TaxTMI 
TaxTMI 
2017 (1) TMI 827
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....xchange Board of India Act, 1992 (for short "SEBI Act") on the ground that the appellants have violated regulation 23(1) of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 ("Takeover Regulations, 1997" for short). Since the appellants in these two appeals have challenged the common order passed by the AO on February 14, 2014, both these appeals are heard together and disposed of by this decision. 2. Facts set out in these two appeals and also revealed during the course of arguments are as follows: a) Appellants at the material time were the Executive Directors/ Non-Executive Directors of Golden Tobacco Limited ("Company" for convenience). Appellant No. 1 in Appeal No. 101 of 2014 is the legal heir of the original Appellant No. 1 Shri Raghunath Kumar, who has died during the pendency of the appeal. b) In the year 1997 company faced unexpected losses due to the devolvement of statutory liabilities and ongoing litigation as a result of which the company was referred to the Board of Industrial and Financial Reconstruction ("BIFR" for convenience). On April 03, 1997 the BIFR declared the company to be a sick underta....
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....mber 21, 2009 itself a notice was addressed to the shareholders of the company convening an Extra Ordinary General Meeting ("EOGM") on January 18, 2010 at 11:00 a.m. to seek their approval under regulation 23(1) of the Takeover Regulations, 1997 for joint development of the Vile -Parle (West) property. j) On December 26, 2009 a Memorandum of Understanding ("MoU" for short) was entered into by the company with Sheth Developers and Suraksha Realty Ltd. ("developers") for joint development of the Vile-Parle (West) Mumbai property inter alia for a consideration of Rs. 542 crore. As per the terms of MoU, amount of Rs. 35 crore was to be paid to the company on or before execution of the MoU and within 48 hours of the execution of the MoU title deeds in respect of the Vile-Parle (West) Mumbai property were to be kept in ESCROW with the company's Solicitors to be released only on execution of the Joint Development Agreement. The amount of Rs. 35 crore was accepted by the company for the purpose of discharging the company's liabilities. k) Challenging the MoU dated December 26, 2009, Mr. Pramod Jain and Pranidhi Holdings filed Company Petition No. 3 of 2010 under Section 397 and 398 o....
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....intly and severally. Challenging the aforesaid decision these two appeals are filed. 3. Mr. Chagla, learned Senior Advocate appearing on behalf of the appellants in Appeal No. 102 of 2014 and Mr. V. M. Singh, learned Advocate appearing on behalf of the appellants in Appeal No. 101 of 2014 submitted as follows:- a) The MoU executed by the company with the developers on December 26, 2009 specifically records that the said MoU was subject to approval from the shareholders and that formal Joint Development Agreement in favour of developers would be executed within a period of one month from the date of the company getting necessary resolution passed at its shareholders meeting. The MoU further records that if the shareholders reject the Joint Development Proposal, then, the MoU shall come to an end and the advance amount received by the company under the MoU shall be returned with 18% interest. Thus, the MoU was in the nature of an agreement to agree and was not a binding contract. In such a case, the AO could not have held that by executing the MoU, the BoD of the company had created third party rights on the assets of the company to the detriment of the acquirers under the open....
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....23 of the Takeover Regulations, 1997 would not bind the appellants, because, the appellants were not party to the said proceedings. Accordingly, it is submitted that the appellants are entitled to agitate before this Tribunal that entering into an MoU subject to the approval by the shareholders in the EOGM was permissible in law and the said MoU did not violate regulation 23(1)(a) of the Takeover Regulations, 1997. d) Regulation 23(1)(a) of the Takeover Regulations, 1997 provides that during the offer period, the BoD of the company, without the approval of the general body of shareholders shall not sell, transfer, encumber or otherwise dispose of the assets of the company. Entering into an MoU subject to approval from the shareholders would not amount to selling, transferring, encumbering or otherwise disposing of the assets of the company. Even the amount of Rs. 35 crore received under the MoU was liable to be refunded with interest in the event of the shareholders rejecting the proposal. Therefore, in the facts of present case it could not be said that the appellants had violated regulation 23 of the Takeover Regulations, 1997. e) Assuming for the sake of argument that ther....
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....nges, as the case may be. 7. Regulation 23(1) of the Takeover Regulations, 1997 expressly provides that during the public offer period without obtaining prior approval of the general body of shareholders, the BoD of a company shall neither sell, transfer, encumber or otherwise dispose of the assets of the company nor the BoD of the company shall enter into any agreement for sale, transfer, encumbrance or disposal of the assets of the company. In other words, regulation 23(1) of the Takeover Regulations 1997, not only makes it mandatory for the BoD of a company to first seek approval of the general body of shareholders before selling, transferring, encumbering or otherwise disposing of the assets of the company but also before entering into an agreement for selling, transferring, encumbering or disposing of the assets of the company. Object of the above provision is to ensure that during the offer period, the assets of the company are not dealt with in any manner whatsoever without the approval of the general body of shareholders, because dealing with the assets of the company would have direct bearing on the shareholders decision either to participate in the open offer or not. ....
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....cember 26, 2009. Fact that the appellants instead of entering into an 'agreement' have entered into an 'MoU' does not entitle the appellants to violate regulation 23 of the Takeover Regulations, 1997. b) Apart from the above, perusal of the terms set out in the MoU reveal that the BoD of the company had not only finalized the terms for joint development of the Vile-Parle (West) property at Rs. 542 crore but also in implementation of the MoU, the company had received Rs. 35 crore from the developers as part payment. Moreover, the MoU records that within 48 hours of the execution of MoU, the title deeds of the Vile- Parle (West) property be kept in ESCROW with the Company's Solicitors. Thus, on execution of the MoU, the title deeds of the Vile-Parle (West) property were encumbered in violation of regulation 23. c) It is interesting to note that clause 9.1 of the MoU records that if the company is unable to obtain approval of the shareholders, then the developers will have an option to terminate the MoU by giving two days notice and upon such termination the company shall refund the amounts paid by the developers with 18% interest. Clause 9.2 of the MoU records the undertaking g....
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....Indian Contract Act permits execution of contingent contracts and such contingent contracts become enforceable depending upon the contingent event taking place or not, would have no bearing on the facts of present case because, regulation 23 of the Takeover Regulations, 1997 specifically provides that during the offer period, the BoD of a company shall not enter into any agreement in respect of any assets of the company without prior approval of general body of shareholders. Therefore, in view of specific bar contained in regulation 23 of the Takeover Regulation, 1997, appellants without the prior approval of the general body of shareholders could neither have entered into an agreement nor could have entered into an MoU for joint development of the Vile-Parle (West) property. Hence, appellants are not justified in relying on the provisions contained in the Indian Contract Act. 13. Strong reliance was placed by the counsel for the appellants on a decision of the Apex Court in case of Saradamani Kandappan (Supra). That decision has no bearing on the facts of present case, because, in that case the issue related to the provisions contained under the Indian Contract Act, whereas, in....
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....of the general body of shareholders for joint development of the Vile-Parle (West) property in terms of regulation 23 of the Takeover Regulations, 1997. However, the MoU was executed on December 26, 2009, even before the EOGM scheduled on January 18, 2010. Moreover, the MoU dated December 26, 2009 specifically records that the MoU be placed before the EOGM on January 18, 2010. Admittedly, the shareholders in the EOGM held on January 18, 2010 have approved the proposal contained in the MoU for joint development of the Vile-Parle (West) property. In these circumstances, the independent directors of the company cannot be said to be unaware of the MoU executed on December 26, 2009. Moreover, it is not the case of the appellants in Appeal No. 101 of 2014 that the MoU was executed on December 26, 2009 without their consent or that they had opposed execution of the MoU on December 26, 2009. Hence the appellants in Appeal No. 101 of 2014 being part of the BoD of the company cannot escape penal liability for executing the MoU on December 26, 2009 without the prior approval of the general body of shareholders in violation of regulation 23 of the Takeover Regulations, 1997. 16. Argument of....