Case: Modi Rubber Ltd. Vs Modi Fibres Ltd. and Ors.. Company Law Board

JudgesVimla Yadav, Member
IssueCompany Laws
Citation[2009] 151 CompCas 141 (CLB)
Judgement DateApril 16, 2009
CourtCompany Law Board


Vimla Yadav, Member

  1. In this order I am considering Company Application No. 255 of 2008 filed in Company Petition No. 48 of 2008 by the applicant (respondent No. 1 company, Modi Fibres Ltd. ("MFL")) against the respondent (petitioner-company, namely, Modi Rubber Ltd. ("MRL")) in terms of Section 399 of the Companies Act, 1956, challenging the maintainability of the company petition No. 48 of 2008. The Company Petition No. 48 of 2008 was filed by Modi Rubber Ltd. ("the petitioner") against Modi Fibres Ltd. and Others ("the respondents") under Sections 111A, 235(2), 250(3), 397 and 398 read with Sections 402, 403 and 408 of the Companies Act, 1956, alleging oppression and mismanagement.

  2. M/s. Modi Fibres Ltd. (respondent No. 1) was incorporated on May 18, 1984, having its registered office at 1/180, "Shreyas", Nariman Point, Mumbai-400 021. The authorised share capital of the company was Rs. 10,00,000 divided into 90,000 equity shares of Rs. 10 each and 1,000 preference shares of Rs. 100 each with the main business of manufacturing, buying, selling, exchanging, converting, altering, importing, exporting, processing, twisting and to carry on business as agents and establish agency or agencies for and on behalf of local or foreign supplies of textile fibres and yarn and for developing a commercial forestation for planting trees to be used as raw material for the manufacture of rayon grade pulp, etc.

  3. Shri Virender Ganda, counsel for the applicant, contended that in terms of Section 399 of the Act, a petition under Section 397/398 of the Act can only be filed by members holding 10 per cent, or more of the issued share capital of the company, in the present case, it is an admitted position that the petitioner-company does not hold any shares in the respondent-company. My attention was drawn to the petition itself as filed by the petitioner-company and it was pointed out that (a) in the prayer clause 8(ii), the petitioner-company has sought a declaration that the petitioner-company is a shareholder; (b) in prayer clause 8(viii) the petitioner-company has sought a declaration that it is the holder of 99.99 per cent. equity shares in the respondent-company; (c) in paragraph 6.18, it is stated that the petitioner-company requested the respondent-company to either allot the shares or refund the money; and (d) the same position is reiterated in the letter dated December 9, 1999, written by the petitioner-company to the respondent-company, and it was contended that these instances make it abundantly clear that the petitioner-company does not consider itself to be a shareholder/member in the respondent-company. It was argued that the present petition is not maintainable since the petitioner is not an existing shareholder. Section 397/398 can be invoked only by the existing shareholders and not by persons who wish that the shares to be allotted to them on the premises suggested or contended in the petition, therefore, the present petitioner cannot maintain the present petition on the basis that he seeks entitlement to certain shareholding. It was pointed out that the petitioner has not shown any application for such shareholding nor has the petitioner shown any basis for such claim, the claim for shareholding far exceeds 30 times of the authorised capital of the present respondent-company. Thus, it was argued that in the absence of any allotment the present petition cannot be filed, the present petition is an abuse of the process of law, at no point of time has there ever been any agreement between the respondent and the petitioner-company for allotment of any shares to the petitioner-company, nor has the petitioner-company ever applied for shares in the respondent-company, even otherwise there cannot be any question of allotting shares to the petitioner-company worth Rs. 3.58 crores as the authorised share capital of the petitioner-company is only Rs. 10 lakhs, it is abundantly clear that a company that has authorised share capital of Rs. 10 lakhs cannot issue shares worth Rs. 3.58 crores.

  4. Further, counsel for the applicant contended that the basis of allotment of shares can only be decided by the board of directors of the company and the existing shareholders in the present case, allotment of shares to the respondent/petitioner-company has never been considered either by the board of directors or the shareholders of the respondent-company, the only basis for claiming shares by the petitioner-company is its own board resolutions. Further, it was argued that even if one were to go with the board resolution dated August 30, 1990, passed by the petitioner-company, whereby a conditional approval was granted by the board of the petitioner-company to invest in the shares of the respondent-company, the said approval was subject to the four conditions (a) obtaining the approvals of the financial and term lending institutions/banks; (b) obtaining the approvals of the Central Government under Section 372 of the Act and Section 30B of the MRTP Act; (c) the funds were to be first made available for the implementation of the expansion/modernisation scheme of the company; and (d) the funds were to be actually made available out of the convertible debenture issue. These four conditions were never fulfilled, so the petitioner-company could not invest in the equity share capital of the respondent-company. Furthermore, it was contended that even the petitioner-company, has nowhere averred in its petition that these conditions were ever fulfilled, IFCI, which was the lead financial institution of the petitioner-company, in fact, directed the petitioner-company not to invest in the respondent-company until the project of the respondent-company was duly approved by IDBI, which never happened. Further, as per the approval given by the Department of Company Affairs to the petitioner-company, the petitioner-company was required to subscribe to shares worth Rs. 13 crores in the respondent-company within one year from the date of approval, i.e., by August 30, 1992, which it never did. Therefore, the petitioner-company could not have invested in the share capital of the respondent-company.

  5. Further, it was pointed out that the petitioner has admitted in the petition that the petitioner had agreed to invest Rs. 13 crores as equity contribution out of the total equity of Rs. 74 crores and the total project cost of Rs. 282 crores, the project could not proceed primarily because of the petitioner backing out from its commitment and in turn leading to abandonment of the project by the company and thus causing grave loss and injury to the company and its reputation.

  6. Counsel for the applicant vehemently argued that the petitioner is admittedly not a member of the company which is a condition precedent for filing a petition under Sections 397 and 398, the issued, subscribed and paid-up share capital as per the petition is Rs. 700 divided into 70 shares of Rs. 10 each, whereas in paragraph 2 of the petition, the petitioner states that the petitioner-company is the holder of 99.99 per cent. of the shareholding of the respondent-company as promoters contribution to the tune of approximately Rs. 3,58,90,580.95 crores, all such facts stated are self-contradictory and cannot be simultaneously true. My attention was drawn to paragraph 8(viii) of the petition wherein the petitioner has sought a declaration to the effect that the petitioner-company is the holder of 99.99 per cent, of equity shares. It was argued that the Company Law Board Regulations, 1992, require the petitioner to produce the documentary evidence as proof of eligibility and status of the petitioner with regard to the voting power held and the same is required to be enclosed with the petition under Sections 397 and 398 of the Act, the documentary evidence has not been enclosed. And at the time of filing of the petition, the petitioner-company is admittedly not the member or the shareholder of the company and is, therefore, not eligible to file this petition. To support its contentions counsel for applicants (respondents) relied upon the case law in the matters of Suhas Chakma v. South Asia Human Rights Documentation Centre P. Ltd. [2008] 142 Comp Cas 902 (CLB): [2008] 84 CLA 427; Ram Gopal Patwari v. Patwari Exports P. Ltd. [2008] 142 Comp Cas 8 (CLB): [2008] 85 CLA 208; Kerala Chamber of Commerce and Industry v. Metalex Agencies [2008] 144 Comp Cas 624 (CLB): [2008] 86 CLA 158; Hiren Harshadrai Desai v. Fori India P. Ltd. [2008] 142 Comp Cas 406 (CLB); Kanwarjit Toney Singh Bansi v. Dolly Farms and Resorts P. Ltd. [1999] 3 Comp LJ 456 (CLB); T. N. K. Govindaraju Chetty and Co. v. Kadri Mills (CBE) Ltd. [1998] 3 Comp LJ 329: [1999] 96 Comp Cas 871 (CLB); Gulabrai Kalidas Naik v. Laxmidas Lallubhai Patel [1977] 47 Comp Cas 151 (Guj); M. Gomathinayagam Pillai v. Sri Manthiramurthi High School Committee [1963] 33 Comp Cas 346 (Mad) and Ved Prakash v. Iron Traders P. Ltd. [1961] 31 Comp Cas 122 (Punj).

  7. Shri Virender Ganda, counsel for the applicant, further argued that the petitioner-company has never considered itself to be a shareholder member of the respondent-company. It has, through out, taken inconsistent and shifting stands on the issue, whether it is a shareholder or simply a lender to the respondent-company. It was pointed out that till recently, when the respondent-company was dormant and not doing any business, the petitioner-company considered itself as a creditor and exercised its rights as such by filing a winding up petition before the Bombay High Court. But now, when it saw that the respondent-company's project will take off, it started to agitate its false rights as a shareholder. Therefore, it was argued that it is clear that the present petition in so far as it seeks reliefs under Sections 397 and 398 read with Sections 402 and 403 of the Act, is not maintainable, since the petitioner-company is not a shareholder of the respondent-company.

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