Company Law Board
Kaikhosrou K. Framji vs Consulting Engineering Services ... on 23 January, 2002
Equivalent citations: [2002]110COMPCAS482(CLB)
ORDER
S. Balasubramanian, Vice Chairman
1. With the main allegation that the respondent company has proposed passing a special resolution to enable the board of directors to allot 12,413 further shares at par to the existing shareholders who are in whole-time employment of the company and to a company under the same management, which would be against the interest of the petitioner who is even though a shareholder is not an employee of the company, the petitioner has sought for a declaration that the said special resolution proposed to be passed is illegal and null and void.
2. When this petition was taken up for hearing on 31-12-1997, this Bench passed an order directing the company not to give effect to the resolution, if passed, till the disposal of the petition. Thereafter, in a hearing held on 10-3-1998, this Bench suggested to the parties to explore the possibilities of a settlement. After hearing the counsel for the parties on 15-4-1998, this Bench passed an order on 28-5-1998 as follows :
"When the petition was taken up for hearing on 15-4-1998, it was suggested to both the parties to arrive at an overall settlement not only with regard to respondent-company but also regarding other two companies, namely, Consulting Engineering Services Investment and Management Company Limited (CESIMC) and Consulting Engineering Services Water Resources Development Management Company (CESWRDMC). In deference to this proposal, the petitioners have agreed (duly signed by them and taken on record) to sell their shares in all the three companies and the respondents have agreed to purchase the petitioners' shares at a fair value to be determined by M/s. Price Waterhouse and Company (PW). The terms of the agreement are set out below :
1. The petitioners and the respondent would make a joint request to PW to arrive at the fair value of the shares of the above-mentioned companies. Both the parties would have an opportunity to be heard by PW before the final report is given by them.
2. The parties have agreed that the valuation shall be made on the following alternative basis:
(a) That the petitioner holds 14.5 per cent of share capital of CES, 24.7 per cent of the share capital of CESIM and 25 per cent of the share capital of CESWRDMC and
(b) That the petitioner holds 10.63 per cent of the share capital of CES present per cent of the share capital of CESIM and 25 per cent of the share capital of CESWRDMC.
3. The valuation of the shares of CESIM shall be made on the following two alternative basis:
(a) On the footing that the transfer of shares held by CESIM in CES after 1994 did not take place.
(b) By giving effect to the said transfer of shares held by CESIM in CES.
4. Parties will be entitled to make submissions to CLB on the valuation and also which of the alternative basis of valuation should be adopted and CLB shall decide the same.
5. Respondents undertake not to raise any objection to the effect that no petitions against CESIM or CESWRDMC or any other technical objections whatsoever which was counter to the intent of this settlement.
6. Respondent undertake to make available to PW all the information, particulars and records which may be required for the purpose of valuation.
7. PW shall be entitled to avail of the services of other expert valuers for valuation of the properties of the companies.
8. PW would give their report within six weeks from the date of request for the same. The cost of the valuation would be borne equally by both the parties.
In accordance with the above agreed terms and in order to facilitate the parties to come to a final settlement, we adjourn the case to 5-8-1998 at 4.00 p.m. when the parties can make their submissions as per clause 4 above."
3. After passing of this order, in the hearing held on 16-11 -1998, the parties agreed that S.R. Batliboi & Co. be appointed to value the shares and accordingly an order was passed on 16-11-1998 appointing the said firm to value the shares. S.R. Batliboi & Co., filed a report by a letter dated 5-4-2000 whereafter both the parties were given the opportunity to react on the report. Both the parties raised various objections on the valuation and thus have sought for rejection of the valuation report. While doing so, the petitioners have sought for appointment of another valuer and the respondents have sought for dismissal of the petition as not maintainable.
4. In the hearing held on 18-9-2001, Shri Rajiv Sawhney, Sr. Advocate for the petitioner submitted that since both the parties had agreed that the shares held by the petitioner would be purchased by the respondents and since both the sides have rejected the valuation report of S.R. Batliboi & Co., to put an end to the disputes and in terms of the consent order dated 28-5-1998 which is binding on the parties, a fresh valuation be ordered by the CLB. He pointed out that the stand of the respondents that there is no binding consent order is not correct. He also submitted that the present plea of the respondents that the petition is not maintainable can also not be accepted in as much as in the consent order it has been very specifically stated in Clause 5 that the respondents have undertaken not to raise any objection to the effect that no petition against CESIMC or CESWRDMC or any other technical objection whatsoever which was counter to the intent of this settlement. Having undertaken not to raise any objection, the respondents cannot now raise the issue of maintainability. Further, the object of the provisions of Section 397/398 is to put an end to the disputes and the CLB has powers under Section 402 to direct purchase of shares held by one group to the other. Referring to the application dated 18-8-2000 filed by the respondents, he pointed out that in this application, they have not raised the issue of maintainability nor have taken a stand that there was no binding consent. He further pointed out that the petitioner had given a draft order which was modified by the CLB in the presence of the counsel from both sides, In Clause 4 of that order, the parties were to only make submissions on the valuation and also suggest the alternative basis of valuation to be adopted and the CLB would decide the same. In other words, he pointed out, that now it is for the CLB to decide the value of the shares on the basis of the valuation report. However, since both the sides have raised objection on the valuation, the CLB could appoint another valuer. The question of getting into the merits of the petition at this stage as claimed by the respondents does not arise. He also pointed out that in view of the consent order, the petitioner has not chosen to file any amendment to the petition after having come to know of certain transfer of shares. Further, he pointed out that the consent order dated 5-8-1998 had practically disposed of the petition and the only issue to be determined is valuation of the shares. Having agreed to purchase the shares of the petitioner in all the 3 companies and after the valuation has been completed, the respondents cannot ask for reopening the entire matter. In view of the consent order they are estopped from seeking hearing of the petition on merits, especially after having participated in the valuation and having waited for 4 long years. Referring to Prasun Roy v. Calcutta Metropolitan Development Authority 1987 4 SCC 217, he pointed out that long participation and acquiescence preclude such a parly from contending that the proceedings were without jurisdiction. He also referred to the judgment of Gauhati High Court in Subhash Mohan Dev v. Santosh Mohan Dev 2000 1 CLC 115 he pointed out that when a challenge was made on the consent order passed by the CLB, the High Court held that once a consent order is passed, it operates as an estoppel and cannot be challenged. On the same proposition, he also referred to Chand Mall Pincha v. Hathi Mall Pincha [1998] Comp. Cas. 368. He further submitted, referring to Katikara Chintamani Dora v. Guatreddi Annamanaidu AIR 1974 SC 1069 that in terms of Order 23 Rule 3 of the Code, the court cannot only permit compromise and adjustment of a suit by a lawful agreement, it also gives a mandate to the court to record it and pass a decree in terms of such compromise and the decree being a consent decree, the same is not appealable because of the express bar in Section 96(3) as this section is based on the broad principle of estoppel.
5. He, therefore, pointed out that the settled law in respect of a consent order is that the parties are estopped from challenging the same on any ground including the maintainability of the petition. Therefore, he submitted that the CLB should appoint a fresh valuer to determine the fair value of the shares of all the 3 companies so that in terms of the consent order, the petitioner would go out of all the 3 companies on receipt of fair consideration for his shares.
6. Shri U.K. Chaudhary, Sr. Counsel appearing for the respondents submitted that the petition itself is not maintainable as no material has been placed before this Bench to come to the conclusion that just and equitable grounds exist for winding up of the company. Referring to the recent decision in Hanuman Prasad Bagri v. Bagress Cereals (P.) Ltd [2001] 105 Comp. Cas. 493 (SC), he pointed out that no petition under Section 397 could be maintained unless there are grounds for winding up of the company on just and equitable grounds. In the present case, the petitioner holds only 11 per cent shares and he has not shown that either there is a deadlock in the affairs of the company or that the conduct of the respondents is burdensome, harsh or unfair. Moreover, the only instant complaint in the petition relates to issue and allotment of shares to employee shareholders which itself being a single act could never be considered to be oppressive especially when there have been a proper resolution with notice to the petitioner. The object of issue of shares to the employees is to motivate them and to keep them in the company and as such it is just like stock option scheme with a view to create a sense of belonging. It is a business decision taken in the interest of the company and merely because the directors incidentally hold majority shares, it cannot be considered to be an act of oppression. He also pointed out that even though some of the family members of the directors hold shares in the company, no shares are being allotted to them. Since on merits the petition cannot survive the same should be dismissed.
7. As far as the plea of the petitioner that the consent order is binding on both the parties, Shri Choudhary contended that the said order is not a final order and the petition has not been disposed of in terms of that order.
Referring to the last paragraph of the order dated 28-5-1998, he pointed out that the parties had to come to a final settlement in accordance with the agreed terms. This being the case, it is wrong to contend that the consent order is binding on the parties as no final settlement could be arrived at in view of the disputes on the valuation made by S.R. Batliboi & Co. In other words, according to him, there was no complete and final compromise between the parties and as such the said order cannot have any binding force. He also submitted that none of the cases cited by the learned counsel for the petitioner is applicable to the facts of this case, since, there is no binding consent order in the present case. Therefore, he submitted that the respondents are no longer interested in getting the fair value of the shares redetermined by another valuer. Accordingly, he submitted that in view of the petitioners having not established any case of oppression against the respondents, the petition should be dismissed.
8. We have considered the arguments of the counsel. The learned counsel for the petitioner argued that there is no scope now to get into the merits of this case including the maintainability in view of the consent order dated 28-5-1998. To determine whether the said order has brought out a complete settlement as claimed by the petitioner, it is essential to not only indicate the circumstances under which the said order was passed but also the terms of that order. This petition was filed in December, 1997. In the hearing held on 31-12-1997, directions were given to the parties to complete the pleadings and accordingly the respondents filed their replies with an affidavit dated 8-1-1998 on 13-1-1998 and the petitioner filed a rejoinder dated 24-1-1998 on 27-1-1998. Thereafter, as seen from the records of the proceedings, the petitioner filed two applications. In CA 67 of 1998 dated 24-1-1998 - one seeking for inspection of statutory records of the company and another for early hearing of the petition. On hearing the application, this Bench passed an order directing the company to produce all records and documents on 10-3-1998. On this day, as is seen from the order sheet, the Bench advised the parties to explore the possibility of an amicable settlement. Thereafter, the order dated 28-5-1998 came to be passed in which it is stated "In deference to this proposal, the petitioners have agreed (duly signed by them and taken on record) to sell their shares in all the 3 companies and the respondents have agreed to purchase the petitioners 'shares at a fair value to be determined by the Price Waterhouse & Company." [Emphasis Supplied]
9. From the sequence of events, it is evident that even though the pleadings had been completed as early as in January, 1998, the matter was not heard on merits obviously in view of the order dated 28-5-1998. This order makes it clear that the petitioner had agreed to sell his shares and the respondents also had agreed to purchase the shares and the only issue left was the determination of the fair value of the shares for which a valuer, as agreed to by the parties, was appointed. As per Clause 4 of the order, after hearing the submissions of the parties, the CLB was to decide the basis of valuation and the value thereof. Under the circumstances, the issue for examination is whether this agreement is binding on both the sides. While according to the petitioners it is binding while according to respondents it is not. The respondents have relied on the last paragraph of the order contend that this order was only facilitatory for the parties to come a final settlement and as such there is no binding final consent order. He also argued that since, the petition has not been disposed of in terms of the agreement, it has not reached a finality to make it binding. We are unable to agree with this contention. It is on record that after the order was issued naming Price Waterhouse to value the shares, at the request of the parties S.R. Batliboi & Co., were appointed to value the shares. Both the parties made submissions before the valuers and after circulation of the draft valuation report, both the parties reacted to the same. Even in their comments to the valuation of S.R. Batliboi & Co., the respondents had not taken the stand that there was no obligation on their part to purchase the shares held by the petitioners. As a matter of fact, in the prayers in the Memo of Objections dated 31-5-2000, they have suggested that this Bench should proceed with certain percentage of shares as held by the petitioner and that the valuation of shares given by S.R. Batliboi & Co. be rejected and 'remand the issue for review/consideration in light of these objections.' From the highlighted portion of the prayers, it is clear that even the intention of the respondents had been that what was objected was the valuation and not the agreement relating to sell and purchase of the shares of the petitioner.
10. Further, the last paragraph of the order dated 28-5-1998 cannot be read in isolation leaving the earlier part of the order. This has to be read along with Clause 4 of that order, according to which, the parties were to make submissions before the CLB regarding the valuation and also on the alternative basis of valuation for the CLB to decide. The words used are 'Company Law Board shall decide the same' indicating clearly that it is for the CLB to decide the fair value on the basis of the report and the submissions of the parties thereon. This order has not left anything to the parties to decide finally to contend that as per last paragraph of the order the parties have to come to a final settlement. The agreement relating to sale and purchase of the shares has become final with the issue of the said order.
11. Now that we have held that the agreement to sell and purchase the shares had become final in view of the consent order dated 28-5-1998, the only issue for consideration is the fixation of the fair price for the shares. As per Clause 4 of the order dated 28-5-1998, after hearing the submissions of the parties on the valuation and also which are the alternative valuation should be adopted, the CLB was to decide the same. In other words, the responsibility to decide the fair price has been given to the CLB. Both the parties have reacted to the valuation report and on various technical and accounting grounds, they have computed their own fair value of the shares. While according to S.R. Batliboi & Co., the fair price for the shares of the respondent-company is Rs. 6,396 per share. According to the petitioners, it should be Rs. 34,342 per share, while according to the respondents, it should be Rs. 170 per share. Likewise in respect of the other companies also the difference in the fair price as computed by the parties and S.R. Batliboi & Co. is substantial. In view of such huge variations in the fair value of the shares, and also in view of various accounting and valuation issues raised by the parties, have been raised by both the parties, even though, as per Clause 4 of the agreement, this Board has to finally decide the fair price, it will not be possible nor be appropriate for us to do so. Since both the sides have committed to sell and purchase the shares, to ensure this, we have to necessarily appoint a new valuer to determine the fair price.
12. Shri Choudhary contended that, since the petition is not maintainable for various reasons indicated as a part of his arguments, we cannot appoint a new valuer and the petition should be dismissed. It is to be noted that in Clause 5 of the consent order, the undertaking of the respondents that they would not raise any objection counter to the intent of the settlement, has been recorded. Further, in their reply to the petition also the respondents had raised similar objections and notwithstanding the same, they were parties to the consent order. Therefore, now, they are completely estopped from raising any objection either on the maintainability or on the merits of the case. The learned counsel for the petitioners cited a few cases on the binding nature of the consent terms, as rightly pointed out by Shri Choudhary, these cases may not be of much assistance in the present case as the facts are different in this case as in this case the maintainability of the petition has been raised which was not the position in those cases. Recently the Division Bench of the Madras High Court has held that once a consent order is passed, the same cannot be challenged on any ground including the ground on jurisdiction. Kulki Leather (P.) Ltd v. T.N.K. Govindaraju Chetiar & Co. - Letters Patent Appeal 123 of 2001, dated 28-8-2001. The facts of that case are: In a proceeding under Section 235 of the Act, the parties agreed to settle the disputes amicably by which the shares purportedly allotted to the petitioner would be purchased by the respondents. An order was passed by this Board in terms of the consent given by the parties. As per this order, the respondents were to pay a sum of Rs. 25 lacs to the petitioner within a certain period. When the respondents failed to do so, the petitioner filed an application under Section 634A of the Act seeking to execute the consent order. When this application was heard, one of the main contentions of the respondents was that the CLB had no powers to pass an order of sale and purchase of the shares in a proceeding under Section 235 and as such the said order was without jurisdiction and that since the parties had not signed the consent terms in terms of Order 23 Rule 3 of the CPC, the consent order had no validity. All the contentions of the respondents was negatived by the Board and the application of the petitioner was allowed. This order was taken on an appeal to the Madras High Court in which a Single Judge upheld the order of this Board which was also taken on appeal to the Division Bench which also upheld the order of the CLB. We may beneficially refer to certain portions of the judgment. Paragraph 15 of the Judgment reads :
"The submission that the Board had nojurisdiction at all to make the kind of order that was made on that date is also a submission which is required to be rejected. The counsel docs not rightly dispute that the Company Law Board can direct thepurchase of shares in proceedings under Sections 397 and 398 of the Companies Act. While the proceedings that was initiated was one under Section 235, that fact by itself is not to be regarded as placing an embargo on orders other than that warranted under Section 235 being made, if parties to the proceedings agreed to such an order and the agreement is not against the public policy, is not illegal and is not violative of any of the provisions of the Companies Act or of any other law and it is not an agreement which itself is beyond the competence of the Board to record under the provisions of the Companies Act. It is not the case of the appellate that the proceeding recorded on 22-1-1999 is against public policy or is illegal or is an agreement which the Company Law Board is prohibited from recording under any of the provisions of the Companies Act or under any other law. The submission that the order is vitiated by reason of total lack of jurisdiction in the Company Law Board, therefore, cannot be accepted".
In paragraph 19, the court has observed:
"We must strongly deprecate the attempt of the appellant to avoid carrying out a solemn promise through their responsible counsel to the Company Law Board by seeking to raise hyper technical pleas when faced with the demand for compliance with the terms of their order. Although we have considered the submissions made by the counsel and examined those submissions, we make it clear that the appellant are not entitled in law to urge any of those grounds, as allowing the appellant who do so successfully would mean closing eyes by the court to a fraud played by a party and the counsel on the Company Law Board. As stated buy us earlier, no counsel or litigant has a right to play fraud on a court or the tribunal and any attempt to do so must be discouraged and should invite the heaviest penalties".
13. In the present case, as recorded in the consent order, the parties had agreed that the petitioner would sell his shares and the respondents would purchase the same. The respondents had given an undertaking not to raise any objection counter to the agreed terms. Having done so, now they cannot turn around and claim that since the petition is not maintainable and they are no longer interested in purchasing the shares of the petitioner. The observations of the Division Bench of Madras High Court as extracted above are squarely applicable in the present case. Therefore, even if the petition were to fail on merits as contended by Shri Chaudhary, having agreed to purchase the shares, the respondents are estopped from raising this issue now. As we have already pointed out that the only issue pending in working out the consent order is the determination of the fair price for the shares in all the three companies and therefore the question of getting into the merits of the case does not arise.
14. In view of our Findings that there is no scope for getting into the merits of the case and that in terms of Clause 4 of the Consent order, this Bench would not be in a position to fix the fair price in view of the huge differences in the fair price computed by the parties and S.R. Batliboi & Co., we consider it appropriate that we should appoint a new valuer for determination of the fair price in terms of the order dated 28-5-1998. Accordingly, we post this case on 18-3-2002 at 2.30 p.m. for the parties to appear before us to decide on the name of the valuer. We also abundantly make it clear that, in order to avoid any future controversy in regard to the valuation, that the value determined by the new valuer shall be binding on both the parties and this Bench would only decide the basis of valuation.