Capricorn Oils Limited and Others Vs. Ratan Mohan Sarda and Others - Court Judgment

1

IN THE HIGH COURT AT CALCUTTA

CIVIL APPELLATE JURISDICTION

APO No. 115 of 2010

ACO No. 91 of 2009

ACO No. 92 of 2009

ACO No. 118 of 2011

CAPRICORN OILS LIMITED AND OTHERS

VERSUS

RATAN MOHAN SARDA AND OTHERS

AND

APO No. 116 of 2010

ACO No. 96 of 2009

AMBO CREDIT PRIVATE LIMITED

VERSUS

RATAN MOHAN SARDA AND OTHERS

For the Appellants in

APO No. 115 of 2010: Mr P.C. Sen, Sr Adv.,

Mr Ranjan Deb, Sr Adv.,

Ms Manju Bhuteria, Adv.,

Mr Sabyasachi Chowdhury, Adv.,

Mr Ravi Asopa, Adv.

For the Appellant in

APO No. 116 of 2010: Mr Debanshu Basak, Adv.

For the Respondents: Mr S.N. Mookerjee, Sr, Adv., Mr Ratnanko Banerji, Adv.,

Mr Krishna Raj Thakkar, Adv.,

Mr Rujdrajit Sarkar, Adv.,

Mr Saunak Mitra, Adv.

Hearing concluded on: February 17, 2012.

2

BEFORE

The Hon'ble Justice

SANJIB BANERJEE

Date: February 21, 2012.

SANJIB BANERJEE, J. : -

The two appeals under Section 10F of the Companies Act, 1956 arise out of the same order passed by the Company Law Board, Principal Bench, disposing of a petition under Sections 397 and 398 of the Companies Act, 1956. The company and those now in management of the company are the appellants in one case; the other appellant is an allottee of shares in the company. The petitioners before the Company Law Board have also carried a cross-objection.

The principal question of law that the company and its present management raise is whether a management that is found guilty of converting the majority group of shareholders in a company into a minority by issuing further shares in the company without notice to the majority group is liable to be dislodged in every case. The allottee-appellant rakes up an issue of natural justice and contends that an allotment of shares in a company cannot be questioned in proceedings under Sections 397 and 398 of the Act and the matter disposed of in the absence of the allottee or allottees of such shares. The petitioners before the Company Law Board suggest that the error of law committed in the order under appeal is in the impugned allotments of shares not being cancelled despite the allotments being found to be illegal and otherwise improper.

The facts are hardly in dispute. The group of shareholders represented by the petitioners before the Company Law Board was, admittedly, the majority shareholders in the company prior to the first of the impugned allotment of shares therein. In fact, the group of shareholders represented by the petitioners before the Company Law Board was the overwhelming majority group in the 3

company prior to April, 2004 when, on or about April 12, 2004, 3,00,000 equity shares of face value of Rs.10 lakh each were transferred by the petitioners - the Sarda group - to the Agarwal group. It appears to be the fairly undisputed position that at the relevant point of time the principal individuals in the Sarda group stood branded as defaulters since they were on the board of directors of another company which had failed to repay money to the West Bengal Financial Corporation. There is some dispute as to the exact nature of the arrangement between the two groups qua the company, but this much is clear: the Sarda group moved out of the management of the company and the board of directors of the company was packed with nominees of the Agarwal group, but the Sarda group continued to hold shares making up slightly over 70% of the then paid-up capital in the company. At the time of the transition in the management of the company early in 2004, the company's manufacturing facility for production of edible oil was in the process of being set up. In course of time, the company's factory has come up and the company appears to be faring reasonably well.

The petition was filed before the Company Law Board in the year 2007 with the principal grievance of the Sarda group being that by the issuance of 7,50,000 shares in the company in December, 2005, made without notice to the Sarda group, the Agarwal group had purported to wrest the shareholding control in the company. A further allotment of shares, made on or about February 14, 2006, was also assailed on the ground that an unsecured loan given to the company by a Sarda concern had been converted into shares in the company without notice to or the knowledge of the relevant Sarda concern. In course of the proceedings before the Company Law Board, it came to light that there was a further issue of 10,00,000 shares in the company that the Sarda group may not have previously been aware of and which the Agarwal group had not disclosed in the affidavit filed to the petition under Sections 397 and 398 of the Act. In course of these appeals, the Agarwal group has applied for bringing some additional evidence on record to justify the three tranches of issuance of shares in the company that the Company Law Board found to be illegal. The Agarwal group's plea to introduce 4

additional evidence in appeals limited to questions of law has been declined. Nothing has been shown by the Agarwal group to demonstrate as to why the material that it now seeks to rely on could not be produced before the Company Law Board for more than two years that the proceedings remained pending before it.

Though the Sarda group claimed before the Company Law Board that it held shares making up more than 70% of the paid-up capital in the company after the transfer of shares amounting to 30% of the paid-up capital in the company to the Agarwal group, the Company Law Board found that the petitioners before it held shares that made up slightly less than 30% of the paid- up capital in the company. The Company Law Board found that despite the petition before it challenging only two lots of allotments of shares in the company subsequent to the Agarwal group being inducted in the management thereof, there was a third allotment which the Agarwal group had kept concealed till deep into the proceedings. The suppression is apparent from the affidavit-in- opposition filed by the Agarwal group before the Company Law Board. There is no doubt that the Agarwal group tried to mislead the Company Law Board as to the shareholding position in the company by actively concealing the matter of the third allotment of shares. Though the petitioners before the Company Law Board contended, as is recorded in the judgment, that such act of suppression amounted to fraud, the Company Law Board accepted that the Agarwal group was guilty of suppression of facts but did not agree that the suppression amounted to fraud. The Company Law Board reasoned that the Agarwal group had not obtained or attempted to obtain the benefit of any order by suppressing the matter as to the third allotment of shares and, thus, though the Company Law Board did not condone the conduct of the Agarwal group, in a sense, it glossed over something that deserved unsympathetic censure.

The Company Law Board found that despite the company being a public company, no resolution under Section 81(1A) of the Act had been passed for the 5

issuance of the first and third lots of shares which were under challenge; that no meetings of the shareholders of the company had been convened for such purpose; and, that it was not even the company's case that shareholders' meetings were convened or appropriate resolutions were passed thereat. The Company Law Board, however, did not set aside the three impugned allotments but directed a shareholders' meeting to be convened by the company on the basis of the shareholding as in October, 2003. In the Company Law Board failing to set aside the three impugned allotments, it did not take into account a serious charge levelled by the petitioners before it that the third allotment of shares was made to an entity controlled by the Agarwal group against no fresh infusion of funds but in lieu of previous loans apparently made available to the company.

The Agarwal group suggests that it is not necessary that when the petitioners in proceedings under Sections 397 and 398 of the Act succeed in making out a case of oppression or mismanagement that the entrenched management has to be dislodged or the petitioners placed in the management of the company. The Agarwal group says that in the order requiring a meeting of the shareholders of the company to be held on the basis of the shareholding position as in October, 2003, the Agarwal group's admitted 30% control of the company has been disregarded; and that is a clear error of law. The Agarwal group argues that since members of the Sarda group cannot become directors of the company as they continue to be defaulters and are, as such, disqualified, the Company Law Board ought to have taken such matter into consideration and allowed a successful management to remain in control of the company by directing the petitioners before the Company Law Board to be appropriately compensated in respect of their investment in the company. It is further asserted by the Agarwal group that since the shares of the Sarda group remain attached in proceedings instituted before the appropriate Debts Recovery Tribunal by the West Bengal Financial Corporation in respect of another Sarda group company, it is more likely than not that the Sarda group would not be able to retain control of the 6

company upon the shares held by it in the company being sold in furtherance of the claim in the recovery proceedings.

The Agarwal Group refers to a judgment reported at AIR 1999 Cal 156 (Bajrang Prasad Jalan v. Mahabir Prasad Jalan) for the proposition that there can be no hard and fast rule as to whether the oppressors should buy out the oppressed or the majority should buy out the minority or those in management should buy out the complainants or otherwise. The Agarwal group emphasises on its contribution to the company, in having infused funds and liaised with banks and financial institutions for financial assistance and extending personal guarantees to cover the credit facilities obtained by the company. The Agarwal group seeks to rely on correspondence exchanged with the company's bankers to demonstrate the bankers' confidence in the management. The Agarwal group exhorts that in granting the final relief in proceedings under Sections 397 and 398 of the Act, it is the company's interest which is of paramount importance and, notwithstanding the best case made out by the complainants or the worst conceivable conduct of those in management of the concerned company, the final order should be for the benefit of the company and not otherwise.

There can be little doubt that proceedings under Sections 397 and 398 of the Companies Act are for the benefit of a company. It is thus that an act of illegality may not be seen as an act of oppression or an act of mismanagement if the company's interest has been furthered by such act without it conferring any undue benefit to the persons responsible therefor. Conversely, a perfectly valid act may be found to be oppressive in the circumstances. In India, the right to complain of oppression or mismanagement has not been reserved to only minority shareholders. Though there was once a belief that in this jurisdiction that the majority shareholders should be given control of the company and the minority shareholders only adequate compensation, it is no longer regarded as the obvious form of a final order. Ordinarily, it would be the minority shareholders in the company who would complain of oppression or 7

mismanagement since the majority shareholders can dislodge the management of a company by calling a shareholders' meeting and can, theoretically, have their grievance redressed without having to knock at the doors of any court or tribunal. But with more complex commercial structures of shareholding coming into vogue and, more significantly, corporate malpractices spreading deep and wide in this country, the majority has not always been able to assert itself within the domestic forum and complaints from majority groups have reached courts and tribunals. By and large, orders passed by courts and tribunals in proceedings under Sections 397 and 398 of the Companies Act have continued the majority rule; that is to say, that ordinarily the wrongs complained of, if found to be justified, have been corrected in this jurisdiction but the majority shareholders have been permitted to continue in management upon the minority being permitted to be bought over by the majority at an appropriate price if the continued existence of the two groups has been found to be detrimental to the interest of the company. Over the recent decades, and corresponding to levels of commercial morality sinking to new lows, seemingly righteous petitioners in proceedings under Sections 397 and 398 of the Companies Act have clamoured for those found guilty of oppression or mismanagement to be removed from the management; and it has increasingly become acceptable to courts and tribunals to require those found guilty of oppression or mismanagement to sell their shareholding in the concerned company to the complainants on the argument that there should be no premium for dishonesty by allowing the wrongdoers to remain entrenched and pushing those who have been wronged out of the company. There are other factors that have weighed in favour of those found to be more adept at managing the business of the company, irrespective of their having wronged other shareholders. There can hardly be a strict rule or form of final relief in matters of this kind, but what is indispensable is that the interest of the company is at the very root of every order. And so has it to be in the instant case.

8

The petitioners before the Company Law Board, the Sarda group, had promoted the company and were at the helm of its affairs till the arrangement with the Agarwal group by which the Agarwal group was installed in the management; but the Sarda group continued to hold the majority shares in the company. That would imply that the Agarwal group was to remain in the management of the company at the pleasure of the Sarda group. For the Agarwal group then to have taken advantage of its managerial position in the company to issue further shares unto itself and to denude the Sarda group of its majority control, was a grave act of oppression. That the third allotment of shares was made not against the fresh infusion of capital into the company but by adjustment of loans previously made available to the company by a Agarwal group concern, would also amount to mismanagement. In such circumstances, the Sarda group had to be found to be utterly undeserving to be denied it's say as the majority shareholders; or, the Agarwal group had to be found to be so competent to manage the affairs of the company that its notorious transgressions could be glossed over.

The company's business does not involve rocket technology; nor has the Agarwal group been able to pursuade the Company Law Board on facts that it had the requisite knowhow or wherewithal, and the Sarda group did not, to run and manage a company in the business of manufacture and sale of edible oil. It mattered little, in the circumstances, that some members of the Sarda group still remained disqualified from being directors of companies or that the shares in the company held by the Sarda group stood attached in proceedings pending before a Debts Recovery Tribunal.

There are certain rights and privileges that groups holding certain percentages of a company's paid-up capital enjoy. A group of shareholders holding more than 75% of the paid-up capital of a company can pass special resolutions and need to care precious little for the other shareholders in the company. As a result, in addition to the aggregate of the value of the shares 9

making up more than the 75% control of a company, such control itself has another intrinsic value. Likewise, a group of shareholders holding shares making up more than 50% of the paid-up capital of a company have the right to install or form the board of directors or the management of the company; and such holding has an additional value over and above the collective value of the shares. A group holding shares making up above 25% of the paid-up capital of a company can block a special resolution and such block will command an extra value in addition to the cumulative value of its shares. A group holding 10% of the paid- up capital of a company can exercise the statutory right of instituting proceedings under Sections 397 and 398 of the Act and that, by itself, has an inherent value in addition to the summative value of the shares. The value of a block of shares is, therefore, not necessarily a product of the value of one share and the number of shares held. For any group of shareholders to be denied the property reflected by its block of shares, in addition to the value of the shares, an exceptional case has to be made out. If then the onus of making out such exceptional case is on the wrongdoers, a much higher burden has to be discharged to show that they should be allowed to retain the management despite their unsavoury conduct. The Agarwal group has made out no case at all as to why the majority group of shareholders in the company need be denied its natural right to control the company and its management, far less any case that would warrant the Agarwal group's shenanigans to be overlooked.

Once the Company Law Board found, as a matter of fact, that the allotments were made without complying with the legal requirements therefor and without notice to the petitioners before the Company Law Board, the allotments ought to have been cancelled. There could have been no justification for the Agarwal group seeking to infuse capital in the company without giving notice therefor to the petitioners or the larger Sarda group. It is possible in some cases that by bringing in further capital in the company, the management or the promoter group may consolidate its control over the company; but that would be permissible if the consolidation was incidental to the infusion of capital and it 10

would be frowned upon if consolidation was the object of the exercise and the infusion of capital was secondary thereto. In respect of the third allotment, the solitary allottee was Ambo Credit Private Limited, the appellant in the second of the two appeals before this court. Following the allotment of shares in favour of Ambo Credit Private Limited, the shareholding of the promoters' group in the company - the Agarwal group - was shown to have risen from 52.39% to 68.24% in the details filed by the management with the Registrar of Companies. That would mean that Ambo Credit Private Limited belonged to the Agarwal group. Ambo Credit Private Limited was allotted shares not against any payment made pursuant to the allotment but against the unsecured loan of Rs.1 crore that had previously been made available to the company by Ambo Credit Private Limited. In the Agarwal group's effort to demonstrate that it had done good to the company it also claimed to have caused Ambo Credit Private Limited to provide the unsecured loan. Such company, therefore, was not altogether distinct from the Agarwal group. Since the petitioners before the Company Law Board were not aware of the third allotment at the time that the petition was instituted, Ambo Credit Private Limited was not a party to the proceedings. Upon the petitioners before the Company Law Board discovering the third allotment, their contention was that the shares issued under the third allotment were to the Agarwal group itself. The Agarwal group was aware of the charge and did not object to the issue being taken up in the absence of Ambo Credit Private Limited. More importantly, it was the conduct of the company and its management that was called into question in respect of the third allotment. Once it was found that the third allotment was both illegal and improper, that the beneficiary of the unfair allotment was not before the Company Law Board mattered little even if it were accepted that Ambo Credit Private Limited was not a part of the Agarwal group. There is no merit in the point of breach of the principles of natural justice urged by the appellant in the second of the two appeals.

The contesting respondents in the two appeals - the petitioners before the Company Law Board - are, however, justified in their assertion in the cross- 11

objection that as a natural corollary, the three allotments of shares should then have been cancelled and the shareholding of the company assessed thereafter. It appears from the judgment and order under challenge that the Company Law Board was aware of the extent of the shareholding of the petitioners before it, but the Company Law Board may not have had the material to assess how the shareholders of the company who were not parties to the proceedings would vote. The Company Law Board, therefore, chose a date prior to any disputed issuance of shares to require a shareholders' meeting of the company to be convened on the basis of the shareholding position in the company in October, 2003. There is an error of law committed by the Company Law Board in going back in point of time to a date that preceded the admitted acquisition by the Agarwal group of approximately 30% control in the company. Just as there is no material that the Agarwal group has been able to show to justify it being allowed to retain control of the company despite its wrongdoing, there is nothing indicated by the Company Law Board as to why the Agarwal group should be deprived of its say to the extent of its undisputed shareholding in the company.

The fundamental basis to the order passed by the Company Law Board cannot be questioned. It is evident that the Company Law Board wanted to have a management installed on the basis of the shareholding position as it prevailed prior to the three impugned allotments. But since the Company Law Board did not set aside the three impugned allotments pursuant to which the Agarwal group came to be the majority group in the company, the order passed by the Company Law Board required the two groups to exercise the option of selling out to the other upon a valuation of the shares being made. With respect, such an order is tailor-made for further disputes, both as to the exercise of the option and the valuation of the shares; and the company and its management remains in virtual limbo till such time that the matters are sorted out by a second set of proceedings and appeals. The order impugned is modified accordingly by issuing the following directions:

12

(i) The shares in the company issued on December 12, 2005, February 14, 2006 and March 19, 2007 stand annulled.

(ii) The allottees of the shares issued on December 12, 2005 will be refunded the amounts invested by June 15, 2012. The amounts will carry no interest since the allottees were aware that the allotment was improper. No refund will be made of any money prior to the general meeting of the company being held in accordance with the directions contained in this order.

(iii) The money adjusted by the company following the allotments of February 14, 2006 and March 19, 2007 will stand cancelled. No refund need be made of the money adjusted against the allotment of shares on February 14, 2006 and an appropriate decision in such regard will be taken in the best interest of the company by the management to be installed following the general meeting of the company to be held in accordance with this order.

(iv) No refund will be made in respect of the allotment of shares on March 19, 2007 to Ambo Credit Private Limited. The money will continue to be shown as an unsecured loan in the accounts of the company and may be repaid, after June 15, 2012 and after the general meeting in terms of this order is held, only upon it being found payable in an appropriate action being instituted.

(v) A general meeting of the company be convened by the company to be held by April 30, 2012. Due notices for such general meeting be issued to all shareholders of the company as were recorded in the register of members of the company immediately after the transfer of the shares in favour of the Agarwal group in April, 2004. Such notices should be issued by March 12, 2012. The general meeting 13

shall be held at the registered office of the company and in accordance with law except that it will be chaired by the person indicated in the order of the Company Law Board on the same terms and conditions and with the same liberty as provided for in the order of the Company Law Board. The general meeting will be held for the purpose of electing seven directors of the company with all the present directors of the company standing removed as directors of the company with effect from the time immediately preceding the holding of such general meeting.

(vi) Till such time that the general meeting is held in terms of this order, the company, its officers and all concerned will remain restrained from dealing with or disposing of or alienating or encumbering any of the assets of the company, except its finished goods in the usual course of business.

(vii) Till the conclusion of the general meeting of the company to be held in terms of this order, the company, its officers and all concerned will remain restrained from repaying any money to any of the unsecured creditors of the company.

(viii) Between now and the conclusion of the general meeting to be held in terms of this order, the company will not incur any unusual expense and will confine its expenses to payment of salary and wages and payments essential for continuing the business operations of the company. The particulars of all payments incurred by the company between now and the conclusion of the general meeting to be held in terms of this order, will be furnished by the company to M/s I.C. Sancheti and; Co., Advocates, on a weekly basis with the first statement being delivered on February 28, 2012.

14

(ix) The subsisting interim order, to the extent it is not repugnant to the directions contained hereinabove, will continue till the conclusion of the general meeting to be held in terms of this order.

The contesting respondents have made an application complaining of the company under the Agarwal management having acted in derogation of the interim order subsisting in these appeals. In the light of the order passed herein, such matter is not considered at this stage. Suffice it to say that anything done in obvious contravention of any order of court will be inoperative.

The appeals and the cross-objection therein, being APO No. 115 of 2010 and APO No. 116 of 2010, and the applications, being ACO No. 91 of 2009, ACO No. 92 of 2009, ACO No. 96 of 2009 and ACO No. 118 of 2011, stand disposed of with costs assessed that 2,000 GM to be paid by the appellants in APO No. 115 of 2010 to the respondent Nos. 1 to 5 therein and costs assessed at 1,000 GM to be paid by the appellant in APO No. 116 of 2010 to the respondent Nos. 1 to 5 therein.

Urgent certified photocopies of this judgment, if applied for, be supplied to the parties subject to compliance with all requisite formalities.

(Sanjib Banerjee, J.)

Later :

The appellants in APO No. 115 of 2010 seek a stay of the operation of the order which is declined.

(Sanjib Banerjee, J.)