Delhi High Court
M/S Renaissance Buildcon Co. Pvt ... vs M/S S.E. Investments Ltd & Ors on 19 November, 2018
$~1
* IN THE HIGH COURT OF DELHI AT NEW DELHI
Decided on: 19.11.2018
+ FAO(OS) (COMM) 253/2018 & CM APPL.Nos.46198-
46201/2018
M/S RENAISSANCE BUILDCON
CO. PVT LTD & ORS ..... Appellants
Through: Mr. Sachin Chopra, Mr. Gaurav
Rana & Ms. Aastha Dhawan,
Advocates.
versus
M/S S.E. INVESTMENTS LTD & ORS ..... Respondents
Through: Mr. P. Nagesh, Advocate for R-1.
CORAM:
HON'BLE MR. JUSTICE S. RAVINDRA BHAT
HON'BLE MR. JUSTICE PRATEEK JALAN
MR. JUSTICE S.RAVINDRA BHAT (OPEN COURT)
%
1. In this appeal under Section 37(1)(C) of the Arbitration &
Conciliation Act, 1995 [hereafter referred to as 'Act'], the judgment and
order of the learned Single Judge dated 2nd February, 2018, rejecting the
petition under Section 34 of the Act is impugned.
2. The brief facts are that the appellant No.1 [hereafter referred as
'Renaissance'] had entered into a Shareholder's Agreement, sometime in
May, 2007 with D.B. Zwirn Mauritius Trading No.2 Limited [hereafter
referred to as 'foreign investor'], and others, including DD Global Capital
Ltd. and one Mr.Sanjay Gambhir. In between, the foreign investor
withdrew from equity participation and sold its shareholding to the Bansal
Group [collectively referred to as 'Appellants No.2 to 4']. Concededly, on
08.07.2008, the Respondent No.1 [hereafter referred to as the 'creditor']
advanced ₹3.2 crores to DD Global. M/s Renaissance Buildcon Company
Pvt. Ltd. stood guarantor to the loan and also furnished mortgage security.
The appellants No.2 to 4 acquired shareholding in M/s Renaissance
Buildcon Company Pvt. Ltd. on 25.10.2010. At that point in time they
became aware of the proceedings initiated by the Respondent No.1/creditor
for recovery of the amount advanced. The appellant and the Bansal Group
were impleaded in the arbitration proceedings. Their principal defence to
the creditor's action seeking enforcement of the guarantee [furnished by
M/s Renaissance Buildcon Company Pvt. Ltd.] was that the loan contract
for the enhancement of credit limits that took place on 30.07.2010 was
unauthorised. In this regard the appellants urged that the Articles of
Association especially Article 26(a), (f) & (g) accepted certain matters to
require the affirmative consent of the investor viz. D.B. Zwirn Mauritius,
the foreign investor which include encumbering the company's property in
any manner whatsoever.
3. The Arbitral Tribunal considered the pleadings of the parties as well
as the oral deposition of the witnesses. The Tribunal concluded that the
appellant's objection with respect to the enforceability of the guarantee, as
against the Bansal Group, which was indeed against M/s Renaissance
Buildcon Company Pvt. Ltd. was not substantial. Consequently the
Tribunal held M/s Renaissance Buildcon Company Pvt. Ltd. liable jointly
and severely with the principal borrower Respondents No.2 to 4, [i.e. M/s
DD Global Capital Private Limited and its Directors]. Learned counsel
relied upon Clause 26 (f) & (g). It was contended that the Articles of
Association are public documents which bound the creditor and that its lack
of inquiry into question as fundamental as the power or authorization
granted to the Directors to enter into the transaction vitiated it, because the
document ipso facto disclose that the permission was not obtained, and that
in the absence of the investor's director in the meeting the Board resolution
relied upon, had no valid legal existence.
4. The learned counsel reiterated the submission made before the
learned Single Judge and also relied upon the judgment reported as MRF
Ltd. Vs. Manohar Parrikar & Ors., (2010) 11 SCC 374, especially on the
following extracts:
"67. The doctrine of indoor management is also known
as the Turquand rule after the case of Royal British Bank
v. Turquand [1856] 6 E. & B. 327. In this case, the
directors of a company had issued a bond to Turquand.
They had the power under the articles to issue such bond
provided they were authorized by a resolution passed by
the shareholders at a general meeting of the company.
But no such resolution was passed by the company. It
was held that Turquand could recover the amount of the
bond from the company on the ground that he was
entitled to assume that the resolution was passed. The
doctrine of indoor management is in direct contrast to
the doctrine or rule of constructive notice, which is
essentially a presumption operating in favour of the
company against the outsider. It prevents the outsider
from alleging that he did not know that the constitution of
the company rendered a particular act or a particular
delegation of authority ultra vires. The doctrine of indoor
management is an exception to the rule of constructive
notice. It imposes an important limitation on the doctrine
of constructive notice. According to this doctrine,
persons dealing with the company are entitled to
presume that internal requirements prescribed in
memorandum and articles have been properly observed.
therefore doctrine of indoor management protects
outsiders dealing or contracting with a company,
whereas doctrine of constructive notice protects the
insiders of a company or corporation against dealings
with the outsiders. However suspicion of irregularity has
been widely recognized as an exception to the doctrine of
indoor management. The protection of the doctrine is not
available where the circumstances surrounding the
contract are suspicious and therefore invite inquiry."
XXXX XXXX XXXX
111. The doctrine of indoor management is in direct
contrast to the doctrine or rule of constructive notice,
which is essentially a presumption operating in favour of
the company against the outsider. It prevents the outsider
from alleging that he did not know that the constitution of
the company rendered a particular act or a particular
delegation of authority ultra vires. The doctrine of indoor
management is an exception to the rule of constructive
notice. It imposes an important limitation on the doctrine
of constructive notice. According to this doctrine,
persons dealing with the company are entitled to
presume that internal requirements prescribed in the
memorandum and articles have been properly observed.
Therefore, doctrine of indoor management protects
outsiders dealing or contracting with a company,
whereas doctrine of constructive notice protects the
insiders of a company or corporation against dealings
with the outsiders. However, suspicion of irregularity has
been widely recognized as an exception to the doctrine of
indoor management. The protection of the doctrine is not
available where the circumstances surrounding the
contract are suspicious and therefore invite inquiry."
5. Learned counsel also relied upon the Supreme Court's judgment in
Vodafone International Holdings Vs. Union of India 2012 107
CLA 63 (SC).
6. The Single Judge went back to the principles of 'Indoor
Management' and also noticed the judgment in the case of MRF (supra).
According to the impugned judgment, the doctrine of 'Indoor Management'
protects the outsiders dealing or contracting with a party and constitutes an
exception to the doctrine of 'Constructive Notice'. In so holding, the
learned Single Judge extracted the decision in the case of MRF (supra).
The relating portions of the discussion and observations of the Single Judge
in the order are as follows:
"17. It is pleaded by the petitioners that this doctrine of
indoor management would have no application to the facts of
this case as there was grave suspicion of irregularity in the
conduct of the affairs of petitioner No.1 by respondents No. 3
and 4. Accordingly, the said suspicion would create an
exception to the plea of the respondent No. 1that the conduct of
respondent Nos.3 and 4 is related to internal management of
petitioner No.l. The plea is that the Acknowledgment and
Agreement dated 05.03.2010 had been executed between
petitioner No.l and respondents No. 3 and 4 and the Investor.
Mr.Sanjay Gambhir, respondent No. 4 has clearly admitted his
guilt of having siphoned off funds from petitioner No.
1Company. A similar plea has already been made regarding
the legality and validity of the Board Resolution of respondent
No.2 dated 30.7.2010 and the execution of the guarantee
agreement dated 31.7.2010. The same pleas are somewhat
repeated here, namely, that respondent No.l should have
known that there is something suspicious and should not have
entered into the transaction. As noted above, no argument was
raised before the Learned Arbitrator that respondent No.l was
aware of any internal issues amongst the Directors/promoter
of petitioner No.l. Reliance of learned counsel for the
petitioner on the above noted judgment of the Supreme Court
in MRF Ltd. vs. Manohar Parrikar & Ors. (supra) is
misplaced and misconceived."
7. This Court is of the opinion that the view expressed by the Single
Judge cannot be said to be unreasonable and cannot be characterized as
being contrary to law, as to warrant interdiction of the award in terms of the
law declared by the Supreme Court. What the appellant argues in this
regard is that the creditor, or someone who is in the same position, is
required to discern whether any authority relied upon exists or not. This is
not only with reference to the documents shown, but also with reference to
other material to be sourced from the public domain such as the Articles of
Association. In the given facts in this case, which clearly disclose that the
liability to the extent of Rs.3.2 crores was in the knowledge of the investor
who stepped in to control the shares of the guarantor company, and
furthermore the enhancement of the credit limit took place in July 2010,
and was even noted as a charge in the Register of Companies [which is a
public document]. The conclusions recorded by the Single Judge in the
opinion of the Court do not call for interference.
8. The appeal is accordingly dismissed.
S. RAVINDRA BHAT
(JUDGE)
PRATEEK JALAN
(JUDGE)
NOVEMBER 19, 2018
„pv/hkaur‟
