TMI Blog2011 (1) TMI 1200X X X X Extracts X X X X X X X X Extracts X X X X ..... Jain and Ankur Garg for the Defendant. JUDGMENT CS(OS) 722/2008 IAs 4847/2008 (O.39 R.1 2 CPC) 17066/2010 (O.39 R.4 CPC) 1. Plaintiff Nos. 1 2 are husband and wife. Plaintiff No. 3 is their married daughter and plaintiff No. 4 is their son. Defendant No. 3 is the wife of defendant No. 2. Defendant No. 1, which is a company, was allotted 12,000 sq. meters of land by Rajasthan State Industrial Development and Investment Corporation Ltd. (RIICO) for setting up a hotel at EPIP Sitapur Industrial Area, Jaipur on 5-2-1998. Additional land measuring 2,750 sq. meters was allotted to defendant No. 1 on 26-4-1998, making the total area of the allotted land 14,750 sq. meters. 2. As on 31-3-2004, the paid-up share capital of defendant No. 1 was Rs. 7,52,000 divided into 7,520 equity shares of Rs. 100 each out of which 7,500 shares were held by plaintiff No. 3 Ms. Nidhi Dhawan whereas 10 shares each were held by plaintiff Nos. 1 2. It is alleged in the plaint that in the year 2004-05, the plaintiff No. 2 was introduced to defendant No. 2. He represented to plaintiff No. 2 that being a foreign citizen, he wanted to invest some money to earn interest thereon. It was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er letter dated 14-2-2008 stating therein that he was selling his 50 per cent shares in defendant No. 1 Company. It is further claimed that on inspecting the record of Registrar of Companies, the plaintiffs found that the forms which were delivered to defendants 2 3 in good faith by plaintiff Nos. 1 2 had been filed by them with the Registrar of Companies. This was followed by another letter dated 2-4-2008 from defendant No. 2 threatening to sell the shares in grey market. It has also been alleged that defendant No. 2 has got printed letterheads through names of defendant No. 1 and has also written a letter to RIICO describing himself as a Director of defendant No. 1. The plaintiffs have sought a declaration that defendants 2 3 are neither shareholders nor directors of defendant No. 1. They have also sought a direction to defendant Nos. 2 3 to deliver the original share certificates for the purpose of cancellation. The plaintiffs have also sought an injunction restraining defendants 2 3 from representing or holding out of themselves as shareholders or directors of defendant No. 1 or acting on its behalf besides injunction against interference by them in the affairs of def ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ideration agreed, as per the MOU, thereby stood paid by defendant Nos. 2 and 3 to plaintiff Nos. 1 and 2. The receipt of letters dated 2-4-2008 and 11-4-2008 has been admitted by defendant Nos. 2 and 3. It is also alleged that two Form No. 2 were filed with the Registrar of Companies one on 20-5-2005 for 3330 equity shares and second on 15-9-2005 for 6670 equity shares, which were duly signed by Mrs. Janak Dhawan confirming the allotment of shares to defendant No. 2, with the knowledge and consent of plaintiff No. 3. 5. IA 4847/2008 was filed by the plaintiffs along with the suit, seeking injunction against defendant Nos. 2 and 3 from alienating, transferring or creating any third party interest in the shares of defendant No. 1 held by them and also restraining them from holding themselves out or representing as shareholders or directors of defendant No. 1. They also sought temporary injunction restraining defendant Nos. 2 and 3 from interfering in the affairs/properties of defendant No. 1. 6. Vide order dated 25-4-2008, this Court restrained defendant Nos. 2 and 3 from alienating, transferring or creating any third party interest in the shares of defendant No. 1 as also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 3 as to why she was not made to sign the MOU despite her holding as many as 99.73 per cent shares of defendant No. 1. This is not the case of the defendant Nos. 2 and 3 that plaintiff Nos. 1 and 2 had represented to them that they were holding the entire shareholding of defendant No. 1 or that they were not aware of the holding of plaintiff No. 3. In any case, a person investing Rs. 4.5 crores in a company and entering into a transaction for holding 50 per cent equity of a company, would before entering into any transaction of this nature, at least ascertain the extent of shareholding of the persons, who are parties to the document and would also insist on the major shareholder being signatory to the document executed in this regard. Nevertheless, this is a matter on which a final view can be taken only after recording the evidence. 9. The next question which comes up for consideration is as to whether the transaction between plaintiff Nos. 1 and 2 on one hand and defendant Nos. 2 and 3 on the other was a transaction for grant of loan or was an agreement whereby 50 per cent of shareholding in defendant No. 1 was to be held by defendant Nos. 2 and 3 or the real transaction bet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... res. Admittedly, 3330 shares of defendant No. 1 company were allotted to defendant No. 2 on 20-6-2005 and remaining 6670 shares were allotted to him on 15-9-2005 as is indicated in Form No. 2 required to be filed under section 75(1) of Companies Act, as also from the copies of the share certificates issued to him. It is an admitted case that the amount of Rs. 4.5 crores had not been paid either to defendant No. 1 or to any other company of the plaintiffs by that date. Only a sum of Rs. 1.5 crore had been paid to defendant No. 1 by that date and the amount of Rs. 3.07 crores to Mode Advertising was paid on 29-9-2005. In normal course, the company would not have allotted all the 10000 shares to defendant No. 2 without receipt of the agreed consideration of Rs. 4.5 crores from him. It would be pertinent to note here that even shares issued on 15-9-2005 were shown as fully paid up shares and not as partly paid up shares. This circumstance indicates that the true nature of transaction between the parties was not for transfer/allotment of half of the equity in defendant No. 1 to defendant Nos. 2 and 3. ( b )Though defendant Nos. 2 and 3 were appointed as additional directors of defenda ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng 14-10-2006 1,97,34,000 Defendant No. 1 7-9-2007 4,00,000 Mode Advertising The case of the plaintiffs is that all these amounts represent the loan given by defendant Nos. 2 and 3 to defendant No. 1 and Mode Advertising from time to time. The case of defendant Nos. 2 and 3, as regards the amount of Rs.3,07,00,000 paid on 25-9-2005, is that this amount was paid by them to Mode Advertising at the instances of the plaintiffs and represented the balance consideration of Rs. 3 crores, which was to be paid to defendant No. 1 for 50 per cent of its equity, Rs. 1.5 crore having already been paid to it on 30-5-2005. This is also the case of defendant Nos. 2 and 3 that the payment was made to Mode Advertising since defendant No. 1 owed this amount to that company. Under the MOU, the amount of Rs. 4.5 crores was fixed as the consideration for transfer/allotment of 50 per cent of the equity of defendant No. 1 to defendant Nos. 2 and 3. Therefore, the balance amount of Rs. 3 crores would in normal course have been paid to defendant No. 1 and not to Mode Advertising. In case defendant No. 1 owed this amount to Mode Advertising, the paym ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unt was paid to defendant No. 1. Again, this circumstance indicates that defendant Nos. 2 and 3 were extending loan to defendant No. 1 and that is why this amount was paid by them on 14-10-2006. ( g )Admittedly, no AGM of defendant No. 1 was attended by defendant Nos. 2 and 3 at any point of time. No explanation is forthcoming from defendant Nos. 2 and 3 at this stage for not attending the AGM of the company. If no notice of the AGM was received by them, they ought to have written to the company and its directors in this regard, since convening of the AGM at least once a year is mandatory. The balance sheets of the company are required to be laid before AGM along with profit and loss account for each financial year, as required under Article 58 of the Articles of Association of the Company. The auditors also can be appointed only by the share- holders at their General Meeting. Failure of defendant Nos. 2 and 3 to attend even a single AGM of defendant No. 1 is yet another indicator that they never considered themselves as shareholders of defendant No. 1 having a substantial stake in the company and that was the reason they did not bother to attend the AGM or to ask the company or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therefore, the respondent should not have been permitted to lead oral evidence in support of her contention. Rejecting the contention, Supreme Court noticing that the first proviso to section 92 of Evidence Act provides that any fact may be proved which would invalidate any document, or which would entitle any person to any decree or order relating thereto; such as fraud, intimidation, illegality, want of due execution, want of capacity in any contracting party, want or failure of consideration, or mistake in fact or law held that the bar imposed by sub-section (1) of section 92 applies only when a party seeks to rely upon the document embodying the terms of the transaction. It was further held that the sub-section is not attracted when the case of a party is that the transaction recorded in the document was never intended to be acted upon at all between the parties and that the document is a sham. Such a question arises when the party asserts that there was a different transaction altogether and what is recorded in the document was intended to be of no consequence whatever. For that purpose oral evidence is admissible to show that the document executed was never intended to operat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... viduals. ( c )Admittedly, defendant No. 2 wrote a letter dated 9-1-2007 (though it had been actually received in January 2008 and during arguments the contention of defendant Nos. 2 and 3 was that the date had wrongly been typed as 9-1-2007 instead of 9-1-2008) to plaintiff Nos. 1 and 2, stating therein that they had assured to deliver the balance shares of defendant No. 1, which were in his name as also in the name of defendant No. 3 and also requested them to inform him about the meetings of Board of Directors and Annual General Meeting of the company. They also sought to know the latest position of the Registrar of Companies in income-tax matters. Similar letter was written by defendant No. 2 to the Chairman RIICO. It appears to me that defendant No. 2 deliberately antedated this letter, because in January 2008, he had no occasion to ask for delivery of shares, all the 10000 shares having already been delivered to them. However, despite defendant Nos. 2 and 3 writing such a letter to them, the plaintiffs did not write back to defendant No. 2 claiming that the transaction between the parties was in fact a transaction for advancement of loan and that they were not entitled to al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fendant No. 1 is a privately owned company, plaintiff Nos. 1 and 2 were the only directors in the company at the time the MOU was executed on 27-5-2005 and they along with plaintiff No. 3 held the entire paid up capital of the company at that time, this clause in the MOU tends to indicate that the true transaction between the parties was the land allotted by RIICO to defendant No. 1 company and its eventual sale in a manner that the consideration above Rs. 10 crores was to be equally shared by them and since the plaintiffs did not possess sufficient funds at that time to make payment to RIICO, defendant Nos. 2 and 3 agreed to finance the payment to be made to RIICO provided profits on sale of land was shared and that is why they also paid Rs. 1,97,34,000 to defendant No. 1 on 14-10-2006 for payment of price for the additional land allotted by RIICO to defendant No. 1 besides providing money for repayment of the loan taken from Bombay Mercantile Cooperative Bank and the MOU which envisaged transfer/allotment of 50 per cent equity to defendant Nos. 2 and 3 was meant to be an instrument to secure the loan given by defendant Nos. 2 and 3 and ensure that the plaintiffs did not back out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to sell their respective shares in defendant No. 1 company to any outside party and that had further agreed that they would first offer for sale of the respective shares to each other with mutual consent, and, if any, of the parties refused to buy the shares or rejected the offer in writing in that case the other party would be free to sell its shares for any consideration to any outside party, subject to mutual consent in writing. Though the document refers to transfer of shares and not to the issue of fresh equity, the conduct of the parties indicates that the terms contained in the document were understood by them to mean that the equity of the company would be raised from 10 lakh shares to 20 lakh shares and half of that equity would be allotted to defendants 2 3. Admittedly, at the time this MOU was executed, authorized share capital of defendant No. 1 comprised thousand shares and plaintiffs 1 to 3 amongst themselves held 7520 shares at that time. It is also an admitted case that 2480 shares were allotted to plaintiff Nos. 1 4 on 30-5-2005, thereby increasing the total holdings of the plaintiffs to 10,000 shares. It is also an admitted case that 10,000 shares have been al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... property, goods or machinery supplied, sold or transferred or for services rendered to the company." The figure of Rs. 30,00,000 was Rs. 10,00,000 and figure of 20,000 was 10,000, when the MOU was signed. 17. It would thus be seen that the company had a legal right, under its Articles of Association to increase its share capital at any point of time and the shares could be allotted by the company to any person on such terms as were deemed appropriate in this regard and the shares could also be allotted against property, goods or machinery sold or transferred or the services rendered to the company. Even otherwise a company has a legal right, subject, of course, to the provisions contained in the Companies Act, 1956, to increase its capital at any time and to any extent, it deems appropriate. The MOU dated 27-5-2005 does not place any restriction on the power of the company to issue fresh capital nor does it provide for sharing of fresh capital in equal shares. 18. Assuming that the MOU dated 27-5-2005 does provide that the authorized share capital of defendant No. 1 company would not be increased or if it is increased, it would be equally shared between the parties to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hareholders who can remove the directors at any point of time and/or appoint new Directors. It is also not necessary that the persons who are directors of the company at a given point of time would always remain its Directors. Therefore, neither any director nor the Board of the company can exercise powers which are not conferred on them under Articles of Association of the company. 20. In V.B. Rangaraj v. V.B. Gopalakrishnan [1992] 1 SCC 160, defendant No. 2 was a Private Limited Company in which 25 shares each were held by two brothers B and G. There was an oral agreement between the brothers B and G that each of the branches of the family would always continue to hold equal number of shares and if any member in either of the branches wished to sell his shares, he would give the first option of purchase to the members of that branch and only if the offer made was not accepted, the shares would be sold to others. However, the Articles of Association of the Company were not amended so as to bring them in conformity with the Agreement. Article 13 of the Articles of Association provided that:- "No new member shall be admitted except with the consent of the majority of the m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... could thereafter not be increased or that additional equity, if any, was necessarily to be allowed in the ratio of 50 per cent each to the parties to the MOU, such an agreement being contrary to the Articles of Association of the Company would not bind either the shareholders or the Company. 21. It was contended by the learned counsel for defendant Nos. 2 and 3 that the plaintiffs have not come to the Court with clean hands since they have filed unamended copies of the Memorandum and Articles of Association of the Company and have not disclosed that after signing of the MOU dated 27-5-1995, they had issued additional shares to themselves so as to increase the number of shares allotted to them to 10000 and thereafter the authorized share capital of the Company was also increased from 10000 to 20000 shares. In support of this contention that a litigant who approaches the Court needs to come with clean hands and produce all the documents which are relevant to the litigation, the learned counsel for defendant Nos. 2 and 3 has referred to S.P. Chengalvaraya Naidu v. Jagannath [1994] 1 SCC 1 where Supreme Court finding that the deceased Jagannath had obtained a preliminary decree ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... No. 1 company, admittedly as many as 10000 shares of defendant No. 1 were allotted to them by plaintiff Nos. 1 and 2, who were the only directors of defendant No. 1 company at the relevant time. The authorized share capital of the company was increased from Rs. 10 lakhs to Rs. 20 lakhs before issuing shares to defendant Nos. 2 and 3. Plaintiff No. 3, who held more than 99 per cent shares in the company at the time MOU was signed on 27-5-2005 was present in the EGM held on 14-6-2005 when the authorized share capital of defendant No. 1 company was increased from Rs. 10 lakhs to Rs. 20 lakhs. The plaintiffs have not sought a decree for cancellation of the share certificates issued to defendant Nos. 2 and 3 in respect of 10000 shares allotted to them, though they have sought a direction to defendant Nos. 2 and 3 to deliver up those certificates to defendant No. 1 for cancellation. The case of defendant Nos. 2 and 3 is that they are entitled to 50 per cent equity in defendant No. 1 company for all times to come. Considering the fact and circumstances of the case, as discussed in the preceding paragraphs, it would not be appropriate for the Court to take a firm view, at this stage, with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ues of the share, it shall be decided and fixed by the Company Auditor, subject to articles 8 and 9. Whereas article 8 provides that no transfer of shares shall be made or registered without the previous sanction of the Board of Directors and the Board may decline to give sanction without assigning any reasons. It would, therefore, be only proper that defendant No. 2 is restrained from transferring, selling, alienating, pledging or otherwise parting with possession of 10000 equity shares held by him in defendant No. 1 company, during pendency of this suit, subject to the plaintiffs furnishing a bank guarantee equivalent to the amount of loans mentioned in para 10 of the plaint, which is alleged to have been given by defendant No. 2/his companies to defendant No. 1 and Mode Advertising, along with interest on that amount at the rate of 15 per cent per annum, which according to the plaintiffs, was the agreed rate of interest to be paid to defendant Nos. 2 and 3. 24. The prayer made by defendant Nos. 2 and 3 in IA 17064/2010 is that the plaintiffs be restrained from creating any third party interest in the assets and land of defendant No. 1 and be also directed to maintain status ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opose to sell, transfer, assign or part with possession of the land allotted to defendant No. 1 company by RIICO and they only want to mortgage it with a bank/financial institution in order to raise loan required for construction of a hotel on this land. Since despite mortgage, ownership of the land would continue to vest in defendant No. 1 company and the funds received from the mortgagee would be used only for construction of a hotel on this land and would thereby increase the value of the asset, I see no reason for not allowing the mortgage of the land in favour of a bank/financial institution in order to raise loan, which will be used for construction of a hotel of this land. 27. For the reasons given in the preceding paragraphs, defendant Nos. 2 and 3 are hereby restrained from holding themselves out as the directors of defendant No. 1 company, during pendency of this suit. Defendant No. 2 is also restrained from selling, transferring, assigning, pleading or otherwise parting with possession of 10000 shares of defendant No. 1 company held by him and creating third party interest therein in any manner, during pendency of this suit without prior permission of the Court, subj ..... X X X X Extracts X X X X X X X X Extracts X X X X
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