TaxTMI 
TaxTMI 
2020 (11) TMI 62
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....ed oppression and mismanagement. 2. In order to appreciate the present prayers, it will be apposite to briefly allude to the facts averred in the Company Petition. The Respondent no. 1 (herein after referred to as the Company) registered under the Companies Act 1956 was engaged in the business of development and construction of real estate projects including construction and contracting activities. The Petitioners are the Promoter Directors of the Company holding about 60 per cent of the shareholding. Respondent nos. 2 and 3 respectively, a Trust incorporated in India and a Company incorporated under the laws of Mauritius (hereinafter referred to as the investors) sought to invest in the Company. Accordingly, a Share Subscription Agreement (SSA) and Share Holders Agreement (SHA) was executed on 23rd April 2008 between the Petitioners, Respondent no. 1 and the investors to subscribe to equity shares and preferential convertible shares of the Company aggregating to Rupees Two Hundred crores. Upon such investment Respondent no. 2 held two (2) per cent and Respondent no. 3 held twenty eight (28) per cent of the shareholding of the Company while Petitioners held seventy (70) per cent....
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.... credit facility did not require an affirmative vote in terms of Article 165 of the AoA which inter alia has been a part of the SHA. Under their letter dated 29th June 2011 the Bank enhanced the cash credit limit to Rupees Two Hundred crores, Bank Guarantee to Rupees Two Hundred crores and a term loan of Rupees Fifty crores. The facilities were again reviewed by the Bank under letter dated 24th December 2012 and it was approved by the Board meeting dated 25th March 2013. Subsequently the Bank vide its letter dated 11th July 2017 sanctioned the enhancement limit of Rupees Two Hundred Fifty crores. In the Board meeting dated 19th September 2018 the Directors of the Board were informed that the Bank had allowed the renewal of working capital credit facility in addition to the loan of Rupees Fifty Crores and the Board approved such renewal. 7. The erstwhile Vijaya Bank merged with the Bank of Baroda with effect of 1st April 2019 in terms of Government of India Gazette no. GSR no. 2E dated 2nd January 2019. Accordingly, the credit facility relating to the Company stood transferred to the Bank of Baroda. The Bank continued the ongoing credit limits under its letter dated 16th October ....
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....compliance under Section 149 of the Act. Certain representatives of the Investor Directors were also present and were asked to leave the room. The Investor Director then objected to the presence of Consultants and Executives of the Company in the Board meeting. The Petitioner no. 1 clarified that they could be present to assist the proceedings in accordance with established secretarial standards. The Investor Director, however, abruptly walked out of the meeting despite of having taken part in the proceedings and its approval. It is contended in the Petition that the rash and incoherent conduct by the Investor Directors to leave the Board meeting indicated their utter lack of respect for the Board in violation of their duties towards the Company. On 19th December 2019 the Minutes of the Meeting were circulated for comments. Respondent no. 4 sent two Emails on 19th December 2019 challenging the propriety of the meeting dated 18th December 2019 and that the same was inquorate. It was contended that since they left the meeting no further business could have been conducted. He also objected to the appointment of the Woman Director. The Emails were followed by another letter dated 24th ....
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....ank and financial institutions of the Company and addressing the letter dated 15th January 2020 was in clear violation of the terms of the AoA. The Company issued the letter dated 21st January 2020 to the Bank of Baroda providing detailed explanations on the concerns raised by the Bank and requested it not to take any adverse decision detrimental to the Company's interest which in turn would affect the day to day functioning of the Company. It also be reiterated that the Board meeting dated 18th December 2019 was validly convened and resolution passed therein was in accordance with law and requested cooperation. It is also requested the Respondent no.2 to withdraw the letter dated 15th January 2020 written to the Bank. The Bank by its letter dated 28th January 2020 intimated that the credit facilities were not a new sanction and have been continuing since 2007. It asked Respondent no. 2 to withdraw the letter dated 15th January 2020 or provide fresh Resolution with respect to the credit facilities. It emphasized that failure to withdraw the letter dated 15th January 2020 may lead to adverse steps being taken by the Bank. The Respondent no. 2 then issued the letter dated 13th Februa....
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....credit facility can be discussed. Thereafter the Investors would rethink regarding the letter dated 15th January 2020 to the Bank. 14. Notice for another Board meeting scheduled on 3rd March 2020 had been circulated on 17th February 2020. The meeting was adjourned to 10th March and was finally held on 16th March which the Investor Director(s) attended. The investors expressed their willingness in respect of the credit facility renewal from the Bank of Baroda and Axis Bank. The Investor Director(s) also indicated that they would intimate the matter regarding letter dated 15th January 2020. They however raised concern over the absence of Statutory Auditor for the Audit Committee Meeting dated 16th March 2020. The Investor Director(s) by an Email dated 18th March 2020 indicated that they refuse to approve the minutes of the Board Meeting dated 18th December 2019 the same being sub judice before the Hon'ble High Court of Bombay. 15. It was also indicated that the financial statement of the 31st December 2019 has been approved subject to providing satisfactory response by the Company to their queries. The acts of the investors were detrimental to the functioning of the Company and....
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....aking any action in the matter. In another letter of the even date the investor's advocates suggested to postpone the Board Meeting dated 2nd May 2020 and to hold it after the lockdown was lifted. So that the physical meeting could be held and the investors queries could be addressed. 17. It was further stated that the Petitioners have already withdrawn fund-based loan of Rupees One Hundred Forty-Seven crores in the violation of the rights of the investors. The loan thus could not be attributed to the Company. The Petitioners must bring back the amounts. They also requested to include it as an additional agenda for discussion and to conduct audit of book and records of the Company by Ernst and Young. The conditional approval of the unaudited financial statement in the Board Meeting dated 16th March 2020 has been nullified. Because of indifference of the Petitioners and the Company in responding to their queries the credit facilities would not be approved until issues of the investors had been resolved and till then Petitioners and the Company were called upon not to seek any credit facility from the Bank of Baroda or other financial institutions. 18. It is contended in the Pe....
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....g upon draft minutes of the Board Meeting dated 2nd May 2020 contrary to what transpired in the said meeting. In its reply dated 19th May 2020 the Bank indicated that it did not involve itself in the internal processes, requirements and/or controls of the Company. It had nothing to do with the dispute between the shareholders concerning the day to day operation and management of the Company. It also reiterated that the credit facility available to the Company was not a new sanction. That has been in favour of the Company since 2007, renewed from time to time. The credit facilities were within the limits approved by the shareholders in the AGM dated 24 September 2019. The investors were equally responsible and obliged and obligated to ensure the credit facilities as well as its timely repayment. It called upon investors to withdraw the letter dated 14th May 2020 and refrain from taking any steps that may potentially affect the Bank which in turn may affect the status and continuity of the credit facilities. The Petitioners' advocate by letter dated 21st May 2020 responded that the Resolution passed at the Board meeting dated 18th December 2019 was in accordance with AoA and that the....
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....,43,96,056/- (Rupees Three crores forty-three lacs ninety six thousand and fifty six) by the Axis Bank approved in the Board Meeting dated 18th December 2019 and by its letter dated 17th September 2019 the Bank had objected to the same. The Axis Bank, however, by letter dated 2nd June 2020 denied the averments that the purported approval did not conform to terms and conditions of the SHA and the AoA. In view of the circumstances emanating from the atrocious acts of the investors amounting to oppression under Section 244 of the Act and inter alia alleging other acts of oppression and mismanagement, breach of their fiduciary duty to the Company and lack of bona fides on the part of the investors, the Petitioners came up with the Company Petition seeking the following reliefs. A. This Hon'ble Tribunal may be pleased to declare that: i) Respondent nos. 2 to 6 have acted in a manner prejudicial and oppressive to the interest of the Petitioners and interest and affairs of Respondent no. 1. ii) Articles 8(b) (Nomination by Shareholders), 165 (Affirmative Vote Items), and 167 (Quorum at Board meetings) have been used as instruments of oppression and prejudice by Respon....
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....person, or through their representative or proxy, with the exception of decisions requiring a special majority under applicable law; vi) Removing Respondent Nos. 4 to 6 as directors from the board of directors of Respondent No. 1; vii) Appointing any person(s) of experience, competence and unimpeachable character to act as the nominees of Respondent Nos. 2 and 3 on the board of directors of Respondent No. 1 in accordance with the Articles of Association of Respondent No. 1 to discharge their fiduciary duties towards Respondent No. 1; Pending hearing and final disposal of the Petition, the Petitioners sought the following interim directions: C. This Hon'ble Tribunal be pleased to pass orders and directions: i) Restraining Respondent nos. 2 to 6 directly or indirectly, from communicating with any third parties with respect to the matters which are sub judice in this Petition. ii) Restraining Respondent nos. 2 to 6, by themselves, their agents, representatives, officers and/or any other person(s) acting on their behalf, from, directly and/or indirectly, preventing and interfering, in any manner whatsoever with the: (i) ongoing cred....
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....jority under applicable law. viii) Restraining Respondent nos. 4 to 6, from, directly and/or indirectly, acting or functioning or purporting to act or purporting to function as directors of Respondent No. 1, in any manner whatsoever. ix) Hon'ble Tribunal appointing person(s) to act as nominees of Respondent nos. 2 and 3 on the Board of directors of Respondent no. 1 and to report to this Tribunal on such matters as this Hon'ble Tribunal may direct. 17. Respondent nos. 2 and 3 have filed their Counters to the praecipe requiring urgent hearing and ad interim reliefs. The respondent nos. 4 to 6 have not filed any Counter. However, they have furnished a written submission objecting to the ad interim reliefs. 18. The Respondent no. 2 in its Counter, to the praecipe seeking ad-interim reliefs, contended that the Company Petition as framed is not maintainable in law. Besides this Tribunal lacks jurisdiction in view of the terms agreed upon between the parties and enshrined in the SHA as well as the AoA. The Petitioners are guilty of suppression of material documents namely documents on record relating the Commercial Suit (L) No. 1093 of 2019 and the related Interim ....
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....cember, 2019 has been continuing between parties and that there is no element of urgency in the matter. The Company held a fresh Board meeting on 2nd May, 2020 inviting objections of Respondent nos. 2 and 3. The Respondents objected to the continuance of the credit facilities due to the lack of governance standards and mismanagement at the hands of the Petitioners. Concerns raised by the Respondent nos. 2 and 3 have also not responded to. Since the continuance of the credit facilities lacked the mandatory affirmative vote of the Respondent nos. 2 and 3 (as required under Article 165 of the Articles of Association), the Bank couldn't have acted upon it. The Petitioners were informed by the Bank on 26th May, 2020 requiring fulfilment of certain conditions. But only approached the Tribunal on 16th June, 2020 after a gap of three weeks. No case is made out for grant of emergent relief. Besides the Petitioners having not come before this Tribunal with clean hands would not be entitled to them. The ad interim reliefs sought essentially are the main reliefs prayed in the Company Petition and are in violation of the terms of the AoA. The Petitioner would accordingly not be entitled to the ....
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....by the Petitioners by their email dated 2nd May, 2020, 15th May, 2020, 6th June, 2020 and 19th June, 2020 were incomplete to say the least. Since the Petitioners have misused and mismanaged the funds of the Company further in flow of funds into the Company by way of the credit facilities may similarly be dealt. Therefore forensic audit was imperative to go into the affairs and financial aspects of the Company. There are also serious disputes regarding the manner of exit of the Respondent nos. 2 and 3 from the Company, which could involve potential loss to the Company. The Petitioners also violated Article 167 of the AoA concerning quorum requirements for a valid Board meeting. In the absence of the Directors appointed by the Respondent nos. 2 and 3 the meeting had to be adjourned. Which in the present case had not been done. The Resolution required affirmative vote of the nominee Directors of Respondent nos. 2 and 3 and without the same resolutions could not be adopted nor could be relied upon. The credit facilities from the Bank of Baroda and Axis Bank being in excess of Rupees One Crore required the affirmative vote of the Respondent nos. 2 and 3. It is accordingly contended that....
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.... Defendant nos. 1 to 4 (Petitioners herein) from acting in furtherance of the said Board meeting. The Hon'ble Court by an order dated 17th December, 2019 refused to grant any ad interim reliefs with the following order. 23. "Having considered all these aspects I am of the view that no case is made out for grant of ad-interim reliefs. The plaintiffs were never kept in the dark. It appears that the plaintiffs had knowledge of the affairs of defendant no. 1 and its dealings with defendant no. 5. The prayers sought at this ad-interim stage would bring to a grinding halt the development activity of the suit property under the JDA and under which defendant no. 6 has acquired valuable rights and have paid large amounts of money which have been utilized for the benefit of defendant no. 1. Prima Facie the plaintiffs have no right to stall the operation of the JDA. Perusal of Exhibit HHH reveals that the draft version of the JDA was shared with the plaintiff on 29th August, 2019. Email dated 27th August, 2019 reveals that the plaintiffs were already fully conscious of the understanding between the plaintiff and defendant no. 1. The email refers to decisions and addressee of the emai....
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....t remain present. The plaintiffs' representative was said to be present throughout the meeting. Even after the meeting no objection seems to have been recorded. Between 19th September, 2019 and 11th October, 2018 when copy of the executed JDA was provided to the plaintiffs, the plaintiffs sought an exit from the transaction and has also sought preparation of the draft agreement for documenting the exit while making the exit request, reference is made to consideration paid by defendant no. 6 to defendant no. 5 clearly. I may observe here that the suit property was purchased by defendant no. 5 under an Indenture of Conveyance dated 7th July, 2011. Defendant no. 5 is a separate legal entity. Plaintiffs and defendant no. 1 are not owners of the suit property. Furthermore, the plaintiffs do not dispute that defendant nos. 5 and 6 entered into a Term Sheet for developing that suit property on 10th May, 2018. Defendant no. 6 is believed to have paid a sum of Rs. 135 crores to defendant no. 5 on 14th May, 2018, the date on which the JDA was signed. A further a sum of Rs. 15 Crores was paid on 6th October, 2018. A ground breaking ceremony was held at the suit property on 18th March, 2019 an....
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....dressed by the plaintiff to defendant no. 1. Even as of 20th November, 2018 the plaintiffs had not objection to the minutes of meeting held in June and September, 2018. On the other hand plaintiffs were seeking an exit and relied upon the JDA and sought repayment of outstanding loan by defendant no. 5 to defendant no. 1. Defendant no. 1 thereafter informed the plaintiff that there was no provision for exit and no such agreement had been arrived at providing for plaintiff exit in the manner sought. 29. Subsequently on 27th December, 2018 as mentioned in paragraph 54 of the plaint read with Exhibit W the plaintiff were clearly seeking confirmation as to when funds would be remitted towards partial exit by which time the plaintiff had also had copy of the JDA. The plaintiffs aware that even their exit, if any, may depend on exploitation of the development of the suit property under the JDA. It is defendant no. 1 who requested the plaintiff not to pressurize them for an exit. The plaintiffs continued to abstain from Board meetings but even at the ground breaking ceremony, no objections were raised. The plaintiff had caused a demand notice to be sent on 20th March, 2019 to the ....
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....of the Act, the statutory remedy available to the Petitioners, would not be hindered by the pendency of the Commercial Suit before the Hon'ble High Court. The reliefs claimed in Company Petition are not arbitrable and this Tribunal would not lack jurisdiction to pass any interim orders. The provision for resolution of a deadlock provided under the AoA would not come in the way of seeking statutory relief before the Tribunal. Even otherwise the conduct of the Respondents in disputing all the resolutions would not have had any effect in resolving the deadlock, if any. 22. It is contended on behalf of the Respondents that the Petitioners being majority shareholders have been acting as if the Company was their fiefdom. They have been systematically demolishing any constructive criticisms by the Respondents which have been in the interest of the Company in which the Respondents also have a substantial stake. The renewal or continuance of the credit facility unequivocally required the affirmative vote, which is a prerogative of the Investor Directors. Without the affirmative vote the resolution for continuance of the credit facility could not be taken forward. Therefore, without the v....
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....e credit facilities. Since the credit facilities are essential for the survival of the Company, in our considered opinion the Petitioners have a prima facie case in their favour. It is clear from the observations of the Hon'ble High Court quoted supra that the Respondents have not been diligent in taking constructive part in various Board meeting. Similar conduct also continued in the proceedings of the Board meeting dated 18th December, 2019. Subsequent to the Board meeting dated 18th December, 2019 there has been series of the correspondence between parties. The Petitioners have sought cooperation from the Respondents for approving the credit facilities. The Respondents without taking constructive part in the Board meeting and ensuring getting their objections and concerns recorded in the proceedings abandoned the Board meeting, raising concerns subsequently that prima facie does not appear to be sound corporate governance. 24. As the correspondence would indicate another Board meeting was sought to be a convened on 2nd May, 2020 for approval of the credit facilities. The Bank of Baroda in its letter dated 26th May, 2020 declined to advance the credit facility unless certain c....
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....lders) through resolutions. Without limiting the powers of the Board in any manner, it is hereby clarified that the Board shall have the powers to decide the following matters (one or more of which shall be referred by the Board to the Shareholders, if a Shareholder resolution is required by Applicable Law in relation to such matter(s)), and any resolution in relation to the following matters at the Board or Shareholder level shall be passed/approved by a Unanimous Vote: xxx xxx xxx (n) Incurring any financial indebtedness in excess of Rs. 10,000,000 (Rupees One Crore) unless otherwise permitted in the Business Plan;" 25. In our considered opinion continuance of an existing credit facility would not come within the purview of financial indebtedness indicated supra. A dispute resolution mechanism between the parties under a contract would not foreclose the party's prerogative of approaching a statutory authority for redressal of its grievances. Therefore, the provision of deadlock under Article 247 of the AoA cannot prevent the Petitioners from seeking reliefs before this Tribunal. Besides the time spent on resorting to the mechanism under Article 247 might have....