Delhi High Court
Umesh Kumar Baveja & Ors. vs Il&Fs Transportation Network ... on 30 September, 2013
Author: R.V. Easwar
* IN THE HIGH COURT OF DELHI AT NEW DELHI
Reserved on:4th September, 2013
% Date of Decision: 30th September, 2013
+ CO.A(SB) 30/2013 & Co.Appl.1051/2013
UMESH KUMAR BAVEJA & ORS. ..... Appellants
Through Mr Chetan Sharma, Sr. Adv. with Mr
Angad Singh Dugal and Mr Akhil Anand,
Advs.
versus
IL&FS TRANSPORTATION NETWORK LTD. & ORS.
..... Respondents
Through Mr. Neeraj Kishan Kaul, Sr. Adv.
with Ms Niti Dixit, Mr Vidur Bhatia and Ms.
Shivani Surghal, Advs. for R-1.
CORAM:
MR. JUSTICE R.V. EASWAR
JUDGMENT
R.V. EASWAR, J.:
1. This is an appeal filed under Section 10F of the Companies Act,
1956 (hereinafter referred to as "Act") impugning the orders dated
10.04.2013 and 10.05.2013 passed by the Company Law Board in
Company Petition No.133(ND)/2012. The appellants are: Umesh
Kumar Baveja (A-1), Regional Airport Holdings International Ltd. (A-
2) and RAHI Aviation Holdings Pvt. Ltd. (A-3). The respondents in the
appeal are IL&FS Transportation Network Ltd. (R-1), Gulbarga Airport
Developers Pvt. Ltd. (R-2) and Shimoga Airport Developers Pvt. Ltd.
(R-3).
2. The relevant facts, in brief, giving rise to the present appeal are
these. The government of Karnataka entered into project development
agreements with R-2 & R-3 for setting up of Green Fields Airports both
at Gulbarga and Shimoga in the state of Karnataka. Umesh Kumar
Baveja (A-1) did not have sufficient funds and, therefore, requested R-1
to make the required investment. A-3 and R-1, therefore, incorporated
A-2 as a "special purpose vehicle" (SPV) for making investments in R-2
and R-3, which may be referred to as "the airport companies". An
agreement styled as "Subscription-cum-shareholders Agreement" (SSA)
was entered into on 12.03.2010 between the SPV, A-3 (which is
hereinafter also known as RAHI) and R-1 (hereinafter also referred to as
ITNL). In terms of the SSA, RAHI was to make an investment of `30
crores in the SPV and acquire 60% stake in it and ITNL would invest
`20 crores in the SPV to acquire 40% stake. RAHI invested the sum of
`30 crores as per the agreement. ITNL too invested the amount of `20
crores as required by the SSA and the said amount was shown in the
accounts of the SPV as "share application money pending allotment".
These shares were never allotted to ITNL. Umesh Kumar Baveja (A-1)
was a director in RAHI as well as the SPV. Mukund Sapre was the
person who controlled ITNL and invested `20 crores in the SPV through
ITNL. Since no shares for `20 crores invested by ITNL were allotted to
it by the SPV, problems arose between the two groups, one headed by
Umesh Kumar Baveja and the other by Mukund Sapre. Mukund Sapre
also entertained doubts about the utilisation of the amounts invested by
ITNL in the SPV. ITNL had also given bank guarantees through United
Bank of India in favour of the Government of Karnataka for `9.69
crores for the Gulbarga Airport project and a bank guarantee through
Axis Bank Ltd. for `12.37 crores in respect of the Shimoga project. It
would also appear that there was little progress in the development of
the airports and the Government of Karnataka wrote a letter to the SPV
on 30.07.2012 expressing its concerns. In this letter, the Government of
Karnataka also sought an explanation for the delay in completion of the
Gulbarga Airport project and asked the airport company to show-cause
why liquidated damages should not be imposed for the delay. There
was a series of correspondence between both the groups containing
allegations and counter-allegations with regard to the working of SPV.
In the meantime, Mukund Sapre sought information from Baveja with
regard to certain agreements entered into by the SPV with several
entities including details of payment of `12 crores to Comet Advisory
which is now known as RAHI. In his capacity as Chairman of the SPV,
Mukund Sapre also sought explanation from Baveja on several items of
expenditure and appointed a firm of Chartered Accountants to carry out
an internal audit of the airport companies as well as the SPV. Baveja, in
response, convened meetings but according to Mukund Sapre these
board meetings were not backed by any background material provided
to him to enable him to meaningfully contribute to the proceedings.
Mukund Sapre also questioned the appointment of Baveja as a whole-
time director of the SPV and the disproportionate remuneration
proposed to be paid to him. These disputes, together with the exchange
of e-mails containing allegations and counter allegations had muddled
the relationship between Baveja and Mukund Sapre and consequently
between the companies controlled by them as well as affairs of the SPV.
3. In the above background ITNL filed a petition before the
Company Law Board under Sections 111A, 397, 398, 402 and 403 of
the Act on the ground that Umesh Kumar Baveja, through RAHI, which
was at the helm of affairs of the SPV being a majority shareholder, was
acting in a manner prejudicial to the interest of ITNL which had
invested `20 crores to acquire 40% shareholding in the SPV; it was also
alleged that Baveja had committed violations of the articles of
association and had siphoned off the funds of the SPV by entering into
transactions with the related parties. It was further alleged in the
petition that Baveja was prevaricating or evading the issue of shares to
ITNL. An interim prayer was made in the petition to the effect that the
respondents in the company petition failed to appoint Mukund Sapre as
another nominee-director of ITNL and that ITNL was not informed
about the affairs of the SPV even though it had invested substantial
amount of money in the SPV and an audit should be carried out by an
independent and impartial auditor which was not done despite request.
There were also charges of misappropriation of the funds of the SPV by
Baveja.
4. Before the CLB, a preliminary objection was taken by the
respondents in the petition, to the effect that the petitioner (ITNL) was
not a "member" of the SPV and that the amount of `20 crores invested
by the petitioner was lying only as share application money, but had not
been converted into shares. It was pointed out on behalf of the
respondents that the minutes of the board meeting of SPV held on
22.02.2012 showed that no shares were allotted to ITNL because of the
disinclination of Mukund Sapre to pursue the share allotment. Another
preliminary objection was taken to the effect that a combined petition
under section 111A and sections 397-398 of the Act is not maintainable.
The other defences taken by the respondent were that the audit sought
by the petitioner was not required nor can it be asked for by a person
who is not a member of the company and that it was baseless to allege
that the respondent has siphoned off the funds of SPV. It was pointed
out that most of the payments were made only to the Government of
Karnataka in relation to the airport companies and the payment of `12
crores made to Comet Advisory was in the knowledge of the petitioner.
On this basis it was contended by the respondents before the CLB that
the petition should be dismissed.
5. The respondent also submitted before the CLB that the right to
claim audit under the SSA was governed by the arbitration clause 16
and, therefore, it was not open to the petitioner to by-pass the arbitration
clause and approach the CLB.
6. The CLB passed two orders on the petition - one on 10.04.2013
and the other on 10.05.2013. The order passed on 10.04.2013 was a
brief order directing the SPV to provide audit at the cost of ITNL by an
auditor of its choice and also directing the SPV, RAHI and Baveja to
allow the audit to ITNL within 10 days from the day ITNL made a
request to that effect. The SPV was further directed to provide
inspection of the financial statements and accounts of the airport
companies for the reason that the SPV has been in the management of
those companies. It was stated in the order that the reasons for the order
will follow later.
7. The reasons for the order were given by a separate order on
10.05.2013. The following is the summary of the reasons/ conclusion of
the CLB:-
(a) ITNL had invested monies to acquire 40% of the equity of
the SPV and the money was also used in the projects set-up by the
airport companies i.e. for the purpose of the Green Field Airports
in Gulbarga and Shimoga.
(b) ITNL had also procured bank guarantees for the lease
agreements entered into with the Government of Karnataka; its
nominees were continuing in the board of SPV. Therefore, it
cannot be disputed that the money invested by the ITNL is for
acquiring 40% shares in the SPV.
(c) The minutes of the meeting of the board of SPV held on
22.02.2012 cannot be read in isolation. Initially ITNL objected to
the holding of the meeting on the ground that no background
material was supplied. Thereafter it made a specific request for
inclusion of the allotment of the shares to it as a specific item in
the agenda in the meeting to be held on 20.08.2012.
(d) On 22.08.2012, ITNL sent an e-mail for allotment of shares
by circular resolution.
In the light of the above findings, the CLB concluded that ITNL,
the petitioner before it, was a member of SPV and, therefore, can
maintain the petition.
8. The CLB also commented upon the action of the respondents in
relation to the conduct of the affairs of the SPV. Baveja, according to
the CLB, had initially stated that the airports would be run as licensed
airports; later he made a proposal that they would run as uncontrolled
airports since getting licenses meant spending further amounts of `6-7
crores. It is only in order to avoid such payments that Baveja, according
to the CLB, started questioning the proposal earlier made to run the
airports as licensed airports, and attempted to dilute the scale and scope
of the project. The CLB also noted that Comet Advisory Services was a
company run by Baveja to which the SPV had made a payment of `12
crores. According to the CLB Baveja did not respond to the queries
raised by ITNL in relation to the payment.
9. In so far as the question whether ITNL was a "member" of the
SPV is concerned, in addition to what is earlier noted, the CLB also held
that the terms of the SSA were incorporated in the articles of association
of the SPV under which the rights of ITNL were spelt out. It was in
accordance with the SSA that ITNL had made a payment of `20 crores,
which was spent by Baveja as the Managing Director of the SPV.
Moreover, according to the CLB, the monies were invested as share
application money. In these circumstances, opined the CLB, the
petitioner (ITNL) has to be viewed as a member of the SPV.
10. The above were the reasons given by the CLB in its order passed
on 10.05.2013 in support of its earlier order dated 10.04.2013.
11. The appellants have challenged the aforesaid orders passed by the
CLB in the present appeal.
12. The main contention put forth on behalf of the appellants is that
the CLB grossly erred in holding that the petition was maintainable. It
is pointed out that the petitioner before the CLB was not a "member" of
the SPV within the meaning of section 41(2) of the Act, notwithstanding
that it had paid an amount of `20 crores for the purpose of acquiring
40% equity in the SPV and notwithstanding that the share application
money (pending allotment) was shown as such in the balance sheet of
the SPV. Criticising as "subjective" the view taken before the CLB that
the petitioner before it was a member/shareholder "for all practical
purposes", it was contended that the text of the statute cannot be ignored
on any equitable or moral grounds as was erroneously done by the CLB.
It was pointed out that Mukund Gajanand Sapre, who was a nominee
director of ITNL which was the petitioner before the CLB, himself
sought postponement of the allotment of shares in the Board meetings
proposed to be held on 22.2.2012 and despite a specific item in the
agenda to allot shares in the board meeting to be held on 20.8.2012,
Sapre did not attend the meeting. Similarly, the meeting of the Board
slated for 28.9.2012 did not take place. The contention is that ITNL
itself did not want to become a member/shareholder of the SPV. If that
is so, so ran the argument, such act coupled with the fact that the
character of the monies advanced was only as an advance towards share
capital, the only conclusion that can be drawn is that the petitioner was
not a member of the SPV. It is submitted further that on this aspect the
CLB has not applied its mind and passed a reasoned order.
13. These submissions were contested stoutly on behalf of the
respondents, the argument being firstly that no question of law is sought
to be raised by the appellants and under section 10F of the Act, an
appeal against the order of the CLB lies to the High Court only on a
question of law. It is pointed out, as a first limb of the argument that the
right that was sought to be exercised by the petitioner before the CLB
was the right granted under clause 123 of the articles of association and
for the purpose of exercising this right, it is not necessary for the
petitioner before the CLB to be a member of the SPV. It was argued
that the articles of association constitute a contract between the parties
to the same and clause 123 read with clause 2(17) of the articles of
association specifically granted ITNL the right to carry out an internal
audit periodically at its own expense. The second limb of the argument
was that in any case the petitioner cannot be held to be not a member of
the SPV, it having paid a sum of `20 crores towards acquiring 40% of
the equity, and the amount having been shown in the books of the SPV
as "share application money pending allotment".
14. In the light of the above arguments, the first point for
consideration in the appeal is whether the petitioner (ITNL) before the
CLB was a member of the SPV so that it can maintain an action under
sections 111A, 397, 398 read with sections 402 and 403 of the Act.
Several authorities were cited by both the sides on this point. The
mainstay of the appellant was the judgment of the Gujarat High Court in
Gulabrai Kalidas Naik and Ors. Vs. Laxmidas Lallubhai Patel and
Ors., (1977) 47 Company Cases 151. This judgment arose in petitions
filed before the Gujarat High Court under section 155 and sections 397
and 398. One of the contentions raised was that since the petitioners
themselves admitted that their names were wrongly removed from the
register of members, they were not members till the register is rectified
and therefore they could not maintain the petition for relief against
oppression and mismanagement, in view of section 399(1). The Gujarat
High Court noted that prima facie it would appear that in order to
acquire the status of a member of a company, the name of a person
seeking to be a member must have been entered in the register of
members, upon which alone he acquires the status of a member. The
Court noticed the provisions of section 399(1) and the position that the
oppression complained of must be in the capacity of members and held
that the pre-requisite for invoking the jurisdiction of the court under
section 397 and 398, statutorily provided for in section 399(1), is that
the complaint must come forth from a member and only a member of a
company can complain of oppression. Having held so, the Court
proceeded to observe as follows :
"Now, it may be that, in a given case, the petitioners
invoking the Court's jurisdiction under sections 397 and
398 are in a position to show that even though their names
are not to be found in the register of members of the
company, yet they have such an indisputable and
unchallengeable title to the membership of the company
that the Court may entertain a petition at their instance."
It would thus appear that the Gujarat High Court was not prepared to lay
down as an absolute proposition of law that action under section 397
and 398 can be taken only by a person whose name is found in the
register of members maintained by the company. Though a general
proposition to this effect was laid down, still an exception was
recognised to the general rule namely that in a given case a person who
can show an undisputable and unchallengable title to the membership of
the company may file a petition under section 397/398, even though his
name is not formally entered in the register of members.
15. I now proceed to a consideration of some of the authorities cited
before me by both sides on the point. In Shri Balaji Textile Mills Pvt.
Ltd. and Anr. Vs. Ashok Kavle and Ors., (1989) 66 Company Cases
654 (Kar), a Division Bench (P.P. Bopanna & M. Ramakrishna, JJ) of
the Karnataka High Court took the view that the word "member" should
be understood in the context in which it is used. It was held that
allotment of shares is a matter of contract between the parties and such
contract could be either expressed or implied. If a person is treated by
the company as its shareholder, his right to membership cannot be
questioned by the company at a later point of time on the ground that
there was no compliance with the provisions of section 41(2) of the Act.
It was pointed out by the Division Bench that the underlining purpose of
section 41(2) is the protection of innocent persons from companies who
are on the verge of liquidation and that it does not mean that the
company cannot allot shares even when a person has not complied with
the provisions of section 41(2). It was held that compliance with the
provisions of section 41(2) was not a mandatory requirement but was
only directory. On the basis of this reasoning the Court held that if a
shareholder who claims relief under sections 397 and 398 satisfies the
company court that he is a shareholder of a company by virtue of
allotment of shares in his favour which is evidenced not only by the
register of members but also by the statutory returns and documents
maintained and filed by the company, it is not open to the contesting
respondents to contend that he must comply with the condition
stipulated in section 41(2) i.e. that there should be a contract between
him and the company in writing. The ultimate decision in this judgment
is on a different question, i.e., whether for purpose of Section 41(2)
there should be a contract of allotment of shares in writing, but what
concerns me is the broader question whether section 41(2) can govern
the provisions of sections 397 and 398. The Karnataka High Court
answered this point in the negative and held that the provision which is
applicable to test whether a member satisfies the requirement of sections
397 and 398 of the Act would be section 2(27) and not section 41(2).
One more point which is worth noting in this decision is that it was held
that allotment of shares is a matter of contract between the parties which
could be either expressed or implied and if a person is treated as a
shareholder of the company or as a member by any subsequent conduct,
his right of membership cannot be questioned by the company.
16. In the case before me the note made to the balance sheet as on
31.3.2012 of the SPV shows that the amount of `20 crores received
from ITNL was shown as "share application money received pending
allotment". This note contains an explanation to the effect that the share
application money was received from ITNL and further that the shares
would be allotted by the company through its directors after the
approval by the shareholders in their meeting and further that the share
application money is primarily used to fund the two airport
infrastructure projects of the company. The conduct of the company in
showing the money as "share application money pending allotment" and
the utilisation of the money for the purpose for which the company was
formed are clear pointers to the fact that the company itself recognised
or treated the ITNL as a shareholder or member. This brings the case
within the observations of the judgment of the Karnataka High Court.
17. I was referred to another judgment of the Karnataka High Court in
Srikanta Datta Narasimharaja Wadiyar Vs. Venkateswara Real Estate
Enterprises (Pvt.) Ltd. and Ors,. (1990) 68 Company Cases 216, which
is that of P.P. Bopanna, J, acting as a Single Judge. In this judgment the
learned single judge followed the Division Bench of the High Court
cited supra. He also referred to the judgment of the Gujarat High court
(supra). Vis-a-vis the judgment of the Gujarat High Court (supra) the
learned single judge agreed that the question of maintainability of a
petition under section 397 did arise for consideration before the Gujarat
High Court and after noticing the observations of the Gujarat High
Court which I have quoted earlier, held as under: -
"So, the Gujarat High Court has not categorically ruled
that the petition should be thrown out on the ground that
the petitioner has not got on the register of members. If, in
a given case, it is shown that, though the name of a person
is not shown in the register of members, if he had been
treated as a member by the company, the company court
can always exercise its equity jurisdiction. This court
should not decline to exercise its equity jurisdiction on the
ground of mere technicality. Till the year 1986, i.e., till the
matter was taken to this court in this petition, there was no
shred of doubt on the rights of the petitioner to represent
his interests as a shareholder in respondent No. 1
company. It was contended that in a number of meetings he
has signed the proceedings of the said meetings and even
the balance-sheet prepared by respondent No. 1 company
right from the year 1971 to 1986 does not show any
indication that the petitioner had been excluded from the
membership of the company either on the ground that he
has not inherited the shares or otherwise. In the
circumstances, I am of the view that the decision of the
Division Bench in Balaji Textile Mills [1988] ILR 1988 Kar
1213; [1989] 66 Comp Cas 654, is applicable, on the
undisputed material on record."
18. In S.V.T. Spinning Mills (P) Ltd. Vs. M. Palanisami (2009) 95
SCL 112, the Madras High Court held as under: -
"The applicability of sections 397 and 398 of the
Companies Act is an equitable jurisdiction which is
intended to protect the minority members of the company
from any oppression and mismanagement at the hands of
majority members. It is in that background, the Supreme
Court has held that the wider meaning of the term 'member'
should be given in the context of sections 397 and 398 of
the Companies Act. On the facts and circumstances of the
case, especially in the circumstance that the respondents
filed a composite application, viz., the company petition
seeking reliefs including the issuance of duplicate share
certificates, I am of the considered view that the claim of
the respondents herein in the company petition cannot be
thrown out at the threshold without even going into the
merits of the issue raised by the respondents under the
guise of deciding the question of maintainability as a
preliminary issue."
It is significant to note that while arriving at the aforesaid view the
Madras High Court referred to both the judgment of the single judge of
the Karnataka High Court (supra) and the judgment of the Gujarat High
Court (supra). It is also to be noted that the judgment of the Supreme
Court referred to by the Madras High Court in the quoted paragraph of
its judgment is that in World Wide Agencies vs. Margarat T. Desor
(1990) 1 SCC 536. In the case before the Supreme Court; an objection
was taken that in view of the specific provisions of Section 41(2), a
member is one whose name is entered in the register of members. In
that case, the member/shareholder of the company was one S K Desor.
His name was entered in the register of members. On his death, his
name continued to remain in the register. The names of his legal heirs
had not been entered in the register when the applications were moved
by them under sections 397-398 of the Act. The Supreme Court,
following certain English authorities, opined that having regard to the
scheme and purpose of section 397 and 398, it would be a proper
construction to hold that the legal heirs of late S K Desor were members
within the meaning of these sections. The overriding considerations, in
the opinion of the Supreme Court were that this construction would
further the purpose intended to be fulfilled by petitions filed against
oppression and mismanagement and would facilitate solution of
problems in case of oppression of the minorities when the member is
dead and his heirs or legal representatives are yet to be substituted. It
would be an equitable and just construction and therefore, it was held
that it should be adhered to. It seems to me that the ratio of the
judgment of the Supreme Court, so far as sections 397 and 398 are
concerned, is that given the facts and circumstances of a particular case,
and having regard to the requirements of justice and equity in the
background of the facts and circumstances of the case, it would be open
to the Court to relax or overlook the condition imposed by section 41(2)
and hold that the person bringing the action and who claims to be a
member or shareholder of the company, need not be entered in the
register of members in order to maintain the action.
19. It seems to me in light of the authorities cited above that the
interpretation to be placed on section 41(2) vis-a-vis petitions filed
seeking relief from oppression and mismanagement should be governed
not strictly by the requirements of the sub-section, so long as in
substance and effect the person complaining of acts of oppression and
mismanagement has been recognised or treated as shareholder/member
by the conduct of the company, and that in giving effect to the remedies
against the grievance, considerations of equity and justice should be
allowed to prevail.
20. Apart from the fact that ITNL did invest a sum of Rs. 20 crores
only to acquire 40% of the equity in the SPV pursuant to call notices as
provided in the articles of association, as against 60% of the equity
already acquired by Baveja and the further fact that it was the intention
of all concerned, including the SPV, to allot shares to ITNL as
evidenced by articles 5, 6 and 8 of the articles and also by entries in its
balance-sheet as explained by the notes below it and the utilisation of
the said monies only for the purpose of the two airports, both facts
supportive of the respondents claim, it is noticed that there is nothing
which would militate against the claim that the money was invested only
towards share capital. Pursuant to the articles of association, ITNL has
appointed its nominee-directions. There is a clear communication made
by ITNL to the SPV on 22-8-2012 to the effect that it should be allotted
the shares. There is no evidence to show that this claim was at any later
point of time abandoned. The non-attendance of Mukund Sapre in the
board meetings cannot be looked at as an act abandoning the claim. It is
difficult to see how he would have thought of abandoning the claim to
get the shares allotted, when the money had been invested with the clear
understanding that the shares would be allotted and the same had not
also been returned. In fact, the SPV has admitted in its balance-sheet
that the money was utilised for the purposes of the two airports. ITNL
also gave two bank guarantees amounting to app. Rs. 20 crores. The
finding of the CLB that Mukund Sapre did not attend the board
meetings because there was no background material/documentation
supplied with regard to them and also the finding that the petitioner
before it had sent a specific request to include the item relating to the
allotment of shares in the agenda for the meeting to be held on 20-8-
2012 are findings of fact; they are not challenged on the ground of
perversity. The learned counsel for the appellants placed reliance on the
judgment of the Supreme Court in Chatterjee Petrochem (I) Pvt. Ltd.
vs. Haldia Petrochemicals (2011) 167 Comp. Cas. 373 (SC). In
paragraphs 102-103 of the judgment, it was observed that the non-
allotment of shares in that case was on account of the fact that the
person who claimed to be a member did not attend the meeting. That
single fact alone cannot turn the present case. All the facts, including the
conduct of the company in treating the person as a member/shareholder,
the entries made in the balance-sheet, the reasons for not attending the
meeting in which the shares were to be allotted, whether there was any
clear and unambiguous abandonment of the claim and similar such facts
have to be cumulatively considered; the inference or conclusion would
depend upon the facts and circumstances and the conduct of the parties
in each case. It would be unsafe to match the colour of one case with
that of the other indiscriminately.
21. I therefore hold that the CLB was right in its view that ITNL was
a "member" for the purpose of maintaining an action under sections
111A, 397 and 398, 399 read with sections 402 and 403 of the
Companies Act.
22. That takes me to a consideration of the next question whether a
combined petition - combining the prayer for rectification of the register
of members to include the name and the prayer for relief against
oppression and mismanagement - can be filed before the CLB. The
objection is apparently raised on the footing that since a petition against
oppression and mismanagement under sections 397-398 can be filed
only by a "member" of the company, a person whose name is not
entered in the register of members has to first get the register rectified
under section 111A through a separate proceeding and only thereafter
can he maintain a petition under ss. 397-398. But this is not always the
case and not in all circumstances. This has been recognised by this
court in Charanjit Khanna and Ors. vs. Khanna Paper Mills and ors.
(2011) 164 Com. Cas. 315 (Manmohan, J.). The learned single judge
observed:
"In my opinion, it cannot be said as a proposition of law
that no composite petition under Sections 397, 398 and
111A of the Act is ever maintainable. In fact, in a large
number of petitions filed under Sections 397 and/or 398 of
the Act, the primary allegation of oppression and
mismanagement is that the faction that is in control of the
company has either intentionally reduced the rival faction
to less than 1/10th of the total number of members of the
company or removed the rival faction from the register of
members. In such cases where allegation of oppression and
mismanagement is inexplicably intertwined with the issue
of maintainability of the petition under Section 399 of the
Act, a composite petition has to be held as maintainable. To
ask a petitioner to file two separate petitions in such
circumstances would not only be unfair but would also
result in unnecessary delay."
23. This should settle the issue. But the following two authorities
were cited on behalf of the appellants: Morgan Ventures Ltd. vs. Blue
Coast Hotels & Resorts Ltd. & Ors. (2010) 3 Comp LJ 33 (Bom) and
Khoday Distilleries Ltd. vs. CIT (2008) 307 ITR 312 (SC).
24. These two authorities were cited for the proposition that the
remedy of appeal under section 111A before the CLB does not lie in
respect of refusal to allot shares. The question was answered by the
learned single judge of the Bombay High Court in the negative. The
reasoning of the learned single judge (S.J.Vazifdar, J) is based on a
comparison of section 111(4) with section 111A(2). Under section
111(4)(b), in the case of a private limited company, if default is made,
or unnecessary delay takes place, in entering the fact of any person
having become a member in the register of members, the aggrieved
person may apply to the CLB for rectification of the register. Section
111A which was brought into effect from 20.9.1995, declared through
sub-section (2) that the shares or debentures and any interest therein of a
public limited company shall be freely transferable. The proviso to the
sub-section was introduced from 15.1.1997. According to this proviso if
a public limited company without sufficient cause refuses to register a
transfer of shares within two months from the date of the lodgement of
the instrument of transfer, the transferee may appeal to the CLB for a
direction that the transfer be registered. Neither in this proviso nor in
any of the other sub-sections of section 111A, has any right been
expressly given to an original allottee of the shares to approach the CLB
for relief in case of refusal to make an allotment of the shares. By thus
comparing both the sections, the Bombay High Court opined that there
is a conscious omission, on the part of the legislature, of the original
alottees of the shares of a public limited company from the category of
persons who are entitled to question the refusal to enter the name of the
shareholder in the register of members. It is on the basis of this line of
reasoning that it was held that section 111A has not provided for a right
of appeal in respect of a refusal to allot shares issued by a public limited
company. It would still be for consideration as to how a transferee of
the shares of a public company and an allottee of such shares are
differently placed. In both the cases, the refusal to enter the name of the
person to whom the shares were either allotted or transferred, identically
affects the right of such persons, i.e., to have their names entered in the
register of members. Moreover, there seems to be no logic in granting
such right to an allottee of shares of a private limited company but
denying it in the case of an allottee of shares of a public limited
company. There does not seem to be any logical explanation for
excluding the allottee of the shares from the proviso to sub-section (2)
of section 111A.
25. The judgment of the Supreme Court in Khoday Distilleries Ltd
(supra) expounds the difference between "creation" and "transfer" of
shares. It says that there is a difference between issue of a share to a
subscriber and the purchase of a share by a person from an existing
shareholder. The former is a case of allotment of shares and the latter is
a transfer of a chose in action. It is true that a transfer of shares is
different from an allotment. The question however is whether the right
of appeal under section 111A(2) is to be confined only to the transferee
of the shares or should be given also to the allottee of the shares.
26. It is a well settled proposition that a right of appeal is a creature of
the statute; there is no inherent right of appeal. Such a right has to be
expressly conferred by the law. However, it is also an equally well
settled proposition that a right of appeal, once conferred, must be
liberally construed. If this principle is applied to the present case, as it
ought to be in my humble opinion, I should prima facie think that a
person who was not allotted the shares and whose name was thus not
entered in the register of members, also has a right of appeal under
section 111A(2). But this point need not trouble me any longer, and no
final opinion need be expressed, since I have already taken the view that
the respondent is a member u/s 41(2) having due regard to the conduct
of the SPV treating him as such.
28. Counsel for the respondents points out that apart from the fact that
in Charanjit Khanna & ors. (supra) this court has held that it is not a
universal proposition that a combined petition under section 111A and
sections 397-398 is not maintainable, in the present case this proposition
is not of any relevance in as much as ITNL is only asking for
implementation of clause 123 of the articles of association dealing with
appointment of internal auditors. In my humble opinion, it is not
necessary to decide in this case whether a combined petition is
maintainable, for the reason advanced on behalf of the respondents. The
position as I see it is this. In form, the petition before the CLB is one
under sections 397-398 and under section 111A of the Act, both rolled
up; but the real grievance raised is based on article 123 of the articles of
association which empowers the parties to it to appoint internal auditors
to examine the accounts of the company. It is this prayer that was
granted by the CLB. It can hardly be disputed that the respondent-ITNL
is a party to the articles of association - see clause 2(17) of the articles
of association. Under clause 123, each party is additionally empowered
to appoint an internal auditor to go through the books of account of the
company (SPV). It is this right that was exercised by the respondent-
ITNL which was granted by the CLB by an interim order. Therefore the
question whether it was a combined petition before the CLB and if so,
whether it was maintainable, is at present alien to the controversy before
me. This is also one more reason why it is not necessary to opine finally
on the question whether an allottee of the shares has a right of appeal
under the proviso to section 111A(2).
29. The other argument raised on behalf of the appellants was that
there was an arbitration clause (clause 16) in the SSA and therefore the
CLB ought not to have entertained the petition. It is submitted that
though this point was raised before the CLB, and was also adverted to in
the impugned order, no ruling was given. It is contended that an
arbitration clause should be widely construed as laid down by the
Supreme Court in P.Anand Gajapathi Raju v. P.V.G. Raju AIR 2000
SC 1886 and that such a clause should be construed to have overriding
effect as held by the Supreme Court in Hindustan Petroleum
Corporation Ltd. vs. Pinkcity Midway Petroleums AIR 2003 SC 2881.
My attention was also drawn to the petition filed by the appellant before
this Court under section 11 of the Arbitration and Conciliation Act,
1996 seeking the appointment of a sole arbitrator in terms of clause 16
of the SSA. It was submitted that this petition was filed before this
Court even before the respondents filed the petition before the Company
Law Board. It was also submitted on behalf of the appellants that the
respondents were avoiding the arbitration for reasons best known to
them. It is pointed out that the procedure prescribed by section 16(1) of
the Arbitration and Conciliation Act, 1996 cannot be bypassed by the
respondents and that the arbitrator himself will rule on his jurisdiction as
provided in the section.
30. These contentions were opposed on behalf of the respondents. It
was pointed out that the argument based on the arbitration clause was
not raised before the CLB. It was submitted that at any rate, having
regard to the urgency of the petition filed under sections 397 and 398,
those proceedings cannot be stopped by reference to the arbitration
clause. It is contended that neither Baveja nor his companies were party
to the SSA and therefore they cannot be taken to arbitration. The
pendency of the petition under section 8 (before the CLB) or section 11
of the Arbitration and Conciliation Act (in the High court), it was
pointed out, cannot be a bar upon the passing of an interim order such as
the impugned order. In support of these propositions strong reliance
was placed on:
(i) Sukanya Holdings Pvt. Ltd. Vs. Jayesh H.Pandya (2003) 5 SCC 531
(ii) N. Radhakrishnan v. Maestro Engineers & Ors. (2010) 1 SCC 72
(iii) Ivory Properties & Hotels P. Ltd. vs. Nusli Neville Wadia (2011) 2
Arbitration LR 479 (Bom.)
(iv) Viom Networks Ltd. Vs. United Wireless P. Ltd. in FAO(OS)
584/2012, order passed by the Division Bench on 5.12.2012.
31. It is not correct to say that no objection based on section 8 of the
Arbitration and Conciliation Act was filed before the CLB. The
objection was raised and was also adverted to by the CLB in its order.
However, the contention of the learned counsel for the respondent that it
is the articles of association that governs the relationship between the
parties and that since they did not contain any provision for arbitration,
Section 8 of the Arbitration and Conciliation Act, 1996 is not applicable,
merits acceptance. The memorandum and articles of association of the
SPV were originally subscribed to on 23.11.2009. The subscribers to
these documents were Umesh Kumar Baveja (A1) who took 49,994
equity shares and six other persons who took one share each. These
persons are: Gaurav Jain, Sachin Sapra, Vishal Rai, Ms. Rukmini Das
Gupta, Piyush Thakur and Kulbhushan Parashar. The articles of
association were amended on 16.11.2011 and it is common ground that
the amended articles did not have an arbitration clause. It was the SSA
which contained a provision for arbitration in clause 16 thereof, but after
the amended articles of association, the arbitration clause in the SSA, or
even the SSA itself, can have no effect. In World Phone India Pvt. Ltd.
and Ors. vs. WPI Group Inc. (2013) 178 Company Cases 173 (Del), a
learned Single Judge of this Court (Dr. S. Muralidhar, J.) opined that the
relationship between the shareholders of a company and what they can
do has to be ascertained with reference to the articles of association and
any earlier arrangement or agreement between the parties inconsistent
with the articles of association cannot be said to govern such
relationship. In that case, there was a joint venture agreement entered
into between the parties in 1999; this agreement provided for the
exercise of an affirmative vote. In the articles of association, no
amendment was carried out to incorporate the provision in the joint
venture agreement providing for the exercise of the affirmative vote. It
was held by the learned Single Judge that unless the articles of
association were amended to provide for the exercise of the affirmative
vote, that right cannot be insisted upon by a party to the joint venture
agreement. In support of this conclusion, reliance was placed on the
judgment of the Supreme Court in V.B. Rangaraj vs. V.B.
Gopalakrishnan, (1992) 73 Company Cases 201. Quoting Palmer's
Company Law, 24th Edition, dealing with the transfer of shares and
referring to a judgment of the Bombay High Court in IL&FS Trust Co.
Ltd. vs. Birla Perucchini Ltd., (2004) 121 Company Cases 335, the
learned Single Judge of this Court held that the existence of an
affirmative vote provided for in the joint venture agreement cannot be
recognised without a corresponding amendment to the articles of
association. In my humble opinion, this judgment concludes the issue in
favour of the respondent so far as the argument based on Section 8 of
the Arbitration and Conciliation Act, 1996 is concerned.
32. In Sukanya Holdings (P) Ltd. (supra) a decision of the Supreme
Court cited on behalf of the respondents, it was held that where a suit is
commenced between some of the parties who are not parties to the
arbitration agreement, there is no question of application of Section 8.
This judgment would also apply in favour of the respondents, because
the parties to the SSA were SPV, Comet Infra Developments Pvt. Ltd.
(later RAHI Aviation Holdings Pvt. Ltd.) and ITNL, whereas the
subscribers to the articles of association were different, whose names are
given above. The SSA containing the arbitration clause and the articles
of association of the SPV being entered into between different parties,
Section 8 of the Arbitration and Conciliation Act, 1996 is not attracted
for this reason also.
33. The judgment of the Supreme Court in P. Anand Gajapathi Raju
& Ors. Vs. P.V.G. Raju (Died) & Ors. (supra) cited on behalf of the
appellant does not touch this question. The question which arose in that
case was whether the Supreme Court sitting in appeal can refer the
parties to arbitration under the 1996 Act. This question was answered in
the affirmative but it has nothing to do with the present case. The other
judgment cited on behalf of the appellants namely Hindustan
Petroleum Corporation Ltd. vs. M/s. Pink City Midway Petroleums
(supra) also touches upon a different question. In that case it was held
that, having regard to the Sections 8 and 16 of the Arbitration and
Conciliation Act, 1996, if the agreement between the parties before the
Civil Court contained an arbitration clause, the Civil Court ought to
refer the dispute to arbitrator without going into the question regarding
the applicability of the arbitration clause to the dispute in question. The
factual position in the case before me, as noted earlier, is that the dispute
arises out of clause 123 of the articles of association, but the articles of
association does not provide for arbitration. This judgment is not,
therefore, applicable to the factual position obtaining in the present case.
34. Several authorities were cited on behalf of the respondents, which
I have referred to earlier, in support of the contention that a complicated
matter involving serious questions such as fraud or malpractice,
manipulation of accounts and finances, etc., requiring detailed
investigation and production of elaborate evidence, would be more
appropriately tried and decided by a Court of law and not by an
arbitrator. It is submitted that there are serious manipulations
committed by the appellants such as siphoning off the monies from the
SPV to RAHI, back dating board resolutions, fabrication of board
resolutions, etc. and in such a situation it would be more appropriate if
the CLB decides the matter and not the arbitrator. This argument would
arise for consideration only if there was a provision for arbitration of the
dispute and it is a question of balancing which course to pursue -
whether to pursue the dispute in the Court or the CLB, or to go before
the arbitrator. Such a situation does not arise on the facts of the present
case and, therefore, this argument need not be addressed by me. In the
present case, the petition is pending decision before the CLB in which
all these allegations will have to per force be examined. Moreover,
proceedings under Section 11 of the Arbitration and Conciliation Act
are stated to be pending before this Court and, therefore, it would not be
appropriate to say anything more with reference to this argument. In
this view of the matter I do not consider it necessary to refer to the
judgments in N. Radhakrishnan vs. Maestro Engineers & Ors. (supra),
Ivory Properties vs. Nusli Neville Wadia (supra) and Biom Networks
Ltd. vs. United Wireless P. Ltd. (supra), cited on behalf of the
respondents.
35. For the above reasons, the appeal and the application are
dismissed with no order as to costs. The stay order passed on 21.6.2013
stands vacated.
(R.V. EASWAR)
JUDGE
SEPTEMBER 30, 2013
hs/vld
