TaxTMI 
TaxTMI 
2009 (9) TMI 1066
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.... on November 14, 2005 and an agreement dated November 19, 2005, with S.A. Narahari Setty (NS) and V. Anjayaneyalu (VA), agreeing to transfer the shares of the company to SM for a consideration of Rs. 15 crores, pursuant to which NS, VA and their associates reportedly delivered the share certificates in respect of their holding in the company together with the share transfer forms in favour of SM. The latter lodged the relevant share transfer documents with the company, whereas the board of directors of the company declined to register the transfer of shares in the name of SM for the following, among other reasons: (i) The company is a sick industrial company within the meaning of Section 3(1)(o) of the Sick Industrial Companies (Special Provisions) Act, 1985 and a reference made under Section 15 of the SICA is pending before the BIFR in Case No. 177 of 1989. The BIFR by an order dated February 16, 2006, prohibited any alienation or disposal of shares in the company, whereby the promoters/guarantors should not change their shareholding pattern or alienate or encumber or dispose their shares in the company or there shall not be any change....
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....Board in relation to the company. This direction came to be deleted by virtue of the BIFR order dated April 1, 2009. The order of the BIFR made on April 1, 2009, has been stayed by the Madras High Court in terms of the order dated April 15, 2009, made in M.P. No. 2 of 2009 in W.P. No. 6432 of 2009. The net effect of these orders is that no order can be passed in Section 111 A proceeding before the Company Law Board, in view of the BIFR orders dated February 16, 2006 and August 7, 2006. (ii) NS has filed O.S. No. 235 of 2008 for an order of permanent injunction restraining the company from effecting the transfer of impugned shares in the name of SM or his nominees as shareholder or director of the company and accordingly obtained an ad interim order dated April 25, 2008, on the premises that (a) the memorandum of understanding/agreement constituted only an arrangement between the parties to facilitate the pledge of shares; (b) the parties were conscious of the legal bar arising out of the BIFR proceedings when the documentation was done; (c) the parties never intended to sell the company or its assets; (d) SM fraudulently attempted to ta....
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....titute sale or transfer of shares. This is a triable issue involved in O.S. No. 235 of 2008. Thus, the material issue before the civil court as well as the Company Law Board is the same. The serious disputes in relation to (a) title of SM to the shares; (b) right of SM to lodge the shares for transfer; and (c) the issue whether the company should give effect to the transfer of shares are pending consideration in O. Section No. 235 of 2008, instituted prior in point of time. These contentious issues are required to be decided before ordering rectification of the register of members and the civil court alone is competent to deal with such issues. The issues pending adjudication in prior legal proceedings initiated in a competent civil court would have a direct bearing on the issues substantially involved in the present company petition. No useful purpose will be served in proceeding with the Company Law Board proceedings, especially when the Company Law Board will have to await the outcome of the pending civil proceedings, before ordering rectification of the register of members. This Board held in Swagath Marine Products P. Ltd. v. K. Muthusamy [2006] 134 Comp Cas 182, that Section ....
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....subject-matter would not be a bar to granting relief under Sections 397 and 398 and yet pendency of a civil suit would be a relevant circumstance to any relief, in the facts of that case. In these circumstances, all further proceedings in the company petition are to be stayed till the final adjudication of O.S. No. 235 of 2008 and the BIFR restraint orders are vacated, to meet the ends of justice. SM and his associates have filed a civil suit on November 11, 2008, before the District Court, Coimbatore in O.S. No. 98 of 2009 praying for specific performance of the memorandum of understanding dated November 14, 2005, as well as the agreement dated November 19, 2005, which cover the entire shareholding of the company. The company petition is in relation to 90 per cent, of shares, while O.S. No. 98 of 2009 is confined to the remaining 10 per cent, of shares of the company, for which no transfer instruments were executed by the transferors. SM specifically averred in O.S. No. 98 of 2009 that (a) the agreement dated November 19, 2005, was entered into between the parties for transfer of the entire shareholding held by NS, VA and their associates to SM for a valuable....
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.... that there is nothing in Section 111A, which has the effect of taking away the common law right of a member of a company to seek rectification of the register of members and that his common law right remains intact. The company petition is based on Section 111A of the Act, while NS cannot invoke the jurisdiction of Section 111 A, especially when the shares are in the name of NS and, therefore, the relief of rectification does not arise, driving NS to approach the civil court. 2. Shri R. Srinivas, learned Counsel, appearing for SM, while opposing the company application submitted: The company application is frivolous and filed to delay the proceedings. SM on one hand and NS as chairman as well as VA as director of the company on the other hand entered into the memorandum of understanding dated November 14, 2005, for sale of 20 per cent, of the shares of the company to SM at the rate of Rs. 4.11 per equity share of Rs. 10 each. The annexure forming part of the memorandum of understanding contains the details of the assets and liabilities of the company and payment particulars. This memorandum of understanding was followed by the agreeme....
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....ard v. Progressive Writers and Publishers [2009] 5 SCC 678, that the intention of the parties is to be gathered from the words used in the agreement. If the words are clear, there is very little that the court can do about it. The letters written from the office of SM referring to the payments, as loan amount cannot establish the theory of loan or pledge, especially when, those letters have not been signed by SM. The consideration of Rs. 15 crores alone is entered in handwriting in the agreement and cannot, therefore, be claimed that the agreement is interpolated and fudged. However, NS and the company have produced copy of the agreement in C.P. No. 3 of 2009, wherein the consideration is stated as Rs. 15 crores and written only by hand. The undated letters of resignation, of all the directors of the company save NS have been handed over to SM, pursuant to the agreement. NS handed over the statutory registers maintained by the company to SM, as acknowledged in terms of his communication dated July 7, 2006. After closure of the Indian Bank dues, all the original title deeds in respect of the company's properties were delivered to SM on October 18, 2006, as confirmed by NS. All t....
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....y, but this would not conclusively establish the participation of VA in the annual general meeting held on September 29, 2006, merely because the word annual general meeting is found added at the top of the attendance sheet which remains unauthenticated. It is, therefore, clear that the annual general meeting held on September 29, 2006, is not a valid annual general meeting. There is nothing to show that VA either signed the minutes or participated in the annual general meeting of September 29, 2006. In view of this, the statement made in the balance-sheet for the year ended March 31, 2006, reporting advance made for property has no meaning. The attendance sheet in respect of the board meetings reportedly held on March 3, 2007 and March 10, 2007, would reveal that VA and Kiran Kumar had signed and not NS, whereas NS, VA and Santhosh Kumar were shown as present in the board minutes dated March 10, 2007. No board meeting ever took place on March 10, 2007. The board minutes dated November 20, 2005, approving the transfer of shares from TVK to W, the board minutes dated March 10, 2007, approving the draft rehabilitation scheme of the company, and the board minutes dated June 20, 2007, ....
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....or director of the company. This is only a bare injunction suit. The suit in O.S. No. 1232 of 2008 has been filed by the company represented by the power agent D. Veerandrappa restraining SM and others from enforcing the transfer of shares of the company in their names. The issue of transfer of shares of a public company is now governed by the provisions of Section 111A of the Act. Section 155(old) gave way to Section 111 and thereafter Section 111A dealing with public companies. Any transferee of shares is to lodge the share certificates along with duly completed transfer instruments with the company for effecting transfer of name in its register of members. The company has to either register or refuse to register the transfer for sufficient cause within two months from the date of submission of the transfer documents. In case of refusal by the company to transfer the shares without sufficient cause, the transferee can approach the Company Law Board within two months from the date of such rejection. The board of directors of the company, in the present case, has not decided to register the transfer in the name of SM. By virtue of Section 111A of the Act, NS has no right or cause o....
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....of Section 111A of the Act. The Madras High Court in Dove Investments P. Ltd. v. Gujarat Industrial Investment Corporation [2005] 124 Comp Cas 399 : [2005] 1 CTC 249, directed the transfer of shares to the transferees, brushing aside the plea of the company that the shares were only pledged to the transferee and that numerous civil suits filed by the company and others were pending in civil courts. This judgment of the Madras High Court has been affirmed by the Supreme Court in its judgment reported in Dove Investments P. Ltd. v. Gujarat Industrial Investment Corporation Ltd. [2006] 129 Comp Cas 929 : [2006] 2 SCC 619. The prayer made in O.S. No. 1232 of 2008 filed by the company for a permanent injunction restraining SM and others from seeking transfer of shares in the register of members is not maintainable, since the right of any transferee of shares to seek transfer in accordance with the provisions of the Act cannot be obstructed by an order of injunction. The company, which is to decide the question of rectification, cannot file any suit for restraining the transferee from seeking any transfer of shares. This Bench can ignore these suits, as the civil co....
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....e assistance of its cotton suppliers. At the BIFR proceedings held on February 27, 2001, NS, managing director of Sreekakulam Textile Mills Ltd. (STML), one of the cotton suppliers, was represented reporting that the cotton suppliers, being unsecured creditors to a tune of Rs. 3.85 crores wanted to be inducted as co-promoters to revive the company and for settlement of their dues. The entire shareholding of Rs. 94 lakhs were held only by the existing promoters. The BIFR by an order dated August 30, 2001, came to the conclusion that it was just and-equitable in public interest that the company should be wound up under Section 20(1) of the SICA, against which the company preferred an appeal before AAIFR (Appeal No. 321 of 2001), wherein it was pleaded that the company has brought in STML, the new prospective promoters, who are prepared to settle the dues of the Indian Bank on the basis of one-time settlement. The AAIFR, while dismissing the appeal on May 23, 2002, thereby confirming the order of winding up made by the BIFR observed that the plant was being used by the new prospective promoters without making any payment to the Indian Bank and the new prospective promoters were derivi....
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....essed the memorandum of understanding and the agreement before the BIFR. All the orders of the BIFR obtained by suppressing these documents are vitiated by fraud and must be ignored. The Supreme Court held in S.P. Chengalvaraya Naidu v. Jagannath AIR 1994 SC 853, that (a) one who comes to the court must come with clean hands; (b) a person whose case is based on falsehood, has no right to approach the court; and (c) if a litigation withholds a vital document in order to gain advantage on the other side then he would be guilty of playing fraud on the court as well as on the opposite party. By virtue of the BIFR order dated February 16, 2006, restraining the promoters from changing their shareholding pattern or encumbering their shares in the company without the specific permission of the BIFR, the company is refusing to approve the transfer of shares to SM. The board minutes dated June 20, 2007, would disclose the approval of transfer of 98,000 shares of the company from V. Prakash to NS, thereby changing the shareholding pattern, without, however, the specific permission of the BIFR, as stipulated in the BIFR order dated February 16, 2006. This would show that ....
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....ceedings and stay of the present proceedings on such pretext is misconceived. The objections of the company or NS to transfer the shares are not bona fide. It is evident from the agreement that the shares were handed over to SM as early as on November 19, 2005, with an intention to transfer in his favour, in which case the provisions of Section 111A will apply to the said transaction. NS and his group admitted that (a) the agreement was signed; (b) 90 per cent, of shares of the company were handed over to SM with blank transfer forms duly signed by the shareholders; (c) SM had submitted the share certificates along with his nominees for transfer of name in the register. Based on these admissions and in view of the principles of Order 12, Rule 6 of the CPC and Section 111(5) of the Act, the register of members of the company has to be rectified. NS failed to file reply to the application filed by SM under Order 12, Rule 6 of the CPC and Section 111(5) application for several months, despite directions of the Bench. Hence, the stay application may be dismissed, allowing the applications filed under Order 12, Rule 6 of the CPC. By virtue of Clause 10 of the BIFR ....
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....pany Law Board Regulations, 1991, the latter of which is akin to the provisions of Section 151 of the CPC. No court shall, by virtue of Section 10, proceed with the trial of a suit in which the matter in issue is also directly and substantially in issue in a previously instituted suit pending between the same parties or parties under whom they or any one of them claim to litigate under same title. These mandatory provisions are meant to (i) avoid any conflicting decisions of two competent courts over the same matter; and (ii) save the precious time of the courts, on fulfilment of the pre-requisites stipulated therein. By virtue of regulation 44 the Company Law Board is bestowed inherent power to make such orders as may be necessary for the ends of justice or to prevent abuse of the process of the Bench. This power shall be exercised to do justice between the parties, by making appropriate orders, if any litigant abuses the process of the Bench. In the aforesaid context, the substantial issue in O.S. No. 235 of 2008 as well as C.P. No. 243 of 2008 need to be examined, to resolve the contentious issues raised before me. In the civil suit (O.S. No. 235 of 2008) filed prior in point....
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....to pledge the shareholding of the promoters of the company in favour of SM. The draft rehabilitation scheme submitted by the company pursuant to the BIFR order dated November 15, 2007, specifically disclosed the liability of the company to SM in the category of pressing creditors. SM fraudulently attempted to take advantage of the custody of the share transfer forms to seek transfer of shares, while SM being only a creditor is not entitled to seek the transfer of shares in his name. The assets of the company are valued at not less than Rs. 60 crores as on the date of the memorandum of understanding/agreement, in which case the promoters or the company could not have agreed to sell the company at a meagre consideration of Rs. 15 crores. At the time of execution of the memorandum of understanding/agreement, consideration columns were specifically left blank, which were later unilaterally filled up by SM. This would show that the memorandum of understanding/agreement was executed merely to support the pledge of shares. SM acknowledged in his letters that the payments made to the company as the loan amounts advanced by h....
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....ng rectification of the register of members. Nevertheless, where rectification involves any complicated questions of facts or law or disputes of a complicated nature or complexity or serious disputes relating to title, the parties will be relegated to a competent civil court, by virtue of the observations of the Supreme Court in Ammonia Supplies Corporation P. Ltd. v. Modern Plastic Containers P. Ltd. [1998] 94 Comp Cas 310. This Board in (a) D.R. Talayarkhan v. Transgene Biotek Ltd. [2007] 138 Comp Cas 727 and (b) Shiv Dayal Agarwal v. Sidhartha Polyster P. Ltd. [1997] 88 Comp Cas 705, had refused in the facts of those cases, the relief of rectification of the register of members under Section 111A and relegated the parties to a civil court. In this connection, the observations of a Division Bench of the Bombay High Court in Shirish Finance and Investment P. Ltd. v. M. Sreenivasulu Reddy [2002] 109 Comp Cas 913, while examining the nature of right of a shareholder to have the register rectified, in the light of, inter alia, the aforesaid decisions of the Supreme Court, concluded that a member of a company has the common law right to move the civil court for rectification of the re....
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....Company Law Board. In these facts and circumstances, the decisions in (a) Dove Investments P. Ltd. v. Gujarat Industrial Investment Corporation [2006] 129 Comp Cas 929 (SC), directing the company to register the transfer, despite the plea of pledge of shares; and (b) Vasudev Ramchandra Shelat v. Pranlal Jayanand Thakar [1974] 2 SCC 323 : [1975] 45 Comp Cas 43, dealing with the circumstances when a company can refuse to register transfer of shares, will be of least assistance to support the case of SM. 9. The civil revision proceedings initiated by SM and VA in C.R.P. No. 3161 of 2008 and C.R.P. No. 3162 of 2008 for rejecting the plaints in O.S. No. 235 of 2008 filed by NS restraining the company from effecting transfer of shares to the name of SM and O. Section No. 1232 of 2008 by the company for an order restraining SM and his associates from seeking transfer of the shares in the name of SM, will have bearing on the rival claims of the parties before me for stay of the Company Law Board proceedings. The categorical contentions raised on behalf of SM before the High Court in C.R.P. No. 3161 of 2008, which are relevant with reference to the present proceedings, are enumerated her....
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.... Any disputes in the matter of transfer of shares between the shareholder and the prospective shareholder of the company have to be adjudicated only by the Company Law Board. Though there is no express provision ousting the jurisdiction of civil courts, it was impliedly barred, in support of which reliance has been placed on the judgments of the Supreme Court in Canara Bank v. Nuclear Power Corporation of India Ltd. [1995] 84 Comp Cas 70 : [1995] Supp (3) SCC 81; Ammonia Supplies Corporation P. Ltd. v. Modern Plastic Containers P. Ltd. [1998] 94 Comp Cas 310 (SC) and N.D.M.C. v. Satish Chand [2003] 1 RC 580 : [2003] 10 SCC 38. The plaintiffs in both the suits contended that the issue raised in O.S. No. 235 of 2008 cannot be decided by the authorities under the Companies Act and the civil court alone has jurisdiction to entertain such disputes. The plaintiffs in O.S. No. 235 of 2008 detailed as many as 23 reasons in support of the contention that the memorandum of understanding as well as the agreement executed by SM and the company was not intended to be acted upon, as it was only a pledge of shares for the purpose of advancing money. 10. The High Court aft....
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....ts also to he posted before the learned District Judge for the purpose of taking up the matter along with the suit filed by him for specific performance. Therefore, I am of the view that the petitioner should be relegated to the alternative remedy by filing an application before the trial court under Order 7, Rule 11 of the CPC. Accordingly, the petitioner is granted liberty to file appropriate application before the trial court to reject the plaint invoking Order 7, Rule 11 of the CPC. In case of filing an application under Order 7, Rule 11 of the CPC, such application has to be decided as expeditiously as possible on merits and in the light of the legal position indicated above. It should also be the endeavour of the trial court to dispose of the interlocutory application for injunction within four weeks from the date of receipt of a copy of this order. 11. I shall point out that the High Court, despite the vociferous arguments advanced on behalf of SM that the Company Law Board has exclusive jurisdiction to determine the issue of transfer of shares and rectification of register of members and that the jurisdiction of the civil courts is impliedly barred,....
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....acter of the agreement, supported by quite a number of decisions, will not arise for my consideration at this stage and, therefore, there is no need to advert to any of the submissions advanced on merits for the purpose of disposing the present application filed by company. Issue (iii): 12. The controversial memorandum of understanding and the agreement came into existence as early as in November 2005, in pursuance of which a sum of Rs. 10 crores was paid by way of advance to the shareholders and an amount of Rs. 4.50 crores was paid towards the discharge of workers dues of the company. The share certificates together with the share transfer forms in respect of 90 per cent, of the shares of the company were delivered in favour of SM, apart from the title deeds of the properties and the statutory registers maintained by the company. The question as to whether the aforesaid transaction represents the sale or pledge of shares, being litigated before the civil court as well as the Company Law Board, needs no deliberation at this point of time. Nevertheless, when the BIFR by an order dated February 16, 2006, stipulated, inter alia, that (a) the company shall not dispose of, lease ....
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....ings before the BIFR will not be prejudicial to any order which may be passed in the proceedings before the Company Law Board in relation to the company; (b) corrigendum issued on April 1, 2009, by the BIFR deleting the aforesaid clarification; and (c) the High Court order dated April 15, 2009, staying operation of the corrigendum issued by the BIFR, there cannot be any legal bar in continuance of the proceedings before me, notwithstanding the order dated February 16, 2006, of the BIFR. However, at the same time, the company petition shall have to wait till disposal of the civil suit in O.S. No. 235 of 2008, for the conclusions already reached by me, in terms of the order. In view of the narrated sequence of events, the issues emanating from the rehabilitation schemes on account of, inter alia, who is the promoter, fraud played on the BIFR, binding nature of the BIFR order dated February 16, 2006, in the light of Section 22A of the SICA and sale of the company's property in favour of Sri Ramakrishna Mills (CBE) Ltd., in terms of the conveyance deed executed by the civil court in O.S. No. 325 of 2006 before the Court of Subordinate Judge of Coimbatore on behalf of the company, w....