2019 (5) TMI 823 - AT - Companies Law

Creation of the encumbrance over the assets of the Respondent Company - Section 8 of the Arbitration and Conciliation Act, 1996 - Company Petition has been filed claiming right to be on the Board and also to restrain the Respondents from entering into transactions without express consent of the Investor s Nominee Director, violating Articles of Association - HELD THAT - When the NCLT had itself said that the disputes being raised were arbitral and the matter was before Hon ble Supreme Court and refrained passing further Orders, in our view, it was inappropriate for the NCLT to have modified the Order dated 16th August, 2017. The Impugned Order did not consider the case, which was put up by the Appellant Petitioner, and how in the face of Articles of Association as they existed, Respondents could be allowed to unilaterally proceed creating huge liabilities without a shred of protection to the cause of Appellant Petitioner who had brought in substantial amounts. We are aware that interest of Company is matter of priority, but parties in management cannot be heard taking adamant stand in the name of interest of Company and expect Orders which prima facie do not appear to be in line with its Articles of Association. The case of the Petitioner is not merely based on the Agreements, but it is also based on the Articles of Association which binds both sides. Prima facie, we find that the Petitioner has made out a good case in its favour based on the Articles of Association. Admittedly, now on the Board, there is no nominee of the Investor. We find that, looking to the prima facie case as appearing in favour of the Petitioner, if the Respondents want to block out Petitioner, hiding behind the Arbitration clause, in equity, they cannot claim discretionary relief to create such a huge liability of ₹ 1250 Lakhs, riding on the back of NCLT Order which, prima facie, is against the Articles of Association. The Impugned Order is quashed and set aside. Earlier Order dated 16.08.2017 passed by NCLT is restored - appeal allowed.

Issues Involved:
1. Modification of interim order by NCLT.
2. Rights and obligations under Shareholders’ Agreement and Articles of Association.
3. Allegations of oppression and mismanagement.
4. Creation of encumbrance/charge over company assets.
5. Arbitration and jurisdictional conflict.

Detailed Analysis:

1. Modification of Interim Order by NCLT:
The Appellant, Metmin Investments Holdings Limited, challenged the NCLT's order dated 6th September 2018, which allowed Rinac India Limited to modify an earlier order dated 16th August 2017. The original order had prohibited the creation of encumbrance over the company’s assets. The NCLT modified this order to permit the company to create a charge to raise loans for corporate office construction and other pressing needs.

2. Rights and Obligations under Shareholders’ Agreement and Articles of Association:
The Appellant argued that the Shareholders’ Agreement (SHA) and Articles of Association mandated the Respondents to provide an exit by a certain date and required the presence and consent of the Appellant’s nominee director for significant decisions, including creating encumbrances. The Respondents failed to provide the agreed exit and diluted the internal rate of return. The Appellant also highlighted that the Articles of Association required the consent of the investor’s nominee director for creating any significant liabilities.

3. Allegations of Oppression and Mismanagement:
The Appellant filed a company petition alleging oppression and mismanagement, claiming that the Respondents were violating the Articles of Association by not appointing a nominee director and creating encumbrances without consent. The Appellant sought urgent relief to prevent further harm and requested the appointment of its nominee director on the board.

4. Creation of Encumbrance/Charge over Company Assets:
The Respondents sought to modify the interim order to create a charge over the company’s assets to raise funds for construction and other needs. The Appellant opposed this, arguing that it violated the Articles of Association and the earlier interim order. The Appellant also filed a contempt application, alleging that the Respondents had already created an additional charge in violation of the interim order.

5. Arbitration and Jurisdictional Conflict:
The Respondents filed an application under Section 8 of the Arbitration Act, claiming that the disputes were arbitrable and pending before the Supreme Court. The NCLT initially refrained from deciding the matter, citing the pending arbitration petition. However, it later entertained and granted the modification request, which the Appellant argued was inconsistent and inappropriate.

Judgment Summary:
The Tribunal found that the NCLT had erred in modifying the interim order while the arbitration petition was pending before the Supreme Court. The Articles of Association clearly required the consent of the investor’s nominee director for creating significant liabilities. The NCLT's modification allowed the creation of substantial financial liabilities without such consent, violating the Articles of Association.

The Tribunal emphasized that the Appellant had made a prima facie case based on the Articles of Association, which protected its interests. The NCLT's order did not adequately consider the Appellant’s case or the provisions of the Articles of Association. The Tribunal noted that the initial interim order should not have been disturbed as it provided necessary protection to the Appellant.

The Tribunal concluded that the NCLT's order was not legally sustainable and set it aside, restoring the earlier interim order dated 16th August 2017. The Tribunal’s observations were not to influence the final decision on the merits of the company petition. Each party was to bear its own costs of the appeal.

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