2015 (10) TMI 2657 - HC - Companies Law

High Court rules on Company Petition, deems MOU invalid. Board meetings oppressive. Valuation criticized. Buyout process directed.

Nafan B.V. Versus SAF Yeast Company (P.) Ltd.

The High Court upheld the maintainability of the Company Petition, rejecting claims of suppression of facts. The Memorandum of Understanding (MOU) was ... Oppression and management - Held that:- The appeal filed by Lesaffre is maintainable. The petition filed by Nafan was rightly not dismissed by the Board on the ground of suppression of facts. The declaration given by the Board that MOU is valid, effective, and enforceable document and its terms are binding, cannot be sustained as it is beyond the jurisdiction of the Board, and needs to be agitated in the suit, which is pending. Prima facie, no unquestionable intention can be culled out from the MOU. The Board meetings held on 29 January 2009, 23 May 2009, and 25 May 2009 and the resolutions passed therein, are invalid, illegal, and oppressive, so also the issuance of duplicate share certificates. The Board has rightly discarded the valuation report and the reliance upon the same by Muthu Group is an act of oppression. The comments made by the Board on the valuation report, were justified. The direction of the Board to Muthu Group to rectify register of SAF Yeast by restoring the shareholding of Nafan and Lesaffre is valid and proper. The direction given by the Board to Nafan and Lesaffre to transfer their shareholding to Muthu Group is not sustainable and has to be set aside. Nafan is entitled to a buyout as prayed for in its petition. However, it will be in the interest of SAF yeast that the litigation ends and if Muthu group agrees to withdraw the suit and undertake not file further proceedings based on the MOU then the dispute can be put an end to by holding a forward competitive bid. If Muthu Group is not agreeable then buyout in favour of Nafan will follow. For overseeing the two options, as suggested by the Board, Justice J.N.Patel is appointed as an Administrator. M/S Ernst and Young is appointed as Chartered Accountants to carry out the valuation. A regards the modalities for holding the auction and the buy out, the modalities suggested by Nafan are proper and can be adopted. ORDER A. The declaration by the Board that the MOU dated 23 January 2009 is valid, effective and enforceable document and the terms thereof are binding upon the Petitioner and Lesaffre Group, is quashed and set aside in light of what is observed above. B. The declaration by the Board that the Valuation Report prepared by Sharp and Tannan is biased, partial and in contravention of the statutory guidelines and rules to carry out the valuation of shares of a going concern and the direction to set it aside, is confirmed. C. (i) The declaration by the Board that the Board Meeting held on 29 January 2009 is invalid and illegal, is confirmed. (ii) The declaration that the Resolutions passed in the Board Meeting held on 29 January 2009 are not oppressive, is quashed and set aside. (iii) It is declared that the Resolutions passed in the Board Meeting held on 29 January 2009, are oppressive. D. (i) The declaration by the Board that the Board Meetings held on 23 May 2009 and 25 May 2009 are non-est, illegal and void, is confirmed. (ii) The direction by the Board that the Resolutions passed in both these meetings are set aside being illegal and oppressive to the Nafan and Lasaffre, is confirmed. E. The directions by the Board setting aside the transfer of shares in favour of the A.M.Muthiah and canceling the duplicate shares issued in favour of the A.M.Muthiah, are confirmed. F. The direction by the Board that the shareholding of Nafan and Lasaffre stands restored, is confirmed. G. The direction by the Board to Muthu Group to rectify the Register of Members of the SAF Yeast as per law, is confirmed H. The direction by the Board to Nafan and Lasaffre to transfer the 80,722 shares held by them to the Muthu Group proportionately to their respective shareholdings, is quashed and set aside. I. If within six weeks from today Muthu group withdraws the civil suit and associated proceedings filed by them and files an undertaking on affidavit in the registry of this court that they will not take any proceedings on the basis of the MOU in question, then Part-I of this order will come in operation. If the above mentioned steps are not taken by Muthu Group within the stipulated period as above, Part-II of the order will come into effect forthwith and prayer clause (a) sought for by Nafan in its company petition will stand granted on the terms mentioned in Part II. J. Interim orders operating in these appeals shall continue for period of six weeks from today. Issues Involved:1. Maintainability of the Company Petition and Alleged Suppression of Facts.2. Validity and Enforceability of the Memorandum of Understanding (MOU) dated 23 January 2009.3. Legality and Oppressiveness of Board Meetings held on 29 January 2009, 23 May 2009, and 25 May 2009.4. Validity of the Valuation Report prepared by M/s Sharp & Tannan.5. Relief and Directions for Buyout of Shares.Issue-wise Detailed Analysis:1. Maintainability of the Company Petition and Alleged Suppression of Facts:The High Court upheld the Company Law Board's (CLB) decision that the petition was properly verified and maintainable. The Court rejected the argument that Nafan was no longer a member and thus could not file the petition. It was also determined that the rejoinder and other affidavits were part of the pleadings and that Nafan had not suppressed material facts. The Court emphasized that the pleadings should be liberally construed and that the parties were fully aware of each other's case, thus the petition was not dismissed on grounds of suppression.2. Validity and Enforceability of the Memorandum of Understanding (MOU) dated 23 January 2009:The Court found that the CLB erred in declaring the MOU as valid and enforceable. It held that the CLB does not have the jurisdiction to enforce the MOU, which is a matter for the Civil Court where a suit for specific performance is pending. The Court emphasized that no unquestionable intention to transfer shares could be culled from the MOU, and it was not a clear and binding contract. The MOU did not constitute a transfer notice as required under Article 15 of the Articles of Association.3. Legality and Oppressiveness of Board Meetings held on 29 January 2009, 23 May 2009, and 25 May 2009:The Court agreed with the CLB that the Board meetings were illegal and oppressive due to the lack of notice to Nafan and Lesaffre, as required by the Participation Agreement and principles of fairness. The Court emphasized that the meetings were part of a larger scheme to usurp Nafan's shareholding without proper notice and in an unfair manner. The Court modified the CLB's finding to declare the resolutions passed in the 29 January 2009 meeting as oppressive.4. Validity of the Valuation Report prepared by M/s Sharp & Tannan:The Court upheld the CLB's finding that the valuation report was biased, partial, and based on incorrect methods. The report did not follow well-established valuation methods like the Discounted Cash Flow (DCF) method and was prepared in an unreasonably short time span, raising questions about its fairness and reliability. The Court agreed that the preparation and use of the valuation report were part of the oppressive conduct by Muthu Group.5. Relief and Directions for Buyout of Shares:The Court set aside the CLB's direction for Nafan and Lesaffre to transfer their shares to Muthu Group. It held that Nafan, as the majority shareholder, is entitled to buy out Muthu Group's shares. The Court proposed a two-step process:1. A forward competitive bid if Muthu Group withdraws its civil suit and undertakes not to rely on the MOU.2. If Muthu Group does not comply, a buyout in favor of Nafan will follow based on a fair market valuation by M/s Ernst and Young, Chartered Accountants.The Court appointed Justice J.N. Patel as an Administrator to oversee the process and ensure fairness. The Administrator would supervise the company until the process of sale/purchase is complete, ensuring that the interests of SAF Yeast are protected and the litigation is put to an end.