TMI Blog2013 (10) TMI 336X X X X Extracts X X X X X X X X Extracts X X X X ..... the present case. All the facts, including the conduct of the company in treating the person as a member/shareholder, the entries made in the balance-sheet, the reasons for not attending the meeting in which the shares were to be allotted, whether there was any clear and unambiguous abandonment of the claim and similar such facts have to be cumulatively considered; the inference or conclusion would depend upon the facts and circumstances and the conduct of the parties in each case. It would be unsafe to match the colour of one case with that of the other indiscriminately - CLB was right in its view that ITNL was a “member” for the purpose of maintaining an action under sections 111A, 397 and 398, 399 read with sections 402 and 403 of the Companies Act. Oppression and mismanagement - Rectification of the register of members - Held that:- a complicated matter involving serious questions such as fraud or malpractice, manipulation of accounts and finances, etc., requiring detailed investigation and production of elaborate evidence, would be more appropriately tried and decided by a Court of law and not by an arbitrator. It is submitted that there are serious manipulations committed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay be referred to as the airport companies . An agreement styled as Subscription-cum-shareholders Agreement (SSA) was entered into on 12.03.2010 between the SPV, A-3 (which is hereinafter also known as RAHI) and R-1 (hereinafter also referred to as ITNL). In terms of the SSA, RAHI was to make an investment of Rs. 30 crores in the SPV and acquire 60% stake in it and ITNL would invest Rs. 20 crores in the SPV to acquire 40% stake. RAHI invested the sum of Rs. 30 crores as per the agreement. ITNL too invested the amount of Rs. 20 crores as required by the SSA and the said amount was shown in the accounts of the SPV as share application money pending allotment . These shares were never allotted to ITNL. Umesh Kumar Baveja (A-1) was a director in RAHI as well as the SPV. Mukund Sapre was the person who controlled ITNL and invested Rs. 20 crores in the SPV through ITNL. Since no shares for Rs. 20 crores invested by ITNL were allotted to it by the SPV, problems arose between the two groups, one headed by Umesh Kumar Baveja and the other by Mukund Sapre. Mukund Sapre also entertained doubts about the utilisation of the amounts invested by ITNL in the SPV. ITNL had also given bank guara ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the SPV by entering into transactions with the related parties. It was further alleged in the petition that Baveja was prevaricating or evading the issue of shares to ITNL. An interim prayer was made in the petition to the effect that the respondents in the company petition failed to appoint Mukund Sapre as another nominee-director of ITNL and that ITNL was not informed about the affairs of the SPV even though it had invested substantial amount of money in the SPV and an audit should be carried out by an independent and impartial auditor which was not done despite request. There were also charges of misappropriation of the funds of the SPV by Baveja. 4. Before the CLB, a preliminary objection was taken by the respondents in the petition, to the effect that the petitioner (ITNL) was not a member of the SPV and that the amount of Rs. 20 crores invested by the petitioner was lying only as share application money, but had not been converted into shares. It was pointed out on behalf of the respondents that the minutes of the board meeting of SPV held on 22.02.2012 showed that no shares were allotted to ITNL because of the disinclination of Mukund Sapre to pursue the share allotment. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng of the meeting on the ground that no background material was supplied. Thereafter it made a specific request for inclusion of the allotment of the shares to it as a specific item in the agenda in the meeting to be held on 20.08.2012. (d) On 22.08.2012, ITNL sent an e-mail for allotment of shares by circular resolution. In the light of the above findings, the CLB concluded that ITNL, the petitioner before it, was a member of SPV and, therefore, can maintain the petition. 8. The CLB also commented upon the action of the respondents in relation to the conduct of the affairs of the SPV. Baveja, according to the CLB, had initially stated that the airports would be run as licensed airports; later he made a proposal that they would run as uncontrolled airports since getting licenses meant spending further amounts of Rs. 6-7 crores. It is only in order to avoid such payments that Baveja, according to the CLB, started questioning the proposal earlier made to run the airports as licensed airports, and attempted to dilute the scale and scope of the project. The CLB also noted that Comet Advisory Services was a company run by Baveja to which the SPV had made a payment of Rs. 12 crores ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ards share capital, the only conclusion that can be drawn is that the petitioner was not a member of the SPV. It is submitted further that on this aspect the CLB has not applied its mind and passed a reasoned order. 13. These submissions were contested stoutly on behalf of the respondents, the argument being firstly that no question of law is sought to be raised by the appellants and under section 10F of the Act, an appeal against the order of the CLB lies to the High Court only on a question of law. It is pointed out, as a first limb of the argument that the right that was sought to be exercised by the petitioner before the CLB was the right granted under clause 123 of the articles of association and for the purpose of exercising this right, it is not necessary for the petitioner before the CLB to be a member of the SPV. It was argued that the articles of association constitute a contract between the parties to the same and clause 123 read with clause 2(17) of the articles of association specifically granted ITNL the right to carry out an internal audit periodically at its own expense. The second limb of the argument was that in any case the petitioner cannot be held to be not a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 397 and 398 can be taken only by a person whose name is found in the register of members maintained by the company. Though a general proposition to this effect was laid down, still an exception was recognised to the general rule namely that in a given case a person who can show an undisputable and unchallengable title to the membership of the company may file a petition under section 397/398, even though his name is not formally entered in the register of members. 15. I now proceed to a consideration of some of the authorities cited before me by both sides on the point. In Shri Balaji Textile Mills Pvt. Ltd. and Anr. Vs. Ashok Kavle and Ors., (1989) 66 Company Cases 654 (Kar), a Division Bench (P.P. Bopanna M. Ramakrishna, JJ) of the Karnataka High Court took the view that the word member should be understood in the context in which it is used. It was held that allotment of shares is a matter of contract between the parties and such contract could be either expressed or implied. If a person is treated by the company as its shareholder, his right to membership cannot be questioned by the company at a later point of time on the ground that there was no compliance with th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... share application money is primarily used to fund the two airport infrastructure projects of the company. The conduct of the company in showing the money as share application money pending allotment and the utilisation of the money for the purpose for which the company was formed are clear pointers to the fact that the company itself recognised or treated the ITNL as a shareholder or member. This brings the case within the observations of the judgment of the Karnataka High Court. 17. I was referred to another judgment of the Karnataka High Court in Srikanta Datta Narasimharaja Wadiyar Vs. Venkateswara Real Estate Enterprises (Pvt.) Ltd. and Ors,. (1990) 68 Company Cases 216, which is that of P.P. Bopanna, J, acting as a Single Judge. In this judgment the learned single judge followed the Division Bench of the High Court cited supra. He also referred to the judgment of the Gujarat High court (supra). Vis-a-vis the judgment of the Gujarat High Court (supra) the learned single judge agreed that the question of maintainability of a petition under section 397 did arise for consideration before the Gujarat High Court and after noticing the observations of the Gujarat High Court which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hile arriving at the aforesaid view the Madras High Court referred to both the judgment of the single judge of the Karnataka High Court (supra) and the judgment of the Gujarat High Court (supra). It is also to be noted that the judgment of the Supreme Court referred to by the Madras High Court in the quoted paragraph of its judgment is that in World Wide Agencies vs. Margarat T. Desor (1990) 1 SCC 536. In the case before the Supreme Court; an objection was taken that in view of the specific provisions of Section 41(2), a member is one whose name is entered in the register of members. In that case, the member/shareholder of the company was one S K Desor. His name was entered in the register of members. On his death, his name continued to remain in the register. The names of his legal heirs had not been entered in the register when the applications were moved by them under sections 397-398 of the Act. The Supreme Court, following certain English authorities, opined that having regard to the scheme and purpose of section 397 and 398, it would be a proper construction to hold that the legal heirs of late S K Desor were members within the meaning of these sections. The overriding consid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nted its nominee-directions. There is a clear communication made by ITNL to the SPV on 22-8-2012 to the effect that it should be allotted the shares. There is no evidence to show that this claim was at any later point of time abandoned. The non-attendance of Mukund Sapre in the board meetings cannot be looked at as an act abandoning the claim. It is difficult to see how he would have thought of abandoning the claim to get the shares allotted, when the money had been invested with the clear understanding that the shares would be allotted and the same had not also been returned. In fact, the SPV has admitted in its balance-sheet that the money was utilised for the purposes of the two airports. ITNL also gave two bank guarantees amounting to app. Rs. 20 crores. The finding of the CLB that Mukund Sapre did not attend the board meetings because there was no background material/documentation supplied with regard to them and also the finding that the petitioner before it had sent a specific request to include the item relating to the allotment of shares in the agenda for the meeting to be held on 20-8-2012 are findings of fact; they are not challenged on the ground of perversity. The lear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agement is that the faction that is in control of the company has either intentionally reduced the rival faction to less than 1/10th of the total number of members of the company or removed the rival faction from the register of members. In such cases where allegation of oppression and mismanagement is inexplicably intertwined with the issue of maintainability of the petition under Section 399 of the Act, a composite petition has to be held as maintainable. To ask a petitioner to file two separate petitions in such circumstances would not only be unfair but would also result in unnecessary delay. 23. This should settle the issue. But the following two authorities were cited on behalf of the appellants: Morgan Ventures Ltd. vs. Blue Coast Hotels Resorts Ltd. Ors. (2010) 3 Comp LJ 33 (Bom) and Khoday Distilleries Ltd. vs. CIT (2008) 307 ITR 312 (SC). 24. These two authorities were cited for the proposition that the remedy of appeal under section 111A before the CLB does not lie in respect of refusal to allot shares. The question was answered by the learned single judge of the Bombay High Court in the negative. The reasoning of the learned single judge (S.J.Vazifdar, J) is ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Supreme Court in Khoday Distilleries Ltd (supra) expounds the difference between creation and transfer of shares. It says that there is a difference between issue of a share to a subscriber and the purchase of a share by a person from an existing shareholder. The former is a case of allotment of shares and the latter is a transfer of a chose in action. It is true that a transfer of shares is different from an allotment. The question however is whether the right of appeal under section 111A(2) is to be confined only to the transferee of the shares or should be given also to the allottee of the shares. 26. It is a well settled proposition that a right of appeal is a creature of the statute; there is no inherent right of appeal. Such a right has to be expressly conferred by the law. However, it is also an equally well settled proposition that a right of appeal, once conferred, must be liberally construed. If this principle is applied to the present case, as it ought to be in my humble opinion, I should prima facie think that a person who was not allotted the shares and whose name was thus not entered in the register of members, also has a right of appeal under section 111A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Supreme Court in P. Anand Gajapathi Raju v. P.V.G. Raju AIR 2000 SC 1886 and that such a clause should be construed to have overriding effect as held by the Supreme Court in Hindustan Petroleum Corporation Ltd. vs. Pinkcity Midway Petroleums AIR 2003 SC 2881. My attention was also drawn to the petition filed by the appellant before this Court under section 11 of the Arbitration and Conciliation Act, 1996 seeking the appointment of a sole arbitrator in terms of clause 16 of the SSA. It was submitted that this petition was filed before this Court even before the respondents filed the petition before the Company Law Board. It was also submitted on behalf of the appellants that the respondents were avoiding the arbitration for reasons best known to them. It is pointed out that the procedure prescribed by section 16(1) of the Arbitration and Conciliation Act, 1996 cannot be bypassed by the respondents and that the arbitrator himself will rule on his jurisdiction as provided in the section. 30. These contentions were opposed on behalf of the respondents. It was pointed out that the argument based on the arbitration clause was not raised before the CLB. It was submitted that at any rat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany and what they can do has to be ascertained with reference to the articles of association and any earlier arrangement or agreement between the parties inconsistent with the articles of association cannot be said to govern such relationship. In that case, there was a joint venture agreement entered into between the parties in 1999; this agreement provided for the exercise of an affirmative vote. In the articles of association, no amendment was carried out to incorporate the provision in the joint venture agreement providing for the exercise of the affirmative vote. It was held by the learned Single Judge that unless the articles of association were amended to provide for the exercise of the affirmative vote, that right cannot be insisted upon by a party to the joint venture agreement. In support of this conclusion, reliance was placed on the judgment of the Supreme Court in V.B. Rangaraj vs. V.B. Gopalakrishnan, (1992) 73 Company Cases 201. Quoting Palmer s Company Law, 24th Edition, dealing with the transfer of shares and referring to a judgment of the Bombay High Court in IL FS Trust Co. Ltd. vs. Birla Perucchini Ltd., (2004) 121 Company Cases 335, the learned Single Judge of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he factual position obtaining in the present case. 34. Several authorities were cited on behalf of the respondents, which I have referred to earlier, in support of the contention that a complicated matter involving serious questions such as fraud or malpractice, manipulation of accounts and finances, etc., requiring detailed investigation and production of elaborate evidence, would be more appropriately tried and decided by a Court of law and not by an arbitrator. It is submitted that there are serious manipulations committed by the appellants such as siphoning off the monies from the SPV to RAHI, back dating board resolutions, fabrication of board resolutions, etc. and in such a situation it would be more appropriate if the CLB decides the matter and not the arbitrator. This argument would arise for consideration only if there was a provision for arbitration of the dispute and it is a question of balancing which course to pursue whether to pursue the dispute in the Court or the CLB, or to go before the arbitrator. Such a situation does not arise on the facts of the present case and, therefore, this argument need not be addressed by me. In the present case, the petition is pend ..... X X X X Extracts X X X X X X X X Extracts X X X X
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