1. In this order, I am considering application CA 72 of 2004 filed by the 1^st respondent seeking for dismissal of CP 32 of 1996 on the ground that the petition is not maintainable in terms of Section 399 of the Companies Act, 1956 (the Act).
2. This petition alleging acts of oppression and mismanagement in the affairs of 14^th respondent- M/s Alaukik Trading and Investment Pvt Ltd- (the company) was filed in 1996. The main allegations in the petition are that even though the 1^st petitioner was the majority shareholder in Alaukik holding 84% equity shares, additional equity shares to the extent of 1500 shares were allotted to the 1^st respondent in exclusion of other shareholders of the company with the view to gain majority in the company and that there had been illegal transfer of shares of the company. Even though a number of interim orders were passed from time to time, the hearing of the main petition was being deferred till 1999, mainly on the ground that there was a preexisting civil suit filed by the petitioners on similar issues.
Later on, it was reported that the civil suit had been withdrawn.
Thereafter, on 24.11.1999, the counsel for the petitioners suggested that since the matter pending before the High Court was coming up for hearing in the next few clays, the matter before this Bench may be heard on a later date. On 7.2.2000, counsel from both the sides sought for adjournment on the same ground that the final hearing of the appeal in Gujarat High court was coming up for hearing shortly. Similar request was made by the counsel for both the sides on 12.3.2001 except that the matter was coming up for hearing in the supreme Court.
Thereafter, on 3.12.2001, at the instance of the counsel for the respondents, an interim order was passed in relation to the properties of the company with the direction that the petition would be heard on 8^th to 10^th May 2002. When the matter came up before this Bench on 3.2.2004, the counsel for the respondents submitted that the SLP and other connected appeals were on daily board of the Supreme Court and as such sought for deferment of the hearing. This was not acceptable to the petitioners who insisted on hearing the petition on merits. Since, the hearings on earlier occasions were deferred with the consent of both the sides, and that now the petitioners were not willing for deferment, I suggested to the counsel for the respondents to obtain an order of stay from the Supreme Court and to enable him to approach the Supreme Court, I adjourned the matter to 1.3.2004. On this day, the respondents filed an application stating that they had already filed an application before the Supreme Court for staying the proceeding before this Bench, but the same was not taken up for hearing and as such sought for adjournment once again on the ground that the matter was on daily board of the Supreme Court. This application was opposed by the petitioners and as such I directed the counsel to commence their arguments. Since, the counsel for the respondents questioned the maintainability of the petition, I asked the counsel for the petitioners to argue both on the maintainability and on the merits also which he did. However, the counsel for the respondents desired to file a written application challenging the maintainability of the petition and the same was permitted. Accordingly, the present application was filed. In the hearing held on 23.3.2004, the counsel for the respondents complained that the reply to the application was handed over to him only on that day and as such sought for time to file a rejoinder. In view of this, the counsel for the petitioner submitted that his reply might be treated as withdrawn and he be permitted to make oral arguments on the same, which was not objected to by the counsel for the respondents. Accordingly, counsel for both the sides argued on the maintainability and the counsel for the petitioner concluded his arguments on the merits of the case also. The matter was adjourned to 6.4.2004 for reply arguments by the counsel for the respondents. On this day, the counsel for the respondents submitted that the Gujarat High Court had stayed further proceeding before this Bench till 30^th April 2004. Therefore, this matter was fixed for further hearing on 7^th May 2004, on which date the counsel for the petitioners produced a copy of the order of Gujarat High Court directing this Bench to pass a speaking order on the maintainability of the petition before deciding on the merits of the petition. Both the counsel desired to file written submissions on the maintainability of the petition, which they did subsequently. Hence, this order on maintainability of the petition.
3. The main grounds for challenging the maintainability of the petition are that the Division Bench of Gujarat High Court has held that by illegal allotment of shares in GIC-the 1^st petitioner company-, the 2^nd petitioner's group had taken control of the Board of that company.
In view of this finding, according to the respondents, the Board was illegally constituted and therefore the decision to file this petition taken by an illegal Board has no validity and if the findings of the Gujarat High Court are confirmed by the Supreme Court, then, the respondents' group would control the Board of GIC and it would withdraw this petition. In that case, the 2^nd petitioner by herself cannot independently maintain this petition in terms of Section 399. Secondly, when the respondents made the above submission before this Bench, the Senior Advocate appearing for the petitioners submitted that this petition could be treated as one filed by the 2^nd petitioner alone, in which case the 2^nd petitioner herself cannot maintain the petition as she would not satisfy either the shareholding requirement or numerical requirement of Section 399 of the Act.
4. Shri Krishan Kumar appearing for the respondents/ applicant submitted: The 1^st petitioner company- M/s Gaekwad Investment Corporation Pvt Ltd (GIC) was established by late Fateh Singh Rao P.Gaekwad. He also established Baroda Rayon Corporation Limited. GIC controls Baroda Rayon. GIC held 84% shares in Alaukik which was incorporated in 1971. All these companies are family companies of members of Maharaja of Baroda. Presently, there are two groups - one is S.P. Gaekwad Group (the petitioners) and second is Mrunalindevi Paur Group (the respondents). GIC was under the control of Paur Group.
However, by illegal allotment of further shares in that company, SP Gaekwad Group gained control of that company including the Board of Directors. Paur Group filed a petition under Sections 397/398 of the Act before Gujarat High Court challenging the allotment in and composition of the Board of GIC. Even though, a Single Judge of that High Court dismissed the said petition, on appeal, in its judgment dated 9.8.2000, the Division Bench has held that all the allotments made beyond the original issued capital were invalid as also the composition of the Board of Directors. In the judgment, the Division Bench has also directed that all directors of GIC stood removed forthwith and that they would not be involved in the affairs of the company in any manner. In view of these findings/directions, the 1^st petitioner did not have the sanction of a validly constituted Board of Directors at the time of filing of the petition and as such it cannot maintain the petition. Further, by an interim order dated 26.9.1995, the High Court had appointed Mr. Justice C.T. Dighe as the Chairman of GIC as well as Alaukik, stipulating that there would be no change in the composition of the Board of both these companies and that all decisions taken by the Board during the pendency of the appeal would be subject to the orders that would be passed ultimately in the appeal.
Since the present petition before the CLB was filed only in June, 1996 and that the Division Bench has held that the Board of the company had been illegally constituted, the decision taken to file this petition in 1996, being subject to the final order in the appeal, can no longer be maintained by the 1^st petitioner. The Gaekwad Group has now filed a Special Leave Petition before the Supreme Court challenging the judgment of the Division Bench of the Gujarat High Court and the Supreme Court has also directed that the terms of the interim order of the High Court dated 26.9.1995 would continue to prevail till the disposal of the SLP and therefore, it would be appropriate that the proceeding before this Bench is stayed till that time.
5. The learned counsel further submitted: No only that the 1^st petitioner cannot maintain this petition in view of the judgment of the Division Bench of Gujarat High Court, even during the hearing on 1.3.2004, when this plea was taken by the counsel for the respondents, the senior counsel appearing for the petitioners submitted that this petition could be treated as a petition filed by the 2^nd petitioner alone. In other words, the senior counsel had conceded that in view of the judgment of the High Court, the 1^st petitioner cannot maintain this petition. In view of this concession made by the learned Senior counsel for the petitioners, the 1^st petitioner is precluded form prosecuting this petition further and this petition should be treated as one filed by the 2^nd petitioner alone. Therefore, the only issue now to be determined is whether the 2^nd petitioner can independently maintain this petition in terms of Section 399. The issued capital of the company consists of 2452 equity shares of Rs. 100 each and 3500 irredeemable preference shares of Rs. 100 each. Thus the total issued capital is Rs. 5,95,200. The 2^nd petitioner holds only 2 equity shares of Rs. 100 each. Even though she also holds 600 preference shares, such holding is jointly with one V.S. Hazare, whose name appears first in the share script as well as in the register of members. Therefore, without the consent of Shri Hazare, she cannot get the benefit of these 600 shares for computing her shareholding. Thus, her independent holding, being only 2 equity shares, is less than 10% of the issued capital. Further, there are 11 shareholders in the company and as such she , by herself alone, does not constitute 1/10^th of the total members in the company. Thus, in her case, neither the shareholding requirement nor the numerical requirement in terms of Section 399 of the Act is satisfied, and as such the petition is not maintainable and should be dismissed.
6. Shri Gopal Jain, Advocate, appearing for the petitioners submitted: The maintainability of the petition has to be judged on the day of filing of the petition as has been held by the Supreme Court in Rajahmundry Electric Supply Corporation Ltd. v. A. Nageshwara Rao (26 CC 91): S. Vardharajan v. Venkateshwara Solvent Extraction Pvt. Ltd. (80 CC 693 MS): Subhash Chand Aggarwal v. Associated Lime Stone Limited (92 CC 525 CLB). Subsequent events cannot nullify the validity of the petition especially, when the judgment of Gujarat High Court, being on appeal before the High Court, has not reached a finality. Even though, in the order dated 26.9.95, the Division Bench had directed that any decision taken by the Board would be subject to the final order on the appeal, yet, by an order dated 30.8.1996, the Division Bench had clarified that the said direction did not preclude the parties from taking out appropriate proceeding before a competent forum for appropriate relief, in accordance with law and that the said order did not preclude proper forum from deciding the same in accordance with law. This being the case, the Board of Director of GIC was competent to file this petition to protect the interest of GIC which was holding 84% shares in Alaukik and which has now been reduced to minority in Alaukik. Therefore, this petition, having been filed with the authority of the Board, is maintainable and this Board is competent to adjudicate on the petition. In regard to the alleged concession given by the learned senior advocate for the petitioners that the petition be treated as one filed by the 2^nd petitioner alone, the same is not correct as no such concession was made. Originally, there were only 10 share holders in the company. However, by some illegal transfer of shares, which have been challenged in the petition, the number of shareholders has been increased to 11. Therefore, the 2^nd petitioner constituting 1/10^th of the total membership of 10, before the illegal transfers were effected, is independently also competent to file this petition in terms of Section 399. Any way, since the 1^st petitioner company has been authorized by its Board to file this petition and since the 2^nd petitioner is also a shareholder in the company, both can jointly maintain this petition, both in terms of shareholding and numerical requirement in terms of Section 399.
7. I have considered the arguments and the written submissions filed by the parties. There are two petitioners, the 1^st petitioner, being an incorporated company holding 800 equity shares in the respondent company, and the 2^nd petitioner who is also a shareholder of the respondent company holding 2 equity shares independently in her name and 600 preference shares jointly with one V.S. Hazare. The main thrust of Shri Krishan Kumar's argument is that, at the time when the Board of the 1^st petitioner company decided to file this petition, it was illegally constituted as held by the Division Bench of Gujarat High Court and as such the 1^st petitioner company cannot continue with this petition. On the other hand, the contention of Shri Gopal Jain is that the maintainability of the petition has to be judged on the day of filing of this petition and he has cited certain cases on this proposition. Even though, as per these cases, the maintainability of the petition has to be judged on the day of filing of the petition, yet, in certain cases when petitions had been filed on the strength of holding of certain shares which was subsequently found to have been acquired in violation of law, this Board has held that the principle of considering the maintainability of the petition on the day of filing of the petition cannot be applied, as illegally acquired shares, being ab-initio illegal, cannot be taken for computation of the holding of the petitioners to determine the qualification under Section 399. (Arun Kumar Bajoria v. Bombay Dyeing Limited (2001 4 CLJ 115) and Aska Investments Private Limited v. The Grob Tea Company Limited (CP 72 of 2000). In the same way, in the present case if the Board of Directors of the 1^st petitioner company had been incapacitated from taking the decision to file the petition, either because the Board was illegally constituted or had been restrained by a competent court of law from taking any decision, then, the principle of considering the maintainability on the clay of filing of the petition cannot be applied as the decision of the Board would be invalid ab-initio. According to Shri Krishna Kumar, in view of the findings given by the Division Bench in its order dated 9.8.2000 that the then Board was illegally constituted, the decisions taken by that Board to file the petition cannot survive especially in view of paragraph 11 of order dated 26^th September, 1995 wherein it has been stipulated that all the decisions of the Board of the company shall be subject to final decision in the appeal. I have perused the order of the Division Bench of the Gujarat High Court dated 9.8.2000. In paragraph 20 of that order, the High Court has held that allotment of shares and increase in the share capital in GIC impugned in the petition before the Court were invalid and that the shareholding in the 1^st petitioner company would be the original 425 shares. It has also held that all the directors or purported directors of the 1^st petitioner company stood removed forthwith and that from that clay they would not deal with the affairs of the company in any manner. Other directions in that order relate to holding of a general meeting of GIC and election of directors. I do not find any declaration or stipulation in that judgment to the effect that decisions taken by the earlier Board were invalid or illegal. As a matter of fact, the High Court has only directed that the directors, having been removed forthwith, would not deal with 2 affairs of the company in any manner in future. In this connection, I may also refer to the order dated 26^th September, 1995 wherein the High Court has permitted the Board to hold meetings with an independent Chairman and accordingly it appointed Mr. Justice C.T. Dighe as the Chairman. Even though in paragraph 11, the High Court has stipulated that all decision of the Board shall be subject to final decision in the appeal, yet, in the final order there is nothing specific about the decisions taken by the Board. In the present case, the authority to file the petition on behalf of the 1^st petitioner company was given to the 2^nd petitioner by a circular resolution dated 11^th July, 1996 i.e. after the date of the order of the Gujarat High Court on 26^th September, 1995 by which the court allowed the Board to function with an independent Chairman.
Therefore, on 11^th July, 1996, the Board had the authority of the High Court to function and take decisions- those decisions being subject to the final order. In the final order, as I have observed earlier, there is no direction regarding the decisions taken by the Board. The respondents have not either claimed or shown that the decision taken by the Board to file this petition was contrary to any of the terms of the order of the High Court dated 26^th September 1995. Further, I also find from the order of the High Court dated 30^th August 1996, that it had clarified its earlier order dated 26.9.95 to state that the earlier order did not preclude the parties from instituting other proceedings.
This being the case, the respondents cannot claim that in view of the final order of the Gujarat High Court, the decision taken by the Board to file this petition is invalid or that the 1^st petitioner company cannot maintain this petition.
8. Shri Krishna Kumar advanced another argument that the senior counsel appearing for the petitioners made a concession that this petition could be treated as one filed by the 2^nd petitioner alone and if so, the 1^st petitioner can no longer be considered as a petitioner. In this connection, it is necessary to record that in the hearing held on 1.3.2004, Shri Ganesh, Senior Advocate appeared for the petitioners and Shri P.V. Kapur, Senior Advocate appeared for the respondents. Shri P.V. Kapur repeatedly urged that the 1^st petitioner cannot maintain the petition in view of the Division Bench order of the Gujarat High Court dated 9.8.2000. In view of this, I specifically asked Shri Ganesh whether the petition was maintainable by the 2^nd petitioner alone. He answered in the affirmative and explained how the petition was independently maintainable by the 2^nd petitioner both in terms of shareholding and numerical requirements in terms of Section 399. Thus, he only answered my query and did not make any concession as alleged by the respondents. The learned senior counsel completed his arguments on the merits of the case also. Shri Krishna Kumar disputed the claim of the senior counsel that the 2^nd petitioner could independently maintain this petition, and sought for permission to file an application questioning the maintainability of the petition by the 2^nd petitioner alone, which was granted. In the application, to establish that the 2^nd petitioner cannot independently maintain this petition, the respondents have given the details of shareholding in and the members of the company. Even assuming that the senior advocate for the petitioners had made a concession, yet, on the next day of hearing on 23.3.2004, Shri Krishna Kumar urged, for reasons I do not wish to elaborate in this order, that the entire arguments of the said senior advocate including his arguments on merits should be ignored. In view of this, I not only ignored the arguments of that senior advocate, but, I also directed Shri Gopal Jain, counsel for the petitioners to argue both on maintainability and on merits, afresh. In other words, at the request of Shri Krishan Kumar himself, none of the arguments of the senior advocate was taken cognizance of by me, including his purported concession. Therefore, since the petition has been filed with the authority of the Board recognized by the High Court and since there was no concession that the petition could be treated as one filed by the 2^nd petitioner alone, I hold that the 1^st petitioner company can maintain this petition.
9. In view of this finding, I do not propose to examine as to whether, the 2^nd petitioner alone can maintain this petition in terms of Section 399 especially in view of the fact that certain transfers have taken place in the shareholdings in the company by which the number of members in the company has increased and the petitioners have challenged those transfers also in the petition and as such, without examining this aspect, it is not possible to decide whether there are 10 or 11 shareholders in the company. Therefore, my examination is limited to find out whether both the petitioner put together satisfy the requirements of Section 399. In terms of Section 399, to maintain a petition under Sections 397 and/or 398, the petitioners should hold not less than 10% of the issued capital of the company or should constitute atleast 1/10^th of the total membership in the company. Before the impugned shares were issued/allotted, the total issued capital was Rs. 4,45,000. The total number of members was 10. This Board has consistently held that the qualification under Section 399 has to be determined before the issue of further capital, if the same is impugned in a petition under Sections 397/398. If done so, the 1^st petitioner holding 800 equity shares of 100 each and the 2^nd petitioner holding 2 equity shares of Rs. 100 each (excluding 600 shares held by her in the joint names of V.S. Hazare as the first holder), were holding shares with the face value of Rs. 80,200, which is more than 10% of the issued capital of Rs. 4,45,200. They also constituted more than 1/10^th of the total membership in the company. Even on the enhanced share capital of Rs. 5,95,200, they hold more than 10% shares. Likewise, they constitute more than 1/10^th of the enhanced number of members Viz 11.
Accordingly, I hold that this petition is maintainable in terms of Section 399.
10. Since the counsel for the petitioners has concluded his arguments of the merits of the case, the matter is posted for hearing on 20^th July 2004 at 2.30 p.m. when the counsel for the respondents will reply to the arguments of the counsel for the petitioners.