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Judgment
V.V.S. Rao, J.—These company applications are filed under Order IX Rule 13 of Code of Civil Procedure, 1908 (CPC) read with Rules 6 and 9 of the Companies (Court) Rules, 1959 (the Rules, for brevity). The applicants, who are statedly shareholders of respondent company, namely, Rockwool (India) Limited (hereafter, Rockwool), seek to set aside/review the judgment and order dated 28.4.2006 passed in Company Petition No. 33 of 2006. By the said order, this Court confirmed special resolution dated 27.3.2006 of General Body of Rockwool for reduction of capital by cancelling and extinguishing 95,93,137 fully paid up shares held by promoters of the company, namely, Alghanim Industries (Mauritius) Limited (hereafter, AIM) and by cancelling and extinguishing 25,25,040 fully paid up shares held by public shareholders at the rate of Rs. 7/- per fully paid up share and also by cancelling and extinguishing partly paid up shares. This Court approved the scheme subject to modification that Rockwool shall pay to public shareholders at the face value of Rs. 10/- per fully paid up share. Needless to mention that this Court had ordered publication of notice in two Newspapers and in spite of the same no objections were received from anybody. In these applications, which in effect are filed seeking review or the order of this Court have been argued in detail covering the ambit of Sections 77, 77A and 100 of the Companies Act, 1956.
Case of the applicants
The first applicant is individual investor. He and his wife promoted second applicant company which invests in shares and securities listed on Bombay Stock Exchange (BSE) and National Stock Exchange (NSE). They individually and together held 1,63,248 shares of Rockwool which manufactures Resin Bonded Rockwool in its factory at Kaveli Village of Zaheerabad Taluk in Medak District. In 1995, due to financial crunch, its networth turned negative. Its accumulated dues to financial institutions stood at Rs. 1,918.19 lakhs. Therefore declaring as sick company, it was referred to Board for Industrial and Financial Reconstruction (BIFR). At that stage, AIM was inducted as a co-promoter and after receiving necessary approvals, 19,87,687 equity shares of Rs. 10/- each at par were allotted to them. AIM is a wholly owned subsidiary of KIMMCO, Kuwait, which is a part of Alghahim Industries. In addition to allotment of shares, AIM infused funds and its percentage of holding went from 25.07% to 63.01%. .They also acquired 1,67,20,000 shares of Rs. 10/- each on 31.3.2000 at a discount price of Rs. 5/- increasing their shareholding to 77.71%. With such infusion, networth of Rockwool turned positive and share capital rose from Rs. 5.9 crores to Rs. 41.00 crores. Rockwool cleared unsecured debts to banks and became debt free company.
AIM made public announcement on 24.6.2005 to acquire 51,89,619 fully paid up shares of Rs. 10/- each, 39,18,000 shares of Rs. 10/- each partly paid up to the extent of Rs. 7.50 each, and 10,600 shares of Rs. 10/-each partly paid up to the extent of Rs. 5/- each. The floor price was fixed at Rs. 5/- per fully paid up share and Rs. 7/- per share was fixed as exit price based on reverse book building process on NSE, statedly in accordance with Securities and Exchange Board of India (Delisting of securities) Guidelines, 2003 (hereafter, SEBI Guidelines). The open offer by promoters was in force during the period from 04.7.2005 to 06.7.2005 and successfully completed. The applicants herein however did not offer their shares for purchase by AIM. After purchasing the shares by reverse book building process, AIM applied to Hyderabad Stock Exchange (HSE) and BSE and accordingly Rockwool shares were delisted from HSE on 14.12.2005 and from BSE on 30.9.2005. AIM made yet another public announcement on 15.12.2005 offering to buy delisted Rockwool shares at the exit price of Rs. 7/- each. In this process, AIM as on 31.12.2005 acquired 3,82,89,813 shares or 93.6% of share capital and balance share capital is held by 11,000 small shareholders dispersed all over India.
In January 2006, Rockwool engaged Chartered Accountants, M/s. A.F. Ferguson and Company (hereafter, Ferguson) to study and submit report on restructuring the capital of company keeping in view the need to reduce cost in servicing small shareholders and to advance the availability of surplus cash with the company. Ferguson in their report dated 04.2.2006 suggested reduction of share capital as a process of capital restructuring, valued shares of Rockwool at Rs. 7/- per share in respect of equity shares of Rs. 10/- each fully paid up. The Board of Directors of Rockwool then called for General Body meeting which passed a special resolution for reduction of shares of the company in the following manner, (a) By reducing issued capital from Rs. 40,90,76,870/- divided into 4,09,07,687 equity shares of Rs. 10/- each to Rs. 28,77,94,100/- divided into 2,87,79,410 equity shares of Rs. 10/- each; (b) to effect such reduction by canceling and extinguishing Rs. 1,21,28,277 equity shares comprising 95,93,137 fully paid up shares held by AIM, and (c) By canceling and extinguishing 25,25,040 fully paid up shares held by public shareholders and 10,100 partly paid up shares to the extent of Rs. 5/- per share held by public, at the rate of Rs. 7/- per fully paid up share at the rate of Rs. 3.50 per fully paid up shares. As noticed supra, after General Body passed resolution in accordance with Sections 100 and 104 of Companies Act, Rockwool presented C.P. No. 33 of 2006 and after following necessary statutory steps, this Court accorded its approval. The contentions of applicants are threefold, namely, violation of provisions of Companies Act; exclusion of minority shareholders from the company and reducing them to non-entity and lastly fraud and misrepresentation played by Rockwool and its promoters in obtaining sanction/approval to scheme of reduction of share capital.
Case of respondent
First applicant is active trader in shares and securities and second applicant is sub-broker in BSE. In the absence of any authorization, objection by the first applicant in favour of second applicant is not maintainable. First applicant was present in the meeting of shareholders, and therefore, he is fully aware that a petition for sanctioning reduction of share capital would be filed. Having not raised any objection before the Court, applicants cannot file petition to set aside order of Court sanctioning scheme for reduction of capital. Respondent filed petition seeking sanction scrupulously complying with provisions of law. All the material facts were disclosed and after satisfying the scheme for reduction of capital, Court sanctioned the same. As per Section 103(4) of Companies Act, Registrar of Companies (RoC) shall certify registration of the order and such certificate shall be conclusive evidence of compliance with the provisions of Companies Act. Once certificate is issued by RoC, it would be conclusive evidence of completion of reduction of capital and the process irreversible as reduction of capital has already been implemented as sanctioned by the Court.
Though the shares of Rockwool were listed on BSE and HSE, it was decided to delist the shares from the stock exchanges and as they were traded very infrequently in BSE and were not at all traded in HSE for a period of three years. BSE was informed about the same on 17.5.2005. Thereafter an advertisement for convening Extraordinary General Meeting (EGM) on 11.6.2005 was published in local editions of''Business Line'' and ''Andhra Bhoomi'' on 19.5.2005. The shareholders unanimously approved resolution to delist the shares from BSE and HSE. Thereafter AIM published advertisement on 07.7.2005 under SEBI Guidelines 2003. The allegation that exit price was fixed very low at Rs. 7/- per share is denied. It is stated that Rockwool had no role to play in acquiring shares from the public.
Prior to May 2005, first applicant had only 500 shares of Rockwool. After the Board resolution for delisting, first applicant acquired equity shares by following subversive methods. He purchased 16,435 shares on 27.5.2005, 4,800 shares on 03.6.2005 and 12,410 shares on 10.6.2005 through Mr. Dipak G. Cholera, who is member broker of BSE and subsequently on two occasions some of the shares were transferred to first applicant on 10.6.2005. Second applicant then transferred some shares to Mr. Janak Mathuradas on 17.3.2006, a few days before General Body Meeting. Mr. Dipak G. Cholera purchased and sold the equity shares of the company around 128 times during the period from May 2005 to February 2006 totalling to nearly five lakh shares of the company. Both the applicants with the connivance of Mr. Dipak G. Cholera artificially manipulated share prices of Rockwool on BSE with ulterior motive in an attempt to increase share price.
First applicant attended EGM held on 29.3.2006, which passed resolution for reduction of capital. The scrutinisers appointed by Chairman of the meeting verified all the Proxies. 1,29,103 shared held by second applicant were not accounted as there was no authorization given to first applicant to vote on behalf of second applicant. First applicant submitted 18 Proxies totaling to 1,31,926 equity shares but not 3,89,000 equity shares. The allegation that Rockwool promised to hold another Court convened meeting, is denied. Applicants leveled baseless allegations with the sole intention of harassing Rockwool and none of 11,000 shareholders opposed proposal for reduction of capital. First applicant sent e-mail on 05.7.2006 to Ms. Sandhya Lakshmi, an employee of Rockwool, who was on maternity leave. In the mean while he sought clarification whether notice of EGM was given. He however admitted that Rockwool might have advertised in local Newspapers and requested for a copy of the same. Rockwool mailed capital reduction warrant to all shareholders including applicants on 17.7.2006. After receiving the same, applicants sent e-mail on 02.8.2006 requesting for a copy of the order of the Court, which was duly sent.
The order of High Court dated 28.4.2006 was received by Rockwool on 24.5.2006. Immediately an application for registration of the order and minute was filed with RoC on 25.5.2006 and Rockwool published notice of registration of order and minute in local Newspapers on 28.6.2006. Respondent complied with procedural formalities prescribed by National Security Depository Limited (NSDL) and Central Depository Services Limited (CDSL) before effecting payments as per orders of the Court. Thus respondent ensured that reduction of capital would take place in a transparent manner and the allegation that respondent reduced capital subversively is not correct. Rockwool had to prefer the route of reduction of share capital and not buy back of shares as provided u/s 77A of Companies Act because there are no free reserves and surplus for buy back.
Applicants'' submissions
Learned Counsel for applicants made following submissions.
The promoters of the company by adopting method of reduction of capital excluded other shareholders by dubious means. Such exclusion of non-promoter shareholders would be contrary to the very principle of incorporation of a joint stock company. Rockwool admittedly proposed to reduce capital to save costs of servicing small investors and to advance availability of surplus cash with the company more than immediate wants of the company. These are not valid reasons for reduction of capital and results in divesting shareholders of their rights under law. Even if Rockwool had good intentions, the company ought to have resorted to Section 77 read with 77A of Companies Act and buyback shares at a just and fair price. The allegation that they had no surplus cash is incorrect as admittedly by 2005 Rockwool became debt free company and also by reason of favourable order from Customs Appellate Tribunal had considerable accruals to its credit.
The company bought back shares at the time of delisting at an exit price of Rs. 7/- for a share of Rs. 10/- each. This amounts to buyback and Sections 77 and 77A of Companies Act are attracted. By offering exit price, which is far below, Rockwool illegally got rid of shareholders. But for the Court order, Rockwool could not have compelled petitioners and similarly situated shareholders to part with their shares, which were purchased at a higher price than the exit price. There is no good faith on the part of the promoters.
There is violation of procedure contemplated under Sections 100 to 102 of Companies Act for the reason that in the meeting of General Body convened AIM admittedly had 93.6%, and therefore, it does not represent public holding of the shares. The resolution for reduction of capital having not been approved by shareholders represented about 7% of the capital, cannot be deemed as legally passed special resolution for reduction of share capital and that Rockwool played fraud in getting special resolution passed by EGM by manipulating an exit/offer price, which is below market price of the share. As the scheme envisages two classes of shareholders, separate meeting of 11,000 shareholders (amounting to 7% of stock) ought to have conducted for considering special resolution. In a case of this nature, when promoters themselves are interested to have sway over the company, holding of promoters should be ignored. Being distinct interested class, AIM does not represent class interest. Even while issuing public announcement on 24.6.2005, the promoters of AIM played fraud by giving wrong information to the effect that there is only sporadic trading of shares and it would be in the interest of shareholders to accept the offer at any price above floor price of Rs. 5/- per share. At the relevant time, shares were traded above Rs. 18/- per share.
Applicants rely on British and American Trustee and Finance Corporation Limited v. John Couper 1894 AC 399 (hereafter, BAT Finance), In re Holders Investment Trust Ltd. (1971) 1 WLR 583 (hereafter, HIT) and Ramesh B. Desai and Others Vs. Bipin Vadilal Mehta and Others, in support of their allegation that fraud is played. Contending that the scheme for reduction of capital is in contravention and violative of SEBI guidelines 2003, they relied on Hamza Haji Vs. State of Kerala and Another, and Andhra Pradesh Scheduled Tribes Employees Association Vs. Aditya Pratap Bhanj Dev and Others, .
Respondent''s submissions
Learned Counsel for respondent made the following submissions.
The application for recall being application for review of the order passed by this Court on 28.4.2006, it is not maintainable, as no grounds are made out for review of the order and the case does not fall within the ambit of Order XLVII Rule 1 of CPC. Respondent relies on M.M.B. Catholicos v. M.P. Athanasius AIR 1954 SC 526 and In Re: Zee Telefilms Ltd., .
Rockwool followed procedure contemplated under Sections 100 to 102 of Companies Act in a very transparent manner with good faith, and therefore, application is misconceived. Rockwool has placed all the facts before the Court while seeking approval and has not contravened any of the provisions of the Companies Act.
The scheme for reduction of capital was just and fair. Though the company initiated proposal at the behest of AIM, promoters as well as non-promoters stand on the same footing, and therefore, there cannot be a separate meeting for 11,000 shareholders. The resolution was passed by majority and therefore, the Court was justified in passing order approving the scheme.
The applicants connived with others and manipulated the share price. When AIM bought shares at the time of delisting, price was fixed in an ordinary manner having regard to the market price of share during 2003-2004. The allegations of fraud is based on the contention that the price was at Rs. 18/- which itself was result of manipulation of applicants. The applicants approached the Court with unclean hands, and therefore, application is liable to be dismissed. After approval of scheme by this Court, consequential transactions have been completed and except applicants and their group of shareholders, all the shareholders have been paid off. This has already been taken note of traders, and therefore, balance of convenience does not warrant any interference.
Respondent relies on BAT Finance (supra), Ramesh B. Desai (supra) and Sandvik Asia Ltd., .
Before considering the merits of the case, it is necessary to notice the law in relation to reduction of capital and in relation to buy back of shares. Sections 77, 77A, 77AA and 77B of Companies Act deal with power of a company to purchase its own securities. Sections 100 to 104 of Companies Act deal with reduction of share capital. A conspectus of the provision dealing with purchases or buy back of shares would show that a company limited by shares or a company limited by guarantee or having share capital cannot buy its own shares unless the consequent reduction of capital is effected and sanctioned pursuant to Sections 100 to 104 or 402 (Section 402 confers powers on CLB under Sections 397 and 398 which inter alia include the power of CLB to order purchase of shares by the company and consequent reduction of its share capital.) of Companies Act. A company which is subsidiary of a public limited company cannot involve or give financial assistance for purchase of the shares of holding company and any violation of Section 77(1) and (2) of Companies Act would attract penal action punishable with fine.
The buy back of shares was not part of Indian Law till Sections 77A, 77AA and 77B of Companies Act were inserted by the Companies (Amendment) Act, 1999, with effect from 31.10.1998. A reading of Section 77 and 77B of the Act would reveal that no company shall directly or indirectly purchase its own shares or other specified securities, any subsidiary company including its own subsidiary company or through any investing company or group of investing companies, and no company can buy back its own shares if such company has not complied with the provisions of Sections 159, 207 and 211 of the Companies Act. In addition to this, a company can buy back its own shares only when it has free reserves, securities premium account or proceeds of any shares or any other specified securities. The proviso to Sub-section (1) of Section 77A of Companies Act further clarifies that no buy back of any kind of shares shall be made out of the proceeds of an earlier issue of the same kind of shares or same kind of other specified securities. Furthermore, the buyback of its shares can be effected only when the Articles authorize by passing a special resolution in AGM and such buy back is less than 25% of total paid up capital and free reserves of the company. In any financial year such buy back shall not exceed 24% of its total paid up capital in that financial year. Any such buy back shall be in accordance with SEBI (Buy back of Securities) Regulations 1998.
In reduction of share capital also, there is some sort of buy back. Section 100(1) of Companies Act contemplates reduction of share capital by extinguishing or reducing the liability on any of its shares in respect of paid up share capital, cancellation of paid up share capital, which is lost or is not represented by available assets with or without extinguishing or reducing liability on any of its shares, pay any paid up share capital, which is in excess of wants of the company with or without extinguishing or reducing liability of any of its shares. A company which has free reserves or securities premium account or proceeds of any shares or any other specified securities, may resort to buy back of its own shares subject to Sections 77 and 77B of Companies Act. Even then a company has to seek sanction for consequent reduction of capital under Sections 100 to 104 of Companies Act. To say in other words, every type of reduction of share capital does not amount to buy back of shares but every buy back exercise would certainly involve reduction of share capital and that is the reason why Legislature mandates Court sanction under Sections 100 to 104 of Companies Act whenever a company resorts to buy back of its own shares if it has free reserves or securities premium account.
What are the safeguards provided to the shareholders in general and minority shareholders in particular if the promoters or majority shareholders connived a scheme to exclude all the small investors or minority shareholders with a view to appropriate the company for themselves. Before further analyzing the provisions of Companies Act to which a reference is made as above, it would be beneficial to notice the case law on these aspects.
BAT Finance (supra) is a case, probably one of its kind, arising under British Companies Act 1867 (1867 Act). It was a case in which the attempt of those who had majority to reduce and extinguish the shares by paying off, was considered by House of Lords. The facts of the said case are the following. BAT Finance, a company limited by shares, was incorporated in 1890 with capital of �2,000,000 divided into 188,600 ordinary shares of �10 each and 114,000 general founders'' shares of 1 Pound each. 63,109 shares of �10 each on which �2 each had been paid up and 72,298 general founders'' shares were fully paid up. The Articles provided that the company may reduce its capital by paying off. A special resolution was passed by EGM for modification of memorandum of association by reduction of capital of the company to �1,691,737 divided into 160,767 ordinary shares of �10 each and 84,067 general founders'' shares of �1 each, and the remainder of the capital, namely, 27,833 ordinary shares and 29,933 general founders'' shares be paid off as the capital represented thereby being in excess of wants of the company. The resolution also provided for extinguishment of ordinary and general founders'' shares to the extent they are paid off for the purpose of reduction. The EGM also approved the arrangement to make over American investments to American shareholders subject to payment of �11,000 to the Corporation and cancellation of shares held by American shareholders, thus reducing pro tanto the capital of the company. All the creditors were either paid or assented to the arrangement. Learned Judge who heard the matter and Court of Appeal, assuming the that the Court had no power to confirm the special resolution as being ultra vires, dismissed the petition for confirmation. BAT Finance carried the matter to House of Lords, who reversed the Court of Appeal and confirmed the special resolution.
The House of Lords referred to 1867 Act, which by Sections 9 and 11 enabled the company by special resolution to reduce its capital subject to confirmation by the Court and that there is no limitation on the power of the Court to confirm reduction, and observed that, "except that it must first be satisfied that all the creditors entitled to object to the reduction have either consented or been paid or secured." As observed by Lord Herschell L.C. any scheme for reduction of capital means, "certain of the shareholders receive part of the assets of the company equivalent to their shares therein, such shares being cancelled." It was held as follows.
If, then the scheme which the Court is asked to confirm be in fact one for reduction of capital, I am, with all deference, at a loss to understand how the Court in confirming it could be acting ultra vires, seeing that, as I have pointed out, the statute has not prescribed the manner in which the reduction is to be carried out, nor has it prohibited any method of effecting that object.... I do not see any danger in the conclusion that the Court has power to confirm such a scheme as that now in question, or any reason to doubt that this was the intention of the Legislature. The interests of creditors are not involved, and I think it was the policy of the Legislature to entrust the prescribed majority of the shareholders with the decision whether there should be a reduction of capital, and if so, how it should be carried into effect. The interests of the dissenting minority of the shareholders (if there be such) are properly safeguarded by this: that the decision of the majority can only prevail if it be confirmed by the Court.
(emphasis supplied)
Learned Lord Chancellor also observed that, "any scheme which does not provide for uniform treatment of shareholders whose rights are similar, would be most narrowly scrutinized by the Court, and that no such scheme ought to be confirmed unless the Court be satisfied that it will not work unjustly or inequitably."
Lord Watson, who concurred with lead opinion, also observed that, "there can be no objection to the surrender of shares which are liable to forfeiture (and) a surrender of shares in return for money by the company is a sale, and open to the same objections as a sale, whatever expression may be used to describe or disguise the transaction." Lord Macnaghten (who wrote the opinion in Trevor v. Whitworth 12 App. Cas 409 on which reliance was placed by Lord Chancellor) concurred with the opinion. The position was explained thus.
...any company limited by shares may by special resolution so far modify the conditions contained in its memorandum, if authorized so to do by its regulations as originally framed or as altered by special resolution, as to reduce its capital. The power is general. The exercise of the power is fenced round by safeguards which are calculated to protect the interests of creditors, the interests of shareholders, and the interests of the public. Creditors are protected by express provisions. Their consent must be procured or their claims must be satisfied. The public, the shareholders, and every class of shareholders individually and collectively, are protected by the necessary publicity of the proceedings and by the discretion which is entrusted to the Court. Until confirmed by the Court the proposed reduction is not to take effect, though all the creditors have been satisfied. When it is confirmed the memorandum is to be altered in the prescribed manner, and the company as it were makes a new departure. With these safeguards, which certainly are not inconsiderable, the Act apparently leaves the company to determine the extent, the mode, and the incidence of the reduction, and the application or disposition of any capital moneys which the proposed reduction may set free.
Yet again, it was held that, "the Court must look at the arrangement as a whole, and have regard to all the circumstances of the case, and the consequences which, the reduction involves (and) the Court must take everything into account before confirming the reduction."
In HIT (supra), petition by the said company for confirmation of reduction of capital was opposed by minority shareholders on the ground that the special resolution of preferential shareholders was not valid and effectual and that the terms on which reduction of capital is to be effected are not fair. The company stood at �2,275,000. It was sought to be reduced by canceling 5% cumulative redeemable preference shares of �1 each and allotting to the holders the same nominal amount of 6% unsecured loan stock. In HIT (supra), the company''s share capital consisted of �834,600 stock and 1,800,000 non-voting ordinary shares of two shillings each, which were issued as fully paid up. In the EGM, resolution for reduction was opposed by trustees of Lionel Barber Voluntary Settlement, who hold 95,000 preference shares. However, the resolution was carried by the requisite majority because 90% of preference shares vested in the trustees of three trusts set up by Mr. William Hill, who voted in favour of resolution. These supporting trustees had 52% of the minority stock and shares and as noticed supra opposing trustees held a small percentage of shares. Relying on the judgments in Carruth v. Imperial Chemical Industries Ltd. (1937) A.C. 707, British America Nickel Corporation Ltd. v. M.J. O''Brien Ltd. (1927) A.C. 369 and Shuttleworth v. Cox Brox. & Co. (Maidenhead) Ltd. (1927) 2 K.B. 9, Chancery Division noticed three following propositions, namely, first, a reduction of capital accordance with the class rights is nevertheless regular if it is effectually sanctioned in accordance with the regulations of the company; second, there is an effectual sanction to the modification of class rights if those holding a sufficient majority of the shares of that class vote in favour of the modification in the bona fide belief that they are acting in the interests of the general body of members of that class; and third, the burden of proof depends on whether or not there is any such sanction. Applying these principles on the question whether there was bona fide belief on the part of majority that they are acting in the interest of general body of members of that class, learned Judge held.
I have to determine whether the supporting trustees voted for the reduction in the bona fide belief that they were acting in the interests of the general body of members of that class. From first to last I can see no evidence that the trustees ever applied their minds to what under company law was the right question, or that they ever had the bona fide belief that is requisite for an effectual sanction of the reduction. Accordingly, in my judgment there has been no effectual sanction for the modification of class rights. It may be observed that I have said nothing as to the burden of proof on the issue whether the sanction to the modification of class rights has been validly given, and I propose to continue to say nothing. However that burden lies, in my judgment there was no effectual sanction. The result is therefore that on the issue of fairness the burden of proof devolves on those supporting the reduction to prove that it is fair. Unless this burden is discharged, confirmation of the reduction will be refused.
On the question of fairness, learned Judge observed.
Now the evidence before me on the fairness of the transaction seems to me to be strongly on the side of the reduction being unfair. On behalf of the opposing trustees, a long and reasoned affidavit, with exhibits, has been filed by Mr. Ashcroft, a chartered accountant who is one of the opposing trustees. There is also an affidavit by Mr. Andrews, a chartered accountant who is an executive director of Samuel Montagu & Co. Ltd, and who for the last two years has been wholly occupied in advising on and negotiating the terms of issues, mergers and acquisitions of both majority and minority holdings of both quoted and unquoted companies. Put shortly, the evidence plainly shows that the advantages in the proposed conversion, and in particular the increase in the rate of interest from five to six per cent., fall substantially short of compensating the preference shareholders for the disadvantages of the conversion, and in particular the postponement of the date of repayment. There is nothing on the petitioner''s side which in my judgment even begins to meet this evidence.
In Sandvik Asia Ltd., (supra), petitioner company proposed reduction of share capital by paying off/returning to non-promoter holders of equity shares at the rate of Rs. 8.50 per share on the face value of Rs. 100/-. The promoters'' group which had 95.54% of equity supported resolution at the EGM but six members opposed the reduction as discriminatory. The company Judge dismissed the petition under Sections 77A, 100 and 301 of the Act observing as under.
...the basic issue in the instant case is that amongst the paid-up equity shareholders themselves, there are two distinct groups in the sense one belonging to the promoters group and the other of non-promoters group. If that be so, the meeting ought to have been convened separately for the non-promoters group otherwise the meeting would be rather absurd and would result in injustice. Over & above, in the instant case, the minority shareholders of 4.46% were not given any option under the proposal. By a particular date if they do not accept the offer of Rs. 850/- per share, in any event, they will have to leave the Company and they will be paid Rs. 850/- per share. In fact, as rightly pointed out by Mr. Dwarkadas referring to the aforesaid judgment of the English Court In Re Denver Hotel Co. (1893) 1 Ch. 495, even a single minority shareholder is entitled to oppose, and if the Court finds the scheme to be unjust, the Court should not confirm the said reduction of share capital. Even with regard to the judgment of High Court in the case of SEBI v. Sterlite (referred to above) wherein it was a scheme u/s 391 read with Section 100 of the Companies Act, in that context the Court held that there was no necessity to buy back only u/s 77A of the Companies Act.... Therefore, the promoters group could virtually bulldoze the minority shareholders and purchase their shares at the price dictated by them, which'' Mr. Dwarkadas contended, is totally unfair and unjust.
The judgment of learned Company Judge in Sandvik Asia Ltd., (supra) was assailed in appeal as Sandvik Asia Limited v. Bharat Kumar Padamsi 2009 (4) Bom LR 1421. The Division Bench allowed the appeal and approved the resolution for rejection of paid up equity share capital as proposed by majority. A reference was made to BAT Finance (supra), Poole v. National Bank of China Limited (1907) AC 229 (HL) and Ramesh B. Desai (supra) and observed as follows.
In our opinion, once it is established that non-promoter shareholders are being paid fair value of their shares, at no point of time it is even suggested by them that the amount that is being paid is any way less and that even overwhelming majority of the non-promoters shareholders having voted in favour of the resolution shows that the court will not be justified in withholding its sanction to the resolution. As the Supreme Court has recognised that the judgment of the House of Lords in the case of British and American Trustee and Finance Corporation Ltd. is a leading judgment on the subject, we are justified in considering ourselves bound by the law laid down in that judgment. As we find that there is similarity in the facts in which the observations were made in the judgment in the case of British & American Trustee and Finance Corporation, we will be well advised to follow the law laid down in that case. In our opinion, therefore, the learned single Judge was in error in declining to grant sanction to the special resolution.
(emphasis supplied)
In Ramesh B. Desai (supra), nine (9) shareholders including Ramesh Desai filed Company Petition No. 35 of 1988 u/s 155 of the Act for rectification of register of M/s. Sayaji Industries Limited (SIL). Vadilal Lallubhai Mehta, who was the Chairman and Managing Director of the company had two sons, namely, Bipinbhai and Suhasbhai. Vadilal was also having controlling interest in other companies. By virtue of Memorandum of Understanding (MoU) among the members of the family of Vadilal - two sons and four daughters - Bipinbhai was entrusted with management of SIL and M/s. C.V. Mehta Pvt Ltd., (CVMPL). Suhasbhai was entrusted with management of M/s. Industrial Machinery Manufacturers Pvt. Ltd., M/s. C. Doctor and Company Pvt. Ltd., M/s. Mehta Machinery Manufacturers Pvt. Ltd., and M/s. Oriental Corporation Pvt. Ltd. Bipinbhai was to deposit about Rs. 40,00,000/- with CVMPL to be paid to Suhasbhai towards his debt and it was treated as a consideration for getting controlling interest over SIL and CVMPL. Bipinbhai did not arrange the funds and he could not get control and management of SIL and CVMPL in January 1982 as contemplated under MoU. Therefore modified MoU was executed in November 1982 providing that Bipinbhai would pay entire amount in two instalments. It was agreed that on payment of Rs. 20,00,000/-, the control and management of SIL would be transferred to him by making transfer of 13,000 shares in his name and balance amount of Rs. 19,00,000/- would be deposited with CVMPL within 24 months for transferring 9,000 equity shares held by CVMPL in SIL. It was also agreed that Bipinbhai was not in a position to pay or deposit Rs. 20,00,000/- without which he could not have got the controlling interest in SIL. It is alleged that Bipinbhai devised a scheme whereunder SIL paid an amount of Rs. 20,00,000/- to M/s. Santosh Starch Products, which in turn paid the said amount to Bipinbhai and his family. This amount was transferred to CVMPL for getting control over SIL. Ramesh Desai and others alleged that funds of the company are used by Bipinbhai in paying amount to CVMPL for acquiring SIL. It was alleged that Bipinbhai devised the scheme whereunder the funds of SIL were used for acquiring the shares of the company in violation of Section 77(2) of the Act. While the company petition was pending, Bipinbhai and another moved company application to dismiss company petition on the ground that the same was barred by limitation. The same was allowed by the Company Judge and in appeal the Division Bench confirmed the same, aggrieved by which the matter was carried to Supreme Court.
Before the Supreme Court, it was contended that as the appellants have taken the plea of fraud, question of limitation was not begin to run till the date petitioners discovered fraud and got knowledge of the same. While considering this question, Supreme Court made the following observations.
The vexed question of the legality of the purchase by a limited company of its own shares was set at rest by the decision of the House of Lords in Trevor v. Whitworth (1887) 12 AC 409, since which it has been clear law that a limited company cannot purchase its own shares except by way of reduction of capital with the sanction of the court, (see Buckley on the Companies Act - 14th edn. p.1499). In the same decision it was also held that even express authority in the memorandum to the contrary was unavailing. The main reasons for this prohibition were that such a purchase could either amount to "trafficking" in its own shares, thereby enabling the company in an unhealthy manner to influence the price of its own snares on the market, or it would operate as a reduction of capital which can only be effected with the sanction of the court and in the manner laid down in the statute (See Palmer''s Company Law - 23rd edn. - p. 440). In the Guide To The Companies Act by A. Ramaiya (16th edn. p.951) apart from Trevor v. Whitworth (supra), British and American Trustee and Finance Corporation v. Coupler 1894 AC 399, has also been referred as a leading authority on the subject. Reference has also been made to several decisions rendered by the superior courts in Australia and New Zealand wherein it has been unequivocally held that "a transaction which upon examination can be seen to involve a return of capital, in whatever form, under whatever label, and whether directly or indirectly, to a member, is void". It is, therefore, well settled legal principle that any valuable consideration paid out of the company''s assets will make a transaction amounting to a purchase and, therefore, invalid.
(emphasis supplied)
From the above decided cases, it may be taken as fairly well settled that the company can always reduce its capital by any of the methods enumerated and formulated by law including reduction of share capital by purchasing its own shares. Though reduction of capital by the company is by way of paying off the excess capital at a determined price, which is fair and non-discriminatory. Even if such reduction of capital by purchase of the shares had been initiated by majority shareholders, which necessarily includes promoters'' group, the same cannot ordinarily be disapproved only on that ground.
In the case of Rockwool, when this Court granted its approval in C.P. No. 33 of 2006, this Court ensured procedural compliance as well as compliance with substantive law. There is evidence on record to show that when EGM was convened by Rockwool, majority shareholders voted in favour of special resolution. The allegation made by Rockwool that applicants were present in the EGM either personally or through their proxies remains unrebutted. Therefore before filing company petition before this Court, required procedure was followed. After this Court ordered publication of notice, no objections were received. The applicants who appeared to have sought information from Rockwool did not bother approaching Court to raise objections. No grounds are made out to review the order passed by this Court earlier.
However this Court is of considered opinion that certain vital aspects concerning buyback of shares or reduction of capital need to be revisited. Before doing so, it needs to be clarified that the registration of the minute as confirmed by the Court with the RoC by itself does not bar the Court in reexamining the scheme in appropriate case. Section 392(1)(b) of Companies Act does not leave any doubt that where the High Court makes an order sanctioning a compromise or an arrangement, it may at any time thereafter can give directions in regard to any matter or make such modifications in the compromise or arrangement for working of compromise or arrangement. The argument that the registration of the Minute for reduction of the capital with the RoC renders it irreversible, is therefore misconceived.
A century ago, the Corporate Law had been that a company can never purchase its capital or shares by utilizing its funds. As one business model came to be replaced by another business model and corporate financial management techniques are perfected with the aim of protecting the interest of creditors (because the shareholder have limited liability and the creditors have to look to the assets of the company to secure their loans), the classical principal came to be relaxed. That is the stage when we have the leading authority in common law jurisdiction rendered by House of Lords in Trevor v. Whitworth (supra), which received imprimatur in BAT Finance (supra). When the power of the company to reduce the share capital which is in excess by extinguishing or without extinguishing paying off, the Courts necessarily started exercising strict vigil in matters brought before them for confirmation of the Minute for reduction of share capital. It is no doubt true that the requirement of confirmation by the Court of the Minute of the share capital is considered to be sufficient safeguard to minority/non promoter group of shareholders against any unfair attempts by majority/promoter group of shareholders to divest the former of their legitimate rights in the company.
The Court besides assuming the role of protector of minority shareholders, invented three tests, which are: in every case of reduction of capital the burden lies on the majority to prove that the special resolution always ensures class rights, that the majority acted in good faith ensuring a fair and non-discriminatory dealing of the minority and that the burden of proof to show the scheme is fair and protect class rights always lie with majority. In addition to this law also - by fiction; assumed that majority ensured the class rights and the requirement of Court''s confirmation of the Minute guaranteed fairness to minority/non-promoter group of shareholders. These principles are also found in Section 102 of Companies Act. In modern times, entities incorporated offshore with trans border operations and global dealings with sole aim of accumulating profits for the benefit of the promoter groups mainly are coming into existence in plenty. In the case of Rockwool one shareholder AIM with more than 90% controls and manages the company. AIM is not a company incorporated in India and it is a company incorporated in Mauritius and its holding company is Dubai based. If the petitioners'' apprehension is true in one go, taking advantage of the Corporate procedure for the same, AIM got rid of all small investors with cumulative stake of more than 7% by following route of reduction of capital (not buyback, which is more than advantageous) and reduced small investors to non-entity divesting them of their rights in the company. A foreign company therefore to obtain total control and management of a company, which was initially promoted by Indians, can successfully use the present procedure. In other words, a company that achieved high growth and high net-worth and in a position to share its profits among all the small investors can go into the hands of few individuals or a group helping them to amass wealth. Is it in tune with the Indian Constitutional values so loudly proclaimed in Preamble and Parts III & IV of Constitution of India.
In National Textile Workers'' Union and Others Vs. P.R. Ramakrishnan and Others, a Constitution Bench of Supreme Court considered the question of the right of workmen of a company to appear and oppose the petition for winding up of the company. The Supreme Court categorically laid down that workers of a company are entitled to appear at the hearing of the winding up petition whether to support or oppose it so long as no winding up order is made by the Court and that they have locus to appear and be heard in the winding up petition either before winding up petition is admitted or after order for advertisement is made. If winding up order is passed, they would also be entitled to prefer an appeal. In that context, Justice Bhagwati (as he then was) explained the modern concept of ''company'' as follows.
It is now accepted on all hands, even in predominantly capitalist countries, that a company is not property. The traditional view that the company is the property of the shareholders is now an exploded myth. There was a time when a group controlling the majority of shares in a company used to say: "This is our concern. We can do what we like with it." The ownership of the concern was identified with those who brought in capital. That was the outcome of the property-minded capitalistic society in which the concept of company originated. But this view can no longer be regarded as valid in the light of the changing socio-economic concepts and values. Today social scientists and thinkers regard a company as a living, vital and dynamic, social organism with firm and deep-rooted affiliations with the rest of the community in which it functions. It would be wrong to look upon it as something belonging to the shareholders. It is true that the shareholders bring capital, but capital is not enough. It is only one of the factors, which contributes to the production of national wealth. There is another equally, if not more, important factor of production and that is labour. Then there are the financial institutions and depositors, who provide the additional finance required for production and lastly, there are the consumers and the rest of the members of the community who are vitally interested in the product manufactured in the concern. Then how can it be said that capital, which is only one of the factors of production, should be regarded as owner having an exclusive dominion over the concern, as if the concern belongs to it? A company, according to the new socio-economic thinking, is a social institution having duties and responsibilities towards the community in which it functions.
Justice Chinnappa Reddy, who wrote concurrent opinion observed as under.
Private corporations hitherto regarded as bastions of private property and leaders of capitalist economy are undergoing transformation and, are surely acquiring the character of public institutions. The public interest element is now quite a predominant factor in the Companies Act itself. There are several provisions in the Companies Act, which take notice of the element of public interest. There are other enactments like the Monopolies and Restrictive Trade Practices Act, the Industries (Regulation and Development) Act, under whose provisions, the activities of a company may be scrutinised in the public interest. There are a host of other legislations involving employment and welfare of labour, to which the managements of companies are subject. The transformation of a company''s character from private to public is going on right before our eyes even as the institution of private property is also losing its diathesis.
Therefore in protecting the rights of workmen/employees/shareholders/promoters and National interest, it would not be sufficient for Court only to adhere procedural and substantive aspects of a scheme of arrangement or compromise. The scrutiny must be beyond the provisions of the corporate law. State cannot ignore the preamble of the Constitution, which assures to secure a Socialist State to citizens, benefits under Articles 38 and 39 and other directive principles. The Court must not lose sight of the fact that Regulatory Bodies have been established under the Acts of Parliament like SEBI to safeguard the interests of the investors. All companies offering shares to public are required to allot required quantity to retail investors. In addition to this, retail investors are provided investor friendly methods, procedures and safeguards for buying and selling securities and prevent fraud by overenthusiastic corporate brokers. All this would be rendered illusory if promoters - with a view to bypass small investors; come forward with petition to reduce share capital. In every case, it cannot be assumed that majority shareholders protect and safeguard class rights. The majority shareholders if they belong to one group or family can never be interested in safeguarding and protecting the class rights of minority. In such cases, all aspects of the matter have to be gone into. Complying with Delisting Regulations, Buyback Regulations and other Regulations of SEBI as well as provisions of Companies Act may not by themselves be sufficient to grant approval to special resolution for reduction of share capital. When such special resolution is engineered by the promoter group controlling majority shareholders and it is found that such reduction is intended only to deny rights of minority shareholders or small investors, the Court can even pass orders rejecting confirmation of the minute and/ or modifying the scheme of arrangement for reduction of the capital, in such a manner that small investors derive the benefit expecting which they invested their money in the company.
In this case, this Court examined the Auditor''s report, various steps Rockwool has taken from time to time and the way the applicants herein went on purchasing shares during May 2005 to February 2006 at higher price and they do not lend any support to the allegation that Rockwool played fraud on the Court. The plea of fraud is, therefore, rejected.
In the result, for the above reasons, these applications fail and are accordingly dismissed. No costs.