1. In this order we are considering Applications Nos. 59 of 1995 and 71 of 1995 of the petitioners in Company Petition No. 23 of 1994, filed under Section 397/398 of the Companies Act, 1956, in the matter of Pentokey Organy (India) Ltd. The prayers made in Company Application No. 59 of 1995, are that the respondent-company should be restrained from implementing the resolution passed at the extraordinary general meeting of the company held on June 20, 1994, removing the petitioners as directors of the company, on the ground that the explanatory statement annexed with the notice of the meeting did not fulfil the requirements of Section 173 of the Companies Act and that the company be directed to offer inspection of documents. Company Application No.71 of 1995 relates to amendments to the main petition.
2. It is essential to record, in brief, the events which led to the filing of Company Application No. 59 of 1995. The petitioners filed the main petition Company Petition No. 23 of 1994 and the chairman of the Company Law Board sitting as a single member passed an interim order on June 15, 1994, restraining the company from transacting the business relating to the removal of the petitioners as directors of the company at the extraordinary general meeting convened June 20, 1994. This order was challenged in the High Court of Bombay and a single judge set aside the order of the Company Law Board on the ground that the constitution of a Bench for considering a Section 397/398 petition with a single member was not in accordance with the Company Law Board Regulations.
However, he also passed an interim order that the decision of the extraordinary general meeting will not be implemented and that the petitioners would be permitted to participate in the board meeting but they will not represent themselves as directors on the board to conduct any work. The order of the single judge was appealed against and the Division Bench of the Bombay High Court upheld the decision of the single judge but it continued the interim order for a further period of two weeks. Since the period of two weeks was to expire, this instant application has been made with the prayer to either restrain the company from implementing the resolution or in the alternative stay the implementation of the resolution till the disposal of the main petition. In a hearing on April 3, 1995, we ordered the continuation of the interim order of the single judge.
3. Shri Devitre, advocate for the petitioner, commencing his arguments stated that while the interim order passed by the Company Law Board on June 15, 1994, has been set aside by the High Court of Bombay, the Division Bench has also recorded that the petitioner is at liberty to approach the Company Law Board to seek appropriate orders relating to the subject matter of the interim order and it has also been observed that the Company Law Board need not take into consideration any observation of the single judge on the merits of the case and as such the Company Law Board can pass any orders relating to the extraordinary general meeting held on June 20, 1,994. According to him, the proceedings of the extraordinary general meeting which was convened for the sole purpose of removing the petitioners as directors was vitiated by non-compliance with the provisions of Section 173 of the Companies Act. This section provides, in Sub-section (2), that a statement setting out all material facts concerning each item of business should be annexed to the notice convening the meeting. In the present case, the company failed to annex with the notice such a statement setting out all material facts. The idea of giving material facts is to ensure that the members of the company are appraised of the facts to enable them to take a decision on the resolutions to be moved. Shri Devitre contended that the main ground for removal of the petitioners as directors as per the requisition given by the shareholders, was that, these petitioners-directors had addressed a letter on April 25, 1994, to the company's bankers, the State Bank of India, alleging that the company was not appropriately functioning in relation to the credit facilities granted to the company and also signifying their wish to get themselves disassociated with the company. In the explanatory statement, the company has simply reproduced the same without giving any additional very pertinent information that the petitioner, in the board meeting held on May 6, 1994, had stated that he was prepared to withdraw the said letter. His statement has been recorded in the minutes also. Secondly, according to Shri Devitre, a proper reading of the letter of April 25, 1994, would show that the purpose of writing the letter was only to give notice of withdrawing personal guarantees because the petitioners were against the company's financial mismanagement. He further stated that even though they had indicated that they desired to withdraw the personal guarantee to the tune of Rs. 1.51 crores, still personal guarantee to other financial institutions to the tune of Rs. 7.5 crores is still in force and this matter was not indicated in the explanatory statement. Further in the explanatory note, a statement has been made that this requisition was considered in the board meeting held on May 16, 1994, but the fact that the petitioners expressed their protest was not indicated in the explanatory note.
4. Shri Devitre narrated the sequences which culminated in the requisi-tionists giving the requisition for convening an extraordinary general meeting for removing the petitioners as directors. The company gave a notice on May 4, 1994, for convening a board meeting on May 16, 1994, to consider the item regarding removal of the petitioners as directors. This agenda item was contested in the Bombay City Civil Court and the court held that the board of directors shall not consider this item or any resolution to be pursued with that item. It also made an observation that, in case the company received any requisition as contemplated in Section 169 from the Shareholders, in this regard, the board may consider the same. This order was passed on May 13, 1994, by a message dated May 14, 1994, which was a Saturday and received by the petitioners on 15th (Sunday) the company intimated the petitioners that a requisition for removal of the petitioners as directors had been received and the same would be placed before the board meeting to be held on May 16, 1994. He further stated that four directors have issued the requisition and they all belong to the family of respondent No. 2 who is the managing director of the company. This requisition was discussed on May 16, 1994, at the board meeting and petitioner No. 1 stated that the matter might be adjourned to a later date for proper discussion but the same was not agreed to and the board decided to call for the extraordinary general meeting. He also mentioned that another important particular which should have been included in the explanatory statement was that even before the petitioner had sent a letter to the State Bank of India, the petitioners had already been relieved of their personal guarantee with effect from May 25, 1994, as per the letter of the State Bank of India, dated April 27, 1994 (exhibit R-88L).
5. The cumulative effect of all the omissions in the explanatory note would make, Shri Devitre argued, the convening of the extraordinary general meeting, void. Even otherwise, according to him, continuation of the petitioners as directors on the board of the company, would not in any way affect the company, especially when, as per the agreement with the other promoters, the petitioners were to have, at any time, two nominees on the board of the company. On the nature of the explanatory statement, he relied on Firestone Tyre and Rubber Co. v.Synthetics and Chemicals Co. Ltd, [1971] 41 Comp Gas 377 (Bom). He also stated that the respondents have not adduced any grounds against continuation of the petitioners as directors. Therefore, Shri Devitre pleaded that the impugned resolution may be declared void or in the alternative the implementation of the resolution may be stayed till the main petition is disposed of.
6. Shri Kapadia, senior advocate appearing on behalf of respondents Nos. 3 and 4, disputed the claim of the petitioners that the material facts had not been brought to the notice of the shareholders. According to him, the material facts are different from full particulars.
Substantiating the stand of the company that the letter of April 25, 1994, written by the petitioner to the State Bank of India was against the interests of the company, Shri Kapadia, drew our attention to the said letter (exhibit R-88J) and stated that from the contents of the letter, two aspects are clear, i.e., the intention of the petitioner of dissociating from the company and its anti-company nature. He also drew our attention to the endorsement made thereon that copies of this letter have been endorsed to other top functionaries of the State Bank.
He also stated that the petitioners had not shown any interest in making any further financial commitment towards the company as is evident from the fact that when the company desired to increase the credit facility from Rs. 1.51 crores to Rs. 2.66 crores, the petitioners did not agree to enhancing their personal guarantee till March, 1994. In the month of March, 1994, the State Bank of India increased the limit to Rs. 2.4 crores and at that time, the guarantee given by the petitioners in respect of Rs. 1.51 crores had been replaced by the guarantee of two other directors. This information was passed on to petitioner No. 1 on March 25, 1994 (exhibit R-88-I). At the board meeting held on March 26, 1994, the replacement of the guarantee given by the petitioners by two other directors was placed before the board and the petitioners were present at the board meeting.
Therefore, according to Shri Kapadia, when the petitioners wrote to the State Bank withdrawing their guarantee they were fully aware that their guarantee was no longer subsisting and only with a view to malign the company, they wrote that letter to the bank. He also drew our attention to the fact that the petitioners never wrote to other financial institutions in which their personal guarantee to the tune of Rs. 7.5 crores was subsisting. Therefore, Shri Kapadia contended that the explanatory note did not suffer from want of particulars in this regard. As regards the offer of withdrawal of the letter written to the bank by the petitioner, Shri Kapadia stated that by alleging misappropriation, the petitioners had already made the company defensive in respect of these allegations and even assuming they withdrew the letter, it does not restore their position as guarantors inasmuch as the bank had already relieved them from the position of guarantors. Even otherwise, the petitioner never withdrew the letter but the offer to withdraw was made only after receipt of the requisition. Therefore, according to Shri Kapadia, this was not a matter which could have been highlighted in the explanatory statement when the petitioners were fully aware of the same.
7. As far as omission to mention about the subsisting guarantee of Rs. 7.5 crores is, Shri Kapadia stated that the other directors had given guarantee to the tune of Rs. 13.5 crores. Therefore, according to Shri Kapadia, the allegation in this regard by the petitioner is only to somehow or other prevent the implementation of the resolution of the extraordinary general meeting. He further stated that the other objection of the petitioners that their protest in the board meeting should have been indicated in the explanatory statement, has no basis as it is immaterial inasmuch as, as per Section 169, the board was bound to call for an extraordinary general meeting when requisitioned and the protest in this regard by any of the members of the board had no bearing on the same.
8. In regard to staying the implemention of the resolution of the extraordinary general meeting, Shri Kapadia pointed out that under Section 397/398 of the Companies Act, it is only members' rights which could be agitated and not the directorial rights. On this aspect, he relied on Suresh Chandra Marwaha v. Lauls Private Ltd. [1978] 48.Comp Cas 110 (P & H), Suresh Kumar Sanghi v. Supreme Motors Lid, [1983] 54 Comp Cas 235 (Delhi), Nagavarapu Krishna Prasad v. Andhra Bank Ltd. [1983] 53 Comp Cas 73 (AP), Siddaramappa Bapurao Patil v. Ratna Cements (Yadwad) Ltd. [1991] 70 Comp Cas 27 (Kar) and Rao (V. M.) v. Rajeswari Ramakrishnan [1987] 61 Comp Cas 20 (Mad). In regard to inspection of documents by the petitioner, Shri Kapadia stated that the petitioner had filed a suit in the civil court at Bombay seeking certain interim relief including the inspection of documents. While the civil court granted the prayer for inspection of documents, the suit was withdrawn.
Even otherwise the company gave inspection of all the documents as per order of the Company Law Board dated June 15, 1994. Presently one of the prayers of the petitioner is to inspect the books of account which Shri Kapadia contended is against the statement of petitioner No. 1 himself, vide his letter dated March 15, 1994, wherein he had written to the company that he does not have any specific query on accounts (exhibit R-36). Shri Kapadia further stated that inspection of documents to which the petitioners are entitled as shareholders has been given to them. As far as their right as directors is concerned, since they have already been removed as directors, they are not entitled to the same. Summing up his arguments, Shri Kapadia stated that non-implementation of the extraordinary general meeting resolution would mean continuation of the petitioners as directors which has no bearing on the final relief and even as final relief, their continuation as directors cannot be granted. In a corporate democracy, he further stated that it is the prerogative of the shareholders to elect/remove directors and in the instant case the general body of shareholders has removed the petitioners from the directorship and, therefore, the Company Law Board should not intervene.
9. Replying to the arguments of Shri Kapadia, Shri Devitre pointed out that the Jetter relied on by the respondents at exhibit R-88-I regarding enhanced credit facilities approved by the State Bank of India was dated March 25, 1994, and it contained enclosures which are different from the loan agreement and other documents indicated to have been enclosed with that letter and as such this letter should not be deemed to have given a notice to the petitioners regarding their release from the guarantee given by them. He further stated that even in the High Court, the petitioner had denied receipt of these enclosures. The respondents' contention that the petitioner's release from the guarantee was discussed at the board meeting cannot be given credence inasmuch as the draft minutes of the meeting were received by the petitioner on May 5, 1994, i.e., after they had written the impugned letter to the State Bank of India. Even otherwise it is not possible for the petitioner to presume that when the bank sanctioned enhanced credit facilities, the petitioner had been relieved from the earlier guarantee when two new directors gave the guarantee for the enhanced limit. Even it is recorded in the minutes of the board meeting held on May 16, 1994, that the State Bank of India had released the guarantee of the petitioners with retrospective effect from March 25, 1995. The petitioner had renewed the guarantee on October 6, 1993, in addition to extending the guarantee for Rs. 7.5 crores sanctioned by the IDBI for the capital project. Even the shares of the petitioner have been pledged with the IDBI. When the petitioner was withdrawing the guarantee of only Rs. 1.51 crores their guarantee for a larger amount of Rs. 7.5 crores was still subsisting and if this fact had been disclosed in the explanatory statement, the real import of the petitioner's letter to the State Bank of India would have been appreciated by the shareholders and as such this is a material fact which should have been disclosed in the explanatory statement. In regard to the claim regarding corporate democracy, Shri Devitre assailed this claim on the ground that as against Rs. 50.13 lakhs of the paid-up capital, only shares for Rs. 24.01 lakhs were voted in the meeting and as against nearly 25,000 members, only 35 attended the meeting. Of these 35 members, 32 members belonged to either of the two groups and only three other members were present. In other words, no member of the public attended the extraordinary general meeting. In addition he stated that on the date of the meeting, there was a news item regarding the order passed by the Company Law Board restraining the holding of the extraordinary general meeting and this could have influenced many members in not attending the meeting. In view of the various submissions made by him, Shri Devitre prayed that not only the petitioners should be allowed to have inspection of the documents which have already been ordered by the Company Law Board, vide its order dated June 15, 1994, but the resolutions passed at the extraordinary general meeting on June 20, 1994, should also be declared void.
10. We have considered the pleadings and arguments of counsel. The prayer for a direction to restrain the respondents from giving effect to or implementing the resolution of removal pf the petitioners as directors passed in the extraordinary general meeting held on June 20, 1994, has been made on the plea that the explanatory statement attached to the notice calling for meeting did not disclose material particulars.
11. Admittedly, the meeting was a requisitioned meeting by some of the shareholders of the company who also happened to be the directors.
There is no dispute that the requisitionists were qualified to requisition the meeting under Section 169(4) of the Act. It is not also in dispute that the board of directors, in compliance with the provisions of Section 169, called the meeting within the time limit as provided in Section 169(6). The notice was issued by the company on May 21, 1994, convening the extraordinary general meeting on June 20, 1994.
Along with the notice, a copy of the requisition received from the shareholders was also enclosed. The requisitionists had also attached an explanatory statement along with their notice under Section 173 of the Companies Act. In the said explanatory statement, the requisitionists have stated "the members of the company and the requisitionists in particular have lost faith in the two directors, namely, Mr. Vijay M. Porwal and Mr. Bhupat K. Shah, and are not satisfied with their holding office as directors of the company and, therefore, both of them be removed as directors of the company. As if what is stated above was not enough, Mr. Vijay M. Porwal and Mr. Bhupat K. Shah without any provocation in that behalf, addressed a very strange and anti-company letter No. TS/23, dated April 25, 1994, to the company's bankers, the State Bank of India, to the effect that the bank was not properly secured in relation to the credit facility granted to the company and also their intentions of dissociating with the company." 12. In the explanatory statement appended with the notice calling for the extraordinary general meeting by the company, the same reasons as indicated in the explanatory statement of the requisitionists has more or less been reproduced. The explanatory statement attached by the company also states that the notice of requisition by the shareholders had been considered by the board on May 16, 1994, and as required under Section 283(3) of the Act a copy of the notice has been given to the directors proposed to be removed and that the shareholders directors who had issued the requisition were deemed to be interested in these resolutions.
13. As we have elaborated earlier, according to the petitioners, this explanatory statement issued by the company did not fulfil the requirements of Section 173(2) of the Companies Act in as much as various material particulars had not been disclosed. Before going into the merits of the contentions of the parties as in this regard, it is essential to examine the legal position relating to the explanatory statement under Section 173(2) of the Act.
14. Section 173(2) states that "where any items of business to be transacted at the meeting are deemed to be special as aforesaid, there shall be annexed to the notice of the meeting a statement setting out all material facts concerning each such item of business including, in particular, the nature of the concern or interest, if any, therein of every director". In the present case, removal of directors is a special business. On the underlying object of this section, Shri Devitre relied on Firestone Tyre and Rubber Co. Ltd. v. Synthetics and Chemicals Co.
Ltd. [1971] 41 Comp Cas 377 in which the Bombay High Court held that "the object underlying Section 173(2) is that the shareholders may have before them all facts which are material to enable them to form a judgment on the business before them. Any fact which would assist them in making up their mind, one way or the other, would be a material fact under Section 173 and has to be set out in the explanatory statement.
This provision is mandatory and not directory and disobedience of its requirements must lead to nullification of the action taken". It is essential at this point of time to note that in this case it was the company which called for the general body meeting for approval of certain resolutions. In the present case before us, it is a requisitioned meeting. The legal position in regard to such a meeting, especially for removal of directors, has been elaborately dealt with by the Supreme Court in Life Insurance Corporation of India v. Escorts Ltd. [1986] 59 Comp Gas 548 as cited by the respondents' counsel. In that case the LIC requisitioned a general body meeting for removal of nine directors of Escorts Ltd. No reasons for their removal had been indicated in the notice of requisition. Escorts Ltd., in a writ before the Bombay High Court, contended that the notice was bad in as much as the notice did not contain any reasons for removal of directors in Escorts Ltd. v. Union of India [1985] 57 Comp Gas 241 (Bom).
15. In this case the Bombay High Court has said that when a meeting is requisitioned by some shareholders for the purpose of removing a director, the requisitionists must disclose the grounds on which they want to proceed against the director. This is necessary because the company has to inform the director before any of the resolutions to remove him is considered so as to enable him to exercise the statutory right of making a representation to the shareholders about the matter.
The right of representation will be an empty formality if the proposed action does not inform the director concerned of the grounds on which he is sought to be removed since he will not know what representation he should make. Further, the court held that the notice of the meeting must be accompanied by a copy of the resolution and an explanatory statement.
16. This decision of the Bombay High Court was, however, reversed by the Supreme Court in Life Insurance Corporation of India v. Escorts Ltd. [1986] 59 Comp Cas 548. The Supreme Court observed as follows (page 636) : "Thus, we see that every shareholder of a company has the right, subject to statutorily prescribed procedural and numerical requirements, to call an extraordinary general meeting in accordance with the provisions of the Companies Act. He cannot be restrained from calling a meeting and he is not bound to disclose the reasons for the resolutions proposed to be moved at the meeting. Nor are the reasons for the resolutions subject to judicial review. It is true that under Section 173(2) of the Companies Act, there shall be annexed to the notice of the meeting a statement setting out all material facts concerning each item of business to be transacted at the meeting including, in particular, the nature of the concern or the interests, if any, therein, of every director, the managing agent, if any, the secretaries and treasurers, if any, and the manager, if any. This is a duty cast on the management to disclose, in an explanatory note, all material facts relating to the resolution coming up before the general meeting to enable the shareholders to form a judgment on the business before them. It does not require the shareholders calling a meeting to disclose the reasons for the resolutions which they propose to move at the meeting. The Life Insurance Corporation of India, as a shareholder of Escorts Ltd., has the same right as every shareholder to call an extraordinary general meeting of the company for the purpose of moving a resolution to remove some directors and appoint others in their place. The Life Insurance Corporation of India cannot be restrained from doing so nor is it bound to disclose its reason for moving the resolutions." 17. This decision of the Supreme Court was followed by the Madras High Court in S. Varadarajan v. Venkateswara Solvent Extraction (P.) Ltd. [1994] 80 Comp Cas 693 (Mad). The court said (page 711) : "Thus, it is clear that the obligation to annex an explanatory statement to the notice of the meeting is only on the company when it calls for a meeting to transact the special business. When a requisitionist calls for an extraordinary general meeting under Section 169, there is no obligation on the requisitionist to annex an explanatory statement to the notice of the meeting." 18. From the above decisions, it is explicit, that a shareholder requisitioning a meeting to transact special businesses like removal of directors etc. does not have to give any reasons nor any explanatory statement need to be attached. As per Section 169, the company has to call for an extraordinary general meeting to consider the resolutions proposed by the requisitionists failing which the requisitionists themselves can convene the meeting. The obligation of the company in a requisitioned meeting is to send a copy of the requisition along with the proposed resolution and if there is an explanatory statement with the notice, the same also has to be sent to the shareholders. In other words, the company itself is not bound to attach any explanatory statement inasmuch as the meeting has not been called by itself but only by the requisitionists and the company acts only as a medium to convene the meeting. In the present case we find that in the explanatory statement attached by the company, it has only reproduced the explanatory statement as given by the requisitionists and it has also complied with the provisions of Section 173(2) to indicate therein that some of the directors, being requisitionists, are interested in the proposed resolutions. Thus, the company has complied with the provisions of law, even assuming that the explanatory statement attached by the company does not reveal the alleged material particulars. The claim of the petitioners amounts to asking the company to supplement additional material either in support or against the reasons given by the requisitionists. We feel that, in convening a requisitioned meeting, the company's role is limited to the forwarding of the material received by it, from the requisitionists to all the members and nothing more. Therefore, according to us, the notice calling for the meeting issued by the company does not suffer from any legal infirmity as alleged by the petitioners and as such we are not going into the question whether so many details advanced by the petitioners as material, are material or not, as the same is not necessary in view of our holding that the notice calling for the meeting did not suffer from any legal infirmity.
19. Another point raised by the petitioners is that, in view of a press note on the date of the meeting, many shareholders did not attend the meeting and that except 3 of the 35 members present, all were belonging to either of the two groups, namely, the petitioner and the respondents and as such the decision of the general body did not represent the true will of the large body of the shareholders. This argument also does not seem to be very valid inasmuch as we find that in the seventh annual general meeting of the company, there were only 51 shareholders present and as per the information collected by us from the company regarding the earlier meetings, it is seen that the number of members present was only around 50.
20. Regarding the voting in respect of the resolutions, it is stated in the application that if the voting in respect of the shares held by Shri R. V. Shah group and RCTC are eliminated then the resolutions would have been defeated. In this connection, it is necessary to refer to the report of the chairman of the meeting. The chairman has counted the votes in three ways ; one is as per scrutineer's report and second, after removing the votes cast by Shri R.V. Shah group and the third by excluding votes relating to newly created shares. We find that in all the three situations, the votes cast for the resolutions were more than the votes cast against the resolutions. As far as the counting of votes relating to RCTC is concerned, the chairman's report covers that also.
The final position that emerges, as per the chairman's report on the result of the votes polled in the extraordinary general meeting is that the resolutions removing the petitioners as directors had been passed by majority. Thus, we are unable to intervene on behalf of the petitioners in this matter. Accordingly, it is not necessary for us to continue with our order dated April 3, 1995, wherein we had directed the company not to implement the decision of the extraordinary general meeting and as such we vacate that order.
21. Regarding inspection of documents, it is the grievance of the petitioners that our order dated June 15, 1994, had not been complied with. Now that we have allowed the company to implement the decision of extraordinary general meeting removing the petitioners as directors, they will be only entitled to inspection of documents which they are entitled to as members and those which have been relied on by the respondents in their replies. Accordingly in modification of our order dated June 15, 1994, we direct the company to offer to the petitioners, all documents which they are entitled as members and those which the respondents have relied on in their replies. The inspection will be given within a period of one month from the date of receipt of this order.
22. In regard to Application No. 71 of 1995 seeking to incorporate amendments to the main petition, we allow the same except that portion relating to the extraordinary general meeting held on June 20, 1994, since we have already considered the same in this order. The respondents will file their replies to the amended application by July 15, and rejoinder, if any, will be filed by August 15, 1995. We also find that the petitioners are yet to file their replies on C. A. No, 236 of 1994 filed by the respondents on maintainability of the petition. As such, the petitioners will file their replies to this application by July 15, and rejoinders if any will be filed by August 15, 1995. As already indicated, the petition will be finally heard on September 25, 1995, to September 27, 1995, at 10.30 a.m. each day.