Dated:23rd
January 2002
Present: 1. Justice A. K. Banerji, Chairman
2. Shri S. Balasubramanian,
Vice Chairman
AND
In the matter of Shri
Kaikhosrou K. Framji
Versus
M/S Consulting Engineering
Services (India) Limited
PETITIONER:
Shri K.K. Framji
RESPONDENTS:
1. Consulting
Engineering Services (India)Ltd.
2. Shri S. S.
Chakraborty
3. Shri S. Ghosh
4. Shri P. Ghosh
5. Shri S.C.
Paul
6. Shri R.N.
Banerji
7. Shri P.K.
Saha
8. Shri
P.K.Datta
Present on behalf of
parties:
1. Shri Rajiv Sawhney, Sr.
Advocate
.. for petitioner
2. Ms. Manisha Lamba, Advocate
.. for petitioner
3. Shri Ajay Vohra, CA
.. for petitioner
4. Shri U.K. Choudhary, Sr.
Advocate
.. for respondents
5. Ms. Anjana Roy Gowai,
Advocate
.. for respondents
6. Ms. Kum Kum Sol, Advocate
.. for respondents
7. Shri Avimukt Dar, Advocate
.. for respondents
(Date of hearing 24.9.2001)
S. BALASUBRAMANIAN:
1.
With the main allegation that the
respondent company has proposed passing a special resolution to enable the Board of
Directors to allot 1,24,13 further shares at par to the existing shareholders who are in
whole time employment of the company and to a company under the same management, which would be against the interest of the petitioner
who is even though a shareholder is not an employee of the company, the petitioner has sought for a declaration that the said special
resolution proposed to be passed is illegal and null and void.
2.
When this petition was taken up for
hearing on 31.12.1997, this Bench passed an order directing the company not to give effect
to the resolution, if passed, till the disposal of the petition. There after, in a hearing held on 10.3.1998, this
Bench suggested to the parties to explore the possibilities of a settlement. After hearing
the counsel for the parties on 15.4.1998, this Bench passed an order on 28.5.1998 as
follows:
“When the petition was taken up for hearing on 15.4.1998, it was
suggested to both the parties to arrive at an overall settlement not only with regard to
Respondent company but also regarding other two companies, namely, Consulting Engineering
Services Investment and Management Company Limited 9CESIMC) and Consulting Engineering
Services ( Water Resources Development Management Company (CESWRDMS). In deference to this proposal, the petitioners
have agreed ( duly signed by them and taken on record) to sell their shares in all the
three companies and the respondents have agreed to purchase the petitioners’ shares
at a fair value to be determined by M/S Price Waterhouse and Company (PW). The terms of
the agreement are set out below:
1.
The petitioners and the
Respondent would make a joint request to PW to arrive at the fair value of the shares of
the above mentioned companies. Both the
parties would have an opportunity to be heard by PW before the final report is given by
them.
2.
The parties have agreed that
the valuation shall be made on the following alternative basis:
(a)
That the petitioner holds 14.5% of share capital of CES, 24.7% of the
share capital of CESIM and 25% of the share capital of CESWRDMS and
(b)
That
the petitioner holds 10.63% of the share capital of CES present percent of the share
capital of CESIM and 25% of the share capital of CESWRDMC.
3.
The valuation of the shares of
CESIM shall be made on the following two alternative basis:
(a)
On the footing that the
transfer of shares held by CESIM in CES after 1994 did not take place.
(b)
By
giving effect to the said transfer of shares held by CESIM in CES.
4.
Parties will be entitled to
make submissions to CLB on the valuation and also which of the alternative basis of
valuation should be adopted and Company Law Board shall decide the same.
5.
Respondents undertake not to
raise any objection to the effect that no petitions against CESIM or CESWRDMC or any other
technical objections whatsoever which was counter to the intent of this settlement.
6.
Respondent undertake to make
available to PW all the information, particulars and records which may be required for the
purpose of valuation.
7.
PW shall be entitled to avail
of the services of other expert valuers for valuation of the properties of the companies.
8.
PW would give their report
within six weeks from the date of request for the same.
The cost of the valuation would be borne equally by both the parties.
In accordance with the above agreed terms and in order to facilitate
the parties to come to a final settlement, we adjourn the case to 5.8.98 at 4.00PM when
the parties can make their submissions as per clause 4 above.”
3.
After passing of this order, in the
hearing held on 16.11.1998, the parties agreed that M/S S.R.Batliboi be appointed to value
the shares and accordingly an order was passed on 16.11.1998 appointing the said firm to
value the shares. M/S Batliboi & Co.,
filed a report by a letter dated 5.4.2000 whereafter both the parties were given the
opportunity to react on the report. Both the
parties raised various objections on the valuation and thus have sought for rejection of
the valuation report. While doing so, the petitioners have sought for appointment of
another valuer and the respondents have sought for dismissal of the petition as not
maintainable.
4.
In the hearing held on 18.9.2001, Shri
Rajiv Sawhney, Sr. Advocate for the petitioner submitted that since both the parties had
agreed that the shares held by the petitioner would be purchased by the respondents and
since both the sides have rejected the valuation report of M/S Batliboi & Co., to put
an end to the disputes and in terms of the consent order dated 28.5.1998 which is binding
on the parties, a fresh valuation be ordered by the Company Law Board. He pointed out that the stand of the respondents
that there is no binding consent order is not correct.
He also submitted that the present plea of the respondents that the petition is not
maintainable can also not be accepted in as much as in the consent order it has been very
specifically stated in clause 5 that the respondents have undertaken not to raise any
objection to the effect that no petition against CESLM or CESWRDMC or any other technical
objection whatsoever which was counter to the intent of this settlement. Having undertaken not to raise any objection, the
respondents cannot now raise the issue of maintainability.
Further, the object of the provisions of Section 397/398 is to put an end to the
disputes and the CLB has powers under Section 402 to direct purchase of shares held by one
group to the other. Referring to the
application dated 18.8.2000 filed by the respondents, he pointed out that in this
application, they have not raised the issue of maintainability nor have taken a stand that
there was no binding consent. He further
pointed out that the petitioner had given a draft order which was modified by the CLB in
the presence of the counsel from both sides. In
clause 4 of that order, the parties were to only make submissions on the valuation and
also suggest the alternative basis of valuation to be adopted and the CLB would decide the
same. In other words, he pointed out, that
now it is for the CLB to decide the value of the shares on the basis of the valuation
report. However, since both the sides have
raised objection on the valuation, the CLB could appoint another valuer. The question of getting into the merits of the
petition at this stage as claimed by the respondents does not arise. He also pointed out that in view of the consent
order, the petitioner has not chosen to file any amendment to the petition after having
come to know of certain transfer of shares. Further,
he pointed out that the consent order dated 5.8.1998 had practically disposed of the
petition and the only issue to be determined is valuation of the shares. Having agreed to purchase the shares of the
petitioner in all the 3 companies and after the valuation has been completed, the
respondents cannot ask for re-opening the entire matter. In view of the consent order they
are estopped from seeking hearing of the petition on merits, especially after having
participated in the valuation and having waited for 4 long years. Referring to Prasun Roy Vs. Calcutta
Metropolitan Development Authority ( 1987 4
SCC 217 ), he pointed out that long
participation and acquiescence preclude such a party from contending that the
proceedings were without jurisdiction. He also referred to the judgment of Gauhati
High Court in Subhash Mohan Dev Vs. Santosh Mohan Dev ( 2000 1 CLC 115 ) he pointed out that when a challenge
was made on the consent order passed by the CLB, the High Court held that once a consent
order is passed, it operates as an estoppel and
cannot be challenged. On the same proposition, he also referred to Chand Mall Pincha
Vs. Hathi Mall Pincha (1998 CC 368).
He further submitted, referring to Katakra Chintamani Doera Vs. Guatreddia
nnamanaidu ( AIR 1974 SC 1069) that in terms of order 23 Rule 3
of the Code, the court can not only permit compromise and adjustment of a suit by a lawful
agreement, it also gives a mandate to the court to record it and pass a decree in terms of
such compromise and the decree being a consent decree, the same is not appealable because
of the express bar in Section 96(3) as this section is based on the broad principle of
estoppel.
5.
He therefore pointed out that the
settled law in respect of a consent order is that the parties are estopped from
challenging the same on any ground including the maintainability of the petition. Therefore, he submitted that the CLB should
appoint a fresh valuer to determine the fair value of the shares of all the 3 companies so
that in terms of the consent order, the petitioner would go out of all the 3 companies on
receipt of fair consideration for his shares.
6.
Shri U.K. Chaudhary, Sr. counsel
appearing for the respondents submitted that the petition itself is not maintainable as no
material has been placed before this Bench to come to the conclusion that just and
equitable grounds exist for winding up of the company.
Referring to the recent decision in H.P. Baghi Vs. Cerals Private Limited(105
CC 493), he pointed out that no petition under Section 397 could be maintained
unless there are grounds for winding up of the company on just and equitable grounds. In the present case, the petitioner holds only 11%
shares and he has not shown that either there is a deadlock in the affairs of the company or that the conduct of the respondents is
burdensome, harsh or unfair. Moreover, the
only instant complaint in the petition relates to issue and allotment of shares to
employee shareholders which itself being a single act could never be considered to be
oppressive especially when there have been a proper resolution with notice to the
petitioner. The object of issue of shares to
the employees is to motivate them and to keep them in the company and as such it is just
like stock option scheme with a view to create a sense of belonging. It is a business decision taken in the interest of
the company and merely because the directors incidentally hold majority shares, it cannot
be considered to be an act of oppression. He
also pointed out that even though some of the family members of the directors hold shares
in the company, no shares are being allotted to them. Since on merits the petition cannot
survive the same should be dismissed.
7.
As far as the plea of the petitioner
that the consent order is binding on both the
parties, Shri Choudhary contended that the said order is
not a final order and the petition has not been disposed of in terms of that order. Referring to the last paragraph of the order dated 28.5.1998, he pointed out that
the parties had to come to a final settlement in accordance with the agreed terms. This being the case, it is wrong to contend that
the consent order is binding on the parties as no final settlement could be arrived at in
view of the disputes on the valuation made by M/S Batliboi & Co. In other words, according to him, there was no
complete and final compromise between the parties and as such the said order cannot have
any binding force. He also submitted that none of the cases cited by the learned counsel
for the petitioner is applicable to the facts of this case, since, there is no binding
consent order in the present case. Therefore, he submitted that the respondents are no
longer interested in getting the fair value of the shares re-determined by another valuer.
Accordingly, he submitted that in view of the petitioners having not established any case
of oppression against the respondents, the petition should be dismissed.
8.
We have considered the arguments
of the counsel. The learned counsel for the
petitioner argued that there is no scope now to get into the merits of this case including
the maintainability in view of the consent order dated 28.5.1998. To determine whether the
said order has brought out a complete settlement as claimed by the petitioner, it is
essential to not only indicate the circumstances under which the said order was passed but
also the terms of that order. This petition was filed
in December, 1997. In the hearing
held on 31.12.1997, directions were given to the parties to complete the pleadings and
accordingly the respondents filed their replies with an affidavit dated 8.1.1998 on 13.1.1998 and the petitioner filed a rejoinder dated 24.1.1998 on 27.1.1998 . Thereafter,
as seen from the records of the proceedings, the petitioner filed two applications. In CA 67 of 1998 dated 24.1.1998 – one
seeking for inspection of statutory records of the company and another for early hearing
of the petition. On hearing the application, this Bench passed an order directing the
company to produce all records and documents on 10th March, 1998. On this day,
as is seen from the order sheet, the Bench advised the parties to explore the possibility
of an amicable settlement. Thereafter, the
order dated 28th May, 1998 came to be passed in which it is stated “ In
deference to this proposal, the petitioners have agreed ( duly signed by them and taken on
record) to sell their shares in all the 3 companies and the respondents have agreed to
purchase the petitioners’ shares at a fair value to be determined by the Price
Waterhouse & Company”.
9.
From the sequence of events, it is
evident that even though the pleadings had been completed as early as in January, 1998,
the matter was not heard on merits obviously in view of the order dated 28th
May, 1998. This order makes it clear that the petitioner had agreed to sell his shares and the respondents also had agreed to
purchase the shares and the only issue left
was the determination of the fair value of the shares for which a valuer, as agreed to by
the parties, was appointed. As per clause 4 of the order, after hearing the submissions of
the parties, the CLB was to decide the basis of valuation and the value thereof. Under the
circumstances, the issue for examination is whether this agreement is binding on both the
sides. While according to the petitioners it
is binding while according to respondents it is not. The respondents have relied on the
last paragraph of the order contend that this
order was only facilitatory for the parties
to come a final settlement and as such there is no binding final consent order. He also
argued that since, the petition has not been disposed of in terms of the agreement, it has
not reached a finality to make it binding. We
are unable to agree with this contention. It
is on record that after the order was issued naming M/S Price Waterhouse to value the
shares, at the request of the parties M/S Batliboi & Co., were appointed to value the
shares. Both the parties made submissions
before the valuers and after circulation of the draft valuation report, both the parties
reacted to the same. Even in their comments
to the valuation of M/S Batliboi & Co., the respondents had not taken the stand that
there was no obligation on their part to purchase the shares held by the petitioners. As a matter of fact, in the prayers in the Memo
of Objections dated 31.5.2000, they have suggested that this Bench should proceed with
certain percentage of shares as held by the petitioner and that the valuation of shares
given by S.R.Batliboi & Co. be rejected and “remand the issue for
review/consideration in light of these objections”.
From the highlighted portion of the prayers, it is clear that even the
intention of the respondents had been that what was objected was the valuation and not the agreement relating to sell and purchase of the
shares of the petitioner.
10.
Further, the last paragraph of the
order dated 28th May, 1998 cannot be read in isolation leaving the earlier part
of the order. This has to be read along with
clause 4 of that order, according to which, the parties were to make submissions before
the CLB regarding the valuation and also on the alternative basis of valuation for the CLB
to decide. The words used are “Company
law Board shall decide the same” indicating clearly that it is for the CLB to
decide the fair value on the basis of the Report and the submissions of the parties
thereon. This order has not left any thing to
the parties to decide finally to contend that as per last paragraph of the order the
parties have to come to a final settlement. The agreement relating to sale and purchase of
the shares has become final with the issue of the said order.
11.
Now that we have held that the
agreement to sell and purchase the shares
had become final in view of the consent order dated 28th May, 1998, the only
issue for consideration is the fixation of the fair price for the shares. As per clause 4
of the order dated 28th May, 1998, after hearing the submissions of the parties
on the valuation and also which are the alternative valuation should be adopted, the CLB
was to decide the same. In other words, the responsibility to decide the
fair price has been given to the CLB. Both the parties have reacted to the valuation
report and on various technical and accounting grounds, they have computed their own fair
value of the shares. While according to M/s Batliboi, the fair price for the shares of the
respondent company is Rs 6,396 per share. According to the petitioners, it should be Rs
34,342 per share, while according to the respondents, it should be Rs 170 per share.
Likewise in respect of the other companies also the difference in the fair price as
computed by the parties and M/s Batliboi is substantial. In view of such huge variations
in the fair value of the shares, and also in view of various accounting and valuation issues raised by the
parties, have been raised by both the parties, even though, as per clause 4 of the
agreement, this Board has to finally decide the fair
price, it will not be possible nor be
appropriate for us to do so. Since both the sides have committed to sell and purchase the
shares, to ensure this, we have to necessarily appoint a new valuer to determine the fair
price.
12.
Shri Choudhary contended that,
since the petition is not maintainable for various reasons indicated as a part of his
arguments, we cannot appoint a new valuer and the petition should be dismissed. It is to
be noted that in clause 5 of the consent order, the undertaking of the respondents that
they would not raise any objection counter
to the intent of the settlement, has been recorded. Further, in their reply to the
petition also the respondents had raised similar objections and not withstanding the same,
they were parties to the consent order. Therefore, now, they are completely estopped from
raising any objection either on the maintainability or on the merits of the case. The learned counsel for the petitioners cited a
few cases on the binding nature of the consent terms, as rightly pointed out by Shri
Choudhary, these cases may not be of much assistance in the present case as the facts are
different in this case as in this case the maintainability of the petition has been raised
which was not the position in those cases. Recently
the Division Bench of the Madras High Court has held that once a consent order is passed,
the same cannot be challenged on any ground including the ground on jurisdiction. (M/s
Kulki Leather Private Ltd V M/s T.N.K. Govindaraju Chetiar &Co- Letters Patent Appeal
123/2001 dated 28.82001) The facts of that case are: In a proceeding under Section 235 of the
Act, the parties agreed to settle the disputes amicably by which the shares purportedly
allotted to the petitioner would be purchased by the respondents. An order was passed by this Board in terms of the
consent given by the parties. As per this
order, the respondents were to pay a sum of Rs.25 lacs to the petitioner within a certain
period. When the respondents failed to do so,
the petitioner filed an application under Section 634A of the Act seeking to execute the
consent order. When this application was
heard, one of the main contentions of the respondents was that the CLB had no powers to
pass an order of sale and purchase of the shares in a proceeding under Section 235 of the
Act and as such the said order was without jurisdiction and that since the parties had not
signed the consent terms in terms of Order 23 Rule 3 of the Civil Procedure Code, the
consent order had no validity. All the
the contentions of the respondents was negatived by
the Board and the application of the petitioner was allowed. This order was taken on an appeal to the Madras
High Court in which a Single Judge upheld the order of this Board which was also taken on
appeal to the Division Bench which also
upheld the order of the Company Law Board. We
may beneficially refer to certain portions of
the judgment. Paragraph 15 of the Judgment reads “ The submission that the Board
had no jurisdiction at all to make the kind of order that was made on that date is also a
submission which is required to be rejected. Counsel
does not rightly dispute that the Company Law Board can direct the purchase of shares in
proceedings under Sections 397 and 398 of the Companies Act. While the proceedings that was initiated was one
under Section 235, that fact by itself is not to be regarded as placing an embargo on
orders other than that warranted under Section 235 being made, if parties to the
proceedings agreed to such an order and the agreement is nt against the public policy, is
not illegal and is not violative of any of the provisions of the Companies Act or of any
other law and it is not an agreement which itself is beyond the competence of the Board to
record under the provisions of the Companies Act. It
is not the case of the appellate that the proceeding recorded on 22nd January,
199 is against public policy or is illegal or is an agreement which the Company Law Board
is prohibited from recording under any of the provisions of the Companies Act or under any
other law. The submission that the order is
vitiated by reason of total lack of jurisdiction in the Company Law Board, therefore,
cannot be accepted”. In paragraph
19, the court has observed: “We must strongly depricate the attempt of the
appellant to avoid carrying out a solemn promise through their responsible counsel to the
Company Law Board by seeking to raise hyper technical pleas when faced with the demand for
compliance with the terms of their order. Although
we have considered the submissions made by the counsel and examined those submissions, we
make it clear that the appellant are not entitled in law to urge any of those grounds, as
allowing the appellant who do so successfully would mean closing eyes by the court to a
fraud played by a party and the counsel on the Company Law Board. As stated buy us earlier, no counsel or litigant
has a right to play fraud on a court or the tribunal and any attempt to do so must be
discouraged and should invite the heaviest penalties”.
13.
In the present case, as recorded
in the consent order, the parties had agreed that the petitioner would sell his shares and
the respondents would purchase the same. The
respondents had given an undertaking not to raise any objection counter to the agreed
terms. Having done so, now they cannot turn
around and claim that since the petition is not maintainable and they are no longer
interested in purchasing the shares of the petitioner. The observations of the Division
Bench of Madras High Court as extracted above are squarely applicable in the present case.
Therefore, even if the petition were to fail on merits as contended by Shri Chaudhary,
having agreed to purchase the shares, the respondents are estopped from raising this issue
now. As we have already pointed out that the
only issue pending in working out the consent order is the determination of the fair price
for the shares in all the three companies and therefore the question of getting into the
merits of the case does not arise.
14.
In view of our findings that there
is no scope for getting into the merits of the case and that in terms of Clause 4 of the
Consent order, this Bench would not be in a position to fix the fair price in view of the
huge differences in the fair price computed by the parties and M/S Batliboi & Co., we
consider it appropriate that we should appoint a new valuer for determination of the fair
price in terms of the order dated 28th May, 1998. Accordingly, we post this
case on 18th March 2002 at 2.30pm for the parties to appear before us to decide
on the name of the valuer. We also abundantly make it clear that, in order to avoid any
future controversy in regard to the valuation, the value determined by the new valuer
shall be binding on both the parties and this Bench would only decide the basis of
valuation.
15.
Accordingly the matter is
adjourned to 18.3.2002 at 2.30 pm.
(S.balasubramanian)
(A.K.Banerji)