Japna Buildcon Llp v. M/S. Brys Resorts Pvt. Ltd. & Ors.

M.M. Kumar, Chairman

CA No. 267/C-I/2015

1. This order shall dispose of CA. No. 267/C-I/2015 filed by Respondent No. 1 raising preliminary issues to the maintainability of CP. No. 125 (ND) 2015. The non applicant/petitioner has approached this Court by filing CP. No. 125 (ND) 2015. It is appropriate to mention that the petitioner holds 66,67% shareholding in the Respondent No. 1 Company. The prayers made by the petitioner are that necessary order be passed to convene the EGM with proposal for appointment of its representatives on the board of directors of R1 Company. A further prayer has been made to annul the appointment of Respondent No. 4 as additional director and appoint the petitioner as a joint signatory in all transactions of the Respondent No. 1 Company. In the clause for main relief, a request has been made, inter alia, that the order be passed to ensure that the affairs of the company are not conducted in a manner which is prejudicial to the interest of the shareholders and tn accordance with the provisions of the relevant statute. There are further prayers made by the petitioner.

2. Mr. Arun Saxena, learned counsel for the applicant/respondent No. 1 has advanced two arguments before me for dismissal of the Company Petition at the threshold.

3. Firstly, he has submitted that in order to succeed in the issuance of any direction in a petition under section 397/398 read with section 402, the petitioner has to make out a case for winding up of the company. According to the learned counsel, this is a condition precedent for filing a petition under section 397/398. In order to substantiate his arguments, learned counsel has placed reliance on Section 397(2)(b) and argued that since no case for winding up has been pleaded in the CP the petition deserved to be dismissed. Learned counsel has then placed reliance on the observations made in para 138 of the judgment rendered by the Hon'ble Supreme Court in the case of Chatterjee Petrochem (India) Pvt Ltd. v. Haldia Petrochemicals Limited (2011) 10 SCC 466.

4. Secondly, it has been submitted that there is a suppression of material facts in as much as Memorandum of Understanding dated 30.05.2015 has not been disclosed. According to the learned counsel, the aforesaid Memorandum of Understanding has been entered into between the petitioner company and the director of R1 Company namely Respondent No. 2. He argued that this document was well within the knowledge of the petitioner and should have been disclosed in the CP, therefore, the non-applicant/petitioner are not entitled to the equitable relief sought in the petition.

5. Ms. Rimati Batra, learned counsel for the non applicant-petitioner has opposed the prayer for dismissal of the petition at the threshold and argued that there is no principle of law as canvassed by the applicant-respondents stipulating that unless a case for winding up is made out, a petition u/s 397/398 would not be maintainable. According to the learned counsel, the winding up jurisdiction is entirely different than the jurisdiction concerning mismanagement and oppression envisaged u/s 397/398 read with Section 402. She has placed reliance on para 22 of the judgment of the Hon'ble Supreme Court rendered in the case of M.S.D.C. Radharamanan v. M.S.D. Chandrasekara Raja (2008) 6 SCC 750 and argued that the issue concerning winding up may be a factor for grant of just and equitable relief keeping in view the paramount consideration of safeguarding the interest of the company and its shareholders. The function of the Company Law Board is to find out whether an order of winding up would serve the interest of the company or subvert the same. Therefore, it follows that there is no condition precedent to make out a case for winding up before the jurisdiction u/s 397/398 of the Act are exercised.

6. Answering the other arguments, learned counsel has submitted that there is no suppression of material facts because the Memorandum of Understanding dated 30.05.2015 has no material bearing on the relief claimed. Therefore, it is not a suppression of a material fact. In any case, the petitioner has disclosed the shareholders' agreement dated 19.05.2015.

7. Having heard the learned counsel for the parties, at a considerable length, 1 am of the view that the preliminary objection raised to challenge the maintainability of the petition are not sustainable. There is no principle of law, which may require that in a petition filed u/s 397/398 highlighting oppression and mismanagement, no relief as envisaged u/s 402 of the Act could be granted unless it is shown that a case for winding up has been made out A perusal of Section 397(1)&(2) would show that a member of the company may approach this court with a complaint that the affairs of the company are being conducted in a manner prejudicial to public interest or in a manner oppressive to any member or members provided the petitioner satisfies the requirement of Section 399 of the Act. According to sub section 2 of section 397, if the court is of the opinion that the company's affairs are being conducted in a manner prejudicial to public interest or in a manner oppressive to any member or members and that the winding up of the company would unfairly prejudice, such member or members but otherwise the facts would justify the making of winding up order on the ground that it was just and equitable then the company should be wound up. Section 397(2)(b) of the Act does not in any manner suggests that it is only when a case for winding up Is made out, the Company Law Board or the Tribunal would exercise Its powers u/s 402 of the Act. The judgment of the Hon'ble Supreme Court in M.S.D.C. Radharamanan v. M.S.D. Chandrasekara Raja (2008) 6 SCC 750 and Chatterjee Petrochem (India) Pvt Ltd. v. Haldia Petrochemicals Limited (2011) 10 SCC 466 do not support this proposition. There may be myriad situations short of winding up when this Board has to exercise the power to remedy the oppression or mismanagement. Therefore, I do not find any substance in the first objection.

8. Likewise, the second objection is also devoid of merit. There is no material fact relatable to the reliefs sought by the petitioner which would be negated on disclosure of Memorandum of Understanding dated 30.05.2015.

9. Moreover, the aforesaid Memorandum of Understanding has never been Incorporated in Articles to attain the status of binding obligations on the part of Respondent No. 1 Company. The Articles are a form of a statutory contract binding all the members of the company. A company obviously cannot enter into a contract outside the Articles in so far as the management or affairs of the company is concerned. No agreement aimed at binding the company as regards its affairs which are not provided in the Articles and Memo of a company would be enforceable. From a recent judgment rendered by Delhi High Court in the case of World Phone India Pvt. Ltd. v. WPI Group Inc USA (2013) 178 Comp Case 173 (Delhi). This proposition is explicit. In that case the Board of Directors of a company passed a resolution approving a rights issue in accordance with the Articles even though such an action required the affirmative vote of appellant in accordance with a SHA entered Into between the shareholders of the company. The CLB held that since the provisions of the SHA stipulating an affirmative vote by the appellant were not Incorporated in the Articles of the company the aforesaid provision was unenforceable and the Board resolution approving the rights issue was valid. This view has been upheld by Delhi High Court Justice Murlidhar went on to observe as under:

“the legal position is that where the articles of association are silent on the existence of an affirmative vote, it will not be possible to hold that a clause in an agreement between shareholders would be binding without being incorporated in the articles of association. The question to be asked is whether the provisions of an agreement, that are not inconsistent with the Act, but are also not part of the articles of association, can be said to be applicable. All that section 9 stated is that the clauses in the agreement that “repugnant to the Act shall be “void”. This does not mean that the clauses in the agreement which are not repugnant to the Act would he enforceable, notwithstanding that they are not incorporated in the articles of association.” (Italics added)

10. Similar view has been taken by a Division Bench of the Madras High Court in the case Crompton Greaves Ltd. v. Sky Cell Communication Ltd., (2002) 39 SCL 704 (Mad-DB). In that case a company was created under a joint venture agreement between certain partners. One of the terms of the agreement was that members of the company would not transfer their shares without the consent in writing of other members. This term of the agreement was not incorporated into the articles of association of the company. One member transferred his shares to another member. The transfer was held to be valid. There was no restriction against it in the company's articles. These members were free to exercise their right of transfer under the Companies Act.

11. In the case of V.B. Rangaraj v. V.B. Gopaikrishan (1992) 1 SCC 160 their Lordship of the Supreme Court held that provisions of share holding agreement imposing restrictions even if consistent with the Companies Act are to be authorized only when they are Incorporated in the Articles of the Company. Similar view has been taken by Hon'ble Supreme Court in the case of IL & FS Trust Co. Ltd. v. Biria Perucchini Ltd. (2004) 121 Comp, Case 335.

12. Once the principle of law is that any agreement between the shareholders has to be incorporated and the MOU dated 30.05.2015 was not a part of Articles then it does not constitute a material fact or a substantive constituent of a right or liability. It was not such a material fact which was required to be disclosed. Had this fact been disclosed the petition would not have suffered a fatal blow. Accordingly, the preliminary objection raised by the applicant-respondents would merit rejection. Thus the second argument also fails.

13. As a sequel to the above discussions, this application fails and the same is dismissed with cost which is determine at Rs. 10,000/-. The cost be paid to the non-applicant/petitioner before the next date of hearing.

CA. No. 268/C-I/2015

14. This is an application filed u/s 8 of the Arbitration and Conciliation Act, 1996 with a prayer to refer the parties to the arbitration in terms of clause 14.2 of shareholders agreement dated 19 May 2015. According to clause 14.2, all disputes, deadlock issues and other matters shall be submitted to final and binding arbitration.

15. Mr. Arun Saxena has submitted that the matter has already been taken to Delhi High Court by the petitioner and status quo order with regard to certain properties has been passed in OMP(i) 614/2015. The next date of hearing before Delhi High Court is 14.03.2016, Learned counsel has submitted that the relief claimed in the present petition is relatable to shareholders agreement dated 19.05.2015 and the petitioner has attached a copy of the order dated 05.11.2015 (P3) collectively where relief u/s 9 of the Arbitration Act has been sought.

16. On the contrary, learned counsel for the petitioner has argued that the reliefs which are emerging from mismanagement and oppression cannot be granted by an arbitrator. According to the learned counsel, the arbitrator will not enjoy any of the powers which this court enjoys u/s 402 of the Act. The petitioner being a shareholder to the extent of 66.67%, cannot be ignored and their request for holding EGM cannot be deferred for all times to come.

17. Having heard the learned counsel for the parties, at some length, I am of the considered view that the present CP by no stretch of imagination be regarded as a dressed up a petition to seek the reliefs which are available before the Arbitrator. The prayers made by the non-applicant petitioner is in two parts. First part relates to interim prayer and the second is in respect of final prayers which are as under:

Interim Prayers

(a) Pass necessary orders to convene the required board meeting for appointment of representative of the petitioner on the Board of Directors of Respondent No. 1 company and ensure their involvement in day to day functioning of the Respondent No. 1 Company, and

(b) Pass necessary orders to restrain Respondent No. 4 from acting as Additional Director of Respondent No. 1 Company during the pendency of the present Company Petition.

(c) Direct that the representative of the Petitioner shall be appointed as a signatory for all the bank accounts of the Respondent No. 1 Company, or in the alternative restrain the other Respondents from operating the various bank accounts of Respondent Company without the express permission of this Hon'ble Board, and

(d) Pass an order for appointment of an independent chairman on the Board of Directors of the Respondent No. 1 Company who shall be responsible for taking decisions regarding day to day affairs of the Respondent No. 1 Company till the matter is sub-judice, and/or

(e) Pass such other and further orders as this Hon'ble Board may deem fit and proper in the facts and circumstances of the case.

Final Prayers

(a) Passing of necessary orders to ensure strict compliance and adherence with the Shareholders Agreement dated May 19, 2015 and Articles of Association of Respondent No. 1 Company, and

(b) Passing of necessary orders ensuring that the affairs of the Company are not being conducted in a manner which is prejudicial to the interest of the shareholders in future and are compliant with the provisions of the relevant statute, and

(c) Deciding the validity of the appointment of Mr. Sumeet Jain as an Additional Director with Respondent No. 1 company, and

(d) Cost of the litigation be awarded to the petitioner.

(e) Pass such other and further orders as this Hon'ble Board may deem fit and proper in the facts and circumstances of the case.

18. A bare perusal of the prayer clauses would show how the oppression and mismanagement has been a part of the petition. In para 6.5 there are allegations of diversion and siphoning of funds of Respondent No. 1 Company by the management. It has failed to discharge its functions by paying bank loan although it has been doing good business. Then there is a prayer for calling the meeting of shareholder (EGM) to induct the petitioner as director being a shareholder of 66.67%. The petitioner served notice for a meeting on 16.09.2015. Thus this petition is not a dressed up petition to seek the relief available before the Arbitrator.

19. In a detailed judgment by this court, the aforesaid principles have been considered in the case of Mr. Christianus Muleer v. A & C Braid and Rope Company Pvt. Ltd. (CP. No. 109 (ND) 2014) decided on 5 October, 2015. In the aforesaid judgment, this court has placed reliance on various judgments of Hon'ble Supreme Court and High Courts. In this regard, a reference was made to the observations of the Hon'ble Supreme Court in the case of Cosmosteeis Private Ltd v. Jairam Das Gupta (1978) 48 Comp Case 312 and Haryana Telecom Ltd. v. Sterlite Industries (India) Ltd. (1999) 97 Com Cases 683 (SC).

20. This court further placed reliance on a Division Bench Judgment of Punjab and Haryana High Court in the case of Suarshan Chopra v. Company Law Board 2004 (2) ARB LR 241 (P&H) and the judgment of Delhi High Court in the case of Q.P. Gupta v. Sffiv General Finance (P) Ltd. St (1997) 47 Comp Case 279. This court also placed reliance on the judgment of Bombay High Court in the case of Rakesh Malhotra v. Rajinder Kumar Maihotra 2014 SCC Online Bom 1146 and concluded that it was not possible to accept the disputes raised in the Company Petition was liable to be referred to the arbitrator in pursuance of provisions in the shareholders agreement.

21. For all the reasons given in that judgment the arguments of the learned counsel for respondents cannot be accepted and in the face of arbitration clause, the disputes raised in the CP can still be adjudicated by this court.

22. There is another aspect of the matter. It is doubtful whether the Shareholders' Agreement dated 19 May, 2015 would bind the Respondent No. 1 Company because the aforesaid agreement has not been incorporated in the Articles of the Company. This aspect has been discussed in details in the order of instant case. In this very Company Petition, the view taken in CA No. 267/C-I/2015 is that in the absence of making the Shareholders' Agreement (SHA) as a part of Articles, no binding obligations would flow to the Respondent No. 1 Company. The following paras of the aforesaid order have a direct bearing on the issue which read as under:

“Moreover, the aforesaid Memorandum of Understanding has never been incorporated in Articles to attain the status of binding obligations on the part of Respondent No. 1 Company. The Articles are a form of a statutory contract binding all the members of the company. A company obviously cannot enter into a contract outside the Articles in so far as the management or affairs of the company is concerned. No agreement aimed at binding the company as regards its affairs which are not provided in the Articles and Memo of a company would be enforceable. From a recent judgment rendered by Delhi High Court in the case of World Phone India Pvt. Ltd. v. WPI Group Inc USA (2013) 178 Comp Case 173 (Delhi), This proposition is explicit. In that case the Board of Directors of a company passed a resolution approving a rights issue In accordance with the Articles even though such an action required the affirmative vote of appellant in accordance with a SHA entered into between the shareholders of the company. The CLB held that since the provisions of the SHA stipulating an affirmative vote by the appellant were not incorporated in the Articles of the company the aforesaid provision was unenforceable and the Board resolution approving the rights issue was valid. This view has been upheld by Delhi High Court Justice Murlidhar went on to observe as under:

“the legal position is that where the articles of association are silent on the existence of an affirmative vote, it will not be possible to hold that a clause in an agreement between shareholders would be binding without being incorporated in the articles of association. The question to be asked is whether the provisions of an agreement, that are not inconsistent with the Act, but are also not part of the articles of association, can be said to be applicable. Alt that section 9 stated is that the clauses in the agreement that “repugnant” to the Act shall be “void”. This does not mean that the Causes in the agreement which are not repugnant to the Act would be enforceable, notwithstanding that they are not incorporated in the articles of association.” (Italics added)

23. Similar view has been taken by a Division Bench of the Madras High Court in the case Crompton Greaves Ltd. v. Sky Cell Communication Ltd. (2002) 39 SCL 704 (Mad-DB). In that case a company was created under a joint venture agreement between certain partners. One of the terms of the agreement was that members of the company would not transfer their shares without the consent in writing of other members. This term of the agreement was not incorporated into the articles of association of the company. One member transferred his shares to another member. The transfer was held to be valid. There was no restriction against it in the company's articles. These members were free to exercise their right of transfer under the Companies Act.

24. In the case of V.B. Rangaraj v. V.B. Gopalkrishan (1992) 1 SCC 160 their Lordship of the Supreme Court held that provisions of share holding agreement imposing restrictions even if consistent with the Companies Act are to be authorized only when they are incorporated in the Articles of the Company. Similar view has been taken by Hon'ble Supreme Court in the case of IL & FS Trust Co. Ltd. v. Birfa Perucchlnl Ltd. (20 (H) 121 Comp. Case 335.

25. Once the principle of law is that any agreement between the shareholders has to be incorporated and the MOU dated 30.05.2015 was not a part of Articles then it does not constitute a material fact or a substantive constituent of a right or liability. It was not such a material fact which was required to be disclosed. Had this fact been disclosed the petition would not have suffered a fatal blow. Accordingly, the preliminary objection raised by the applicant-respondents would merit rejection. Thus the second argument also fails”.

26. In view of the above, the objection fails and is hereby overruled. Accordingly, the application is dismissed with cost of Rs. 10,000/-.