CHUNNILAL ONKARMAL Vs. HUKOMCHAND MILLS LTD

JUDGEMENT

(1.) THIS is a petition by a private limited company holding shares in the first respondent-the Hukumchand Mills Ltd-which gives it a controlling interest for all practical purposes but not sufficient for getting a special resolution passed on its own strength in an extraordinary meeting of the general body of the shareholders. The respondent No. 2 Sir Sarupchand private Ltd. retains 25 per cent of the shares in the Hukumchand Mills Ltd. though apparently it is not represented in the Board of Directors. The background is that Sir Sarupchand Hukumchand Private Ltd. had originally full controlling interest over respondent No. 1,-the latter in fact named after the senior member of the Sir Sarupchand Hukamchand Private Ltd. However, in course of time the present petitioner and their associates-names of some of whom have been set out in the petition had been acquiring more and more shares so that at present the respondent No 2 has been reduced to the status of the holder of a minority of shares though not such minority as it cannot block the passing of a special resolution in an extraordinary meeting of the shareholders. This is mentioned because it goes a long way to explain the attitude of respondent No. 2 in the dispute that has arisen. The real grievance of the petitioner is that the respondent No. 2 has been blocking the passing of a special resolution for the amendment of the Articles of Association which is necessary to enable the National Industrial Development Corporation ltd. (a Government of India owned undertaking) getting one or two of its nominees in the Board of Directors so as to guarantee that its stake as a creditor is not jeopardized. The petitioners assert that it had been agreed before the taking of a big loan from the National Industrial Development corporation that it should have one or two directors of its own in the Board of directors without share holding qualification, who, further will not be liable to retirement after the prescribed period. A special resolution sought to be passed in a meeting for this purpose was voted against by the representative of the respondent No 2 and that has created a deadlock. To be sure, the petitioners have been for the time satisfying the Development Corporation by managing to allot some of their own shares to its nominees; but this is not a very satisfactory arrangement from the view-point of the Corporation because such shareholders are not there as of right as its nominees but by the sufferance of the petitioners' group and their membership in the Board of Directors is precarious.

(2.) THE events that have led to the present impasse are the following: as long ago as 1958 the Hukumchand Mills Ltd. decided to take a loan at that time working out as thirty lakhs from the National Industrial Development corporation for the modernization of its plant, machinery etc. and bring it up-to-date. In those days the day to day conduct of affairs were in charge of a managing agency which had been coming on from before entitled hukumchand Mannalals (a partnership.) In those days it appears also that the Hukumchand group whose shares were owned by the respondent No. 2 had more shares and were represented in the Board. In a meeting of the board a resolution was passed authorising the taking of the loan and further deputing Shri Mannalal Onkarmal to conduct the negotiations on behalf of the Company with the Corporation and give them all the guarantees wanted. Accordingly the loan was incurred and applied to the purpose for which it had been raised. It appears also that some more loans have already been raised or happen to be under proposal either from this Corporation or similar financing agencies owned by the Central or the State Government. As usual the factory was mortgaged to the creditor the clause being-

(3.) ACCORDINGLY in time the Board of Directors proposed that the articles should be amended. The election of Directors is now governed by article 113. The proposed Article is 113 (a) to be inserted immediately after the present Article 113. It has been set out at page 10 of the Petition being already part of the resolution of the Board's wanting on 1-5-1962. There is nothing in it which has not been called for by the conditions of the loan from the Corporation which have already been set out above. Since this is an amendment of the Articles of Association an extra ordinary meeting was called. In that meeting the Sir Sarupchand Hukumchand Private Ltd. were represented by one of its members who had proxies authorising him to act on behalf of all these particular share-holders holding as already noted a total of 35 per cent shares. When the special resolution was put to vote the respondent No. 2 voted against it and as already noted the holding of the petitioners' group not being sufficiently large it was voted out. The company accordingly found itself in a difficult situation viz a viz the Corporation from whom it had taken a large loan on a distinct understanding that two of its nominees would be taken on the Board of Directors without share qualification and liability to retire on rotation. For the time being the petitioners' group who have the controlling interest in the Board have met this requirement halfway in the manner already set out. Accordingly the creditor Corporation is not asking for repayment or creating any other difficulty, but obviously it would very much like that in time the agreement is implemented in its own terms giving more permanency and better status to its nominee directors than is possible under the present arrangement which in any event is on the sufferance of the petitioner group in the Board.