IN THE HIGH COURT OF KERALA AT ERNAKULAM
Co.Appeal.No. 67 of 2010()
1. JIJI ANTONY, MADHAVATHU HOUSE,
... Petitioner
2. REGI JACOB, 5C, MANGALAM TOWERS,
3. GIBY MATHEW, 5B,
4. JERRY MATHEW, 7A, TOC H RETREAT,
5. MATHEW JACOB, TALAVYALIL HOUSE,
6. JOSE THOMAS, NEDUMKANAL HOUSE,
7. MINI JOSEPH, 5C, MANGALAM TOWERS,
Vs
1. JRG SECURITIES LIMITED,
... Respondent
2. DUCKWORTH LIMITED,
3. MR.PADMANABHAN VISWANATHAN,ADDITIONAL
4. MR.T.M.VENKATARAMAN,
5. MR.PRADEEP MALLICK, INDEPENDENT DIRECTOR
6. MR.BHASKER RAMAKRISHNA MENON,
7. MR.RAHUL BHASIN, CHAIRMAN,
8. MR.MUNISH DAYAL, DIRECTOR, B24,
9. MR.GAURAV VIVEK SONI,
For Petitioner :SRI.SANTHOSH MATHEW
For Respondent :SRI.SATHISH NINAN
The Hon'ble MR. Justice K.M.JOSEPH
The Hon'ble MRS. Justice M.C.HARI RANI
Dated :01/12/2010
O R D E R
K.M.JOSEPH & M.C.HARI RANI, JJ.
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COMPANY APPEAL No.67 of 2010-G
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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
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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:
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“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
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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
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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
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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
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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
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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.
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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
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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