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BEFORE THE COMPANY LAW BOARD
PRINCIPAL BENCH
NEW DELHI
Date: 13th June 2001
C.P.No.45 of 1998
Present: 1. Justice A.K. Banerji, Chairman
2. Shri S. Balasubramanian, Vice Chairman
In the matter of Companies Act, 1956- Sections 397/398
AND
In the matter of VLS Finance Limited
Versus
Sunair Hotels Limited &others
PETITIONER:
VLS Finance Limited
RESPONDENTS:
1. Sunair Hotels Limited
2. Sun Aero Limited
3. Shri Satya Pal Gupta
4. Shri Kaveen Gupta
5. Shri Vipul Gupta and 23 others.
Present on behalf of parties:
1. Shri S. Sarkar, Sr. Advocate .. for petitioner
2. Ms. Rakhi Ray, Advocate .. for petitioner
3. Ms. Bina Gupta, Advocate .. for petitioner
4. Shri Manmohan, Advocate .. for petitioner
5. Shri Anupam Varma, Advocate .. for petitioner
6. Shri Dhirendra Negi, Advocate .. for petitioner
7. Shri Sudhir Chandra, Sr. Advocate .. for resps. 4 and 5
8. Shri A.N. Haksar, Sr. Advocate .. for resps. 1 and 3
9. Shri Atul Sharma, Advocate .. for resp.1
10. Shri Achintya Dvivedi, Advocate .. for resps. 4 and 5
11. Shri Rajeev K. Garg, Advocate .. for resp. 2
12. Shri Saurab Chandra, Advocate .. for resps.6-27
13. Shri P. Dhingra, C.A .. for resps.1-
O R D E R
(Date of final hearing: 5.3.2001)
S. BALASUBRAMANIAN:
1. The main allegation in this petition filed under Sections 397/398 of the Companies Act, 1956 ( the Act) by the petitioner holding 24.17% shares in M/S Sunair Hotels Limited ( the company) is that the respondents 3 to 5 have fraudulently allotted shares worth about Rs.21 crores to respondents 3 to 27 and therefore the petitioner has prayed for cancellation of the allotment of these shares as null and void and for consequential rectification of the Register of Members by deleting the names of respondents 3 to 27 in respect of these shares. Another allegation is that when further shares were issued by the company, no offer was made to the petitioner and as such the allotment of further shares should also be declared as null and void.
2. The undisputed facts in this case are: The company was incorporated in February, 1977, the 3rd respondent being the main promoter along with his family members. The main object of the company is to carry on hotel and allied businesses. The NDMC allotted a plot of land to this company on license basis in Gole Market area New Delhi by a License Deed dated 5.12.1982 with a supplemental deed in 1988. A part of the land was handed over in 1982 and another part possession was given in 1988. The NDMC cancelled the license in 1990 due to some dispute on the license fees, the cancellation of which was challenged in the Delhi High Court. As the proceedings were on, the balance land was given possession in 1992. In June 1993, M/s Aeroflot and the company entered into an agreement for a joint venture hotel project by which a company in the name of Sunaero Ltd (2nd respondent) was to be incorporated. Accordingly Sunaero was incorporated as a wholly owned subsidiary of the company in October 1993. In the beginning of 1994, Aeroflot withdrew its proposal and thereafter the 2ndrespondent entered into a management contract with one ACCOR for the hotel project and necessary approval from the government was also obtained. In October 1994, the Delhi High court decided the matter in favour of the company and the NDMC restored the land license to the company. In March, 1995, the petitioner, the company and the promoters entered into an MOU, according to which the petitioner was to invest Rs.7 crores as share capital in the company and also to provide a sum of Rs.10 crores as security deposit and the respondent promoters were to invest a sum of Rs.22 crores by way of share capital. The petitioner was also to arrange for public issue of shares for Rs.10 crores and mobilize a sum of Rs.85 crores by way of loans. In 1995, the petitioner invested Rs.7 crores as share capital and also gave a security deposit of Rs.8 crores. The respondents also got allotted shares worth Rs.20.99 crores. The main complaint of the petitioner is that the respondents got the shares allotted in a fraudulent manner without actually remitting any consideration for the shares by rotation of the funds of the company through the 2nd respondent. Further, in October 1997 the company had issued 15.3 lakh further shares to the respondents group without offering any shares to the petitioner. The petitioner has challenged the allotment of these shares also.
3. According to the respondents, the company had transferred the land developmental rights to the 2nd respondent in 1993 and it was the 2nd respondent which had pursued the High court proceedings successfully. Therefore, when the High Court passed an order in favour of the company, it was decided to retransfer the developmental rights from the 2nd respondent to the company for a consideration of Rs 21 crores which was 1/3 of the then prevailing market value of the land. The amount of Rs 21 crores thus paid by the company to the 2nd respondent was given to various respondents for valuable consideration and these respondents had invested in the share capital of the company and as such the allegation of the petitioner that share were allotted without receiving any consideration from the respondents, is baseless.
4. Shri Sarkar, Sr. Advocate appearing for the petitioner submitted as follows: The petitioner entered into an MOU with the company and the promoter respondents 3 to 5 on 11.3.1995 by which the petitioner was to invest a sum of Rs.7 crores towards share capital and was to provide a sum of Rs.10 crores as interest bearing security deposit. The petitioner had also undertaken the responsibility of arranging for public issue of 10 lakh shares of Rs.10/-each at a premium of not less than Rs.90/- so as to mobilize Rs.10 crores. It also undertook to mobilize Rs.85 crores for the project by way of term loans and working capital facilities. The promoter respondents were to invest a sum of Rs.22 crores by cash towards the shares. M/S ACCOR were to invest in 10 lakh shares at Rs.100/- per share. Both the petitioner and the promoter respondents were to contribute cash at par for the shares by 30th April, 1995. In terms of this MOU, the petitioner paid Rs.7 crores between 11.3.1995 and 18.4.1995 and 70 lakh shares were allotted to the petitioners. On allotment of these shares, the petitioner constituted the majority with 87.41% shares in the company. In addition, the petitioner also paid a sum of Rs. 8 crores between the period 21.11.1995 to 23.4.1996 towards security deposit. Even though, the respondents assured the petitioner that they had also contributed Rs.22 crores in terms of the MOU towards the share capital in cash, yet, later it was found out that the respondents had fraudulently allotted shares to themselves without actually paying any consideration for Rs 20.99 lakhs.
5. The learned counsel further argued as follows: The alleged investment of Rs.21 crores by the respondents 3 to 5 and others is a fraud arising out of sham transactions of transfer and retransfer of the developmental rights. The land for the hotel was allotted by NDMC in the name of the company and the agreement with the NMDC ( Annexure-C ) expressly prohibits a licensee from transferring or assigning its rights or interests in the property to anyone without the prior written consent of the NDMC. Therefore, the company could have never transferred its rights to the 2nd respondent without the prior consent of the NDMC. Even otherwise, when the NDMC had cancelled the license in 1990, the question of transferring the developmental right of the land which the company did not possess in 1993, does not arise. Further, there is nothing on record to show that any consideration was received by the company at the time when the developmental rights were allegedly transferred to the 2nd respondent. However, after the petitioner joined the company, the respondents alleged to have got the developmental rights transferred back from the 2nd respondent to the company at Rs.21 crores. While the very act of agreeing to pay Rs.21 crores is against the interests of the company, the same has been used to dupe the petitioner and the other financial institutions which had lent monies to the company. A reference to the Bank Statement of the company would indicate that as payment towards the Rs.21 crores for the developmental rights, the company issued a cheque to the 2nd respondent for a sum of Rs.1 crore on 16.3.1995. This amount comprised of Rs 70 lakhs paid by the petitioner as share application money. On the same day, the 2nd respondent issue a cheque for Rs 1 Crore to one H.J. Consulatants Pvt Ltd, a company under the control of the respondents. On the same day, H.J. Consultants Private Limited issued a cheque for the same amount to one Janki Exports International, another entity of the 3rd respondent, which paid this amount to the 3rd respondent who had paid this amount back to the company as his contribution towards share capital. All transactions were by means of cheques on the same branch of Syndicate Bank in which all the respondents had accounts. Like this, this amount of Rs.1 crore was rotated four times on 16.3.1995 and it was shown that the 3rd respondent had contributed Rs.4 crores as share capital. In the same way on 18.3.1995, a sum of Rs.1 crore was rotated two times, and again on 19.3.1995, a sum of Rs.1 crore was rotated 15 times. Thus, a sum of Rs.1 crore which was with the company as share application money by the petitioner was rotated 21 times and was accounted for as share investment of Rs.21 crores by the respondents. All the cheques-whether from the company or from the 2nd respondent or from M/S H.J. Consultants Private Limited-were signed only by one person, namely, the 3rdrespondent. This would clearly indicate that the alleged investment in shares is a fraudulent transaction and that the company money was being used for subscribing to the shares which is also against the provisions of Section 77 of the Act.
6. Shri Sarkar further argued as follows: As per the MOU, for the shares, the parties had to pay cash at par, which the petitioner did, while the respondents rotated Rs 1 crore, without bringing in Rs 21 crores in cash. Since the MoU stipulated cash being brought in, the respondent had no right to allot shares against the land value, which incidentally, belongs to the company itself. Further Section 75 of the Act requires payment of cash for allotment of shares, but in this case, the respondents had not paid any cash for the shares. Further, for the allotment of shares in March 95, instead of filing the return o allotment within 30 days as specified in Section 75,the same was filed only in only in December 1995. Even assuming that the shares were allotted in consideration for the land, yet, the provisions of Section 75(b) had not been followed for such allotment otherwise than for cash and therefore the allotment is a nullity.
7. Arguing further, Shri Sarkar pointed out that the land having been taken on lease cannot be assigned any value and as a matter of fact only in the Balance Sheet as on 31st March,1995, the company had indicated the land value at Rs.21 crores, however, without indicating as to why such a value has been assigned for a land already in its possession. Referring to Annexure –I-, he pointed out that in the Directors’ Report of the 2nd respondent, it has been indicated that it had reverted the developmental rights to the company for a consideration of Rs.21 crores. The claim of the company that the amount of Rs.21 crores was paid as compensation to the 2nd respondent for prosecuting the proceedings in the High Court is also not borne out by facts as no litigation expenses have been shown in any of the accounts of the 2nd respondent. Therefore, he pointed out that the claim of the respondents that they had transferred a right which was not subsisting and that they had paid Rs.21 crores for re-transfer of the said right is nothing but a concocted story to fraudulently acquire the shares without paying any consideration. He countered the stand of the respondents that the petitioner had the full knowledge about payment of Rs.21 crores to the 2nd respondent by pointing out that in the MOU dated 11.3.1995,even though there is a mention about ACCOR, there is no mention about the 2nd respondent nor the proposed action by the respondents to pay Rs.21 crores to the 2nd respondent. Since the petitioner is governed by the provisions of the MOU in which there is no mention about the 2nd respondent, no knowledge regarding the 2nd respondent can be attributed to the petitioner. He pointed out that on the basis of shares worth Rs.21 crores for which no consideration was paid, the respondents have taken financial assistance from the financial institutions by pledging these shares. Therefore, the element of public interest is also involved in this case. The so called transfer of the developmental right in 1993 is also against the provisions of Section 149 as the 2nd respondent commenced business only in December 1993. Even the letter by the company to the NDMC dated 12.8.93 seeks its permission only in terms of Clause 5 of the license agreement and not for transferring the developmental rights or the license itself. It is also an admitted fact that the NDMC had not given its permission as sought for and therefore the question of retransfer of the developmental rights does not arise. The promoter respondents had also duped ACCOR in relation to the ownership of the land. The company entered into an MOU with ACCOR on 29th August, 1994 ( Page 300 of Volume III) wherein the company is shown as the licensee of the land. But in the MOU between the 2nd respondent and ACCOR entered into within a short period on 9th September, 1994, the 2nd respondent is shown as the “ owner “. The petitioner was not privy to the real agreement and as a matter of fact, once the petitioner invested its money, the company terminated the MOU with ACCOR. Therefore, it is wrong to say that the petitioner was aware of the transaction between the company and the 2nd respondent.
8. In regard to the stand of the respondents that the petitioner itself had valued the land for Rs 21 crores, the learned counsel submitted: The valuation was taken only notionally to compute the cost of the project. This value has no relationship with the lease hold rights or the alleged contribution towards share capital. Just because the petitioner had valued the land, it does not mean that it had agreed for or had the knowledge of the fraudulent allotment of shares for that value. Actually, the TFCI had valued the land only at Rs 2 crores and had sought the promoters to bring in cash for the balance. Therefore there is absolutely no basis in claiming that the petitioner was a party to the fraudulent allotment of shares.
9. In regard to the rotation of money from the 2nd respondent to H.J. Consultants Private Limited, he pointed out that the agreement alleged to have been entered into between the two on 10th March, 1995 is a fake document having no validity. According to this MOU, the 2nd respondent was to purchase a number of properties from M/S H.J. Consultants Private Limited for Rs 35 crores of which an advance of Rs.21 crores was to be paid by the 2nd respondent. This MOU was not disclosed to the petitioner when the petitioner entered into the MOU with the respondents/company on 11.3.95. Further, on the day when this MOU was entered into, the 2nd respondent had a paid up capital of only Rs.7000/. Even, this MOU is not an agreement to sell. All the properties mentioned in the Schedule to the MOU are allegedly owned by the respondents or their family members or companies controlled by them. None of the properties mentioned in the Schedule has yet been transferred in the name of the 2nd respondent. Nothing has been shown justifying the purchase of these properties by the 2nd respondent as a matter of fact, the MOU between the two having common directors is in violation of the provisions of Section 299 of the Act. Further, some of the properties proposed to be purchased do not find a place in the Balance Sheets of the companies indicated as owners in the MOU. Therefore, all the documents have been fabricated only to justify the fraudulent rotation of Rs.1 crore twenty-one times to enable the respondents to acquire the shares without paying any consideration for the shares. In regard to the knowledge of the petitioner about the transfer and retransfer of the developmental rights, Shri Sarkar pointed out that the petitioner was never aware of the same and nothing is mentioned in the MOU about the 2nd respondent. It also does not talk of the price of the land. In the same way, the MOU between the 2nd respondent and the H.J. consultants was also not in the knowledge of the petitioner as the same was not mentioned in the MOU.
10. He further submitted that the company had issued further shares to the respondents in 1997 in violation of the provisions of Section 81 A and also in breach of the MOU which stipulates that the share holding parity among the parties has to be maintained. Even though the company is alleged to have held an EOGM on 7.7.97 wherein the resolution to issue further shares on a right basis was passed, yet the petitioner never got any notice of the said meeting nor any offer for subscription. All the new shares of 15.3 lakh shares were allotted only to the respondent group. Since the petitioner has challenged the earlier allotment on the basis of rotation of funds, no right shares could have been allotted in respect of these shares.
11. Summing up his arguments, Shri Sarkar submitted that the relationship between the petitioner and the respondents is that of a quasi partnership as would be evident from the MOU dated 11.3.1995 at paragraph 3(iv) and 6(g). Being a partner, the petitioner, in facts of this case wherein the respondents have perpetrated fraud, can claim winding up of the company on just and equitable grounds. Notwithstanding the rights of the petitioner arising out of the MOU, being a shareholder holding about 24% shares at present, it can allege oppression arising out of the fraudulent acts of the respondents as decided in B.M Jain Sons Co Pvt Ltd V Bombay Cable Car Pvt Ltd (2001 1 CLJ 468) Case. It is incorrect to say that this petition has been motivated only with a view to recover the investment made by the petitioner. It is also wrong to say that the petitioner is not entitled for any relief since it had breached the terms of the MOU. Since the respondents have committed a major fraud by paying for a land owned by itself to an outsider, the petitioner is fully justified in moving this petition before the company Law Board. In regard to the knowledge of the petitioner about all these transactions, he denied the same and contended that even otherwise, when there are statutory violations and fraudulent transactions, it is immaterial that the petitioner had the knowledge of the same. The company and its directors have been prosecuted for violation of the provisions of Section 211, which they have compounded. This would indicate that all is not well with the affairs of the company. The entire risk was taken by the petitioner by investing Rs 15 crores in the company, but the respondents, without investing any money are enjoying the fruits of the investment made by the petitioner. But for the investment by the petitioner, the company could not have even started the project. Therefore, he submitted that one of the equitable reliefs could be that the entire investment made by the petitioner be directed to be repaid with an interest at 20% compounded annually or in the alternative he prayed for canceling all the allotments impugned in the petition and restoring the majority of the petitioner.
12. Shri Sudhir Chandra, Sr.Advocate appearing for respondents 2 to 5 argued as follows: This petition is not a bona fide one and has been filed with the oblique motive of recovering the investment made by the petitioner. The petitioner breached the terms of the MOU by not arranging for funds of Rs.85 crores undertaken to be mobilized by it and therefore the company refused to pay interest on the security deposit. Because of this, petitioner tried to put as many spokes as possible to stall the completion of the project by making complaints to various authorities not only against the respondents but also against the collaborators, namely, M/S NIKO of Japan with whom the company has entered into a technical cum management collaboration. Having failed in all its attempts to stall the project, the petitioner has filed this petition.
13. On merits of the case, the learned counsel submitted: In regard to the transaction between the 2nd respondent and the company, it is to be noted that when the 2nd respondent was incorporated at the instance of M/S AEROFLOT, the developmental rights were transferred to the 2nd respondent and the company had applied to the NDMC for transfer of the right by a letter dated 12.8.1993. Even though, at the administrative level, the proposal was approved, yet, no formal communication was received from the NDMC. Only on the basis of the transfer of the developmental rights, the 2nd respondent, entered into an MOU with Aeroflot. Even the Government of India conveyed its approval for the foreign collaboration with the AEROFLOT by a letter dated 9th January, 1995. Since the agreement with AEROFLOT did not materialize, the 2nd respondent entered into a fresh MOU with ACCOR on 29.8.94 and the Government approval was also received in this regard for investment of US $ 3 million for the project by ACCOR. Therefore, it is incorrect to say that the company had not transferred the developmental rights to the 2nd respondent. The 2nd respondent had been actually involved in prosecuting the proceedings in the Delhi High Court. However, when the High Court case was decided in favour of the company, to avoid any further delay in getting the approval of the NDMC for the transfer to the 2ndrespondent, the promoters decided that the hotel project would be taken up by the company itself and therefore it was decided to re-transfer the developmental rights by a Board resolution dated 5.12.94. Government of India permission was also taken to transfer its approval for collaboration between the 2nd respondent with ACCOR to the company. At that time the land value was assessed at more than Rs.63 crores, but the company decided to pay only Rs 21 crores to the 2nd respondent for the retransfer. By an agreement dated 10.3.95 with M/s HJ international, the 2nd respondent agreed to purchase 13 properties of the promoters for Rs 35 crores, towards which Rs21 crores were paid as advance before 31.3.95. This amount was given to the proposed sellers of the properties as advance and they had invested the same in the shares of the company. Once the 2nd respondents pays the full consideration of Rs 35 crores, all these properties would be transferred to the 2nd respondent. Therefore, neither any fraud had been committed by the respondent promoters nor there is any sham transaction. Further, the company being a family company of the respondents and since, it is they who had taken all the steps to get the land licensed to the company, they could have legitimately and directly got shares for the services rendered without paying any cash consideration . Yet, they decided to invest cash and for this purpose they have agreed to sell their personal properties to the 2nd respondent through H.J International. The petitioner is nothing but a financier joining the company for future profit. When the MOU stipulates that shares would be issued to ACCOR at Rs 100 per share and that public would also be offered the shares at that price, the petitioner was allotted shares at par, so that it could mobilize necessary finance for the company. That is the reason why the petitioner gave proxies to the respondents in respect of its shares. The MOU does not confer any management rights on the petitioner and with the proxies being in he name so the respondents, the petitioner does not have even voting rights. The company could have offered these shares to the public at a high premium and the management could have continued with the respondents without any difficulty. The petitioner not only failed in discharging its obligations, it also acted in a prejudicial manner against the interest of the company. It is not that the petitioner did not know about the alleged rotation earlier. It has made this an issue in this petition, only when the company refused to pay interest on the security deposit.
14. The learned counsel further argued that for the amount of Rs.21 crores, the 2nd respondent would be acquiring valuable properties. Since the 2nd respondent is a wholly owned subsidiary of the company in which the petitioner holds 24% shares, the benefit of the properties would accrue to the petitioner also. Referring to the technical assistance agreement at Page 80 of the Reply, he pointed out that the 2nd respondent entered into this agreement with ACCOR wherein the 2ndrespondent, in view of the transfer of developmental rights, described itself as the owner. Requisite approval from Government also was received on 9.1.1995 for this collaboration. All these facts were known to the petitioner when it entered into an MOU with the company and the promoters on 11.5.1995. The knowledge of the petitioner about the valuation of this land at Rs.21 crores is also evident from its inter office memo dated 28th November, 1996 ( Page 133 of the Reply) wherein the petitioner has stated “ We have valued the land at Rs.21 crores as against the market value of Rs.70-80 Crores”. Further, in their application to IDBI dated 19.11.1996 ( Page 139 of the Reply), the petitioner has indicated its awareness about the payment of Rs.21 crores to the 2ndrespondent by stating “ Since the land rights have been acquired at Rs.21 crores by Sunair Hotel from its subsidiary company ……”.Further, in the letter to the company dated 13.2.1995 ( Page 140 of the Reply), the petitioner has indicated the promoters’ equity of Rs.20 crores as “ land “. Similarly, in their letter to IDBI dated 18.11.1996 ( Page 144 of the Reply ), the petitioner once again indicated that the company had acquired the land rights at Rs.21 crores. Therefore, the petitioner cannot now question the payment of Rs.21 crores to the 2nd respondent and allege fraud on the ground that the company could not have transferred the developmental rights to the 2nd respondent or re-possessed the same on payment of Rs.21 crores. The 2nd respondent has paid this amount to the other respondents for purchase of their properties. In the appraisal report by Tourism Finance Corporation at Page 505 of Volume III, there is clear mention that the promoters would be selling their properties to deploy cash contribution for the company and in the same report at Page 512, the land and site developmental has been shown as Rs.12 crores and Rs.1.1 crore. Therefore, the contention of the petitioner that no value could be assigned to the land is also fallacious. The transactions with the 2nd respondent was bonafide and the petitioner was fully aware of the same. Only when the company rejected their claim for interest on the security deposit, with a malafide intention and with a view to pressurize the respondents, this petition has been filed. In addition, the petitioner has also indulged in various prejudicial acts with a view to hamper the progress of the project. In this connection, he referred to the legal notice issued by the petitioner to M/S Niko about which the petitioner itself had paid compliments in its letter to IDBI dated 18.11.1996.
15. He further pointed out that even though in Paragraph 6 of its Reply, the company has averred as follows: “It is stated that before the petitioner company agreed to finance the project, it examined all the relevant correspondences, viability reports and also had independent meetings and correspondence with representatives of ACCOR and in fact the entire ground work for the project was being done by respondent no.2 and the fact that respondent no.2 held the rights to develop the 5 Star Project was well within the knowledge of the petitioner company and its managing director – Shri Somesh Mahrotra. It is stated, in fact, the valuation of Rs.,21 crores for re-transfer of the developmental rights from respondent no.2 to the answering respondent was done in consultation with Shri Somesh Mehrotra, the managing director as well other senior executives of the petitioner company” , this averment has not been contradicted by the petitioner in its Rejoinder and as such the petitioner now cannot now allege that it was not aware of the valuation or that the payment of Rs.21 crores to the 2ndrespondent for the developmental rights is fraudulent or a sham transaction.
16. Summing up his arguments, Shri Sudhir Chandra submitted that in a 397/398 petition, the petitioner should come with clean hands. The petitioner had acted in a manner prejudicial to the interest of the company both before filing of this petition and during the pendency of the petition by making complaints to all the authorities including the financial institutions, which resulted in delay in completion of the project. Therefore, referring to page 3096 of Ramaiah on Companies Act (2001 Edn), he submitted that the right to protection is a product of equity and therefore there must not be such conduct as would disqualify the plaintiff from proceeding against the company. Further, the complaint of the petitioner is that the respondents have breached the terms of the MOU by failing to bring cash for the shares. Any alleged breach of the MOU has to be agitated in a civil suit and not in the present proceedings as decided by the CLB in Allianz Securities Ltd V Regal Industries Ltd (37 CLA 250). He also contended that even if there had been any violation of law in the allotment of shares, the same cannot be agitated in a 397/98 petition as decided by the Apex Court in Needles case ( 51 CC 743). He also pointed out the this petition has been filed with an oblique motive to put pressure on the respondents to refund the investment made by the petitioner with interest at exorbitant rate and therefore as held in ReBellador Silk Ltd (1 AER 667), this petition should be dismissed in limine. He also pointed out that, not withstanding all these objections, when the respondents were ready and willing to settle the disputes amicably, the petitioner, without assigning any reason, withdrew from the settlement only with the view to extract more money from the respondents. Even in facts of this case, he pointed out that the petitioner having had the full knowledge and having been a party to the valuation of Rs.21 crores for the land, it cannot now complain of either oppression or mismanagement. Further, the petitioner came to the company only as a financier and it has neither a representation on the Board nor any voting rights in view of the proxies executed in favour of the respondents. As far as the allegation relating to non allotment of shares when further shares were issued, he submitted that notwithstanding the fact that the company had issued notices to the petitioner, the respondent directors would arrange for transfer of proportionate shares to the petitioner in case it expresses its willingness to acquire the shares.
17. Shri Haksar, Sr. Advocate appearing for respondents 1 and 3 supplementing the arguments of Shri Sudhir Chandra pointed out that in the MOU dated 11.3.1995, there is a clear mention that the license deed dated 8.12.1982 and supplementary agreement dated 1.2.1988 had been enclosed with the MOU. If it is so, then, the petitioner was fully aware of the various restrictions imposed on the company by these agreements. The petitioner knew about the agreement between the 2ndrespondent and ACCOR. It never questioned, having the knowledge of the restrictions in the license deed, as to how the 2nd respondent could have entered into an agreement with ACCOR. Therefore, having the full knowledge of the developmental rights having been transferred to the 2nd respondent, the petitioner still entered into the MOU since they knew that the right could be re-transferred to the company. In this connection, he referred to Page 17 of Volume VI wherein in a letter dated 25.3.1997, wherein the petitioner had informed Punjab National Bank, that the TFCI had approved the project cost with Rs.22.10 crores as cost of land and development. Thus, there is ample evidence to show that the petitioner was fully aware that the land had been valued at Rs.21 crores payable to the 2ndrespondent. Now, he has filed this petition only when the company by a letter dated 31.10.97 informed the petitioner that no provision for interest has been made due the failure of the petitioner to arrange for funds. Therefore, the complaint of the petitioner is more as a creditor and not as a share holder and as such this petition should be dismissed.
18. We have considered the pleadings and arguments of the counsel. Before dealing with merits of the case, it is appropriate to record that during the pendency of the proceedings, on our advise given in the hearing on 23/9/98 that the parties should try to resolve the disputes amicably, the parties attempted to settle the disputes amicably. Initially, the respondents offered a sum of Rs 16 crores to the petitioner towards the shares and the security deposit, but the petitioner desired a sum of Rs 24 crores. However, in the hearing on 18.11.98, the counsel for the parties reported that an agreement had been reached by which the petitioner would go out of the company on receipt of Rs 19 crores payable within 15 months from 1.12.1998 and that they would require some time to work out the modalities. In the hearing held on 24.12.98, it was reported that out of the Rs 19 crores, the company would pay Rs 12 crores in final settlement of the security deposit and the other respondents would purchase the shares of the petitioner for Rs 7 crores and that the first installment of Rs 6 crores would be paid on 11.1.99 and the balance of Rs 13 crores on or before 6.3.2000. The counsel had desired time to finalize necessary terms in this regard and accordingly the matter was adjourned to 11.1.1999.On this day, the matter was adjourned to 20.1.1999. On this day also, the parties did not place before us the agreed draft settlement, but the respondents produced bank drafts for Rs 6 crores. Since the parties had not placed before us the draft settlement, the matter was adjourned to 9th Feb 1999. In the next hearing, even though both the parties presented their own terms of settlement, yet, they did not place before us an agreed draft. However, the Bench itself prepared a draft settlement and handed over to them on 28.7.1999 and the counsel conveyed their acceptance to the same. Accordingly, the parties were directed to file a formal agreement signed by both the parties on 1.9.1999 and it was also directed that the respondents will hand over a draft for Rs.6 crores on that day. However, on 1.9.1999, it was reported that the Income Tax Department had attached the amount payable to the petitioner in terms of the agreement before the CLB and has restrained the petitioner from transferring the shares held by it in the company and the petitioner had filed a writ petition before the Delhi High Court challenging the attachment and that the High Court has directed that the amount of Rs.6 crores to be received by the petitioner as the 1st installment should be kept in a fixed deposit and therefore the respondents were moving an application to seek a clarification from the Delhi High Court about the title of the respondents in respect of the shares. Accordingly, the matter was adjourned to 10.11.1999 with the directions that the respondents would bring the first installment of Rs.6 crores on that day. On 10.11.1999, the respondents brought demand drafts worth Rs.2 crores and sought for a few more days for paying the balance of Rs.4 crores along with interest. However, the petitioner was not willing to accept this amount. In the hearing held on 1.3.2000, the respondents produced before us demand drafts for Rs.6.5 crores and cheque for Rs.50 lacs towards the 1st installment of Rs.6 crores and towards interest for the delayed payment with an assurance that the balance amount will be paid positively on or before 31.5.2000 failing which the petitioner could forfeit the amount of Rs.6 crores. However, the representative of the petitioner submitted that the Board of Directors of the petitioner company had already passed a resolution on 29.10.1999 deciding not to proceed with the compromise. We advised him that the Board of the petitioner company might review their earlier decision in view of the offer of payment of Rs.7 crores and assurance of the respondents to complete the settlement by 31.5.2000. The matter was accordingly fixed on 14.3.2000 to ascertain the reaction of the petitioner. On that day it was reported that the Board of Directors of the petitioner company had reconsidered ha matter and decided not to proceed with the compromise. Thus, the compromise efforts which were going on for nearly two years came to an end and it was decided to hear the petition on merits. The respondents who had filed an application in terms of Section 8 of the Arbitration and Conciliation Act on 24.2.1999 when the compromise efforts were on, desired that this application should be heard before proceeding with the main petition. After hearing the counsel on this application seeking for referring the disputes to arbitration in terms of the MOU dated 11.3.1995, this Bench passed an order on 21st August, 2000 dismissing the application as not maintainable. Thereafter, the petition was heard on merits and concluded on 5.3.2001.
19. It is to be noted that the petitioner is not an ordinary/common shareholder. It is a finance company having experts specialized in arranging funds for projects. Therefore, normally, before entering into an agreement for financing a project, a financier carries out a thorough due diligence of the project. In the present case, such a study would have been more important, since the MOU stipulates mobilization of funds through public issue also. Since, in this case, the MOU deals with a hotel project, to which the land component is the most important one, it is inconceivable that the petitioner would not have gone through the land license agreement, which has been, incidentally, stated in the MOU as forming a part of the same. Thus, the status of the petitioner is relevant in determining the allegations in this petition. It is also relevant to note that there are only two groups of shareholders in the company viz the petitioner and the respondents groups. Even though the learned counsel brought in the element of public interest as financial institutions have lent money to the company, we note that the petitioner has already made complaints to these institutions. Since this Bench exercises equitable jurisdiction in a 397/98 petition, the conduct of the parties will have to be taken into consideration in these proceedings.
20. The main allegation of the petitioner is that the respondents had allotted shares worth about Rs.21 crores without investing any money and that by fraudulent rotation of the funds of the company, the shares were allotted to them. This is assailed as fraudulent. In regard to the transfer and retransfer of the developmental rights, the same are assailed as sham transactions. When the petition was mentioned, initially this Bench itself felt that there was some hanky panky in the allotment of shares to the respondents. However, in the replies filed by the company and the respondents, they have justified the allotment of shares. The crux of the matter, as we find from the proceedings, revolves around the transfer of the developmental rights to the 2nd respondent and the re-transfer of the same to the company for Rs.21 crores. Without examining this issue first, we cannot decide on the validity or otherwise of the allotment of shares to the respondents.
21. It is not in dispute that the NDMC granted license for the land to the company. It is on record that the 2nd respondent was incorporated sometime in October, 1993 as is evident from the Certificate of Registration consequent to the agreement between the company and Aeroflot dated 17.6.93 ( page 243 of Vol III). It has obtained the certificate of commencement of business on 31.12.1993. According to the company, as soon as the 2nd respondent was incorporated, the developmental rights were transferred to it. It is on record that the 2rd respondent by itself entered into a Management Contact dated 9.9.94 (page 80 of Vol III) with ACCOR for which the approval of the Government of India was also obtained (page 127 of Vol III). It is on record that the company had applied to the NDMC for transfer of the rights arising out of the license agreement to the 2nd respondent as seen from the company’s letters dated 12th August 1993 and 16thSeptember 1993 ( pages 134 and 136 of Vol III). There is a report of Coopers & Lybrand on the hotel project to be executed by the 2nd respondent (page 253 of Vol III). These agreements could not have been entered into by the 2nd respondent, if there had been no proposal to transfer the developmental rights by the company. All these events had taken place before the petitioner entered into the MOU with the respondents and the company and when the High Court proceedings were pending. The learned counsel for the company raised various issues in regard to the alleged transfer of the developmental rights. According to him, when the license was no longer subsisting, no right arising out of the license could have been transferred and that when the 2nd respondent was not in existence on the alleged day of transfer, no transfer could have taken place and that when the license agreement prohibits transfer of any of the rights arising out of the agreement to a third party without the approval of NDMC, the developmental rights could not have been transferred to the 2nd respondent without the approval of the NDMC. As far as the cancellation of the license is concerned, we find from the letter of the company to NDMC dated 12.8.93 and 16.9.93 that even when the proceedings were pending in the High Court challenging the cancellation of the license, the NDMC had transferred a portion of the land to the company and also sanctioned the building plans. Thus we that notwithstanding the cancellation of the license - both the NDMC and the company had been taking steps in terms of the earlier license deed and therefore perhaps the company, in anticipation of a favourable decision by the High Court, had transferred the developmental rights. In regard to the argument that in terms of the license agreement, no rights could have been transferred, we note that the company had already sought the permission of the NDMC citing the approval given by it to other hotels and therefore nothing prevented the company from transferring the rights pending approval. In regard to the other objection that no rights could have been transferred before incorporation of the 2nd respondent, it is the stand of the company that the rights were transferred only after the incorporation of the 2nd respondent. One other important aspect that has to be taken note of regarding the knowledge of the petitioner about the transfer of the developmental rights is the Management Contact between the 2nd respondent and ACCOR dated 9.9.94. This contact has been specifically referred to in the MOU dated 11.3.955 at the top of page 2 In this contract, the 2nd respondent has been shown as the “owner”. Having referred to both the NDMC license deed containing restrictive clauses and the management contract with ACCOR in the same MOU referring the 2nd respondent as the “owner”, the petitioner cannot now claim that it was not aware of the transfer of the developmental rights to the 2nd respondent at the time of signing the MOU. Therefore, as far as the transfer of the developmental rights to the 2nd respondent is concerned, the petitioner cannot disclaim knowledge.
22. As far as re-transfer of the developmental rights back to the company for Rs.21 crores is concerned, the objections of the petitioner are manifold. One is that since at the time when these rights were transferred to the 2nd respondent no consideration was received, nothing should have been paid for the retransfer of the rights, that the property being that of the company, no value could have been put on the land. As far as putting a value to the land, we find that when Tourism Finance Corporation of India Limited made an appraisal ( Page 503 of Volume III ), it had estimated a notional value of Rs.12 crores for the land and Rs.1.1 crore for site developmental and in the means for financing, it had also estimated the equity share capital of the Indian promoters as Rs.20.33 crores inclusive of the land. In the proposal given by the petitioner to the company dated 13.2.1995 (Page 140 of Volume III ), the petitioner itself had indicated that the promoters equity of Rs.20 crores would be “ Land “. Further, in the inter office memo ( Page 133 of Volume III ), the petitioner had indicated “We value the land at Rs.21 crores as against the market value of Rs.70-80 crores”. Again as late as on 25.3.97, the petitioner had indicated in its letter to the Punjab National bank (page 17 of Vol VI) that TFCI had estimated the cost of the land and its development at Rs 22.10 crores and the promoters had so far spent Rs 35 crores on the project. This amount included Rs 21 crores against which shares were allotted. Thus, the intention of not only the appraising agency ( TFCI ) but also the petitioner had been to put a value for the land. From the documents, it appears that right from the beginning the intention of the promoters was to put a value on the land and get shares allotted against that value. In the MOU with Aeroflot, the company was to get shares in the 2nd respondent against its granting the right to use the land for the hotel. Same is the position in the MOU between the company and ACCOR dated 29.8.94, wherein it is provided that “the parties agree hat the property shall be valued by an independent approved valuer. SUNAIR to contribute the said property as part of the equity in the limit of 20% of the total project cost amounting to USD 5.15 million.” This amount of US D 5.15 million works out to roughly Rs 22 crores, which figure has perhaps been adopted in the MOU dated 11.3.95 as the contribution by the respondents. Since as per this MOU, ACCOR was to contribute Rs 10 crores, the petitioner cannot disown its knowledge its knowledge of the the MOU dated 29.8.94 according to which the promoters were to contribute the land for the shares. Only in this MOU and not in the Management Contract dated 9.9.94, that there is any mention about ACCOR’ contribution towards the funds for the company. Therefore, without knowledge of this MOU, the petitioner could not have written the letter dated 18.3.95,(page 161 of Vol III) to ACCOR suggesting that its contribution could be either by way of share capital or by way of loans. Thus there is ample evidence to show that the petitioner was aware of the value being put on the land.
23. Having held that the petitioner cannot question the value of Rs 21 crores put on the land, the next issue is whether the company was justified in attributing this value to the 2nd respondent. According to the petitioner, since no money was paid by the 2nd respondent while transferring the rights to the company, there is no justification in paying Rs 21 crores. While this arguments appears to be sound, yet, we have to look into the circumstances of the case. From the previous paragraph, it is clear that the intention of promoters as well as the collaborators had been that the promoters would be allotted shares against the value of the land. But those proposals were with reference to the project being implemented through the 2nd respondent, in which case, the company, which was in complete control of the respondents, would have been allotted the shares against the land. However, according to the respondents, after having got the license restored in the name of the company after a long drawn legal battle, they did not want to waste time in getting the permission of the NDMC to get the project implemented through the 2nd respondent and therefore, it was decided that the company itself would implement the project. It appears that since as per their original proposals with Aeroflot and ACCOR the land value was to be reflected in shares, perhaps, they had passed on the value to the 2nd respondent, through which to have the shares allotted. Therefore, the only question is as to whether the petitioner had the knowledge of the proposal to pay Rs 21 crores to the 2nd respondent. It is on record that the petitioner itself had indicated in its letter to the IDBI ( Page 144 of Vol III) dated 18.11.1996 that the company had acquired the land rights from it subsidiary for Rs 21 crores. Again in its letter to the IDBI dated 19.11.96, the same has been once again reiterated. Further in the letter date 18.11.96, the petitioner had also stated that a sum of Rs 34.40 had been spent of the project which was financed by the promoters contribution. This amount included the payment of Rs 21 crores to the 2nd respondent. The petitioner, being not an ordinary share holder but specializing in financial matters, would not have made such a statement unless it was aware that the 2nd respondent was entitled to that amount and that the company had paid the same.
24. With the above in the back ground, we have to examine the complaint of the petitioner about the alleged fraudulent rotation of Rs 1 Crore. Now that the petitioner was aware of the value of Rs 21 crore put on the land and that the said amount had to be paid to the 2nd respondent, the company was liable to pay the said amount to the 2nd respondent. It has become the liability of the company and it had the option to pay the same in one or more installments. If the company did not owe any money to the 2nd respondent, then, the method of rotation adopted by the respondents would have been highly irregular and would have merited cancellation of the allotment. However, in the present case, the petitioner itself had admitted the valuation of Rs 21 crores and the proposal of the company to acquire the developmental rights from the 2nd respondent, in its letters to the financial institutions as referred to earlier. Once the liability of the company is in the knowledge of the petitioner, it cannot question the ingenious method followed by the respondents in discharging the company’s liability and at the same time getting shares issued to the respondents. It was strongly urged by the learned counsel for the petitioner that the company did not have any funds and it was the amount of Rs 70 lakhs paid by the petitioner that was utilized to pay the first Rs 1 crore on 16.3.95 to the 2nd respondent which was rotated 21 times. We have already pointed out that the petitioner was aware that the company owed Rs 21 crores to the 2nd respondent and this liability had to be discharged sooner or later. May be the manner in which it was done would indicate some hanky panky, but in facts of this case, the petitioner being aware of the discharge of the liability cannot allege illegality in the rotation of money as the liability of the company towards the 2nd respondent has been discharged. We are also not able to believe that that the petitioner was never aware of the mode of discharge of the liability, since, as a financier, before writing the letters to the financial institutions that the company had acquired the land for Rs 21 crores from the 2nd respondent, it should have checked up the mode of payment, especially when it has the right to access to the accounts of the company in terms of the MOU> Further, if the petitioner was not aware of the mode of discharging the liability, it would have definitely advised the company to defer the paryment and utilize the funds for the project. As a matter of fact, the petitionr paid the security deposit only during the period between 21.11.95 and 23.4.96, by which time atleast by this time, it should have known about the mode of discharge of the liability towards the 2nd respondent. The petitioner claims that it had no access to the accounts of the company, but no evidence that it had complained of the same to the company at any time, has been produced. Therefore, even assuming that the rotation of Rs 1 crore is irregular, yet, in facts of this case, knowledge of and consent to the same the same have to be attributed to the petitioner.
25. The petitioner has also challenged the payment of money by the 2nd respondent to HJ Consultants which facilitated the rotation of money. The main objection of the petitioner in relation to the MOU dated 10.3.1995 between the 2nd respondent and M/s HJ Consultants is that the same is a fabricated document to justify the illegal rotation of money. Further the MOU is not an agreement to sell, that there was no reason for the 2nd respondent to purchase properties, that so far no property has been transferred to the 2nd respondent etc. It has also pointed out that there are common directors in both these companies and as such they could not have entered into this MOU in violation of Section 299 of the Act. We find from the Balance Sheet as on 31 3 1995 of the 2nd respondent that the sum of Rs 21 crores is shown under “Loans and Advances”. In the Balance Sheet of HJ Consultants as on 31.3.1995, this amount is shown as “Current Liabilities” and also under “Loans and Advances”. In the auditors report it has been mentioned that these heads include amounts received from and paid to entities in which one or more directors of the company are interested. However, we also note that neither the Balance sheets nor the Directors’ Reports of both the companies, as pointed out by the petitioner, indicate the transactions are with reference to the MOU. However, since the amount paid by the 2nd respondent, which is a wholly owned subsidiary of the company to HJ Consultants has been reflected in the accounts of both the companies, HJ Consultants is bound to repay the amount in cash or in kind. Since HJ Consultants are not before us, we cannot examine as to whether, its lending/advancing money to M/s Janki Investment through which the respondents could get money to subscribe to the shares is proper or not. However, since the 2nd respondent is a wholly owned subsidiary of the company, with the view to protect the interests of the 2nd respondent, we direct, that the 2nd respondent should take steps to recover the amount of Rs 21 crores paid to HJ Consultants either in cash or by way of properly valued properties worth Rs 21 crores within 9 months from the date of this order.
26. Now we shall deal with the other issues raised by the counsel. Shri Sarkar submitted that the allotment of shares by way of rotation would not be in conformity with the MOU which stipulated that cash of Rs 22 crores was to be brought in by the respondents towards the shares. It is a settled law that a private agreement, not forming part of Articles is not binding on the company with certain exceptions like family companies or companies in the guise of partnership, that too in relation to shareholding position and participation in the management. In this case, the partnership principles cannot be applied in view of the express stand taken by the petitioner in its letter to TFCI dated 17.12.96(page 556 of Vol III) stating that the petitioner was an institutional investor in the company without involvement in the management and functioning of the company, when its personal guarantee was sought for by TFCI. Shri Sarkar cited the case of Bombay Cable Car decided by this Board to urge that in line with the decision in that case, we should declare that violation of the provisions of the MOU should entitle the petitioner the grant of the prayers sought for. A reading of that case would show that the reliefs granted in that case were not based on the agreement between the parties but on the facts of the case after observing “Now we have to see whether the allegations of the petitioner, de-hors the agreement, could be considered as acts of oppression”. Once the cheques issued by the respondents had been encashed by the company and utlised for clearing the liabilities, the petitioner cannot complain that no cash was received for the shares.
27. Shri Sudhir Chandra contended that in a proceeding under Section 397/98, the petitioner should come with clean hands failing which he should be denied relief. We agree that it is a settled proposition of law that the conduct of parties is a very relevant factor to be considered in the equitable proceedings under section 397/98. In S.D.N, Wadiyar Vs. Sh. Venkateshwara Real Estates Private Ltd. ( 72 CC 211 Kar) it was held that the petitioner seeking equitable relief must come with clean hands and good conduct, failing which the petition would constitutes a gross abuse of the process of court and the petitioner is not entitled for any relief under Sections 397 & 398. It also held that that the conduct of the parties in other proceedings could also be taken into consideration. We find that, once the disputes started between the parties, the petitioner, without minding the interest of the company, took various steps to put blocks on the progress of the project. By a letter dated 14.3.98 the petitioner advised TFCI that the latter should protect its interest in the company as the petitioner was contemplating filing of a winding up petition (page 62 of Vol III). In the same volume at page 64, by another letter, the petitioner asked TFCI to instruct its bank to stop payment of a cheque by which some loan had been disbursed. Again by a letter dated 4.5.98, the petitioner advised TFCI to recall the loan given to the company. In all these letters the grievance of the petitioner was that the company had not paid interest on the security deposit and that the respondents had allotted shares without paying consideration. While, the conduct of the petitioner before filing of the petition may not be a relevant factor, yet after filing of this petition and when the process of amicable settlement was on, the petitioner had continued its prejudicial act. It is on record that the parties had decided to settle the disputes for an amount of Rs 19 crores payable by the respondents/company to the petitioner. This agreement was recorded in our order dated 18.11.1998 and only the other terms remained to be settled. Not withstanding this, the petitioner, by a letter dated 19.12.98 (page 106 of Vol IV) addressed to TFCI, while making a reference to the process of settlement, once again referred to all the allegations made in the petition and had cautioned TFCI in its dealings with the company . The respondents also, through their affidavit dated 1.4.98, complained that the petitioner had been giving adverse publicity to the disputes through various news papers, which allegation, we note was denied by the petitioner. Further, in the High Court proceedings in relation to the writ against the attachment order of the Income tax department, the petitioner sought for the High Court permission to go ahead with the compromise arrived at before us. The High Court granted the permission on 30.8.99. However, in the hearing on 10.11.99, the counsel for the petitioner informed that his client was withdrawing from the compromise terms. The Bench thought that the reason for withdrawal was that on that day the respondents produced demand drafts for only Rs 2 crores as against Rs 6 crores as agreed to earlier. However, in the hearing on 1.3.2000 when the respondents had brought cheques and demand drafts for Rs 7 crores, this Bench was informed that the Board of the petitioner company had passed a resolution, as early as on 29.10.2000 not to proceed with the compromise. This resolution was not disclosed in the hearing on 10.11.99. In this connection, we may also note that even though both the sides had accepted the draft terms of settlement suggested by this Bench on 28.7.99, while the respondents were willing to sign the same and file it before us, the petitioner did not want to sign the same till the first installment was paid and when the first installment was offered, even though belatedly due to the High Court proceedings, the petitioner did not want to accept the same even with interest. Therefore, we feel that the conduct of the petitioner has not been bonafide even during the course of the present proceedings.
28. Shri Sudhir Chandra also argued that the petition has been filed with an obique motive to get back the investment by the petitioner at a high rate of interest and not with a view to get redressal of the grievance of either oppression or mismanagement. We are inclined to agree with him. The relationship between the parties, it appears, was cordial even during 1997 as is evident from the letter dated from the petitioner to the company dated 28.5.97 advising that the petitioner could arrange for ECB. However, the relationship appears to have become sore when the petitioner did not respond to the requests of the company for funds during 1997 culminating in the company writing a letter dated 31.10.97 ( page 21 of Vol VI) declining to make provision for interest. In its letter dated 14.3.98 (page 62 of Vol III), addressed to TFCI, the petitioner had complained of non payment of interest and had also stated “having left with no other choice, VLS is proceeding against Aunair Hotels Ltd and its promoters to recover its invested amount of loan and equity and is also filing a petition for winding up of Sunair”. From this letter, it is clear that the grievance of the petitioner against the respondents was relating to non payment of interest and its desire was to recover its investment. Further, in the present proceedings also the petitioner expressed its desire to settle the matter for a consideration of Rs 19 crores. However, it backed out of the settlement inspite of offer of Rs 7crores by the respondents on 1.3.2000 as the first installment with the assurance of paying the balance by 31.5.2000 failing which the amount of Rs 7 crores could be forfeited. Further, when we advised the petitioner to reconsider this decision, the Board of the petitioner once again resolved on 9.3.2000, not to proceed with the compromise on the ground “of various frauds committed by the respondents, their oppressive acts on VLS Finance Ltd, collapse of faith and conviction in the respondents, and the efforts at prolonging the litigation time and again on one pretext of the other by the respondents”. When the present petition itself is based on the same allegations and inspite of this the petitioner still agreed to compromise, we do not find any justification in the above resolution to reject the compromise. May be that the petitioner desired a higher amount than the Rs 19 crores as is evident from the submission of the learned counsel for the petitioner at the end of his arguments that one of the equitable reliefs could be to direct the respondents to pay back the investment of his clients with 20% interest at quarterly rest. Therefore, the ratio of Belladore case are squarely applicable in this case, meriting dismissal of the petition as one filed with an oblique motive.
29. Thus on an overall assessment of the case, we conclude that the intention of the promoters had always been to get shares allotted against the value of the land and that the petitioner was also aware of the same and as such the transfer and retransfer of the developmental rights are not sham transactions. In regard to the rotation of Rs 1 crore, the allegation is that the same is fraudulent. For an act to be fraudulent, it should be with a view to deceive a person. When there is ample evidence, in black and white, that the land would be valued and shares would be allotted against that value, the manner of implementation, however suspicious, cannot considered to be fraudulent. It is an admitted fact that the liability toward the 2nd respondent has been discharged and to ensure that it gets back its Rs 21 crores, we have also given suitable directions. In respect of the submissions of Shri Sarkar that even if the petitioner had the knowledge of the transactions, yet, in view of the investment of public financial institutions, public interest is involved, we find that not withstanding the complaint of the petitioner to these institutions they have disbursed the loans, indicating that they were not impressed with the complaints.
30. Even otherwise, by the prejudicial conduct against the interest of the company, and also on the grounds of waiver, estoppel and acquiescence, the petitioner has disentitled itself from being granted any equitable relief in these proceedings. Further the relief sought for cancellation of the allotment of all shares impugned in the petition, if granted would result in the petitioner becoming majority in the company with about 84% shares. Such a relief would be highly unjustifiable in facts of the case especially when the petitioner has claimed itself only a financier and not a promoter when the financial institutions sought for personal guarantee of the petitioner. Even if we grant that the petitioner has invested substantial funds in the company, yet, the credit for completing the project, inspite of the continued prejudicial action of the petitioner putting obstacles in the completion of the project, goes to the respondents. With a view to have a first hand knowledge of the project, we visited the project after the arguments were concluded and found that the hotel has become operational due to the efforts of the respondents. In this connection, we may beneficially refer to a decision of this Board in Neelu Kholi V Nikhil Rubbers Pvt Ltd (2001 1 CLJ 168) wherein the wife claiming to have invested in 95% of the shares in the company prayed for handing over the company to her. Finding that it was with the expertise of her husband holding 5% shares in the company that it prospered, this Board declined to grant her prayer observing “We are not impressed with the claim of the petitioner that, since she had 95% share capital, she should be given the charge of the company in as much as mere capital alone cannot ensure prosperity of a company. Her averment that she joined the respondent as a promoter only due to the legal requirement of having two members does not carry much conviction. It is on record that the respondent has expertise in rubber technology while, the petitioner has no such expertise. It is also on record that the major portion of the turnover of the company was out of the exports for which the respondent had obtained orders while visiting exhibitions abroad. Thus, even assuming that the respondent had not contributed to the capital of the company initially, his contribution of expertise for the benefit of the company cannot be ignored. The Company Law Board, in a proceeding under Section 397/98 exercises equitable jurisdiction and therefore all these aspects have to be taken into consideration in molding the relief.” The same analogy applies here also. The claim of the petitioner is that without his investment of Rs 15 crores, the project could not have progressed but we find that it is the efforts of the respondents, inspite of the prejudicial acts of the petitioner, that the project has been completed. We may also note that Allahabad High Court, in Reghunath Sarup Mathur Vs. Har Sarup Mathur ( 40 CC 282 ), has held that, the court has to be careful and astute enough to prevent a misuse of the provisions of Sections 397/398 by a party, lest a remedy proposed and granted to overcome an alleged mischief becomes a source of greater oppression than the one sought to be removed or prevented. The grnat of the relief as sought for would be a great act of oppression against the respondents who had nurtured the project from 1982 onwards.
31. After the hearing was concluded, the counsel for the petitioner mentioned an additional affidavit dated 15.5.2001, enclosing therewith copies of certain documents mostly correspondence exchanged between the officers of the Department of Company Affairs (DCA) in connection with the follow up action on the Inspection carried out by that department into the affairs of the company. When this affidavit was mentioned, the counsel for the respondents submitted that the Department of company Affairs had closed the follow up action on the inspection report and nothing survived on that report. He also pointed out that the company has filed an application before the Delhi High court under Sections 9 and 11 of the Arbitration and Conciliation Act and that the High Court has passed some interim orders. He also mentioned that the company has forfeited the security deposit of Rs 8 crores paid by the petitioner to the company in terms o the MOU. Shri Sarkar suggested that this Bench should ascertain the correct position from the DCA. As per the suggestion of the learned counsel for the petitioner, we perused the inspection report prepared by the Department of Company Affairs. According to the report, the company has violated various provisions of the Act. Many of these violations are not part of the allegations in this petition and as such we cannot take cognizance of the said report without an opportunity to the respondents. It has been held by the Apex Court in Needles case that violation of statutory provisions need not be oppressive. If the company/respondents have violated the provisions of the Act, on the basis of the inspection report, the Registrar Companies would definitely initiate suitable proceedings independent of the present proceedings before us. In Shaw Wallace case (1998 31 CLA 234), this Board took a view that if a governmental agency has taken cognizance of any violation of statutory provisions, this Board would not examine the same in a proceeding under Sections 397/98. This view was endorsed by the Division Bench of the Calcutta High Court also on appeal. What this Bench is concerned is whether the allegations made in the petition could be considered to be acts of oppression/mismanagement and regarding the main allegation relating to allotments of shares we have already given our findings that the allotments were neither fraudulent nor sham. As far as the allegation of not making an offer to the petitioner in 1997 when further shares were issued, the learned counsel for the respondents gave an undertaking that the petitioner would be given proportionate shares if it were to express its desire to do so. In view of this undertaking, this complaint of the petitioner no longer survives.
32. Now in view of our findings that the as per TFCI appraisal the promoters contribution was to be in the form of land and that in both the collaboration agreements with AEROFLOT and ACCOR, the same has been indicated, and that the petitioner itself had valued the land at Rs 21 crores and had known that the same was payable to the 2nd respondent, the fact of which the petitioner itself had communicated to the financial institutions, neither the allegation of sham nor fraudulent transaction has been established. In this connection, we may also observe that it is not uncommon for the promoters to get shares issued for services rendered and this has been recognized by the statute itself in Section 75(b) of the Act, subject to compliance with the procedure specified in that Section. In the present case, even though the land was licensed as early as in 1982, due to the efforts of the promoters only, all the disputes relating to the license came to an end and the project commenced in 1995. Even assuming that the respondents had adopted a questionable method of clearing the liability and in the process got shares allotted to them, taking into consideration all aspects of this case and our direction that the 2nd respondents should take steps to recover the money paid to HJ International either by way of cash or properties within a set time frame, we do not find any scope to grant any relief to the petitioner especially when we have held that the petition is a motivated one and that the petitioner has disentitled itself by its conduct in being granted any equitable relief. Therefore the petition deserves to be dismissed.
33. However, without dismissing the petition, since there are only two groups of shareholders in the company and that the petitioner having invested a substantial amount in the company feels oppressed, we are of the view that it should be given an option, in case it desires, to go out of the company on return of its investment in shares of the company of Rs 7 crores. We are not considering the amount of Rs 8 crores of security deposit for the reasons that the respondents have reportedly forfeited the same and that they have also claimed substantial amount against the petitioner for breach of the terms of MOU. Further, the same has no connection with the status of the petitioner as a shareholder. In case the petitioner is willing to part with his shares, then the company/respondents should purchase the shares on a valuation to be made by an independent valuer. The valuation will be based on the Balance Sheet as on 31.3.1998, being the proximate date of the petition. In case the petitioner desires to continue with its membership, it has the option to apply for proportionate shares in respect of the shares allotted in 1997. Either of the options should be exercised within a period of 3 months of this order. In case it desires to go out of the company, then, on an application made by it, we shall appoint a suitable valuer. In case it desires to continue with the company and opts to acquire proportionate shares, the same will be at par and the respondents should arrange to have the requisite number of shares transferred to the petitioner on receipt of consideration.
34. The petition is disposed of in the above terms with no order as to costs.
(S.Balasubramanian) (A.K Banerji)
Source: http://clb.nic.in/sections/sunair397398-13062k1.htm
