2011 (1) TMI 1200 - HC - Companies Law

Transfer of shares - Defendant No. 1 which is a company was allotted 12, 000 sq. meters of land by Rajasthan State Industrial Development and Investment Corporation Ltd. (RIICO) for setting up a hotel - In MOU it was mentioned that loan amount was for 50 per cent shares of defendant No. 1 - Plaintiffs allotted 10, 000 shares to defendants by increasing authorised share capital - The plaintiffs have sought a declaration that defendants 2 & 3 are neither shareholders nor directors of defendant No. 1. They have also sought a direction to defendant Nos. 2 & 3 to deliver the original share certificates for the purpose of cancellation. The plaintiffs have also sought an injunction restraining defendants 2 & 3 from representing or holding out of themselves as shareholders or directors of defendant No. 1 or acting on its behalf besides injunction against interference by them in the affairs of defendant No. 1.

Issues Involved:
1. Validity and knowledge of MOU execution.
2. Nature of the transaction between the parties.
3. Interim relief and injunctions.
4. Production and inspection of company records.
5. Rights and restrictions on shareholding and transfer.

Issue-wise Detailed Analysis:

1. Validity and Knowledge of MOU Execution:
The primary issue was whether the MOU dated 27-5-2005 was executed with the consent and/or knowledge of plaintiff No. 3, who held more than 99.73% shares of defendant No. 1 at that time. The court noted that there was no documentary proof of plaintiff No. 3 having consented to the execution of the MOU. Although it was probable that she was aware of it, she was not a director of defendant No. 1 at the time nor did she sign any relevant documents. The court highlighted the improbability of a significant shareholder not being a signatory to such a crucial document, emphasizing that a final view could only be taken after recording evidence.

2. Nature of the Transaction:
The court examined whether the transaction was a loan or an agreement for shareholding. The MOU's terms suggested a shareholding agreement, but several circumstances indicated it might have been a sham document intended to secure a loan:
- Shares were allotted before the full consideration was paid.
- Defendants did not act as directors after their initial term expired.
- Payments were made to a different company (Mode Advertising) instead of defendant No. 1.
- Defendants did not attend any board meetings or AGMs.
The court noted that plaintiffs could lead evidence to show the true nature of the transaction, referencing the legal principle that oral evidence is admissible to prove that a document was a sham.

3. Interim Relief and Injunctions:
The court granted interim relief restraining defendant Nos. 2 and 3 from holding themselves out as directors of defendant No. 1. However, it allowed them to hold themselves out as shareholders, as 10,000 shares had been allotted to them. The court also restrained defendant No. 2 from transferring or creating third-party interest in these shares, subject to the plaintiffs furnishing a bank guarantee equivalent to the alleged loan amount with interest.

4. Production and Inspection of Company Records:
The court directed the plaintiffs and defendant No. 1 to produce and allow inspection of the minutes books, financial records, balance sheets, profit and loss accounts, and annual returns for the years 2004-05 to 2009-10. There was no objection to this directive, ensuring transparency and accountability.

5. Rights and Restrictions on Shareholding and Transfer:
The court discussed the implications of the MOU and the Articles of Association regarding shareholding and transfer. It concluded that the MOU did not restrict the company's right to increase its authorized capital or issue fresh capital. The court emphasized that any agreement contrary to the Articles of Association would not bind the company or its shareholders. Consequently, the plaintiffs were restrained from allotting shares to outsiders but could mortgage the company's assets for raising loans for the hotel project.

Conclusion:
The court's interim order balanced the interests of both parties, allowing the defendants to hold themselves out as shareholders while protecting the plaintiffs' control over the company. The observations made were tentative, not affecting the final decision on merits. The case was scheduled for further hearing on 27th May 2011, with directions for filing replies and rejoinders.

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