BUSINESS LAW ASSIGNMENT

Case Analysis

Case 1 : Gordon Woodroffe Ltd. V. Trident Investment and Portfolio Services P. Ltd. Citation: [1994]79CompCas764(CLB) Court: Company Law Board Year: 1993 Parties involved and their representatives: Gordon Woodroffe Ltd (Plaintiff), T. Raghavan, Senior Adv. and King and Patridge and K. Gunasekaran and S.N. Mookherjee, Advs. Trident Investment and Portfolio Services P. Ltd. (Defendant), R. Shankaranarayanan, Adv. and S. Gurumurthy and A.S. Varadarajan, Chartered Accountants Facts: 1. On March 30, 1992, Trident lodged with GWL instruments of transfers in respect of 2,67,725 equity shares constituting 6.84 percent of the paid-up capital in GWL for registration in favour of Trident. 2. Along with the transfer documents, Trident also filed a declaration under Section 187C of the Companies Act, 1956 (hereinafter referred to as "the Act"), indicating therein the name of Tracstar Investment Private Limited as the holder of beneficial interest as absolute owner of these shares.

3. The board of directors of the company considered the transfers in their meeting held on May 26, 1992 to refuse the registration of transfer on the following grounds : a. the transfer of the said securities is in contravention of the Benami Act ; b. the transfer of the said securities in favour of Trident is likely to result in such change in the composition of the board of directors of the company which would be prejudicial to the interest of the company and/or public interest. 4. The GWL had become a sick company within the meaning of the provisions of the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA), and the Board for Industrial and Financial Reconstruction (BIFR) has framed a scheme for its revival.

5. Shaw Wallace and Co. Ltd. has provided provided financial assistance of over Rs. 4 crores by way of equity, interest free loans, provision of guarantee, etc.

6. SWC is reported to be under the control of Shri M. R. Chabaria (MRC).

The Issues Involved: 1. According to Shri Raghavan, Senior Advocate, appearing on behalf of GWL, the registration of impugned shares would be against the provisions of the Benami Transactions (Prohibition) Act. 2. Shri Raghavan pointed out that the holding of Tracstar is already 24.91 percent and, therefore, any further registration of shares in its name would go beyond 25 percent as stipulated in Section 372 of the Act. 3. Shri Raghavan advocated that the violation of the provisions of Section 372 of the Act and the provisions of clause 40A(a) and (b) of the listing agreement squarely fall within Section 22A(3)(b) of the SCR Act and as such the board could have never given its approval for registration of transfer of the impugned shares. 4. Shri Gurumurthy stated that Tracstar wanted the registration in the name of Trident so that the shares were to be treated as marketable securities and Trident to act as agent of Tracstar. 5. Shri Raghwan pointed out that the minutes of a particular meeting are confirmed only in the next meeting and it is inconceivable that within two days the minutes could be confirmed and taken on record. 6. The question, therefore, arises for determination is whether the five directors who allegedly owed allegiance to MRC in view of their being employees/consultants of SWC were interested directors within the provisions of either Section 299 or 300. 7. According to Trident, the minutes of the meeting dated May 26, 1992, have been tampered with in the minutes book, as according to it, the minutes book contained the proceedings as per annexure 'S'.

Articles/sections relevant to the case: Companies Act, 1956 - Sections 43A, 187C, 193, 194, 299, 300 and 372; Securities Contracts (Regulation) Act, 1956 - Section 22A(3) and 22A(4); Benami Transactions (Prohibition) Act, 1988

Analysis of the case 1. Any further registration in name of Tracstar would make it a Section 43A-company and it will not be covered under the exemption as per Sub-section (14) of Section 372 nor can it avail of the benefit of being an investment company. The very purpose of getting the shares purchased by Tracstar in the name of Trident is only to avoid the contingency of coming under Section 372 of the Act. 2. Shri Raghavan raised another objection that the proposed transfer was in violation of the provisions of Section 40A(a) and 40A(b) of the listing agreement which, with effect from May 30, 1990, is one of the grounds under which registration can be refused under Section 22A of the SCR Act.

Discussion on the case: It is clear that from a gap of nearly 13 percent between the MRC holding and the KRC holding, the acquisition of 6.84 percent would narrow the margin to 7 per cent. This narrow margin is to be viewed in the context of a large public holding of nearly 32 per cent. So in this scenario we have no doubt that the board of directors was right in coming to a conclusion that the registration of the impugned shares in favour of Trident was likely to result in a change in the composition of the board of directors.

Conclusion:

1. The board of directors was justified in apprehending a change in the composition of the board of directors in the event of registration of transfer in favour of Trident. 2. The board's apprehension about the interest of the company being affected by the likely change in the board of directors was wellfounded. 3. Tracstar is subject to the provisions of Section 372. 4. Clause 40A(b) is not applicable in the case of acquisition of the impugned shares by Tracstar as it already holds more than 10 percent voting rights in GWL. 5. Therefore, the transfer of the shares should not be registered by the company.