BEFORE THE COMPANY LAW BOARD
PRINCIPAL BENCH
Dated: 20th
April, 2002
Present:
1. Shri A.K. Banerji, Chairman
2. Shri S. Balasubramanian, Vice Chairman
In the matter of Companies
Act, 1956- Sections 397/398
AND
In the matter of M/S EIH Limited and Ors.
Versus
M/S Mashobra Resort Limited
and Ors.
PETITIONERS:
M/S EIH Ltd. & 5 Ors.
RESPONDENTS:
1. Mashobra Resort
Ltd.
2. The State Govt.
of Himachal Pradesh
3. Shri Harsh
Gupta
4. Shri S.K. Sood
5. Shri Ashok
Thakur
6. Shri PRS Oberoi
7. Shri S.S.
Mukherjee
8. Shri Arjun
Singh Oberoi
9. Shri T.K. Sibal
Present on behalf of
parties:
1. Shri Dushyant Dave, Sr.
Advocate .. for
petitioners
2. Shri O.P. Khaitan, Advocate ..
for petitioners
3. Shri Prateek Jalan, Advocate
.. for petitioners
4. Shri A.T. Patra, Advocate .. for
petitioners
5. Shri Nipun Malhotra, Advocate
.. for petitioners
6. Shri Mukul Rohatgi, ASG
.. for respondents 2-5
7. Shri Ajay Sharma, Advocate
.. for respondents 2-5
8. Shri Pramod Saigal, Advocate
.. for respondents 2-5
9. Shri Sanjay Karol, Advocate Gen. .. for
respondents 2-5
10.Shri Amrita Sanghi, Advocate
.. for respondents 2-5
ORDER
S.BALASUBRAMANIAN:
1.
In this order, we are considering
as to whether the petitioners have established a prima facie case for grant of interim
prayers as sought for in CA No.52 of 2002 in CP No.12 of 2002 and if so, what are the
interim reliefs to be granted.
2. The facts of
the case are that the 2nd respondent- the Govt of Himachal Pradesh- owned a
property known as “Wildflower Hall” in Simla. With the view to develop the
property into a 5 star Deluxe Hotel, it entered into a joint venture agreement (JV) with the 1st petitioner (known as Oberoi group) on 10.10.1995. The JV
provided for incorporation of the 1st
respondent company to develop and manage the proposed hotel. As per the joint venture agreement, the 2nd
respondent was to hold not less than 35% shares while the 1st petitioner and
its group were to hold not less than 36% and
not more than 55% shares in the 1st respondent company. The contribution by the 2nd respondent
was to be in kind, that is the transfer of
the Wildflower Hall to the company for a value of Rs 7.5 crores against which shares were
to be issued. The 1st petitioner and its group were to invest Rs 20 crores
forwards share capital and the responsibility to construct the hotel and make it
commercially operational was to be with the 1st petitioner. The board of the
company was to comprise of 7 directors of which 3 including the chairman were to be
nominated by the 2nd respondent and 4 including the MD by the 1st
petitioner. The JV also provided that in case the hotel
did not become fully commercially operational within a period of 4 years from the
effective date, extendable by two terms of one year each – subject to payment of Rs 2
crores for each of the extended years- the shares issued in favour of the petitioners’ group would be surrendered/transferred to the 2nd
respondent on payment of 50% of the face value of the shares plus Rs 10 for the technical
services rendered by the Oberoi group. It further provided that the premises
with all the improvements thereon would vest in the second respondent. It also
provided for arbitration in case of disputes
arising out of the JV. It contained 7
Schedules inter alia including a Draft
Memorandum and Articles, shareholders
agreement, Draft Allotment Agreements etc. Accordingly in terms of the JV, the 1st
respondent company was incorporated on 3.12.1995. Notwithstanding the agreement relating
to specific ratio of shareholdings in the company by
the 1st petitioner and the 2nd respondent, the shareholding
percentage has changed by which the petitioners’ group came to hold about 79% shares
in the company while the 2nd respondent about 21%. As per the terms of the JV, the 2nd
respondent has 3 directors including the Chairman while the petitioners’ group has 4
directors including the MD. Even though all the 85 rooms
envisaged under the JV have been fully
constructed, yet, only 28 rooms are operational w.e.f.30.3.2001 and the operation of the balance rooms are reportedly struck up for
want of certain approvals. A writ petition has been filed by the company in HP High Court
for directions to the concerned governmental authorities to sanction the approval for the
57 rooms.
3. By a
letter/notice dated 6th March,
2002, the 2nd respondent conveyed to the 1st petitioner that the
Joint Venture Agreement stood automatically terminated w.e.f. 13.10.2001 in view of the
following:
1. You have failed
to make the hotel fully commercially operational within 4 years from the effective within
the meaning of Clause 10.1(b) of the Joint Venture Agreement and Article 3 (2) of the
Allotment Agreement.
(2)
You have failed to perform your obligation as
regarding the technical services in the manner and time frame prescribed within the
meaning of proviso appended with Clause 11 of the Joint Venture Agreement and Article 1(3)
of the Allotment Agreement
(3)
You have illegally and unauthorizedly changed the
equity distribution ratio without obtaining our permission and consent in terms of the
Joint Venture Agreement.
(4)
You have paid and/or appropriated a large sum
of money as payment to your associate companies and other companies under the garb of
having obtained technical assistance from them, even though under the agreement, those
services were to be provided by you free of charge or in any case that was your
responsibilities.
(5)
You have unduly delayed the commissioning of the
project and have burdened the joint venture with escalation of more than 100%.
4. The notice
further stated that in view of the termination of the JV Agreement, in terms of the said
agreement, the shares held by the petitioners’ group stood transferred to the 2nd
respondent for a consideration of 50% of the face value of the shares held by the
petitioners plus Rs.10/- as consideration towards the technical services. A cheque for Rs.
9 crores and Rs. 10 was enclosed with the notice. The notice also stated that the land,
buildings and structures standing on the land stood reverted to the 2nd
respondent on “ as is where is basis”. Thereafter,
the 2nd respondent conveyed to the company by a letter dated 7th
March, 2002 that in view of the termination of the JV Agreement, the nominee directors of
the 1st petitioner including the managing director ceased to hold office as
directors of the company and that one Shrikant Baldi has been appointed as Executive
Director cum Officer on Special Duty to
exercise all the powers of the Managing Director and also be responsible for the day to
day running of the company. On 7th March, 2002, a Board Meeting of the company was held in which resolutions were passed for
changing the authorization of bank operations, appointment of Shri Baldi as the Executive
Director cum OSD and that in view of the termination of the JV Agreement, the nominee
directors of the petitioners including the managing director had ceased to hold office
w.e.f. 13.10.2001. No notice of this meeting
was given to the directors from the petitioners’ group.
5. On receipt of
the letter/notice dated 6th March, 2002 from the 2nd respondent, the
1st petitioner issued a legal notice dated 12th March, 2002 to the 2nd
respondent challenging the grounds on which the notice of termination had been issued and
had also invoked the arbitration clause in the JV Agreement
suggesting the name of Justice R.S. Pathak as sole arbitrator. The notice also
indicated that the cheque sent by the 2nd respondent towards consideration for
the shares would be returned. Thereafter the
instant petition was filed on 13th March, 2002.
6. When the
petition was mentioned on 13.3.2002, after hearing Shri Dave, Sr. Advocate for the
petitioners, this Bench passed an order directing the maintenance of status quo as on date in respect of the composition of the Board as well
as in respect of the movable and immovable assets of the company. The respondents were directed to file their reply
to the interim application. On 18.3.2002, this Bench advised the parties to amicably
resolve the disputes and report on 1.4.2002. On this day, the learned counsel for the
respondents submitted that his clients would be willing to go out of the company if the petitioners were to pay Rs.20 to Rs.25
crores which was not acceptable to the petitioners who suggested that valuation should be
done by an independent financial institution. In view of this, we suggested to the counsel for
the respondents that it would be appropriate to have the valuation determined by an
independent valuer acceptable to both the sides and the learned counsel desired some time
to consult his clients. In the subsequent hearing, the
counsel for the respondents submitted that, at the time when the 2nd
respondent had called for proposals for developing a 5 star Deluxe Hotel, it had got an
offer for Rs 145 crores and as such if the petitioners were prepared to offer that amount,
the 2nd respondent would be willing to go out of the company. Since there was
no agreement between the parties on the valuation, we heard the counsel extensively on the
interim prayers sought for by the petitioners.
7. Even though the
counsel appearing for the parties argued extensively referring to the JV agreement,
annexures thereto and the Articles, we do not propose to elaborate the same in this order
as, at present, we are only examining whether there is a prima facie justification and
balance of convenience in favour of the petitioners for grant of any interim relief pending the final disposal of
the petition.
8. Shri Dave
argued: The claim of the 2nd
respondent that the shares held by the petitioners stood transferred to the 2nd
respondent and its claim that the nominees of
the petitioners had ceased to be the directors of the company cannot be sustained in law.
By claiming so, the 2nd respondent has sought to oust the petitioners from the
company not withstanding the fact that they have invested over Rs 90 crores in the project
and have also given personal guarantee to ICICI for a loan of Rs 55 crores. The foundation
of the claim of the 2nd respondent is that the petitioners had failed to make
the hotel fully commercially operational within 4 years of the effective date and that the
effective date is the date of the agreement on 30.10.1995. The stand of the 2nd
respondent regarding the effective date is erroneous in as much as Article 8(1) indicates
the effective date as the date of handing over the possession of the premises by the 2nd
respondent. The premises were actually handed
over to the company only on 3.5.96 and this
fact has been recorded in the minutes of a Board meeting also. In terms of the JV
Agreement the period of 4 years is extendable for a period of two terms of one year each. Thus, even in terms of the JV Agreement the period
of 6 years would expire only on 3.5.2002. Even though, all the 85 rooms with full
facilities of a Deluxe 5Star Hotel were ready as early as on 30.3.2001, only 28 rooms
could be commissioned on that date due to non receipt of necessary approval in respect of
the balance 57 rooms. In other words, full commercial operation commenced on
30.3.2001itself which is within 5 years of
the effective date. Therefore, the foundation on which the notice has been issued
terminating the JV Agreement does not exist. Further, the action of the 2nd
respondent in terms of the notice dated 6.3.2002 is not sustainable in law for the
following reasons:
1.The terms
of the JV agreement are not binding on the company as it is not a party to the JV (S.P.
Jain Vs. Kalinga Tubes Ltd. – 1965 2 SCR 720
)
2. Even if the terms of the JV are part of the Articles, it will not have any binding force on the company; (Rolta
India Ltd. Vs. Venire Industries Ltd. 100 CC 19
)
3. In terms
of Section 9 of the Act, any provision in the Articles/agreement, contrary to the
provisions of the Act is void; ( Madanlal Faquir Chand Dudhediya Vs. Shri Changdeo
Sugar Mills Ltd.- 1962 3 SCR 973 )
4. The
alleged transfer of shares of the petitioners to the 2nd respondent is in
violation of the provisions of Section 108 the compliance of which is mandatory: (Mannalal
Vs. Kedarnath -AIR 1977 SC 536
)
5. No
director can be removed without following the provisions of Section 284 of the Act;
6. The
holding of the Board meeting on 7.3.2002 without notice to the nominees of the petitioners
is unlawful and invalid (Parmeshwari Prasad Vs. UOI
AIR 1973 SC 2389 );
7. There
could be no agreement or provision in the Articles for transfer of the properties of a
company to a shareholder for the alleged
breach of terms of an agreement as the property of the company belongs to it and the
shareholders cannot have nay claim over it or appropriate the same– Bacha F
Guzdar Vs. CIT- 1955 SCR 876
); LIC Vs. Escorts Ltd.- AIR 1986 SC 1370).
9. Summing up his
arguments, the learned counsel submitted that the nominee directors of the 2nd
respondent, being in government service, have acted in breach of their fiduciary duties to
the company, in implementing the directions
of Government, without taking into
consideration the legal aspects of the case and also the interest on the company. In other words they have exhibited that they owe
duty to a shareholder and not to the company. By implementing the directions of the
Government, the property of the company has been handed over to the government, the
nominees of the largest stake holder have been ousted from the Board, the day to day management of the hotel has been
taken over. All these acts are oppressive to the petitioners and would adversely affect
the interest of the company. With commencement of summer, the peak tourist season has
started and only the petitioners with their expertise and net work could ensure higher occupation and better service to the
customers. If the day to day operation of the company is with government servants having
no expertise in hotel management, it would adversely affect the interest of the company.
Accordingly he prayed that till the disposal of the petition, as an interim measure, the respondents should be restrained from giving
effect to any of the decisions taken in the Board meeting held on 7.3.2002 and also from
interfering with the day to day management, control and functioning of the company, from
holding any Board meeting except in accordance with the Articles with adequate notice to
the nominee directors of the 1st petitioner, that the respondents should be
directed to maintain the status que of the Board as existed on 5th March 2002 and that the 2nd respondent should be
restrained from to treating the assets of the company as reverted to the 2nd
respondent.
10. According to Shri Mukul
Rohtagi, ASG appearing for the respondents, the
proceedings before the Bench should be stayed in view of the arbitration clause in the JV
Agreement, more so, since the 1st
petitioner has already invoked the arbitration clause. According to him, if the substance
of the matters covered in the petition are
subject matter of arbitration, the same should be referred to arbitration
( Gurnir Singh Gill Vs. Saz
International Private Ltd. – 62 CC 197).
Further, since the petitioners have invoked the arbitration clause, to avoid parallel
proceedings, the present proceedings should be stayed.
Even though the company is not a party to the JV Agreement, yet, the company owes
its birth to the terms of the JV and these terms are the guiding star of the company and
as a matter of fact, a perusal of the various Articles would indicate that the company has
adopted many of the terms of the agreement and as such they are binding on the company and
the shareholders. Every action taken by the 2nd
respondent is in accordance with the JV agreement and Articles. One of the main conditions
of allotment of shares to the petitioners group as per the allotment agreement was that the hotel should become fully
commercially operational within 4 years plus 2 years. Since the effective date of the
agreement is 30.10.1995, the six years period expired on 30.10.2001 but only 28 rooms out
of 85 rooms became operational. Therefore, in
terms of the JV agreement, allotment agreement and Article
8.1, the 2nd respondent is entitled to terminate the JV and takeover the shares
held by the petitioners. Further, the petitioners have also changed the proportion of the
shareholding without amendment to the JV, by which they have acquired a larger proportion of shares than what was
envisaged in the JV. They are also responsible for escalation in the cost of the project and in view of
this, the 2nd respondent cannot expect any dividend for a number of years to
come. The second respondent being a state government, it has to keep in mind the public
interest and since the property belonged to the State earlier, in view of the breach of
the terms of the JV, the state has the right to revert the property right to itself in
public interest. Since as per the terms of the JV and the Articles, the petitioners group
will have to go out of the company, whether the shares are surrendered or transferred or
forfeited, the mode is of no consequence as the result of any one of them is that the
petitioners would be out of the company. A company has
full rights to forfeit the shares on
any ground as provided in the Articles. (Naresh
Chandra Sanyal V The Calcutta Stock Exchange Association Ltd- AIR 1971 SC 422).
Article 10.1 clearly provides that breach of the JV would result in expulsion from
membership and surrender of the shares held
by the petitioners to the 2nd
respondent. Once they cease to be the shareholders, they cannot have any representation on
the Board as is evident from Article 18. He further submitted that the nominees of the 2nd
respondents are capable of running the company effectively and as such no interim relief
should be granted and the earlier interim order should be vacated.
11. We have very carefully
considered the arguments of the counsel. As far as staying our proceedings is concerned,
such a stay was possible earlier at the discretion of the Court under Section 34 of the
Arbitration Act 1940. But, after coming into
force of the Arbitration and Conciliation Act 1996, stay of proceedings by a Court is no longer possible. Section 8 of this
Act only enjoins a judicial authority to refer the parties to Arbitration if the
requirements of this Section are fulfilled. For referring the parties to Arbitration, a
party should apply not later than when submitting his first statement on the substance of
the dispute. Shri Dave referred to the decisions in VLS Finance Ltd V Sunair Hotels
Ltd- (CP45/1998-CLB) and P Anand Gajapathi Raju V PVG Raju- (2000 4
SCC 539). In the present case, admittedly, the respondents have not filed any
application under Section 8. Instead, they
have filed a reply to the interim application touching upon extensively
on the substance of the disputes. This is not withstanding the argument of Shri Dave that
the company is not a party to the JV to bind it with the arbitration clause. Therefore, the question of staying our proceedings or referring the matter to
arbitration does not arise. As far as parallel proceedings are concerned, Section 8 itself
contemplates, in subsection (3) such parallel
proceedings.
12. The main ground for seeking
interim reliefs is that the 2nd respondent, after ousting the petitioners from
membership and directorship, has taken over the day to day management of the hotel which
would not be in the interest of the company and that non grant of the interim reliefs
sought for would be prejudicial to the
interest of the petitioners. The normal principles to be applied for grant of interim relief are that there is a serious dispute in question to be
tried, that the court’s interference is necessary to protect the parties from injury,
that a prima facie case has been established and that the balance of convenience is in
favour of the petitioners. It is also a
settled principle that at the interim stage the court is not justified in embarking on
anything resembling a trial in order to evaluate the strength of either party’s case.
It is also a settled principle that where the factors appear to be evenly balanced, it is
a counsel of prudence to take such measures
as are calculated to preserve the status quo. Applying
these principles, if we consider the facts of the case, it is crystal clear that
the various legal issues raised by the learned counsel for the petitioners
as indicated in paragraph 8 ante are extremely valid requiring determination at the time of hearing of the main petition. These would also indicate that
there is prima facie justification to protect the interests of the petitioners and that
the balance of convenience is in their favour. It is not in dispute, as seen from the
copies of various Board Minutes, that the affairs of the company had been carried on by
both the parties amicably during the last 6 years. We
find that more than 25 Board Meetings had
been held without any dissent from either side indicating that neither of them had
grievances against the other. It is on record
that the petitioners had been executing the project and had been in control of the day to day affairs of the company all these years.
We also note that the petitioners have moved this Board within the shortest possible time
after occurrence of the events complained of. Considering the fact that the financial
exposure of the petitioners is to the extent of over Rs 90 crores (with personal guarantee
of over Rs 50 crores) and that the 2nd
respondent had chosen the 1st petitioner as a joint venture partner because of its expertise in management of hotels, it is
necessary that the petitioners are associated with the affairs of the hotel till the
petition is finally disposed of. The admitted
position is that the company is nothing but a hotel project. If the premises of the hotel
were to vest in the government, there will be no
activity for the company and association of the petitioners with the management of the
company would be of no consequence. We are of the prima facie view, even assuming that the
2nd respondent has the right to
the shares of the petitioners in terms of the JV and Articles, that the property of the company could not be
taken over by the 2nd respondent especially when there is a huge liability
against the company.
13. Thus, considering the facts
in totality and taking into consideration the interest of the company, in exercise of our
powers under Section 402 of the Act, we direct as follows:
a. The entire
hotel complex will be treated as
the property of the company and the company alone will have the right to the full usage of
the hotel complex.
b. All the
decisions taken in the Board meeting on 7.3.2002 are stayed.
c. The Board of
the company will be reconstituted with 4 directors- 2 from the petitioners’ side and
two from the 2nd respondent. One of the nominees of the petitioners will be the
MD and one of the 2nd respondent’s will be
the Chairman. The nominations should be forwarded to the company and the respective
parties at the earliest and the first Board meeting should be held latest by 30.4.2002. The MD will be in charge of the day to day
management and control of the company. All policy decisions will be taken only in Board meetings for which 7 clear days notice with agenda should be given to all
directors. Both the sides will be at liberty to bring
proposals to the Board. Only unanimous decisions of the Board will be implemented.
The MD should circulate, on a fortnightly basis, a summary of the performance of the hotel
to all the directors.
d. As far as the
shares of the petitioners are concerned, we do not propose, for the present, to give any
directions, other than stipulating that none of the shares of the company shall be dealt
with in any manner and that no general meeting of the company will be convened or held so
that there will be no need to exercise voting rights on the shares.
14. CA 52 of 2002 is accordingly disposed of. The respondents to file their detailed reply to
the petition by 31.5.2002 and the rejoinder to be filed by 30.6.2002. The petition will be heard on 11th and 12th
July at 2.30 p.m. Liberty given to both
the sides to apply.
15. Before we part with the order we consider it appropriate
to observe that the disputes between the parties deserve to be settled amicably. Even
assuming that the Government has acted in accordance with law in issuing the termination
notice and taking over the shares of the petitioners, we feel that it would not be in the
interest of the Government to run the hotel on a long term basis especially when the hotel
has a liability of over Rs.50 crores. In view
of the strained relationship between the parties, it may also not be possible for them to
carry on together also. Under the
circumstances, we would suggest that the Government should consider disinvesting the
shares held by it in the company for a consideration which could be based on the value of
the land against which shares were issued. In
case the Government is inclined to accept our suggestion of disinvesting the shares on the basis of the valuation of the land, the same may be reported to us on 3rd
May 2002 at 2.30 p.m. In that
case, it would be in the interest of the petitioners also to agree to the suggestion so
that they could become the exclusive owner of the company. If both the parties agree, we
shall appoint an independent valuer to value the land on that day.
(S. Balasubramanian)
(A.K. Banerji)