2015 (4) TMI 951 - HC - Companies Law

CLB's Jurisdiction Over Foreign Company Shares Dispute Upheld, Enforcement of Pre-emptive Rights Denied

The Company Law Board (CLB) had jurisdiction over a dispute involving foreign company shares held in an Indian subsidiary. The appellant's rights were not ... Application of Oppression and mismanagement u/s 397,398 & 402 of the Companies Act, 1956 - Shares sold outside India at nominal amount of one pound sterling - Jurisdiction of Company Law Board to test the fairness of the procedure adopted by the Joint Receivers in England for the sale of the shares - Principles of estoppel - Pre-emptive right of purchase of the shares under Articles of Association - Held that:- it is clear that any transfer or even a transmission by law, can take place only in accordance with the procedure prescribed in the Companies Act, 1956. What the Company Law Board has omitted to see is the fact that despite the procedure adopted by the Insolvency Court in England being in accordance with the Insolvency Laws of United Kingdom, the transfer was in respect of a property that was subject to the Indian Law. Therefore, the Indian law had to be applied, for the purpose of statutory recognition of such a transfer. In other words, if the company, by virtue of the Articles of Association and the power conferred thereunder refuses to register the sale ordered by the Insolvency Court in England, the purchaser cannot do anything except to come to India and seek redressal in the manner provided by the Indian Companies Act. The Company Law Board had omitted to see that what was challenged by the appellant was not really the procedure adopted by the Insolvency Court in United Kingdom, in bringing the shares to sale. What was agitated by the appellant was that the second respondent, who was a Director of the first respondent, committed a breach of trust and kept the appellant away from the whole episode and bought all the shares for a token consideration. Suppose any one other than the second respondent had purchased the shares, they would have faced a formidable task in getting the transfer recognized and registered in India. Therefore, the attack of the appellant was not really to be construed as an attack on the procedure adopted by the Insolvency Court in United Kingdom. It was an attack on the conduct of a Director, who held a fiduciary relationship and who was bound by the Articles of Association of the Company. The finding of the Company Law Board that there was acquiescence on the part of the appellant and that the appellant is guilty of laches, does not appear to be correct. In B.L.Sreedhar [2002 (12) TMI 594 - SUPREME COUR], the Supreme Court summarized the doctrine of acquiescence. Merely because estoppel was given an elevated status, along with other equitable principles such as election and family settlement, in S.Shanmugam Pillai [1972 (5) TMI 60 - SUPREME COURT] , the fundamental requirement for invoking this principle of equity cannot be dispensed with. I am actually surprised at the respondents setting up the equitable plea of estoppel, when what the respondents have done cannot fall under the category of equity. The entire shareholding of the third respondent in the first respondent has been sold for just one Pound Sterling, behind the back of the appellant and hence it is not for the respondents to plead estoppel against the appellant. It is out of the scope of the present petition to find out whether the appellant is guilty of any mismanagement or whether the second respondent has suffered a huge loss or not. The Company Law Board was primarily concerned about the validity of the sale of shares of the third respondent company in the first respondent company to the second respondent for a nominal amount of one Pound Sterling. It is this issue that has to be addressed, independent of the other transactions. In the mail dated 13.9.2006, there is a reference to the shares and the shareholding pattern. But there is no reference to the sale or sale consideration. In the mail dated 2.10.2006 also, there is no indication about the share transfer. In the mail dated 5.1.2007, sent by the second respondent to the appellant, there is a reference to the transfer of two properties. But there is no reference to the share transfer. But in a reply sent by the appellant to the second respondent on 5.1.2007, there is a vague reference to share transfer without any further detail. This statement in the mail dated 5.1.2007, cannot be taken to be conclusive. In any case, there is no equity in favour of the second respondent. He is not a person who has bailed out the third respondent when it was in distress, to claim equity in his favour. He has just paid one GBP for the entire shareholding of the third respondent in the first respondent. Therefore, he cannot plead equities. It is true, that in order to maintain a petition under Sections 397 and 398 of the Companies Act, the acts of oppression complained of, should be a series of acts continuing upto the date of filing of the petition. But it does not mean that when the entire holding of a company incorporated in England, in the shares of a company incorporated in India is sold outside India for a consideration of one GBP, shocking the conscious of any court, the same can be rejected as an isolated instance not warranting an action under Sections 397 and 398 of the Companies Act. Therefore, the said argument also deserves to be rejected. - Decided in favour of appellant. Issues Involved:1. Jurisdiction of the Company Law Board (CLB) over foreign company shares held in an Indian subsidiary.2. Application of estoppel, waiver, and laches principles against the appellant.3. Enforcement of pre-emptive rights under the Articles of Association.Detailed Analysis:Issue 1: Jurisdiction of the Company Law BoardThe primary question was whether the CLB had jurisdiction to entertain a petition concerning the shares of a foreign company (third respondent) held in an Indian subsidiary (first respondent). The CLB initially held that it had jurisdiction over the dispute regarding the sale of shares of the first respondent held by the third respondent, applying the principle of lex situs, which dictates that the law of the location of the property governs its transfer. However, the CLB later concluded that the appellant should seek remedies under the laws of the United Kingdom for issues related to the procedure adopted by the Joint Receivers in England.The judgment clarified that despite the procedure followed in England, the shares in question were subject to Indian law. Sections 108 and 111 of the Companies Act, 1956, mandate that any transfer of shares must comply with the Indian Companies Act. The CLB failed to recognize that the transfer of shares, even if conducted under UK Insolvency Laws, required statutory recognition under Indian law. Thus, the first question of law was resolved in favor of the appellant, affirming the CLB's jurisdiction over the matter.Issue 2: Estoppel, Waiver, and LachesThe second issue examined whether the appellant was barred by principles of estoppel, waiver, and laches. The respondents argued that the appellant had waived his rights by not acting promptly and that the CLB's finding on waiver was factual and not subject to appeal under Section 10-F of the Companies Act, 1956. However, the judgment emphasized that waiver must be voluntary and intentional, with the party being fully aware of the right being waived. The appellant contended that he was unaware of the sale and had no notice of the Board meeting where the decision was made.The court found no evidence that the appellant had knowledge of the intended sale or that he had waived his rights. The plea of estoppel was also rejected, as there was no clear evidence of conduct by the appellant that would lead to estoppel. The judgment highlighted that the appellant approached the CLB within four months of the sale, negating the claim of laches. Thus, the second question of law was also resolved in favor of the appellant.Issue 3: Pre-emptive Rights under the Articles of AssociationThe final issue was whether the CLB was correct in dismissing the appellant's plea for enforcement of pre-emptive rights guaranteed under the Articles of Association. Article 7 and Article 8 of the Articles of Association of the first respondent company provided specific provisions regarding the transfer of shares and their valuation, requiring Board sanction for any transfer, except under pre-emptive rights.The court found that the Board meeting held on 18.09.2006, where the sale was decided, was conducted without proper notice to the appellant, who was the Managing Director. The sale of shares for one British Pound Sterling was conducted without adhering to the Articles of Association, which mandated pre-emptive rights. The judgment rejected the respondents' reliance on the alleged Board meeting and the subsequent sale, deeming it void and not binding on the appellant.The court also dismissed the argument that a single act of transfer could not constitute oppression and mismanagement, given the significant impact of selling the entire shareholding for a nominal amount. Thus, the third question of law was resolved in favor of the appellant.Conclusion:All three questions of law were answered in favor of the appellant. The appeal was allowed, and the order of the CLB was set aside. The sale of the shares held by the third respondent in the first respondent company to the second respondent was declared null and void. No order as to costs was made.