Company Law Board
Gujarat Industrial Investment ... vs Sterling Holiday Resorts (India) ... on 4 August, 2006
Equivalent citations: [2007]137COMPCAS801(CLB), [2007]74SCL299(CLB)
ORDER
K.K. Balu, Vice-Chairman
1. M/s Gujarat Industrial Investment Corporation Limited ("the applicant") by an application (C. A. No. 15 of 2005) filed under Section 634A of the Companies Act, 1956 ("the Act") sought to enforce the Order dated 23.08.2004 made in C.P. No. 13 of 2003 under Section 111A directing M/s Sterling Holiday Resorts (India) Limited ("the Company") to register the transfer of 22,93,000 shares in favour of the applicant within thirty days, on failure of which this Bench directed the Company on 27.03.2006 to register the transfer of shares in a time bound manner and gave appropriate directions, in the event of the Company failing to act strictly in terms of the order dated 27.03.2006. The Company registered the transfer of 22,93,000 shares in the name of the applicant on 27.04.2006, however, subject to final decision in the pending civil suits in relation to the impugned shares as borne out by the endorsement set out in the share certificates in the following manner:
This transfer is subject to final decision in C.S. No. 296 of 2006 for redemption, pending in the Hon'ble High Court of Madras and also subject to O.S.Nos. 3740, 3741 & 3742 of 2003 for injunction pending in the XVI Asst. City Civil Court, Chennai.
The applicant aggrieved by the endorsement contained in the share certificates, has now come out with the present application (C.A. No. 42 of 2006) seeking directions against the Company to cancel the endorsement made in the share certificates bearing folio No. 65620, in support of which, Shri T.K. Seshadri, learned Senior Counsel submitted:
• In the company petition No. 13 of 2003, under Section 111 A of the Act, after hearing both sides, this Bench was pleased to pass final order as early as on 23.08.2004, whereby, the Company has been directed to register the transfer of 22,93,000 shares in the name of the applicant. The appeals filed before the Division Bench of the High Court of Judicature at Madras, by the Company and the pledgors were dismissed on 30.12.2004. The special leave petition filed before the Supreme Court also came to be dismissed on 27.02.2006.
• The order dated 23.08.2004 of the CLB is not subject to any restriction or condition and therefore, the transfer ought not to have been made subject to any endorsement as resorted to by the Company. If the Bench Officer were to effect the transfer in terms of the order, there would not have been any endorsement at all. Thus, the endorsement made by the Company in the share certificates is in gross violation and contempt of the orders passed by the CLB. The CLB in exercise of the inherent powers may direct the Bench Officer to cancel the endorsement contained in the share certificates.
• This Bench while enforcing the order dated 23.08.2004 directed the Company on 27.03.2006 to register the transfer of shares in the name of the applicant, within a specified time. When the Company preferred an appeal in CMA No. 1285 of 2006, the High Court of Madras refused to admit the appeal. However, the Company effected the transfer, but subject to final decision in C.S. No. 296 of 2003 filed for redemption, pending in the High Court of Madras and O.S. No. 3740, 3741 and 3742 of 2003 instituted for injunction pending in City Civil Court, Chennai and made such endorsement in the share certificates. These proceedings namely, the City Civil Court proceedings are found to be irrelevant by the CLB while disposing the main company petition in terms of its order dated 23.08.2004 and by the Supreme Court while disposing the civil appeals preferred by the Company. These proceedings have no bearing on the execution proceedings. The endorsement made by the Company in each of the share certificates is contrary to the orders dated 23.08.2004 and 27.03.2006, whereby the applicant is unable to demat the shares. The Company has made such endorsement in the share certificates only with an ulterior motive to delay the recovery process and drag the present proceedings.
• The Madras High Court by an order dated 13.04.2006 made in C.S. No. 296 of 2006 has dismissed the injunction applications filed by the pledgors with regard to the transfer of shares pledged with the applicant, in the absence of which, making such endorsement in the share certificates is illegal and contrary to the orders passed by this Bench, which was confirmed by the Supreme Court. The injunction application restraining the applicant from selling the shares pledged by the promoters does not have any impact on the present proceedings before the CLB.
• The applicant is not in a position to exercise his legitimate right to enforce the securities in realisation of its dues or demat the shares. The defence put forth seeking shelter under the provisions of Sections 176 & 177 of the Indian Contract Act by the Company cannot be raised in execution proceedings and the executing court cannot go beyond the terms of the decree.
• The Supreme Court, while dealing with the powers of the CLB under Section 634A in Manish Mohan Sharma v. Ram Bahdur Thakur Limited (2006) Vol. 67 SCL 91 held that (a) the CLB is bound to execute its order. If CLB finds that the decree or any of its terms called for interpretation, it is within the CLB's jurisdiction to interpret that particular terms and to execute the decree on the basis of such interpretation; (b) the effort of the executing court must be to see that the parties are given the fruits of the decree; and (c) if the CLB refuses to execute its order, it would amount to error committed by it.
• The High Court of Madras in State Bank of India v. N. Sathiah have recognised the rights of a Pawnee as envisaged in Section 176. They are: (i) he may bring a suit upon the debt; (ii) he may retain the goods pawned as collateral security; and (iii) he may sell it giving the Pawnee reasonable notice of sale.
• This Board in ICICI Bank Limited v. Klen and Marshalls Manufacturers and Exporters Limited (2003) Vol. 113 CC 480 held that an order of the CLB is enforceable in the same manner as if it were a decree in a suit. Mere filing of an appeal without obtaining an order of stay, does not prohibit the CLB from enforcing its order. The CLB has power to enforce any order passed by it.
2. Shri G. Sundaram, learned Counsel vehemently opposed the company application on the following among other grounds:
• In terms of the order dated 23.08.2004 of the CLB, which has been confirmed by the High Court of Madras and later Supreme Court, transferred the shares in the name of the applicant and made the endorsement, as pointed out by the applicant, in the share certificates at the request of the promoters/share holders. Thus, the order of the CLB has been complied with by the Company and the applicant has become owner of the shares, which can be dealt with in any manner, as may be deemed fit by the applicant.
• The promoters, before effecting the transfer of shares, have filed civil suit in O.S.No. 3740 to 3742 of 2003 for an order of injunction against the transfer and those suits are pending. The promoters have further exercised the right of redemption under Section 177 of the Indian Contracts Act, 1872 by filing civil suit in C.S. No. 296 of 2006, which is pending before the High Court of Madras. The injunction granted in O.A. No. 326 of 2006 in C.S. No. 296 of 2006 came to be suspended on 13.05.2006, but the application for an order of injunction restraining the applicant from selling the pledged shares is still pending.
• If the pledgors repay the outstanding amount due to the applicant, the latter is bound to return the pledged shares without altering the character. In the event of the applicant being permitted to sell the shares, they will not be in a position to return the pledged shares to the pledgors, who would be constrained to proceed against the intending purchasers, who would become the owners at the relevant future point of time.
• The applicant is not entitled to deal with the pledged shares consequent upon the filing of civil suit in O.S. No. 577 of 1999 for recovery of the amount due from the Company, which is still pending before the City Civil Court at Ahmedabad. By virtue of Section 176 of Indian Contract Act, once a suit for recovery is instituted by the Pawnee, the Pawnee cannot deal with the pledged property including the sale of pledged goods save retaining the property as collateral security.
• The applicant, as made clear in para 5(i) of the application, is not in a position to enforce the securities in realisation of its legitimate dues from the Company, or to demat the shares, on account of the endorsement contained in the share certificates. This proposed action of the applicant is hit by Sections 176 & 177 of the Indian Contract Act. This proposition of law is reiterated by the Supreme Court in Lallan Prasad v. Rahntat Ali in , wherein it has been held that a pledgee cannot maintain a suit for recovery of debt as well as retain the pledged property. By virtue of Section 176, where a pawnee filed a suit for recovery of debt, though he is entitled to retain the goods, he is bound to return them on payment of the debt. The pawnee cannot have both the payment of the debt and also the goods, which is the effect of Section 176. The ratio of this decision has been followed by the High Court of Delhi and Gauhati. The Delhi High Court in Bank of Maharashtra v. Racmann Auto Private Limited held that the remedy for the pawnee, in the event of default, is to file a suit for recovery and retain the pledged goods as collateral security or in the alternative the pawnee could resort to sell the pledged goods after giving reasonable notice. The High Court of Gauhati in Union Bank of India v. Debendra Nath Roy Choudhury AIR 1992 Gau. 88, held that in case of default by the pawnor, the pawnee has the right to sue upon the debt and retain the goods as collateral security, or, to sell goods after reasonable notice of the intended sale to pawnor. By virtue of Sections 176 and 177 of the Indian Contract Act and these decisions, the applicant has no right to deal with the pledged shares, consequent upon the filing of the civil suit in O.S. No. 577 of 1999 on the file of City Civil Court, Ahmedabad.
• The prayer for removal of the endorsement to enable the applicant to dematerialise the shares and sell them in realisation of the dues of the Company, cannot be granted, which would otherwise enable the applicant sell the shares. This is violative of the statutory provisions of Sections 176 & 177 of the Indian Contract Act and will also be against the interest of the Company and pledgors. By virtue of Section 47 of code of civil procedure, the CLB must take cognizance of the proceedings before the High Court.
• The Company has already forwarded its proposal for one time settlement of the dues. The Company has deposited an amount of Rs. 4.50 Crores in C.S.No. 296 of 2006, which would be adjusted against the dues which has to be quantified either in the redemption suit namely, C.S.No. 296 of 2006 or in civil suit No. 577 of 1999 pending in the City Civil Court, Ahmedabad. As and when the amount is qualified by the Competent Court in the pending proceedings, the Company would make the payment and get back the pledged shares from the applicant and till such time the applicant has the liberty to retain the shares as collateral security. -
3. I have considered the arguments advanced for the parties. The short issue before me is whether the endorsement contained in the share certificates is liable to be cancelled, as claimed by the applicant. It is on record that the applicant approached the Company Law Board under Section 11A of the Act (C.P. No. 13 of 2003) seeking directions against the Company and others, pursuant to the failure on the part of Company to repay the outstanding loan amount due to the applicant, to register the transfer of 22,93,000 shares of the Company pledged by the promoters in favour of the applicant. This Bench after considering the matter in entirety on merits by an order dated 23.08.2004, directed the Company to register the transfer of 22,93,000" shares in the name of the applicant within 30 days of receipt of the order. The appeals preferred against the order dated 23.08.2004, by the Company and the pledgors before the Division Bench of the High Court of Madras were dismissed on 30.12.2004. Similarly the civil appeals filed before the Supreme Court came to be dismissed as early as on 27.02.2006, with which the order made by the CLB on 23.08.2004 to the effect that the Company is hereby directed to register the transfer of 22,93,000 shares in the name of the petitioner within 30 days on receipt of this orderhas become final and is binding on the Company and the pledgors. When the Company failed to comply with the order of the Bench, the applicant came out with an application (CA No. 15 of 2005) for enforcement of the order dated 23.08.2004. By virtue of Section 634A the order made on 23.8.2004 may be enforced by the Bench in the same manner as if it were a decree by a Court in a suit pending thereon. This Bench was in a position to execute order and therefore directed the Company by an order dated 27.03.2006 in the following terms:
(A) The Company shall register the transfer of 22,93,000 shares in the name of the applicant within ten days of receipt of this order and file an affidavit of compliance within three days thereafter.
(B) If the Company fails to act strictly in terms of the directions stipulated hereinabove, Shri A.M. Sridharan, Bench Officer, Company Law Board, Southern Region Bench, Chennai shall -
i) endorse the transfer entries on the reverse of the share certificates in respect of 22.93.000 shares of the Company pledged in favour of the applicant; and
ii) make appropriate entries in the Share Transfer Register and the Register of Members of the Company, recording the transfer of 22,93,000 in the name of the applicant, towards which the Company shall make available the concerned registers to the Bench Officer at the registered office.
(C) A copy of this order shall be forwarded to the Registrar of Companies, Tamilnadu, Chennai who shall take it on record in the Company's record file.
4. The Company aggrieved by the above order made in execution proceedings filed an appeal before High Court of Madras but could not succeed in the appeal proceedings, which resulted in the registration of transfer of 22,93,000 shares by the Company in the name of the applicant, however, with the following endorsement:
This transfer is subject to final decision in C.S. No. 296 of 2006 for redemption, pending in the Hon'ble High Court of Madras and also subject to O.S.Nos.3740, 3741 & 3742 of 2003 for injunction pending in the XVI Asst. City Civil Court, Chennai.
While it is true that (a) promoters, before effecting the transfer of shares, have filed suits in O.S. No. 3740 to 3742 of 2003 on the file of City Civil Court, Chennai, for an order of injunction against the transfer and (b) promoters after effecting the transfer of shares, have filed civil suit in C.S. No. 296 of 2006 before the High Court of Madras in exercise of the right of redemption, but the order made either on 23.08.2004 or on 27.03.2006 by the Bench is absolutely free from any conditionality namely, the Company ought to have transferred the shares in terms of the order dated 23.08.2004, which is not couched with any condition or restriction. It may be observed that the injunction application in O.A. No. 325 of 2006 in C S No. 296 of 2006 restraining the applicant from effecting the transfer of 22,93,000 equity shares pledged by the promoters is dismissed and further that the injunction granted in O A No. 326 of 2006 in C S No. 296 of 2006 has been suspended until further orders by the High Court. This Bench before directing the Company on 23.08.2004 to register the transfer of shares in the name of the applicant has taken due cognizance of the civil suits pending before the City Civil Court and also the winding up proceedings on the file of High Court of Madras. It is well settled that an executing court cannot go beyond the decree, in which case this Bench cannot look beyond the order dated 23.08.2004, wherein the Company has been directed to transfer the shares in the name of the applicant without any rider whatsoever. In view of this legal position, the defence of the Company that any removal of the endorsement in the share certificates, thereby enabling the applicant to sell the shares in question will be violative of the statutory provisions of Section 176 & 177 of the Indian Contract Act, does not merit any consideration. Therefore, the decisions cited by the learned Counsel for the Company will have no application to the execution proceedings and will not.go to the aid of the Company. The Supreme Court in Manish Mohan Sharma v. Ram Bahdur Thakur Ltd. (Supra)unequivocally held that the effort of executing court must be to see that the parties are given the fruits of the decree. If this Bench refuses to execute its order, it would amount to an error committed by it. In this background, the endorsement made by the Company in the share certificates not being in accordance with the order dated 23.08.2004 must appropriately dealt with to meet the ends of justice.
In view of my foregoing conclusions and in exercise of the powers under Regulations 29(6) and 44, it is hereby directed that Shri A.M.Sridharan, Bench Officer, Company Law Board, Southern Region Bench, Chennai, is directed to cancel the endorsement namely, This transfer is subject to final decision in C.S. No. 296 of 2006 for redemption, pending in the Hon'ble High Court of Madras and also subject to O.S.Nos.3740, 3741 & 3742 of 2003 for injunction pending in the XVI Asst. City Civil Court, Chennaicontained on the reverse of the share certificates in respect of 22,93,000 shares of the Company transferred in the name of the applicant. Towards this end, the applicant shall lodge by 14.08.2006 the relevant share certificates bearing folio No. 65620 with the Bench Officer for cancellation of the endorsement in terms of this order. The whole process shall be completed by 18.08.2006. With these directions the application stands disposed off.