C.P. No. 16 of 1994. Case: Gordon Woodroffe and Company Limited, U.K. Vs Gordon Woodroffe Limited and Ors.. Company Law Board
| Case Number | C.P. No. 16 of 1994 |
| Counsel | For Appellant: P. Nagesh and S. Ganesh, Advs. and For Respondents: Lalit Gupta, Sudipto Sarkar, R. Shankaranarayanan, Sanjay Chabra, Bina Gupta and Rakhi Ray, Advs. |
| Judges | S. Balasubramanian, Vice-Chairman and A.R. Ramanathan, Member |
| Issue | Companies Act, 1956 - Sections 247, 250, 398(1), 399 and 409; Foreign Exchange Regulation Act, 1973 |
| Citation | [1999] 97 CompCas 411 (CLB) |
| Judgement Date | May 12, 1998 |
| Court | Company Law Board |
Order:
S. Balasubramanian, Vice-Chairman and A.R. Ramanathan, Member
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Gordon Woodroffe Limited (U. K.) (petitioner) holding 24.9 per cent. shares in Gordon Woodroffe Limited, Chennai (GWL), have filed this petition under Section 398(1)(b) of the Companies Act, 1956, alleging that material changes have taken place in the shareholding and control of GWL, on account of which it is likely that the affairs of GWL will be conducted in a manner which is likely to be prejudicial to the interests of the company/public interest and seeking grant of suitable reliefs as prayed for in the petition.
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To appreciate the issues involved, it is necessary to narrate certain admitted facts in the case. The petitioner-company held majority shares in the Indian company, which was reduced to 40 per cent. in view of the Foreign Exchange Regulation Act, some time in 1973. M. R. Chabbria (MRC), a non-resident Indian, acquired the controlling interest in the petitioner-company, some time in 1985. He also acquired about 39 per cent. shares in Shaw Wallace and Company Limited (SWC) and became the largest single shareholder in SWC. By virtue of these large shareholdings, he became the chairman of both SWC and GWL. SWC, while controlling various subsidiaries also controlled the boards of Shoes Specialities Private Limited (SSPL) and Tracstar Investment Private Limited (Tracstar) through its own nominees on the boards of these companies. Three companies under the control of MRC held among themselves 6.89 per cent. shares in GWL. GWL, having become sick in 1987, was referred to the Board for Industrial and Financial Reconstruction. In the Board for Industrial and Financial Reconstruction proceedings in 1988, MRC was treated as a promoter of GWL and IRBI which was appointed as the operating agency, gave a proposal by which SWC, the company controlled by MRC, was to be closely associated with the revival of GWL. In pursuance of the Board for Industrial and Financial Reconstruction's suggestion, the board of SWC decided to invest a sum of Rs. 250 lakhs in the equity of GWL. However, for various reasons, instead of investing the entire amount by way of equity, on a suggestion made by GWL, the Board for Industrial and Financial Reconstruction sanctioned a scheme by which SWC was to invest Rs. 140 lakhs as equity, representing 24.90 per cent. in the expanded equity of GWL. SWC was also to make a loan of Rs. 50 lakhs. However, this proposal did not go through. From 1987 to 1991, SWC had funded GWL to the tune of more than Rs. 300 lakhs by way of loans, etc.
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GWL came out with a rights issue in May, 1991, with the record date as May 1C, 1991. The three MRC companies holding 6.78 per cent. shares in GWL transferred these shares to Tracstar, and the same were registered in the name of Tracstar on May 25, 1991. The petitioner-company did not take its rights, while Tracstar, in addition to its rights, on the basis of acquisition of shares by transfer, got allotted to itself additional shares, by which its holding in GWL came to about 25 per cent. It also sought and obtained, out of its request for additional shares, allotment of 5 lakhs shares in the name of SSPL which accounted for about 12 per cent. in the capital of GWL.
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K. R. Chabbria (KRC) is the younger brother of MRC. He became the managing director of SWC when MRC became the chairman. Due to certain family disputes between the two, KRC was removed from the post of managing director. KRC started claiming control of both SSPL and Tracstar. A few proceedings were initiated before us and his control of both SSPL and Tracstar has been confirmed by us. In the meanwhile, Trident, a company under the control of KRC, acquired from the market, further 6.1 per cent. shares in GWL. Thus, presently, KRC controls about 44 per cent. shares in GWL compared to MRC controlling 24.9 per cent. Tracstar/KRC have also submitted certain proposals before the Board for Industrial and Financial Reconstruction for reviving GWL. GWL continues to be under the management of MRC/SWC, even though the KRC group holds larger percentage of shares.
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In the background of the facts of this case, the petitioner has filed this petition, alleging that any change in the management of GWL at this juncture, when the Board for Industrial and Financial Reconstruction is considering revival of GWL would be against the interests of the company and as a matter of fact, according to the petitioner, even the acquisition of shares by SSPL and Tracstar is illegal and that the gaining control of SSPL and Tracstar has been manipulated by KRC by dubious means. It has also advanced certain arguments, that, if the change in the management takes place, on account of change in control, it is likely that the affairs of GWL will be conducted in a manner prejudicial to the interest of the company/ public interest. Accordingly, the petitioner has prayed for the following reliefs:
(i) That directions be issued, that, there shall be no change in the management of GWL at the instance of Tracstar/SSPL and that the board shall continue to be with the nominees of SWC/the petitioner.
(ii) That directions be issued to Tracstar and SSPL to transfer their holdings from GWL to the petitioner or its nominees.
(iii) Restrain permanently Tracstar and SSPL from exercising any voting or other rights in respect of the shares held by them in GWL.
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The respondents have raised a preliminary objection to the maintainability of the petition under Section 398(1)(b) on the ground, that, the ingredients/requirements of this section have not been satisfied. In addition to this, they have also raised certain other objections to the reliefs sought for in the petition. When the petition was taken up for hearing, we advised counsel for the parties to argue both on the preliminary objections as well on the merits so that a composite order could be issued.
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Shri Sarkar, senior advocate, appearing for the contesting respondents, dealing with the provisions of Section 398(1)(b) submitted that the provisions of Section 397/398 are invoked by minority shareholders against majority shareholders complaining, that, the latter are conducting the affairs of a company in an oppressive manner or are mismanaging the affairs of the company. The present case, as per the version of the petitioner itself, GWL is being managed by MRC through SWC. In other words, since MRC is acting on behalf of the petitioner, by alleging oppression or mismanagement in the affairs of the company, it is complaining about MRC/SWC, which situation is not contemplated by Section 397/398. In other words, according to him, people in the management of a company cannot file a petition under this section alleging mismanagement in the affairs of the same company. For this proposition he relied on the Allahabad High Court in Rai Saheb Vishwamitra v. Amar Nath Mehrotra [1986] 59 Comp Cas 854. Citing the decision of the Delhi High Court in Suresh Kumar Sanghi v. Supreme Motors Ltd. [1983] 54 Comp Cas 235, he stated that relief under Section 398 does not necessarily mean that the management of the company should be handed over to the petitioners and on the other hand the interests of the company and oth er equitable consideration have to be taken into consideration. He further submitted, that, a reading of the provisions of the Section 398(1)(b) would show, that, to invoke the provisions of this section, there should have been a material change in the management or control of the company either by alteration in the board or change in the ownership of shares. In the present case, there has been no alteration in the board nor is there a change in the ownership of shares inasmuch as SSPL and Tracstar continue to hold the shares right from the time when they acquired the shares. He also cited the decision of the Calcutta High Court in Bengal Luxmi Cotton Mills Ltd., In re [1965] 35 Comp Cas 187 for the proposition that a material change in the control or management of the company is to arise from certain speci-fied facts as laid down in Section 398(1)(b). Even assuming that the control of these two companies has come under the control of KRC, yet, such changes in the control of a company holding shares in another company cannot amount to change in 'ownership of shares as contemplated under this section. Even otherwise, according to him, the change in the control of these companies has been judicially recognized by the Company Law Board in other proceedings. Dealing with the words "any other manner whatsoever" as used in the section, he submitted that it has to be interpreted "ejusdem generis" and cannot be made use of to widen the import...
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