9911796707
TMI Blog2011 (1) TMI 1200X X X X Extracts X X X X X X X X Extracts X X X X ..... intiff 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 agreed between plaintiff No. 2 and defendant No. 2 that defendant No. 2 will give loan to defendant No. 1 and to Mode Advertising, another company of plaintiff Nos. 1 & 2 at the interest of 15 per cent per annum, which was to be paid at the time of return of the loan. An MOU was executed wherein it was mentioned that the loan amount of Rs. 4.50 Crores were for 50 per cent shares of defendant No. 1. It is further alleged that defendant No. 2 had represented to plaintiff Nos. 1 & 2 that the MOU was intended only to secure the loans being given by defendants 2 & 3 and he will not claim any shareholding in defendant No. 1 at any point of time. At the time of signing MOU on 27-5-2005, plaintiff Nos. 1 & 2 also signed Form-32, Form 2, Annual Return and also some share certificates showing allotment of 50 per cent shares of defendant No. 1 to defendant Nos. 2 & 3. They ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal 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 defendant No. 1. 4. The defendant Nos. 2 & 3 have contested the suit. It is alleged in the MOU that the MOU was executed between the plaintiff Nos. 1 and 2 and defendant Nos. 2 and 3 with the consent and knowledge of plaintiff No. 3 and payment of Rs. 1.5 crores was also in her knowledge. It is further alleged that the company allotted 10,000 additional shares to defendant No. 2 Laxman Rawat on 20-6-2005 and 15-9-2005 and issued share certificates accordingly in terms of the MOU dated 27-5-2005. The authorized share capital of the company was increased from Rs. 1 crore to Rs. 2 crore in the EGM held on 14-6-2005 and thus, 50 per cent shareholding of defendant No. 1 was transferred by the company to defendant No. 2 for total consideration of Rs. 4.5 crores, in terms of the MOU. It is further alleged that defendant No. 1 filed its return disclosing authorized capital as we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ght 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 restraining them from holding themselves out to be the shareholders or directors of defendant No. 1. 7. I.A. No. 17066/2010 has been filed by the defendants 2 and 3 seeking vacation of the interim order granted by this Court on 25-4-2008. I.A. No. 17064/2010 has been filed by defendant Nos. 2 and 3 seeking direction to the plaintiffs not to create any third party interest in the assets and land of defendant No. 1 and also directing them to maintain status quo qua the shareholding of defendant No. 1. They have also sought production of the minutes books of the meetings, financial records being Books of Account, Balance Sheet, Profit and Loss Account and annual return of defendant No. 1 for the years 2004-05 to 2009-10 as also inspection of the aforesaid record. 8. The first question, which comes up for consideration, is as to whether the MOU dated 27-5-2005 was executed with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 between the parties was neither of loan by defendant Nos. 2 and 3 to defendant No. 1 nor for giving 50 per cent shareholding in defendant No. 1 company to defendant Nos. 2 and 3 and was an altogether different transaction probably related to the land which RIICO had allotted to defendant No. 1. The salient terms of the MOU dated 27-5-2005, which is the main document evidencing transaction between plaintiff Nos. 1 and 2 and defendant Nos. 2 and 3, inter alia, read as under:- "This memorandum of understanding (MOU) is made on this 27th day of May, 2005 between Smt. & Shri G.K. Dhawan R/o J-4, Lajpat Nagar III, New Delhi, Director of M/s. J.D. Worldwide Exports/Imports (P.) Ltd. (hereinafter called the party of the first part) AND WHEREAS the party of the first part have agreed to give 50 per cent shareholding and equal representation in the Board of M/s. J.D. Worldwide Exports/Imports (P.) Ltd., ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p 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 defendant No. 1, their appointment, in view of the provisions contained in the Articles of Association as also Companies Act, 1956 was valid only till the next AGM of defendant No. 1, which admittedly was held on 30-9-2005. As per the MOU, the parties were entitled to equal representation in the Board of defendant No. 1. However, despite their term as additional directors having been expired on 30-9-2005, defendant Nos. 2 and 3 did not write to the plaintiffs at any point of time requiring them to renew their appointment as additional directors of defendant No. 1 in terms of the agreement contained in MOU. This is yet another circumstance which indicates that the terms and conditions contained in the MOU dated 27-5-2005 were not to be actually acted upon. (c)Neither defendant No. 2 nor defendant No. 3 attended any meeting of the Board of Directors of defendant No. 1 despite both of them having been appointed as its a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e been paid to defendant No. 1 and not to Mode Advertising. In case defendant No. 1 owed this amount to Mode Advertising, the payment would have been made by defendant Nos. 2 and 3 to defendant No. 1 and, thereafter, defendant No. 1 would have repaid that amount to Mode Advertising. No explanation is forthcoming from defendant Nos. 2 and 3 for making payment to Mode Advertising instead of paying it to defendant No. 1 in terms of the MOU dated 27-9-2005. Another significant circumstance in this regard is that the amount paid to Mode Advertising is Rs. 3.07 crores and not Rs. 3 crores and there is no explanation from defendant Nos. 2 and 3 as to why they paid Rs. 3.07 crores as against the balance consideration of Rs. 3 crores. (e)Defendant Nos. 2 and 3 and/or their companies have also paid Rs. 2,50,000 on 23-9-2005, Rs. 13,00,000 on 29-9-2005, Rs. 10,00,000 on 5-10-2005 and Rs. 4,00,000 on 7-9-2007 to Mode Advertising. During the course of arguments, when questioned about these payments, the learned counsel for defendant Nos. 2 and 3 stated that these amounts represented the loan given to Mode Advertising by the companies with which defendant No. 2 was associated and had nothing to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubstantial stake in the company and that was the reason they did not bother to attend the AGM or to ask the company or even its Directors as to why no notice of AGM had been sent to them despite their being holding as many as 10000 shares of the company. Section 166 of Companies Act, 1956 provides that every company shall in each year hold in addition to any other meetings a general meeting as its annual general meeting and shall specify the meeting as such in the notices calling it. Therefore, holding AGM is also a statutory requirement provided in Companies Act and the default in complying with this requirement is punishable under section 168 of the Act. Section 172(2) of Companies Act provides that notice of every such meeting shall be given to every member of the company in the manner authorised by sub-sections (1) to (4) of section 53. Since there is nothing to the contrary in the Articles of Association of defendant No. 1 company, the aforesaid provision was applicable in the case of defendant No. 1 as well. Failure of defendant Nos. 2 and 3 to attend any AGM or to ask for notice of the AGM also indicates that they never considered themselves as the shareholders of defendant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er. For that purpose oral evidence is admissible to show that the document executed was never intended to operate as an agreement but that some other agreement altogether, not recorded in the document, was entered into between the parties. 12. The following, however, are the circumstances which indicate that the transaction between the parties was not a loan transaction as claimed by the plaintiffs:- (a)If only a loan was to be taken either by plaintiff Nos. 1 and 2 or by defendant No. 1 from defendant Nos. 2 and 3, there was no reason for them not to execute a document straightway evidencing advancement of loan by defendant Nos. 2 and 3. There was no compulsion on them to enter into a sham transaction showing an agreement for allotment/transfer of 50 per cent equity of defendant No. 1 to defendant Nos. 2 and 3 instead of entering into a loan agreement. If defendant Nos. 2 and 3 wanted to secure repayment of the loan which they had agreed to advance, either the property of plaintiff Nos. 1 and 2 or the land which had been allotted to defendant No. 1 could have been mortgaged with defendant Nos. 2 and 3 to secure repayment of the loan. Alternatively the plaintiffs could have pledg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the parties was in fact a transaction for advancement of loan and that they were not entitled to allotment of any shares of defendant No. 1 company. It was submitted by the learned senior counsel for the plaintiffs that vide letter dated 23-4-2008, the plaintiffs had informed defendant Nos. 2 and 3 that the transaction between the parties was a loan transaction. This to my mind does not have much significance considering the fact that the suit itself having been filed on 24-4-2008, the plaintiffs by that time must already have worked out the stand they had to take in the Court and the letter dated 23-4-2008 would obviously have been drafted accordingly. (d)Admittedly, no interest has been paid by defendant No. 1 to defendant Nos. 2 and 3 at any point of time. The case of the plaintiffs is that the interest was to be paid at the time of repayment of the principal amount. Ordinarily, when an individual advances loan to a company, he is not likely to defer payment of interest till the repayment of the principal sum, particularly when the documents executed between the parties make out a transaction of nature different from a loan transaction and there is no document evidencing the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re the loan given by defendant Nos. 2 and 3 and ensure that the plaintiffs did not back out of the two agreements between the parties. Of course, neither party has setup this case but the reason could be that it does not suit either of them. The plaintiffs do not want to part with the land and want to commercially exploit it and they also know that if defendant Nos. 2 and 3 are recognized as 50 per cent equity holders, they may create difficulties in exploitation of the land by plaintiffs to their exclusion and that is why they have setup a case of advancement of loan by defendant Nos. 2 and 3 to defendant No. 1. Similarly, defendant Nos. 2 and 3 may not be willing to acknowledge the true nature of transaction between the parties since they know that such a plea may not be tenable in law since the land belongs to the company and they feel that if they are recognized as 50 per cent equity holders, they can leverage the equity held by them to pressurize the plaintiffs to sell the land and share the profit received on sale of the land in terms of actual agreement between the parties. I would like to add that this is only a possibility and may not necessarily be the true transaction be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iffs to 10,000 shares. It is also an admitted case that 10,000 shares have been allotted to defendant No. 2, 3330 shares on 20-6-2005 and 6670 shares on 15-9-2005. The conduct of the plaintiffs in allotting 2480 shares to themselves and 10,000 shares to defendant No. 2 after signing of the MOU dated 27-5-2005 clearly shows that the understanding between the parties was that they would hold 10,000 shares each in defendant No. 1 company. 16. However, in my view, neither the terms contained in the MOU dated 27-5-2005 can be interpreted to mean that defendants 2 & 3 were entitled to hold 50 per cent equity of defendant No. 1 company for all times to come nor can such an agreement, if any, between the parties bind defendant No. 1 company. Nowhere does the MOU stipulate that after execution of the document authorized capital of defendant No. 1 company will not be increased. Nowhere does this document stipulate that if and when the authorized capital of defendant No. 1 is increased, it will be equally shared between the parties to the document. This document, therefore, does not place any restriction on the right of defendant No. 1 company to increase its authorized capital and issue fre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is increased, it would be equally shared between the parties to the documents, such an agreement, in my view, will be ultra vires the powers of the Directors of the company as also the Articles of Association of the company and, therefore, would not bind the company. The powers of the Board of Directors as contained in Articles of Association 19 & 50 of defendant No. 1 provide as under:- "19 The business of the Company shall be managed by the Directors who may pay all expenses incurred in getting up and registering the Company and may exercise all such powers of the Company as are not restricted by the Act or any statutory modification thereof for the time being in force or by these Articles required to be exercised by the company in general meeting subject nevertheless, to any regulations of these Articles, to the provisions of the Act, and to such regulations being not inconsistent with the aforesaid regulations or provisions as may be prescribed by the Company in general meeting. Nothing shall invalidate a prior act of the Directors which would have been valid if that regulation had not been made. 50. The Managing Directors shall have powers for the engagement and dismissal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itted except with the consent of the majority of the members. On the death of any member, his heir or heirs or nominee, shall be admitted as member. If such heir, heirs or nominee is/are unwilling to become a member, such share capital shall be distributed at par among the members equally or transferred to any new member with the consent of the majority of the members." After death of the brothers B and G, the son of one of them, who was defendant No. 1 in the suit sold the shares to defendants No. 4 to 6 who were the sons of the other brother contrary to the oral agreement between the deceased brothers. Hence, the plaintiffs, who were the other sons of B filed a suit seeking declaration that the sale was void and was not binding on them and also sought transfer of the shares to them and defendant No. 2. The High Court held that the sale of shares by defendant No. 1 in favour of defendant Nos. 2 and 6 was invalid and hence the plaintiffs and defendant No. 2 were entitled to purchase those shares, Allowing the appeal against the decision of the High Court, Supreme Court held that the Articles of Association being regulations of the Company were binding as well as its shareholders, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed Jagannath had obtained a preliminary decree by playing fraud on the Court by not disclosing all relevant facts and not producing the release deed which was a vital document, was of the view that fraud was a deception on the Court in order to gain advantage by another's loss and a litigant who approaches the Court would be guilty of playing fraud on the Court as well as the opposite party if vital documents are withheld by him in order to gain advantage on the other side. Rebutting the contention, it was pointed out by learned senior counsel for the plaintiffs that the documents filed by the plaintiffs along with the plaint disclosed the whole information including issue of additional equity to the plaintiffs and increase in authorized share capital of defendant No. 1 Company. Considering the fact that the relevant information was available to the Court in the documents filed by the plaintiffs, I do not think any unfair advantage has been obtained by the plaintiffs by filing unamended Memorandum and Articles of Association or by not disclosing the allotment of additional equity to them and increase in the authorized share capital of defendant No. 1 Company in the plaint. 22. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to take a firm view, at this stage, with respect to true nature of the transaction between the parties. As noted earlier, there are also circumstances which tend to indicate that the transaction between the parties was not a transaction for advancement of loan by defendant Nos. 2 and 3 to defendant No. 1. The management and control of defendant No. 1 company continues to vest in plaintiff Nos. 1 and 2. In these circumstances, it would not be appropriate to restrain defendant Nos. 2 and 3 from holding themselves out as shareholders of defendant No. 1 company during pendency of this suit. I see no serious prejudice being caused either to the plaintiffs or to defendant No. 1 company if defendant Nos. 2 and 3 are allowed to hold themselves out as the shareholders of defendant No. 1 company during pendency of this suit. This is more so when I do not propose to place any restriction on increase in the authorized share capital of defendant No. 1 company or allotment of fresh equity to one or more of the plaintiffs. The contention of the learned senior counsel for the plaintiffs was that if defendant Nos. 2 and 3 are allowed to act as share holders holding 50 per cent equity of the plainti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also directed to maintain status quo with respect to shareholding of defendant No. 1. They have also sought production of the minutes books of the meetings, financial records being Books of Accounts, Balance Sheet, Profit and Loss Account and annual return of defendant No. 1 for the years 2004-05 to 2009-10 as also inspection of the aforesaid record. 25. There can be no objection to the plaintiffs and defendant No. 1 being directed to produce copies of minutes books, books of accounts, balance sheets, profit and loss accounts and annual returns of defendant No. 1 for the years 2004-05 to 2009-10 and to give their inspection to defendants No. 2 and 3. As regards the share capital of defendant No. 1, I am of the view that there is no justification either for placing any embargo on the right of defendant No. 1 to increase his authorized capital or to issue fresh capital. If an embargo is placed on the record of issue of fresh capital that would result in depriving defendant No. 1 company of the funds which it requires for executing the projects it proposes to execute on the land allotted to it by RIICO and which can be available to it in the form of additional share capital. Allotmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of the Court, subject to the plaintiffs furnishing a bank guarantee equivalent to the amount of loan mentioned in para 10 of the plaint and simple interest on that amount at the rate of 15 per cent per annum from the date of the advancement of loan till the date of this order, to the satisfaction of the Registrar General of this Court. They are granted four weeks' time for this purpose. 28. The plaintiffs and defendant No. 1 are restrained from allotting any share of defendant No. 1 company to any person(s) other than themselves, without prior permission of the Court, during pendency of this suit. The allotment of additional equity, if any, to the plaintiffs will be subject to final decision in this suit and will not create any equity in their favour. The plaintiffs and defendant No. 1 will be entitled to mortgage the assets of defendant No. 1 company including the land allotted to it by RIICO with any bank/financial institution for obtaining loan for construction of a hotel on the land provided that the funds are used only for the construction of the hotel but, they will not sell, transfer, assign or part with possession of the aforesaid land during pendency of this suit, witho ..... X X X X Extracts X X X X X X X X Extracts X X X X
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