IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE K.M.JOSEPH & THE HONOURABLE MRS. JUSTICE M.C.HARI RANI WEDNESDAY, THE 1ST DECEMBER 2010 / 10TH AGRAHAYANA 1932 Co.Appeal.No. 67 of 2010 ---------------------------------------- APPELLANTS/PETITIONERS: ------------------------------------------ 1. JIJI ANTONY, MADHAVATHU HOUSE, ARUNAPURAM P.O.,PALA, KOTTAYAM DISTRICT. 2. REGI JACOB, 5C, MANGALAM TOWERS, NH 47, BYPASS, VENNALA P.O., ERNAKULAM-682028. 3. GIBY MATHEW, 5B, SKYLINE MARBLE ARCHKATTAKKARA CROSS, KALOOR, KOCHI, KERALA. 4. JERRY MATHEW, 7A, TOC H RETREAT, TOC H SCHOOL ROAD, TOC H NAGAR, VYTTILA, KOCHI- 682019. 5. MATHEW JACOB, TALAVYALIL HOUSE, PADAMUGAL, PALACHUVADU, KAKKANAD P.O., KOCHI-30. 6. JOSE THOMAS, NEDUMKANAL HOUSE, PALA- 686575. 7. MINI JOSEPH, 5C, MANGALAM TOWERS, NH 47, BYPASS, VENNALA P.O., ERNAKULAM- 682028, KERALA. BY ADV. SRI.KARTHIK SESHADHRI (SENIOR) SRI.SANTHOSH MATHEW SRI.SATHISH NINAN SRI.ARUN THOMAS SRI.JENNIS STEPHEN RESPONDENT(S): RESPONDENTS: ------------------------------------------------ 1. JRG SECURITIES LIMITED, JRG HOUSE, ASHOKA ROAD, KALOOR, KOCHI- 682017, KERALA. COA NO.67/2010 -2- 2. DUCKWORTH LIMITED, A COMPANY INCORPORATED UNDER THE LAWS OF MAURITIUS, HAVING ITS REGISTERED OFFICE AT C/O MULTI CONSULT LIMITED,P.O.BOX NO.799,10, FRERE FELIX,DE VALOIS STREET,PORT LOUIS,MAURITIUS. 3. MR.PADMANABHAN VISWANATHAN,ADDITIONAL DIRECTOR AND INDEPENDENT DIRECTOR,6A/6B "ABBOTSBURY", BLOCK 1, NEW NO.42 (OLD NO.74), C.P.RAMASWAMY ROAD, ALWARPET, CHENNAI-600 018. 4. MR.T.M.VENKATARAMAN, INDEPENDENT DIRECTOR, FLAT D, VENKAT SARSHAN,8, SECOND CANEL CROSS ROAD, GANDHINAGAR, ADAYAR, CHENNAI-600 020. 5. MR.PRADEEP MALLICK, INDEPENDENT DIRECTOR A/2, PALLONJI MANSION, 43, CUFFE PARADE, MUMBAI-400 005. 6. MR.BHASKER RAMAKRISHNA MENON, INDEPENDENT DIRECTOR, 27/3,SHAHTOOT MARG, DLF CITY ONE, GURGAON, HARYANA- 122 002. 7. MR.RAHUL BHASIN, CHAIRMAN, A2/16, SAFDARJUNG ENCLAVE, NEW DELHI-110 029. 8. MR.MUNISH DAYAL, DIRECTOR, B24, MAYFAIR GARDENS, NEW DELHI- 110 016. 9. MR.GAURAV VIVEK SONI, MANAGING DIRECTOR, JRG HOUSE, ASHOKA ROAD, KALOOR, KOCHI, KERALA- 682 017. R1, R6, R8 & R9 BY ADV. SRI.M.PATHROSE MATTHAI, SENIOR ADVOCATE SMT.MARIAM MATHAI SRI.SAJI VARGHESE R9 BY ADV.SRI.ROHIT CHOUDHRY THIS COMPANY APPEAL HAVING BEEN FINALLY HEARD ON 01/12/2010, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: K.M.JOSEPH & M.C.HARI RANI, JJ. ------------------------------------------------------ COMPANY APPEAL No.67 of 2010-G ---------------------------------------------- Dated, this the Ist day of December, 2010 J U D G M E N T K.M.Joseph, J. This company appeal is lodged against the order dated 11th October, 2010 in C.A.No.92/2010 in C.P.No.44/2010 by the Chennai Bench of the Company Law Board. 2. Briefly put, the case of the appellants is as follows: Appellants are the petitioners in C.P.No.44/2010. They are the original promoters of the Ist respondent company. The Ist respondent company is incorporated under the Companies Act, 1956 and it is a public limited company. It is a listed public company and it is engaged in equity, commodity and insurance broking business. Appellants 1 to 3 are the original promoters of the company. Respondent No.2 is a financial investor. The 2nd respondent had agreed to subscribe 1,03,82,174 equity shares of Rs.10/- each at a premium of Rs.38/- per share. Annexure A-2 is the agreement between the appellants 1 to 3 and the 2nd COA 67/2010 -2- respondent. Appellants filed Company Petition under Section 397 and 398 of the companies Act. The appellants also filed application seeking interim injunction (Annexure A-14) feeling aggrieved by the decision of the company to raise capital. Various other acts are allegedly the subject matter of the petition. The Company Law Board initially granted injunction dated 6.7.2010. The Company Law Board directed that the respondents shall not proceed with the rights issue without the leave of the Bench. Subsequently, by the impugned order the Company Law Board has vacated the said injunction and permitted the Ist respondent company to proceed with the rights issue. The Ist respondent was permitted to proceed with the rights issue as resolved in the Board meeting on 25.5.2010. It is also observed that the above order is subject to the final outcome of the C.P. Respondents were directed to file counter within four weeks. 3. The case of the appellants is essentially based on Article 157 (A) of the Articles of Association of the company. Article 157A inter alia reads as follows: COA 67/2010 -3- “157A e. Decisions of the Company and its present and future subsidiaries, regarding the following subject matters shall require the affirmative vote of Regi Jacob or the nominee of Regi Jacob in an appropriately convened Board meeting. (e) Further issue of shares or other securities of the Company/group companies to Baring or its affiliates; 4. We heard Sri.Karthik Seshadhri on behalf of the appellants, Sri.Pathrose Mathai, learned senior counsel for respondents 1, 6, 8 and 9. We have also heard Sri.Rohit Choudhry also who appeared with Sri. Pathrose Mathai for respondent No. 9. 5. Sri.Karthik Seshadhri, learned counsel for the appellants submits that the 2nd appellant who is referred in the Articles of Association has a legal right to insist that further issue of capital can be done only if he agrees to the proposal. There should be an affirmative vote on the part of the 2nd appellant. According to him, there is no such COA 67/2010 -4- affirmative vote, and, therefore, the decision of the company approving the rights issue is in contravention of the provisions of the Articles of Association. He would point out that the stand of the Ist respondent as is disclosed in the counter affidavit is as follows: “5. Without prejudice to the foregoing, I say and state that matter relating to issue of shares on rights basis does not fall within the ambit of provisions of sub-clause e (e) of Article 157A of the Articles of Association. It is submitted that the said provisions only come into play in the event in any further issue of shares, which is likely to alter the shareholding of the promoter/petitioners, the petitioner shall have an affirmative vote on such matter. In the instant case, shares are sought to be issued on rights basis, which does not alter the shareholding pattern in the respondent company and as such there is no requirement of any affirmative vote of the petitioners/promoter group.” 6. However, he would point out that the Company Law Board, by the impugned order has proceeded on the basis that the Article itself is void being ultra vires Section 81 of the Companies Act. He would point out that even the respondents did not have such a case before the Company Law Board. He would further submit that the Company Law COA 67/2010 -5- Board has also found that no case of oppression is made out by the appellants and that the oppression which is sought to be built up by the appellants revolves around only the rights issue when on the contrary the appellants have other allegations in support of their case under Sec.397 and 398 of the Companies Act. He would submit that under Sec.81 of the Companies Act, the Board must decide to increase subscribed capital. This result inevitably follows from the words used in Sec.81 namely that 'where it is proposed'. According to him, 'where it is proposed' means where it is decided by the Board. Therefore, according to him, when it is in dispute that he did raise his objection to the raising of further capital the fact that he was outvoted would not make any difference. At a stage when the Board decides to take a decision as to whether there must be an increase in subscribed capital in the light of Article 157A he poses the question as to how the Company Law Board could come to the conclusion that the said Article is repugnant to provision of Section 81. According to him, once it is decided by Board lawfully to increase the capital necessarily, unless the COA 67/2010 -6- company decides in the general body by special resolution under Sub-sec (1A) of Sec.81 inexorably there must be a rights issue under sub-sec (1) (a) of Sec.81. According to him, preceding the stage where the question of right issue arises or a question of preferential right under sub-sec.(1A) arises the Board must take a decision to increase the capital and it is at that stage that Article 157A operates enabling the 2nd appellant to lawfully object to the proposal to increase the capital. There is no repugnancy in the Article if it is so interpreted, he contends. Of course, he further contends that appellants were the original promoters. They wanted further infusion of capital. It is accordingly that the agreement with the 2nd respondent was entered into. They wanted the company to grow. It is pointed out that proposed issue is attempted for a collateral purpose. He would contend that even though it is termed as rights issue actually the result will be that there will be several shareholders who may not subscribe to the rights issue and in respect of such shares the Board can allot shares at their discretion and he would submit that though it is stated to be a rights issue at the end of it all COA 67/2010 -7- shareholding pattern will be completely changed and it will be heavily loaded in favour of the contesting respondents. 7. Per contra, Sri.Pathrose Mathai would point out that there is no merit at all in the appeal. He would point out that what is involved is a plain case of rights issue. He would submit that there can be no case at all for the appellants to complain about as the shares will be distributed among the existing shareholders as mandated in section 81 (1) (a). There is no preferential allotment at all to Barings and in this regard he draws our attention to Article 157A (e) and he would submit that the Article is directed to prevent any issue to M/s.Barings or its associates. (It is not in dispute that Barings is the company controlled by the 2nd respondent). He would submit that there is no preferential allotment in this case. He would submit that the question of allotment of shares other than to the existing shareholders does not arise in this case and that is a matter which may be controlled by Sec.81 (1A) and there is no such proposal by the company at all. He would also submit that the appellant was outvoted in the meeting and the Board has decided to raise capital in the COA 67/2010 -8- interest of the company. Sri.Rohit Choudhry also would submit that there can be no complaint about the manner in which the company has taken a decision on the rights issue. He would submit that Article 157A will not apply in the facts of this case. Both Sri.Pathrose Mathai and Sri.Rohit Choudhry would point out that apart from the allegation of rights issue there is no other allegation under Section 397 and 398. Sri.Pathose Mathai would emphasise that under Section 397 and 398 it is not open to the applicant to rely on an allegation of isolated nature to make good his case under Section 397 and 398. 8. We notice that the Company Law Board has proceeded to refer to few decisions and came to the conclusion that Article 157A is repugnant to Section 81 of the Companies Act and therefore void. In the light of the same, it is tentatively held that Article 157A is void as far as the Company Petition is concerned. It is also found that except the rights issue no prima facie case is made out regarding oppression on other grounds pleaded in the petition. The shares have been issued to all shareholders on pro-rata basis. COA 67/2010 -9- This is an interlocutory order. Any finding which is arrived in the course of interlocutory order can only be tentative and prima facie. We say this to allay the apprehension in the minds of the appellants that when the Company Law Board takes up the matter for final disposal the Company Law Board should not feel bound to follow the reasoning adopted in the interlocutory order. We are of the view that we need not interfere with the order vacating the injunction. We must notice in this regard that Article 157A (e) which we have extracted actually prohibit rights issue in favour of Barings or its associates. There is no dispute that what is proposed is rights issue under Sec.81(1) (a). We would think that in the facts of this case the appellants have not made out a case for interference with the exercise of discretion by the Company Law Board in vacating the interlocutory order. But, we also feel that this is a case which calls for a direction to the Company Law Board to dispose of C.P.No.44/2010 on its files finally on merits within a time limit. Therefore, in the interest of justice, we direct the Company Law Board to take up C.P.No.44/2010 and dispose of it finally on merits within COA 67/2010 -10- three months from the date of production of a copy of this judgment untrammelled by anything contained in its own order as also this judgment. (K.M.JOSEPH) JUDGE. (M.C.HARI RANI) JUDGE. MS