BEFORE THE COMPANY LAW
BOARD
PRINCIPAL BENCH
NEW DELHI
Present: 1. Justice 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 VLS
Finance Limited
Versus
Sunair Hotels Limited
&others
PETITIONER:
VLS Finance Limited
RESPONDENTS:
1. Sunair Hotels Limited
2. Sun Aero Limited
3. Shri Satya Pal Gupta
4. Shri Kaveen Gupta
5. Shri Vipul Gupta and 23
others.
Present on behalf of parties:
1. Shri S. Sarkar, Sr. Advocate
.. for petitioner
2. Ms. Rakhi Ray, Advocate
.. for petitioner
3. Ms. Bina Gupta, Advocate
.. for petitioner
4. Shri Manmohan, Advocate
.. for petitioner
5. Shri Anupam Varma, Advocate
.. for petitioner
6. Shri Dhirendra Negi, Advocate
.. for petitioner
7. Shri Sudhir Chandra, Sr. Advocate ..
for resps. 4 and 5
8. Shri A.N. Haksar, Sr. Advocate
.. for resps. 1 and 3
9. Shri Atul Sharma, Advocate
.. for resp.1
10. Shri Achintya Dvivedi, Advocate
.. for resps. 4 and 5
11. Shri Rajeev K. Garg, Advocate
.. for resp. 2
12. Shri Saurab Chandra, Advocate
.. for resps.6-27
13. Shri P. Dhingra, C.A
.. for resps.1-
O R D E R
(Date of final
hearing: 5.3.2001)
S. BALASUBRAMANIAN:
1. The main allegation in
this petition filed under Sections 397/398 of the Companies Act, 1956 ( the Act) by the petitioner holding 24.17% shares in M/S Sunair Hotels Limited ( the company)
is that the respondents 3 to 5 have fraudulently allotted
shares worth about Rs.21 crores to respondents 3 to 27 and therefore the petitioner
has prayed for cancellation of the allotment of these shares as null and void and
for consequential rectification of the Register
of Members by deleting the names of respondents 3 to 27 in respect of these shares.
Another allegation is that when further shares were issued by the company, no offer was
made to the petitioner and as such the allotment of further shares should also be declared
as null and void.
2. The undisputed facts in
this case are: The company was incorporated in February, 1977, the 3rd
respondent being the main promoter along with his family members. The main object of the
company is to carry on hotel and allied
businesses. The NDMC allotted a plot of land
to this company on license basis in Gole Market area New Delhi by a License Deed dated
5.12.1982 with a supplemental deed in 1988. A part of the land was handed over in 1982 and
another part possession was given in 1988.
The NDMC cancelled the license in 1990 due to some dispute on the license fees, the
cancellation of which was challenged in the
Delhi High Court. As the proceedings were on, the balance land was given possession in
1992. In June 1993, M/s Aeroflot and the company
entered into an agreement for a joint venture
hotel project by which a company in the name
of Sunaero Ltd (2nd respondent) was to be incorporated. Accordingly Sunaero was incorporated as a wholly owned
subsidiary of the company in October
1993. In the beginning of 1994, Aeroflot withdrew its proposal and thereafter the 2nd respondent entered
into a management contract with one ACCOR for the hotel project and necessary approval from the
government was also obtained. In October 1994, the Delhi High court decided the matter in
favour of the company and the NDMC restored the land license to the company. In
March, 1995, the petitioner, the company and
the promoters entered into an MOU, according
to which the petitioner was to invest Rs.7 crores as share capital in the company and also
to provide a sum of Rs.10 crores as security deposit and
the respondent promoters were to invest a sum of Rs.22 crores by way of share
capital. The petitioner was also to arrange for public issue of shares for Rs.10 crores
and mobilize a sum of Rs.85 crores by way of loans. In 1995, the petitioner invested Rs.7
crores as share capital and also gave a security deposit of Rs.8 crores. The respondents also got allotted shares worth
Rs.20.99 crores. The main complaint of the
petitioner is that the respondents got the shares allotted in a fraudulent manner without
actually remitting any consideration for the shares by rotation of the funds of the
company through the 2nd respondent. Further, in October 1997 the company had
issued 15.3 lakh further shares to the respondents group without offering any shares to
the petitioner. The petitioner has challenged
the allotment of these shares also.
3. According to the
respondents, the company had transferred the land developmental
rights to the 2nd respondent in 1993 and it was the 2nd respondent
which had pursued the High court proceedings successfully. Therefore, when the High Court
passed an order in favour of the company, it was decided to retransfer the developmental
rights from the 2nd respondent to the company for a consideration of Rs 21
crores which was 1/3 of the then prevailing market
value of the land. The amount of Rs 21 crores thus
paid by the company to the 2nd respondent was given to various respondents for valuable consideration and
these respondents had invested in the share capital of the company and as such the
allegation of the petitioner that share were allotted without receiving any consideration
from the respondents, is baseless.
4. Shri Sarkar, Sr. Advocate
appearing for the petitioner submitted as follows: The petitioner entered into an MOU with
the company and the promoter respondents 3 to 5 on 11.3.1995 by which the petitioner was
to invest a sum of Rs.7 crores towards share capital and was to provide a sum of Rs.10
crores as interest bearing security deposit. The petitioner had also undertaken the responsibility of arranging for public issue
of 10 lakh shares of Rs.10/-each at a premium of not less than Rs.90/- so as to mobilize
Rs.10 crores. It also undertook to mobilize Rs.85 crores for the project by way of term
loans and working capital facilities. The promoter respondents were to invest a sum of
Rs.22 crores by cash towards the shares. M/S ACCOR were to invest in 10 lakh shares at Rs.100/-
per share. Both the petitioner and the
promoter respondents were to contribute cash at par for the shares by 30th
April, 1995. In terms of this MOU, the
petitioner paid Rs.7 crores between 11.3.1995 and 18.4.1995 and 70 lakh shares were
allotted to the petitioners. On allotment of
these shares, the petitioner constituted the majority with 87.41% shares in the company. In addition, the petitioner also paid a sum of Rs.
8 crores between the period 21.11.1995 to 23.4.1996 towards security deposit. Even though, the respondents assured the
petitioner that they had also contributed Rs.22 crores in terms of the MOU towards the
share capital in cash, yet, later it was found out that the respondents had fraudulently
allotted shares to themselves without actually paying any consideration for Rs 20.99
lakhs.
5. The learned counsel further argued as follows: The alleged investment of Rs.21 crores by the respondents 3 to 5 and others is a fraud arising out of sham transactions of transfer and retransfer of the developmental rights. The land for the hotel was allotted by NDMC in the name of the company and the agreement with the NMDC ( Annexure-C ) expressly prohibits a licensee from transferring or assigning its rights or interests in the property to anyone without the prior written consent of the NDMC. Therefore, the company could have never transferred its rights to the 2nd respondent without the prior consent of the NDMC. Even otherwise, when the NDMC had cancelled the license in 1990, the question of transferring the developmental right of the land which the company did not possess in 1993, does not arise. Further, there is nothing on record to show that any consideration was received by the company at the time when the developmental rights were allegedly transferred to the 2nd respondent. However, after the petitioner joined the company, the respondents alleged to have got the developmental rights transferred back from the 2nd respondent to the company at Rs.21 crores. While the very act of agreeing to pay Rs.21 crores is against the interests of the company, the same has been used to dupe the petitioner and the other financial institutions which had lent monies to the company. A reference to the Bank Statement of the company would indicate that as payment towards the Rs.21 crores for the developmental rights, the company issued a cheque to the 2nd respondent for a sum of Rs.1 crore on 16.3.1995. This amount comprised of Rs 70 lakhs paid by the petitioner as share application money. On the same day, the 2nd respondent issue a cheque for Rs 1 Crore to one H.J. Consulatants Pvt Ltd, a company under the control of the respondents. On the same day, H.J. Consultants Private Limited issued a cheque for the same amount to one Janki Exports International, another entity of the 3rd respondent, which paid this amount to the 3rd respondent who had paid this amount back to the company as his contribution towards share capital. All transactions were by means of cheques on the same branch of Syndicate Bank in which all the respondents had accounts. Like this, this amount of Rs.1 crore was rotated four times on 16.3.1995 and it was shown that the 3rd respondent had contributed Rs.4 crores as share capital. In the same way on 18.3.1995, a sum of Rs.1 crore was rotated two times, and again on 19.3.1995, a sum of Rs.1 crore was rotated 15 times. Thus, a sum of Rs.1 crore which was with the company as share application money by the petitioner was rotated 21 times and was accounted for as share investment of Rs.21 crores by the respondents. All the cheques-whether from the company or from the 2nd respondent or from M/S H.J. Consultants Private Limited-were signed only by one person, namely, the 3rd respondent. This would clearly indicate that the alleged investment in shares is a fraudulent transaction and that the company money was being used for subscribing to the shares which is also against the provisions of Section 77 of the Act.
6. Shri Sarkar further argued as follows: As per the MOU, for the shares, the parties had to pay cash at par, which the petitioner did, while the respondents rotated Rs 1 crore, without bringing in Rs 21 crores in cash. Since the MoU stipulated cash being brought in, the respondent had no right to allot shares against the land value, which incidentally, belongs to the company itself. Further Section 75 of the Act requires payment of cash for allotment of shares, but in this case, the respondents had not paid any cash for the shares. Further, for the allotment of shares in March 95, instead of filing the return o allotment within 30 days as specified in Section 75,the same was filed only in only in December 1995. Even assuming that the shares were allotted in consideration for the land, yet, the provisions of Section 75(b) had not been followed for such allotment otherwise than for cash and therefore the allotment is a nullity.
7. Arguing further, Shri Sarkar pointed out that the land having been taken on lease cannot be assigned any value and as a matter of fact only in the Balance Sheet as on 31st March,1995, the company had indicated the land value at Rs.21 crores, however, without indicating as to why such a value has been assigned for a land already in its possession. Referring to Annexure –I-, he pointed out that in the Directors’ Report of the 2nd respondent, it has been indicated that it had reverted the developmental rights to the company for a consideration of Rs.21 crores. The claim of the company that the amount of Rs.21 crores was paid as compensation to the 2nd respondent for prosecuting the proceedings in the High Court is also not borne out by facts as no litigation expenses have been shown in any of the accounts of the 2nd respondent. Therefore, he pointed out that the claim of the respondents that they had transferred a right which was not subsisting and that they had paid Rs.21 crores for re-transfer of the said right is nothing but a concocted story to fraudulently acquire the shares without paying any consideration. He countered the stand of the respondents that the petitioner had the full knowledge about payment of Rs.21 crores to the 2nd respondent by pointing out that in the MOU dated 11.3.1995,even though there is a mention about ACCOR, there is no mention about the 2nd respondent nor the proposed action by the respondents to pay Rs.21 crores to the 2nd respondent. Since the petitioner is governed by the provisions of the MOU in which there is no mention about the 2nd respondent, no knowledge regarding the 2nd respondent can be attributed to the petitioner. He pointed out that on the basis of shares worth Rs.21 crores for which no consideration was paid, the respondents have taken financial assistance from the financial institutions by pledging these shares. Therefore, the element of public interest is also involved in this case. The so called transfer of the developmental right in 1993 is also against the provisions of Section 149 as the 2nd respondent commenced business only in December 1993. Even the letter by the company to the NDMC dated 12.8.93 seeks its permission only in terms of Clause 5 of the license agreement and not for transferring the developmental rights or the license itself. It is also an admitted fact that the NDMC had not given its permission as sought for and therefore the question of retransfer of the developmental rights does not arise. The promoter respondents had also duped ACCOR in relation to the ownership of the land. The company entered into an MOU with ACCOR on 29th August, 1994 ( Page 300 of Volume III) wherein the company is shown as the licensee of the land. But in the MOU between the 2nd respondent and ACCOR entered into within a short period on 9th September, 1994, the 2nd respondent is shown as the “ owner “. The petitioner was not privy to the real agreement and as a matter of fact, once the petitioner invested its money, the company terminated the MOU with ACCOR. Therefore, it is wrong to say that the petitioner was aware of the transaction between the company and the 2nd respondent.
8. In regard to the stand of
the respondents that the petitioner itself had valued
the land for Rs 21 crores, the learned counsel submitted: The valuation was taken
only notionally to compute the cost of the project. This value has no relationship with
the lease hold rights or the alleged contribution towards share capital. Just because the
petitioner had valued the land, it does not mean that it had agreed for or had the
knowledge of the fraudulent allotment of shares for that value. Actually, the TFCI had
valued the land only at Rs 2 crores and had sought the promoters to bring in cash for the
balance. Therefore there is absolutely no basis in claiming that the petitioner was a
party to the fraudulent allotment of shares.
9. In regard to the rotation
of money from the 2nd respondent to H.J. Consultants Private Limited, he
pointed out that the agreement alleged to have been entered into between the two on 10th
March, 1995 is a fake document having no validity.
According to this MOU, the 2nd respondent was to purchase a number of
properties from M/S H.J. Consultants Private Limited for Rs 35 crores of which an advance
of Rs.21 crores was to be paid by the 2nd respondent. This MOU was not disclosed to the petitioner when
the petitioner entered into the MOU with the respondents/company on 11.3.95. Further, on the day when this MOU was entered into, the 2nd
respondent had a paid up capital of only Rs.7000/. Even, this MOU is not an agreement to
sell. All the properties mentioned in the
Schedule to the MOU are allegedly owned by the respondents or their family members or
companies controlled by them. None of the
properties mentioned in the Schedule has yet been transferred in the name of the 2nd
respondent. Nothing has been shown justifying
the purchase of these properties by the 2nd respondent as a matter of fact, the
MOU between the two having common directors is in violation of the provisions of Section
299 of the Act. Further, some of the
properties proposed to be purchased do not find a place in the Balance Sheets of the
companies indicated as owners in the MOU. Therefore, all the documents have been
fabricated only to justify the fraudulent rotation of Rs.1 crore twenty-one times to
enable the respondents to acquire the shares without paying any consideration for the
shares. In regard to the knowledge of the petitioner about the transfer and retransfer of
the developmental rights, Shri Sarkar
pointed out that the petitioner was never aware of the same and nothing is mentioned in
the MOU about the 2nd respondent. It also does not talk of the price of the
land. In the same way, the MOU between the 2nd respondent and the H.J.
consultants was also not in the knowledge of the petitioner as the same was not mentioned
in the MOU.
10. He further submitted that the company
had issued further shares to the respondents in 1997
in violation of the provisions of Section 81 A and also in breach of the MOU which
stipulates that the share holding parity among the parties has to be maintained. Even
though the company is alleged to have held an EOGM on 7.7.97 wherein the resolution to
issue further shares on a right basis was
passed, yet the petitioner never got any notice of the said meeting nor any offer for
subscription. All the new shares of 15.3 lakh shares were allotted only to the respondent
group. Since the petitioner has challenged the earlier allotment on the basis of rotation
of funds, no right shares could have been allotted in respect of these shares.
11. Summing up his arguments, Shri Sarkar
submitted that the relationship between the petitioner and the respondents is that of a
quasi partnership as would be evident from the MOU dated 11.3.1995 at paragraph 3(iv) and
6(g). Being a partner, the petitioner, in facts of this case wherein the respondents have
perpetrated fraud, can claim winding up of the company on just and equitable grounds. Notwithstanding the rights of the petitioner
arising out of the MOU, being a shareholder holding about 24% shares at present, it can
allege oppression arising out of the fraudulent acts of the respondents as decided in B.M Jain Sons Co Pvt Ltd V Bombay Cable Car
Pvt Ltd (2001 1 CLJ 468) Case. It is
incorrect to say that this petition has been motivated only with a view to recover the
investment made by the petitioner. It is also
wrong to say that the petitioner is not entitled for any relief since it had breached the
terms of the MOU. Since the respondents have
committed a major fraud by paying for a land owned by itself to an outsider, the
petitioner is fully justified in moving this petition before the company Law Board. In
regard to the knowledge of the petitioner about all these transactions, he denied the same
and contended that even otherwise, when there
are statutory violations and fraudulent
transactions, it is immaterial that the petitioner had the knowledge of the same. The company and its directors have been prosecuted
for violation of the provisions of Section 211, which they have compounded. This would
indicate that all is not well with the affairs of the company. The entire risk was taken
by the petitioner by investing Rs 15 crores in the company, but the respondents, without
investing any money are enjoying the fruits of the investment made by the petitioner. But for the investment by the
petitioner, the company could not have even started the project. Therefore, he submitted that one of the equitable reliefs could be that the entire investment made
by the petitioner be directed to be repaid with an interest at 20% compounded annually or
in the alternative he prayed for canceling
all the allotments impugned in the petition and restoring
the majority of the petitioner.
12. Shri Sudhir Chandra, Sr.Advocate
appearing for respondents 2 to 5 argued as follows: This petition is not a bona fide one
and has been filed with the oblique motive of recovering the investment made by the
petitioner. The petitioner
breached the terms of the MOU by not arranging for funds of Rs.85 crores undertaken to be
mobilized by it and therefore the company refused to pay interest on the security deposit.
Because of this, petitioner tried to put as many spokes as possible to stall the
completion of the project by making complaints
to various authorities not only against the respondents but also against the
collaborators, namely, M/S NIKO of Japan with whom the company has entered into a
technical cum management collaboration. Having failed in all its attempts to stall the
project, the petitioner has filed this petition.
13. On merits of the case, the learned
counsel submitted: In regard to the
transaction between the 2nd respondent and the company, it is to be noted that
when the 2nd respondent was incorporated at the instance of M/S AEROFLOT, the
developmental rights were transferred to the 2nd respondent and the company had
applied to the NDMC for transfer of the right by a letter dated 12.8.1993. Even though, at the administrative level, the
proposal was approved, yet, no formal communication was received from the NDMC. Only on the basis of the transfer of the
developmental rights, the 2nd
respondent, entered into an MOU with
Aeroflot. Even the Government of India
conveyed its approval for the foreign collaboration with the AEROFLOT by a letter dated 9th
January, 1995. Since the agreement with AEROFLOT did not materialize, the 2nd
respondent entered into a fresh MOU with ACCOR on 29.8.94
and the Government approval was also received in this regard for investment of US $
3 million for the project by ACCOR. Therefore,
it is incorrect to say that the company had not transferred the developmental rights to
the 2nd respondent. The 2nd
respondent had been actually involved in prosecuting the proceedings in the Delhi High
Court. However, when the High Court case was
decided in favour of the company, to avoid any further delay in getting the approval of
the NDMC for the transfer to the 2nd respondent,
the promoters decided that the hotel
project would be taken up by the company itself and therefore it was decided to
re-transfer the developmental rights by a Board resolution dated 5.12.94. Government of India permission was also taken to transfer its approval for
collaboration between the 2nd respondent with ACCOR to the company. At that time
the land value was assessed at more than Rs.63 crores, but the company decided to pay only
Rs 21 crores to the 2nd respondent for the retransfer. By an agreement dated
10.3.95 with M/s HJ international, the 2nd respondent agreed to purchase 13
properties of the promoters for Rs 35 crores, towards which Rs21 crores were paid as advance before 31.3.95. This amount
was given to the proposed sellers of the properties as advance and they had invested the
same in the shares of the company. Once the 2nd
respondents pays the full consideration of Rs 35 crores, all these properties would be
transferred to the 2nd respondent. Therefore, neither any fraud had been
committed by the respondent promoters nor there is any sham transaction. Further, the
company being a family company of the
respondents and since, it is they who had taken all the steps to get the land licensed to
the company, they could have legitimately and directly
got shares for the services rendered without paying any cash consideration . Yet,
they decided to invest cash and for this purpose they have agreed to sell their personal
properties to the 2nd respondent through H.J International. The petitioner is
nothing but a financier joining the company for future profit. When the MOU stipulates
that shares would be issued to ACCOR at Rs 100 per share and that public would also be
offered the shares at that price, the petitioner was allotted shares at par, so that it
could mobilize necessary finance for the company. That is the reason why the petitioner
gave proxies to the respondents in respect of its shares. The MOU does not confer any
management rights on the petitioner and with the proxies being in he name so the
respondents, the petitioner does not have
even voting rights. The company could have
offered these shares to the public at a high premium and the management could have
continued with the respondents without any difficulty. The petitioner not only failed in
discharging its obligations, it also acted in a prejudicial manner against the interest of
the company. It is not that the petitioner did not know about the alleged rotation
earlier. It has made this an issue in this petition, only when the company refused to pay
interest on the security deposit.
14. The learned counsel further argued that
for the amount of Rs.21 crores, the 2nd respondent would be acquiring valuable
properties. Since the 2nd
respondent is a wholly owned subsidiary of the company in which the petitioner holds 24%
shares, the benefit of the properties would accrue to the petitioner also. Referring to the technical assistance agreement at
Page 80 of the Reply, he pointed out that the 2nd respondent entered into this
agreement with ACCOR wherein the 2nd respondent, in view of the transfer of
developmental rights, described itself as the owner.
Requisite approval from Government also was received on 9.1.1995 for this
collaboration. All these facts were known to
the petitioner when it entered into an MOU with the company and the promoters on
11.5.1995. The knowledge of the petitioner
about the valuation of this land at Rs.21 crores is also evident from its inter office
memo dated 28th November, 1996 ( Page 133 of the Reply) wherein the petitioner
has stated “ We have valued the land at Rs.21 crores as against the market value of
Rs.70-80 Crores”. Further, in their
application to IDBI dated 19.11.1996 ( Page 139 of the Reply), the petitioner has
indicated its awareness about the payment of Rs.21 crores to the 2nd respondent
by stating “ Since the land rights have been acquired at Rs.21 crores by Sunair Hotel
from its subsidiary company ……”.Further, in the letter to the company dated
13.2.1995 ( Page 140 of the Reply), the petitioner has indicated the promoters’
equity of Rs.20 crores as “ land “. Similarly,
in their letter to IDBI dated 18.11.1996 ( Page 144 of the Reply ), the petitioner once again indicated that the company had acquired
the land rights at Rs.21 crores. Therefore, the petitioner cannot now question the
payment of Rs.21 crores to the 2nd respondent and allege fraud on the ground
that the company could not have transferred the developmental rights to the 2nd
respondent or re-possessed the same on
payment of Rs.21 crores. The 2nd respondent has paid this amount to the other
respondents for purchase of their properties. In
the appraisal report by Tourism Finance Corporation at Page 505 of Volume III, there is
clear mention that the promoters would be
selling their properties to deploy cash contribution for the company and in the same
report at Page 512, the land and site developmental has been shown as Rs.12 crores and
Rs.1.1 crore. Therefore, the contention of the petitioner that no value could be assigned
to the land is also fallacious. The
transactions with the 2nd respondent was bonafide and the petitioner was fully
aware of the same. Only when the company
rejected their claim for interest on the security deposit, with a malafide intention and
with a view to pressurize the respondents, this petition has been filed. In addition, the petitioner has also indulged in
various prejudicial acts with a view to hamper the progress of the project. In this connection, he referred to the legal
notice issued by the petitioner to M/S Niko about which the petitioner itself had
paid compliments in its letter to IDBI dated
18.11.1996.
15. He further pointed out that even though
in Paragraph 6 of its Reply, the company has averred as follows: “It is stated that before the
petitioner company agreed to finance the project, it examined all the relevant
correspondences, viability reports and also had independent meetings and correspondence
with representatives of ACCOR and in fact the entire ground work for the project was being
done by respondent no.2 and the fact that respondent no.2 held the rights to develop the 5
Star Project was well within the knowledge of the petitioner company and its managing
director – Shri Somesh Mahrotra. It is
stated, in fact, the valuation of Rs.,21 crores for re-transfer of the developmental
rights from respondent no.2 to the answering respondent was done in consultation with Shri
Somesh Mehrotra, the managing director as well other senior executives of the petitioner
company” , this averment has not been contradicted by the petitioner in its
Rejoinder and as such the petitioner now cannot now allege that it was not aware of the
valuation or that the payment of Rs.21
crores to the 2nd respondent for the developmental rights is fraudulent or a
sham transaction.
16. Summing up his arguments, Shri Sudhir
Chandra submitted that in a 397/398 petition, the petitioner should come with clean hands.
The petitioner had acted in a manner prejudicial to the interest of the company both
before filing of this petition and during the pendency of the petition by making
complaints to all the authorities including the financial institutions, which resulted in
delay in completion of the project. Therefore, referring to page 3096 of Ramaiah on
Companies Act (2001 Edn), he submitted that the right to protection is a product of equity
and therefore there must not be such conduct as would disqualify the plaintiff from
proceeding against the company. Further, the
complaint of the petitioner is that the
respondents have breached the terms of the MOU by failing to bring cash for the shares.
Any alleged breach of the MOU has to be agitated in a civil suit and not in the present
proceedings as decided by the CLB in Allianz Securities Ltd V Regal Industries Ltd
(37 CLA 250). He also contended that even if there had been any violation of law
in the allotment of shares, the same cannot be agitated in a 397/98 petition as decided by the Apex Court in Needles case (
51 CC 743). He also pointed out the this petition has been filed with an oblique
motive to put pressure on the respondents to refund the investment made by the petitioner
with interest at exorbitant rate and therefore as held in Re Bellador Silk Ltd (1
AER 667), this petition should be dismissed in limine. He also pointed out
that, not withstanding all these objections, when the respondents were ready and willing
to settle the disputes amicably, the petitioner, without assigning any reason, withdrew
from the settlement only with the view to extract more money from the respondents. Even in facts of this case, he pointed out
that the petitioner having had the full
knowledge and having been a party to the valuation of Rs.21 crores for the land, it cannot
now complain of either oppression or mismanagement. Further,
the petitioner came to the company only as a financier and it has neither a representation
on the Board nor any voting rights in view of the proxies executed in favour of the
respondents. As far as the allegation
relating to non allotment of shares when further shares were issued, he submitted that
notwithstanding the fact that the company had issued notices to the petitioner, the
respondent directors would arrange for
transfer of proportionate shares to the
petitioner in case it expresses its willingness to acquire the shares.
17. Shri Haksar, Sr. Advocate appearing for
respondents 1 and 3 supplementing the arguments of Shri Sudhir Chandra pointed out that in
the MOU dated 11.3.1995, there is a clear mention that the license deed dated 8.12.1982
and supplementary agreement dated 1.2.1988 had been enclosed with the MOU. If it is so, then, the petitioner was fully aware
of the various restrictions imposed on the company by these agreements. The petitioner knew about the agreement between the 2nd
respondent and ACCOR. It never
questioned, having the knowledge of the restrictions in the license deed, as to how the 2nd
respondent could have entered into an agreement with ACCOR. Therefore, having the full
knowledge of the developmental rights having been transferred to the 2nd
respondent, the petitioner still entered into the MOU since they knew that the right could
be re-transferred to the company. In this
connection, he referred to Page 17 of Volume VI wherein in a letter dated 25.3.1997,
wherein the petitioner had informed Punjab National Bank, that the TFCI had
approved the project cost with Rs.22.10 crores as cost of land and development. Thus,
there is ample evidence to show that the petitioner was fully aware that the land had been
valued at Rs.21 crores payable to the 2nd respondent. Now, he has filed this petition only when the
company by a letter dated 31.10.97 informed the petitioner that no provision for interest
has been made due the failure of the petitioner to arrange for funds. Therefore, the
complaint of the petitioner is more as a creditor and not as a share holder and as such
this petition should be dismissed.
18. We have considered the pleadings and
arguments of the counsel. Before dealing with merits of the case, it is appropriate to
record that during the pendency of the proceedings, on our advise given in the hearing on 23/9/98 that the parties should
try to resolve the disputes amicably, the
parties attempted to settle the disputes amicably. Initially, the respondents offered a
sum of Rs 16 crores to the petitioner towards the shares and the security deposit, but the
petitioner desired a sum of Rs 24 crores. However, in the hearing on 18.11.98, the counsel
for the parties reported that an agreement had been reached by which the petitioner would
go out of the company on receipt of Rs 19 crores payable within 15 months from 1.12.1998
and that they would require some time to work out the modalities. In the hearing held on
24.12.98, it was reported that out of the Rs 19 crores, the company would pay Rs 12 crores
in final settlement of the security deposit and the other respondents would purchase the
shares of the petitioner for Rs 7 crores and that the first installment of Rs 6 crores
would be paid on 11.1.99 and the balance of Rs 13 crores on or before 6.3.2000. The
counsel had desired time to finalize necessary terms in this regard and accordingly the
matter was adjourned to 11.1.1999.On this day, the matter was adjourned to 20.1.1999. On
this day also, the parties did not place before us the agreed draft settlement, but the
respondents produced bank drafts for Rs 6 crores. Since the parties had not placed before
us the draft settlement, the matter was adjourned to 9th Feb 1999. In the next hearing, even though both the parties
presented their own terms of settlement, yet, they did
not place before us an agreed draft. However,
the Bench itself prepared a draft settlement and handed over to them on 28.7.1999 and the
counsel conveyed their acceptance to the same. Accordingly,
the parties were directed to file a formal agreement signed by both the parties on
1.9.1999 and it was also directed that the respondents will hand over a draft for Rs.6
crores on that day. However, on 1.9.1999, it was reported that the Income Tax Department
had attached the amount payable to the petitioner in terms of the agreement before the CLB
and has restrained the petitioner from transferring the shares held by it in the company
and the petitioner had filed a writ petition before the Delhi High Court challenging the
attachment and that the High Court has directed that the amount of Rs.6 crores to be
received by the petitioner as the 1st installment should be kept in a fixed
deposit and therefore the respondents were moving an application to seek a clarification
from the Delhi High Court about the title of the respondents in respect of the shares. Accordingly, the matter was adjourned to
10.11.1999 with the directions that the respondents would bring the first installment of
Rs.6 crores on that day. On 10.11.1999, the
respondents brought demand drafts worth Rs.2 crores and sought for a few more days for
paying the balance of Rs.4 crores along with interest. However, the petitioner was not
willing to accept this amount. In the hearing
held on 1.3.2000, the respondents produced before us demand drafts for Rs.6.5 crores and
cheque for Rs.50 lacs towards the 1st installment of Rs.6 crores and towards
interest for the delayed payment with an assurance that the balance amount will be paid
positively on or before 31.5.2000 failing which the petitioner could forfeit the amount of
Rs.6 crores. However, the representative of
the petitioner submitted that the Board of Directors of the petitioner company had already
passed a resolution on 29.10.1999 deciding not to proceed with the compromise. We advised him that the Board of the petitioner
company might review their earlier decision in view of the offer of payment of Rs.7 crores
and assurance of the respondents to complete the settlement by 31.5.2000. The matter was accordingly fixed on 14.3.2000 to
ascertain the reaction of the petitioner. On that day it was reported that the Board of
Directors of the petitioner company had reconsidered ha matter and decided not to proceed
with the compromise. Thus, the compromise efforts which were going on for nearly two years
came to an end and it was decided to hear the petition on merits. The respondents who had filed an application in
terms of Section 8 of the Arbitration and Conciliation Act on 24.2.1999 when the
compromise efforts were on, desired that this application should be heard before
proceeding with the main petition. After
hearing the counsel on this application seeking for referring the disputes to arbitration
in terms of the MOU dated 11.3.1995, this Bench passed an order on 21st August,
2000 dismissing the application as not maintainable. Thereafter, the petition was heard on
merits and concluded on 5.3.2001.
19. It is to be noted that the petitioner
is not an ordinary/common shareholder. It is a finance company having experts specialized in
arranging funds for projects. Therefore, normally, before
entering into an agreement for financing a project, a financier carries out a thorough due
diligence of the project. In the present case, such a study would have been more
important, since the MOU stipulates mobilization of funds through public issue also.
Since, in this case, the MOU deals with a hotel project, to which the land component is
the most important one, it is inconceivable that the petitioner would not have gone through the land license agreement,
which has been, incidentally, stated in the MOU as forming a part of the same. Thus, the
status of the petitioner is relevant in determining the allegations in this petition. It is also relevant to note that
there are only two groups of shareholders in the company viz the petitioner and the
respondents groups. Even though the learned counsel brought in the element of public
interest as financial institutions have lent money to the company, we note that the
petitioner has already made complaints to these institutions.
Since this Bench exercises equitable jurisdiction in a 397/98 petition, the conduct of the parties will have to be taken
into consideration in these proceedings.
20. The main allegation of the petitioner
is that the respondents had allotted shares worth about Rs.21 crores without investing any
money and that by fraudulent rotation of the funds of the company, the shares were
allotted to them. This is assailed as fraudulent. In regard to the transfer and retransfer
of the developmental rights, the same are assailed as sham transactions. When the petition was mentioned, initially this Bench itself felt that there was some hanky panky in the allotment
of shares to the respondents. However, in the
replies filed by the company and the respondents, they have justified the allotment of
shares. The crux of the matter, as we find
from the proceedings, revolves around the transfer of the developmental rights to the 2nd respondent and the re-transfer of the same
to the company for Rs.21 crores. Without
examining this issue first, we cannot decide on the validity or otherwise of the allotment of shares to the respondents.
21. It is not in dispute that the NDMC
granted license for the land to the company. It is on record that the 2nd respondent was incorporated sometime in October,
1993 as is evident from the Certificate of Registration consequent to the agreement
between the company and Aeroflot dated 17.6.93 ( page 243 of Vol III). It has obtained the certificate of commencement of
business on 31.12.1993. According to the company, as soon as the 2nd respondent
was incorporated, the developmental rights were transferred to it. It is on
record that the 2rd respondent by
itself entered into a Management Contact dated 9.9.94 (page 80 of Vol III) with ACCOR for which
the approval of the Government of India was also obtained (page 127 of Vol III). It is on
record that the company had applied to the NDMC for transfer of the rights arising out of
the license agreement to the 2nd respondent as seen from the company’s
letters dated 12th August 1993 and 16th September 1993 ( pages 134
and 136 of Vol III). There is a report of Coopers & Lybrand on the hotel project to be
executed by the 2nd respondent (page 253
of Vol III). These agreements could not have been entered into by the 2nd
respondent, if there had been no proposal to transfer the developmental rights by the
company. All these events had
taken place before the petitioner entered into the MOU
with the respondents and the company and when the High Court proceedings were pending. The
learned counsel for the company raised various issues in regard to the alleged transfer of
the developmental rights. According to him,
when the license was no longer subsisting, no right arising out of the license could have
been transferred and that when the 2nd respondent was not in existence on the alleged day
of transfer, no transfer could have taken place and that when the license agreement
prohibits transfer of any of the rights arising out of the agreement to a third party
without the approval of NDMC, the developmental rights could not have been transferred to
the 2nd respondent without the approval of the NDMC. As far as the cancellation
of the license is concerned, we find from the letter of the company to NDMC dated 12.8.93
and 16.9.93 that even when the proceedings
were pending in the High Court challenging the cancellation of the license, the NDMC had
transferred a portion of the land to the company and also sanctioned the building plans. Thus we that notwithstanding
the cancellation of the license - both the NDMC and the company had been taking steps in
terms of the earlier license deed and
therefore perhaps the company, in
anticipation of a favourable decision by the High Court, had transferred the developmental
rights. In regard to the argument that in terms of the license agreement, no rights could
have been transferred, we note that the company had already sought the permission of the
NDMC citing the approval given by it to other hotels and therefore nothing prevented the
company from transferring the rights pending
approval. In regard to the other objection that no rights could have been transferred
before incorporation of the 2nd respondent,
it is the stand of the company that the rights were transferred only after the
incorporation of the 2nd respondent. One other important aspect that has to be
taken note of regarding the knowledge of the petitioner about the transfer of the
developmental rights is the Management Contact between the 2nd respondent and
ACCOR dated 9.9.94. This contact has been specifically referred to in the MOU dated
11.3.955 at the top of page 2 In this
contract, the 2nd respondent has been shown as the “owner”. Having
referred to both the NDMC license deed containing restrictive clauses and the management
contract with ACCOR in the same MOU referring the 2nd respondent as the
“owner”, the petitioner cannot now claim that it was not aware of the transfer
of the developmental rights to the 2nd respondent at the time of signing the
MOU. Therefore, as far as the transfer of the developmental rights to the 2nd
respondent is concerned, the petitioner cannot disclaim knowledge.
22. As far as re-transfer of the
developmental rights back to the company for Rs.21 crores
is concerned, the objections of the petitioner are manifold. One is that since at the time when these rights were transferred to the
2nd respondent no consideration
was received, nothing should have been paid for the retransfer of the rights, that the
property being that of the company, no value could have been put on the land. As far as putting a value to the
land, we find that when Tourism Finance Corporation of India Limited made an appraisal ( Page 503 of
Volume III ), it had estimated a notional value of Rs.12 crores for the land and Rs.1.1
crore for site developmental and in the means for financing, it had also estimated the
equity share capital of the Indian promoters as Rs.20.33 crores inclusive of the land. In the proposal given by the petitioner to the
company dated 13.2.1995 (Page 140 of Volume III ), the petitioner itself had indicated that the promoters equity of Rs.20 crores would
be “ Land “. Further, in the inter
office memo ( Page 133 of Volume III ), the
petitioner had indicated “We value the land at Rs.21 crores as against the market
value of Rs.70-80 crores”. Again as late as on 25.3.97, the petitioner had
indicated in its letter to the Punjab National bank (page 17 of Vol VI) that TFCI had
estimated the cost of the land and its
development at Rs 22.10 crores and the
promoters had so far spent Rs 35 crores on the project. This amount included Rs 21 crores
against which shares were allotted. Thus, the intention of not only the appraising agency ( TFCI ) but also the petitioner
had been to put a value for the land. From
the documents, it appears that right from the beginning the intention of the promoters was
to put a value on the land and get shares allotted against that value. In the MOU with
Aeroflot, the company was to get shares in the 2nd respondent against its
granting the right to use the land for the
hotel. Same is the position in the MOU between the company and ACCOR dated 29.8.94,
wherein it is provided that “the parties agree hat the property shall be valued by
an independent approved valuer. SUNAIR to contribute the said property as part of the
equity in the limit of 20% of the total project cost amounting to USD 5.15 million.” This
amount of US D 5.15 million works out to roughly Rs 22 crores, which figure has perhaps
been adopted in the MOU dated 11.3.95 as the contribution by the respondents. Since as per
this MOU, ACCOR was to contribute Rs 10 crores, the petitioner cannot disown its knowledge its knowledge of the the MOU dated 29.8.94
according to which the promoters were to contribute the land for the shares. Only in this
MOU and not in the Management Contract dated 9.9.94, that there is any mention about
ACCOR’ contribution towards the funds for the company. Therefore, without knowledge
of this MOU, the petitioner could not have written the letter dated 18.3.95,(page 161 of
Vol III) to ACCOR suggesting that its contribution could be either by way of share capital
or by way of loans. Thus there is ample evidence to show that the petitioner was aware of
the value being put on the land.
23. Having held that the petitioner cannot
question the value of Rs 21 crores put on the land, the next issue is whether the company
was justified in attributing this value to the 2nd respondent. According to the
petitioner, since no money was paid by the 2nd respondent while transferring
the rights to the company, there is no justification in paying Rs 21 crores. While this arguments appears to be sound, yet, we
have to look into the circumstances of the case. From the previous paragraph, it is clear
that the intention of promoters as well as the collaborators had been that the promoters
would be allotted shares against the value of the land. But those proposals were with
reference to the project being implemented through the 2nd respondent, in which
case, the company, which was in complete control of the respondents, would have been
allotted the shares against the land. However, according to the respondents, after having
got the license restored in the name of the company after a long drawn legal battle, they
did not want to waste time in getting the permission of the NDMC to get the project
implemented through the 2nd respondent and therefore, it was decided that the company itself would implement the project. It
appears that since as per their original proposals with Aeroflot and ACCOR the land value
was to be reflected in shares, perhaps, they had passed on the value to
the 2nd respondent, through which to have the shares allotted. Therefore, the
only question is as to whether the petitioner had the knowledge of the proposal to pay Rs
21 crores to the 2nd respondent. It is on record that the petitioner itself had indicated in its letter to the IDBI ( Page 144
of Vol III) dated 18.11.1996 that the company had acquired the land rights from it
subsidiary for Rs 21 crores. Again in its
letter to the IDBI dated 19.11.96, the same has been once again reiterated. Further in the
letter date 18.11.96, the petitioner had also stated that a sum of Rs 34.40 had been spent
of the project which was financed by the
promoters contribution. This amount included the payment of Rs 21 crores to the 2nd
respondent. The petitioner, being not an ordinary share holder but specializing in
financial matters, would not
have made such a statement unless it was aware that the 2nd respondent was
entitled to that amount and that the company had paid the same.
24. With the above in the back ground, we
have to examine the complaint of the petitioner about the
alleged fraudulent rotation of Rs 1
Crore. Now that the petitioner was aware of the value of Rs 21 crore put on the land and
that the said amount had to be paid to the 2nd respondent, the company was
liable to pay the said amount to the 2nd respondent. It has become the
liability of the company and it had the option to pay the same in one or more installments. If the company did not owe
any money to the 2nd respondent, then, the method of rotation adopted by the
respondents would have been highly irregular and would have merited cancellation of the
allotment. However, in the present case, the petitioner itself had admitted the valuation
of Rs 21 crores and the proposal of the company to acquire the developmental rights from
the 2nd respondent, in its letters to the financial institutions as referred to
earlier. Once the liability of the company is in the
knowledge of the petitioner, it cannot question the ingenious method followed by the
respondents in discharging the company’s
liability and at the same time getting shares issued to the respondents. It was strongly
urged by the learned counsel for the petitioner that the company did not have any funds
and it was the amount of Rs 70 lakhs paid by
the petitioner that was utilized to pay the first Rs 1 crore on 16.3.95 to the 2nd
respondent which was rotated 21 times. We have already pointed out that the petitioner was
aware that the company owed Rs 21 crores to the 2nd respondent and this
liability had to be discharged sooner or
later. May be the manner in which it was done would indicate some hanky panky, but in facts of this case, the petitioner being aware
of the discharge of the liability cannot allege illegality in the rotation of money as the liability of the company towards the 2nd
respondent has been discharged. We are also not able to believe that that the petitioner
was never aware of the mode of discharge of the liability, since, as a financier, before
writing the letters to the financial institutions that the company had acquired the land
for Rs 21 crores from the 2nd respondent, it should have checked up the mode of
payment, especially when it has the right to access to the accounts of the company in
terms of the MOU> Further, if the
petitioner was not aware of the mode of discharging the liability, it would have
definitely advised the company to defer the paryment and utilize the funds for the
project. As a matter of fact, the petitionr paid the security deposit only during the
period between 21.11.95 and 23.4.96, by which time atleast by this time, it should have
known about the mode of discharge of the liability towards the 2nd respondent.
The petitioner claims that it had no access to the accounts of the company, but no evidence that it had complained of the same to the
company at any time, has been produced. Therefore, even assuming that the rotation of Rs 1
crore is irregular, yet, in facts of this case, knowledge of and consent to the same the same have to be attributed to the petitioner.
25. The petitioner has also challenged the
payment of money by the 2nd respondent to HJ Consultants which facilitated the
rotation of money. The main objection of the petitioner in relation to the MOU dated
10.3.1995 between the 2nd respondent and M/s HJ Consultants is that the same is
a fabricated document to justify the illegal rotation of money. Further the MOU is not an
agreement to sell, that there was no reason for the 2nd respondent to purchase
properties, that so far no property has been transferred to the 2nd respondent
etc. It has also pointed out that there are common directors in both these companies and
as such they could not have entered into this MOU in violation of Section 299 of the Act.
We find from the Balance Sheet as on
31 3 1995 of the 2nd respondent that the sum of Rs 21 crores is shown
under “Loans and Advances”. In the Balance Sheet of HJ Consultants as on
31.3.1995, this amount is shown as “Current Liabilities” and also under
“Loans and Advances”. In the auditors report it has been mentioned that these
heads include amounts received from and paid to entities in which one or more directors of
the company are interested. However, we also note that neither the Balance sheets nor the Directors’ Reports
of both the companies, as pointed out by the
petitioner, indicate the transactions are
with reference to the MOU. However, since the amount paid by the 2nd
respondent, which is a wholly owned subsidiary of the company to HJ Consultants has been
reflected in the accounts of both the companies, HJ Consultants is bound to repay the
amount in cash or in kind. Since HJ Consultants are not before us, we cannot examine as to
whether, its lending/advancing money to M/s Janki Investment through which the respondents
could get money to subscribe to the shares is proper
or not. However, since the 2nd respondent is a wholly owned subsidiary
of the company, with the view to protect the interests of the 2nd respondent, we direct, that the 2nd respondent
should take steps to recover the amount of Rs 21 crores paid to HJ Consultants either in
cash or by way of properly valued properties worth Rs 21 crores within 9 months from the
date of this order.
26.
Now
we shall deal with the other issues raised by the counsel. Shri Sarkar submitted that the allotment of shares by way of rotation would not be in conformity with the MOU which
stipulated that cash of Rs 22 crores was to
be brought in by the respondents towards the shares. It is a settled law that a private
agreement, not forming part of Articles is not binding on the company with certain
exceptions like family companies or companies in the guise of partnership, that too in
relation to shareholding position and participation in the management. In this case, the
partnership principles cannot be applied in view of the express stand taken by the
petitioner in its letter to TFCI dated 17.12.96(page 556 of Vol III) stating that the
petitioner was an institutional investor in the company without involvement in the management and functioning of the company, when
its personal guarantee was sought for by TFCI. Shri
Sarkar cited the case of Bombay Cable Car decided by this Board to urge that in line with the decision in that case, we should
declare that violation of the provisions of the MOU should entitle the petitioner the
grant of the prayers sought for. A reading of that case would show that the reliefs
granted in that case were not based on the agreement between the parties but on the facts
of the case after observing “Now we
have to see whether the allegations of the petitioner, de-hors the agreement, could be
considered as acts of oppression”. Once the cheques issued by the respondents had
been encashed by the company and utlised for clearing the liabilities, the petitioner
cannot complain that no cash was received for the shares.
27. Shri Sudhir Chandra contended that in a
proceeding under Section 397/98, the petitioner should come with clean hands failing which
he should be denied relief. We agree that it is a settled proposition of law that the
conduct of parties is a very relevant factor to be considered in the equitable proceedings under section 397/98.
In S.D.N, Wadiyar Vs. Sh. Venkateshwara Real Estates Private Ltd. ( 72 CC 211 Kar)
it was held that the petitioner seeking
equitable relief must come with clean hands and good conduct, failing which the petition
would constitutes a gross abuse of the process of court and the petitioner is not entitled
for any relief under Sections 397 & 398. It also held that that the conduct of the parties in other
proceedings could also be taken into
consideration. We find that, once the disputes started between the parties, the
petitioner, without minding the interest of
the company, took various steps to put blocks
on the progress of the project. By a letter
dated 14.3.98 the petitioner advised TFCI that the latter should protect its interest in
the company as the petitioner was contemplating filing of a winding up petition (page 62
of Vol III). In the same volume at page 64, by another letter, the petitioner asked TFCI
to instruct its bank to stop payment of a cheque by which some loan had been disbursed.
Again by a letter dated 4.5.98, the petitioner advised TFCI to recall the loan given to
the company. In all these letters the grievance of the petitioner was that the company had
not paid interest on the security deposit and that the respondents had allotted shares
without paying consideration. While, the conduct of the petitioner before filing of the
petition may not be a relevant factor, yet after filing of this petition and when the
process of amicable settlement was on, the petitioner had continued its prejudicial act. It is on record that the parties had decided to
settle the disputes for an amount of Rs 19 crores payable by the respondents/company to
the petitioner. This agreement was recorded in our order dated 18.11.1998 and only the
other terms remained to be settled. Not withstanding this, the petitioner, by a letter
dated 19.12.98 (page 106 of Vol IV) addressed
to TFCI, while making a reference to the process of settlement, once again referred to all
the allegations made in the petition and had cautioned TFCI in its dealings with the
company . The respondents also, through their affidavit dated 1.4.98, complained that the
petitioner had been giving adverse publicity to the disputes through various news papers,
which allegation, we note was denied by the petitioner. Further, in the High Court
proceedings in relation to the writ against the attachment order of the Income tax
department, the petitioner sought for the High Court permission to go ahead with the
compromise arrived at before us. The High Court granted the permission on 30.8.99.
However, in the hearing on 10.11.99, the counsel for the petitioner informed that his
client was withdrawing from the compromise terms. The Bench thought that the reason for
withdrawal was that on that day the respondents produced demand drafts for only Rs 2
crores as against Rs 6 crores as agreed
to earlier. However, in the hearing on 1.3.2000 when the respondents had brought cheques
and demand drafts for Rs 7 crores, this Bench was informed that the Board of the
petitioner company had passed a resolution, as early as on 29.10.2000 not to proceed with
the compromise. This resolution was not disclosed in the hearing on 10.11.99. In this
connection, we may also note that even though both the sides had accepted the draft terms
of settlement suggested by this Bench on 28.7.99, while the respondents were willing to
sign the same and file it before us, the petitioner did not want to sign the same till the
first installment was paid and when the first installment was offered, even though
belatedly due to the High Court proceedings, the petitioner did not want to accept the
same even with interest. Therefore, we feel that the conduct of the petitioner has not
been bonafide even during the course of the present proceedings.
28. Shri Sudhir Chandra also argued that
the petition has been filed with an obique motive to get back the investment by the
petitioner at a high rate of interest and not with a view to get redressal of the
grievance of either oppression or mismanagement. We
are inclined to agree with him. The relationship between the parties, it appears, was
cordial even during 1997 as is evident from
the letter dated from the petitioner to the company dated 28.5.97 advising that the
petitioner could arrange for ECB. However, the relationship appears to have become sore
when the petitioner did not respond to the requests of the company for funds during 1997
culminating in the company writing a letter dated 31.10.97 ( page 21 of Vol VI) declining
to make provision for interest. In its letter dated 14.3.98 (page 62 of Vol III), addressed to TFCI, the petitioner had complained
of non payment of interest and had also stated “having left with no other choice, VLS
is proceeding against Aunair Hotels Ltd and its promoters to recover its invested amount
of loan and equity and is also filing a petition for winding up of Sunair”. From this
letter, it is clear that the grievance of the petitioner against the respondents was
relating to non payment of interest and its desire was to recover its investment. Further,
in the present proceedings also the petitioner expressed its desire to settle the matter
for a consideration of Rs 19 crores. However, it backed out of the settlement inspite of
offer of Rs 7crores by the respondents on
1.3.2000 as the first installment with the assurance of paying the balance by 31.5.2000
failing which the amount of Rs 7 crores could be forfeited. Further, when we advised the
petitioner to reconsider this decision, the Board of the
petitioner once again resolved on 9.3.2000, not to proceed with the compromise on
the ground “of various frauds
committed by the respondents, their oppressive acts on VLS Finance Ltd, collapse of faith
and conviction in the respondents, and the efforts at prolonging the litigation time and
again on one pretext of the other by the
respondents”. When the present petition itself is based on the same
allegations and inspite of this the petitioner still
agreed to compromise, we do not find any justification in the above resolution to reject
the compromise. May be that the petitioner desired a higher amount than the Rs 19 crores
as is evident from the submission of the learned counsel for the petitioner at the end of
his arguments that one of the equitable reliefs could be to direct the respondents to pay
back the investment of his clients with 20% interest at quarterly rest. Therefore, the
ratio of Belladore case are squarely applicable in this case, meriting dismissal of the
petition as one filed with an oblique motive.
29. Thus on an overall assessment of the
case, we conclude that the intention of the promoters had always been to get shares
allotted against the value of the land and that the petitioner was also aware of the same
and as such the transfer and retransfer of the developmental rights are not sham
transactions. In regard to the rotation of Rs 1 crore, the allegation is that the same is
fraudulent. For an act to be fraudulent, it should be with a view to deceive a person.
When there is ample evidence, in black and white, that the land would be valued and shares
would be allotted against that value, the manner of implementation, however suspicious,
cannot considered to be fraudulent. It is an admitted fact that the liability toward the 2nd respondent has been discharged and
to ensure that it gets back its Rs 21 crores, we have also given suitable directions. In respect of the submissions of Shri Sarkar that even if the petitioner had the knowledge of
the transactions, yet, in view of the
investment of public financial institutions, public interest is involved, we find that not withstanding the
complaint of the petitioner to these institutions
they have disbursed the loans, indicating that they were not impressed with the
complaints.
30. Even otherwise, by the prejudicial
conduct against the interest of the company, and also
on the grounds of waiver, estoppel and
acquiescence, the petitioner has disentitled itself from being granted any
equitable relief in these proceedings. Further the
relief sought for cancellation of the allotment of all shares impugned in the petition, if
granted would result in the petitioner becoming majority in the company with about 84%
shares. Such a relief would be highly unjustifiable in facts of the case especially when
the petitioner has claimed itself only a financier and not a promoter when the financial
institutions sought for personal guarantee of the petitioner. Even if we grant that the petitioner has invested
substantial funds in the company, yet, the credit for completing the project, inspite of
the continued prejudicial action of the petitioner putting obstacles in the completion of
the project, goes to the respondents. With a view to have a first hand knowledge of the
project, we visited the project after the arguments were concluded and found that the
hotel has become operational due to the efforts of the respondents. In this connection, we
may beneficially refer to a decision of this Board in Neelu Kholi V Nikhil Rubbers
Pvt Ltd (2001 1 CLJ 168)
wherein the wife claiming to have invested in 95% of the shares in the company prayed for
handing over the company to her. Finding that it was with the expertise of her husband
holding 5% shares in the company that it prospered, this Board declined to grant her
prayer observing “We are not impressed with the claim of the petitioner that,
since she had 95% share capital, she should be given the
charge of the company in as much as mere capital alone cannot ensure prosperity of
a company. Her averment that she joined the respondent as a promoter only due to the legal
requirement of having two members does not carry much conviction. It is on record that the
respondent has expertise in rubber technology while, the petitioner has no such expertise.
It is also on record that the major portion of the turnover of the company was out of the
exports for which the respondent had obtained
orders while visiting exhibitions abroad. Thus, even assuming that the respondent had not
contributed to the capital of the company initially, his contribution of expertise for the
benefit of the company cannot be ignored. The Company Law Board, in a proceeding under
Section 397/98 exercises equitable jurisdiction and therefore all these aspects have to be
taken into consideration in molding the relief.” The same analogy applies here
also. The claim of the petitioner is that without his investment of Rs 15 crores, the
project could not have progressed but we find that it is the efforts of the respondents,
inspite of the prejudicial acts of the petitioner, that the project has been completed. We may also note that Allahabad High Court, in Reghunath Sarup Mathur Vs. Har
Sarup Mathur ( 40 CC 282
), has held that, the court has to be careful and astute enough to prevent a
misuse of the provisions of Sections 397/398 by a party, lest a remedy proposed and
granted to overcome an alleged mischief becomes a source of greater oppression than the
one sought to be removed or prevented. The grnat of the relief as sought for would be a
great act of oppression against the respondents who had nurtured the project from 1982
onwards.
31. After the hearing was concluded, the
counsel for the petitioner mentioned an additional affidavit dated 15.5.2001, enclosing
therewith copies of certain documents mostly correspondence exchanged between the officers
of the Department of Company Affairs (DCA) in connection with the follow up action on the
Inspection carried out by that department into the affairs of the company. When this affidavit was mentioned, the counsel
for the respondents submitted that the Department of company Affairs had closed the follow
up action on the inspection report and nothing survived on that report. He also pointed
out that the company has filed an application before the Delhi High court under Sections 9
and 11 of the Arbitration and Conciliation Act and that the High Court has passed some
interim orders. He also mentioned that the company has forfeited the security deposit of
Rs 8 crores paid by the petitioner to the company in terms o the MOU. Shri Sarkar
suggested that this Bench should ascertain the correct position from the DCA. As per the suggestion
of the learned counsel for the petitioner, we perused the inspection report
prepared by the Department of Company Affairs. According to the report, the company has
violated various provisions of the Act. Many of these violations are not part of the
allegations in this petition and as such we cannot take cognizance of the said report
without an opportunity to the respondents. It has been held by the Apex Court in Needles
case that violation of statutory provisions need not be oppressive. If the
company/respondents have violated the provisions of the Act, on the basis of the
inspection report, the Registrar Companies would definitely initiate suitable proceedings
independent of the present proceedings before us. In Shaw Wallace case (1998 31 CLA
234), this Board took a view that if a governmental agency has taken cognizance of
any violation of statutory provisions, this Board would not examine the same in a
proceeding under Sections 397/98. This view
was endorsed by the Division Bench of the Calcutta High Court also on appeal. What this
Bench is concerned is whether the allegations made in the petition could be considered to
be acts of oppression/mismanagement and regarding the main allegation relating to
allotments of shares we have already given our findings that the allotments were neither
fraudulent nor sham. As far as the allegation of not making an offer to the petitioner in
1997 when further shares were issued, the learned counsel for the respondents gave an
undertaking that the petitioner would be given proportionate shares if it were to express
its desire to do so. In view of this undertaking, this complaint of the petitioner no
longer survives.
32. Now in view of our findings that the as
per TFCI appraisal the promoters contribution was to
be in the form of land and that in both the collaboration agreements with AEROFLOT and
ACCOR, the same has been indicated, and that
the petitioner itself had valued the land at Rs 21 crores and had known that the same was
payable to the 2nd respondent, the fact of which the petitioner itself had
communicated to the financial institutions, neither
the allegation of sham nor fraudulent transaction has been established. In this
connection, we may also observe that it is not uncommon for the promoters to get shares
issued for services rendered and this has been recognized by the statute itself in Section
75(b) of the Act, subject to compliance with the procedure specified in that Section. In
the present case, even though the land was licensed as early as in 1982, due to the
efforts of the promoters only, all the disputes relating to the license came to an end and the
project commenced in 1995. Even assuming that
the respondents had adopted a questionable method of clearing the liability and in the
process got shares allotted to them, taking into consideration all aspects of this case
and our direction that the 2nd respondents should take steps to recover the
money paid to HJ International either by way of cash or properties within a set time
frame, we do not find any scope to grant any relief to the petitioner especially when we
have held that the petition is a motivated one and that the
petitioner has disentitled itself by its conduct in being granted any equitable
relief. Therefore the petition deserves to be
dismissed.
33. However, without dismissing the
petition, since there are only two groups of shareholders in the company and that the petitioner having invested a substantial amount in the company feels
oppressed, we are of the view that it should
be given an option, in case it desires, to
go out of the company on return of its investment in shares of the company of Rs 7 crores.
We are not considering the amount of Rs 8 crores of security deposit for the reasons that
the respondents have reportedly forfeited the same and that they have also claimed substantial amount against the petitioner
for breach of the terms of MOU. Further, the same has no connection with the status of the
petitioner as a shareholder. In case the petitioner is willing to part with his shares,
then the company/respondents should purchase the shares on a valuation to be made by an
independent valuer. The valuation will be based on the Balance Sheet as on 31.3.1998,
being the proximate date of the petition. In
case the petitioner desires to continue with its membership, it has the option to apply
for proportionate shares in respect of the
shares allotted in 1997. Either of the options should be exercised within a period of 3
months of this order. In case it desires to go out of the company, then, on an application
made by it, we shall appoint a suitable valuer. In case it desires to continue with the
company and opts to acquire proportionate shares, the same will be at par and the
respondents should arrange to have the requisite number of shares transferred to the petitioner on receipt of
consideration.
34. The petition is disposed of in the
above terms with no order as to costs.
(S.Balasubramanian)
(A.K
Banerji)