2010 (9) TMI 213 - HC - Companies Law

Court Upholds Interim Relief, Void Transfer of Shares, and Validity of SPA Clause

The court dismissed all appeals and upheld the interim relief granted to the plaintiffs. It found the transfer of shares by Defendant No. 1 to Defendant ... Whether the plaintiffs were entitled for interim-relief of injunction against the defendants as prayed? Whether the defendant Nos. 3 and 4 were entitled for relief of allowing execution and acting upon the Consent Award between defendant No. 1 and defendant No. 3.? Held that:- It is rightly argued on behalf of the plaintiffs as well as defendant No. 2 company that the application taken out by the defendant No. 4 was not within the purview of Order 39 rule 1(a). In any case, that application could not have been filed by the defendant No. 4 in the face of order passed by this Court dated 26-3-2003 restraining them from claiming any right in respect of the disputed shares. If the relief claimed by the defendant No. 4 were to be granted, it would result in overlooking the injunction operating against them in terms of order dated 26-3-2003. Taking any view of the matter, therefore, the relief as claimed by the defendant No. 4 cannot be countenanced. The Learned Single Judge in our opinion has rightly considered this material aspect to reject the claim of the defendant No. 4 and hold that the defendant No. 4 has no right to represent. Further, the subject-matter of two suits pending in this Court were not property of defendant No. 2 and interim-relief can be considered only in aid of and to preserve the subject-matter of the suit. For that reason, even the conclusion reached by the Learned Single Judge for dismissing the Notice of Motion taken out by defendant No. 4 merits no interference. Issues Involved:1. Entitlement to interim relief of injunction against the defendants.2. Legality of the transfer of shares by Defendant No. 1 to Defendant No. 4.3. Validity of clause 6.1 of the Share Purchase Agreement (SPA) dated 23-6-1997.4. Allegations of misrepresentation and fraud by Defendant No. 1.5. Compliance with SEBI Regulations.6. Jurisdiction of the Civil Court to decide matters under SEBI Regulations.7. Applicability of Section 111A of the Companies Act to the SPA.8. Impact of the agreement dated 5-12-2002 between Plaintiffs and Defendant No. 1 on the pending suits.9. Entitlement of Defendant No. 4 to relief regarding the appointment of a Court Receiver.Detailed Analysis:1. Entitlement to Interim Relief of Injunction Against the Defendants:The court found that the plaintiffs were entitled to interim relief of injunction against the defendants. The transfer of shares by Defendant No. 1 to Defendant No. 4 was in violation of clause 6.1 of the SPA dated 23-6-1997 and the injunction orders dated 6-5-1999, 8-6-1999, and 29-2-2000. The court noted that the transfer was a subterfuge to circumvent the injunction and was therefore void.2. Legality of the Transfer of Shares by Defendant No. 1 to Defendant No. 4:The court held that the transfer of shares by Defendant No. 1 to Defendant No. 4 was not in favor of the Hoechst Group but rather in favor of the Goyal Group, which controlled Defendant No. 3. This transfer was in breach of clause 6.1 of the SPA and the court's injunction orders, rendering the transfer void.3. Validity of Clause 6.1 of the SPA Dated 23-6-1997:The court upheld the validity of clause 6.1 of the SPA, rejecting the argument that it violated the principle of free transferability under Section 111A of the Companies Act. The court reasoned that Section 111A regulates the powers of the Board of Directors to refuse transfer of shares and does not restrict shareholders from entering into consensual agreements regarding their shares.4. Allegations of Misrepresentation and Fraud by Defendant No. 1:The court found that Defendant No. 1 had committed misrepresentation and fraud by not disclosing its agreement with Defendant No. 3 to the plaintiffs. The court held that the SPA dated 23-6-1997 was executed based on this misrepresentation, and the subsequent transfer of shares was also fraudulent.5. Compliance with SEBI Regulations:The court held that the SPA dated 23-6-1997 violated SEBI Regulations as the public announcement failed to disclose that Defendant No. 3 was acting in concert with Defendant No. 1. This non-disclosure rendered the public announcement and the SPA invalid.6. Jurisdiction of the Civil Court to Decide Matters Under SEBI Regulations:The court rejected the argument that it lacked jurisdiction to decide matters under SEBI Regulations. It held that the Civil Court could incidentally examine compliance with SEBI Regulations while deciding the controversy.7. Applicability of Section 111A of the Companies Act to the SPA:The court held that Section 111A of the Companies Act did not invalidate clause 6.1 of the SPA. It reasoned that Section 111A regulates the powers of the Board of Directors to refuse transfer of shares and does not restrict shareholders from entering into consensual agreements.8. Impact of the Agreement Dated 5-12-2002 Between Plaintiffs and Defendant No. 1 on the Pending Suits:The court held that the agreement dated 5-12-2002 between the plaintiffs and Defendant No. 1 did not render the suits infructuous. The agreement acknowledged that the transfer of shares to Defendant No. 4 was void and unenforceable, and the beneficial interest in the shares remained with Defendant No. 1, who agreed to transfer them back to the plaintiffs.9. Entitlement of Defendant No. 4 to Relief Regarding the Appointment of a Court Receiver:The court rejected Defendant No. 4's request for the appointment of a Court Receiver for the assets of Defendant No. 2. It held that Defendant No. 4, not being a registered shareholder, had no right over the assets of Defendant No. 2. The court also noted that the relief sought by Defendant No. 4 was inconsistent with the injunction operating against it.Conclusion:The court dismissed all four appeals and upheld the interim relief granted to the plaintiffs. It held that the transfer of shares by Defendant No. 1 to Defendant No. 4 was void due to violation of clause 6.1 of the SPA, misrepresentation, fraud, and breach of court orders. The court also upheld the validity of clause 6.1 of the SPA and rejected the argument that it violated Section 111A of the Companies Act. The agreement dated 5-12-2002 between the plaintiffs and Defendant No. 1 did not render the suits infructuous, and Defendant No. 4 was not entitled to any relief regarding the appointment of a Court Receiver.