Tax Management India. Com
Law and Practice  :  Digital eBook
Research is most exciting & rewarding


  TMI - Tax Management India. Com
Follow us:
  Facebook   Twitter   Linkedin   Telegram

TMI Blog

Home

2002 (11) TMI 798

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... on 30.10.1995. The JV provided for incorporation of the 1st respondent company to develop and manage the proposed hotel. As per the joint venture agreement, the 2nd respondent was to hold not less than 35% shares while the 1st petitioner and its group were to hold not less than 36% and not more than 55% shares in the 1st respondent company. The contribution by the 2nd respondent was to be in kind, that is the transfer of the Wildflower Hall to the company for a value of ₹ 7.5 crores against which shares were to be issued. The 1st petitioner and its group were to invest ₹ 20 crores towards share capital and the responsibility to construct the hotel and make it commercially operational was to be with the 1st petitioner. The Board of the company was to comprise of 7 directors of which 3 including the chairman were to be nominated by the 2nd respondent and 4 including the MD by the 1st petitioner. The JV also provided that in case the hotel did not become fully commercially operational within a period of 4 years from the effective date, extendable by two terms of one year each -- subject to payment of ₹ 2 crores for each of the extended years - the shares issued in fa .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... d unauthorizedly changed the equity distribution ratio without obtaining our permission and consent in terms of the Joint Venture Agreement. 4. You have paid and/or appropriated a large sum of money as payment to your associate companies and other companies under the garb of having obtained technical assistance from them, even though under the agreement, those services were to be provided by you free of charge or in any case that was your responsibility. 5. You have unduly delayed the commissioning of the project and have burdened the joint venture with escalation of more than 100%. In view of the above, the joint Venture Agreement dated 30.10.95 stands automatically terminated w.e.f. 30.10.2001 in terms of Clause 10.1.(b) of the JVA. Consequently EIH stands disqualified from continuing as a member and/or shareholder of the JV company and the shares held by EIH stand surrendered in favour of the State in terms of Article 3(3) of Allotment Agreement read with Article 10 of the Article of Association of the JV company and Article 5 of the Shareholders Agreement. x x x x x Further, in terms of Clause 11.1 11.2 of the JVA, the land, buildings and structures on the Wild Flowe .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... shares and once this condition is no longer fulfilled, even the JVA cannot stand. It is more so when the State itself agreed for alteration in the Articles to provide for the Board to decide the proportion of shareholding of the State and the petitioners' group. According to Article 6.2, the State has the right to appoint the Chairman of the Board only if it continues to hold 35% shares and not otherwise. Therefore, the decision taken in the Board Meeting held on 7.3.2002 which are impugned in the petition could not have been taken with the presence of the Chairman appointed by the State. Further, as per Article 6.6, 7 days notice is required for any Board Meeting and in terms of Article 6.7, such notice should set out the agenda to be transacted in the Board Meeting convened. As far as the meeting on 7.3.2002 is concerned, neither 7 days notice was given nor the agenda for that meeting had been set out in the notice. Further, in terms of Article 6.8, there should be at least one director from both the sides to constitute the quorum for the meeting. In the absence of a notice, 'none from the petitioners' side attended the meeting on 7.3.2002 and the decision taken in t .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... premises of the company would be handed over to the State on a as is where is basis is unlawful and unenforceable in as much as two shareholders can never agree on taking over the assets of a company. It is a settled law that no shareholder has a right to a share of the property of a company except on a winding up of company, if there is any surplus. (Bacha F. Gudzar v. CIT-1955 SCR 876). 5. The learned counsel further submitted: The Hotel became fully commercially operational with 28 room with all the facilities on 30.3.2001. Even though other 57 rooms are fully ready, yet the Government has not given permission to operate these rooms. Therefore, the petitioners can never be held responsible for not bringing these 57 rooms operational. Even otherwise, in terms of Clause 4 of Article 3 of the Allotment Agreement, extension can be granted. Even though the original 4 years period expired on 3.5.2000 after handing over the premises on 3.5.1996, yet, no issue was raised regarding the delay by the State afterwards and subsequent to that period, the petitioners have pumped in huge amount of money into the project. Such inaction by the State would amount to implied extension of the p .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... the petitioners. It is to the knowledge of the State that a Hotel project is a capital intensive one and there is no likelihood of any income for quite some time. That is the reason why the State gave only the premises for development and did not want to subscribe to further shares in spite of right offers made to the State. Without investing any money, the State wants to take over the mortgaged assets of the company on which a lot of value addition has been made by the petitioners by huge investments. Such an action on the part of the State and the consent given by the Board consisting of the nominees of the State is highly oppressive and burdensome not only on the petitioners but also the company. Further, the State cannot wear two caps. While its nominees of the State on the Board approve the plans for construction of the hotel premises, another arm of the State, namely, the Tourism Department declines to give permission to operate the hotel fully. The Supreme Court has approved in Express Newspapers Ltd v. UOI (1986 1 SCC at page 248) the observation in Robertson v. Minister of Pension (1949 1 KB 27) that one arm of the government is bound by the decision of another arm of the .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... y prohibited by this Section. When an Arbitral Tribunal has been constituted, there is no requirement to file an application under Section 8 of the Arbitration Act. In addition, in terms of Section 17 of the Arbitration Act, the Arbitral Tribunal is competent to grant interim relief and as such the petitioners can move that Tribunal for any interim order that they seek to have. The very fact of invoking the Arbitration clause and immediately thereafter filing this petition is nothing but abuse of process of this Board and as such should not be encouraged. This is more so because the entire cause of action in this petition arises out of JVA which has now become the subject matter of Arbitration. The validity of termination has to be adjudicated only by the Arbitral Tribunal and not by this Bench. This Board has held in Dr. Mrs. Mrunalini Devi Paur v. Gaekwar Investment Corporation Private Limited (82 CC 899) that no party can have parallel proceedings side by side and accordingly stayed the proceedings before the CLB. Since in the present case, the Arbitration proceedings have also commenced unlike in the case Bhadresh Kansilal Shah v. AIA Magotteaux International (2000 36 CLA 76-CL .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... for any equitable relief from this Bench and as such this petition itself should be dismissed.Further, the petitioners have not been consistent in their pleadings and are approbating and reprobating. While in the petition, they have admitted the execution of allotment agreement with the company, in the rejoinder, they have denied the same. 9. It was further submitted on behalf of the state the petitioners being in control of the management of the company have mismanaged the affairs. The cost of the project has gone up to ₹ 100 crores as against projected cost of ₹ 40 crores. They have been charging the company for provision of technical services which should have been given free of charge in terms of the JVA. For over 3 years, in spite of repeated requests by the State for having the accounts of the company audited by an independent auditor, the petitioners have refused to do so. The suggestion of the State to agree to the lease terms and match the offer made by Holiday Inn has not been agreed to by the petitioners. If the petitioners had agreed for this suggestion, the State would be getting over ₹ 140 crores over a period of 45 years. Presently, in view of th .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... equire the petitioners to sell their shares to the State and it also provides the consideration to be paid in case of such sale of shares. The same clause also provides that on termination and payment of consideration for the shares, the property of the company shall revert to the State. The JVA, the allotment agreement and the Articles, all provide for timely completion of the project and the therefore time is the essence of the entire project. On breach of the fundamental duty, the petitioners are bound to surrender their shares to the State. This being the case, the moment the JVA is cancelled, the petitioners ceased to be members of the company. In what manner and how the shares held by the petitioners are to be dealt with further is not of any concern of the petitioners. A perusal of the deed of conveyance of the land at page 70 of the reply would indicate that the conveyance was subject to the provisions of JVA. 11. In terms of JVA, shareholders' agreement, allotment agreement and Memorandum and Articles of the company, it was the duty of the petitioners to make the Hotel fully commercially operational within 6 years from the date of signing of the JVA or within a peri .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... view of this, there is no scope to exercise inherent powers under Regulation 44 of the CLB Regulations to stay the present proceedings. As far as Section 5 of the Arbitration Act is concerned, it also has no application as this section restricts the intervention of the judicial authority to the situations provided in Part-1 of that Act. It only provides that a judicial authority cannot intervene in the conduct of the arbitration and does not restrict it from matters brought before it when the party do not make any application under Section 8 of the Arbitration Act. 13. The learned counsel further submitted: As alleged by the State, the prayers before the arbitration and in the present petition are not common. While in the arbitration, the petitioners have challenged the termination notice dated 6th March, 2002, in the present proceedings, they have challenged the decision taken by the Board of Directors on 7th March, 2002. In the present proceedings, the petitioners are not challenging the termination notice and they will have the same adjudicated by the Arbitration Tribunal. The shares held by the petitioners cannot be taken away without due process of law by another sharehold .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... in case of non fulfillment of any of the terms of the allotment agreement notwithstanding the fact that this allotment agreement has not been executed between the company and EIH as is evident from the agenda for the Board meeting on 24.4.2002, it as all there is a right to acquire the shares, it is only with the company and not with the State. Just because the State has written a letter to the company on 7.3.2002 that the shares stood surrendered in favour of the State, the Board could not have decided that EIH Group had ceased to be a member of the company. Further when the State, on its own violation, diluted its shareholding by not subscribing to the right offer to a hopeless minority, it cannot take over a company. The ground on which the nominees of EIH had reportedly ceased to be directors was on the basis that EIH and its group had ceased to be members of the company. Such a stand by the Board cannot be sustained in law. The only way by which a person can be declared to have ceased to a director is his removal in terms of Section 28A Act after following the procedure prescribed under that Section. (Bhankerpur Simbholi Breweries P Ltd. v. Sarabjit Singh-86 CC 842). 14. Th .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... l for the applicant, the provisions of Section 8 would become redundant. This order of this Board in Sunair Hotel was taken on appeal and the High Court upheld the decision. SLP filed thereafter was also dismissed. As a matter of fact even when an application under Section 8 of the Arbitration Act is pending before a judicial authority, Section 8(3) of the said Act permits continuation and completion of arbitration proceedings. Therefore, the provisions of Section 5 of the Arbitration Act do not envisage either staying or dismissal of a petition pending before a judicial authority once arbitration proceedings have commenced. This can be contrasted with provisions of Section 34 of the Arbitration Act of 1940, according to which, a party could ask stay of legal proceeding when there is an arbitration agreement between the parties. Most importantly, the company is not a party to the Arbitration proceeding and this Board has held in AIA Magotteaux case (supra) that a proceeding under Sections 397/98 cannot be referred to Arbitration if the company is not a party to the arbitration. As far as the argument that once Arbitration proceedings have commenced, there is no need to file a peti .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... that arbitration proceedings have commenced. 17. One other ground for seeking dismissal of the petition is that the petitioners have averred that there were no dispute between the parties before 6.3.2002 by suppressing the information relating to the disputes between the parties on restructuring. I have gone through the petition. In para 8(k) of the petition, the petitioners have averred In between December 13, 1995 till date, the business of the company in accordance with objects and terms of the Articles have been carried on successfully and peacefully. Throughout this period, the Board of Directors of this company including the representative of the petitioner No. 1 and respondent No. 2 have conducted the affairs of the company in accordance with provisions of the Act and the Articles and in furtherance of the aforesaid objects. During this period, the Board of Directors of the company met on number of occasions and except in the meeting held on December, 28, 2001, there was unanimity among the members of the Board. On various issues, the Board of Directors have applied its mind from time to time and approved the business of the company carried on in accordance with the dire .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... ent from its letter dated 21.9.2001 to the State wherein EIH has given an alternative proposal that the State could sell its shares to EIH on a value to be determined by an internationally recognized independent valuer. No further documents have been filed to ascertain as to what ultimately happened. It is on record that even after 1998, both the parties have been working together and the 28 rooms were made operational in March 2001. In other words these correspondence do not reflect that there had been disputes between the parties and non disclosure of the same would amount to coming to court with unclean hands. 18. Yet another complaint of the State is that the petitioners are changing their stand in regard to the execution of Allotment Agreement. The fact as to whether the same was executed as averred in the petition or not executed as averred in the rejoinder has now been put to rest by the agenda for the Board meeting convened on 6th May. Item No. 4 reads Execution of the allotment agreement between Mashobra Resort Limited and EIH Limited as per the Board of Directors resolution dated 6th January 1996 . Shri Sarkar fairly admitted that the petitioners had committed an erro .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... ir office as Director/Managing Director of Respondent No. 1 company. (e) That this Hon'ble Board may be pleased to pass such other and further orders with a view to bringing to an end the matter complained of in this petition and as may be deemed necessary in the interest of justice and may pass any or all of the directions provided in Section 402 of the Act including the purchase of shares or interest of Respondent No. 2 by Petitioner No. 1 and/or its nominee. (f) This Hon'ble Board may be pleased to reserve petitioners right to amend or add to the reliefs as prayed for. 21. The impugned Board meeting was held obviously in response to the letter of the State dated 7.3.2002 addressed to the company, which reads as follows: This is to inform you that the Government of Himachal Pradesh has terminated the joint venture agreement dated 30.10.1995 between the Govt. of Himachal Pradesh and East India Hotel Ltd. pertaining to Mashobra Resorts Ltd. As a consequence of this termination, EIH stands disqualified from continuing as a member and or shareholder of the joint venture company and the shares held by EIH stand surrendered in favour of the State of Himachal Pradesh i .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... at all the businesses as per the agenda had been transacted in that meeting which was attended only by 3 of the nominees of the State. In regard to item No. 4 of the agenda, the minutes read: 4. Transfer of shares and vacation of office of EIH nominee directors: Mr. Ashok Thakur informed the Board that the Government of Himachal Pradesh has informed EIH of the Automatic Termination of the Joint Venture Agreement dated 30.10.1995 between the Government of Himachal Pradesh and The East India hotels Limited (EIH) pertaining to Mashobra Resort Limited. The letter of termination issued by the State Government to EIH in this regard dated 6.3.2002 was tabled before the meeting. He further informed the board that in terms of the aforesaid letter, as a consequence of this automatic termination EIH stands disqualified from continuing as a member and/or shareholder of the Joint Venture Company and the shares held by EIH stand surrendered in favour of the State of Himachal Pradesh in terms of Article 3(3) of Allotment Agreement read with Article 10 of the Articles of Association of the Joint Venture Company and Article 5 of the Shareholders Agreement. Also the nominee directors of EIH inc .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... to be oppressive. In the present case since both the acts have taken place, the petitioners have alleged oppression. Therefore, the issue to be examined is whether, the same have been done on valid grounds and in accordance with law. 25. The rights and liabilities of EIH and the State have been elaborated in various documents like JVA, Allotment Agreement, Shareholders Agreement and Articles. According to the learned counsel for the State, all these documents have to be read together to determine the rights and liabilities of the parties since in terms of Clause B-15 of the Memorandum, the company has adopted all pre incorporation agreements between the parties. It is to be seen that this clause only gives the powers to the company to adopt those agreements but a perusal of the minutes of the first meeting of the Board of Directors held on 6.1.1996 and minutes of subsequent meetings, does not disclose any decision adopting these agreements. Even in the Articles of Association, it is stated that Table A in the First Schedule to the Companies Act shall form the Articles of the company. Further, Article 1.1 reads The present Articles of Association have been formulated in pursuanc .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... all be strictly on the terms specified in the allotment agreement to be executed between the company and EIH. Any breach of obligations under the allotment agreement shall entail consequences as under: Article 10.1: The failure of EIH to comply with the aforementioned terms and conditions shall disqualify it from continuing as member and/or shareholder of the company and consequently, EIH shall be expelled from the membership of the company and shall cease to hold any shares therein. The shares held by EIH shall be surrendered by the company in accordance with the shareholders' agreement. Article 10.2: The Board shall then issue the shares held by EIH to the other members and/or shareholders in proportion to their shareholder in the company in accordance with the shareholders' agreement. Article 10.3: In the event that EIH continues to hold the shares for any reason whatsoever, it shall exercise its voting rights in such a manner so as to cause the transfer of the premises on a as is where is basis to the State subjects to shareholders' agreement. Article 32: Compulsory Transfer of Shares: The shares of either EIH or the State shall be transferred to the o .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... Significantly, in the Board resolution in regard to transfer of shares, there is no reference to the Articles at all. In terms of the Articles of Association, only the company has the right to either acquire the shares held by EIH or expel them as members, that too only in case of breach of the terms of the allotment agreement. Even though, there is a dispute as to whether the allotment agreement has been executed, now it is on record, as is evident from the agenda for the Board Meeting on 10.4.2002 that the allotment agreement is yet to be executed. When the right of the company is regard to EIH shares is subject to execution of allotment agreement, the Board could not have taken any decision in this regard when no allotment agreement had been executed. Further, according to the allotment agreement, shares shall stand surrendered. It would mean that the shares would be surrendered to the company by EIH which is not the position in the present case. At the same time, Article 32 of the Articles of Association of the company stipulates compulsory transfer of shares in the event of termination of the joint venture agreement. In addition while Article 8.1 gives the right to the company .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... n watches the company's interest and is not acting on executive authority of the Government . One important aspect as may be seen from the provisions of the Articles, JVA, shareholders Agreement and Allotment Agreement is that no where it is provided that the State can unilaterally declare that the shares stood transferred on its remitting the consideration and that on that basis the Board would approve the transfer. Even though Article 32 provides for compulsory transfer, it does not mean that the State can unilaterally decide that the shares stood transferred in its favour. This Article only provides that the State can compel EIH to transfer its shares in favour of the State. In the process of approving the transfer of shares in a hurried manner, the Board had also overlooked compliance with statutory requirements in terms of Section 108, which are mandatory as per Apex Court decision in Mannalal case. Shri Sarkar relevantly cited certain cases noted as a part of his arguments to the effect that without instruments of transfer properly executed, a company cannot register transfer of shares. As per Article 9 of the JVA, in the event of termination of the JVA, EIH is to sell th .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... in the decision making process with reference to aforesaid surrender of the shares allotted to East India Hotels.....as there shall be deemed to be interested parties for the same . Article 5.3 of the shareholders' agreement reads: In any case subject to Clause 2 above, the directors who are appointees or nominees of EIH shall give up their position as such and shall not attend any meeting of the Board. It is further stipulated that in case the appointees or nominees of EIH attend any meetings of the Board for any reasons whatsoever, the EIH shall exercise its voting right in the company in such a manner as to cause the transfer of the premises on a as is where is basis to the State . None of the above provisions empowers the Board to resolve that the nominees of EIH cease to be directors once the State declares that the shares stood transferred in its favour. These provisions indicate that the directorship of the nominees of EIH is linked to its holding shares. The Board had passed the resolution of cessation of the nominees of EIH as directors on the ground that EIH had ceased to be members of the company on approval of the transfer its shares in favour of the State. Since .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... in specie any property of the company or any proceeds of the same on disposal of any property of the company in the event of winding up, but no distribution amounting to a reduction of capital be made except with the sanction for the time being (if any) required by law . As per Article 23(i) of the Articles of Association of the company, the approval of the Board is required for transfer of interest including sale, exchange, lease, mortgage, surrender or disposal of any asset of the company. In the present case there is no Board resolution nor such a transfer is permissible without following the procedure as per law. The settled principle of law as enunciated as early as in 1897 in Saloman v. Saloman Co. Ltd. (1897 AC 22) is that once a company is incorporated, it becomes a separate legal entity and must be treated like any other independent person with its own rights and liabilities distinct from those of its shareholders. No shareholder can claim any right over the property of the company and on the basis of a shareholders' agreement, a shareholder cannot appropriate the assets of a company. The cases cited by Shri Sarkar viz., Bharat Aluminium Company Ltd. v. Special Are D .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... 02. The control and management of the company will continue to be what it was before the Board Meeting held on 7.3.2002 as also the operation of bank accounts and exercise of powers under power of attorney. The State has complained that the company is not furnishing accounting and other information/details sought by it. Since, the State is the only other shareholder and also has nominees on the Board, the company, EIH should provide all information relating to the affairs of the company when sought for. Even though Shri Sarkar pointed out that since the right of the State to appoint the Chairman of the Board had ceased after its shareholding came down below 35%, I do not propose to examine the same as thee is no prayer to that effect in the petition. As far as the prayer of the petitioners that this Bench should give directions to the State to accord permission to operate the remaining 57 rooms in the Hotel is concerned, I am of the view that it is beyond the powers of this Bench to do so in these proceedings in as much as according to the State there have been certain violations of the Building Laws. Further, since the petitioners have already filed a writ prosecute those proceedi .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... ent value, which cannot be more than ₹ 15 crores. Taking this aspect and also the interests of the company, EIH and the State into consideration, I would suggest two alternatives for the consideration of both the sides. In facts of certain cases filed under Sections 397/98 of the Act, while directing one of the parties to sell the shares, this Board did not direct valuation of shares. Instead, the money invested in the shares was ordered to be refunded with a reasonable rate of interest. In the same way, in the present case, the par value of the shares could be deemed to have been invested by the State in cash and interest at a reasonable rate-say 15% per annum or at the bank rate could be added to the par value from the date of handing over the possession of the premises to the company upto 31.12.2002 and the sum so arrived at could be taken as the fair value of the shares. The State can have the option of keeping this amount as loan to the company at the same rate of interest so that the State could get regular income, which, over 45 years period could come to a substantial amount. It can also have a nominee on the Board of the company as long as the loan is kept with the c .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

 

 

 

 

Quick Updates:Latest Updates