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Gouri Shankar Kayan & Others v/s East India Investment Company Pvt. Ltd. & Others

    Apot No. 421 of 2005, C.P. No. 58 of 2004 & APO 395 of 2005

    Decided On, 24 August 2005

    At, High Court of Judicature at Calcutta

    By, THE HONOURABLE MS. JUSTICE INDIRA BANERJEE

    For the Appellants: Sudipto Sarkar, S.N. Mukherjee, Sanjib Banerjee, Advocates. For the Respondents: R1, R2, Anindya Kr. Mitra, Moloy Ghosh, P.C. Sen, Jishnu Choudhury, R3, R19, Ranjan Bachawat, Subhojit Roy, R20, R26, R29, Jayanta Mitra, Abhrajit Mitra, D. Basak, Advocates.



Judgment Text

Indira Banerjee, J.

1. This appeal u/s 10F of the Companies Act, 1956, is against an order dated 25th April 2005 of the learned Company Law Board, in an application of the Appellants u/s 247(1A) read with Section 250 of the Companies Act, 1956 refusing to direct the Central Government to appoint an Inspector and/or Inspectors to investigate into the affairs of Birla Corporation, hereinafter referred to as the company, as regards the membership of the company and other matters relating to the company, for the purpose of ascertaining the true persons who are financially interested in the success or failure of the company or are controlling the company.

2. The Appellants, who admittedly own less than 0.16 per cent of the shares of the company, filed an application in the Company Law Board u/s 247(1A) read with 250 of the Companies Act, inter alia praying for the following orders:

(a) the relevant facts in relation to the shares in the company particularly the ones held by the Respondent Nos. 1 to 28 be enquired into

(b) an investigation be directed on such terms and on such conditions as to this Hon'ble Board may seem fit and proper for obtaining information and ascertaining the true identity of person or persons who are financially interested in the success or failure, whether real or apparent, of Birla Corporation Limited and further, to ascertain the true identity of the person or persons who are able to control or to materially incluence the policy and affairs of the company;

(c) An investigation be directed to ascertain as to whether the provisions of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 have been complied with by the persons now seeking to control or to materially influence the policy and affairs of he company.

In the aforesaid application the Appellants also prayed for an interim order of injunction restr

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aining the Respondent Nos. 1 to 28 from exercising any rights as shareholders of the company including the right to vote or to receive dividends, bouns shares or rights shares.

3. The sole ground for seeking an investigation, as disclosed in the application, in the death of Smt. Priyamvada Devi Birla, who had controlling interest in the Respondent Nos. 1 to 28, who jointly hold 63.8 per cent of the shares of the company and disputes with regard to alleged wills allegedly executed by her. There is no allegation of mismanagement of the company, of siphoning of funds or of the company being run in a manner against its own interest, against the interest of its share holders or against public interest.

Some of the averments in the petition filed before the Company Law Board are extracted herein below:

13. After the death of Madhav Prasad Birla and till her death on July 3, 2004, Smt. Priyamvada Birla was the promoter Chairman of the company.

22. ...It appears that the said Lodha is seeking to exercise control over the shareholding of the Respondent Nos. 1 to 19 companies and the charitable societies.

23. In view of the pending proceeding before the Hon'ble High Court at Calcutta and the serious disputes in respect of the two sets of Wills relating to the estate of Smt. Priyamvada Birla, no question arises of any person exercising any control in respect of the shares formerly controlled by Smt. Priyamvada Birla.

28. Such investigation and necessary ancillary orders have been necessitated, inter-alia, inasmuch as substantial change, long term in nature, is being sough to be brought about in the composition of the Board of Directors of the company at the Annual Genera Meeting of the company which has been sought to be convened on September 15, 2004. A true copy of the relevant notice in respect of such Annual General Meeting is annexed hereto and marked 'P-4'.

4. By the order under appeal the Company Law Board dismissed the application, holding that no case had been made out to order an investigation in terms of Section 247(1A) of the Companies Act.

Mr. Sudipto Sarkar appearing on behalf of the Appellant submitted that the principal legal question raised in the appeal in the meaning of the expression 'true persons' in Section 247(1A) of the Act.

According to Mr. Sarkar "determining of true persons" u/s 247 of the Companies Act 1956 requires identification of the ultimate human agencies who are financially interested in the success or failure of the company and who are above to control or influence the policy pf the, company.

Mr. Sarkar further submitted that proceedings under Sections 247 and 250 of the Companies Act are fact finding proceedings and not adversarial in nature. However, whether and to what extent authority u/s 247 or 250 should be exercised in any particular case, gives rise to questions of law.

Mr. Sarkar Submitted that the Respondent companies were all controlled by Sm. Priyamvada Birla, who was died. With the death of Sm. Priyamvada Birla, it is necessary to ascertain who is in control of the Respondent Nos. 1 to 28.

Mr. Sarkar argued that the Company Law Board erred in law in considering it relevant that the Appellants had not demonstrated any change in shareholding of the company or any change in the Board of Directors of the company.

Mr. Sarkar further argued that the Company Law Board had erred in law in recording, as a fact, that the estate of the said deceased was controlling the majority shares in the company and was materially interested in its affairs. Such finding of the Company Law Board was made despite it being recorded in the order that the parties had proceeded on the basis that one Rajendra Singh Lodha was controlling the interest of the said deceased.

Mr. Sarkar submitted that the Company Law Board was not required to adjudicate who entitled to the estate of the said deceased in the company. Even though it appears from the order that the Respondent had accepted that Shri R.S. Lodha was controlling the interest of the said deceased in the company, the Company Law Board proceeded to recorded that it was the estate of the said deceased which was in control of the majority shares of the company and interested in its affairs.

Mr. Sarkar cited the judgment of the Supreme Court in the case of Life Insurance Corporation of India Vs. Escorts Ltd. and Others, where the Supreme Court held that the corporate veil might be lifted where the statute contemplates lifting the corporate veil. Mr. Sarkar submitted that since the statute in this case required piercing of the corporate veil to identify the "true persons", the Company Law Board should either have recorded the identity of the true person or should have directed an investigation for ascertaining the identity of the true persons in control of the majority share of the company.

5. According to Mr. Sarkar the Company Law Board erred in law in holding that the estate of the said deceased was the true person in control of the majority shares in the company and materially interested in the affairs of the company. Neither the estate of any person nor a company nor any other non-human agency can be "true person" within the meaning of Section 247(1A).

6. Mr. Anindya Kr. Mitra appearing for the Respondent Nos. 1 and 2 Mr. P.C. Sen appearing for the Respondent Nos. 3 to. 19 Mr. Ranjan Bachawat appearing on behalf of the Respondent Nos. 20 to 26 and Mr. Jayanta Mitra appearing on behalf of the company all emphatically argued that there was no question of law involved in the instant appeal.

7. Mr. Jayanta Mitra submitted that the Petitioners were in a minuscule minority as shareholders, their shareholding being less than 0.16 per cent. The Respondent Nos. 1 to 28 admittedly hold 63.8 per cent of the shares in the company. The financial institutions and banks hold 11.20 per cent, Mutual Funds 7.76 per cent and Foreign Financial Institutions 5.79 per cent which totals to 89 per cent of the total shares.

Mr. Jayanta Mitra submitted that the Appellants have obviously been set up by members of the Birla family and their associates with the ulterior intent of preventing the Respondent Nos. 1 to 28 from exercising their rights as shareholders of the company and in particular from exercising their right to vote, for it is unbelievable that a group of shareholders with a minuscule percentage of shares should get themselves involved in expensive litigation.

Mr. Jayanta Mitra argued that the fact that the Annexure 'P-2' to the petition before the Company Law Board is a reproduction of Annexure 'A' of the plaint filed by the Birlas in the Calcutta High Court, leads to the inference that the Appellants were set up by the Birlas. Mr. Mitra further submitted that the spokesperson of the birlas had issued statements to the Press stating that they were taking steps for moving the Company Law Board with regard to the company. The advocates engaged on behalf of the Birlas were also present when interim orders were obtained from the Company law Board.

Mr. Mitra submitted that in spite of directions to the Company Law Board, the Appellants chose not to file any affidavit-in-opposition to the application filed by the company before the Company law Board for dismissal of the applications of the Appellants u/s 247 read with Section 250 of the Act. The detailed allegations in the said application, of the Appellants having been set up by the Birlas and their associates, are not controverted.

Mr. Jayanta Mitra next submitted that the Appellants had not made complaint to the Central Government. The Petitioner could not have applied to the Company Law Board without first lodging a complaint with the Central Government.

Mr. Jayanta Mitra finally submitted that there were no reasons at all for directing an investigation into the affairs of the company. The Appellants had themselves proceeded on the basis that Shri R.S. Lodha was in control of the interest of late Priyamvada Birla.

8. Mr. Anindya Kr. Mitra adopted and elaborated on the submissions made by Mr. Jayanta Mitra. Mr. Anindya Mr. Mitra emphaticallh argued that all the parties had proceeded on the basis that Shri R.S. Lodha was in control, as recorded in the order under appeal. That being the position, there was no need for any investigation by appointment of an Inspector for the purpose of identifying the 'true persons' in control of the company.

Mr. P.C. sen emphatically argued that there was no questions of law involved in this appeal. The Company Law Board arrived at the factual finding that there was no case for investigation, in view of the admitted facts as recorded in the order under appeal. The aforesaid factual finding could not be assailed by filing an appeal u/s 10F of the Companies Act.

9. Mr. Ranjan Bachawat pointed out that his clients, that is, the Respondent Nos. 20 to 26 were all societies registered under the Societies Registration Act, 1860 and/or West Bengal Societies Registration Act, 1961 of which Sri Lodha has been Chairman/co-chairman since the lifetime of Sm. Priyamvada Birla.

Mr. Bachawat submitted that there could be no dispute that Sri Lodha has been in control of the Respondent Nos. 20 to 26 since the lifetime of Sm. Priyamvada Birla and has continued in control after her death. The Respondent Nos. 20 to 26 have not transferred any shares in the company after the death of Sm. Priyamvada Birla.

10. It is not necessary for this Court delve into the question of whether the Appellants in the instant case have been set up by the Birlas or any of their associates. this Court need only examine whether the Appellants were competent to approach the Company Law Board under Sections 247(1A) and 250 of the Companies Act, whether their application disclosed any legally sustainable reason for seeking investigation u/s 247(1A) and whether the instant appeal filed by them in otherwise maintainable.

11. As rightly pointed out by Mr. Sanjib Banerjee learned junior counsel appearing with Mr. Sarkar, in his reply to the submission that the Appellants held a miniscule percentage of the shares of the company, there is no prequalification required for making an application u/s 247 or 250 of the Companies Act. Unlike Section 399 which prescribes a qualification for making an application under Sections 397 and 298 of the Companies Act, there are no qualifications for initiating an application u/s 247 and/or Section 250 of the said Act.

There is also nothing in the language of Section 247(1A) to warrant the construction that a person invoking the jurisdiction of the Company Law Board under the aforesaid Section would first have to approach the Central Government and then approach the Company Law Board, if the Central Government did not take action. Such a construction would in effect impose a fetter on the power of the Company Law Board, which the Section does not contemplate.

12. The Principle question of law sought to be raised in this appeal is the meaning of the expression 'true persons' within the meaning of Section 247(1A) of the Act. The question is whether determining 'true persons' require identification of the human agencies, controlling juristic entity or persons.

As rightly submitted by Mr. Sarkar, the question whether the expression 'true persons' in Section 247(1A), requires identification of the human agencies, who control the policy of a body corporate and/or juristic person, is a question of law. The question does not, however, require adjudication in this appeal.

In the case of LIC of India v. Escorts Ltd. (supra) the Supreme Court in effect held that though the corporate veil might be lifted, where statute contemplate, lifting of the veil, or to prevent fraud or improper conduct, lifting of the veil is not permissible beyond the essential requirements of the statute.

13. It is, therefore, axiomatic that in an appropriate case where an investigation u/s 247(1A) might be deemed necessary, the men and women in control of the juristic entity or person would have to be ascertained, for a juristic entity or person is ultimately controlled and run by human agencies. In the instant case, however, the Company Law Board found on facts that no case of investigation had been made out.

Section 247(1A) does not lay down the circumstances in which the Company Law Board might pass orders for investigation into the affairs of the company.

(14) The essential ingredients of Sub-section (1A) of Section 247 of the Companies Act are (i) there should be proceedings before the Company Law Board, (ii) in course of those proceedings, the Company Law Board should form an opinion that the 'true persons' who are or have been financially interested in the success or failure of the company, are different from the persons who appear to be the members of the company, (iii) the 'true persons' who are or have been able to control or materially influence the policy of the company, are different from the persons who appear to be in the control of the company and (iv) a probe into the company's affairs is desirable in the interest of the company itself, and/or in public interest.

15. The sine qua non for passing a order for investigation by appointment of Inspectors in formation of opinion of necessity of such an investigation. There can be no doubt that the opinion might be subjective, but existence of circumstances and/or materials that justify formation by the Company Law Board of prima facie opinion of the necessity of an investigation in the interest of the company and/or in public interest must be demonstrable.

The Company Law Board should not direct a roving fishing investigation at the behest of persons who have some ulterior intent in seeking investigation, for example, to stop the shareholders from exercising their rights as shareholders, including their right to vote, as attempted in the instant case. The power to direct investigation u/s 247(1A) is to be invoked bona fide and in public interest.

16. The application before the Company Law Board does not disclose the public interest which necessitated an investigation. As observed above, no case of mismanagement of the company or of siphoning of funds or any other illegal acts or omission have been made out. The application u/s 247(1A) appears to be based on unfounded apprehensions.

Mr. Sarkar rightly argued that a change in the composition of shareholding is not necessary for direction an investigation u/s 247(1A). The Company Law Board might in course of any proceedings before it direct an investigation provided grounds for such investigation exist, for example, where personal responsibility for any acts or omission may have to be fixed.

In the instant case, however, the Appellants had specifically pleaded that investigation and ancillary orders had been necessitated by the fact that substantial changes, long tern in nature, were being brought about in the composition of the Board of Directors of the company.

It was in the context of ten pleadings of the Appellants, in support of the necessity of an order for investigation, that the Company Law Board observed that there had not been any change either in the share holding pattern of the company or in the composition of its Board of Directors.

17. The death of a shareholder is not, in itself, a ground for an order of investigation u/s 247 and/or Section 247(1A) into true persons in control of the company. Whether or not there is any necessity for an investigation would directly depend on the manner of conduct of the business and affairs of the company, the policies adopted. Commission of wrongful, illegal or fraudulent acts and the life. Allegations of wrongful, illegal or fraudulent acts, or of mismanagement of the company might necessitate orders u/s 247(1A) for investigation, if there were reasons to believe that the true persons financially interested in the success or failure of the company or able to control or materially influence the policy of the company were different from those who were apparently members of the company.

In the absence of any allegations against the company of mismanagement or misappropriation or siphoning of funds or any acts contrary to law, investigation u/s 247(1A) would not be necessary.

18. In any event, as recorded in the order under appeal, both the parties proceeded on the basis, that Sri Lodha was in control. The learned Company Law Board accordingly found that there was no ground for an investigation u/s 247(1A) of the Act.

The learned Company Law Board rightly recorded the finding that the Estate of Late Priyamvada Birla was in control of the majority shares of the company. It was not necessary for the learned Company Law Board to record a finding on the true persons in control of the Estate of Late Priyamvada Birla o to order an investigation for the reasons discussed above, in view of the case made out by the parties.

The observation of the learned Company Law Board that Section 247(1A) could not be invoked, to determine the persons entitled to control the Estate, which was in issue in this Court in its Testamentary Jurisdiction, does not call for interference in Appeal.

There is no question of law which requires decision of this Court in the instant appeal. The appeal is, therefore, dismissed without any order as to costs.

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