The Commercial High Court on Thursday delivered what was described as a landmark judgment refusing notice of interim injunction and enjoining order prayed for by plaintiff G.L.E.S.V. Perera,
the biggest shareholder in CBD Exports Ltd., against the sale of HNB stake (estimated to be around 7.5%) held by the Company for Rs. 5.8 billion via the Colombo Stock Exchange on Monday. Here we reproduce the order issued by the Colombo High Court Judge Gamini Amarasekera.
IN THE COMMERCIAL HIGH COURT OF WESTERN PROVINCE
(EXERCISING CIVIL JURISDICTION)
HOLDING IN COLOMBO
No.170/7, Negombo Road,
Case No : H.C.Civil 606/2010 MR - Vs -
C B D Exports (Pvt) Ltd.,
No.833, Sirimavo Bandaranayaka Mawatha, Colombo 14.
Came up before Hon.Gamini Amarasekera the Judge of the Commercial High Court
Appearance : Mr. S.A. Parathalingam P.C. with Mr. Nihal Fernando P.C., Mr.N.R.Sivendran Attorney-at-Law instructed by Upendra Gunasekera Attorney-at-Law for the Plaintiff.
Mr. M.A. Sumanthiran Attorney-at-Law with Mr. Viran Corea Attorney-at-Law instructed by Mr. Malin Rajapakshe Attorney-at-Law for CBD Exports (Pvt) Ltd.
Mr.Romesh de Silva P.C. with Mr.Sugath Caldera, Mr.Aruna Samarajeewa, Mr.Shanaka Cooray, Mr.Eraj de Silva Attorneys-at-Law instructed by Mr. G.G. Arulpragasam Attorney-at-Law for Zaki Alif and Raj Obeysekera.
Mr.Kuvera de Zoysa Attorney-at-Law with Mr. Senaka de Seram Attorney-at-Law instructed by Mr. Malin Rajapaksha Attorney-at-law for D.K. Obeysekera.
Mr. Nihal Fernando P.C with Mr. Rajindra Jayasinghe Attorney-at-law for the 6th Defendant Company Placidrange Holdings Limited.
Plaintiff by his Plaint dated 06-10-2010 praying inter alia Enjoining Orders in terms of prayer f, g, h & i to the Plaint and the case was called in Open Court. However Respondents who had the knowledge of the institution of this action been represented by their counsel Mr. Sumanthiran Attorney-at-Law appeared on instructions of 1st Defendant there was an objection to the proxy filed by the 1st Defendant and that issue be taken up later. Mr.Sumanthiran at the outset submitted to court that under section 39 of the Civil Procedure Code, when a Plaint in filed in court the summons to the Defendants also should be filed along with the Plaint and therefore if the Plaintiff has not filed the summons along with the Plaint court should not permit the Plaintiff to support the application for Enjoining Orders. Moving for an Enjoining Order amounts to seeking an equitable order from courts and court is of the view that it is sufficient to file the summons at the time of the order been given and though there may be deficiencies in that regard and that deficiency could be rectified at a later stage.
Therefore when a person seeks an equitable order the court shall not prevent making their submissions merely on such Technical Ground.
Learned President’s Counsel Mr.Parathalingam made submissions supporting the application for Enjoining Orders prayed for in the Plaint. Learned President’s Counsel Mr.Nihal Fernando who appeared on behalf of the 6th Defendant supported the Plaintiff in his application for the said Enjoining Orders.
On behalf of the Defendants who were objecting to Plaintiff’s application been represented by Learned President’s Counsel Mr.Romesh de Silva and Mr.Kuwera de Zoysa Attorney-at-Law. One lady Attorney-at-Law who made some submission on behalf of the Securities & Exchange Commission of Sri Lanka and later found that there was no Enjoining Order prayed against the said commission.
It is submitted that on perusing Paragraph 45 and 46 of the Plaint it is clear that the Plaintiff’s action is based on Board of Directors meeting dated 13-09-2010 and the said meeting is wrong and void in law and the 3rd and 4th Defendants could not have functioned as Directors by that day if they have not obtained the Interim Orders from the court and by abusing the process of court, 2nd, 3rd and 4th Defendants acted mala fide and also the sale of shares of the 8th Defendant held by the 1st Defendant is clearly transaction that comes under section 185 of the Companies Act and therefore the prior consent of the share holders should be obtained for the sale of shares and the share holders have not decided to such sale of shares.
It is undisputed that the Plaintiff is the Major share holder who held the maximum number of shares in the 1st Defendant Company. It is seen from the submissions made that the decisions that have been taken to oust the 3rd and 4th Defendants from the Board of Directors and the attempt to appoint a representative of the Plaintiff have been subjected to actions filed in court and while the cases are pending in courts and Interim Orders been obtained in favour of the Defendants, the 2nd and 3rd Defendants conduct in deciding to sell the shares in issue is something to be looked into and also one may argue that such an act would affect the rights of the Plaintiff who has the maximum number of shares in 1st Defendant Company. But the Enjoining Order prayed for would affect not only the parties of this action. As per Plaint it is seen about 120 parties who have not been made party to this action who had bought the said shares from the Stock Exchange would also get affected by the Enjoining Order.
The rights of the parties on the offer and acceptance of contract of sales and the right to request to convey the shares on the acceptance of such sales is also affected.
Court also understood the difficulty in making all of them as parties in an urgent application of this nature, but when issuing such Enjoining Order, Court cannot ignore the effect of this Enjoining Order on the persons who are not parties to the action,
In terms of sections 209 & 21 of the Companies Act No.07 of 2007 if there is no issue in regard to the third parties their ownership of the shares purchased by them as per paragraph 45 of the Plaint. In the event of any deficiency of the Directors or Board of Directors meeting could be challenged. In such event it is not advisable to issue an Enjoining Order without inquiring from the parties who purchased the shares.
The other main contention of the Plaintiff is that to be a Major transaction which falls within section 185 of the Companies Act and the decisions by the Directors to sell shares are not lawful. On perusing section 185 the court is of the view that it does not preclude a Major transaction in every respect.
If the transaction has been adopted by a resolution or special resolution and if all the share holders have approved and the Company been authorised for such sale by the Articles of the Company, a company could enter into a Major transaction as such. However the said Section says only about the said approval of the transaction and not about the period or the time. If such transaction has taken place according to Section 185 the management of the Company has the latitude of deciding the period and time of Section 185(1).
Someone may argue that deciding the time of the transaction is a part of the transaction, but however on the submissions made on behalf of the Plaintiff it is seen that the Plaintiff consider this as a Major transaction by taking into account the assets of the Company. To consider whether the transaction is a Major one as per Section 185(2) the transaction should be more than ½ of the assets of the Company.
It is said in the Plaint in paragraph 11 that 99% investments of the 1st Defendant Company are on the shares of 8th Defendant (decided to sell and subjected to Investments). Though investments are also assets, a Company may have other assets as well. In such a situation to consider whether such selling of Investments are falling within the Major transaction one has to peruse the annual statement of accounts and/or any such documents. There was no agreement as to the transactions which falls more than half of the assets of the 1st Defendant Company.
However decision to sell has not taken place on the consent set out in Section 185(1) (a) to (d) of the Companies Act. However if this transaction been accepted as the Major transaction it has to be considered that this Major transaction is in accordance with the Section 185.
Provisions in Section 185(a) to (d) are the term which provides for voluntary transactions. As stated previously it provides only the approval of a transaction and not the period and the time. On perusing documents X6 and X7 it is seen that the Company has to disposed the shares by operation of law. The decision to sell the shares is not a transaction taken by the voluntary decision of the Company or the Board of Directors. According to Document X6 the 1st Defendant has been removed from the list of Members of the 8th Defendant Board (accordingly the Enjoining Order prayed for in g(i) could not be issued).
Further the 1st Defendant is given 6 months time to sell its share. It is seen on the face of it that the 1st Defendant is bound in law to sell the relevant shares. Now the question arises as there is further time for the lapse of 6 months period can the sale be considered under Section 185. This is because the 1st Defendant is bound and required by law to sell the said shares even though the requirements of Section 185 (a) to (d) are not fulfilled. Therefore it can be vehemently questioned as to the relevancy of Section 185 to this transaction.
It is seen by X11 that the Plaintiff has had the knowledge by or about 17th of September 2010 that the Board of Directors has decided to sell the Shares as required by law, but the Plaintiff has not acted until such time that the rights of the outside parties are affected (Purchasers of shares) and Plaintiff has not challenged the decision until the sale of shares been listed in the Stock Exchange and until the sale has taken place and also there are parties who are not parties to this action whose rights be affected by issuing Enjoining Order in this nature. Therefore without herein who could be made parties to this action, the Court is of the view that Enjoining Order should not be issued. If this application been made prior to the purchase of shares by the outside parties, issuing of the Enjoining Order would only affect the rights of the parties and therefore could have considered until the matter be argued broadly.
According to the Rules 1.20 of Central Depository Systems the trading of shares would completes by selling and purchasing of such shares and also according to Rule 6.2 all trading which if not revoke by the Colombo Stock Exchange become a valid sale and if there is any request to make a sale invalid it has to be made to the Central Depository System prior to the day of trading.
However according to Rule 19.1 to complete the payment 3 days plus the trading day is given to complete the payment and it is seen that the Enjoining Orders prayed for are made now for the reason that the sale may not have confirmed until the payment been transferred as Rule 11.6(a).
On the other hand if the Enjoining Orders are issued then by the operation of Rules 11.6(c) and 11.6(d) the Plaintiff would have the reliefs sought for by the end of the case at the outset of the case because the ownership of shares would again be vested in the 1st Defendant.
This would certainly affect the rights of the persons who are not parties to this action and to grant Enjoining Order against the outsiders who are not parties to the action and bringing them into difficulties is not advisable and therefore granting of Enjoining Order is refused.
Sgd : by
High Court Judge Colombo