LIC.v. Escorts Ltd, (1986) 1 SCC 264

Introduction

Life Insurance Corporation of India (LIC) along with other financial institutions (that held as many as 52% of the total number of shares in the company) issued a requisition to the company to hold an extraordinary general meeting to move a resolution to replace the directors. In this case when this resolution was claimed to be illegal the Court had to decide if shareholders have the authority to issue a requisition notice for the appointment of new Directors.

Facts : LIC.v. Escorts Ltd, (1986) 1 SCC 264

The Government of India (GOI) decided to render incentives to non-resident individuals of Indian origin to invest in Indian Companies for their shares. This was available for the non-resident individuals only after prior the permission and approval by the Reserve Bank of India (RBI).

The objective was to avail the opportunity of the Non-Resident Portfolio Investment Scheme and to invest in Escorts Ltd, an Indian company, Caparo Group Ltd. Designates Punjab National Bank as their authorized dealer and M/s Raja Ram Bhasin and co. as their broker to carry out the process of the investment.

There were Thirteen companies in total out of which twelve companies’, shares were owned 100% by the Caparo Group and 98%of the thirteenth company was owned by the Caparo group.

The company asked for detailed information about the investors and whether the reserve bank of India had permitted them for further investment. Escorts refused to register the transfer of shares.

Life Insurance Corporation of India along with other financial institutions (that held as many as 52% of the total number of shares in the company) issued a requisition to the company to hold an extraordinary general meeting to move a resolution to replace the directors removed.

The Union of India, the Reserve bank of India and the Caparo group Ltd claimed that the requisition for the meeting moved by LIC was arbitrary, illegal, and ultra vires.

Issue

1. Whether LIC had the right to issue the requisition to hold an extraordinary general meeting?

2. Whether shareholders have the authority to issue a requisition notice for the appointment of new Directors?

3. Whether the Reserve Bank of India has the power to give ex-post-facto permission for the purchase of shares in India by a foreign company?

Summary of Court Decision and Judgement

Firstly, the petition was allowed by the High Court of Bombay, which held that the requisition notice issued by LIC is arbitrary and mala fide action taken for collateral purpose and violates Article 14 of the Constitution of India. The Union of India and RBI were not responsible for the action of LIC. The requisition notice was quashed and aggrieved by the judgement. LIC appealed the Supreme Court of India and cross-appeals were filed by Escorts Ltd.

The Supreme Court allowed the appeal by LIC and dismissed the appeal by Escorts Ltd.

It was held:

The action by LIC by issuing a requisition notice for the replacement of nine directors by nominating new Directors is not contrary to the provisions of section 284 of the Companies Act, 1956, nor was it ultra vires and the powers vested with LIC under section 6 of the Life Insurance Corporation was not arbitrary or violative of Article 14 of the Constitution of India.

The financial institutions involved in the case had huge stakes in the working of the company and were of the view that the management did not even choose to consult them or inform them. Further, the resolution did not seek the removal of the executive directors as this action would hamper the functioning and management of the company. The resolution involved the removal of the nine non-executive Directors. It was held to be a wholly democratic process. The idea of corporate democracy was highlighted well in the case.

The majority of the shareholders in the company have the power where they were authorized to appoint directors and the power to remove them through a prescribed procedure of removal. This is considered as the essence of Corporate democracy.

Under section 173(2) of the Companies Act, it is required to state the meeting and stating the reasons for the same. But the statement does not need to be given during the meeting. The shareholder cannot be restrained from holding an extraordinary general meeting and is not bound to disclose the reasons for the proposed resolution of summoning a meeting.

The court does not operate under the jurisdiction of restraining or imposing an injunction of the shareholders for summoning the meeting if the process for the requisition proposal is valid, as was held in a UK landmark corporate law case: John Shaw & Sons (Salford) Ltd v Shaw.

It was held that the court would have the jurisdiction to examine the actions of the state if they are about the public law domain and refrain from examining them if they pertain to the private law domain. When the state gets involved in the corporate world and becomes a shareholder, it has all the rights available to them like any other shareholder of the company. Therefore, the state does not need to give reasons for holding the meeting in the same manner as any other shareholder.

The court held that the transfer of shares was regulated by a statute (FERA- Foreign Exchange Regulation Act). After permission is obtained by the RBI, the company cannot refuse to register the transfer of shares thereafter. It is not upon the company or any other entity or authority to decide whether the permission was officially granted by the Reserve Bank of India.

The rights of a shareholder are:

to elect directors and thus to participate in the management through them
to vote on resolutions at meetings of the company
to enjoy the profits of the company in the shape of dividends
to apply to the court for relief in the case of oppression
to apply to the court for relief in the case of mismanagement
to apply to the court for winding up of the company and
to share in the surplus on winding up.

It was held that the Reserve Bank of India did not have mala fide intentions or actions. Though the Reserve Bank of India did not send a reply to the communications made by the company to look into the matter, it does not mean that the Reserve Bank had mala fide intention. After the communications made by the company, the Bank looked into the matter and carried it on with full seriousness.

There were no mala fide intentions on the part of the Union of India as well.

There was a total failure on the part of Punjab National Bank in the matter concerning the discharge of their duties as authorized dealers under the Foreign Exchange Regulation Act and Portfolio Investment Scheme with the result that there were no purchases of shares made on the behalf of the Caparo Group Companies.

Analysis : LIC.v. Escorts Ltd, (1986) 1 SCC 264

The case was decided correctly with certain parts that were not that essentially taken into consideration. The fact that the court’s decision was made based on the statute, so the interpretation was appropriate.

The court highlighted the concept of Corporate democracy or ‘Lifting the Corporate Veil’ – the will of the majority constitutes the decision of the body of the company in question). It is a democratic setup where the directors and members are considered two primary organs of the company.

A company’s shareholders have their rights, and such rights of appointment and removal, if followed correctly, cannot be stopped by any court. Similarly, here, the Supreme Court did not have the authority to impose an injunction on the meeting as a statement of reasons was not the requirement for the proceedings of the meeting but was a formality that was required to be done before the meeting for the board members to have an idea. The requisition notice was not arbitrary and this claim can be supported by a UK company law case: Isle of Wight Railway Company v Tahourdin and an Indian Company Law case: The Workmen of The Associated Rubber Industry Ltd. v The Associated Rubber Industry Ltd.

Since this is a case that had multiple aspects that required consideration taken into consideration, the statute made it easier for the court to keep in mind all the aspects and decide on the same. The court has correctly though through the facts concerning the right of the shareholders in the company for the appointment of the board members and the board of Directors. The court was also correct on not having the authority to impose an injunction on a meeting that was summoned on a correct legal basis.

The point the court missed is to check the acts of RBI. The court held that though RBI did not reply to any of the questions asked by the company about the registering of shares and details of the foreign company, the Bank was looking into the matter. The problem lies where the court does not check the RBI or holds it responsible for not acknowledging the letters sent by the company. Being a part of the state and an essential element of the newly formed scheme, it was the responsibility of RBI to keep track of the questions put forth by the company and to reply to them as well.

They concluded that no mala fide could be attributed to the Union of India but were not noticeably clear about the instances or the arguments which made the court reach this decision of not holding the Union of India responsible.

Further, the court should have also held Escorts Ltd. responsible for keeping LIC in the dark about the foreign investment but also about the Writ Petition that was filed. The resolution was not even open to discussion but straight away led to the filing of the Writ Petition.

Lastly, the rest of the judgement was backed by proper legal reasoning.

Conclusion

The case is treated as a landmark case judgement where the rights of shareholders were recognised in the court to elect directors to participate in the management to enjoy the profit etc. The case was carried out with appropriateness and with giving importance to the intricacies.