Company Law Board
In Re: Amar Ujala Publication Limited vs Unknown on 10 July, 2006
Equivalent citations: [2007]76SCL255(CLB)
ORDER
S. Balasubramanian, Chairman
1. In this order, I am considering two applications filed by the respondents-CA 62 of 2006 and CA 148 of 2006. To appreciate the issues involved, 1 am narrating, in brief, the sequence of events which lead to the filing of these applications.
2. The petitioners, holding 35.33% shares in M/s Amar Ujala Pubication Limited (the company) had filed CP No.26 of 2005, alleging oppression and mismanagement in the affairs of the company by the respondents holding 64.67% shares in the company. The company is a news paper company having a number of editions in many places in North India. During the proceedings, considering the close association of the parties for a long time, I suggested to the counsel that the parties should attempt to resolve their disputes amicably. Referring to some earlier understanding between the parties that the company could be divided by which certain editions could be taken over by the petitioner and the balance being taken over by the respondents, the petitioners suggested that if such a division was effected, then the disputes could come to an end. This suggestion was not acceptable to the respondents as no being viable and not in the interest of the company and the shareholders. In turn, they suggested that the petitioners, being in minority, could sell their shares to the respondents so that the disputes could come to an end. This was not acceptable to the petitioners. Accordingly, the petition was heard on merits and the hearing was concluded on 9.11.2005. On that day, the counsel for the petitioners, Shri Sarkar, suggested that, to put an end to the disputes, the respondents may quote a price for the shares with the first option to the petitioner to decide either to sell their shares or purchase the shares of the respondents at that price. The counsel for the respondents sought for some time to consult his clients. On 30.11.2005, the counsel for the respondents conveyed the consent of his clients to quote for the price of the shares of the company and also of A & N Publications with the first choice to the petitioners to sell or purchase. While doing so, he also stipulated that there should be a three years lock in period for the shares purchased by either of the parties. This was accepted by the counsel for the petitioners. The matter was adjourned to 9.1.2006 for the respondents to indicate the price on that day. On 9.1.2006, the respondents filed an application CA 6 of 2006 stating that even though the respondents were the majority shareholders, with a view to ensure that the company continued to remain with the promoters, they had agreed to the proposal that they could quote for the price with the option to the petitioners either to purchase or sell at that price. However, the respondents had come to know that the petitioners had started approaching third party buyers with a view to sell the shares after purchasing the same from the respondents and thus make a profit out of such a transaction. Accordingly, they sought for a direction to the petitioners to sell their shares to the respondents on a valuation to be determined by an independent auditor. In the reply to this application, the petitioners had clarified that they had no intention to sell the shares of the respondents in case they chose to buy the same after value/price of the shares was disclosed. When the matter was heard on 17.1.2006, the counsel for the petitioners also affirmed the statement of the petitioners in their reply to the application CA 6 of 2006 that the petitioners had no intention of selling the shares in case they purchase the same from the respondents. Thereafter, the respondents indicated the value of the company at Rs. 390 crores. The petitioners sought some time to consider whether they would purchase the 64.67% shares held by the respondents or sell their 35.33% shares on the said valuation of the company. In the haring held on 23.1.2006, the petitioners elected to purchase the 64.67% shares held by the respondents. The consideration for the 64/37% shares of the respondents worked out to Rs. 252 crores. On 24.1.2006, both the sides, presented, in writing, their terms of settlement (copies enclosed herewith shall form part of this order). The terms given both the sides were discussed in my presence and I also assisted them in finalizing the terms. The terms given by the respondents were kept as the basis and additions/alterations on the basis of the proposal given by the petitioners, and as agreed to by the parties, were incorporated therein. When Clause 2 of the respondents' proposal was discussed, the petitioners desired that there should be a provision for going in for IPO as the company might need funds in the long 3 years period. The respondents agreed, provided that the shareholding of the petitioners should not come below 51% even after the IPO and that public issue could be made only after the full consideration was paid. In view of this, in Clause 2(a), the words "even after IPO" were added and Clause 4(d) was introduced. On the basis of the consensus emerged during the discussions on the terms to be incorporated, an order was passed on 25.1.2006. Some the clauses of the consent order, which are relevant to the present applications are:
2. It has been agreed by the parties that sale of shares by the respondents shall be subject to the following:
(1) There will be a lock-in period of 3 years on the shares of the respondents that are purchased by the petitioner group.
(2) The petitioners shall not transfer any shares of the companies or raise the shareholding in the companies or cause any shares to be allotted and will not enter into any agreement/transactions in such manner that result in the following;
(a) Results in purchaser of the shares (Petitioners' Group) ceasing to hold 51% of the shareholding of the companies at any point of time for a period of next 3 years even after IPO.
(b) Ceasing to have management control of the companies and all and every policy decision of the company shall be taken by the petitioner group.
(c) That the petitioner group shall also have majority Directors on the Board of the company.
(d) However, the petitioners are at liberty to go in for public issue after payment of full consideration for the shares in terms of Clause (4) below subject to Clauses (a) and (b) above.
(3) The management control of the company shall only be transferred to the petitioner group on payment of 40% of the agreed amount payable to the respondent group by the petitioners. In the meantime, the shares sought to be sold by the respondents and all so the installments of consideration paid by. the petitioners shall be kept in escrow account and on full payment, the money will be released to the respondents and all the shares will be transferred to the petitioners.
(4) The payment shall be made by the petitioners' group in the following manner:
(a) 5% of the consideration will be paid within 2 weeks from the date of the order and another 5% within the next two weeks.
(b) 30% within 3 months from the date of the order.
(c) 30% within 6 months from the date of the order.
(d) 30% within 9 months from the date of the order.
(e) The full amount payable to the respondent group by the petitioners shall be completely paid within 9 months of the passing of the order and as per the schedule contained herein above. No default in the schedule given hereinabove shall be made by the petitioner group.
(f) In case of default in payment and in non-compliance of the Schedule of payment as provided in Clause 4, the petitioner group shall not only immediately cease to have the management control and the control shall automatically vest in the respondent group but also the petitioner group shall immediately transfer their shareholding in the companies to the respondent group on the basis of the same valuation of Rs. 390 crores. The respondents will have the liberty to forfeit 10% of the total consideration payable to the respondents.
3. After recording a few more terms of the consent, I had recorded as follows in paragraphs 3 and 4: "3. Since the above terms were discussed and agreed to in my presence, the parties should scrupulously abide by the above terms. Further, since right from the beginning, both the parties expressed their desire to keep the business of the company within the family and that is why the option was given to the petitioners to either buy or sell, the petitioners having opted to take the full ownership and control of the company that is within the family, they shall not either directly or indirectly facilitate or negotiate or shop around with any third party for a period of 3 years to either acquire the ownership or control of the company. 4. The parties are at liberty to approach this Bench in case of any difficulty in working out this order".
4. On 8.2.2006, the respondents filed CA 53 of 2006, seeking for directions to the petitioners to deposit the share certificates relating to 35.33% shares held by them with the escrow agent on the ground that such a stipulation has been omitted to be incorporated in the consent order while directing the respondents to deposit their 64.67% shares with the escrow agent. In reply to the application, while contending that it was never the understanding that the petitioners' shares would also be kept in the escrow account, the petitioners agreed to deposit their shares with the escrow agent till the full consideration as per the consent order was paid. The first installment of Rs. 12.5 crores, being 5% of the total consideration was deposited in the escrow account on 6.2.2006. Thereafter, the respondents filed CA 62 of 2006, alleging that the petitioners had not paid the first installment from their own funds as stipulated in the consent order, but, instead, the money had been drawn from the accounts of M/S Media West India Private Limited, a group company of Zee Group which was a competitor to the company. In this application, they had also referred to their earlier allegations in CA 6 of 2006 and contended that the petitioners were playing fraud on the respondents. Consequently they sought for directions to the petitioners to produce the agreement between the petitioners and M/S Media West and also for direction to the petitioners to sell their shares to the respondents as the petitioners had breached the terms of the MOU by drawing money from Media West. In their reply to this application, the petitioners contended that in the order dated 25.1.2006, there was no stipulation that the petitioners could not borrow money for payment of consideration for the shares and that the arrangement with Media West was purely a financial arrangement and did not envisage any charge to be created on the shares or ownership of the two companies. When the application was heard, the counsel for the respondents demanded production of the agreement with Media West which the petitioners were not willing to produce. However, they agreed to produce the same for my perusal. On conclusion of the hearing and after perusal of the agreement shown to me by the petitioners, I passed an order on 4.4.2006, holding that in the consent order, there was no term preventing the petitioners from borrowing funds and that on reading of the MOU, it prima facie appeared to me that none of the terms in the MOU was in breach of the consent order dated 25.1.2006. However, since I felt that before I decided the application, I should have the views of the respondents on the terms of the MOU, I directed the petitioners to file an affidavit disclosing the main terms of the MOU with a copy to the respondents. When this matter was taken up on 12.4.2004, I passed the following order "Heard. The counsel have agreed, on the statement of the counsel for the petitioners that the merchant banker is not a part or connected with Essel Group, that a Xerox copy of the MOU would be given to the respondents blocking the name and particulars of the merchant banker. To be done with an affidavit that there is no agreement or MOU with the same party or other parties. The duration of the pendency of the application would be excluded from the term of payment as per the consent order". Accordingly, the petitioners field an affidavit enclosing therewith a copy of the MOU with Media West, however, blocking the name of the Merchant Banker and the arbitrator. It is further stated in the affidavit that besides the said MOU, there was no other agreement or MOU except a similar arrangement with the Merchant Banker and there are no stipulations or clauses which are either in addition to or contrary to or inconsistent with the MOU with Media West. When the matter was taken up again for hearing on 27.4.2006, the respondents demanded a copy of the MOU with the Merchant Banker on the ground that, even though, the petitioners had earlier asserted that there was no other MOU besides the one with Media West, now in the affidavit they have disclosed that there is another MOU with the Merchant Banker. When the petitioners declined to disclose the MOU, the respondents sought to file an application for discovery of documents. Accordingly, the respondents filed CA 148 of 2006 seeking for directions to the petitioners to produce the financial arrangement/MOU between the petitioners and the merchant banker and the merchant bankers and Media West and also to disclose the name of the arbitrator. In addition, they had also sought for recalling the order dated 25.1.2006. This application was part heard on 11.5.2006 when the petitioners filed CA 149 of 2006 under Sections 11 & 12 of Contempt of Courts Act, 1961 alleging that the respondents had acted in breach of the order of this Board dated 25.1.2006, according to which there should be no change in the composition of the Board, by removing the 1st petitioner as a director in the Board meeting on 28.3.2006. On this application, I passed an order on 11.5.2006 that the 1st petitioner would continue to enjoy the same status that he was enjoying before 28.3.2006. Thereafter respondents filed CA 166 of 2006 complaining that the 1st petitioner had started to interfere with the affairs of the company on the basis of the order of this Board dated 11.5.2008. On this application, I passed an order on 18.5.2006 directing the 1st petitioner not to claim or discharge any function other than those vested in him as a Whole Time Director. Thereafter, the petitioners filed CA 186 of 2006 complaining that in breach of the consent order, in a Board Meeting convened on 8.6.06, the respondents had proposed to change the instructions on Bank operations with the view to exclude the 1st petitioner from being a signatory and also to change the Bankers to the company. I passed an interim order on 8.6.2006 directing the company not to give effect to these resolutions till the application was heard.
5. Applications CAs 62, 148 were heard and arguments were concluded on 15.6.2006. Shri Datar appearing for the respondents submitted: The petitioners have played a fraud not only on this Board but also on the respondents completely in breach of the consent terms by associating Media West in acquisition of the shares of the respondents. Media West is a group company of Essel/Zee group and this company is being used as a special purpose vehicle by that Group to acquire newspaper companies. Media West has a capital of only Rs. 1 lac and its main object relates to buy, sell, procure, commission, entertainment software etc. It is not a financial institution engaged in the business of lending money nor is an investment company. While it's paid up capital is Rs. 1 lac, its net worth is negative to the extent of more than Rs. 11 crores. For the years ended 31st March, 2004 and 2005, its income was nil. It is inconceivable that such a company could lend Rs.l00 crores to the petitioners without some clandestine arrangement of ultimately taking over the ownership and control of the company on the ground of non repayment of the loan by the petitioners. The Media West was used to acquire Asian Age and DNA by taking loans from-Essel group and thereafter the amount was written of as doubtful debts. One of the directors of Media West is director of Zee group. Therefore, it is necessary to find out who the real financier is, by lifting the corporate veil. Likewise, in the absence of disclosure of name of the merchant banker who is supposed to organize further Rs. 151 crores, it is quite possible that even the merchant banker is also part of Essel group. A perusal of the MOU would indicate that it is nothing but a scam document. Any instrument relating to lending would have a schedule of repayment and also specify the security provided for the loan given. In the MOU, these aspects are absent. Even some of the terms in the MOU are not in consonance with the spirit of the consent order. The MOU has proceeded on the basis that while the petitioners could dispose of their holding of 35.33% entirely, they cannot dispose of only the 64.67% shares acquired from the respondents. In the spirit of the consent order, no shares of the company could be disposed of for acquisition of the shares of the respondents. The only security in terms of the MOU is the 35.33% shares for the funding proposed by the financier and also the merchant banker. The absence of provision for any other security itself would indicate that the MOU is not a clean one. Clause 4 at Page 5 of the MOU which specifies that the petitioners have the option to pay the entire amount in a period of 6 months after acquisition of all the shares with interest at the rate of 15% per annum or in the alternative allow the merchant bankers and financiers to sell the shares in terms of Clause 5 would indicate that it is nothing but a planned default as the petitioners having no other source of finance could never repay Rs. 252 crores within the said period. The provision in Clause 5 at page 5 that, the proceeds received in respect of 49% of the shares which the financiers might get on public offer or private placement would discharge the petitioners from all debts, liabilities and obligations to the financiers and the merchant bankers, clearly shows that no bonafide lender could agree to such a provision. In addition, in the MOU it is specified that in case of disputes, the same would be referred to arbitration and the decision of the arbitrator would be final. The name of the arbitrator has been conveniently blocked. The arbitrator could not be an independent person but again should be one associated with Essel Group. That is the reason why the petitioners are reluctant to disclose his name. A reading of the entire MOU would show that it is not a financial agreement but a planned take over agreement as the amount involved is not a small sum and not in the ordinary course of business and the conditions imposed on the petitioners in the MOU are incapable of fulfillment. It is quite evident that the terms of MOU had been agreed upon even before the consent order was passed and the petitioners have concealed the terms of the agreement when the said order was passed. It was never in the contemplation of the respondents that the petitioners would use their 35.33% shares to acquire the 64.67% shares of the respondents. If the respondents had been aware of this fact before the consent order was passed, they would not have given their consent. Therefore, the consent order is vitiated as the petitioners who had always been aware from the beginning that without disposing of the shares, they would not be able raise funds for acquisition of the shares of the respondents had concealed this vital information. The consent order was based on the premises that the company will be within the family but having agreed with Essel Group prior in time, the petitioners have induced the respondents to enter into the consent terms. Therefore, the petitioners are guilty of suppressio veri and have made a promise without any intention of fulfilling the same with a hidden agenda. Since the consent order is vitiated by fraud and also the petitioners have breached the terms of the consent order, the same should be recalled and the respondents should be allowed to purchase the shares held by the petitioners. 6. Shri Datar relied on the following cases:
S.P. Chengalvaraya Naidu v. Jagan Nath A fraud is an act of deliberate deception with the design of securing something by taking unfair advantage of another. It is a cheating intended to get an advantage. A litigant who approaches the court is bound to produce all the documents executed by him which are relevant to the litigation. If he withholds a vital document in order to gain advantage on the other side, then, he would be guilty of playing fraud on the court as well as on the opposite party. The principle of "finality of litigation" cannot be pressed to the extent of such an absurdity that becomes an engine of fraud in the hands of dishonest litigant. The courts of law are meant for imparting justice between the parties. One who comes to the court must come with clean hands. In the present case, when the respondents allege that the MOU with Media West is an attempt to clandestinely hand over the company to Essel Group and have expressed an apprehension that the agreement with the merchant bankers could also be on the similar line, the petitioners are not producing that agreement and thus are playing fraud on the court as well as the respondents.
Indian Bank v. Satyam Fibres Ltd. The court has got inherent powers to recall its judgment and order if found to be obtained by fraud as fraud amounts to abuse of process of the court.
United Insurance Co. v. Rajender Singh . "Fraud and justice never dwell together". No judgment of a court, no order of a minister can be allowed to stand if it has been obtained by fraud as fraud unravels everything. No court or tribunal can be regarded as powerless to recall its own order if it is convinced that the order was wangled through fraud or misrepresentation of such a dimension as would affect the very basis of the claim.
Shoe Specialties Ltd. v. Standard Distilleries Pvt. Ltd. 90 CC 1 Madras : Till such time, the order is worked out, the CLB cannot be said to have become fuscous officio. In the present case, the consent order has not yet been worked out and in addition the consent order itself provide for liberty to apply. Rajender Kumar Malhotra v. Harbans Lal Malhotra & Sons Ltd. 1999 34 CLA 360, : By exercising inherent powers, an order could be recalled.
Banwari Lal v. Shmt. Chando Devi : If the agreement or compromise itself is fraudulent, then it shall be deemed to be void within the meaning of explanation to proviso to Rule 3 of Order 23 of the Court.
Fishmongers' Company v. Donang Finance Co. Ltd. 1941 AER Vol.1 : An order made in ignorance of an essential fact is the one which cannot possibly stand and as a matter of fact it ought not have to been made and never would have been made if the circumstances had been brought to the notice of the court. Bindeshwari v. Debendra fraud is practiced on the court for obtaining an order recording the compromise, the court is perfectly justified in getting aside the same under its inherent powers.
Gopal Krishna G. Ketkar v. Mohammad R.G. Latif Even if the burden of proof does not lie on a party, the court may draw an adverse inference if he withholds important documents in his possession which can throw light on the facts of the issue. It is not, in our opinion, a sound practice for those desiring to rely upon a certain state of facts to withhold from the court, the best evidence which is in their possession which could throw light upon the issues in controversy and to rely upon the abstract doctrine of onus of proof.
Rampreeti Yadav v. UP Board of High School Once fraud is proved, it will deprive the person of all advantages or benefits obtained thereby. Delay in detection or in taking action will raise no equity. Fraud is a conduct either by letter or words which induces the other person to take a definite determinative stand as a response as a conduct of the former either by words or letter.
7. Shri Sarkar, Senior Advocate, appearing for the petitioners submitted: Right from the beginning after the consent order, the intention of the respondents has been to somehow get out of the consent order. When the respondents quoted the value for the company, they never anticipated that the petitioners would exercise of the option of acquiring the shares of the respondents. After the exercise of option by the petitioners, in CA 62 of 2006 filed on 16.2.2006, the respondents made a similar prayer that the petitioners should sell their shares to the respondents. Again in CA 142, they made a similar prayer. The allegation of fraud is based on the assumption of the respondents that the petitioners had decided on the terms of the MOU with Media West before the consent order was passed. The petitioners never knew what the terms of the consent order would be and therefore to allege that they had settled the terms of MOU with Media West prior in time is nothing but a design to get out of the consent terms by the respondents. The main ground on which the respondents seek the option to buy the petitioners' shares is based on para 3 of the consent order. That paragraph is not one to which the parties had given the consent but it was recorded by the Bench itself. In terms of the consent order, the respondents could have the right to purchase the shares of the respondents only if there is default in payment of installments of the consideration and not on any other ground. The entire allegations of the respondents are based on speculation, on the basis which this Board has no power to recall the consent order. Once the consent order is passed, this Board has only the power to execute the xsame and cannot recall on the ground of fraud etc. for which the respondents have to go to a civil court. Moreover, after the CLB disposed of the petition by a consent order, its powers are restricted only to implement the said order. For that purpose, this Board can only put the petitioners on terms so that the consent order is worked out. It is not the concern of the respondents how Media West raises funds. It was fully aware of the terms of the consent order and in the MOU, Media West has specifically indicated its awareness of the terms of the consent order and has undertaken to abide by the same. If Media West were to take a risk in lending the money, it is of no concern of the respondents or this Board. Even the present application is premature as the petitioners have been given time to pay the full consideration and in case they are unable to do so, the respondents would automatically get the right to purchase the shares of the petitioners in terms of the consent order. This being the case, the respondents should give the petitioners a chance but on the contrary the respondents are approaching the financiers to prevent them from lending money to the petitioners. In terms of the consent order, for a period of 3 years, the petitioners should continue to hold not less than 51% shares in the company and also the control and management. The MOU specifically stipulates so. As long as these conditions are fulfilled, the respondents can have no grievance. In the consent order, there is no prohibition in the petitioners dealing with their 35.33% shares which even in terms of the consent order, they can dispose of by a public offer. In Rambahadur Thakur case 2006 4 SCC 416, the Supreme Court has held that the Company Law Board has no powers to recall a consent order but it is its duty to enforce the said order. Therefore, the petitioners should be given the fruits of the consent order. Further, as is evident from the affidavit of the petitioners dated 12.6.2006, the respondents are indirectly also putting pressure on the petitioners to selktheir shares. As the matter stands today, 100% shares in the company are held in escrow. Therefore, the question of the petitioners dealing with their 35.33% shares, which is the main allegation of the respondents, does not arise. It is on record that as indicated in applications CAs 149 and 186, it is the respondents who, first, by excluding the petitioners from the board and later changing the instructions on bank operations, and also the bank accounts, have violated the terms of the consent order and as such in exercise of equitable jurisdiction, they should not be granted any relief. Even in the event of the order being recalled, the respondents will not have any right to purchase the shares of the petitioners. Paragraph 3 of the CLB order imposes obligations only on the petitioners which will operate after the petitioners acquire the shares of the respondents. The very fact that no corresponding obligations have been imposed on the respondents Paragraph 3 of the consent order, the question of their acquiring the shares of the petitioners does not arise. In so far as the production of the MOU with the Merchant Bankers in concerned, the petitioners cannot produce the same because of the objections of the Merchant Bankers.
8. Shri Sarkar relied on the following cases:
State of M.P. v. Sanjay Rai 2004 10 SCC 573 : No executing court can go beyond the decree. IN the present case, the consent order passed by this Board is a decree and as such its only power is to execute the decree and not to recall or modify.
State of Punjab v. Krishan Dayal Sharma When the decree does not provide for payment of interest, the executing court cannot award any interest as it is bound by the terms of the decree and it cannot add or alter the decree on its notion or fairness or justice. Similarly, in the resent case, the CLB has no power to pass any other contrary to the terms of the consent order.
Manish Mohan Sharma v. Rambahadur Thakur Ltd. When a consent order is passed, the parties cannot resile there from and the said order cannot be described as an interim order in the sense that the issues decided thereby could be reopened. A consent order is something more than a mere contract and has the element of both a command and a contract. The efforts of the executing court must be to see that the parties are given the fruits of decree. The mandate is re--enforced when it is a consent decree and doubly re-enforced when the consent decree is a family settlement.
Sangram Sinh P Gaekwad v. Shanta Devi P. Gaekwad 123 CC 566 at 537 : The plaintiff is bound to give particulars where he relies on misrepresentation, fraud, breach of trust etc. In the present case, other than making allegations of fraud on presumptions and assumptions, the respondents have not produced any particulars.
9. In rejoinder, Shri Datar argued: In exercise of its inherent powers, CLB can recall its order if it finds that the order had been obtained by fraud or is unworkable or one of the parties had acted in breach of terms of the consent order. The foundation of the consent order was that the company would continue to be in the family. This Board has specifically recorded this fact in the order at 3rd paragraph. When the said premise is breached, the order can no longer stand. Getting an order on the basis of a certain promise and if the said promise is subsequently broken intentionally, it is nothing but a fraud. In terms of Section 47 of the Code, even at the execution stage the question of fraud can be examined. Para 3 of the consent order is a part and parcel of the said order and as such it is not severable. Actually, this paragraph signifies the foundation and structure of the consent order and if it is breached, the respondents automatically get the right to purchase the shares of the petitioners.
10. The learned Counsel further submitted: The allegations of the petitioners that the respondent has acted in breach of the consent terms are wrong. The petitioner was never removed as a director. In spite of notice, the petitioner did not attend the board meeting offering himself for appointment as director after completion of his existing term of office. Likewise, the bank operations were changed only due to the appointment of new personnel and the power of the petitioner to sign cheques was not disturbed at all. Even the decision of the Board to change its bankers was only with a view to avail, at par facility, in various places where the company has its operations. By this change, the company could save over Rs. 40 lacs per year. Thus, in no way, the respondents had acted in breach of the terms of the consent order.
11. In so far as the right of the respondents to purchase the shares of the petitioners is concerned, the right accrues on three grounds. One is the implied right arising out of the fact that the company is to be within the family, the second is that the petitioners have breached the terms of the consent order, and the third is that the petitioners had played fraud in obtaining the said order. Their right to purchase goes and the respondents' right accrues. Even otherwise, in terms of Section 402, this Board has the power to direct so with a view to put an end to the disputes. The very fact, that the petitioners have not answered any of the points raised by the respondents with reference to the terms of the MOU and in the absence of production of the MOU with merchant bankers, would show that the respondents have established a case of not only fraud but also breach in the terms of the consent order by the petitioners. It is an admitted fact that the petitioners have no funds and they are borrowing over Rs. 250 crores at 15% interest. There is nothing on record to show how the petitioners will pay even the interest leave alone the principal amount. In terms of Clauses 7/8 of the MOU, it is the financiers and the merchant bankers who will decide the price for sale of the shares to the public. This itself would show that it will be they who would be controlling the shares and not the petitioners.
12. I have considered the pleadings and arguments of the counsel. Before dealing with the merits of the case, it would be appropriate to summarize, point wise, the recitals in the MOU between the petitioners and Media West.
a. The subject matter of the MOU is financing the acquisition of 64.67% shares presently held by the respondents.
b. Immediately after the value of the company was disclosed by the respondents on 17.1.2006, the petitioners held discussions with a well known undisclosed merchant banking institution which had indicated that purchase of 64.67% shares was eminently a bankable proposition and the petitioners could divest their own 35.33% holding in the market at an appropriate time. While the merchant banker was agreeable to fund major part of the requirement, it insisted that the petitioners should recruit another investor to fund one third to half of the requirement. On the suggestion of the merchant banker, the petitioners approached Media West, one of the names suggested by the merchant bankers and Media West agreed to fund not more than 40% of the requirement.
c. After the consent order, further discussions were held jointly with the merchant banker and Media West and it was agreed that Media West would lend Rs. 101 crores, being 40% of the total amount of Rs. 252 crores where after the merchant banker will lend the balance amount of Rs. 151 crores.
d. The security for the amount of Rs. 252 crores lent jointly by Media West and the merchant banker would be 35.33% shares held by the petitioners, which shall be subject to restraint against all transfers.
e. During the currency of the loans, these shares will stand pledged in favour of Media West and merchant banker and the shares acquired from the respondents of 64.67% will be retained as collateral security. The voting rights of 35.33% shares shall not be exercisable in any manner prejudicial to the interest of the lenders.
f. The petitioners would have the option to repay the loans at any time within a period of 6 months of acquiring the entire shares, with 15% interest per annum, before the lenders exercise their option to sell the shares.
g. The merchant banker will have the right to make public offer for sale or private placement to financial investors of the 35.33% shares at any time after 6 months but within 36 months from the date on which the petitioners acquire the entire shares and the lenders will appropriate the proceeds proportionately. After 3 years, the merchant banker will have the right to sell either by public offer or by private placement of additional 13.67% shares, thus totaling to 49% shares. The receipt of the proceeds of sale of 49% shares would fully and finally release the petitioners from all debts, liabilities and obligations due to the lenders and the balance 51% shares will be released unconditionally to the petitioners.
h. Till that time, no dividend shall be declared without the consent of the lenders.
i. If the petitioners do not accept the scheme prepared by the merchant banker for sale of 35.33% shares, the shares shall be immediately transferred in the joint name of the lenders and the petitioners will pay 15% interest per annum right from the beginning repayable within a period of 48 moths from the date of the loan. During the currency of the loan, 64.67% shares shall continue to be retained as collateral security by the lenders.
j. If the interest on the loan remains unpaid for more than a year, after notice to the petitioners, the lenders may offer for sale to public or by private placement, the 35.33% shares and the proceeds shall be appropriated proportionately by the lenders first towards interest and thereafter the principal.
k. If the remaining principal amount and the interest is not paid within 48 months, the lenders shall have a right to make a public offer of such number of shares out of 64.67% shares so that the petitioners continue to retain 51 % shares.
l. In the event, public offer for sale does not take place within a period 12 moths from the date of acquisition, the parties may renegotiate and the new agreement shall provide for public offer by the petitioners for repaying the loan by the lenders with simple interest at 15% per annum.
m. The lenders may transfer their rights under this agreement to any party willing to abide by the consent order and the rights and obligations of the lenders shall vest in the new investors. Further, it is open to Media West to transfer its right to the merchant banker and vice versa.
n. In the event of any dispute, the same shall be referred to an arbitrator named in the MOU, whose decision shall be final.
o. Media West will release the amount in installments as per the consent order subject to the petitioners producing the agreement with the merchant banker before the 2nd installment is paid.
p. Once the entire consideration due on 64.67% shares is paid, the petitioners shall execute pledge documents in respect of 35.33% shares and the share certificates shall be kept in escrow. Likewise, the shares in respect of 64.67% also shall be kept in escrow and retained as collateral security.
q. In a number of places in the MOU, it is stipulated that the parties will strictly comply with the terms of the consent order.
13. The counsel for the respondents argued on two main pointsone is that the consent order itself was obtained by concealing the fact that the petitioners had already entered into certain terms with the lenders and the same had not been disclosed at the time of entering into the consent terms. This act of the petitioners, according to the learned counsel, amounts to a fraud as his clients had been induced to enter into consent terms by concealment of vital facts by the petitioners. The second argument is that the MOU with Media West is a scam document and the purpose of the petitioners, is to hand over the control and management including the shares to the Essel Group and as such they have breached the premises on which the consent terms were entered into i.e. the company is to be within the family.
14. It is on record that before the respondents disclosed the value of the company, they filed an application expressing an apprehension that the petitioners were shopping around for sale of the shares which the petitioners expressly denied in their reply. Simultaneously, the respondents also sought for keeping the shares of the petitioners in escrow so that their shares are not dealt with in any manner. Even though, initially the petitioners were unwilling to do so as the same was not part of the consent order, ultimately they deposited their shares with the escrow account. In my order dated 4.4.2006, I held that there was no specific stipulation in the consent order that the petitioners could not borrow to pay for the consideration and a such, borrowing per se, cannot be considered to be in breach of the consent terms. I had also expressed a prima facie view in that order that a perusal of the MOU with Media West indicated that none of the terms in the same was in breach of the consent terms. However, after hearing the counsel for the parties now, I find that the respondents are justified in claiming that they had been induced to enter into the MOU without full disclosure of vital facts and that the MOU read as a whole, would reflect, as detailed below, to be in breach of the consent terms.
15. It was argued by Shri Sarkar, that the petitioners did not and could not have entered into any arrangement with the lenders before the CLB passed the consent order as they would not have known the terms of the consent. This argument is contrary to facts. In the MOU itself, it is stated that after the respondents disclosed the value of the company, the petitioners had held discussions with the Merchant Bankers who had indicated that the purchase of 64.67% shares was a bankable proposition and that the petitioners could divest their 35.33% shares in the market at an appropriate time and that on the suggestion of the Merchant Banker, Media West was approached, who agreed to fund 40% of the cost of Requisition. Therefore, prior in time to the date of consent order, the petitioners had tied up the financing arrangement. Further, the 3 year lock tin period had already been decided in the hearing on 30.11.2005. The whole MOU revolves around the shares of the company and the lock in period. From the terms of the MOU, it is evident that the entire funding arrangement is based on the existing shares of the company, part of which could be sold to public or through private placement for repayment of the loans. In other words, from the proceeds of an IPO of the existing shares, the loans are to be repaid. As I have narrated in the last portion of 1st paragraph ante, the issue relating to IPO was added in the consent order at the request of the petitioners that if the company needed funds, it could go for an IPO, subject, to ensuring that even after the IPO, the petitioners would continue to hold not less than 51% shares. In other words, the IPO was for issue of new shares, the proceeds of which would go to the company. The intention of going for IPO of the existing shares was never expressly indicated not could be implied during the discussions even though the petitioners were aware that their 35.33% shares would be subject to public offer in terms of the discussions with the lenders. But in the arguments, Shri Sarkar took a stand that even the existing shares could be sold through IPO. When the petitioners knew, at the time when the consent terms were being discussed before me that the entire financing arrangement was based on the advise of the Merchant Bankers that the petitioners could dispose of their shares of 34.33% shares through IPO, they should have disclosed the same when they sought for permission to go for IPO, but instead they wanted the same for raising funds for the company. Thus, the petitioners are guilty of not only of suppression of this material fact that the 34.33% shares would be subject to sale through IPO, but also induced the petitioners to agree for IPO on the ground that the company might need further funds. This is evident from the consent order also. In paragraph 2(d) of the consent order, it is not stated that the petitioners are at liberty to divest their shares through public offer but it is stated that they are at liberty to go for public issue indicating the understanding of the respondents that the IPO would be for new shares. Shri Datar contended that if the respondents had known that the petitioners were to fund the acquisition by sale of their own shares, the respondents would not have agreed to the consent terms. I find full justification in this argument.
16. The above argument would become relevant only if the terms of the MOU indicate the possibility of the shares being sold to repay the loans. In CA 148 of 2006, the respondents have elaborately dealt with their objections and apprehensions on the terms of the MOU. However, in the reply to this application, the petitioners have not addressed on any of these objections and apprehensions of the respondent. In terms of the MOU, the petitioners have the right to repay the entire loan of Rs. 252 crores along with interest at the rate of 15% per annum within a period of 6 months of acquisition of shares. When Shri Datar pointed out that when the petitioners have not been able to mobilize even a sum of Rs. 12.5 crores being 5% of the first installment on their own, how they would be able to mobilize this huge amount within a period of 6 months after acquisition of shares to repay the loans, there was no response form the counsel for the petitioners. The inevitable consequence of the failure of the petitioners to repay the loan within the stipulated time, is that the lenders would acquire the right to dispose of the shares either by public offer or private placement. In other words, as rightly pointed out by Shri Datar, built in default has been provided to enable the lenders to deal with the shares. Further, it is worth noting that the MOU not only provides for sale to the public but also by private placement. Here comes the linkage between Media West and the Essel Group which is admittedly a competitor to the company and which has been acquiring news paper companies.
17. In terms of the MOU, Media West is to fund the petitioners to the tune of Rs. 101 crores and the balance sum of Rs. 151 crores is to be funded by the Merchant Bankers. In all, the amount involved in acquisition of the shares of the respondents is about Rs. 252 crores and the petitioners are borrowing the entire amount. The admitted position is that Media West is a group company of Essel group. Media West is not an NBFC nor a finance company as is evident from the its object clause in the Memorandum. It is also an admitted fact that the paid up capital of Media West is only Rs. 1 lac and its net worth is negative, having incurred a loss of over Rs. 11 crores in the last year. Its business income for the last two years is nil. With this financial position, there is nothing on record to show how Media West is going to mobilize Rs 100 crores to fund the acquisition of the shares of the respondents.. Whether it is going to borrow on interest or to be assisted by someone else without interest is not clear. For lending such a huge amount to the petitioners, there are no terms in the MOU relating to security, either financial or otherwise to be provided by the petitioners. The security is obviously only the shares of the company, whether it is 35.33% or 64.67% or the whole 100%. The said security in the form of shares, covers the lending by both Media West and the unnamed Merchant Banker. Normally, when a large amount of money is lent against shares, especially those of an unlisted closely held company, due diligence is carried out of the company to find out the fair value of the shares, but, in the present case, admittedly, nothing was done. Even though the respondents have raised all these issues in CA 148, the petitioners have not responded to the same in their reply. The motive of a company, having no cash resources, in lending such a huge amount, cannot be but for an oblique purpose. Considering the fact that Media West has been used as a special purpose vehicle by Essel Group, the claim of which has not been denied by the petitioners, to acquire other newspaper companies, it appears that even the present funding to the petitioner is with the object of taking over control of the company. The very fact that the MOU provides that whatever might be the consideration that the lenders would receive on sale of 49% shares, the same would release the petitioners of all their liabilities, obligations etc. would indicate that the present lending arrangement by the lenders is not based either on commercial or financial consideration, especially when no due diligence of the company has been carried out. It is rather a strange arrangement by which the lenders expect that proceeds from sale of 35.33%/49% shares would cover their entire loans given for acquisition of 64.67%, shares, that too with 15% interest. It is more so, as far as the Merchant Banker is concerned. No Merchant Banker would fund such a huge amount of Rs. 151 crores on the strength of shares of a closely held, unlisted company, without due diligence. From the MOU it is seen that it was the Merchant Banker who had suggested that the petitioners could approach Media West for part financing of the acquisition. Further, the provisions in the MOU that the lenders could sell the shares by private placement and that the lenders have the right to transfer their rights to any party etc, definitely rises a doubt whether, this right has been conferred on the lenders only to facilitate Essel group to acquire the shares. Non disclosure of the name of the Arbitrator also raises a doubt about the independence of the unnamed arbitrator. Shri Sarkar argued that it is of no concern of either the respondents or this Board to examine why and how Media West would fund the acquisition and why it is taking the risk. In normal circumstance, the contention of the learned Counsel may be correct. But in the present case, when a party alleges breach of the terms of the consent order, to adjudicate on the allegation, this Board has to examine all aspects. Even though it is claimed that since the MOU specifically provides that 51% shares would continue to be held by the petitioners as also the control and management of the company as stipulated in the consent order, it is to be noted that the restriction of the holding and management is only for a period of 3 year. The terms of the MOU are so unrealistic and one sided, that it appears that the MOU is a prelude to hand over the control of the company after a period of 3 years. Further, that it was not to the knowledge of the respondents that the funding for acquisition would be arranged on the basis of the existing shares of the company and therefore, mere continuing with the 51% shares by the petitioners is of no justification.
18. The facts that Media West, without any financial resources of its own agreeing to fund a huge sum of Rs. 101 crores, that Media West is a group company of Essel which has been acquiring news paper companies, that the petitioners have not been able to establish their financial strength to pay of the loans within the stipulated time, that the liberty given to the lenders to sell the shares by private placement and their right to transfer their rights under the MOU to any party, that the petitioners have refused to produce the MOU with the Merchant Bankers who had suggested the name of Media West to the petitioners, etc lead only to the strong presumption that there is more to the understanding expressed in the MOU than what the eyes meet. In other words, the whole arrangement of financing for the acquisition of shares of the respondents does not appear to be a straight forward one and it is only a prelude to the final take over of the company after the period of 3 years. This adverse presumption is inevitable in the light of the refusal of the petitioners to disclose the MOU with the Merchant Banker, who has agreed to fund a huge sum of Rs. 152 crores even without a due diligence.
19. Thus, I find that not only the consent order is vitiated by non disclosure of material facts by the petitioners and inducement to agree for IPO, even the spirit of the order is found to have been flouted by the petitioners. The terms of the MOU are so unrealistic, that no man of ordinary prudence, leave alone a business person, would be convinced that it is a pure and simple financial arrangement. Under these circumstances, either the consent order should be recalled or the respondents should be given the option of purchasing the shares of the petitioners. Shri Sarkar vehemently argued that this Board has no power either to recall the consent order or to modify the same. He further submitted that on any account, the respondents can not have the right to purchase the shares of the petitioners. It is a settled law when an order is obtained, whether it is consent order or otherwise, by fraud, concealment of material facts, misrepresentation and the like, it is the bounden duty of the court which passed the order, to set aside or recall the said order. In the cases cited by Shri Datar, it has been held so. In the cases cited by Shri Sarkar that executing court cannot go beyond the decree, no element of fraud, concealment of material facts or misrepresentation had been alleged. Therefore, there is every justification to recall the consent order, but, I do not propose to recall the same but, try to work out the said order in the spirit under which the same was passed.
2. As far as the right of the respondents to acquire the shares of the petitioners is concerned, reference to the chronology of events is necessary. Even though, initially the petitioners were against the suggestion of their going out of the company and were only interested in the division of the company, later, it was only at the suggestion of the counsel for the petitioners, the consent order resulted. The foundation of the suggestion of the counsel for the petitioners is that one of the two groups should control the company in exclusion of the other group. Both in the replies to the applications and during the arguments, there was not even a whisper that the petitioners would be able to mobilize funds to avoid the lenders from taking over the control of the shares. Instead, their stand has been that there is no provision in the consent order restraining the petitioners from raising funds on the strength of the. shares of the company. Thus, it is crystal clear that the petitioners are not in a position to fund the purchase of the shares of the respondents without the backing of the shares of the company, which, I have held the petitioners cannot do so. Therefore, since, I have come to the conclusion that the consent order was obtained by concealment of material fact and that the petitioners have breached the terms of the said order, even in the absence of any stipulation in the consent order to the specific effect, the respondents will have the fight to purchase the shares of the petitioners. In this connection, I may refer to the decision of the Supreme Court in Rambahadur Thakur's case wherein the Supreme Court has held that when a consent order is recorded by this Board, it is its duty to interpret the terms of the consent order with a view to ensure that the same is worked out. Therefore, the contention of Shri Sarkar that only if there is a default in payment of the installments of consideration, the respondents will have the right to purchase the shares of the petitioners and not otherwise is not correct as the basic premises under which the parties decided to end the disputes was that only one group would continue with the company. Now that it is established that the petitioners cannot acquire the shares of the respondents, the latter has the right to purchase the former. Likewise, his contention that in the event of breach of any other terms of the consent order, this Board can only put the petitioners to terms is also is not correct, as in the present case, the consent order itself has been obtained by concealment of material facts and misrepresentation.
21. In view of my findings that the consent order had been obtained by suppressing the material known fact that financing for acquisition of the shares of the respondents was based on an understanding of sale of the shares of the company and that in view of the inbuilt default clause giving right to the lenders to dispose of 49% of the existing shares of the company, which was never disclosed, I hold, on the basic understanding that one group should go out of the company, that the right$6 purchase the shares of the petitioners would now revert to the respondents. They will be bound by all the terms of the consent order dated 25.1.2006 which were applicable to the petitioners with the stipulation that the respondents shall not borrow or make any financial arrangements on the strength of either of their own shares or of the shares now held by the petitioners for acquisition of the shares of the petitioners. They shall also disclose all the financial arrangements that they propose to make for acquiring the shares of the petitioners before making payment towards the 1st installment. The amount of Rs. 12.5 crores deposited by the petitioners in escrow will be released to them immediately along with interest accrued thereon, without any part of the same being forfeited. On production of a copy of this order by the petitioners, the escrow agent State Bank of Patiala, Shastri Bhavan Branch will release the payment. However, it will continue to keep custody of the share certificates of both the groups, which are already in escrow with it. The petitioners are released from all their obligations arising out of the consent order. The schedule of payment by the respondents will be the same as in Paragraph 2(4) of the order dated 25.1.2006, beginning with deposit of the first installment on the 1st August 2006 (and not before), with the escrow agent.
22. CA 62 of 2006 and CA 148 of 2006 are disposed of in the above terms. As far as other applications mentioned in this order are concerned, I have already passed interim orders, which, in the changed circumstances, will be treated as final orders to be strictly complied with by both the parties.
23. This order is stayed upto 31.7.2006 to enable the parties prefer appeal/s, if so advised.