shareholders and to advance the availability of surplus ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpanies Act, Registrar of Compa nies (RoC) shall certify registration of the order and such certificate shall be conclusive evidence of compliance with the provisions of Companies Act. Once certificate is issued by RoC, it would be conclusive evidence of completion of reduction of capital and the process irreversible as reduction of capital has already been implemented as sanctioned by the Court. 6. Though the shares of Rockwool were listed on BSE and HSE, it was decided to delist the shares from the stock exchanges and as they were traded very infrequently in BSE and were not at all traded in HSE for a period of three years. BSE was informed about the same on 17-5-2005. Thereafter an advertisement for convening Extraordinary General Meeting (EGM) on 11-6-2005 was published in local editions of Business Line and Andhra Bhoomi on 19-5-2005. The shareholders unanimously approved resolution to delist the shares from BSE and HSE. Thereafter AIM published advertise ment on 7-7-2005 under SEBI Guidelines, 2003. The allegation that exit price was fixed very low at Rs. 7 per share is denied. It is stated that Rockwool had no role to play in acquiring shares from the public. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f registration of order and minute in local newspapers on 28-6-2006. Respondent complied with procedural formalities prescribed by National Security Depository Limited (NSDL) and Central Depository Services Limited (CDSL) before effecting payments as per orders of the Court. Thus, respondent ensured that reduction of capital would take place in a transpar ent manner and the allegation that respondent reduced capital subversively is not correct. Rockwool had to prefer the route of reduction of share capital and not buyback of shares as provided under section 77A of Companies Act because there are no free reserves and surplus for buyback. Applicants submissions 10. Learned counsel for applicants made following submissions : 1. The promoters of the company by adopting method of reduction of capital excluded other shareholders by dubious means. Such exclusion of non-promoter shareholders would be contrary to the very principle of incorporation of a joint stock company. Rock wool admittedly proposed to reduce capital to save costs of servicing small investors and to advance availability of surplus cash with the company more than immediate wants of the company. These are not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 18 per share. 11. Applicants rely on British American Trustee Finance Corpn. Ltd. v. John Couper 1894 AC 399 (hereafter, BAT Finance), Holders Investment Trust Ltd., In re [1971] 1 WLR 583 (hereaf ter, HIT) and Ramesh B. Desai v. Bipin Vadilal Mehta [2006] 5 SCC 638 1 in support of their allegation that fraud is played. Contend ing that the scheme for reduction of capital is in contravention and violative of SEBI Guidelines, 2003, they relied on Hamza Hazi v. State of Kerala [2006] 7 SCC 416 and Andhra Pradesh Scheduled Tribes Employees Association v. Aditya Pratap Bhanj Dev 2001 (6) ALT 433 (FB). Respondent s submissions 12. Learned Counsel for respondent made the following submis sions : 1. The application for recall being application for review of the order passed by this Court on 28-4-2006, it is not maintainable, as no grounds are made out for review of the order and the case does not fall within the ambit of Order XLVII, Rule 1 of C.P.C. Re spondent relies on M.M.B. Catholicos v. M.P. Athanasius AIR 1954 SC 526 and Zee Telefilms Ltd., In re [2005] 124 Comp. Cas. 102 2 (Bom.). 2. Rockwool followed procedure contemplated unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or purchase of the shares of holding company and any viola tion of section 77(1) and (2) of Companies Act would attract penal action punishable with fine. 15. The buyback of shares was not part of Indian Law till sec tions 77A, 77AA and 77B of the Companies Act were inserted by the Companies (Amendment) Act, 1999, with effect from 31-10-1998. A reading of sections 77 and 77B of the Act would reveal that no company shall directly or indirectly purchase its own shares or other specified securities, any subsidiary company including its own subsidiary company or through any investing company or group of investing companies, and no company can buyback its own shares if such company has not complied with the provisions of sections 159, 207 and 211 of the Companies Act. In addition to this, a company can buyback its own shares only when it has free reserves, securities premium account or proceeds of any shares or any other specified securities. The proviso to sub-section (1) of section 77A of Companies Act further clarifies that no buyback of any kind of shares shall be made out of the proceeds of an earlier issue of the same kind of shares or same kind of other specified securities ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of those who had majority to reduce and extinguish the shares by paying off, was considered by House of Lords. The facts of the said case are the following. BAT Finance, a company limited by shares, was incorporated in 1890 with capital of 2,000,000 divided into 188,600 ordinary shares of 10 each and 114,000 general found ers shares of 1 Pound each. 63,109 shares of 10 each on which 2 each had been paid-up and 72,298 general founders shares were fully paid-up. The Articles provided that the company may reduce its capital by paying off. A special resolution was passed by EGM for modification of memorandum of association by reduction of capital of the company to 1,691,737 divided into 160,767 ordi nary shares of 10 each and 84,067 general founders shares of 1 each, and the remainder of the capital, namely, 27,833 ordi nary shares and 29,933 general founders shares be paid off as the capital represented thereby being in excess of wants of the company. The resolution also provided for extinguishment of ordinary and general founders shares to the extent they are paid off for the purpose of reduction. The EGM also approved the arrangement to make over American inves ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e for uniform treatment of shareholders whose rights are similar, would be most narrowly scrutinized by the Court, and that no such scheme ought to be confirmed unless the Court be satisfied that it will not work unjustly or inequi tably." 21. Lord Watson, who concurred with lead opinion, also observed that, "there can be no objection to the surrender of shares which are liable to forfeiture (and) a surrender of shares in return for money by the company is a sale, and open to the same objec tions as a sale, whatever expression may be used to describe or disguise the transaction." Lord Macnaghten (who wrote the opinion in Trevor v. Whitworth [1987] 12 App. Cas. 409 on which reliance was placed by Lord Chancellor) concurred with the opinion. The posi tion was explained thus : ". . . any company limited by shares may by special resolution so far modify the conditions contained in its memorandum, if authorized so to do by its regulations as originally framed or as altered by special resolution, as to reduce its capital. The power is general. The exercise of the power is fenced round by safeguards which are calculated to protect the interests of creditors, the interests of s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he judg ments in Carruth v. Imperial Chemical Industries Ltd. [1937] AC 707, British America Nickel Corpn. Ltd. v. M. J. O Brien Ltd. [1927] AC 369 and Shuttleworth v. Cox Brox. Co. (Maidenhead) Ltd. [1927] 2 KB 9. Chancery Division noticed three following propositions, namely, first, a reduction of capital in accordance with the class rights is nevertheless regular if it is effectual ly sanctioned in accordance with the regulations of the company; second, there is an effectual sanction to the modification of class rights if those holding a sufficient majority of the shares of that class vote in favour of the modification in the bona fide belief that they are acting in the interests of the general body of members of that class; and third, the burden of proof depends on whether or not there is any such sanction. Applying these principles on the question whether there was bona fide belief on the part of majority that they are acting in the interest of general body of members of that class, learned Judge held. I have to determine whether the supporting trustees voted for the reduction in the bona fide belief that they were acting in the interests of the general b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inatory. The Company Judge dismissed the petition under sections 77A, 100 and 301 of the Act observing as under : ". . . the basic issue in the instant case is that amongst the paid-up equity shareholders themselves, there are two distinct groups in the sense one belonging to the promoters group and the other of non-promoters group. If that be so the meeting ought to have been convened separately for the non-promoters group other wise the meeting would be rather absurd and would result in injustice. Over and above, in the instant case, the minority share-holders of 4.46 per cent were not given any option under the proposal. By a particular date if they do not accept the offer of Rs. 850 per share, in any event, they will have to leave the Company and they will be paid Rs. 850 per share. In fact, as rightly pointed out by Mr. Dwarkadas referring to the aforesaid judgment of the English Court in Re Denver Hotel Co. [1893] 1 Ch 495, even a single minority shareholder is entitled to oppose, and if the Court finds the scheme to be unjust, the Court should not confirm the said reduction of share capital. Even with regard to the judgment of High Court in the case of SEBI v. Sterlit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntrol ling interest in other companies. By virtue of Memorandum of Understanding (MoU) among the members of the family of Vadilal two sons and four daughters Bipinbhai was entrusted with manage ment of SIL and M/s. C.V. Mehta Pvt. Ltd. (CVMPL). Suhasbhai was entrusted with management of M/s. Industrial Machinery Manufac turers Pvt. Ltd., M/s. C. Doctor and Company Pvt. Ltd., M/s. Mehta Machinery Manufacturers Pvt. Ltd. and M/s. Oriental Corpo ration Pvt. Ltd. Bipinbhai was to deposit about Rs. 40,00,000 with CVMPL to be paid to Suhasbhai towards his debt and it was treated as a consideration forgetting controlling interest over SIL and CVMPL. Bipinbhai did not arrange the funds and he could not get control and management of SIL and CVMPL in January 1982 as contemplated under MoU. Therefore, modified MoU was executed in November 1982 providing that Bipinbhai would pay entire amount in two instalments. It was agreed that on payment of Rs. 20,00,000, the control and management of SIL would be transferred to him by making transfer of 13,000 shares in his name and balance amount of Rs. 19,00,000 would be deposited with CVMPL within 24 months for transferring 9,000 equity shares held by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... British American Trustee Finance Corpn. Ltd. s case ( supra ), has also been referred as a leading authority on the subject Reference has also been made to several decisions rendered by the superior Courts in Australia and New Zealand wherein it has been unequivo cally held that "a transaction which upon examination can be seen to involve a return of capital, in whatever form, under whatever label, and whether directly or indirectly, to a member, is void." It is, therefore, well-settled legal principle that any valuable consideration paid out of the company s assets will make a trans action amounting to a purchase and, therefore, invalid. " [Emphasis supplied] 28. From the above decided cases, it may be taken as fairly well-settled that the company can always reduce its capital by any of the methods enumerated and formulated by law including reduction of share capital by purchasing its own shares. Though reduction of capital by the company is by way of paying off the excess capital at a determined price, which is fair and non-discrimina tory. Even if such reduction of capital by purchase of the shares had been initiated by majority shareholders, which necessarily include ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ican Trustee Finance Corpn. Ltd. s case ( supra ). When the power of the company to reduce the share capital which is in excess of extinguishing or without extinguishing paying off, the Courts necessarily started exercising strict vigil in matters brought before them for confirmation of the Minute for reduction of share capital. It is no doubt true that the re quirement of confirmation by the Court of the Minute of the share capital is considered to be sufficient safeguard to minority non-promoter group of shareholders against any unfair attempts by majority/promoter group of shareholders to divest the former of their legitimate rights in the company. 32. The Court besides assuming the role of protector of minority shareholders, invented three tests, which are : in every case of reduction of capital the burden lies on the majority to prove that the special resolution always ensures class rights, that the majority acted in good faith ensuring a fair and non-discrimina tory dealing of the minority and that burden of proof to show the scheme is fair and protect class rights always lie with majority. In addition to this law also by fiction; assumed that majority ensured the cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ven in predominantly capital ist countries, that a company is not property. The traditional view that the company is the property of the shareholders is now an exploded myth. There was a time when a group controlling the majority of shares in a company used to say : "This is our con cern. We can do what we like with it." The ownership of the concern was identified with those who brought in capital. That was the outcome of the property-minded capitalistic society in which the concept of company originated. But this view can no longer be regarded as valid in the light of the changing socio-economic concepts and values. Today social scientists and think ers regard a company as a living vital and dynamic, social organ ism with firm and deep-rooted affiliations with the rest of the community in which it functions. It would be wrong to look upon it as something belonging to the shareholders. It is true that the shareholders bring capital, but capital is not enough. It is only one of the factors, which contributes to the production of national wealth. There is another equally, if not more, important factor of production and that is labour. Then there are the financial institutions and d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d investor friendly methods, procedures and safeguards for buying and selling securities and prevent fraud by over enthusiastic corporate brokers. All this would be rendered illusory if promoters with a view to bypass small investors; come forward with petition to reduce share capital. In every case, it cannot be assumed that majority share holders protect and safeguard class rights. The majority share holders if they belong to one group or family can never be inter ested in safeguarding and protecting the class rights of minori ty. In such cases, all aspects of the matter have to be gone into. Complying with Delisting Regulations, Buyback Regulations and other Regulations of SEBI as well as provisions of Companies Act may not by themselves be sufficient to grant approval to special resolution for reduction of share capital. When such special resolution is engineered by the promoter group controlling majority shareholders and it is found that such reduction is intended only to deny rights of minority shareholders or small investors, the Court can even pass orders rejecting confirmation of the minute and/or modifying the scheme of arrangement for reduction of the capital, in suc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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