In this order, we are considering the application CA---/91 filed by the respondent company in CP No------filed by the petition

BEFORE THE COMPANY LAW BOARD

PRINCIPAL BENCH

NEW DELHI

Dated 17^th October 2001

C.P.No.12 of 2001

CA No.151 of 2001

Present: 1. Justice A.K. Banerji, Chairman

2. Shri S. Balasubramanian, Vice Chairman

In the matter of Companies Act, 1956- Sections 235, 397,398

AND

In the matter of M/S Mega Resources & Ors.

Versus

M/S Bombay Dyeing & Manufacturing Company Limited & Ors.

Present on behalf of parties:

1. Shri Aspi Chinoy, Sr. Advocate .. for applicant respondents

2. Ms. Avantika Keswani, Advocate .. –do-

3. Shri S.N. Mookherjee, Advocate .. for petitioners

4. Shri Ratnanko Banerji, Advocate .. for petitioners

5. Shri A. Acharjee, Advocate .. for petitioners

O R D E R

(Date of hearing: 25.9.2001)

S. BALASUBRAMANIAN:

1. In this order, we are considering the application CA NO.151 of 2001 filed by the respondent company in CP No. 12 of 2001filed by the petitioners under Sections 235/397/398 of the Companies Act, 1956 ( the Act). In this application the respondent company has challenged the maintainability of the petition in terms of Section 399 of the Act.

2. Shri Aspi Chinoy, Senior counsel for the respondent company submitted: This petition has been filed on the strength of the petitioners’ holding 10.4% shares in the company. Since, these shares were acquired in contravention of the provisions of Regulation 7 of SEBI ( Substantial Acquisition of Shares & Take Overs ) Regulation 1997, the applicant company had filed a petition before the Company Law Board seeking rectification of the register of its members in terms of Section 111A of the Act. The Company Law Board, in its order dated 4.7.2001 has given a finding that the shares acquired by the petitioners beyond 5% shares in the company was in violation of and as such the acquisition was null and void. This being the case, the petitioners cannot claim to hold shares beyond 5% and since this petition has been filed on the basis of their holding more than 10% shares, this petition is not maintainable. Further, this petition was filed on 7.2.2001 and was mentioned on 8.2.2001. Even though, this petition has been filed on the strength of the petitioners’ holding 41 lakhs shares in the company constituting 10.4% shares as on 19.1.2001, as per the records of the company, the petitioners held only 34.52 lakh shares constituting 8.42% shares only. Therefore, it is doubtful whether on the day of filing of the petition, whether the petitioners held 10% or more of the shares in the company. A reference to the various paragraphs in the order dated 4.7.2001,would indicate that this Board had categorically come to the conclusion that the acquisition being in contravention of the Take Over Code , the same was null and void and the Register of Members of the company deserves to be rectified in respect of the shares held beyond 5%. However, having come to the conclusion that the acquisition was null and void, yet, in view of the petitioners having transferred the shares beyond 5%, this Board has also held that no order of rectification could be ordered. A reading of the order would clearly indicate that the petitioners had no title to the shares since the acquisition was ab-initio invalid and if it is so, then, on the strength of holding 10% shares, the petitioners cannot file this petition and therefore they are not qualified in terms of Section 399 of the Act. Accordingly, he prayed for dismissal of the petition.

3. Shri Mookherjee, Advocate appearing for the petitioners submitted: In terms of Section 399 of the Act, the court has to consider the maintainability of the petition only at the time of presentation. Subsequent events by which the holding of the petitioners is reduced below 10%, cannot be taken into account to challenge the petition in terms of Section 399. Further, under Section 397 of the Act, the petitioners act in a representative capacity and under Section 398, it is a derivative action. Therefore, once a petition is filed and the same is valid and maintainable, since it is a representative petition and a derivative action, notwithstanding any subsequent event, the court itself should allow the petition to continue. On this proposition he cited the following cases:

· L.RM.K. Narayanan Vs. Pudhthotam Estate Limited ( 74 CC 30- Mad ) : The requirement as to the share qualification is relevant and material only at the time of institution of proceedings and once there is a valid petition and a shareholder seeks to substitute himself in order to merely continue such a valid petition, such a shareholder need not hold 10% of the share capital. It is not incumbent upon the court to dismiss a petition because the proceedings under Section 397 or 398 of the Act is a representative proceeding. Even the original petitioner does not want to continue the proceedings, the court cannot be compelled to dismiss the action. Even then, it is open to the court to consider the merits of the case without dismissing the petition.

· Rajahmundri Electric Supply Corporation Vs. Nageshwar Rao (AIR 1956 SC 213 ). The validity of a petition must be judged on facts as they were at the time of presentation and a petition which was valid when presented, cannot, in the absence of a provision to that effect in the statute cease to be maintainable by reason of events subsequent to its presentation.

· S. Varadarajan V Venkateswara Solvent Extraction (P)Ltd (80 CC 693):The requirement of share qualification is relevant and material only at the time of institution of the proceedings.

4. On the basis of the above decisions, he contended that the petitioners were de-facto shareholders with more than 10% shares on the day of filing of the petition and therefore the same was sufficient to maintain the petition. Even de-jure, the shareholding was valid in law. Further, since on the day of presentation, there was no declaration by any court of law that the shareholding was null and void, subsequent declaration to this effect cannot affect the maintainability of the petition.

5. He also contended that since the petitioners have already filed an appeal against order of the CLB dated 4.7.2001, the findings in that order cannot be applied in the present case as these findings have not reached a finality. Therefore, the decision of this Board cannot act as res-judicata in the present proceedings on the maintainability of the petition. On this proposition, he cited the following cases: Sheosagar Singh & Ors. Vs. Sitaram Singh & Ors (XXIV Indian Appeals 51) and Koshal Pal Vs. Mohanlal ( AIR 1976 SC 688 )

6. He also contended that since no relief has been granted in the order of this Board regarding rectification of the Register of Members and since the transfer of shares by the petitioners during the pendency of court proceedings had been upheld to be valid, there is no bar in the petitioners proceeding with the present petition. In other words, there is no finding against the petitioners to operate as res-judicata. On this proposition, he relied on Abhey Ram Vs. Jhanda ( AIR 1929 All. 910 ).

7. Shri Chenoy, in rejoinder submitted that while he is in agreement with the proposition that the maintainability of the petition in terms of Section 399 has to be judged on the day of filing of the petition, yet, whether such holding of shares was valid in law has to be examined to determine the maintainability. In the present case, since the CLB has made a declaration that the acquisition of the shares by the petitioners beyond 5% was null and void, the acquisition became illegal ab-initio and therefore the membership in respect of these shares was not valid in law. He also pointed out that all the cases cited by Shri Mookherjee on the principles of res-judicata, that in all these cases the appellate order superceded the order of the lower court and therefore these cases do not support the view that once an appeal is filed, the decision of the lower court cannot be applied in another proceeding. Referring to Order 41 Rule 5 of the Civil Procedure Code, he pointed out that an appeal shall not operate as a stay of the proceedings. He pointed out that the petitioners, by claiming that this petition is maintainable inspite of the order of this Board regarding the illegality of acquisition of the shares by the petitioners, are trying to reopen same issue which is nothing but an abuse of process of law. On this proposition, he relied on K.K. Modi Vs. K.N. Modi ( 1998 3 SCC 573) wherein the apex court has held that “it is an abuse of the process of the court and contrary to justice and public policy for a party to re-litigate the same issue which has already been tried and decided earlier against him. The re-agitation may or may not be barred as res-judicata but if the same issue is sought to be re-agitated, it also amounts to an abuse of the process of the court”.

8. In regard to the stand of Shri Mookherjee that there was no specific decision/relief in the order of this Board to bind the petitioners, the learned counsel pointed out that this Board had not refused any relief but while making a declaration regarding rectification, did not order the same in view of the petitioners having, they then, transferred shares held by them beyond 5%. If the petitioners had not transferred the shares, this Board would have ordered rectification, which would have related to the date of acquisition. Therefore, a declaration that the acquisition of the shares by the petitioners beyond 5% was null and void is a decision given against the petitioners. In this connection, he referred to State of Panjab Vs. Gurdev Singh ( 1991 4 SCC 1) cit`ed by Shri Mookherjee and pointed out that in paragraph 9 of that judgment, the apex court has observed “ If an act is void or ultra vires, it is enough for the court to declare it so and it collapses automatically. It need not be set aside. The aggrieved party can simply seek a declaration that it is void and not binding upon him. A declaration merely declares the existing state of affairs and does not squash so as to produce a new set of affairs”. Accordingly, he submitted that once the CLB has made a declaration that the acquisition was void and a nullity, no further directions need be given and such a finding is binding on all the parties.

9. We have considered the pleadings and arguments of the counsel. The admitted position is that the petitioners had acquired more than 10% shares in the company and on a petition filed by the respondent company under Section 111A of the Companies Act seeking for rectification of its Register of Members on the ground that the petitioners had contravened the provisions of Regulation 7 of the Take Over Code in acquiring shares beyond 5% without giving intimation, this Board passed an order on 4.7.2001. In that order, after examining the issues in detail, this Board disposed of the petition as follows: “ Accordingly, we dispose of this petition by declaring that the respondents ( the present petitioners) acting in concert have contravened the provisions of Regulation 7 of the Take Over Code by not disclosing their acquisition beyond 5% in the company and that the Register of Members in respect of all the shares acquire beyond 5% deserves to be cancelled, but we are not doing so as the shares in excess of 5% have already been reportedly transferred as permitted by Section 111A (5) during the pendency of the present proceedings”.

10. Now the issue for our consideration is whether with the above declaration, the petitioners could still be considered to be legally holding the excess shares on the day of presentation of the petition and as such the petition is maintainable. Since the maintainability of the petition is challenged in terms of Section 399, we may examine that Section. This Section provides that to maintain a petition under Sections 397/98 in case of a company having a share capital, it should be filed by members having 10% of the subscribed capital or constituting 10% of the total membership of the company or by a member/members who have obtained consent of the rest. In the present case, the petitioners, claiming to hold 41,00,213 shares as on 19.1.2001, constituting 10.4% shares have filed this petition on 7.2.2001. They have also obtained the consent of 5 other shareholders collectively holding 90 shares. Thus, on the day of presentation of the petition, the petitioners fulfilled the requirements of Section 399. Even though, the respondent company has doubted the actual holding of the petitioners on the day of the presentation of the petition on the basis that the holding of the petitioners as on 16.2.2001 was only 8.42%, we shall go by their holding as on 19.1.2001 which was more than 10% and the company has not indicated the actual holding by the petitioners on 7.2.2001. While we are in full agreement with the contention of the learned counsel for the petitioners and supported by the learned counsel for the respondents that the validity of a petition under Sections 397/398 has to be judged on the day of presentation, yet, when the question as to whether the shares were held validly has been raised, the same has to be examined at the threshold before proceeding with the petition. In all the cases cited by Shri Mookherjee, there was no challenge to the validity of the shareholding of the petitioners at the time when the petitions were filed. The challenge on the maintainability was raised due to subsequent events by which the percentage holding came down subsequent to the filing of the petition. In Pudhthotam Estate Limited case (74 CC 30), the petition was filed by members holding 18.37%. This petition was supported by another member holding 4.88%, by an affidavit. After filing of the petition, the petitioners prayed for withdrawal of the petition on the ground that they had sold their shares to the respondents. The same was opposed by the shareholder holding 4.88% who had supported the petition and he desired to be substituted in the place of the petitioners. The issue before the Court was whether such substitution was possible to maintain the petition as this member held only 4.88%. Under these circumstances, the Court held that “once a petition is validly presented, it is well open to a shareholder, to ask for substitution and prosecute the proceedings even though such a shareholder by himself could not have presented the petition for want of required qualification”. Thus, in the above case, validity at the time of presentation was not under challenge. In Rajamundry case, the petition was filed with the consent of 80 members constituting more than 10% of the membership of the company which was 603. It was found that 13 of those who had given consent were not members and one member had signed twice. 13 of the members who had given the consent withdrew their consent subsequently. Thus, the total number of members who had given their consent was reduced to 52 and therefore, the question that arose was whether, the petition was still maintainable since the number of petitioners had come down to below 10% of the total membership. The apex Court held that “The validity of a petition must be judged on facts as they were at the time of presentation and a petition which was valid when presented, cannot, in the absence of a provision to that effect in the statute cease to be maintainable by reason of events subsequent to its presentation”. Thus, in this case also, no question arose on the validity of the shareholding of the members, and as a matter of fact, in computing the figure, the Court ignored those who were not members of the company. In Venkateswara Solvent case (supra), the petition was filed by 5 petitioners and at that time the petition was maintainable in terms of Section 399. However four of the petitioners sold their shares subsequently which resulted in the number/shares becoming less than 10% and therefore the issue that arose was whether the petition was maintainable. The Court held “The requirement as to share qualification was relevant and material only at the time of institution of the proceedings and the fact that other petitioners ceased thereafter to be the shareholders did not affect the maintainability of the petition”. Thus, we find that in all these cases, the petitions were maintainable on the date of filing the petitions, but the maintainability was questioned on the basis of subsequent events. But in the present case before us, the validity of the shareholding at the time of presentation of the petition itself is questioned and therefore, the decisions in these cases are not applicable to the present case. If in a petition, the legality of the acquisition of the shares, or the factum of holding shares, the strength on which the petition is filed, is challenged, before proceeding with the petition, the Bench has to examine the same and give its finding, which has to be definitely and necessarily subsequent to the date of filing the petition. Therefore, we are not impressed with the arguments of Shri Mookherjee that at the time when the petition was filed, there was no finding against the petitioners. Assuming that there were no earlier proceedings, in the present proceedings, we would have to first deal with the objection of the company as to whether the petitioners were holding the shares validly by examining whether they had complied with the provisions of Take Over Code and would have to give our finding. Whatever be the finding, even though a such finding would be subsequent to the filing of the petition, yet, that finding would have been applied to examine the maintainability of the petition. It is not the first time that the title to the shares on the strength of which a petition was filed has been challenged before this Bench. In Satish Chand Sanwalka V Tinplate DealeRs Association Pvt Ltd (93 CC 70), the company challenged the title to the shares held by the petitioners on the ground that those shares had already been forfeited and therefore, the petitioners had ceased to be members of the company and as such the petition was not maintainable in terms of Section 399. This Board had to examine this issue to find out whether the petition was maintainable before proceeding with the allegations in the petition. The only difference is that, in the present case, a finding has been given in a different proceeding, which as far as this Board is concerned, is binding and acts as res-judicata and since that finding has been given by a coordinate Bench of this Board, this Bench cannot take a different view on the same issue. It is to be noted that this petition was filed only after the earlier proceeding had been initiated by the company.

11. As far as the contention that there has been no finding against the petitioners in the order of this Board dated 4.7.2001 is concerned, we do not find much substance. There has been a categorical finding that the petitioners had contravened the provisions of Take Over Code and their acquisition being in violation of law, was null and void. The settled principle of law is that any act which is null and void is non-est and therefore the acquisition of shares beyond 5% is non-est. Merely because no order of rectification of the Register of Members was made, which was not possible since the petitioners had transferred the shares beyond 5%, it does not mean that there was no order against the petitioners. In this connection, as rightly pointed out by Shri Chainoi, we may refer to the observation of the Supreme Court in 1991 4 SCC 1 that once a court declares that an act is void, it collapses and need not be set aside.

12. The next contention of Shri Mookherjee is that since an appeal has been filed, the decision of this Board in the earlier order cannot be construed as final and binding. The cases cited by him, on this proposition, are not applicable to the facts of this case. We note that there has been no order of stay against our proceeding with the present petition and there is no stay on our findings also. It is to be noted that in a few cases where this Board had decided on the maintainability of the petition in terms of Section 399 and when such findings had been taken on an appeal, this Board had proceeded with the petition wherever no stay had been obtained. Therefore, merely because the petitioners have filed an appeal, it does not mean that our finding in an earlier proceedings cannot be applied in the present case. The petitioners were aware that the application of the company challenging the maintainability of the petition was coming up for hearing and when they filed the appeal, they could have sought for a stay of these proceedings. Any way, as a principle, mere filing of an appeal does not operate as a stay on the findings of the order appealed against. Shri Chinoy referred to Order 41 Rule 5 of the Code in this regard.

13. Taking into consideration all these aspects, we hold, that in view of the order of this Board dated 4.7.2001 holding that the shares acquired by the petitioners beyond 5% was null and void for the reasons stated in that order, the petitioners were not legally and validly holding shares beyond 5% on the date of filing this petition. This being the position, even on the date of filing this petition, they did not satisfy the requirements of Section 399 of the Act to maintain the petition. Accordingly we dismiss this petition as not maintainable.

(S.Balasubramanian) (A.K.Banerji)