IN THE HIGH COURT OF DELHI AT NEW DELHI CS(OS) 2011/2008 & IAs 11686, 11687, 12820, 12822, 12823/2008 Reserved on: July 17, 2009 Decision on : August 25, 2009 HB STOCKHOLDINGS LTD. Plaintiff Through Mr. [ENTITY], [ENTITY]ior Advocate with Mr. [ENTITY], Advocate versus DCM SHRIRAM INDUSTRIES LTD & OTHERS Defendants Through Mr. [ENTITY], [ENTITY]ior Advocate with Mr. [ENTITY], Mr. [ENTITY], Ms. [ENTITY] and Ms. [ENTITY], Advocates for D-1 to 13. Mr. [ENTITY] with Mr. [ENTITY], Advocate for D-[SECTION]. CORAM: HON'BLE DR. JUSTICE [ENTITY] 1.Whether reporters of the local newspapers be allowed to see the judgment? No 2.To be referred to the Reporter or not ? Yes 3. Whether the judgment should be reported in the Yes Digest? JUDGMENT
25.08.2009 [ENTITY],J.
1. This is an application under [SECTION] of the [ACT] ([ACT]) seeking rejection of the plaint.
The case of the Plaintiff
2. The Plaintiff [ENTITY] (HBSL) claims to hold 24.8% of expanded issued and paid-up capital of DCM Shriram Industries Limited ([ENTITY]), Defendant No.1 and thereby being its single largest shareholder. On 22nd September 2008, the Plaintiff received the Annual Report and audited accounts of [ENTITY] for the year ending 31st March 2008, which had been approved by the Board of Directors of [ENTITY] on 25th June 2008. According to the Plaintiff, the Annual Report and audited accounts revealed that they were "grossly inaccurate and/or lacking in several material particulars" and "do not reflect a true and fair view of the Companys affairs, apart from being in violation of the provisions of the [ACT], the provisions of the Listing Agreement with the Bombay Stock Exchange (BSE) and the Companys own [ACT]." It is claimed that these constituted "unjust and unlawful acts of the Defendants" which were likely to "cause irreparable harm and injury not only to the Plaintiff but also to over one lakh other shareholders of the Defendant No.1 company."
3. Tracing the background to the present suit, it is stated in the plaint that Versa Trading Limited (VTL) was a wholly owned subsidiary of [ENTITY]. In September 2002, [ENTITY] sold 50.02% of its shareholding in VTL at 10 paise per share against its acquisition price of Rs.10/- per share to three entities viz., AKS International Limited (AIL), RPG Securities Limited (RSL) and Indus Netlink Limited (INL). However, a perusal of the Annual Reports of these three companies for the year ending 31st March 2006 did not reflect any investment in VTL. It had, therefore, to be inferred that the three companies were benami holders of the said shares. The balance 49.98% shares held by [ENTITY] in VTL were claimed to have been sold in 2007-08 but the price at which they were sold was not known. According to the Plaintiff, it was strange that [ENTITY] would sell its shareholding in VTL when it knew that more than Rs.18 crores would be raised by VTL itself for investment in [ENTITY]. Moreover, VTL owed [ENTITY] about Rs.7.8 crores as on 31st March 2007. Out of this debt, a sum of Rs.7 crores was converted into redeemable non-cumulative preference shares. However, the Directors Report dated 30th July 2007 of [ENTITY] as well as of VTL did not reflect any increase in the authorized capital of VTL. They also made no mention of the issuance of any preference shares in lieu of the debt owed by VTL to [ENTITY]. It is stated that VTL could not have possibly invested Rs.18.63 crores in [ENTITY] instead of repaying the debt. [ENTITY]s balance sheet showed that [ENTITY] had made a 100% provision for the Rs.7 crores invested in VTL.
4. According to the Plaintiff, the Annual Return of VTL dated 30 th August 2007 filed with the Registrar of Companies (ROC) did not reflect the increase in the share capital or the issuance of preference shares to [ENTITY]. The shareholding pattern in terms of the Annual Return showed that [ENTITY] held 49.98% shares, and the three companies AIL, RSL and INL 16.67%, 16.67% and 16.68% shares respectively. The six individuals shown as the remaining shareholders of VTL were either [ENTITY]s or VTLs employees. As already mentioned in the Annual Returns of the three companies i.e AIL, RSL and INL for the years ending 31st March 2006 and 31st March 2007, their investment in VTL was not shown. The Auditors Report of VTL for the year ending 31st March 2007 showed that VTL had accumulated losses exceeding the companys share capital, and yet it was investing Rs.18.63 crores in [ENTITY].
5. According to the Plaintiff, although [ENTITY] itself had not indicated how and to whom it had sold the remaining 49.98% shares held by it in VTL, enquiries revealed that they were sold to DCM Hyundai Limited (DHL). Also AIL, RSL and INL sold their 50.02% shares in VTL to DHL.
6. On 16th October 2007, a resolution was passed by the Board of Directors of [ENTITY] by which 7 lakh share warrants were to be issued to the Promoters/Promoter Group companies including VTL. 6.99 lakh warrants in the sum of Rs.18.63 crores were allotted to VTL. This despite the fact that VTL had a negative net worth and was prohibited by the Reserve Bank of India (RBI) by an order dated 24th November 2001 from transacting the business of a non-banking financial institution. Also, VTL was not authorized by its Memorandum and Articles of Association to make such investments. The minutes of the meeting of the Board further show that rights issue was never discussed in detail and Letters of Intent had been received by the proposed allottees including VTL.
7. On 18th October 2007, a notice was sent to the shareholders of [ENTITY] under [SECTION] of the Act stating that the purpose of the preferential issue was to raise funds for working capital purposes and supplementing bank finance. The notice did not state the number of warrants to be allotted to each of the six proposed entities. The amount proposed to be raised in terms of the notice was approximately Rs.12 crores, spread over the next 18 months.
8. On 15th November 2007, VTL passed three resolutions at an Extraordinary General Meeting (EGM): (a) to increase its authorized capital to Rs.32 crores; (b) to issue and allot 2 crore equity shares of Rs.10 each to DHL which was now suddenly referred to as its Holding Company; and (c) to obtain the approval of shareholders under [SECTION] of the Act for the purpose of making an investment of Rs.18.63 crores for subscribing to 6.9 lakh warrants at Rs.90/- per share issued by [ENTITY]. Thus, as on 16th October 2007 the Letter of Intent by VTL to [ENTITY] to subscribe to the proposed issue of warrants was without authority and hence void. According to [ENTITY] itself, the price of the warrants was revised only on 21st November 2007 from Rs.57/- per share (set on 8th November 2007) to Rs.90/- per share. It was therefore strange that VTL would have offered to subscribe to warrants at Rs.90/- per share on 15th November 2007 when the [ENTITY]s Board meeting determined this price only on 21st November 2007.
9. In order to consolidate its shareholding, HBSL made a public announcement on 19th November 2007 under [SECTION] and [SECTION] of the [ACT] for acquisition of 35 lakhs equity shares of [ENTITY].
10. According to the Plaintiff, due to various acts of oppression and mismanagement perpetrated by the promoters and directors of [ENTITY], the HBSL was constrained to approach the Company Law Board (CLB) with a petition under [SECTION] and [SECTION] of the Act. In the said petition, which is pending adjudication, it was inter alia mentioned by the Plaintiff that on 29th November 2007, it had written a letter to [ENTITY] urging it to go in for a rights issue and even offering to have the same underwritten. The Plaintiff had further made an offer of subscribing to the warrants proposed to be issued at a price of Rs.120/- per share rather than the price of Rs.90/- per share that had been proposed. However, the said letter was completely ignored and warrants allotted to the six entities. It is stated that [ENTITY] had raised Rs.18.9 crores by the allotment of shares although it required only Rs.12 crores. Further the actual receipt of moneys of Rs.18.9 crores was not evidenced except for the certificate given by Defendant No.[SECTION] [ENTITY] No information was given as to the utilization of the moneys allegedly raised for the payment of cane arrears. The Plaintiff also stated that it had come to know that [ENTITY] had raised Rs.87.752 crores from the Sugar Development Fund and a consortium of Banks between April 2007 and April 2008 of which Rs.45.752 crores was specifically earmarked for the purpose of payment and sugarcane arrears. Therefore, the reason given for raising funds through allotment of shares was apparently false. It is submitted by the Plaintiff that reasons given by [ENTITY] for raising funds has kept changing from time to time. It is further pointed out that although the shares were to be allotted in three tranches, [ENTITY] issued the entire shares by 1st April 2008. Further, 20.7 lakhs shares were allotted to VTL.
11. On 26th March 2008, a resolution was passed by the Board of Directors of VTL stating that it was now a wholly owned subsidiary of DHL which had proposed to extend its financial year by six months i.e. ending on 30th September 2008 and, therefore, it was now extending its financial year likewise.
12. As regards DHL enquiries revealed that [ENTITY] held 49.28% shareholding in DHL plus 100% of optionally convertible preference shares amounting to Rs.12.85 crores. Moreover, the Articles of Association of DHL gave substantial control to [ENTITY] over the management and composition of its Board of Directors. The pattern and composition of the Board of Directors of DHL revealed that the DHL is in fact a subsidiary of [ENTITY]. Further, DHL had pledged all its movable and immovable properties to [ENTITY] which had in turn undertaken to repay all DHLs loans to banks and financial institutions. However this had not been reflected in the accounts of [ENTITY].
13. DHL has been a loss making company since 1995 and it had been declared sick by the Board for Industrial and Financial Reconstruction (BIFR) on 28th July 1998. It is currently under a scheme of rehabilitation which had been sanctioned by the BIFR in 2007. According to the report of the Board of Directors of DHL, [ENTITY] had written-off loans of over Rs.75 crores of DHL. The Plaintiff has sought to explain how [ENTITY] first financed VTL and DHL and then wrote off crores of dues from both these companies thereby depleting the shareholder value of [ENTITY]. Notwithstanding the write offs, both these companies still owed [ENTITY] several crores of outstanding dues. Instead of paying off these dues, DHL purportedly bought 49.98% shareholding of [ENTITY] in VTL and the 50.02% shareholding from the three benami entities. DHL further gave VTL Rs.20 crores to subscribe to warrants issued by [ENTITY], while DHL itself was under a Scheme of Rehabilitation sanctioned by the BIFR. On its part, VTL, while still owing money to [ENTITY], instead of repaying those dues, subscribed to 6.9 lakh warrants allotted by [ENTITY], which formed part of the promoter holding of [ENTITY]. According to the Plaintiff, the above facts demonstrated that the Defendants had siphoned off the funds of [ENTITY] to the detriment of the shareholders of [ENTITY] by borrowings from banks and using them to fund DHL. These acts were detrimental to the interests of the shareholders of [ENTITY]. It is further pointed out that since DHL was a sick company it could not have possibly raised funds on its own.
[SECTION]. It is stated that that none of the above facts have been reflected in the Annual Report of [ENTITY]. The plaint acknowledges that there is pending litigation before the CLB, this Court and the Securities Appellate Tribunal ([ACT]) in which the [ENTITY] had been bearing the cost of litigation initiated/defended by it. However, the promoters of [ENTITY] have been benefited by the fraud and it is solely at their behest and for their benefit that the litigation was being carried out in the name of [ENTITY]. According to the Plaintiff, the Auditors (Defendant No.[SECTION]) of [ENTITY] had also committed a breach of the provisions of the Act by failing to report the above position in their Report. The Plaintiff alleges that there is a breach of fiduciary duty cast on the Board of Directors and the individual directors have been arrayed as Defendant Nos. 2 to 11. In para [SECTION] of the plaint, numerous irregularities in the Annual Report and the Accounts have been set out. According to the Plaintiff, the Defendants had violated [SECTION], [SECTION], [SECTION], [SECTION] and [SECTION] of the [ACT] and "several provisions of the Listing Agreement with the Bombay Stock Exchange including but not limited to Clause 32, Clause 41, and Clause 49."
15. In para 19 of the plaint, it is stated as under:
"19. The Plaintiffs are agitating issues with regard to mismanagement and oppression of the minority before the Honble Company Law Board, and on issues with regard to the violation of the [ACT] and Regulations before the Honble Securities Appellate Tribunal. The reliefs claimed in this suit have not been claimed elsewhere and are solely within the jurisdiction of this Honble Court."
16. On the basis of the above pleadings the following reliefs are sought in the suit:
"(a) Pass a decree in favour of the Plaintiff and against the Defendants, declaring the Annual Report of the Defendant No.1 along with the Accounts, the Directors Report, the Auditors Report and annexures thereto, for the year ending 31.03.2008 as currently circulated to the shareholders after approval by the Defendants on 25th June 2008, as null and non est and the same be treated as cancelled.
(b) Pass a decree of mandatory injunction directing appointment of an independent and qualified Chartered Accountant to carry out a fresh audit of the books of account of the Defendant No.1 company and the Defendants to provide the shareholders with the true and fair state of affairs by circulating for the shareholders approval in a duly constituted shareholders meeting, a fresh Annual Report and Accounts prepared in accordance with the provisions of law;
(c) pass a decree of permanent injunction in favour of the Plaintiff, restraining the Defendants, their respective officers, agents, etc from passing proposed Resolution No.1 (to adopt the Directors Report, the Audited Balance Sheet and the Profit & Loss), Resolution No. 3 (Re-appointment of Mr. [ENTITY] as a Director), and Resolution No. 6 (to reappoint M/s. A.P. Ferguson & Co. as the auditors of the Company), as stated in the Notice for the AGM dated 25th June 2008, in the Annual General Meeting proposed to be held on 25th September 2008;
(d) Pass a decree of permanent injunction in favour of the Plaintiff, restraining the Defendants their respective officers, agents, etc. from acting upon or giving effect to the Annual Report and Audited Accounts as approved by the Defendants on 25th June 2008 for the year ending 31st March 2008, and upon the proposed Resolutions No. 1, 3 and 6; and
(e) grant costs in favour of the Plaintiff and against the Defendants."
17. Along with the suit, the Plaintiff also filed [CASE NUMBER] under [SECTION] and [SECTION] of [ACT] in which prayer was made for an ad interim injunction to restrain the defendants from proposing or passing the resolution adopting or from giving effect to the Annual Report and Audited Accounts for the year ending 31st March 2008 at the Annual General Meeting (AGM) proposed to be held on 25th September 2008 and for a direction for a fresh audit of the books of account of [ENTITY] to be carried out by an independent and qualified Chartered Accountant.
18. On 23rd September 2008, this Court directed summons to issue in the suit and notice in the aforementioned application. However, no interim injunction was granted since it was felt that if the resolution in question were stayed, irreparable injury could be caused to [ENTITY]. The court took note of the contention of learned [ENTITY]ior counsel for Defendant No.1 who appeared on caveat and pointed out that similar points were urged by the Plaintiff before the CLB and before SEBI/[ACT] but without success.
19. After the AGM was held on 25th September 2008 and the resolution in question passed, the Plaintiff filed [CASE NUMBER] under [SECTION] [ACT] for amending the plaint to challenge the said decision. Meanwhile, the Defendant [ENTITY] had filed [CASE NUMBER] under [SECTION] [ACT]. [CASE NUMBER] was filed by Defendant No.1 [ENTITY] for suspending the time for filing the written statement. Along with the plaint, the Plaintiff also filed [CASE NUMBER] under [SECTION] [ACT] seeking leave to sue for in respect of any other cause of action that may arise after the assessment and investigation of the damage caused to [ENTITY] and in the event of any misappropriation being discovered subsequently.
20. Defendant No.11 did not appear despite service. No written statement was filed in the suit by the other defendants. Pleadings were complete in [CASE NUMBER] under [SECTION] [ACT], which, with the consent of parties, was heard finally. The case of the Defendant
21. The contentions of [ENTITY] in the said application under [SECTION] [ACT] are as follows:
(a) The allegations in the suit were really in the nature of oppression and mismanagement for which a remedy was provided under the Act. Alternatively, the alleged violations were of the provisions of [ACT] and the Regulations framed thereunder.
Therefore alternate/efficacious remedies were available to the Plaintiff either before the CLB or before the SEBI and the Securities Appellate Tribunal ([ACT]). It is submitted that the jurisdiction of the civil court is barred in view of [SECTION] [ACT] read with [SECTION] of the [ACT] and [SECTION] of the [ACT].
(b) The very grievance raised in the present suit is already the subject matter of proceedings before the CLB, SEBI and [ACT]. Therefore, the present suit was case of forum shopping particularly since no interim relief was granted to the Plaintiff by the CLB and SEBI. The suit is also therefore an abuse of the process of the court.
(c) The suit was a personal action brought about by a single shareholder against the manner of preparation of companys accounts. In any event none of the other shareholders had made complaint about the alleged lack of proper notice/particulars/disclosures in the Annual Accounts and Auditors Report. The decision of the majority of the shareholders had to prevail.
(d) The present suit insofar as seeks the removal of Defendant No.[SECTION] as an Auditor is barred since there is specific procedure outlined in [SECTION] of the Act for removal or appointment of an Auditor. That cannot be short circuited by resorting to a civil suit.
(e) At the AGM held on 25th September 2008 the Plaintiff was represented by Mr. [ENTITY] who demanded poll on several items on the agenda. Poll was accordingly taken on the following day i.e. 26th September 2008. The result thereof was announced by the Chairman based on the scrutinizers report. All the seven agenda items were passed with more than the requisite votes. Since the Plaintiff had participated in the said meeting it should be deemed to have abandoned the present proceedings and therefore the cause of action leading to the filing of the present suit did not survive any more.
(f) Towards implementation of the said resolutions, copy of balance sheet, profit and loss account and related documents were filed with ROC at New Delhi and they were taken on record by the said office. The Annual Report has also been uploaded on SEBIs web-site on 29th September 2008 in terms of the Listing Agreement. Reappointments/ appointments of the Directors have also been given effect to by filing the statutory Form 32 with the ROC. Minutes of meeting have been also sent to the BSE on 3rd October 2008. It is submitted that in view of the above developments the cause of action had disappeared. Accordingly it is prayed that the plaint must be rejected. The Plaintiff's reply
22. In its reply to the IA under [SECTION] [ACT], the Plaintiff submitted that in view of the subsequent developments, the application had become infructuous. It is further submitted that the ground on which the [ENTITY] seeks rejection of the plaint is not one of the grounds enumerated under [SECTION] [ACT]. It is submitted that the reference to [SECTION] [ACT] is misplaced. It is further submitted that the challenge to the audited accounts adopted by the [ENTITY] for the financial year ending 2007-2008 is not the subject matter of any other petition before the CLB or SEBI/[ACT] and, therefore, the present civil suit is maintainable. Merely on account of the commonality of the background facts leading up to the present suit, it could not be concluded that the issues involved in the suit were common to the proceedings before the CLB or the [ACT]. The issues in this suit are distinct and separate. It is urged that violations complained of and the reliefs claimed in the suit have not been urged or claimed by the Plaintiff before any other forum. It is stated that there is no provision of law pointed out by [ENTITY] according to which a single individual shareholder cannot maintain a suit against a company. The mere approval of the annual accounts at the AGM of [ENTITY] cannot render the suit infructuous since a shareholder cannot possibly give consent to an act that is in violation of the law.
Submissions of Counsel
23. Mr. [ENTITY], [ENTITY]ior counsel appearing for the Plaintiff/non- applicant in [CASE NUMBER] submits that the question to be addressed first was whether in terms of [SECTION] [ACT] there was an express or an implied bar to this court entertaining the suit? Secondly, whether [SECTION], [ACT] constituted a bar to the maintainability of the suit? Thirdly, whether a suit seeking the relief of a bare declaration without a consequential relief of injunction can be maintainable?
24. It is submitted by Mr. [ENTITY] that [SECTION] [ACT] is only a bar to the court granting an injunction in a given context. It does not bar the maintainability of the suit itself. In any event, the relief concerning the removal of the auditor has not been claimed by the Plaintiff before CLB or the [ACT] and, therefore, not hit by [SECTION] [ACT]. Further, notwithstanding [SECTION] [ACT], the common law remedy is not taken away. It is submitted that none of the grounds on which the Defendants seek rejection of the plaint are spelt out in [SECTION] [ACT]. It is submitted that this is not a case where there is no disclosure of cause of action, or where the plaint contains a statement whereby the suit appears to be barred by any law. As regards the proceedings before the [ACT], it is submitted that the reliefs sought before that authority are different from those sought in the petition before the CLB and in the present suit. The proceedings before the [ACT] primarily concern the violation of the [ACT]. It is therefore submitted that [SECTION] [ACT] does not bar the present suit. Reference has been made to a large number of decisions including [PRECEDENT], [ENTITY], in re. [PRECEDENT]), Spices Valley Estate Limited v. TC For Express Limited (2007) 3 Comp LJ [SECTION]8 (Mad), [PRECEDENT], [PRECEDENT], [PRECEDENT], Smt. Premvati v. Smt. Bhagwati Devi (2008) [SECTION]5 Comp Cas 440 (Delhi), [PRECEDENT], [PRECEDENT], M/s. [PRECEDENT], [PRECEDENT], [PRECEDENT], [PRECEDENT], [ENTITY], [ENTITY], [PRECEDENT] and [PRECEDENT] and [PRECEDENT].
25. Mr. [ENTITY], learned [ENTITY]ior counsel refers to [SECTION], [SECTION] and [SECTION] of the Act and contends that powers of the CLB are wide enough to grant any of the reliefs sought for in the suit. According to him, once the Plaintiff has elected to go before the CLB with a petition complaining of oppression and mismanagement, it cannot be permitted to go from one forum to another with the same set of grievances till such time it gets relief. That would clearly constitute forum shopping which is impermissible in law. He hands over a chart showing the comparison of the averments made in the suit, in the petition before the CLB and in the petition before the SEBI/[ACT] and points out to the commonalities of the averments.
26. It is further pointed out that after the filing of suit, the Plaintiff has sought to amend its petition before the CLB. Although not termed formally as an amendment application, it is described as an application "for placing on record additional and subsequent facts, documents and ground along with supporting affidavit." Referring to [SECTION] [ACT], it is submitted that inasmuch as the Court cannot possibly grant the relief of injunction, the suit would be only for a bare declaration which is barred under [SECTION] [ACT]. It is pointed out that even in the amendment application under [SECTION] [ACT], the reliefs for a consequential injunction have not been sought to be deleted. By an oral statement at the bar, the Plaintiff cannot seek to restrict the relief being sought for in the suit. It is submitted that suit is also bad for misjoinder of parties.
27. It is submitted that the test is really whether the relief being sought in the suit is expressly or impliedly barred by law. There is a clear bar in terms of the Act to "entertaining" the suit for the same relief as is sought before the CLB. It is submitted that after the enactment of the Act and, in particular, [SECTION], [SECTION] and [SECTION] thereof the relief against oppression and mismanagement can no longer be termed as a common law right. It is contended that there is an express bar to claiming the relief of removal of the auditor without following the procedure under [SECTION] of the Act.
28. Mr. [ENTITY], learned [ENTITY]ior counsel refers to the various decisions including [PRECEDENT], [PRECEDENT], [PRECEDENT], [PRECEDENT], M/s. [PRECEDENT], [PRECEDENT], [PRECEDENT], [PRECEDENT], [PRECEDENT], [PRECEDENT], [PRECEDENT], [PRECEDENT], [PRECEDENT], [PRECEDENT], [PRECEDENT] (dead) by LRs v. Union of India AIR 1988 SC 752, [PRECEDENT], [PRECEDENT], [PRECEDENT].
Implied or express bar under [SECTION], [ACT]
29. One of the questions to be considered is whether there is any implied or express bar to the maintainability of the suit. [SECTION] of the [ACT] states that the civil court shall have jurisdiction to try all suits of a civil nature "excepting suits of which their cognizance is either expressly or impliedly barred."
30. For the purpose of examining the above question, the court is accepting as correct the averments in the plaint as originally filed. For the sake of completeness, although the application for amendment has not yet been allowed, this court has also kept in purview the plaint as sought to be amended. According to the Plaintiff, the annual accounts and the Annual Report of [ENTITY] for the year 2007-08 suffers from numerous irregularities. A declaration to that effect is being sought in the suit. Consequently, the relief of injuncting [ENTITY] from adopting the Annual Report and annual accounts has been sought. The amendment sought to be carried out to the plaint is a result of the adoption of certain resolutions at the AGM of the [ENTITY] which took place on 26 th September 2008. The amendments, if allowed, would add to the prayers in the suit to seek a declaration that the resolutions passed at the AGM/Poll held on 25th September 2008/26th September 2008 would be null, void and non est. The amendment does not seek to delete the mandatory injunction originally sought directing the appointment of an independent Chartered Accountant to carry out a fresh audit of the books of account of [ENTITY]. Further the prayer of removal of the auditor (Defendant No.[SECTION]) as auditor of [ENTITY] and directing the appointment of another auditor in place thereof also remains. In effect, the suit even after the proposed amendments continues to be one seeking the relief of declaration and consequential injunction.
31. The question is whether the suit framed as such is impliedly barred? According to the Defendants, the Plaintiff has already elected to go before two other fora - the CLB and the [ACT]. Pending before the CLB is a petition filed by the Plaintiff complaining of oppression and mismanagement within the meaning of the Act. The provisions of that Act and in particular [SECTION] and [SECTION] have been held to be a complete code. The question whether the issues arising out of the management of the affairs of a company can be adjudicated in a civil suit and whether such suit is impliedly barred in view of the remedy available under the Act, has come up before the courts earlier.
32. In [PRECEDENT] (supra) the Division Bench of the Bombay High Court explained the scope and ambit of [SECTION] of the Act which includes [SECTION], [SECTION] and [SECTION] of the Act. In drawing a distinction between the powers of the Central Government under [SECTION] of the Act and powers of the Court under [SECTION] (later these powers of the Court were vested in the CLB), the Bombay High Court held as under:
" It is in view of this scheme which is very apparent on a fair reading of the arrangement of chapters and the Sections contained in each chapter which are all grouped under [SECTION] of the Act that the question will have to be answered as to whether the powers of the court under [SECTION] (which includes [SECTION], [SECTION] and [SECTION]) should be read as subject to the provisions contained in the other chapters which deal with normal corporate management of a company and, in our view, in the context of this scheme having regard to the object that is sought to be achieved by [SECTION] and [SECTION] read with [SECTION], the powers of the court thereunder cannot be so read. Further, an analysis of the Sections contained in [SECTION] of the Act will also indicate that the powers of the court under [SECTION] or [SECTION] read with [SECTION] cannot be read as being subject to the other provisions contained in Sections dealing with usual corporate management of a company in normal circumstances. As stated earlier, [SECTION] deals with the prevention of oppression and mismanagement and the provisions therein have been divided under two heads under head A powers have been conferred upon the court to deal with cases of oppression and mismanagement in a company falling under [SECTION] and [SECTION] of the Act while under head B similar powers have been given to the Central Government to deal with cases of oppression and mismanagement in a company but it will be clear that some limitations have been placed on the Government's powers while there are no limitations or restrictions on the court's powers to pass orders that may be required for bringing to an end the oppression or mismanagement complained of and to prevent further oppression or mismanagement in future or to see that the affairs of the company are not being conducted in a manner prejudicial to public interest. In other words, whenever the legislature wanted to do so it has made a distinction between powers conferred on the Government (vide [SECTION]) and powers conferred on the court (vide [SECTION]} while dealing with similar emergent situations or extraordinary circumstances arising in the management of a company and in the case of the Government it has placed restrictions or limitations on the Government's powers but no restrictions or limitations of anything have been prescribed on the court's powers."
33. Emphasizing that the powers of the Court were wide, given the object that is sought to be achieved by the exercise of such power under [SECTION] and [SECTION], it was explained that [SECTION] "indicate the widest amplitude of the courts power". It was then explained as under:
"An examination of the aforesaid Sections clearly brings out two aspects, first, the very wide nature of the power conferred on the court, and, secondly, the object that is sought to be achieved by the exercise of such power with the result that the only limitation that could be impliedly read on the exercise of the power would be that nexus must exist between the order that may be passed there under and the object sought to be achieved by these Sections and beyond this limitation which arises by necessary implication it is difficult to read any other restriction or limitation on the exercise of the court's power. We are, therefore, unable to accept Mr. [ENTITY]'s contention that the court's powers under [SECTION] read with [SECTION] should be read as subject to the other provisions of the Act dealing with normal corporate management or that the court's orders and directions issued thereunder must be in consonance with the other provisions of the Act."
34. It is plain from the above decision on the facts of the present case that it would be definitely open to the Plaintiff to invite the CLB to examine the issues raised in the suit i.e. whether the [ENTITY] can be said to be mismanaged on account of the audited accounts and Annual Report not reflecting the correct state of affairs. In fact, by the subsequent application filed before the CLB, the Plaintiff has sought to bring on record the very averments and contentions raised in the present suit. This Court is unable to find any restriction on the power of the CLB to examine these issues.
35. In [PRECEDENT] (supra) the learned Single Judge of the Bombay High Court followed the decision of the Supreme Court in [PRECEDENT] to hold that the question whether a group of shareholders could seek the removal of a director by filing a civil suit should be answered in the negative. It was held that the civil court cannot interfere in such matters. They should be dealt with in accordance with the procedure laid down in the Act. It was observed that the rule in [PRECEDENT] applied in such a case. It did not fall in any of the known exceptions to the rule viz., , an act which is ultra vires the company or illegal, an act which constitutes a fraud against the company and a resolution which requires a qualified majority but has been passed by a simple majority. It was held that the civil courts jurisdiction was impliedly barred.
36. The wide nature of the powers under the Act has been explained recently by the Supreme Court in [PRECEDENT] (supra). It was observed in the context of [SECTION] and [SECTION] that "the Act is a complete code". Likewise, the learned Single Judge of the Punjab & Haryana High Court in [PRECEDENT] (supra) held that the jurisdiction of the civil court was impliedly barred in relation to the question of oppression or mismanagement. The aggrieved persons could certainly approach the CLB. Notice was taken of the judgment of the Supreme Court in [PRECEDENT].
37. In [PRECEDENT] (supra) the Supreme Court was considering the question whether an application for rectification of the register of members in terms of [SECTION] of the Act and disputes arising thereunder can be agitated before the civil court. It was held that in the first place the civil court was required to examine on the facts of each case whether the application made was for rectification or something else. It was held that it was necessary to remove the cloak and examine what the dispute actually was about. It was further explained as under:
"26. In case any claim is based on some seriously disputed civil rights or title, denial of any transaction or any other basic facts which may be the foundation to claim a right to be a member and if the Court feels such claim does not constitute to be a rectification but instead seeking adjudication of basic pillar some such facts falling outside the rectification, its discretion to send a party to seek his relief before civil court first for the adjudication of such facts, it cannot be said such right of the court to have been taken away merely on account of the deletion of the aforesaid proviso. Otherwise under the garb of rectification one may lay claim of many such contentious issues for adjudication not falling under it. Thus in other words, the court under it has discretion to find whether the dispute raised are really for rectification or is of such a nature, unless decided first it would not came within the purview of rectification."
38. Thereafter it was explained in para 31 as under:
"31 So, whenever a question is raised court has to adjudicate on the facts and circumstance of each case. If it truly is rectification all matter raised in that connection should be decided by the court under [SECTION] and if it finds adjudication of any matter not falling under it, it may direct a party to get his right adjudicated by civil court. Unless jurisdiction is expressly or implicitly barred under a statute, for violation or redress of any such right civil court would have jurisdiction. There is nothing under the [ACT] expressly barring the jurisdiction of the civil court, but the jurisdiction of the 'court' as defined under the Act exercising its powers under various sections where it has been invested with exclusive jurisdiction, the jurisdiction of the civil court is impliedly barred."
39. The law, as explained by the Supreme Court in [PRECEDENT] (supra), is held and has been followed in [PRECEDENT], [PRECEDENT], [PRECEDENT] and Amar Nath Malhotra v. MCS Limited 1993 Vol 76 CC
469). In [PRECEDENT] (supra), it was pointed out that after the 1988 Amendment to the Act, the jurisdiction of the Court to decide and determine matters pertaining to [SECTION] and [SECTION] vested with the CLB and further the allegations concerning the matters covered by those provisions should be agitated only by the CLB.
40. Applying the ratio of [PRECEDENT] (supra) to the instant case, it requires to be noticed that the claim made in the suit does not contain any aspect which cannot be adjudicated by the CLB. Under [SECTION] of the Act, the power of the CLB would include the passing of an order which may provide for "any other matter for which in the opinion of the Tribunal it is just and equitable that provision should be made." Under [SECTION] of the Act, the scope of the power of the CLB is to determine whether "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". Likewise under [SECTION], it is called upon to adjudicate on whether the affairs are being conducted "in a manner oppressive to any member or members". Further, both under [SECTION] and [SECTION] of the Act, the CLB may "with a view to bringing to an end the matters complained of, make such order as it thinks fit." The inevitable conclusion is that the jurisdiction of the civil court is impliedly barred.
41. If there was any doubt whether the issues sought to be raised in the civil suit can be agitated before the CLB, that stands removed by the conduct of the Plaintiff itself in filing a further application before the CLB "for placing on record additional and subsequent facts, documents and ground along with supporting affidavit." A perusal of the application filed on 28th February 2008 would show that the very averments made in the plaint, i.e out about the investments in [ENTITY] and in DHL and other facts set out in the plaint have been included in the application before the CLB. It is not, therefore, possible to accept the plea of the learned [ENTITY]ior counsel for the Plaintiff that what constitute the subject matter of the suit is different and distinct from what is being presently agitated before the CLB.
42. The learned [ENTITY]ior Counsel for the Plaintiff, however, placed reliance upon certain other judgments which seemingly hold a contrary point of view. In [PRECEDENT], the question that arose was whether there was any impediment in the exercise of the powers by the Court to supersede the Board of Directors of the company although it had the support of the majority if it was found that the Board of Directors had acted malafide or in a manner oppressive to the shareholders or in a manner prejudicial to the interests of the company or to public interest. It was held that the court always had jurisdiction to prevent abuse of the majority power. The Court found that the management had refused to register the transfer of shares to ensure that no change took place in the composition of the Board of Directors. Accordingly, the Board of Directors was required to be superseded and restrained from functioning any further. It was held that there was no impediment of the Act in the exercise of power by the Court to supersede the Board of Directors of a Company, although it has the support of the majority. What requires to be noticed is that this was a petition before the High Court under [SECTION] and [SECTION] of the Act at a time when the 1988 Amendment had not come into effect and the powers thereunder had not been transferred to the CLB. The facts are also not similar. There the Plaintiff had not earlier approached a different forum before filing the suit. In the considered view of this Court, the above decision does not help the Plaintiff.
43. The facts leading to the decision of the Kerala High Court in [PRECEDENT] (supra) were that the minority shareholders complained that the majority was attempting to place a heavy financial burden on the company by the purchase of equipment and also lease of the hospital which were against the interests of the company and could not have been approved by the majority. It was held that the principle in [PRECEDENT] could not be a bar to granting the reliefs sought for in the suit. Negativing the argument that there was a remedy available before the CLB under [SECTION] and [SECTION] of the Act, it was held that the scope of an application under those Sections was limited. It was further held: "It is intended to prevent only continuing wrongs and does not enable the shareholders to challenge concluded transactions. Moreover, the provisions are essential intended against the tyranny of the majority against the minority shareholders." With respect, this Court is unable to accept the conclusion arrived at by the Kerala High Court, although reliance was placed upon the judgment in [PRECEDENT]. It must be recalled that these decisions were given at a time when the judgment of the Supreme Court in M/s. [PRECEDENT] (supra) was not available. There is no reference, therefore, to the said decision in the judgment of the Kerala High Court.
44. Reliance was placed on the judgment of the Madras High Court in [PRECEDENT] (supra). Here again, on facts it was held that when the allegations related to misrepresentation, fraud, failure to furnish details, dishonest or mala fide intention, the jurisdiction of the civil court was not barred. What distinguishes the present case from the aforementioned case is that the Plaintiff there had not opted to go before the CLB before approaching the civil court. Here the Plaintiff first approached the CLB and failed to obtain any interim relief. It cannot be permitted to approach the civil court seeking the same relief as that would encourage forum shopping and constitute an abuse of the process of law.
45. In In re. Jaypee Cement Limited, the learned Single Judge of the Allahabad High Court was called upon to approve a scheme of amalgamation between two companies under [SECTION] and [SECTION] of the Act. Again this decision cannot help the Plaintiff. In the first instance the said petition did not deal with the situation where shareholders had already approached the CLB in a petition under [SECTION] and [SECTION] of the Act and subsequently when interim relief was refused by the CLB, they approached the civil court. Consequently that case was really about the powers of the Court to approve a scheme of amalgamation. The 1998 Amendment does not bring about any change to that situation.
46.1 Extensive arguments were addressed by Mr. [ENTITY] on the basis of the decision of the Division Bench of the Bombay High Court in [PRECEDENT] (supra). The Plaintiff there filed a suit seeking a declaration that an agreement dated 27th June 2001 among four groups of shareholders agreeing that the cellular business of Defendant No.1 conducted through its subsidiaries would ultimately be merged with the cellular business of the operating subsidiaries of Birla- Tata-AT&T (BTAL) was without the approval and sanction of the shareholders of the company under [SECTION] of the Act and therefore was null and void. An injunction was prayed for restraining the Defendant from giving effect to the said agreement as well as to the resolution of the Board of Directors of 25th July 2001. 46.2 The Plaintiff challenged the impugned action on three grounds namely; (a) that the conduct of the Defendant was actuated by mala fides; (b) the transaction required the consent of the shareholders under [SECTION] of the Act; and (c) if the transaction were completed without the approval of the company in a general meeting, it would be ultra vires the company. A preliminary objection was raised by the Defendant that the arguments based on mala fides were really in substance an allegation of oppression and mis-management by the majority shareholders coming under the purview of [SECTION] and [SECTION] of the [ACT] and that the "Plaintiff should have approached the Company Law Board for appropriate reliefs." 46.3 The Division Bench of the Bombay High Court in [PRECEDENT] took note of the legal position arising from the earlier decisions of the Supreme Court in [PRECEDENT] and [PRECEDENT]. It also took note of the later decision in [PRECEDENT] as well as the judgment of this Court in [PRECEDENT] It was observed that "if the right is traceable to general law of contract or it is a common law right, it can be enforced through civil court, even though the forum under the statute also will have jurisdiction to enforce that right." The Division Bench appears to have relied upon a decision by another Division Bench of that Court in [ENTITY]'s case [PRECEDENT] where the Hongkong & Shanghai Banking Corporation case was considered and it was held that notwithstanding the fact that the Plaintiffs in that case could approach the Company Law Board under [SECTION] of the Act, the Plaintiff had a common law right to seek rectification of registration of members and that "pre-existing common law right can be taken away only by express enactment or necessary implication." Accordingly the preliminary objection was overruled. 46.4 To this Court, it appears that the facts of the present case are different inasmuch as the Plaintiff here has already approached two other fora namely the CLB with a petition under [SECTION] and [SECTION] as well as the SEBI and [ACT]. This is, therefore, not a case where the Plaintiff first sought remedy before a civil court. Here the doctrine of election would apply. If the Plaintiff chooses to enforce its right first before the CLB, can it then be permitted to also approach the civil court particularly when CLB refuses interim relief? Such a question was never considered in CDS Financial Services (Mauritius) Limited. This Court is therefore unable to accept the arguments of Mr. [ENTITY] that notwithstanding the availability of a remedy before the CLB, this Court should entertain the present suit.
Conclusion:
47. Having carefully examined the plaint as well as the averments made in the petition before the CLB, as further sought to be amended by the subsequent application, it appears to this Court that the grounds on which the relief is being sought for are more or less similar to what has been sought in the CLB. In the considered view of this Court, therefore, the answer to the question first posed is that there is an implied bar to this Court entertaining the present suit.
48. Although the learned [ENTITY]ior counsel for the Plaintiff may be right in his contention that the suit is itself not barred under [SECTION] [ACT], the fact remains that the suit is reduced to one seeking a bare declaration if the consequential prayers for injunction are barred since they have already been sought in other earlier proceedings before the CLB and [ACT]. Such a suit for a bare declaration (which in any event is not the form of prayer even after the proposed amendments) would be barred expressly by [SECTION] [ACT].
49. For the above reasons, the application is allowed. The plaint is rejected. Consequently, the suit is dismissed with costs. The other pending applications are also dismissed.
[ENTITY], J.
AUGUST 25, 2009 rk