Bombay High Court
Shri Kannan Vishwanath vs Sicom Ltd on 5 November, 2014
Author: R.D. Dhanuka
Bench: R.D. Dhanuka
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IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
NOTICE OF MOTION (L) NO. 2101 OF 2014
IN
SUIT (L) NO. 883 OF 2014
Mr. Kannan Vishwanath .... Applicant
In the matter between :
Shri. Kannan Vishwanath,
Promoter Cum Managing Director,ig
Dr. Datson Labs Limited,
residing at Vishwam, 8/N, Postal Colony,
Chembur, Mumbai 400 071. ... Plaintiff
Versus
SICOM Limited,
having registered office at
Solitaire Corporate Park,
Building No. 4, Guru Hargovindji
Road, Andheri Ghatkolar Link Road,
Chakala, Mumbai 400 093. ... Defendant
Mr. G.R. Joshi, Sr. Advocate i/by Subir Kumar for the plaintiff.
Mr. Chirag Balsara along with Mr. Hemant Prabululkar i/by Juris Consultus for the
defendant.
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CORAM : R.D. DHANUKA,J.
RESERVED ON : 28/10/2014
PRONOUNCED ON : 05/11/2014
ORAL JUDGMENT :
By this notice of motion the plaintiff seeks a declaration that the pledge of shares dated 21st August, 2012 pursuant to the "Modification of Loan Agreement"
dated 21st August, 2012 and 11th July, 2012 is void, illegal and contrary to securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009. The Plaintiff also seeks injunction against the defendant from selling, disposing alienating, transferring the pledged shares of the plaintiff pursuant to notice dated 9 th September, 2014 and without giving reasonable notice to the plaintiff. The plaintiff has prayed for similar reliefs in the plaint also. Some of the relevant facts for the purpose of deciding this notice of motion are as under :
2. The plaintiff is a director cum promoter of Dr. Datson Labs Limited. Vide loan agreement dated 19th August, 2011 one M/s. Arch Pharmalabs Limited availed of loan of Rs.20 Crores by way of inter corporate deposit from the defendant. By loan agreement dated 28th March, 2012 defendant provided further loan of Rs. 30 Crores to M/s. Arch Pharmalab Limited by way of intercorporate deposit. The loan granted by the defendant to the said company were secured in the form of (I) subservient charge only to the existing charge by way of ::: Downloaded on - 05/11/2014 23:48:14 ::: Hvn 3 hypothecation of plant and machinery, current assets, debts and (ii) personal guarantee of Mr. Rajendra Kaimal, Mr. Manoj Jain and Mr. Ajit Kamath and (iii) Demand Promissory note.
3. By sanction letters dated 29th June, 2012 and 21st August, 2012 the defendant modified the terms and conditions in relation to the security in respect of the said loans granted to the said company. The loan agreement was subsequently modified and was entered into between plaintiff, Arch Pharmalabs Limited and the defendant. Under the Modification to the loan agreement dated 11th July, 2012 and 21st August, 2012, the plaintiff granted security for repayment of loan given to the said M/s. Arch Pharmalabs Limited and pledged the shares in favour of the defendant in dematerialized form. The plaintiff pledged 12,00,000 shares pursuant to the said agreement in favour of the defendant. The said shares were under lock in period till 27th May, 2014.
4. It is the case of the plaintiff that the defendant has been paid interest amount of Rs.10,45,95,374 on the loans availed by the said M/s. "Arch Pharmalabs Limited through Medichem Life Sciences Private Limited on 29 th March, 2014. The defendant has already filed a winding up Petition against the said borrower. On 9th September, 2014 the defendant issued a notice to the plaintiff recording that the loan of about Rs.50 Crores disbursed to the said company M/s Arch Pharmalabs Limited, was also secured by way of 127500 ::: Downloaded on - 05/11/2014 23:48:14 ::: Hvn 4 shares of Dr., Datson's Lab pledged by the plaintiff in favour of the defendant. It is alleged in the said notice which was addressed to the said company as well as to the plaintiff that since they have failed and neglected to pay the overdue amount to the defendant, the defendant was invoking the pledged shares to recover its dues. The defendant informed that they were in process of invoking 2,00,000 shares of Dr. Datson Labs Limited pledged by the plaintiff and the invocation of the shares would be done within two days from the date of the said letter.
5.
The plaintiff filed a writ petition in this court bearing (L) No. 1454 of 2014 impugning the said notice. The defendant made a statement that before taking any action in respect of pledged shares, notice would be given to the plaintiff. The said statement was accepted by this court. The said writ petition is disposed of by an order dated 30th May, 2014 by granting liberty to the plaintiff to challenge the notice and any action to be taken by the defendant on the basis of the said notice. All contentions regarding the validity of the pledge of shares and liability of the plaintiff thereunder are kept open.
6. On 10th January, 2014 the Industries, energy and labour department issued a notification under the provisions of Maharashtra Relief Undertakings (Special Provisions) Act declaring Dr. Datson's Lab Limited as relief undertaking and that the financial assistance of Rs.1,03,81,833 had been provided by the Government ::: Downloaded on - 05/11/2014 23:48:14 ::: Hvn 5 of Maharashtra as sales tax incentives to the said company for the period ending on 9th January, 2015.
7. It is the case of the plaintiff that the Corporate Debt Restructure Cell sanctioned a CDR scheme and out of 48 lenders 36 lenders had signed the CDR scheme pursuant to which the CDR lenders had signed the Master Restructure Agreement. It is the case of the plaintiff that defendant though being a non CDR member, the principal debtor Arch Pharmalabs Limited has restructured the entire loan of Rs. 50 Crores availed by the said company and the same would be paid to the defendant by the said company as per the scheme of CDR as sanctioned on 24th October, 2013.
8. It is the case of the plaintiff that as per current market value of the shares pledged by the plaintiff to the defendant the value of each share may be only about Rs.11/- and even if the entire pledged shares are sold in the market, it would not fetch more than Rs.1.25 Crores to the defendant. It is averred by the plaintiff that since the plaintiff is the promoter and director of the said Dr. Datson's Lab, shares if sold would put the company to an end which manufactures critical medical products and would result in change in management of the company which has undergone difficult time. The defendant is already secured by the other assets of the Arch Pharmalabs Limited and thus sale of the pledged shares would not give recovery of even 1% out of the loan amount to be repaid by the ::: Downloaded on - 05/11/2014 23:48:14 ::: Hvn 6 said M/s. Arch Pharmalabs Limited to the defendant.
9. Mr. Joshi learned senior counsel for the plaintiff strongly placed reliance on Regulation 35, 36 and 39 of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations 2009. Regulation 35, 36 and 39 reads thus :
"35.(1) Save as otherwise provided in this Chapter, specified securities held by promoters and persons other than promoters shall not be transferable (hereinafter referred to as "Lock-in") from the date of allotment of the specified securities in the proposed public issue for the period stipulated in this Chapter.
(2) The certificate of specified securities which are subject to lock-
in shall contain the inscription "non transferable" and the lock-in period and in case such specified securities are dematerialized, the issuer shall ensure that lock-in is recored by the depository. (3) Where the specified securities which are subject to lock-in partly paid-up and the amount called-up on such specified securities is less than the amount called-up on the specified securities issued to the public, the "lock-in" shall end only on the expiry of three years after such specified securities have become pari-passu with the specified securities issued to the public.
36. In a public issue, the specified securities held by promoters shall be locked-in for the period stipulated hereunder :
(a) minimum promoters' contribution shall be locked-in for a period of three years from the date of commencement of commercial production or date of allotment in the public issue, whichever is later.
(b) promoter's holding in excess of minimum promoter's contribution shall be locked-in for a period of one year.
Provided that excess promoters' contribution as provided in proviso to clause (b) of regulation 34 shall not be subject to lock-in. Explanation : For the purposes of this clause, the expression "date of commencement of commercial production" means the last date of the month in which commercial production in a manufacturing company is expected to commence as stated in the offer document.
::: Downloaded on - 05/11/2014 23:48:14 ::: Hvn 739. Specified securities held by promoters and locked-in may be pledged with any scheduled commercial bank or public financial institution as collateral security for loan granted by such bank or institution, subject to the following :
(a) if the specified securities are locked-in in terms of clause (a) of regulation 36, the loan has been granted by such bank or institution for the purpose of financing one or more of the objects of the issue and pledge of specified securities is one of the terms of sanction of the loan.
(b) If the specified securities are locked-in in terms of clause (b) of regulation 36 and the pledge of specified securities is one of the terms of sanction of the loan."
10. Learned senior counsel submits that under the said guidelines the shares held by the promoters and further locked in cannot be pledged to any other company except to achieve the objective of the initial public offer and such pledge can only be made in favour of the company for which public issue has been called for. It is submitted that the pledge of shares obtained by the defendant from the plaintiff is in violation of the said regulations and the said pledge is thus void ab initio.
11. It is submitted that the initial public offer was on 9 th May, 2012 and the said IPO was closed on 12th May, 2011. The shares were listed on the stock Exchange on 30th May, 2011. The number of shares in IPO in public was 50 lacs and with the promoters were 75 lacs. Out of 75 lacs shares 25 lacs shares were locked in for one year and 50 lacs shares were locked in for three years.
12. Learned senior counsel submits that entire transaction of pledge was ::: Downloaded on - 05/11/2014 23:48:14 ::: Hvn 8 contrary to and in violation of regulations framed by SEBI. It is submitted that the plaintiff was only a confirming party to the agreement. The defendant has to recover the loan amount from M/s. Arch Pharmalabs Limited. Plaintiff was not a guarantor. The defendant has not taken any steps against the principal debtor.
Learned senior counsel submits that though plaintiff was a party to the pledge agreement, there is no estoppel against the statute. Plaintiff is entitled to challenge the agreement of pledge on the ground that the same is void ab initio and in violation of SEBI regulations. Learned senior counsel submits that the shares could not be pledged for the purposes other than the purpose mentioned in the SEBI Regulations.
13. Learned senior counsel submits that the borrower company have restructured a CDR scheme. The defendant does not stand outside the said CDR scheme. It is submitted that the defendant also can put up its claim under the said CDR scheme. 75% of the creditors of the principal debtor have agreed to be bind by the said CDR scheme and thus the same is also binding on the defendant.
14. Learned senior counsel submits that since the pledge itself was void ab initio, it cannot be acted upon. Merely because lock in period has expired subsequently, it would not make any difference and the pledge cannot be acted upon. It is submitted that the pledge itself could be held only after lock in period would have expired.
::: Downloaded on - 05/11/2014 23:48:14 ::: Hvn 915. Mr. Balsara learned counsel for the defendant on the other hand invited my attention to the Modification to Loan Agreement to which the plaintiff was a confirming party and has confirmed that he had created a valid and subsisting pledge of demat shares in favour of the defendant. It is submitted that under the agreement entered into between the parties, the plaintiff had pledged his shares in favour of the defendant as a security to repay the dues of the defendant.
There are no restrictions or bar on transferability and/or pledge of shares by the promoters during the lock in period as per the SEBI Regulations.
16. Reliance is placed on Regulation 39, in support of the submission that pledge of shares by the promoters to the commercial banks and public financial institutions is permitted even during the lock in period. The learned counsel placed reliance on regulation 40 and would submit that the transfer of shares during the lock in period is also permitted however, on the condition that there shall not be further transfer till the lock in period was released and/or expired.
Learned counsel submits that the plaintiff did not raise this issue that the pledge of shares alleged to be void when the agreement was signed. Only when the defendant raised the demand for sale of part of the pledged shares, plaintiff raised this frivolous issue at this stage. Even in the writ petition filed by the plaintiff in this court, no such issue was raised.
::: Downloaded on - 05/11/2014 23:48:14 ::: Hvn 1017. Learned counsel invited my attention to letter dated 6 th August, 2013 addressed by the defendant placing on record that the defendant was not member of CDR and were not accepting the proposed CDR package. It is submitted that the sanctioned CDR scheme does not propose any payment to the present defendant.
18. Learned counsel submits that even if this court considers that during the lock in period the pledged agreement cannot be acted upon, since the lock in period has expired, defendant has rightly invoked their rights under the said pledge agreement after expiry of lock in period and issued notice for sale of 2,00,000 shares out of the shares pledged. It is submitted that at most, during the lock in period the pledge agreement can be said to continue to be an agreement and not contract. After expiry of the lock in period, the said agreement has become a contract enforceable in law. The notice is issued only after expiry of lock in period when the pledge agreement became contract.
19. My attention is also invited to the affidavit filed by the principal borrower in the proceedings filed by the defendant against the principal borrower before the Mumbai Debt Recovery Tribunal. In the said affidavit the principal borrower has averred that the defendant herein has chosen not to join the CDR scheme.
20. Mr. Balsara learned counsel placed reliance on the judgment of the ::: Downloaded on - 05/11/2014 23:48:14 ::: Hvn 11 Supreme Court in case of Kuju Collieries Limited Vs. Jharkhand Mines Ltd. AIR 1974 SC 1892 in support of the submission that an agreement which is enforceable by law is a contract. Reliance is placed on paragraph 6 of the said judgment which reads thus :
"6. We are of the view that Section 65 of the Contract Act cannot help the plaintiff on the facts and circumstances of this case. Section 65 reads as follows:
When an agreement is discovered to void, or when a contract becomes void, any person who has received any advantage under such agreement or contract is bound to restore it, or to make compensation for it to the person from whom he received it.
The section makes a distinction between an agreement and a contract. According to Section 2 of the Contract Act an agreement which is enforceable by law is a contract and an agreement which is not enforceable by law is said to be void. Therefore, when the earlier part of the section speaks of an agreement being discovered to be void it means that the agreement is not enforceable and is, therefore, not a contract.
It means that it was void. It may be that the parties or one of the parties to the agreement may not have, when they entered into the agreement, known that the agreement was in law not enforceable. They might have come to know later that the agreement was not enforceable. The second part of the section refers to a contract becoming void. That refers to a case where an agreement which was originally enforceable and was, therefore, a contract, becomes void due to subsequent happenings. In both these cases any person who has received any advantage under such agreement or contract is bound to restore such advantage, or to make compensation for it to the person from whom he received it. But where even at the time when the agreement is entered into both the parties knew that it was not lawful and, therefore, void, there was no contract but only an agreement and it is not a case where it is discovered to be void subsequently. Nor is it a case of the contract becoming void due to subsequent happenings. Therefore, Section 65 of the Contract Act did not apply."::: Downloaded on - 05/11/2014 23:48:14 ::: Hvn 12
21. In rejoinder Mr. Joshi learned senior counsel placed reliance on section 23 of the Contract Act and would submit that a contract which is forbidden by law is void and is not enforceable. Learned senior counsel placed reliance on section 65 of the Contract Act and submits that it was not the case of the defendant that the pledged agreement was subsequently discovered to be void after its execution.
Even section 65 of the Contract Act does not permit enforcement of a void contract. At the highest the defendant can plead and pray for restoration of the benefits received if any by the plaintiff under the pledged agreement which was void ab initio and cannot seek enforcement thereof.
22. A perusal of the "Modification to Loan Agreement" which was a tripartite agreement makes it clear that the plaintiff was the confirming party to the said agreement which was entered into by and between Arch Pharmalabs Limited and defendant herein. The plaintiff has confirmed under the said agreement that he had created valid and subsisting pledge of demat shares in favour of the defendant. The plaintiff has also declared that the plaintiff was the absolute owner of those shares and it was within their powers of disposition and control.
The plaintiff also agreed that if the principal borrower fails to repay or satisfy the dues of the defendant or commits any breach or default, the defendant can without giving any notice to the principal borrower can get the shares transferred in favour of the defendant or to sell or otherwise dispose of all or any of those ::: Downloaded on - 05/11/2014 23:48:14 ::: Hvn 13 shares.
23. It is not the case of the plaintiff that the principal borrower has not committed any default or has paid the loan amount to the defendant. The submission of the plaintiff is that the said Modification to loan agreement was void ab initio being in violation of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations 2009. A perusal of the record indicates that though the said agreement was entered into in the month of August 2012 and thereafter various facilities were granted in favour of the principal borrower by the defendant under the said agreement, the plaintiff raised this issue only now when the defendant proposed to sell part of the shares pledged by the plaintiff with the defendant. The plaintiff himself has confirmed in the said agreement that the plaintiff could pledge such shares in favour of the defendant.
Even in the writ petition filed by the plaintiff no such issue was raised.
24. In so far as submission of the learned senior counsel that defendant was party to the CDR scheme is concerned, a perusal of the letter addressed by the defendant to the principal borrower clearly indicates that the defendant was not party to the CDR scheme. The affidavit filed by the principal debtor in the proceedings before Debt Recovery Tribunal also indicates their admission that the defendant was not party to the CDR scheme. Even plaintiff has admitted in the plaint that defendant can anytime join the CDR scheme and can be a part of ::: Downloaded on - 05/11/2014 23:48:14 ::: Hvn 14 CDR scheme. In paragraph 10 of the plaint, the plaintiff has admitted that the defendant is not member of CDR scheme. In my view, there is thus no merit in the submission of the learned senior counsel that the defendant was part of the CDR scheme and can avail of the benefits of the said scheme. In my view Mr. Balsara is right in his submission that under the said CDR scheme, no provision is made for payment of any amount to the defendant.
25. In so far as submission of the learned senior counsel for the plaintiff that though M/s.Arch Pharmalabs Ltd. was the principle debtor, no steps have been taken against the said borrower and thus no action under the pledged agreement can be taken against the plaintiff is concerned, in my view there is no merit in this submission of the learned senior counsel. The defendant has already filed proceedings against the said said M/s.Arch Pharmalabs Ltd. before the Debt Recovery Tribunal. Be that as it may, the plaintiff being confirming party to the agreement which permits the defendant to sell the pledged shares in case of any default by the borrower, defendant having exercised their rights under the said agreement entered into between the parties in view of the default committed by the borrower, no relief in this proceedings can be granted in favour of the plaintiff.
26. In so far as the submission of the learned senior counsel that the shares could not have been pledged at all under the provisions of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) ::: Downloaded on - 05/11/2014 23:48:14 ::: Hvn 15 Regulations 2009 and the said pledge itself was illegal, void ab initio is concerned, a conjoint reading of regulations 35, 36 and 39 makes it clear that the shares mentioned therein can be pledged even during the lock in period however subject to certain conditions mentioned therein. It is not in dispute that the defendant has issued notice for sale of two lacs shares out of the pledged shares much after the lock in period in respect of such shares was over. In my view there is thus no substance in the submission of the learned senior counsel that the shares which were pledged could not have been pledged at the first instance in view of there being a lock in period or the same could not have been sold even after lock in period was over.
27. In so far as the submission of the learned senior counsel that since the price of all the pledged shares even if sold today, as against the loan of Rs.50 crores, would not fetch more than Rs.1.25 crores to the defendant and thus no purpose would be served by selling those shares is concerned, the defendant disputes this statement of the plaintiff. In my view, even if the defendant would not be able to recover the entire amount that the defendant has to recover from the borrower by selling the pledged shares of the plaintiff, injunction from selling the shares cannot be granted on that ground. The defendant is entitled to sell the pledged shares under the agreement entered into between the parties.
28. A perusal of the record indicates that the plaintiff did not press any issue of ::: Downloaded on - 05/11/2014 23:48:14 ::: Hvn 16 the alleged illegality of the pledge itself till the defendant informed the plaintiff of their decision to sell two lacs of the pledged shares. In my view in view of the provisions of the said Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations 2009, reliance placed by the learned senior counsel on section 23 of the Contract Act is misplaced.
29. In my view the Notice of Motion is devoid of any merit and is accordingly dismissed. There shall be no order as to costs.
ig (R.D. DHANUKA,J.)
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