2017 (7) TMI 1078 - HC - Companies Law

Proceedings under Arbitration and Conciliation Act, 1996 - Held that - In the opinion of the court, the absence of material to establish that it would be irreparably prejudiced or that balance of convenience would be against it can only mean that it failed to substantiate its contentions. A contrary finding, that they would not be prejudiced in any manner, sans documentary materials on the record, but only based on press reports and interpretation of balance sheet for a given year available in the public domain, would be fraught with difficulty. At the same time, the court is aware that there is a possibility that compliance with the impugned directions can result in strapping the company severely and impairing its commercial operations. In these circumstances, while upholding the substantive reasoning of the learned single judge, the court is of the view that a modification of the order is necessary to meet the overall ends of justice. Given the fact that the amount paid by the petitioners is a specific one, ends of justice would be met with by securing it in the form of cash deposit to the extent of ₹ 250 crores and securing the balance ₹ 329 crores through a bank guarantee to the satisfaction of the Registrar of this court. The said amount of ₹ 250 crores shall be deposited by the appellant on or before 31stAugust, 2017; the bank guarantee for ₹ 329 crores shall be furnished to the satisfaction of the Registrar on or before 31st July, 2017. This court is of the opinion that this modification is essential, not because the petitioners were unable to establish a strong prima facie case, but because of the unpredictable nature of the likely injury that may be caused to the commercial operations of the company and the appellants, if the entire amounts were secured through deposit in court. The appeals are bereft of merit; however, the impugned order is modified to the extent indicated above. Parties are directed to be present before the Registrar General for compliance with the directions in the preceding paragraph, on 10th July, 2017. The appeals are dismissed, but subject to the modification in the impugned order, to the extent indicated

Issues Involved:

1. Non-issuance of warrants.
2. Non-issuance of non-convertible redeemable cumulative preference shares (CRPS).
3. Failure to compound the offences under the Income Tax Act.
4. Compliance with Section 42 of the Companies Act, 2013.
5. Applicability of principles underlying Order 38, Rule 5 CPC to interim measures under Section 9 of the Arbitration and Conciliation Act, 1996.
6. Balance of convenience and irreparable harm considerations.

Detailed Analysis:

1. Non-issuance of Warrants:
The appellants failed to issue warrants as per the Share Purchase Agreement (SPA) due to lack of approval from SEBI and BSE. The court noted that the appellants received ?579 crores but did not fulfill their contractual obligation to issue the warrants. The learned single judge held that the appellants were liable to refund the amount to the petitioners since the warrants were not issued.

2. Non-issuance of CRPS:
The appellants also failed to issue and allot the Tranche 1 and Tranche 2 CRPS shares as per the SPA. The court observed that the appellants' inability to issue the preference shares was due to non-compliance with certain regulations, resulting in a statutory obligation to return the monies to the petitioners under Section 42 of the Companies Act, 2013.

3. Failure to Compound Offences under Income Tax Act:
The petitioners alleged that the appellants did not utilize the amounts in the designated accounts to pay outstanding statutory dues, leading to criminal proceedings against the company. The court noted that the appellants applied for a waiver of interest under Section 119 of the Income Tax Act after prosecution was initiated, indicating a failure to fulfill their obligations under the SPA.

4. Compliance with Section 42 of the Companies Act, 2013:
The court emphasized that the company accepted consideration for CRPS in violation of Section 42 (6) of the Companies Act, 2013, which mandates repayment with interest if securities are not allotted within the prescribed period. The appellants' failure to allot the securities exposed them to penal action under Section 42 (10) of the Act.

5. Applicability of Principles Underlying Order 38, Rule 5 CPC:
The court addressed the argument that principles underlying Order 38, Rule 5 CPC should be considered while making interim orders under Section 9 of the Arbitration and Conciliation Act, 1996. It was noted that the exercise of power under Section 9 must be principled and based on known guidelines, although not strictly bound by the text of Order 38.

6. Balance of Convenience and Irreparable Harm:
The appellants argued that the learned single judge failed to consider the balance of convenience and irreparable harm. The court found no substantial evidence from the appellants to demonstrate that compliance with the impugned order would cause irreparable injury. However, the court acknowledged the potential severe impact on the company's commercial operations and modified the order to require a cash deposit of ?250 crores and a bank guarantee for the balance ?329 crores.

Conclusion:
The appeals were dismissed, but the impugned order was modified to require the appellants to deposit ?250 crores in cash and provide a bank guarantee for ?329 crores. The court emphasized the need for a principled exercise of power under Section 9 of the Arbitration and Conciliation Act, 1996, while ensuring that the petitioners' claims were adequately secured.

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