TaxTMI 
TaxTMI 
2013 (10) TMI 336
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.... of Karnataka entered into project development agreements with R-2 & R-3 for setting up of Green Fields Airports both at Gulbarga and Shimoga in the state of Karnataka. Umesh Kumar Baveja (A-1) did not have sufficient funds and, therefore, requested R-1 to make the required investment. A-3 and R-1, therefore, incorporated A-2 as a "special purpose vehicle" (SPV) for making investments in R-2 and R-3, which may be referred to as "the airport companies". An agreement styled as "Subscription-cum-shareholders Agreement" (SSA) was entered into on 12.03.2010 between the SPV, A-3 (which is hereinafter also known as RAHI) and R-1 (hereinafter also referred to as ITNL). In terms of the SSA, RAHI was to make an investment of Rs. 30 crores in the SPV and acquire 60% stake in it and ITNL would invest Rs. 20 crores in the SPV to acquire 40% stake. RAHI invested the sum of Rs. 30 crores as per the agreement. ITNL too invested the amount of Rs. 20 crores as required by the SSA and the said amount was shown in the accounts of the SPV as "share application money pending allotment". These shares were never allotted to ITNL. Umesh Kumar Baveja (A-1) was a director in RAHI as well as the SPV. Mukund S....
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....7, 398, 402 and 403 of the Act on the ground that Umesh Kumar Baveja, through RAHI, which was at the helm of affairs of the SPV being a majority shareholder, was acting in a manner prejudicial to the interest of ITNL which had invested Rs. 20 crores to acquire 40% shareholding in the SPV; it was also alleged that Baveja had committed violations of the articles of association and had siphoned off the funds of the SPV by entering into transactions with the related parties. It was further alleged in the petition that Baveja was prevaricating or evading the issue of shares to ITNL. An interim prayer was made in the petition to the effect that the respondents in the company petition failed to appoint Mukund Sapre as another nominee-director of ITNL and that ITNL was not informed about the affairs of the SPV even though it had invested substantial amount of money in the SPV and an audit should be carried out by an independent and impartial auditor which was not done despite request. There were also charges of misappropriation of the funds of the SPV by Baveja. 4. Before the CLB, a preliminary objection was taken by the respondents in the petition, to the effect that the petitioner (IT....
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....ga. (b) ITNL had also procured bank guarantees for the lease agreements entered into with the Government of Karnataka; its nominees were continuing in the board of SPV. Therefore, it cannot be disputed that the money invested by the ITNL is for acquiring 40% shares in the SPV. (c) The minutes of the meeting of the board of SPV held on 22.02.2012 cannot be read in isolation. Initially ITNL objected to the holding of the meeting on the ground that no background material was supplied. Thereafter it made a specific request for inclusion of the allotment of the shares to it as a specific item in the agenda in the meeting to be held on 20.08.2012. (d) On 22.08.2012, ITNL sent an e-mail for allotment of shares by circular resolution. In the light of the above findings, the CLB concluded that ITNL, the petitioner before it, was a member of SPV and, therefore, can maintain the petition. 8. The CLB also commented upon the action of the respondents in relation to the conduct of the affairs of the SPV. Baveja, according to the CLB, had initially stated that the airports would be run as licensed airports; later he made a proposal that they would run as uncontrolled airports since....
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....pecific item in the agenda to allot shares in the board meeting to be held on 20.8.2012, Sapre did not attend the meeting. Similarly, the meeting of the Board slated for 28.9.2012 did not take place. The contention is that ITNL itself did not want to become a member/shareholder of the SPV. If that is so, so ran the argument, such act coupled with the fact that the character of the monies advanced was only as an advance towards share capital, the only conclusion that can be drawn is that the petitioner was not a member of the SPV. It is submitted further that on this aspect the CLB has not applied its mind and passed a reasoned order. 13. These submissions were contested stoutly on behalf of the respondents, the argument being firstly that no question of law is sought to be raised by the appellants and under section 10F of the Act, an appeal against the order of the CLB lies to the High Court only on a question of law. It is pointed out, as a first limb of the argument that the right that was sought to be exercised by the petitioner before the CLB was the right granted under clause 123 of the articles of association and for the purpose of exercising this right, it is not necessar....
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....er sections 397 and 398 are in a position to show that even though their names are not to be found in the register of members of the company, yet they have such an indisputable and unchallengeable title to the membership of the company that the Court may entertain a petition at their instance." It would thus appear that the Gujarat High Court was not prepared to lay down as an absolute proposition of law that action under section 397 and 398 can be taken only by a person whose name is found in the register of members maintained by the company. Though a general proposition to this effect was laid down, still an exception was recognised to the general rule namely that in a given case a person who can show an undisputable and unchallengable title to the membership of the company may file a petition under section 397/398, even though his name is not formally entered in the register of members. 15. I now proceed to a consideration of some of the authorities cited before me by both sides on the point. In Shri Balaji Textile Mills Pvt. Ltd. and Anr. Vs. Ashok Kavle and Ors., (1989) 66 Company Cases 654 (Kar), a Division Bench (P.P. Bopanna & M. Ramakrishna, JJ) of the Karnataka High....
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....e balance sheet as on 31.3.2012 of the SPV shows that the amount of Rs. 20 crores received from ITNL was shown as "share application money received pending allotment". This note contains an explanation to the effect that the share application money was received from ITNL and further that the shares would be allotted by the company through its directors after the approval by the shareholders in their meeting and further that the share application money is primarily used to fund the two airport infrastructure projects of the company. The conduct of the company in showing the money as "share application money pending allotment" and the utilisation of the money for the purpose for which the company was formed are clear pointers to the fact that the company itself recognised or treated the ITNL as a shareholder or member. This brings the case within the observations of the judgment of the Karnataka High Court. 17. I was referred to another judgment of the Karnataka High Court in Srikanta Datta Narasimharaja Wadiyar Vs. Venkateswara Real Estate Enterprises (Pvt.) Ltd. and Ors,. (1990) 68 Company Cases 216, which is that of P.P. Bopanna, J, acting as a Single Judge. In this judgment th....
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....application, viz., the company petition seeking reliefs including the issuance of duplicate share certificates, I am of the considered view that the claim of the respondents herein in the company petition cannot be thrown out at the threshold without even going into the merits of the issue raised by the respondents under the guise of deciding the question of maintainability as a preliminary issue." It is significant to note that while arriving at the aforesaid view the Madras High Court referred to both the judgment of the single judge of the Karnataka High Court (supra) and the judgment of the Gujarat High Court (supra). It is also to be noted that the judgment of the Supreme Court referred to by the Madras High Court in the quoted paragraph of its judgment is that in World Wide Agencies vs. Margarat T. Desor (1990) 1 SCC 536. In the case before the Supreme Court; an objection was taken that in view of the specific provisions of Section 41(2), a member is one whose name is entered in the register of members. In that case, the member/shareholder of the company was one S K Desor. His name was entered in the register of members. On his death, his name continued to remain in the re....
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....videnced by articles 5, 6 and 8 of the articles and also by entries in its balance-sheet as explained by the notes below it and the utilisation of the said monies only for the purpose of the two airports, both facts supportive of the respondents claim, it is noticed that there is nothing which would militate against the claim that the money was invested only towards share capital. Pursuant to the articles of association, ITNL has appointed its nominee-directions. There is a clear communication made by ITNL to the SPV on 22-8-2012 to the effect that it should be allotted the shares. There is no evidence to show that this claim was at any later point of time abandoned. The non-attendance of Mukund Sapre in the board meetings cannot be looked at as an act abandoning the claim. It is difficult to see how he would have thought of abandoning the claim to get the shares allotted, when the money had been invested with the clear understanding that the shares would be allotted and the same had not also been returned. In fact, the SPV has admitted in its balance-sheet that the money was utilised for the purposes of the two airports. ITNL also gave two bank guarantees amounting to app. Rs. 20 ....
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....d by this court in Charanjit Khanna and Ors. vs. Khanna Paper Mills and ors. (2011) 164 Com. Cas. 315 (Manmohan, J.). The learned single judge observed: "In my opinion, it cannot be said as a proposition of law that no composite petition under Sections 397, 398 and 111A of the Act is ever maintainable. In fact, in a large number of petitions filed under Sections 397 and/or 398 of the Act, the primary allegation of oppression and mismanagement is that the faction that is in control of the company has either intentionally reduced the rival faction to less than 1/10th of the total number of members of the company or removed the rival faction from the register of members. In such cases where allegation of oppression and mismanagement is inexplicably intertwined with the issue of maintainability of the petition under Section 399 of the Act, a composite petition has to be held as maintainable. To ask a petitioner to file two separate petitions in such circumstances would not only be unfair but would also result in unnecessary delay." 23. This should settle the issue. But the following two authorities were cited on behalf of the appellants: Morgan Ventures Ltd. vs. Blue Coast Hotels....
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....right of such persons, i.e., to have their names entered in the register of members. Moreover, there seems to be no logic in granting such right to an allottee of shares of a private limited company but denying it in the case of an allottee of shares of a public limited company. There does not seem to be any logical explanation for excluding the allottee of the shares from the proviso to sub-section (2) of section 111A. 25. The judgment of the Supreme Court in Khoday Distilleries Ltd (supra) expounds the difference between "creation" and "transfer" of shares. It says that there is a difference between issue of a share to a subscriber and the purchase of a share by a person from an existing shareholder. The former is a case of allotment of shares and the latter is a transfer of a chose in action. It is true that a transfer of shares is different from an allotment. The question however is whether the right of appeal under section 111A(2) is to be confined only to the transferee of the shares or should be given also to the allottee of the shares. 26. It is a well settled proposition that a right of appeal is a creature of the statute; there is no inherent right of appeal. Such a....
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.... the proviso to section 111A(2). 29. The other argument raised on behalf of the appellants was that there was an arbitration clause (clause 16) in the SSA and therefore the CLB ought not to have entertained the petition. It is submitted that though this point was raised before the CLB, and was also adverted to in the impugned order, no ruling was given. It is contended that an arbitration clause should be widely construed as laid down by the Supreme Court in P. Anand Gajapathi Raju v. P.V.G. Raju AIR 2000 SC 1886 and that such a clause should be construed to have overriding effect as held by the Supreme Court in Hindustan Petroleum Corporation Ltd. vs. Pinkcity Midway Petroleums AIR 2003 SC 2881. My attention was also drawn to the petition filed by the appellant before this Court under section 11 of the Arbitration and Conciliation Act, 1996 seeking the appointment of a sole arbitrator in terms of clause 16 of the SSA. It was submitted that this petition was filed before this Court even before the respondents filed the petition before the Company Law Board. It was also submitted on behalf of the appellants that the respondents were avoiding the arbitration for reasons best known....
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....t have an arbitration clause. It was the SSA which contained a provision for arbitration in clause 16 thereof, but after the amended articles of association, the arbitration clause in the SSA, or even the SSA itself, can have no effect. In World Phone India Pvt. Ltd. and Ors. vs. WPI Group Inc. (2013) 178 Company Cases 173 (Del), a learned Single Judge of this Court (Dr. S. Muralidhar, J.) opined that the relationship between the shareholders of a company and what they can do has to be ascertained with reference to the articles of association and any earlier arrangement or agreement between the parties inconsistent with the articles of association cannot be said to govern such relationship. In that case, there was a joint venture agreement entered into between the parties in 1999; this agreement provided for the exercise of an affirmative vote. In the articles of association, no amendment was carried out to incorporate the provision in the joint venture agreement providing for the exercise of the affirmative vote. It was held by the learned Single Judge that unless the articles of association were amended to provide for the exercise of the affirmative vote, that right cannot be ins....
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....ontained an arbitration clause, the Civil Court ought to refer the dispute to arbitrator without going into the question regarding the applicability of the arbitration clause to the dispute in question. The factual position in the case before me, as noted earlier, is that the dispute arises out of clause 123 of the articles of association, but the articles of association does not provide for arbitration. This judgment is not, therefore, applicable to the factual position obtaining in the present case. 34. Several authorities were cited on behalf of the respondents, which I have referred to earlier, in support of the contention that a complicated matter involving serious questions such as fraud or malpractice, manipulation of accounts and finances, etc., requiring detailed investigation and production of elaborate evidence, would be more appropriately tried and decided by a Court of law and not by an arbitrator. It is submitted that there are serious manipulations committed by the appellants such as siphoning off the monies from the SPV to RAHI, back dating board resolutions, fabrication of board resolutions, etc. and in such a situation it would be more appropriate if the CLB de....