The Judgment of the Court was delivered by
Kalyan Jyoti Sengupta, J.:— By this motion the plaintiffs/petitioners have sought, for interlocutory reliefs which are in effect if granted, would amount to decreeing the suit itself at the interlocutory stage. It is not unheard of under the law altogether, that final relief cannot be granted at the interlocutory stage, but there shall be compelling facts and circumstances on which such relief may be granted.
2. Now the task of this Court would be to find out, whether any such case has been made out for granting such interlocutory reliefs, or not. The reliefs claimed by the plaintiffs/petitioners are set out hereunder:
a. Injunction restraining the respondents/defendants and each one of them from acting upon or giving any effect or Anther effect to the purported agreements for pledge dated November 28, 1997 and December 3, 1997, entered into by and between the petitioners No. 1 and 2 on the one hand and respondent/defendant No. 8 on the other hand, and the notices dated 29th June 2002 and 31st July 2002.
b. Injunction restraining the respondents/defendants and each one of them from giving any effect or further effect to the resolutions passed at the Extraordinary General Meeting of the Company held on 29th July 2002.
c. Injunction restraining the defendants/respondents and each one of them from conducting and/or holding the Board Meeting of the Company scheduled to be held on 7th August 2002, pursuant to the notices dated 31st July 2002 and 7th August 2002.
d. Injunction restraining the respondents/defendants and each one of them from giving any effect or further effect to the resolution having been passed in respect of items nos. 7 and 8 of the notices dated July 31, 2002 to convene the Board Meeting of the Company for August 7, 2002.
e. Injunction restraining the respondents/defendants and each one of them from exercising their rights or receiving any benefit in respect of the share holding of the petitioners or any part thereof and in the company, and in particular, in respect of 17,87,024 equity shares standing in the name of the petitioner No. 1 and 18,06,267 equity shares standing in the name of the petitioner No. 2.
f. Injunction directing the respondents/defendants and each one of them to permit the petitioners to exercise their voting rights and receive benefits in respect of 17,87,024 equity shares standing in the name of the petitioner No. 1 and 18,06,267 equity shares standing in the name of the petitioner No. 2 of and in the company.
g. Injunction directing the respondent No. 8 to forthwith release 17,87,024 equity share standing in the name of the petitioner No. 1 of and in the company to the petitioner No. 1 and 18,06,267 equity shares standing in the name of the petitioner No. 2 of and in the company to the petitioner No. 2
h. Injunction directing the respondents/defendants to cancel the votes cast in respect of the share holding of the petitioners of and in the company by the respondents No. 8 at the Extraordinary general meeting of the Company held on July 29, 2002.
i. Injunction directing the respondents and each one of them not to issue and/or allot any share or any debenture of and in the company pursuant to the resolution purportedly passed by the Extraordinary General Meeting of the Company held on 29th July 2002 or any subsequent Board Meeting of the Company including that convened on August 7, 2002, pursuant to the notice dated July 31, 2002.
j. Injunction directing the respondents and each one of them to return the share certificates relating to the share holding of the petitioner of and in the company, which are lying with the respondent No. 8.
3. The case made out by the petitioners is shortly put as follows:
The petitioners jointly hold approximately 33 percent of the paid up capital of the company amounting to Rs. 10,87,30,000/- which is made up of 1,08,73,000 equity shares of Rs. 10 each of the paid up capital of the company. In or about 1997 the Respondents No. 2 and 3 were and still are in control of the management of the company, were interested in obtaining credit facilities for the company from the banks and/or financial institutions, and as such they represented the petitioners that as part of the terms of the agreement signed by the respondent No. 8 for grant of credit facility to the company, the shares held in the company by the petitioners were required to be pledged in favour of the respondent No. 8 by way of interim security till final security is furnished, inter alia by way of mortgage of immovable property were furnished by the company to the respondent No. 8.
4. Relying on the said representation and honestly and reasonably believing the same to be true and acting thereupon the petitioners agreed to pledge 17,87,024 equity shares held by the petitioner No. 1 and 18,06,267 equity shares held by the petitioner No. 2 of and in the company, in favour of the respondent No. 8 by way of interim security till final security by way of, inter alia all immovable properties were furnished by the company to the respondent No. 8. At the request of the respondents No. 2 and 3, the petitioners executed pledged documents in respect of the said shares in favour of the respondent No. 8 on or about December 3, 1997. The said documents after execution, were kept in the custody and control of the respondent No. 8 and the copies thereof were kept in custody and control of the respondents No. 2 and 3 as the management and affairs of the said company were under their control.
5. On queries being made it was represented by the respondents No. 2 and 3 on behalf of the company, namely respondent No. 1 to the petitioners that final security had been created in favour of the respondent No. 8 on July 5, 1998. The said company by letters dated November 8, 1999, January 3, 2000, February 1, 2000, two letters dated 16th February 2000 addressed to the respondent No. 8, requested for release of such interim security. In spite of this request the respondent No. 8 did not release the said interim security namely, the said equity shares pledged by the petitioners.
6. However, on the strength of the aforesaid pledged documents the respondent No. 8 is said to have exercised its voting right in the Extraordinary General Meeting as well as in the meeting of the Board of Directors, denying the right of the petitioners. Moreover, by the impugned two resolutions the aforesaid number of shares have been converted into fully paid up debentures in order to restructure the loan allegedly granted by the respondent No. 8. As such the impugned resolutions were challenged on various grounds. Mr. P.C Sen, learned Senior Advocate appearing for the petitioners submits in support of this motion that the respondent No. 8 cannot exercise its voting right nor it is entitled under law to participate in the Extraordinary General Meeting being pledge. The respondent No. 8 is beneficial holders of these shares. In support of his submission he has relied on decision of the Supreme Court reported in (1985) 2 SCC 167 : AIR 1985 SC 520.
7. His further contention is that the petitioners are still recorded in the register of members of the defendant No. 1 as shareholders in respect of these shares, as such they were and still are entitled to exercise voting rights in respect of such shares. Articles 73 and 74 of the Articles of Association of the respondent No. 1 also recognize this right of the petitioners. In support of his submission he has relied on a number of decision of the Supreme Court reported in AIR 1959 SC 775 : AIR 1953 SC 385, (1986) 1 SCC 264 : AIR 1986 SC 1370. The aforesaid plethora of decisions support the proposition that a beneficial holder has no right to vote in respect of the concerned shares in a company and it is only the persons whose names appear in the register of members, are entitled to exercise voting rights.
8. No valid or proper authorization had been given in favour of the respondent No. 8 under Section 187 of the Companies Act, 1956, enabling it to exercise voting right in respect of the alleged pledged shares. The agreement or the letter dated 25th July 2002 and the enclosure thereto on the basis of which respondent No. 8 claimed to be entitled to exercise voting rights, could not and did not in law or on fact, give respondent No. 8 voting rights. The letter dated 25th July 2002 and enclosure thereto only permitted respondent No. 8 to exercise voting rights in respect of such shares of which it was a holder. Admittedly, in the instant case respondent No. 8 is not recorded holder of concerned shares. In support of this proposition Mr. Sen has relied on the decisions of the Supreme Court reported in AIR 1953 SC 385 : AIR 1959 SC 775 and (1985) 2 SCC 167 : AIR 1985 SC 520.
9. His further contention is that a mere pledgee cannot be permitted to exercise any voting rights. Pledge agreements on the contrary were illegal and being violative of Sections 172-178 of the Indian Contract Act.
10. His submission in relation to the validity and legality of the said pledged agreement is that the loan agreement was incomplete containing large unexplained gaps and is contrary to and inconsistent with the representation of respondent No. 1 and 2 to the effect that the pledge was by way of interim security. The pledge agreement appeared to be interpolated. By this process the petitioners have been reduced to less than 25 per cent of the paid-up-capital and thereby the control of the respondent No. 1 has been usurped by providing with buy-back clause in respect of the shares to be allotted to Industrial Credit and Investment Corporation of India (ICICI) Bank Ltd. and Industrial Development Bank of India (IDBI), which would permit respondent No. 2 to take control over respondent No. 1. These shares could not be converted into a security for a loan as has been sought to be done on the basis of the terms and conditions, all conversion of loan of ICICI Bank Ltd. and IDBI into equity shares and/or fully convertible debentures the shares were given as interim security only to IDBI in respect of a specific loan of Rs. 12 crores only. The ICICI Bank Ltd. had no security in respect of the concerned shares.
11. Mr. Kapur, teamed Senior Counsel while opposing this motion submits that the petitioners have deliberately suppressed material and relevant facts and further have distorted the facts. The petitioners conveniently did not disclose their acceptance and admission of creation of the pledge and pledge agreement and this has been recorded in the Board meetings held on 19th November 1997 and 24th November 1997 respectively which are annexed to the affidavit-in-opposition. It will appear from the said resolutions that the plaintiffs had authorized one Niranjan Kumar Goenka who has verified both the plaint and petition to take all steps in terms of the pledges in favour of Industrial Development Bank of India. This fact is more or less undisputed in the affidavit-in-reply.
12. So, the plaintiffs from 1997 all along knew the terms of the loan given by IDBI, defendant No. 8 to Soma Textile Limited (hereinafter referred to as SOMA). By this agreement with their full knowledge the plaintiffs have authorized irrevocably IDBI to exercise voting right in respect of the subject shares and the pledges were not interim measure. Once the correctness of the pledge agreement, is established, the whole story of creating the pledges as an interim measure, which is the core of their case, stands completely demolished. The plaintiffs have suppressed further fact that they had delivered the shares together with blank transfer deeds to IDBI under the pledge documents. The story of ignorance of the plaintiffs about the restructuring packages offered by IDBI to Industrial Credit and Investment Corporation of India (ICICI) is wholly untrue.
13. One Surendra Kumar Somany of Somany Group was in the Board of Directors of Soma Textile and the Plaintiff No. 1 throughout. Admittedly, the said Somany attended a Board Meeting of Board of Directors of Soma on 31st January 2002, at which the proposal to restructure the loan from ICICI was expressly discussed by the Board. So, Mr. Somany expressed dissent to the restructuring package by ICICI at the Board Meeting. In fact the minutes of the said meeting show that the restructuring packages offered by ICICI by letter dated 12th October 2001 was circulated to all the Board Members, including Mr. Somany. Story of forgery of pledge agreement of IDBI is again patently untrue.
14. Therefore, prima facie the pledge agreements are valid and subsisting and the same are binding upon the plaintiffs. The pledge agreements record that the plaintiffs had deposited their shares certificate together with transfer deeds with IDBI. In effect, therefore, IDBI admittedly became beneficial owner of the pledge shares with the indefeasible right to direct how and on what grounds the voting right in respect of the same could be exercised. The plaintiffs by this agreement irrevocably authorized IDBI to attend any general meeting of Soma and to exercise the voting rights in any manner as IDBI may choose at its absolute discretion. Therefore, the right to vote in respect of the shares was vested in IDBI by the said agreement and expressed authorization.
15. Soma was a party to the transactions between IDBI and the plaintiffs, as the loan was taken by Soma and the execution of the pledges was a term of its loan. So, having noticed and knowledge of this transaction. Soma is bound to houour the same and cannot afford any breach being committed by having the rights of the IDBI under the pledges.
16. By and under Clause 7 of the Pledge Agreement, plaintiffs had constituted and appointed IDBI as their Attorney in their names and on their behalf to do such acts and things as may be necessary to give effect to the provisions of the Pledge agreements and powers reserved thereunder to IDBI. In other words, IDBI not only had irrevocable authority to attain the general meeting but also held to be of Attorney on behalf of the plaintiffs to exercise the voting rights in respect of the shares in question at its absolute discretion. The pledges so created have valuable consideration of stamped documents. The effect of agreement of such documents is dealt with by the Supreme Court in the case reported in AIR 1969 SC 73 at page 76 para 5 and it has held that such a power given to Bank is power coupled with interest and cannot be terminated. So, the plaintiffs have no right to question the voting right of the IDBI at the Extraordinary General Meeting merely because the names of the IDBI is not in the register.
17. Moreover, the question of voting rights relates to the decision of the Chairman (defendant No. 2) taken at the EGM held on 29th July 2002 permitting IDBI to vote in respect of the shares in question. The decision of the Chairman in the in-house procedure of this nature is final and conclusive, it cannot be questioned before the Court of law nor the Courts should do it. In this connection he has referred to decision of the learned Single Judge of this Court rendered in case of Mahali Ram Santhalia v. Ford Gloster Manufacturing Company Ltd. reported in 58 CWN 715.
18. He has also referred to in this connection, Article 82 of the Articles of Association of Soma. Besides, the suit is also barred by limitation on the face of it as the interlocutory reliefs claimed herein are based on the substantial relief for declaration with the pledged agreement is void.
19. The aforesaid agreements were entered into in November 1997 with full knowledge of the plaintiffs and the suit has been filed beyond three years from the aforesaid date, as Article 59 of the Limitation Act 1963 does not permit a suit to be filed beyond three years from the date of execution of the documents or knowledge of document. The plaintiffs are also guilty of delay and laches. That apart the ICICI who will be affected if any order is passed in this matter as it is directly concerned with the resolution No. 3. On the questions of non-joinder of necessary party the suit is bound to fail on the face of it on the question of maintainability.
20. Now question of balance of convenience and inconvenience comes in. Substantial amount of loan has been granted in the shape of foreign currency and this is part of the restructuring packages of the finance of the company. Unless these agreements are allowed to be operative, both the companies will be destroyed totally. He then contends that Section 187(C) has no application to the Government companies, by virtue of notification dated 31st January 1978. Therefore, the Government companies such as IDBI is exempted from complying with the provisions of 187(C). He contended that though IDBI has been constituted under the Act of 1965 itself but the authorized capital of this institution has been subscribed by and vested in the Central Government. Therefore, it is a Government company within the meaning of Section 617 of the Companies Act 1956. So, the application should be dismissed and order dated 7th August 2002 should be vacated.
21. Mr. Dhandhania appearing for the IDBI, defendant No. 8 adopts the argument, more or less of Mr. Kapur. He contends that the allegations of forgery against a statutory body are not only unfortunate but it is an unbelievable story. The defendant No. 1 Company approached the defendant No. 8 for the loan, which was granted in foreign currency. In terms of the agreement such loan could not be repaid, as measure of repayment the defendant No. 8 has agreed to accept the pledge of the shares. In this case along with creation of pledge the share certificates in original and necessary documents of transfers have been handed over. This fact is within the specific knowledge of the plaintiffs/petitioners since beginnings in the event the injunction is not vacated then, defendant No. 8 will have no option but to recover the entire amount of loan and in that event the defendant No. 1 company will face its dissolution. The defendant No. 8 is seriously prejudiced and affected, as a large amount is remaining blocked.
22. Having heard the respective contention of the learned Lawyers and considering the fact of this case it seems to me that two fundamental issues are involved it this interlocutory stage as to whether interim order as modified by my order dated 17th August 2002 will remain or not. Namely, whether the plaintiffs have been able to make out a prima facie case for declaratory relief as mentioned in prayers (a) and (d). If these reliefs upon prima facie findings are found not to be granted, then the other consequential reliefs are bound to be rejected. Whether under the law these agreements can be enforced so as to deprive the plaintiffs/petitioners' legal right or not.
23. Next question is whether any relief can be granted affecting the interest of the ICICI which is not a party to the suit, or not and last question remains as to whether the decision of the Chairman of the Board of Directors in the in-house procedure is liable to be examined and scrutinized by the Court in the matter of allowing or rejecting the voting right of the shareholders, or not.
24. I think the last issue should be decided first at this stage. If this question is decided in favour of the defendant then perhaps, other issues are not required to be adjudicated by this Court as the plaintiffs would be non-suited at the threshold. Mr. Kapur has relied on the decision of the Learned Single Judge of this Court on this subject which was rendered in case of Mahali Ram Santhalia v. Ford Glosters and Manufacturing Company Ltd. reported in 58 CWN 715. In that case on a challenge being made against the resolution of the meeting on the ground of improper and illegal acceptance and rejection of proxies by the Chairman at the interlocutory stage learned Judge observed that in view of the specific provisions of Article 90 of the Company's Articles of Association that made the decision of the Chairman in the admission or rejection of any vote, final and conclusive. Therefore the decision of the Chairman was final and it was not liable to be examined and scrutinized by the Court.
25. The provisions of Article 90 of the Articles of Association of the Company is a complete code of the in-house procedure. I think in that case there was no challenge against the very basis of the right of the transferee shareholders. Here is a case of legality and validity as well as genuineness of the pledge agreement and associated documents, which are the very basis of the claim of the defendant No. 8, are challenged. This could not be decided by the Chairman in the in house procedure, howsoever, larger scope of the relevant provisions of Articles of Association may be. Although, it is claimed by Mr. Kapur similar provisions of Articles of Association is provided with that of the aforesaid Santhalia case.
26. As such I hold that Chairman's decision can be examined and scrutinized by this Court in this case as factually it stands on a different footing altogether. At the very first instance I observe, accepting the argument of Mr. Kapur that no decision can be rendered in this suit either at the interlocutory stage or otherwise affecting the interest of the ICICI since it is not a party to this suit. Having regard to the facts and circumstances of this case I observe that the said company is also a necessary party as the resolution adopted in the Extraordinary General Meeting, if set aside, will certainly affect the interest of the ICICI. Now I make it clear no adverse order in this suit shall bind ICICI.
27. As I have already observed that the challenge as against the pledge agreements dated 28th November 1997 and dated 3rd December 1997 is mostly controlling the governing issues. At this stage it is necessary to examine whether the plaintiffs have been able to make out any case to sustain this challenge on the plea of limitation and further on the plea of suppression of material facts or not.
28. It is said by the plaintiffs/petitioners that they were absolutely unaware of the existence of the aforesaid agreements and further they have said that those documents were incomplete, unsigned and even the same are forged. Upon examining the: documents and other materials annexed to the pleadings I have no slightest of doubt as Mr. Kapur has rightly argued that the plaintiffs have deliberately suppressed very material facts that could be found in the affidavit-in-opposition.
29. It appears, the plaintiffs themselves have adopted a resolution in its Board Meeting on 19th November 1997 and 24th November 1997 copies thereof have been annexed to the affidavit-in-opposition of IDBI at pages 70, 72 and 100 wherefrom it is clear that they had admitted and accepted the aforesaid agreements. So, the story of ignorance of the plaintiffs/petitioners until 2002, in my view, is wholly unbelievable and these litigants are totally untrustworthy to entertain their application to grant any equitable relief. As such, I think that the declaratory relief obviously on the face of it barred by limitations as the documents were executed on the date as aforesaid, whereas the instant suit have been filed nearly after 5 years.
30. In this connection Article 59 of the Limitation Act 1963 is an appropriate provision which provides the time limit of 3 years from the date of execution of the documents or from the date on which the plaintiffs/petitioners have got the first knowledge. The Board's resolution of the plaintiffs is their own documents and in the affidavit-in-reply I do not find any challenge and rather they cannot challenge their own documents. I hold, therefore, the declaratory reliefs are prima facie barred by limitation.
31. Even if we assume the documents being factually or lawfully valid but question remains to be decided regarding the legal implication as to the right and obligation vis-a-vis the interest of the defendant No. 8 and all the defendants.
32. Factually in this case in spite of the creation of pledge by entering into an agreement the transfer of share holding has not been effected in the share register. The effect of non-recording of such transfer in the register has been settled by various pronouncements of the Supreme Court. In an old decision of the Supreme Court rendered in case of Mathalone v. Bombay Life Assurance Co. Ltd. reported in AIR 1953 SC 385 it has been held amongst others that:
“On the transfer of shares, the transferee becomes the sole beneficial owner of those Shares sold by the transferor, the legal title to which vested in him. Thus, the relation of trustee and ‘cestu que trust’ is thereby established between them. The transferor hold the shares for the benefit of the transferee to the extent necessary to satisfy the demands of S. 94, Trusts Act, 1882. As the transferee holds the whole beneficial interest and transferor has none, the transferor must comply with all reasonable directions that the transferee may give. In this situation if he becomes a trustee of dividends he is also a trustee of the right to vote because the right to vote is right to control the exercise by the trustee of the right to vote.
The relationship arises by reason of the circumstances that till the name of the transferee is brought on the register of share-holders in order to bring about a fair dealing between the transferor and the transferee, equity clothes the transferor with the status of a constructive trustee and this obliges him to transfer all the benefits of property rights annexed to the sold shares of the ‘cestui que trust’. That principle of equity cannot be extended to cases where the transferee has not taken active steps to get his name registered as a member on the register of the company with due diligence and in the meantime certain other privileges or opportunities arises for purchase of new shares in consequence of the ownership of the shares already acquired.
The trustee can very well see to any request made by the ‘cestui que trust’ for the acquisition of new share that he is not prepared to put his name in register of members for any additional shares, particularly to the acquisitions of those shares involves him in further liabilities.”
33. In another decision of the Supreme Court in case of Howrah Trading Co. v. Commissioner of Income-tax reported in AIR 1959 SC 775 had observed amongst others that:
“The company recognizes no person except one whose names is on the register of members, upon whom alone class for unpaid capital can be made and to whom only the dividend declared by the company is legally payable. Of course, between the transferor and the transferee, certain equities arise even on the execution and handing over of ‘a blank transfer’, and among these equities is the right of the transferee to claim the dividend declared and paid to the transferor who is treated as a trustee on behalf of the transferee. These equities, however, do not touch the company, and no claim by the transferee whose name is not in the register of member can made against the company, if the transferor retain the money in his own hands and fails to pay it to him.”
34. Similar is the observation and decision of the Supreme Court in case of Balkrishan Gupta v. Swadeshi Polytex Ltd. reported in (1985) 2 SCC 167 : AIR 1985 SC 520.
35. According to Mr. Sen that since his clients' names are still in the register of the members of the company and no transfer has been effected formally by the company, his clients are entitled to exercise their voting right, in other words, the IDBI or ICICI having acquired no voting right. Therefore, the Chairman ought not to have allowed them to cast their votes.
36. There is no dispute as to the proposition as above that the transferee, unless transfer is effected in the register of the company, cannot get any voting right and company justly refuses to assert such right. But in this case the plaintiffs having full knowledge of pledge agreement and with authorization to cast votes cannot complain against company allowing that respondent No. 8 to cast vote.
37. The transfers have been effected factually and in all practical purposes, and it appears that the company is also a party to the agreement. So, effecting registration in the mere formality. I have examined the various terms of the pledge agreement and I found as rightly submitted by Mr. Hirak Mitra, learned Senior Counsel that IDBI has been given full authority to cast vote. As such, the defendant No. 8 is entitled to exercise their voting right on receipt of this transfer documents. Therefore, the resolution, which has been adopted, is prima facie valid and lawful.
38. The plaintiffs/petitioners estopped from challenging this resolutions. Therefore, the application fails and the same in hereby dismissed. Interim order if any stands vacated. Costs cost in the cause.
39. Signed copy of the operative portion of this judgment and order may be made available upon the petitioners' making an application for xerox certified copy.
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