2015 (1) TMI 255 - HC - Companies Law

Maintainability of the petition - Entitlement for having shares in the company - Scope of Section 111 of the Companies Act Held that - It is difficult to see how it could ever have been said that Ponds had become a member or shareholder of Advansys - In order to be a member and shareholder and one holding alleged 7.5 lakh shares, those shares would have had first to have been issued to Ponds, making Ponds a member of Advansys - Absent any such share issue, no rectification of the register of members could have been permitted - If, as it does indeed appear in the present case, all that Ponds could at highest lay claim to, was an agreement for purchase of shares, Ponds would nonetheless first have to file a civil suit for specific performance of such an agreement - It could not bundle that claim for specific performance with an application for rectification of the register - The suit for specific performance was a necessary precursor to a rectification application - the explanation set up by Ponds is no explanation at all - Ponds merely says that it had not indicated that the purpose of the remittance was towards invoices - It has not affirmatively stated what, if any, purpose was stated on that remittance when it originated from NatWest Bank in the UK - It defies credulity that such a substantial amount would have been remitted, without specifying or identifying a purpose, especially given the fact that the transactions and the correspondence between the parties pertained to a large number of interlocking issues. There does not seem to be any indication in the prior correspondence to explain how this figure of 92,500 is actually derived - what that figure actually does achieve is a complete and an explicable match with the reconciliation statement of outstanding invoices - Thus, on the one side, as postulated by Mr. Chinoy, on behalf of Advansys, there is entirely plausible explanation for the remittance - There is the endorsement of the FIRC certificate - The amount can be traced and exactly matched to the invoices in a reconciliation statement sent by Hunjan himself - on the other hand, the case propounded by Ponds, remains in a shadowy, grey area absent all specifics. No concluded agreement, no consideration Held that - It could not be comprehended as to how and on what basis, the Company Law Board could have possibly have concluded that there existed such an agreement or that it had been acted upon and fully effected - In order to arrive at that conclusion, the Company Law Board would have had to find as a matter of incontrovertible fact, capable of no other interpretation, that there was such an agreement and that it had been implemented - It is impossible to sustain the finding of the Company Law Board. It is not open to a party to constantly attempt to improve his case in this manner - as against this, there is evidence in the form of buyback agreement dated 1st February 2002 that prima-facie indicates that Tansun would provide loans in the form of capital equipment to Advansys - This explains why Balwani treated the payments from Tansun as loans or advances for manufacturing, and which were latter set off against exports - the buyback agreement also says that the relation between the parties is not that of a joint-venture, a joint undertaking, a partnership or co-ownership - the entire edifice seems to have constructed around the consequence of an inconvenient or awkward audit query, which itself was result of some internal inconsistency or contradiction created by the Ponds, Tansun, Hunjan and Rana - the findings of the CLB that there was a concluded agreement for valuable consideration, is entirely unsustainable. FEMA/FERA Violation Held that - There is a material factual error in the Company Law Board s decision where it notes that Advansys being a 100% Export Oriented Unit ( EOU ), it is located in SEEPZ - the material error lies in the fact that while Advansys is a 100% EOU, it is located in Pune - the fact that it was a 100% EOU would not make it a SSI also - thus, even on the respondents own construct, the automatic route was never available for investment in Advansys - there was no agreement in the first place - there was nothing on which any permission of FEMA could be obtained or, not having been obtained and the provisions of FEMA having been violated could have been compounded. Delay, laches, acquiescence, suppression and bona fides Held that - The petition was filed by one Chatrabhuj Mathuradas, a gentleman who surfaced only at the time of affirmation of the petition - He claimed to be a director and shareholder of Ponds - He claimed to have a general power of attorney. This general power of attorney however shows that Mathuradas is merely a friend of Hunjan and Rana; that, between them, Hunjan and Rana hold 75% and 25% respectively, i.e., the entirety of the equity in Ponds - They are also the only two directors of the Respondent No.1. In an affidavit in rejoinder, it is admitted that Mathuradas is neither a shareholder nor a director - Hunjan filed an affidavit in rejoinder on 4th October 2012 - He dealt with the issue of delay - He said that 2012 was the first time since 2009, when he had a stroke, that he visited India to attend to this litigation. He then filed an affidavit in sur-sur-rejoinder on 30th October 2012 - In this he attempted to explain several discrepancies as typographical errors , including the description of Mathuradas as a director and shareholder of Ponds, but now admitting that between 2009 and 2012, he visited India several times - He claimed that the date of 2009 in his affidavit in rejoinder was a typographical error for 2011 - He admitted to having visited India more than once - He was here on five occasions in 2010 and also again in 2012 - this makes matters even worse on the question of delay and laches - If Hunjan was in India in 2010, and more than once, there is certainly no explanation for the delay in filing this petition - How this issue could have been seen in favour of Ponds is baffling - There is absolutely no basis for the Company Law Board s finding that there was delay in approaching it - Hunjan s affidavits shown him to be an Ananias in every respect; no credence whatever could be given to a single word. Indoor Management Held that - There was no discussion between the shareholders or directors about this item of business - the correspondence from Johnstone indicates that he, as a relatively late entrant, could not understand how the initial remittance of Copex of 4000 could have been shown as towards share subscription - this is the entire genesis of these two documents - that is the only purpose for which they were issued, i.e., to suit the respondents internal auditing and accounting purposes - Mr. Bharucha s argument glissades over all these factors, every one of which is of his clients own making - It is also not without significance that the first draft of these documents emanated from Hunjan, was sent to Balwani, who filled it in having been by then totally subjugated and bent to the financial and commercial will of Tansun, Hunjan and Rana, and sent it back to Johnstone for approval , with a copy of Hunjan - all of this is in the context of Hunjan s repeated statements that the share certificates were needed for internal purposes , without upsetting the apple cart - That is something that is never satisfactorily explained, and it lies at the core of the dispute. The order dated 14th January 2013 of the Company Law Board is entirely unsustainable - There was no agreement for purchase of shares - Certainly, there was no consideration for it - The Company Law Board had not the power or authority u/s 111 of the Act to hold as it did, effectively decreeing a suit for specific performance and also simultaneously ordering a rectification of the register - the two documents at Exhibits C and D are not share certificates and do not confer any rights on Ponds - at no point did Ponds make any payment for the shares it claims - the only basis for the claim is of Hunjan s and Rana s own contrivance in incorrectly, or perhaps for other, murkier reasons, showing the initial remittance of 4000 as being toward share subscription in Ponds own books of account - the relentless audit that followed forced Hunjan and Rana into an intractable position, one from which there was no escape except by badgering and pressuring Balwani into issuing a share certificate to assuage increasingly perturbed auditors - That is the only plausible explanation for Hunjan s repeated assurances that these documents were needed for internal use - Ponds entire case is bogus - It is an edifice built of straw on a foundation of half-truths, deceit and wholly improper financial duress - Decided in favour of appellant.

Summary

Issues Involved:
1. Power and authority of the Company Law Board under Section 111(4)(b) of the Companies Act, 1956.
2. Maintainability of the Company Petition under Section 111 of the Companies Act, 1956.
3. Existence of a concluded agreement for the issue of shares.
4. Consideration for the alleged issue of shares.
5. Compliance with FEMA/FERA regulations.
6. Delay, laches, acquiescence, and suppression of material facts.
7. Application of the doctrine of indoor management.

Detailed Analysis:

1. Power and Authority of the Company Law Board:
The primary issue was whether the Company Law Board (CLB) could direct the actual issue of shares under Section 111(4)(b) of the Companies Act, 1956. The court concluded that while the CLB can examine questions of title, it cannot adjudicate the right to shares, which must be done through civil proceedings. The CLB's power is limited to rectification of the register of members, not the issuance of shares.

2. Maintainability of the Company Petition:
The court found that the Company Petition filed by Ponds under Section 111 was not maintainable. The CLB cannot adjudicate complex questions of fact regarding entitlement to shares. The right to become a member must be established in independent proceedings, and a combined action for specific performance and rectification is not permissible.

3. Existence of a Concluded Agreement:
The court held that there was no concluded agreement between Ponds and Advansys for the issue of 75% of the equity share capital. The documents presented (Exhibits "C" and "D") were not share certificates and were issued under economic duress for internal purposes only. The court noted significant discrepancies and inconsistencies in Ponds' case, indicating no binding agreement.

4. Consideration for the Alleged Issue of Shares:
The court found that there was no valid consideration for the alleged issue of shares. The remittance of lb92,500 was towards invoices, not share subscription, as evidenced by the Foreign Inward Remittance Certificate (FIRC) and the reconciliation statement from Hunjan. The court dismissed the claim that the remittance was for share subscription.

5. Compliance with FEMA/FERA Regulations:
The court observed that the purported issue of shares violated FEMA and FERA regulations. Advansys, being governed by the Industries (Development & Regulation) Act, 1951, required prior approval for foreign investment, which was not obtained. The court noted that the automatic route for foreign investment was not available to Advansys, and the valuation of shares was not done as per the guidelines.

6. Delay, Laches, Acquiescence, and Suppression of Material Facts:
The court highlighted the unexplained delay of over five years (or nine years if considering the 2003 remittance) in filing the petition. Ponds failed to act with diligence and suppressed critical correspondence and the FIRC in its petition. The court found that Ponds approached the CLB with unclean hands and was disentitled to any equitable relief.

7. Doctrine of Indoor Management:
The court rejected the application of the doctrine of indoor management, which allows outsiders to presume that internal company requirements have been complied with. The court found that the documents relied upon by Ponds were incomplete and issued under duress for internal purposes, not as part of a formal share issuance process.

Conclusion:
The court allowed the appeal, setting aside the CLB's order and dismissing the Company Petition filed by Ponds. The court found no agreement for the purchase of shares, no valid consideration, and violations of FEMA/FERA regulations. The court also dismissed Ponds' Cross Objections, emphasizing that Ponds' case was built on deceit and improper financial duress.