2022 (6) TMI 391 - HC - Companies Law

Review application - error apparent on the face of record - investments in equity - non-production of share certificates - HELD THAT - Under FEMA investments in equity are permitted under the automatic route currently and the same avenue was also open when remittances were made by the first Review Applicant. The automatic route refers to general permission to make investments by way of FDI without the prior approval of the RBI subject to post-remittance compliances such as the issuance of FIRCs by the AD and the filing of Form FC-GPR to report the remittances to the RBI. The rationale for allowing such remittances under the automatic route is that the inflow of foreign exchange is bolstered and given the nature of equity outflow is generally limited to dividend payouts. By contrast borrowing by an Indian company from a non-resident is strongly discouraged because it would entail foreign exchange outflow in accordance with the terms of the credit facilities. Therefore except for specific and limited end-uses borrowing from non-residents which is referred to as external commercial borrowing (ECB) is not allowed without prior approval under a stringent regulatory regime. The documents on record provide strong evidence that the remittances were towards the issuance of equity. The contesting Respondents are unable to controvert the genuineness of these documents which were issued either by the Hospital or by the AD - These documents were disregarded both by the CLB and by this Court without assigning cogent reasons for the same. Besides these are material and indeed vital documents forming part of the record. Consequently the Review Applicants were non-suited at the threshold. These errors cannot be characterized as minor and are evident ex facie. Therefore it is not necessary to undertake a fishing expedition to ferret out these errors. The Review Applicants have made out a case of errors apparent on the face of the record to set aside the order sought to be reviewed. In the facts of this case the documents relied upon by the Review Applicants emanated either from the Hospital or the AD and are not denied by the Respondents. Even the execution of the SSA is admitted by all parties. Therefore it is difficult to fathom as to why a trial is required to adjudicate this dispute. While on this subject it is pertinent to notice that under sub-section (7) of Section 111 even title to shares and all questions relating to rectification may be decided. Besides the Review Applicants prayed for statutory relief under CA 1956 such as rectification and relief from oppression and mismanagement including surcharge of the defaulting directors which remedies cannot be granted by an arbitral tribunal. Therefore even assuming that only one or two Review Applicants out of four are entitled to seek such relief the petition should not have been rejected in this fashion. The key issue to be adjudicated as regards the eligibility of the Review Applicants would be whether the Review Applicants would be entitled to maintain the composite petition if shares had been allotted by the Hospital upon receipt of remittances. Such issue has not been adjudicated. The assertion by the Review Applicants that their shareholding would be in excess of 10% of the paid up share capital of the Hospital in such event has not been controverted by the Respondents. The primary forum for rectification as per Ammonia Supplies should not abdicate its role without due deliberation. For all these reasons the Review Applicants are entitled to succeed. This Review Application is allowed.

Summary

Issues Involved:
1. Maintainability of the composite petition under Sections 111(4), 397, and 398 of the Companies Act, 1956.
2. Compliance with the Share Subscription Agreement (SSA) and the implications of foreign direct investment (FDI) under the automatic route.
3. Errors in the previous judgments by the Company Law Board (CLB) and the High Court.
4. Scope of review jurisdiction under Order 47 Rule 1 CPC.

Detailed Analysis:

1. Maintainability of the Composite Petition:
The Review Applicants filed C.P.No.25 of 2011 under Sections 111(4), 397, and 398 of the Companies Act, 1956, alleging that the Hospital and its promoters failed to allot shares despite receiving remittances towards equity shares. The CLB rejected the petition on the grounds that the Review Applicants did not meet the eligibility requirements under Section 399 of the Companies Act, 1956, as they did not hold 10% or more of the paid-up share capital of the Hospital. The CLB also suggested that the Review Applicants have an alternative remedy through arbitration as per the SSA. The High Court upheld this decision, stating that the disputes involved complex questions that should be decided by a civil court or through arbitration.

2. Compliance with the SSA and FDI Regulations:
The Review Applicants invested Rs.2.5 crore in the Hospital, which was acknowledged by the Hospital in communications to the Reserve Bank of India (RBI) and through Foreign Inward Remittance Certificates (FIRCs). The Review Applicants argued that these documents conclusively indicate that the investment was towards equity shares. The CLB and the High Court failed to appreciate the significance of these documents, leading to the rejection of the petition. The Review Applicants contended that the Hospital and its promoters should not benefit from their default in issuing and allotting shares after receiving remittances under the automatic approval route as per the Foreign Exchange Management Act (FEMA).

3. Errors in the Previous Judgments:
The Review Applicants pointed out that the CLB and the High Court committed errors by not considering the implications of the communications to the RBI and the FIRCs. The High Court's conclusion that the investments should be treated only as investments and not otherwise was deemed patently erroneous. The Review Applicants argued that the Hospital's failure to allot shares should not be used to dismiss their petition. The High Court's findings that the Review Applicants did not fulfill their obligations under the SSA and that the petition involved complex questions were also challenged.

4. Scope of Review Jurisdiction:
The Review Applicants relied on several judgments to argue that the scope of review jurisdiction includes correcting errors apparent on the face of the record to prevent miscarriage of justice. They cited cases such as Board of Control for Cricket in India v. Netaji Cricket Club and others, S.Bagirathi Ammal v. Palani Roman Catholic Mission, and Kamlesh Verma v. Mayawati and others. The Hospital countered that review jurisdiction is limited and should only be exercised in specific circumstances, such as errors apparent on the face of the record or the discovery of new and important evidence.

Conclusion:
The High Court allowed the review application, setting aside the previous orders of the CLB and the High Court. The Court found that the errors in the previous judgments were apparent on the face of the record and that the Review Applicants had made a case for review. The Review Applicants were granted the liberty to re-present their petition under the equivalent provisions of the Companies Act, 2013, to the National Company Law Tribunal, Chennai, for adjudication on merits.