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2011 DIGILAW 1289 (CAL)

Birla Corporation Ltd v. Birla Education Trust

2011-09-16

ANIRUDDHA BOSE

body2011
Judgment : ANIRUDDHA BOSE, J. 1. This proceeding arises out of a petition filed by the respondent no. 1 to 6 before the Company Law Board (CLB) under Sections 235, 237, 247, 250, 397, 398, 402 and 403 of the Companies Act 1956. I shall refer to them as the applicants in the later part of this order. The petition has been registered as C.P. No. 1 of 2010 by the CLB. In this petition, various allegations have been made in the operation of Birla Corporation Limited, being the appellant/company which according to the applicants before the CLB constituted mismanagement of the company as well as the acts complained against have been alleged to be oppressive and prejudicial to the interest of the minority shareholders as well as public interest. The allegations are in the nature of siphoning of funds of the company by way of payment of brokerage to undeserved persons and through various other means like payment of freights for doubtful consignments and certain other acts. The applicants have filed the petition before the CLB on the strength of having consent of holders of more than 10% of the shares out of total issued capital of the company as well as having support of more than 100 shareholders numerically. Several applications in the past have been filed alleging mismanagement of the affairs of the company by their existing management. These applications with prayers for interim reliefs were heard earlier but relief was refused by the CLB in those applications in an order passed on 9th February 2011. The petitioners before the CLB have preferred an appeal against this order which is also pending before me for final adjudication. This appeal has been registered as ACO No. 42 of 2011. 2. The order under appeal in this proceeding was passed in a further interlocutory application taken out by the applicants, which was registered as CA No. 302 of 2011. Primary prayer for relief in this application was for restraining the company and other respondents therein from giving any effect to a notice for postal ballot dated 28th April 2011. Through the postal ballot, Special Resolution was sought to be carried through effecting alteration of memorandum of association of the company amending the object clause permitting the company to venture into new business areas, being trading in commodities and financial products. Through the postal ballot, Special Resolution was sought to be carried through effecting alteration of memorandum of association of the company amending the object clause permitting the company to venture into new business areas, being trading in commodities and financial products. The contention of the applicants opposing such alteration is that if such alteration was allowed, that would have changed the fundamental character of the company’s business, which at present is centered around cement, jute and power generation. In this petition, allegations were also made that the company was already indulging in trading in financial products through business processes known as Collateral Borrowing and Lending Obligations (CBLO) and MIBOR (Mumbai Inter-Bank Offer Rate) linked non-convertible debentures. The case of the applicants is that by borrowing money through these routes and instruments the company had already started indulging in financial trading which they sought to sanctify by expanding the object clause in the memorandum of association of the company. The postal ballot notice was dated 28th April 2011 but the applicants claim to have received them on or after 24th May 2011. 3. The substance of the allegations of the applicants in this interlocutory application as well as in the main petition is that the respondent no. 7, Harsh Bardhan Lodha (HVL) had illegally assumed control of the group of companies and entities who together exercise voting rights to the extent of 62.9% of the shares of the appellant/company. It is complaint of the applicants that HVL had been indulging in siphoning of funds from the said company through various means and money market transactions of the company was also being made through investment companies in which HVL had substantial interest which generated huge sums as commissions. Such activities, according to the applicants, lead to conflict of interest. 4. In the order of CLB passed on 9th February 2011, the interim reliefs prayed for in C.P. No. 1 of 2010 was refused. Interim reliefs prayed for in the said petition in substance sought to prevent the present management of the company running the affairs of the company. A prima facie finding was given by the CLB while considering prayers for interim relief in C.P. No. 1 of 2010 and other petitions that such petitions appeared to be motivated and the applicants seemed to be working for personal interest and the petition was not for protecting the interest of the company. A prima facie finding was given by the CLB while considering prayers for interim relief in C.P. No. 1 of 2010 and other petitions that such petitions appeared to be motivated and the applicants seemed to be working for personal interest and the petition was not for protecting the interest of the company. It was also observed in the said order;- “4. Prima facie the petitioners have not been able to demonstrate that the Respondents have acted in a manner oppressive to the Petitioners in their capacity as shareholders or in a manner prejudicial to their rights as shareholders. None of the rights of the Petitioners under the Companies Act, as shareholders in R-1 have been demonstrated to have been breached. Thus, prima facie no irreparable injury to the rights of shareholders (Petitioners) would be caused by refusal to grant injunction as prayed for at the interim stage. 5. R-1 is a profit making company, professionally managed and consistently declaring dividends to its shareholders (the last being 60%). No public Interest would be served in granting the interim relief prayed for at this stage. 6. Balance of convenience is not in favour of the Petitioners but lies in maintaining the status quo and it would be unjust to grant interim relief (d) as in Interim measure. 7. A serious question of maintainability of the Company Petition has been raised by the Respondents on the ground that C.P. NO. 1/2010 must fail at the touchstone of the qualitative aspect under Section 399 as propounded by CLB in C.P. No. 57/2004 which could be considered only at the final hearing and not at the interim stage in C.P. No. 1/2010. An appeal against the order passed in C.P. No. 57/2004 is yet to be admitted. 8. Granting interim reliefs as prayed for amounts to granting the main relief at the interim stage which is impermissible in law. 9. The existing Board of directors in R-1 comprises of eminent persons from the Corporate world. Balance of convenience does not lie in upsetting the existing Board of Directors in R-1 at the interim stage. 10. So far as allegations in the Petition relating to the internal audit reports, balance of convenience lies in directing the Respondents to take immediate and effective measures to ensure strict corporate governance and to prevent recurrence of events mentioned in the internal audit report in the R-1 company. 11. 10. So far as allegations in the Petition relating to the internal audit reports, balance of convenience lies in directing the Respondents to take immediate and effective measures to ensure strict corporate governance and to prevent recurrence of events mentioned in the internal audit report in the R-1 company. 11. The High Court of Calcutta has passed an Order dated 27.8.2010 in proceedings for appointment of APL and quoted by me in para 28. Any other direction would amount to overriding the said order. 12. Petitioners have not been able to demonstrate any ground for winding up of R-1 Company under the just and equitable clause in Section 397 of the Companies Act.” 5. In the interlocutory application out of which the present proceeding arises, there are repetitions of the complaints of mismanagement and oppression made in the earlier stage of the proceeding as well as in the earlier interlocutory applications in connection with the same company petition and complaints have also been made under two new heads. One relates to proposal for altering the memorandum of association of the company to enable them trading in commodities and financial products and the other relates to subsisting transactions of the company made through CBLO and MIBOR. Involvement of two companies in which HVL has interest, in making transactions in the money market has also been highlighted. On this count, it has been alleged that the said two companies, being Lodha Capital Markets Ltd. and its wholly owned subsidiary, PLC Securities Pvt. Ltd. had been making secret profits. In this application the CLB held, after considering rival submissions:- “84. Having made out a very strong prima facie case of mismanagement in the affairs of the Company causing oppression to the minority shareholders, seeking amendment of the Object Clause of MOA of the R-1 Company for doing the business already being done, keeping the shareholders in the dark, the Counter Affidavits of the Respondents being silent about this aspect, such an act is sought to be got ratified now by seeking amendment to the object clause of the Memorandum, an enquiry into the charges is very much within the scope of interim injunction in the instant matter. It is noted that the Respondents have failed to meet the allegations made by the Applicants. The Respondents’ contentions are not tenable in law and in facts. It is noted that the Respondents have failed to meet the allegations made by the Applicants. The Respondents’ contentions are not tenable in law and in facts. I find that the Applicants’ contentions are tenable in law, in the facts and circumstances of this case they have succeeded in making out a prima facie case showing the balance of convenience in their favour entitling them to interim reliefs. Even otherwise, the CLB which is required to do substantial justice in these equitable proceedings and hence empowered to regulate the conduct of the company’s affairs in future in any matter for which in the opinion of the CLB it is just and equitable that provision should be made. Objects and purpose of Sections 397, 398, 402 and 408 of the Act is two fold to set right the wrongs and take remedial action to prevent occurrence of wrongs in future. Thus both preventive and curative action can be taken by the Company Law Board to regulate the conduct of the Company’s affairs in future and to bring to an end the matters complained of. 85. In view of the foregoing, the Applicants having succeeded in making out a prima facie case for granting of interim reliefs, granting of which, in my opinion, in the facts and circumstances of this case shall not cause any prejudice to the respondents, in fact, not granting of interim reliefs sought would cause irreparable loss and damage to the instant public listed company, the substratum itself would go, the Company would land up in the money market and get lost, the prayers sought are urgent in nature, require immediate remedial action before it is too late to salvage the situation. The balance of convenience being in favour of the Applicants their contentions remaining uncontroverted, to do substantial justice between the parties, the following reliefs are hereby granted to remedy the situation and to regulate the conduct of the Company’s affairs in future, it is just and equitable to order that:- I. The R-1 Company and other Respondents are hereby restrained from further proceeding with the voting through Postal ballot in respect of the Special Resolution seeking Amendment to the Object clause of the Memorandum of Association of the R-1 Company. Action taken in respect of Postal ballot Notice (dated 28.4.2011) so far and hereafter is hereby declared as null and void. II. Action taken in respect of Postal ballot Notice (dated 28.4.2011) so far and hereafter is hereby declared as null and void. II. The R-1 Company and other Respondents are hereby restrained from taking any action for alteration of the Object Clause as per Special Resolution in the Postal Ballot Notice dated 28.4.2011 and sought to be incorporated as Clause No. 17 O and 17 P or any clause of the same kind or having similar provisions and stipulations. III. The R-1 Company and other Respondents are hereby restrained from doing any business of the kind proposed to be commenced or in fact already doing as contemplated or envisaged under the proposed clauses 17 O and 17 P sought to be incorporated in the Memorandum of Association of the R-1 Company. IV. The Respondents and the Applicants are hereby restrained from exercising any voting rights directly or indirectly in respect of their shares to carry through the Special Resolution for Amendment to the Object Clause of the Memorandum of Association of the R-1 Company as contemplated or envisaged under the proposed Clauses 17 O and 17 P sought to be incorporated in the Memorandum of Association of the R-1 Company. V. The Scrutinizers appointed in terms of the said purported postal ballot notice are hereby directed to completely ignore and disregard any vote that may have been cast by the shareholders so far in response to the said postal ballot notice. Such record be put in a sealed cover and be produced before the Company Law Board on the next date of hearing in C.P. No. 1/2010. VI. In view of the allegations against the R-1 company of already dealing in securities, etc. as reflected in the Financial Statements contained in the Final Accounts, through the R-2’s family companies, the prima facie case having been made out, the allegations made have not been controverted, the firm namely Ernst & Young are hereby appointed as Investigating Auditors for investigating into such dealings during the years 20082009, 2009-2010, 2010-2011 to ascertain the profits made through such dealings by the R-1 company and the Lodha Capital Market Ltd., PLC Securities Pvt. Ltd. and others through whom such business was done. Investigative Audit be completed within three months of receipt of this order. R-1 Company shall pay the Audit fee for Investigative Audit as per the prescribed Rules & Procedures (as per men hours). Investigative Audit be completed within three months of receipt of this order. R-1 Company shall pay the Audit fee for Investigative Audit as per the prescribed Rules & Procedures (as per men hours). On completion of the requisite Audit, the Investigating Auditors shall present their Report to the Company Law Board, Principal Bench, New Delhi as well as to the R-1 Company. VII. In view of the Applicants having succeeded in making out a prima facie case for granting interim injunction in aid of the main prayers in C.P. No. 1 of 2010, in the facts and circumstances of this case, the Applicants’ prayer as contained in para 67 at page 38 of the CA 302/2011 seeking leave to add, alter, amend, modify C.P. No. 1/2010 is hereby allowed, prima facie case having been made out in respect of subsequent act of oppression and mismanagement, CA NO. 302/2011 is to be read as part of C.P. No. 1/2010, CP and relief sought therein stand amended to that extent.” 6. The proceeding before me is at the interim stage only and on behalf of the appellant, that is the company, prayer has been made as an interim measure, for stay of operation of Paragraph 85(vi) of the order, pending final decision in the appeal. On behalf of the appellant, it has been submitted that the transactions of the company under the CBLO and MIBOR were all valid transactions. It has been argued that the CLB has committed jurisdictional error in passing the order under Section 402 of the Act, as the scope of interim order under Act is required to be passed in terms of Section 403 of the Act only. The other ground on which I have been addressed is that in the order passed on 9th February 2011 the CLB had come to a finding that there was no prima facie case of mismanagement, and no subsequent event had taken place which required the CLB to take a diametrically opposite stand in C.A. No 302 of 2011. In this regard, the learned Counsel for the appellants sought to attract the principle of res judicata. 7. In this regard, the learned Counsel for the appellants sought to attract the principle of res judicata. 7. On behalf of the respondent no.7, supporting the appellants, it was contended that it was impermissible on the part of the applicants to come with an interlocutory application with the factual allegations at variance with the pleadings that form foundation of the original complaint contained in the main company petition. The main case of the respondent nos. 1 to 6 being the applicants before the CLB is that when the company petition was filed, the notice for postal ballot seeking to drastically alter the main business line of the company was not in existence, and the annual report of the company containing the accounts for the year 2010-2011 was also not available. It was contended that the applicants came to learn the details of CBLO and MIBOR transactions subsequent to 9th February 2011. Further submission on behalf of the respondents/applicants has been that these subsequent acts on the part of the company formed part of a chain of activities resulting in mismanagement of the affairs of the company which were oppressive to the minority shareholders, and such subsequent facts could be brought to the notice of the CLB by filing an interlocutory application in the subsisting proceeding, and for each of these acts, filing of a fresh petition was not necessary. 8. On the latter point, that is whether a new petition was required to be filed or not, the CLB, in the last paragraph of the order, i.e. paragraph 85(vii) has issued direction which is in the nature of direction for amendment of the original company petition. On behalf of the appellant, the legality of such a direction was questioned. But that issue I propose to deal with at the stage of final hearing of the appeal. In this order, I shall confine my scrutiny to the directions contained in paragraph 85(vi) of the order impugned, by which investigation of the dealings of the company to ascertain profits made through such dealings by the company and Lodha Capital Markets Ltd., PLC Securities Pvt. Ltd. and others through whom such transactions were done, has been directed by an outside audit firm, Ernst & Young. The appellant has questioned the choice of the audit firm also, on the ground that the said firm does audit work for several companies belonging to different branches of the Birla Group, being the industrial house having presence in several areas in the corporate sector of this country. This issue was raised as there are several proceedings pending in different forums in which the members or associates of the said family and the respondent no.7 are involved over a dispute relating to grant of probate of the will of Priyamvada Devi Birla (since deceased), who had controlling interest in several companies and other entities of a branch of Birla Group known as the M.P. Birla group. The appellant company also belongs to the said M.P. group. Though in the main company petition the authority or power of the respondent no.7 over the estate of said Priyamvada Devi Birla, which includes 62.9% of the shareholding of the appellant company has been questioned, before me at this stage arguments have been primarily presented on behalf of the applicants as minority shareholders having grievance over the acts of the majority, which they consider oppressive and prejudicial to their interest, interest of the company as also public interest. 9. As I have already discussed in the earlier part of this order, there have been interlocutory proceedings in the past among the same parties on the allegations of mismanagement and oppression and plea for various interim reliefs was turned down by the CLB in the order passed on 9th February, 2011. The instant application, i.e. C.A. No.302 of 2011 was filed on the ground of occurrence of certain subsequent events to which I have also referred to earlier in this order. So far as proposal for alteration of the memorandum of association of the company is concerned, if the resolution was carried through, that might have had resulted in unalterable situation so far as the activities of the company is concerned, and I shall test the legality of that issue at the stage of final hearing of this proceeding. But the CLB has already directed not to give effect to the said notice for postal ballot and stay of operation of that part of the order has not been pressed before me at the interim stage by the appellant. But the CLB has already directed not to give effect to the said notice for postal ballot and stay of operation of that part of the order has not been pressed before me at the interim stage by the appellant. If the postal ballot notice is not given effect to, in the light of the earlier order of the CLB and its observations made in the said order passed on 9th February 2011, can the order for audit investigation in the manner directed be justified? 10. In my opinion, within such a short span of time the Company Law Board ought not to have come to an altogether different finding at the prima facie stage so far as it directed investigation into the dealings of the company in the money market. In my opinion, the events subsequent to 9th February 2011 would not have justified formation of fresh opinion, even at prima facie level, requiring investigation into the financial dealings of the company. Such financial transactions seemed to be going on since 2008-09. Substantial argument was advanced on the legality of the transactions conducted through CBLO and MIBOR. The other complaint made was rapid frequency of the transactions in relation to the investments of the funds of the company, which according to the applicants did not constitute investments made by a company of its surplus funds in normal course, but constituted trading in financial products. But the CLB has not come to any finding that such transactions are impermissible or cannot be entered into by the company on the ground that such dealings would constitute dealing in financial products, at present not mandated by its memorandum of association. As transactions of this nature had been going on when the earlier order was passed by the CLB, in the absence of there being any fresh finding that these transactions were illegal, I do not think, prima facie, an investigation by an outside agency is warranted at this stage. 11. On behalf of the applicants, it was submitted that the order passed on 9th February 2011 was not sustainable in law and the observations and comments made in the said order ought not to be given credence to by this Court. The appeal against that order has also been assigned before me and I am hearing that appeal. 11. On behalf of the applicants, it was submitted that the order passed on 9th February 2011 was not sustainable in law and the observations and comments made in the said order ought not to be given credence to by this Court. The appeal against that order has also been assigned before me and I am hearing that appeal. I am not making any observation in this order as regards the legality of the order passed on 9th February 2011. But so far as the CLB is concerned, I do not think subsequent facts justified directing investigation into the dealings of the company when the Board itself had opined earlier that the applicants had not made out any prima facie case. 12. It was brought to my notice in course of hearing that the order passed by the CLB on 9th February 2011 and 17th June 2011 were by different members of the Board. But I do not think on a subsisting set of facts the CLB ought to take different view through different members in different interlocutory proceedings arising out of a single company petition. 13. It was also submitted on behalf of the applicants that such investigation would not in any way prejudice the company. Mere fact that a particular direction would not prejudice a company would not justify passing an order directing something to be done which in normal course would not be permissible. 14. Argument was advanced on behalf of the applicants that the appellate jurisdiction of this Court under Section 10F of the Act being only on point of law, in this appeal I should not interfere with an interim order of the CLB which is discretionary in nature. But in the instant case, so far as the directive contained in paragraph 85(vi) of the order is concerned, I am prima facie satisfied that the manner in which such discretion has been exercised borders on perversity in law, and hence I am inclined to stay that part of the order only. So far as other directions contained in the said order, I decline to interfere with such directions at the interim stage. On behalf of the appellant also, no such prayer has been pressed. Certain authorities were also cited by the learned Counsel appearing for the respective parties in support of their submissions. So far as other directions contained in the said order, I decline to interfere with such directions at the interim stage. On behalf of the appellant also, no such prayer has been pressed. Certain authorities were also cited by the learned Counsel appearing for the respective parties in support of their submissions. But at this stage, I do not think it is necessary to refer to these authorities for the purpose of adjudicating on the prayer of the appellant for interim relief. 15. These of course are my prima facie view and I shall examine the matter in greater detail at the time of hearing of the appeal. As an interim measure, I restrain the investigating auditors appointed by the CLB from taking any step as regards any dealing of the company without leave of this Court. At the same time I direct the company to maintain in detail accounts of all its financial transactions for the period 2008-09 onwards, particularly in respect of transactions in the money market and the particulars of the investment made through the companies in which HVL has any interest shall also be specifically kept recorded so that particulars of these transactions are available at a later stage of this proceeding if the investigation as directed is revived. 16. Let paper books be filed along with index thereof and the appeal be placed for hearing on 8th November 2011 at 2 P.M.. 17. Urgent photostat certified copy of this order be supplied to the parties if applied for subject to compliance with all requisite formalities.