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TMI Blog2006 (11) TMI 682X X X X Extracts X X X X X X X X Extracts X X X X ..... or taking a resolution for this purpose, and the main prayer in the interlocutory motion was to restrain holding of such meeting. 2. The meeting was, however, held and the shareholders of DESCON appears to have passed a resolution to that effect on 9th June, 2006. This Court, however, by an order passed on 14th June, 2006 directed the respondent not to give effect to that resolution until disposal of the instant interlocutory motion. DESCON has also taken out an interlocutory motion, being G.A. No. 2062 of 2006 for vacation of this interim order. Both these motions were taken up for hearing simultaneously, but arguments were advanced mainly based on pleadings filed in connection with G.A. No. 1745 of 2006. Thus any reference to pleading in this judgment would relate to the pleadings in G.A. No. 1745 of 2006 only. 3. The main controversy involved in the present proceeding arises out of the petitioner's claim that the respondent ought to remain within the fold of YULE group, from which the respondent would be dissociated if there is such allotment of equity shares on preferential basis in favour of the venture capitalists. For the purpose of understanding the real scope o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to enhance the paid up capital of the company and this was to be done by way of issuing 1,73,713 equity shares of face value of ₹ 10/- each at par to the petitioner and 93,412 shares to DPSL on the same terms. This would have had entitled the petitioner and the DPSL shares representing 26% each of the paid up capital of DESCON. This decision of the Board of Directors of the respondent also received the approval of the shareholders of DESCON in an extraordinary general meeting. This proposal was communicated to the petitioner by a communication of 9 ' April, 1999. 8. In a Board meeting of the petitioner held on 5th May, 1999, decision was taken to accept the offer, but the matter was to be referred to the Central Government for its approval. It appears that such approval was necessary as per the prevailing regulations and practices. 9. The petitioner claims to have had accepted the offer by a written communication dated 11th June, 1999. The receipt of this communication, however, is denied by the respondent. For two years between June, 1999 and 2001, no development appears to have had taken place with regard to issuance of such shares. The Central Government, howev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ril 9, 1999; (e) Perpetual injunction restraining the defendant, its servants or agents and assigns from giving any effect or further effect to the resolution passed at the Annual General Meeting of the defendant held on September 28, 2001 in relation to item No. 6 of the agenda in the notice convening such Annual General Meeting; (f) Perpetual injunction restraining the defendant whether by itself or by its servants or agents or assigns or otherwise howsoever from in any manner exercising any rights as a shareholder of the proforma defendant except in accordance with the instructions of the plaintiff; (g) Decree for delivery up and cancellation of resolution alleged to have been passed at the Annual General Meeting of the defendant held on September 28, 2001, in relation to Item No. 6 of the agenda in the notice convening such Annual General Meeting; (h) Perpetual injunction restraining the defendant from dealing with transferring, encumbering and alienating its shareholding in the proforma defendant except to the plaintiff in any manner whatsoever; (i) Perpetual injunction restraining the defendant, its servants, agents and assigns from giving any effect to the all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he respondents; i) Such further or other order or orders be passed and/or direction or directions be given as to this Hon'ble Court may seem fit and proper. 13. An Hon'ble Single Judge of this Court on 3rd October, 2001 passed an ad interim order in the said interlocutory motion restraining DESCON from giving effect to the resolution, through which the amendment to the Articles of Association was sought to be introduced. The ad interim order of injunction was subsequently modified by His Lordship by an order passed on 10th October, 2001. By this order, respondent No. 1 therein, (i.e. DESCON) was directed not to take any step in respect of buy-back shares without complying with all steps as provided in Sections 77A and 77B of the Companies Act, 1956. In this order, the following submissions of the learned Senior Counsel for DESCON was recorded: ...Mr. Sen further submitted that if they take any step, that will be in terms of the resolution passed in the Board Meeting on 26th December, 1998. It is, however, clarified by Mr. Sen that if any steps are being taken by his client, Descon Ltd. they will give notice to the Advocate-on-record of the petitioner. 14. This ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spondent at all material times was conceived to be a part of the Yule group and could not break off from the fold of the petitioner and its group companies. 18. In support of his submissions, he has brought to my notice to the fact that when DESCON was incorporated in the year 1995 the first subscribers to its Memorandum of Association were the employees of DPSL, the petitioner or its group companies. Further, the decision of the petitioner to renounce the offer of rights shares by DPSL in favour of DESCON was on the understanding that DPSL belonged to the same group. The approval of Securities and Exchange Board of India to this arrangement was also on the basis that the renouncer and renouncee belonged to the same group, and it was an in-house arrangement. 19. Mr. Sarkar has also laid emphasis on two resolutions passed by the shareholders of DESCON in its extraordinary general meeting held on 26th December, 1998 and 9th April, 1999. In the meeting held on 26th December, 1998, a copy of which has been made a part of annexure to the supplementary affidavit filed on behalf of DESCON affirmed by one Debabrata Sanyal on 2nd August, 2006, it was resolved: Under the above bac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... referential allotment in favour of the venture capitalists. The Department of Heavy Industries, in a communication addressed to DPSL dated 8th June, 2006, a copy of which has been made part of Annexure J to the petition, has advised. ... 4. Under the circumstances enumerated above, DHI feels that the interest of DPSC Ltd. should be protected and the Board of DPSC Ltd. should advise DESCON not the proceed with holding of the proposed Extraordinary General Meeting and passing of the resolutions, as enumerated in the notice convening the said meeting. 22. The apprehension of the concerned ministry of the Central Government as it appears from this communication is that the contemplated issuing of shares to the venture capitalists instead of issuing fresh shares to DPSL Ltd. on preferential basis would be prejudicial to the interest of DPSL Ltd., since its present holding in DESCON would come down to 10.2% from the existing 20.02% and the holding of DESCON of 30.41% of paid up capital of DPSL was most likely to be disposed of by the venture capitalists on assuming the controlling interest of DESCON. 23. Mr. Sarkar's argument is that the reason for issuing fresh equity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ON on preliminary ground is that since the petitioner has never been a shareholder of DESCON, he does not have the locus standi to question a resolution passed in a duly convened extraordinary general meeting. 27. On merit, the submission of Mr. Sen is that the letter accepting the offer alleged to have been issued by the petitioner was never received by DESCON. On the other hand, the Department of Company Affairs, while conducting an inspection under Section 209A of the Companies Act 1956, opined that the issue of such shares (i.e. 1,73,713 shares) at par was not in the interest of the existing shareholders of DESCON. The Board of Directors of DESCON had resolved at a Board Meeting held on 22nd May, 2001 that the preferential issue at par would not be made in favour of the petitioner. This decision of the Board of Directors of DESCON was taken, it was submitted on behalf of the respondent, in view of such observation of the Department of Company Affairs, and also in view of the fact that there was a lapse of two years since the making of offer for the shares. 28. As regards the proposal to issue fresh equity shares to the venture capitalists, it was sought to be justified on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s been laid down by the Hon'ble Supreme Court in the case of L.I.C. v. Escorts reported in AIR 1986 SC 370. which are: (i) to vote on resolutions at meetings of the Company (ii) to enjoy the profits of the company in the shape of dividends. (iii) to apply to the Court for relief in the case of oppression. (iv) to apply to the Court for relief in the case of mismanagement. (v) to apply to the Court for winding up of the company. (vi) to share in the surplus on winding up. Mr. Mukherjee's argument is that the claim of the petitioner goes far beyond the rights of a shareholder, which they are not entitled to under the law. 30A. So far as the nature of the offer of the shares of DESCON to the petitioner, which forms the foundation of the present suit, Mr. Mukherjee submitted that the offer was for sale of a stipulated number of shares, but not for 26% of the equity holding of DESCON. This Court, while disposing of the first application of the petitioner did not come to a finding as to whether, there was concluded contract vis-a-vis that offer, and hence further relief primarily based on that contract could not be prayed for. As regards the advise of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... il, 1999, and the ensuing letters of offer and alleged acceptance. In my opinion, if a resolution is passed by a company, the effect of which would be to override or supersede a vested legal or equitable right of another person, then it would be open to the latter to challenge the legality of such resolution. The nature of right the petitioner is seeking to enforce in the present interlocutory motion is not derived from its status of a shareholder or a potential shareholder, but for enforcement of a right which the petitioner claims, has its source in an alleged contract with the respondent. The nature of the right which may be enforced in such a situation may not remain confined to the shareholders' rights as enumerated in the Escorts decision (supra). 34. It has also been contended by the respondent that the instant interlocutory motion (i.e. G.A. No. 1745 of 2006) is not maintainable as the same goes beyond the scope of the suit. To this, the answer of the petitioner appears to be that the intention of the respondent as manifested in the resolution passed on 9th June, 2006 is to defeat the right of the petitioner to have control of 26% of the paid up equity share capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for issuing equity capital to venture capitalists as these events surfaced in the year 2006. The argument of the petitioner, however, is that the issue of the petitioner's claim for control of 26% of equity capital of DESCON is central to the dispute involved in the suit, and if the impugned resolution of 9th June, 2006 is given effect to, the petitioner's right of 26% holding of equity share capital of DESCON would stand permanently defeated. It is the case of the petitioner that its grievance or complaint forming the basis of the present interlocutory motion has direct link to the cause of action of the suit. 39. The claim of the petitioner in the suit, however, is in respect of its entitlement to a certain number of shares; and not over 26% equity holding. This is how the plaint has been framed. The two communications, which the petitioner claims to have concluded the contract relates to issuance of 1,73,713 shares in favour of the petitioner and does not speak of control of 26% equity holding in or of the respondent. Mr. Sarkar, has argued that the real intention of the arrangement amongst the parties which culminated in the resolution passed in the extraordinary ge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 001). 42. As I have already held that the instant interlocutory motion is not maintainable, under normal circumstances it would have been unnecessary to decide the claim of the petitioner for interim relief on merits. But since substantial argument has been advanced on merits as well by the learned Counsels appearing for the parties, I chose to decide the case of the petitioner on merit as well. 43. The argument of the petitioner in support of this application is that it has a strong prima facie case on merit. Such prima facie case is, according to the petitioner, for control of 26% equity capital of the respondent. Mr. Sarkar has laid strong emphasis on the concept of Yule group, and the DESCON's obligation to remain within that group. In support of the argument on this aspect, I have been taken through the series of events since incorporation of DESCON. Mr. Sarkar has also argued that while making of the offer, DESCON was quite clear of the fact that the petitioner would have control over 26% of the equity share capital. This gets reflected in the explanatory statement to the notice of extraordinary general meeting of 9th April, 1999 as also in the odd numbers of shar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ally required for a prohibitory injunction. (2) It is necessary to prevent irreparable or serous injury which normally cannot be compensated in terms of money. (3) The balance of convenience is in favour of the one seeking such relief. 47. In the case of Colgate Palmolive (India) Ltd. (supra), the Hon'ble Supreme Court has laid down a seven point guideline for the purpose of granting of interim injunction. In this judgment, the Hon'ble Supreme Court held: We, however, think it fit to note hereinbelow certain specific considerations in the matter of grant of interlocutory injunction, the basic being non-expression of opinion as to the merits of the matter by the Court, since the issue of grant of injunction, usually is at the earliest possible stage so far as the time-frame is concerned. The other considerations which ought to weigh with the Court hearing the application or petition for the grant of injunctions are as below: (i) extent of damages being an adequate remedy; (ii) protect the plaintiffs interest for violation of his rights though, however, having regard to the injury that may be suffered by the defendants by reason therefor; (iii) the Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vernment of India is concerned, this appears to be advisory in nature and does not create any legal right in favour of the petitioner. On the argument that there being a 'Yule group, to which respondent was a necessary constituent, I do not find any legal support. The group itself is a nebulous concept in the context of this case and the petitioner cannot have any permanent control over any of its group companies under the law, save by way of establishing controlling interest on them. This is an argument based on historicity, but does not establish any legal right. In fact, the proforma respondent, which on petitioner's own case, is a constituent of the group is contesting the petitioner's claim. 52. On the question of balance of convenience and inconvenience, in my opinion, this aspect largely becomes insignificant as I am of the opinion that the petitioner has failed to make out a prima facie case. For the purpose of grant of temporary relief, requirement to establish a prima facie case is the first and main criteria. If this condition is not satisfied, an applicants' case rested on the aspect of balance of convenience and/or inconvenience or irreparable los ..... X X X X Extracts X X X X X X X X Extracts X X X X
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