Company Law Board
V. Sundararajan And Anr. And R. ... vs R.R. Spinning Mills Ltd. And Ors. on 12 February, 1998
Equivalent citations: [1999]98COMPCAS105(CLB)
ORDER
1. Two groups of shareholders, each group holding about 22 per cent, shares in R. R. Spinning Mills (P.) Ltd., filed two separate petitions, namely, C. P. No. 25 of 1995 on June 14, 1995, and an unnumbered petition dealt with in File No. 5/8/97-CLB (PB) dated February 7, 1997, alleging acts of oppression and mismanagement in the affairs of R. S. Spinning Mills Private Limited. While in C. P. No. 25, one of the prayers itself was that in view of the strained relationship between the parties, respondents Nos. 2 and 3 should be ordered to purchase the shares held by the petitioners in that petition at the market value to be arrived at by the auditors or any other independent valuer, in the second petition, the prayer was that the second and third respondents should be ordered to sell their shares to the petitioners in that petition.
2. When both the petitions were taken up for consideration on February 12, 1997, the petitioners in both the petitions expressed their desire to put an end to the disputes by selling their shares constituting roughly 44 per cent, collectively in the company to the respondents' group at the fair value to be determined by a valuer appointed by the Company Law Board. The respondents were also agreeable to this proposition. Accordingly, we recorded an order on that day to that effect, stipulating therein that till the valuation report was received by us, the proposed rights issue shall not be made. On February 13, 1997, we recorded an order appointing one Shri Rudra Kumar, chartered accountant, Madras, to value the shares of the company.
3. The valuer submitted his report valuing the shares of the company at Rs. 885 per share as on March 31, 1995, and Rs. 862 per share as on March 31, 1997. Two valuations were made in view of two petitions filed, one in 1995, and another in 1997. When the valuation report was considered in the hearing on December 19, 1997, counsel for the petitioners submitted that the value computed by the valuer was much lower than the price of the share that had been offered by some outsiders and, therefore, they were reluctant to accept the valuation report. In the alternative they sought for permission to sell their shares to non-members of the company at a higher price offered. However, since there were two valuations on two different dates, we suggested to both the parties to consider the value per share at Rs. 873 and indicate their willingness to accept that price. They were required to report on the same on January 9, 1998.
4. On January 9, 1998, the petitioners submitted an application for withdrawal of the petitions, the prayer for which was objected to by the respondents. Counsel for the petitioners, Shri Subba Reddy, submitted that in view of certain developments that have taken place recently, the petitioners did not wish to pursue the petitions and as such they would like to withdraw the same. The main reason adduced by him in this regard was that the shareholders of the company are closely related. While respondents Nos. 2 and 3 against whom allegations have been made, were together all along, recently, respondent No. 2 has decided, to keep peace in the family, to join the petitioners group. Together with the shareholding of respondent No. 2, the petitioners' group will now become a majority in the company and as such they do not wish to part with their shares. He submitted, that, the consent given by the petitioners for selling their shares on February 12, 1997, cannot bind them inasmuch as it was only a proposal for appointment of a valuer and not a final compromise. The question of binding the petitioners to the order dated February 12, 1997, would arise only when a firm price had been agreed between the parties. The valuation was only for guidance. It was submitted, even after the receipt of the valuation report, the parties had been given the liberty on December 19, 1997, to react to the proposal of fixing the price per share at Rs. 873. In other words, according to him, there was no binding agreement between the parties which had been recorded in any of the orders of the Company Law Board. He submitted that as per Order 23, Rule 1, a plaintiff has an unqualified right to withdraw from a suit and once such a prayer is made, the court is bound to allow such withdrawal. The maximum the court could order is payment of cost, but it cannot refuse permission for withdrawal. For this proposition, he relied on Hulas Raj Baij Nath v. Firm K.B. Bass and Co., AIR 1968 SC 111; Shaik Hussain and Sons v. M. G. Kanniah, AIR 1981 SC 1725; Konkan Trading Co. v. Suresh Govind Kamat Tarkar, AIR 1986 SC 1009 and Teja Singh v. Union Territory of Chandigarh, AIR 1982 Punj 169 [FB]. He also submitted that since there has been no finality in the terms of compromise recorded in the order dated February 12, 1997, the petitioners are at liberty to withdraw the petitions as decided in Jayawant Raj v. Choksi and Co. [1997] 2 SCC 518, according to which a dispute not finally having been resolved and compromise being contingent, there is no finality. Therefore, he submitted that the petitioners are at liberty to withdraw the petitions since no final order stipulating the terms of sale of shares has been passed by the Company Law Board. He further submitted, that, the order dated February 12, 1997, only indicates that the respondents' group would purchase the shares. Now, respondent No. 2 has filed an affidavit that he has not authorised respondent No. 3 to agree for the purchase of shares and, therefore, even the order dated February 12, 1997, cannot be implemented even if it is binding on the petitioners. He also submitted that respondent No. 2 has no objection to dismissal of the petitions as withdrawn. Under these circumstances he submitted that the prayer for withdrawal should be allowed.
5. Shri Seshadri, appearing on behalf of respondent No. 3 submitted, that, by the order dated February 12, 1997, the respondents have become entitled to purchase the shares and now the petitioners cannot be allowed to withdraw the petitions. In other words, a right has accrued to the respondents to purchase the shares and they are also prepared to accept the price of Rs. 873 per share as suggested in the Company Law Board order dated December 19, 1997. Further, he submitted, that the principle behind Rule 1 of Order 23 of the Code is rested on public policy. Once the petitioners have filed the petition and they had also agreed for settlement of the dispute, they cannot be allowed now to withdraw the petitions.
6. Referring to regulation 38 of the Company Law Board Regulations and also to Order 23, Rule 1(3), Shri Seshadri submitted that leave of the Company Law Board is necessary before the petitions are withdrawn and in view of the fact that the compromise terms had already been recorded in the order dated February 12, 1997, the Company Law Board should not grant leave for withdrawal of the petition. Since as per Section 10E of the Companies Act, the Code of Civil Procedure is applicable to the Company Law Board, the spirit of Order 23, Rule 1(3) should be adhered to by the Company Law Board. He relied on the following case law to substantiate his arguments :
(i) Sarguja Transport Services v. State Transport Appellate Tribunal, AIR 1987 SC 88 : The principle underlying Order 23, Rule 1 is rested on public policy. The principle should be extended in the interest of administration of justice to cases of withdrawal of writ petitions also, not on the ground of res judicata but on the ground of public policy.
(ii) Tukaram Mahadu Tandal v. Ramchandra Mahadu Tandal, AIR 1925 Bom 425 : When in a partition suit, a defendant has, by a compromise with the plaintiff, acquired rights which otherwise could not have existed, it is not open to the plaintiff who has consented to the compromise afterwards to annul its effect by withdrawing the suit.
(iii) Satyabamabai v. Ganesh Balkrishna [1905] ILR 29 Bom. 13 : When in a partition suit, defendants have by concessions of the plaintiff acquired rights which otherwise could not have existed, it is not open to the plaintiff, who has made that concession afterwards to annul its effect by withdrawing from the suit in the appellate court.
(iv) Ramamurthi Aiyar v. Raja V. Rajeswara Rao, AIR 1973 SC 643 : If any vested right comes into existence before the prayer for withdrawal is made under Order 23, Rule 1, the court is not bound to allow withdrawal. As soon as the shareholder applies for leave to buy at a valuation, the share of the party asking for the same under Section 3 of the Partition Act, he obtains an advantage in that, the court is bound thereafter to order for valuation and after getting the same done to offer to sell the same to such shareholder at the valuation so made. The plaintiff cannot be allowed to withdraw the suit after the defendant has gained or acquired the advantage or privilege of buying the share of the plaintiff in accordance with the approvals of Section 3(1).
(vi) Anupriya Services Pvt. Ltd. v. SBI (CS No. 1200 of 1993 (unreported case of the Madras High Court)): When the parties had agreed that one would sell the shares to another and the High Court appointed a valuer to value the shares, on receipt of the valuation report, the court directed the company to rectify the register of members in case the transferor petitioner failed to execute the necessary transfer forms.
We have considered the arguments of counsel. As far as withdrawal of a petition filed under Section 397/398 is concerned, as per regulation 38 of the Company Law Board Regulations, the same shall not be withdrawn without the leave of the Company Law Board. The discretion is with the Company Law Board whether to allow such withdrawal or not. The Company Law Board is always guided in this regard, by the allegations contained in the petition. If the allegations are such that if established they would be against the interests of the company or public interest, then the Company Law Board may not, in the normal course allow such withdrawal. However, if the allegations are only relating to oppression of shareholders, without in any way affecting the interests of the company or public interest, then the Company Law Board may not stand in the way of withdrawal of the petition. In the present case, in both the petitions, there are no substantial allegations relating to either the interests of the company or public interest. Lack of confidence amongst the shareholders is found to have been the basis for these petitions. Therefore, as far as the prayer for withdrawal is concerned we do not find any compelling reason to reject the same.
7. The contention of Shri Seshadri, that Order 23, Rule 1 rested on public policy, the observation of the court to that effect related to suits filed after having been withdrawn earlier without leave to file a fresh suit. In the present case the petitioners desire withdrawal unconditionally. Therefore, we are in agreement with the submission of Shri Reddy in this regard on the scope of Order 23, Rule 1, even though the provisions of the Code are not applicable to the proceedings before the Company Law Board.
8. Shri Seshadri, argued to state, citing some cases, that the consent order recorded on February 12, 1997, had vested the right to purchase the shares held by the petitioner by the respondents and as such the petitions cannot be allowed to be withdrawn. Whether any vested right has been created in the respondents has to be examined with reference to the order made by us on February 12, 1997. The said order is reproduced below :
"The petitioners in the instant petition holding 22 per cent, shares in the company as well as the petitioner in another petition filed with the Company Law Board, Principal Bench on February 7, 1997, holding further 22 per cent, are agreeable to sell their shares to the respondent group at the fair value to be determined by a valuer appointed by us. The respondents are agreeable to this proposition. In view of the general agreement among the parties, we shall appoint a valuer in the next few days . . ."
9. In addition to the above order, we also recorded another order on February 13, 1997, appointing R. Rudra Kumar, as the valuer to value the shares. The second para, of that order reads as follows :
"On receipt of the valuation report, the matter will be heard on a date to be intimated later."
From the above orders, we have to examine whether any vested right has been created in favour of the respondents to purchase the shares and whether the said consent order is an implementable one. As far as creation of a vested right is concerned, Shri Seshadri relied on certain cases which we have already elaborated earlier. A perusal of all these cases would show that the matter dealt with in those cases related to partition matters and the courts were considering Sections 2 and 3 of the Partition Act. In Ramamurthi Aiyar v. Raja V. Rajeswara Rao, AIR 1973 SC 643, 650, the Supreme Court held "As soon as a shareholder applies for leave to buy at a valuation, the share of the party asking for a sale under Section 3 of the Partition Act, he obtains an advantage in that the court is bound thereafter to order a valuation and after getting the same done to offer to sell the same to such a shareholder at the valuation so made. This advantage which may or may not fulfil the juridical meaning of right is nevertheless a privilege or a benefit which the law confers on the shareholder. If the plaintiff is allowed to withdraw the suit after the defendant has gained or acquired advantage or the privilege of buying the share of the plaintiff in accordance with provisions of Section 3(1) it would only enable the plaintiff to defeat the purpose of Section 3(1) and also to deprive the defendant of the above option or privilege which he has obtained by the plaintiff initially requesting the court to sell the property under Section 2 instead of partitioning it". Therefore in this particular case, when application was made under Order 23 for withdrawal of the suit, the same was refused. Similar is the position in the other cases cited by Shri Seshadri in this regard.
10. The petitions before us have been filed under Section 397/398 of the Companies Act. As per Section 397(2) of the Companies Act, the Company Law Board may, with a view to bringing to an end the matters complained of, make such order as it thinks fit. Section 402 of the Companies Act also empowers the Company Law Board to order the purchase of the shares or interest of any members of the company by other members. The petitioners in both these petitions originally expressed their desire, with a view to end the disputes, to sell the shares to the respondent at a valuation to be made by a valuer. In the cases cited by Shri Seshadri, which related to partition matters, parties had some interests/share in the properties in dispute and when one agreed to transfer his interest/share in that property to another then the courts have held that it created a vested interest. However, in the present case, the respondents do not have any interest in the shares held by the petitioners. The shares of the petitioners wholly belong to them. Therefore, their consent to sell their shares to the respondents, in our view, does not create any vested interest in the respondents. Therefore, this argument fails.
11. Now, the only issue for our consideration is whether, after a consent order has been recorded, the petitions can be allowed to be withdrawn. A reading of the orders dated February 12, 1997, and February 13, 1997, would indicate there has been no finality in that order. The second para, of our order dated February 13, 1997, makes it clear that the matter would be considered after receipt of the valuation report. A consent order becomes final when all terms including the price per share, the terms of payment, etc., have been specifically incorporated. In the present case, there were two valuations and as a matter of fact we suggested a particular price on which the parties were to react. Before the firm price was agreed upon, the petitioners have filed an application for withdrawal of the petitions. Further, one of the respondents has made a statement that he had not authorised anyone to agree for the purchase of the shares held by the petitioners. In view of the fact that no firm price or terms of payment have been agreed upon and that one of the respondents has expressly denied to have been a party to the consent terms, we find that the consent terms recorded are not implementable. In other words, there has been no binding consent terms that has been recorded by us. Shri Seshadri submitted that in case the second respondent is not agreeable to purchase the shares, the third respondent is prepared to purchase all the shares, which we feel would be contrary to the consent terms. The unreported case of the Madras High Court relied on by Shri Seshadri does not deal with withdrawal of a case after compromise terms were recorded. In that case the court ordered sale of shares at a particular price when there was a dispute on the share price. This was done after the court found that certain terms of consent had already been acted upon. Therefore, this case is not of any relevance to the present case, before us. Further, as we have already pointed out, the basic principle underlying Section 397/398 of the Act is that our order should put an end to the matters complained of. Withdrawal of the petitions means that the petitioners have no grievance against the affairs of the company and as such there is nothing that survives for us to proceed with, especially, when the withdrawal is unconditional without seeking any liberty to file a fresh petition.
12. Therefore, considering the facts that the consent terms are not final and implementable and that it has not created any vested right in respondent No. 3 and that respondent No. 2 who disowned the consent terms as not being a party to the same has no objection to the prayer for withdrawal, and that the petitioners seek to withdraw the petition unconditionally and that the petitions do not contain any allegations relating to the interests of the company or public interest, we allow the prayer of the petitioners to withdraw the petitions and dismiss these petitions as withdrawn without any liberty to reagitate the matter. In the facts and circumstances of the case, we also order that the petitioners in both the petitions shall pay a sum of Rs. 5,000 as costs for each petition which will be credited to the Legal Aid Cell of the Madras High Court within ten days from the date of receipt of this order and they will file an affidavit to this effect within further 10 days.