1 IN THE HIGH COURT OF BOMBAY AT GOA COMPANY APPEAL NO. 8 OF 2007 M/s Northern Projects Ltd., a Company incorporated under the Companies Act, 1956(Act 1 of 1956), having its Registered Office at 6, Old Post Office Street, 4th Floor, KOLKATA-700 001, through its Authorized Signatory, Shri Lal Pratap Singh. ... Appellant versus 1. Blue Coast Hotels and Resorts Ltd., having its Registered Office at 263C, Arossim, Cansaulim Goa-403 712; AND Corporate Office at 415-417, Antriksh Bhawan, 22, Kasturba Gandhi Marg, New Delhi-110001. 2. Mr. P. L. Suri, C/o Blue Coast Hotels and Resorts Ltd., 263C, Arossim, Cansaulim, Goa-403 712. 3. Mrs. Sunita Suri, C/o Blue Coast Hotels and Resorts Ltd., 263C, Arossim, Cansaulim, Goa-403 712. 4. Mrs. Mamta Suri, C/o Blue Coast Hotels and Resorts Ltd., 263C, Arossim, Cansaulim, Goa-403 712. 2 5. Mr. B. K.. Goswami, C/o Blue Coast Hotels and Resorts Ltd., 263C, Arossim, Cansaulim, Goa-403 712. 6. Mr. K. S. Mehta, C/o Blue Coast Hotels and Resorts Ltd., 263C, Arossim, Cansaulim, Goa-403 712. 7. Dr. V. M. Kaul, C/o Blue Coast Hotels and Resorts Ltd., 263C, Arossim, Cansaulim, Goa-403 712. 8. Mr. Ashoka Kini, C/o Blue Coast Hotels and Resorts Ltd., 263C, Arossim, Cansaulim, Goa-403 712. ... Respondents Mr. V. B. Nadkarni, Senior Advocate with Mr. M. S. Sonak and Mr. P. S. Rao, Advocates for the Appellant. Mr. U. K. Chowdhari, Senior Advocate with Mr. Rahul Srivastava and Mr. Savrabh Kalia , Advocates for Respondent No.1. Mr. S. G. Dessai, Senior Advocate with Mr. Shivan Dessai, Advocate for Respondent Nos.2 to 8. CORAM : N. A. BRITTO, J. DATE : 25TH APRIL, 2008. ORAL ORDER Challenge in this appeal, filed under Section 10F of the Companies 3 Act, 1956 (Act, for short) is to the Order dated 3-5-2007 of the Company Law Board(CLB, for short), Principal Bench at New Delhi by which the appellant's petition filed under Section 397/398 of the Act has been rejected, holding that the appellant did not qualify to file the said petition in terms of Section 399 of the Act as the appellant held less than 1/10th of the “issued share capital”. 2. Some undisputed facts are required to be stated to dispose off the appeal. 3. The Respondent-Company was first incorporated on 27-7-1992 and after it changed its name several times, it is now registered in its present name, having its registered office at Arossim, Cansaulim, Goa. 4. The Appellant is a Company incorporated on 4-3-1983 having its registered office at 6, Old Post Office Street, 4th Floor, Kolkata-700 001. 5. The authorized capital of the Respondent (Company, for short) is Rs.100,00,00,000/-(Rs.One Hundred Crores only) divided into 1,85,00,000/-(One Crore, Eighty Five Lacs) equity shares of Rs.10/- each and 81,50,000/-(Eighty One Lacs, Fifty Thousand) preference shares of Rs.100/- each, and thus the issued, subscribed and paid up capital of the Company is Rs.88,05,28,000/- (Rs. Eighty Eight Crores Five Lacs and Twenty Eight Thousand only) consisting of 65,52,800/-(Sixty Five Lacs, Fifty Two Thousand Eight Hundred) equity 4 shares of Rs.10/- each and 81,50,000/-(Eighty One Lacs Fifty Thousand) preference shares of Rs.100/- each as per the latest audited balance sheet of the Company as on 31-3-2006. 6. The Company is mainly engaged in running a hotel in the name and style of “Park Hyatt Goa Resort and Spa”. 7. As on 31-3-2002 the Company had issued Rs.6,55,28,000/- equity shares of Rs.10/- each. Thereafter on 30-10-2002 the Company issued 41,50,00.00 10% cumulative redeemable preference shares of Rs.100/- each to the promoters group. 8. On 24-2-2004 the appellant acquired 3,15,000 equity shares and again on 5-3-2004 acquired another 6,55,000 of equity shares and thus the appellant acquired 9,70,000 of equity shares of Rs.10/- each. On 28-10-2004 the Company allotted another 30,00,000, 1% preference shares and again on 29-3-2005 another 10,00,000, 1% preference shares were allotted. These shares were allotted to the promoters group against the money brought in by them towards the project cost of the Hotel. According to the appellant, since the appellant holds 9,70,000 fully paid equity shares of Rs.10/- each he holds 14.80% of the total issued, subscribed and paid up equity share capital of the Company, and, this on the assumption that the expression “issued share capital” of the Company in Clause (a) of sub-section(1) of Section 399 of the Act means issued 5 “equity share capital” and which in turn should mean only “legally valid share capital”. 9. As per the Company, with the successive issue of preference shares, the appellant's holding in the issued share capital came down to 2.01% on 30-10-2002, to 1.24% on 28-10-2004, and to 1.10% on 28-3-2005 and thereafter, and, as such the appellant at no time held more than 2.01% share capital in the Company and as such neither on the date when the appellant became the member nor on the date of filing the petition before the CLB, the appellant held more than 1/10th allotted share capital of the Company. That was in brief the controversy before the CLB which came to be decided against the appellant. 10. The case of the appellant, in brief, was that the said cumulative preference shares were issued by the Company with the sole objective of diminishing the voting rights available to the appellant and other equity share holders of the Company to virtually nil and with a view to usurp more than 90% of voting rights to the detriment of the appellant and other share holders. As per the appellant, the same also violated the provisions of SEBI(Substantial Acquisition and Takeover) Regulations, 1977 in that, by virtue thereof the Promoters/Directors held more than 55% of the voting rights in the Company without complying with the requirements specified under the said Regulations. In fact the proviso to Regulation 11 of the said Regulations stipulates that “no acquirer shall acquire shares or voting rights, through market purchases and 6 preferential allotment pursuant to a resolution passed under Section 81 of the Companies Act, 1956 or any other applicable law, which, (taken together with shares or voting rights, if any, held by him or persons acting in concert with him) entitle such acquirer to exercise more than 55% of the voting rights in the Company. The next proviso stipulates that if the acquirer has acquired shares or voting rights through such market purchases or preferential allotment beyond 55% of the voting rights in the company, he shall forthwith disinvest the shares acquired in excess of 55% and shall be liable for action under these Regulations and the Act. The appellant also alleged several acts of gross mismanagement which are not necessary to be reproduced herein for the purpose of disposal of this appeal. However, a preliminary objection having been taken, on behalf of the Company, in the light of Section 399 of the Act, the appellant's petition came to be rejected. 11. The learned CLB in rejecting the appellant's petition came to the conclusion that (a) the expression “issued share capital” would include both equity and preference share capital and as the appellant held less than 1/10th of the “issued share capital” the petition was not maintainable; (b) the Act did not visualize challenging the past acts and that too before the person became Member of the Company; (c) the principle laid down by the CLB in the case of Mega Resources and Others v. Bombay Dyeing and Manufacturing Company(2002-(001)-CLJ-0347-CLB) did not apply to the facts of the case. 7 12. Since the entire controversy is centered round Clause (a) of sub- section (1) of Section 399 of the Act it would be relevant to reproduce the said Section. That the Appellant had other remedies in terms of sub-sections(3) and (4) is not at all in controversy in this appeal. Clause (a) of sub-section(1) of Section 399 reads as follows:- “399. Right to apply under Sections 397 and 398. (1) The following members of a Company shall have a right to apply under Section 397 or 398:- (a) in the case of a Company having a share capital, not less than one hundred members of the Company or not less than one-tenth of the total number of its members, whichever is less or any members or members holding not less than one-tenth of the issued share capital of the Company, provided that the Applicant or Applicants have paid all calls and other sums due on their shares; (b) in the case of a Company not having a share capital, not less than one-fifth of the total number of its members.” 13. I have heard the learned Senior Counsel appearing on behalf of the parties at length. 14. The object behind the provisions of Sections 397, 398 has been set 8 out in Mohanlal Ganpatram and another v. Shri Sayaji Jubilee Cotton and Jute Mills Co. Ltd. and others(AIR 1965 Gujarat 96) on which extensive reliance has been placed on behalf of the appellant, and, it has been stated by the learned Single Judge of that Court that Sections 397 and 398 are part of a fasciculus of Sections commencing from Section 397 and ending with Section 407 and this fasciculus of Sections occurs in Section A dealing with Powers of Court under Chapter VI headed “Prevention of Oppression and Mismanagement”. Under Section 397 any member of a Company who complains that the affairs of the Company are being conducted in a manner oppressive to any member or members including any one or more of themselves, may petition the Court which, if satisfied that the Company's affairs are being conducted in a manner oppressive to any member or members and that the facts justify the making of a winding up order on the ground that it is just and equitable to do so but that this would unfairly prejudice such member or members, may make such order as it thinks fit with a view to bringing to an end the matters complained of. This Section corresponds to Section 210 of the English Companies Act, 1948. Section 398 considerably enlarges the scope of the remedy by providing that any members of a Company who complain that the affairs of the Company are being conducted in a manner prejudicial to the interests of the Company or that a material change has been taken place in the management or control of the Company, and that by reason of such change, it is likely that the affairs of the Company will be conducted in a manner prejudicial to the interests of the Company, may apply to the Court and the Court may, if it is of the opinion that the affairs of the Company are being 9 conducted as aforesaid or that by reason of any material change as aforesaid in the management or control of the Company, it is likely that the affairs of the Company will be conducted as aforesaid, make such order as it thinks fit with a view to bringing to an end or preventing the matters complained of or apprehended. It is obvious that this remedy provided by Section 398 is of a much wider nature than the remedy under Section 397, since unlike the remedy under Section 397, it is not limited by the requirement that the facts must be such as justify the making of the winding up order against the Company on the ground that it is just and equitable to do so. The question of construction which arises for determination on these provisions is as to what is the extent of the power of the Court under Section 397 or 398. Does the power of the Court extend to the making of an order, setting aside or interfering with past and concluded transactions between a Company and a third party which are no longer continuing wrongs or is the power of the Court confined to the making of an order preventing future oppression or mismanagement? Mr. S. B. Vakil, learned advocate appearing on behalf of the petitioners, pleaded for former construction on the ground that such construction would enlarge the power of the Court rather than limit it and in support of this plea he relied on the well- known rule of interpretation that in the case of provisions of a remedial nature, which Sections 397 and 398 undoubtedly were, the construction to be made should be such as will suppress the mischief and advance the remedy and add force and life to the cure and remedy according to the true intent of the makers of the Act, probono publico. Now Mr. S. B. Vakil is certainly right in his submission that Sections 397 and 398 being designed to suppress an acknowledged mischief, they 10 should receive liberal interpretation and the Court should give such construction as will advance the remedy, but even applying this principle of interpretation, it is not possible to accept the construction contended for on behalf of the petitioners. 12. It has also been stated in the aforesaid decision that the object and purpose of the remedy was to cure the mischief of oppression or mismanagement on the part of controlling shareholders by bringing to an end such oppression or mismanagement so that it does not continue in future. The remedy was intended to put an end to a continuing state of affairs and not to afford compensation to the aggrieved shareholders in respect of acts already done which were no longer continuing wrongs. Sections 397 and 398 thus clearly postulate that there must be at the date of the application a continuing course of conduct of the affairs of the Company which is oppressive to any share-holder or share-holders or pre-judicial to the interests of the Company and it is this course of oppressive or prejudicial conduct which would form the subject-matter of the complaint in the application. The remedy is not intended to enable the aggrieved shareholders to set at naught what has already been done by controlling shareholders in the management of the affairs of the Company. If such were the intension of the Legislature, which as I will presently show it could never have been, the language of Sections 397 and 398 would have been different and the Legislature would not have confined the power of the Court by limiting the purpose for which it can be exercised under the Sections. 11 13. The object behind Section 399 of the Act has been set out by the Apex Court in the case of J. P. Srivastava & Sons Pvt. Ltd. and others v. M/s. Gwalior Sugar Company Limited and others(supra) wherein the Apex Court has stated that the object of prescribing a qualifying percentage of shares in petitioners and their supporters to file petitions under Sections 397 and 398 is clearly to ensure that frivolous litigation is not indulged in by persons who have no real stake in the Company. What is required in these matters is a broad common sense approach. If the Court is satisfied that the petitioners represent a body of shareholders holding the requisite percentage, it can assume that the involvement of the Company in litigation is not lightly done and that it should pass orders to bring to an end the matters complained of and not reject it on a technical requirement. Substance must take precedence over form. Of course, there are some rules which are vital and go to the root of the matter which cannot be broken. There are others where non-compliance may be condoned or dispensed with. In the latter case, the rule is merely directory provided there is substantial compliance with the rules read as a whole and no prejudice is caused. 14. It is the appellant's contention that the expression “issued share capital” in Section 399 of the Act has to be interpreted by applying the rule of interpretation of 'Noscitur a Sociis' to mean the share capital of the member only i.e. equity share capital inasmuch as in Section 41(3) of the Act only the persons holding the equity shares can be said to be the members of the Company. As per 12 the appellant, the expression “issued share capital” appearing in Section 399 has to be interpreted to mean only “issued equity share capital” which can only mean “legally, valid issued share capital” and certainly not inclusive of any share capital, which is ab initio null and void and which consequently necessarily will have to be ignored for the purpose of calculating the percentage thereof as postulated in Section 399 of the Act. According to the appellant, the requirement of 10% of “issued share capital”, even assuming without conceding includes both kinds of share capital namely the equity share capital and preference share capital it has necessarily to be 10% of the validly issued total of the two kinds of the share capital and after applying the aforesaid tests and in case the issue of 41,50,000 preference share is held to be void and consequently ignored, the appellants will be eligible to maintain the petition under Section 397/398 of the Act as its percentage of holding would be 14.70% of the validly issued share capital of the Company. 15. On behalf of the appellant, it is therefore submitted that the impugned Order be set aside and the matter be remitted to the Company Law Board to give its decision whether 41,50,000 preference shares are null and void in view of the violation of the proviso in Regulation 11 of the SEBI(Substantial Acquisition and Takeover) Regulations, 1997 so as to satisfy the eligibility requirement as stipulated in Section 399 of the Act to maintain an application under Section 397/398 of the Act. It is also contended that the Company Law Board committed a gross error in law in applying the rule of literal construction in interpreting the provisions of Section 399 of the Act. It is the contention of the 13 appellant that the term “issued share capital” was nowhere defined in the Act and therefore the CLB was not right in concluding that the said term was defined under the Act. On the rule of interpretation of 'Noscitur a Sociis' reliance has been placed on behalf of the Appellants on the case of The State of Bombay v. The Hospital Mazdoor Sabha and others(AIR 1960 SC 610) and Norman J. Hamilton and another v. Umedbhar S. Patel and others (1979 Company Cases 49). 16. The problem of interpretation is a problem of meaning of words and their effectiveness as medium of expression to communicate a particular thought. The rule of construction 'Noscitur a Sociis' simply means that the word is to be judged by the company it keeps. It is a rule wider than the rule of ejusdem generis. This rule according to Maxwell, means that when two or more words which are susceptible of analogous meaning are coupled together, they are understood to be used in their cognate sense. They take as it were their colour from each other, that is, the more general is restricted to a sense analogous to a less general(Maxwell: Interpretation of Statutes, 11th Edition, page 321). It must be borne in mind that 'Noscitur a Sociis' is merely a rule of construction and it cannot prevail in cases where it is clear that the wider words have been deliberately used in order to make the scope of the defined words correspondingly wider. It is only where the intention of the legislature is associating wider words with words of narrower significance is doubtful, or other wise not clear that the said rule of construction can be usefully applied. 14 17. In the first case of The State of Bombay v. The Hospital Mazdoor Sabha and others(supra) the Apex Court has stated that when two or more words which are susceptible of analogous meaning are coupled together they are understood to be used in their cognate sense and they take as it were their colour from each other that is, the more general is restricted to a sense analogous to a less general. It was further held that expressed differently, it means that, the meaning of a doubtful word may be ascertained by reference to the meaning of words associated with it. In Norman J. Hamilton and another(supra) this Court was dealing with the expression securities as defined under Section 2(h) of Securities Contracts(Regulation) Act, 1956. Securities were defined to include (i) shares, scripts, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated Company or other body corporate; (ii) Government securities, and (iii) rights or interests in securities. This Court referred to the Judgment of the Apex Court in The State of Bombay v. The Hospital Mazdoor Sabhaand others(supra) and applying the doctrine of 'Noscitur a Sociis' held that it was permissible to read the definition of “securities” so that it applies to only securities which are marketable, that is to say, those securities which enjoy a high degree of liquidity and can be freely bought and sold in the open market. At the cost of repetition, it may be reiterated that the doctrine of 'Noscitur a Sociis' means that, when two or more words which are susceptible of analogous meaning are coupled together they are understood to be used in their cognate sense. They take as it were their colour from each other, that is, the 15 more general is restricted to a sense analogous to a less general. Expressed differently, it means that the meaning of a doubtful word may be ascertained by reference to the meaning of words associated to it. 18. On the other hand the rule of literal construction simply means that the words of a statute are first understood in their natural, ordinary or popular sense and phrases and sentences are construed according to their grammatical meaning, unless that leads to some absurdity or unless there is something in the context, or in the object of the statute to suggest the contrary (Emphasis supplied). 19. On behalf of the Company, it is contended that a bare reading of Section 399(1)(a) of the Act clearly provides that in order to maintain a petition on the basis of the share holding, a member must hold, not less than 1/10th of the “issued share capital” of the Company and this provision is amply clear and has got to be interpreted by applying the rule of strict or literal interpretation since there is no ambiguity and the provision has got to be read as it is. In particular on behalf of the Company reliance is placed on Raghunath Rai Bareja and another v. Punjab National Bank and others(2007) 2 SCC 230) wherein the Apex Court has held that:- “The rules of interpretation other than the literal rule would come into play only if there is any doubt with regard to the express language used or if the plain reading meaning would lead to an absurdity. Where the words are 16 unequivocal, there is no scope for importing any rule of interpretation. It is only where the provisions of a statute are ambiguous that the Court can depart from a literal or strict construction”. 20. The literal rule of interpretation really means that there should be no interpretation. In other words, we should read the statute as it is, without distorting or twisting its language. The Apex Court has further stated that the literal rule of interpretation is not only followed by Judges and lawyers, but it is also followed by the layman in his ordinary life. To give an illustration, if a person says “this is a pencil”, then he means that it is a pencil; and it is not that when he says that the object is a pencil, he means that it is a horse, donkey or an elephant. In other words, the literal rule of interpretation simply means that we mean what we say and we say what we mean. If we do not follow the literal rule of interpretation, social life will become impossible, and we will not understand each other. If we