L.MOHAPATRA, J. COPET NOS.39,40 & 41 OF 2009 (Decided on 22.02.2011) ORISSA SPONGE IRON & ………Appellants. STEEL LTD. & ORS. .Vrs. BHUSHAN ENERGY LTD. & ORS. ……….Respondents. (A) COMPANIES ACT, 1956 (ACT NO.1 OF 1956) – S.10-F. (Para 7) (B) COMPANIES ACT, 1956 (ACT NO.1 OF 1956) – S.397. For Appellants - M/s. P.Chatterji, Satyajit Mohanty, R.R.Swain, S.Patnaik, S.S.Das, R.K.Sahoo, K.C.Mohapatra,R.Agarwal, A.Riya & S.P.Das. For Respondents - M/s. S.K.Kapur, Pinaki Mishra, S.P.Sarangi, P.P.Mohanty, P.K.Das, B.C.Mohanty, A.Pattnaik, R.K.Tripathy, A.Kanungo, A.K.Kanungo & D.K.Das. For Appellant - M/s. S.K.Kapur, R.K.Rath, P.Mishra & A.Parija. For Respondents - M/s. P.Chatterji, Satyajit Mohanty, R.R.Swain & S.S.Das. L. MOHAPATRA, J. The order dated 6th October, 2009 passed by the Company Law Board, Principal Bench, New Delhi in C.P.No.5 of 2009 is assailed in all the three company petitions, which were taken up together for hearing and disposal. BNS Steel Trading Pvt. Ltd., who was petitioner no.1 before the Company Law Board, has filed COPET No.40 of 2009 whereas BBN Transportation Pvt. Ltd., who was petitioner no.3 before the Company Law Board, has filed COPET No.41 of 2009. Orissa Sponge Iron and Steel Ltd., who was respondent no.1 before the Company Law Board, has filed COPET No.39 of 2009. Out of three petitioners before the Company Law Board, two have preferred COPET Nos.40 and 41 of 2009 whereas out of eleven respondents, respondent No.1-Orissa Sponge Iron and Steel Ltd., has filed COPET No.39 of 2009. The impugned order was passed on the basis of a petition filed under Sections 397, 398 and 399 read with Section 402 and 403 of the Company Act, 1956. 2. BNS Steel Trading Pvt. Ltd., Bhushan Energy Ltd. and BBN Transportation Pvt. Ltd. jointly filed the said Company Petition for the following reliefs :- “a) Direct the respondents to maintain the status quo regarding their shareholdings, fixed assets of the company, and not to change the shareholding pattern of the company by transfer or further issue of shares. b) Direct that any transfer in the facts and circumstances of the case shall be void. c) Direct the Respondents not to sell its shares held in the Respondent No.1 Company without the prior approval of the shareholders. d) Direct the investigation in the affairs of the company for its financial mismanagement and huge siphoning of the funds. e) Reconstitute the board of the Respondent No.1 Company after carrying out the investigation in the affairs of the company for its financial mismanagement and huge siphoning of the funds and declare that affairs are being conducted prejudicial to the public interest the company and/or its members and further declare that the affairs of the company are being or are committed on prejudicial to the company or its members or public at large and oppressive to its members and the present management is conducting its efforts in a manner which is intended to disfraud its members creditors and public at large. f) Pass such further order or orders as this Hon’ble Court may deem fit and proper in the facts and circumstances of the case. g) Direct the Respondents to transfer the warrants in the name of petitioner No.2.” 3. The facts/instances of oppression and mismanagement alleged in the company petition filed by the said three companies are that Orissa Sponge Iron and Steel Ltd. is not only governed under the provisions of Companies Act, 1956 but under the provisions of SEBI Act and Guidelines. It is alleged in the petition that the present management and the promoters holding the controlling stake in the company are trying to dispose of the said unit by way of transferring its shareholding to a 3rd party without the consent and approval of the shareholders. The attitude of the existing promoters to wash their hands of the Company’s Management confirms the belief that affairs of the company are being conducted with an intent to defraud its members, creditors and public at large and are oppressive to its members. The circumstances and facts as now emerging or as may emerge fully after investigation would prove beyond doubt that some person other than the existing promoters, who intend to take over management of the Company is influencing the policy of the company. Such action adversely affects the rights of the shareholder at large. It is also alleged that in case of promoters holding the controlling stake handover the company to a party alien to the present line of business, the same would be prejudicial to the interest of the company and consequently the shareholders. It is further alleged that the present management/ directors intend to handover the management of the company to some outsiders to absolve themselves from the liability of the company after siphoning away the huge funds of the company resulting in loss. Such conduct of the present management/directors is an act of oppression, which may ultimately give rise to winding up of the company. It is stated that the company has issued convertible warrants in terms of shareholders resolution dated 15.10.2007 and the same have been pledged to raise funds but such funds have been diverted by the 2 promoters for their personal use. On this account, it is stated that issuance of such warrants or their conversion may affect capital structure of the company. Some instances of issuance of such warrants and conversion thereof have been narrated in the petitions. It is further stated in the petition that petitioner no.2, Bhushan Energy Ltd. holds 35 lakhs share warrants of the company convertible into equitable shares. After conversion of these warrants, the holding of all the three petitioners would become 27.53 % but the said warrants are not being converted to shares in the name of Bhushan Energy despite of submission of all the requisite documents with the Registrar of Transfer Agent. This conduct of the present management amounts to oppression. The dishonest acts and mala fide intention of the management/ Directors have pushed the company at its financial brink where it is likely to collapse and thus would justify the winding up of the company on just and equitable grounds. Since winding up the company may not be in the interest of the share holders of the company and the company itself, the said petition was filed under the provisions mentioned above and for the relief quoted earlier. 4. With the above background, I proceed to examine the case of the appellants in COPET Nos.40 and 41 of 2009. Admittedly four days after C.P.No.5 of 2009 was filed before the Company Law Board, C.A. No.113 of 2009 was filed by the appellants (1) For a declaration that 12,00,000 shares in the name of Torsteel Research Foundation in India (Respondent No.10) before the Company Law Board be declared as null and void being contrary to and in violation of the provisions of Section 77 of the Companies Act, 1956. (2) To declare that 11,88,916 number of shares converted from similar number of warrants of OSIL (Respondent No.1 before the Company Law Board) in the name of Respondent No.10 is null and void. (3) For a declaration that 14,10,000 equity shares issued by OSIL on preferential basis to Respondent No.10 at Rs.41.14 paise per share amounting to Rs.5.78 crores is null and void. (4) For a declaration that 40,00,000 warrants of OSIL converted into the equity shares is null and void and for a direction to OSIL and its Directors to transfer 30 lakhs warrants in the name of Bhushan Energy Ltd. In the said petition, i.e., the case of the appellants is that on inspection of records of Torsteel Research Foundation in India (Respondent No.10 before CLB) and TRFI Investment Private Limited (Respondent No.11 before CLB) from the Registrar of Companies portal of MCA 21, the following facts emerged which constitute the acts of oppression and mismanagement: (I) In March 2004, Torsteel Research Foundation in India was holding 11% share in OSIL. During the third quarter of 2005, Torsteel Research Foundation in India purchased 12,00,000 shares from Industrial Promotion and Investment Corporation of Orissa Limited which was also a shareholder of OSIL at 58.06 per share amounting to Rs.6.97 crores. Torsteel Research Foundation in India had received Rs.6 crores as a loan from Torsteel Services Limited which is owned 3 and controlled by the promoters of OSIL and this amount was borrowed by Torsteel Services Limited from UTI Bank on 29.7.2005 against the security of Escrow account of payables from OSIL. A corporate guarantee from Torsteel Research Foundation was also provided. On the same day, a sum of Rs.5.44 crores was transferred to Torsteel Research Foundation in its account in ICICI Bank and the said money was utilized for purchasing the 12,00,000 shares from IPICOL. This transaction is in violation of Section 77 of the Companies Act. (II) In May 2005, OSIL again allotted 11,88,916 number of share warrants to be converted into equal number of shares at the rate of Rs.68.87 per warrant amounting to Rs.8.18 crores in favour of Torsteel Research Foundation which was convertible into equity shares within 18 months from the date of allotment. A small fraction of the said amount was paid by Torsteel Research Foundation to convert the warrants. OSIL in order to facilitate Torsteel Research Foundation to convert those warrants into equity shares provided an advance of Rs.6 crores to Torsteel Services Limited under the pretext of mining development and in turn Torsteel Services Limited provided the same amount to Torsteel Research Foundation for paying the conversion amount in respect of the said warrants. Torsteel Research Foundation utilized the said amount for converting the warrants into equal number of shares in January, 2006. It is, therefore, evident that OSIL provided financial assistance to Torsteel Research Foundation for acquisition of shares of OSIL in violation of Section 77 of the Act. (III) In August 2006, OSIL issued 14,10,000 equity shares on preferential basis to Torsteel Research Foundation at Rs.41.14 paise per share amounting to Rs.5.78 crores in the same circuitous manner by providing financial assistance in contravention of Section 77 of the Companies Act. On these allegations, the above prayers were made in the petition. OSIL contested the petition by filing a reply and the gist of the reply is that at no point of time OSIL either directly or indirectly rendered any financial assistance to Torsteel Research Foundation for acquisition of shares. 5. The Company Law Board after examination of the documents produced by the parties before it, in paragraph-24 of the impugned order, observed that so far as the alleged tainted transactions are concerned, the admitted fact is that all these transactions took place before Bhushan Group (the present appellants) became shareholders. By these transactions, Bhushan Group has not been affected at all in any manner. From paragraph-27 of the impugned order, the Company Law Board proceeded to examine the allegations relating to the alleged tainted transactions but observed that three transactions had been alleged to be tainted. While for two transactions, details were given, for the third one only an apprehension had been expressed. Therefore, the Company Law Board examined the two alleged tainted transactions and came to the following findings. The first transaction relates to acquisition of 12 lakh shares by Torsteel Research Foundation and it is admitted that OSIL has not funded these transactions. UTI had sanctioned a loan of Rs.6 crores to Torsteel Services Private Limited which was not a 4 party to the proceeding for mining development. This loan was taken on the security of receivable from OSIL. This was the primary security provided by Torsteel Services Limited and the loan was guaranteed by Torsteel Research Foundation. The conclusion arrived at by the Company Law Board is that OSIL has not given any financial assistance directly or indirectly. The allegation of tainted transactions was based on a further allegation that Torsteel Services Pvt. Ltd. is not engaged in mine development but its only business is in fisheries and therefore, the transaction is a tainted transaction as OSIL has indirectly provided financial assistance. In response to such allegation, the Company Law Board observed that UTI Bank had given the loan being satisfied that the primary security given by the loanee is adequate and may be the Bank had the confidence of recovery of the loan because of association of Torsteel Services Pvt. Ltd. with OSIL. It further found that from the said transactions, it is crystal clear that OSIL has not given any financial support indirectly except perhaps its reputation to the satisfaction of the Bank. It is also held that the said issue cannot be determined in absence of UTI Bank and Torsteel Services Pvt. Ltd. who are not parties to the proceeding. So far as the second transaction of conversion of warrants by Torsteel Research Foundation out of loan of Rs.6 crores sanctioned by UTI Bank to OSIL is concerned, referring to the letter of UTI Bank, the Company Law Board held that the said amount had been sanctioned by the Bank in favour of OSIL for a specific purpose of lending it to Torsteel Services Pvt. Ltd. for mine development. Torsteel Services Pvt. Ltd. handed over this amount as a loan to Torsteel Research Foundation which was used for conversion of the warrants. The allegation of the appellants in this regard was that Torsteel Services Pvt. Ltd. does not have any mining development experience and its sole business was in fisheries. In respect of the first transactions, such submission having been rejected by the Company Law Board, in respect of the second transaction, the very same submission was also rejected. While arriving at such findings, the Company Law Board had referred to a decision of the Calcutta High Court in the case of Unity Company Private Ltd v. Diamond Sugar Mills and others, reported in AIR 1971 Calcutta 18 and a decision of the Company Law Board, Principal Bench, in the case of Northern Projects Ltd. v. Blue Coast Hotels and Resorts Ltd. and others, reported in (2007) 140 Comp Cas 300 (CLB). 6. Shri Kapur, the learned Senior Counsel appearing for the appellants in the above two appeals drew attention of the Court to certain documents filed before the Company Law Board to substantiate the case of the appellants that the above two transactions are tainted transactions and OSIL had directly or indirectly rendered financial assistance for the above two transactions. It was contented by Shri Kapur, the learned Senior Counsel for the appellants that so far as the first transaction is concerned, UTI Bank advanced a loan of Rs.6 crores to Torsteel Services Pvt. Ltd. for mine development of OSIL. The primary security provided for the said loan was the OSIL payables from it’s Escrow account to Torsteel Services Pvt. Ltd. and the said loan was guaranteed by Torsteel Research Foundation. Torsteel Services Pvt. Ltd. after obtaining loan from UTI advanced the same as loan to Torsteel Research Foundation and in turn Torsteel Research Foundation utilized the said amount for purchasing 12 lakh shares of OSIL from IPICOL. Referring to the copy of the Bank transactions of Torsteel Services Pvt. Ltd., it was contented by Shri Kapur, the learned Senior Counsel for the appellant that all these transactions took place on the very same day. 5 So far as the second transaction is concerned, it was contended by the learned Senior Counsel that UTI Bank sanctioned a loan of Rs.6 crores to OSIL for mine development by Torsteel Services Pvt. Ltd. and the said amount was provided as advance by OSIL to Torsteel Services Pvt. Ltd. for mine development. In turn Torsteel Services Pvt. Ltd. provided the very same amount to Torsteel Research Foundation as a loan and the said amount was utilized by Torsteel Research Foundation for conversion of 11,88,916 warrants of OSIL. It was also contended by Shri Kapur with reference to the Bank transactions that all these transactions had taken place in one day. According to the learned Senior Counsel appearing for the appellants, all these transactions only establish indirect financial assistance rendered by OSIL either for acquisition of shares from IPICOL or for conversion of warrants into shares. Reference was also made to the letter of UTI Bank dated 26.7.2005 to substantiate the contention that Torsteel Services Pvt. Ltd. for obtaining a term loan of Rs.6 crores had offered exclusive charge of Escrow account of OSIL on payables from OSIL as primary security. It was contended by the learned Senior Counsel appearing for the appellants that the promoters of OSIL are also the owners of Torsteel Services Pvt. Ltd. and Torsteel Research Foundation and therefore, it was easier for them to enter into such transactions for defrauding the shareholders. Shri P. Chatterji, the learned Senior Counsel appearing for the OSIL does not dispute the transactions but submits that none of the documents produced by the appellants establish that OSIL had either directly or indirectly rendered any financial assistance either for acquisition of shares from IPICOL or for conversion of warrants into shares. Referring to the letter of UTI Bank dated 26.7.2005, it was contended by Shri Chatterji, the learned Senior Counsel appearing for OSIL that while granting a term loan of Rs.6 crores in favour of Torsteel Services Pvt. Ltd., the primary security offer was the Escrow account of OSIL on payables from OSIL. Referring to the same, it was contended that any amount payable from the Escrow account of OSIL in favour of Torsteel Services Pvt. Ltd. is the property of Torsteel Services Pvt. Ltd. which could be offered as security and therefore, there was no financial assistance rendered by OSIL in the said transaction. It was also brought to the notice of the Court that against the said loan, Torsteel Research Foundation stood as corporate guarantee and an exclusive charge in relation to the office of Torsteel Research Foundation in India office area at Nariman Point, Mumbai had been created. This property itself was worth of more than Rs.20.00 crores and therefore, no further security was also necessary against a loan of Rs.6 crores. In respect of the second transaction, Shri Chatterji also contended that the loan of Rs.6 crores had been granted by UTI Bank in favour of OSIL to be utilized for mine development which was undertaken by Torsteel Services Pvt. Ltd. Therefore, the said amount was provided as advance by OSIL to Torsteel Services Pvt. Ltd. for mine development. The conduct of Torsteel Services Pvt. Ltd. in providing a similar amount as loan to Torsteel Research Foundation for conversion of the warrants into shares cannot be said to be a financial assistance rendered by OSIL either directly or indirectly to Torsteel Research Foundation for conversion of warrants into shares. The learned counsel made the above submissions on facts, alleged in the petition and also cited some decisions in support of their respective submissions. I now proceed to examine the submission of the learned Senior Counsel appearing for both the parties with reference to the documents and the decisions cited at the Bar. 6 7. A preliminary objection was raised by Shri Chatterji, the learned Senior Counsel appearing for OSIL with reference to Section 10-F of the Companies Act, 1956 and it was submitted that the appellant can only be heard on a question of law and the appellate court cannot reassess the materials placed before the Company Law Board and come to a different conclusion. In response, Shri Kapur, the learned Senior Counsel appearing for the appellants placed reliance on a decision of the Hon’ble Supreme Court in the case of M/s. Dale & Carrington Invt. (P) Ltd. and another v. P.K. Prathapan and others, reported in AIR 2005 S.C. 1624. Para 35 of the said judgment is quoted below: “ Section 10F refers to an appeal being filed on the question of law. The learned counsel for the appellant argued that the High Court could not disturb the findings of fact arrived at by the Company Law Board. It was further argued that the High Court has recorded its own finding on certain issues which the High Court could not go into and therefore the judgment of the High Court is liable to be set aside. We do not agree with the submission made by the learned counsel for appellants. It is settled law that if a finding of fact is perverse and is based on no evidence, it can be set aside in appeal even though the appeal is permissible only on the question of law. The perversity of the finding itself becomes a question of law. In the present case we have demonstrated that the judgment of the Company Law Board was given in a very cursory and cavalier manner. The Board has not gone into real issues which were germane for the decision of the controversy involved in the case. The High Court has rightly gone into the depth of the matter. As already stated the controversy in the case revolved around alleged allotment of additional shares in favour of Ramanujam and whether the allotment of additional shares was an act of oppression of his part. On the issue of oppression the finding of the Company Law Board was in favour of Prathapan i.e. his impugned act was held to be an act of oppression. The said finding has been maintained by the High Court although it has given stronger reasons for the same.” Referring to the above paragraph, Shri Kapur, the learned counsel appearing for the appellants submitted that if the findings arrived at by the Company Law Board is perverse and is based on no evidence, it can be set aside in appeal even though the appeal is permissible only on the question of law. The perversity of the finding itself becomes a question of law. Shri Chatterji, the learned Senior Counsel submitted that only when a finding of fact arrived at by the Company Law Board is found to be perverse or based on no evidence, then only the same can be set aside in appeal. But this is a case where the findings of the Company Law Board are based on documents produced by the parties, under no stretch of imagination it can be said that the findings are based on no evidence or that they are perverse. As stated earlier, the appellants in order to substantiate their claim that the above two transactions were tainted had relied upon certain documents referred to above and the Company Law Board referring to the said documents recorded the findings against the appellants. Therefore, it cannot be said that the findings are based on no evidence. The question as to whether such findings are perverse or not, it is necessary to refer to the very same documents again. So far as the first transaction is concerned, it is clear from the letter of the UTI Bank dated 26.7.2005 that the term loan of Rs.6 crores had been granted in favour of Torsteel Services Pvt. Ltd. on furnishing certain securities. The 7 primary security is the exclusive charge on Escrow account of payables from OSIL. This clearly shows that whatever amount was payable to Torsteel Services Pvt. Ltd. from the Escrow account of OSIL on account of mining development is furnished as primary security. Therefore, the Company Law Board was right in making any observation that UTI had the confidence of recovering the amount of loan granted in favour of Torsteel Services Pvt. Ltd. because of the business to get from OSIL. There is nothing in the letter to show that OSIL had stood as a guarantor or furnished any security directly or indirectly to the Bank for the purpose of the above loan. On the other hand, it is clear from the said letter that Torsteel Research Foundation stood as a corporate guarantee and an office area of 778 sq.ft. belonging to Torsteel Research Foundation at Bajaj Bhawan, Nariman Point, Mumbai had been furnished as a security. I do not find anything from the letter of the Bank indicating direct or indirect involvement of OSIL in facilitating Torsteel Services