Choudhary & Ors v Rakecha & Ors

This case concerns the affairs of the Barnagore Jute Factory Company PLC (the company). It was incorporated in 1872 under the Companies Act of 1862 to carry on the business of manufacturing jute at a mill in Barnagore near Calcutta in what is now the Indian state of West Bengal. The factory is still in existence, employing over 3,500 workers, and is the sole business of the company. Notwithstanding the advent of Indian independence in 1947 the company has remained an English company, though its sole connection with England is its registered office in London, the members register which - in accordance with statutory requirement - is also kept in England, and the returns which it is required to make to Companies House. It is thus a barely surviving relict of past empire.

In the 1980s the company encountered financial difficulties. On 28 October 1987 the Indian Companies Court ordered that the company should be wound up, and the Official Liquidator was directed to take possession of the company and its assets. As appears from a later judgment of the Indian High Court, this order only applied to the company's business within India, the power being apparently similar, if not identical, to the power exercisable by an English court to wind up a foreign company. Subsequently, an application was made by an interested party for a Scheme to be ordered by the court for the revival of the company and the stay of the winding-up in the meantime. On 15 September 1988 the court appointed an Ad Hoc Committee of Management for the purpose of re-opening the jute mill and running it in accordance with the Scheme. It further directed the Official Liquidator to continue in possession of the mill but not to interfere with the management by the Committee of Management appointed by the court. On 22 September 1988 following a rival application it replaced the Ad Hoc Committee by another Committee of Management, including representatives from the State Bank of India and another bank, representatives of the workers, a jute technologist and a chartered accountant. The winding-up was stayed for a period of six months.

Over the following years that stay was regularly extended by court orders, sometimes with changes in the composition of the Committee of Management, as recounted in some detail by the High Court at Calcutta in a lengthy judgment on appeal on 18 November 2004. It appears that by that date the Committee of Management had been failing to carry out their responsibilities and the directors of the company, Mr Chatdan Choudhury and Mr Ridh Karan Rakecha, who are the First and Second Claimants in the present proceedings, had assumed de facto management. The court observed that, though their assumption of control of the mill was legally unwarranted, their motives had been good and they had met with success in resurrecting the jute mill. It further noted that the de facto management enjoyed the support of both the workers and the statutory creditors. It therefore ordered that (the present set of Directors) should function as a Committee of Management for a period of six months on the same terms and conditions as applied to the earlier Committees of Management, with leave to apply for further orders. The result of this order was that the First and Second Claimants, who were the sole directors of the company, were appointed as the Committee of Management in the context of a Scheme for the management of the company with a view to its rehabilitation and eventual exit from winding-up, subject to the supervision of Joint Special Officers (two lawyers) appointed by the High Court at Calcutta.

The interim stay was further extended on a number of occasions for successive periods of six months until on 31 March 2006 the court ordered that the interim stay should be extended (until further orders). There have been no such orders.

Also in 2004 the company approached the Board for Industrial and Financial Reconstruction (BIFR). Operating under the Sick Industrial Companies Act (SICA) the BIFR is tasked with determining appropriate measures for revival and rehabilitation of potentially viable sick industrial companies. On 7 June 2006 it declared the company to be a sick industrial company for the purposes of SICA and designated IDBI as its agent to examine the viability of the company and to produce a rehabilitation scheme, if feasible, for the consideration of BIFR. That report was submitted on 30 June 2008. Having considered it, BIFR formulated a Draft Rehabilitation Scheme (the DRS) on 2 December 2008. It ordered particulars of the draft proposals to be published in two local dailies, in English and the vernacular, inviting objections or suggestions within 60 days, which it intimated would be considered at a hearing on 19 February 2009.

The DRS proposed relief from central and state governments, the sale of surplus land, and the provision of 50 million rupees (about 700,000) by way of equity and unsecured loans (and further funds if required) from (the Promoters). The Promoters referred to in the DRS were two existing minority shareholders, Yashdeep Trexim P Ltd (Yashdeep) and Namokar Vinimay P. Ltd (Namokar), respectively the Fourth Claimant and the Second Defendant.

The report of the BIFR stated that the combined shareholding of these two shareholders, along with their associates was 29% of the total share capital, with public financial institutions holding a further 5.16%, banks 0.02%, and the general public 66.15%. Of a total issued share capital of 175,000 ordinary shares Yashdeep and Namokar had acquired respectively 10,839 and 16,000 ordinary shares some years earlier. There is a dispute as to whether Yashdeep has in the meantime reduced its holding down to 2,950 shares. The Third Claimant, Mr Tapuriah, was registered as the holder of 120,000 shares, though they were only partly paid, with a balance of 577,366 outstanding. A print-out of the members register as at 31 December 2008 shows that in addition to some holdings by banks and financial institution there were a very large number of small holdings by individual members of the general public, not infrequently in single figures. The First and Second Claimants each hold 200 shares. (The Third and Fourth Claimants and the Second Defendants also hold preference shares.)

In September 2007 the First and Second Claimants, still the only directors of the company, appointed the First Defendant, Mr Bhattar, as a co-director. According to the Claimants he was recruited and appointed to assist the First and Second Claimants with the day-to-day management of the company in conjunction with the General Manager, the Commercial Manager, and the in-house accountant and to report to them in their capacity as the Committee of Management. Mr Bhattar lives at the workers colony adjacent to the factory. In practice, according to the Defendants Mr Bhattar has been left largely free to oversee the day-to-day management himself, with Mr Choudhury and Mr Rakecha rarely if ever coming to the factory.

I turn now to the disputed events following the release of the DRS on 2 December 2008 which have given rise to these proceedings.

The Defendants maintain, and the Claimants dispute, that the following events affecting the company took place in December 2008, with the knowledge and participation of the First and Second Claimants.

The First and Second Claimants say that they had no knowledge of, or participation, in any of these events.

In a letter dated 5 December 2008 from Mr Bhattar to Namokar he wrote to inform them that

In its reply dated 6 December 2008 Namokar stated that (Funds in BJF [i.e. the company] and function of the BJF has not been at par with our expectation) and that it had requested an accountant's report on loans and unsecured advances given to (the Association of the Directors, the accounts and shareholders/promoters(. On 9 December 2008 it sought the consent of the company to its accountants doing due diligence on the company's accounts: their report was produced on 15 December 2008. Though not referred to in that report, I do not understand it to be in dispute that an unsecured loan of about 27 million rupees (ca. 378,000) advanced to Yashdeep by the company some years ago under the aegis of the First and Second Claimants remains unpaid.

On 16 December 2008 Namokar wrote to Mr Bhattar enclosing a draft agreement, which the company was required to execute as a condition precedent to Namokar introducing new capital into the company. The letter also stipulated that (1) the First and Second Claimants must resign as directors and (2) the company should appoint five independent directors with experience and knowledge of the jute industry. There followed the appointment or purported appointment of the five new directors at the alleged Board Meeting on 17 December 2008 and the production of the letters of (actual or apparent ) resignation dated 18 December 2008.

The agreement - entitled Memorandum of Understanding - dated 19 December 2008 between the company, signing by Mr Bhattar (apparently on 18 December 2008) and Namokar (the MOA) provided that

The Claimants say that they were not informed of any of the correspondence or negotiations with Namokar or the proposed MOA.

On 8 January 2009 returns were filed at Companies House in respect of allotments to Namokar of (a) 117,000 fully paid ordinary shares and (b) 216,000 partly paid (to the extent of 10%) ordinary shares. The allotment, made pursuant to a written Board resolution dated 7 January 2009, was made against the payment of some 50 million rupees, which were said to have been urgently required to defray its expenses, including the purchase of raw materials. The Claimants say (inter alia) that the conclusion of the MOA and its contents were highly improper and that the allotment of shares in implementation of it was voidable. In addition, they say that in these circumstances the allotment did not enjoy the protection of Article 123 of the company's articles, which validates acts done bona fide by any meeting of directors or by any person acting as a director notwithstanding any defect in the appointment of any director or person acting as a director.

The Claimants' case is in short that the First and Third Defendants have sought to effect a coup d(etat by a series of forgeries and illegalities intended to move majority ownership and control of the Board to Namokar. The Defendants respond that the Claimants were well aware of what happened, that the First and Second Claimants participated in the events up to and including their resignation from the Board on 18 December 2008, and that this litigation is motivated by the wish of Tapuriah to reverse the forfeiture of his shares and the desire of Yashdeep to eject a Board which is likely to insist on immediate repayment of the 27 million rupee loan.

The Particulars of Claim in the substantive proceedings seek inter alia

The litigation opened with an Application Notice issued by the Claimants on 9 January 2009 against the First and Second Defendants seeking an order restraining Mr Bhattar from

The application came before Blackburne J on 15 January 2009, when it was ineffective for want of time. On 21 January 2009 it came briefly before me, but was adjourned to a hearing before me on 27 January 2009 to permit the service of further evidence, undertakings being given by the respondents in the meantime. Both on 21 and on 27 January 2009 the parties were in accord that the court was being asked only to decide whether an injunction should be ordered pending a yet further hearing as to whether interim relief should be granted in advance of trial. Notwithstanding this, I was invited to consider evidence occupying more than four substantial lever-arch files, and the submissions ranged widely and deeply, occupying almost three days and supplemented in writing even after the conclusion of the hearing.

For convenience I refer in this judgment to submissions made, or evidence given, by or on behalf of (the Claimants) and (the Defendants). This is shorthand in more than one respect.

So far as the substantial disputes of fact are concerned, I am clear that they cannot properly be determined on this application, or indeed without a trial. It would therefore be inappropriate for me to analyse in this judgment the submissions made by Mr Hollington as to the inherent improbability, as he contended, of the scenario advanced by the Claimants, culminating in the large investment in early January by Namokar, or the opposed arguments of Mr Christopher Pymont Q.C. for the Claimants advanced in counter. It is sufficient to record that the Claimants have established a seriously arguable case on the facts.

Mr Hollington also argued that the proceedings were at least in part misconceived and bound to fail because of the rule in Foss v Harbottle. 2 Hare 461, drawing my attention in particular to Macdougall v Gardiner, (1875) 1 Ch D 13 (C.A.). Many of the complaints of the claimants, he submitted, even if established factually were no more than defects in internal management which could be approved by the general meeting, and could not therefore found a claim by a minority shareholder.

There are in my view difficulties about this submission.

Most fundamentally, the submission ignores the fact that a central dispute in this case relates to the composition of the general body of shareholders. If the allotment was effective or is permitted to stand, Namokar would indeed hold on its own a substantial majority of the ordinary shares. If not, Mr Tapuriah would be the majority shareholder, if the forfeiture was ineffective or is reversed, though if the unpaid balance had been called he would be precluded from voting (by Article 15 of the company's Articles) until he paid it. (If both Namokar's allotted shares and Tupariah's shareholdings are to be ignored, Yashdeep and Namokar would have the largest shareholdings, but still in each case a minority holding.)

Accordingly, so long as the court has not resolved the questions at the heart of this case, a general meeting would merely confirm and reflect the fissure and dispute and resolve nothing. That key feature distinguishes this case from Macdougall v Gardiner in a critical respect, and the principle enunciated in that decision can never have been intended to apply to such a situation. Even if there were no dispute as to shareholdings, the court must in my view have jurisdiction to make an appropriate order regulating the conduct of the affairs of the company until such time as a general meeting could be convened and vote.

Moreover, it appears from Pulbrook v Richmond Consolidated Mining Company, (1878) 9 Ch.D. 610 that a director of a company can sustain an action in his own name against the other directors, if he is wrongfully excluded from acting as director, including a claim for an injunction to restrain that exclusion. This would of course cover only part of the relief sought by the Claimants.

Mr Hollington submitted that the court would refuse to entertain this action on the ground that India was the forum conveniens, leaving no proceedings to support an injunction, a result I should anticipate on the present application. More concretely, he argued that the court would stay the action as against the company and refuse permission to serve the other two defendants out of the jurisdiction. In this connection, he stressed the minimal connection that both the company and the dispute had with this country. He might have added that, given the close similarity of Indian company law, an Indian court could be expected to experience no difficulty in applying English law in this area.

Whatever merit an argument based on forum conveniens might otherwise have, it ignores the impact of EU law, and in particular of Council Regulation (EC) No.44/2001 (the Judgments Regulation). Though I should record an in limine submission by Mr Hollington that the present proceedings were excluded from the ambit of the Judgments Regulation by Article 1(2)(b), which provides that it shall not apply to

Article 22 of the Judgments Regulation provides that:

In Grupo Torras SA v Al-Sabah [1996] 1 Lloyd's Rep 7 the Court of Appeal was concerned with the interpretation of the identical provision, numbered Article 16, of the Lugano Convention. Giving the lead judgment, Stuart-Smith LJ noted that, following decisions of the ECJ , (proceedings which have as their object) means (proceedings which have as their subject-matter) or are principally concerned with ), and that the appropriate interpretative approach was (purposive rather than textual). On that basis he continued (at page 15):

On the facts of that case the dispute, as the Court of Appeal decided, fell plainly outside the ambit of the Article. In Speed Investments Ltd and another v. Formula One Holdings Ltd and others (No 2) [2005] 1 WLR 1936, however, the Court of Appeal repeated and applied the observations of Stuart-Smith LJ in holding that Article 22 governed the case. The dispute concerned the validity of the appointment of the third and fourth defendants as directors of the first defendant company, which was registered in England. Carnwarth LJ, with whom the other two judges agreed, was clear that the dispute fell within Article 22(2) as a dispute about the composition of the board, so that the subject matter of the dispute was a (question about the internal management of the company) or concerning the (composition of ... [one of the] organs of the company). He continued

The present case is on all fours in so far as it seeks the determination of the composition of the board of directors. It is also covered by Article 22 as regards the determination of the composition of the general body of shareholders and their entitlement to vote at general meeting. The remaining points with which the proceedings are concerned are also properly to be regarded as addressing questions as to the internal management of the company or concerned with the validity of the decisions of its organs. Contrary to Mr Hollington's submission, I can see no reason or basis for treating Article 22 as inapplicable because the individual elements were, on the Claimants' case, components of a plan of iniquity - or, as he put it, using the word in a sense devoid of legal rigour, of fraud.

It is therefore unnecessary for the claimants to invoke Article 22(3), though on the authority of Re Fagin's Bookshop PLC [1992] BCLC 118 a company's register of members is a public register.

Whereas other articles of the Regulation conferring jurisdiction apply only to actions against defendants domiciled in a Member State, Article 22 applies (regardless of domicile). It therefore provides a basis of jurisdiction not only against the company but also against the other defendants. In addition, so far as the company is concerned, jurisdiction is available under Article 2 on the basis of its domicile.

Where jurisdiction exists under the Regulation, the court on which it is conferred is obliged to hear and determine the claim even where the potential alternative court is not that of a Member State. That was established unequivocally by the ECJ in Owusu v Jackson [2005] QB 801.

In Owusu the claimant was injured diving into the seabed off the private beach of a villa in Jamaica which he had hired from an English domiciled defendant. That defendant sought a stay of the proceedings on the basis that Jamaica was the natural and proper forum. The ECJ held that this course was not open to the English court. Firstly, it dismissed the argument that Article 2, conferring jurisdiction on the basis of the defendant's domicile in a member State, did not apply to cases involving relationships between the courts of a single Contracting State and those of a non-Contracting State rather than only relationships between the courts of a number of Contracting States. Secondly, it held that the Brussels Convention precluded the court of a Contracting State from applying the forum conveniens doctrine and declining to exercise the jurisdiction conferred on it by Article 2 of that Convention. In the light of this ruling, the decision of the Court of Appeal in Re Harrods (Buenos Aires) Ltd [1992] Ch 72, on which I understood Mr Hollington to rely, is no longer good law.

In so far as the Claimants might seek to invoke Article 2 as a basis of jurisdiction against the company, the present proceedings are on all fours with Owusu. But the reasoning in that case is applicable to any ground of jurisdiction conferred by the Regulation, including Article 22. In this connection, it is irrelevant that the jurisdiction is stated to be exclusive, an adjective whose function is simply to prevent courts in another Member State from becoming seised. It is sufficient that the Article confers jurisdiction on the English court, both as against the company and the two other defendants.

Consistently with the wording of Article 22 and the ruling in Owusu, the Claimants do not need the permission of the court to serve the proceedings in India on the Second and Third Defendants: see CPR 6.33(2)(a)(ii).

As I have already indicated, this is a case in which both sides claim to hold the majority of the shares and to represent a majority on the board of directors, and where these essential questions cannot be resolved before trial. In this it differs in a fundamental respect from a case such as Pringle v Callard [2008] 2 BCLC 505, in which the Court of Appeal refused to impose the claimant as a director on the company by the grant of an injunction where the defendants indisputably controlled the company, owning two thirds of the shares and representing two out of the three directors.

Damages are plainly an inadequate remedy on both sides.

In these circumstances, the basic approach of the court should be to (hold the ring). That necessarily requires restrictions on both sides which would preclude them in the meantime from seeking by the convening of a general meeting or the decision of directors to alter the composition, whatever it may be contended to be, of the board or the shareholding in the company. The more acute question relates to the practical management of the company's business, which cannot be frozen in the same way.

Mr Hollington made a number of points in support of his contention that Mr Bhattar and the (new). directors should be left free to manage the company to the exclusion of the First and Second Claimants. In particular

To my mind, however, the factor of paramount importance - both in general and in considering the status quo which the court should seek to preserve - is that there is in place in India a legal regime for the management of this company. By order of the Indian court it is entrusted to the Committee of Management subject to the supervision of the Joint Special Officers in the context of a suspended winding-up of the company's business located (entirely) in India. That is an order within the territorial jurisdiction of the Indian court, and it would be a serious breach of comity for the English court to endorse or proceed on the basis of any course of action in conflict with it. So long as the Indian court has not revoked its appointment of the First and Second Claimants as the Committee of Management it is wrong for any other person, whether or not a validly appointed director, to seek to manage the business of the company in their stead. It is also right for this court to reflect in its decision as to how in the interim period before trial the company's business is to be managed in India that by reason of the Indian court's order only the First and Second Claimants are currently authorised or permitted to perform this function.

(a) The Defendants argue that the so-called (permanent) stay of the winding-up discharged the Committee of Management. That is not however the way in which the matter was viewed over the years by the Indian court, which proceeded on the (only comprehensible) basis that the Committee of Management was to function during the period of the stay.

The Indian legal regime is not however necessarily set in stone, even this side of a trial of these proceedings. At various points in the past the Indian court has acted on the application of an interested party to change the composition of the Committee of Management, most recently in the decision of the appeal court of 18 November 2004. If, for the reasons advanced by the defendants or otherwise, it is desirable or appropriate that the management of the company's business should be moved from the First and Second Claimants, the Indian court can change the Committee of Management, and it is better placed than this court to evaluate the rival contentions and to consider what is the best solution in the interests of all parties, including the workers and creditors as well as the other shareholders, in the light of all the circumstances (which may include the BIFR rehabilitation scheme, if it is in due course adopted). It goes almost without saying that nothing in any order made by this court should preclude any of the parties to these proceedings from making or opposing an application to the Indian court for such a change.

The appropriate interim order is in my judgment that the First Defendant shall act in relation to the management of the company's business only as directed or authorised by the First and Second Claimants or as may hereafter be ordered by the courts of India. In addition, the First Defendant should be restrained from taking any step to convene a general meeting or procure a decision of directors to alter the composition of the board or the shareholding in the company upon the Claimants giving an undertaking to the court to the same effect. I will hear submissions from the parties as to the precise wording of the order, if it cannot be agreed.

Finally, however the affairs of the company are regulated in the meantime, the questions raised by the present proceedings must be resolved as a matter of some urgency. I will therefore expect Counsel to address me on appropriate directions with a view to a speedy trial.