BEFORE THE COMPANY LAW
BOARD
PRINCIPAL BENCH
Present: 1. Justice A.K. Banerji, Chairman
2. Shri S.
Balasubramanian, Vice Chairman
In the matter of Companies
Act, 1956 -Sections 397/398
AND
In the mater of PIK
Securities Pvt Ltd &others
Verses
United Western Bank Limited
PETITIONERS:
1. PIK Securities
Management Private Limited
2. Vibhuti Investment Co.
Pvt. Ltd.
3. Ganesh Benzoates Private
Ltd.
4. Impress Packagings
Private Ltd.
5. Mittal Fabric
Manufacturing Company Pvt.Ltd.
6. Horizon Corporate
Services Private Ltd.
7. Gaurishankar Investment
Private Ltd.
8. M.M. Investment Company
Pvt. Ltd.
9. Kamalkumar Jalan
Securities Private Ltd.
10. Shri Kamalkumar Jalan
11. Shri Ramesh Ranga
12. Shri Ganesh Khemka
13. Shri Niraj Dalmia
14. Shrimati Pushpadevi Khemka
15. Shrimati Veena Makharia
16. Shri Rahul dalmia
17. Shri Mahesh Saboo
RESPONDENTS:
1. The United Western Bank
Ltd.
2. Shri P.N. Joshi
3. Shri S.T. Gadre
4. Shri Dr. A.S. Sathe
5. Shri S.N. Gogate
6. Shri S. V. Joshi
7. Shri Dr. N.A. Kalyani
8. Shri Dr. K.R. Chandrate
9. Shri P.M. Khire
10. Shri R.J. Joshi
11. State Industrial and Investment Corpn
of Maharashtra Ltd.
12. M/S KPMG
Present on behalf of the parties:
1. Shri Sudipto Sarkar, Sr. Advocate
.. for petitioners
2. Shri Rahul Chitnis, Advocate
.. for petitioners
3. Shri Santosh Paul, Advocate
.. for petitioners
4. Shri Ranjan K. Pandey, Advocate
.. for petitioners
5. Shri Arvind Datar, Sr. Advocate
.. for respondent no.1
6. Shri Manoj Wad, Advocate
.. for respondent no.1
7. Shri Ashish Wad, Advocate
.. for respondent no.1
8. Shri Neeraj Kaul, Advocate
.. for respondents 2 to 10
9. Shri Dilip Goswami
.. for respondent no.12
10. Shri U.K. Choudhary,Sr.Advocate ..
for respondent no.11
11. Shri Rajeev Kumar, Advocate
.. for respondent no.11
O R D E R
(Date of final hearing:
19.3.2001)
S. BALASUBRAMANIAN:
1. The petitioners
collectively holding 10.61% shares in M/S United Western Bank Limited ( the Bank ) have
filed this petition under Sections 397/398 of the Companies Act, 1956 ( the Act ) alleging
acts of oppression and mismanagement in the affairs of the Bank and seeking appropriate
reliefs. The 11th respondent, holding about 9% shares in the Bank has filed
affidavits supporting the petition.
2. This Bank is a private
sector Bank incorporated in 1936. It has
about 53000 shareholders and its shares are
listed in the Stock Exchange. The authorized and paid up capital on the company was Rs 50
crores and about Rs 30 crores respectively. The equity shares are of the denomination of
Rs 10 per share. The Bank convened an extraordinary general meeting on 7th
August, 2000 to transact the businesses relating to amendment to Articles, issue of bonus
cum right shares. In all, there were 4 proposals to be considered
as special resolutions. The second item was to increase the authorized capital from Rs 50
crores to Rs 100 crores, issue of Bonus
shares in the ratio of 1:2 was the third item and issue of right shares at a premium of
not exceeding Rs 15 per share was the 4th item.
According to the petitioners, while the first three resolutions were passed
unanimously by show of hands, the shareholders protested against the resolution relating
to the right issue and demanded a poll. However,
the Chairman of the Meeting announced the withdrawal of this item and abruptly concluded the meeting and left. Thereafter, according to the petitioners, the
remaining shareholders continued the meeting and passed a unanimous resolution by show of
hands rejecting the proposal for the right issue. However,
the Board of Directors passed a resolution in the Board Meeting on 8.8.2000 to issue the
right shares at 1:5 with a premium of Rs 10 per share. According to the petitioners, the
conduct of the Chairman in withdrawing the resolution, the action of the Board to approve
the issue of right shares when the same had been rejected by the shareholders are
oppressive to the petitioners. Accordingly they have
filed this petition seeking for a
permanent injunction against the bank from taking any further action in pursuance to the
resolution of the Board dated 8.8.2000. The 2nd respondent is the Chairman of
the Bank and respondents 3 to 9 are directors and the 10th respondent is the
company secretary.
3. When this petition was
mentioned, considering the facts and circumstances of the case, by an ex parte order dated 21.9.2000, we restrained the Bank from
acting on the resolution of the Board to issue right shares. The Bank was also given the
liberty to apply for modification of the said order. The Bank filed an application CA
200/2000 seeking vacation of the restraint order. During the pendency of the proceedings,
the petitioners along with the 11th respondent, requisitioned an extraordinary
general meeting of the Bank for appointment
of 4 directors by a notice dated 12.10.2000. Thereafter,
on 25th October, 2000, they filed an application CA 204/2000 for appointment
of an independent Chairman to conduct this meeting on the ground that the Bank has been
obtaining proxies through its employees and as such they have no confidence in the
Chairman of the Bank to preside over this meeting. With
the view to hear these applications along with the petition, we directed the bank to defer
the convening of the EOGM sine die. Later, in
the rejoinder, the petitioners have made further allegations that the company has
used its own funds for purchasing shares of the Bank in the name of employees stock option
trust against the provisions of the Act, RBI & SEBI Regulations etc. The applications as well as the petition were heard
together on a number of days.
4. Shri Sarkar, Sr. Advocate
appearing for the petitioners argued as follows: The
members of the Board of Directors collectively hold only 0.4% shares in the Bank but they
have been carrying on the business of the Bank to the detriment of the shareholders and
the Bank. The 11th respondent,
which is the largest single shareholder having about 9% shares in the company, is
supporting the petitioners. The motive for
the issue of the right shares is not to benefit the shareholders but to allot the same to
a foreign bank to be identified by M/S KPMG, with whom the company has entered into an
agreement for identifying a suitable foreign
bank as is evident from the press report dated 31st May 2000, annexed at page
94 of the petition. Even though the Bank claims, that, in a Board Meeting held on
29.5.2000 prior to the AGM, the decision to issue bonus cum right issue was taken, yet,
the same was not mentioned in the AGM held on the same date. Further, the bank had also not intimated the
Stock Exchange about the same in time. Reference was made to the pamphlets at RJ-3/4 which
were circulated to the shareholders during
the AGM on 29.5.2000 wherein the Bank had projected the paid up capital as in March 2005
at Rs.30 crores which is the present paid up capital. Normally, banks issue shares only
for the purpose of maintaining prescribed Capital Adequacy Ratio ( CAR ). As far as this bank is concerned, the CAR is higher than the prescribed ratio and at no time
the bank had indicated inadequate CAR. Therefore, the decision to issue right shares was
with some ulterior motive and not for the interest of the Bank. Therefore, this aspect has
to be kept in mind while considering the proceedings of the EOGM held on 7th
August 2000.
5. As far as the proceedings
of the EGM are concerned, certain amendments (RJ 8) were proposed to the first proposal for the consideration of the
meeting, but no mention was made about the 4th proposal. The first three resolutions, including the 3rd
relating to issue of bonus shares, were passed unanimously by show of hands. However, when the 4th item relating to the right
issue was taken up, the shareholders protested against the same and demanded a poll.
Apprehending that the resolution would be defeated, the Chairman of the meeting announced
the withdrawal of the resolution without assigning any reason and ended the meeting abruptly and left.
Thereafter, the shareholders elected a new chairman- representative of the 11th
respondent- and tried to continue the meeting
but could not do so due to disturbances created by the employees of the Bank. Therefore,
the shareholders assembled at another nearby venue
and defeated the resolution by show of hands. A copy of the resolution was sent to the
bank but was not accepted. Thereafter, on the 8th August 2000, the Board had
passed a resolution to issue right shares at 1;5 at a premium of Rs 10 per share. The
action of the Chairman in withdrawing the resolution and later on the Board passing the
resolution exhibit the oppressive conduct of the management.
6. The learned counsel
contended that the chairman of the meeting had no authority or power to withdraw a
resolution once proposed by the Board and as per Article 71, he cannot even adjourn the meeting without the sanction of the general
body. Therefore, the Chairman had exceeded
his authority in withdrawing the proposal, that too after having the proposal to increase
the authorized capital carried through. If at
all he decided to withdraw the resolution, he should have obtained the approval of the
members before doing so. Further, before the
starting of the meeting, certain amendments were proposed in relation to the first
resolution but nothing was said about the withdrawal of the fourth resolution. The withdrawal was only on account of the
apprehension of the Chairman that the proposal would be defeated. The manner in which the meeting was held is so
oppressive that the views of the members had not been taken into consideration. The oppressive conduct of the Board of Directors
is evident from the fact that after the members had defeated the resolution, the Board
chose to pass the same resolution later on.
7. On the powers of the
Chairman in conducting a general meeting he relied on certain authorities:
· Halsbury’s Laws of
England 1996 issue): Except where empowered by the
regulations of the company, the chairman cannot adjourn the meeting nor dissolve it while
any of the business for which it was called remained untransacted and if he refuses to
act, the shareholders may elect another chairman. He cannot adjourn against the wishes of
the majority.
· Seth Sobhag Mal Lodha V
Edward Mills Co Ltd( 42 CC Raj): It is settled law that when once a
meeting is called, no chairman can arbitrarily dispose of it. Its continuance or dispersal
rests entirely on the will of the shareholders.
· S.Rm.S.T. Narayana
Chettiar V The Kaleeswarar Mills Ltd (AIR 1952 Mad.515), Deodutt Sharma V Zahoor Ahmed
Zaid ( AIR 1969 Raj 25) and National Dwelling Society V Sykes ( 1894 Chd 159): The chairman of the meeting is not entitled to stop
the meeting at his own will and pleasure. It is not open to him to stop the meeting and
dissolve it. If the chairman unjustly and with out the consent of the shareholders stops
the meeting and declares it dissolved, it is perfectly within the powers of the meeting to
elect a chairman and conduct the remaining business.
8. In regard to the
proceedings of the EOGM, he pointed out that the Bank did not reveal that without the
right issue, no bonus shares could be issued and they never brought to the notice of the
general body about the RBI stipulation in this regard. If the members had known about the
stipulation, they would have examined as to whether to approve the increase in the
authorized capital or not. The meeting could
be cancelled on this issue alone that full particulars had not been revealed to the
general body even though the same was in possession/knowledge of the Board of Directors. He further pointed out that when two proposal are
made independent of each other, the shareholders are at liberty to approve one and reject
the other. If the members had been advised
that without approval for right issue, bonus shares could not be issued, then the
shareholder would have weighed the pros and cons of approving the bonus issue. Therefore, it is wrong to contend that having
approved the bonus issue, the shareholders cannot dis-approve the right issue.
9. Referring to the reply of
the Bank, wherein the Bank has averred that the resolution was withdrawn on the basis of
a legal advice that in terms of Section 81(1) of the Act, in case of rights shares there
is no need to obtain the general body approval, he pointed out that the Chairman never
mentioned about the legal advice during the meeting, as is evident from the minutes of the
EOGM as prepared by the Bank at Anne A-19. Even though this minutes talks of mentioning
about Section 81(1), no mention was actually
made. Not withstanding this, as per the provisions of Articles 45 to 47 of the Articles of
Association of the company, whenever new shares are created or issued, the same has to be
approved by the general body. The practice in
this bank in the past also was that whenever further shares
were allotted, even on a right basis, the approval of the general body was taken. Further, when the company approached the RBI on 5th June 2000, ( Annx C to CA 200/2000) for permission to issue bonus cum
right shares, it had indicated to RBI that the Bank would obtain general body approval.
Referring to Annexure SSR 3 to the reply to the sur-rejoinder, he pointed out that in this
letter dated 14.6.2000, the Bank had informed the RBI that in the EOGM which had to be
convened to get the approval of the shareholders for bonus cum right issue, the bank would
also get the Articles amended to provide for capitalization
of reserve for issue of bonus shares and for increasing the authorized capital. Thus, he
contented that now the Bank cannot take a stand that it did not require the approval of
the members for issue of right shares, after having obtained the approval of the RBI on the basis of certain undertaking. Even
otherwise, the residual power always vests in the general body and the ultimate authority
on issue of shares rests with the general body. While
the shareholders cannot force the Board to do something, yet, they can exercise negative
control on the Board of Directors. Even
though, the Bank contends that by issue of bonus shares and right shares, the Bank is
rewarding the shareholders, yet, when the majority do not want the reward, the same cannot
be forced on them. The entire episode clearly
indicates that the intention of the Bank is to off load the un-subscribed right shares to
a foreign partner and as such the proposal to issue right shares itself is a motivated and a malafide act.
10. Shri Sarkar, referring to the
interlocutory application relating to the EOGM requisitioned by the petitioners, pointed
out that the Explanatory Statement furnished by the petitioners was not circulated to the
members while the Bank has circulated its own Explanatory Statement containing derogatory
and wrong information to the members. Further,
the Bank has started using its own machinery to collect proxies for the meeting which is
prohibited. Therefore, the petitioners have no confidence in the Chairman of the Bank
chairing the requisitioned EOGM and such the CLB should appoint an independent Chairman.
He further pointed out that without RBI and SEBI and General Body approval, the company
has introduced an Employees Stock option Scheme and has also established a Trust for the
same purpose. The funds of the Bank have been used to purchase about 9% of the shares of
the Bank in favour of the Trust. This purchase has been going on from the last quarter of
2000 perhaps only with the view to consolidate the voting power with the management in the
EOGM requisitioned by the petitioners. Further this also
exhibits utter mismanagement of the affairs of the company.
11. Summing up his arguments, Shri Sarkar
argued that there are inconsistencies in the stand of the Bank in regard to the
reasons/need for the bonus cum right issue. According
to the minutes of the EOGM as prepared by the Bank, the purpose was to reward the
shareholders. In the Board Meeting held on
8.8.2000 approving the right issue, the reason given is to improve the CAR. In the letter to the Stock Exchange dated 8th
November, 2000 ( RJ-2 ), the Bank has intimated that the decision to issue bonus cum right
shares as reward to the shareholders was suddenly decided. In the reply to the petition it
is stated that the decision to issue bonus-cum right shares
was a well reasoned one. In the
Press Conference held by the Bank on 31st May, 2000, the Bank had informed that mandate
had been given to KPMG to find a foreign partner for sale of 20% shares in the Bank. Thus, the whole idea of the right issue seems to
be only to off load the un-subscribed shares to a foreign partner and not for the
needs/benefit of the Bank. Therefore, he submitted that the decision of the
Board to issue right shares should be declared as null and void and since no bonus shares
could be issued without a right issue as per the RBI Guidelines, the entire proceedings of
the EOGM held on 7th August, 2000 also be declared as null and void.
12. Shri Arvind Datar appearing for the
Bank argued as follows: In terms of Section 397, the CLB has to come to a
conclusion that the company is liable to be wound up on just and equitable grounds and
that such a winding up would not be in the interests of the shareholders. Winding up of a
company on just and equitable grounds is provided under Section 433(f) of the Act. Since
Section 38 of the Banking Companies Regulation Act deals with the winding up of banking
company, the provisions of Section 433 of the Companies Act are not applicable to a
banking company. If so then a petition under Section 397 of the Companies Act in respect
of a banking company is not maintainable. Kerala
High Court in K.P. Chockochan Vs. Federal Bank (
66 CC 953 ), has held that a banking company cannot be wound up
under Section 433 of the Companies Act. Therefore,
this jurisdictional aspect has to be first examined before proceeding with the merits of
the case. Further, since the petitioners'
only allegation in the petition relates to the proceedings in the EOGM which is a single
act, this cannot be a ground for a petition
under Sections 397/398 of the Act since a single and an isolated act cannot constitute oppression as decided in Nanalal
Zaver Vs. Bombay Life Insurance Company ( AIR 1950 SC 172
). The same proposition has been
applied in Maharani Lalita Rajyalakshmi Vs. Indian Motor company Limited ( 32 CC 207 ).
In Needle's case also ( 1981 1 SCC 333
), the Supreme Court has held that an isolated act which is contrary to law may
not necessarily and by itself support the inference that the law was violated with a
malafide intention and such violation was burdensome, harsh or wrongful. Therefore, this petition founded on a single and
isolated act is not maintainable. Further, the petitioners' group owes a substantial
amount of money to the Bank and therefore, with the malafide intention to deprive the Bank
of additional share capital, this petition has been filed.
In addition if the petitioners were to subscribe to the right issue, they have to
pay about Rs.6 crores and with a view to avoid such a payment, they have filed this
petition challenging the right shares. The
bonus cum right issue has been made not only with a view to reward the shareholders but
also improve the CAR of the Bank. At the time
when the right issue was proposed, the market price of the share was Rs.40/- while the
right shares could have been acquired for Rs.20/- including the premium of Rs.10/-. Therefore, when such an issue of bonus and right shares would benefit the shareholders, the question of
their interest being affected does not arise. By this issue, the directors who
collectively hold less than 0.4% are not in any way benefited and as such no motive could
be attributed to them in this regard. The
petitioners have not shown prima-facie that there is lack of probity or that the
substratum of the company has gone or that the company is liable to be wound up on just
and equitable grounds. He further argued that the only prayer in the petition is to set
aside the proceedings of the EOGM, which could be done only by the civil court in a suit
and as such the petitioners should have resorted to a suit.
13. In regard to the proceedings of the
EOGM Shri Datar pointed out that the petitioners having voted for the bonus shares could
not have opposed the right issue as both are unseverable in view of RBI guidelines that
bonus shares can be issued only if simultaneously rights/public issue is made by a bank.
Before the commencement of the meeting, the Chairman, informed the members that the meeting had been convened for the purpose
of issuing bonus cum right shares and therefore the shareholders were fully aware that
they had to approve right issue in case they decided to have bonus shares. Further, a reading of the Explanatory Statement in
regard to increase in the authorized capital would clearly reveal that the authorized
capital was being increased for the purposes of issuing bonus cum right shares. He pointed
out that in case the petitioners opposed the right issue, then, they cannot get bonus
shares in as much as the same would be against the guidelines of RBI. He pointed out that in the petition the
petitioners have not sought for cancellation of the bonus issue.
14. By the time the EOGM took place, the
Bank had obtained legal opinion from M/s Kanga& Co to the effect that the in respect
of right issue, there is no need to get the approval of the general body and therefore the
Board had decided to withdraw the resolution in his regard and accordingly the Chairman
rightly withdrew the proposal. He
contended that neither in the Articles nor in the Act, there is any provision to restrict
the powers of the Chairman from withdrawing a resolution.
According to him, as long as something is not prohibited by the statute, then, the
same is legal as decided by the Supreme court in New India Assurance Limited ( 2000 3 SCC 242) The
Chairman of a meeting is fully empowered to take whatever decision is needed in the
larger interest of the company and the shareholders and as such there is no limitation to
his powers. As long as the decision is
bonafide, which in the present case is based on a legal opinion, the same cannot be
questioned. He submitted that as a
proposition, the court should not interfere
with the decisions taken in a company meeting and the burden to prove that the decision of
the Chairman is wrong rests with the petitioners, as the Chairman of a meeting has full
powers to conduct the proceedings. (
Mahaliram Santhalia Vs. Fort Gloster Jute Manufacturing Co. Ltd. 24 CC 311
).
15. As far as the applicability of Articles
45, 46 and 47 is concerned, the learned counsel submitted that these Articles are not
applicable in respect of right issue of shares. Article
46 requires general body approval only when there are variations in the rights attached to
the shares and not in a case where same class of shares are issued on a right basis. Article 47 deals with right issue of shares which
is more or less in line with Section 81(1) of the Companies Act. Since Section 81(1) of the Act empowers the Board
to issue shares on a right basis, there is no need to get the general body approval. No doubt, the Board had made a mistake of
including this item to be transacted in the general body, but it does not mean that general body approval has to
be obtained when as per the statute, the
Board of Directors had the full authority. He
further contended that even assuming that the Chairman had acted wrongly in withdrawing
the resolution, yet, it cannot be considered to be oppressive to any shareholder in as
much as the bonus cum right issue is beneficial to all the shareholders. He pointed out
that in Nagavarapu Krishna Prasad Vs.
Andhra Bank Limited ( 23 CC 73
): it was held that in case a
resolution passed in a meeting is invalid or illegal due to non compliance with the
provisions of the Act, the same does not constitute oppression and such act could be
challenged in a civil proceedings.
16.
He also contended that the alleged
meeting held by the shareholders themselves is
invalid in as much as the shareholders cannot usurp the powers of the Board as held in Morarka
Paint and Varnish Works Private Ltd. Vs. Mohan Lal Morarka ( 31 CC 301 Cal.
), Suburban Bank Private Ltd. Vs. Thariah ( 38 CC 13 Ker), Pothen Vs. Hindustan Trading Corporation ( 37 CC 266
Ker. ). He also pointed out that
holding a meeting by the shareholders in a place other than the one specified in the
notice for the meeting is invalid as decided in Sikkim Bank Limited Vs.
R.S.Choudhary ( 102 CC 387 ).
17. As far as the need for increase in the
capital is concerned, referring to various details filed by the bank as well as the
petitioners, he pointed out that if the Bank does not go for right issue, its CAR would
come down and once it goes below 10%, then, the Bank would not be able to advance any
further loans. In this connection, he also
referred to RBI directions according to which the private sector banks will have to have a
minimum of Rs.50 crores as paid up capital. Further,
the issue of further shares is a managerial and commercial decision which cannot be
challenged by the shareholders. In the
present case, since the RBI which is the regulatory authority in respect of the banks has
already approved the proposal of bonus cum right issue, no other authority including the
CLB could go into the question as to whether there is need for funds for the Bank or not. It is an issue purely between the Bank and RBI. To the proposition that bonafide issue of further
shares cannot be challenged, he relied on Nanalal Zaver(supra) Khemka Vs. Deccan Enterprises Pvt. Ltd. ( 100 CC 211 ).
18. As far as the interlocutory application
relating to the EOGM requisitioned by the petitioners is concerned, Shri Datar pointed out
that since this matter has not arisen out of the main petition, CLB has no jurisdiction to
entertain this application as it has no nexus with the allegations in the petition. Since it an independent action of the petitioners
themselves, they have to invoke relevant provisions of the Act to seek whatever remedy
they need in respect of the same and cannot claim any relief in this petition. On this
proposition, he relied on Lipton India Ltd. Vs.
UOI ( 1994 6
SCC 524 ) wherein the Supreme Court has held that
interlocutory application in a writ petition making a claim not arising out of but
independent of the writ petition is not maintainable. Therefore, he urged that the
interlocutory application should be ignored.
19. Summing up his arguments, Shri Datar
contended that the main motive of the
petition is to avoid payment of about Rs.6
crores which the petitioners will have to pay in case they accept the right issue. A right issue cannot be challenged on the ground
of inability to pay for the shares as held in Jetu Jacques Taru Lalwani Vs. JBA Printing Inks Ltd. ( 88 CC 759
). He also pointed out that the
petitioners owe a sum of more than Rs.51 crores to the Bank and the Bank has already filed
a winding up petition. Therefore, with a view
to put pressure on the Bank, this petition has been filed. He further contended that the
petitioners have not either alleged or established that by issue of the right shares, they
are going to be in any way prejudicially affected in as much as the option to apply for
right issue vests with them and it is not mandatory. Unless and until they are not in a
position to establish some prejudice, they cannot prosecute this petition. On this
proposition, he relied on Aligarh Musilim University Vs. Mansoor Ali Khan ( 2000 6 Scale 125 ).
Once the petitioners fail to establish that the action by the Bank is prejudicial
to their interest, then they have no locus standi to pursue the petition. When a person is
benefited by the action of the company, he can never claim to have been aggrieved by such
an act of the company. He also pointed out
that the petitioners being business people were fully aware that the Bank cannot issue
bonus shares without offering right shares but they have not chosen to challenge the bonus
shares in the petition. The oral submissions
by the counsel to declare the entire proceedings of the meeting as null and void, having
not been sought in the petition, cannot be considered by the CLB on the basis of the oral
prayer as it would be against the provisions of Regulation 16 of the Company law Board
Regulations according to which the petitioners will have to indicate the specific reliefs in the petition. He also contended that if the
prayer of the petitioners that the proceedings of the EOGM should be declared as null and
void, then, the effect of the same would be completely against the interest of the Bank as
well as a large number of other shareholders as decided by Allahabad High Court in
Reghunath Sarup Mathur Vs. Har Sarup Mathur
( 40 CC
282 ), according to which, the court has to be careful and astute enough to
prevent a misuse of the provisions of Sections 397/398 by a party, lest a remedy proposed
and granted to overcome an alleged mischief becomes a source of greater oppression than
the one sought to be removed or prevented. According
to him if the bonus cum right issue does not go through, then, by the year 2002 the Bank would reach a level endangering its
survival. The very fact that instead of issuing only right shares, the Bank had also
decided to issue bonus shares which is not in any way going to benefit the persons in
management, would show that the bank has acted bonafide in proposing bonus cum right
issue. The allegations of the petitioners is that
the right issue has been proposed only with a view to off load un-subscribed portion of
the right issue to a foreign bank or institution. If the intention of the Bank is to
induct a foreign bank, it need not have to adopt this circuitous route and it could have
sought the permission of the general body for a preferential
issue. In this connection, he referred to the sur- rejoinder wherein the Bank has
expressly stated that it would not allot un-subscribed portion of the right issue to any
foreign bank/institution.
20. He also pointed out that as per the
listing agreement, shares have to be issued with the right to renounce and without stock
exchange approval the bank cannot issue shares without the right to renounce. Since the Articles are subject to any other law,
notwithstanding the provisions in the Articles for getting the approval of the
shareholders for issue of shares with the right to renounce, in view of the listing
agreement, no approval of the general body is needed for issue of shares with the right to
renounce. Therefore, the contention that the
general body approval should have been obtained for issue of shares with the right to
renounce is not correct. As far as the
allegation relating utilization of the bank
funds for employees stock option shares, Shri
Datar pointed out that there are no pleadings in this regard and as such oral complaints
made during the hearing should not be taken cognizance of.
Any way he pointed out that the RBI is seized of this matter and the Bank would abide by the decision of the
RBI in this regard. He also pointed out that that all cases cited by Shri Sarkar in
relation to the applicability of the provisions of Sections 397/398 in respect of banking
companies related to the provisions of Sections 391/394 while the case cited by him of
Kerala High Court directly relates to a 397/398 petition and as such the Kerala case is
directly applicable to the present proceedings. Therefore,
he pleaded that the petition should be dismissed both as not maintainable as also on
merits. He also contended that the petitioners had impleaded M/S KPMG only with a malafide
intention as they are not necessary parties at all to the proceedings. The demand for a copy of the contract between the bank and M/S KPMG cannot be
considered in as much as, a shareholder is not entitled to the same. He also pointed out that in view of the interim
stay given by the CLB, the bank has been deprived of the substantial cash inflow which has
resulted in heavy loss of interest which the bank would have earned by advancing the same
to the borrowers. Since this petition is a
malafide petition, the petitioners should be directed to compensate the Bank for the loss
of interest.
21. Shri
Neeraj Kaul appearing for the 2nd respondent also concurred with the
submissions of Shri Datar and reiterated the
same. In addition, he pointed out that the
cancellation of the proceedings of the EOGM as sought for by Shri Sarkar would deprive
50,000 odd shareholders their bonus entitlement and as such should not be cancelled.
Further, even assuming that the interpretation of the provisions of Section 81 (1A) of the
Act by the Chairman of the meeting was wrong, yet, it cannot constitute a ground for this
petition as the petitioners are at liberty to challenge the same in a civil suit.
22. Shri Dilip Goswamy appearing for M/S
KPMG sought for deleting the name of his clients from the array of parties on the ground
that his clients are not necessary parties to the proceedings. He contended that his clients had been impleaded
as parties only with a view to get a copy of the agreement with the Bank to find a foreign
party which his clients are not bound to supply. In
this connection, he also referred to paragraph XIII of
the sur rejoinder filed by the Bank wherein the Bank has explicitly stated that it
had no intention of issuing shares to a foreign bank/institution out of the un-subscribed
portion of the right issue. Therefore, he
sought for deleting the name of his clients from the array of parties.
23. Shri Chaudhary, Sr Advocate, appearing
for the 11th respondent submitted that his clients have entered into an MOU
with the Bank for induction of two of their representatives on the Board and as such he is
not taking part in the arguments.
24.
In reply, Shri Sarkar, Senior
Advocate for the petitioners contended that
the decision of the Kerala High Court in KP Chockochan Vs. Federal Bank
( 66 CC 953 ) in which the court has held that since the provisions of
Section 433 of the Act are not applicable to Banking companies, the provisions of Section 397/398 of the Act are also
not applicable to the Banking companies cannot be taken as a legal proposition as there
are prior decisions of other High Courts to
the contrary which had not been considered by the Kerala High Court. He referred to Section 616 of the Act which
makes it clear that the provisions of the Act shall be applicable to Banking companies
except in so far as the provisions are inconsistent with the provisions of Banking
Companies (Regulation) Act, 1949 (Banking Act). Section
2 of the Banking Act makes it clear that the
provisions of that Act shall be in addition to and not in derogation of the
Companies Act with certain exceptions. Section 38 of the Banking Act dealing with winding
up of a banking company has excluded the application of certain Sections of the Companies
Act but the provisions of Section 397/98 are not excluded.
He pointed out that Section 38 of the Banking Companies Act is an additional
provision as far as winding up of Banking Companies is concerned as it makes it mandatory
for the Court to make a winding up order on two instances as provided in that Section
unlike the provisions of Section 433 of the Companies Act, where discretion is vested with
the Court. Thus it would be evident that the provisions of Section 433 are still
applicable to banking companies and therefore winding up of a banking company on just and
equitable grounds under Section 433(f) is
permissible and as such the shareholders of a banking company can approach the CLB under
Section 397/98. To the proposition that the powers of the Court under Section 38 of the
Banking Act in respect of winding up of a banking company is in addition to such powers
under Section of Section 433 of the companies Act, he relied on
Dilip Singh Vs. First National Bank Limited (
AIR 1952 Pun 158 ), Dwarkadas Agarwall
V Dharam Chand Jain (AIR 1954 Cal 583) The
Chotanagpur Banking Association Ltd(AIR 1959 Pat 288), The Federal Bank of India (Pb) V
Durga Das Kapur (AIR 1954 Pun 21), GOI v
Court Liquidators Employees Assocoation (1999 8 SCC 560),
T.S. Arumugham V Laxmi Vilas Bank Ltd (1993 Bank J 435 Mad) wherein in some
of the cases it has also been held that
banking companies are governed by the provisions of the Companies Act as also the Banking
Act.
25. In regard to subsequent events which are part of CA 2004 and
rejoinder, he pointed out, that in a 397/98 petition, since that affairs of company are
under scrutiny, the entire affaires of the company could be looked into not withstanding
that some of the events had taken place after filing of the petition. In this connection
he referred to the decision of this Board in Vinod
Kumar Agarwal V Ringtong Tea Co P Ltd( 1995 1 CLJ 138) wherein this Board held that further affidavits to make
good the petition could be considered. He also relied on the same case, that even a single
act, if its effect were to have permanent effect, could be considered to be an act of oppression. In this connection, he also
referred to Needles's case wherein also the act complained of was one in
relation a single meeting. In the same way he pointed out that in Shoe Specialities
case(82CC836), the allegation related
to a single act of issue of shares, which was
held to be an act of oppression by the CLB and upheld by the Division Bench of Madras High
Court. He also referred to Howard Smith V Ampol Petroleum Ltd case
(1974 AER 1126) wherein also the only
issue was allotment of further shares. Therefore, he contended that the proposal of the
bank to issue right shares, even though may be a single act, yet it would have effect for
all the time to come and such could be challenged as an act of oppression.
26. In regard to the contention of Shri
Datar, that in view of there being no
prejudice caused to the petitioners by issue of right shares and as such the petitioners
can have no complaints, Shri Sarkar pointed out that to invoke the provisions of Sections
397/398 of the Act, there is no need for proving personal prejudice as is evident from
Section 397 itself. Section 399 confers statutory rights on the shareholders to invoke the
provisions of Sections 397/398 of the Act as long as the ingredients of these sections are
satisfied. He also pointed out that Section
401 of the Act empowers the Central Government to invoke the provisions of Sections
397/398 and if it is so, it cannot be said that the Central Government has to satisfy
personal prejudice. According to him, the
provisions of Sections 397/398 are special provisions giving wide powers to the CLB under
Section 402 of the Act. He pointed out that
by investing the funds of the Bank, shares of the Bank have been purchased which is not only against the provisions of the
Act but also done with a view to consolidate voting powers indirectly.
27. In regard to the proceedings of the
EOGM, he pointed out that the Bank did not reveal that without the right issue, no bonus
shares could be issued and they never brought to the notice of the general body about the
RBI stipulation in this regard. If the members had known about the stipulation, they would
have examined as to whether to approve the increase in the authorized capital or not. The meeting could be cancelled on this issue alone
that full particulars had not been revealed to the general body even though the same was
in possession/knowledge of the Board of Directors. He
further pointed out that when two independent proposals
are placed for consideration, the shareholders are at liberty to approve one and reject
the other. If the members had been advised
that without approval for right issue, bonus shares could not be issued, then the
shareholder would have weighed the pros and cons of approving the bonus issue. Therefore, it is wrong to contend that having
approved the bonus issue, the shareholders cannot dis-approve the right issue.
28. We have considered the pleadings and
the arguments of the counsel. The issues that have been raised for our consideration are,
the maintainability of the petition, need for further capital, the power of the chairman
to withdraw a resolution, the scope of Articles 45-47 allegations subsequent to the filing
of the petition etc. We shall first examine the
issue as to whether a petition under Sections 397/98 of the Act could be filed in respect
of a banking company as this issue has a bearing on our jurisdiction to entertain this
petition. Shri Datar relied on Federal
Bank case to state that against a banking company, a petition under Sections
397/98 does not lie, while according to Shri Sarkar, there is no such bar and he cited a
few cases in support of his stand. We are generally in agreement with the submissions of
Shri Sarkar that there is no bar in filing a 397/98 petition in respect of a banking
company. In
Federal Bank case, the Kerala High Court has held that since a banking company cannot be wound up under
Section 433 of the Act, a petition under
Sections 397/98 cannot be maintained. This
judgment has not referred to any of the judgments cited by Shri Sarkar, even though some
the judgments were rendered before rendering the judgment of Kerala High Court.
29. As per Section 616 of the Act, the
provisions of this Act shall apply to banking companies, except in so far as the said
provisions are inconsistent with the provisions of the Banking Companies Regulation Act
1949. Section 2 of the Banking Regulation Act
reads: “Application of other laws not barred: The provisions of this Act shall be
in addition to, and not, save as hereinafter expressly provided, in derogation of the
Companies Act, 1956 and any other law for the
time being in force". An analysis of these two Sections would indicate that like any other company, a banking company is also
governed by the provisions of Companies Act except as provided in the Banking Act. In this
connection we may refer to the observation of the Apex Court in GOI V Court
Liquidators Employees Assn case (supra) that “The distinction between the
banking company and the non banking company, broadly speaking, is that a banking company
is a company which deals with banking business and a non banking company, on the other
hand, deals with non banking business. The general law applicable to both the categories
of companies is the Companies Act.” Similar view has been expressed by the Madras
High Court in Laxmi Vilas Bank case (supra). In respect of winding up
of a banking company, the Banking Act provides in Section
38 as: “Winding up by High Court: (1)
Notwithstanding anything contained in Section 391, 392, 433, 583 of the Companies Act but
without prejudice to its power under sub Section (1) of Section 37 of this Act, the High
Court shall order the winding up of a banking company - (a) If the banking company is
unable to pay its debts; (b) If an application for its winding up has been made by the
Reserve Bank under Section 37 of this Act".
( It is to be noted that there is no mention of Sections 397/98 of the Act in this
Section). This Section deals with the winding up of a banking company which is unable to
pay its debts, while Section 433 of the Companies Act provides for five other
circumstances under which a company could be
wound up. The issue for consideration is whether
a banking company could be wound up under any of the other five circumstances as in
Section 433 of the Act. As per this Section, the power of the Court is discretionary
even when a company is unable to pay
its debts. However, Section 38 of the Banking Act provides that when a banking company is
unable to pay its debts or if the RBI applies in terms of Section 37 of that Act, the
Court is bound to order winding up of that company. In
other words, it is mandatory for the court to order winding up of a banking company under
these circumstances. The words “notwithstanding anything contained in Section 433
of the Companies Act” has to be interpreted to mean that the discretionary power under Section 433 of
the Companies Act is not available to the Court in respect of a banking company when it is
unable to pay its debts. In other circumstances, the court has the discretionary powers
even in respect of a banking company and petitions could be filed for winding up of a
banking company in any of these circumstances envisaged in Section 433 of the Act
including for winding up on just and equitable grounds. In First National Bank
case, the Punjab High Court has held that the
provisions of the Banking Act is in addition to the provisions of Section 162 of the 1913
Companies Act (Section 433 of 1956 Act). In Federal Bank of India (Pb), the
same Court held that “From the words used in S 38 of the Act of 1949, it cannot be
sustained that the banking company cannot be wound up by the Court under clauses (i),(ii),
(iii),(vi) and (vi) of the Act”. Similar is the decision of Calcutta High Court in Dwarkdas
Agarwall case(supra). Thus, in law, according to us, there is no bar in an
application being filed under Section 433 of the Act against a banking company, which
would also include winding up on just and equitable grounds. If so then a petition under
Section 397/98, which is alternative to a winding
up petition, can also be filed in respect of
a banking company. In view of this finding, we hold that this petition is maintainable.
30. Shri Datar raised an objection that a
single and an isolated act cannot constitute
oppression. As a legal proposition it is difficult to accept this contention. Whether a
single act would constitute oppression or not would
depend on the facts of a case, the nature of the company, the relationship between the
parties and also on the provisions of the Articles and the Act. In a family company
wherein participation in the Board is
provided in the Article, removal as a director, even, if it is a single act could
constitute oppression as the removal has a permanent effect of keeping one from the
management. In the same way, further issue of shares by which the percentage holding of
person a comes down, even though a single
act, has continuous effect. In Indian Motor case, the
allegation with reference to which the court held that a solitary act cannot constitute
oppression related to the complaint that the petitioner was denied the right of
inspection of books of accounts. While the court held that a shareholder is not entitled
to the same, it also remarked as above. Even in Needles case relied on by Shri Datar, the
Court has not categorically stated that a
single and isolated act would not constitute oppression, but it only observed that only
observed that “an isolated act which
is contrary to law may not necessarily and by itself support the inference that the law
was violated with a malafide intention and that such violation was burdensome, harsh or
wrongful”. In other words, the Court has cautioned against drawing a presumption
of oppression once a law is violated. However, if one could establish that the law was
violated with a malafide intention, then there is no bar in challenging the same.
In fact the allegation in the Needle’s case related to the
deliberations in a single Board meeting. Even in Nanalal Zaver case also,
the only issue before the Court was issue of further shares. Therefore, as we have observed whether a
single act constitutes oppression or not would depends on the facts of a case and as a
general proposition, it cannot be held that a single and isolated act cannot constitute
oppression.
31. She Datar also argued to state that, personal prejudice should be
established in a 397/98 petition. The action under these Sections is a derivative action
for the benefit of all the shareholders, the company and in public interest. The usage of
the words in Section 397 “oppressive to any member or members (including any or
more of themselves)” would indicate that there is no need to establish personal
prejudice in a 397 petition. As far as Section 398 is concerned, the action is in the
interest of the company and public interest and the members interest does not figure in
this Section. In Aligarh Muslim
University, in which the Apex court held that personal prejudice should be
established was in connection with the grievance that principle of natural justice was not followed. Therefore,
the said ruling is not applicable in the instant case.
32.
In
regard to the question as to whether subsequent events can be considered in a 397/98
petition, there are conflicting decisions of the High Courts, some holding in the
affirmative and others in the negative. This Board had an occasion to examine this issue
in detail in Karelda Suryanarayan V Sri Ramdas Motor Transport Ltd (1998 1 CLJ 342).
In that case, while certain interim reliefs were sought on the basis of subsequent events,
this Board observed “there is no bar in subsequent events being brought on record
and being considered by us but such
consideration would be only to mould the relief to be granted in case the petitioner
succeeds in the main petition and that any interim relief granted, based on subsequent
events, would be limited to the status quo being maintained in regard to the affairs of
the company”. In view the above, we do not find any bar in subsequent events
being considered in a 397/98 petition.
33. As far as the need for additional
capital is concerned, as rightly pointed out by Shri Datar, it is a managerial decision
and a judicial forum should not interfere with the decision of the Board except when the increase in the share capital is with an ulterior motive and not for the bonafide
needs of the company, but, in the garb of
raising capital, shares are issued either to
consolidate one’s position or with a view to create a new majority or to convert a
majority into a minority. In such cases, a petition under Sections 397/98 can be maintained. In the present case, the company is a
banking company having over 50000 shareholders. The board of directors hold only 0.4%
shares in the company. Further the bank cannot increase its share capital without the
approval of the RBI and even the pricing of the shares has to be approved by the RBI. A
chronology of the events leading to the issue of right shares is a relevant aspect to be
considered. According to the Bank, in the AGM held on 29.5.2000, the Chairman indicated
about the decision to issue bonus cum right issue and this is recorded in the minutes of
that meeting. Even though the petitioners contend that no such mention was made, yet in
the press report dated 31.5.2000, it is
stated that the same was mention in the meeting. The petitioners have not challenged the report in
the press till the petition was filed. The decision of the Board on 29.5.2000, is
corroborated by the letter of the Bank to
the Stock Exchange about the same on the same
day ( Ann B to CA 200). In the same way the Bank had also sought the approval of the RBI
through an application on 5th June
( Anne C to CA 200). In this application, the Bank had indicated the CAR as 11.94
percent and the Bank had informed the RBI
that the Bank would get the approval of the shareholders for bonus cum right issue.
Thereafter, the Bank issued the notice for the EOGM on 23rd June 2000. It is on
record that the RBI gave its ‘in
principle’ approval on 21st July 2000 for the bonus cum right issue as
proposed by the Bank on the basis of the application subject to complying with the SEBI
guidelines (Annx D to CA 200).Thus, when a
competent authority has applied its mind and had given the approval for the bonus cum
right issue, the shareholders cannot question the wisdom of the Board on the
ground that the bank has adequate CAR and
therefore, there is no need to go in for right issue. That is the reason why we have also
not elaborated the extensive arguments of the
counsel in regard to the need for capital referring to various statements on CAR etc. Once
the Board decides about the quantum and the price which has also been approved by the RBI,
we are of the view that further examination by us is not called for. Even though Shri
Sarkar pointed out the inconsistent stand taken by the Bank regarding its decision to go
in for right issue, yet, we do not think that the same would call for scrutiny by us as to
whether the Bank needs additional capital or not. The petitioners have not stated as to
why they are objecting to the right issue especially, the option to invest or not is with
them. They have only expressed their apprehension that the Bank is likely to allot the un-subscribed shares to a foreign partner which
would not be in the interest of the shareholders/bank. Even then they have not indicated
as to how and why the same would be against their interest or that of the bank. We also
note that in the meeting held with the representative of the 11th respondent as
the Chairman, wherein the resolution for right shares was defeated, the minutes of the
meeting does not indicate the grounds on which the resolution was defeated. However, now
that the bank has filed an affidavit in the form of sur- rejoinder that it has no
intention to off load the shares to a foreign partner,
we do not find that the decision of
the bank to issue right shares could be considered to be an act of oppression.
34. The next issue is the authority of the
Chairman to withdraw a resolution included in
the agenda for the general meeting. The companies Act does not specify the powers and
duties of the Chairman of a meeting. Section 175 of the Act deals with election of a
chairman, Section 178 stipulates that the decision of the Chairman in case of voting by
show of hands is final, Section 176 permits the Chairman to seek a poll on his own motion
and makes it mandatory on his part to order poll if the same is demanded by the members
possessing the requisite qualification prescribed in that Section, Section 184 stipulates
that the Chairman shall appoint two scrutinizers in case of a poll and Section 185
empowers him regulate the manner in which the poll is to be taken. Thus, there are no
substantive provisions in the Act regulating the powers of the Chairman of a meeting. Regulations 49 to 55 of Table A also
does not specify the powers of the chairman of a meeting except that Regulation 53 deals
with the powers of the Chairman to adjourn the meeting, that too with the consent of the
members. The Articles of the Company incorporates practically all the provisions as
indicated above, including the one that the Chairman may adjourn the meeting with the
consent of the members in Article 71. None of
the cases cited by the respective counsel deals with the power of the Chairman to withdraw
a resolution. All the cases cited by Shri Sarkar relate to the power of the Chairman to
adjourn the meeting. We are of the view that once a resolution is placed before the
general meeting, more so a special resolution, it
cannot be withdrawn with out the leave/approval of the members for the reason indicated
hereinafter. The duty and the authority of the Chairman, according to us, is limited to ensure that the meeting is held in an orderly
manner and the will of the shareholders is
ascertained properly on the businesses placed before them. To this end he has full
authority and powers to regulate the proceedings of the meeting and nothing more. We do
not accept the contention of She Datar, relying on New India Assurance Ltd
case that what is not prohibited by law can be done, because in that case, the court made that observation in the
context whether a court can dismiss a complaint
for non prosecution when no such power is vested in the court by the statute. The businesses to be transacted in a meeting are
decided by the Board (except in cases of meetings requisitioned by the members) and once
the same are placed before the general body
by the Board, it is for the general body to approve the same with or without modification
or disapprove the same. If the Chairman desires to withdraw a matter placed before the
general body, he has to get the approval of the members. The Chairman of the meeting could
be the Chairman of the company or any one of the directors or one of the members elected.
(In Article 66 of the Bank the same provision has been made). If the Chairman or a
director chairs the meeting, he assumes the position of the Chairman of the meeting and is not acting in his
capacity as the Chairman or a director of the company to take whatever decision he could take in that capacity. The Chairman of the
meeting should be disinterested and impartial and he
cannot, at his will, decide whether a resolution is to be tabled and voted upon or
to be withdrawn. Once, matters are
placed before the members through a valid notice
for their consideration, these maters come under their domain and cannot be withdrawn without their consent.
35. In the present case, as per the minutes
of the meeting, the Chairman informed the members, that the Board had decided to withdraw
the resolution, but no minutes of the Board taking the said decision was either placed
before the meeting nor before us. It is also doubtful whether any decision was taken by
the Board in this regard before the meeting commenced as we find from the minutes of the
Board meeting on 8th August 2000, that there is no mention about the same.
Rather it records “In the Extra Ordinary General Meeting held on August 7, 2000,
the Chairman had announced that as per the provisions of law, the special resolution was
necessary only when shares were to be offered on a basis other than the right
basis--------”. Thus it appears that the decision to withdraw was the decision of
the Chairman and not by the Board. Even if the Board had decided that way, then, as
rightly pointed out by Shri Sarker, the resolution should
have been withdrawn at the beginning of the meeting, when amendments were proposed to the
first resolution. It is to be noted that even for these amendments, the approval of the
members was obtained. Nothing prevented the Chairman from explaining the legal provisions
to the members and seek their approval for the withdrawal. Thus, the manner in which the
resolution was unilaterally withdrawn, gives credence to
the version of the petitioners that the
resolution was withdrawn only in view of the objections
raised by the members and on the apprehension that the same would be defeated. In
that case, the petitioners have a legitimate grievance that they have been oppressed by
the denial of their right to express
their decision on a matter placed before them.
36. In regard to the rights of shareholders to continue with a meeting
after the same is terminated, the same would depends on the facts of a case. The general
proposition, as it emerges from the cases cited by Shri Sarkar, is that, when the chairman adjourns the meeting or
dissolves the same without the consent of the members when the businesses placed before
the meeting are yet to be concluded, then the
members can elect a new chairman and continue with the meeting. In the present case,
according to the learned counsel for the Bank, with the withdrawal of the 4th
resolution, no business remained un-transacted to apply this general proposition.
Therefore, according to him, the meeting held by the members thereafter has no validity
and that is why the Bank did not accept the copy
of the resolution passed by the members rejecting the 4th resolution. We have
already held that the Chairman had erred in withdrawing the resolution when the members
desired discussion on the same. Therefore, we
have to hold that the said business remained un-transacted and that the members were at
liberty to continue with the meeting with a new chairman.
37. Now that we have held that the meeting
chaired by the representative of the 11th respondent is valid, the issue for
consideration is, whether the Board could have resolved to issue right shares in the Board
meting held on 8th August 2000. It is admitted by the learned counsel for the
petitioners too that the board has powers to issue right shares under Section 81 of the
Act, but according to him, in terms of Articles 45 to 47 of the Bank, the approval of the
shareholders is necessary even for a right issue and for offering shares with the right to
renounce. He also pointed out that on an earlier occasion of issue of right shares, the
approval of the shareholders was taken in terms of Articles and that the Bank itself had
committed to the RBI to seek shareholders approval.
· Article 45: The Bank, in
general meeting may, from time to time increase the capital by creation of new shares of
such amount as may be deemed expedient.
· Article 46: The new
shares shall be issued upon such terms and conditions, and with such rights and privileges
annexed thereto as the General Meeting resolving upon the creation thereof shall direct
and if no direction be given, as the directors shall determine; and in particular such
shares may be issued with a preferential or qualified right to dividends and in the
distribution of assets of the company, and with a special or without any right of voting.
· Article 47: Subject to
any other direction to the contrary, that may be given by the resolution passed by the
Bank in General Meeting, all new shares shall, before issue be offered in the first
instance, and either at par or at premium, to all then members in proportion, as nearly as
circumstances admit, to the amount of the capital held by them and such offer shall be
made by notice specifying the number of shares to which the member is entitled and limiting a time not being less than fifteen
das from the date of offer within which the offer is not accepted will be deemed to have
been declined and after the expiration of such time or
receipt of an intimation from the members to whom such notice is given that he declines to accept the shares offered, the
directors may deal with such shares as if they form part of
the shares in the original ordinary
capital and may dispose of the same in such manner as they think fit. The directors may
likewise deal with any new shares which (by reason of the ratio which the new shares bear to the shares held by persons entitled to an offer
of new shares) cannot in the opinion of the directors conveniently offered under this
Article. The offer aforesaid shall not be deemed to include a right exercisable by the
members concerned to renounce the shares offered to
him or any of them in favour of any other person unless the resolution sanctioning the
increase of share capital so provides.
38. These Articles talk of new shares.
Article 45 deals with creation of new shares, Article 46 with issue of new shares with
differential rights and Article 47 with offer of new shares on a proportionate basis. A
reading Articles 45 and 46 would indicate
that the general body approval is necessary
only when authorized capital is increased and shares are proposed to be issued with
differential rights. ( In terms of Section 88 of the Act, the provisions contained in
Article 46 are void as Section 88 prohibits issue of shares with differential rights. It
may be noted that this Section has been omitted by amendment Act 2000). In the present
case, the general body has approved the increase in the authorized capital and therefore
there is compliance with this Article. Article 47 requires approval of the general body
only when shares are not issued on a right basis, which is in accordance with Section 81(1). Therefore, the only issue for
consideration is whether this Article requires general body approval for issue of shares
with the right to renounce. There is
nothing in this Article to bar the Board from issuing right shares with the right to
renounce even though it may appear from the last
sentence of the Article that the Board cannot
do so without the approval of the general body. We are of the view that this sentence
cannot be read in isolation but has to be read with the earlier sentence. If it is done
so, then it is evident that only when shares
are not issued on a right basis, then the persons to whom shares are offered, cannot have
the right to renounce with out the approval of the general body. In other words, there is
no specific bar in the Articles to issue shares on a right basis with the right to
renounce and therefore we do not agree with the petitioners that right shares could not be
issued with the right to renounce, without the approval of the general body.
39. Shri Sarkar contended that the Bank had
given assurance to the RBI that general body approval would be obtained for bonus cum
right issue and therefore, the Bank is bound to honour the commitment. He referred to the
letters of the Bank to RBI dated 5th June 2000 and 14th June 2000.
The 'in principle' approval contained in the RBI approval dated 21st July 2000
only stipulates that the same is subject to making necessary provisions in the Articles
and the Memorandum in regard to capitalization of reserve and enhancement of the
authorized capital. Both would require the general body approval which the bank has
obtained in the EGM held on 7th August 2000. Thus we find that there is
compliance with the stipulation made by the RBI.
40. Even though we have held that the act
of the Chairman in withdrawing the resolution is an act of oppression, we have also held
that neither in law nor by virtue of the Articles,
the Board is required to obtain the approval of the general body to issue right shares
with the right to renounce. It is a settle position of law that an act, even if lawful could be oppressive and an illegal act need not be
oppressive. In the present case, on the basis of the oppressive act, the petitioners have
sough for canceling the right issue. We are of the view that such a drastic relief is not
called for in this case. It is an admitted
position that as per RBI guidelines, no bonus shares could be issued without simultaneous
right/public issue. The grant of the relief
would result in the cancellation of the bonus issue which had been approved unanimously by
the shareholders. Further, none of the shareholders is prejudiced by the issue of right
shares as every shareholder has the option to subscribe to the share or not. The only
apprehension by the petitioner that the Bank would allot the un-subscribed shares to a
foreign partner has also been set at rest by the Bank in its affidavit. As rightly pointed
out by Shri Datar, relying on Regunath Sarup Mathur case (supra), the
cancellation of the bonus issue arising out of restraining the bank from issuing right
shares, would result in greater oppression to
the 50,000 odd shareholders by depriving them
of the bonus shares. Therefore,
considering the fact that issue of right shares is for the benefit of the company and the
shareholders would also be getting bonus shares, we allow the Bank to implement its
decision to issue right shares as approved in
the Board meeting on 8th August 2000.
41. In so far as the purchase of the shares
for the Trust out of the bank funds, we find that RBI is already seized of the matter and
that certain directions have been given to the Bank in this regard. Further, we do not
have enough material to form an opinion on this allegation. Therefore, we are not dealing
with this allegation in detail.
42. The next issue is the application of
the petitioners for appointment of an
independent Chairman to conduct the proceeding of the EOGM requisitioned by the
petitioners. This meeting has been adjourned sine die as per our directions. The
petitioners have complained that the explanatory statement annexed with the requisition
notice had not been circulated to the members. They have also complained that the
explanatory statement circulated by the Bank contains certain wrong particulars. They have
also complained that the Bank is utilizing its resources to collect proxies etc.
Therefore, according to them, to ensure that the meeting is properly held, an independent
person should chair the proposed meeting. We find that there is justification in the
prayer of the petitioners in view of what happened in the EOGM held on 7th
August 2000. However, instead of appointing an independent as Chairman of the meting we
propose to appoint an observer to observe the proceedings of the meeting and report.
Accordingly we appoint Shi C.R Mehta, former member of the Company Law Board as an
observer, who will send a report to us on the proceedings of the meeting. Since, this
meeting convened on 24th November 2000 has been deferred sine- die, we give the
following directions in regard to holding of this EGM. The requisitioned notice dated 12th
October 2000 shall be deemed to have been lodged with the Bank on 26th April,
2001 and the Board shall act in accordance with the provisions of Section 169 of the Act
on this basis. The bank will circulate the explanatory statement received from the
petitioners along with the requisition. In case the Bank desires to circulate its own
explanatory statement, it will ensure that the same does not contain any wrong or
incorrect particulars. The Bank will not utilize its resources in collection of proxies. A
copy of the notice convening the EGM will be given to the observer. The Bank will pay a
sum of Rs 10,000 to the observer
as honorarium.
43. The learned counsel for the Bank
forcefully argued for award of cost to compensate the loss of interest on the funds that
the bank would have earned by usage of the proceeds of the
right issue, occasioned by the institution of the present proceedings by the
petitioners. We would have found merit in the
claim of the Bank if this petition had been a frivolous one. We have held that the
Chairman was wrong in withdrawing the resolution which has occasioned this petition.
Further we also note that the shareholders had not been advised of the guidelines of the
RBI that issue of bonus shares has to be accompanied by right/public issue. Therefore, on
the grounds of irregular withdrawal of the resolution and non furnishing of relevant
information, the petitioners had the right to file this petition and therefore, the
question awarding any cost to the Bank does not arise.
44. The petition is disposed of in the above terms, without any order as to cost.
(S.Balasubramanian)
(A.K. Banerji)
New Delhi, the 24th April, 2001