Rolta India Ltd. . and another vs Venire Industries Ltd. and others

Judicial Analysis Court Copy Headnote Facts Arguments Court observation

1999 Supreme(Bom) 841

IN THE HIGH COURT OF BOMBAY
Y.K. Sabharwal, C.J. S.H. Kapadia, J.
Rolta India Ltd. another..... Appellants.
Versus
Venire Industries Ltd. others..... Respondents.
Appeal No. 1038 of 1999 in Notice of Motion No. 2696 of 1999 in Suit No. 5010 of 1999 with Notice of Motion No. 2696 of 1999 in Suit No. 5010 of 1999, decided on 29-10-1999.
Advocates appeared :
Aspi Chinoy with Shyam Divan with Farzad Damania i/by Kanga Co., for appellants.
R.A. Kapadia with V.L. Desai, for respondents.

Headnote:Section 252-Company law - Pooling agreement-Enforceability - Scope-Pooling agreement cannot be used to supersede statutory rights given to Board of Directors to manage company.-Pooling agreement is an agreement between two or more share-holders which generally provides that in exercising any voting rights, the shares held by the shareholders shall be voted as provided therein; it is a contract to the effect that the shares held by them shall be voted as one single unit. The shareholders bind one another to vote as they mutually agree. In a pooling agreement, each shareholder retains sole ownership of shares binding himself only to vote for a specific person or in a certain way. These agreements are enforceable because the right to vote is a proprietary right. The right to vote may be aided and effectuated by a contract. Generally, pooling agreements are thought of in relation to control of private companies and smaller public companies. A pooling agreement may be utilised in connection with the election of Directors and shareholders Resolutions where shareholders have a right to vote. However a pooling agreement cannot be used to supersede the statutory rights given to the Board of Directors to manage the company, the underlying reason being that the shareholders cannot achieve by pooling agreement that which is prohibited to them, if they are voting individually. Therefore, the power of the shareholders to unite is not extended to contracts, "hereby restrictions are placed on the powers of Directors to manage the business of the Corporation. It is for this reason that a pooling agreement cannot be between Directors regarding their powers as Directors. Directors are fiduciaries of the company and the shareholders. It is their duty to do what they consider best in the interest of the company. They cannot abdicate their independent judgment by entering into pooling agreements. The company works through two main organs viz., the shareholders and the Board of Directors. The Courts have been slow to enforce pooling agreements. The pooling agreements, which are enforced are concerning only the right to vote of the shareholders. The Courts have not been granting specific performance of the agreements whereby the powers of the Directors stand denuded. The shareholders cannot infringe upon the Directors fiduciary rights and duties. Even Directors cannot enter into an agreement, thereby agreeing not to increase the number of Directors when there is no such restriction in Articles of Association. The shareholders cannot dictate the terms to the Directors, except by amendment of Articles of Association or by removal of Directors.

JUDGMENT - Y.K. SABHARWAL, C.J.:---The appellants are plaintiffs in the suit. They are aggrieved by the impugned Order dated 17th August, 1999 passed by the learned Single Judge declining to grant to them ad-interim order of injunction restraining the defendants from taking steps pursuant to or in implementation of the resolutions in respect of the allotment of rights shares and/or from appointing any Additional Directors on the Board of Directors of the First defendant - Company.

2.On the request of learned Counsel for the parties, considering the facts and circumstances of the case, we have taken up for decision the application filed in the suit for grant of interim injunction, (Notice of Motion No. 2696 of 1999) instead of only considering the question of grant of ad-interim injunction. In order to appreciate the rival contentions, facts, in brief, may be noticed as follows :---

3.Plaintiff No. 2 (Kamal K. Singh) is the Chairman of plaintiff No. 1-Company (for short 'RIL'), defendant No. 2 (Chetan K. Singh) is the Chairman and Managing Director of defendant No. 1-Company, which has three Directors on its Board of Directors. Defendant No. 3 is sought to be appointed as an Additional Director. Chetan is younger brother of Kamal. Defendant No. 1-Company, which was originally known as "Rolta Motors Ltd." (for short 'RML') was incorporated on 19th May, 1983. Kamal was the Chairman and Chetan was the Director of the said Company. A Memorandum of Understanding (MoU) dated 19th April, 1991 was executed between the two brothers, under which the elder brother Kamal, his wife and family trust, which held 10551 shares equivalent to 30% of the issued capital of RML, agreed to transfer, without any monetary consideration, the said shares in favour of Chetan. RIL owned 40% of the issued capital of RML. The MoU, inter alia, provides that, till RIL holds share capital in RML of the face value of Rs. 10 lacs, it will continue to have a representative on Board of Directors of RML and that the number of Directors on the Board of Directors of RML shall not exceed three, out of which two shall be the nominees of younger brother and one shall always be the nominee of RML. The younger brother shall also procure release of the Guarantees given by the RIL and give a Counter Guarantee/Indemnity to the plaintiffs against any claim by the bank. It also provides that till RIL holds shares of face value of Rs. 10 lacs, the younger brother and his family members would not dispose of the shareholding to any outsider. Further, the younger brother shall also change the name of the company from RML and use any other name without word 'Rolta' and shall also take steps for shifting the Registered Officer of RML from the address of RIL at Mumbai. The requisite Resolutions were passed and other documents, including Counter-guarantee/Indemnity Bond and Undertaking were executed in implementation of the MoU, by defendant No. 1 and 2. Resultantly, the 30.50% shares of Kamal were transferred in favour of Chetan.

4.The Meeting of Board of Directors of RML held on 27th August, 1992 has noted the contents of the MoU in the minutes which further record that the Managing Director, Chetan Singh, stated that the Board of Directors of RML shall not have any authority or discretion to change or modify the terms of the MoU, unless and until such changes or modifications are approved personally by Kamal Singh. Between 1992 and 1997, one S.L. Baluja was the nominee-Director of RIL on the Board of Directors of defendant No. 1.

5.It seems that the working of defendant No. 1-Company went on smoothly till middle of 1997. The differences between the two brothers started somewhere in middle of 1997. Defendant No. 1-Company, in its meeting held on 25th June, 1997, decided to increase the paid-up capital from Rs. 50 lacs to Rs. 100 lacs by issue of 50,000 equity Rights shares on pro-rata basis to the shareholders. In this meeting, it was, inter alia, decided to offer to RIL 20036 shares on

Click Here to Read the rest of this document

1999 Supreme(Bom) 841

Cases Referred (2)