9911796707
TMI Blog1997 (10) TMI 326X X X X Extracts X X X X X X X X Extracts X X X X ..... otal equity capital were sold by the plaintiff to defendant No. 2 a Foreign Institutional Investor (FII) in October, 1993 and the said transfer was registered by the Company in December, 1993. Defendant No. 2 (through defendant No. 8 also an FII) thereafter sold 5,89,000 shares to defendant Nos. 6 and 7 (also FIIs) between March and November, 1996 and defendant No. 2 sold 1,19,000 shares to the plaintiff in June, 1997. Claiming a right of pre-emption, the plaintiff has filed the present suit for a decree against defendant No. 2 (FII) to execute transfer forms in respect of the suit shares ( i.e., 3,81,000 shares) at the price at which defendant Nos. 2 and 8 executed transfer forms in favour of defendant Nos. 6 and 7 and in the alternative the plaintiff has prayed for a decree of Rs. 5.25 crores by way of damages in lieu of specific performance against defendant No. 2. The plaintiff has taken out the present Notice of Motion for an interim injunction to restrain defendant No. 2 from alienating, encumbering, dealing with or creating any third party rights or selling 3,81,000 shares to any person and also restrain defendant No. 1 ( i.e., Gujarat Gas) from registering the transfer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wrote a letter dated 27-9-1993 (Page 165) to the GIIC stating that the plaintiff was desirous of disposing of upto 38,50,000 shares out of the total of 49,95,325 held by the plaintiff and, therefore, in view of the terms of the shareholders agreement, the plaintiff was offering the shares to the GIIC for the first purchase and that in the event of the GIIC declining to take up the shares, the plaintiff would offer the shares to HOEC/HDFC and its associates or to any other interested party at a negotiated price not lower than the price determined under the formula prescribed by the shareholders agreement. The plain- tiff also mentioned that in the event of shares being offered to HOEC and its associates, a fresh shareholders agreement would be drawn up be- tween the purchasers, the plaintiff and the GIIC. The GIIC did not immediately respond to the aforesaid request, and sometime in October, 1993 the plaintiff sold 5 lakhs shares to defendant No. 2 (Jardine Fleming India Pacific Trust, an FII) at the rate of Rs. 119.45. Defendant No. 2 entered into the said transaction through defendant No. 8 (Fledgeling Nominees International Ltd., another FII). The company (defendant No. 1) regi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rities (P.) Ltd. has its office, sent its letter dated 9-9-1994 (page 134) to the Company (Gujarat Gas - defendant No. 1) which reads as under : "To, Gujarat Gas Co. Ltd. 2-C Embassy Apartments, Opp. Vandana School, Dr. V. Sarabhai Road, Ambawadi, Ahmedabad-390 015. Dear Sir, We have received the enclosed letter reference No. GIIC/SEC/MD/ 3636, dated August 26, 1994 from Gujarat Industrial Investment Corporation Limited. We would like to inform you that as a representative of Fledgeling Nominees International Limited in India, we are writing on their behalf to say that we have not entered into any Nominee Agreement with Mafat Lal Industries Limited. Therefore, unless you revert with a clarification on the purpose of the enclosed letter, we do not intend to reply to the same. Thanking you, Yours faithfully, For Jardine Fleming India Ltd. Sd/- Dr. Rafiq Dossani." 8. On 17-10-1994 (page 155), the plaintiff sent a letter to the GIIC stating that the circumstances under which the plaintiff had sought to encash a part of their holding in Gujarat Gas in order to meet certain pressing obligations on the plaintiff s cash flow were explained by the plaintiff t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad sold 5 lakhs shares to defendant No. 2 and that there was a clear understanding that the plaintiff will have a right of pre-emption on those shares; the plaintiff was surprised to know that out of the said 5 lakhs shares, 1,90,000 shares were purportedly lodged for transfer by defendant No. 2 in favour of defendant No. 6. The plaintiff, therefore, protested that the purported transfer of the aforesaid shares was in breach of the undertaking given by Jardine Fleming India Pacific Trust through their representatives Khanna Securities (P.) Ltd. and in breach of the provisions of the Articles of Association. The plaintiff, thus, lodged their objection before the company (Gujarat Gas) against the transfer of shares in the name of defendant No. 6. The plaintiff also addressed a letter dated 26-11-1996 to Khanna Securities Ltd. referring to the letter dated 16-3-1994 and its contents and making a grievance about the breach of the agreement for the first right of refusal by transfer to shares by defendant No. 2 to defendant Nos. 6 and 7. Mr. Ted Pulling of Jardine Fleming Investment Management Ltd. sent his reply on 10-12- 1996 by Fax in the following terms : To: Ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve reply from defendant No. 2, the plaintiff filed the present suit on 4-8-1997 praying for the aforesaid reliefs (para 2 above) which are basically in the nature of relief for specific performance of the agreement referred to in the letter dated 16-3-1994. As stated in para 2 above, the plaintiff also filed the present notice of motion, inter alia, to restrain defendant No. 1 (Gujarat Gas Co. Ltd.) from registering the transfer of 3,81,000 shares and also to restrain defendant No. 2 from transferring or selling the said 3,81,000 shares to any person pending the hearing and final disposal of the suit. On 5-8-1997, the City Civil Court issued notice and granted ex parte injunction in terms of the aforesaid prayers. After hearing the parties, the City Civil Court rejected the Notice of Motion and vacated the said ex parte order on the following grounds: ( i )The Civil Court s jurisdiction is barred. The present civil suit would not lie in view of the judgment of the Supreme Court in the case of Canara Bank v. Nuclear Power Corpn. of India Ltd. 1995 (3) JT SC 42/ 4 SCL 42 . ( ii )The plaintiffs have failed to make out a prima facie case that the suit shares are not fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e through their sister concerns and in commercial transactions like this, it is but natural that the plaintiff would act on the basis of such a commitment given on behalf of Jardine Fleming group companies. A distinction between Jardine Fleming India Pacific Trust and Jardine Fleming India Securities (P.) Ltd. cannot be made a decisive factor at the time of considering a prima facie case in the suit for the purpose of equitable relief of injunction. ( ii ) The plaintiff has a right to have its pre-emption right enforced in the present suit filed before the Civil Court and such right is de hors provisions of the Act and therefore, the Company Law Board (CLB) established by the Act cannot have exclusive jurisdiction to decide such a dispute about the right of pre-emption. ( iii )Irrespective of the merits of the plaintiff s case on the basis of the right of pre-emption, the plaintiff was entitled to get an injunction to restrain defendant No. 1-Company-Gujarat Gas from registering the transfer of 3,81,000 shares purported to have been transferred by defendant Nos. 2 and 8 to defendant Nos. 6 and 7 on the following grounds: ( a )The transfer forms lodged by defendant Nos. 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lusive jurisdiction (except under the provisions of the Special Court Act, 1992). ( 2 )( a ) As far as the plaintiff s claim for the right of pre-emption is concerned, the same is vehemently denied. According to the plaintiff, the agreement for giving right of pre-emption alleged to have been executed by defendant No. 2 in favour of the plaintiff was at the time of purchase of 5 lakhs shares in October, 1993, but no contemporaneous document is pro- duced in support of the said allegation. The affidavit in reply on behalf of the defendants has categorically denied this allega- tion and it has been asserted on behalf of the defendants that no such agreement was entered into nor was any such promise or commitment given to the plaintiff. It is inconceivable that the plaintiff, which is a giant company incorporated under the Act, would, while transferring 5 lakhs shares worth more than Rs. 5 crores, rely upon any oral agreement or promise or commitment from defendant No. 2 when defendant No. 2 is also a trust and not a natural person. The plaintiff has not given the particulars of any person or individual who is alleged to have made any such promise at the time of purchase of shares ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of free transferability of shares, the alleged agreement for pre-emption cannot be enforced ? IVIf the findings on Issues II and III are in favour of the plaintiffs, whether the plaintiff has made out a case for any temporary injunction to restrain defendant Nos. 2 and 8 from transferring shares to any party ? Whether the balance of convenience is in favour of the plaintiffs on the one hand or defendant Nos. 2 and 8 on the other hand ? VWhether the Civil Court has jurisdiction to entertain the suit in respect of the prayers for permanent temporary injunction against defendant No. 1 regarding registration of transfer of shares ? VIWhether the plaintiff has made out a prima facie case on merits and a case for temporary injunction against registration of transfer of shares ? Issues I V - Jurisdiction of Civil Court: 16. It will be convenient to discuss both these issued regarding jurisdiction together as certain common legal propositions will have to be considered. 17. Mr. Vakil has submitted that the Trial Court has erred in holding that the Civil Court has no jurisdiction to entertain the present suit. In support of the said submission Mr. Vakil submitted th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e case of Killick Nixon Ltd. v. Bina Popatlal Kapadia [l983] 54 Comp. Cas. 432 wherein a Division Bench of the Bombay High Court comprising of Mr. Justice P.B. Sawant and Ms. Justice Sujata V. Manohar held that any member, aggrieved or not, had a right to apply to the Court for rectifica- tion order and the Court had power under the provisions of sections 154, 155 and 163(2) of the Act to order rectification even in interlocutory proceedings. 20. Mr. Vakil has further placed reliance on the decision of the Division Bench of Madras High Court in the case of Kalyani Sundaram ( supra ) wherein the Court held that where the plaintiff is claiming pre-emptive right to purchase shares and is challenging transfer in breach of such right of pre-emption, the tightness or wrongness of the transfer cannot be question within the scope of section 155. Since the plaintiff was merely attacking the transfer of the shares on the ground that the administrator had no authority to do so, particularly after having had the benefit of administration of the estate by him, the remedy under section 155 could not be invoked for relief. 21. As regards the decision of the Supreme Court in the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the Supreme Court in the case of Public Passenger Service Ltd. (supra) which has approved the settled law on the subject as already held by the Bombay High Court. 22. On the other hand, Mr. Shelat for the contesting respondents/ defendants has submitted that jurisdiction under section 155 has been held to be wide and comprehensive. This Court speaking through Mr. Justice D.A. Desai (as His Lordship then was) in the case of Gulabrai Kalidas Naik v. Laxmidas Lallubhai Patel [1978] 48 Comp. Cas. 438 had considered the previous decisions of the Bombay High Court and of the Supreme Court in the case of Public Passenger Services Ltd. ( supra ) and then held that the jurisdiction under section 155 is comprehensive en- abling the Court to decide all questions necessary or expedient to decide in connection with the application for rectification. 23. Mr. Shelat has then relied on the provisions of section 111(7), read with section 111A(7) and has submitted that the CLB has power to decide the title of the securities in question before it. Paragraph 31, which is strongly pressed into service by Mr. Shelat, reads as under : "31. Now, under section 111 of the Companies Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance of a suit relating to title to shares is impliedly barred by section 9 of the Code of Civil Procedure." (p. 732) 25. Before dealing with the rival contentions, it is necessary to refer to three decisions of the Supreme Court dealing with the question of ouster of jurisdiction of the Civil Court. In the case of Dhulabhai v. State of MP AIR 1969 SC 78, the Supreme Court, inter alia, laid down the following principle: "Where there is an express bar of the jurisdiction of the Court, an examination of the scheme of the particular Act to find the adequacy or the sufficiency of the remedies provided may be relevant but is not decisive to sustain the jurisdiction of the Civil Court. Where there is no express exclusion the examination of the remedies and the scheme of the particular Act to find out the intendment becomes necessary and the result of the inquiry may be decisive. In the latter case it is necessary to see if the statute creates a special right or a liability and provides for the determination of the right or liability and further lays down that all question about the said right and liability shall be determined by the Tribunals so constituted, and whether remed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (3) must be understood as referring not only to the Industrial Disputes Act but also to all sister enactment (like Industrial Employment (Standing Orders) Act), which do not provide a special forum of their own for enforcement of the rights and liabilities created by them. The Civil Court has no jurisdiction to entertain such suits. In other words, a dispute arising between the employer and the workman/ workmen under, or for the enforcement of the Industrial Employment Standing Orders, is an Industrial Dispute, if it satisfied the requirement of section 2( k ) and/or section 2A of the Industrial Disputes Act and must be adjudicated in the forums created by the Industrial Disputes Act alone. This would be so, even if the dispute raised or relief claimed is based partly upon certified standing orders and partly on general law of contract. In para 32, Their Lordships summarised the principles and principle No. 2 reads as under : "Where, however, the dispute involves recognition, observance or enforcement of any of the rights or obligation created by the Industrial Disputes Act, the only remedy is to approach the forms created by the said Act" [Emphasis supplied] 26. The t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ub-section (3) of section 155 gives discretion to the Court to decide any question which it is necessary or expedient to decide in connection with the application for rectification . This expression is wider in amplitude than the well-known expression questions which are ancillary or incidental to the main question . The jurisdiction conferred by section 155(3) is a comprehensive jurisdiction which enables the Court in an application under section 155 to examine all question, complex, intricate or otherwise, relating to the title to the shares, and further enlarges the jurisdiction of the Court set up under the Companies Act to decide all those questions which the Court consider necessary or expedient to decide in connection with the application for rectification. In other words, when an application for rectification of register of shareholders is made, it would be open to the Court while considering the main relief to decide all questions that may arise in such an application on rival contentions. To illustrate, if a petitioner asserts title to the shares and the respondent contends that the title was acquired by a forged document, forgery would be put in issue and it would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e as the jurisdiction of the CLB includes within its compass power to hold a full-fledged enquiry in respect of the title to shares and to decide any question which it considers necessary or expedient to decide in connection with the application for rectification. Sub-sections (5) and (7) of the section 111 which are also to be found by incorporation in section 111A are required to be reproduced in extenso : "(5) The Company Law Board, while dealing with an appeal preferred under sub-section (2) or an application made under sub-section (4) may, after hearing the parties, either dismiss the appeal or reject the application, or by order ( a )direct that the transfer or transmission shall be registered by the company and the company shall comply with such order within ten days of the receipt of the order; or ( b )direct rectification of the register and also direct the company to pay damages, if any, sustained by any party aggrieved. (6)****** (7) On any application under this section, the Company Law Board ( a )may decide any question relating to the title of any person who is a party to the application to have his name entered in, or omitted from, the register ; ( b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... period, to the defendants institutions. Hence, the question was about breach of fiduciary duties and not about non-compliance with the provisions of the Act. Hence, this decision does assist the plaintiff s case on the question of jurisdiction of the Civil Court to entertain the prayer based on the claim for pre-emption. 30. There is no dispute that the proposition of law laid down in the case of Killick Nixon Ltd. (supra) that even a person not aggrieved by an incorrect or a wrong entry in the register would be entitled to file the petition for rectification of the register of members and that such person need not be transferor or transferee because incidentally also his rights as a shareholder are likely to be affected. The provisions of section 155 for rectification of the register are now assimilated with the provisions of sections 111 and 111A. This decision does not carry the plaintiff s case any further, because in the above decision also, the Court was a Company Court hearing the matter under section 155. 31. In view of the above discussion and in view of the principle laid down in Rajasthan S.R.T. Corpn. case (supra), even if the dispute raised or relief clai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, Mr. Vakil is right in contending that in Canara Bank s case ( supra ), the Supreme Court was merely concerned with the question whether the CLB is a Court or not within the meaning of the Special Courts Act and, therefore, the Supreme Court examined the indicia of Court and judicial power of the State. It was in this context that the Supreme Court examined the question about jurisdiction of the CLB under the Act and observed that in regard to these matters, i.e., questions relating to title of any person to have his name entered upon the compa- ny s register and any question which it is necessary or expedient to decide, the CLB has exclusive jurisdiction but the observation "it (CLB) has exclusive jurisdiction" is required to be confined to exclusivity amongst all the forums created by or under the Act and the observation does not have the effect of ousting the jurisdiction of the Civil Court which it already had for deciding disputes for adjudication of rights under the common law. This conclusion is fortified by the recommendation of Sachar Committee itself which is quoted in para 14 in Canara Bank s case ( supra ) as under: "Under the existing law, there are two rem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the jurisdiction of the Civil Court is certainly barred insofar as the plaintiff has prayed for permanent and temporary injunction to restrain defendant No. 1 compa- ny from registering the transfer of shares from defendant Nos. 2 and 8 to defendant Nos. 6 and 7, but the jurisdiction of the Civil Court is not barred, insofar as the plaintiff has prayed for reliefs on the basis of the alleged right of pre-emption. Issue II - Existence or Otherwise of the Agreement for Pre-emption: 36. As far as the merits of the plaintiff s claim for pre-emption are concerned, the plaintiff has heavily relied on the letter dated 16-3-1994 of Khanna Securities Ltd. written on behalf of Jardine Fleming India Secu- rities (P.) Ltd., which is quoted in para 6 above. It is, however, required to be noted that even according to the plaintiff, the aforesaid letter does not constitute the suit agreement for pre-emption, but it is the record, or reaffirmation, of an pre-existing agreement which was entered into between the plaintiff and defendant No. 8 at the time of transfer of 5 lakhs shares in October, 1993. 37. The stand of the Jardine Fleming Group through Mr. Ted Pulling (letter dated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n law, the same needs to be vacated forthwith." 38. There is no contemporaneous record to substantiate the plaintiff s case about the aforesaid alleged agreement of October, 1993, but from the facts narrated in paras 5 to 8 of this judgment particularly the plaintiff company s letters dated 27-9-1993 and 17-10-1994 to the GIIC, it appears that the plaintiff company was in difficult financial circumstances and, therefore, it had approached the GIIC for permission to sell its shares. The approval was sought as far back as in September, 1993 but the GIIC, (a Government Corporation) took its own time to consult the Government and to take its decision which process took about 5 months time. In the meantime, the plaintiff was in a hurry to generate some funds and, therefore, it sold off 5 lakhs shares and generated almost Rs. 6 crores by selling the shares to defendant No. 2 in the open market at Rs. 119.45 when the share price quoted at the Bombay Stock Exchange was Rs. 117.50 approximately. In all probability, at that time the plaintiff had not obtained any agreement or commitment from defendant No. 2 regarding the right of pre-emption and defendant No. 2 being an FII playing in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 41. After referring to the aforesaid provisions and the various standard authorities of Company Law, the Supreme Court has, in the case of V.B. Rangaraj (supra) held as under : "Whether under the Companies Act or Transfer of Property Act, the shares are therefore, transferable like any other movable property. The only restriction on the transfer of the shares of a company is as laid down in its Articles, if any. A restriction which is not specified in the Articles is, therefore, not binding either on the company or on the shareholders. The vendee of the shares cannot be denied the registration of the shares purchased by him on a ground other than that stated in the Articles." 41A. In support of the aforesaid proposition of law, the Supreme Court relied on its decision in the case of Shanti Prasad Jain v. Kalinga Tubes Ltd. AIR 1965 SC 1535, certain English decisions and also authorities on Company Law like Palmer and Pennington. In Chapter 16 of the Gore-Brown on Companies (43rd edn.), it is stated that subject to certain limited restrictions imposed by law, a shareholder has prima facie the right to transfer his shares when and to whom he pleases. This freedom to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hough an agreement by or amongst shareholders cannot bind the company, it can certainly bind the shareholders. ( 3 )In the case of Shantiprasad Jain (supra), all the Supreme Court had laid down was that an agreement between two shareholders about issuance of shares by the company cannot bind the company unless such an agreement was incorporated into Articles of Association of the company. That case did not deal with restrictions imposed by a shareholder on himself. ( 4 )If the decision in the case of V.B. Rangaraj ( supra ) is held to have the effect of nullifying the restrictions imposed by a shareholder on himself, merely because they are not contained in the Articles of Association, it is likely to have a serious fall out. The question may arise in the following illustrative cases : ( i )The promoters of a private or a public limited company bor- rowing loans from banks and/or financial institutions have to pledge their shares with the lending institutions/banks with an agreement not to transfer the shares without prior written consent of the lending institutions/banks. Will the banks and financial institutions be reduced to a state of helplessness if such agreements ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccepted because in V.B. Rangaraj s case ( supra ) the Supreme Court was concerned with a similar restriction imposed by a shareholder on himself. It is clear from the facts of that case and it is also highlighted in the concluding paragraph which reads as under: "Hence, the private agreement which is relied upon by the plaintiffs whereunder there is a restriction on a living member to transfer his shareholding only to the branch of family to which he belongs in terms imposes two restrictions which are not stipulated in the Article. Firstly, it imposes a restriction on a living member to transfer the shares only to the existing members and secondly the transfer has to be only to a member belonging to the same branch of family. The agreement obviously, therefore, imposes additional restrictions on the member s right to transfer his shares which are contrary to the provisions of Art. 13. They are, therefore, not binding either on the shareholders or on the company. In view of this legal position, the finding recorded by the Courts below that the sale by the first defendant of his shares to defendants 4 to 6 invalid as it is in breach of the agreement, is erroneous in law." 45 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f first refusal cannot be enforced. In para 8 of the affidavit in reply, the following assertion is made. "8. I submit no specific performance ought to be granted in respect of an agreement for the sale of shares of a company where there is a regular market for the shares of that company. I say that the trading figures at the Bombay and the National Stock Exchanges reveal that from November, 1996 to July, 1997, there was large scale trading in the shares of the defendant No. 1. Consequently, the present case is not one where specific performance is the proper remedy. Assuming, whilst denying, that Defendant No. 2 has committed a breach of the purported agreement, I submit that the plaintiffs ought to be left to the remedy of damages at law." [Emphasis supplied] It is further submitted that the plaintiff is basically interested in money as is clear from its various letters and the plaintiff has also prayed for the alternative relief of damages. Damages would be adequate remedy in case the plaintiff ultimately succeeds and, therefore, also the Court should not consider the plaintiff s prayer for interim injunction. There is consider- ation force in the submission of behalf of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not affect the jurisdiction of the Civil Court to entertain such suit. (II)The plaintiff has raised a triable question about existence or other- wise of the agreement conferring upon the plaintiff the right of first refusal in case of sale of shares by defendant No. 2 to any other party; though this finding need not be treated as a finding that the plaintiff has made out a prima facie case about existence of the agreement. All that is held at this stage is that the issue about existence of the agreement is a triable issue and it can be decided after the evidence is led. (III)In view of the concept of free transferability of shares as embodied in sections 82 and 111A(2) of the Companies Act and expounded by the Supreme Court in the case of V.B. Rangaraj ( supra ) and followed in the case of Gujarat Bottling Co. Ltd ( supra ) the alleged agreement for pre-emption is not binding on any of the defendants. (IV)The plaintiff has not made out any case for interim injunction against transfer of shares by defendant Nos. 2 and 8 to defendant Nos. 6 and 7 or to any party, as ultimately even if the plaintiff succeeds in the suit, it will be entitled to get damages which would be ..... X X X X Extracts X X X X X X X X Extracts X X X X
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