TaxTMI 
TaxTMI 
2008 (8) TMI 964
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....ers or CEPL and consequently an order of permanent injunction restraining CEPL from giving effect to any of the resolutions purported to have been passed at the said Board meeting; b) to amend the articles of association of CEPL to include articles to the effect that so long as C.G. Holdings holds shares in CEPL, no policy decision to increase the authorised capital, sale, disposal or encumbrance of the investments in shares in the subsidiaries be taken by CEPL in general meeting, without the affirmative vote of C.G. Holdings; c) to amend the articles of association of CEPL to include an article that so long as C.G. Holdings has its nominee on the Board as a director no quorum for any meeting of the Board of directors would be possible without presence of such a nominee; d) to restrain the respondents 3 & 4 or any other nominee of the respondents 2 & 5 from proceeding with the holding of the Board of directors meeting on 12.11.2005 or any other subsequent date; e) to appoint an independent valuer to assess the value of CEPL and loss suffered by it on account of the breach committed by respondent Nos. 2 & 6 under the JVA and surcharge the respondent No. 2 to 6 who have acted....
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....oner in C.P. No. 76 of 2005. The respondents 3 & 5, being father and son, in C.P. No. 65 of 2005 are the respondents 7 & 6 respectively in C.P. No. 76 of 2005. The fourth respondent in C.P. No. 65 of 2005 is a nominee of ORE, on the Board of CEPL. The sixth respondent in C.P. No. 65 of 2005 is the holding company of the second respondent in C.P. No. 65 of 2005, which is the petitioner in C.P. No. 76 of 2005. The respondents 8 to 11 in C.P. No. 76 of 2005 being bankers of CEPL are neither necessary nor proper parties to adjudicate the disputes involved in C.P. No. 65 of 2005. The respondent No. 13 in C.P. No. 76 of 2005 is one of the group companies of KCP. All the contentious issues primarily arising on account of the alleged breach of the terms of the JVA dated 30.01.2004 are common to C.P. No. 65 of 2005 as well as C.P. No. 76 of 2005. For these reasons, both the company petitions were heard together and are being disposed of by this common order. 4. Shri H. Karthik Seshadri, learned Counsel, while initiating his arguments, in support of C.G. Holdings and KCP, submitted: "KCP being an Industrialist from Coimbatore along with his family members had acquired controlling interest....
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....equity shares of ₹ 10/- each in VML, in favour of CEPL, in consideration of which, C.G. Holdings was allotted 12,41,419 equity shares of ₹ 100/- each representing 45% of the issued, subscribed and paid up capital of CEPL. Athappan had similarly sold his shareholding in CPL and VML in exchange for being allotted 2,84,550 equity shares of ₹ 100/- each constituting 10% of the issued, subscribed and paid up capital of CEPL. KCP in order to facilitate the transactions with ORE and R. Athappan, agreed for the aforesaid share swap and the resultant transactions came to be scrutinised by the Income Tax Authorities and attached a sum of ₹ 32.43 crores in the account of CEPL. KCP never received any money, and yet he was saddled with an income tax demand of over ₹ 32 crores. 6. A Joint Venture Agreement (JVA) was executed on 30.01.2004 between the petitioners, the respondents 1 to 5 (C.P. No. 65 of 2005), VML and CPL, the terms of which were incorporated in the articles of association of CEPL. In the event of any conflict between the JVA and the articles, the JVA should prevail over the articles. In terms of the JVA, ORE had brought in a sum of ₹ 75 crores....
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.... into an agreement in May 2004, with Data Access India Limited (DAIL), involved in the business of "International Long Distance Service", with its registered office at New Delhi, pursuant to a series of discussions and correspondence among R. Athappan and Chandran and one Siddhartha Ray, who along with his associate companies controlled 76% of DAIL and in accordance with the decision of the Board of directors of CEPL, for acquiring 76% control over DAIL. Any investment by CEPL in DAIL needed modification of the Foreign Investment Promotion Board (FIPB) approval and therefore, at the instance of the respondents 2 to 4, (C.P. No. 65 of 2005), KCP had incorporated a new company by name Cheran Holding Private Limited (CHPL) in June 2004. CHPL did not have the required capital to acquire DAIL, compelling CEPL to transfer a sum of ₹ 35.30 crores in accordance with the decision of the Board of directors of CEPL taken on 24.06.2004, to CHPL for acquiring the shares of DAIL from Siddhartha Ray and associates. However, the Board of directors of CEPL had decided on 12.08.2004 to withdraw their decision to invest in CHPL for acquisition of the shares of DAIL. The e-mail dated 1....
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....Pasting India Private Limited (SPIL). In the meanwhile, DAIL faced winding up proceedings (C.P. No. 292 of 2004 before Delhi High Court) at the instigation of Siddhartha Ray, wherein various creditors of DAIL intervened and sought orders for attachment of funds in the hands of CEPL, CHPL, KCPHAPL and SPIL, in whose favour the US D 17 million had been transferred by DAIL. Income Tax Authorities also attached the bank accounts of these companies and made demands for the alleged defaults of DAIL. 11. The annual report of Odyssey Re Holding Corporation for the year ended 2005 recorded its obligation to provide a guarantee of a credit facility, if such facility was established by CEPL, to the extent of USD 66.0 million. The annual report further states that no credit facility was established as of 31.12.2005 and the guarantee liability of OARC no longer exists. Thus, by the conduct of OARC, the JVA stands terminated. The Business Plan could not be implemented for want of the syndicated credit facility of ₹ 300 crores to be brought in by OARC and thereby, CG Holding and KCP immensely suffered. ORE as reported by its nominee on the Board of CEPL, namely, Chandran, had arranged a te....
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....ctors of VML, with concurrence all directors of CEPL, to enter into two agreements with Cherraan Constructions Limited (CCL) for sale of the properties belonging to VML for a total consideration of ₹ 66 crores. CPL had necessary approvals and sanctioned building plan from the competent authorities and therefore, the development of the properties of CPL would be in the interest of CEPL and its shareholders. Accordingly, CPL had entered into two Agreements of Contracting with CCL for up-gradation of the existing Cherraan Towers, at a cost of ₹ 15 crores; and for construction of a three Star Hotel at a cost of ₹ 35 crores. ORE through M/s Ernst and Young assessed the value of properties of CPL and VML. This would show that CEPL has not suffered on account of entering into the agreements with CCL. CPL further entered into an agreement for sale cum developing agreement with CCL, to develop undivided share to a tune of one lakh square feet of apartments for a consideration of ₹ 5 crores. The correspondence produced along with C.A.I82 of 2007 would show that KCP sought approval of the Board of CEPL before entering into the agreements in respect of the assets held b....
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....vement of tax liability, ORE would keep KCP indemnified to an extent of ₹ 30 crores which arose out of the share swap, as borne out by the Term Sheet, circulated by ORE and R. Athappan to KCP before the Board meeting "field on 21.09.2005. The Term Sheet was given by R. Athappan which was not accepted by KCP. 16. The management cannot be taken away from KCP in view of the specific terms of the JVA. The Board minutes dated 21/22.09.2005, disclose wrongly, as if KCP left the Board meeting. The negotiations failed and R. Athappan and Chandran constituting quorum transacted as many as 17 subjects and allegedly passed resolutions without however any deliberations or decisions taken at the aforesaid Board meeting. Therefore, the resolutions passed at the aforesaid Board meeting are null and void and not binding on CEPL and its shareholders. The respondents (C.P. No. 65 of 2005) have taken further steps to hold a Board meeting on 12.11.2005 for the purpose of reviewing the financial and accounting controls and procedures, hiring of consultants for legal and other accounting services, replacement of the Managing Director, approving a new name for CEPL, new registered office and ....
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.... is permissible under the rules of evidence. Pokhran Investments P. Ltd. and Anr. v. Dadha Estates P. Ltd. and Ors. (2006) 132 CC 324 to show that the grievances of one director on account of not holding Board meetings and lack of transparency in the day-to-day management were held to be not genuine, when the petitioning director failed to discharge his duty under the articles of association of the company for convening any meeting of directors of the company and therefore, reliefs claimed in this behalf were declined." 19. Praful M. Patel v. Wonderweld Electrodes Private Limited (2003) 115 Comp Case 377 to show that the provisions of Section 397 can be invoked only when the substratum of the company is lost or there is a lack of probity or there is a dead lock in management. Ebrahimi v. Westbourne Gallleries Ltd. and Ors. (1972) 2 W.LR. 1289 to show that the "just and equitable provision" does not entitle one party to disregard the obligations he assumes by entering a company, nor the court to dispense him from it. It does, as equity always does, enable the court to subject the exercise of legal rights to equitable considerations; considerations that is, of personal ....
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.... other parties to JVA are enumerated therein." 23. Based on the representations, assurances and projections made by KCP, ORE invested a sum of ₹ 75 crores in CEPL by subscribing towards 45% equity capital of CEPL for the purpose of construction of Hotels and IT Parks, a shopping complex and renovation as well as development of properties owned by CPL and VML and selling the aforesaid properties, in terms of the JVA. ORE, by virtue of its investment in CEPL in terms of the JVA, would automatically gain significant control over the affairs of the subsidiaries and CEPL and the subsidiaries would function as a unified group. Athappan, CG Holdings and CPL, should not sell, transfer, pledge or otherwise encumber the shares held by them in VML, without the written consent of ORE, until the expiration of its term. Similarly, CG holdings should not sell, transfer, pledge or otherwise encumber the shares held by it in CPL, without the prior written consent of ORE. Any appointment by CEPL to the Board of directors and of its subsidiaries including CPL and VML should be made only with the prior written consent of ORE. CG Holdings, CPL, R. Athappan and Athappan should exercise their voti....
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....her hand it was the responsibility of KCP in his capacity as Chief Executive Officer and Managing director of CEPL to ensure the syndicated credit facility of ₹ 300 crores in terms of the J VA, which never happened at any point of time Any such contractual obligations cannot be enforced in the present proceedings. There were only negotiations with GE Capital for extending syndicated credit facilities. GE Capital never communicated its final sanction. KCP never produced any sanction letter from GE Capital and no reference was ever made before the Board of directors in regard to any sanction of syndicated credit facility by GE Capital. The Supreme Court held in Sangramsinh P. Gaekwad and Ors. v. Shantadevi P. Gaekwad and Ors. that (a) when a complaint is made as regards violation of statutory or contractual rights, the shareholder may initiate a proceeding in a civil court, but a proceeding under Section 397 of the Act would be maintainable only when an extraordinary situation is brought to the notice of the court keeping in view the wide and far-reaching power of the court in relation to the affairs of the company; (b) If the pleadings and/or the evidence adduced in the procee....
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....not forthcoming, there should be charge on 45% of shareholding held by CG Holdings in CEPL. 26. Necessary application for approval to invest in CEPL was made to the FIPB, much prior to the capital contribution by ORE and execution of the JVA. Neither the application nor the approval of FIPB makes any reference to the telecom related activities. Furthermore, at no point of time, CEPL intended to engage in telecom related business. However, the FDI Regulations do not permit any investment in the telecom business. The communication dated 09.11.2004 of the FIPB in favour of CEPL approving foreign collaboration envisages equity participation of 55% in the paid up capital of CEPL, in the ratio of 45% by ORE and Athappan. The FIPB approval does not permit any investment in telecom business. The JVA also does not envisage the telecom business. ORE is interested to secure monies from KCP and further OARC lent ₹ 78 crores for revival of DAIL in order to enhance its value. KCP was giving priority to the revival of DAIL instead of performing his obligations as CEO and Managing Director of CEPL in gross violation of the JVA. KCP with a view to induce the Board of CEPL into approving inve....
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....le period, without any authority of the Board of CEPL. OARC or any associate or affiliate of ORE never intended the amount lent to DAA to be invested towards equity in CHPL or to be further diverted from CHPL to companies related to KCP. When OARC demanded repayment of the entire loaned amount together with interest from DAA, the latter failed to meet the claim, compelling OARC to institute a suit against DAA for recovery of the loan amount of USD 17 million before the Supreme Court of the State of New York. The High Court of Delhi by an order dated 18.11.2004 made in C.P. No. 292 of 2004 directed DAIL to be wound up and further ordered to return the funds which are illegally kept in entities related to KCP in favour of the Official Liquidator appointed by the High Court. 29. OARC by its communications dated 23.11.2005, 30.11.2005 and 05.12.2005 instructed KCP and CHPL to return the loan amounts to the Official Liquidator in terms of the order of the High Court. CEPL has not so far commenced any development operations, as envisaged by the JVA on account of - (a) KCP falsely represented that he had been offered a right of first refusal on a valuable property in Chennai for the deve....
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....roperly recorded in accordance with the articles and with the sole object safeguarding the interest of CEPL and are binding on CEPL and its directors. The term sheet circulated at the Board meeting of 21/22.09.2005 was by KCP and not by ORE, wherein ORE never agreed to indemnify KCP, on account of any tax liability, pursuant to the share swap, in terms of the Term Sheet. Before termination of the JVA by the parties or by this Bench it is necessary that the funds and properties of CEPL, which have been misappropriated by KCP must be restored to CEPL. 32. Shri J. Sivanandaraaj, learned Counsel, while supporting the respondents 3 & 5 (C.P. No. 65 of 2005) submitted: "KCP has committed breach of trust and misappropriated funds of CEPL for his personal needs and further fabricated the minutes of various Board meetings of CEPL, in order to legitimate his unauthorized activities. R. Athappan, a person of Indian origin holding citizenship of Singapore is an independent contractor of a company, by name First Capital Insurance Ltd., which is a part of the "Fairfax Group of Companies in Canada", engaged in the business of financial services. When KCP approached R. Athappan in Sin....
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....the landed properties of VML would disclose the total net value at ₹ 686 million. 34. The impugned agreements have been executed on 28.08.2004, after a lapse of more than eight months of the date of valuation report of M/s. Ernst & Young Private Limited. CPL and CCL entered into an agreement of sale-cum-developing on 28.08.2004 to construct and sell 1,00,000 sq.ft. in Cherraan Towers at a cost of ₹ 500/- per sq.ft. amounting to ₹ 5 crores, whereas the report of M/s Ernst & Young Private Limited would reveal the value of saleable area in Cherraan Towers at ₹ 1230 per sq.ft, and the police complaint lodged by KCP against ORE and others, discloses the value of the said property owned by CPL at 120 crores. CPL by virtue of the agreements both dated 14.01.2005 has undertaken to honour the financial commitments made in favour of CCL as specified therein, and such financial commitments are contrary to the JVA. All the agreements with CCL are without any authority of the Board of CEPL, consent of ORE and contrary to the terms of the JVA. The assets of CPL and VML having being sold at a very low value, is oppressive of CEPL, ORE and other shareholders. 35. The prop....
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.... seeking of Shri Chandrannn Rathnaswami in Form No. 29 is not his signature and that it was one of the Company Secretaries in the Company who had done it wrongly". KCP, taking into account his past conduct will not return back the investment of ₹ 75 crores made by ORE in CEPL. KCP would on the other hand only pursue the criminal complaints wrongfully initiated against ORE, R. Athappan, Chandran and other respondents. The affairs of CEPL, therefore, cannot be entrusted with him. KCP came with unclean hands and further CG Holdings as well as KCP have not established any oppressive acts on the part of ORE or other respondents. (C.P.76 of 2005). 37. In terms of Clause 9.1 of the JVA, CEPL should obtain a syndicated credit facility, to be secured by a corporate guarantee issued by OARC, which is subject to satisfaction of the obligations imposed on among others, CG Holdings and KCP as specified therein, which never happened. Therefore, OARC cannot be solely blamed for not offering any corporate guarantee in terms of the JVA. The e-mail sent from Paul Rivett on 27.08.2004 and the police complaint dated 27.02.2006 made by KCP would show that ORE had arranged a term loan of USD....
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....s a shareholder. Further, as held by the Supreme Court, oppression involves at least an element of lack of probity or fair dealing "to a member in matters of his proprietary right as a shareholders and not any harsh or unfair treatment in any other capacity". 40. Srikantha Datta Narasimharaja Wadiyar v. Sri Venkateswara Real Estate Enterprises P. Ltd. and Ors. (1991) 72 CC 211 to show that the relief under Sections 397 and 398 of the Act is an equitable relief which is entirely left to the discretion of the company court. Even assuming that the allegations of the petitioner, if proved, do make out a case of oppression and mismanagement within the scope of Sections 397 and 398 of the Act, mere proof of those allegations would not entitle the petitioner to the reliefs sought for when these reliefs are discretionary reliefs and they will be granted only to persons who approach this Court in good faith and with a clean record and clean hands. Sangramsinh P. Gaekwad and Ors. v. Shantadevi P. Gaekwad and Ors. (2005) AIR SC 809 to show that a director of a company indisputably stands in a fiduciary capacity vis-a-vis the company. He must act for the paramount interest of the c....
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....t be invalid and is binding on the Company and others. If there is complete deadlock in the management of the company, it would be just and equitable to wind up the company, for, with such deadlock, the affairs of the company cannot be carried on to its advantage. In this company petition, no dead lock situation has been shown, to remedy such grievances. Mohta Bros P. Ltd. and Ors. v. Calcutta Landing and Shipping Co. Ltd. and Ors. (1970) 40 CC 119 to show that in a petition under Sections 397 & 398, the court must confine itself to the case as made out in the petition and to the allegations in the petition itself and supporting affidavits, if any, and not look at other evidence with regard to events that might have happened subsequent to the petition. 44. Seth Mohanlal and Anr. v. Grain Chambers Ltd. Muzaffarnagar and Ors. to show that substratum of the company is said to have disappeared, when the object of the company has substantially failed, or when it is impossible to carry on the business of the company except at a loss, or the existing and possible assets are insufficient to meet the existing liabilities. In re H.R. Harmer Ltd. (1959) 1 W.L.R. 62 to show that when the re....
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....y on the part of OARC either to arrange for a syndicated credit facility or offer any corporate guarantee, as claimed by KCP. At the inducement of KCP, OARC provided a loan of USD 17 million to DAA, a wholly owned subsidiary of DAIL, to be lent onward to DAIL in accordance with applicable laws and regulatory approvals. However, the loan proceeds were inappropriately remitted by DAA to DAIL, as payment of receivables for services rendered by DAIL and thereafter remitted in favour of CHPL by KCP. CHPL in turn without any basis allotted preference shares to OARC, which came to be cancelled by this Bench in its order dated 29.12.2006 made in C.P. No. 343/111/SRB of 2008. OARC has not caused any loss to CEPL and not liable on any account, as claimed by the petitioners (C.P. No. 65 of 2005)." 47. CCL is an extended arm of KCP, which is borne out by the prospectus issued by CCL on the eve of the public issue came out by CCL, wherein it was highlighted that CCL has been promoted by KCP. KCP was one of the directors of CCL at the relevant point of time, namely, October 1992. The annual report for the year 2003-2004 would disclose that KCP alongwith its relatives held 42:62% of shares, whil....
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.....2004, for constructing one lakh sq.ft. for apartments in Cherraan Towers, an amount of ₹ 5 crores towards undivided share of the land. 49. The remaining clauses in this agreement are also not beneficial to CPL. CCL is the only beneficiary under the various contracts. CPL and VML are nothing but branches of CEPL and, therefore, Section 402 can be extended to subsidiaries too. CCL is under the control of KCP. KCP had undertaken to suspend the construction activities as per the contracts entered into with CPL and VML. Thus, CCL, having the knowledge of the JVA, the doctrine of indoor management would not apply to it. Therefore, CCL cannot ignore it. CCL has falsely lodged a private complaint against CEPL, Chandran, R. Athappan, ORE and Gopinath Athappan in CC No. 157 of 2006 before the Court of Judicial Magistrate of Perundurai, after filing of the company petition by ORE. There has been no material to show that any amount has been incurred by CCL on development of any of the properties, pursuant to the agreements entered into with CPL and VML and therefore, CCL cannot claim any compensation. The interim report of M/s Deloitte Haskins and Sells on CEPL for the year ended 31.03....
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....ready developed 60,000 square feet of constructed area belonging to third parties and completed construction of Cherraan Towers Phase I and Cherran Plaza. CCL is competent to perform the contracts as entered into with CPL and VML as borne out by the construction work already successfully done by CCL which are found reflected in a number of photographs produced at the time of hearing. The sale deeds dated 31.10.1991, 24.06.1992 and 10.06.1993 would show that KCP sold 248/50,0000, 207/50,0000 and 229/50,0000 of undivided share in the land respectively along with constructed area in favour of third parties. CCL is not a party to the JVA and its terms cannot be enforced against CCL. It cannot therefore, be contended that the impugned agreements are violative of the JVA." 52. CCL in its normal course of business validly entered into contracts with CPL and VML, which are the subsidiaries of CEPL. CPL properties were subject to several controversies, particularly between Coimbatore Municipal Corporation and CPL. The Municipal Administration, pursuant to initiative taken by CCL, gave permission in March 1993 to construct additional six floors, by relaxing the relevant rules, subject to KC....
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....ents, namely CPL, VML and CCL fixed the consideration in respect of the transactions involved therein, after taking into account various liabilities and legal obligations suffered by the respective entities. 54. This Board in Pokhran investments Private Limited v. Dadha Estates Private Limited (2006) 132 CC 324 held that the valuation of property was held to be reasonable when so many litigations regarding that property existed. The Gujarat High Court held in Official Liquidator, Dhavalgiri Paper Mills Private Limited v. Chinubhai Khilachand (2003) 144 CC 277 that to bring the charge of misfeasance against ex-directors, it is necessary that specific acts of commission or omission or negligence on their part must be made out and the resultant losses must be quantified for ordering recovery of such losses. The persons alleging such acts of misfeasance, must produce cogent, reliable and specific evidence to prove that any alleged mis-conduct was wilful and amounted to misfeasance with culpable negligence. The act of commission or omission of negligence should be with the intent and knowledge to cause losses to the company and resulting in personal gain which are absent in the transac....
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....d therefore, the rights and liabilities and other consequences emerging therefrom do not affect CCL. There is no cause of action for ORE, being a shareholder to approach the CLB challenging the agreements, it is only CEPL which ought to have challenged the impugned agreements, in view of the fact that the issues are between the subsidiaries of CEPL and CCL. Clause 11.3.4(xvi) requiring an affirmative vote from ORE director only in the case of acquisition or sale of the assets of CEPL or its subsidiaries other than in the ordinary course of business of CEPL or its subsidiaries. The contracts of sale or development between VML, CPL and CCL are in the ordinary course of business of the subsidiaries of CEPL and therefore, the requirement of affirmative vote from ORE director does not arise and therefore, these transactions are not violative of the terms of the JVA. The contracts with CCL are fair transactions. ORE has abused the process of law by initiating the present proceedings and seeking to set aside the transactions impugned by them. Section 402(e) of the Act deals with termination, setting aside an agreement between a company and not part)' referred in Clause (d) therein. Th....
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....perfectly legal and valid and hence incapable of being avoided by the company, was oppressive to the aggrieved shareholders or prejudicial to the interests of the company. This would make it impossible for any outsiders to deal with the company. Merely because the agreements are oppressive to some part of the shareholders, they ought not to be terminated. The shareholders should be prevented from misusing the provisions of Sections 397/398, failing which the proposed remedy becomes a source of greater oppression and harm than the one sought to be removed or prevented, as held in Raghunath Swarup Mathur v. Har Swamp Mathur (1967) 37 CC 802. 60. The internal affairs of CPL and VML cannot be presumed to be known to CCL and CCL is entitled to protection by virtue of the doctrine of indoor management, which protects third parties who have acted in good faith. An outsider is entitled to presume that the procedural aspects of a transaction have been carried out, as held in (i) Sree Meenakshi Mills Ltd. v. Callianjee & Sons (1935) Vol.5 CC 103; (ii) Varkey Sourier v. Keraleeya Banking Co. Ltd. (1957) Vol.27 CC 591; and (iii) C.K. Siva Sankara Panicker C.K. v. Kerala Financial Corporation ....
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.... parties are competent; (ii) consent of parties is free; (iii) consideration is lawful; (iv) object of contract is lawful; and (v) contracts are not expressly declared by the Act to be void and hence cannot be challenged in a court of law. These essentials of a contract having been duly satisfied as stipulated in the Indian Contract Act, 1872, cannot be assailed by ORE. The contracts entered into between CPL, VML and CCL are not hit by the provisions of Sections 24, 25, 26, 27, 28, 29 or 30 of the Indian Contract Act, 1872. CCL is only a contractor therefore, ORE cannot seek to set aside the agreements which are properly and validly executed between CPL, VML and CCL. The CLB may not, therefore, amend, vary, modify, cancel the contracts entered between CPL, VML and CCL. In the event of setting aside the aforesaid contracts, among other parties, the material obligation and commitments undertaken by CPL will be seriously affected. CCL could not undertake the project on account of the restraint order passed by the CLB, thereby both CPC and CCL and the shareholders are put into irrepairable loss. 63. According to SBI, Main Branch Erode, CEPL opened a short term deposit of ₹ 25 cr....
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.... ₹ 2394.48. 66. After conclusion of the arguments and when the compromise efforts attempted among the contesting parties failed, ORE came out the following proposal remedying the grievances: "(a) to remove KCP as a director, CEO and Managing Director of CEPL with immediate effect; (b) to direct CG Holdings and KCP to return in favour of CEPL and the subsidiaries all assets- moveable and immovables - funds and securities of CEPL and the subsidiaries, misappropriated by them, apart from capital investment of ORE, Athappan, in CEPL; CEPL's shareholding in CPL and VML and all immovable properties belonging to CPL and VML within 14 days of the order of this Bench; (c) to set aside all contracts entered into by CEPL and the subsidiaries in violation of the JVA, with immediate effect; (d) to direct KCP to provide to M/s. Deloitte Haskins and Sells, Chartered Accountants all statutory records, financial statements, bank statements, and other records in order to carry out an audit for the period between 30.01.2004 till date and to carry out valuation of CEPL; (e) to constitute a new Board of directors of CEPL consisting of nominee of ORE, Athappan, CG Holdings other tha....
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....hed with reference to the voluminous records made available before me. 68. R. Athappan, is the Principal Officer of M/s First Capital Insurance Company Limited, a group company of OARC, forming part of 'Fairfax Group" companies, having its registered office at Stamford, Connecticut, USA, as reflected in the annual report of Fairfax for the year ended 2005. The exchange of e-mail Athappan and KCP time to time, particularly e-mail sent on 03.08.2004 by Gopinath Athappan, son of R. Athappan and e-mail dated 30.09.2005 of R. Athappan would disclose their family acquaintance and close familiarity which existed even prior to the incorporation of CEPL in November 2003, the fact of which has been admitted by KCP and found reflected in the communication dated 04.11.2003 of Athapppan addressed to KCP, the relevant portion of which assuming relevance reads thus: "Please refer to your discussion in Singapore with my father Mr. R. Athappan when you expressed your current cashflow difficulties. You had requested for assistance to tide over the cash flow problem and offered to issue new shares to raise cash of IRS 4 crores at a mutually acceptable price." Accordingly, Athappan....
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....irected by ORE (clause 2A.6); • to amend the articles of association of CPL and VML as specified in Clause 2A.7 • to appoint directors of CEPL and its subsidiaries including CPL and VML with the prior written consent of ORE (clause 2A.8); • to subscribe ₹ 75 crores by ORE towards equity capital of CEPL (clause 3). • to seek and obtain a syndicated credit facility of ₹ 300 crores, to be secured by a corporate guarantee to be issued by OARC (clause 9.1); • to pledge the shares of (i) CG Holdings and Athappan in VML; (ii) KCP and his affiliates in UBC and UPL and (iii) Athappan in UPL and UBC in favour of OARC, as security for the grant of a corporate guarantee by OARC (clause 9.1); • to prepare a detailed Business Plan by KCP, within its parameters for CEPL on annual basis (clause 10.1); • not to carry through any resolutions by the Board, in relation to the specified matters, without an affirmative vote from ORE director, which shall include sale of the property or assets of CEPL or its subsidiaries, other than in the ordinary course of business of CEPL or its subsidiaries (clause 11.3.4/article 88 (xvii); • not to ....
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....e Board of directors of CEPL emphasizes that the general control, supervision, conduct and management of CEPL should be exercised _by the Board of directors. The proviso to Section 2(26) of the Act makes it abundantly clear that ''a managing director of the company his powers subject to the superintendence control and directions of its Board of directors. " In the light of various provisions of the JVA, articles of association of CEPL and of the Act, the responsibilities of carrying on the business and affairs of CEPL lie jointly or severally in the hands of the Board of directors of CEPL. When KCP failed to achieve the business targets of CEPL, in terms of the JVA, neither R. Athappan nor Chandran acted for the paramount interest of CEPL, as laid down by the Supreme Court in Sangramsinh P. Gaekwad and Ors. v. Shantadevi P. Gaekwad and Ors. (supra), by discharging their fiduciary duties in accordance with the JVA. When default occurred in respect of many a matter covered under the JVA, ORE did not choose to act as per Clause 14.2 of the JVA, in declaring such matters as events of default. The default on the part of KCP and the inaction by the remaining directors, in my....
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....artner is claiming that the guarantee should be available and is pursuing legal actions against the Company. The Company finds this claim without merit and is vigorously defending the legal actions." 74. It is clear from the above recitals forming part of the annual report of Odyssey Re Holding Corporation, which are not under dispute, that OARC did not dis-own its obligation to provide a guarantee of a credit facility in terms of the JVA, but only denied the existence of the requisite conditions for any future provision of the guarantee any longer on the sole premise that no credit facility has been established by CEPL as of 31.12.2005. However, it is on record that GE Commercial Finance, Gurgaon, had sanctioned in terms of its communication dated 13.09.2004, in favour of CEPL, a term loan of USD 66 million for the purpose of working capital finance, capital expenses and investment in subsidiaries on the terms and conditions specified therein. The categorical assertion of Shri Karthik Seshadri, learned Counsel, that the upfront fees of US D 50,000 remitted by CEPL, at the time of the acceptance of the in-principle offer of GE Commercial Finance, was refunded by it for not having ....
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....d the articles of association of CPL in terms of Clause 2A.7 of the JVA. • Any appointment by CEPL to the Board of directors of its subsidiaries including CPL and VML should be made only with the prior written consent of ORE, until expiration of the terms of the JVA (clause 2A.8) • With the execution of the JVA, the Board of directors of CPL and VML must be reconstituted by inducting CG Holdings nominee, Athappan nominee and ORE representative in the place of the existing directors (clause 2A.9). • Athappan and CG Holdings should create a pledge over 2,84,550 and 12,32,740 shares in CPL and 11,62,900 and 12,92,600 shares in VML in favour of ORE. Athappan should pledge 25,05,300 shares in CPL in consideration of ORE having agreed to subscribe to ORE shares {clause • The outstanding dues of CPL to Lord Krishna Bank and Tourism Finance Corporation of India Ltd. should be repaid by CPL using funds loaned by CEPL to CPL {Clause 3.2(i)} • All shares held by CG Holdings in CPL should be transferred to CEPL {Clause 3.2(iii)} • Athappan should transfer his shares in VML and CPL to CEPL {clause 3.2(iv)} • The dues of VML to Industrial Developm....
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....lding company is intertwined with that of CPL and VML, ORE a shareholder of the holding Company, is entitled to agitate the grievances on account of the subsidiary companies. 78. In view of this, the grievances of ORE, holding 45% of equity shares of CEPL that the subsidiary companies, namely, CPL and VML entered into contracts with CCL in respect of their properties, contrary to the JVA and without any approval of the Board of directors of CEPL can be raised in the present proceedings. The proposition of law advanced by Dr. K.S. Ravichandran, that shareholders of the holding company cannot proceed against the subsidiary for remedying the grievances in the subsidiary companies cannot be applied uniformly, but will depend upon the facts and circumstances of each case. No hard and fast rule can be laid down. The arguments that no transaction which is legal and valid, but oppressive cannot be set aside are misconceived in the light of the principles enunciated by the Supreme Court in Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd. (1981) VoL. 51 CC 743, according to which "every action in contravention of law may not per se be oppressive for the pu....
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....herein. There are no materials to show that (a) Board meetings convened and held on 24.06.2004 and 12.08.2004 after following the procedure specified in the articles; (b) notices of the Board meetings were sent to R. Athappan and Chandran; and (c) R. Athappan and Chandran participated in this Board meetings. The bare Board minutes, without any corroborative evidence establishing the convening and holding of such Board meetings especially when they are under challenge, cannot sustain any such investment by CEPL in DAIL. 81. Furthermore, the categorical admission of KCP made before the Income Tax authority, which is found reflected in the assessment order dated 23.02.2005 in the matter of SPIL would show that KCP had transferred in anticipation of the approval of the Board of CEPL, a sum of ₹ 33 crores as capital advance to CHPL, which was paid to DAIL and that CEPL Board had subsequently disapproved the said transfer of funds to CHPL for investing in DAIL. It is rather evident from the communication of KCP dated 05.02.2005 addressed to the Income Tax Authority that the investment made in DAIL does not enjoy the authority of the Board of CEPL. It is, therefore, far from doubt ....
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....4 R. Athapp KCP E-mail C alled for annual reports of an DAIL for the years 2001 & 2002; physical and financial performance in the financial year 2004 and borrowing profile, purpose of the loan, as required by IBank, Singapore. 12. 15.10.2004 R. Athapp KCP E-mail Called for further an information and documents on DAIL for internal appraised as required by Ibank Singapore. 13. 24.12.2004 R. Athapp KCP E-mail ICICI,UK approved the... an of USD 17 million to CEPL to refinance the ECB of USD 17 million borrowed from OARC and arranged at the request of CEPL which was routed through DAA 14. - R. Athapp Ashutosh E-mail Authorised the transfer of an an CEO of amount of USD 17 million DAA in favour of CEPL 82. It is indisputably clear from the foregoing correspondence that the decision to invest monies in DAIL was as a result of the collective wisdom exercised by among others KCP, R. Athappan, Chandran, Paul Rivett and Prem Watsa, after an indepth study of the financial and technical viability, business prospects of telecom business, modalities and advantages of funding of DAIL. R. Athappan and KCP had personal discussions with Siddharth Ray and ORE was in possession of co....
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.... by DAA in favour of the petitioner is produced herewith as Annexure P3. It subsequently transpired that the loan proceeds were inappropriately remitted by DAA to DAIL as payment of receivables for services rendered by DAIL. It is submitted that at no point in time were the loan proceeds intended by the petitioner to be used for any purpose other than onward lending to DAIL in accordance with applicable laws and regulations. It is submitted that faced with the inappropriate remittance and subsequent diversion of the loan proceeds, and the failure of DAA to make payment on the loan, the petitioner instituted a suit for recovery against DAA at the Supreme Court of the State of New York, USA. The Supreme Court of New York has since passed a judgment in favour of the petitioner in the said proceedings for the amount of USD 17,000,000 (United States Dollars seventeen million) together with interest thereon and costs. A certified copy of the judgment passed by the Supreme Court of New York in favour of the petitioner is produced herewith as Annexure P4. 84. KCP had admittedly transferred the loaned amount of USD 17 million, (equivalent to ₹ 78.45 crores) extended by OARC to the ....
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....45% against which M/s ORE Holdings Ltd. brought in ₹ 75 crores. 86. This attracted short term capital gains tax of ₹ 32.40 crores. This tax liability has been calculated by the Income Tax Department on the basis of the valuation of the shares of the CEPL at ₹ 604, at which price the shares were issued in favour of ORE. The sequence of events would show that CG Holdings as well as KCP are accountable for the Income Tax liability and the consequent appropriation of ₹ 25.57 crores from the fixed deposit held by CEPL with SBI, Kilpauk, Chennai, on 24.09.2005, towards income tax liability of CG Holdings. SBI, Erode Branch by its communication dated 16.11.2005 reported that a sum of ₹ 6.86 crores has been remitted on 23.09.2005 from and 'out of the fixed deposit amount kept by CEPL to the Income Tax Department towards tax liability of CG Holdings. These amounts, namely, ₹ 25.57 crores and ₹ 6.86 crores having been appropriated towards the income tax liabilities of CG Holdings, without any approval of the Board of directors of CEPL and not for the purpose of CEPL, must be restored back to the account of CEPL by KCP, on the principles enunciat....
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....ion of ₹ 15 crores. 88. The locus standi of ORE being a member of CEPL to challenge the contracts entered into by the subsidiaries with CCL is seriously challenged by CCL. In this connection, it is already found that the subsidiaries, namely, CPL and VML have been treated as branches of the holding Company, CEPL, in which case the CLB is empowered to exercise all its powers under Section 402 of the Act with reference to the affairs of the subsidiaries. In view of this, the empowerment of ORE to challenge the impugned contracts cannot be resisted by CCL. 89. The agreements have been executed as early as on 28.08.2004 and 14.01.2005, which came to be deliberated at the Board meeting held on 22.08.2005 and further decided that KCP would with immediate effect, suspend all construction activities, in terms of the agreements entered into with CPL and VML. At the same time, ORE initiated necessary action (C.P. No. 76 of 2005) to set aside the agreements only on 16.12.2005, beyond a period of three months, stipulated in Section 402(f) of the Act, and, therefore, ORE has lost its remedy to set aside the agreements executed by CPL, VML and CCL. Nevertheless, it shall be borne in mind....
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....ed, in the light of various provisions of the JVA/articles of which CCL is quite aware on account of its specific admission which is found reflected in the criminal complaint (CC No. 157 of 2006) filed before the Judicial Magistrate of Perundurai against CEPL and others, reading thus: "The first accused approached the complainant for putting up a multi storied apartment cum shopping complex, at Arts College Road, Coimbatore in the name and style of 'Cheran Towers' through the subsidiary company and had produced a Joint Venture Agreement dated 30.01.2004 and made the complainant to believe the same and made representation to enter into an agreement of sale cum developing (para 2)" 92. It is observed that CCL has been promoted as a private Company in August 1988 by KCP, his wife and one R. Manian who are the subscribers to the memorandum of association. CCL has been converted into a public company under Section 44 of the Act with effect from 25.04.1992. The prospectus issued in October 1992 on the eve of the public issue of 24,00,000 equity shares of CCL, it was projected that CCL has been promoted by KCP. The annual report of CCL for the years 2003-2004 discloses that dir....
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....ith possession of 24.95 acres of prime lands on receipt of a paltry amount of ₹ 20,000/-, which is the only benefit derived by VML. CCL has been given powers to mortgage the properties for the purpose of raising loans to complete the construction as per the agreements, while VML will have no right to deal with the property without the written consent of CCL. 95. By virtue of an agreement of contracting dated 14.01.2005, CPL should pay CCL a sum of ₹ 35 crores for constructing a hotel building within one year of the agreement which does not carry any interest and CCL would take seven years for completion of the construction of the hotel building. CCL has already taken possession of the property on payment of a meagre amount of ₹ 10,000/- in favour of CPL. This contract is made irrevocable and in the event of any cancellation or alteration of the contract, CPL is liable to pay CCL the cost incurred by CCL. The agreement of contracting dated 14.01.2005 for upgrading the existing shopping complex at Cherraan Towers is irrevocable. The agreement dated 28.08.2004 for constructing 1,00,000 square feet for apartments in Cherraan Towers envisages a consideration of ₹....
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.... 97. Clause 11.3.3 of the JVA provides that two directors, one of whom should be ORE director, shall constitute quorum for a meeting of the Board of CEPL. All matters save those specified in Clauses 11.3.4 will have to be decided by simple majority. Clauses 11.3.3 and 11.3.4 of the JVA have been incorporated as clauses 99 and 88(a) of articles of association of CEPL. The notice of agenda of the Board meeting held at Mumbai on 21/22.09.2005 are not under dispute. The Board minutes would show that KCP was present in the Board meeting only until 3 p.m on 22.09.2005 compelling the remaining directors to continue the Board meeting, transact the business and pass various resolutions in terms of the board resolutions dated 21/22.09.2005. This Board minutes are found to have been signed by R. Athappan and Chandran. R. Athappan and Chandran, being a nominee of ORB constitute a valid quorum in terms of JVA/articles for the board meeting of 21/22.09.2005 and they are empowered to decide all the matters which came up before the Board meeting on 21/22.09.2005 and KCP cannot have any grievances on the validity and enforceability of any of the resolutions passed at the board meeting held on 21/22....
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....n of current account balances held with banks and for the sums advanced to other companies/related parties etc., have been made available to the Chartered Accountants for carrying out the audit of transactions of CEPL. The two books containing minutes of as many as 24 Board meetings for the period from 05.12.2003 to 01.06.2005 would disclose, interalia, directors present at such meetings. Nevertheless, none of the directors present for the meetings, other than KCP is found to have signed the Board minutes despite the fact that the names of other directors are reflected therein. In the absence of any concrete evidence, the presence and participation of directors whose names are reflected in the relevant minutes remain unestablished, especially when the very convening and holding of board meetings have been seriously disputed by such directors of CEPL. The communication dated 26.08.2005 of Ms Dorothy Thomas would show that all Board minutes other than the minutes dated 22.08.2005 have not been signed by the directors present. KCP is accountable for not having diligently discharged his statutory duties cast on him. At the same time it may observed that Article 86 empowers the director....
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....e. There is no scope and further it is impossible to carry on the joint venture business of CEPL as per the terms of the JVA on account of the strained relationship which got aggravated by virtue of a number of criminal complaints initiated against ORE and others. There is a complete mistrust and lack of mutual confidence between KCP on one hand and ORE, R. Athappan and OARC on the other hand. 103. ORE expressed its concern and doubts as to whether KCP would keep up any of the terms which may be imposed towards settlement of the disputes, bringing to an end the acts complained of in the affairs of CEPL. CEPL neither carried nor could accomplish its Business Plan under the joint management of CG Holdings, ORE and Athappan. In these circumstances, the most equitable remedy would be parting of ways among ORE, Athappan and CG Holdings. CG Holdings and KCP cannot draw any support from the decision in Ebrahimi v. Westbourne Gallleries Ltd. and Ors. (supra) for their co-existence with ORE and Athappan, in the existing facts of the present case. The very purpose of CEPL could never be achieved in terms of the JVA, since 30.01.2004 and therefore, CG Holdings or KCP cannot claim to be in th....