2015 (11) TMI 438 - HC - Companies Law

Oppression - dilution of the equity of Jamal from 50% as originally proposed to 28.33% which it was brought down to as a result of divestment in favour of Nilesh and Doshi - whether act was illegal and constituted oppression? - ouster of Jamal from the management is claimed to be another act of oppression - Held that - The first stage of reduction of Jamal s agreed shareholding, i.e. allotment of 100 instead of 250 out of 500 shares of the Company initially, is adequately explained. Ms. Sethna tried to show some corrections and interpolations in the register of members. The CLB noted in this behalf that not only in the Folio of Akkadian (the Company of Jamal through whom he held the Company s shares), even in other Folios there were corrections and alterations. Secondly, there were no supporting documents to show that Jamal had originally acquired 250 shares of the Company, but that by manipulation of records his shareholding was brought down to 100 shares. The CLB observed that when there was no proof of any consideration paid for even 100 shares by Jamal, merely on the basis of errors and alterations in the register of members, no grievance could be made about reduction of Jamal s shareholding from 250 to 100 allegedly by way of a manipulation. Besides, this aspect of the matter is hardly of any relevance, since, as rightly observed by the CLB, Rajan has neither taken any advantage of denying those 150 shares to Jamal nor any extra benefit to himself and in the end, at any rate, the agreed shareholding of 28.33% was actually allotted to Jamal. No error of law can be found in the analysis of the CLB or its conclusion in this behalf. Second stage of reduction of Jamal s shareholding, i.e. when Nilesh was inducted, is also adequately explained. As observed by the CLB, Jamal was a party to this arrangement. He actually signed a Supplementary Agreement for the purpose. Nilesh s commitment as against 28.33% shareholding to be allotted to him was to get the House of Tata s on board for development of Phase2 and 3. Tatas did after all enter into an agreement with the Company after Nilesh s induction. The CLB noted that Tata s association at that stage had greatly benefited the Company inasmuch as the Company could raise a loan from ICICI Bank for making the balance payment of ₹ 44.4 crores to Parke Davis. Tata s also took space in the existing building (Phase 1) for their sister concern, Sitel. The Tata s, noted the CLB, had their own reason for leaving the project. Merely because Tata s, having first associated themselves with the project postinduction of Nilesh (whose commitment was to get them on board), left the project later, it cannot be said that Nilesh s induction was vitiated for any reason or that it was not bona fide or for a genuine purpose. No fault can be found per se with 28.33% shareholding offered to Nilesh in a duly signed Supplementary Agreement between Rajan, Jamal and Nilesh. The CLB also found that at the relevant time, i.e., when Nilesh resigned from the Board in 2001, or when the board of the Company noted in its meeting of 18 September 2003, which was attended by Jamal, that Tata s had expressed their intention to exit from the project, or even when Tata s actually left in 2004, Jamal did not raise any issue about Nilesh. In the premises, the CLB did not find anything wrong about 28.33% shareholding meant for Nilesh. This part of the impugned order is clearly sustainable and gives rise to no question of law. The third stage of reduction was when Doshi was inducted. Again, his induction was accepted with open eyes by Jamal, though there was no written agreement with Doshi unlike in the case of Nilesh. There is certainly material on record to suggest that Doshi played a meaningful role, justifying his induction into the Company. That itself should be sufficient to sustain the CLB s conclusion in this behalf. But what is more important is Jamal s own admission contemporaneously made before the disputes arose between the parties, when, on 4 March 2005, in the wake Doshi s proposed exit from the Company, he (Jamal) categorically asserted that he had no complaint against Doshi, who, Jamal himself agreed, had played his role and assisted the project. Jamal even suggested that the parties should convince Doshi to stay on till the conclusion of the project. In the face of all this material, if the CLB concludes that Jamal was not justified in making any grievance about the association of Doshi after the disputes arose, surely it is a plausible conclusion and does not give rise to any question of law. According to Jamal, he agreed to reduce his shareholding from 50% to 28.33% only on the consideration that he would not be required to fund the project; the admitted fact was that he actually did not contribute any funds for the project besides his initial contribution of ₹ 2.45 crores; and Jamal had nowhere averred or even conveyed through Counsel during arguments that had he been aware that the shares meant for Nilesh and Doshi were to go to Rajan, he (Jamal) would have undertaken the obligations under which the shares were to be allotted. Secondly, there is nothing on record to show that Jamal had any objection to the allotments per se to Nilesh and Doshi. If that is so, the complaint, if any, as noted by the CLB, could only be made by Nilesh and Doshi, according to whom their respective obligations were complied with, if shares were not allotted to them despite such compliance. And finally, the percentage of shareholding, in the ultimate analysis, hardly had any bearing on the order that the CLB actually made. (This aspect will be dealt with later in this order.) There is, thus, no merit in Jamal s case concerning linkage of Rajan to the allottee entities. In the face of the Shareholders Agreement, the Supplementary Agreement and the Minutes of Meeting, the conclusion that there was no oppression of Jammal on account of reduction of his shareholding from 50%, as originally proposed, to 28.33%, as finally brought down to, is clearly sustainable and does not give rise to any question of law. Mismanagement - Jamal in regard to the transaction with Ashwamegh, where 18000 sq. ft. of constructed area was sold - Held that - The CLB, was, however, of the view that interest ought to have been recovered from Ashwamegh for delayed payment of consideration, but did not accept the Appellants case that the agreement with Ashwamegh should have been cancelled. The basis of upholding the transaction notwithstanding acceptance of the case of delayed payment of consideration was that the Board being a court of equity, could not ignore business realities and inquire into the correctness or otherwise of a decision other than for examining if the same was mala fide or resulted in enrichment of the decision makers at the cost of the Company. In the face of its observations that the property was not sold at an undervalue, that there was nothing to suggest either than Rajan and Ashwamegh were related parties or that the decision was against the interest of the Company or enriched Rajan, the CLB refused to order cancellation of the transaction. Besides, the CLB held that Ashwamegh was not a party to the petition and in its absence the agreement could not have been cancelled, in terms of Section 402(e) of the Act. For the same reasons, as in the case of Ashwamegh, the CLB did not find a case made out for cancellation of the Fine Plaza transaction under Section 402(e) of the Act. In Ecstacy, though the CLB found that the payment of ₹ 28.11 crores paid to Ecstacy was, in the absence of any particulars forthcoming, a diversion of funds, it noted that this amount had come back. What the CLB found amiss was the fact that it came back sans any interest. It accordingly ordered recovery of interest from the party and in default, restitution of the Company by Rajan to the extent of the amount of interest. In Stylus, the CLB found that the decisions were duly taken in board meetings of the Company, which were not objected to by Jamal. Though the CLB found some substance in Jamal s contentions regarding lack of full transparency in the Stylus matter, since the draft agreement was not placed before the board, it observed that merely for that reason, the agreement could not be cancelled unless it was found to be against the interests of the Company. The CLB did not find any substance in the alleged association of Stylus with Rajan and found the royalty received to be commensurate with the market rates. None of these conclusions can be faulted. No question of law can be said to arise in connection with these conclusions. On the allegations of rotation of funds, the CLB held that it could not examine day to day transactions; that in a private company engaged in construction work, it was not uncommon that when the company was in need of short term funds, the promoters would bring in money and then when funds are available with the company later, would take the same out; that what was to be examined was whether funds were provided when the Company was in need of them; that it was an admitted position that the project had progressed well, the Company had earned profit of over ₹ 14 crores as on 31.3.2007 and Rajan could manage to save about ₹ 11 crores payable towards penal interest. The CLB found that there was no instance brought to its notice by the Appellants where money was taken out of the Company without accounting for the same. The CLB found no siphoning of funds, but merely found fault with noncharging of interest to certain parties such as Ecstacy, Millennium and Parshaw and ordered recovery of interest. As for the remuneration paid to Rajan, the CLB did not find the same to be excessive or unreasonable. None of the conclusions of the CLB noted above concerning Jamal s case of mismanagement can be described as perverse. They are all supported by evidence on record; no irrelevant material is considered to arrive at the same; and they are all possible conclusions. No question of law arises therefrom for the consideration of this Court under Section 10F. Validity of the relief granted by the CLB - after acknowledging 28.33% share of the Appellants in the first Respondent Company (if not 50% as claimed by Jamal), the consideration for the Appellants exit from the Company is not the market value of 28.33% share, but 4.35% of the profits arising out of the value of the land, which, with addition of 50% to take care of the pendency of the petition for nearly three years, works out to 6.6%. On a closer scrutiny, however, it not only appears to be a legitimate relief, and therefore, not giving rise to any question of law, but also a reasonable and adequate relief in the facts of the case. There were various allegations of oppression and mismanagement including about alleged attempts on the part of the company to sell the land at an undervalue. In these facts, the land was directed to be sold under orders of the CLB and proceeds distributed between shareholders. These facts were clearly distinguishable from the facts of our case. The CLB found that the Company, here, was actively engaged in the business for which it was established, was making profits after being brought up single handedly by Rajan to the present level, and it would really be oppressive to Rajan if the project were now to be sold and proceeds distributed. That is perfectly reasonable. The reasons cited are cogent and acceptable. No error of law can possibly arise.

Summary

Issues Involved:
1. Dilution of shareholding and ouster from management.
2. Acts of mismanagement, including undervalued sales and fund diversion.
3. Appropriate relief and valuation for the exiting shareholder.

Detailed Analysis:

1. Dilution of Shareholding and Ouster from Management:
The Appellants contended that the original Shareholders' Agreement stipulated a 50:50 shareholding ratio, but Jamal's shareholding was reduced to 28.33% through misrepresentation and malafide actions by Rajan. The CLB found that Jamal actively participated in the share allotment and accepted 28.33% shares. It also noted that private agreements between shareholders could not be enforced through petitions under Sections 397 and 398 of the Act. The CLB concluded that Jamal had not provided evidence of acquiring 250 shares initially and that the reduction in shareholding was justified by the agreements and contributions made by other parties, including Nilesh and Doshi. The CLB also found that Jamal's removal as a director was oppressive and declared it null and void.

2. Acts of Mismanagement:
The Appellants alleged that Rajan sold and leased company properties below market rates and diverted funds to related parties. The CLB examined specific transactions (Ashwamegh, Fine Plaza, Ecstacy, Stylus) and found no substantial undervaluation or evidence of related-party transactions benefiting Rajan. The CLB noted that Jamal failed to provide comparative sales figures to prove undervaluation. It also found that the company had made significant profits and there was no evidence of fund siphoning, although it ordered the recovery of interest from certain transactions.

3. Appropriate Relief and Valuation for the Exiting Shareholder:
The CLB determined that parting of ways was the best solution due to the soured relationship between the parties. It concluded that Jamal should exit the company rather than Rajan, who had been actively managing the company. The CLB used a profit-sharing basis for valuation, considering Jamal's limited contribution to the initial purchase and no involvement in the development. The valuation date was set as the date of the petition, with a 50% markup to account for the delay in proceedings. The CLB assured Jamal a minimum compensation of Rs. 30 crores, which was deemed fair and equitable.

Conclusion:
The High Court upheld the CLB's conclusions on all three issues. It found no error of law in the CLB's analysis and determination of facts. The appeal was dismissed, affirming the CLB's order for Jamal's exit with a compensation based on the valuation of the land as of the date of the petition, with a 50% markup. The companion appeal challenging specific findings and the minimum compensation was also dismissed.