N R MURTY Vs. INDUSTRIAL DEVELOPMENT

JUDGEMENT

(1.) THIS is an application under Sections 397 and 398 of the Companies Act of 1956 (hereinafter referred to as "the Act") by a shareholder of a public limited company - -M/s. East Coast Breweries & Distilleries Ltd. - -having its registered office at Cuttack.

(2.) THE short facts relevant for the adjudication of the dispute as pleaded are these: One Sri Nitya Kishore Mohapatra (hereafter referred to as " the promoter " or " the managing director " as required in the context) conceived of a project for setting up of a brewery and distillery as early as 1967. A feasibility report of the project was prepared by Messrs. Engineers (India) Ltd. - -a Government of India undertaking - -and in due course a public limited company by name East Coast Breweries & Distilleries Ltd. (opposite party No. 2 herein) was proposed to be formed. The Government of India issued the Letter of Intent on Febuary 11, 1969. The company was incorporated by the Registrar of Companies, Orissa, on 15th of April, 1969. The promoter had in the meantime purchased certain lands off the Paradeep Port with his own funds for the purpose of setting up the factory. The company was to have a share capital of Rs. 75 lakhs divided into, seven lakh fifty thousand equity shares of ten rupees each. The promoter, his friends and relations purchased shares of the face value of seven and a half lakhs which were fully paid up. He started contacting financial institutions like the United Commercial Bank (opposite party No. 3 - -hereafter referred to as " the UCO Bank ") and the Industrial Devlopment Bank of India (opposite party No. 4 - -hereafter referred to as "the IDBI") and was assured of their financial participation in the project. He also turned to the State Government of Orissa and the Industrial Development Corporation of Orissa Ltd. (opposite party No. 1 - -hereafter referred to as " the Corporation"). On May 13, 1969, the company requested the Corporation to underwrite shares. On June 19, 1969, the Corporation informed the company that the State Government was prepared to participate in the equity. In the course of negotiation, on February 7, 1970, the company intimated the Corporation of its willingness to buy back the shares within nine years of the company going into production at the rate of Rs. 7 lakhs per year and requested the Corporation to underwrite. On August 10, 1970, the company requested for early completion of steps for underwriting on the ground that others were coming into the field of production and the company would have to face competition adversely in the market if there was further delay in the setting up of the factory and commencement of production. In August, 1970, the company impressed again upon the Corporation the need for quickly finalising matters, but, in October, 1970, the Corporation asked for a fresh feasibility report from Messrs, Engineers (India) Ltd. and early in January, 1971, the said report came. On February 17, 1971, the Corporation decided to underwrite shares to the tune of rupees twenty -four lakhs, but it is claimed that this decision was never communicated to the company. The company approached the State Government for State aid under the Bihar and Orissa State Aid to Industries Act of 1923 by application dated March 23, 1971, On 27th April, 1971, the State Government informed the Director of Industries of its decision to participate in the shares of the company and indicated the terms on which such participation was envisaged. On August 19, 1971, the Corporation's board of directors agreed to underwrite shares of the face value of Rs. 24 lakhs and on December 28, 1971, the State Government agreed to invest Rs. 38 lakhs as indicated in their earlier letter to the Director of Industries ; but Rs. 33 lakhs was to be under the Bihar and Orissa State Aid to Industries Act and Rs. 5 lakhs was to be processed through the Corporation. On January 4, 1972, the Corporation informed the company of its agreement to participate in the equity to the tune of the aforesaid Rs. 5 lakhs. On April 3, 1972, the underwriting agreement was concluded by offer and acceptance of the terms between the Corporation and the company. During the months of May and June, 1972, the public issues were made. It had been expressly understood and agreed to by and between the parties that in the event of the failure of the public to subscribe to the issue, the Corporation as underwriter would hold the shares as trustees and transfer the same to the promoter, his associates, friends and nominees within a period of five years from the date the factory goes into production. Due to adverse financial circumstances and slump in the share market when the public issue was made, public subscription was not up to expectation and the Corporation came to hold the equity shares worth rupees twenty -four lakhs as underwriter. Under the underwriting contract, the Corporation was obliged to pay the full value of the shares within the time stipulated. The Corporation, however, committed long defaults in the payments of the calls.

(3.) THE loan from the IDBI was to carry interest of 12 per cent, per annum while the rate of interest in respect of the loan from the UCO Bank was 18 per cent, per annum. The loan from the UCO Bank, therefore, worked out considerable financial strain on the company. On account of the term loan from the IDBI not being available, the company was again forced to borrow a further bridging loan of Rs. 25 lakhs from the UCO Bank till the loan from the IDBI was available. The bridging loan also carried a higher rate of interest. The promoter arranged loans from Messrs. Vijaya Bank Ltd. on a deferred payment guarantee basis for purchase of plant and machinery, but as under the existing agreement of the company with the IDBI such loan was to be obtained upon prior approval of the IDBI, the promoter pressed upon the Corporation to complete the agreement with the IDBI and obtain IDBI's consent for the arrangement with the Vijaya Bank Ltd. The Corporation paid no heed to such requests and, to meet the financial stringency, arranged a loan of Rs. 18 lakhs to the company as a short -term loan at 18 per cent. interest per annum.