Bombay High Court
Rajinder Kumar Malhotra vs Vidyut Metallics Pvt. Ltd on 15 July, 2013
Author: S.J. Kathawalla
Bench: S.J. Kathawalla
KPP 1 CAAL-47 of 2013
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
COMPANY APPLICATION (L) NO. 47 OF 2013
IN
COMPANY APPEAL NO. 15 OF 2013
IN
CLB COMPANY APPLICATION NO. 268 OF 2012
IN
CLB COMPANY PETITION NO. 13 OF 2012
Rajinder Kumar Malhotra ... Applicant/Appellant
vs.
1. Vidyut Metallics Pvt. Ltd.
2. Paresh Biharilal Vyas
ig )
)
3. Subhash D.Chaudhari )
4. Transauto & Mechaids Pvt. Ltd. )
5. Amit Bhansali )
6. Rakesh Malhotra )
7. Abhishek Kumar )
8. Ms. Jaanvi Tekchandani )...Respondents
And
9. HDFC Bank Ltd. )
10. Supermax Personal Care Pvt. Ltd. )..Addl. Respondents
Mr. F.E. Devitre, Senior Advocate, along with Mr. Rahul Chitnis, Mr. J.P. Sen, Mr. M.S.
Doctor, Mr. Rohan Dakshini, Ms. S. Jaydev and Mr. R.P. Carvalho, instructed by M/s.
Federal & Rashmikant, for the Applicant.
Mr. Virag Tulzapurkar, Senior Advocate, along with Mr. Farid Karachiwala and Mr.
Sahil Saiyed, instructed by M/s. Wadia Ghandy & Co., for Respondent No.9.
Mr. N.H. Seervai, Senior Advocate, along with Mr. M.P. Bharucha, Mr. Akash Rebello
and Ms. Sneha Jaisingh, instructed by M/s. Bharucha & Partners, for Respondent
No.10.
CORAM: S.J. KATHAWALLA, J.
DATE: 15
JULY, 2013
th
.
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KPP 2 CAAL-47 of 2013
ORAL ORDER:
1. The above Application is filed by the Applicant-Appellant - Shri Rajinder Kumar Malhotra in Company Appeal No. 15 of 2013 in CLB Company Application No. 268 of 2012 in CLB Company Petition No. 13 of 2012 inter alia for an order and injunction restraining Respondent No. 9 - HDFC Bank Limited from attempting to recover any amount under the Loan-cum-Guarantee Agreements dated 2 nd February, 2012, and 7th November, 2012, from Respondent No.1 Company - Vidyut Metallics Pvt. Ltd. and to also restrain Respondent No.9 Bank from enforcing the pledge created in its favour, or selling any of the securities furnished by Respondent No.1 in its favour. By consent of the parties, the above Company Application is taken up for final hearing.
2. The Applicant - Shri Rajinder Kumar Malhotra has submitted that he is directly or indirectly a 100 per cent shareholder of Transauto & Machaids Pvt. Ltd.
(Transauto), a Company registered under the Companies Act, 1956 (Respondent No.4) and its subsidiaries viz. (i) Unique Properties & Securities Pvt. Ltd. (Unique);
(ii) Vidyut Metallics Pvt. Ltd. (VMPL) - Respondent No. 1 herein; (iii) Supermax International Pvt. Ltd. (SIPL); and (iv) RCC (Sales) Pvt. Ltd. (RCC). Transauto along with its four main subsidiaries are collectively referred to as "the Indian Companies".
3. According to the Applicant, his son Rakesh Malhotra (Respondent No.6) has ::: Downloaded on - 06/01/2014 03:45:52 ::: KPP 3 CAAL-47 of 2013 in collusion with the Directors of the Respondent No.1 Company - VMPL sought to fraudulently assume liability on behalf of VMPL as a purported guarantor of the alleged dues of Super Max Personal Care Pvt. Ltd. (SPCPL), a Company which is presently under the control and management of Respondent No.8 - Ms. Jaanvi Tekchandani. According to the Applicant, these liabilities were sought to be assumed behind his back despite the Applicant directly and/or indirectly holding the 100 per cent shareholding of Respondent No.1.
4. The Applicant in the year 2008 decided to restructure the Super Max Group of Companies which restructuring was completed on 24 th March, 2011. However, according to the Applicant, his son Rakesh - Respondent No.6 in collusion with the Directors appointed by the Applicant to manage the Indian Companies, sought to assume control of its affairs despite the fact that the Applicant, along with his wife, is virtually 100 per cent owners of these Companies. The Directors of the Indian Companies began to act in blatant disregard of the Applicant's directions. The Applicant therefore realised that his son Rakesh having assumed control of the Super Max Group was seeking to deprive the Applicant and his son Rajiv of the benefit of the Indian Companies and their assets which were to be managed by them. The Applicant therefore in January, 2012, addressed letters to the Company's Bankers -
Citi Bank, Andhra Bank and Punjab National Bank, calling upon them to freeze the Current Accounts and Fixed Deposits maintained by these Companies with them.
The Applicant through his Advocates' also addressed letters to the Directors of the Indian Companies stating that they were acting to the detriment of the said Indian ::: Downloaded on - 06/01/2014 03:45:52 ::: KPP 4 CAAL-47 of 2013 Companies and that they should desist from acting as Directors of the said Indian Companies with immediate effect and they should not to take any major decisions which may affect the interest of the Indian Companies.
5. On 6th February, 2012, the Applicant also filed four Company Petitions bearing Nos. 11, 12, 13 and 14 of 2012 before the CLB, Mumbai Bench, and Company Petition No. 14 of 2012 before the CLB, Chennai Bench, in respect of the Indian Companies, alleging oppression and mismanagement in the affairs of these Companies on the part of the Directors appointed by the Applicant. By an ad-interim order dated 9th February,2012, the CLB, Mumbai Bench issued an order of injunction in the following terms:
"...i) The Respondents shall not utilize, invest or deal in any manner the funds, monies and securities of the company (including bank account) except for the purpose of making statutory payments that may be required to be made to any government authorities and salaries of the employees in the ordinary course of business until further orders.
ii) The Respondents shall not dispose off, transfer, encumber or create any charge on the assets of the company including the immovable properties until further orders....."
6. In or about March 2012, Rakesh Malhotra (Respondent No. 6),the son of the Applicant initiated proceedings before the English Court against the Applicant and his younger son Rajiv Malhotra (Rajiv) seeking an injunction restraining them from proceeding with the Company Petitions filed by the Applicant before the CLB in ::: Downloaded on - 06/01/2014 03:45:52 ::: KPP 5 CAAL-47 of 2013 Mumbai and Chennai. By an interim order dated 26 th March, 2012, the English Court initially granted an injunction as prayed. This order was however vacated by a final order dated 30th October, 2012, whereby the application filed by Rakesh -
Respondent No. 6 was rejected.
7. In the course of the proceedings before the English Court, Rakesh -
Respondent No. 6 for the first time in a witness statement dated 23 rd March, 2012, in support of his Anti-Suit Injunction Application disclosed certain documents regarding the facility granted by HDFC Bank Ltd. - Respondent No. 9 herein, to SPCPL for which the Indian Companies had stood as Guarantors. Respondent No. 6 had also disclosed the Loan-cum-Guarantee dated 2 nd February, 2012 along with two sanction letters dated 24th and 25th January, 2012. According to the Applicant, the Loan-cum-Guarantee signed by the Directors of the Indian Companies bore several blanks and which had evidently not been filled in prior to their signatures.
According to the Applicant, the said documents had been fraudulently executed behind the Shareholder's back and without his consent by the Directors of the Indian Companies acting in collusion with Respondent No.6.
8. According to the Applicant, in the English proceedings, Rakesh - Respondent No. 6 had inter alia set up an alleged oral arrangement whereby he was to assume control of the Indian Companies to facilitate the payment of any cash shortfall that may arise as contemplated in Clause 18 of the Subscription and Shareholder Deed (SSD) entered into between the parties to facilitate the restructuring. According to ::: Downloaded on - 06/01/2014 03:45:52 ::: KPP 6 CAAL-47 of 2013 the Applicant, though the oral arrangement set up was false, in view of the fact that the said plea of oral arrangement was subjudice before the English Court, the Applicant did not immediately take any steps in regard to the aforementioned documents disclosed by Rakesh - Respondent No.6.
9. According to the Applicant, by its order dated 30 th October, 2012, the English Court inter alia rejected the case set up by Rakesh - Respondent No.6 of the alleged oral arrangement whereby he was to assume control of the Indian Companies.
10. Thereafter by a letter dated 12 th January, 2013, the Applicant brought to the notice of HDFC Bank Ltd. the order dated 9 th February, 2012, that had been passed by the CLB, Mumbai Bench and called upon them not to entertain any application/proposal by the Directors of the Indian Companies for extending the guarantees given by them. According to the Applicant, the Advocates for HDFC Bank Ltd. by their letter dated 21 st February, 2013, informed the Applicant that they were in the process of taking instructions from their clients and would issue a detailed response in due course. Thereafter since the Applicant did not receive any further response to his letter he assumed that the guarantees earlier furnished had not been extended and that no further guarantees furnished by the Indian Companies would be accepted as security by HDFC Bank Ltd.
11. In the meantime, Application Nos. 266-269 of 2012 filed before the CLB by ::: Downloaded on - 06/01/2014 03:45:52 ::: KPP 7 CAAL-47 of 2013 Rakesh - Respondent No.6, under Section 45 of the Arbitration and Conciliation Act, 1996, praying that the CLB Mumbai Bench ought to forthwith refer the parties to arbitration and vacate the order dated 9 th February, 2012, was heard on 23 rd / 24th January, 2013, and dismissed by an order of the CLB, Mumbai Bench dated 31 st January, 2013, as being devoid of merits. The CLB by its order modified the interim order dated 19th November, 2012, directing the parties to maintain status quo in respect of the composition of the Board of Directors and appointed Mr. Justice D.K. Deshmukh, a former Judge of this Court as an Observer-cum-Facilitator of the Company on a monthly remuneration of Rs. 5 lacs. The Applicant was aggrieved by the order passed by the CLB dated 31 st January, 2013 to the extent of appointment of an Observer-cum-Facilitator of the Company. The Applicant by himself and/or through Sapphire Properties Pvt. Ltd. and RSM Properties Pvt. Ltd. filed four Appeals being Appeal(L) Nos. 15-18 of 2013 before this Court under Section 10-F of the Companies Act, 1956, impugning the said order dated 31 st January, 2013 which Appeals were admitted on 18th February, 2013.
12. However, on 1st June, 2013, one of the Indian Companies viz. RCC (Sales) Pvt. Ltd. received a copy of the letter dated 31 st May, 2013, addressed by HDFC Bank Ltd., through its Advocates to SPCPL inter alia recalling the facilities granted by HDFC Bank Ltd. and calling SPCPL to pay a sum of Rs. 38,78,02,503.18 along with further interest alleged to have been accrued. The said letter also referred to the fact that the facilities granted to SPCPL had been altered in November 2012 and that a fresh Loan-cum-Guarantee Agreement dated 7 th November, 2012, had been ::: Downloaded on - 06/01/2014 03:45:52 ::: KPP 8 CAAL-47 of 2013 executed between SPCPL and the Indian Companies in favour of HDFC Bank Ltd.
According to the Applicant, he received a copy of the said letter addressed by the Advocates for the HDFC Bank Ltd. only because the Applicant had in the meanwhile assumed control of RCC (Sales) Pvt. Ltd., having replaced its Board of Directors on 20th January,2013 pursuant to the Board Resolution dated 13th November, 2012.
13. The Applicant by his Advocates' letter dated 17th June, 2013, addressed to the Advocates for HDFC Bank Ltd. recorded the events that had transpired including inter alia the disputes with his son Rakesh - Respondent No. 6 and the Directors of the Indian Companies, the order that had been passed by the CLB and his earlier correspondence with the HDFC Bank Ltd. Without prejudice to his rights, the Applicant called upon the HDFC Bank Ltd. to fix an immediate appointment for inspection of all the documents executed on behalf of the Indian Companies and the correspondence that may have been exchanged in this behalf. The HDFC Bank Ltd.
did not respond to the said letter and also to a further letter dated 20 th June, 2013 from the Applicant.
14. The Applicant thereafter filed the above Company Application on 25 th June, 2013, in the pending Appeal No. 15 of 2013 for the aforestated reliefs.
15. Mr. Devitre, the Learned Senior Advocate appearing for the Applicant after pointing out what is recorded hereinabove, submitted that despite the fact that the HDFC Bank was clearly put on enquiry by the Applicant's letter dated 12 th January, ::: Downloaded on - 06/01/2014 03:45:52 ::: KPP 9 CAAL-47 of 2013 2013, of the fraudulent circumstances under which the guarantees were furnished on behalf of the Indian Companies, the HDFC Bank Ltd. has neither responded to the letter of the Applicant, nor furnished inspection of the purported documents which they seek to enforce. He therefore submitted that the HDFC Bank Ltd. is acting in connivance with Respondent No. 6 and the Directors of the Indian Companies.
16. In view of the aforestated allegation, Mr. Tulzapurkar, the Learned Senior Advocate appearing for HDFC Bank Ltd. submitted that the HDFC Bank Ltd. has nothing to hide from any party and will offer inspection of documents sought by the Applicant.
17. After taking inspection of the documents, Mr. Devitre strongly contended that the Bank has accepted the position that there is no deed of pledge executed in favour of the Bank by the Indian Companies but now relies on a "lien and set off" to justify its right to sell the mutual funds of the Indian Companies. He submitted that there being no pledge of the mutual fund units in favour of the Bank, the Bank cannot sell the securities as they are purporting to do. In support of his contention that a "lien" differs from a "pledge", Mr. Devitre relied on the decisions in the case of
(i) Bank of Bihar vs. State of Bihar and others 1, (ii) Central Bank of India vs. Siriguppa Sugars and Chemicals Ltd. and others 2 and (iii) Jagjit Distilling and Allied Industries Ltd. vs. Bharat Nidhi Ltd.3. Mr. Devitre submitted that the decisions relied upon by the Respondents in this regard do not apply to the facts of the present case and 1 AIR 1971 SC 1210 2 AIR 2007 SC 2804 3 (1978) ILR Delhi 526.
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therefore ought to be rejected.
18. Mr. Devitre further submitted that in any event any alleged pledge after the order dated 9th September, 2012, is void. Mr. Devitre has relied on the decision of a Division Bench of this Court in Keshrimal Jivji Shah and another vs. Bank of Maharashtra and others4 in support of the contention that any rights purported to be created in property in breach of an order of injunction are illegal and ex facie void.
Mr. Devitre submitted that the Respondents have not only suppressed material documents from this Court but the record relied upon by the HDFC Bank Ltd. is entirely unreliable and appears to consist of documents on which signatures have been obtained in blank, to be subsequently filled in as per the Bank's convenience.
The documents furnished for inspection even otherwise suffer from various material discrepancies which would serve to vitiate them.
19. Mr. Devitre submitted that the deliberate suppression, acts of omission/commission and mismanagement on the part of the Directors of the Indian Companies under the influence of Respondent No.6 are causing irreparable prejudice to the Companies and its assets. The funds of the Indian Companies are being fraudulently misused /misappropriated for the benefit of Respondent No. 10 i.e. SPCPL without authority, thereby leaving the Indian Companies as merely shell companies with no funds or assets. The Respondents have not only defrauded the Company and its shareholders but have also blatantly disregarded the Courts 4 2004 (4) BCR 842 ::: Downloaded on - 06/01/2014 03:45:53 ::: KPP 11 CAAL-47 of 2013 directions by dealing with the assets of the Indian Companies. The Directors by their continuous conduct and actions are inter alia in total breach of their fiduciary duties towards the Companies and its shareholders. Mr. Devitre submitted that Respondent No. 6 be therefore directed by this Court to forthwith pay the dues, if any, to the HDFC Bank Ltd.
20. Mr. Devitre has submitted that the Respodnents have in their pleadings, inter alia, submitted as follows:
(i) That this Court has no jurisdiction to hear the present application;
(ii) That the Applicant "affirmed" or "acquiesced" in the acts of the Directors/Authorized Representatives on behalf of the Indian Companies or "elected" to do so by words or conduct;
(iii) The Applicants are guilty of delay/standing by/inaction after March, 2012; and
(iv) That the only remedy available to the Applicant is the removal of the Directors.
21. Mr. Devitre submitted that the contention of the Respondents that this Court has no jurisdiction to hear the present application is on the basis that according to the Respondents the Appeal of the Applicant is filed under Section 50 of the Arbitration Act. He submits that this contention is untenable. He submitted that the present application is made in the Appeal under Section 10-F of the Companies Act filed by the Applicant impugning a part of the order dated 31 st January, 2013. The contention of the Respondents overlooks the fact that the order dated 31st January, 2013, impugned in the Applicant's present Appeal, not only ::: Downloaded on - 06/01/2014 03:45:53 ::: KPP 12 CAAL-47 of 2013 rejects the application under Section 45 of the Arbitration Act but also modifies the earlier order passed in the Company Petitions under Sections 397/398 and 402/403 of the Companies Act, 1956. The Appeal filed by the present Applicant impugns the directions in the order regarding the appointment of the observer-cum-
facilitator, including on the question that the CLB has no jurisdiction to pass such orders in an application under Section 45 of the Arbitration Act. The appointment of the observer-cum-facilitator with wide powers is an order passed in exercise of powers under Sections 397-403 of the Companies Act. Thus the Appeal against the said order lies under Section 10-F of the Act since the part of the order impugned in the Appeal is passed under the aforesaid sections of the Act.
22. Mr. Devitre submitted that the Appeal Court is entitled to exercise all the powers of the CLB under Sections 397-398 and 402-403 of the Act. Under Section 402 (e), the Court is entitled to order the termination, setting aside or modification of any agreement between the Company and any person not mentioned in clause (d), provided that due notice has been given to the party concerned. Under Section 402 (g), the Court may provide for any other matter for which in the opinion of the Court it is just and equitable that provision should be made. The powers under Section 403 relating to interim orders are also very wide.
Mr. Devitre submitted that in these circumstances, no question arises as to the applicability of Section 9 of the Arbitration Act as contended, or of this Court not having jurisdiction in regard to third parties like the HDFC Bank since they are not parties to the arbitration agreement in the SSD as contended. Mr. Devitre ::: Downloaded on - 06/01/2014 03:45:53 ::: KPP 13 CAAL-47 of 2013 submitted that in the Company Petitions pending before the CLB, there is an express final prayer (prayer (e) in the above Petition) seeking the setting aside, termination or modification of agreements, dealings and transfers of any of the Company's assets/properties as may have been effected by the Company after March, 2011, as may be just and equitable in the circumstances so to do. Interim orders based on the above have also been sought, as can be seen from prayer clauses (f), (g) and (h) which include inter alia an injunction restraining the Directors from utilizing, investing or dealing with the funds, monies and securities of the Company and status quo with regard to the properties and assets of the Company, including but not limited to Bank accounts, mutual fund holdings and immovable properties. Mr. Devitre submitted that in this context, the contention of the HDFC Bank Ltd. that interim relief cannot be granted as they are not in aid of any final reliefs, is untenable. Mr. Devitre submitted that while there can be no dispute in regard to the principle in Cotton Corporation of India Limited vs. United Industrial Bank Limited and others5 , its applicability to the facts of the present case is denied. Mr. Devitre therefore submitted that this Court certainly has the jurisdiction to hear and decide the present application.
23. Mr. Devitre further submitted that the Respondents contention that the Applicant "affirmed" or "acquiesced" in the acts of the Directors/authorized representatives on behalf of the Indian Companies or "elected" to do so by words or conduct is patently untenable. He submitted that by no stretch of imagination the 5 AIR 1983 SC 1272- Para 10 pg. 1277 ::: Downloaded on - 06/01/2014 03:45:53 ::: KPP 14 CAAL-47 of 2013 Applicant's letter dated January 12, 2013 addressed to HDFC Bank can be interpreted to mean that the Applicant gave up its challenge to the Directors/Bank Signatories actions and conduct in regard to the financial dealings on behalf of the Company. He submitted that the use of the expression "authorised Bank signatories"
in the said letter is descriptive of the persons named therein and identifies them as persons whose names were maintained by the Bank as the authorized signatories.
24. Mr. Devitre also submitted that the allegation of delay/standing by/inaction after March 2012 is wholly untenable. He submitted that on 30 th October, 2012, an order was passed by Justice Walker refusing Rakesh's application to continue the injunction. By that order, the injunction earlier granted was discharged. The claim form issued on 21st March, 2012, was struck off. These orders were immediately operative. On 30th October, 2012, a draft judgment (i.e. the reasons) marked "subject to editorial corrections" was circulated in private as per the English Court practice. After the revised draft orders were exchanged, the final judgment under seal as approved by the Learned Judge was received by the Applicant on 9 th January, 2013. The final approved judgment i.e. the reasons, show changes made in the previous drafts of the judgment, after inviting comments from the parties' advocates as per the English practice. It was in these circumstances that the letter to HDFC Bank Ltd. was addressed on 12th January, 2013, after receipt of the final reasons and the finally approved judgment under seal. From March 2012 to 30 th October, 2012, the English Court injunction was operative, including restraining the removal of the Directors. The removal of the Directors was sought by the Applicant on the ::: Downloaded on - 06/01/2014 03:45:53 ::: KPP 15 CAAL-47 of 2013 basis of their conduct and actions including those highlighted in the Petition. These were the subject matter of debate in the English proceedings commenced by Rakesh Malhotra. The final reasoned approved judgment dealing with the parties contentions in this regard was received only on 9 th January, 2013 (under seal), although the operative order refusing to continue the earlier injunction was operative from 30th October, 2012. Thus the Applicant's case that it wrote to the HDFC Bank Ltd. only after receipt of the final sealed judgment is totally credible.
Mr. Devitre also submitted that the party who has prevented shareholders from reconstituting the Board of Directors cannot then allege/oppose the application on the ground that the only remedy available is their removal.
25. Mr. Devitre therefore submitted that the present application be allowed.
26. Mr. Seervai, the Learned Senior Counsel appearing for Respondent No. 10 -
SPCPL, submitted that the current proceedings arise out of a purported appeal from an order under Section 45 of the Arbitration Act. This is a statutory appeal made under Section 50 of the Arbitration Act to the Court authorised to hear appeals from the CLB under Section 10-F of the Companies Act, 1956. These proceedings are thus on the Applicant's own case governed by the Arbitration Act alone. Under the Arbitration Act, interim relief can only be granted under Section 9 of the Arbitration Act. The Court does not have the power under any other law to grant interim relief in a matter arising under the Arbitration Act. It is therefore submitted that this Court does not have jurisdiction to hear this matter and grant relief to the Applicant.::: Downloaded on - 06/01/2014 03:45:53 :::
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27. Mr. Seervai further submitted that the conduct of the Applicant in the instant case disentitles him from seeking relief. The whole objective of the Applicant is to stall the functioning of the Respondent Group Companies, especially SPCPL. It is the Applicant who through his recent conduct/correspondence has applied pressure on the Banks (including HDFC Bank) to freeze credit to SPCPL and seek repayment of the loan. Thus despite SPCPL not being in default, the Bank froze its credit facilities and demanded repayment of the loan.
28. Mr. Seervai submitted that no cause of action in the main Appeal arises against the Bank and SPCPL. The Appeal is from an order of the CLB refusing to refer a matter to arbitration in a dispute between two shareholders. The Bank is a financial institution that has provided credit facilities to SPCPL. Their only connection with the dispute is that some of the Companies in respect of whom the shareholder dispute arises pledged their assets as security for the credit facility. Mr. Seervai submitted that the shareholder cannot interfere with or impugn the validity of a transaction entered into by Directors. Mr. Seervai submitted that in the letter dated 12th January, 2013, the Applicant admits that the Directors of the Company were validly appointed and that they were duly authorised signatories of the Company. He submitted that it is well settled that a shareholder cannot sue in respect of a duty owed to the Company. If the Director has entered into a transaction with a third party within his authority, a shareholder cannot challenge the said transaction. His remedy is to remove the Director or bring a claim against ::: Downloaded on - 06/01/2014 03:45:53 ::: KPP 17 CAAL-47 of 2013 the Director at a later point of time. In support of his submission, Mr. Seervai relied on the decisions in Suburban Bank Pvt. Ltd. vs. Thariath 6, Murarka P. vs. Mohanlal7, and John Shaw vs. Peter Shaw & another8.
29. Mr. Seervai further submitted that the present application suffers from delay/laches. Mr. Seervai submitted that the Applicant's claim that he did not take any action as the matter was subjudice in the English Court cannot be accepted. The fact that the English Court proceedings were ongoing, the same did not preclude the Applicants from at least writing to the Bank. Furthermore, the English proceedings ended on 30th October, 2012, the Applicant's position is that he only received a sealed copy of the order on 9th January and therefore he could not take any action till then. This excuse is disingenuous; the Applicant moved with extreme haste and on 31st October (the day after the judgment of the English Court) changed the Board of Directors of Transauto & Mechaids Pvt. Ltd. (Respondent No. 4) without waiting for a sealed copy of the order. Similarly on 30 th November, 2012, they changed the Board of Directors of RCC Sales Pvt. Ltd. ("RCC"). Mr. Seervai submitted that though the Applicant could change the Board of Directors of these two Companies before receiving a sealed order, yet viewed non receipt of the sealed copy of the order as an impediment in writing to the Banks. Mr. Seervai submitted that the Applicant's purported excuse for the said delay is therefore no excuse at all.
6 AIR 1968 Ker. 206 7 AIR 1961 Cal. 251 8 2 (1935) KB 113 and 134 ::: Downloaded on - 06/01/2014 03:45:53 ::: KPP 18 CAAL-47 of 2013
30. Mr. Seervai next submitted that the Applicant has elected by affirmation/acquiesced to the validity of the transaction and now cannot challenge it. He submitted that the authority of the Directors to enter into the said transactions was never challenged or impugned by the Applicant. The Applicant came to know of the impugned transaction at least on 23 rd March, 2012. At no time since then has he claimed that the said transaction was ultra vires or that the Directors did not have the authority to enter into the same. Indeed the Applicant's stand was that the said transactions though validly entered into were against the interests of the shareholders. The Applicant therefore sought to remove the Directors based on the fact that they were using their power in such a manner so as to oppress the shareholders. Thus the Applicant's stand both in words and conduct, as communicated to the Respondents, has always been to treat the acts of the Directors as intra vires, though not in the interests of the shareholders. The Applicant's main grievance has been that these lawful acts of the Directors were hostile to the interests of the shareholders. This continued conduct of the Applicant constitutes an election by him to approve the authority of the Directors and affirm/acquiesce to the transaction. Their only recourse was to remove the Directors, which they failed to do. It is for the first time in their Advocate's letter of 17th June, 2013, that the Applicant has adopted the position that the acts of the Directors were without authority and the transactions were illegal. This is a new stand by the Applicant to resist the efforts of the Bank to move against the securities of the Respondent Companies. This is a complete inversion of the Applicant's position - while earlier the Directors were sought to be removed because of their ::: Downloaded on - 06/01/2014 03:45:53 ::: KPP 19 CAAL-47 of 2013 oppressive acts; the Applicant now claims that the transactions were illegal because of want of authority of the Directors. In such a situation, the Applicant must be held to his earlier election to affirm/acquiesce to the transaction and his revised claim cannot be entertained.
31. Mr. Seervai has also pointed out that in the order from which the present Appeal is filed, the CLB clearly states that all questions including the rights of the Directors to enter into such transactions are governed by the agreement to arbitrate, though the CLB has refused to refer the matter to arbitration on other grounds. Mr. Seervai submitted that these questions which are directly covered under the Shareholders Agreement must therefore be determined at the time of reference to arbitration, and determining them at this stage would tantamount to circumventing the Appeal from the order under Section 45 of the Arbitration Act.
32. Mr. Seervai lastly submitted that the balance of convenience is also in favour of the Respondents and if any relief sought by the Applicant is granted, the Respondents would be unfairly prejudiced and all lenders would recall their credit facilities to SPCPL, as a result of which the business of SPCPL would be severely prejudiced. On the other hand, the damage to the Applicant is merely monetary in nature, which can be easily recompensed. The security that has been pledged is a liquid asset in the form of mutual funds. If the Applicant ultimately succeeds either in arbitration or in the CLB, he will automatically become a creditor of SPCPL for the amount of mutual funds that have been sold by the Bank. Furthermore, if the ::: Downloaded on - 06/01/2014 03:45:53 ::: KPP 20 CAAL-47 of 2013 Directors are found to have acted in breach of their fiduciary duty, they would be liable to make good any loss of earnings resulting from premature sale of the mutual funds. The claim of the Applicant is thus a purely monetary claim that can be easily recompensed, if it ultimately succeeds. Mr. Seervai therefore submitted that no reliefs ought to be granted in favour of the Applicant and the Company Application deserves to be dismissed.
33. Mr. Virag Tulzapurkar submitted that the reliefs as sought for by the present application against HDFC Bank Ltd. are beyond the scope of the main proceedings i.e. the Appeal, and cannot and ought not to be granted by this Court. He submitted that the Applicant has misinterpreted the statutory provisions viz. Section 402 (e) of the Companies Act, 1956, in particular, with an attempt to misguide this Court and obtain favourable orders. Mr. Tulzapurkar submitted that this Court has no jurisdiction to grant the relief as sought by the Applicant by way of the Company Application against HDFC Bank Ltd. Mr. Tulzapurkar also pointed out that the documents pertaining to the grant of credit facilities and furnishing of guarantee has been executed prior to passing of the order dated 9 th February, 2012. Mr. Tulzapurkar submitted that the grant of credit facilities in favour of the principal borrower - SPCPL was conditional and the Guarantor Companies always intended to and created security over mutual fund units in favour of HDFC Bank Ltd. by marking a lien thereon, with a right to set off the same in favour of the Bank, in consideration of the credit facilities being sanctioned in favour of the principal borrower. Mr. Tulzapurkar submitted that the HDFC Bank Ltd. has not suppressed ::: Downloaded on - 06/01/2014 03:45:53 ::: KPP 21 CAAL-47 of 2013 any facts and/or documents and all documents pertaining to creation of security are duly filled, executed and complete. Mr. Tulzapurkar pointed that the Bank in exercise of the bankers general lien and its right of set off as available under the law, and as envisaged under the documents executed for the purpose of creation of security, is entitled to redeem the mutual fund units and appropriate the proceeds realized towards its outstanding dues. In support of his contention, Mr. Tulzapurkar has relied on the decision in Punjab National Bank vs. Arura Mal9 and the decision in M/s. Shivam Construction Co. Ahmedabad and ors. vs. Vijaya Bank, Ahmedabad and others10. Mr. Tulzapurkar submitted that the submission on behalf of the Applicant that the said decisions do not lend assistance to the HDFC Bank Ltd. is incorrect. Mr. Tulzapurkar submitted that in fact the judgments cited by the Applicant in no manner assist/aid the claim/stand of the Applicant in the present case.
34. Mr. Tulzapurkar next submitted that the HDFC Bank Ltd. has acted bona fide with due regard to the constitutional documents of the Guarantor Company and without notice/knowledge of the order dated 9 th February, 2012. He submitted that the Loan-cum-Guarantee Agreement dated 7 th November, 2012, was executed for the limited purpose of interchanging the limits under the credit facilities already sanctioned to the principal borrower. The total credit limits remained unchanged at Rs. 60 crores.
9 AIR 1960 Punjab 632
10 AIR 1997 Guj. 24
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KPP 22 CAAL-47 of 2013
35. Mr. Tulzapurkar further submitted that the Applicant, Veena Malhotra, Rajiv and Rakesh Malhotra have suppressed material facts and are guilty of attempting to play a collusive fraud on the Bank, the CLB, this Court as well as foreign entities. He has submitted that the Applicant is not entitled to any reliefs against HDFC Bank Ltd. in equity, on account of delay/laches, acquiescence, affirmation and dishonest conduct. He submitted that the Applicant, in the facts and circumstances of the present case, is not entitled even in law to any injunctory relief. He submitted that the findings of the Division Bench of this Court in the case of Keshrimal Jivji Shah and another vs. Bank of Maharashtra and others 11 are not applicable to the facts and circumstances of the present case. Mr. Tulzapurkar therefore submitted that the above application be dismissed.
36. I have considered the submissions advanced on behalf of the parties. I have perused the pleadings as well as the written submissions filed on behalf of the parties. I have also perused the case law cited by the learned Advocates appearing for the parties.
37. The proceedings before the CLB pertained to certain disputes between the Applicant and the other Respondents. The CLB order has been passed on an application under Section 45 of the Arbitration and Conciliation Act, 1996, seeking reference to arbitration of the proceedings before the CLB. Appeal Nos. 15-18 of 2013 have been preferred before this Court under Section 10-F of the Companies 11 2004 (3) Mh. L.J. 893 ::: Downloaded on - 06/01/2014 03:45:53 ::: KPP 23 CAAL-47 of 2013 Act, 1956, wherein a part of an order dated 31 st January, 2013, passed by the CLB, Mumbai Bench, is assailed by the Applicant. The Appeals from the CLB order are the main proceedings in which this Application has been made for interim reliefs pending the Appeal. The outcome of the Appeal will result either in reference to Arbitration under Section 45 of the Arbitration and Conciliation Act or a refusal of such reference. HDFC Bank Ltd. (Respondent No.9) was neither a party to the proceedings before the CLB nor any reliefs were sought against them before the CLB.
The claim of the Applicant that prayer clause (e) of the CLB Petition No. 13 of 2012 pertains to final relief sought against HDFC Bank Ltd. and/or prayer clauses
(f) (g) and (h) pertain to interim reliefs sought against HDFC Bank Ltd. cannot be accepted. As submitted on behalf of HDFC Bank Ltd., the reliefs as mentioned in the aforestated prayer clauses are against the Company, the Board of Directors and authorised signatories of the Company alone and/or persons purported to be acting under the express directions of Mr. Rakesh Malhotra and not against the HDFC Bank Ltd. Admittedly, the Applicant since March, 2012 had knowledge of the credit facilities advanced by HDFC Bank Ltd. in favour of the SPCPL - the principal borrower and also had knowledge of the fact that credit facilities were guaranteed by each of the guarantor Companies. However HDFC Bank Ltd. was not given notice of the proceedings before the CLB. The suggestion of the Applicant that it intended to seek any reliefs let alone final reliefs against the HDFC Bank in the CLB proceedings is therefore devoid of any merits. Again as pointed out by the Learned Senior Advocate appearing for HDFC Bank, a perusal of the prayer clause in the Memorandum of Appeal (Page 65) shows that no reliefs have been sought against ::: Downloaded on - 06/01/2014 03:45:53 ::: KPP 24 CAAL-47 of 2013 the HDFC Bank Ltd. as and by way of these Appeals. The Appeals have been filed impugning only a part of the order dated 31 st January, 2013 passed by the CLB, Mumbai Bench and are the main proceedings in which the present Application has been taken out. In Cotton Corporation of India Limited vs. United Industrial Bank Limited and others12 the Hon'ble Supreme Court after relying upon the decision of the Constitution Bench in State of Orissa vs. Madan Gopal Rungta13 has affirmed thus:
"It is indisputable that temporary injunction is granted during the pendency of the proceeding so that while granting final relief the court is not faced with a situation that the relief becomes infructuous or that during the pendency of the proceeding an unfair advantage is not taken by the party in default or against whom temporary injunction is sought. But power to grant temporary injunction was conferred in aid or as auxiliary to the final relief that may be granted. If the final relief cannot be granted in terms as prayed for, temporary reliefs in the same terms can hardly ever be granted"
The reliefs sought by way of the present Application are therefore beyond the scope of the main proceedings i.e. the Appeal, and neither in aid nor ancillary to the reliefs sought in the main proceedings and the question of granting any interim relief against the HDFC Bank Ltd. in the present Application does not arise.
38. The Applicant has submitted that the CLB under Section 402 (e) of the 12 AIR 1983 SC 1272- Para 10 pg. 1277 13 AIR 1952 SC 12 ::: Downloaded on - 06/01/2014 03:45:53 ::: KPP 25 CAAL-47 of 2013 Companies Act, 1956, is equipped to terminate, set aside or modify any agreement between the Company and any person not referred to in clause (d) (i.e. Managing Director, any other Director, Manager) after due notice to the party concerned.
However the Applicant has missed the second proviso to clause (e) viz. "provided further that no such agreement shall be modified except after obtaining the consent of the party concerned". As submitted on behalf of the HDFC Bank Ltd., the true and fair interpretation of Section 402 (e) would undoubtedly be that the CLB would only have the power to terminate, set aside, modify any agreement between the Company and a third party such as HDFC Bank Ltd., if the third party was given prior notice of the intention to terminate, set aside and/or modify the agreement and only after obtaining the consent of the third party concerned thereto. In the present case, HDFC Bank Ltd., the third party, admittedly did not even have notice of the proceedings before the CLB. Therefore, the question of the CLB setting aside or modifying any agreement entered into with each of the guarantor Companies does not even arise. In any case, an order of termination, setting aside and/or modification of the Agreement entered into between the principal borrower, guarantor companies and HDFC Bank Ltd., without hearing does not arise. Thus even if it is assumed that any final relief has been sought against HDFC Bank Ltd. in the Company Petition, the CLB could never have granted the Applicant any reliefs, interim and/or final, in terms of prayer clause (e) in the CLB Petition No. 13 of 2012 in exercise of its powers under Section 402 (e) of the Companies Act, 1956 and for the same aforestated reasons neither can this Court grant any reliefs in Appeal from an order passed by the CLB.
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39. It is also submitted on behalf of the Applicant that the HDFC Bank has acted in breach of the order passed by the CLB dated 9 th February, 2012. However, in response to an application made by SPCPL (the principal borrower), the credit facilities were sanctioned by the HDFC Bank in favour of SPCPL on 25 th January, 2012. The Indian Companies viz. Repondent No. 1 -- Vidyut Metallics Pvt. Ltd., Supermax International Pvt. Ltd., RCC (Sales) Pvt. Ltd. and Unique Properties and Securities Pvt. Ltd. passed necessary Board Resolutions on 30 th January, 2012, for the purpose of creation of security in favour of the HDFC Bank to secure the credit facilities being sanctioned to SPCPL. The Loan-cum-Guarantee Agreement was executed between the HDFC Bank, SPCPL and each of the guarantor Companies including Respondent No. 1 on 2nd February, 2012. Each of the guarantor Companies executed and handed over an Irrevocable Power of Attorney dated 2 nd February, 2012 for creating security and clearly authorizing the HDFC Bank to deal with the securities of the guarantor Companies for recovery of its dues. Since all these steps had been taken prior to the CLB passing its order dated 9 th February, 2012, the submission that HDFC Bank has acted in breach of the order passed by the CLB dated 9th February, 2012, cannot be accepted and is hereby rejected.
40. The Applicant has also alleged that HDFC Bank Ltd. has suppressed facts and has not disclosed material documents pertaining to the creation of security for each of the guarantor Companies. As pointed out by the learned Counsel appearing for the HDFC Bank Ltd., as a matter of practice, each mutual fund house provides and ::: Downloaded on - 06/01/2014 03:45:53 ::: KPP 27 CAAL-47 of 2013 uses a standard proforma letter containing blanks to be filled up for intimating the creation of lien/pledge, which blanks are then filled up with the relevant details and forwarded to the mutual fund houses. The reference to the execution of a separate deed of pledge as contained in the standard format is inapplicable in the present case. The Bank on its part also uses a standard proforma forwarding letter addressed to mutual fund houses for the purpose of forwarding the letter addressed by the party intimating creation of lien/pledge and recording therein the standard details as sought by each mutual fund house. The reference as contained therein to a separate deed of pledge is again inapplicable to the present case. The Learned Counsel appearing for the HDFC Bank has correctly submitted that the fact that each of the respective mutual fund houses have issued letters to HDFC Bank Ltd. confirming the creation of security in their favour by each of the guarantor Companies, negates all claims of the Applicant that the letters addressed were incomplete and/or bore discrepancies. The allegations therefore of HDFC Bank Ltd. having suppressed facts and not having disclosed material documents pertaining to the creation of security by each of the guarantor Companies is devoid of merit and is rejected.
41. It is submitted on behalf of the Applicants that in the admitted absence of any document of pledge executed by the guarantor Companies in favour of the HDFC Bank, the Bank is not entitled to sell the mutual funds of the Indian Companies without approaching the Court and without obtaining specific orders from the Court. As submitted by HDFC Bank, the documents issued/executed in regard to the credit facilities sanctioned to SPCPL clearly establish that the grant of credit ::: Downloaded on - 06/01/2014 03:45:53 ::: KPP 28 CAAL-47 of 2013 facilities by the HDFC Bank in favour of SPCPL was conditional, and the guarantor Companies always intended to and created securities over mutual fund units in favour of the HDFC Bank Ltd. by marking a lien thereon with a right of set off in favour of the Bank, in consideration of credit facilities being sanctioned to the principal borrower/SPCPL. This is clear from the following:
(i) As more particularly detailed in the Loan-cum-Guarantee Agreement dated 2 nd February, 2012, the grant of credit facilities not exceeding a sum of Rs. 60 crores in favour of the principal borrower/ SPCPL was conditional upon:
"(a) The Borrower and/or the Guarantor pledging/mortgaging/ charging securities satisfactorily to the Bank, in favour of the Bank.
The pledge/mortgage of the securities shall be created by the Borrower/Guarantor in the manner specified by the Bank prior to the disbursement of any advances by the Bank to the Borrower as an exclusive charge to the Bank towards repayment of the principal amount,
(b) The borrower executing a promissory note in favour of the Bank in the form indicated by the Bank;
(c) The borrower and the guarantor complying with such other conditions as may be required by the Bank".
In terms of Clause 7 of the said Agreement, it was agreed as under:
"It is agreed that the Bank will have a lien and right of set off on all moneys belonging to the Borrower and/or Guarantor standing to their credit in any account whatsoever with the Bank or in the possession or custody of the Bank. If upon demand by the Bank, the balance outstanding in the credit account is not repaid within the ::: Downloaded on - 06/01/2014 03:45:53 ::: KPP 29 CAAL-47 of 2013 prescribed time, such credit balance in any account including fixed deposit accounts and any properties of the Borrower and/or the Guarantor in the possession or custody of the Bank whether for safe keeping or otherwise, including but not limited to dematerialized shares or other securities of the borrower and/or the guarantor, held by the Bank as a depository participant may be adjusted towards dues under the overdraft account. In case of any deficit, the deficit amount may be recovered by the Bank from the borrower and/or guarantor."
The sanction letter dated 25 th January, 2012, addressed to the principal borrower also categorically recorded that the facilities were subject to the security by way of lien over own/third party Debt & equity Mutual Funds.
(ii) The Irrevocable Power of Attorney dated 2 nd February, 2012, executed by each of the guarantor Companies empowered the Bank to perform the following actions amongst others:
"1. To transfer the said securities or any of them to the name of the Bank or to the name of its nominee(s) and/or to transfer, sell, or dispose of or otherwise realize or encash the said securities or any of them and for the purposes to endorse the same or to sign and execute all transfer forms, contracts, declarations and other instruments and writings as may be necessary or expedient for the purpose and give delivery thereof...
4. To receive all consideration consequent on any sale, transfer, disposition, realization or encashment and to give proper receipts and valid and effectual discharges for the same."
The mutual fund houses were accordingly intimated of the creation of security in ::: Downloaded on - 06/01/2014 03:45:53 ::: KPP 30 CAAL-47 of 2013 favour of the Bank by each of the guarantor Companies vide their respective letters.
The HDFC Bank has therefore followed the standard procedure adopted by the Banking Industry and the mutual fund sector in relation to creation of security in respect of mutual fund units and is entitled to redeem the units.
42. The Applicant has also contended that the HDFC Bank Ltd. in exercise of its claim of lien and its right of set off, is not entitled to redeem the units/mutual funds and/or appropriate the proceeds realised towards the Banks outstanding dues, without intervention of the Court. In Punjab National Bank vs. Arura Mal 14, the Division Bench of the Punjab and Haryana High Court in dealing with the distinction between Bankers lien and Banks right of set off has observed as under:
"(13) Strictly speaking the use of the word 'lien' in relation to money--
though frequently used, is not correct. It is confined to securities and property in Bank's custody. A distinction is drawn between a Banker's lien on its clients, paper, goods and security etc. and the Bank's right to set off deposit's against debts due to it from its depositors. It may arise from the contract, or from mercantile usage or by operation of law.
Hart (Law of Banking, 3rd edition, page 810) cited with approval the following from the treatise of Morse on the American Law of Banking:
"The word 'lien' cannot properly be used in reference to the claim of the bank upon a general deposit, for the funds on general deposit are the property of the bank itself. The term 'set-off' should be applied in such cases, and 'lien' when a claim against paper or valuables on special or specific deposit is referred to. In the case the words are used very loosely .......The practical effect of lien and set-off is much the same."
14 AIR 1960 Punjab 632 ::: Downloaded on - 06/01/2014 03:45:53 ::: KPP 31 CAAL-47 of 2013 In para 390 (Volume 2, third edition page 210) Halsburry dealing with the nature of the Banker's lien, it is stated:
"The general lien of bankers is part of the law merchant as ju-
dicially recognised, and attaches to all securities deposited with them as bankers by a customer, or by a third person on a customer's account, and to money paid in by, or to the account of, a customer unless there is a contract, express or implied, inconsistent with the lien."
There is also a foot note below the above observation which reads:
"Money is however not usually the subject of lien not being coupled or being ear-marked and the banker's claim in such cases is probably more rightly referred to as set-off and it has been held that a Bank has no lien to individual's right to set off in respect of a customer's account."
(14) The rule of English law that the Bank has a lien or more appropri- ately, a right to set off against all monies of his customers in his hands has been accepted as the rule in India. According to this rule when monies are held by the Bank in one account and the depositor owes the Bank on another account, the Banker by virtue of his lien has a charge on all monies of the depositor in his hands and is at liberty to transfer the monies to whatever account, the banker may like with a view to set off or liquidate the debts: vide Llyods Bank Ltd. v. Administrator Gener- al of Burma, AIR 1934 Rang 66 and Devendrakumar Lalchandji v. Gu- labsingh, AIR 1946 Nag. 114.
.... ..... .... ....
(21) A generally accepted rule respecting a bank's right of set off was stated in 3 Ruling Case Law, 591, in the following words:
"The right of a Bank to apply a deposit to an indebtedness due from the depositor, results from the right of set-off, which ob- tains between persons occupying the relation of debtor and creditor and between whom there exist mutual demands, and ::: Downloaded on - 06/01/2014 03:45:53 ::: KPP 32 CAAL-47 of 2013 it is familiar law that mutuality is essential to the validity of a set off, and that, in order that one demand may be set off against another, both must mutually exist between the same parties".
In M/s. Shivam Construction Co. Ahmedabad and others vs. Vijaya Bank, Ahmedabad and others15, a Division Bench of the Gujarat High Court has recognized a Bank's right to exercise Banker's lien and set off. Paragraph 35 of the Judgment which affirms this position is reproduced hereunder:
"35. In the present case, it is beyond any doubt that the appellants who had enjoyed overdraft facilities on the securities of the FDRs, failed to discharge their duties and committed defaults, went on for overdrawals. Therefore, under the terms of loan as well as under the right of "set off" and also under the general banker's lien, the plaintiff Bank was empowered and entitled to transfer and appropriate even by liquidation the FDs towards their overdraft account of the defendants.
On all counts, it cannot be said even for a moment that the action of the Plaintiff Bank in liquidating the FDRs for purpose of appropriation towards bank's dues was, in any way, unjust, improper or illegal."
43. The ratio of the judgments cited by the Applicant in no manner assist/aid the claim/stand of the Applicant/Appellant in the present case. In the Bank of Bihar vs. The State of Bihar and others (supra), the matter related to the right of lien of the Pawnee Bank on the goods pledged as security in favour of the Bank in consideration of money advanced. The real issue involved was whether the claim of the Government authority which lawfully seized the goods from the custody of the 15 AIR 1997 Guj. 24 ::: Downloaded on - 06/01/2014 03:45:53 ::: KPP 33 CAAL-47 of 2013 Pawnee Bank would prevail over the claim of the Pawnee Bank in whose hands the secured goods constituted a special property with a right of lien for money advanced. In Central Bank of India vs. Siriguppa Sugars and Chemicals Ltd. and others (supra) the case involved pledge of sugar stock by a borrower in favour of a Bank as security and claims of Cane Commissioner and workman as against entitlement of the Bank, wherein the Court held that, "Both the Cane Commissioner and the workmen in the absence of a liquidation, stand only as unsecured creditors and their rights cannot prevail over the rights of the Pawnee of the goods."
44. The aforesaid judgments do not consider the right of set off and/or right of banker's lien and its implications, but are concerned with bailment of goods as a security in favour of the Pawnee bank and the prevalence of claim of a Pawnee as against an unsecured creditor. The same are thus wholly inapplicable to the facts and circumstances of the present case. The contention of the Applicant that the Bank is required to obtain orders of an appropriate court or forum to exercise its right of lien/set off in the present case therefore cannot be accepted. The documents executed by the guarantor Companies expressly authorize the HDFC Bank Ltd. to redeem the units secured to the Bank and recover and/or appropriate the proceeds realized towards the Bank's outstanding dues without intervention of the Court.
Thus, HDFC Bank Ltd. is correct in its submission that in exercise of the Banker's general lien and its right of set off as available under the law and as envisaged under the documents executed for the purposes of creation of security, the Bank is entitled to redeem the mutual fund units and appropriate the proceeds realized towards its ::: Downloaded on - 06/01/2014 03:45:53 ::: KPP 34 CAAL-47 of 2013 outstanding dues.
45. It is also submitted on behalf of the Applicant that from a perusal of the Loan-
cum-Guarantee Agreement dated 7th November, 2012, it is clear that the said Agreement drastically altered the arrangement between the HDFC Bank and SPCPL.
As such the Indian Companies were being called upon to assume liabilities as guarantors in respect of what was essentially a new and altered facility. Apart from the fact that admittedly the HDFC Bank was not a party to any of the Company Petitions filed before the CLB by the Applicant, as well as the Company Applications taken out therein, and the Bank was indisputably unaware of the order dated 9 th February, 2012 passed by the CLB, till 12 th July, 2013, the Loan-cum-Guarantee Agreement dated 7th November, 2012 was executed for the limited purpose of interchanging the limits under the credit facilities already sanctioned by the HDFC Bank to the principal borrower - SPCPL, the total credit limits remained unchanged at Rs. 60 crores, as is clear from the table hereunder:
Sr. No. Facility Original Limits- Change Limits - 7th
2nd Feb. 2012 (Rs. Nov. 2012 (Rs. In
In crores) crores)
1. Overdraft 20.00 35.00
2 LC/BC 40.00 25.00
Total 60.00 60.00
As the Loan-cum-Guarantee Agreement was only entered for the purpose of interchangeability no further security was given by the guarantor Companies either.
The allegations therefore advanced on behalf of the Applicant that the arrangement between the HDFC Bank and the principal borrower - SPCPL was drastically altered ::: Downloaded on - 06/01/2014 03:45:53 ::: KPP 35 CAAL-47 of 2013 and/or that the facilities granted under the Loan-cum-Guarantee Agreement dated 2nd February, 2012, were superseded and that the obligations assumed on behalf of the guarantor Companies stood discharged and/or came to an end are untenable and therefore rejected.
46. The Applicant has questioned the bona fides of HDFC Bank Ltd. in advancing credit facilities on the basis of the guarantee and securities furnished by each of the guarantor Companies. The Applicant has also alleged that the HDFC Bank Ltd. has colluded with Respondent No.6 and the Directors of the guarantor Companies. As correctly submitted on behalf of the HDFC Bank, the said allegations are devoid of any merit. By virtue of the Articles of Association of each of the guarantor Companies, the management of the business of each of the guarantor Companies is vested in the Board of Directors who are entitled to exercise all such powers and do all such acts and things as each of the respective Companies were authorized to exercise or do under its Memorandum of Association or otherwise. The Memorandum of Association of each of the guarantor Companies in its objects incidental to the main object permitted the Company to become and/or act as sureties and/or guarantors for any purpose. In fact, the Directors of each of the guarantor Companies at their discretion are also empowered to borrow and secure repayment of any sum or sums of money for the purpose of the Company and the borrowings could exceed the paid up capital of the Company and its free reserves.
The Bank was not a party to the CLB proceedings. The Bank admittedly had no knowledge of the CLB Order dated 9 th February 2012 till 12th January 2013.
::: Downloaded on - 06/01/2014 03:45:53 :::KPP 36 CAAL-47 of 2013 Admittedly, the order dated 9 th February, 2012 was brought to the knowledge of the Bank for the first time vide a letter dated 12 th January, 2013, addressed by Mr. Ranjit Kumar Malhotra (Exhibit-D to the Company Application page 43 onwards) i.e. after a gap of almost one year since it was passed. The Bank granted credit under the facilities prior to 12th January, 2013. Thus any dispute between each of the guarantor Companies and its members were issues pertaining to the indoor management of the Company and the Bank being a third party cannot and ought not to suffer for the same. The doctrine of indoor management is thus squarely applicable to the facts and circumstances of the present case. In any case, the guarantor Companies are separate legal entities independent of its members. The Applicant being a shareholder has no locus and right to challenge the authorized and legal acts of the Board of Directors for and on behalf of the Company. The mutual fund units secured in favour of the Bank belong to the Companies and the Applicant has no right or interest therein. Therefore, in my view, the HDFC Bank Ltd. has acted bona fide, with due regard to the constitutional documents of the guarantor Company and without notice/knowledge of the order dated 9 th February, 2012.
47. The Learned Senior Advocates appearing for the Respondents including the HDFC Bank Ltd. have submitted that the Applicant is not entitled to any relief in equity on account of delay/laches, acquiescence, affirmation, and conduct on the part of the Applicant. The Applicant of course has vehemently denied and disputed the same.
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48. Admittedly and as is expressly clear from a perusal of paragraph 11 of the Company Application, RKM, Rajiv Malhotra/Veena Malhotra being the 100% shareholders of the Applicant/Appellant were aware of the fact that each of the guarantor Companies had stood as guarantors in respect of credit facilities sanctioned to the principal borrower for a sum of Rs. 60 crores by HDFC Bank Ltd.
They were further aware of the execution and contents of the Loan -cum-Guarantee Agreement dated 2nd February, 2012 as well. They became so aware in the English Court proceedings on 23rd March, 2012. Admittedly the documents disclosed by Respondent No. 6 included the Loan Agreement-cum-Guarantee which according to the Applicant was undated and contained several blanks; and the sanction letters dated 24th and 25th January, 2012.
49. Despite such knowledge the Applicant not only maintained stoic silence pertaining to the said documents, but the order passed by the CLB on 9 th February, 2012, was indisputably communicated to the Bank for the first time after a gap of almost a year vide the Applicant's letter dated 12 th January, 2013, without any just and plausible reason and/or explanation whatsoever. Further, no steps whatsoever have been taken to intimate the mutual fund house of the order dated 9 th February, 2012 either. Vide letter dated 12th January, 2013, the Applicant confirmed that the persons who executed the security documents for and on behalf of the guarantor Companies in favour of the Bank were the duly authorized Directors and/or authorized signatories of each of the guarantor Companies. The Bank was merely informed that the shareholders were in the process of changing the constitution of ::: Downloaded on - 06/01/2014 03:45:53 ::: KPP 38 CAAL-47 of 2013 the Board of Directors of each of the guarantor Companies.
50. Significantly, no claim whatsoever was made vide letter dated 12 th January, 2013, to allege that the Directors of each of the guarantor Companies furnished the guarantee on behalf of the principal borrower without authority, and/or any fraud was played on the shareholders of the guarantor Companies, and/or that the Directors acted at the instance of Rakesh Malhotra, or that the documents executed were undated or incomplete as is sought to be made out now. In fact, being fully aware that the term of the credit facilities sanctioned by the Bank in favour of the principal borrower vide their letter dated 25 th January, 2012, was for a period of 12 months which expired in January, 2013, the Bank vide letter dated 12th January, 2013, was merely requested not to entertain any application/proposal by the old Directors/authorized signatories for extending the guarantees given by them. The aforesaid clearly constituted an affirmation as to the validity and binding nature of the entire transaction between the Bank, principal borrower and each of the guarantor Companies, including the guarantee furnished by each of the guarantor Companies by creation of security on the mutual fund units. The aforesaid clearly establishes delay/laches and more importantly acquiescence on the part of the Applicant in the grant of credit for and the creation of security to the extent of the grant in the Bank's favour. The Applicant by his conduct also ought to be deemed to have elected to recognize the validity of the aforesaid transaction. It is only when the Bank addressed a demand notice dated 31 st May, 2013, seeking payment of its outstanding dues of Rs. 38,78,02,503.18 together with further interest thereon at ::: Downloaded on - 06/01/2014 03:45:53 ::: KPP 39 CAAL-47 of 2013 the rate of 12.60 per cent per annum along with penal interest at the rate of 2 per cent per annum from 29th May, 2013, till the date of full and final payment and/or realization, a copy of which notice was also marked to each of the guarantor Companies that in an attempt to resile from contractual obligations and a false case of the Directors of each of the guarantor Companies allegedly acting without authority and/or fraud being played on the shareholders of each of the guarantor Companies was made out, as and by way of an afterthought through letter dated 17th June, 2013, addressed by the Advocates for the Applicant to the Advocates for the HDFC Bank Ltd. Pertinently, the said letter was addressed after a gap of one year and three months since aquiring knowledge of the entire transaction involving the Bank, the principal borrower and each of the guarantor Companies, and only when the parties were put to notice that the Bank would take appropriate action for recovery of its outstanding dues. Thus, the Applicant is not entitled to any reliefs under equity in view of his own aforestated conduct. As correctly submitted by Mr. Seervai, the Learned Senior Advocate appearing for Respondent No. 10, the Applicant's purported excuse for the said delay cannot be accepted. The Applicant's claim that he did not take any action as the matter was subjudice in the English Court is untenable since the English proceedings would in no way preclude the Applicant from at least writing to the Bank. Again, the English proceedings ended on 30th October,2012. According to the Applicant, he only received a sealed copy of the order on 9th January and therefore he could not take any action till then. As correctly submitted by Mr. Seervai, surprisingly the Applicant could change the Board of Directors of two of the Companies before receiving the sealed order; yet ::: Downloaded on - 06/01/2014 03:45:53 ::: KPP 40 CAAL-47 of 2013 viewed it as an impediment in writing to the Banks.
51. The findings of the Division Bench of this Court in the case of Keshrimal Jivji Shah and another vs. Bank of Maharashtra and others 16 does not assist the Applicant in the facts and circumstances of the present case in view of the following reasons submitted by the HDFC Bank Ltd.:
(i) In the aforesaid case, the Court came to the aid of a Bank behind whose back the principal borrower assigned leasehold rights to an immovable property vide a registered document in favour of a third party in defiance/breach of an order of injunction. The bank on its part had no knowledge of any such transaction and/or dealing between the principal borrower and third party and the original title deeds pertaining to the immovable property were in the custody of the Bank. The conduct of the borrower was further worthy of criticism as none appeared for the borrower throughout the course of the proceedings. The third party on its part did not place any material on record to disclose the steps it had taken as a prudent transferee to ascertain facts about pendency of proceedings or encumbrances over property, the matter relating to an immovable property. It is in the aforesaid background that the court held that parties cannot be permitted to take advantage of their own wrong and passed the aforesaid order.
(ii) As opposed to the aforesaid, in the facts of the present case, RKM/Veena
16 2004 (3) Mh. L.J. 893
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Malhotra/Rajiv Malhotra viz. the Applicant on whose behest the order dated 9 th February, 2012, was passed, admittedly learnt of the grant of credit facilities by HDFC Bank Ltd. in favour of the principal borrower and creation of security by each of the guarantor Companies as early as in March 2012 itself. No steps were taken by them to communicate the order to the mutual fund house and/or the Bank. No plausible explanation has been provided for the same.
(iii) The Bank on its part was unaware of the order dated 9 th February, 2012. The order was admittedly communicated to the Bank for the first time only in January, 2013 i.e. after a gap of almost one year and even then the transaction was affirmed and not in the least disputed by the Applicant. No plausible explanation has been provided for not communicating the order dated 9 th February, 2012, to the Bank on an earlier occasion either. It is only when the Bank initiated steps for recovery of its dues by issuing the demand notice that the present false claim of the Directors of the guarantor Companies acting without authority and/or fraud being played on the shareholders was made out. Thus the Applicant/Appellant allowed this situation to arise. Now he cannot urge to the contrary.
(iv) The Bank has acted bona fide with due regard to the constitutional documents of the guarantor Companies. The Bank has acquired rights for valuable consideration bona fide and without notice of any order/fetter upon it. The present matter relates to movable property and the Bank in no manner could have had notice of the disputes between the Applicant/Appellant and the other Respondents, ::: Downloaded on - 06/01/2014 03:45:53 ::: KPP 42 CAAL-47 of 2013 much less the passing of any order without direct communication.
(v) The Applicant on the other hand is guilty of delay, laches, acquiescence and affirmation. The entire transaction has even been affirmed by the Applicant with full knowledge thereof and has not been disputed, till after the time the Bank issued demand notice for recovery of its lawful dues.
52. Under the aforesaid circumstances and without finding the necessity to advert to the remaining submissions canvassed by Respondent Nos. 9 and 10, I am of the view that the conduct of the Applicant merits no relief. The balance of convenience is heavily in favour of the Bank in the present case. Irretrievable injustice will be caused to the HDFC Bank Ltd. if any reliefs are granted in favour of the Applicant.
The Company Application is therefore dismissed.
(S.J. KATHAWALLA, J.) ::: Downloaded on - 06/01/2014 03:45:53 :::