IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED : 19.07.2010 CORAM: THE HON'BLE MR.JUSTICE P.JYOTHIMANI COMPANY APPEAL NOS.16 AND 17 OF 2010 AND CONNECTED MISCELLANEOUS PETITIONS 1.V.L. Sridharan 2.Nalini Sridharan ..Appellants in both the appeals/Respondents 1 & 2 vs. 1.Econo Valves Pvt., Ltd., 197 SIDCO Industrial Estate Ambattur, Chennai 600 098. 2.M/s.NSSL Limited F-8, MIDC Hingna Road Nagpur 440 016. 3.M/s.Jayaswal Holdings Ltd., F-8 MIDC Hingna Road Nagpur 440 016. 4.B.L.Shaw F-8 MIDC Hingna Road Nagpur 440 016. 5.Anand Jayaswal F-8, MIDC Hingna Road Nagpur 440 016. ..Respondents in both the appeals/Appellants Company appeals filed under Section 10-F of the Companies Act, 1956 against the dismissal order of the Company Law Board Additional Principal Bench, Chennai, dated 11.05.2010 made in Company Petition No.81 of 2009 & Company Application No.112 of 2009 in L.P.No.81/09 respectively. For Appellants : Mr.R.Murari For Respondents : Mr.Karthik Seshadri for M/s.Iyer and Thomas for R1 to 3 https://hcservices.ecourts.gov.in/hcservices/ COMMON JUDGEMENT These appeals are filed under section 10F of the Companies Act, 1956 against the order of the Company Law Board dated 11.5.2010, by which the Company Law Board allowed the application filed in C.A.No.112 of 2009 by the respondents 1 to 3 and consequently dismissed the company petition in C.P.No.81 of 2009 filed by the appellants. 2. The first respondent company is a Private Limited Company stated to have been promoted by the appellants having substantial stack as on 13.12.2006. The second and third respondents have entered into two agreements with the appellants offering to purchase the appellants’ shareholding in the first respondent company, viz., (i) shareholders agreement and (ii) agreement to sell all technical processes for the manufacture of plug valves and various other types of valves on 14.12.2006. (a) It is the case of the appellants that while as per the share holders agreement, the consideration in respect of both the agreements has to be paid and according to the appellants, the respondents 2 and 3, after paying the first stage of consideration and obtaining majority of shares, failed to pay the balance amount and there was a failure on the part of the respondents 2 and 3 in performing their obligation under the said agreement, which resulted in filing of applications in O.A.Nos.667 and 668 of 2009 by the appellants under section 9 of the Arbitration and Conciliation Act,1996 in which a direction was given by this Court against the respondents 1 and 2 to furnish security. (b) It is stated that 45,600 shares were transferred in favour of 2nd and 3rd respondents as on 14.12.2006. The respondents 4 and 5 were appointed as additional Directors of the first respondent company. The first appellant, who is stated to have continued to be the Director and Managing Director, has also been appointed as Chief Operating Officer of the first respondent company from 14.12.2006 and as per shareholders agreement, the respondents 2 and 3 have also agreed to acquire 14,018 equity shares representing 23.36% interest in the paid up share capital and they also received transfer forms and share transfer certificates and in spite of the first appellant’s readiness, the respondents 2 and 3 did not make payment as per the agreement. (c) It is the case of the appellants that the respondents 2 and 3 increased the share capital of the first respondent company from Rs.1 crore to Rs.2 crores in an Extraordinary General Meeting (EGM) conducted on 4.6.2007 and in respect of increased share capital, further allotment of shares were made in favour of respondents 2 and 3 to the extent of 71400 and 68600 equity shares https://hcservices.ecourts.gov.in/hcservices/ respectively under a Board resolution dated 10.10.2007, which according to the appellants is against the Articles of Association. (d) After such transfer, it is the case of the appellants that the respondents 2 to 5 attempted to control the first respondent company at the exclusion of the first appellant by conducting meeting at Nagpur, outside the place of the first respondent company which is at Chennai. It is the case of the appellants that in the meeting purported to have been conducted by the above respondents on 21.9.2009, removed the first appellant from all his roles and responsibilities as Managing Director of the first respondent company by taking away the cheque signing authority and the first appellant’s salary was also discontinued from September, 2009. (e) It is due to the above said conduct, the appellants alleging oppression and mismanagement, filed the company petition under sections 397 and 398 of the Companies Act before the Company Law Board and the Company Law Board on 24.9.2009, granted an order of injunction restraining the respondents 2 to 5 from convening and holding any Board Meeting without leave of the Board and from taking any steps to amend the Articles of Association of the first respondent company without leave of the Board. (f) The respondents 1 to 3 filed company application in C.A.No.112 of 2009 questioning the maintainability of the company petition and for dismissal of the same, apart from filing the application in C.A.No.113 of 2009 under section 8 of the Arbitration Act. It is stated that the earlier order passed by the Company Law Board on 24.9.2009 came to be modified on the application filed by the respondents. It is stated that the Company Law Board modified the order permitting the respondents to hold Board Meeting to approve and adopt the accounts of the first respondent's company for the year 2008-09 for submitting the same to the bankers stating that finality shall be subject to the outcome of the company petition. (g) It is stated that the statutory auditors of the company viz., M/s.Venkatramani and Associates functioning for 28 years, also submitted resignation on 5.2.2010. It is also stated that in an emergent General Body Meeting stated to have been conducted by the respondents on 13.3.2010, M/s.Agarwal Chhallani and Co. was appointed as statutory auditors. It is stated that the said auditors are directors of a group of companies ‘NECO Group of Industries’, to which the transfer of shares of the first respondent company is stated to have been effected. (h) It is stated that the Company Law Board on application filed by the appellants in Application No.47 of 2010, restrained the respondents from implementing the resolution for appointment of the said auditors. In the meantime, on the filing of the said company application in C.A.No.112 of 2009 by the respondents 1 to 3, the https://hcservices.ecourts.gov.in/hcservices/ Company Law Board passed an order allowing the said application and holding that the company application filed by the appellants under section 399 of the Companies Act is not maintainable and vacated the interim orders stated above. 3. The Company Law Board having taken note of the admitted facts of transfer of shares effected by the appellants in the following manner: (a) transfer of 30600 shares by the first appellant to the second respondent; (b) transfer of 455 shares by the first appellant to the second respondent; and (c) transfer of 14545 shares by the second appellant in favour of third respondent held that it constituted 76% of total number of shares. After the authorized share capital of the first respondent company which was originally rupees one crore came to be increased to two crores, having found that in the Board Meeting held on 10.10.2007, the increased shares to the value of Rs.1,40,000/- were transferred to respondents 2 and 3, the Company Law Board held that both the appellants jointly held 14410 shares equivalent to 7.20% while the respondents 2 and 3 held 1,85,590 shares to the extent of 92.80%. Therefore, having found that the appellants jointly have not constituted more than 1/10th of the members of the company, the Company Law Board came to the conclusion that the company petition is not maintainable. 4. The Company Law Board has also found that in the Board of Directors’ Meeting of the first respondent held on 14.12.2006, it was resolved to approve the transfer effected by the appellants in favour of respondents 2 and 3 and in the consequent Board Meeting dated 10.10.2007, it was resolved to allot 1,40,000 equity shares to respondents 2 and 3 further resolving to authorize the first appellant and the 5th respondent to make necessary entries in the books of account and in fact, returns were filed by the first appellant and in the Annual General Body Meetings held on 29.9.2007 and 29.9.2008, the first appellant participated in which the shareholdings of the first appellant holding 328 shares was found to be 0.164% while the second and third respondents along with their groups were holding 185600 shares to the extent of 92.08% and others were holding 14072 shares to the extent of 7.036%. Taking note of the letter written by the first appellant dated 16.11.2007, admitting that the second appellant is no more a Director of the Company and she is also not a shareholder since her shares were completely transferred and finding that in spite of the said letter, the appellants chose to file the company petition to set aside the https://hcservices.ecourts.gov.in/hcservices/ allotment made on or after 14.12.2006 and to restore the original shareholding pattern as on 13.12.2006 and that in the meeting there was no challenge by the first appellant in respect of the said shares, the Company Law Board came to the conclusion that the entire dispute rests on the shareholders agreement dated 14.12.2006, that said dispute has been raised by the appellants in respect of payment which is only a dispute attracting the breach of agreement and therefore, no relief can be asked for before the Company Law Board. Accordingly, the Company Law Board passed the order holding that the company petition is not maintainable and dismissed the same. 5. The order is challenged by the appellants on various grounds including that the further increase of shares or allotment was not taken into consideration; that the appellants complied with the requirements of section 399 of the Companies Act; that even before deciding the validity or otherwise of the further increase of share capital, it cannot be held that the appellants have not conformed with the requirements of qualifying shares for filing the petition under section 399 of the Companies Act; that the transfer stated to have been effected to NECO Limited to the extent of 14400 shares is against the Articles of Association; that all these are substantial issues that are to be decided and even before deciding the same, on the maintainability of requirement of qualifying shares, the company petition was dismissed which is not correct; that inasmuch as it amounts to rejection of plaint, utmost care should have been taken by the Company Law Board; that the Company Law Board ought to have gone into the merits of the case before deciding the question of maintainability; that the shareholders agreement is binding on the first respondent company which fact has been brushed aside by the Company Law Board; that the acts of the respondents 2 to 5 are continuous acts of oppression and misconduct which include removal of the first appellant from the post of Director without convening a meeting of the Board when the appellants challenged the increase in the authorized share capital; that unless and until the merit of the same is decided, the appellants cannot be thrown out; that the Company Law Board dismissed the company petition at threshold which is not correct; that the Company Law Board has failed to consider the question of law which is a mixture of law and fact which cannot be decided in the preliminary stage and that as per the judicial precedents, the Company Law Board has no power to decide the matter on preliminary issues. 6. Mr.R. Murari, learned counsel appearing for the appellants on the above said facts would contend that even though the shareholders agreement is not disputed by the appellants, the acts against the shareholders agreement and also against the Articles of Association in increasing the authorized share capital by which the appellants are said to have been relegated to a minor position holding less than 1/10th shares itself, are all acts of oppression and unless and until the correctness of the same is decided, it is not https://hcservices.ecourts.gov.in/hcservices/ proper or legal for the Company Law Board to throw out the appellants at the preliminary stage. (a) It is his further submission that when in the main company petition the appellants questioned the validity of further issue of share capital to the extent of 140000 shares in favour of respondents 2 and 3, unless the same is decided, the company petition cannot be decided on the question of maintainability for want of required number of shares to maintain a petition under section 399 of the Companies Act. (b) He would strongly rely upon the judgment of Andhra Pradesh High Court in C.A.Nos.19 and 20 of 2005 dated 3.7.2009 [B.Subba Reddy vs. S.S.Organics Limited rep. By its Managing Director and V.N.Sundana Reddy] reported in MANU/AP/0229/2009, wherein it was held that under the Companies Act, there are no powers on the Company Law Board to decide preliminary issues and the Company Law Board cannot exercise the powers of Civil Court under the Civil Procedure Code except what is explained under section 10E(4C) of the Companies Act. (c) It is his submission that as per the provision of section 10E of the Companies Act, except those mentioned in the said provision, no other provisions of Civil Procedure Code are applicable. He would also rely upon a Division Bench Judgment of Karnataka High Court reported in Mr.Vijayan Rajes and others vs. M.S.P.Plantations Private Ltd., rep. By its Managing Director M.S.P.Rajes and others [ILR 2009 Kar.3576] to substantiate his contention that for the purpose of deciding the eligibility of a member of a company to maintain a petition under section 399 of the Companies Act, the qualification in respect of the requisite shareholdings in the company of such person prior to the act of oppression complained of has to be taken into consideration and not the qualifying shares after the act of oppression complained of. (d) He would also rely upon the judgment of this Court in S.V.T.Spinning Mills Pvt. Ltd., vs. M.Palanisami [2009 (151) Com.Cases 233] for the proposition that the Company Law Board cannot decide on the issue of maintainability if it involves appreciation of evidence and other factors. It is his submission that the shareholding position of the appellants being the promoters of the company should have been considered for the purpose of eligibility to move a petition under section 397 of the Companies Act as on the date of shareholders agreement viz., 14.12.2006 and even as per the terms of the said agreement, on the said date, the appellants had more than 10% of interest in the paid up share capital of the company and it was, only subsequent to the said shareholders agreement, the conduct of oppression by the respondents 2 to 5 was revealed by unauthorized transfer of shares against the provisions of the Articles of Association, apart from the unauthorized increase of share capital https://hcservices.ecourts.gov.in/hcservices/ which requires appreciation of evidence and therefore, the decision of the Company Law Board in rejecting the Company Petition on maintainability has to be set aside. (e) It is his further submission that under section 10E(4C) of the Companies Act, there are only six instances where the Code of Civil Procedure is applicable and apart from those exhaustive circumstances, it is not open to the Company Law Board to decide anything in the name of maintainability. He has also referred to various Company Law Board Regulations to substantiate his contention. 7. On the other hand, it is the contention of Mr.Karthik Seshadri, learned counsel for the respondents 1 to 3 that the main company petition itself was filed in the year 2009, which is based on two agreements viz., shareholders agreement and Technical know-how agreement dated 14.12.2006 and no where in the company petition, the appellants have challenged the validity of shares which are admitted to have been transferred in favour of the respondents 2 and 3 and on the other hand, it is the specific case of the appellants that they were consciously and voluntarily agreeable to sell their shares and the complaint is that the consideration for transfer of shares has not been paid in full. According to him, when the validity or otherwise of the transfer of shares has not been challenged by the appellants in the main company petition, an overall reading of the entire company petition shows that it is only the contractual right which the appellants sought to enforce in the company petition under the guise of treating it as oppression and mismanagement. (a) It is his submission that the agreement to transfer of shares entered into by the appellants was in their individual status and that has nothing to do with the affairs of the company and therefore, the appellants have no locus standi to maintain the petition under section 397 of the Companies Act. (b) It is his submission that the appellants have made a misstatement before the Company Law Board on the very first hearing to the effect that out of four members of the company, the appellants constituted two in number and in combination, they held more than 1/10th of total members of the company. He would vehemently submit that the very conduct of the appellants in invoking section 9 of the Arbitration and Conciliation Act,1996 shows the interest of the appellants in obtaining money as per the transactions. He would submit that section 399 of the Companies Act has to be construed strictly. (c) It is his submission that on the facts of the present case, the judgment of the Andhra Pradesh High Court relied upon by the appellants should be treated as per incurium. He has placed reliance on the judgment of the Supreme Court in Canara Bank vs. https://hcservices.ecourts.gov.in/hcservices/ Nuclear Power Corporation of India Ltd., [(1995) Supp.(3) SCC 81]. It is his submission that the term, ‘court’ has to be construed comprehensively which may include certain Tribunals and according to him, the Company Law Board should also be construed as a Court for limited purpose. (d) He has also submitted that the powers of the Company Law Board under section 402 are vast and such powers are not ousted in respect of the Company Law Board on reading of Order 14 Rule 2 C.P.C. He would insist on the judgment of the Division Bench of this Court in Om Sakthi Renergies Limited rep. By its Managing Director Mr.M.Jayathirth vs. Megatech Control Limited rep. By its Managing Director Mr.N.Ramkhumar and another [2006(2) CTC 161] and the judgment of the Supreme Court in ITI Ltd., vs. Siemens Public Communications Network Ltd., [(2002) 5 SCC 510] and the order of the Company Law Board in Morgan Ventures Ltd., vs. Blue Coast Hotels and Resorts Ltd., and others [2010 (155) Com.Cases 431] to assert his stand that the Company Law Board’s powers are vast. It is his submission that inasmuch as the appellants have not questioned the transfer which was effected and the transfer itself is in the individual capacity of the appellants, it cannot be termed as affairs of the company. (e) It is his submission that the validity or otherwise of the transfer can be questioned by the appellants in a different forum. He would submit that the Company Law Board’s order is in substantial compliance. It is his submission that as far as the transfer of shares, which is alleged by the appellants as not valid, is concerned, the substantial compliance of the provisions of the Act is sufficient to hold as to the validity of such transfer and in this context, he would rely upon the judgment in J.P.Srivastava & Sons (P) Ltd., vs. Gwalior Sugar Co., Ltd., [(2005) 1 SCC 172]. (f) It is his submission that the appellants having filed an application under section 9 of the Arbitration and Conciliation Act,1996 cannot now go back and say that the position as stood on 14.12.2006 has to be taken note of for the purpose of deciding about the locus standi of the appellants in maintaining the petition under section 397 of the Companies Act. 8. I have heard the learned counsel for the appellants and the respondents and referred to the impugned order and given my anxious thoughts to the issues involved in this case. 9. These appeals being ones filed under section 10F of the Companies Act, which are maintainable on any question of law, arise from the orders of the Company Law Board. A reference to the pleadings in these appeals show that the major complaint made by the appellants being the petitioners in the original company petition https://hcservices.ecourts.gov.in/hcservices/ filed under sections 397 and 398 of the Companies Act is revolving around the shareholders agreement dated 14.12.2006 and another agreement entered on the same day for the purpose of transfer of technical know-how of the first respondent company in favour of second and third respondents by the appellants being the promoters of the first respondent company. 10. The company petition in C.P.No.81 of 2009 came to be filed by the appellants complaining oppression and mismanagement of the affairs of first respondent company by the respondents 2 and 3 subsequent to the said agreement dated 14.12.2006 and the said company petition came to be filed on 18.9.2009 before the Company Law Board. It is also an admitted fact that based on the said agreements, the appellants approached this Court under section 9 of the Arbitration and Conciliation Act, 1996 by filing O.A.Nos.667 and 668 of 2009, in which this Court on 30.4.2010 issued direction against the respondents 2 and 3 to furnish security for an amount of Rs.3 crores. A reference to the averments made in the company petition filed by the appellants show that as per the said agreements dated 14.12.2006, the appellants transferred 45600 shares out of 60000 equity shares of the company to second and third respondents and that constituted 76% of the total number of shares of the first respondent company, and it is also not in dispute that they executed necessary instrument for transferring such shares as per the provisions of the Companies Act. 11. After such transfer, the second and third respondents were holding 76% of stake in the first respondent company, while the appellants were having 24%. It is seen that pursuant to the said two agreements, on 14.12.2006 viz., the date of agreements, the second and third respondents waived Rs.15 million and Rs.5 million respectively under the shareholders agreement and the agreement for sale of technical process for manufacture of plug valves and various other types of valves. As stated above, for the balance amount, the appellants approached this Court by filing the application under section 9 of the Arbitration and Conciliation Act. 12. It is stated by the second and third respondents that the appellants preferred an application under section 11 of the Arbitration and Conciliation Act before the High Court of Judicature at Bombay in Nagpur Bench and a Honourable retired Judge came to be appointed as Arbitrator, in which it is stated that the appellants were participating. It is seen that the share capital of the first respondent company came to be increased from Rs.1 crore to Rs.2 crores and further allotment of shares was made to the extent of 140000 fully paid up equity shares by allotting 71400 shares to the second respondent and 68600 shares to the third respondent on 10.10.2007 in the meeting of the Board of Directors. It is not in dispute that the first appellant participated in the said meeting and at that time, he was the Chairman of the Board. https://hcservices.ecourts.gov.in/hcservices/ 13. After the said further allotment, the shareholding pattern of the company as stated by the appellants in the company petition was as follows: 1. Both the appellants together … 14410 shares … 7.20% 2. Respondents 2 and 3 … 1,85,590 shares … 92.80% However, according