PRINCIPAL BENCH
NEW DELHI
Present: 1. Justice A.K. Banerji, Chairman
2. Shri S. Balasubramanian,
Vice Chairman
AND
In the matter of Shri Ashok
Kumar Oswal
Versus
M/S Vardhman Polytex Limited
PETITIONER:
Shri Ashok Kumar Oswal
RESPONDENTS:
1. Shri S.P. Oswal
2. Smt. Suchita
Jain
3. Smt. Shakun
Oswal
4. M/S Panchsheel
Textile Manufacturing & Trading Co. (P) Ltd.
5. M/S Vardhman
Polytex Limited
6.
Present on behalf of
parties:
1. Shri U.K. Chaudhary, Sr.
Advocate
.. for petitioner
2. Ms. Ranjana Roy, Advocate
.. for petitioner
3. Shri S. Sarkar, Sr.
Advocate
.. for resp.2,4 & 5
4. Shri S.N. Mookherjee,
Advocate
.. for resp.1,2 & 3
5. Shri K.K. Lahiri,
Advocate
.. for resp.1,2,3 & 4
6. Shri Gaurav Kejriwal,
Advocate
.. for resp.1,2,3 & 4
7. Shri Sidharth Dutt,
Advocate
.. for resp.5
(Date of final
hearing:11.1.2002)
S. BALASUBRAMANIAN:
1. The petitioner,
being the Managing Director of M/S Vardhman Polytex Limited ( the company), has filed this
petition under Section 409 of the Companies Act, 1956 ( the Act) seeking for a direction
that the company shall not pass any resolution to effect any change in the Board of
Directors or in the management by appointment
of the 1st respondent as the Chairman and Managing Director or for removal of
the petitioner as the Managing Director of
the company.
2. Some relevant
facts of the case are that this company is a part of a group known as R.C. Oswal Group or
Vardhman group. The petitioner and the 1st respondent are sons of Shri R.C.
Oswal. Earlier, there had been some division
in the family and the companies and presently this Group consists of 3 manufacturing
companies – Vardhman Spinning & General Mills Ltd., Mahavir Spinning Mills Ltd.
And Vardhman Polytex Limited. In addition to
these 3 manufacturing companies, there are a number of investment companies within the group which hold shares in these 3
companies. During the life time of Shri R.C.
Oswal ( who expired on 6th January, 1990), the petitioner became Managing
Director of the company while the 1st respondent was the MD/Executive Director
of other companies. He was also the Chairman of the company. Shri R.C. Oswal left behind a Will dated 2nd
April, 1996 in which it has been stated that an understanding had been reached between him
and his two sons that the ownership and control of the company shall be with the petitioner and the ownership and control of
the other two companies shall be with the 1st respondent. The 4th respondent company holds about
26.2% shares in the company, in which according
to the petitioner, he held majority shares and thus was in control of the said company.
There had been an issue/allotment of 10,000
additional shares in the company, by which
the 1st respondent and his family members have become majority shareholders in
that company and as such now they have effective control over the 26.2% shares.
The petitioner has filed a separate petition under Sections 397/398 of the Act in
respect of the 4th respondent with the main allegation that the 1st
respondent had illegally snatched away the majority control of the 4th
respondent company with a view to control the shares held by it in the company
notwithstanding the fact that this company was to be owned and controlled by the
petitioner as per the Will of the father. The Board of directors of the company has
approved the appointment of the 1st respondent as the Chairman and MD of the
company in a recently held Board meeting. In
the year, 1995, the company had issued 13% Secured Redeemable Non Convertible Debentures
(NCDs) on right basis with 2 detachable warrants for every NCD. Each detachable
warrant was entitled to one equity share of Rs.10/- at a premium of Rs.30/- per share
between 3 to 5 years from the date of allotment on 28th Feb., 1995. The period of these warrants expired on 27th
Feb. 2000. In a General Meeting of the
Members, the life of the warrants was extended by another two years by which these
warrants could now be converted into shares on or before 27th February, 2002.
M/s Mahavir which is under the control of the 1st respondent holds about 50% of
the warrants. In this background, the
petitioner has filed this petition under Section 409 of the Act alleging that there has
been change in the ownership of shares and there is likely to be further change in the
ownership and that the same would result in the change in the Board which would be
prejudicial to the interest of the company.
3. Shri U.K.
Choudhary, Sr. Advocate appearing for the petitioner submitted: The main object of the
provisions of Section 409 of the Act is that a change in the shareholding should not bring
about change in the management. The powers
conferred on the CLB by this Section are preventive in nature to protect the company from
change in the Board which would be prejudicial to the interest of the company. In the present case, a change in the shareholding
has already taken place by the clandestine issue of additional shares in the 4th
respondent company which holds 26.2% shares
in the company. Further, M/S Mahavir Spinning
Mills Limited which is under the control of the 1st respondent holds nearly 50%
of the detachable warrants and by extending the life of these warrants, this company would
acquire further shares resulting in further
change in the shareholding of the company. The
very fact that the 1st respondent has appointed himself as the Chairman and Managing Director of the
company, there has been a change in the in
the composition of the Board. The 1st
respondent, being the head of the family, has also acted in a manner prejudicial to the
interest of the company. Therefore, all the
ingredients of Section 409 of the Act are present in this case and as such the petitioner,
being the Managing Director of the company, has filed this petition for appropriate
relief.
4. In regard to change in the ownership of shares, he
submitted: The petitioner had controlling interest in the 4th respondent
company which holds 26.2% shares in the company. In good faith and out of respect, the
petitioner had allowed the appointment of the 1st respondent and his daughter
as directors in the 4th respondent company. By clandestine and illegal means,
and without the consent and knowledge of the petitioner,
the 1st respondent had issued 10000 shares in that company to his own
family members by which his family has now
gained control of majority shares in that
company by virtue of which the control over 26.4% shares in the company has come under his
control. This is not withstanding the fact that as per the Will of the father, the 4th
respondent is to be under the control of the management, through which the petitioner is
to have control of the company also. Since
the control of the petitioner on the 26.2%
shares has gone to the control of the 1st respondent, there has been a change in the ownership of
shares of the company, thus satisfying the provisions
of Section 409 of the Act. Further, since, the company is a listed public company,
the acquisition of 26.2% shares attracts the provisions of Regulations 11 and 12 of the
SEBI Take Over Code which the 1st respondent has not complied with.
5. He further
submitted: The act of the 1st respondent in getting the life of the warrants
extended is only to benefit M/s Mahavir which holds about 50% of the warrants. By
exercising the option of conversion, this
company would be entitled for about 50% of the shares to be allotted on conversion. Since this company is under the control of the 1st
respondent, by extending the life of the warrants and getting shares allotted, the 1st
respondent is trying to consolidate his shareholding in the company. Thus there is an
element of likely change in the ownership of shares also, satisfying the alternate limb of
Section 409. Since the NCDs had already been
redeemed, the warrants had lapsed and cannot be revived. Such extension of the
life of the detachable warrants itself is illegal and void in terms of the guidelines
issued by the SEBI but the company has resorted to do so only for the purposes of
consolidating the shareholding of the 1st respondent. Thus both in terms of change of ownership of the 4th
respondent and consolidation of shares in the hands of M/s Mahavir, there is likely to be a change in the Board of Directors attracting the provisions of
Section 409 of the Act.
6. He further
submitted: The petitioner has been the Managing Director of the company right from 1987 with substantial powers of
management. Even though, there are no
provisions in the Articles of the company for appointment of more than one Managing Director, the 1st
respondent had proposed his own appointment
as the Chairman and Managing Director only with a view to dilute the powers of the
petitioner. When the petitioner brought this to the notice of the Board of Directors by
his letter dated 8th August, 2001 ( Annexure 12 ), the Board decided to call for an EOGM to amend the Articles
to provide for more than one Managing Director as is evident from the Minutes of the Board
Meeting held on 11th August, 2001. However, even before effecting the amendment
to the Articles, the 1st respondent got himself appointed as the Chairman and
Managing director with effect from 11.8.2001 for a period of 3 years in the same Board
Meeting. This appointment itself could be
considered to be a change in the Board attracting the provisions of Section 409. Further,
this appointment itself is invalid in as much as he had already been functioning as
MD/Executive Director of two other companies and as such, he could not have been appointed
to a managerial poison in a third company. Even
though it has been recorded in the minutes that the 1st respondent had already
resigned from the other two companies, yet, nothing has been placed on record that these
companies had accepted his resignation before his appointment as the Chairman and Managing
Director of the company. The 1st
respondent has justified his appointment as the Chairman and Managing Director of the
company on the ground that the petitioner had decided to have a separate corporate
identity for the company from that of Vardhman group which would be against the interest
of the group as a whole and also against the express desire of the Banks that the group
should continue as a whole. This justification is thoroughly fallacious since the
petitioner was or is never interested in going out of the group. This appointment would dilute the powers of the
petitioner and therefore, such a change in powers of the Managing Director would amount to
change in the Board attracting the
provisions of Section 409 of the Act. The respondents have taken a stand that the Articles
so framed presently no longer hold good in view of change of circumstances in relation to
the appointment of the Managing Director, meaning thereby that the petitioner cannot hold
the office as managing Director. In terms of
Section 269 of the Act, this company has to mandatorily
have a Managing Director, whether it is provided in the Articles or not. Thus, on
one hand they question the validity of appointment of the petitioner as the MD and on the
other, the 1st respondent has got himself appointed as the CMD.
7. As far as the
last requirement of the provisions of Section 409 of the Act that such a change would be prejudicial to the interest of the
company, is concerned, Shri Choudhary submitted: Being
the head of the family, the 1st
respondent has been controlling the finances of all group companies and has been taking
all financial decisions in respect of this company at his own whims and fancies without caring for the interest of the
company. He has been diverting the funds of the company for the benefit of the other two
companies under his control. At his behest, the company has extended over Rs.20 crores during last
few years by purchase of its shares at Rs.142/- per share while the market price was only
around Rs.40/- per share resulting in a loss of Rs.14 crores to the company. Likewise, in 1994-95 at the behest of the 1st
respondent, the company purchased shares of Vardhman Spinning & General Mills Ltd. at
Rs.240/- per share. Later, within a year, at
his behest, the company sold these shares at Rs.225/- per share, thus, incurring a loss of
Rs.66 lacs. Therefore any consolidation of powers with the 1st respondent as
the Chairman and Managing Director of the company would
be prejudicial to the interest of the company and in a way will ruin the company.
8. Summing up his
arguments, Shri Choudhary submitted that all the ingredients of Section 409 of the Act are
satisfied in this case and as such the resolution appointing the 1st respondent
as the Chairman and Managing Director of the company should be stayed and the company
should not be permitted to convert the warrants into shares.
9. Shri Sarkar appearing for the company submitted: This petition is not maintainable in terms of
Section 409 of the Act. The basic requirement of this Section is that there should be a
change in the ownership of the shares held in the company. In other words, there should be
direct change in the ownership of shares. The
change in the ownership as alleged by the petitioner is with reference to the 4th
respondent company and therefore the provisions of Section 409 of the Act relating to
change in ownership of shares does not arise. Further, a strict interpretation of the
provisions of Section 409 of the Act would mean that only when by virtue of acquisition of
shares and exercise of voting in respect of those shares if there is a change or likely to be change in the Board, then, the
provisions of this Section would apply. The petitioner has attacked the decisions of the
existing Board while the provisions of Section 409 are
for ensuring the continuity of the existing Board as is evident from the heading of
the Section which reads “Power of Company Law Board to prevent change in the Board
of Directors likely to affect company prejudicially”. In these circumstances, the petitioner cannot
invoke the provisions of Section 409 of the Act. Mere
appointment of a Chairman and Managing Director from among the existing directors does not
amount to a change in the composition of the Board of Directors. In the present case,
appointment of the first respondent as the CMD was done in a Board Meeting and it has
already taken place. The provisions of this
Section cannot affect past acts of the Board. Further, when the provisions of this Section
are to protect the existing Board, the decision of that Board cannot be challenged under
this Section. By invoking the provisions of
this Section, the petitioner seeks to curtail the power of the Board which cannot be done. The allegation of the petitioner that there are no
provisions in the Articles for appointment of more than one MD is fallacious. A reading of Sections 2 (26) and 269 would
indicate that even without a provision in the Articles, the company could appoint a
Managing Director. As per Section 2 (26), an MD could be appointed either by virtue of an
agreement, or a resolution of the General Body or by the Board of Directors or by virtue
of Memorandum and Articles. Thus, the Act itself provides for four alternative methods of
appointing a Managing Director clearly indicating that there is no need to have a
provision in this regard in the Articles. The main allegation of the petitioner is that by
appointment of another MD, his powers are sought to be diluted. Section 409 of the Act does not cover instances
of change of powers of the directors. As a
matter of fact the 1st respondent has been on the Board of the company for a
very long time. In Para 14 of the Judgment in
PH Rao Vs. Sky Cell Communications Limited ( 2001
1 CLJ
144), the Company Law Board has pointed out the circumstances under which
the provisions of Section 409 could be invoked. According
to that decision, only when, with the strength of the voting powers of the shares
acquired, the Board is changed or likely to be changed, the provisions of this Section
would apply.
10. The learned counsel further
submitted: The whole foundation of the petition is that the 1st respondent has
acquired the control of 4th respondent which holds 26.2% shares in the company,
which according to him, would amount to change in the ownership of the company. This
argument is absolutely baseless. Only
when change in ownership of the shares in the
company itself takes place or is likely
to take place, then, the provisions of this Section are attracted. In Ajaib Singh Vs. RG Shah & Co.Ltd. (
1985 3 CLJ 411), in which, on the contention that acquisition of a foreign company which held
38.7% shares in M/S Shaw Wallace & Co. Ltd.
amounted to a change in the ownership
of shares attracting the provisions of Section 409 of the Act, the erstwhile Company Law
Board held that the same would not fall within the provisions of Section 409 of the Act. This order of the Company Law Board was upheld by
the Supreme Court as reported in 1987 1 SCC 424. Therefore, even the
fundamental requirement of Section 409 of the
Act that there has been change in the ownership of shares is not established. As far as the likely change in the ownership of
shares, as alleged by the petitioner, in view of the extension of life of the detachable
warrants is concerned, it also would not fall within the provisions of Section 409. The allegation that the extension of life of the
detachable warrants is illegal is not correct. This
matter was taken up with the SEBI and on its advise, the approval of the General Body was
taken for extension of the life of the warrants for two years. If as alleged by the petitioner, this extension
has been approved only with a view to benefit M/S Mahavir, nothing prevented this company
to have exercised the option even before the
expiry of the life of the warrants. Further,
the extension of warrants is uniform for all the warrant holders and it is for them to
exercise the option and as such there is no certainty that everyone would exercise the
option. Any way, conversion of warrants into shares does not amount to change in ownership
of shares within the meaning of provisions of
Section 409.
11. As far as the allegation of
the petitioner that a change in the Board
would be prejudicial to the interest of the company is
concerned, the learned counsel submitted: As
already pointed out, change in the designation or powers of a member of the Board does not
constitute a change in the Board. If the
allegation is that the association of the 1st respondent is prejudicial to the
interest of the company, then, such allegation cannot be made since the 1st
respondent has been on the Board for a long time. It is he, as the head of the Group, has
ensured the growth of all the companies in the group.
Regarding the allegation of diversion
of funds , it is to be noted that all these transactions took place 5 years back when Shri
R.C. Oswal was alive and the petitioner was a party to the said decisions. A reading of
the letters from ICICI at Annexures ‘E’ and ‘F’ would indicate that
all loans have been given by ICICI only because the company is a part of Vardhman group
headed by the 1st respondent. Even
in the Will, on which reliance has been placed by the petitioner, Shri R.C. Oswal has
specifically recognized the contribution of the 1st respondent to the group as
a whole and now to allege that his association with the company would be prejudicial does
not stand to scrutiny.
12. Summing up his arguments,
Shri Sarkar referred to the clarification issued by the Department of Company Affairs in
respect of Section 409 of the Act reported at Page 1.426 of Circulars and Clarifications
on Company Law by Taxman wherein it has been specifically mentioned that the object of the
Section is to prevent new comers from acquiring substantial shares with a view to take
control of the company by changing the composition of the Board of Directors. In the present case, the 1st
respondent is associated with the company for such a long time that he could never be
considered to be a new comer. In a petition under Section 409 of the Act, the CLB cannot
adjudicate whether an act has been done legally or illegally. Section 409 is a ‘straight jacket
section’ and only when all the 4 ingredients of this Section are satisfied, the CLB
can pass suitable order which incidentally is only temporary. The petitioner has invoked
the provisions of this Section with a malafide intention knowing fully well that there is
no scope to invoke the provisions of this Section in facts of this case and therefore this
petition should be dismissed as not maintainable.
13. Shri Mookherjee, appearing for
respondents 1 to 3 submitted: This petition is misconceived. The term “ change
in ownership of shares” would mean that shares are in existence and that by transfer
of the shares, the ownership has changed. Unless the change in ownership takes place on acquisition of shares by transfer of existing shares, this Section has no application.
This Section does not deal with the issue of further shares. On that ground alone, all the allegations relating
to extension of life of detachable warrants will have to be ignored. Even otherwise, the NCDs were issued on right
basis to the existing shareholders along with detachable warrants. If the shareholders convert these warrants into shares,
there could be no change in the ownership of shares as the freshly issued shares will
continue to be with the existing shareholders. In
a Board Meeting held on 7.5.1999 ( Annexure ‘K’) which was attended by the
petitioner, the Board unanimously decided to call for an EOGM to get the approval of the shareholders for
extending the life of the detachable warrants and as a matter of fact the petitioner was
authorized to take necessary steps in this regard. The
approval of IFCI in its capacity as Debenture Trustees was obtained for this purpose as is
evident from Annexure ‘M’. In a
Board Meeting held on 21st October, 1999 which was chaired by the petitioner,
it was resolved to convene a meeting of the debenture
holders and warrant holders to consider the proposal for extending the life of the
warrants and accordingly in the Class Meeting held on 21st Dec. 1999 (Annexure
–‘P’), which was attended by the petitioner,
the approval was obtained. Therefore,
the petitioner is estopped from challenging this decision on any ground.
14. The learned counsel further
submitted: As far as the allegation relating
to change in control of 26.2% shares is
concerned, as decided in Shaw Wallace case by the erstwhile CLB, this cannot be a ground
to invoke the provisions of Section 409 of the Act. The
petitioner has already filed a petition under Sections 397/398 of the Act challenging the
further issue of shares in the 4th respondent and as such he cannot allege the
same in the present petition. Therefore, the
petitioner has not even satisfied the basic requirement of
the provisions of Section 409 relating to change in the ownership of shares and as
such this petition is not maintainable.
15. In regard to the allegation
relating to change in the Board, the learned
counsel pointed out that in Paragraph 15 of the Rejoinder, the petitioner has made
allegations against the members of the present Board stating that they are not acting as
independent professionals but are acting in accordance with the wishes of the 1st
respondent. The provisions of Section 409 of
the Act are not available for making complaints against the existing Board. Mere change in the designation or powers of a
member of the Board does not result in change in the Board to attract the provisions of
Section 409 of the Act. Section 2 (6) of the Act defines a Board as the Board of Directors
of a company and therefore any hierarchical change
in the Board cannot constitute change in the Board.
Further, this Section is preventive in nature and acts which had already taken place
cannot be remedied by this Section. Since the
1st respondent has already been appointed as the Chairman and Managing
Director, the petitioner cannot seek stay of the resolution regarding the appointment of
the 1st respondent.
16. Shri Choudhary in Rejoinder
submitted: The objections of the learned counsel for the respondents have been more on
interpretation of Section 409 of the Act and not on the facts of the case. The main object and purpose of Section 409 is to
protect the interest of the company. There can be no strict application of each and every
word of the provision of this Section. The
interpretation should be to suit the needs of the society as economic laws are dynamic in
nature. The rule of interpretation should be
liberal to advance justice. The circular of
the Department of Company Affairs which has been relied on by the learned counsel for the
respondents was issued in 1956 and therefore is not relevant at present. If liberal
construction is applied, then, the term ‘change in ownership’ cannot be limited
only to direct change in the shareholding in the
company but also to a situation where the acquisition of a company having large number of
shares in the company would also come within ‘ change in the ownership’. Therefore, the change in control of the 4th
respondent having 26.2% shares in the company would also amount to change in the ownership
of shares of the company. As far as likely
change in the Board is concerned, since the 1st respondent has already got
himself appointed as the CMD, there is every likelihood that the petitioner would be
removed as the Managing Director. In such a situation, there will be change in the Board. Further, even without a provision in the Articles
and without waiting for amendment to the Articles, the 1st respondent has got
himself appointed as the CMD which in invalid abinitio.
Further his appointment as the CMD is in violation of Schedule XIII –
Part-I(d) of the Act. His resignation has not been accepted by the other companies on the
day when he was appointed as the CMD of the company and as such he cannot hold the
position of CMD of the company. Since his
appointment is not in accordance with the law, his appointment could never be considered
to have already taken place. Further, his
appointment was confirmed only after this petition was filed. Under Section 409, the CLB
has the powers to direct that no resolution passed by
the general body or by the Board of Directors to change
the Board of Directors shall have effect. Since
in the present case, the appointment is invalid, the CLB should stay the implementation of
the resolution.
17. As far as the warrants are
concerned, he submitted: The entire exercise
has been done only for consolidation of the shareholding of the 1st respondent. In the initial prospectus, the company had not
reserved the right to extend the life of the detachable warrants and therefore the terms
of the Prospectus could not have been modified without the approval of the debenture
trustees. The reliance of the company on
Section 106 of the Act for obtaining the approval of debenture holders cannot be accepted
in as much as this Section deals with only shares and not debentures. The company has not justified need of funds for
extending the life of the detachable warrants but it has done so only to benefit Mahavir
which is under the control of the 1st respondent.
18. We have considered the
pleadings and arguments of the counsel. Section 409 reads: “Power of Company Law Board to prevent
change in the Board of Directors likely to affect the company prejudicially:- (1) Where a complaint is made to the
Company Law Board by the managing director or any other director or the manager of a
company that as a result of a change which has taken place or is likely to take place in
the ownership of any shares held in the company, a change in the Board of Directors is
likely to take place which (if allowed) would affect prejudicially the affairs of the company, the Company Law Board
may, if satisfied, after such enquiry as it thinks fir to make that it is just and
equitable and proper so to do, by order, direct that no resolution passed or that may be
passed or no action taken or that may be taken to effect a change in the Board of
Directors after the date of the complaint shall have effect unless confirmed by the
Company Law Board; and any such order shall have effect notwithstanding anything to the
contrary contained in any other provisions of the Act or in the Memorandum or articles of
the company or any agreement with, or any resolution passed in the general meeting by, or
the Board of Directors of the company .
19. A reading of the Section
would show that there are four requirements in this Section. They are
(a)
The petition is to be
filed by the Managing director or a director or the manager
(b)
There is a change or likely change in the ownership
of shares held in the company
(c)
Such a change is likely to
result in a change in the Board and
(d)
Such a change in the Board
is prejudicial to the company.
20. The cause of action would
arise only when there is a change or likely change in the Board, brought about by the
change in ownership of the shares held in a company. It is like a cause and an effect,
cause being the change in the ownership of shares and the effect being the change in the Board. Normally, if the facts
establish that these two events had taken place, no further enquiry may have to be made by
the CLB on these two aspects and the only
enquiry left to be made is whether, such a change in the Board is prejudicial to the
interest of the company. However, there could be cases where even the fact of change in
ownership is challenged or the resultant change in the Board. For instance, in Skycell
case, the change in ownership of shares was established but not the change in the Board
that it arose consequent to such a change
in the ownership of shares.
21. In the present case,
according to the petitioner there has been a change and
also a likely change in the ownership of shares and
on this the petitioner has relied on two instances. The
first is the change of control of the 4th respondent which holds 26.2% shares
in the company and the second is the proposal to issue shares against warrants. The term
used in the Section “change in the
ownership of any shares held in the company” , as rightly pointed out by Shri
Mookerjee, pre supposes that the shares of the subject company are in existence and are held and owned by someone, and that
the ownership these shares has changed. For a change of ownership of shares, there should
be a transfer or transmission of shares. Keeping this in mind we have to examine as to
whether there is any change or likely change in the ownership of the shares of the
company. In Skycell case, this Board has observed that Sections 250(3) and 250(4) are more
or less pari-materia to Section 409. The former Sections specifically refer to
transfer and likely transfer of shares resulting in change in the composition of the
Board, while Section 409 refers to change or likely change in the ownership of shares held
in a company. No change of ownership of the
shares held in a company can take place unless the shares are acquired by transfer or
transmission. In the present case, according to the petitioner, since there is a change in
the control and ownership of the 4th respondent which holds 26.2% shares in the
company, it should be construed as change in the ownership of the shares of the company.
His learned counsel urged that a liberal construction should be adopted to interpret this
term to include even indirect acquisition of control over the shares should be brought
within the purview of this term. In construction of a Section, the court has to examine
the Section as a whole. This Section enjoins that order passed by the CLB would have
effect notwithstanding the provisions of the
Act, the Memorandum and the Articles or the resolution of the general body or the Board.
When the order of the CLB will have such an overriding effect, then, the construction of
the provisions of the Section has to be strict. Further, in Shaw Wallace case, wherein it was contended
that acquisition of a foreign company holding about 38% shares in Shaw Wallace
would amount to change in the ownership of Shaw Wallace shares, the erstwhile CLB
negatived the contention, even though the acquisition of the foreign company was by means
of acquisition of shares by transfer of the shares of the foreign company. In the present
case, even the change of control of the 4th respondent company was brought
about by issue of further shares and not by acquisition of its shares by transfer.
Therefore, the change of control of the 4th respondent which holds 26.2% shares
cannot be brought under the term “change in the ownership” of the company’s
shares. If we read the provisions of this Section with that of Section 250(3) and 250(4)
it is clear that the object of this Section is to prevent a change in Board by outsiders acquiring the shares of a company. In the present case, the petitioner and
the 1st respondent belong to the same Vardhman group and even if we assume that
the acquisition of the 4th respondent by the 1st respondent could
come under this Section, yet, the control of the shares has not gone to any outsider. The shares of the company are still held
by the 4th respondent. Thus, from whatever
angle we look at this issue, we find that the acquisition of the control of the 4th respondent by the 1st
respondent cannot be brought under the term “change in the ownership of shares held
in the company”. As far as the motive and object of issue of additional shares in the
4th respondent is concerned, the petitioner has already filed a petition under
Sections 397/98 in which these issues will be considered.
22. For his contention that there is a
likely change in the ownership of shares, the petitioner has taken a stand that by extending the life of detachable warrants
against which shares are to be issued, there is likely to be a change in the ownership of
shares. As we have already observed, change
in ownership of shares has to be a result of transfer of shares for which the shares
should be in existence. Section 409 of the
Act does not cover the situations of change
in ownership of shares arising out of future
shares which are to be prospectively issued/allotted, as is evident from the plain
language of that Section. Therefore we are
not examining the arguments of the counsel as to the legality or otherwise of the decision
to extend the life of the warrants.
23. The foundation of a petition
under Section 409 has to be that there has
been a change or a likely change in the
ownership of shares. However, we have found that neither the change in control of the 4th
respondent could come within “change in ownership of shares of the company” nor
the proposed issue of shares against the warrants would come within ‘likely change in
ownership of shares’. This being the
case, there would have been no need for us to examine whether the change in ownership of
shares has changed or likely to change the Board.
24. However, assuming that the contention of the petitioner
that taking control of the 4th respondent by the 1st respondent
amounts to a change in the ownership of
shares, we have to see whether the same has brought out or likely to bring out a change in
the Board. In Skycell case (supra), this Board compared this Section with
that of Sections 250(3) and Section 250(4) and observed in paragraph 15 “To put it
in a simpler language, the voting strength of the shares acquired should influence/cause the change in the Board and that is why these Sections provide for giving
directions regarding the shares. Section 409 should also, therefore to be interpreted in
the similar manner and if we do so it is clear that there should be nexus between the
change in the ownership of shares and the change in the Board”. The complaint of
the petitioner is that the appointment of the 1st respondent as the CMD and
consequent curtailment of the petitioner’s
powers as the MD, both would constitute a change in the Board. Nowhere the petitioner has
averred nor the counsel argued that this change has been effected on the strength of
acquisition of control of the 4th respondent. This being the case, there is no
nexus between the acquisition of the control of the 4th respondent, and the
change in the Board. In other words the cause and effect have not been established. Even
otherwise we do not agree that either the
appointment of the 1st respondent as the CMD or the curtailment of the powers
of the petitioner could be considered to be a change in the Board. A change in the Board would mean
appointment or removal of a director or replacement
of the Board either partly or in full. No
change in the designation or powers of the existing member of the Board could be considered to be a change in the Board within
the meaning of Section 409. The object of
this Section is not to protect any individual director. He has been authorized to invoke
the provisions of this Section to protect the Board as a whole in the interest of the
company. Therefore, on the ground that his powers
are being curtailed by the Board, the Board of which this Section seeks to protect, he cannot complain
that there is a change in the Board. In V.R Textile Ltd case (supra),
this Board has held that if the existing majority were to remove a Managing Director, he
cannot invoke the provisions of Section 409. Further, it is an admitted fact that the 1st
respondent had been the Chairman of the company a for long time and by his appointment as
the CMD, no change in the Board has been brought about to allege that change in the
ownership of shares has bought about a change in the Board. The petitioner has challenged
this appointment as being in violation of the provisions of the Act and the Articles. As
rightly pointed out by the learned counsel for the respondents, legality or otherwise of
the appointments is not within the scope of enquiry by this Board in a proceeding under Section 409.
25. Whether the acquisition of
control of the 4th respondent is likely to change the Board has not been
categorically answered by the petitioner in the affirmative. From the details of the shareholding furnished by
the respondents, we find that nearly
48% of the shares are held by outsiders, and in exclusion of the holding of the 4th
respondent, the petitioner controls about 10.3% and the 1st respondent about 15.6%. This being the case, it is doubtful whether
26.2% shares held by the 4th respondent alone could bring about a change in the
Board.
26. Since we have held that the
appointment of the 1st respondent as the CMD has not brought about any change
in the Board, nor there is any likely change
in the Board, there is neither a need nor a scope
to make any examination as to whether the change or likely change is prejudicial to the
interest of the company.
27. In fine, since the petitioner has failed to establish that there has been either a change or likely
change in the ownership of shares held in the
company, the establishment of which is the foundation of a petition under Section 409 for
making further inquiries to find out whether there is or a likely change in the Board
which would be prejudicial to the interest of the company, we dismiss this petition as not
maintainable under Section 409 of the Act, and vacate all the interim orders.
(S.Balasubramanian)
(A.K.Banerji)