TaxTMI 
TaxTMI 
2001 (6) TMI 817
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....pany, no offer was made to the petitioner and as such the allotment of further shares should also be declared as null and void. 2. The undisputed facts in this case are: The company was incorporated in February 1977, the third respondent being the main promoter along with his family members. The main object of the company is to carry on hotel and allied businesses. The NDMC allotted a plot of land to this company on license basis in Gole Market area New Delhi by a License Deed dated 5-12-1982 with a supplemental deed in 1988. A part of the land was handed over in 1982 and another part possession was given in 1988. The NDMC cancelled the license in 1990 due to some dispute on the license fees, the cancellation of which was challenged in the Delhi High Court. As the proceedings were on, the balance land was given possession in 1992. In June 1993, Aeroflot and the company entered into an agreement for a joint venture hotel project by which a company in the name of Sunaero Ltd. (second respondent) was to be incorporated. Accordingly Sunaero was incorporated as a wholly owned subsidiary of the company in October 1993. In the beginning of 1994, Aeroflot withdrew its proposal and there....
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.... on 11-3-1995 by which the petitioner was to invest a sum of Rs. 7 crores towards share capital and was to provide a sum of Rs. 10 crores as interest bearing security deposit. The petitioner had also undertaken the responsibility of arranging for public issue of 10 lakh shares of Rs. 10 each at a premium of not less than Rs. 90 so as to mobilize Rs. 10 crores. It also undertook to mobilize Rs. 85 crores for the project by way of term loans and working capital facilities. The promoter respondents were to invest a sum of Rs. 22 crores by cash towards the shares. ACCOR were to invest in 10 lakh shares at Rs. 100 per share. Both the petitioner and the promoter respondents were to contribute cash at par for the shares by 30-4-1995. In terms of this MOU, the petitioner paid Rs. 7 crores between 11-3-1995 and 18-4-1995 and 70 lakh shares were allotted to the petitioners. On allotment of these shares, the petitioner constituted the majority with 87.41 per cent shares in the company. In addition, the petitioner also paid a sum of Rs. 8 crores between the period 21-11-1995 to 23-4-1996 towards security deposit. Even though, the respondents assured the petitioner that they had also contribute....
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....tal. All transactions were by means of cheques on the same branch of Syndicate Bank in which all the respondents had accounts. Like this, this amount of Rs. 1 crore was rotated four times on 16-3-1995 and it was shown that the third respondent had contributed Rs. 4 crores as share capital. In the same way on 18-3-1995, a sum of Rs. 1 crore was rotated two times, and again on 19-3-1995, a sum of Rs. 1 crore was rotated 15 times. Thus, a sum of Rs. 1 crore which was with the company as share application money by the petitioner was rotated 21 times and was accounted for as share investment of Rs. 21 crores by the respondents. All the cheques-whether from the company or from the second respondent or from H.J. Consultants Private Limited-were signed only by one person, namely, the third respondent. This would clearly indicate that the alleged investment in shares is a fraudulent transaction and that the company money was being used for subscribing to the shares which is also against the provisions of section 77 of the Act. 6. Shri Sarkar further argued as follows: As per the MOU, for the shares, the parties had to pay cash at par, which the petitioner did while the respondents rotate....
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....dent, no knowledge regarding the second respondent can be attributed to the petitioner. He pointed out that on the basis of shares worth Rs. 21 crores for which no consideration was paid, the respondents have taken financial assistance from the financial institutions by pledging these shares. Therefore, the element of public interest is also involved in this case. The so called transfer of the developmental right in 1993 is also against the provisions of section 149 as the second respondent commenced business only in December 1993. Even the letter by the company to the NDMC dated 12-8-1993 seeks its permission only in terms of clause 5 of the license agreement and not for transferring the developmental rights or the license itself. It is also an admitted fact that the NDMC had not given its permission as sought for and therefore the question of retransfer of the developmental rights does not arise. The promoter respondents had also duped ACCOR in relation to the ownership of the land. The company entered into an MOU with ACCOR on 29-8-1994 (Page 300 of Volume III) wherein the company is shown as the licensee of the land. But in the MOU between the second respondent and ACCOR entere....
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....d do not find a place in the Balance Sheets of the companies indicated as owners in the MOU. Therefore, all the documents have been fabricated only to justify the fraudulent rotation of Rs. 1 crore twenty-one times to enable the respondents to acquire the shares without paying any consideration for the shares. In regard to the knowledge of the petitioner about the transfer and retransfer of the developmental right, Shri Sarkar pointed out that the petitioner was never aware of the same and nothing is mentioned in the MOU about the second respondent. It also does not talk of the price of the land. In the same way, the MOU between the second respondent and the H.J. Consultants was also not in the knowledge of the petitioner as the same was not mentioned in the MOU. 10. He further submitted that the company had issued further shares to the respondents in 1997 in violation of the provisions of section 81A and also in breach of the MOU which stipulates that the shareholding parity among the parties has to be maintained. Even though the company is alleged to have held an EOGM on 7-7-1997 wherein the resolution to issue further shares on a right basis was passed, yet the petitioner nev....
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....r cent compounded annually or in the alternative he prayed for cancelling all the allotments impugned in the petition and restoring the majority of the petitioner. 12. Shri Sudhir Chandra, Sr. Advocate appearing for respondents 2 to 5 argued as follows: This petition is not a bona fide one and has been filed with the oblique motive of recovering the investment made by the petitioner. The petitioner breached the terms of the MOU by not arranging for funds of Rs. 85 crores undertaken to be mobilized by it and therefore the company refused to pay interest on the security deposit. Because of this, petitioner tried to put as many spokes as possible to stall the completion of the project by making complaints to various authorities not only against the respondents but also against the collaborators, namely, NIKO of Japan with whom the company has entered into a technical cum management collaboration. Having failed in all its attempts to stall the project, the petitioner has filed this petition. 13. On merits of the case, the learned counsel submitted : In regard to the transaction between the 2nd respondent and the company, it is to be noted that when the second respondent was incor....
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....it is they who had taken all the steps to get the land licensed to the company, they could have legitimately and directly got shares for the services rendered without paying any cash consideration. Yet, they decided to invest cash and for this purpose they have agreed to sell their personal properties to the second respondent through HJ International. The petitioner is nothing but a financier joining the company for future profit. When the MOU stipulates that shares would be issued to ACCOR at Rs. 100 per share and that public would also be offered the shares at that price, the petitioner was allotted shares at par, so that it could mobilize necessary finance for the company. That is the reason why the petitioner gave proxies to the respondents in respect of its shares. The MOU does not confer any management rights on the petitioner and with the proxies being in the name of the respondents, the petitioner does not have even voting rights. The company could have offered these shares to the public at a high premium and the management could have continued with the respondents without any difficulty. The petitioner not only failed in discharging its obligations, it also acted in a prej....
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....Finance Corporation at Page 505 of Volume III, there is clear mention that the promoters would be selling their properties to deploy cash contribution for the company and in the same report at Page 512, the land and site developmental has been shown as Rs. 12 crores and Rs. 1.1 crore. Therefore, the contention of the petitioner that no value could be assigned to the land is also fallacious. The transactions with the second respondent was bona fide and the petitioner was fully aware of the same. Only when the company rejected their claim for interest on the security deposit, with a mala fide intention and with a view to pressurize the respondents, this petition has been filed. In addition, the petitioner has also indulged in various prejudicial acts, with a view to hamper the progress of the project. In this connection, he referred to the legal notice issued by the petitioner to NIKO about which the petitioner itself had paid compliments in its letter to IDBI dated 18-11-1996. 15. He further pointed out that even though in Paragraph 6 of its Reply, the company has averred as follows : 'It is stated that before the petitioner company agreed to finance the project, it examined all ....
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....tments made by the petitioner with interest at exorbitant rate and therefore as held in Re Bellador Silk Ltd. 1 AER 667, this petition should be dismissed in limine. He also pointed out that, notwithstanding all these objections, when the respondents were ready and willing to settle the disputes amicably, the petitioner, without assigning any reason, withdrew from the settlement only with the view to extract more money from the respondents. Even in facts of this case, he pointed out that the petitioner having had the full knowledge and having been a party to the valuation of Rs. 21 crores for the land, it cannot now complain of either oppression or mismanagement. Further, the petitioner came to the company only as a financier and it has neither a representation on the Board nor any voting rights in view of the proxies executed in favour of the respondents. As far as the allegation relating to non-allotment of shares when further shares were issued, he submitted that notwithstanding the fact that the company had issued notices to the petitioner, the respondent directors would arrange for transfer of proportionate shares to the petitioner in case it expresses its willingness to acqui....
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....rom 1-12-1998 and that they would require sometime to work out the modalities. In the hearing held on 24-12-1998, it was reported that out of the Rs. 19 crores, the company would pay Rs. 12 crores in final settlement of the security deposit and the other respondents would purchase the shares of the petitioner for Rs. 7 crores and that the first instalment of Rs. 6 crores would be paid on 11-1-1999 and the balance of Rs. 13 crores on or before 6-3-2000. The counsel had desired time to finalize necessary terms in this regard and accordingly the matter was adjourned to 11-1-1999. On this day, the matter was adjourned to 20-1-1999. On this day also, the parties did not place before us the agreed draft settlement, but the respondent produced bank drafts for Rs. 6 crores. Since the parties had not placed before us the draft settlement, the matter was adjourned to 9-2-1999. In the next hearing, even though both the parties presented their own terms of settlement, yet, they did not place before us an agreed draft. However, the Bench itself prepared a draft settlement and handed over to them on 28-7-1999 and the counsel conveyed their acceptance to the same. Accordingly, the parties were di....
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....merits. The respondents who had filed an application in terms of section 8 of the Arbitration and Conciliation Act on 24-2-1999 when the compromise efforts were on, desired that this application should be heard before proceeding with the main petition. After hearing the counsel on this application seeking for referring the disputes to arbitration in terms of the MOU dated 11-3-1995, this Bench passed an order on 21-8-2000 dismissing the application as not maintainable. Thereafter, the petition was heard on merits and concluded on 5-3-2001. 19. It is to be noted that the petitioner is not an ordinary/common shareholder. It is a finance company having experts specialized in arranging funds for projects. Therefore, normally, before entering into an agreement for financing a project, a financier carries out a thorough due diligence of the project. In the present case, such a study would have been more important, since the MOU stipulates mobilization of funds through public issue also. Since, in this case, the MOU deals with a hotel project, to which the land component is the most important one, it is inconceivable that the petitioner would not have gone through the land license agre....
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....age 127 of Vol. III). It is on record that the company had applied to the NDMC for transfer of the rights arising out of the license agreement to the second respondent as seen from the company's letters dated 12-8-1993 and 16-9-1993 (pages 134 and 136 of Vol. III). There is a report of Coopers & Lybrand on the hotel project to be executed by the second respondent (page 253 of Vol. III). These agreements could not have been entered into by the second respondent, if there had been no proposal to transfer the developmental rights by the company. All these events had taken place before the petitioner entered into the MOU with the respondents and the company and when the High Court proceedings were pending. The learned counsel for the company raised various issues in regard to the alleged transfer of the developmental rights. According to him, when the license was no longer subsisting, no right arising out of the license could have been transferred and that when the second respondent was not in existence on the alleged day of transfer, no transfer could have taken place and that when the license agreement prohibits transfer of any of the rights arising out of the agreement to a third pa....
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....n these rights were transferred to the second respondent no consideration was received, nothing should have been paid for the retransfer of the rights, that the property being that of the company, no value could have been put on the land. As far as putting a vlaue to the land, we find that when Tourism Finance Corporation of India Limited made an appraisal (page 503 of Volume III), it had estimated a notional value of Rs. 12 crores for the land and Rs. 1.1 crore for site developmental and in the means for financing, it had also estimated the equity share capital of the Indian promoters as Rs. 20.33 crores inclusive of the land. In the proposal given by the petitioner to the company dated 13-2-1995 (page 140 of Volume III), the petitioner itself had indicated that the promoters equity of Rs. 20 crores would be 'Land'. Further, in the inter-office memo (page 133 of Volume III), the petitioner had indicated 'we value the land at Rs. 21 crores as against the market value of Rs. 70-80 crores'. Again as late as on 25-3-1997, the petitioner had indicated in its letter to the Punjab National Bank (page 17 of Vol. VI), that TFCI had estimated the cost of the land and its development at Rs. ....
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....s would be allotted shares against the value of the land. But those proposals were with reference to the project being implemented through the second respondent, in which case, the company, which was in complete control of the respondents, would have been allotted the shares against the land. However, according to the respondents, after having got the license restored in the name of the company after a long drawn legal battle, they did not want to waste time in getting the permission of the NDMC to get the project implemented through the second respondent and therefore, it was decided that the company itself would implement the project. It appears that since as per their original proposals with Aeroflot and ACCOR the land value was to be reflected in shares, perhaps, they had passed on the value to the second respondent, through which to have the shares allotted. Therefore, the only question is as to whether the petitioner had the knowledge of the proposal to pay Rs. 21 crores to the second respondent. It is on record that the petitioner itself had indicated in its letter to the IDBI (page 144 of Vol. III) dated 18-11-1996 that the company had acquired the land rights from its subs....
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....bility cannot allege illegality in the rotation of money as the liability of the company towards the second respondent had been discharged. We are also not able to believe that that the petitioner was never aware of the mode of discharge of the liability, since, as a financier, before writing the letters to the financial institutions that the company had acquired the land for Rs. 21 crores from the second respondent, it should have checked up the mode of payment, especially when it has the right to access to the accounts of the company in terms of the MOU 7. Further, if the petitioner was not aware of the mode of discharging the liability, it would have definitely advised the company to defer the payment and utilize the funds for the project. As a matter of fact, the petitioner paid the security deposit only during the period between 21-11-1995 and 23-4-1996, by which time at least by this time, it should have known about the mode of discharge of the liability towards the second respondent. The petitioner claims that it had no access to the accounts of the company, but no evidence that it had complained of the same to the company, at any time, has been produced. Therefore, even ass....
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....the other issue raised by the counsel. Shri Sarkar submitted that the allotment of shares by way of rotation would not be in conformity with the MOU which stipulated that cash of Rs. 22 crores was to be brought in by the respondents towards the shares. It is a settled law that a private agreement, not forming part of Articles is not binding on the company with certain exceptions like family companies or companies in the guise of partnership, that too in relation to shareholding position and participation in the management. In this case, the partnership principles cannot be applied in view of the express stand taken by the petitioner in its letter to TFCI dated 17-12-1996, (page 556 of Vol. III) stating that the petitioner was an institutional investor in the company without involvement in the management and functioning of the company, when its personal guarantee was sought for by TFCI. Shri Sarkar cited the case of Bombay Cable Car decided by this Board to urge that in line with the decision in that case, we should declare that violation of the provisions of the MOU should entitle the petitioner the grant of the prayers sought for. A reading of that case would show that the reliefs....
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....s. 19 crores payable by the respondents/company to the petitioner. This agreement was recorded in our order dated 18-11-1998 and only the other terms remained to be settled. Notwithstanding this, the petitioner, by a letter dated 19-12-1998 (page 106 of Vol. IV) addressed to TFCI, while making a reference to the process of settlement, once again referred to all the allegations made in the petition and had cautioned TFCI in its dealings with the company. The respondents also, through their affidavit dated 1-4-1998 complained that the petitioner had been giving adverse publicity to the disputes through various newspapers, which allegation, we note was denied by the petitioner. Further, in the High Court proceedings in relation to the writ against the attachment order of the Income-tax department, the petitioner sought for the High Court permission to go ahead with the compromise arrived at before us. The High Court granted the permission on 30-8-1999. However, in the hearing on 10-11-1999, the counsel for the petitioner informed that his client was withdrawing from the compromise terms. The Bench thought that the reason for withdrawal was that on that day the respondents produced ....
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....to settle the matter for a consideration of Rs. 19 crores. However, it backed out of the settlement inspite of offer of Rs. 7 crores by the respondents on 1-3-2000 as the first instalment with the assurance of paying the balance by 31-5-2000 failing which the amount of Rs. 7 crores could be forfeited. Further, when we advised the petitioner to reconsider this decision, the Board of the petitioner once again resolved on 9-3-2000, not to proceed with the compromise on the ground 'of various frauds committed by the respondents, their oppressive acts on VLS Finance Ltd., collapse of faith and conviction in the respondents; and the efforts at prolonging the litigation time and again on one pretext of the other by the respondents'. When the present petition itself is based on the same allegations and inspite of this the petitioner still agreed to compromise, we do not find any justification in the above resolution to reject the compromise. May be that the petitioner desired a higher amount than the Rs. 19 crores as is evident from the submission of the learned counsel for the petitioner at the end of his arguments that one of the equitable reliefs could be to direct the respondents to....
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.... the project, goes to the respondents. With a view to have a first hand knowledge of the project, we visited the project after the arguments were concluded and found that the hotel has become operational due to the efforts of the respondents. In this connection, we may beneficially refer to a decision of this Board in Neelu Kholi v. Nikhil Rubbers (P.) Ltd. [2001] 1 CLJ 168 wherein the wife claiming to have invested in 95 per cent of the shares in the company prayed for handing over the company to her. Finding that it was with the expertise of her husband holding 5 per cent shares in the company that it prospered, this Board declined to grant her prayer observing 'We are not impressed with the claim of the petitioner that, since she had 95 per cent share capital, she should be given the charge of the company in as much as mere capital alone cannot ensure prosperity of a company. Her averment that she joined the respondent as a promoter only due to the legal requirement of having two members does not carry much conviction. It is on record that the respondent has expertise in rubber technology while, the petitioner has no such expertise. It is also on record that the major portion....
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....ggestion of the learned counsel for the petitioner, we perused the inspection report prepared by the Department of Company Affairs. According to the report, the company has violated various provisions of the Act. Many of these violations are not part of the allegations in this petition and as such we cannot take cognizance of the said report without an opportunity to the respondents. It has been held by the Apex Court in Needless case that violation of statutory provisions need not be oppressive. If the company/respondents have violated the provisions of the Act, on the basis of the inspection report, the Registrar of Companies would definitely initiate suitable proceedings independent of the present proceedings before us. In Shaw Wallace [1998] 31 CLA 234, this Board took a view that if a governmental agency has taken cognizance of any violation of statutory provisions, this Board would not examine the same in a proceeding under section 397/398. This view was endorsed by the Division Bench of the Calcutta High Court also on appeal. What this Bench is concerned is whether the allegations made in the petition could be considered to be acts of oppression/mismanagement and regarding t....