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TMI Blog2013 (9) TMI 283X X X X Extracts X X X X X X X X Extracts X X X X ..... tion was paid, it was for them to sue the KSK group for the unpaid consideration, before a civil court - If at all petitioners were entitled to claim 24 per cent. of the 10,000 shares (2,400 shares), they had to get it established by availing appropriate remedies before a civil court because complicated question of facts were involved in the case - Then it automatically follows that the Kanunga group (petitioners Nos. 1, 2 and 3) had no stakes in the first respondent-company on the date of filing of this petition. They had failed to prove that their names were removed from the register of members of the company without sufficient cause. Accordingly the point is found against the petitioners. Restoration of Directorship - Whether petitioner was entitled to get his directorship restored as per the memorandum of understanding - The terms of the memorandum of understanding were not made part of the articles of association, and directorial complaints were not grounds to invoke powers under sections 397 and 398 of the Act There was no reason to interfere with the removal of the first petitioner as a director. Liability to Transfer Shares - Whether respondents Nos. 1 and 8 are lia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y selling their shareholding and relinquishing their directorship in respondent No. 1 - the petitioners did not care to initiate any proceedings before the Company Law Board - There was no explanation for the long delay of more than two years in filing this petition - The petitioners were guilty of unexplained delay, laches, etc. thus no orders could be passed on ground of equity also. Jurisdiction of CLB Bar of Limitation - Whether the Company Law Board has jurisdiction to enforce the terms of the memorandum of understanding - Whether the petition was barred by the principles of limitation, acquiescence, laches etc. - Held that:- Breach of contract by a majority shareholder does not amount to oppression of minority shareholders or mismanagement or that the contractual relationship between two individuals does not fall within the purview of sections 397 and 398 - Even if it was to be held that the petitioners still hold 2,400 shares in the company it was not established that the affairs of the company were being conducted in a manner prejudicial to public interest or in a manner oppressive to any members and prejudicial to the interest of the company - It was also not pleade ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... VSLP. 3. It all started on October 11, 1999, when Anitha Impex Ltd. (petitioner No. 4), a UK based company (incorporated on October 5, 1993, in London) entered into an agreement with the Rajasthan State Electricity Board to establish and maintain a generating station with 150 MW capacity in Sirohi or Jodhpur District in the State of Rajasthan, after incorporating a company in India under the Companies Act, 1956. The power generated was agreed to be purchased by the Rajasthan State Electricity Board. The copy of the agreement is available as annexure P14 (pages Nos. 153-180 of the petition). As per the above agreement Anita Impex Ltd. (petitioner No. 4) was given approval by the Government of Rajasthan (GoR) to set up a 100 to 150 MW captive power plant which resulted in the execution of annexure P17 the memorandum of understanding, signed by respondent No. 1 with the Rajasthan State Mineral Corporation for supply and sale of lignite from Raneri Lignite deposits Bikaner District. Pursuant to the above respondent No. 1 was incorporated on October 10, 2001, by petitioners Nos. 1 and 2 by subscribing 5,000 shares each. The authorised share capital as per the memorandum of associati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the paid-up and subscribed capital even on April 3, 2002, is ₹ 1,00,000 of ₹ 10 each. 5. The fulcrum of the case is a memorandum of understanding dated April 3, 2002, entered into between respondents Nos. 1 and 8 (annexure P19). The main reliefs claimed in the company petition are solely based on the above memorandum of understanding. The petitioners claim that they had entered into the memorandum of understanding on April 3, 2002, with KSK Energy (respondent No. 8), whereby they agreed to transfer 76 per cent. of their shareholding in respondent No. 1 company to KSK Energy (respondent No. 8) who had in turn, agreed to give them 40 lakhs shares as consideration in respondent No. 1, besides retaining petitioner No. 1 as a permanent director. The petitioners are seeking to enforce this clause in the memorandum of understanding. The respondents say, in so far as performance of the memorandum of understanding is being sought, it is a relief by nature of specific performance or a suit for payment of consideration which the Company Law Board is having no jurisdiction. The respondents would admit the clause referred to above, but they say that the agreement was to give ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It is the case of the petitioners that respondents Nos. 2, 3 and 4 had illegally transferred the balance 24 per cent. shares held by them and removed petitioner No. 1 from the post of director, increased the authorised capital and paid-up capital, and allotted shares to others. The petitioners allegedly came to know about this fact during December, 2006 through an advertisement related to the initial public offer proposed by KSK Energy (respondent No. 8), in which the petitioners are not shown as shareholders of respondent No. 1. But the respondents say that the petitioners have voluntarily transferred their entire shareholding, and they were fully aware of the subsequent developments. By letters dated December 8, 2006 and December 21, 2006, the petitioners sought clarifications from the respondents. The petitioner wrote another letter to respondent No. 8 on June 18, 2008, asking them to immediately settle the issues and allot 40 lakhs equity shares as per the memorandum of understanding dated April 3, 2002 (annexure P24). By letter dated June 20, 2008, a similar complaint was sent to the SEBI, Bombay Stock Exchange, National Stock Exchange, etc., seeking, appropriate reliefs in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of electricity. The petitioners have not invested a single rupee. There is no equity in favour of the petitioners. The petitioners have kept quiet for over 8 years before filing the petition even though they had knowledge of the events complained of in the company petition. The conduct of the petitioners would show that they are attempting to blackmail the respondents. The petitioners are guilty of delay and laches and have come with unclean hands, respondents Nos. 1, 2 and 3 say. 9. The fourth respondent is an associate and is involved in the affairs of the KSK group and currently the whole-time director and president (corporate affairs) of KSK Energy (respondent No. 8). He adopts the counter filed by respondents Nos. 2 and 3. He says that he was fully aware of the set back suffered and the financial commitments made by respondent No. 1 in the project referred to in the memorandum of understanding, till it was abandoned, following which the company set up a new 135 MW power project and the associated Gruha Lignite Block in Rajasthan. He would confirm that the entire shares held by petitioners Nos. 1 to 4 in respondent No. 1 company have been legally transferred to responden ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 and 3. He is a technically qualified professional associated with the evolution and development of energy sector in the State of Rajasthan. Petitioners Nos. 1 and 3 and the KSK group (respondents Nos. 2 and 3) are known to him. On realising that petitioners Nos. 1 and 3 had necessary permission to set up the power plant, respondent No. 6 introduced the KSK group to the petitioners. In the memorandum of understanding between the two groups he is a witness. He is aware that the entire funds for the implementation of the project were brought in by the KSK group. He is also aware that the project became a non-starter. He says there were disputes and differences between the two groups, regarding the claim of the KSK group over the expenses incurred by them and failure of the petitioners to render full account in regard to the money received by them from respondent No. 1 company. Thereupon, at the request of petitioners Nos. 1 and 3 and respondents Nos. 2 and 3, he mediated in the matter following which, the KSK group decided to explore the possibility of setting up another project to the exclusion of the petitioners to recover the loss sustained in the abandoned project. Since the new ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spondent No. 1 company after paying valid and bona fide consideration and purchased 14,44,445 class-A equity shares of ₹ 10 each and 27,85,555 class-A cumulative preferential shares of ₹ 10 each and necessary share certificates have been received in compliance with the Companies Act. Respondent No. 9 is not aware of the involvement of the petitioners in respondent No. 1 company. Respondent No. 9 is not a party to the memorandum of understanding dated April 3, 2002. The entire capital contribution of ₹ 173.50 crores required for the 135 MW power project has been brought in by all the respondents. The issues raised by the petitioners do not constitute oppression of the minority shareholders or mismanagement of respondent No. 1 company. If the reliefs sought for in the company petition are to be granted it will affect the operations of the company, the power project and ultimately the public interest. 15. Respondent No. 10 adopts the counter of respondents Nos. 1, 2 and 3. It is a bona fide company which has invested in the shares of respondent No.1 company after carrying out a due diligence. The entire capital contribution required for the power project has been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecords of respondent No. 1 and therefore they cannot say that the petition is not maintainable. It is argued that respondent No. 10 being only a shareholder of respondent No. 1 it is surprising as to how it is aware of the facts and figures of respondent No. 1 and this only shows the collusion of respondent No. 10 with respondents Nos. 1, 2 and 3. It is argued that the respondents have allotted shares to respondents Nos. 7, 8 and 10 illegally and without the knowledge of and intimation to the petitioners and without holding board meeting, following the prescribed procedures. It is specifically denied that the new 135 MW project has obtained its approval. The respondents are misrepresenting facts as the project which is being developed by the respondents is the same for which licence was obtained by petitioner No. 4 and it is only the modus operandi that has been changed in view of the commencement of the new Electricity Act, 2003. It is also contended that the respondents have allotted shares to respondents Nos. 17 and 18 illegally without holding any meeting of the board of directors and intimation to the petitioners. It is argued that the petitioners are holding 24 per cent. of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure Code, where issues both of law and of fact arise in the same suit, and the court is of opinion that the case or any part thereof may be disposed of on the issues of law only, it shall try those issues first, and for that purpose may, if it thinks fit, postpone the settlement of the issues of fact until after the issues of law have been determined. The jurisdiction to try issues of law apart from the issues of fact may be exercised only where in the opinion of the court the whole suit may be disposed of on the issues of law alone, but the Code confers no jurisdiction upon the court to try a suit on mixed issues of law and fact as preliminary issues. Normally all the issues in a suit should be tried by the court : not to do so, especially when the decision on issues even of law depends upon the decision of issues of fact, would result in a lopsided trial of the suit. Though there has been a slight amendment in the language of Order 14, rule 2 of the Civil Procedure Code, by the Amending Act, 1976, the principle enunciated in the above quoted decision still holds good and there can be no departure from the principle that the Code confers no jurisdiction upon the court to try a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that is sought to be achieved by the exercise of such power under sections 397 and 398, it was explained that clauses (a) to (g) of section 402 indicate the widest amplitude of the court s power . . . An examination of the aforesaid sections clearly brings out two aspects, first, the very wide nature of the power conferred on the court, and, secondly, the object that is sought to be achieved by the exercise of such power with the result that the only limitation that could be impliedly read on the exercise of the power would be that nexus must exist between the order that may be passed thereunder and the object sought to be achieved by these sections and beyond this limitation which arises by necessary implication it is difficult to read any other restriction or limitation on the exercise of the court s power. Radhabari Tea Co. (P.) Ltd. v. Mridul Kumar Bhattacharjee [2009] GH 100 ; [2010] 153 Comp Cas 579 (Gauhati) (page 630 of 153 Comp Cas) : The question, now, is as to whether the subject-matters of sections 397 and 398 fall outside the purview of the court of ordinary civil jurisdiction. In other words, the question is this : when the facts of a given case fall within the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . It was not on account of any act on the part of the company that the shares transferred to the joint venture company were not registered in the name of the C group. There was, therefore, no occasion for the Company Law Board to make any order either under section 397 or 402 of the Act. Chatterjee Petrochem (Mauritius) Co. v. Haldia Petrochemicals Ltd. [2008] 143 Comp Cas 726 (CLB). Incable Net (Andhra) Ltd. v. Apaksh Broadband Ltd. [2008] 142 Comp Cas 860 (CLB). M. Thimme Gowda v. SPR Sugars (P.) Ltd. [2008] 142 Comp Cas 152 (CLB). Satish Kumar Bharti v. Surya Estates (P.) Ltd. [2007] 138 Comp Cas 694 (CLB). Multimedia Frontiers Ltd. v. Software Frontiers Ltd. [2006] 134 Comp Cas 387 (CLB). R. Balakrishnan v. Vijay Dairy and Farm Products (P.) Ltd. [2005] 125 Comp Cas 661 (CLB). AES OPGC Holding (Mauritius) v. Orissa Power Generation Corporation Ltd. [2005] 125 Comp Cas 299 (CLB). Allianz Securities Ltd. v. Regal Industries Ltd. [2000] 25 SCL 349 ; [2002] 110 Comp Cas 764 (CLB). Vikas Jalan v. Hyderabad Industries Ltd. [1997] 88 Comp Cas 551 (CLB). Palghat Exports (P.) Ltd. v. T.V. Chandran [1994] 79 Comp Cas 213 (Ker.). K. Kalyanaram v. V.K. Kalyan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itioner No. 2) shall resign from the board and the other promoter (petitioner No. 1) will be appointed as a permanent director, that KSK Energy (respondent No. 8) has agreed that 40 lakhs shares of ₹ 10 each will be issued to the promoter group before the commencement of the project. The draft memorandum of understanding was approved in this board meeting and the 40 lakhs shares was resolved to be taken in the name of petitioner No. 3 or his nominee. On the same day a memorandum of understanding (annexure P19) was entered into between KSK Energy (respondent No. 8), petitioner No. 3 and respondent No. 8 and the relevant terms are incorporated hereunder : This memorandum of understanding is made and entered into on this April 3, 2002, at Jodhpur, Rajasthan. by and between KSK Energy Ventures P. Ltd. (KSK) hereinafter referred to as codeveloper , unless repugnant to the context thereof a company incorporated under Companies Act, 1956 (Act 1 of 1956) having its registered office at 1st Floor, SDF Serene Chambers, Road No. 7, Banjara Hills, Hyderabad-500 034, including its successors and assigns on the first part represented by its director, Mr. S. Kishore. and Mr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 003, hereinafter referred to as MPPL unless repugnant to the context thereof as required under the AT and SP. Copies of the memorandum and articles of association and certificate of incorporation of MPPL are enclosed hereto as annexure I. 1.1.2 The developer hereby represents that he has the absolute power and authority to deal on behalf of MPPL the developer further undertakes that any demand or dispute or rights claimed by any other party shall not impair MPPL and the co-developer and that any costs relating to such disputes shall be borne only by the developer. 1.2 The developer represents that 76 per cent. of the shares of MPPL shall be transferred to the co-developer within three (3) days from the date hereof. 1.3 The co-developer undertakes that all additional requirements of equity and debt will be either brought in or arranged in a manner deem fit. For monies brought in the form of equity shares shall be allotted to such entities/persons as directed by the co-developer. 1.4 The developer represents that MPPL has entered into AT and SP with RRVPNL and the Discoms on March 13, 2002. A copy of this agreement has been enclosed as annexure 2. 2. The board repres ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entered into between respondent No. 1 company and Rajasthan State Mineral Development Corporation ( RSMDC ) as per which RSMDC agreed to supply and send lignite to the project undertaken by respondent No. 1 company. The agreement contemplated two more separate agreements, i.e., fuel supply agreement after obtaining the requisite statutory clearances such as approval of mining licence from the Ministry of Coal, Government of India, environment clearance from the Ministry of Environment and Forests, and acquire the required land for mining of lignite for phase-I of the project, etc., and deadlines were fixed for signing the fuel supply agreement. The agreement is signed by petitioner Nos. 1 and 3. The petitioners vide annexure P22 letter dated April 15, 2002, nominated petitioner No. 1 to be the permanent director of respondent No. 1 company and authorised him to receive consideration under the memorandum of understanding dated April 3, 2002, i.e., 40 lakhs equity shares of respondent No. 1 company. 26. On August 16, 2002, M/s. Rajarathna Metal Industries Ltd., reportedly invested ₹ 1 crore as share application money into the company, as part of the memorandum of understandi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 2003, came into force on June 10, 2003, consequent to which the provisions relating to grant of licence or exemption from the requirement of the licence contained in the 1999 Act have ceased to be operative. 32. During the period between July, 2003 and September, 2003, the Company Law Board allowed the application filed by the company to shift its registered office from the State of Rajasthan (Jodhpur) to the State of Andhra Pradesh (Hyderabad) (annexure R6, Volume A1). The second annual general meeting of the company was convened on September 13, 2003 and the annual accounts for the year ended March 31, 2003, were adopted by the shareholders (annexure R7, Volume A1). On October 8, 2003, respondent No. 3 sent a letter on behalf of the company to petitioner No. 1 seeking to convene the board meeting and discuss about the various legal options in the light of the communications between the Government of Rajasthan and the erstwhile RSEB (annexure R11, Volume-A1) (receipt of this letter is disputed). A reminder was also sent on November 4, 2003, by fax (annexure R12, Volume A1). 33. On March 20, 2004, RSMDC terminated the memorandum of understanding dated April 8, 2002, with th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the fourth annual general meeting (annexure R15). On July 1, 2005, Government of Rajasthan gave its in-principle approval for allocation of Gruha (E) Lignite Mine to the company. On February 24, 2006, a public hearing on the planned environmental clearance for the lignite mine was conducted. (The respondents say the petitioner was aware of this hearing). 37. On June 15, 2006, 2,50,000 equity shares of M/s. Anita Impex (petitioner No. 4) was transferred to K. Bapi Raju (respondent No. 4) as approved by the board subject to affixing the deficient share transfer stamps (annexure R25, Volume D). The fifth annual general meeting was called on July 28, 2006 (respondents Nos. 2 and 3 say by this time they had caused induction of over 26 crores into the company whereas the petitioners had not invested anything other than the subscription amount of ₹ 1 lakh in 2001). On July 28, 2006, the fifth annual general meeting was held and the annual accounts for the financial year ended March 31, 2006, were adopted by the shareholders (annexure R16, Volume A1). On August 21, 2006, public hearing was conducted (annexure R17, Volume A1) with respect to the power project referred to above. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent with the National Security Depository Ltd., for dematerialisation of shares. (The respondents say that movement of original documents like transfer deeds, share certificates for the purpose of dematerialisation was necessitated in connection with the above, and while so the original documents got misplaced, but after verification by both M/s. Khaitan and Co., and NSDL. The respondents are relying on the above circumstantial evidence to support their case). In the extraordinary general meeting convened on March 7, 2007, the authorised capital was increased from ₹ 97 crores to ₹ 163.5 crores. In between the name of the company was changed to M/s. B. S. Lignite Power P. Ltd., as approved by the board on April 2, 2007. On April and June 2007, the company executed share subscription agreement with several companies. Towards the end of 2007, KSK Energy (respondent No. 8) began taking steps to make an initial public offer in the Indian market and it took necessary steps in connection with it. The Draft Red Herring Prospectus (DRHP) contains all the particulars about respondent No. 8 company as well as respondent No. 1 company. The DRHP was made public by the SEBI in Februa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eneral meeting held on September 18, 2002, in which petitioner No. 1 participated (annexure R6, page 92, Volume-1). It is very important to note that, the registered office was originally in the residence of petitioners Nos. 1 to 3. As rightly contended by the respondents all the communications with regard to the change of registered office was delivered at Jodhpur at the address of petitioners Nos.1, 2 and 3. It is pointed out by the respondents that the order of the Company Law Board in allowing the shifting of the registered office was also served on the residential address of the first petitioner, which is the original address of the registered office (annexure R6, pages 92 to 93, Volume-A1). Moreover, the shifting was effected at an undisputed period of time and supported with minutes showing the approval of the board and shareholders. So it can very well be presumed that the registered office was shifted with the knowledge and consent of the petitioners. Shifting of the registered office and handing over the statutory records of the company is practically admitted by petitioner No. 1 in his letter dated December 8, 2006. The petitioners cannot plead ignorance of the documents ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt to note that there is no reference in this resolution to the 100 shares issued to petitioner No. 3 on March 8, 2002 and the 2,50,000 shares issued to Anita Impex (petitioner No. 4) on October 10, 2001 and another 100 shares to Pandya on March 8, 2002. Curiously, Pandya is not made a party to the company petition. It is relevant to note that the memorandum of understanding was executed on the very same date, i.e., after annexure P11 board meeting. So it is most probable that the understanding at the time of the memorandum of understanding was that the paid-up capital of respondent No. 1 company is ₹ 1,00,000. Based on the above resolution, I have no-difficulty to assume that petitioners Nos. 1, 2 and 3 had represented to the KSK group as if petitioners Nos. 1 and 2 were solely holding 100 per cent. shares in the paid-up capital (₹ 1,00,000) of the company. No mention is also made about petitioners Nos. 3 and 4 in the memorandum of understanding. According to the respondents, they joined the power plant project through respondent No. 6 (resident of Jodhpur) who was a common friend of both groups (hereafter to be referred to as Kanunga group (petitioners) and the KSK gr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . As a foreign company, under the Foreign Exchange Laws, the investment has to come into the company in convertible foreign exchange by normal banking channels. This has not been established by petitioner No. 4 despite being specifically called for in the form of interrogatories. After the arguments were over, the petitioner filed a document showing payment of 25 lakhs by petitioner No. 4 to the Rajasthan State Electricity Board. This payment was shown to have made in 1997 much before the incorporation of the company. The petitioner did not state that the allotment was towards it. In fact, such a claim would be acceptance of the illegality in the allotment of 2,50,000 shares to petitioner No. 4. The respondents have filed the balance-sheet of the fourth petitioner as annexure R1, page 61, Volume A1. At page 64, the entry relating to investment is shown under the heading fixed assets. The total amount invested is stated at 100 pounds, the details of which are shown in page 67, paragraph 2.1. The investment is in a company known as Anita Impex (Alcester) Ltd. Thus, the alleged investment in the shares of VSLP is not shown in the balance-sheet of petitioner No. 4. The respondent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 company. The admission made by petitioners Nos. 1 and 2 is further corroborated by annexure P23 which is a letter dated December 8, 2006, found at page 228 of Volume 1A. This is a letter addressed by petitioner No. 1 to respondent No. 1 company. In the first paragraph of this letter, the following averments are made : undersigned and his wife Sucheta Kanunga were the promoter and director of this company and each of us had subscribed 5,000 equity shares of ₹ 10 each as signatories to the memorandum and articles of association of the company . Therefore even as late as December 8, 2006, there is a clear admission that petitioners Nos. 3 and 4 did not hold any shares in respondent No. 1 company because the total paid-up capital has been stated to be 10,000 shares as per the letter dated December 8, 2006. Therefore, no order can be granted in favour of petitioner No. 4 as it would amount to giving premium to an illegality. Reliance in this regard in placed on the judgment in Transatlantic Life Assurance Co. Ltd., In re [1979] 3 All ER 352 (Ch. D). Any allotment of shares in violation of the Exchange Control Act, 1947, is void ab initio and does not confer any rights on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the allotment of the shares to petitioner No. 4 was signed by respondent No. 3 not by petitioner No. 1 as wrongly mentioned by counsel appearing for respondent (refer page 91 of the reply). 49. I have already held that the alleged shares held by petitioners Nos. 3 and 4 were not in contemplation under the memorandum of understanding, nor there is a mention of it in the annexure P11, board resolution that immediately preceded the memorandum of understanding. Petitioner No. 4 is also not a party to the memorandum of understanding. There is also no mention in annexure P19, the memorandum of understanding that the third petitioner is signing the memorandum of understanding also on behalf of Anitha Impex. Evidently, the memorandum of understanding is executed between KSK Energy Ventures (respondent No. 8) and the third petitioner in his individual capacity as a developer of the project. On the date of the memorandum of understanding, petitioners Nos. 1 and 2 held 100 per cent. equity share capital of the company, out of which 76 per cent. had been admittedly transferred to the KSK group. Even if the petitioners case that they are entitled to the balance 24 per cent. shareholding is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In the above circumstances I am inclined to accept the version of the KSK group, that they were compelled to acknowledge and own the allotments to petitioners Nos. 3 and 4 in view of the substantial investment made by them in the company soon after the signing of the memorandum of understanding and before the first annual general meeting. According to the KSK group by June 14, 2006, respondents Nos. 2 and 3 had caused investment of over ₹ 26 crores into the company. Since the proposed project suffered setbacks, the respondents had to refund the share application money brought in by Aravind Kumar D. Sanghvi (annexure R24 and Volume C). It is at this juncture that Anitha Impex offered to transfer 2,50,000 equity shares to respondent No. 4 (Sri K. Bapi Raju, a close associate of the KSK group) and the same was approved by the board (annexure R25, Volume D). Respondent No. 4 in turn transferred the shares to the KSK group on August 31, 2006. The consideration according to the KSK group had been paid in cash by Bapi Raju which was later on refunded by the KSK group. There is clearly something special about the acquisition and transfer of shares by Anitha Impex (petitioner No. 4). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aises a suspicion that consideration had passed to petitioner No. 4, but mere suspicion is not conclusive evidence. If the share transfer is illegal and not supported by consideration, the remedy open to petitioner No. 4 is to seek appropriate remedies before a civil court. The point is found against the petitioners. 53. As rightly pointed out by the KSK group, the petitioners have conflicting stands regarding their shareholding in the company. On the date of the memorandum of understanding, petitioners Nos. 1 and 2 held 100 per cent. subscribed and paid-up equity share capital of the company. Subsequently, the KSK group had to own the shareholding of petitioners Nos. 3 and 4 for the reasons discussed above. In the light of my finding on the shareholding of petitioner No. 4, what remains is the 10,000 shares held by petitioners Nos. 1 and 2 and the 100 shares held by petitioner No. 3. The transfer of 76 per cent. shareholding to the KSK group as per the memorandum of understanding is practically admitted in the company petition. The share certificate pertaining to the 24 per cent. is not forthcoming. Since the reliefs (b) and (f) sought in the company petition seek to restore th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iates had invested substantial amount, besides the efforts to process the various approvals. So as rightly argued, the KSK group had no option but to accede to co-operate with the petitioners and to regularise the back door allotments by back dating the date of allotment of shares to petitioner No. 4, to make good the compliances in respect of the above allotments, since the abandonment of the project at that stage would necessarily result in loss to the KSK group. It is pointed out that in the above circumstances, the KSK group was forced to buy the 2,50,200 shares also in 2006 after giving consideration in cash. The respondents say that it is in the above circumstances that the accounts of 2002 was finalised by including the above allotments in August, 2002. I see considerable merit in the above submissions of the KSK group. 54. Coming to the issue whether the petitioners have gone out of the company with effect from August 31, 2006, after transferring their shares (24 per cent.) to the KSK group. As per the register of shares of the company, the petitioners ceased to be shareholder with effect from August 31, 2006. The case of the petitioners is that the shares held by them h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt) terminating the memorandum of understanding dated April 8, 2002, entered into with the company for supply of fuel, culminating in the abandonment of the project. As rightly, pointed out by learned counsel for the KSK group the contract stood frustrated, having its performance becoming impossible by the refusal of the Government to supply fuel. The memorandum of understanding was terminated on March 20, 2004. In the above circumstances, the continued existence of the company is of paramount importance and it was only the KSK group which was actively pursuing the alternative because of their huge investment in respondent No. 1 company. There is absolutely no evidence to show that the petitioners had invested any amount other than ₹ 1 lakh as paid-up share capital at the time of incorporation of the company. The petitioners say no meeting was ever held after 2002. The registered office was in Kanungas place till 2005. Petitioner No. 1 was a director of the company and he also had a responsibility to convince this Bench regarding his attempt to discuss the subsequent events in any of the board meetings and rescue the company from going into oblivion. He did not care to clarif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce to the exit of the Kanunga group and the encashment of cheque for raising the consideration of ₹ 25 lakhs and the payment of the same to Anita Impex (petitioner No. 4). Evidently, it was petitioner No. 4 who had deposited ₹ 25 lakhs with the Electricity Board in 1997 for securing annexure P14 agreement. According to the KSK group, the entire exercise occurred in June-July, 2006, at an undisputed period of time which makes their version more believable. The KSK group had produced a copy of the minutes of the board of directors on June 15, 2006, which deals with the transfer of 2,50,000 shares on the basis of a request for transfer of the above shares from Anita Impex to K. Bapi Raju (respondent No. 4) vide Volume D. The meeting of the board of directors was held on August 31, 2006, as per which consent had been given to effect the transfer of 2,60,200 shares held by petitioners Nos. 1, 2 and 4, Suresh Bai Pandya and petitioner No. 3, in favour of respondent No. 4 and the KSK group. The copy of the minutes is produced as Volume D (annexure R26). Though the petitioners strongly questioned the evidentiary value of the above document, I am inclined to rely on the above do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e memorandum of understanding dated April 3, 2002. 58. For the reasons already discussed, it can reasonably be presumed that to facilitate exit of the Kanunga group from the company, petitioner No. 1 has offered to step down as director. Even if the contention of the petitioner is accepted as correct, the remedy available to him is to seek specific performance of the memorandum of understanding dated April 3, 2002, before a civil court, since the relief is solely based on the breach of the conditions in the memorandum of understanding. Evidently, the terms of the memorandum of understanding are not made part of the articles of association, and directorial complaints are not grounds to invoke powers under sections 397 and 398 of the Act. In the light of what is discussed above, I am not inclined to interfere with the removal of the first petitioner as a director. 59. The main plank of this petition is the claim to transfer 40 lakhs shares to Kanungas which is relief No. 1 in the company petition, i.e., to direct respondents Nos. 1 and 8 to transfer 40 lakhs shares of respondent No. 1 company ( company of VSLP ) to petitioner No. 1 in terms of the memorandum of understanding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that such violation would amount to an act of oppression against the shareholders. As rightly argued by learned counsel for the respondents the remedy open to the petitioners is to enforce the terms of the memorandum of understanding by filing a civil suit before the appropriate forum. The memorandum of understanding is entered into between the third petitioner and eighth respondent (KSK Energy). 62. As held by the hon ble Supreme Court in Sangramsinh P. Gaekwad v. Shantadevi P. Gaekwad [2005] 123 Comp Cas 566 ; [2005] 11 SCC 314, paragraph 185 (page 631 of 123 Comp Cas) : It has to be borne in mind that when a complaint is made as regards violation of statutory or contractual right, the shareholder may initiate a proceeding in a civil court but a proceeding under section 397 of the Act would be maintainable only when an extraordinary situation is brought to the notice of the court keeping in view of the wide and far-reaching power of the court in relation to the affairs of the company. 63. The petition for the purpose of enforcing the rights under private contracts would not be maintainable before this forum and could not be the subject-matter of the petition under sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er to be adjudicated before a civil court. The petitioners claim three rights in the company petition, i.e., (i) to retain the first petitioner as a director of respondent No. 1 company, (ii) to allot 40 lakhs shares in respondent No. 1 company, and (iii) to restore 24 per cent. of the shareholding in respondent No. 1 to the petitioners. The above three rights guaranteed in the memorandum of understanding had been allegedly violated by the KSK group. All the three rights claimed by the petitioners are based on the memorandum of understanding. If at all the petitioners are entitled to any remedy, only the civil court can adjudicate those issues. The respondents have successfully established that the Kanunga group exited from the company after transferring its shares to the KSK group. The material particulars regarding who committed the breach of the terms of the memorandum of understanding or whether it became incapable of performance beyond the control of the two groups or whether the KSK group had derived any undue advantage as per, memorandum of understanding, etc., are matters to be established by adducing cogent evidence before the civil court. Whether the KSK group had unlawfu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shares as on March 31, 2005 (annexure P25, page 254, Volume 1A), which constitutes less than one per cent of the then paid-upcapital. The allotment of shares as detailed at page 254 of company petition is not disputed by the petitioners in the company petition. Since the petitioners ceased to be the shareholders with effect from August 30, 2006, as per the records maintained, the petitioners have no locus standi to challenge the subsequent allotment made as per the decision of the majority. 69. The next issue pertains to the increase in the authorised capital and paid-up capital of the company. The original authorised capital of the company was ₹ 50 lakhs. On September 29, 2004, the authorised capital was increased to ₹ 175 lakhs. On October 25, 2006, it was further increased to ₹ 97 crores, and again to ₹ 163 crores on March 7, 2007 and finally to ₹ 175 crores on December 6, 2008. The petitioners allege that the increase in authorised capital and paid-up capital has been done without their consent. According to the petitioner, on September 29, 2004, the petitioners held 100 per cent. shares in the company and the first petitioner had been director ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 135 MW project. In the letter dated June 18, 2008 (annexure P24) also petitioner No. 1 mentioned that the company was promoted by himself and his wife being the subscribers to the memorandum and articles of association. There is a categorical admission in the letter that the KSK group has been maintaining the accounts, convening the board and general meetings and also fulfilling all the requirements of law in force. Besides complaining about lack of notice and information about the status of the project, the first petitioner demanded performance of the obligations by the KSK group as envisaged under the memorandum of understanding. The petitioner has been repeatedly writing letters to the company from 2006 but he cared to inspect the records from the Ministry of Corporate Affairs only in 2008, as mentioned in annexure P24 letter. It is relevant to note that in annexure P23 there is no demand to perform the obligations as per the memorandum of understanding. For the first time a complaint is raised in 2008 regarding the shifting of the registered office to Hyderabad on January 10, 2005. Inhis letter in 2006, annexure P23 admits the shifting of registered office. In annexure P23 let ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g and/or transferring ownership of 40,00,000 shares of face value of ₹ 10 per share to me and the consideration for the same has already been received by KSK as mentioned in the memorandum of understanding. KSK has however in the first place not disclosed the said memorandum of understanding and their outstanding obligations thereunder. More importantly KSK has not disclosed that while they are offering shares to the members of public at a premium of ₹ 240 to ₹ 255 per share they are obliged to issue me 40,00,000 shares of face value of ₹ 10 per share, at par, for the consideration already received by them. 71. Yet, another letter has been sent by third petitioner to the KSK group reiterating the obligation under the memorandum of understanding to give him 40 lakhs shares of KSK Energy Ventures (respondent No. 8) was to be honoured on or before setting up of the plant by respondent No. 1 company and that the KSK group is deliberately confusing the issue by alleging that the impugned 40 lakhs shares relate to respondent No. 1 company (annexure R21, page 219, Volume A1). Contrary to the above assertions, in the company petition they claim entitlement ..... X X X X Extracts X X X X X X X X Extracts X X X X
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