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TMI Blog2015 (11) TMI 438X X X X Extracts X X X X X X X X Extracts X X X X ..... , a/w. Mr. M.S. Doctor, Senior Advocate, Ms. Ankita Singhania, i/b. Bachubhai Munim & Co. For the Respondent : Mr. Milind Sathe, Senior Advocate, a/w. Mr. Shyam Mehta, Sr. Advocate, Ms. Naira Jejeebhoy, Ms. Spenta Havewala, Mr. Robin Fernandes, i/b. Federal & Rashmikant, Mr. Aspi Chinoy, Senior Advocate, a/w. Mr. M.S. Doctor, Senior Advocate, Ms. Ankita Singhania, i/b. Bachubhai Munim & Co. JUDGEMENT :. Company Appeal No.19 of 2009 impugns an order passed by the Company Law Board, Principal Bench ("CLB"), in the Appellants' petition under Sections 397 and 398 of the Companies Act, 1956 ("Act"). The facts of the Appellants' case may be briefly stated thus: 2. Appellant No.1 - Akkadian Housing and Infrastructure Pvt. Ltd. ("Akkadian") - is a private company limited by shares incorporated under the Act and owned/controlled by Appellant No.2 - Alnoor H. Jamal ("Jamal") - who is a foreign national of Indian origin based in Kenya. Jamal is a businessman of Canadian nationality and claims to be holding varied business interests globally. Akkadian is the registered holder of 14,023 fully paid up equity shares of the first Respondent Company ("Company"), which comprise of 28.33% of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mited, would provide the requisite capital and technical expertise to develop the subject property. A Supplementary Agreement dated 15 June 2000 was accordingly entered into between Rajan, Jamal and Nilesh. Under this agreement each of the three groups represented by them was to subscribe for and hold 33.33% of the issued and paid up shares of the Company and each group was to be entitled to appoint two directors on the board of the Company comprising of six directors. Simultaneously with this agreement, Minutes of Meeting were drawn between the three on the same date, i.e. 15 June 2000. The Supplementary Agreement read with the Minutes formed a new contract, modifying the earlier contract contained in the Shareholders' Agreement between Jamal and Rajan. 5. The development project over the subject property, as conceived by the parties, involved three phases - Phase 1 involving completion of rentable area of approx. 2,00,000 sq. ft. of the original factory premises of Parke Davis ("Plot A"), Phase 2 involving construction of a tower ("Plot B") and Phase 3 involving balance development ("Plot C"). 6. At this stage, in or about March 2001, Respondent No.4 - Bharat Doshi ("Doshi") - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Shareholders' Agreement, by false misrepresentation and with malafide intention, Rajan reduced the shareholding of Jamal from 50% to 28.33%, whilst Rajan himself continued to control, through Nilesh, Doshi and others, 71.67% shares in the Company, which was against the original understanding of 50% stake in the equity each of Rajan and Jamal; (c) Jamal was unauthorisedly removed from the board of directors of the Company as an act of oppression, by manipulation of the Company's records and with a view to completely oust him from the affairs of the Company; (d) Rajan, being in control of the Company, sold and leased out constructed areas of the project below the market rates, and also rotated and laundered the Company's funds prejudicially to the interests of the Company. After the proceedings were started before the CLB, by various interim applications, allegations concerning individual transactions with various parties (such as Fine Plaza, Ecstacy, Stylus., etc.) were made. 12. In its impugned order dated 8 January 2009, the CLB, after analyzing the facts of the case, held that if at all one of the two, Rajan and Jamal, had to be considered as the prime mover of the projec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n. It reckoned 4.35% of the profits arising out of the value of the land as a just and reasonable return on the investment made by Jamal, to which 50% increase could be added to take care of the pendency of the petition for nearly three years, thus taking the profit sharing of Jamal to 6.6% of the profit on the value of the land. The value of the land was taken at the highest price prevailing during the last quarter of 2005 (the petition having been filed on 7 December 2005). The CLB ordered that from the value so determined, the total cost of the land taken at Rs. 56.56 crores (i.e. basic price + interest + stamp duty and registration charges) should be deducted to arrive at the profit and of this profit, Jamal should get 6.6% subject to a minimum of Rs. 30 crores. The petition was disposed of in these terms, reserving the jurisdiction to determine the value of the land. 13. This order is challenged in the present appeal on several grounds. The grounds formulated by Ms. Sethna, learned Counsel for the Appellants, at the hearing, may be briefly stated as follows : (i) The dilution of the shareholding of Jamal from 50% to 28.33% and his ouster from the management of the Company we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n drawing its conclusions on these two aspects. The third and the last aspect is the relief granted by the CLB. We will examine if there is any error of law in granting the relief. 15. On the case of oppression : 15.1 The case of the Appellants is that the original Shareholders' Agreement between Rajan and Jamal stipulated 50:50 shareholding ratio between the two, but in breach of that agreement, by false misrepresentation and in a malafide manner, Jamal's shareholding was brought down to 28.33% by machinations of Rajan. This is said to have been brought about in stages. Ms. Sethna argues that contrary to the Shareholders' Agreement, in the first place, even initially Jamal was allotted only 100 shares (instead of 250 shares) out of the 500 shares acquired from the erstwhile shareholders of the Company. Then, when Nilesh was inducted into the membership of the Company, Jamal's shareholding was brought down to 33.33%. It was reduced further to 28.33% at the time of induction of Doshi. At each of these stages, Jamal was made a misrepresentation; Jamal was never informed that it was Rajan who actually controlled the shareholding divested in favour of Nilesh and Doshi; and Rajan's ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce Corporation Ltd.(HDFC) and/or ICICI should be first paid. Thereafter monies brought in, quantified and accepted by all the parties at Rs. 4 crores each by A Group and B Group excepting monies required for share capital, shall be repaid. Thereafter the terms and conditions regarding division of profit in three shares as per agreement dated 23rd December 1999 between Mr. Alnoor Jamal and Mr. Shobhit Rajan and Supplementary Agreement dated 15th June 2000 between Mr. Alnoor Jamal, Mr. Shobhit Rajan and Mr. Nilesh Parekh will come into effect." 15.3 In the backdrop of these provisions, the CLB rejected Jamal's case of oppression on account of reduced shareholding on the following basis : (a) In the present case, Jamal actively participated in the allotment of shares to the Respondent Companies and accepted 28.33% shares as per the agreement. (b) The CLB was bound by the decision of the Supreme Court in Shanti Prasad Jain Vs. Kalinga Tubes Ltd. AIR 1965 SC 1535, which was followed in a number of cases, that private agreements between shareholders (to which the Company was not a party) could not be enforced through petitions under Sections 397 and 398 of the Act. (c) None of the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... brought down to 100 shares. The CLB observed that when there was no proof of any consideration paid for even 100 shares by Jamal, merely on the basis of errors and alterations in the register of members, no grievance could be made about reduction of Jamal's shareholding from 250 to 100 allegedly by way of a manipulation. Besides, this aspect of the matter is hardly of any relevance, since, as rightly observed by the CLB, Rajan has neither taken any advantage of denying those 150 shares to Jamal nor any extra benefit to himself and in the end, at any rate, the agreed shareholding of 28.33% was actually allotted to Jamal. No error of law can be found in the analysis of the CLB or its conclusion in this behalf. 15.5 The second stage of reduction of Jamal's shareholding, i.e. when Nilesh was inducted, is also adequately explained. As observed by the CLB, Jamal was a party to this arrangement. He actually signed a Supplementary Agreement for the purpose. Nilesh's commitment as against 28.33% shareholding to be allotted to him was to get the House of Tata's on board for development of Phase2 and 3. Tatas did after all enter into an agreement with the Company after Nilesh's induction. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t when it was imperative that stamp duty to the tune of Rs. 4.93 crores was paid before execution of conveyance of the property, the requisite funds were brought in/arranged by Doshi and Rajan. Out of these funds, a sum of Rs. 2.72 crores was brought in by Doshi himself. There is certainly material on record to suggest that Doshi played a meaningful role, justifying his induction into the Company. That itself should be sufficient to sustain the CLB's conclusion in this behalf. But what is more important is Jamal's own admission contemporaneously made before the disputes arose between the parties, when, on 4 March 2005, in the wake Doshi's proposed exit from the Company, he (Jamal) categorically asserted that he had no complaint against Doshi, who, Jamal himself agreed, had played his role and assisted the project. Jamal even suggested that the parties should convince Doshi to stay on till the conclusion of the project. In the face of all this material, if the CLB concludes that Jamal was not justified in making any grievance about the association of Doshi after the disputes arose, surely it is a plausible conclusion and does not give rise to any question of law. 15.7 That leav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mane or irrelevant material. In the face of the Shareholders' Agreement, the Supplementary Agreement and the Minutes of Meeting, the conclusion that there was no oppression of Jammal on account of reduction of his shareholding from 50%, as originally proposed, to 28.33%, as finally brought down to, is clearly sustainable and does not give rise to any question of law. 16. On the case of mismanagement: 16.1 The Appellants' case of mismanagement is based on (i) acts of sale and leasing of constructed areas of the project purportedly below the market rates, (ii) rotating and laundering of the funds purportedly prejudicially to the interests of the Company and (iii) benefits purportedly extended to related parties at the expense of the Company. 16.2 The allegation of the Appellants before the CLB was that Rajan sold and leased substantial portions of constructed space without due publicity and at an undervalue only with a view to enrich himself by underhand dealings. There were four such transactions particularly brought before the CLB. They concern, and are discussed in the impugned order under the headings of, (i) Ashwamegh, (ii) Fine Plaza, (iii) Ecstacy and (iv) Stylus. O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shwamegh for delayed payment of consideration, but did not accept the Appellants' case that the agreement with Ashwamegh should have been cancelled. The basis of upholding the transaction notwithstanding acceptance of the case of delayed payment of consideration was that the Board being a court of equity, could not ignore business realities and inquire into the correctness or otherwise of a decision other than for examining if the same was mala fide or resulted in enrichment of the decision makers at the cost of the Company. In the face of its observations that the property was not sold at an undervalue, that there was nothing to suggest either than Rajan and Ashwamegh were related parties or that the decision was against the interest of the Company or enriched Rajan, the CLB refused to order cancellation of the transaction. Besides, the CLB held that Ashwamegh was not a party to the petition and in its absence the agreement could not have been cancelled, in terms of Section 402(e) of the Act. 16.4 These are all cogent reasons. There is material on record to sustain these and no irrelevant or nongermane material is taken into consideration to arrive at these. It is trite law t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fault with the business decision of the board in selling the area rather than leasing it for rental income. For the same reasons, as in the case of Ashwamegh, the CLB did not find a case made out for cancellation of the Fine Plaza transaction under Section 402(e) of the Act. In Ecstacy, though the CLB found that the payment of Rs. 28.11 crores paid to Ecstacy was, in the absence of any particulars forthcoming, a diversion of funds, it noted that this amount had come back. What the CLB found amiss was the fact that it came back sans any interest. It accordingly ordered recovery of interest from the party and in default, restitution of the Company by Rajan to the extent of the amount of interest. In Stylus, the CLB found that the decisions were duly taken in board meetings of the Company, which were not objected to by Jamal. Though the CLB found some substance in Jamal's contentions regarding lack of full transparency in the Stylus matter, since the draft agreement was not placed before the board, it observed that merely for that reason, the agreement could not be cancelled unless it was found to be against the interests of the Company. The CLB did not find any substance in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for nearly three years, works out to 6.6%. On a closer scrutiny, however, it not only appears to be a legitimate relief, and therefore, not giving rise to any question of law, but also a reasonable and adequate relief in the facts of the case. The following paragraphs discuss that aspect of the matter. 17.2 At the outset, it needs to be noted that the relief ordered is really speaking a 'no fault' relief, that is to say, a relief not based on findings of oppression and mismanagement, but under the jurisdiction of the Court to do justice in a petition under Sections 397 and 398 of the Act, even if a case of oppression and mismanagement is not made out in terms. The parties before me have differing perceptions on the nature of this relief. Ms. Sethna for the Appellants claims that at least some instances of oppression and mismanagement are found in favour of her clients and therefore, equitable reliefs under Section 402 should have been granted; and that ultimately, if at all someone had to exit, it should have been Rajan as the oppressor rather than Jamal as the oppressed. Mr. Chinoy for the Respondent Rajan, on the other hand, submits that the relief granted here is essen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng or the right shares, which they had originally shown willingness for, and which factor, to some extent, had gone in their favour on the question of oppression. Having had the benefit of that stance, they must, the court held, now make it good. The court hastened to add as follows : "We must make it clear that we are not asking the Indian shareholders to pay the premium as a price of oppression. We have rejected the plea of oppression and the course which we are now adopting is intended primarily to set right the course of justice, insofar as we may." Later in the case of Sangramsinh P. Gaekwad vs. Shantadevi P. Gaekwad (2005) 11 SCC 314, the Supreme Court reaffirmed the principle that in a given case the court, despite holding that no case of oppression has been made out, may grant such relief as to do substantial justice between the parties. In a more recent case, in M.SD.C. Radharaman vs. M.S.D. Chandrasekara Raja (2008) 143 CompCas 97 (SC) , the principle was reiterated once again. 17.5 The parting of ways thus being held to be on a 'no fault' principle and to do substantial justice and found to be in order, the controversy really boils down to the manner ordered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and beautiful buildings that had come up on the project site were due to the efforts of Rajan, both in organizing funds and in actively implementing the project, for which Jamal had even complemented Rajan. On these findings of fact, the CLB held that it was not Jamal, but Rajan, who was the prime mover. Once again, the findings of fact and the conclusion based thereon cannot be termed as either impossible, or vitiated by lack of supporting material or consideration of irrelevant material. Apart from the question of prime mover, the CLB also considered the position that the Board had always taken the view that persons in active management, whether in minority or majority, should have the right to take over the Company. The CLB considered the decisions in Praful M. Patel vs. Wonderweld Private Limited (2002) 36 SCL 825 CLB-ND , C.M. Jain vs. CRM Digital Synergies Pvt. Ltd. 2008 142 Comp Cas 658 CLB and in Re: Nikhil Rubbers Pvt. Ltd. (2008) 215 CTR All 332 in this behalf and held that since it was Rajan, who had been managing the affairs of the Company, while Jamal had not been in participation, the question of directing Rajan to sell his interest to Jamal did not arise. Ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that Jamal should get the Company has already been discussed above and on that the CLB's conclusion has been found to be in order. Let me now take up the alternative of sale of the project and division of proceeds. The CLB rejected this alternative, holding that such an order would actually amount to winding up of the Company, whereas proceeding under Sections 397 and 398 were alternative to winding up and the paramount consideration was to ensure that the Company survives. The CLB dealt with the decision in the case of Vijayawada Sharebrokers Limited 2008 144 CompCas 326 (AP) relied upon by Counsel for Jamal in this behalf. In that case, the CLB had directed the company to sell the only landed property of the company and apportion the sale proceeds between shareholders. This property was acquired by the company for establishing a stock exchange, which was the main object of the company. SEBI, however, declined to give permission to set up the stock exchange. The proposal to construct one was, accordingly, given up by the company and for over ten years, the company did not conduct any business except deriving some rental income from the land. There were various allegatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the company. In the result, the court found the option of dividing the business and assets between the two groups as the only equitable way of parting of the two. In Trackparts of India Limited(supra), a listed company in which two groups of family members had equal shareholding (24% each) and each had a managing director/joint managing director, there were three divisions, one under the management of one group and two under the other. What the Board did was to finalise this division after an exercise of valuation. In Jaidka Motor Company Limited (supra), an original partnership of two groups of family converted into a company with the two having equal shareholding and representation on the board, the company had two business units, one at Patna and the other at Kolkata managed by each group separately. As part of the relief granted under Section 402, the Board directed each business unit to be separately managed by one group the Patna unit by the petitioners who were already managing it and the Kolkata unit by the Respondents who were likewise managing it separately. In James Fredrick (supra), in the peculiar facts of the case, the Board directed a fiveway division of the shareho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profit sharing was to be in proportion to the respective contribution of the groups, which included all types of funding provided by the groups, whether by way of share subscription or loans brought in. This conclusion was on the footing that firstly, the clause, read as a whole, talked of 'providing amount required' for completing the sale and secondly, read in the context of the other clauses of the agreement, made it clear that the intention of the parties was to provide compensation to the parties on the basis of the funding provided by them and not necessary actual share capital subscribed by them. It, therefore, concluded that bank loans arranged by Rajan by giving his personal guarantees cannot be excluded for determining the profit sharing ratio, though interest paid by the Company to the banks on these loans may have to be deducted from the loans. Thirdly, the CLB considered whether the valuation must be for the entire project. In this behalf, the CLB considered the totality of the agreements, namely, the JVA (already considered above), the supplementary Agreement and the Minutes, and held that they did not talk of development, but dealt only with acquisition of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers (which funds were also to be treated as part of funding obligations, as discussed above). Thus, Jamal's contribution of funds to meet the cost of land was 4.35%. That was treated by the CLB as the proportion of the profits arising out of the land value to which Jamal was fairly and equitably entitled. 17.18 On the date of valuation, the parties propounded diverse approaches before the CLB, each relying on judgments in support. Counsel for Jamal rooted for the date of the order as the most appropriate date of valuation. This was on the ground that the price of the land had gone up due to market conditions and not due to efforts of Rajan. Learned Counsel relied on the cases of Mahavir Prasad Jalan (supra), London School of Electronics Re (1985) 1 BCC 99, 394 , Profinance (2002) BCLC 141 , Re: Ghyll Beck Driving Range Ltd. (1993) BCLC 1126 and Re: A Company Ex parte Harries (1989) BCLC 383 and submitted that considering that the value had gone up, through no effort of the rival, even during the pendency of the proceedings, the value for the purpose of sharing should be determined on the date of the order. Learned Counsel for Rajan, on the other hand, submitted tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .6% would be paid to the Appellants. 17.21 At the same time, the CLB thought it fit to assure unto Jamal a fixed minimum compensation. Considering Rajan's preparedness to offer a sum of Rs. 20 crores to buy peace, and the markup of 50% proposed by it, the CLB put that fixed minimum at Rs. 30 crores. Thus, in the end, the consideration that Jamal would get worked out to 6.6% of the profit arising from the valuation of the land (the market value as in the last quarter of 2005 less the cost, but without adding interest paid to banks to the cost) or Rs. 30 crores, whichever was higher. That, said the CLB, was a just and fair return on his investment of Rs. 2.46 crores, which remained in the Company for about 8 years. 17.22 The question now in the appeal, that is left to be answered, is: Is there any error of law in this determination? We shall presently answer it. But before we do so, it would be apposite to note the limits of our inquiry. In V.S. Krishnan Vs. Westfort HiTech Hospital Ltd. (2008) 3 Supreme Court Cases 363 the Supreme Court explained the scope of the jurisdiction of the High Court under Section 10F of the Act in the following words : "16. It is clear that Section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urchase of land and development of real estate envisage large funding and also extensive management of affairs. The CLB's conclusion that the parties themselves agreed to share profits on the basis of the ratio of funding brought in by the respective parties is reasonably based on the agreement between the parties, which is reflected in the JVA, Supplementary Agreement and Minutes of Meeting, referred to above. It is a legitimate and perfectly possible conclusion that contribution of capital in this context not only included share subscription, but funds brought in by each, whether in the form of share subscription, borrowings or otherwise. Secondly, the CLB determined that Jamal was entitled to sharing only of profits arising out of the valuation of the land. This was on the footing that he merely contributed for the initial earnest money paid for the land and did not contribute anything towards the further purchase price of the land or its development and also did not participate in the management so far as the development was concerned; and that in fact it was a one man show of Rajan. Again a conclusion based on appreciation of facts and perfectly reasonable, supported by re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hus, cannot be faulted on any ground of law. 17.27 There is one more way of looking at the reasonableness of the compensation. The submission of the Appellants is that the Company in the present case is in the nature of a quasipartnership and principles of dissolution of partnership should be applied to parting of ways between the shareholders here, suggesting thereby that the valuation of shares should be on a pure prorata basis. On the other hand, it is the submission of the Respondents that the Company is a joint venture between businessmen who had come together for a particular project, namely, acquisition and development of a particular property and there are no incidents of quasipartnership - neither equality of shares nor joint participation in management. It is submitted that in the present case, the minority share ought to be valued not on a prorata basis, but at a discount, as is usually the case. 17.28 In Re: Bird Precision Bellows Ltd. (1984) 3 All ER 444 , the Court held that it was axiomatic in all cases of valuation that a price fixed by the Court must be fair; while that which is fair may often be predicated in regard to matters of common occurrence, it can never ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... minority shareholder whose interests had been unfairly prejudiced by the conduct of the majority, but who had nevertheless so acted as to deserve his exclusion from the company. In such a case, despite the company being a quasipartnership, the exit of that minority shareholder can be at a discount and not prorata valuation. Likewise, depending on special and particular facts of the case, in an ordinary private company, the exiting shareholder's share may be valued prorata and not at a discount. But that would be in the special facts of a case, but for which the general rules would ordinarily be followed. When the case of Bird Precision went to the Court of Appeal, the appeal was dismissed, with the Court further adding that the 'proper' price is the price which the Court in its discretion determines to be proper having regard to all the circumstances of the case. The Bird Precision principle was followed in Re D.R. Chemicals Ltd. (1989) 5 BCC 39 where the Court put the matter thus : "approach the matter somewhat differently. Mr. Harries is a minority shareholder seeking a fair price or his shares. In the absence of any special features the value of his shares mus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is case appears to be more akin to an investor who holds a minority stake in a private company rather than a quasipartner who could claim a prorata valuation. 17.31 Once, as a matter of principle, valuation of Jamal's share at a discount is accepted, the actual valuation, or in other words, calculating of the discount, is really a question of fact, the sole basis of which is the consideration of what is fair in the facts of the particular case. As we have noticed above, the CLB has arrived at a fair basis and proportion in the particular facts of the case for valuing Jamal's share. It cannot be faulted on the principles which we have noted above in connection with the scope of challenge in an appeal under Section 10F. 17.32 Ms. Sethna argues, referring to the case of Re Planet Organic Ltd. 28, that any discount in this behalf must be considered by the Court on an expert testimony and it is not for the Court to decide the same unilaterally. There is always some amount of arbitrariness in a matter like this. Thumb rules are used and different experts or valuers or even courts would come to different estimates. What the Court in a 10F appeal has to see is whether the conclus ..... X X X X Extracts X X X X X X X X Extracts X X X X
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