TaxTMI 
TaxTMI 
2018 (11) TMI 1408
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....pondent no. 2 herein in the shares which are in the names of Respondent nos. 3 to 7. These constitute a total of 6.16% of the share holding of Respondent No. 1. However, issue before this Court is very limited which pertains to the territorial jurisdiction, viz., whether High Court of Madras has the territorial jurisdiction to entertain the suit filed by the appellants herein? 3) As per Clause 12 of the Letters Patent, along with the suit the plaintiffs also filed application for seeking leave to sue on the ground that a substantial part of cause of action had arisen within its jurisdiction. This application was allowed by the High Court vide its order dated January 12, 2018. After the service of summons in that suit, Respondent no. 1 herein (Defendant no. 1 in the suit) filed applications for revoking leave to institute the suit within the jurisdiction of Madras High Court on the ground that it lacked territorial jurisdiction to decide the suit. Similar applications were filed by Respondent nos. 2 and 3 as well. Respondent nos. 4,6,and 7 filed Memos supporting these applications. The learned Single Judge of the High Court dismissed these applications holding that High Court had....
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....ffs and all resident nationals of Dubai) jointly own 6.16% shares in the Indian Company. 10) All the share certificates regarding these 6.16% shares are held with the Proforma Defendant no. 11, viz., ETA Star Holding LLC, having its registered office in Dubai, UAE, which is a limited liability company incorporated in the Emirates of Dubai, UAE under UAE Federal Law No. 8 and is the 100% beneficial owner of the Indian Company. 11) The Contesting Defendant no. 8, Mr. V. Jagannathan, a resident of Chennai, Tamil Nadu India was the Manging Director of Defendant no. 1/Indian Company at the time of institution of the Suit. 12) The Contesting Defendant no. 9, Mr. V.P. Nagarajan, a resident of Chennai, Tamil Nadu India was the Managing Personnel of Defendant no. 2 (incorporated in Dubai) at the time of institution of the Suit. 13) The Contesting Defendant no. 10, Mr. C.M. Kannan Unni, a resident of Chennai, Tamil Nadu India was the Joint Executive director and Company Secretary of Defendant no. 1 at the time of institution of the Suit. 14) The Proforma Defendant no. 12, Emirates Trading Agency is having its registered office in Dubai, UAE. It has 52% share held by the plaint....
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....fs have further claimed that four share certificates for a total of 33,200 shares were issued on July 11, 2005 in favour of Defendant nos. 3, 5 and 7, who are shown as subscribers to the Memorandum of Association of Indian Company. The outstanding call amounts on these shares were satisfied from the remittance made in March 2006 by Defendant no. 12. These share certificates are in the custody of Defendant no. 11 in its capacity as beneficial interest holder of Defendant no. 2. Defendant nos. 3, 5 and 7 have also made declarations acknowledging the beneficial interest of Defendant no. 2 in these shares. 19) It was further stated that on December 21, 2005 a sum of Rs. 50/- lakhs was remitted by the Defendant no. 12 through bank transfer from Mashreq Bank in Dubai to the Bank Account of the Indian Company in Andhra Bank, Chennai, Main Branch and share certificates were issued in favour of the Defendant no. 3, which has also been recorded in the books of accounts of the Indian Company. 20) Thereafter, on January 16, 2006, the Indian Company issued payment instructions to HSBC Bank, Dubai, for an amount of Rs. 16,25,00,000/- to be deposited in the account of the Defendant no. 1 in....
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....spective effect from 2014. The same was on account of Defendant nos. 3, 4 and 7 to sign the financial statements of Defendant no. 2. It was also urged that till the time the Indian Company had requirements for funds, the interest of Defendant no. 2 was acknowledged and it was stopped subsequently. It was further urged that the entire remittance towards the suit shares of 6.16% of the Indian Company, were by the funds provided by Defendant no. 12 or Defendant no. 2 and no part of the funds came from the personal accounts of Defendant nos. 3 to 7. It was further urged by the plaintiffs that Defendant nos. 8 to 10 had direct knowledge of these facts. 24) It is pertinent to mention here that there is no dispute regarding the fact that the decision of the Board of Directors of the Group General Body followed by Defendant no. 11 through the draft financial statement would impact the beneficial interest of Defendant no. 2 in the shares held by in the names of Defendant nos. 3 to 7, which was the subject matter of the suit. 25) Plaintiff no. 2, under these circumstances, wrote the letter dated June 01, 2017 to Defendant no. 8 - the Managing Director of the Indian Company, protesting ....
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....e alienated. It was further stated that substantial part of cause of action arose within the jurisdiction of the Court where the registered office of the first defendant was located and where it carried on business. Further, the entire subject matter of the suit was the shares of the Indian Company, which are held by Defendant nos. 3 to 7 and that Defendant nos. 3, 5, 6 and 7 normally reside in Chennai. It was further stated that the correspondences between the Plaintiff no. 2 and the Indian Company through Defendant no. 10 also took place in Chennai. Claiming on this basis that substantial part of cause of action arose within the jurisdiction of the High Court, leave to institute the suit was sought. The Single Judge Court granted leave. 31) As noted above, the contested defendants filed applications for revocation of the order granting leave to the plaintiffs. The Indian Company in the affidavit filed in support of A. No. 1387 of 2018, stated that Defendant no. 2 is a body corporate situated in Dubai and any dispute regarding the same could not be adjudicated by Courts in India. It was urged that order granting leave should be revoked on this ground itself. It was further stat....
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....s in the nature of a derivative action on behalf of defendant No.2 to protect and declare its beneficial interest (i.e. beneficial interest of defendant No.2) in the shares available with the Indian company, which stand in the name of defendant Nos. 3 to 7. According to the plaintiffs, defendant No.2 is the beneficial owner and defendant Nos. 3 to 7, in collusion with defendant Nos. 1, 8 and 9, are acting against the interests of defendant No.2. In the plaint the averments regarding cause of action and Chennai having territorial jurisdiction were mentioned in paragraph Nos. 54 and 55, which are as under: "54. The Plaintiffs submit that the present lis relates to the denial and non-recognition of the beneficial interest of Defendant No.2 of the shares held by the Defendant Nos. 3, 4, 5, 6 and 7 in Defendant No.1. The cause of action arose on 31.12.2016 when the draft consolidated financial statement of Defendant No.11 records deconsolidation of its accounts with those of Defendant No.2 (refer to Para 42 supra) for the reason that there is "absence of confirmation of beneficial ownership from the legally registered shareholders of the entities" (which inter alia includes Def....
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....being craved to sue the Defendants who are outside the jurisdiction of this Hon'ble Court." 37) The plaintiffs, thus, wanted a declaration to the effect that shares in the Indian company which are held by defendant Nos. 3 to 7 in fact belong to defendant No.2 company. Since defendant No.2 did not come forward to make the said claim, derivative action was filed by the plaintiffs on its behalf to the aforesaid effect. As per the plaintiffs, the High Court of Madras, at Chennai, had the jurisdiction to entertain the same inasmuch as: (a) Registered Office of the Indian company is in Chennai; (b) the investments made by defendant No.2 were made in the Indian company in Chennai; and (c) substantial part of cause of action, as reflected in the correspondence/letters exchanged between plaintiff No.2 and defendant Nos. 1 and 10 arose in Chennai. 38) The contesting defendants questioned the territorial jurisdiction of the Madras High Court to entertain the said suit on the ground that no cause of action available to the plaintiffs to maintain the suit arose within the jurisdiction of the said Court. In substance, the plaintiffs were attempting to resolve the dispute between the shareh....
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....title to such character or right, and the court may in its discretion make therein a declaration that he is so entitled, and the plaintiff need not in such suit ask for any further relief: Provided that no court shall make any such declaration where the plaintiff, being able to seek further relief than a mere declaration of title, omits to do so." 131. In the present case, the plaintiffs are not seeking a declaration that they have a beneficial interest. A derivative action is sought only for the beneficial interest of the second defendant. The second defendant has however abjured such interest. Whether such disclaimer or abjuration is the result or effect of collusion or fraud are further aspects to be examined. Such abjuration has to be weighed with the flow of funds through the second defendant to the first defendant, leading to the allotment of shares to the third to the seventh defendants. Examining all these aspects can only be through advancing oral and documentary evidence. This would further imply that the suit has to be retained on file. 132. It had been further contended that the suit relief is barred under Section 187C of the Companies Act, 19....
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....h defendants had made similar declarations and in the plaint, the plaintiffs have stated that they believed that similar declarations had been made in the books of the first defendant. This statement of the plaintiffs has to be tested further through oral and documentary evidence. Consequently, I am not in agreement with this contention raised by the defendants. Trial is the answer to settle facts. At this stage, the plaint averments hold the sway and a reading makes it obvious that the first defendant has to open up its records for scrutiny, and that can be done only during trial. xx xx xx 139. To sum up, the allegations raised in the plaint have to be examined at Chennai since, the first defendant is registered in Chennai. During its pre-incorporation, incorporation and post corporation stages, substantial amounts of money had flowed to it. It is only with examination of the books of the first defendant that the source of the funds can be determined. This is because the third to seventh defendants, who are said to have benefited by allotment of shares in view of the flow of funds have denied the contention of the plaintiffs. The eighth, ninth and tenth defendant....
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....rs of defendant No.2. It was specifically argued that paragraph 54 of the plaint would reflect that the dispute raised by the plaintiffs pertained to the shares in defendant No.1/Indian company, which would mean that situs of the shares, namely, the place where company is located, would be the determinative factor, as held in Vodafone International Holdings BV v. Union of India and Another (2012) 6 SCC 613 in the following words: "Situs of the CGP share 139. Before concluding, one more aspect needs to be addressed. It concerns the situs of the CGP share. According to the Revenue, under the Companies Law of the Cayman Islands, an exempted company was not entitled to conduct business in the Cayman Islands. CGP was an "exempted company". According to the Revenue, since CGP was a mere holding company and since it could not conduct business in the Cayman Islands, the situs of the CGP share existed where the "underlying assets are situated", that is to say, India. That, since CGP as an exempted company conducts no business either in the Cayman Islands or elsewhere and since its sole purpose is to hold shares in a subsidiary company situated outside the Cayman Islands, t....
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....is available and belongs to the company and not to the shareholder personally. The essential purpose of such an action is to remedy a wrong done to the company and if the suit ultimately succeeds, the judgment is given in favour of the company, so that the complainant-shareholder obtains no direct personal benefit therefrom." (ii) Nirad Amilal Mehta v. Genelec Limited & Others (2008) 6 Bom CR 499 "Regarding derivative action by a shareholder. 6. The sale of the suit property was effected in the name of defendant No.1 company by defendant Nos. 2, 3 and 4 in the capacity as its directors. It is alleged that the sale being contrary to the provisions to section 293 of the Companies Act is void. If the said is void, the person aggrieved is the company. The suit should therefore normally be filed by the company for setting aside the alienation. The plaintiff who is only a shareholder of the company would not normally have a right to file a suit on behalf of the company as the person aggrieved is the company and not a shareholder. More than one and a half century ago, in (Foss v. Harbottle), (1843) 2 Hare 461, the Court laid down the rule that normally an indivi....
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.... beneficial interest in any share. - (1) Where the name of a person is entered in the register of members of a company as the holder of shares in that company but who does not hold the beneficial interest in such shares, such person shall make a declaration within such time and in such form as may be prescribed to the company specifying the name and other particulars of the person who holds the beneficial interest in such shares. (2) Every person who holds or acquires a beneficial interest in share of a company shall make a declaration to the company specifying the nature of his interest, particulars of the person in whose name the shares stand registered in the books of the company and such other particulars as may be prescribed." (b) Though the action was brought by the plaintiffs on behalf of defendant No.2 as a derivative action, defendant No.2 had specifically opposed this action. It, therefore, became a dispute between the shareholders of defendant No.2, which is a Dubai company. Therefore, the courts at Chennai had no jurisdiction to deal with such a dispute. (c) In the instant case the question was about the correctness of the order granting leave to the plai....
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....tatement of the defendant No.11. This draft financial statement confirms two things. One is with respect to the deconsolidation and the other is removal of status over the shares held by the individuals. The decision was to implement it with retrospective effect from 10.01.2014. It is an admitted case that the decision of the ETA Group and the draft financial statement of defendant No.11 would make the trustees of the holders of the respective shares involving beneficial interest as absolute owners. The plaintiffs may have grievance over this, but their remedy will lie elsewhere. That is the reason why one of the plaintiffs after issuing notice on behalf of the defendant No.11 to defendant No.1, has chosen to file the suit along with the other in the status of shareholders. May be it is also for the reason that the defendant No.11 cannot wriggle out of the decision of ETA Group followed by its draft financial statement. If we see the cause of action as recorded above, it is abundantly clear that what has triggered the present suit is the aforesaid facts. 6.14 The decision of the ETA Group, which consists of numerous entities, applies to every shareholder of the Group. Acco....
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....y defendant No. 12 on behalf of defendant No.2 followed by book adjustment itself would vouch for the fact that such things have happened involving the other entities of the ETA Group as well and at least defendant No.2 and its subsidiaries. These issues also cannot be looked into by this Court. 6.17 In the plaint, the plaintiffs have not stated anything about the derivative action available to a shareholder on behalf of the company in Dubai. We also note that the Indian Companies Act, 1956/2013 do not have an application to a foreign entity. Even assuming it to be so, Section 187(c) read with 89(8) of the Companies Act, 1956/2013 would disentitle the plaintiffs from getting the relief, when once, the reliefs cannot be granted through a statutory bar, a suit filed claiming it also would be barred. After all, a Court is required to grant a relief, which parties are entitled to in law. Similarly, there is no corresponding duty fixed on the defendant No.1 to seek the declaration from defendants 3 to 7 in favour of defendant No.2. Suffice it is to state that the plaintiffs do not raise any such issue till 2016, though share certificates were issued in the year 2012 itself. Tho....
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....2 Company and in respect of which cause of action has not arisen in Chennai and such a dispute has to be sorted out by the parties between themselves by filing appropriate proceedings in Dubai, UAE only. 47) From the material facts in this behalf, as mentioned in the plaint itself, specifically in paragraphs 54 and 55 of the plaint, while making the averments qua the cause of action and territorial jurisdiction, it becomes apparent that the plaintiffs got aggrieved by the draft Consolidated Financial Statement of Defendant No. 11 (which is again a Dubai company and a parent company) and this statement records deconsolidation of its account with those of Defendant No. 2. The real dispute, thus, is whether Defendant Nos. 3 to 7 in whose name shares to the extent of 6.16% of Indian Company stand, are the real owners or it is Defendant no. 2 Company which has the beneficial interest in the said shares. Though, the plaintiffs claim beneficial interest of Defendant No. 2, Defendant Nos. 3 to 7 deny the same. Interestingly, even Defendant No. 2 Company, whose beneficial interest in these shares is claimed by the plaintiffs, refutes such a claim of the plaintiffs. Thus, in reality, it i....
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.... may involve a case of deceit, fraud, inability or incapacity. However, the fundamental factor to be considered is the relationship between the plaintiff and the party, which the plaintiff seeks to represent. 49) The term 'Beneficial interest' is defined under Section 3 of the Indian Trust Act, 1882 which is reproduced hereunder: "Beneficial interest" or "interest of the beneficiary is his right against the trustee as owner of the trust property." 50) As it can be discerned from the definition of 'Beneficial interest' provided in Section 3 of the Indian Trust Act, 1882, there are two parties involved in an issue governing beneficial interest. One is a beneficiary named as 'beneficial owner' and the other is the owner named as 'registered owner' being the trustee of the property or the asset in question. Thus, one can deduce the underlining principle that the ownership is nonetheless legal over the trust property, which vests on him but he also acts as a trustee of the beneficiary. A beneficial owner may include a person who stands behind the registered owner when he acts like a trustee, legal representative or an agent. 51) In Mount Royal/Walsh Inc. vs. Jensen Sta....
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....s who are residents of Dubai and which revolves around Defendant no. 2, again a Company registered and situate in Dubai. 55) The High Court also appears to be right in holding that the relief sought for against Indian Company, at best, is a consequential one and cannot give a cause of action. Even Defendant no. 2 cannot seek such a relief without resolving its dispute as against Defendant nos. 3 to 7. Such a dispute can only be dealt with by competent forum in Dubai as per the law prevailing in Dubai, UAE. 56) We would also like to reproduce the following discussion from the impugned judgment, with which we concur: "6.11 When a dispute arose against the company, which issued the shares, then the situs would be its registered office. However, when the dispute is between the shareholder and the company with respect to the shares held in another, the mere existence of registered office of the subsequent company is not a factor to clothe jurisdiction. In this connection, it is apposite to refer the following paragraphs of the judgment of the Apex Court in R. Viswanathan and others v. Rukn-Ul-Mulk Syed Abdul Wajid Since Deceased and others (Air 1963 Supreme Court 1). ....
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.... of the Mysore courts on the ownership of the shares is ancillary to the main decision. It is therefore not necessary for me to consider the argument of Mr Desai that jurisdiction attaches on the principle of effectiveness propounded by Dicey, but which has been criticised by the present editors of his book and by Cheshire. In my opinion, this controversy does not arise in this case, which must be decided on the plain words of Section 13 of the Code of Civil Procedure." 6.12 Keeping in view of the abovesaid principles of law,let us consider the issues raised before us. Admittedly, the defendant no. 2 is a foreign entity governed by the laws of Dubai. The Plaintiffs are its shareholders. Therefore, any dispute between them will have to be resolved under the laws of Dubai. Hence, the contention of the learned Senior Counsel appearing for the plaintiffs that they are stepping into the shoes of the defendant no. 2 seeking a relief against the defendant no. 1 cannot be countenanced. This is also for the reason that there must be declaration in clear terms qua the status of a beneficial interest holder before seeking a relief against the defendant no. 1. More so, when defendant ....