THE HIGH COURT OF DELHI AT NEW DELHI
% Judgment Reserved on: January 21, 2011
Judgment Pronounced on: January 24, 2011
+ CS(OS) No. 722/2008
JANAK DHAWAN & ANR. ....Plaintiffs
- versus -
J.D.WORLD WIDE EXPORTS
PVT. LTD. & ORS. ....Defendants
Advocates who appeared in this case:
For the Plaintiffs: Mr. P.V. Kapur, Sr. Adv. with Mr. Pawan
Sharma and Ms. Madhumeet Chauhan
For the Defendants: Ms. Sudhir Nandrajog, Sr. Adv. with
Mr. Manish Jain and Mr. Ankur Garg
CORAM:-
HON'BLE MR JUSTICE V.K. JAIN
1. Whether Reporters of local papers may
be allowed to see the judgment? Yes
2. To be referred to the Reporter or not? Yes
3. Whether the judgment should be reported
in Digest? Yes
V.K. JAIN, J
CS(OS) 722/2008 & IAs 4847/2008 (O.39 R.1 & 2 CPC)
& 17066/2010 (O.39 R.4 CPC)
1. Plaintiffs No.1 & 2 are husband and wife. Plaintiff
No.3 is their married daughter and plaintiff No.4 is their
son. Defendant No.3 is the wife of defendant No.2.
CS(OS)No.722/2008 Page 1 of 51
Defendant No.1, which is a company, was allotted 12,000
sq. meters of land by Rajasthan State Industrial
Development and Investment Corporation Ltd. (RIICO) for
setting up a hotel at EPIP Sitapur Industrial Area, Jaipur on
5.2.1998. Additional land measuring 2,750 sq. meters was
allotted to defendant No.1 on 26th April 1998, making the
total area of the allotted land 14,750 sq. meters.
2. As on 31st March 2004, the paid-up share capital
of defendant No.1 was Rs.7,52,000/- divided into 7,520
equity shares of Rs.100/- each out of which 7,500 shares
were held by plaintiff No.3 Ms. Nidhi Dhawan whereas 10
shares each were held by plaintiffs No.1 & 2. It is alleged in
the plaint that in the year 2004-05, the plaintiff No.2 was
introduced to defendant No.2. He represented to plaintiff
No.2 that being a foreign citizen, he wanted to invest some
money to earn interest thereon. It was agreed between
plaintiff No.2 and defendant No.2 that defendant No.2 will
give loan to defendant No.1 and to Mode Advertising,
another company of plaintiffs No.1 & 2 at the interest of
15% per annum, which was to be paid at the time of return
of the loan. An MOU was executed wherein it was
mentioned that the loan amount of Rs.4.50 Crores were for
CS(OS)No.722/2008 Page 2 of 51
50% shares of defendant No.1. It is further alleged that
defendant No.2 had represented to plaintiffs No.1 & 2 that
the MOU was intended only to secure the loans being given
by defendants 2 & 3 and he will not claim any shareholding
in defendant No.1 at any point of time. At the time of
signing MOU on 27th May 2005, plaintiffs No.1 & 2 also
signed Form-32, Form 2, Annual Return and also some
share certificates showing allotment of 50% shares of
defendant No.1 to defendants No.2 & 3. They were also
shown as Directors of defendant No.1. It is also claimed
that the MOU was signed by plaintiffs No.1 & 2 without
knowledge and consent of plaintiff No.3 who was at that
time holding 99.73% shares of defendant No.1. It is further
alleged that defendant No.2 gave a loan of Rs.1.50 crores to
defendant No.1 on 30th May 2005 and four loans
aggregating Rs.3,32,00,000/- to Mode Advertising in
September 2005. Another loan of Rs.1,97,34,000/- was
given to defendant No.1 on 14.10.2006. A few more loans
though of small amounts are also alleged to have been given
to Mode Advertising.
3. Vide fax sent on 10th January 2008 bearing the
date 9th January 2007, defendant No.2 claimed that
CS(OS)No.722/2008 Page 3 of 51
plaintiffs 1 & 2 were not delivering the balance shares of
defendant No.1. He also sought information about the
meetings of the Board of Directors and Annual General
Meeting of defendant No.1 besides seeking information on
Income Tax/Registrar of Companies Returns. He also
sought convening a meeting prior to finalization of accounts
for the years 2005-06 and 2006-2007. The plaintiffs No.1 &
2 thereupon offered return of the loans taken from
defendants No.2 & 3, along with interest on that amount,
after setting off the amounts/shares which plaintiff No.2
claims he was entitled to receive from defendant No.2/his
benami companies in lieu of getting the land use of the land
owned by those companies changed at his own cost.
Defendants No.2 & 3, however, refused to accept the
repayment of loan and defendant No.2 sent another letter
dated 14th February 2008 stating therein that he was selling
his 50% shares in defendant No.1 Company. It is further
claimed that on inspecting the record of Registrar of
Companies, the plaintiffs found that the forms which were
delivered to defendants 2 & 3 in good faith by plaintiffs No.1
& 2 had been filed by them with the Registrar of Companies.
This was followed by another letter dated 2nd April 2008
CS(OS)No.722/2008 Page 4 of 51
from defendant No.2 threatening to sell the shares in grey
market. It has also been alleged that defendant No.2 has
got printed letterheads through names of defendant No.1
and has also written a letter to RIICO describing himself as
a Director of defendant No.1. The plaintiffs have sought a
declaration that defendants 2 & 3 are neither shareholders
nor directors of defendant No.1. They have also sought a
direction to defendants No.2 & 3 to deliver the original share
certificates for the purpose of cancellation. The plaintiffs
have also sought an injunction restraining defendants 2 & 3
from representing or holding out of themselves as
shareholders or directors of defendant No.1 or acting on its
behalf besides injunction against interference by them in
the affairs of defendant No.1.
4. The defendants No.2 & 3 have contested the suit.
It is alleged in the MOU that the MOU was executed
between the plaintiffs No.1 and 2 and defendant Nos. 2 and
3 with the consent and knowledge of plaintiff No.3 and
payment of Rs.1.5 crores was also in her knowledge. It is
further alleged that the company allotted 10,000 additional
shares to defendant No.2 Laxman Rawat on 20 th June, 2005
and 15th September, 2005 and issued share certificates
CS(OS)No.722/2008 Page 5 of 51
accordingly in terms of the MOU dated 27th May, 2005. The
authorized share capital of the company was increased from
Rs.1 Crore to Rs.2 Crore in the EGM held on 14th June,
2005 and thus, 50% share holding of defendant No.1 was
transferred by the company to defendant No.2 for total
consideration of Rs.4.5 crores, in terms of the MOU. It is
further alleged that defendant No.1 filed its return
disclosing authorized capital as well as paid up capital of
Rs.20 lacs, comprising 20,000 shares out of which 10,000
were shown as held by defendant No.2 Laxman Rawat, 7500
by plaintiff No.3 Nidhi Dhawan, 2110 by plaintiff No.1
Janak Dhawan, 380 by plaintiff No.4 Madhur Dhwan and
10 by plaintiff No.2 G.K. Dhawan. It is further alleged that
at the time defendant No.2 was introduced to plaintiffs No. 1
and 2, defendant No.1 was under liability to pay over Rs.3
crores to Bombay Mercantile Bank, M/s Mode Advertising
and Marketing Pvt. Ltd. and others. In order to salvage the
bank liability and get the property released from mortgage,
plaintiff Nos. 1 and 2 entered into a settlement with the
bank. The bank agreed to settle the amount if the settled
amount was paid within a period of 120 days from the date
of the compromise sanction letter, failing which the entire
CS(OS)No.722/2008 Page 6 of 51
outstanding due was to be paid by defendant No.1. It was,
in these circumstances, that the plaintiff Nos. 1 and 2 with
the knowledge and consent of plaintiff No.3 agreed to
transfer 50% share holding of defendant No.1, in terms of
the MOU dated 27th May, 2005, for a total consideration of
Rs.4.5 crores. The balance amount of Rs.3 crores was to be
paid by defendant No.2 and 3 to the plaintiff within 90-120
days from the date of MOU. On the request of plaintiff Nos.
1 and 2, a sum of Rs.3,07,00,000/- was paid towards
payment of outstanding dues of Bombay Mercantile Bank
against the liability of Mode Advertising and Marketing Pvt.
Ltd. and the entire consideration agreed, as per the MOU,
thereby stood paid by defendant Nos. 2 and 3 to plaintiff
Nos. 1 and 2. The receipt of letters dated 2nd April, 2008
and 11th April, 2008 has been admitted by defendant Nos. 2
and 3. It is also alleged that two Form No.2 were filed with
the Registrar of Companies one on 20th May, 2005 for 3330
equity shares and second on 15th September, 2005 for 6670
equity shares, which were duly signed by Mrs. Janak
Dhawan confirming the allotment of shares to defendant
No.2, with the knowledge and consent of plaintiff No.3.
5. IA 4847/2008 was filed by the plaintiffs along with
CS(OS)No.722/2008 Page 7 of 51
the suit, seeking injunction against defendant Nos. 2 and 3
from alienating, transferring or creating any third party
interest in the shares of defendant No.1 held by them and
also restraining them from holding themselves out or
representing as share holders or directors of defendant
No.1. They also sought temporary injunction restraining
defendant Nos. 2 and 3 from interfering in the
affairs/properties of defendant No.1.
6. Vide order dated 25th April, 2008, this Court
restrained defendant Nos. 2 and 3 from alienating,
transferring or creating any third party interest in the
shares of defendant No.1 as also restraining them from
holding themselves out to be the shareholders or directors
of defendant No.1.
7. I.A. No.17066/2010 has been filed by the
defendants 2 and 3 seeking vacation of the interim order
granted by this Court on 25 th April, 2008. I.A.
No.17064/2010 has been filed by defendant Nos. 2 and 3
seeking direction to the plaintiffs not to create any third
party interest in the assets and land of defendant No.1 and
also directing them to maintain status quo qua the
shareholding of defendant No.1. They have also sought
CS(OS)No.722/2008 Page 8 of 51
production of the minutes books of the meetings, financial
records being Books of Accounts, Balance Sheet, Profit and
Loss Account and annual return of defendant No.1 for the
years 2004-05 to 2009-10 as also inspection of the aforesaid
record.
8. The first question, which comes up for
consideration, is as to whether the MOU dated 27 th May,
2005 was executed with the consent and/or knowledge of
plaintiff No.3, who at the time this document was executed
admittedly held more than 99.73% shares of defendant No.1
or not. Admittedly, plaintiff No.3, who is the married
daughter of plaintiff Nos. 1 and 2, was a major on 27th May,
2005 when the MOU was signed. There is no documentary
proof of plaintiff No.3 having consented to the execution of
MOU dated 27th May, 2005. There is no documentary
evidence which would suggest that execution of the MOU
was in the knowledge of plaintiff No.3, though, it is quite
probable that being the daughter of plaintiff Nos. 1 and 2
she was aware of the execution of the MOU. She was not a
director of defendant no.1, at the time MOU was signed nor
did she sign any of the share certificates issued to the
defendant no. 2 or the documents such as Form 2, Form 5
CS(OS)No.722/2008 Page 9 of 51
and Return filed with Registrar of Companies, on which
defendant Nos. 2 & 3 have strongly relied. Another
circumstance which indicates that plaintiff No.1 was in the
know of the transaction is that she was present in the EGM
held on 14th June 2005 wherein authorized share capital of
defendant No.1 was increased from Rs.10Lacs to Rs.20Lacs
consisting of 2000 shares. Since she was holding 7500
shares of defendant No.1 at that time, the increase in the
authorized capital of the company could not have been
possible without her consent. Admittedly, plaintiff No.3 was
not the signatory to the MOU and no explanation has been
given by defendant Nos. 2 and 3 as to why she was not
made to sign the MOU despite her holding as many as
99.73% shares of defendant No.1. This is not the case of
the defendant Nos. 2 and 3 that plaintiff Nos. 1 and 2 had
represented to them that they were holding the entire share
holding of defendant No.1 or that they were not aware of the
holding of plaintiff No. 3. In any case, a person investing
Rs.4.5 crores in a company and entering into a transaction
for holding 50% equity of a company, would before entering
into any transaction of this nature, at least ascertain the
extent of share holding of the persons, who are parties to
CS(OS)No.722/2008 Page 10 of 51
the document and would also insist on the major share
holder being signatory to the document executed in this
regard. Nevertheless, this is a matter on which a final view
can be taken only after recording the evidence.
9. The next question which comes up for
consideration is as to whether the transaction between
plaintiff Nos. 1 and 2 on one hand and defendant Nos. 2
and 3 on the other was a transaction for grant of loan or
was an agreement whereby 50% of share holding in
defendant No.1 was to be held by defendant No.2 and 3 or
the real transaction between the parties was neither of loan
by defendants No.2 and 3 to defendant No1 nor for giving
50% share holding in defendant No.1 company to
defendants No.2 and 3 and was an altogether different
transaction probably related to the land which RIICO had
allotted to defendant No.1. The salient terms of the MOU
dated 27th May, 2005, which is the main document
evidencing transaction between plaintiff Nos. 1 and 2 and
defendant Nos. 2 and 3, inter alia, read as under:-
"This memorandum of understanding
(MOU) is made on this 27th day of May
2005 between Smt. & Shri G.K. Dhawan
R/o J-4, Lajpat Nagar III, New Delhi,
Director of M/s J.D. Worldwide
CS(OS)No.722/2008 Page 11 of 51
Exports/Imports (P) Ltd. (hereinafter
called the party of the first part)
AND WHEREAS the party of the first part
have agreed to give 50% shareholding
and equal representation in the Board of
M/s J.D. Worldwide Exports/Imports (P)
Ltd., to the party of the second part for
the total consideration of Rs.4.50 crores.
1. That the total consideration for 50%
shareholding of M/s J.D. Worldwide
Exports/Imports (P) Ltd. to be
transferred by the party of the first part
to the party of the second part is fixed at
Rs.4.50 Crores.
4. That both the parties have agreed to
the condition that they may sell or offer
to sell to the outside either party, if and
when they get the sale consideration for
the said land over and above Rs.10.00
Crores and have agreed to share equally
the amount of consideration over and
above Rs.10.00 Crores.
5. That both the parties hereby agreed
not to sell their respective shares in the
said company to any outside party(s).
The parties further agreed that they will
first offer for the sale of their respective
shares of the said company to each other
with mutual consent and if any of the
party refuses to buy the shares or rejects
the said offer in writing in that case the
other party is free to sell its respective
shares for any consideration to any
outside party(s), subject to the mutual
consent in writing."
Real Transaction Between the Parties:
10. The following in my view are the circumstances
CS(OS)No.722/2008 Page 12 of 51
which indicate that the MOU dated 27th May 2005 was only
a sham document and was not intended to be acted upon:-
(a) As per the MOU, 50% of the equity of defendant No.1
was to be transferred/allotted to defendants No. 2 and
3 for a fixed consideration of Rs.4.5 Crores.
Admittedly, 3330 shares of defendant No.1 company
were allotted to defendant No.2 on 20th June 2005 and
remaining 6670 shares were allotted to him on 15 th
September 2005 as is indicated in form No.2 required
to be filed under Section 75(1) of Companies Act, as
also from the copies of the share certificates issued to
him. It is an admitted case that the amount of Rs.4.5
Crores had not been paid either to defendant No.1 or
to any other company of the plaintiffs by that date.
Only a sum of Rs.1.5 Crore had been paid to defendant
No.1 by that date and the amount of Rs 3.07 Crores to
Mode Advertising was paid on 29th September 2005.
In normal course, the company would not have allotted
all the 10000 shares to defendant No.2 without receipt
of the agreed consideration of Rs.4.5 Crores from him.
It would be pertinent to note here that even shares
issued on 15th September 2005 were shown as fully
CS(OS)No.722/2008 Page 13 of 51
paid up shares and not as partly paid up shares. This
circumstance indicates that the true nature of
transaction between the parties was not for
transfer/allotment of half of the equity in defendant
No.1 to defendants No.2 and 3.
(b) Though defendants No. 2 and 3 were appointed as
additional directors of defendant No.1, their
appointment, in view of the provisions contained in the
Articles of Association as also Companies Act, 1956
was valid only till the next AGM of defendant No.1,
which admittedly was held on 30th September 2005.
As per the MOU, the parties were entitled to equal
representation in the Board of defendant No.1.
However, despite their term as additional directors
having been expired on 30th September 2005,
defendants No. 2 and 3 did not write to the plaintiffs at
any point of time requiring them to renew their
appointment as additional directors of defendant No.1
in terms of the agreement contained in MOU. This is
yet another circumstance which indicates that the
terms and conditions contained in the MOU dated 27 th
May 2005 were not to be actually acted upon.
CS(OS)No.722/2008 Page 14 of 51
(c) Neither defendant No.2 nor defendant No.3 attended
any meeting of the Board of Directors of defendant
No.1 despite both of them having been appointed as its
additional directors. No explanation has been given by
defendants No. 2 and 3 for not attending any meeting
of the Board of Directors during their terms as
additional directors of the company. If no meeting of
the Board of Directors was convened to their
knowledge, they ought to have written to the company
or to plaintiffs No. 1 and 2 asking them as to why no
meeting of the Board of Directors was being convened.
The management and control of the business of a
company vest in its Board of Directors, which is
required to meet regularly, to attend to the affairs of
the company. Hence, if defendants No. 2 and 3 despite
being additional directors of defendant No.1 were not
invited to attend any meeting of the Board, they in
normal course of human conduct would have taken up
the matter with the regular directors particularly when
they were also allotted 50% of the equity of the
company.
(d) It is an admitted fact that defendant No.2 and/or his
CS(OS)No.722/2008 Page 15 of 51
companies paid the following amounts to either
defendant No.1 or to Mode Advertising:-
Date Amount Payee
30.05.2005 1,50,00,000 Defendant No.1
22.09.2005 10,00,000 Mode Advertising
23.09.2005 2,50,000 Mode Advertising
29.09.2005 13,00,000 Mode Advertising
29.09.2005 3,07,00,000 Mode Advertising
05.10.2006 10,00,000 Mode Advertising
14.10.2006 1,97,34,000 Defendant No.1
07.09.2007 4,00,000 Mode Advertising
The case of the plaintiffs is that all these amounts
represent the loan given by defendants No. 2 and 3 to
defendant No.1 and Mode Advertising from time to
time. The case of defendants No. 2 and 3, as regards
the amount of Rs.3,07,00,000/- paid on 25th
September 2005, is that this amount was paid by them
to Mode Advertising at the instances of the plaintiffs
and represented the balance consideration of Rs.3
Crores, which was to be paid to defendant No.1 for
50% of its equity, Rs.1.5Crore having already been
paid to it on 30th May 2005. This is also the case of
defendants No. 2 and 3 that the payment was made to
Mode Advertising since defendant No.1 owed this
amount to that company. Under the MOU, the
CS(OS)No.722/2008 Page 16 of 51
amount of Rs.4.5Crores was fixed as the consideration
for transfer/allotment of 50% of the equity of
defendant No.1 to defendants No. 2 and 3. Therefore,
the balance amount of Rs.3 Crores would in normal
course have been paid to defendant No.1 and not to
Mode Advertising. In case defendant No.1 owed this
amount to Mode Advertising, the payment would have
been made by defendants No. 2 and 3 to defendant
No.1 and, thereafter, defendant No.1 would have
repaid that amount to Mode Advertising. No
explanation is forthcoming from defendants No. 2 and
3 for making payment to Mode Advertising instead of
paying it to defendant No.1 in terms of the MOU dated
27th September 2005. Another significant
circumstance in this regard is that the amount paid to
Mode Advertising is Rs.3.07 Crores and not Rs.3
Crores and there is no explanation from defendants
No. 2 and 3 as to why they paid Rs.3.07 Crores as
against the balance consideration of Rs.3 Crores.
(e) Defendants No. 2 and 3 and/or their companies have
also paid Rs.2,50,000/- on 23rd September 2005,
Rs.13,00,000/- on 29th September 2005,
CS(OS)No.722/2008 Page 17 of 51
Rs.10,00,000/- on 5th October 2005 and Rs.4,00,000/-
on 7th September 2007 to Mode Advertising. During
the course of arguments, when questioned about these
payments, the learned counsel for defendants No. 2
and 3 stated that these amounts represented the loan
given to Mode Advertising by the companies with
which defendant No.2 was associated and had nothing
to do with the transaction evidenced vide MOU dated
27th May 2005. However, the fact remains that these
payments to Mode Advertising do indicate that
defendants No. 2 and 3 were giving loan to Mode
Advertising either themselves or through their
companies, which, in turn, tends to support the case
of the plaintiffs that the real transaction between the
parties was for grant of loan by defendants No. 2 and 3
to defendant No.1 and Mode Advertising and terms
contained in the MOU were never intended to be acted
upon.
(f) A sum of Rs.1,97,34,000/- was paid by defendants No.
2 and 3 to defendant No.1 on 14 th October 2006. The
case of the defendants No.2 and 3 is that the
consideration for 50% equity of defendant No.1 had
CS(OS)No.722/2008 Page 18 of 51
already been paid by that time for making payment of
Rs.1.5 Crore to defendant No.1 on 30th May 2005 and
Rs.3,07,00,000/- to Mode Advertising on 29th
September 2005. When questioned about this payment
the learned counsel for defendants No. 2 and 3 stated
that this amount was given to defendant No.1 in order
to enable it to make payment of additional land to
RIICO and defendant No.1 paid exactly the same
amount to RIICO. Even if that be so, the amount
would be a loan from defendants No. 2 and 3 to
defendant No.1 since no additional equity was allotted
or agreed to be allotted to them at the time this
amount was paid to defendant No.1. Again, this
circumstance indicates that defendants No. 2 and 3
were extending loan to defendant No.1 and that is why
this amount was paid by them on 14th October 2006.
(g) Admittedly, no AGM of defendant No.1 was attended
by defendants No. 2 and 3 at any point of time. No
explanation is forthcoming from defendants No. 2 and
3 at this stage for not attending the AGM of the
company. If no notice of the AGM was received by
them, they ought to have written to the company and
CS(OS)No.722/2008 Page 19 of 51
its directors in this regard, since convening of the AGM
atleast once a year is mandatory. The balance sheets
of the company are required to be laid before AGM
along with profit and loss account for each financial
year, as required under Article 58 of the Articles of
Association of the Company. The auditors also can be
appointed only by the shares holders at their General
Meeting. Failure of defendants No. 2 and 3 to attend
even a single AGM of defendant No.1 is yet another
indicator that they never considered themselves as
share holders of defendant No.1 having a substantial
stake in the company and that was the reason they did
not bother to attend the AGM or to ask the company or
even its Directors as to why no notice of AGM had been
sent to them despite their being holding as many as
10000 shares of the company. Section 166 of
Companies Act, 1956 provides that every company
shall in each year hold in addition to any other
meetings a general meeting as its annual general
meeting and shall specify the meeting as such in the
notices calling it. Therefore, holding AGM is also a
statutory requirement provided in Companies Act and
CS(OS)No.722/2008 Page 20 of 51
the default in complying with this requirement is
punishable under Section 168 of the Act. Section
172(2) of Companies Act provides that notice of every
such meeting shall be given to every member of the
company in the manner authorised by sub- sections
(1) to (4) of section 53. Since there is nothing to the
contrary in the Articles of Association of defendant
No.1 company, the aforesaid provision was applicable
in the case of defendant No.1 as well. Failure of
defendants No. 2 and 3 to attend any AGM or to ask
for notice of the AGM also indicates that they never
considered themselves as the share holders of
defendant No.1 company.
11. Though the terms contained in the MOU dated 27 th
May, 2005 do not apparently make out a transaction for
grant of loan by defendants No.2 and 3 to defendant No.1,
the case of the plaintiffs being that this document was only
a sham document and was not intended to be acted upon,
the law permits them to lead evidence to show the true
nature of the transaction between the parties. In Smt.
Gangabai w/o Rambilas Gilda Vs. Smt. Chhabubai w/o
Pukharajji Gandhi; (1982) 1 Supreme Court Cases 4, the
CS(OS)No.722/2008 Page 21 of 51
respondents before the Supreme Court had filed a suit
alleging that though she had entered into an agreement with the appellant for a loan of Rs.2,000/- it was decided that simultaneously she should execute a nominal document of sale and a rent note, these documents were never intended to be acted upon and that the rent paid by her, in fact, represented the interest payable on the loan. This was also her case that the appellant was attempting to enforce the document as the Sale Deed by filing suit for recovery of rent. The appellant, in defence, maintained that the Sale Deed represented a genuine transaction and ownership of the loan had passed to him. It was urged on behalf of the appellant that sub-section (1) of Section 92 of the Evidence Act bars the respondent from contending that there was no sale and, therefore, the respondent should not have been permitted to lead oral evidence in support of her contention. Rejecting the contention, Supreme Court noticing that the first proviso to Section 92 of Evidence Act provides that any fact may be proved which would invalidate any document, or which would entitle any person to any decree or order relating thereto; such as fraud, intimidation, illegality, want of due execution, want of capacity in any CS(OS)No.722/2008 Page 22 of 51 contracting party, want or failure of consideration, or mistake in fact or law held that the bar imposed by sub- section (1) of Section 92 applies only when a party seeks to rely upon the document embodying the terms of the transaction. It was further held that the sub-section is not attracted when the case of a party is that the transaction recorded in the document was never intended to be acted upon at all between the parties and that the document is a sham. Such a question arises when the party asserts that there was a different transaction altogether and what is recorded in the document was intended to be of no consequence whatever. For that purpose oral evidence is admissible to show that the document executed was never intended to operate as an agreement but that some other agreement altogether, not recorded in the document, was entered into between the parties.
12. The following, however, are the circumstances which indicate that the transaction between the parties was not a loan transaction as claimed by the plaintiffs:-
(a) If only a loan was to be taken either by plaintiffs No. 1 and 2 or by defendant No.1 from defendants No.2 and 3, there was no reason for them not to execute a CS(OS)No.722/2008 Page 23 of 51 document straightway evidencing advancement of loan by defendants No.2 and 3. There was no compulsion on them to enter into a sham transaction showing an agreement for allotment/transfer of 50% equity of defendant No.1 to defendants No.2 and 3 instead of entering into a loan agreement. If defendants No.2 and 3 wanted to secure repayment of the loan which they had agreed to advance, either the property of plaintiffs No.1 and 2 or the land which had been allotted to defendant No.1 could have been mortgaged with defendants No.2 and 3 to secure repayment of the loan. Alternatively the plaintiffs could have pledged their shares in defendant No.1 and/or their other companies with defendants No.2 and 3 in order to secure repayment of the loan agreed to be given by them.
(b) The case of the plaintiff is that defendants No.2 and 3 had agreed to advance loan to them, which was to be repaid along with interest at the rate of 15% per annum. Admittedly, there is no document evidencing such a transaction. Had the actual transaction between the parties been for advancing of loan by CS(OS)No.722/2008 Page 24 of 51 defendants No.2 and 3 to defendant No.1 and Mode Advertising, defendants No.2 and 3 would have insisted atleast on evidencing the term on which loan was agreed to be given and the rate of interest in writing, so that there would be no dispute between the parties in future as regards the time when the loan was to be paid and the interest which the defendant No.1 had to pay on them. If there is only an oral agreement particularly with respect to rate of interest, it would be open to the borrower to claim a rate of interest lower than the agreed rate and for the lender to claim rate of interest higher than the agreed rate. In the normal course of human conduct, this does not happen particularly when the parties are strangers and huge amounts are advanced by way of loan and that too to companies and not to individuals.
(c) Admittedly, defendant No.2 wrote a letter dated 9 th January 2007 (though it had been actually received in January 2008 and during arguments the contention of defendants No.2 and 3 was that the date had wrongly been typed as 9th January 2007 instead of 9 th January 2008) to plaintiffs No.1 and 2, stating therein that they CS(OS)No.722/2008 Page 25 of 51 had assured to deliver the balance shares of defendant No.1, which were in his name as also in the name of defendant No.3 and also requested them to inform him about the meetings of Board of Directors and Annual General Meeting of the company. They also sought to know the latest position of the Registrar of Companies in income tax matters. Similar letter was written by defendant No.2 to the Chairman RIICO. It appears to me that defendant No.2 deliberately antedated this letter, because in January 2008, he had no occasion to ask for delivery of shares, all the 10000 shares having already been delivered to them. However, despite defendants No.2 and 3 writing such a letter to them, the plaintiffs did not write back to defendant No.2 claiming that the transaction between the parties was in fact a transaction for advancement of loan and that they were not entitled to allotment of any shares of defendant No.1 company. It was submitted by the learned senior counsel for the plaintiffs that vide letter dated 23rd April 2008, the plaintiffs had informed defendants No.2 and 3 that the transaction between the parties was a loan transaction. This to my mind CS(OS)No.722/2008 Page 26 of 51 does not have much significance considering the fact that the suit itself having been filed on 24 th April 2008, the plaintiffs by that time must already have worked out the stand they had to take in the Court and the letter dated 23rd April 2008 would obviously have been drafted accordingly.
(d) Admittedly, no interest has been paid by defendant No.1 to defendants No.2 and 3 at any point of time. The case of the plaintiffs is that the interest was to be paid at the time of repayment of the principal amount. Ordinarily, when an individual advances loan to a company, he is not likely to defer payment of interest till the repayment of the principal sum, particularly when the documents executed between the parties make out a transaction of nature different from a loan transaction and there is no document evidencing the rate at which interest is to be paid. This, to my mind, tends to show that the transaction between the parties might not be a simple transaction of advancing of loan by defendants No.2 and 3 to defendant No.1 and Mode Advertising.
13. It appears to me that the real transaction between CS(OS)No.722/2008 Page 27 of 51 the parties may not be either for grant of loan by defendants No.2 and 3 to defendant No.1 or for transfer/allotment of 50% equity of defendant No.1 to defendants No.2 and 3. Clause 4 of the MOU to my mind is quite important in this regard. This clause provides that the land allotted to defendant No.1 company could be sold to an outsider if and when sale consideration of more than Rs.10Crore was offered and in that case the sale consideration over and above Rs.10Crores was to be equally divided between the parties to the MOU. This clause does not suitably fit either in a transaction for advancement of loan or in a transaction for transfer/allotment of 50% equity of defendant No.1 to defendants No.2 and 3. The land allotted by RIICO is the property of defendant No.1 company and, therefore, the consideration which would be received in the event of sale of that land, would go to the company and not to individual directors/share holders. Considering the fact that defendant No.1 is a privately owned company, plaintiffs No.1 and 2 were the only directors in the company at the time the MOU was executed on 27th May 2005 and they along with plaintiff No.3 held the entire paid up capital of the company at that time, this clause in the MOU tends to CS(OS)No.722/2008 Page 28 of 51 indicate that the true transaction between the parties was the land allotted by RIICO to defendant No.1 company and its eventual sale in a manner that the consideration above Rs.10Crores was to be equally shared by them and since the plaintiffs did not possess sufficient funds at that time to make payment to RIICO, defendants No.2 and 3 agreed to finance the payment to be made to RIICO provided profits on sale of land was shared and that is why they also paid Rs.1,97,34,000/- to defendant No.1 on 14th October 2006 for payment of price for the additional land allotted by RIICO to defendant No.1 besides providing money for repayment of the loan taken from Bombay Mercantile Cooperative Bank and the MOU which envisaged transfer/allotment of 50% equity to defendants No.2 and 3 was meant to be an instrument to secure the loan given by defendants No.2 and 3 and ensure that the plaintiffs did not back out of the two agreements between the parties. Of course, neither party has setup this case but the reason could be that it does not suit either of them. The plaintiffs do not want to part with the land and want to commercially exploit it and they also know that if defendants No.2 and 3 are recognized as 50% equity holders, they may create CS(OS)No.722/2008 Page 29 of 51 difficulties in exploitation of the land by plaintiffs to their exclusion and that is why they have setup a case of advancement of loan by defendants No.2 and 3 to defendant No.1. Similarly, defendants No.2 and 3 may not be willing to acknowledge the true nature of transaction between the parties since they know that such a plea may not be tenable in law since the land belongs to the company and they feel that if they are recognized as 50% equity holders, they can leverage the equity held by them to pressurize the plaintiffs to sell the land and share the profit received on sale of the land in terms of actual agreement between the parties. I would like to add that this is only a possibility and may not necessarily be the true transaction between the parties, which can be ascertained only after recording evidence of the parties.
14. Assuming that the MOU dated 27.5.2005 is not a sham document and was actually intended to be acted upon, the next question which comes up for consideration is as to what is the true import of this document. The case of the plaintiffs is that this document provides only for transfer of 50% shareholding in defendant No.1 to defendants 2 & 3 and contains no reference to allotment of fresh equity CS(OS)No.722/2008 Page 30 of 51 whereas the case of defendants 2 & 3 is that under the terms of the document, they are entitled to 50% equity of defendant No.1 for all times to come.
15. The preamble to the document contains a recital that the parties of the first part i.e. plaintiffs No.1 & 2 directors of defendant No.1 company had agreed to give 50% shareholding and equal representation on the Board of defendant No.1 company to the party of the second part i.e. defendants No.2 & 3, for a total consideration of Rs.4.5 crores. As per Clause 1 of the MOU, the total consideration for 50% shareholding of defendant No.1 company, to be transferred by the first party to the second party, was fixed at Rs.4.50 crores. Clause 5 of the MOU provided that the parties had agreed not to sell their respective shares in defendant No.1 company to any outside party and that had further agreed that they would first offer for sale of the respective shares to each other with mutual consent, and, if any, of the parties refused to buy the shares or rejected the offer in writing in that case the other party would be free to sell its shares for any consideration to any outside party, subject to mutual consent in writing. Though the document refers to transfer of shares and not to the issue of fresh CS(OS)No.722/2008 Page 31 of 51 equity, the conduct of the parties indicates that the terms contained in the document were understood by them to mean that the equity of the company would be raised from 10 lakhs shares to 20 lakhs shares and half of that equity would be allotted to defendants 2 & 3. Admittedly, at the time this MOU was executed, authorized share capital of defendant No.1 comprised thousand shares and plaintiffs 1 to 3 amongst themselves held 7520 shares at that time. It is also an admitted case that 2480 shares were allotted to plaintiffs No.1 & 4 on 30.5.2005, thereby increasing the total holdings of the plaintiffs to 10,000 shares. It is also an admitted case that 10,000 shares have been allotted to defendant No.2, 3330 shares on 20.6.2005 and 6670 shares on 15.9.2005. The conduct of the plaintiffs in allotting 2480 shares to themselves and 10,000 shares to defendant No.2 after signing of the MOU dated 27.5.2005 clearly shows that the understanding between the parties was that they would hold 10,000 shares each in defendant No.1 company.
16. However, in my view, neither the terms contained in the MOU dated 27.5.2005 can be interpreted to mean that defendants 2 & 3 were entitled to hold 50% equity of defendant No.1 company for all times to come nor can such CS(OS)No.722/2008 Page 32 of 51 an agreement, if any, between the parties bind defendant No.1 company. Nowhere does the MOU stipulate that after execution of the document authorized capital of defendant No.1 company will not be increased. Nowhere does this document stipulate that if and when the authorized capital of defendant No.1 is increased, it will be equally shared between the parties to the document. This document, therefore, does not place any restriction on the right of defendant No.1 company to increase its authorized capital and issue fresh capital thereafter, nor it provide for sharing of capital which could be issued in future. Article 4, 5 & 6 of the Articles of Association of defendant No.1 company read as under:-
" 4. The Authorised Shares Capital of the Company is Rs.30,00,000/- (Rupees Thirty Lacs) divided into 20000 (Twenty Thousand) Equity Shares of Rs.100/- (Rupees Hundred) each payable in the manner as may be determined by the Directors from time to time with power to increase, reduce, sub-divide or to repay the same into several classes and to attach thereto any right and to consolidate or subdivide or reorganize the share and subject to Section 106 of the Act to vary such right as may be determined in accordance with the regulations of the Company.
5. The Shares shall be under the CS(OS)No.722/2008 Page 33 of 51 control and disposal of the Board of Directors who may allot or otherwise dispose of the same to such persons on such terms as the Board of Directors think fit and to give any persons any shares whether at par or at a premium and for such consideration as the Board of Directions may think fit Such allotment and disposal shall be exercised by the Board only by a special resolution.
6. The Board of Directors may allot and issue shares in the capital of the company as payment or part payment for any property, goods or machinery supplied, sold or transferred or for services rendered to the company."
The figure of Rs.30,00,000/- was Rs.10,00,000/-
and figure of 20,000/- was 10,000, when the MOU was signed.
17. It would thus be seen that the company had a legal right, under its Articles of Association to increase its share capital at any point of time and the shares could be allotted by the company to any person on such terms as were deemed appropriate in this regard and the shares could also be allotted against property, goods or machinery sold or transferred or the services rendered to the company. Even otherwise a company has a legal right, subject, of course, to the provisions contained in the Companies Act, 1956, to increase its capital at any time and to any extent, it deems CS(OS)No.722/2008 Page 34 of 51 appropriate. The MOU dated 27.5.2005 does not place any restriction on the power of the company to issue fresh capital nor does it provide for sharing of fresh capital in equal shares.
18. Assuming that the MOU dated 27.5.2005 does provide that the authorized share capital of defendant No.1 company would not be increased or if it is increased, it would be equally shared between the parties to the documents, such an agreement, in my view, will be ultra vires the powers of the Directors of the company as also the Articles of Association of the company and, therefore, would not bind the company. The powers of the Board of Directors as contained in Articles of Association 19 & 50 of defendant No.1 provide as under:-
"19 The business of the Company shall be managed by the Directors who may pay all expenses incurred in getting up and registering the Company and may exercise all such powers of the Company as are not restricted by the Act or any statutory modification thereof for the time being in force or by these Articles required to be exercised by the company in general meeting subject nevertheless, to any regulations of these Articles, to the provisions of the Act, and to such regulations being not inconsistent with the aforesaid regulations or provisions as may be prescribed by the Company in CS(OS)No.722/2008 Page 35 of 51 general meeting. Nothing shall invalidate a prior act of the Directors which would have been valid if that regulation had not been made.
50 The Managing Directors shall have powers for the engagement and dismissal of managers, engineers clerks and assistants and shall have power of general direction, management and superintendence of the business of the Company with full powers to do all such acts, matters and things deemed necessary, proper or expedient for carrying on the business and concern of the Company, and to make and sign all such contracts and to draw and accept on behalf of the Company all such bills of exchange, hundies, cheques, drafts and others Government papers and instruments and shall be necessary, proper or expedient for the authority and direction of the Company except only such of them as by the Act or any these presents are expressly directed to be exercised by share-holders in the general meeting."
19. The powers delegated to the Board of Directors do not include a power to enter into an agreement not to increase the share capital of the company or to agree that 50% of the fresh capital which may be issued by the company will be allotted to a particular person(s). The Board of Directors of the company cannot curtail the right of the company to issue fresh equity nor can it bind the company as to the persons to whom such capital may be CS(OS)No.722/2008 Page 36 of 51 issued. The Board of Directors works under the overall control of the general body of share holders who can remove the directors at any point of time and/or appoint new Directors. It is also not necessary that the persons who are directors of the company at a given point of time would always remain its Directors. Therefore, neither any director nor the Board of the company can exercise powers which are not conferred on them under Articles of Association of the company.
20. In V.B. Rangaraj Vs. V.B. Gopalakrishnan and others; (1992) 1 Supreme Court Cases 160, defendant No.2 was a Private Limited Company in which 25 shares each were held by two brothers B and G. There was an oral agreement between the brothers B and G that each of the branches of the family would always continue to hold equal number of shares and if any member in either of the branches wished to sell his shares, he would give the first option of purchase to the members of that branch and only if the offer made was not accepted, the shares would be sold to others. However, the Articles of Association of the Company were not amended so as to bring them in conformity with the Agreement. Article 13 of the Articles of CS(OS)No.722/2008 Page 37 of 51 Association provided that:-
"No new member shall be admitted except with the consent of the majority of the members. On the death of any member, his heir or heirs or nominee, shall be admitted as member. If such heir , heirs or nominee is/are unwilling to become a member, such share capital shall be distributed at par among the members equally or transferred to any new member with the consent of the majority of the members."
After death of the brothers B and G, the son of one of them, who was defendant No.1 in the suit sold the shares to defendants No.4 to 6 who were the sons of the other brother contrary to the oral agreement between the deceased brothers. Hence, the plaintiffs, who were the other sons of B filed a suit seeking declaration that the sale was void and was not binding on them and also sought transfer of the shares to them and defendant No.2. The High Court held that the sale of shares by defendant No.1 in favour of defendants No.2 and 6 was invalid and hence the plaintiffs and defendant No.2 were entitled to purchase those shares, Allowing the appeal against the decision of the High Court, Supreme Court held that the Articles of Association being regulations of the Company were binding as well as its shareholders, any restriction which was not specified in the CS(OS)No.722/2008 Page 38 of 51 Articles was not binding either on the Company or in its shareholders. Noticing that Article 13 envisaged distribution of the shareholding of deceased member (and not of living member), equally amongst the members of the two branches of the family and not of any one of the branches only and that even the shares of the deceased member could be transferred to any new member with his heirs/nominees were not willing to become members, the Court was of the view that the private agreement between B and G wherein a restriction was placed on a living member to transfer his shareholding only to the branch of the family to which he belonged, imposed two restrictions which was not stipulated in the Article and those additional restrictions being contrary to the provisions of Article 13 were not binding either on the shareholders or on the Company. The ratio of this judgment, in my view, is that any private agreement which is contrary to the Articles of Association of the Company would not bind either the shareholders of the Company or the Company itself. Therefore, in the case before this Court also, if the MOU dated 27 th May, 2005 is interpreted to mean that the authorized share capital of the Company could thereafter not be increased or that CS(OS)No.722/2008 Page 39 of 51 additional equity, if any, was necessarily to be allowed in the ratio of 50% each to the parties to the MOU, such an agreement being contrary to the Articles of Association of the Company would not bind either the shareholders or the Company.
21. It was contended by the learned counsel for defendants No.2 and 3 that the plaintiffs have not come to the Court with clean hands since they have filed unamended copies of the Memorandum and Articles of Association of the Company and have not disclosed that after signing of the MOU dated 27th May, 1995, they had issued additional shares to themselves so as to increase the number of shares allotted to them to 10000 and thereafter the authorized share capital of the Company was also increased from 10000 to 20000 shares. In support of this contention that a litigant who approaches the Court needs to come with clean hands and produce all the documents which are relevant to the litigation, the learned counsel for defendants No.2 and 3 has referred to S.P. Chengal Varaya Naidu (Dead) By LRs Vs. Jagannath (Dead) By LRs and others; (1994) 1 Supreme Court Cases 1 where Supreme Court finding that the deceased Jagannath had CS(OS)No.722/2008 Page 40 of 51 obtained a preliminary decree by playing fraud on the Court by not disclosing all relevant facts and not producing the release deed which was a vital document, was of the view that fraud was a deception on the Court in order to gain advantage by another's loss and a litigant who approaches the Court would be guilty of playing fraud on the Court as well as the opposite party if vital documents are withheld by him in order to gain advantage on the other side. Rebutting the contention, it was pointed out by learned senior counsel for the plaintiffs that the documents filed by the plaintiffs along with the plaint disclosed the whole information including issue of additional equity to the plaintiffs and increase in authorized share capital of defendant No.1 Company. Considering the fact that the relevant information was available to the Court in the documents filed by the plaintiffs, I do not think any unfair advantage has been obtained by the plaintiffs by filing unamended Memorandum and Articles of Association or by not disclosing the allotment of additional equity to them and increase in the authorized share capital of defendant No.1 Company in the plaint.
22. The final question which comes up for CS(OS)No.722/2008 Page 41 of 51 consideration is as to what interim order the Court should pass in the facts and circumstances of the case. The interim order sought by the plaintiff is that defendants No. 2 and 3 should not hold themselves out as the directors and/or share holders of defendant No.1 company. They are also seeking an injunction against transfer of the equity held by defendants No.2 and 3 in defendant No.1 company.
An interim order was passed by this Court on April 25, 2008 restraining defendants No.2 and 3 from alienating, transferring or creating any third party interest in or parting with possession of any shares/share certificates of defendant No.1 company and from holding themselves out to be the share holders or directors of defendant No.1 company.
As noted earlier, defendants No.2 and 3 were never appointed as directors of defendant No.1 company after 30 th September 2005, when their terms as additional directors of the company came to an end. Therefore, defendants No.2 and 3 have absolutely no right to hold themselves out as directors of defendant No.1 company and they are liable to be injuncted from doing so. As regards defendants No.2 and 3 holding themselves out to be the share holders of CS(OS)No.722/2008 Page 42 of 51 defendant No.1 company, admittedly as many as 10000 shares of defendant No.1 were allotted to them by plaintiffs No.1 and 2, who were the only directors of defendant No.1 company at the relevant time. The authorized share capital of the company was increased from Rs.10Lacs to Rs.20lacs before issuing shares to defendants No.2 and 3. Plaintiff No.3, who held more than 99% shares in the company at the time MOU was signed on 27th May 2005 was present in the EGM held on 14th June 2005 when the authorized share capital of defendant No.1 company was increased from Rs.10Lacs to Rs.20lacs. The plaintiffs have not sought a decree for cancellation of the share certificates issued to defendants No.2 and 3 in respect of 10000 shares allotted to them, though they have sought a direction to defendants No.2 and 3 to deliver up those certificates to defendant No.1 for cancellation. The case of defendants No.2 and 3 is that they are entitled to 50% equity in defendant No.1 company for all times to come. Considering the fact and circumstances of the case, as discussed in the preceding paragraphs, it would not be appropriate for the Court to take a firm view, at this stage, with respect to true nature of the transaction between the parties. As noted earlier, there CS(OS)No.722/2008 Page 43 of 51 are also circumstances which tend to indicate that the transaction between the parties was not a transaction for advancement of loan by defendants No.2 and 3 to defendant No.1. The management and control of defendant No.1 company continues to vest in plaintiffs No.1 and 2. In these circumstances, it would not be appropriate to restrain defendants No.2 and 3 from holding themselves out as share holders of defendant No.1 company during pendency of this suit. I see no serious prejudice being caused either to the plaintiffs or to defendant No.1 company if defendants No.2 and 3 are allowed to hold themselves out as the share holders of defendant No.1 company during pendency of this suit. This is more so when I do not propose to place any restriction on increase in the authorized share capital of defendant No.1 company or allotment of fresh equity to one or more of the plaintiffs. The contention of the learned senior counsel for the plaintiffs was that if defendants No.2 and 3 are allowed to act as share holders holding 50% equity of the plaintiff company, they are likely to obstruct the functioning of the company and may jeopardize the project it has undertaken to construct a hotel on the land allotted to it by RIICO. Any such possibility in my view can CS(OS)No.722/2008 Page 44 of 51 be adequately averted by the plaintiffs by allotting additional equity to themselves which would have the effect of defendants No.2 and 3 becoming the minority share holders.
23. As regards alienation, transferring or parting with possession of the shares held by defendants No.2 and 3 in defendant No.1 company, the MOU provides that the parties had agreed not to sell their respective shares to any outsider and they would first offer their respective shares to each other and only on refusal the shares would be sold to an outsider and the Article 7 of the Articles of Association of defendant No.1 company also provides that any member desiring to sell any of its shares must notify the Board of Directors of the number of shares, the fair value and the name of the proposed transferee and the Board must offer to the other shareholders the shares offered at the fair value and if offer is accepted the shares shall be transferred at pro-rata only to the acceptor and in case of any dispute, regarding the fair values of the share, it shall be decided and fixed by the Company Auditor, subject to Articles 8 and
9. Whereas Article 8 provides that no transfer of shares shall be made or registered without the previous sanction of CS(OS)No.722/2008 Page 45 of 51 the Board of Directors and the Board may decline to give sanction without assigning any reasons. It would, therefore, be only proper that defendant No.2 is restrained from transferring, selling, alienating, pledging or otherwise parting with possession of 10000 equity shares held by him in defendant No.1 company, during pendency of this suit, subject to the plaintiffs furnishing a bank guarantee equivalent to the amount of loans mentioned in para 10 of the plaint, which is alleged to have been given by defendant No.2/his companies to defendant No.1 and Mode Advertising, along with interest on that amount at the rate of 15% per annum, which according to the plaintiffs, was the agreed rate of interest to be paid to defendants No.2 and
3.
24. The prayer made by defendants No.2 and 3 in IA 17064/2010 is that the plaintiffs be restrained from creating any third party interest in the assets and land of defendant No.1 and be also directed to maintain status quo with respect to shareholding of defendant No.1. They have also sought production of the minutes books of the meetings, financial records being Books of Accounts, Balance Sheet, Profit and Loss Account and annual return CS(OS)No.722/2008 Page 46 of 51 of defendant No.1 for the years 2004-05 to 2009-10 as also inspection of the aforesaid record.
25. There can be no objection to the plaintiffs and defendant No.1 being directed to produce copies of minutes books, books of accounts, balance sheets, profit and loss accounts and annual returns of defendant No.1 for the years 2004-05 to 2009-10 and to give their inspection to defendants No.2 and 3. As regards the share capital of defendant No.1, I am of the view that there is no justification either for placing any embargo on the right of defendant No.1 to increase his authorized capital or to issue fresh capital. If an embargo is placed on the record of issue of fresh capital that would result in depriving defendant No.1 company of the funds which it requires for executing the projects it proposes to execute on the land allotted to it by RIICO and which can be available to it in the form of additional share capital. Allotment of additional equity, however, should not be made to an outsider during pendency of the suit. If the additional equity is allowed to be allotted to an outsider, that may give a fait accompli to defendants No.2 and 3, whose case is that under the MOU they are entitled to 50% equity of defendant No.1 company CS(OS)No.722/2008 Page 47 of 51 for all times to come, besides equal representation in its management. If additional equity is allowed to be allotted to an outsider, the plaintiffs may simply transfer the control and management of the company to another person(s) by enhancing the authorized capital of the company and issuing the additional capital to the outsider, which would have effect of creating third party interest and defeating the claim of defendants No.2 and 3 to 50% equity of the company. Of course, allotment of additional equity to the plaintiffs has to be subject to final decision of the suit.
26. As regards transfer, alienation, mortgage, etc. of the assets of defendant No.1 company is concerned, admittedly, the main asset of defendant No.1 company is that land allotted to it by RIICO. During the course of arguments, the learned counsel for the plaintiffs fairly stated that the plaintiffs do not propose to sell, transfer, assign or part with possession of the land allotted to defendant No.1 company by RIICO and they only want to mortgage it with a bank/financial institution in order to raise loan required for construction of a hotel on this land. Since despite mortgage, ownership of the land would continue to vest in defendant No.1 company and the funds CS(OS)No.722/2008 Page 48 of 51 received from the mortgagee would be used only for construction of a hotel on this land and would thereby increase the value of the asset, I see no reason for not allowing the mortgage of the land in favour of a bank/financial institution in order to raise loan, which will be used for construction of a hotel of this land.
27. For the reasons given in the preceding paragraphs, defendant No.2 and 3 are hereby restrained from holding themselves out as the directors of defendant No.1 company, during pendency of this suit. Defendant No.2 is also restrained from selling, transferring, assigning, pleading or otherwise parting with possession of 10000 shares of defendant No.1 company held by him and creating third party interest therein in any manner, during pendency of this suit without prior permission of the Court, subject to the plaintiffs furnishing a bank guarantee equivalent to the amount of loan mentioned in para 10 of the plaint and simple interest on that amount at the rate of 15% per annum from the date of the advancement of loan till the date of this order, to the satisfaction of the Registrar General of this Court. They are granted four weeks' time for this purpose.
CS(OS)No.722/2008 Page 49 of 51
28. The plaintiffs and defendant No.1 are restrained from allotting any share of defendant No.1 company to any person(s) other than themselves, without prior permission of the Court, during pendency of this suit. The allotment of additional equity, if any, to the plaintiffs will be subject to final decision in this suit and will not create any equity in their favour. The plaintiffs and defendant No.1 will be entitled to mortgage the assets of defendant No.1 company including the land allotted to it by RIICO with any bank/financial institution for obtaining loan for construction of a hotel on the land provided that the funds are used only for the construction of the hotel but, they will not sell, transfer, assign or part with possession of the aforesaid land during pendency of this suit, without prior permission of the Court. The plaintiffs and defendant No.1 are also directed to produce copies of minutes books, books of accounts, balance sheets, profit and loss accounts and annual returns of defendant No.1 for the years 2004-05 to 2009-10 and to give their inspection to defendants No.2 and
3. The observations made in this order being tentative in nature, will not affect the decision of this suit on merits. CS(OS)No.722/2008 Page 50 of 51 IA 9332/2010 (u/O 7 R 11 of CPC) List for hearing on 27th May 2011.
Reply can be filed within four weeks and rejoinder, if any, can be filed within two weeks, thereafter.
(V.K. JAIN) JUDGE JANUARY 24, 2011 'sn'/Ag CS(OS)No.722/2008 Page 51 of 51