Jiji Antony and Others vs JRG Securities Ltd. and Others

K.M. Joseph, J.—This company appeal is lodged against the order dated 11th October, 2010 in CA No. 92 of 2010 in CP No. 44 of 2010 [Jiji Antony v. JRG Securities Ltd. [2011] 101 CLA 410) by the Chennai Bench of the Company Law Board.

The briefly put, the case of the Appellants is as follows : The Appellants are the Petitioners in CP No. 44 of 2010. They are the original promoters of the first Respondent-company. The first Respondent-company is incorporated under the Companies Act, 1956 (''the Act'') and it is a public limited company. It is a listed public company and it is engaged in equity, commodity and insurance broking business. Appellant Nos. 1 to 3 are the original promoters of the company. Respondent No. 2 is a financial investor. The second Respondent had agreed to subscribe 1,03,82,174 equity shares of Rs. 10 each at a premium of Rs. 38 per share. Annexure A2 is the agreement between Appellant Nos. 1 to 3 and the second Respondent. The Appellants filed a company petition under Sections 397 and 398 of the Act. The Appellants also filed an application seeking interim injunction (annexure A14) feeling aggrieved by the decision of the company to raise capital. Various other acts are allegedly the subject-matter of the petition. The Company Law Board (''CLB'') initially granted injunction dated 6th July, 2010. The CLB directed that the Respondents shall not proceed with the rights issue without the leave of the Bench. Subsequently, by the impugned order the CLB has vacated the said injunction and permitted the first Respondent-company to proceed with the rights issue. The first Respondent was permitted to proceed with the rights issue as resolved in the Board meeting on 25th May, 2010. It is also observed that the above order is subject to the final outcome of the company petition. The Respondents were directed to file counter within four weeks.

The case of the Appellants is essentially based on Article 157A of the articles-of association of the company.

Article 157A, inter alia, reads as follows:

157A(3)(e). Decisions of the company and its present and future subsidiaries, regarding the following subject-matters shall require the affirmative vote of Regi Jacob or the nominee of Regi Jacob in an appropriately convened Board meeting :...

(e) Further issue of shares or other securities of the company/group companies to barring or its affiliates ;

We heard Sri Karthik Seshadhri on behalf of the Appellants, Sri Pathrose Mathai, learned senior counsel for Respondent Nos. 1, 6, 8 and 9. We have also heard Sri Rohit Choudhry also who appeared with Sri Pathrose Mathai for Respondent No. 9.

Sri Karthik Seshadhri, learned Counsel for the Appellants submits that the second Appellant who is referred in the articles of association has a legal right to insist that further issue of capital can be done only if he agrees to the proposal. There should be an affirmative vote on the part of the second Appellant. According to him, there is no such affirmative vote, and, therefore, the decision of the company approving the rights issue is in contravention of the provisions of the articles of association. He would point out that the stand of the first Respondent as is disclosed in the counter affidavit is as follows:

Without prejudice to the foregoing, I say and state that matter relating to issue of shares on rights basis does not fall within the ambit of provisions of Sub-clause (e) of Article 157A of the articles of association. It is submitted that the said provisions only come into play in the event in any further issue of shares, which is likely to alter the shareholding of the promoter/Petitioners, the Petitioner shall have an affirmative vote on such matter. In the instant case, shares are sought to be issued on rights basis, which does not alter the shareholding pattern in the Respondent-company , and as such there is no requirement of any affirmative vote of the Petitioners''/promoter group.

However, he would point out that the CLB, by the impugned order has proceeded on the basts that the article itself is void being ultra vires Section 81 of the Act. He would point out that even the Respondents did not have such a case before the CLB. He would further submit that the CLB has also found that no case of oppression is made out by the Appellants and that the oppression which is sought to be built up by the Appellants revolves around only the rights issue when on the contrary the Appellants have other allegations in support of their case under Sections 397 and 398 of the Act. He would submit that u/s 81 of the Act, the Board must decide to increase subscribed capital. This result inevitably follows from the words used in Section 81, namely, that "where it is proposed". According to him, "where it is proposed" means where it is decided by the Board. Therefore, according to him, when it is in dispute that he did raise his objection to the raising of further capital the fact that he was outvoted would not make any difference. At a stage when the Board decides to take a decision as to whether there must be an increase in subscribed capital in the light of Article 157A he poses the question as to how the CLB could come to the conclusion that the said article is repugnant to provision of Section 81. According to him, once it is decided by the Board lawfully to increase the capital necessarily, unless the company decides in the general body by special resolution under Sub-section (1A) of Section 81 inexorably there must be a rights issue under Sub-section (1)(a) of Section 81. According to him, preceding the stage where the question of rights issue arises or a question of preferential right under Sub-section (1A) arises the Board must take a decision to increase the capital and it is at that stage that Article 157A operates enabling the second Appellant to lawfully object to the proposal to increase the capital. There is no repugnancy in the article if it is so interpreted, he contends. Of course, he further contends that the Appellants were the original promoters. They wanted further infusion of capital. It is accordingly that the agreement with the second Respondent was entered into. They wanted the company to grow. It is pointed out that the proposed issue is attempted for a collateral purpose. He would contend that even though it is termed as rights issue actually the result will be that there will be several shareholders who may not subscribe to the rights issue and in respect of such shares the Board can allot shares at their discretion and he would submit that though it is stated to be a rights issue at the end of it all shareholding pattern will be completely changed and it will be heavily loaded in favour of the contesting Respondents.

Per contra, Sri Pathrose Mathai would point out that there is no merit at all in the appeal. He would point out that what is involved is a plain case of rights issue. He would submit that there can be no case at all for the Appellants to complain about as the shares will be distributed among the existing shareholders as mandated in Section 81(1)(a). There is no preferential allotment at all to Barrings and in this regard he draws our attention to Article 157A(3)(e) and he would submit that the article is directed to prevent any issue to Barrings or its associates. (It is not in dispute that Barrings is the company controlled by the second Respondent). He would submit that there is no preferential allotment in this case. He would submit that the question of allotment of shares other than to the existing shareholders does not arise in this case and that is a matter which may be controlled by Section 81(1A) and there is no such proposal by the company at all. He would also submit that the Appellant was outvoted in the meeting and the Board has decided to raise capital in the interest of the company. Sri Rohit Choudhury also would submit that there can be no complaint about the manner in which the company has taken a decision on the rights issue. He would submit that Article 157A will not apply in the facts of this case. Both Sri Pathrose Mathai and Sri Rohit Choudhury would point out that apart from the allegation of rights issue there is no other allegation under Sections 397 and 398. Sri Pathrose Mathai would emphasise that under Sections 397 and 398 it is not open to the applicant to rely on an allegation of isolated nature to make good his case under Sections 397 and 398.

We notice that the CLB has proceeded to refer to a few decisions and came to the conclusion that Article 157A is repugnant to Section 81 of the Act and, therefore, void. In the light of the same, it is tentatively held that Article 157A is void as far as the company petition is concerned. It is also found that except the rights issue no prima facie case is made out regarding oppression on other grounds pleaded in the petition. The shares have been issued to all the shareholders on pro rata basis. This is an interlocutory order. Any finding which is arrived in the course of interlocutory order can only be tentative and prima facie. We say this to allay the apprehension in the minds of the Appellants that when the CLB takes up the matter for final disposal the CLB should not feel bound to follow the reasoning adopted in the interlocutory order. We are of the view that we need not interfere with the order vacating the injunction. We must notice in this regard that Article 157A(3)(e) which we have extracted actually prohibits rights issue in favour of Barrings or its associates. There is no dispute that what is proposed is a rights issue u/s 81(1)(a). We would think that in the facts of this case the Appellants have not made out a case for interference with the exercise of discretion by the CLB in vacating the interlocutory order. But, we also feel that this is a case which calls for a direction to the CLB to dispose of CP No. 44 of 2010 on its files finally on the merits within a time limit. Therefore, in the interest of justice, we direct the CLB to take up CP No. 44 of 2010 and dispose of it finally on the merits within three months from the date of production of a copy of this judgment untrammelled by anything contained in its own order as also this judgment.