ORDER
S. Balasubramanian, Chairman
1. In this order, I am considering CA 391 of 2006 filed by the respondents challenging the maintainability of the petition- CP 82 of 2006- on the ground that the petitioner does not satisfy the requirements of Section 399 of the Companies Act, 1956 (the Act) to file this petition under Sections 397/398.
2. The petitioner, claiming to hold 14.8% of the equity shares in M/S Blue Coast Hotels & Resorts Limited (the company) has filed this petition alleging oppression and mismanagement in the affairs of the company. In the present application, the respondents have pointed out that in addition to the equity share capital, the company has also issued substantial preferential shares and thus the holding of the petitioner in the issued capital of the company is only around 2% and therefore, in terms of Section 399 of the Act, the petition is not maintainable.
3. Shri Sarkar appearing for the applicant/respondents submitted: The company is a listed company and the issued capital of the company consists of both preference as well as equity shares. The total issued capital is Rs. 88.8 Crores comprising of Rs equity share capital and- -preference share capital. The petitioner acquired 3,15,000 equity shares on 24.2.2004 and 6,55,000 equity shares on 5.3.2004 aggregating to 9,70,000 equity shares of the total paid up value of —–, thus constituting 14.8% of the equity share capital. Even before the petitioner acquired the shares, the company had issued preference shares worth Rs. 41.5 crores. Therefore, even at the time when the petitioner acquired the equity shares, its holding was less than 10% of the total issued capital of the company. In terms of Section 399 of the Act, to maintain a petition under Sections 397/398 , one should hold not less than 1/10th of the issued share capital of the company. Presently, in view of further issue of preference shares after the petitioner acquired the equity shares, the petitioner holds only just about 2% of the total issued capital of the company and as such this petition is not maintainable. Accordingly, the petition should be dismissed.
4. Shri Mookherjee, Senior Advocate, appearing for the petitioner submitted: By a strict interpretation of Section 399 of the Act, one has to hold that issued capital would mean only equity capital and voting rights and cannot include preference capital. Even assuming that issued capital means and includes both equity and preference shares, then, it should consist of only validly issued shares. The preference shares issued by the company prior to the petitioner became a shareholder and issued thereafter were in violation of the SEBI guidelines and therefore should be ignored for the purposes of determining the entitlement of the petitioner to file the petition. Even though, the preference shares were issued before the petitioner acquired the equity shares, since the preference shares had not been validly issued, the petitioner can challenge the said issue and once it is declared as invalidly issued, the petitioner’s holding at the time of acquisition of shares would be more than 10% of the issued capital. Since the action initiated in a petition under Sections 397/398 is a derivative action, a shareholder can challenge even acts that occurred before he acquired shares in the company. The respondents have not only illegally issued the preference shares, they have also acquired voting rights on those shares by not paying dividend due on the shares. By this, the respondents have acquired more than 98% of the voting rights, thus, acting against the interests of the petitioner. The right of a petitioner to challenge past acts by means of a derivative action has been judicially recognized in Singapore. In interpreting Section 216(1)(a) of Singapore Companies Act which is more or less similar to the provisions of Section 397 of the Indian Act, it has been held that as a derivative action, a shareholder can challenge acts/transactions prior to his becoming a shareholder. Therefore, to determine the maintainability of the petition, the illegally issued preference shares should be ignored and if done so, only equity share capital would remain of which the petitioner holds 14.2% entitling it to file this petition.
5. In rejoinder, Shri Sarkar submitted: Section 399 does not deal with voting rights nor equity shares alone. Even to question the past acts, on the day of filing the petition, the petitioner should hold 10% of the total issued capital. Indian law is different from Singapore law. In Section 216 of the Singapore Act, there is a specific provision that past acts could be challenged while in terms of Indian Act, past and concluded transactions cannot be challenged under Sections 397/398. No one can seek to acquire qualification under Section 399 alleging that shares issued in the past are either illegal or wrongful. The Act itself recognizes two kinds of share capital in Section 85 of the and Section 86 deals with voting rights. However, Section 399 neither mentions a particular type of shares nor voting rights, but only specifies “issued capital”. Therefore, in determining the eligibility, total issued capital should be taken into account.
6. Shri Choudhary, Senior Advocate, appearing for respondents submitted: The claim of the petitioner that Section 399 deals with voting rights or equity shares alone is not sustainable. There are various Sections in the Companies Act specifying different kinds of qualifications to assert the right of a shareholder. In terms of Section 169, to requisition an EOGM, the qualification prescribed is 1/10th of voting rights. Likewise, in terms of Section 188(2) of the Act, for a requisition under Section 188(1), the qualification fixed is 1/20th of the voting power. Likewise in terms of Section 235, to seek for an investigation into the affairs of a company, the members should hold not less than 1/10th of the total voting power. Section 399 only specifies that to file a petition under Sections 397/398, the shareholders should hold not less than 1/10th of the issued capital. Schedule VI to the Companies Act classifies the share capital into authorized, issued, subscribed and paid up capital and under each of these, details of equity share capital and preference share capital have to be indicated. This would establish that issued capital consists of not only equity capital but also preference share capital. Since the petitioner holds only about 2% of the issued capital, the petition is not maintainable in terms of Section 399.
7. The learned Counsel relied on the following cases: Gaurav Distributors Pvt. Ltd. v. Commissioner of Customs 2004 Ind. law SC 587 wherein the Supreme Court has held that the word used in a statute should construed as such. Since Section 399 specifically mentions issued capital, it should be construed as such and if done so, both equity and preference share capital should be taken into account. In Hillcrest Reality Sdn. Bhd. v. Hotel Queen Road Pvt. Ltd. CLB order dated 31.1.2006 this Board has observed that issued capital as used in Section 399 would include both equity and preference share capital. In Kishan Khariwal v. Ganganagar Industries Ltd. 118 CC 626, this Board has held that if the petitioners did not hold 10% or more of the subscribed capital even before further issue of shares, the petition was not maintainable. In the present case, at no time, the petitioner held more than 10% of the issued and paid up capital of the company. In Mega Resources v. Bombay Dyeing & Mfg. Co. Ltd. 116 CC 205, this Board has held that the maintainability of the petition in terms of Section 399 has to be judged on the day of presentation. In the present case, on the day of presentation of the petition, the petitioner held less than 2% shares.
8. In rejoinder, Shri Mookherjee submitted: In Bombay Dyeing case, this Board has held that even though the maintainability of a petition has to be judged on the day of presentation, yet, it has also held that at the threshold it has to be examined as whether the shares were validly held. Since in the present petition, the petitioner has challenged the validity of issue of preference shares, the same should be first examined to determine whether the petitioner holds more than 10% of the issued capital of the company. In other words, without determining the validity of the issue of preference shares, the maintainability of the petition should not be decided.
9. I have considered the pleadings and arguments of the counsel. Section 399 prescribes certain qualifications for filing a petition under Sections 397/398. One of the qualifications is that the petitioner should hold not less than 1/10th of the issued capital. It has been urged by the learned Counsel for the petitioner that the term “issued capital” should be construed to mean only equity share capital. In a recent case, the Supreme Court has laid down the principle of construction of a statute in the following terms : “The first and foremost principle of interpretation of a statute in every system of interpretation is the literal rule of interpretation. The other rules of interpretation e.g. the mischief rule, purposive interpretation etc. can only be resorted to when the plain words of statute are ambiguous and lead to no intelligible results or if read literally would nullify the very object of the statute. Where the words of a statute are absolutely clear and an unambiguous, recourse cannot be had to the principles of interpretation other than the literal rule “. : Raghurath Bareja v. Punjab National Bank 2007 19 CLA-BL Supp 108 (SC). The term “issued share capital” as used in Section 399 is neither ambiguous nor would lead to any unintelligible result, as, this term is well known, well understood and also in a way defined in the Companies Act itself. The Act recognizes two types of share capital-equity and preference. Shri Choudhary, referring to Schedule VI to the Companies Act, rightly pointed out that issued capital would include not only equity share capital but also the preference share capital. This being the position, there is no scope, contrary to the contention of the learned Counsel for the petitioner, to interpret “issued capital” as “equity capital” or “voting rights”. Considering the fact that the Act itself has, in various provisions, as pointed out by Shri Chaudhary, provides for various types of qualifications to invoke those provisions, to initiate action under Sections 397/398, one has to hold not less than 1/10th of the issued capital, which would include not only equity shares but also preference shares. It appears to me that legislature has consciously used the term “issued capital” in Section 399 instead of “equity capital” or “voting rights” to ensure that the person invoking the provisions of Section 397/398 has some minimum financial stake in the company in the form of share capital-be it equity or preference or both. Thus, I am unable to accept the contention of the petitioner that the petition is maintainable as it holds 14.8% of the equity capital, which is only about 2% of the issued share capital.
10. Admittedly, in the present case, on the day of filing of the petition, the petitioner held less than 1/10th of the issued capital. In a number of cases, this Board has held that if the shareholding of the petitioner got reduced to below 10% on issue/allotment of further shares and if the said issue/allotment had also been alleged to be an act of oppression in the petition, the maintainability of the petition would be decided after determining the validity of the issue/allotment. But in the present case, even at the time of acquisition of the equity shares, the petitioner held only—–% of the issued capital. In other words, its holding has not come down below 10% by allotment of shares subsequent to its becoming a shareholder. Shri Mookherjee relied on the decision relating to Singapore Companies Act to argue that even past transactions can be impugned as a measure of derivative action and therefore, the validity of the issue of preference shares before the petitioner acquired shares could also be impugned. Shri Sarkar relevantly referred to Section 216(1)(b) of the said Act which reads “That some of the acts of the company had been done or is threatened or that some resolution of the members, holders of debentures or any class of them has been passed or is proposed which is unfairly discriminates against or is otherwise prejudicial to one or members or holders of debentures”. This provision would indicate that the said Act gives a statutory right to the members to challenge past acts too, but there is no such similar provision in the Indian Act which specifically provides “Any member of a company who complains that the affairs of the company are being conducted in a manner prejudicial to interest or in a manner oppressive to any member”. In other words, the Indian Act does not visualize challenging past acts that too before a person becoming a member of a company. It has been judicially held in a number of cases that in terms of Section 397 of the Act, past and concluded transactions cannot be impugned in a petition under Sections 397/398 of the Act. However, even assuming as contended by the petitioner, that the issue of preference shares before the petitioner became a shareholder is oppressive or amounts to mismanagement, yet, even to challenge the same, on the day of filing of the petition, the petitioner should hold the requisite 10% of the issued capital of the company, which obviously, the petitioner does not hold. Shri Mookerjee contended that in Bombay Dyeing case, this Board has held that to maintain a petition under Section 397/398, the validity of acquisition of the shares by a petitioner could be examined to determine the maintainability of the petition and therefore, in the same analogy, whether shares had been issued validly could also examined to determine the maintainability. Even though this argument appears to be attractive, yet, a reading of that judgment would show that there was an earlier finding, in a different proceeding that the petitioner therein had not validly acquired the shares and the validity of acquisition of the shares was not determined in the petition under Sections 397/398. Therefore, the decision in that case is of no assistance to the petitioner. 11. Since the petitioner does not fulfill the requirements of Section 399, the petition is dismissed.
CORRIGENDUM
In the order dated 3rd May, there are some omissions relating to the share capital of the company. Accordingly, this corrigendum is issued.
In para 3 of the said order, the 3rd and 4th sentences be substituted with the following:
The total issued capital is Rs. 88.05 Crores comprising of Rs. 6.55 crores of equity share capital and Rs. 81.50 crores of preference share capital. The petitioner acquired 3,15,000 equity shares on 24.2.2004 and 6,55,000 equity shares on 5.3.2004 aggregating to 9,70,000 equity shares of the total paid up value of Rs. 97 lakhs, thus constituting 14.8% of the equity share capital.
In para 10 of the said order, the 3rd sentence be substituted with the following:
But in the present case, even at the time of acquisition of the equity shares, the petitioner held only about 2% of the issued capital.