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2011 DIGILAW 561 (CAL)

Jodh Raj Laddha v. Birla Corporation Limited

2011-04-20

ANIRUDDHA BOSE

body2011
Judgment : ANIRUDDHA BOSE, J. 1. The appellants before me are six shareholders of Birla Corporation Limited, (the company). Five of them are private individuals and the sixth appellant is a company. In this appeal under Section 10-F of the Companies Act 1956 (the Act), they challenge the judgment and order of the Company Law Board (CLB) passed on 19th October 2009 in a proceeding initiated under Sections 397, 398, 402, 403 and 406 of the Act. This petition was registered as C.P. No. 57 of 2004. In the petition, the petitioners have alleged various illegal acts on the part of the existing management of the company, and the prayers of the petitioner centre around preventing the existing management from running the affairs of the company. Before the CLB, the respondents contested the proceeding, and the main thrust of their defence was that the petition was filed with an oblique motive and this was a proxy war being fought on behalf of the members of the Birla family, referring to the industrial house known in the commercial world by their surname. There is an ongoing probate proceeding in connection with the estate of Priyamvada Devi Birla (PDV) in which some of the members of the Birla family and the respondent no. 3 are involved as contesting parties. 2. In the judgment under appeal, along with the main petition, several other interlocutory applications were also considered and directions and orders have been issued in those proceedings as well. In the petition originally filed, the five individual appellants were the petitioners. Subsequently, the sixth appellant who was arraigned as respondent no. 25 in the petition was transposed as a petitioner. The main petition has been dismissed by the CLB on various grounds, including on the ground of maintainability. 3. In this matter, the appellants’ case has been argued by Mr. S. B. Mukherjee, Mr. Sudipto Sarkar and Mr. P. S. Sengupta, learned Counsel whereas on behalf of the respondents argument has been advanced mainly by Mr. Anindya Kumar Mitra, Mr. P. C. Sen, Mr. Pratap Chatterjee, Mr. Abhrajit Mitra and Mr. Soumen Sen, learned Counsel. In this order, however, I shall refer to the submissions of the learned Counsel of the respective parties in a composite manner instead of dealing with their submissions individually as there are many overlapping points in their submissions. Anindya Kumar Mitra, Mr. P. C. Sen, Mr. Pratap Chatterjee, Mr. Abhrajit Mitra and Mr. Soumen Sen, learned Counsel. In this order, however, I shall refer to the submissions of the learned Counsel of the respective parties in a composite manner instead of dealing with their submissions individually as there are many overlapping points in their submissions. At the threshold a preliminary objection has been taken by the learned Counsel appearing for the respondents as regards maintainability of the appeal itself. It has been argued on behalf of the respondents that the appeal ought not to be admitted since in the judgment under appeal, the CLB has come to a finding that the petition is not maintainable and such finding is based on factual issues. Argument of the respondents on this count has been that CLB has come to its finding that the petition was filed mala fide, and such finding was finding on fact. Referring to the provisions of Section 10F of the Act, it has been contended that the appeal should not be admitted as no appeal lies against a finding on fact under the aforesaid provision of the Act. In the judgment, (at pages 7072) it has been inter alia held:- “18. Shri Sarkar argued that as long as the petition has been filed/supported by 100 members, the question of qualitative aspect does not arise. He relied on Shaw Wallace and also on Killick Nixon cases. In Shaw Wallace, the issue raised was that the petitioners therein held insignificant percentage of shares and therefore they could not maintain the petition when majority shareholders had no complaint. The qualitative issue never arose. As a matter of fact it could not have arisen at all in that case. The petitioners therein were employees of Shaw Wallace and the Employees Union had complained to the Government about the mismanagement in the company. The government ordered an inspection and on the basis of the inspection report, while the employee shareholders filed a petition under section 387/398, the government itself filed a petition under Section 408. Since the petitioners therein were employees of the company itself, they had vital interest in ensuring better management in the company. Further, the petition was essentially a one under Section 398 and a large number of instances in the affairs of the company had been alleged as mismanagement. Since the petitioners therein were employees of the company itself, they had vital interest in ensuring better management in the company. Further, the petition was essentially a one under Section 398 and a large number of instances in the affairs of the company had been alleged as mismanagement. In so far as the reliance of Shri Sarkar on Killick Nixon case is concerned, it is to be noted that in that case, the transferor of the shares whose name continued in the register of members gave a power of attorney to the transferees to file a petition under Sections 397/398. A challenge was taken that the transferees, not being the members, had no personal interest in the affairs of the company. On this contention the court held “In the present case, there is nothing in s. 397 Or s. 398 To indicate that any special personal skill, judgment or quality of a member is required to be used when a member exercises his right under s. 397 Or s. 398. In a broad sense every person who is required to exercise any right or privilege is required to apply his mind. But this does not disable him from appointing an agent to exercise that right or privilege. In fact, there may be a number of cases where a person concerned may be unable to apply his mind, e.g., an illiterate person who is not aware of the facts or a person who is too ill or infirm to exercise the power. Such persons are entitled to appoint an agent to look after their affairs. It is the agent who will apply his mind to the affairs of his principal and use his own judgment. Members who are given a right to file a petition under Sec. 397 And 398 can, therefore, delegate their right to an agent who can exercise that right on their behalf”. In this judgment, the statutory provision has been examined in facts of that case. While I do agree that Section 399 does not talk of the quality of a member, I have explained below as to why the quality of the member is necessary in a proceeding under sections 397/398. 19. In this judgment, the statutory provision has been examined in facts of that case. While I do agree that Section 399 does not talk of the quality of a member, I have explained below as to why the quality of the member is necessary in a proceeding under sections 397/398. 19. In many of the proceedings before this Board, motive had been questioned, I do not remember that in any case, the qualitative aspect, as a point of law had been raised or considered by this Board. Shri Sarkar argued that there is no statutory provision regarding the qualitative aspect of a petition. I agree that Section 399 does not deal with the qualitative aspect. Yet, since in a proceeding under Sections 397/398, this Board exercises equitable jurisdiction with enormous powers, I am of the firm view that while examining the eligibility under Section 399, the qualitative aspect of a member should also be taken into account. It is more so in case of listed companies, as with no marketable lot now in force, any one holding shares could transfer a part of his shares and create 100 members, and file a petition on flimsy grounds just to harass the management or for publicity. 20. In the present case, the petitioners have not denied any of the facts alleged by the respondents in regard to the consenters. Shri Sarkar argued that no court can enquire as to how the petitioners got qualification. I would have given some thought, if the petitioners had gathered or collected existing members to meet the qualification. However in the present case, 109 members were created, that too, by a single member, who himself had acquired shares only a few days before he transferred the shares to the consenters. Thus it is quite obvious that a single shareholder became 109 shareholders. As a court of equity, this Board cannot shut its eyes when a person creates 100 members only to qualify to file a petition under Sections 397/98. While, as a proposition of law, I do not want to hold that there should be personal interest for the petitioners, yet, in the present case, the consenters do not have real interests in the affairs of the company as shareholders, but acquired shares only to lend their signatures to enable filing of this petition. While, as a proposition of law, I do not want to hold that there should be personal interest for the petitioners, yet, in the present case, the consenters do not have real interests in the affairs of the company as shareholders, but acquired shares only to lend their signatures to enable filing of this petition. Shri Datar relevantly referred to the judgment of the Supreme Court in Gwalior Sugar ( 2005 1 SCC 172 ) case, wherein regarding Section 399, the Supreme Court has observed “The object of prescribing a qualifying percentage of shares in the petitioners and their supporters to file petitions under Sections 397 and 398 is clearly to ensure that frivolous litigation is not indulged in by persons who have no real stake in the company. However, it is of interest that the English Companies Act contains no such limitation. What is required in these matters is a broad common-sense approach. If the court is satisfied that the petitioners represent a body of shareholders holding the requisite percentage, it can assume that the involvement of the company in litigation is not lightly done and that it should pass orders to bring to an end the matters complained of and not reject it on a technical requirement”. This would show that a petition under Section 397/398 can be filed only by those, even if qualified under Section 399, having some real stake in the company. As I have observed earlier in this paragraph, from the manner, mode and method of acquisition of shares, it is clear that the consenters have no real stake or interests in the company and therefore their fulfilling the requirements of Section 399 is of no consequence. In other words, in real sense, considering the equitable nature of the proceedings under Sections 397/398, it can be held that the petitioners cannot maintain the petition.” 4. Since objection has been raised on the point of maintainability, I shall refer to the submissions made on behalf of the respondents first. Reliance has been placed on the decision of the Hon’ble Supreme Court in the case of T. K. Lathika Vs. Seth Karsandas Jamnadas reported in 1999(6) SCC 632 on behalf of the respondents in support of their contention that such preliminary issue should be decided first, before entering into the merits of the appeal. Reliance has been placed on the decision of the Hon’ble Supreme Court in the case of T. K. Lathika Vs. Seth Karsandas Jamnadas reported in 1999(6) SCC 632 on behalf of the respondents in support of their contention that such preliminary issue should be decided first, before entering into the merits of the appeal. The other judgment relied on by the respondents on this count is also a decision of the Hon’ble Supreme Court, in the case of N. V. Srinivasa Murthy & Ors. Vs. Mariyamma (Dead) By Proposed Lrs. & Ors. reported in 2005(5) SCC 548 . It has been argued that the question of maintainability of the petition is a factual issue, and in this regard an order of the CLB in the same proceeding passed on 15th October 2009 has been referred to. In this order it has been observed:- “In the present case, the allegation is that the petition is a motivated one and for a collateral purpose and instigated by Birla groups and the petitioners and the consenting shareholders who had acquired shares recently cannot voice any grievance relating to alleged acts of oppression/mismanagement in the past. These issues, I am of the view do not raise any point of law but have raised factual issues.” 5. Two unreported decisions of this Court have been referred to by the learned Counsel for the respondents, being (APOT No. 31 OF 2007, ACO No. 16 OF 2007) Bansidhar Agarwalla & Co. Ltd. Vs. Smt. Malati Devi Agarwalla & Ors. decided on 30th July 2007 and (APOT No. 566 OF 2006, ACO No. 97 of 2006) Mayank Kocher Vs. Company Law Board & Ors. decided on 26th September 2007 to contend that an appeal under the said provision of law can be dismissed at the initial stage itself. A decision of this Court in the case of Bhagwati Developers Pvt. Ltd. Vs. Peerless General Finance & Investment Company Ltd. & Anr. reported in (2005) 128 CC 444 (Cal). has been cited in support of the contention that finding of fact by the CLB cannot be interfered with in an appeal under Section 10F of the Act. 6. It is also the contention of the respondents that the applicants do not have sufficient stake to maintain the action. reported in (2005) 128 CC 444 (Cal). has been cited in support of the contention that finding of fact by the CLB cannot be interfered with in an appeal under Section 10F of the Act. 6. It is also the contention of the respondents that the applicants do not have sufficient stake to maintain the action. To sustain a petition alleging oppression and mismanagement, it has been argued that the applicants would have to establish that mismanagement is of such degree that it would affect the interest of the applicant members of the company. On the scope of right of a shareholder, the case of Rustom Cavasjee Cooper Vs. Union of India [ (1970) 1 SCC 248 ] has been cited. The other authority relied on by the respondents on this point is the case of The Neptune Assurance Co. Ltd. Vs. Union of India [ (1973) 1 SCC 310 ]. 7. Last, it has been argued that finding by the Board that the petitioners are not entitled to maintain this petition is a factual finding and does not suffer from perversity. Two authorities have been referred to for demonstrating the factors on the basis of which perversity of a decision is adjudicated upon. These are both decisions of the Hon’ble Supreme Court in the cases of General Manager (P), Punjab & Sind Vs. Daya Singh reported in (2010) 11 SCC 233 and M/s. Sumitomo Heavy Industries Ltd. Vs. Oil & Natural Gas Company reported in AIR 2010 SC 3400 . 8. Main submission of the appellants in response to the preliminary objection is that the impugned judgment involves decision on various points of law. In particular, it has been argued that once the qualification test laid down in Section 399 of the Companies Act for maintaining an application under the provisions of Sections 397 and 398 of the Act is satisfied, there is no further necessity to enquire into the quality of the applicant members before entertaining a petition of this nature. It has been further argued that no personal interest is required to be established once the applicants establish their locus in the manner specified under the aforesaid provision of the Act. It has been further argued that no personal interest is required to be established once the applicants establish their locus in the manner specified under the aforesaid provision of the Act. It is the case of the appellants that once the petitioners qualify in the threshold test, then the scope of enquiry as to whether there is mismanagement or not becomes wider and under Section 398(2) of the Act, the Board can enquire into the question of apprehended mismanagement also. 9. In support of the appeal, it has been submitted that the impugned judgment is perverse, as according to the appellants, the finding is not based on evidence. Learned Counsel appearing for the appellants has referred to the case of Dale & Carrington Invt. (P) Ltd. Vs. P. K. Prathapan [ (2005) 1 SCC 212 , in support of the submission that finding and facts also can give rise to points of law. 10. In the judgment under appeal, the CLB has not confined its enquiry on the preliminary issue of maintainability alone. As I have discussed in the earlier part of this order, the Board at the initial stage of the proceeding postponed adjudication on the maintainability point. The issues raised on different interlocutory applications were dealt with first in the judgment and the maintainability point was decided in the last part of the judgment. The judgment also addresses the questions on merit of the petition. 11. I accept the submission made on behalf of the respondents that preliminary issues which may strike at the root of a proceeding ought to be adjudicated first. The Hon’ble Supreme Court in the cases of N.V. Srinivasa Murthy & Ors. (supra) and T.K. Lathika (supra) has prescribed such a course, though the proceedings involved in those two cases were under different provisions of law. In this appeal, however, respondents seek dismissal of the appeal at the threshold stage, before admission. I do not think this cannot be done under the law, but such a course can be adopted only in exceptional cases, where an outstanding case as regards ineligibility of the appellants is made out in maintaining the appeal, or otherwise some fundamental flaw on the question of maintainability can be established. In the cases of Bansidhar Agarwalla & Co. I do not think this cannot be done under the law, but such a course can be adopted only in exceptional cases, where an outstanding case as regards ineligibility of the appellants is made out in maintaining the appeal, or otherwise some fundamental flaw on the question of maintainability can be established. In the cases of Bansidhar Agarwalla & Co. Ltd. (supra) and Mayank Kocher (supra), the appeals were dismissed upon considering the appellants’ cases in both the proceedings, albeit at the initial stage, in the factual context of those two appeals. The context in which rejection of the present appeal is sought for is different. 12. Referring to the decision of the Hon’ble Supreme court in the case of K.P. Rao & Anr. Vs. Public Prosecutor, Andhra Pradesh [ (1975) 2 SCC 570 ], learned Counsel for the respondents submitted that the finding of the CLB on the point of locus of the appellants belongs to the realms of facts and not of law. In the case of Bhagwati Developers (supra), an Hon’ble Single Judge of this Court held:- “…………..a finding of fact recorded by the Company Law Board is final and cannot be reversed by the High Court.” 13. But it is not an absolute proposition of law that every factual finding of the CLB is immune from the scrutiny of the High Court under Section 10F of the Act. In the case of Dale & Carrington Invt. (P) Ltd. (supra), the Hon’ble Supreme Court held: “36. Section 10-F refers to an appeal being filed on a question of law. The learned counsel for the appellant argued that the High Court could not disturb the findings of fact arrived at by the Company Law Board. It was further argued that the High Court has recorded its own finding on certain issues which the High Court could not go into and, therefore, the judgment of the High Court is liable to be set aside. We do not agree with the submission made by the learned counsel for the appellants. It is settled law that if a finding of fact is perverse and is based on no evidence, it can be set aside in appeal even though the appeal is permissible only on the question of law. The perversity of the finding itself becomes a question of law. It is settled law that if a finding of fact is perverse and is based on no evidence, it can be set aside in appeal even though the appeal is permissible only on the question of law. The perversity of the finding itself becomes a question of law. In the present case we have demonstrated that the judgment of the Company Law Board was given in a very cursory and cavalier manner. The Board has not gone into real issues which were germane for the decision of the controversy involved in the case. The High Court has rightly gone into the depth of the matter. As already stated, the controversy in the case revolved around alleged allotment of additional shares in favour of Ramanujam and whether the allotment of additional shares was an act of oppression on his part. On the issue of oppression the finding of the Company Law Board was in favour of Prathapan i.e. his impugned act was held to be an act of oppression. The said finding has been maintained by the High Court although it has given stronger reasons for the same.” 14. In view of the ratio of the decisions of the Hon’ble Supreme Court in the cases of M/s Sumitomo Heavy Industries Ltd. (supra) and Punjab & Sind Bank (supra), in my opinion, a judgment dismissing a similar petition solely on the ground of being mala fide might not have had warranted interference, except on the limited test of perversity. But has the CLB applied the mala fide test alone in the petitioner’s case? 15. The term mala fide connotes ill motive or bad faith. In paragraph 19 of the judgment of the CLB, to which I have referred to in the earlier part of this order, the CLB itself has made a distinction between the expression “motive” and “qualitative aspect of a member”. There is clear indication in this paragraph that it was upon consideration of quality of the applicant members of the company the CLB came to its finding on maintainability of the petition. In fact, the judgment itself records uniqueness of such a concept, and it has been observed that the Board could not remember in any case qualitative aspect as a point of law had been considered by the CLB. In fact, the judgment itself records uniqueness of such a concept, and it has been observed that the Board could not remember in any case qualitative aspect as a point of law had been considered by the CLB. It has also been observed in the judgment itself that the question of maintainability of the petition is interlinked with merit of the case. In page 45 of the judgment, dealing with CA 290/2004 on the question of maintainability, it has been observed:- “I had purposely kept the issue of maintainability at last, realizing well that the maintainability should be decided as a preliminary issue. The reason for doing so is that if the respondents had only raised the issue relating to the numerical eligibility, then the same has necessarily to be decided as a preliminary issue. But in the present case, the petitioners do satisfy the numerical requirement and the objections of the respondents on the maintainability are on various grounds which cannot be decided without going into the merits of the case.” 16. Now would the finding based on qualitative test of a member raise a point of law? In my opinion, for that purpose the judgment under appeal would have to be scrutinised in greater detail. It has to be ascertained first as to whether such a factor could at all be considered by the CLB for determining the locus of the applicants in a proceeding under Sections 397 and 398 of the Act or not. If finding on this point is affirmative, then it has to be examined whether there was sufficient material before the CLB to come to such a conclusion. Of course upon consideration of these issues the Appellate Court could affirm the finding of the CLB on the point of maintainability of the petition. But the appeal cannot be rejected outright for not involving any point or question of law at the admission stage. On the question of motive of the petitioners for testing their right to maintain the appeal, the cases of Palghat Exports Pvt. Ltd. [(1994) 79 CC 213(Ker) and an english authority, Bellador Silk Ltd., In re: [(1965) 1 All ER 667] were cited. But to apply the test laid down in these two decisions also, the judgment under appeal requires to be examined in relation to merits of the case. But to apply the test laid down in these two decisions also, the judgment under appeal requires to be examined in relation to merits of the case. The preliminary objection raised before admitting the appeal is rejected for this reason. The applicability of the judgments of the Hon’ble Supreme Court in the cases of Rustom Cavasjee Cooper (supra) and Neptune Assurance Co. Ltd. (supra) in the factual context of this appeal would have to be considered only when the judgment is considered in greater detail, which, in my opinion would be the proper course in this appeal. 17. There is another ground on which I am inclined to reject the preliminary objection. Section 10F of the Act permits a party aggrieved by an order of the CLB to appeal before the High Court on any question of law. In the judgment under appeal, the Board decided the rights of the parties in different applications arising out of the main petition. The judgment also addresses the controversy on merit. If at this stage I dismiss the appeal only on the point of maintainability, the other issues which the Board decided on merit and in connection with the other applications would become res judicata between the parties, and if those issues are raised in any subsequent proceeding between the parties, it would not be possible for the aggrieved party to make out its case on these issues under the principle of res judicata. Thus, the right of appeal, albeit on questions of law, granted under the Act would be rendered nugatory so far as such other issues are concerned. If the CLB had confined its enquiry on the maintainability point alone, this question would not have arisen. But in the judgment under appeal, the question of maintainability was left to be determined last. The CLB felt it necessary to address the issues based on merit raised before it in course of the subject proceeding. This necessitates at least testing whether the other issues adjudicated by the CLB raise any question of law on which an appeal can be preferred. 18. The practise followed by this Court in an appeal under Section 10F of the Act has been to admit the appeal and then examine as to whether the judgment under appeal involves any point of law or not, if objection on this ground is raised. 18. The practise followed by this Court in an appeal under Section 10F of the Act has been to admit the appeal and then examine as to whether the judgment under appeal involves any point of law or not, if objection on this ground is raised. Such test can be applied on the day of first hearing itself, at the time of admission of appeal, as has been done in the two unreported judgments cited on behalf of the respondents. But unlike in an appeal under Section 100 of the Code of Civil Procedure, it has not been practise of this Court to ascertain first if the appeal involves any question of law, and then admit the appeal upon being satisfied that it does. An appellant assailing an order of the Company Law Board is not usually required to obtain any entry-permit from the Court before being allowed into the arena of adjudication at the appellate stage. If this established course is to be followed then the only enquiry at the stage of admission would be to ascertain from the memorandum of appeal as to whether grounds on questions of law has been formulated or not, with a very broad correlation with the finding of the CLB in the judgment under appeal. The scope of enquiry thus has to be minimal at this stage. 19. Applying such minimal scrutiny test, in my opinion the appellants have made out a case for admission of the appeal. I make it clear, however, that the question of maintainability of the appeal in the facts of the present case would have to adjudicated on deeper scrutiny of the judgment after admission, upon consideration of the issues touching upon merits of the case. Pre-admission objection on the question of maintainability of the appeal is rejected. 20. Let the Paper Books be filed and other procedural formalities be complied within a period of four weeks. Liberty is given to the learned Counsel for the parties to mention the appeal for listing for hearing after completion of formalities. 21. Urgent Photostat certified copy of this judgment, if applied for be supplied to the learned Advocates for the parties, as expeditiously as possible with necessary formalities.