Company Law Board
W. Gunther Gmbh And Dr. Werner Phlmann vs Switching Technologies Gunther ... on 29 July, 2004
Equivalent citations: [2005]57SCL42(CLB)
ORDER
K.K. Balu, Member
1. This is a petition filed by M/s W. Gunther GmbH ("the German Company") and the Insolvency Administrator of the German Company under Section 111A of the Companies Act, 1956 ("the Act") for rectification of the register of members of M/s Switching Technologies Gunther Limited ("the Indian Company") by canceling the transfer of 15,00,000 shares of Rs. 10/- each covered under folio No. 000008 of the Indian Company made in favour of the second respondent ("the American Company") and reinstating the name of the German Company.
2. Shri Sriram Panchu, learned Senior Counsel appearing for the petitioners, while initiating his arguments submitted that the German Company owns 61.22 per cent of the paid-up equity share capital in the Indian Company. When the German Company suffered losses, filed an application on 24.10.2003 for insolvency before the Nuremberg Insolvency Court. The Insolvency Court by an order dated 27.10.2003 appointed the second petitioner as the Provisional Insolvency Administrator of the German Company. Thereafter, the German Company was declared as insolvent by an order dated 15.12.2003 of the Insolvency Court, confirming the appointment of the Insolvency Administrator. Consequently, none of the assets of the German Company could be disposed of without prior written permission of the Insolvency Administrator with effect from 27.10.2003. Earlier, the German Company had executed a Stock Purchase Agreement ("SPA") dated 01.03.2003 with the American Company selling the impugned shares for Euro 70,000. The American Company did not pay the sale consideration in terms of the SPA. By virtue of an Addendum to the SPA executed on 24.10.2003 between the German Company and the American Company the purchase price for the impugned shares was enhanced to Euro 1,90,000. Though the Addendum shows payment of the sale consideration of Euro 1,90,000 by the American Company in favour of the German Company on different dates, i.e., Euro 45,000 on 04.04.2003, Euro 45,000 on 25.04.2003 and Euro 1,00,000 on 04.08.2003, the sale price was never paid by the American Company. The third respondent is on the Board of directors of the Indian Company, the German Company as well as the American Company and is well aware of the order dated 27.10.2003 of the Insolvency Court. The solicitors of the Insolvency Administrator, by a letter dated 07.11.2003 advised the Indian Company about the appointment of the Provisional Insolvency Administrator with specific instructions not to give effect to the terms of the SPA and the Addendum. In this connection, Shri Sriram Panchu, learned Senior Counsel referred to a series of correspondence made on behalf of the second petitioner with the Indian Company (Annexure A-13). Nevertheless, the Transfer Committee of the Indian Company ignoring the instructions of the second petitioner passed a resolution on 14.01.2004, approving the transfer of shares in favour of the American Company. The share transfer form was signed by the third respondent both on behalf of the German Company (transferor) and the American Company (transferee). The third respondent had no legal authority and authorization to sign the share transfer form on behalf of the German Company, which neither obtained prior approval of the second petitioner and therefore, the share transfer form executed by the third respondent not being a proper instrument of transfer, the transfer was not effected in accordance with the requirements of Section 108 of the Act, which are mandatory as held in Mannalal Khetan v. Kedar Nath Khetan - AIR 1977 Supreme Court 536 and Mathrubhumi Printing And Publishing Co. Ltd. v. Vardhaman Publishers Ltd. - [1992] 73 CC 80. Thus, the transfer of impugned shares approved in favour of the American Company is void ab-initio. Shri Sriram Panchu, learned Senior Counsel read out the relevant excerpts of provisions from the German Insolvency Act, to show that prior approval of the Insolvency Administrator is required for every action committed by the Debtor, including persons acting on behalf of the Debtor, without which any such act of the Debtor would be invalid in law. Further, upon commencement of the Insolvency proceedings, any right to administer the assets of the Insolvency Estate is vested with the Insolvency Administrator. In spite of the legal notice dated 23.02.2004, caused by the Insolvency Administrator, calling upon the Indian Company to cancel the impugned transfer, the Indian Company refused to comply with the legal notice on the ground that they had received the share transfer form and the share certificate in respect of the impugned shares evidencing conclusive proof of ownership of the American Company, being the transferee. Shri Sriram Panchu, learned Senior Counsel, while concluding his submissions pointed out that the impugned transfer of shares by the German Company without prior approval of the Insolvency Administrator, being void, the Indian Company must be directed to rectify its register of members by canceling the transfer effected in favour of the American Company and reinstating the name of the German Company.
3. Shri Arvind P. Datar, learned Senior Counsel, appearing for the respondents contended that the impugned shares were sold by the German Company to the American Company for valuable consideration as borne out by the SPA dated 01.03.2003 and the Addendum dated 24.10.2003. On completion of the share purchase transaction in terms of these agreements and on payment of full consideration thereon, the share certificate and blank share transfer form duly signed in blank by the German Company were delivered to the American Company on 15.09.2003, much before commencement of the insolvency proceedings on 27.10.2003 before the Nuremberg Court. The third respondent had the full authorization and competence to sign and execute the share transfer form in blank on behalf of the German Company. The American Company had filled on 15.12.2003 the blank transfer form and executed the same as buyer of the impugned shares for registration of the transfer in the books of the Indian Company. Shri Datar, learned Senior Counsel pointed out that the blank transfers are recognized by the courts, in support of which referred to Howrah Trading Co. Ltd. v. Commissioner of Income-tax, Central, Calcutta - AIR 1959 SC 775 and In the matter of Bengal Silk Mills Co., Ltd. - A.I.R. (29) 1942 Calcutta 461. The Calcutta High Court in the latter case held that even in cases of transfers in blank, the transferee has the right, after the death of the original transferor, to fill in the necessary particulars including his own name as transferee and the date of the transfer. The instrument then is complete and the transferee is entitled to have his name registered as the holder of shares in the company's register. In the instant case, the shares being movable property, the ownership and title passed on to the American Company on the date of entering into the contract for sale and its delivery, in support of which Shri Datar, learned Senior Counsel, referred to the relevant provisions of the Sale of Goods Act, 1930. Thereafter the Indian Company had effected registration of the transfer of shares in favour of the American Company. At present, the American Company is the lawful owner of the impugned shares and the German Company is no longer has any interest over the impugned shares and in any case, the petitioners have already sold on 28.01.2004 the shares in favour of one M/s Amazeum Shop & Merchandising GmbH, in spite of being fully aware of the sale of shares by the German Company in favour of the American Company, the fact of which has been suppressed by the petitioners. Therefore, the petitioners do not have any locus standi to file the company petition for rectification of the register of members of the Indian Company. Moreover, M/s Amazeum Shop & Merchandising GmbH, the purchaser is not before the CLB, The petitioners have not indicated as to how the transfer of shares in favour of the American Company is in contravention of the particular provision of any law for time being in force. They are not specified persons in Sub-section (3) of Section 111A to make the present petition for rectification of the register of members of the Indian Company. The requirements of Section 111A(3) are not fulfilled enabling the petitioners to invoke the provisions of Section 111A. Section 111A can be pressed into service, inter-alia, in the event of breach of "any law for time being in force" in India and not in other countries of the world. The petitioners have filed a similar suit for the same cause of action in the District Court of Nuremberg. The petitioners are engaged in forum shopping, which must be declined by the CLB. The remedy open to the petitioners is to question the transfer of shares in favour of the American Company before the Nuremberg Court and not before the CLB.
4. Shri Sriram Panchu, learned Senior Counsel in his rejoinder submitted: The Insolvency Administrator had on 28.01.2004 entered into the sale and transfer agreement with one M/s Amazeum Shop & Merchandising GmbH prior to gaining of knowledge about the fraudulent transfer of shares in favour of the American Company. Moreover, the purchaser had neither paid the sale consideration nor were the shares physically delivered. The transfer would take effect only when registration of the transfer is effected, as stipulated in the sale and transfer agreement dated 28.01.2004. The agreement is a non-starter. Therefore, the petitioners, being aggrieved persons do have locus standi to file the company petition for appropriate reliefs. The transfer of shares in favour of the American Company was made on 15.12.2003 as borne out by the share transfer form and the transfer was approved by the share transfer committee of the Indian Company on 14.01.2004, both of which are subsequent to the appointment of the Insolvency Administrator. The third respondent had no authority to execute the share transfer form for and on behalf of the German Company and as the transfer in favour of the American Company is in violation of Section 108 of the Act, the petitioners have approached the CLB invoking the provisions of Section 111A and therefore the petition is absolutely maintainable. Though the German Company contends that blank share transfer form duly signed by its authorized representative was delivered to the American Company on 15.09.2003, the Addendum dated 24.10.2003 does not speak of delivery of the blank share transfer form by the German Company to the American Company. The Addendum shows payment of the increased sale price which according to the petitioners was towards the invoices raised by them, in which case, the blank transfer form could not have been delivered in September as alleged by the German Company. The theory of blank transfer advanced by Shri Datar, learned Senior Counsel nullifies the insolvency law and therefore cannot be received. The Nuremberg Insolvency Court, by way of an interim order dated 19.03.2004 prohibited the American Company from disposing of the shares and further by an order dated 14.05.2004 categorically held that the acts of the respondents are nothing but ways and means to fleece the German Company of its assets; that they have engaged in willful immoral injury of the Debtor and that the petitioners have a right of retransfer of the shares from the American Company. Shri Panchu, learned Senior Counsel pointed out that under Section 133 of the German Insolvency Law, such invalid transfers can be set aside within the period prescribed therein.
5. Before going into merits of the company petition, I may point out that learned Senior Counsel appearing for the petitioners, while moving the petition sought indulgence of this Bench for issue of the following interim reliefs: -
a) to suspend the voting rights of the American Company and its nominee directors in the Indian Company;
b) to permit the German Company to appoint two nominee directors on the Board of the Indian Company; and
c) to restrain respondents from effecting any further transfer in regard to the impugned shares till disposal of the company petition.
This Bench, by an order dated 01.03.2004 expressed satisfaction that the German Company made out a prima facie case for the interim reliefs and permitted the German Company to appoint two of its nominees on the Board of the Indian Company. Aggrieved by this order, the Indian Company, the American Company and the fifth respondent preferred an appeal in CMA No. 730/2004, wherein the High Court of Madras was pleased to pass on 27.04.2004, the following order: -
"(i) the Indian Company as well as the American Company are at liberty to approach the Company (Law) Board to review the order dated 1.3.2004 and to seek modification or vacation of the same, raising all the points which are agitated here, viz. as to the
(a) jurisdiction of the Company (Law) Board under Section 111A of the Act to permit the German Company to appoint two more Directors;
(b) right and eligibility of the Insolvency Administrator of the German Company to appoint two nominee Directors, in view of the insolvency proceedings initiated by the German Company, as the same is attracted under Section 274(b) read with Section 283(c) and (d) of the Act;
(c) allegation that the admission made by Mr. C. Venkataraman, Director of the Indian company, referred to in the order dated 1.3.2004 was obtained by coercion and fraud; and
(d) any other points that are relevant to the issue;
(ii) since the Company (Law) board has passed the interim order dated 1.3.2004, adjourning the matter to 14.5.2004 permitting the Indian Company to file counter in the Company Petition and permitting the German company to file rejoinder, suffice it to permit both the Indian company and the American Company to approach the Company (Law) Board to review the order dated 1.3.2004 and to seek modification or vacation of the same;
(iii) the Company (Law) Board is directed to take up the matter and pass appropriate final orders, on merits, entertaining all the contentions of both sides, expeditiously, in any event, within sixty days from the date of receipt of a copy of this order;
(iv) as we do not propose to interfere the interim arrangements made in the order dated 1.3.2004, we make it clear that the nominee Directors appointed by the German Company, pursuant to the order of the Company (Law) Board under appeal dated 1.3.2004, even though are entitled to participate in the proceedings of the Board, shall not be entitled to exercise their voting rights and such appointment of the nominee Directors, shall not confer any right on them till appropriate final order is passed by the Company (Law) Board in the Company Petition; and
(v) till such appropriate final order is passed by the Company (Law) board, both the appellants and respondents shall maintain Status quo as on 1.3.2004."
While the company petition was argued on merits, learned Senior Counsel did not advance arguments on the points agitated before the High Court. However, on the pleadings of the parties and arguments of their learned Senior Counsel, the following issues arise for my consideration: -
(i) Whether the petitioners have any locus-standi to file the instant company petition?
(ii) If so, whether the Company shall rectify its register of members by restoring the name of the German Company in the facts of the case?
Issue No. (i):
The answer to this issue depends upon the terms and conditions of the sale and transfer agreement dated 28.01.2004 entered into between the petitioners and M/s Amazeum Shop & Merchandising GmbH ("the purchaser") for sale of the impugned shares in favour of the purchaser for Euro 70,000 payable on 31.01.2004 or when the transfer in favour of the purchaser becomes effective and registered by the Indian Company according to the Indian law, whichever is earlier. The sale and transfer of shares must be approved by the creditors of the German Company, which was to be given by 31.01.2004. A careful perusal of these terms and conditions show that the agreement dated 28.01.2004 is a conditional contract. Where the transfer of the property in the goods is subject to some conditions to be fulfilled, the property in the goods stands transferred on fulfillment of such conditions. In the instant case, one of the stipulations in the agreement is that the sale and transfer of shares is subject to the approval of the creditors of the German Company. There is no document on record to show that this condition has been fulfilled, in which case, in my considered view, the interest or title over the impugned shares remains vested with the petitioners, empowering them to file the instant company petition, despite the stipulation that transfer was to take immediate and real effect. Moreover, the transfer in favour of the purchaser is not yet registered according to the Indian Law. At this juncture, it shall be borne in mind that the parties have excluded the applicability of the Indian Law for legal enforceability of the agreement dated 28.01.2004. There is, therefore, no merit in the plea of the respondents that in the light of the provisions of the Sale of Goods Act, the sale of shares in favour of the purchaser is completed with the execution of the agreement entered into between the petitioners and M/s Amazeum Shop & Merchandising GmbH. Accordingly, this issue is answered in the affirmative.
Issue No. (ii): A careful perusal of the records show that the German Company had entered into the SPA with the American Company for sale of the impugned shares for Euro 70,000, which was enhanced to Euro 1,90,000 by means of an Addendum to the SPA. Though there is on record a letter dated 15.09.2003 of the German Company forwarding two share transfer forms executed in blank by the third respondent in favour of the American Company, the Addendum does not make any reference to the delivery of share certificate or the share transfer forms executed in blank by the German Company to the American Company. It is observed from the said communication which is not reflected in any other place before any authority or forum, that the German Company forwarded two share transfer forms executed in blank by the third respondent, whereas the impugned shares are covered by only one share certificate bearing No. 00008. It is not known as to why there should be two share transfer forms in respect of one share certificate. Though the communication dated 15.09.2003 indicates that the relevant share certificate has already been handed over to the American Company, there is no material establishing the date of handing over the share certificate by the German Company. While the Addendum speaks of the payment of sale consideration of Euro 1,90,000 in three instalments said to have been made in April and August, 2003 by the American Company in favour of the German Company, it does not contain the details regarding the delivery of the share certificate and the blank share transfer form purported to have been handed over in September, 2003 by the German Company in favour of the American Company. This remains unexplained. It is not under dispute that the share transfer form (Annexure A-15) was signed by the third respondent both on behalf of the transferor company (German Company) and the transferee company (American Company). I do not see any legal authority empowering the third respondent to sign the share transfer form on behalf of the German Company. The application filed by the German Company before the Nuremberg Insolvency Court, initiating insolvency proceedings was also signed by the third respondent. It is, therefore, far from doubt that the third respondent must be quite aware of the commencement of the insolvency proceedings on the file of the Nuremberg Insolvency Court, while transferring the impugned shares in favour of the American Company. The SPA and the Addendum were executed on behalf of the American Company by the very same third respondent. Therefore, the plea of the respondents that the share certificates and the blank share transfer form signed by the third respondent on behalf of the German Company were handed over to the American Company, much before the commencement of the insolvency proceedings, supported only by the communication dated 15.09.2003 of the German Company without being corroborated by any other documentary proof and without any legal authorization given by the German Company, in my view, could in no way establish the case of the respondents. It is evident from the share transfer form that the same was executed on 15.12.2003, after the commencement of the insolvency proceedings. Against this background, the decisions cited by Shri Datar, learned Senior Counsel, do not go to the aid of the respondents. The share transfer form executed by the third respondent without explicit authority of the German Company not being a proper instrument of transfer, does not satisfy the requirements of Section 108, which are mandatory, as held in Mannalal Khetan v. Kedar Nath Khetan and Mathrubhumi Printing And Publishing Co. Ltd. v. Vardhaman Publishers Ltd (supra). Furthermore, the Nuremberg Insolvency Court, on an application filed by the third respondent on behalf of the German Company, initiating insolvency proceedings, appointed the second petitioner on 27.10.2003 as the Provisional Insolvency Administrator of the German Company. Later, the German Company was declared as an insolvent company by an order dated 15.12.2003 of the Insolvency Court. It is on record that the Attorney of the second petitioner by a letter dated 07.11.2003 (Annexure A-13) intimated the Indian Company about the order dated 27.10.2003 of the Nuremberg Insolvency Court appointing the second petitioner as the Provisional Insolvency Administrator of the German Company and further specifically advised the Indian Company not to give effect to the SPA and the Addendum. This communication was followed by yet another communication dated 13.01.2004 (Annexure A-13), Wherein the Indian Company was advised not to transfer the impugned shares to any other party without written approval of the Insolvency Administrator. The Attorney of the second petitioner further by a communication dated 12.02.2004 (Annexure A-13) categorically questioned the validity of the transaction of shares in favour of the American Company and indicated that the second petitioner already contested the transaction according to Germany Insolvency Act. It is also on record that the Attorney of the second petitioner by a communication dated 16.02.2004 (Annexure A-13) specifically invited the attention of the Indian Company that the transfer of impugned shares in favour of the American Company is in violation of the provisions of Section 91 of the German Insolvency Act. It is worthwhile to observe that the communication dated 13.01.2004 was addressed to Shri Venkataraman and the remaining communications in favour of Shri Uttam Reddi, who constituted the Share Transfer Committee of the Indian Company, which approved the transfer in favour of the American Company. It is, therefore, beyond doubt that the Indian Company was appraised as early as on 07.11.2003 about the prohibition, under the German Insolvency Act, of sale of the impugned shares in favour of the American Company pursuant to the terms of the SPA and also the commencement of the insolvency proceedings against the German Company before the Nuremberg Insolvency Court. Further, even the manner in which the registration of transfer had been approved in favour of the American Company by the Share Transfer Committee of the Indian Company raises doubts about bonafides of the entire transaction. When the Insolvency Administrator had cautioned the Indian Company not to effect the registration of transfer, the Committee should have, before effecting the transfer ascertained full particulars, as a measure of abundant caution, which in the present case, it had failed to do giving rise to possible conclusion that the registration was sought to be made before the Insolvency Court seized of the matter. However, when the Indian Company approved the transfer of impugned shares in favour of the American Company on 14.01.2004, ignoring the various communications of the second petitioner, the latter approached the Nuremberg Court questioning the validity of the transfer approved by the Indian Company, which was contested by the American Company. The contentious issues raised by the American Company form part of the order dated 14.05.2004 of the Nuremberg Insolvency Court. The Insolvency Court came to the conclusion that the transfer of the impugned shares by the German Company in favour of the American Company is hit by the German Insolvency Act and further held that the second petitioner is entitled for the block of shares re-transferred from the American Company. It shall be borne in mind that neither the Indian Company nor the American Company ever raised the plea of handing over the share certificate or the share transfer form duly signed in blank by the German Company in favour of the American Company, either in reply to any of the aforesaid correspondence or in the course of the proceedings before the Nuremberg Insolvency Court. Having found that there is no adequate material to show that the German Company had transferred the impugned shares in favour of the American Company prior to the commencement of the insolvency proceedings and further that the Indian Company had acted in contravention of the provisions of Section 108(1), the petitioners are entitled to seek rectification of the register of members of the Indian Company. This issue is answered accordingly.
In the light of the aforesaid discussions and the settled legal position, the Indian Company is directed to rectify its register of members by cancelling the impugned transfer made in favour of the American Company and restoring the name of the German Company within 30 days from the date of receipt of this order. As the transfer in favour of the American Company is held to be invalid, the directors nominated by the American Company on the Board of the Indian Company, cease to be directors of the Indian Company, with immediate effect. In view of the final order passed by me, the interim order made on 01.03.2004 stands vacated. With these directions, the petition stands disposed of. No order as to costs.