Delhi High Court
Umesh Kumar Baveja & Ors. vs Il&Fs Transportation Network Ltd. & ... on 30 September, 2013
Author: R.V. Easwar
Bench: R.V. Easwar
* IN THE HIGH COURT OF DELHI AT NEW DELHI
Reserved on:4th September, 2013
% Date of Decision: 30th September, 2013
+ CO.A(SB) 30/2013 & Co.Appl.1051/2013
UMESH KUMAR BAVEJA & ORS. ..... Appellants
Through Mr Chetan Sharma, Sr. Adv. with Mr
Angad Singh Dugal and Mr Akhil Anand,
Advs.
versus
IL&FS TRANSPORTATION NETWORK LTD. & ORS.
..... Respondents
Through Mr. Neeraj Kishan Kaul, Sr. Adv.
with Ms Niti Dixit, Mr Vidur Bhatia and Ms.
Shivani Surghal, Advs. for R-1.
CORAM:
MR. JUSTICE R.V. EASWAR
JUDGMENT
R.V. EASWAR, J.:
1. This is an appeal filed under Section 10F of the Companies Act, 1956 (hereinafter referred to as "Act") impugning the orders dated 10.04.2013 and 10.05.2013 passed by the Company Law Board in Company Petition No.133(ND)/2012. The appellants are: Umesh Kumar Baveja (A-1), Regional Airport Holdings International Ltd. (A-CO. A. (SB) 30/2013 Page 1 of 37
2) and RAHI Aviation Holdings Pvt. Ltd. (A-3). The respondents in the appeal are IL&FS Transportation Network Ltd. (R-1), Gulbarga Airport Developers Pvt. Ltd. (R-2) and Shimoga Airport Developers Pvt. Ltd. (R-3).
2. The relevant facts, in brief, giving rise to the present appeal are these. The government of Karnataka entered into project development agreements with R-2 & R-3 for setting up of Green Fields Airports both at Gulbarga and Shimoga in the state of Karnataka. Umesh Kumar Baveja (A-1) did not have sufficient funds and, therefore, requested R-1 to make the required investment. A-3 and R-1, therefore, incorporated A-2 as a "special purpose vehicle" (SPV) for making investments in R-2 and R-3, which may be referred to as "the airport companies". An agreement styled as "Subscription-cum-shareholders Agreement" (SSA) was entered into on 12.03.2010 between the SPV, A-3 (which is hereinafter also known as RAHI) and R-1 (hereinafter also referred to as ITNL). In terms of the SSA, RAHI was to make an investment of `30 crores in the SPV and acquire 60% stake in it and ITNL would invest `20 crores in the SPV to acquire 40% stake. RAHI invested the sum of `30 crores as per the agreement. ITNL too invested the amount of `20 CO. A. (SB) 30/2013 Page 2 of 37 crores as required by the SSA and the said amount was shown in the accounts of the SPV as "share application money pending allotment". These shares were never allotted to ITNL. Umesh Kumar Baveja (A-1) was a director in RAHI as well as the SPV. Mukund Sapre was the person who controlled ITNL and invested `20 crores in the SPV through ITNL. Since no shares for `20 crores invested by ITNL were allotted to it by the SPV, problems arose between the two groups, one headed by Umesh Kumar Baveja and the other by Mukund Sapre. Mukund Sapre also entertained doubts about the utilisation of the amounts invested by ITNL in the SPV. ITNL had also given bank guarantees through United Bank of India in favour of the Government of Karnataka for `9.69 crores for the Gulbarga Airport project and a bank guarantee through Axis Bank Ltd. for `12.37 crores in respect of the Shimoga project. It would also appear that there was little progress in the development of the airports and the Government of Karnataka wrote a letter to the SPV on 30.07.2012 expressing its concerns. In this letter, the Government of Karnataka also sought an explanation for the delay in completion of the Gulbarga Airport project and asked the airport company to show-cause why liquidated damages should not be imposed for the delay. There CO. A. (SB) 30/2013 Page 3 of 37 was a series of correspondence between both the groups containing allegations and counter-allegations with regard to the working of SPV. In the meantime, Mukund Sapre sought information from Baveja with regard to certain agreements entered into by the SPV with several entities including details of payment of `12 crores to Comet Advisory which is now known as RAHI. In his capacity as Chairman of the SPV, Mukund Sapre also sought explanation from Baveja on several items of expenditure and appointed a firm of Chartered Accountants to carry out an internal audit of the airport companies as well as the SPV. Baveja, in response, convened meetings but according to Mukund Sapre these board meetings were not backed by any background material provided to him to enable him to meaningfully contribute to the proceedings. Mukund Sapre also questioned the appointment of Baveja as a whole- time director of the SPV and the disproportionate remuneration proposed to be paid to him. These disputes, together with the exchange of e-mails containing allegations and counter allegations had muddled the relationship between Baveja and Mukund Sapre and consequently between the companies controlled by them as well as affairs of the SPV. CO. A. (SB) 30/2013 Page 4 of 37
3. In the above background ITNL filed a petition before the Company Law Board under Sections 111A, 397, 398, 402 and 403 of the Act on the ground that Umesh Kumar Baveja, through RAHI, which was at the helm of affairs of the SPV being a majority shareholder, was acting in a manner prejudicial to the interest of ITNL which had invested `20 crores to acquire 40% shareholding in the SPV; it was also alleged that Baveja had committed violations of the articles of association and had siphoned off the funds of the SPV by entering into transactions with the related parties. It was further alleged in the petition that Baveja was prevaricating or evading the issue of shares to ITNL. An interim prayer was made in the petition to the effect that the respondents in the company petition failed to appoint Mukund Sapre as another nominee-director of ITNL and that ITNL was not informed about the affairs of the SPV even though it had invested substantial amount of money in the SPV and an audit should be carried out by an independent and impartial auditor which was not done despite request. There were also charges of misappropriation of the funds of the SPV by Baveja.
CO. A. (SB) 30/2013 Page 5 of 37
4. Before the CLB, a preliminary objection was taken by the respondents in the petition, to the effect that the petitioner (ITNL) was not a "member" of the SPV and that the amount of `20 crores invested by the petitioner was lying only as share application money, but had not been converted into shares. It was pointed out on behalf of the respondents that the minutes of the board meeting of SPV held on 22.02.2012 showed that no shares were allotted to ITNL because of the disinclination of Mukund Sapre to pursue the share allotment. Another preliminary objection was taken to the effect that a combined petition under section 111A and sections 397-398 of the Act is not maintainable. The other defences taken by the respondent were that the audit sought by the petitioner was not required nor can it be asked for by a person who is not a member of the company and that it was baseless to allege that the respondent has siphoned off the funds of SPV. It was pointed out that most of the payments were made only to the Government of Karnataka in relation to the airport companies and the payment of `12 crores made to Comet Advisory was in the knowledge of the petitioner. On this basis it was contended by the respondents before the CLB that the petition should be dismissed.
CO. A. (SB) 30/2013 Page 6 of 37
5. The respondent also submitted before the CLB that the right to claim audit under the SSA was governed by the arbitration clause 16 and, therefore, it was not open to the petitioner to by-pass the arbitration clause and approach the CLB.
6. The CLB passed two orders on the petition - one on 10.04.2013 and the other on 10.05.2013. The order passed on 10.04.2013 was a brief order directing the SPV to provide audit at the cost of ITNL by an auditor of its choice and also directing the SPV, RAHI and Baveja to allow the audit to ITNL within 10 days from the day ITNL made a request to that effect. The SPV was further directed to provide inspection of the financial statements and accounts of the airport companies for the reason that the SPV has been in the management of those companies. It was stated in the order that the reasons for the order will follow later.
7. The reasons for the order were given by a separate order on 10.05.2013. The following is the summary of the reasons/ conclusion of the CLB:-
(a) ITNL had invested monies to acquire 40% of the equity of the SPV and the money was also used in the projects set-up by the CO. A. (SB) 30/2013 Page 7 of 37 airport companies i.e. for the purpose of the Green Field Airports in Gulbarga and Shimoga.
(b) ITNL had also procured bank guarantees for the lease agreements entered into with the Government of Karnataka; its nominees were continuing in the board of SPV. Therefore, it cannot be disputed that the money invested by the ITNL is for acquiring 40% shares in the SPV.
(c) The minutes of the meeting of the board of SPV held on 22.02.2012 cannot be read in isolation. Initially ITNL objected to the holding of the meeting on the ground that no background material was supplied. Thereafter it made a specific request for inclusion of the allotment of the shares to it as a specific item in the agenda in the meeting to be held on 20.08.2012.
(d) On 22.08.2012, ITNL sent an e-mail for allotment of shares by circular resolution.
In the light of the above findings, the CLB concluded that ITNL, the petitioner before it, was a member of SPV and, therefore, can maintain the petition.
CO. A. (SB) 30/2013 Page 8 of 37
8. The CLB also commented upon the action of the respondents in relation to the conduct of the affairs of the SPV. Baveja, according to the CLB, had initially stated that the airports would be run as licensed airports; later he made a proposal that they would run as uncontrolled airports since getting licenses meant spending further amounts of `6-7 crores. It is only in order to avoid such payments that Baveja, according to the CLB, started questioning the proposal earlier made to run the airports as licensed airports, and attempted to dilute the scale and scope of the project. The CLB also noted that Comet Advisory Services was a company run by Baveja to which the SPV had made a payment of `12 crores. According to the CLB Baveja did not respond to the queries raised by ITNL in relation to the payment.
9. In so far as the question whether ITNL was a "member" of the SPV is concerned, in addition to what is earlier noted, the CLB also held that the terms of the SSA were incorporated in the articles of association of the SPV under which the rights of ITNL were spelt out. It was in accordance with the SSA that ITNL had made a payment of `20 crores, which was spent by Baveja as the Managing Director of the SPV. Moreover, according to the CLB, the monies were invested as share CO. A. (SB) 30/2013 Page 9 of 37 application money. In these circumstances, opined the CLB, the petitioner (ITNL) has to be viewed as a member of the SPV.
10. The above were the reasons given by the CLB in its order passed on 10.05.2013 in support of its earlier order dated 10.04.2013.
11. The appellants have challenged the aforesaid orders passed by the CLB in the present appeal.
12. The main contention put forth on behalf of the appellants is that the CLB grossly erred in holding that the petition was maintainable. It is pointed out that the petitioner before the CLB was not a "member" of the SPV within the meaning of section 41(2) of the Act, notwithstanding that it had paid an amount of `20 crores for the purpose of acquiring 40% equity in the SPV and notwithstanding that the share application money (pending allotment) was shown as such in the balance sheet of the SPV. Criticising as "subjective" the view taken before the CLB that the petitioner before it was a member/shareholder "for all practical purposes", it was contended that the text of the statute cannot be ignored on any equitable or moral grounds as was erroneously done by the CLB. It was pointed out that Mukund Gajanand Sapre, who was a nominee CO. A. (SB) 30/2013 Page 10 of 37 director of ITNL which was the petitioner before the CLB, himself sought postponement of the allotment of shares in the Board meetings proposed to be held on 22.2.2012 and despite a specific item in the agenda to allot shares in the board meeting to be held on 20.8.2012, Sapre did not attend the meeting. Similarly, the meeting of the Board slated for 28.9.2012 did not take place. The contention is that ITNL itself did not want to become a member/shareholder of the SPV. If that is so, so ran the argument, such act coupled with the fact that the character of the monies advanced was only as an advance towards share capital, the only conclusion that can be drawn is that the petitioner was not a member of the SPV. It is submitted further that on this aspect the CLB has not applied its mind and passed a reasoned order.
13. These submissions were contested stoutly on behalf of the respondents, the argument being firstly that no question of law is sought to be raised by the appellants and under section 10F of the Act, an appeal against the order of the CLB lies to the High Court only on a question of law. It is pointed out, as a first limb of the argument that the right that was sought to be exercised by the petitioner before the CLB was the right granted under clause 123 of the articles of association and CO. A. (SB) 30/2013 Page 11 of 37 for the purpose of exercising this right, it is not necessary for the petitioner before the CLB to be a member of the SPV. It was argued that the articles of association constitute a contract between the parties to the same and clause 123 read with clause 2(17) of the articles of association specifically granted ITNL the right to carry out an internal audit periodically at its own expense. The second limb of the argument was that in any case the petitioner cannot be held to be not a member of the SPV, it having paid a sum of `20 crores towards acquiring 40% of the equity, and the amount having been shown in the books of the SPV as "share application money pending allotment".
14. In the light of the above arguments, the first point for consideration in the appeal is whether the petitioner (ITNL) before the CLB was a member of the SPV so that it can maintain an action under sections 111A, 397, 398 read with sections 402 and 403 of the Act. Several authorities were cited by both the sides on this point. The mainstay of the appellant was the judgment of the Gujarat High Court in Gulabrai Kalidas Naik and Ors. Vs. Laxmidas Lallubhai Patel and Ors., (1977) 47 Company Cases 151. This judgment arose in petitions filed before the Gujarat High Court under section 155 and sections 397 CO. A. (SB) 30/2013 Page 12 of 37 and 398. One of the contentions raised was that since the petitioners themselves admitted that their names were wrongly removed from the register of members, they were not members till the register is rectified and therefore they could not maintain the petition for relief against oppression and mismanagement, in view of section 399(1). The Gujarat High Court noted that prima facie it would appear that in order to acquire the status of a member of a company, the name of a person seeking to be a member must have been entered in the register of members, upon which alone he acquires the status of a member. The Court noticed the provisions of section 399(1) and the position that the oppression complained of must be in the capacity of members and held that the pre-requisite for invoking the jurisdiction of the court under section 397 and 398, statutorily provided for in section 399(1), is that the complaint must come forth from a member and only a member of a company can complain of oppression. Having held so, the Court proceeded to observe as follows :
"Now, it may be that, in a given case, the petitioners invoking the Court's jurisdiction under sections 397 and 398 are in a position to show that even though their names are not to be found in the register of members of the company, yet they have such an indisputable and CO. A. (SB) 30/2013 Page 13 of 37 unchallengeable title to the membership of the company that the Court may entertain a petition at their instance."
It would thus appear that the Gujarat High Court was not prepared to lay down as an absolute proposition of law that action under section 397 and 398 can be taken only by a person whose name is found in the register of members maintained by the company. Though a general proposition to this effect was laid down, still an exception was recognised to the general rule namely that in a given case a person who can show an undisputable and unchallengable title to the membership of the company may file a petition under section 397/398, even though his name is not formally entered in the register of members.
15. I now proceed to a consideration of some of the authorities cited before me by both sides on the point. In Shri Balaji Textile Mills Pvt. Ltd. and Anr. Vs. Ashok Kavle and Ors., (1989) 66 Company Cases 654 (Kar), a Division Bench (P.P. Bopanna & M. Ramakrishna, JJ) of the Karnataka High Court took the view that the word "member" should be understood in the context in which it is used. It was held that allotment of shares is a matter of contract between the parties and such contract could be either expressed or implied. If a person is treated by the company as its shareholder, his right to membership cannot be CO. A. (SB) 30/2013 Page 14 of 37 questioned by the company at a later point of time on the ground that there was no compliance with the provisions of section 41(2) of the Act. It was pointed out by the Division Bench that the underlining purpose of section 41(2) is the protection of innocent persons from companies who are on the verge of liquidation and that it does not mean that the company cannot allot shares even when a person has not complied with the provisions of section 41(2). It was held that compliance with the provisions of section 41(2) was not a mandatory requirement but was only directory. On the basis of this reasoning the Court held that if a shareholder who claims relief under sections 397 and 398 satisfies the company court that he is a shareholder of a company by virtue of allotment of shares in his favour which is evidenced not only by the register of members but also by the statutory returns and documents maintained and filed by the company, it is not open to the contesting respondents to contend that he must comply with the condition stipulated in section 41(2) i.e. that there should be a contract between him and the company in writing. The ultimate decision in this judgment is on a different question, i.e., whether for purpose of Section 41(2) there should be a contract of allotment of shares in writing, but what CO. A. (SB) 30/2013 Page 15 of 37 concerns me is the broader question whether section 41(2) can govern the provisions of sections 397 and 398. The Karnataka High Court answered this point in the negative and held that the provision which is applicable to test whether a member satisfies the requirement of sections 397 and 398 of the Act would be section 2(27) and not section 41(2). One more point which is worth noting in this decision is that it was held that allotment of shares is a matter of contract between the parties which could be either expressed or implied and if a person is treated as a shareholder of the company or as a member by any subsequent conduct, his right of membership cannot be questioned by the company.
16. In the case before me the note made to the balance sheet as on 31.3.2012 of the SPV shows that the amount of `20 crores received from ITNL was shown as "share application money received pending allotment". This note contains an explanation to the effect that the share application money was received from ITNL and further that the shares would be allotted by the company through its directors after the approval by the shareholders in their meeting and further that the share application money is primarily used to fund the two airport infrastructure projects of the company. The conduct of the company in CO. A. (SB) 30/2013 Page 16 of 37 showing the money as "share application money pending allotment" and the utilisation of the money for the purpose for which the company was formed are clear pointers to the fact that the company itself recognised or treated the ITNL as a shareholder or member. This brings the case within the observations of the judgment of the Karnataka High Court.
17. I was referred to another judgment of the Karnataka High Court in Srikanta Datta Narasimharaja Wadiyar Vs. Venkateswara Real Estate Enterprises (Pvt.) Ltd. and Ors,. (1990) 68 Company Cases 216, which is that of P.P. Bopanna, J, acting as a Single Judge. In this judgment the learned single judge followed the Division Bench of the High Court cited supra. He also referred to the judgment of the Gujarat High court (supra). Vis-a-vis the judgment of the Gujarat High Court (supra) the learned single judge agreed that the question of maintainability of a petition under section 397 did arise for consideration before the Gujarat High Court and after noticing the observations of the Gujarat High Court which I have quoted earlier, held as under: -
"So, the Gujarat High Court has not categorically ruled that the petition should be thrown out on the ground that the petitioner has not got on the register of members. If, in a given case, it is shown that, though the name of a person is not shown in the register of members, if he had been CO. A. (SB) 30/2013 Page 17 of 37 treated as a member by the company, the company court can always exercise its equity jurisdiction. This court should not decline to exercise its equity jurisdiction on the ground of mere technicality. Till the year 1986, i.e., till the matter was taken to this court in this petition, there was no shred of doubt on the rights of the petitioner to represent his interests as a shareholder in respondent No. 1 company. It was contended that in a number of meetings he has signed the proceedings of the said meetings and even the balance-sheet prepared by respondent No. 1 company right from the year 1971 to 1986 does not show any indication that the petitioner had been excluded from the membership of the company either on the ground that he has not inherited the shares or otherwise. In the circumstances, I am of the view that the decision of the Division Bench in Balaji Textile Mills [1988] ILR 1988 Kar 1213; [1989] 66 Comp Cas 654, is applicable, on the undisputed material on record."
18. In S.V.T. Spinning Mills (P) Ltd. Vs. M. Palanisami (2009) 95 SCL 112, the Madras High Court held as under: -
"The applicability of sections 397 and 398 of the Companies Act is an equitable jurisdiction which is intended to protect the minority members of the company from any oppression and mismanagement at the hands of majority members. It is in that background, the Supreme Court has held that the wider meaning of the term 'member' should be given in the context of sections 397 and 398 of the Companies Act. On the facts and circumstances of the case, especially in the circumstance that the respondents filed a composite application, viz., the company petition seeking reliefs including the issuance of duplicate share certificates, I am of the considered view that the claim of the respondents herein in the company petition cannot be thrown out at the threshold without even going into the merits of the issue raised by the respondents under the CO. A. (SB) 30/2013 Page 18 of 37 guise of deciding the question of maintainability as a preliminary issue."
It is significant to note that while arriving at the aforesaid view the Madras High Court referred to both the judgment of the single judge of the Karnataka High Court (supra) and the judgment of the Gujarat High Court (supra). It is also to be noted that the judgment of the Supreme Court referred to by the Madras High Court in the quoted paragraph of its judgment is that in World Wide Agencies vs. Margarat T. Desor (1990) 1 SCC 536. In the case before the Supreme Court; an objection was taken that in view of the specific provisions of Section 41(2), a member is one whose name is entered in the register of members. In that case, the member/shareholder of the company was one S K Desor. His name was entered in the register of members. On his death, his name continued to remain in the register. The names of his legal heirs had not been entered in the register when the applications were moved by them under sections 397-398 of the Act. The Supreme Court, following certain English authorities, opined that having regard to the scheme and purpose of section 397 and 398, it would be a proper construction to hold that the legal heirs of late S K Desor were members within the meaning of these sections. The overriding considerations, in CO. A. (SB) 30/2013 Page 19 of 37 the opinion of the Supreme Court were that this construction would further the purpose intended to be fulfilled by petitions filed against oppression and mismanagement and would facilitate solution of problems in case of oppression of the minorities when the member is dead and his heirs or legal representatives are yet to be substituted. It would be an equitable and just construction and therefore, it was held that it should be adhered to. It seems to me that the ratio of the judgment of the Supreme Court, so far as sections 397 and 398 are concerned, is that given the facts and circumstances of a particular case, and having regard to the requirements of justice and equity in the background of the facts and circumstances of the case, it would be open to the Court to relax or overlook the condition imposed by section 41(2) and hold that the person bringing the action and who claims to be a member or shareholder of the company, need not be entered in the register of members in order to maintain the action.
19. It seems to me in light of the authorities cited above that the interpretation to be placed on section 41(2) vis-a-vis petitions filed seeking relief from oppression and mismanagement should be governed not strictly by the requirements of the sub-section, so long as in CO. A. (SB) 30/2013 Page 20 of 37 substance and effect the person complaining of acts of oppression and mismanagement has been recognised or treated as shareholder/member by the conduct of the company, and that in giving effect to the remedies against the grievance, considerations of equity and justice should be allowed to prevail.
20. Apart from the fact that ITNL did invest a sum of Rs. 20 crores only to acquire 40% of the equity in the SPV pursuant to call notices as provided in the articles of association, as against 60% of the equity already acquired by Baveja and the further fact that it was the intention of all concerned, including the SPV, to allot shares to ITNL as evidenced by articles 5, 6 and 8 of the articles and also by entries in its balance-sheet as explained by the notes below it and the utilisation of the said monies only for the purpose of the two airports, both facts supportive of the respondents claim, it is noticed that there is nothing which would militate against the claim that the money was invested only towards share capital. Pursuant to the articles of association, ITNL has appointed its nominee-directions. There is a clear communication made by ITNL to the SPV on 22-8-2012 to the effect that it should be allotted the shares. There is no evidence to show that this claim was at any later CO. A. (SB) 30/2013 Page 21 of 37 point of time abandoned. The non-attendance of Mukund Sapre in the board meetings cannot be looked at as an act abandoning the claim. It is difficult to see how he would have thought of abandoning the claim to get the shares allotted, when the money had been invested with the clear understanding that the shares would be allotted and the same had not also been returned. In fact, the SPV has admitted in its balance-sheet that the money was utilised for the purposes of the two airports. ITNL also gave two bank guarantees amounting to app. Rs. 20 crores. The finding of the CLB that Mukund Sapre did not attend the board meetings because there was no background material/documentation supplied with regard to them and also the finding that the petitioner before it had sent a specific request to include the item relating to the allotment of shares in the agenda for the meeting to be held on 20-8- 2012 are findings of fact; they are not challenged on the ground of perversity. The learned counsel for the appellants placed reliance on the judgment of the Supreme Court in Chatterjee Petrochem (I) Pvt. Ltd. vs. Haldia Petrochemicals (2011) 167 Comp. Cas. 373 (SC). In paragraphs 102-103 of the judgment, it was observed that the non- allotment of shares in that case was on account of the fact that the CO. A. (SB) 30/2013 Page 22 of 37 person who claimed to be a member did not attend the meeting. That single fact alone cannot turn the present case. All the facts, including the conduct of the company in treating the person as a member/shareholder, the entries made in the balance-sheet, the reasons for not attending the meeting in which the shares were to be allotted, whether there was any clear and unambiguous abandonment of the claim and similar such facts have to be cumulatively considered; the inference or conclusion would depend upon the facts and circumstances and the conduct of the parties in each case. It would be unsafe to match the colour of one case with that of the other indiscriminately.
21. I therefore hold that the CLB was right in its view that ITNL was a "member" for the purpose of maintaining an action under sections 111A, 397 and 398, 399 read with sections 402 and 403 of the Companies Act.
22. That takes me to a consideration of the next question whether a combined petition - combining the prayer for rectification of the register of members to include the name and the prayer for relief against oppression and mismanagement - can be filed before the CLB. The objection is apparently raised on the footing that since a petition against CO. A. (SB) 30/2013 Page 23 of 37 oppression and mismanagement under sections 397-398 can be filed only by a "member" of the company, a person whose name is not entered in the register of members has to first get the register rectified under section 111A through a separate proceeding and only thereafter can he maintain a petition under ss. 397-398. But this is not always the case and not in all circumstances. This has been recognised by this court in Charanjit Khanna and Ors. vs. Khanna Paper Mills and ors. (2011) 164 Com. Cas. 315 (Manmohan, J.). The learned single judge observed:
"In my opinion, it cannot be said as a proposition of law that no composite petition under Sections 397, 398 and 111A of the Act is ever maintainable. In fact, in a large number of petitions filed under Sections 397 and/or 398 of the Act, the primary allegation of oppression and mismanagement is that the faction that is in control of the company has either intentionally reduced the rival faction to less than 1/10th of the total number of members of the company or removed the rival faction from the register of members. In such cases where allegation of oppression and mismanagement is inexplicably intertwined with the issue of maintainability of the petition under Section 399 of the Act, a composite petition has to be held as maintainable. To ask a petitioner to file two separate petitions in such circumstances would not only be unfair but would also result in unnecessary delay."CO. A. (SB) 30/2013 Page 24 of 37
23. This should settle the issue. But the following two authorities were cited on behalf of the appellants: Morgan Ventures Ltd. vs. Blue Coast Hotels & Resorts Ltd. & Ors. (2010) 3 Comp LJ 33 (Bom) and Khoday Distilleries Ltd. vs. CIT (2008) 307 ITR 312 (SC).
24. These two authorities were cited for the proposition that the remedy of appeal under section 111A before the CLB does not lie in respect of refusal to allot shares. The question was answered by the learned single judge of the Bombay High Court in the negative. The reasoning of the learned single judge (S.J.Vazifdar, J) is based on a comparison of section 111(4) with section 111A(2). Under section 111(4)(b), in the case of a private limited company, if default is made, or unnecessary delay takes place, in entering the fact of any person having become a member in the register of members, the aggrieved person may apply to the CLB for rectification of the register. Section 111A which was brought into effect from 20.9.1995, declared through sub-section (2) that the shares or debentures and any interest therein of a public limited company shall be freely transferable. The proviso to the sub-section was introduced from 15.1.1997. According to this proviso if a public limited company without sufficient cause refuses to register a CO. A. (SB) 30/2013 Page 25 of 37 transfer of shares within two months from the date of the lodgement of the instrument of transfer, the transferee may appeal to the CLB for a direction that the transfer be registered. Neither in this proviso nor in any of the other sub-sections of section 111A, has any right been expressly given to an original allottee of the shares to approach the CLB for relief in case of refusal to make an allotment of the shares. By thus comparing both the sections, the Bombay High Court opined that there is a conscious omission, on the part of the legislature, of the original alottees of the shares of a public limited company from the category of persons who are entitled to question the refusal to enter the name of the shareholder in the register of members. It is on the basis of this line of reasoning that it was held that section 111A has not provided for a right of appeal in respect of a refusal to allot shares issued by a public limited company. It would still be for consideration as to how a transferee of the shares of a public company and an allottee of such shares are differently placed. In both the cases, the refusal to enter the name of the person to whom the shares were either allotted or transferred, identically affects the right of such persons, i.e., to have their names entered in the register of members. Moreover, there seems to be no logic in granting CO. A. (SB) 30/2013 Page 26 of 37 such right to an allottee of shares of a private limited company but denying it in the case of an allottee of shares of a public limited company. There does not seem to be any logical explanation for excluding the allottee of the shares from the proviso to sub-section (2) of section 111A.
25. The judgment of the Supreme Court in Khoday Distilleries Ltd (supra) expounds the difference between "creation" and "transfer" of shares. It says that there is a difference between issue of a share to a subscriber and the purchase of a share by a person from an existing shareholder. The former is a case of allotment of shares and the latter is a transfer of a chose in action. It is true that a transfer of shares is different from an allotment. The question however is whether the right of appeal under section 111A(2) is to be confined only to the transferee of the shares or should be given also to the allottee of the shares.
26. It is a well settled proposition that a right of appeal is a creature of the statute; there is no inherent right of appeal. Such a right has to be expressly conferred by the law. However, it is also an equally well settled proposition that a right of appeal, once conferred, must be liberally construed. If this principle is applied to the present case, as it CO. A. (SB) 30/2013 Page 27 of 37 ought to be in my humble opinion, I should prima facie think that a person who was not allotted the shares and whose name was thus not entered in the register of members, also has a right of appeal under section 111A(2). But this point need not trouble me any longer, and no final opinion need be expressed, since I have already taken the view that the respondent is a member u/s 41(2) having due regard to the conduct of the SPV treating him as such.
28. Counsel for the respondents points out that apart from the fact that in Charanjit Khanna & ors. (supra) this court has held that it is not a universal proposition that a combined petition under section 111A and sections 397-398 is not maintainable, in the present case this proposition is not of any relevance in as much as ITNL is only asking for implementation of clause 123 of the articles of association dealing with appointment of internal auditors. In my humble opinion, it is not necessary to decide in this case whether a combined petition is maintainable, for the reason advanced on behalf of the respondents. The position as I see it is this. In form, the petition before the CLB is one under sections 397-398 and under section 111A of the Act, both rolled up; but the real grievance raised is based on article 123 of the articles of CO. A. (SB) 30/2013 Page 28 of 37 association which empowers the parties to it to appoint internal auditors to examine the accounts of the company. It is this prayer that was granted by the CLB. It can hardly be disputed that the respondent-ITNL is a party to the articles of association - see clause 2(17) of the articles of association. Under clause 123, each party is additionally empowered to appoint an internal auditor to go through the books of account of the company (SPV). It is this right that was exercised by the respondent- ITNL which was granted by the CLB by an interim order. Therefore the question whether it was a combined petition before the CLB and if so, whether it was maintainable, is at present alien to the controversy before me. This is also one more reason why it is not necessary to opine finally on the question whether an allottee of the shares has a right of appeal under the proviso to section 111A(2).
29. The other argument raised on behalf of the appellants was that there was an arbitration clause (clause 16) in the SSA and therefore the CLB ought not to have entertained the petition. It is submitted that though this point was raised before the CLB, and was also adverted to in the impugned order, no ruling was given. It is contended that an arbitration clause should be widely construed as laid down by the CO. A. (SB) 30/2013 Page 29 of 37 Supreme Court in P.Anand Gajapathi Raju v. P.V.G. Raju AIR 2000 SC 1886 and that such a clause should be construed to have overriding effect as held by the Supreme Court in Hindustan Petroleum Corporation Ltd. vs. Pinkcity Midway Petroleums AIR 2003 SC 2881. My attention was also drawn to the petition filed by the appellant before this Court under section 11 of the Arbitration and Conciliation Act, 1996 seeking the appointment of a sole arbitrator in terms of clause 16 of the SSA. It was submitted that this petition was filed before this Court even before the respondents filed the petition before the Company Law Board. It was also submitted on behalf of the appellants that the respondents were avoiding the arbitration for reasons best known to them. It is pointed out that the procedure prescribed by section 16(1) of the Arbitration and Conciliation Act, 1996 cannot be bypassed by the respondents and that the arbitrator himself will rule on his jurisdiction as provided in the section.
30. These contentions were opposed on behalf of the respondents. It was pointed out that the argument based on the arbitration clause was not raised before the CLB. It was submitted that at any rate, having regard to the urgency of the petition filed under sections 397 and 398, CO. A. (SB) 30/2013 Page 30 of 37 those proceedings cannot be stopped by reference to the arbitration clause. It is contended that neither Baveja nor his companies were party to the SSA and therefore they cannot be taken to arbitration. The pendency of the petition under section 8 (before the CLB) or section 11 of the Arbitration and Conciliation Act (in the High court), it was pointed out, cannot be a bar upon the passing of an interim order such as the impugned order. In support of these propositions strong reliance was placed on:
(i) Sukanya Holdings Pvt. Ltd. Vs. Jayesh H.Pandya (2003) 5 SCC 531
(ii) N. Radhakrishnan v. Maestro Engineers & Ors. (2010) 1 SCC 72
(iii) Ivory Properties & Hotels P. Ltd. vs. Nusli Neville Wadia (2011) 2 Arbitration LR 479 (Bom.)
(iv) Viom Networks Ltd. Vs. United Wireless P. Ltd. in FAO(OS) 584/2012, order passed by the Division Bench on 5.12.2012.
31. It is not correct to say that no objection based on section 8 of the Arbitration and Conciliation Act was filed before the CLB. The objection was raised and was also adverted to by the CLB in its order. However, the contention of the learned counsel for the respondent that it CO. A. (SB) 30/2013 Page 31 of 37 is the articles of association that governs the relationship between the parties and that since they did not contain any provision for arbitration, Section 8 of the Arbitration and Conciliation Act, 1996 is not applicable, merits acceptance. The memorandum and articles of association of the SPV were originally subscribed to on 23.11.2009. The subscribers to these documents were Umesh Kumar Baveja (A1) who took 49,994 equity shares and six other persons who took one share each. These persons are: Gaurav Jain, Sachin Sapra, Vishal Rai, Ms. Rukmini Das Gupta, Piyush Thakur and Kulbhushan Parashar. The articles of association were amended on 16.11.2011 and it is common ground that the amended articles did not have an arbitration clause. It was the SSA which contained a provision for arbitration in clause 16 thereof, but after the amended articles of association, the arbitration clause in the SSA, or even the SSA itself, can have no effect. In World Phone India Pvt. Ltd. and Ors. vs. WPI Group Inc. (2013) 178 Company Cases 173 (Del), a learned Single Judge of this Court (Dr. S. Muralidhar, J.) opined that the relationship between the shareholders of a company and what they can do has to be ascertained with reference to the articles of association and any earlier arrangement or agreement between the parties inconsistent CO. A. (SB) 30/2013 Page 32 of 37 with the articles of association cannot be said to govern such relationship. In that case, there was a joint venture agreement entered into between the parties in 1999; this agreement provided for the exercise of an affirmative vote. In the articles of association, no amendment was carried out to incorporate the provision in the joint venture agreement providing for the exercise of the affirmative vote. It was held by the learned Single Judge that unless the articles of association were amended to provide for the exercise of the affirmative vote, that right cannot be insisted upon by a party to the joint venture agreement. In support of this conclusion, reliance was placed on the judgment of the Supreme Court in V.B. Rangaraj vs. V.B. Gopalakrishnan, (1992) 73 Company Cases 201. Quoting Palmer's Company Law, 24th Edition, dealing with the transfer of shares and referring to a judgment of the Bombay High Court in IL&FS Trust Co. Ltd. vs. Birla Perucchini Ltd., (2004) 121 Company Cases 335, the learned Single Judge of this Court held that the existence of an affirmative vote provided for in the joint venture agreement cannot be recognised without a corresponding amendment to the articles of association. In my humble opinion, this judgment concludes the issue in CO. A. (SB) 30/2013 Page 33 of 37 favour of the respondent so far as the argument based on Section 8 of the Arbitration and Conciliation Act, 1996 is concerned.
32. In Sukanya Holdings (P) Ltd. (supra) a decision of the Supreme Court cited on behalf of the respondents, it was held that where a suit is commenced between some of the parties who are not parties to the arbitration agreement, there is no question of application of Section 8. This judgment would also apply in favour of the respondents, because the parties to the SSA were SPV, Comet Infra Developments Pvt. Ltd. (later RAHI Aviation Holdings Pvt. Ltd.) and ITNL, whereas the subscribers to the articles of association were different, whose names are given above. The SSA containing the arbitration clause and the articles of association of the SPV being entered into between different parties, Section 8 of the Arbitration and Conciliation Act, 1996 is not attracted for this reason also.
33. The judgment of the Supreme Court in P. Anand Gajapathi Raju & Ors. Vs. P.V.G. Raju (Died) & Ors. (supra) cited on behalf of the appellant does not touch this question. The question which arose in that case was whether the Supreme Court sitting in appeal can refer the parties to arbitration under the 1996 Act. This question was answered in CO. A. (SB) 30/2013 Page 34 of 37 the affirmative but it has nothing to do with the present case. The other judgment cited on behalf of the appellants namely Hindustan Petroleum Corporation Ltd. vs. M/s. Pink City Midway Petroleums (supra) also touches upon a different question. In that case it was held that, having regard to the Sections 8 and 16 of the Arbitration and Conciliation Act, 1996, if the agreement between the parties before the Civil Court contained an arbitration clause, the Civil Court ought to refer the dispute to arbitrator without going into the question regarding the applicability of the arbitration clause to the dispute in question. The factual position in the case before me, as noted earlier, is that the dispute arises out of clause 123 of the articles of association, but the articles of association does not provide for arbitration. This judgment is not, therefore, applicable to the factual position obtaining in the present case.
34. Several authorities were cited on behalf of the respondents, which I have referred to earlier, in support of the contention that a complicated matter involving serious questions such as fraud or malpractice, manipulation of accounts and finances, etc., requiring detailed investigation and production of elaborate evidence, would be more appropriately tried and decided by a Court of law and not by an CO. A. (SB) 30/2013 Page 35 of 37 arbitrator. It is submitted that there are serious manipulations committed by the appellants such as siphoning off the monies from the SPV to RAHI, back dating board resolutions, fabrication of board resolutions, etc. and in such a situation it would be more appropriate if the CLB decides the matter and not the arbitrator. This argument would arise for consideration only if there was a provision for arbitration of the dispute and it is a question of balancing which course to pursue - whether to pursue the dispute in the Court or the CLB, or to go before the arbitrator. Such a situation does not arise on the facts of the present case and, therefore, this argument need not be addressed by me. In the present case, the petition is pending decision before the CLB in which all these allegations will have to per force be examined. Moreover, proceedings under Section 11 of the Arbitration and Conciliation Act are stated to be pending before this Court and, therefore, it would not be appropriate to say anything more with reference to this argument. In this view of the matter I do not consider it necessary to refer to the judgments in N. Radhakrishnan vs. Maestro Engineers & Ors. (supra), Ivory Properties vs. Nusli Neville Wadia (supra) and Biom Networks CO. A. (SB) 30/2013 Page 36 of 37 Ltd. vs. United Wireless P. Ltd. (supra), cited on behalf of the respondents.
35. For the above reasons, the appeal and the application are dismissed with no order as to costs. The stay order passed on 21.6.2013 stands vacated.
(R.V. EASWAR) JUDGE SEPTEMBER 30, 2013 hs/vld CO. A. (SB) 30/2013 Page 37 of 37