2018 (4) TMI 549 - HC - Companies Law

Breach of MOU - transfer of shares of ATS Estate Pvt. Ltd. - bar on contracts - Held that - Arbitral Tribunal noted that petitioner no.1, in his crossexamination, had stated that the shares of ATS Estate Pvt. Ltd would have been transferred to the respondent whenever a buyer for the same was found. However, the MOU did not stipulate that transfer of shares of ATS Estate Pvt. Ltd. to the respondent would be contingent upon the investor(s) being located in advance. Clause 3 mentions that the petitioners would ensure on best effort basis that the respondent realizes with the net exit amount of ₹150 crores, the obligations to procure transfer of shares of ATS Estate Pvt. Ltd. to the petitioner is unqualified. Clause 4 of the MOU further provided that in the event the respondent is unable to realize the minimum amount of ₹150 crores as further enhanced, the petitioners would also ensure that additional shares of ATS Estate Pvt. Ltd. are transferred to the petitioners. Further, in terms of Clause 6 of the MOU, in the event the petitioners were unable to locate investors before the specified date, the respondent would be entitled to sell the shares of ATS Estate Pvt. Ltd. Thus, the MOU also provided for the eventuality, where despite best efforts, the petitioners were unable to ensure realization of the exit amount on or before 31.05.2008. In view of the above, this Court finds no infirmity with the Arbitral Tribunal s finding that the petitioners had breached the MOU. In terms of Section 297(1) of the Companies Act, 1956, a Director of a company is, inter alia, prohibited from entering into a contract with the company in which he is a director for sale, purchase or supply of any goods, materials or services except with the consent of the Board of Directors of the said company. In certain cases, prior approval of the Central Government is also required. It is, thus, apparent that there is no absolute bar on such contracts and it merely requires the consent of the Board of Directors of the company. Further, in terms of the proviso to Section 297(1) of the Companies Act, 1956, prior approval of the Central Government may also be required. MOU was between individuals and required the petitioners to procure the transfer of shares of ATS Estate Pvt. Ltd. by ATS Infrastructure Ltd. to the respondent. In the event, the respondent or the concerned companies were required to ensure any regulatory compliance, it is obvious that the petitioners were also required to ensure the same. Arbitral Tribunal also noted that ATS Infrastructure Ltd. had transferred the first tranche of 90,00,000 shares of ATS Estate Pvt. Ltd. and none of the parties had challenged the said transaction. Thus, the contention that the MOU is void or that the impugned award is unsustainable, is unmerited. Petition dismissed.

Summary

Issues Involved:
1. Challenge to the arbitral award under Section 34 of the Arbitration and Conciliation Act, 1996.
2. Interpretation of the Memorandum of Understanding (MOU) and the obligations of the petitioners.
3. Alleged violation of Section 297 of the Companies Act, 1956.
4. Determination of whether the MOU is void and the enforceability of the arbitral award.

Detailed Analysis:

1. Challenge to the Arbitral Award:
The petitioners filed a petition under Section 34 of the Arbitration and Conciliation Act, 1996, challenging the arbitral award dated 04.03.2017. The arbitral award directed the petitioners to pay a sum of ?110 crores with interest, procure ownership of certain properties, and pay additional amounts with interest to the respondent. The petitioners contended that the award was contrary to the terms of the MOU and violated Section 297 of the Companies Act, 1956.

2. Interpretation of the Memorandum of Understanding (MOU):
The MOU dated 03.03.2008 was central to the dispute. The petitioners argued that the MOU only required them to make their best efforts to provide an exit for the respondent from the company and did not guarantee the realization of ?150 crores. The Arbitral Tribunal found that the petitioners had breached their obligations under the MOU by failing to procure the transfer of 2.1 crore shares of ATS Estate Pvt. Ltd. and failing to find investors for the shares. The Tribunal concluded that the petitioners were in breach of the MOU, as they did not fulfill their obligation to ensure the respondent realized the exit amount.

3. Alleged Violation of Section 297 of the Companies Act, 1956:
The petitioners contended that the MOU was void as it violated Section 297 of the Companies Act, 1956, which requires the consent of the Board of Directors for certain contracts involving directors. The Arbitral Tribunal noted that the MOU was an agreement between individuals and not the companies. The Tribunal concluded that Section 297 did not apply as the MOU was not a contract with the company but an agreement among the individuals to transfer shares and exit the business. The Tribunal also observed that the first tranche of shares had been transferred without any challenge, indicating compliance with necessary approvals.

4. Determination of Whether the MOU is Void and the Enforceability of the Arbitral Award:
The Court found no infirmity in the Arbitral Tribunal's findings. It held that the petitioners' contention that their obligations were on a best-effort basis was unmerited, as the MOU contained specific obligations that the petitioners failed to fulfill. The Court also dismissed the argument that the MOU was void under Section 297 of the Companies Act, 1956, as the MOU was between individuals and did not involve the companies directly. The Court concluded that the arbitral award was valid and enforceable, dismissing the petition and all pending applications.

Conclusion:
The petition challenging the arbitral award was dismissed. The Court upheld the Arbitral Tribunal's findings that the petitioners breached the MOU and that the MOU was not void under Section 297 of the Companies Act, 1956. The arbitral award directing the petitioners to pay the specified amounts and fulfill other obligations was deemed valid and enforceable.