ORDER
P.D. Dinakaran, J.
1. The above appeal is directed against the order dated 13.7.2004 made in C. P. No. 15 of 2003 on the file of the Company Law Board, Additional Principal Bench, Chennai on the following substantial question of law:
'Whether the Company Law board was correct in law in the various findings arrived at by it and whether the order of the Company Law Board is sustainable in law ?'
2.1. Brief facts of the case sans unnecessary details are as under:
The Central Government of India, second respondent herein, in order to prevent oppression and mismanagement, invoking the power conferred under Section 408 read with Sections 397 and 398 of the Companies Act sought for appointment of majority Directors on the Board of the first respondent Bank before the Company Law Board.
2.2. After hearing all necessary parties, the Company Law Board satisfied that the Board of directors had not been constituted in accordance with law for the first respondent Bank directed the second, respondent to appoint three of its nominees on the Board with a view to have some checks and balances on the functioning of the Board.
2.3. Thereafter, by an order dated 14.8.2003, the Company Law Board directed the first respondent Bank to convene Annual General Meetings for the year 1996-97 to 2002-2003, appointing a retired Judge of this Court, Hon'ble Mr. Justice S. Ramalingam as Chairman, and gave certain directions. The operative portion of the said order dated 14.8.2003 reads as follows:
'4. To ensure that the AGMs are held properly, in exercise of our powers under Section 403 of the Act, and subject to any subsisting orders in any other pending proceedings in relation to appointment of directors and/or registration of transfer of shares (the Bank may take steps to get the orders vacated) we direct as follows:
i. The Bank will convene and hold the AGMs for the year 1996-97 to 2002-03 as decided by the Board of the Bank.
ii. In the AGMs for the years 1996-97 to 2001-02, the meetings will transact only the statutory businesses relating to adoption of accounts, appointment of auditors and declaration of dividends.
iii. As far as the AGM for 2002-03 is concerned, all the Directors of the Bank other than the RBI/Central Government will be deemed to have retired at the commencement of the AGM and the business in relation to the election in respect of these vacancies will also be transacted along with other statutory businesses.
iv. The election of the directors shall be in accordance with the relevant provisions of the Act and the Articles.
v. Eligibility to participate and vote in the meetings: It is seen from the Memo of the Bank that of the 1,91,445 shares, 96,000 shares representing 33.74% are to be first registered in the names of 4 finance companies and thereafter to be transferred in the names of individual members of public from whom the Nadar Mahajana Bank Share Investors' Forum has collected funds and that transfer instruments in respect of approximately 29000 shares have been received by the Bank. We arc of the view that initially transferring in the name of 4 finance companies and then getting the same shares transferred to a number of individuals after obtaining transfer instruments is a time consuming and an avoidable exercise. Since the Nadar Mahajana Bank Share Investors' Forum has already furnished a complete list of the names of those to whom these 96000 shares are to be ultimately transferred, we authorize the company to register all these shares on the basis of the list given by the Nadar Mahajana Bank Share Investors' Forum without the production of transfer instruments. In other words compliance with the provisions of Section 108 of the Act is waived. Since, by these directions, the work involved in the transfer of shares would be minimal, the entire exercise of transferring these 96000 shares should be completed by 37' August, 2003. Since all these shares are being transferred directly to individual shareholders, there would be no need to obtain acknowledgement from the RBI in respect of these 96000 shares. All the shareholders in whose names the shares are to be transferred shall be entitled to participate and vote in the proposed annual general meetings.
vi. As far as 95,418 shares constituting 33.55% are concerned, which are to be transferred in the names of four other companies, they will also be entitled to participate and vote but the votes would be counted only if by the time of holding the AGM, acknowledgement from RBI has been received in respect of these shares.
vii. We appoint Justice Mr. S. Ramalingam (Retd.) to preside over all these meetings. He will fix his own fee in consultation with the Bank. To assist him in discharge of his assignment, we also appoint Shri B. Ravi and Shri R. Balasubramaniam, Practicing Company Secretaries who will work under the control and superintendence of the Chairman and their remuneration will be fixed by the Chairman. The remuneration for the Chairman and the Practising Company Secretaries shall be paid by the Bank.
viii. Even though the Board of Directors of the Bank has proposed to hold the AGMs on 25.9.2003, the Chairman appointed by us shall decide, in consultation with the Bank, a suitable date for holding the AGMs one after the other on the same day.
ix. Besides sending individual notices to the shareholders, the Bank will also publish the notice in an English and in a Tamil newspaper widely circulated in Tamil Nadu.
x. A copy of the notice shall be endorsed to this Bench.
xi. Within a week from the conclusion of the AGMs, the Chairman of the meetings will send a report to us on the proceedings of the meetings.'
2.4. As per the directions (v) and (vi) of the Company Law Board dated 14.8.2003, referred supra, the entire exercise of transferring 96,000 shares should be completed by 31st August, 2003 and since all these shares are being transferred directly to individual shareholders, there would be no need to obtain acknowledgement from the Reserve Bank of India in respect of these 96,000 shares and all the shareholders in whose names the shares are to be transferred shall be entitled to participate and vole in the proposed annual general meetings; and that apart, as far as 95,418 shares constituting 33.55% are concerned, which are to be transferred in the names of four other companies, they will also be entitled to participate and vote but the votes would be counted only if by the time of holding the Annual General meeting, acknowledgement from RBI has been received in respect of these shares.
2.5. However, by a subsequent order dated 19.12.2003, the Company Law Board suspended the entire Board of the first respondent Bank and appointed a Four Member Committee to discharge the functions of the Board, and the same was challenged before the Madras High Court in C.M.A. No. 3379 of 2003 and the Division Bench of Madras High Court, by judgment dated 31.12.2003 confirmed the order dated 19.12.2003 finding no illegality in the directions issued by the Company Law Board superseding the Board; and also directed that the Annual General Meeting of the Bank should be held on or before 15.3.2004. Accordingly, Annual General Meeting of the Bank was held on 12.3.2004 for the year 2002-2003, in which 10 Directors were elected and the Bank is being managed by the elected representatives of the shareholders.
2.6. While the main complaint of the Central Government, second respondent herein, had thus come to an end, the Company Law Board proposed to close the Company petition filed by the Central Government, viz., C.P. No. 15 of 2003, At this point of time, certain shareholders, viz., the appellants herein filed C.A. No. 46 of 2004 questioning the validity of the mode and manner of the election of the Directors and prayed to set aside the election conducted on 12.3.2004.
2.7. The main contention of the appellants herein, who were the applicants in C.A. No. 46 of 2004 was that when 67% of the shares were sold to Essar Group of Companies and said shareholders also executed power of attorneys in favour of the Essar nominees, till the said sale of snares arc acknowledged by the Reserve Bank of India, their votes could not be taken into consideration. It was also brought to the notice of the Company Law Board that the said Essar Group of Companies subsequently sold the said shares to Sterling Group, who applied to the Reserve Bank of India for acknowledgement of the purchase of shares from Essar Group of Companies, and the Reserve Bank of India rejected the purchase of shares by the Sterling Group, and the same had become final, and therefore, the nominees of the Essar Group are not entitled to exercise their proxies, as the ultimate sale in favour of the Sterling Group was rejected by the Reserve Bank of India. According to the appellants, once the Reserve Bank of India refused to acknowledge the transfer of 67% of the shares to four companies which belong to Essar group, the four companies cease to have any beneficial interest in the shares and therefore, the nominees of the Essar Group under power of attorneys are not entitled to exercise their vote under proxies, even based on the power of attorneys executed by the original shareholders. It was thus contended by the appellant that no voting in respect of these shares would be allowed accepting the proxies by the power of attorney members.
2.8.1, The said application was resisted by the elected members, respondents 4 to 13 herein, on the ground that the election itself was conducted pursuant to the judgment of the Division Bench of the Madras High Court dated 31.12.2003 made in C.M.A. No. 3379 of 2003, wherein the Division Bench of the Madras High Court has laid down guidelines for conduct of the Annual General Meeting as well as the election schedule for electing the Directors. The relevant portion of the judgment dated 31.12.2003 reads as follows:
'23. We, therefore, do not find any illegality in the directions issued by the Company Law Board superseding the Board which comprised of additional directors and in it's place empowering the nominee directors whose tenure was not dependent upon and was not for any specified period to function as Directors, the Chairman also being a nominee of the Reserve Bank of India.
24. This arrangement however can only be for a limited period till the annual general meeting is held. The annual general meeting which has not been held for several years must now be held with utmost expedition. The Company Law Board has already directed that the process of distribution of share certificates to the members of the investors Forum be completed before 25th January, 2004, that the Members Register close as on that date, and that notice of the AGM be sent to those whose names appear in the Register of Members on that date.
25. We must however take note of the Reserve Bank of India's failure to act with a sense of urgency with regard to application said to have been sent to it some time in October 2003 with regard to the transfer of shares to four investment companies belonging to the Sterling Group. The transfer of shares in their favour has already been, we are told, approved by the Board of Directors of this company, subject to the Reserve Bank of India giving its approval.
26. Learned Additional Solicitor General who appeared for the Reserve Bank of India assured us that the Reserve Bank will definitely take a decision and communicate the same to the Company within a period of two weeks from today.
27. We direct the Reserve Bank of India to complete the process within two weeks from today so that thereafter, in the event of the transfer being approved, notice of the AGM can be sent to the purchasers after bringing their names on record in the Register of Members, and in the event of permission being refused, notice of the meeting can be sent to persons in whose names those shares presently stand in the Register of Members.
28. The Company Law Board shall fix the date for holding the annual general meeting after giving sufficient time for the despatch of notice and that meeting shall as far as possible be held before the end of February, 2004 and in any event not later than 15th March, 2004.
29. The Committee now constituted by the Company Law Board under the impugned order shall only take decisions with regard to day to day matters and the normal' functioning of the bank and shall not embark upon any new major project or take any major decision affecting the future of the bank, as the directors to be elected by the general body should have the opportunity to deal with those matters after the annual general meeting is held.
30. We make it clear that, the Company Law Board may proceed with the hearing of the application filed by the Central Government after the counter affidavits of the respondents to that application are filed before it and make appropriate orders thereon.'
2.8.2. While resisting so, the respondents 4 to 13, inter alia, contended that the nominees of the Essar Group of Companies who got power of attorneys of sale of 67% of the shares, referred to above, moved the District Munsif Court, Tuticorin in O.S. No. 479 of 1995 and got an order of permanent injunction restraining the Bank from interfering with their rights of power agent and the said decree dated 3.10.1996 made in O.S. No. 479 of 1995 had also become final.
2.8.3. It was further contended by the respondents 4 to 13 that since the Reserve Bank of India refused grant of acknowledgement of transfer to Essar Group, the subsequent purchaser Sterling Group sold about 33% of the shares to various individuals, retaining 34% of the shares, which were thereafter, sold to the seven individuals constituting a Group, who by their representation dated 19.2.2004 requested the Bank to register the transfer.
2.8.4. The elected Directors, viz., respondents 4 to 13, also brought to the notice of the Company Law Board that the Madras High Court by a judgment dated 31.12.2003 observed that in the event of Reserve Bank of India not giving acknowledgement, notice for the annual general meeting would be sent to the person in whose names these shares then stood in the Register of members. That apart, the Division Bench of the Madras High Court in its judgment dated 9.3.2004 made in W.A. No. 579 of 2004 and W.P. No. 3734 of 2004 allowed proxies being obtained from those persons in whose name the shares stood or their authorized agents and for doing so, it extended the period of lodging the proxies by a further period of 24 hours. Thus, according to the elected Directors, the High Court has allowed the power of attorney holders to exercise voting in respect of the impugned share and the same became final and hence, there is no illegality in permitting the proxies of the powers of attorney holders to exercise voting in respect of the impugned shares.
2.9. Considering the above rival contentions of the appellant herein, who are the applicants in C.A. No. 46 of 2004, and also that of the elected members, referred to above, who are the respondents 4 to 13 herein, the Company Law Board in its order dated 13.7.2004 made in C.P. No. 15 of 2003 held that, (i) the Chairman was right in allowing the proxies of the powers of attorney holders to exercise votes and taking the votes into consideration; (ii) the purpose of the petition filed by the Central Government, second respondent herein, had served, ensuring that the first respondent-Bank is managed by the newly elected representatives; and (iii) accordingly, closed C.P. No. 15 of 2003 finding no further orders are required.
2.10. Aggrieved by the same, the applicants in C.A. No. 46 of 2004 have preferred the above appeal, on the following substantial question of law:
'Whether the Company Law board was correct in law in the various findings arrived at by it and whether the order of the Company Law Board is sustainable in law ?'
3.1. During the course of the argument, the learned counsel for the Reserve Bank of India-third respondent herein, produced a letter dated 13.8.2004 passed by the Reserve Bank of India, claiming the same to be secret document. The letter dated 13.8.2004 reads as follows:
'RESERVE BANK OF INDIA
Secret:
Ref : DBOD:PSBS.213/16.1.075/2004-05 August 13,2004The ChairmanTamilnadu Mercantile Bank Ltd.Head Office, 57, V.E. Road,Thoothukudi-628002.Dear Sir,
Transfer of 33.06% shares of the bank to seven individuals.
Please refer to your letter No. RBI. Mum.DBOD.42/2003-04, dated March 11, 2004 seeking directions from RBI in compliance with the order dated March 9, 2004, issued by High Court at Madras, and subsequent correspondence with regard to transfer of shares in favour of the seven individuals.
2. We advise that the terms of the Sale agreements neither effect, nor indicate the intention to effect, transfer of ownership in the shares in favour of the purchasers. Moreover, the terms of the Sale Deed show that whatever rights are transferred to the purchasers can be exercised by them only under the directions of the sellers. Thus, the rights and beneficial interest connected with ownership remained with the sellers, transfer in whose favour was not acknowledged by us, and in substance there was no sale of shares.
3. Further, even the purchasers are not clearly mentioned in the Sale Agreement, since Clause 3 thereof provides that the sale will be in favour of such other persons as the Purchaser may find to buy the shares.
4. Having considered the matter on the basis of the information and documents made available to us and taking into account all relevant factors, we are unable to recognize the sale of shares from the Sterling Group Companies to the seven individuals, referred to us.
Yours faithfully,
sd/-
(Prashant Saran)
Chief General Manager.'
3.2. Concededly, the proceedings dated 13.8.2004 of the Reserve Bank of India refusing transfer of shares from Sterling Group to seven individuals was treated as 'secret', and therefore, the seven individuals had no occasion to agitate against the same.
4. The learned counsel for the appellants and the respondents reiterated their submissions made before the Company Law Board.
5. We have given careful consideration to the submissions of all the parties.
6. From the above rival contentions, the only question that arises for our consideration is whether the finding of the Company Law Board that the Chairman was right in allowing the proxies of the powers of attorney holders to exercise votes and taking the votes into consideration, is right under the facts and circumstances of the case.
7.1. In this regard, a reference to Section 408 of the Companies Act, which was invoked by the Central Government, with reference to Sections 397 and 398 of the Companies Act, in preferring C.P. No. 15 of 2003, are relevant to be referred to:
'Section 408 - Powers of Government to prevent oppression or mismanagement:
(1) Notwithstanding anything contained in this Act, the Central Government may appoint such number of persons as the Tribunal may, by order in writing, specify as being necessary to effectively safeguard the interest of the Company, or its shareholders or by the public interests to hold office as directors thereof for such period, not exceeding three years on any one occasion, as it may think fit, if the Tribunal, on a reference made to it by the Central Government or on an application of not less than one hundred members of the company or of the members of the company holding not less than one-tenth of the total voting power therein, is satisfied, after such inquiry as it deems fit to make, that it is necessary to make the appointment or appointments in order to prevent the affairs of the company being conducted either in a manner which is oppressive to any members of the company or in a manner which is prejudicial to the interests of the company or to public interest:
Provided that in lieu of passing an order as aforesaid, the Tribunal may, if the company has not availed itself of the option given to it under Section 265, direct the company to amend its articles in the mariner provided in that Section and make fresh appointments of directors in pursuance of the articles as so amended, within such time as may be specified in that behalf by the Tribunal.(2) In case the Tribunal passes an order under the proviso to sub- Section (1), it may, if it thinks fit, direct that until new directors are appointed in pursuance of the order aforesaid, such number of persons as the Tribunal may, by order, specify as being necessary to effectively safeguard the interests of the company, or its shareholders or the public interest, shall hold office as additional directors of the company and on such directions, the Central Government shall appoint such additional directors.
(3) For the purpose of reckoning two-thirds or any other proportion of the total number of directors of the company, any director or directors appointed by the Central Government under sub-section (I) or (2) shall not be taken into account.
(4) A person appointed under sub-section (1) to hold office as a director or a person directed under sub-section (2) to hold office as an additional director, shall not be required to hold any qualification shares nor his period of office shall be liable to determination by retirement of directors by rotation; but any such director or additional director may be removed by the Central Government from his office at any time and another person may be appointed by that Government in his place to hold office as a director or, as the case may be, an additional director.
(5) No change in the Board of Directors made after a person is appointed or directed to hold office as a director or additional director under this section shall, so long as such director or additional director holds office, have effect unless confirmed by the Tribunal.
(6) Notwithstanding anything contained in this Act or in any other law for the time being in force, where any person is appointed by the Central Government to hold office as director or additional director of a company in pursuance of sub-section (1) or sub-section (2), the Central Government may issue such directions to the company as it may consider necessary or appropriate in regard to its affairs and such directions may include direction to remove an auditor already appointed and to appoint another auditor in his place or to alter the articles of the company, and upon such directions being given, the appointment, removal or alteration, as the case may be, shall be deemed to have come into effect as if the provisions of this Act in this behalf have been complied with without requiring any further act or thing to be done.
(7) The Central Government may require the persons appointed as directors or additional directors in pursuance of sub-section (1) or sub- section (2) to report to the Central Government from time to time with regard to the affairs of the Company.
Section 397- Application to Tribunal for relief in cases of oppression:
(1) Any members of a company who complain that the affairs of the company are being conducted in a manner prejudicial to public interest or in a manner oppressive to any member or members including any one or more of themselves may apply to the Tribunal for an order under this section, provided such members have a right so to apply in virtue of Section 399.
(2) If, on any application under sub-section (1), the Tribunal is of opinion -
(a) that the company's affairs are being conducted in a manner prejudicial to public interest or in a manner oppressive to any member or members; and
(b) that to wind-up the company would unfairly prejudice such member or members, but that otherwise the facts would justify the making of a winding-up order on the ground that it was just and equitable that the company should be wound-up;
the Tribunal may, with a view to bringing to an end the matters complained of, make such order as it thinks fit.
Section 398: Application to Tribunal for relief in cases of mismanagement:
(1) Any members of company who complain -
(a) that the affairs of the company are being conducted in a manner prejudicial to public interest or in a manner prejudicial to the interests of the company; or
(b) that a material change not being a change brought about by, or in the interests of, any creditors including debenture-holders, or any class of shareholders, of the company has taken place in the management or control of the company whether by an alteration in its Board of Directors, or manager or in the ownership of the company's shares, or if it has no share capital, in its membership, or in any other manner whatsoever and that by reason of such change, it is likely that the affairs of the company will be conducted in a manner prejudicial to public interest or in a manner prejudicial to the interests of the company,
may apply to the Tribunal for an order under this section, provided such members have a right so to apply in virtue of Section 399.
(2) If, on any application under sub-section (1), the Tribunal is of opinion that the affairs of the company are being conducted as aforesaid or that by reason of any material change as aforesaid in the management or control of the company, it is likely that the affairs of the company will be conducted as aforesaid, the Tribunal may, with a view to bringing to an end or preventing the matters complained of or apprehended, make such order as it thinks fit.'
7.2. The power conferred on the Central Government under Section 408 of the Companies Act is intended to effectively safeguard the interest of the Company, its shareholders and the public interest and to prevent oppression and mismanagement. Thus, the powers conferred under Section 408 of the Companies Act are extraordinary in nature as the said powers require the Central Government virtually to step in and interfere with the day to day management of the Company through its nominated Directors in the case of oppression or mismanagement or a complaint that the Company is being managed in a manner prejudicial to the company's interest or public interest.
7.3. The power conferred on the Tribunal under Section 397 of the Companies Act for the relief in the case of oppression and under Section 398 of the Companies Act for the relief in the case of mismanagement are equally intended to safeguard the interest of the member or members as well as the shareholders, debenture holders, creditors, as well as in the interest of the Company and the public interest. In the instant case, there were sufficient materials placed before the Company Law Board by the Central Government to prove that there were acts of omissions and commissions attracting oppression of the interest of the members, shareholders, debenture holders, creditors as well as the interest of the public and the public interest, in various forms, besides misfeasance and nonfeasance, which attracted oppression of the rights of the members and the mismanagement of the Company. Only by appreciating these aspects of the case and in the light of the earlier judgments of the Madras High Court dated 31.12.2003 made in C.M.A. No. 3379 of 2003 and dated 9.3.2004 made in W.A. No. 579 of 2004 and W.P. No. 3734 of 2004, the election to the post of Directors were conducted.
7.4. Concededly, there was a subsisting decree dated 3.10.1996 in O.S. No. 479 of 1995 on the file of the District Munsif Court, Tuticorin, whereby the proxies of the power of attorney holders were held entitled to exercise their voting. That apart, none of the shareholders objected to the method of election before the election took place, and therefore, it must be presumed that they had no complaint on the method of election and hence, the appellants herein, who are the applicants in C.A. No. 46 of 2004, cannot have any complaint on the same as they are estopped to do so.
7.5. Even though the counsel for the Reserve Bank of India, third respondent herein, during the course of the argument produced a letter dated 13.8.2004, claiming the same as 'secret' document, whereunder the Reserve Bank of India rejected to recognize the sale of shares from the Sterling Group Companies to the seven individuals, in our considered opinion, since the said order was not served on the parties concerned till date, the same cannot be used to test the correctness of the order dated 13.7.2004 of the Company Law Board.
7.6. However, it has to borne in mind that the Madras High Court by judgment dated 9.3.2004 itself had observed that the transfer in favour of the seven individuals could not be effected until such time the Reserve Bank of India gave its acknowledgement.
7.7. Nevertheless, the powers of the Reserve Bank of India under Section 35-A of the Banking Regulation Act, 1949 in the case of banking companies and the circulars issued thereunder cannot be lightly disregarded. Section 35-A of the Banking Regulation Act, 1949 reads as under:
'Section 35-A - Power of the Reserve Bank to give directions (1) Where the Reserve Bank is satisfied that-
(a) in the public interest; or
(aa) in the interest of banking policy; or
(b) to prevent the affairs of any banking company being conducted in a manner detrimental to the interests of the depositor or in a manner prejudicial to the interests of the banking company; or
(c) to secure the proper management of any banking company generally;
it is necessary to issue directions to banking companies generally or to any banking company in particular, it may, from time to tome, issue such directions as it deems fit, and the banking companies or the banking company, as the case may be, shall be bound to comply with such directions.
(2) The Reserve Bank may, on representation made to it or on its own motion, modify or cancel any direction issued under sub-section (1), and in so modifying or cancelling any direction may impose such conditions as it thinks fit, subject to which the modification or cancellation shall have effect.'
7.8. Exercising the said power conferred under Section 35-A(1) of the Banking Regulation Act, 1949, the Reserve Bank of India had issued guidelines for acknowledgement of shares in private banks and therefore, they have to be scrupulously given effect to. The powers conferred on the Reserve Bank of India under Section 35-A of the Banking Regulation Act, 1949, as well as the guidelines thereunder are intended to protect the public interest and the interest of the banking companies, which are in consonance with Section 408 read with Sections 397 and 398 of the Companies Act. In that view of the matter, the letter dated 13.8.2004, referred to above, cannot be totally ignored. In which event, as provided under Section 35-A(2) of the Banking Regulation Act, 1949, the parties aggrieved by the letter dated 13.8.2004, having now been given notice of the said letter dated 13.8.2004, may move the Reserve Bank of India, and on such application, the Reserve Bank of India shall modify or cancel the order dated 13.8.2004 or pass such other appropriate orders as it may deem fit and necessary.
8. Under such circumstances, we do not see any error or illegality in the order of the Company Law Board made in C.P. No. 15 of 2003 and C.A. No. 46 of 2004.
For the reasons aforesaid, the appeal fails and is therefore, dismissed, of course, without prejudice to the right of the parties aggrieved by the letter dated 13.8.2004 of the Reserve Bank of India to work out their rights in the manner known to law. No costs.