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TMI Blog2015 (5) TMI 799X X X X Extracts X X X X X X X X Extracts X X X X ..... ated in Mauritius and jointly hold the entire issued paid up and subscribed capital of the proforma defendant. The defendant no.1 is a company owned by Sarda group. The defendant no.2 is a joint-venture company. The proforma defendant and the defendant no.1 hold the entire issued paid up and subscribed capital of the defendant no.2. Pursuant to the permission granted by the Government of India, Ministry of Finance, by its letter dated 14th June, 2007 to the plaintiff no. 1, the proforma defendant was incorporated as a wholly owned subsidiary of the plaintiff in India, interalia, for the purpose of engaging in construction, development projects, including and by way of consortium and joint development agreement and to make downstream investment in the wholly owned subsidiaries and joint ventures engaged for the aforesaid activities. Pursuant to the approval of the Foreign Investment Promotion Board (FIPB), foreign equity participation of US $ 10,000,000 was to be made by the plaintiff no. 1 in the paid up share capital of the proforma defendant. Following the approval, the plaintiff no. 1 subscribed to the paid up share capital and holds 99.5% of the share capital of and in the pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... defendant. Thereafter, on 22nd December, 2009, in an Extra Ordinary General Meeting, the defendant nos.3 to 5 were removed from the board of the proforma defendant and two new directors were appointed in the said Board. The plaintiffs, thereafter, duly informed the banker of the proforma defendant about the removal of the said defendant nos. 3 to 5, as directors of the said company and requested Hong Kong and Shanghai Bank to freeze the account of the proforma defendant. The proforma defendant, however, could not file the requisite Form 32 recording the cessation of directorship and appointment of the two new directors, as the said form was to be filed electronically under a valid digital signature of an authorized signatory registered with the concerned Registrar of Companies, and such digital signature was not available with the plaintiffs. The non-filing of such Form 32, however, did not and could not entitle the defendant nos. 3 to 5 to claim themselves as the directors of the proforma defendant after 22nd December, 2009. Subsequently, the plaintiffs, through a Company Secretary, addressed a mail dated 18th February, 2010, to the Registrar of Company, Mumbai, requesting the sai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . A Special Leave Petition was also dismissed by recording that the Division Bench of the High Court has already granted liberty to the writ petitioners to approach the appropriate forum. Subsequently, another Writ Petition, being W.P. No. 1314 of 2012, was filed by the defendant no.2 and Jagdish Sarda, as one of the directors of the defendant no.2, against the order of the Banking Ombudsman, to revoke the orders dated, 13th April, 2011 and 14th October, 2011, by which the Banking Ombudsman, closed the complaint filed by the defendant no.2 based on a finding that the freezing of the account was done by the Hong Kong Bank on the basis of the Board resolution, and not on the request of the shareholders. The Hong Kong Bank refused to honour the cheques on the basis of the instructions received from the plaintiffs. On a notice being issued, the plaintiffs were impleaded as Respondent nos. 7 and 8. The Hon'ble Division Bench of the Bombay High Court by a judgment and order dated 8th January, 2014 after referring to the earlier Division Bench order in W.P. No. 1971 of 2011 held that the defendant nos. 2 to 5 having availed the remedy provided under section 35A of the Banking Regulation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er, was subsequently corrected on 16th May, 2013. The defendant no.1 has put that award into execution. It is alleged that the defendants, in collusion and conspiracy with each other, have perpetrated fraud on the plaintiffs through the proforma defendant. The defendant nos. 3 to 5 and each one of them purported to represent themselves as directors of the proforma defendant even after 22nd December, 2009, knowing fully well that they were not authorized to do so. The defendant nos. 1 and 2 are both being controlled by Mr. Jagdish Sarda, actively concealed the fact that they were fully aware that the defendant nos. 3 to 5 had no authority to issue any cheque or cheques on behalf of the proforma defendant. The defendant nos. 1 and 2, actively concealed the fact that the plaintiffs, being the 100% shareholders of the proforma defendant, were only entitled to represent the proforma defendant, and the defendant nos. 3, 4 and 5 had no authority to represent the proforma defendant. The alleged dispute between the defendant no.1 and the proforma defendant was not covered by the arbitration clause contained in the Joint-venture Agreement dated 12th July, 2007. The defendant nos. 1 and 3 to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r S. & W. Co. reported at AIR 1941 Cal 174 @ pages 177-179 4) Western Coalfields Limited -vs- Special Area Development Authority, Korba & Anr. reported at AIR 1982 SC 697 It is submitted that a shareholder has no interest in the assets of the company. There is not a single averment in the plaint that the suit is being filed for the benefit of or on behalf of the proforma defendant company. The suit is not for protection of assets of the proforma defendant company. The suit is essentially a personal cause of action and not a derivative action. Mr. Chatterjee has relied upon Bacha F. Guzdar -vs- Commissioner of Income Tax, Bombay reported at AIR 1955 SC 74 and Vodafone International Holdings BV -vs- Union of India & Anr., reported at 2012 (6) SCC 613 @ page 712. It is submitted that the Arbitration & Conciliation Act, 1996 mandates an application under Section 34 as the only mode for setting aside of an award. The proforma defendant (against whom the award has been passed) has not challenged the said Award by filing an application under Section 34 of the Arbitration and Conciliation Act, 1996. The mandatory period prescribed for filing an application for setting aside of an Award ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the defendant nos. 3 to 5 as Directors of the proforma defendant since 22nd December, 2009 and have intentionally permitted the state of affairs to continue. Though aware since December, 2009, the plaintiffs deliberately and intentionally chose to remain silent and did not institute any proceeding whatsoever against the defendant nos. 3 to 5. In the premises, challenge to the authority of the defendant nos. 3 to 5 to act as Directors of the proforma defendant is barred by the laws of limitation. Hence, prayer (c), (e) and (f) of the plaint cannot be granted. The reliefs other than those challenging the said Award are purely declaratory in nature without any consequential reliefs being claimed, and hence cannot be granted, in view of the law laid down in M. K. Rappai & Ors. -vs- John & Ors. reported at (1969)2 SCC 590. Abdul Sattar Hajee Abdoulla has no authority to represent the plaintiff companies and execute a Power of Attorney for institution of the instant suit. Also, Kurupath Madhavan Nayar has no authority to initiate the instant suit as he cannot possibly have any knowledge of the averments made in the plaint which have been verified as true to his knowledge. The Powers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eement on the basis whereof such award was obtained, the plaintiffs though aggrieved by such award could not have filed an application under Section 34 of the Arbitration and Conciliation Act, 1996 for setting aside the same. In the normal course it was for the proforma defendant to challenge the said award. However, the proforma defendant has not challenged the award as its directors on record being the defendant nos. 3 to 5 are parties to the collusion and conspiracy which culminated into the fraudulent award. An application under Section 34 of the Arbitration and Conciliation Act, 1996 can only be made by a party as defined in section 2(1)(h) of the said Act. In this connection, Mr. Mitra has relied upon the following judgements:- 1) Chennai Container Terminal Pvt. Ltd. etc. Vs. Union of India & Ors. reported at AIR 2007 Madras 325 (DB) paragraphs 9 to 11; 2) Benarsi Krishna Committee & Ors. Vs. Karmyogi Shelters Private Limited reported at (2012) 9 SCC 496 paragraph 15. The decisions relied upon on behalf of the defendant no.1 to contend that the above suit is barred by the Arbitration and Conciliation Act, 1996, has no application to the instant suit. None of such decisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oners. In the said writ petition, the right of the defendant nos. 3 to 5 to represent the proforma defendant was questioned. The Hon'ble Supreme Court by its order dated 2nd July, 2012 while dismissing the Special Leave Petition filed by the defendant no. 3 to 5 observed that the Division Bench of High Court had already granted liberty to the petitioners to approach the appropriate forum. The defendant nos. 3 to 5, thereafter did not approach any forum to assert or claim their right to represent the proforma defendant. Only on 10th July, 2014, the plaintiffs came to know about the further wrongful activities of the defendant nos. 3 to 5 which led to filing of the instant suit. Under the circumstances, it cannot be said that the claim of the plaintiffs against the defendant nos. 3 to 5 is barred by the laws of limitation. In any event, on that ground the entire suit cannot be dismissed. In reply Mr. Pratap Chatterjee, the learned Senior Counsel submitted that in the plaint, the plaintiffs have referred to various documents and filed such documents along with plaint, but there is no specific pleading in the plaint about the said documents. The learned Senior Counsel has relied upon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dends which have been duly declared, to exercise pre-emption rights conferred by the articles, and to have his capital returned in proper order of priority on a winding up or on a properly authorized reduction of capital. Under the general law he is entitled to restrain the company from doing acts which are ultra vires, to have a reasonable opportunity to speak at meetings of members and to move amendments to resolutions proposed at such meetings to transfer his shares; not to have his financial obligations to the company increased without his consent; and to exercise the many rights conferred on him by the Companies Act, such as his right to inspect various documents and registers kept by the Company. The dividing line between personal and corporate rights is not always very easy to draw. The Courts, however, incline to treat a provision in the memorandum or articles as conferring a personal right on a member, if he has a special interest in its observance distinct from the general interest which every member has in the company adhering to the terms of its constitution. In an action for violation of personal rights a single shareholder suing alone and not even on behalf of other s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 975) QB 373 at 390 (CA). It is a "procedural device for enabling the Court to do justice to a company controlled by miscreant directors or shareholders." (Per Lawton in Nurcomba vs. Nurcomba; 1985 (1) WLR 370 at Page 376). As a general rule, the courts will not interfere in matters of internal administration. It is for the majority of shareholders to decide the manner in which the affairs of the company are to be conducted. This principle was laid down in the celebrated case of Foss Vs. Harbottle. The court held that in the case of an injury to the corporation, it is for the corporation to sue in its own name and individual shareholders cannot assume to themselves the right of suing in the name of corporation. The effect of the rule is that the majority shareholders cannot complain of any irregular act which the majority are entitled to do regularly. The circumstances in which minority shareholders' actions are allowable constitute the exceptions to the rule in Foss Vs. Harbottle. Such an action is filed by the shareholder in his own name but is for the benefit and advantage of the company. The person filing a derivative claim has to show that the company has a right to sue but be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (supra) the form of a derivative actions was discussed and it was held that if a wrong is done to the company a special form of suit can be adopted as a matter of machinery to obtain relief under special and peculiar circumstances. It states:- "I propose, as shortly as I can without going into the case in detail, to explain my understanding of the matter. There can of course be suits by shareholders against the company for individual wrong done to them. Apart from individual wrong there may be suits to restrain acts ultra vires. There is no question of ultra vires in this case and I propose to confine the discussion to suits other than those based upon complaints of acts ultra vires, although I am not suggesting that there is any fundamental difference in principle. Suit to restrain acts ultra vires and suits to restrain certain acts about to be discussed notwithstanding that the acts have the support of the majority of shareholders, are both exceptions to the rule that the Court will not interfere in the affairs of the company or with the decision of the majority. The Court interferes in cases of an ultra vires act, because i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... There is, it is true, a secondary wrong in the suppression of the opposition of the minority, the overwhelming of the minority. In the normal case the distinction is purely theoretical, the wrong-doers are themselves the majority. I can conceive, however, of cases where the distinction may become apparent, in other words, where the primary wrong-doers, those committing the fraud or the wrongful act, are not themselves the majority but get the support of the majority." As has been lucidly explained in Pennington Company Law:- "In certain circumstances an individual member may bring an action to remedy a wrong done to the company or to compel his company to conduct its affairs in accordance with its constitution and the rules of law governing it, even though no wrong has been done to him personally but only to the company, and even though the majority of his fellow members do not wish the action to be brought. The form of his action in these exceptional cases is peculiar, because the complainant does not sue in his own right alone, but he sues instead on behalf of himself and all his fellow m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orced is against the proforma defendant. It appears from the reading of the Plaint that it is essentially a personal cause of action against the Defendant nos. 3, 4 and 5. The plaintiffs are the majority shareholders. There is a dispute with regard to the internal management of the proforma defendant. The orders relied upon by the plaintiffs would not show that the Defendant nos. 3, 4 and 5 were restrained from representing the proforma defendant. In fact, the plaintiffs admit that the Form 32 is yet to be accepted. The plaintiffs as shareholders of the proforma defendant neither could have initiated an arbitration proceeding in their own name, nor the said plaintiffs would be entitled to initiate arbitration proceedings and claim any relief on behalf of the company. No shareholder can say that because the company is a party to the arbitration agreement, he should be allowed to initiate arbitration proceedings and claim any relief in the said proceeding. It is the company who alone can initiate and/or defend such proceeding. A third party is no way concerned with the inter se disputes between the shareholders of the company. However if the said third party is a party to a fraud in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nter se disputes between the plaintiffs and the defendant Nos.3 to 5. Although, the plaintiffs have asserted that the said defendants for long years have ceased to become directors and since 2009 the said defendants were not entitled to hold themselves as directors but the plaintiffs did not take recourse to any legal proceeding to prevent the said defendants from asserting their rights as directors since even thereafter the said defendants continued to assert their right as directors that had resulted in various litigation. Even if it is assumed that the defendant No.1 is aware of the inter se disputes between the plaintiffs and the defendant Nos.3 to 5, the defendant No.1 is under no obligation to disclose such dispute before the arbitrator since the claim of the defendant No.1 is against the proforma defendant. The defendant No.1 appears to have been roped in by clever drafting, in order to avoid the award passed against the proforma defendant. The reliefs claimed in the plaint so far as it seeks a declaration that the award against the defendant No.1 is nonest, illegal and not enforceable and the said award is required to be set aside, in my view, having regard to the frame of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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