TMI Blog2005 (12) TMI 289X X X X Extracts X X X X X X X X Extracts X X X X ..... pondent No. 1 and respondents Nos. 6 to 27 are the shareholders of respondent No. 1 company. The facts of the case as per the appellant briefly stated as follows : ( i )In February, 1977, respondent No. 1 company was incorporated and the third respondent Mr. S. P. Gupta was the main promoter along with his family members. The company was incorporated to carry on hotel and other cognate businesses. By licence deed dated December 5, 1982, along with supplementary deed executed in 1988, a plot of land was allotted to the company in 1982 by the NDMG. The complete possession of the land was received by the respondent in 1988. In the interregnum, there was cancellation of the license deed by the NDMC in 1990 owing to some claim relating to the licence fees and the said cancellation was challenged in this court. During the pendency of the proceedings, respondent No. 1 company received the complete possession of land in 1992. ( ii )In June 1993 M/s. Aeroflot and respondent No. 1 entered into an agreement for a joint venture hotel project under the name and style of Sunaero Ltd., which was in fact a wholly owned subsidiary company of respondent No. 1 company. In October, 1993, owing to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de to the appellant. ( v )The stand of the respondent as reflected in the impugned order of the Company Law Board dated June 13, 2001, is that respondent No. 1 company had transferred the land development rights to respondent No. 1 in 1993 and it was respondent No. 2 who pursued the High Court proceedings successfully. Consequently, when an order was passed in favour of respondent No. 1 company, a decision was taken to retransfer the development rights from respondent No. 2 to respondent No. 1 company for a consideration of Rs. 21 crores which was in fact 1/3rd of the prevailing market value of the land of the company housing the hotel. Consequently, the amount of Rs. 21 crores paid by respondent No. 1 to respondent No. 2 was given to the various respondents for a valuable consideration and these respondents invested in the share capital and the allegation of the appellant that the shares were allotted without any consideration from the respondents was baseless. Before I deal with the merits of the matter, it is necessary to record the unsuccessful efforts towards settlement made by the Company Law Board as reflected eloquently in paragraph 18 of the impugned order of the Compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany Law Board and has restrained the petitioner from transferring the shares held by it in the company and the petitioner had filed a writ petition before the Delhi High Court challenging the attachment and that the High Court has directed that the amount of Rs. 6 crores to be received by the petitioner as the first instalment should be kept in a fixed deposit and therefore the respondents were moving an application to seek a clarification from the Delhi High Court about the title of the respondents in respect of the shares. Accordingly, the matter was adjourned to November 10, 1999, with the directions that the respondents would bring the first instalment of Rs. 6 crores on that day. On November 10, 1999, the respondent brought demand drafts worth Rs. 2 crores and sought for a few more days for paying the balance of Rs. 4 crores along with interest. However, the petitioner was not willing to accept this amount. In the hearing held on March 1, 2000, the respondents produced before us demand drafts for Rs. 6.5 crores and cheque for Rs. 50 lakhs towards the first instalment of Rs. 6 crores and towards interest for the delayed payment with an assurance that the balance amount will ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r sections 397 and 398 of the Act. ( c )The main allegation of the appellant is that the respondent has allotted shares worth Rs. 21 crores without investing any money and by fraudulent rotation of the funds. The consequent transfer and retransfer of the development rights were assailed by the appellant as sham transactions. ( d )The crux of the matter deducible from the proceedings revolves around the transfer of development rights from the second respondent to respondent No. 1 company for Rs. 21 crores. ( e )Notwithstanding the cancellation of the licence both the NDMC and respondent No. 1 company had taken steps in terms of the earlier license deed. Therefore, respondent No. 1 company, perhaps in anticipation of a favourable decision by the High Court had transferred the development rights. ( f )The management contract between the second respondent and ACCOR dated September 9, 1994, demonstrated the knowledge of the appellant about the transfer of development rights as it was specifically referred to in the MoU dated March 11, 1995, at page 2. Respondent No. 2 was described in this contract dated September 9, 1994, as the owner. ( g )Since the MoU mentioned the restric ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... illegality in the rotation of the money as the discharge of the liability of respondent No. 1 company towards the second respondent. ( p )In any event the appellant as a financier, before writing the letter to the financial institutions that the land has been acquired from the second respondent, should have checked up the mode of payment, particularly when it had a right to access to the accounts of the company in terms of the MoU. ( q )Even assuming that the rotation of Rs. 1 crore was irregular, yet knowledge and consent of the appellant has to be attributed to the appellant. ( r )Since respondent No. 2 is wholly owned subsidiary of respondent No. 1 company, with a view to protect the interest of the respondents, the second respondent is directed to take steps to recover the amount of Rs. 21 crores paid to HJ Consultants either in cash or by way of property valued worth Rs. 21 crores within nine months. ( s )It cannot be said that the allotment of shares by way of rotation would not be in conformity with the MoU which stipulated cash contribution of Rs. 22 crores by the respondents towards the share. Once the cheques issued by the respondents were encashed and utilised by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appellant. The grant of the relief claimed by the appellant would be a great act of oppression against the respondents who had nurtured the project from 1982 and the project was at that time running well. (aa)In so far as the proposal for not giving shares in 1997 at the time of further allotment of shares was concerned, the respondent gave an undertaking that the appellant shall be given proportionate shares and accordingly this grievance does not survive. (ab)Even assuming that the clearance of the liability by the respondent was done in a questionable method so as to get the allotment of shares to them, taking into consideration all aspects of the case and the direction by the Company Law Board that respondent No. 2 should take steps to recover the money paid to HJ International within a set time frame, there is no scope of granting any other relief to the appellant particularly when the petition is motivated and the appellant had disentitled itself owing to its own conduct from being granted any equitable relief. Consequently, since there were only two groups of shareholders in the company and that the appellant having invested a substantial amount of money in the company, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a )That since the order of the Company Law Board is perverse and the real issue germane to the issue in question has been ignored, this court can interfere even in its jurisdiction confined to a question of law under section 10F of the Act. ( b )That the main grievance of the appellant is that while the entire transaction flowed from the memorandum of understanding dated March 11, 1995, between the appellant and the respondents herein, yet in the impugned judgment of the Company Law Board there is only a passing reference to that MoU of March 11, 1995 and the terms of the said MoU and the impact of the said terms have not even been referred to let alone considered by the impugned judgment thus making it wholly unsustainable. ( c )That the appellant-company has been duped of several crores of rupees as the respondents while persuading the appellant by virtue of the memorandum of understanding to part with their contribution of Rs. 7 crores of share money and Rs. 8 crores of deposit have not themselves contributed the corresponding amount as per the MoU and funds which ought to have been used for the benefit of the company have instead been diverted by rotation to purchase the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mills Co. Ltd. [1964] 34 Comp. Cas. 777 ; AIR 1965 Guj. 96 at paragraph 25,27, pp. 98-99 ; ( vi ) Needle Industries ( India ) Ltd. v. Needle Industries Newey ( India ) Holding Ltd. [1981] 51 Comp. Cas. 743 ; AIR 1981 SC 1298 at para graphs 44, 51. The acts of oppression and mismanagement by the respondents as per the appellant's averments are as follows : ( a )that the respondents did not contribute any money into the project contrary to the terms of the MoU dated March 11,1995, between the appellant and respondents Nos. 1 and 3 to 5. ( b )that consequently the majority shareholding is that of the appellant who would then control 87 per cent, of the actual paid up capital of respondent No. 1 company. ( c )that the rights issue without a corresponding offer to the appellant was solely with a view to reduce the appellant to a minority contrary to the terms of the agreement dated March 11,1995, where it was stipulated that the ratio of shareholding set out in the said agreement would not be altered unless mutually agreed to by the parties and such an alteration was also contrary to the provisions of section 81 of the Act. ( d )That the oppression is evident from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies of the respondent such as Sunaero and HJ Consultants (for the sake of convenience the documents compiled by the appellant are named vol. C and those by the respondent vol. R) : ( a )C-45 is the licence dated December 5, 1982, made between the NDMC and M/s. Sunair Hotels Ltd., by virtue of which the licensee was required to use the plot of land admeasuring 7109 sq. yards for construction of a hotel to be run by licensee on license basis on the terms and conditions and at an annual licence fee of Rs. 34,01,400 from the date of handing over the said plot of land to the licensees. ( b )C-57 is the supplemental agreement to the license deed dated December 5, 1982, whereby the licence fee of the hotel was increased to Rs. 49,90,33 instead of Rs. 34,01,400 and that the license fee would commence from the date of handing over possession of the land in full to the licensee. ( c )C-61 is the letter by Sunair Hotels to NDMC seeking possession to have subsidiary by the name of Sunaero Ltd. ( d )C-66 is the memorandum of understanding dated August 29, 1994, executed between ACCOR and Sunair. As per the MoU, Sunair is required to contribute the property as part of the equity in the l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (dd)C-224 is a letter dated May 4, 1998, by VLS to TFCI asking it to withdraw the loan given to Sunair Hotels Ltd. (ee)C-150 is the memorandum of understanding dated March 10, 1995, between VLS Finance, Sunair Hotels Ltd. and Sh. Satyapal Gupta. (ff)R1 is the agreement dated June 17, 1993, between Sunair Hotels Ltd and International Commercial Department of Civil Aviation, Russia. (gg)R1/annexure 1 shows the decision to float Sunaero and annexure 2/P.4C states contribution by Mr. Gupta in the form of land. (hh)R4 is the document of NDMC dated January 27,1994, whereby Sunaero as a subsidiary of Sunair Hotels Ltd was allowed to be floated by NDMC. ( ii )R6 is the letter dated February 8,1999, by VLS to TFCI asking it to send necessary documents so that VLS could apply for loan to TFCI. (jj)R7 is the letter dated February 13, 1995, by VLS to S. P. Gupta, Sunair stating that cost of the proposed commercial project would be Rs. 75 crores including the cost of the land and that the total equity should not be more than Rs. 30 crores and offer price to be in the range of Rs. 60-70 per share. (kk)R-9 is the letter dated February 13, 1995, by TFCI to Sunaero stating that TFCI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dent from the aforesaid correspondence detailed above and the oppression and mismanagement was a mere ruse and the real object of the company petition was securing the payment of interest due to the appellant. That as per the arbitration clause which formed para graph 12 of the MoU between the parties, the arbitrator, Mr. Justice P. K. Bahri (Retd.) had been appointed and in so far as the claim for interest was concerned, a counter-claim had been led by the appellants and the disputes were under adjudication. He has also highlighted the fact that the company petition was in fact an oppression of the majority by the minority and not as alleged vice versa. He has also referred to the clause 9 of the MoU to submit that the balance sheets of the respondent-company were always available and the grievance of the appellant emanated from alleged non-compliance of clause 8 pro viding for payment of interest. The appellant itself was guilty of not making payment of the balance of Rs. 12 crores towards security and not carrying on the public issue of Rs. 85 crores as was mandated by the MoU. Even, the sum of Rs. 8 crores minus the balance sum of Rs. 2 crores was paid only in June, 1996. He ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... petitioner. At all times, the petitioner was assured by respondents Nos. 1, 3, 4 and 5 that the hotel project was progressing satisfactorily and its interests as a financial collaborator/ promoter were secure. At that stage the petitioner had no reason or occasion to doubt the assurances and representations of respondents Nos. 1, 3, 4 and 5 and in the bona fide belief that its interest and investment was secure and would not be in any way jeopardised by the respondents, the petitioner did not question or ask for details of the conduct of the affairs of respondent No. 1 company by respondents Nos. 3 to 5." Some time in October 1997, the petitioner received information that respondents Nos. 3 to 5 had allotted further 15,30,000 equity shares of respondent No. 1 company worth Rs. 1,53,00,000 in their own name and in the name of their family members so as to increase their percentage holding in respondent No. 1 company. This was in violation of the agreement dated March 11, 1995 wherein it had been agreed that the ratio of the shareholding set out in the said agreement would not be altered unless mutually agreed by the parties in writing. On receiving this information, the petition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 00 shares of Rs. 10 each fully paid up to respondents Nos. 3 to 27 as under : Name No. of shares S. P. Gupta (respondent No. 3) 15,41,600 Kaveen Gupta (respondent No. 4) 28,00,000 Vipul Gupta (respondent No. 5) 28,00,000 Sheel Gupta (respondent No. 6) 15,00,000 Babita Gupta (respondent No. 7) 12,50,000 Ananya Gupta (respondent No. 8 and Kaveen Gupta respondent No. 4) 4,50,000 Monlsha Gupta (respondent No. 9) 12,50,000 S. P. Gupta HUF (respondent No. 10) 15,41,600 Kaveen Gupta HUF (respondent No. 11) 4,00,000 K. C. Gupta (respondent No. 12) 1,50,000 Lalita Gupta (respondent No. 13) 1,50,000 Praveen Gupta (respondent No. 14) 1,25,000 Tusha Gupta (respondent No. 15) 1,25,000 Naveen Gupta (respondent No. 16) 1,50,000 Smriti Gupta (respondent No. 17) 1,50,000 Vidur Gupta (respondent No. 18) and Praveen Gupta (respondent No. 14) 50,000 Veni Gupta (respondent No. 19) 1,50,000 Varad Gupta (respondent No. 20) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... statement from the respondent. After having received the fund flow statement in April, 1995, the winding up petition was filed in August, 1998, thus demonstrating laches vitiating the plea of oppression and mismanagement. Mr. Keswani, learned counsel, appearing on behalf of respondents Nos. 21 to 23 has submitted that Shri B. C. Gupta, elder brother of Shri S. P. Gupta, and the original founder, promoter, director and his wife and son, namely, respondents Nos. 21 to 23 of the respondent-company founded by S.P. Gupta in 1980 along with S. P. Aggarwal his brother-in-law. The licence and land was secured by Shri S. P. Gupta along with Shri S. K. Aggarwal and as is evident from the licence deed which bears the signature of S.K. Aggarwal. There is a violation of agreement from both the sides and the prayer of VLS to become majority shareholder ought not to be granted. He has further submitted that in view of the fact that both the sides have violated the memorandum of understanding dated March 10, 1995, (in short "the MoU"), the whole memorandum of understanding should be set aside and B. C. Gupta should be introduced as a director since he was instrumental in bringing the valuable l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... part of the memorandum of understanding dated March 11,1995, have in fact rotated a sum of Rs. 1 crore 21 times so as to purportedly carry out their obligation under the memorandum of under standing and have thus duped the appellant. The memorandum of under standing dated March 11, 1995, which records the terms of the contract between the parties reads as under : "Memorandum of Understanding/Agreement for Financial Assistance This Memorandum of Understanding ('MoU )/Agreement is made at New Delhi this March 11,1995, between and amongst VLS Finance Ltd., (hereinafter referred to as 'VLS'), a company incorporated under the Companies Act, 1956, and having its Registered Office at C-489, Defence Colony, New Delhi-110 024 (which expression shall, unless repugnant to the context or meaning thereof, be deemed to include its successors and assigns) of the First Part ; Sunair Hotels Ltd., (hereinafter referred to as 'Sunair'), a company incorporated under the Companies Act, 1956, and having its Registered Office at 302, Akash Deep Building, 26, Barakhamba Road, New Delhi-110 001 (which expression shall, unless repugnant to the context or meaning thereof, be deemed to include its su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... joining together to manage the 'project' and complete it successfully in the interests of all concerned. Now, this Memorandum of Understanding/Agreement witnesseth as under : (1) That the promoters and Sunair have agreed to take VLS as financial promoters of their proposed hotel project in Gole Market on the land admeasuring about 80,000 sq. ft. allotted to them by the New Delhi Municipal Committee and whereas VLS has agreed to join as financial collaborators for the hotel project of Sunair. (2) That the authorised share capital of the company shall be Rs. 40 crore (rupees forty crores only) and out of which, the initial paid up capital shall be Rs. 30 crores (rupees thirty crores only) dividend into 300 lakhs equity shares of Rs. 10 each and the promoters shall take all necessary steps to make the capital structure accordingly. (3) That the initial paid up share capital in equity shares shall be held/subscribed in the following manner by the parties : ( i ) Rs. 22 crores (rupees twenty-two crore only) shall be subscribed by the promoters or their nominated companies by way of subscribing to 2,20,00,000 shares of Rs. 10 each for cash at par. ( ii ) Rs. 7 crores (rupees ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lic offer of Rs. 10 crore of capital to the public at a price not less than Rs. 100 per share ; ( d ) Providing managerial advices whenever required by Sunair and/ or the promoters on specific requests ; ( e ) To provide interest-bearing security deposit of Rs. 10 crores to Sunair for the project at an interest rate not exceeding 20 per cent, per annum. The interest in respect of which is required to be paid on quarterly basis. The security deposit would be paid on or before May 15, 1995, provided the share capital has been fully allotted and share certificates delivered to VLS. The said security deposit shall be refunded back to VLS immediately on closing of the public issue of Sunair and a lien to the extent of security deposit amount will be made against the proceeds of public issue at the time. ( f ) The security deposit to be forfeited by Sunair in case VLS fails to organise the funds required for the project and/or does not fulfil its obligation to sell the public offering of Sunair at a price not less than Rs. 100 per share. The same is however subject to the timely implementation and the fulfilment of the project by Sunair in terms of clause 7 of this agreement. ( g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... crores (rupees seventeen crores only). (8) Sunair, through its directors and the promoters, hereby agree and undertake to ensure the implementation of the project within two-and-a- half years from the date of payment of equity capital or the date of disbursement of first instalment of loan from financial institutions, i.e ., TFCI/ other financial institutions, whichever is later. This is provided VLS arranges all funding requirements on time without letting the project suffer because of lack of financial resources. (9) Sunair and the promoters also agree and undertake to send periodically financial details and statements to VLS and on the request of VLS, Sunair shall produce the books of account and all financial and accounting statements or any other information pertaining to the project which VLS may desire. (10) Any changes in the terms and conditions of this MoU/Agreement would be made by mutual consent in writing only. (11) All parties hereto agree to keep everything mentioned herein and any information about the project strictly confidential. (12) In the event of any dispute of difference of opinion in the matter of interpretation, execution of carrying out the su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to the promoters against the value of the land. The impugned judgment also finds that the appellant was not an ordinary shareholder but a specialist in financial matters and was fully aware of the entitlement of the second respondent and the payment of Rs. 21 crores by company to the second respondent. Without going into the terms of the MoU dated March 11, 1995, the Company Law Board also finds that the liability of the company was in the knowledge of the company petitioner/appellant herein and since it was having such knowledge, the method of payment of Rs. 21 crores by the rotation utilised by the respondents in discharging the company's liability could not be questioned by the appellant. Such findings could have only been arrived at after taking into account the effect of the terms of the said MoU dated March 11, 1995. The main plea of the appellant in respect of the rotation of Rs. 21 crores has been, that by payment by the respondent-company to H. J. Consult ants which was closely related to respondent No. 1 a sum of Rs. 1 crore was rotated 21 times and this was also found to be reflected in the accounts of both respondent No. 1 company and the H. J. Consultants. The Com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oard's order dated June 13, 2001 See [2002] 110 Comp. Cas. 772 (CLB), could be looked at under the jurisdiction of this court under section 10F of the Act as held by the hon'ble Supreme Court in Dale and Carrington's case [2004] 122 Comp. Cas. 161; [2005] 1 SCC 212, as a vital piece of evidence, i.e ., the MoU dated March 11, 1995, indeed the foundation and the substratum of the appellant's case has been ignored by the Company Law Board. Accordingly the order of the Company Law Board is liable to be set aside. I am mindful of the fact that the respondents and the promoters have also raised the plea as to the lack of bona fides of the appellant and findings have been returned in their favour by the impugned order. The respondents' plea is that the appellant itself not completing its part of transaction as the respondents did not fully comply with the terms of the MoU dated March 11, 1995, as the obligation to proceed with the rights issue and the securing of finances was not met by the appellant as they had only paid the sum of Rs. 7 crores and made a deposit of Rs. 8 crores. This plea of the respondents is also required to be considered by the Company Law Board. However, wheth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ilment of the appellant's part of the obligations entailed by the terms of the memorandum of understanding dated March 11,1995, between the parties and the other transactions which took place between the appellant and the respondents and other obligations of the appellant. This court is not expressing any views on any other plea of either of counsel for the parties in respect of the findings arrived at by the Company Law Board but has found the order of the Company Law Board to be fundamentally flawed as it has failed to take into account the memorandum dated March 11,1995, which was the contract between the parties. However, this judgment need not be taken as an expression of any opinion on the merits of the pleas of either side by this court and the appellant's pleas and indeed the respondents' plea would be fully considered by the Company Law Board which will be free to arrive at its own findings and the mere fact that the Company Law Board's order dated June 13, 2001 See [2002] 110 Comp Cas 772 (CLB), has been set aside for non-consideration of the memorandum dated March 11,1995, will not come in the way of the Company Law Board arriving at its own findings in case such finding ..... X X X X Extracts X X X X X X X X Extracts X X X X
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