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Purna Investments Ltd. Vs. Southern Steelmet and Alloys Ltd. and ors. - Court Judgment

LegalCrystal Citation
SubjectCompany
CourtKarnataka High Court
Decided On
Case NumberCompany Application No. 71 of 1977 in Company Petition No. 20 of 1977
Judge
Reported in[1978]48CompCas264(Kar); ILR1977KAR1365; 1977(2)KarLJ266
ActsCompanies Act, 1956 - Sections 397 and 398
AppellantPurna Investments Ltd.
RespondentSouthern Steelmet and Alloys Ltd. and ors.
Appellant AdvocateSidhartha Shankar Roy, Adv.
Respondent AdvocateS.G. Sundaraswamy, Adv.
Excerpt:
.....by their servants and agents or otherwise howsoever from holding the said proposed extraordinary general meeting to be held on 24th june, 1977.'8. sri sidhartha shankar ray, learned counsel for the applicants, contended that the purported decision to raise the capital of the company was demonstrably mala fide, done not in the interests of the company but solely to achieve the collateral and oblique motive of furthering the interest of the indrasen group and the said decision, coming as it did, in the wake of a notice issued by the applicants requisitioning an extraordinary general meeting at which res 10 would clearly go to show that there was no intent or the expectation on the part of the directors that there was any possibility of raising any additional capital by the issue of..........sought for in this application. the prayer at clause (n) of the application pertains to the annual general meeting scheduled to be held on june 23, 1977, respecting which an order of temporary injunction in its restraint is sought. this part of the interim prayer having been considered to be of some urgency is taken up for consideration. prayer clause (o) also pertains to the extraordinary general meeting scheduled for june 24, 1977, in respect of which also an order of injunction restraining the holding of that meeting is sought. in this order the two reliefs at clauses (n) and (o) of the application are, by consent of parties, disposed of. the order reliefs in the applications will be disposed of separately after hearing the parties.7. the prayer at clauses (n) and (o) are in the.....
Judgment:

Venkatachalaiah, J.

1. Applicants are the petitioners in Company Petition No. 20 of 1977 and by this application seek certain interlocutory orders.

2. Company Petition No. 20 of 1977 has been instituted by the applicants under sections 397 and 398 of the Companies Act alleging that the affairs of the company, Southern Steelmet and Alloys Ltd. are conducted in a manner so prejudicial to the interests of the company and its members as to call for and justify the interference of the company court and the exercise of the powers of the court under sections 397, 398 and 402 of the Companies Act.

3. The grievances ventilated in the petition stem from disputes amongst brother, the eldest, Mohanlal Mittal, and his group being on the one side and his younger brothers, Indrasen Mittal, and others on the other. The main allegations in the said petition brought under section 397 and 398 of the Companies Act are that the board of directors of the company purportedly passed a resolution on 31st March, 1977, deciding to raise the equity capital of the company by authorising the issue of 1,14,000 equity shares of Rs. 10 each amounting to Rs. 11,40,000 which according to the applicant represents 60 per cent. of the existing equity capital; that the exercise of the powers of the board of directors in this behalf is not informed by considerations relevant to the matter and is not in the interests of the company, but is actuated by collateral and oblique motive of acquiring a controlling interest by the Indrasen group. There are also certain allegations of financial irregularities, discrepancies in the accounts and the further allegations that the Indrasen group is making fraudulent and secret profits.

4. When the said Company Petition No. 20/77 came up before me on the 17th of May, 1977, Sri S. G. Sundaraswamy took notice on behalf of the company and wanted a short adjournment till today to file his counter to the interlocutory application and argue the matter. Accordingly, the matter stood adjourned to this date.

5. I have heard Sri Siddartha, Shankar Ray, learned counsel for the applicants, and Sri S. G. Sundaraswamy, learned counsel for the 1st respondent-company.

6. There are several reliefs sought for in this application. The prayer at clause (n) of the application pertains to the annual general meeting scheduled to be held on June 23, 1977, respecting which an order of temporary injunction in its restraint is sought. This part of the interim prayer having been considered to be of some urgency is taken up for consideration. Prayer clause (o) also pertains to the extraordinary general meeting scheduled for June 24, 1977, in respect of which also an order of injunction restraining the holding of that meeting is sought. In this order the two reliefs at clauses (n) and (o) of the application are, by consent of parties, disposed of. The order reliefs in the applications will be disposed of separately after hearing the parties.

7. The prayer at clauses (n) and (o) are in the following terms :

'(n) Injunction restraining the respondents 2 to 7 and each of them whether by themselves or by their servants, agents, or otherwise however from holding the said proposed annual general meeting to be held on 23rd June, 1977.

(o) Injunction restraining the respondents and each of them whether by themselves or by their servants and agents or otherwise howsoever from holding the said proposed extraordinary general meeting to be held on 24th June, 1977.'

8. Sri Sidhartha Shankar Ray, learned counsel for the applicants, contended that the purported decision to raise the capital of the company was demonstrably mala fide, done not in the interests of the company but solely to achieve the collateral and oblique motive of furthering the interest of the Indrasen group and the said decision, coming as it did, in the wake of a notice issued by the applicants requisitioning an extraordinary general meeting at which resolution touching want of confidence in the board of directors were proposed to be moved, was clearly an attempt to pre-empt the outcome of that extraordinary general meeting which would otherwise have been inevitable. Sir Ray further urged that the circumstances that the company had not declared any dividends so far, that its shares were admittedly quoted in the stock-market at Rs. 5.75 each, and that the present offer pursuant to the resolution dated March 31, 1977, was at face value of Rs. 10 would clearly go to show that there was no intent or the expectation on the part of the directors that there was any possibility of raising any additional capital by the issue of shares. Sri Ray contended that the undue and unbecoming haste in which the allotments to the allottees, who according to him, are merely the nominees of the Indrasen group were made and the fact that applications for the shares by non-members were entertained even before the last day, i.e. May 27, 1977, fixed for renunciation of the offer by the shareholders, in themselves amount conclusive evidence of the mala fides on the part of the board of directors in making the impugned resolution and the allotments made pursuant thereto. Sri Ray strongly urged that the allotment of the said 1,14,000 shares made pursuant to the impugned resolution of the board of directors being wholly mala fide and having been demonstrably for a collateral purpose, the exertion of the voting power stemming from the said allotment at the ensuing annual general meeting of the company, if permitted, would result in irreversible illegalities and put the applicants under an un comestible disadvantage.

9. Sri S. G. Sundaraswamy, learned counsel for the company, however, stated at the outset that no un comestible disadvantage or irreversible detriment is likely to be occasioned to the applicants if the meeting is allowed to be held on 23rd June, 1977, as, according to him, sufficient protection for the apprehension of the applicants could be afforded by imposing a condition that the proceedings of the meeting should be submitted to this court for such further orders in that behalf as its court may deem fir including orders whether the operation of any of the resolutions passed at the meeting should be stayed or not. Secondly, while maintaining that the allotments of shares was valid and that the allottees should not be prevented from exercising their legitimate voting rights, he stated that if it turns out that part altogether from the voting power stemming from the impugned allotments of shares, and even on the basis of the partner of voting rights obtaining prior to the impugned allotment, the resolutions of the annual general meeting become supportable, then that would be a matter which the court could take into consideration when the proceedings of the meeting are brought up before this court for further orders.

10. The principles guiding the grant of interlocutory injunctions are fairly well-settled. The relief is both temporary and discretionary. In cases of interlocutory injunctions in aid of the rights of the party seeking it, the court will first consider whether the applicant has established a prima facie case, the expression 'prima facie' in this context being understood in the sense that it is not a frivolous or vexatious claim but involves a serious matter to be investigated. The rules guiding the administration of this form of discretionary relief admit of being formulated in the following three sequential propositions :

(1) Discover whether the plaintiff's case is frivolous or vexations;

(2) If it is not, decide in whose favour the balance of convenience lies;

(3) If the balance is fairly even, taint may not be improper to take into account in tipping the balance the relative strength of each party's case as revealed by the affidavit-evidence adduced on the hearing of the application.

11. In the present case, the petition has been admitted and I proceed on the assumption that the applicants have made out what, according to their learned counsel, is 'a very strong prima facie' case. The question that arises is as to the balance of convenience between the parties and the imminent and un comestible disadvantage or some irreversible detriment that may result to the applicants by the denial of the relief. In this context, it is not necessary for the court to find a case for the applicants which would entitle them to relief at all events; but it is quite sufficient if the court finds that the case shows that there are substantial questions to be investigated and that the matter has to be preserved in status quo until the question can finally be disposed of. The consequences resulting from allowing the annual general meeting to be held as urged and envisaged by Sri Ray, learned counsel for the applicants, proceeds on the assumption that the allotment of the shares in question is void. To hold so, at this stage, and proceed on that assumption would, in my opinion, amount to prejudging the matter. The House of Lords in American Cyanamid Co. v. Ethicon Ltd. [1975] 2 WLR 316 (HL) observed (page 323) :

'It is not part of the court's function at this stage of the litigation to try to resolve conflicts of evidence on affidavit as to facts on which the claims of either party may ultimately depend nor to decide difficult questions of law which call for detailed argument and nature considerations. These are matters to be dealt with at the trial. One of the reasons for the introduction of the practice of requiring an undertaking as to damages upon the grant of an interlocutory injunction was that it aided the court in doing that which was its great object, viz., abstaining from expressing any opinion upon the merits of the case until the hearing.'

12. In the said case, the House of Lords also emphatically negatived the existence of the supposed rule that the court is not entitled to take any account of the balance of convenience unless it has been satisfied that if the case went to trial upon no other evidence than is before the court at the hearing of the application, the plaintiff would be entitled to judgment for a permanent injunction in the same terms as the interlocutory injunction sought. It was also pointed out in the said case that the use of the expressions such as a 'possibility', 'a prima facie case' or 'a strong prima facie case' in the context of the exercise of a discretionary power to grant an interlocutory injunction leads to confusion as to the object sought to be achieved by this form of temporary relief. The court, no doubt, must be satisfied that the claim is not frivolous or vexatious, in other words, that there is a serious question to be tried. When once the court comes to the conclusion that there is a serious question to be tried, what is of materiality is the consideration of the balance of convenience and if the balance is fairly even, then it may not be improper to take into account, in tipping the scales, the relative strength of each party's case. In assessing the balance of convenience, the nature of injury which the applicants would suffer if the injunction is not granted and they turn out to be right at the trial, on the one hand, should be juxtaposed with the hardship that the respondent would suffer if the injunction is granted and if they turn out to be right at the trial. Again, the words of Lord Diplock in the American Cyanamid's case [1975] 2 WLR 31, 321(HL) are worth recalling :

'The object of the interlocutory injunction is to protect the plaintiff against injury by violation of his right for which he could not be adequately compensated in damages recoverable in the action if the uncertainty were resolved in his favour at the trial, but the plaintiff's need for such protection must be weighed against the corresponding need of the defendant to be protected against injury resulting from his having been prevented from exercising his own legal rights for which he could not be adequately compensated under the plaintiff's undertaking in damages if the uncertainty presented under the plaintiff's undertaking in damages if the uncertainty were resolved in the defendant's favour at the trial. The court must weigh one need against another and determine where 'the balance of convenience' lies.'

13. The burden of establishing that the inconvenience which the applicants will suffer by refusal of the induction is greater than what the respondents will suffer, it if is granted, lies clearly on the application. It is seen that the appointees who are alleged to be nominees of the Indrasen group are not impleaded in this action. It is not also averred that the intrinsic or break-up value of the share is not anywhere near about Rs. 10. After a careful and anxious consideration of the matter, and subject to the conditions which I propose to impose, I must hold that this burden has not been discharged by the applicants. The applicants have not shown as to how and in what manner the specified of injury known to law as irreparable would be occasioned to them if the holding of the annual general meeting is not restricted. They are also unable to establish that the injury and hardship resulting to the respondents by the issue of an order of induction would not be grater than the injury that may result to the applicants by the denial of the order.

14. Sri Ray drew my attention to two decisions in support of his contention that notwithstanding the conditions suggested by Sri Sundaraswamy, the meeting should not be allowed to be held. First was in Punt v. Symons & Co. Ltd. [1903] 2 Ch 506 (Ch D), where it was held that where shares had been issued by the directors, not for the general benefit of the company, but for the purpose of controlling the holders of the greater number of shares by obtaining a majority of voting power, the principle in Fraser v. Whalley [1864] 2 Hem & M 10 applied and that the directors ought to be restrained from holding the meeting at which the votes of the new shareholders were to have been used. In the said case, the finding that the allotments of shares impugned therein was in violation of fiduciary obligation of the board of the directors and was in fact for a collateral purpose was arrived at on evidence. In the present case, we are at the stage of interlocutory orders and trail is yet to commence. Findings on matters such as mala fides, fraud and bad faith cannot, generally, be arrived at one mere affidavits. The matter has to go for trial and I am, therefore, reluctant to take into account the merits of the case at this stage to come to a conclusion which detracts from what an assessment of the balance of convenience in the case suggests.

15. The next decision cited was the decision of the Supreme Court in Nanalal Zaver v. Bombay Life Assurance Co. Ltd. [1950] 20 Comp Cas 179 (SC), where it was held that the object of the provision in section 105C in the 1913 Act was to prevent discrimination amongst shareholders and to prevent the directors from offering shares, etc., before they offered to this shareholders. It was pointed out that so long as these two requirements were complied with, the action of the directors in selecting the time when they will issue the shares as also the proportion in which they should issue is a matter left entirely to their discretion and it is not the province of the court to interfere with the exercise of that discretion. This power of the directors, it was however made clear, was subject to the general exception that the directors were not to act against the interests of the company or mala fide. In pressing this ruling into service, the learned counsel would virtually ask me to hold that the allotment in the present case is, in fact, mala fide. That is precisely the matter to be gone into at the trial and as stated earlier what is of materiality at this stage is the consideration as to the balance of convenience or inconvenience and hardship. I, therefore, hold that the applicants have not made quota case for an order of stay of the annual general meeting to be held on June 23, 1977.

16. However, Sri Ray submitted that in the event the annual general meeting is to be held, it should not be held under the chairmanship of any of the represent respondents and that a member of the Bar may be appointed to act as chairman, to preside over and conduct the deliberations of the said meeting, and submit a report of the proceedings to this court. Sri S. G. Sundaraswamy, fairly, accepted this suggestion. By consent of the learned counsel on both sides, Sri M. P. Chandrakantaraj Urs, learned High Court Government Advocate, is appointed to act as chairman of the annual general meeting of the company to be held tomorrow. Sri Urs who is present in court signified his consent to act as such chairman. It is directed that the officers-in-charge of the affairs of the company will provide all the necessary assistance to Sri Urs in discharge of his function as chairman of the meeting. Sri Urs shall be entitled and at liberty to appoint such persons as scrutineers, as may, in his opinion, be necessary. The voting shall be by taking poll; it shall not be by show of hands. The chairman shall submit a report of the proceedings of the said meeting before 27th June, 1977.

17. It was next urged by Sri Ray that having regard to the protracted litigation between the parties pertaining to the ensuing meeting and having regard further to the fact that between June 2, 1977, and June 18, 1977, there was an order of induction issued by the Calcutta High Court staying the holding of the meeting, it was only fair to the shareholders that there be a direction of the court affording an opportunity to them to exercise their votes by proxy and that time for deposit of the proxies, not already so deposited, be extended till 1.30 p.m. on June 23, 1977. I consider this submission reasonable and order accordingly. The proxies not already deposited, shall, however, be deposited with the chairman-designate of the meting at his chamber in the High Court premise before 1.30 p.m. on June 23, 1977.

18. So far as the extraordinary general meeting scheduled for June 24, 1977, which is the subject-matter of the prayer at clause (o) is concerned, by consent of both the parties, there will be an order stating the said meeting.

19. In the result, this application in so far as interim reliefs prayed for in clause (n) and (o) are concerned is disposed of in the light of the directions contained in this order. There will be no order as to costs.

20. In respect of other interim prayers contained in the application, first respondent-company will file its counter on or before 4th July, 1977. Let the application be posted for further order on 8th July, 1977. In the meanwhile applicants will take out emergent notices to the other respondents.

21. Copies of this order be made available to Sri M. P. Chandrakantaraj Urs and to the learned counsel for the applicants and of the company before 2 p.m. on June 23, 1977.


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