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TMI Blog2008 (8) TMI 964X X X X Extracts X X X X X X X X Extracts X X X X ..... m giving effect to any of the resolutions purported to have been passed at the said Board meeting; b) to amend the articles of association of CEPL to include articles to the effect that so long as C.G. Holdings holds shares in CEPL, no policy decision to increase the authorised capital, sale, disposal or encumbrance of the investments in shares in the subsidiaries be taken by CEPL in general meeting, without the affirmative vote of C.G. Holdings; c) to amend the articles of association of CEPL to include an article that so long as C.G. Holdings has its nominee on the Board as a director no quorum for any meeting of the Board of directors would be possible without presence of such a nominee; d) to restrain the respondents 3 4 or any other nominee of the respondents 2 5 from proceeding with the holding of the Board of directors meeting on 12.11.2005 or any other subsequent date; e) to appoint an independent valuer to assess the value of CEPL and loss suffered by it on account of the breach committed by respondent Nos. 2 6 under the JVA and surcharge the respondent No. 2 to 6 who have acted in concert in CEPL for having caused loss, under Schedule XI of the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5, being father and son, in C.P. No. 65 of 2005 are the respondents 7 6 respectively in C.P. No. 76 of 2005. The fourth respondent in C.P. No. 65 of 2005 is a nominee of ORE, on the Board of CEPL. The sixth respondent in C.P. No. 65 of 2005 is the holding company of the second respondent in C.P. No. 65 of 2005, which is the petitioner in C.P. No. 76 of 2005. The respondents 8 to 11 in C.P. No. 76 of 2005 being bankers of CEPL are neither necessary nor proper parties to adjudicate the disputes involved in C.P. No. 65 of 2005. The respondent No. 13 in C.P. No. 76 of 2005 is one of the group companies of KCP. All the contentious issues primarily arising on account of the alleged breach of the terms of the JVA dated 30.01.2004 are common to C.P. No. 65 of 2005 as well as C.P. No. 76 of 2005. For these reasons, both the company petitions were heard together and are being disposed of by this common order. 4. Shri H. Karthik Seshadri, learned Counsel, while initiating his arguments, in support of C.G. Holdings and KCP, submitted: KCP being an Industrialist from Coimbatore along with his family members had acquired controlling interest in M/s Vasantha Mills Limited, (VML) and p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ur of CEPL, in consideration of which, C.G. Holdings was allotted 12,41,419 equity shares of ₹ 100/- each representing 45% of the issued, subscribed and paid up capital of CEPL. Athappan had similarly sold his shareholding in CPL and VML in exchange for being allotted 2,84,550 equity shares of ₹ 100/- each constituting 10% of the issued, subscribed and paid up capital of CEPL. KCP in order to facilitate the transactions with ORE and R. Athappan, agreed for the aforesaid share swap and the resultant transactions came to be scrutinised by the Income Tax Authorities and attached a sum of ₹ 32.43 crores in the account of CEPL. KCP never received any money, and yet he was saddled with an income tax demand of over ₹ 32 crores. 6. A Joint Venture Agreement (JVA) was executed on 30.01.2004 between the petitioners, the respondents 1 to 5 (C.P. No. 65 of 2005), VML and CPL, the terms of which were incorporated in the articles of association of CEPL. In the event of any conflict between the JVA and the articles, the JVA should prevail over the articles. In terms of the JVA, ORE had brought in a sum of ₹ 75 crores on 30.01.2004 and was allotted 12,41,419 equity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cess India Limited (DAIL), involved in the business of International Long Distance Service , with its registered office at New Delhi, pursuant to a series of discussions and correspondence among R. Athappan and Chandran and one Siddhartha Ray, who along with his associate companies controlled 76% of DAIL and in accordance with the decision of the Board of directors of CEPL, for acquiring 76% control over DAIL. Any investment by CEPL in DAIL needed modification of the Foreign Investment Promotion Board (FIPB) approval and therefore, at the instance of the respondents 2 to 4, (C.P. No. 65 of 2005), KCP had incorporated a new company by name Cheran Holding Private Limited (CHPL) in June 2004. CHPL did not have the required capital to acquire DAIL, compelling CEPL to transfer a sum of ₹ 35.30 crores in accordance with the decision of the Board of directors of CEPL taken on 24.06.2004, to CHPL for acquiring the shares of DAIL from Siddhartha Ray and associates. However, the Board of directors of CEPL had decided on 12.08.2004 to withdraw their decision to invest in CHPL for acquisition of the shares of DAIL. The e-mail dated 11.08.2004 by Mr. Paul Rewat, Authorised Representative ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hile, DAIL faced winding up proceedings (C.P. No. 292 of 2004 before Delhi High Court) at the instigation of Siddhartha Ray, wherein various creditors of DAIL intervened and sought orders for attachment of funds in the hands of CEPL, CHPL, KCPHAPL and SPIL, in whose favour the US D 17 million had been transferred by DAIL. Income Tax Authorities also attached the bank accounts of these companies and made demands for the alleged defaults of DAIL. 11. The annual report of Odyssey Re Holding Corporation for the year ended 2005 recorded its obligation to provide a guarantee of a credit facility, if such facility was established by CEPL, to the extent of USD 66.0 million. The annual report further states that no credit facility was established as of 31.12.2005 and the guarantee liability of OARC no longer exists. Thus, by the conduct of OARC, the JVA stands terminated. The Business Plan could not be implemented for want of the syndicated credit facility of ₹ 300 crores to be brought in by OARC and thereby, CG Holding and KCP immensely suffered. ORE as reported by its nominee on the Board of CEPL, namely, Chandran, had arranged a term loan of USD 66 million in the name of CEPL fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of CEPL, to enter into two agreements with Cherraan Constructions Limited (CCL) for sale of the properties belonging to VML for a total consideration of ₹ 66 crores. CPL had necessary approvals and sanctioned building plan from the competent authorities and therefore, the development of the properties of CPL would be in the interest of CEPL and its shareholders. Accordingly, CPL had entered into two Agreements of Contracting with CCL for up-gradation of the existing Cherraan Towers, at a cost of ₹ 15 crores; and for construction of a three Star Hotel at a cost of ₹ 35 crores. ORE through M/s Ernst and Young assessed the value of properties of CPL and VML. This would show that CEPL has not suffered on account of entering into the agreements with CCL. CPL further entered into an agreement for sale cum developing agreement with CCL, to develop undivided share to a tune of one lakh square feet of apartments for a consideration of ₹ 5 crores. The correspondence produced along with C.A.I82 of 2007 would show that KCP sought approval of the Board of CEPL before entering into the agreements in respect of the assets held by CPL and VML. 14. All the agreements wer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ified to an extent of ₹ 30 crores which arose out of the share swap, as borne out by the Term Sheet, circulated by ORE and R. Athappan to KCP before the Board meeting field on 21.09.2005. The Term Sheet was given by R. Athappan which was not accepted by KCP. 16. The management cannot be taken away from KCP in view of the specific terms of the JVA. The Board minutes dated 21/22.09.2005, disclose wrongly, as if KCP left the Board meeting. The negotiations failed and R. Athappan and Chandran constituting quorum transacted as many as 17 subjects and allegedly passed resolutions without however any deliberations or decisions taken at the aforesaid Board meeting. Therefore, the resolutions passed at the aforesaid Board meeting are null and void and not binding on CEPL and its shareholders. The respondents (C.P. No. 65 of 2005) have taken further steps to hold a Board meeting on 12.11.2005 for the purpose of reviewing the financial and accounting controls and procedures, hiring of consultants for legal and other accounting services, replacement of the Managing Director, approving a new name for CEPL, new registered office and future plans for the CEPL and the JVA. The agenda of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Pokhran Investments P. Ltd. and Anr. v. Dadha Estates P. Ltd. and Ors. (2006) 132 CC 324 to show that the grievances of one director on account of not holding Board meetings and lack of transparency in the day-to-day management were held to be not genuine, when the petitioning director failed to discharge his duty under the articles of association of the company for convening any meeting of directors of the company and therefore, reliefs claimed in this behalf were declined. 19. Praful M. Patel v. Wonderweld Electrodes Private Limited (2003) 115 Comp Case 377 to show that the provisions of Section 397 can be invoked only when the substratum of the company is lost or there is a lack of probity or there is a dead lock in management. Ebrahimi v. Westbourne Gallleries Ltd. and Ors. (1972) 2 W.LR. 1289 to show that the just and equitable provision does not entitle one party to disregard the obligations he assumes by entering a company, nor the court to dispense him from it. It does, as equity always does, enable the court to subject the exercise of legal rights to equitable considerations; considerations that is, of personal character arising between one individual and anot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed therein. 23. Based on the representations, assurances and projections made by KCP, ORE invested a sum of ₹ 75 crores in CEPL by subscribing towards 45% equity capital of CEPL for the purpose of construction of Hotels and IT Parks, a shopping complex and renovation as well as development of properties owned by CPL and VML and selling the aforesaid properties, in terms of the JVA. ORE, by virtue of its investment in CEPL in terms of the JVA, would automatically gain significant control over the affairs of the subsidiaries and CEPL and the subsidiaries would function as a unified group. Athappan, CG Holdings and CPL, should not sell, transfer, pledge or otherwise encumber the shares held by them in VML, without the written consent of ORE, until the expiration of its term. Similarly, CG holdings should not sell, transfer, pledge or otherwise encumber the shares held by it in CPL, without the prior written consent of ORE. Any appointment by CEPL to the Board of directors and of its subsidiaries including CPL and VML should be made only with the prior written consent of ORE. CG Holdings, CPL, R. Athappan and Athappan should exercise their voting rights in respect of any sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ility of KCP in his capacity as Chief Executive Officer and Managing director of CEPL to ensure the syndicated credit facility of ₹ 300 crores in terms of the J VA, which never happened at any point of time Any such contractual obligations cannot be enforced in the present proceedings. There were only negotiations with GE Capital for extending syndicated credit facilities. GE Capital never communicated its final sanction. KCP never produced any sanction letter from GE Capital and no reference was ever made before the Board of directors in regard to any sanction of syndicated credit facility by GE Capital. The Supreme Court held in Sangramsinh P. Gaekwad and Ors. v. Shantadevi P. Gaekwad and Ors. that (a) when a complaint is made as regards violation of statutory or contractual rights, 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 the wide and far-reaching power of the court in relation to the affairs of the company; (b) If the pleadings and/or the evidence adduced in the proceedings remains unsatisfactory ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld be charge on 45% of shareholding held by CG Holdings in CEPL. 26. Necessary application for approval to invest in CEPL was made to the FIPB, much prior to the capital contribution by ORE and execution of the JVA. Neither the application nor the approval of FIPB makes any reference to the telecom related activities. Furthermore, at no point of time, CEPL intended to engage in telecom related business. However, the FDI Regulations do not permit any investment in the telecom business. The communication dated 09.11.2004 of the FIPB in favour of CEPL approving foreign collaboration envisages equity participation of 55% in the paid up capital of CEPL, in the ratio of 45% by ORE and Athappan. The FIPB approval does not permit any investment in telecom business. The JVA also does not envisage the telecom business. ORE is interested to secure monies from KCP and further OARC lent ₹ 78 crores for revival of DAIL in order to enhance its value. KCP was giving priority to the revival of DAIL instead of performing his obligations as CEO and Managing Director of CEPL in gross violation of the JVA. KCP with a view to induce the Board of CEPL into approving investments in DAIL, made fal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y authority of the Board of CEPL. OARC or any associate or affiliate of ORE never intended the amount lent to DAA to be invested towards equity in CHPL or to be further diverted from CHPL to companies related to KCP. When OARC demanded repayment of the entire loaned amount together with interest from DAA, the latter failed to meet the claim, compelling OARC to institute a suit against DAA for recovery of the loan amount of USD 17 million before the Supreme Court of the State of New York. The High Court of Delhi by an order dated 18.11.2004 made in C.P. No. 292 of 2004 directed DAIL to be wound up and further ordered to return the funds which are illegally kept in entities related to KCP in favour of the Official Liquidator appointed by the High Court. 29. OARC by its communications dated 23.11.2005, 30.11.2005 and 05.12.2005 instructed KCP and CHPL to return the loan amounts to the Official Liquidator in terms of the order of the High Court. CEPL has not so far commenced any development operations, as envisaged by the JVA on account of - (a) KCP falsely represented that he had been offered a right of first refusal on a valuable property in Chennai for the development (Oberoi Hot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in accordance with the articles and with the sole object safeguarding the interest of CEPL and are binding on CEPL and its directors. The term sheet circulated at the Board meeting of 21/22.09.2005 was by KCP and not by ORE, wherein ORE never agreed to indemnify KCP, on account of any tax liability, pursuant to the share swap, in terms of the Term Sheet. Before termination of the JVA by the parties or by this Bench it is necessary that the funds and properties of CEPL, which have been misappropriated by KCP must be restored to CEPL. 32. Shri J. Sivanandaraaj, learned Counsel, while supporting the respondents 3 5 (C.P. No. 65 of 2005) submitted: KCP has committed breach of trust and misappropriated funds of CEPL for his personal needs and further fabricated the minutes of various Board meetings of CEPL, in order to legitimate his unauthorized activities. R. Athappan, a person of Indian origin holding citizenship of Singapore is an independent contractor of a company, by name First Capital Insurance Ltd., which is a part of the Fairfax Group of Companies in Canada , engaged in the business of financial services. When KCP approached R. Athappan in Singapore towards the en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies of VML would disclose the total net value at ₹ 686 million. 34. The impugned agreements have been executed on 28.08.2004, after a lapse of more than eight months of the date of valuation report of M/s. Ernst Young Private Limited. CPL and CCL entered into an agreement of sale-cum-developing on 28.08.2004 to construct and sell 1,00,000 sq.ft. in Cherraan Towers at a cost of ₹ 500/- per sq.ft. amounting to ₹ 5 crores, whereas the report of M/s Ernst Young Private Limited would reveal the value of saleable area in Cherraan Towers at ₹ 1230 per sq.ft, and the police complaint lodged by KCP against ORE and others, discloses the value of the said property owned by CPL at 120 crores. CPL by virtue of the agreements both dated 14.01.2005 has undertaken to honour the financial commitments made in favour of CCL as specified therein, and such financial commitments are contrary to the JVA. All the agreements with CCL are without any authority of the Board of CEPL, consent of ORE and contrary to the terms of the JVA. The assets of CPL and VML having being sold at a very low value, is oppressive of CEPL, ORE and other shareholders. 35. The proposed structure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Chandrannn Rathnaswami in Form No. 29 is not his signature and that it was one of the Company Secretaries in the Company who had done it wrongly . KCP, taking into account his past conduct will not return back the investment of ₹ 75 crores made by ORE in CEPL. KCP would on the other hand only pursue the criminal complaints wrongfully initiated against ORE, R. Athappan, Chandran and other respondents. The affairs of CEPL, therefore, cannot be entrusted with him. KCP came with unclean hands and further CG Holdings as well as KCP have not established any oppressive acts on the part of ORE or other respondents. (C.P.76 of 2005). 37. In terms of Clause 9.1 of the JVA, CEPL should obtain a syndicated credit facility, to be secured by a corporate guarantee issued by OARC, which is subject to satisfaction of the obligations imposed on among others, CG Holdings and KCP as specified therein, which never happened. Therefore, OARC cannot be solely blamed for not offering any corporate guarantee in terms of the JVA. The e-mail sent from Paul Rivett on 27.08.2004 and the police complaint dated 27.02.2006 made by KCP would show that ORE had arranged a term loan of USD 66 million in India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , as held by the Supreme Court, oppression involves at least an element of lack of probity or fair dealing to a member in matters of his proprietary right as a shareholders and not any harsh or unfair treatment in any other capacity . 40. Srikantha Datta Narasimharaja Wadiyar v. Sri Venkateswara Real Estate Enterprises P. Ltd. and Ors. (1991) 72 CC 211 to show that the relief under Sections 397 and 398 of the Act is an equitable relief which is entirely left to the discretion of the company court. Even assuming that the allegations of the petitioner, if proved, do make out a case of oppression and mismanagement within the scope of Sections 397 and 398 of the Act, mere proof of those allegations would not entitle the petitioner to the reliefs sought for when these reliefs are discretionary reliefs and they will be granted only to persons who approach this Court in good faith and with a clean record and clean hands. Sangramsinh P. Gaekwad and Ors. v. Shantadevi P. Gaekwad and Ors. (2005) AIR SC 809 to show that a director of a company indisputably stands in a fiduciary capacity vis-a-vis the company. He must act for the paramount interest of the company. 41. Selangor Unite ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inding on the Company and others. If there is complete deadlock in the management of the company, it would be just and equitable to wind up the company, for, with such deadlock, the affairs of the company cannot be carried on to its advantage. In this company petition, no dead lock situation has been shown, to remedy such grievances. Mohta Bros P. Ltd. and Ors. v. Calcutta Landing and Shipping Co. Ltd. and Ors. (1970) 40 CC 119 to show that in a petition under Sections 397 398, the court must confine itself to the case as made out in the petition and to the allegations in the petition itself and supporting affidavits, if any, and not look at other evidence with regard to events that might have happened subsequent to the petition. 44. Seth Mohanlal and Anr. v. Grain Chambers Ltd. Muzaffarnagar and Ors. to show that substratum of the company is said to have disappeared, when the object of the company has substantially failed, or when it is impossible to carry on the business of the company except at a loss, or the existing and possible assets are insufficient to meet the existing liabilities. In re H.R. Harmer Ltd. (1959) 1 W.L.R. 62 to show that when the respondent regard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the part of OARC either to arrange for a syndicated credit facility or offer any corporate guarantee, as claimed by KCP. At the inducement of KCP, OARC provided a loan of USD 17 million to DAA, a wholly owned subsidiary of DAIL, to be lent onward to DAIL in accordance with applicable laws and regulatory approvals. However, the loan proceeds were inappropriately remitted by DAA to DAIL, as payment of receivables for services rendered by DAIL and thereafter remitted in favour of CHPL by KCP. CHPL in turn without any basis allotted preference shares to OARC, which came to be cancelled by this Bench in its order dated 29.12.2006 made in C.P. No. 343/111/SRB of 2008. OARC has not caused any loss to CEPL and not liable on any account, as claimed by the petitioners (C.P. No. 65 of 2005). 47. CCL is an extended arm of KCP, which is borne out by the prospectus issued by CCL on the eve of the public issue came out by CCL, wherein it was highlighted that CCL has been promoted by KCP. KCP was one of the directors of CCL at the relevant point of time, namely, October 1992. The annual report for the year 2003-2004 would disclose that KCP alongwith its relatives held 42:62% of shares, whil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 08.2004, for constructing one lakh sq.ft. for apartments in Cherraan Towers, an amount of ₹ 5 crores towards undivided share of the land. 49. The remaining clauses in this agreement are also not beneficial to CPL. CCL is the only beneficiary under the various contracts. CPL and VML are nothing but branches of CEPL and, therefore, Section 402 can be extended to subsidiaries too. CCL is under the control of KCP. KCP had undertaken to suspend the construction activities as per the contracts entered into with CPL and VML. Thus, CCL, having the knowledge of the JVA, the doctrine of indoor management would not apply to it. Therefore, CCL cannot ignore it. CCL has falsely lodged a private complaint against CEPL, Chandran, R. Athappan, ORE and Gopinath Athappan in CC No. 157 of 2006 before the Court of Judicial Magistrate of Perundurai, after filing of the company petition by ORE. There has been no material to show that any amount has been incurred by CCL on development of any of the properties, pursuant to the agreements entered into with CPL and VML and therefore, CCL cannot claim any compensation. The interim report of M/s Deloitte Haskins and Sells on CEPL for the year ended 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CCL has already developed 60,000 square feet of constructed area belonging to third parties and completed construction of Cherraan Towers Phase I and Cherran Plaza. CCL is competent to perform the contracts as entered into with CPL and VML as borne out by the construction work already successfully done by CCL which are found reflected in a number of photographs produced at the time of hearing. The sale deeds dated 31.10.1991, 24.06.1992 and 10.06.1993 would show that KCP sold 248/50,0000, 207/50,0000 and 229/50,0000 of undivided share in the land respectively along with constructed area in favour of third parties. CCL is not a party to the JVA and its terms cannot be enforced against CCL. It cannot therefore, be contended that the impugned agreements are violative of the JVA. 52. CCL in its normal course of business validly entered into contracts with CPL and VML, which are the subsidiaries of CEPL. CPL properties were subject to several controversies, particularly between Coimbatore Municipal Corporation and CPL. The Municipal Administration, pursuant to initiative taken by CCL, gave permission in March 1993 to construct additional six floors, by relaxing the relevant rules, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ties, to agreements, namely CPL, VML and CCL fixed the consideration in respect of the transactions involved therein, after taking into account various liabilities and legal obligations suffered by the respective entities. 54. This Board in Pokhran investments Private Limited v. Dadha Estates Private Limited (2006) 132 CC 324 held that the valuation of property was held to be reasonable when so many litigations regarding that property existed. The Gujarat High Court held in Official Liquidator, Dhavalgiri Paper Mills Private Limited v. Chinubhai Khilachand (2003) 144 CC 277 that to bring the charge of misfeasance against ex-directors, it is necessary that specific acts of commission or omission or negligence on their part must be made out and the resultant losses must be quantified for ordering recovery of such losses. The persons alleging such acts of misfeasance, must produce cogent, reliable and specific evidence to prove that any alleged mis-conduct was wilful and amounted to misfeasance with culpable negligence. The act of commission or omission of negligence should be with the intent and knowledge to cause losses to the company and resulting in personal gain which are abse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t a party to the JVA and therefore, the rights and liabilities and other consequences emerging therefrom do not affect CCL. There is no cause of action for ORE, being a shareholder to approach the CLB challenging the agreements, it is only CEPL which ought to have challenged the impugned agreements, in view of the fact that the issues are between the subsidiaries of CEPL and CCL. Clause 11.3.4(xvi) requiring an affirmative vote from ORE director only in the case of acquisition or sale of the assets of CEPL or its subsidiaries other than in the ordinary course of business of CEPL or its subsidiaries. The contracts of sale or development between VML, CPL and CCL are in the ordinary course of business of the subsidiaries of CEPL and therefore, the requirement of affirmative vote from ORE director does not arise and therefore, these transactions are not violative of the terms of the JVA. The contracts with CCL are fair transactions. ORE has abused the process of law by initiating the present proceedings and seeking to set aside the transactions impugned by them. Section 402(e) of the Act deals with termination, setting aside an agreement between a company and not part)' referred in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsaction, though otherwise perfectly legal and valid and hence incapable of being avoided by the company, was oppressive to the aggrieved shareholders or prejudicial to the interests of the company. This would make it impossible for any outsiders to deal with the company. Merely because the agreements are oppressive to some part of the shareholders, they ought not to be terminated. The shareholders should be prevented from misusing the provisions of Sections 397/398, failing which the proposed remedy becomes a source of greater oppression and harm than the one sought to be removed or prevented, as held in Raghunath Swarup Mathur v. Har Swamp Mathur (1967) 37 CC 802. 60. The internal affairs of CPL and VML cannot be presumed to be known to CCL and CCL is entitled to protection by virtue of the doctrine of indoor management, which protects third parties who have acted in good faith. An outsider is entitled to presume that the procedural aspects of a transaction have been carried out, as held in (i) Sree Meenakshi Mills Ltd. v. Callianjee Sons (1935) Vol.5 CC 103; (ii) Varkey Sourier v. Keraleeya Banking Co. Ltd. (1957) Vol.27 CC 591; and (iii) C.K. Siva Sankara Panicker C.K. v. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceable as (i) parties are competent; (ii) consent of parties is free; (iii) consideration is lawful; (iv) object of contract is lawful; and (v) contracts are not expressly declared by the Act to be void and hence cannot be challenged in a court of law. These essentials of a contract having been duly satisfied as stipulated in the Indian Contract Act, 1872, cannot be assailed by ORE. The contracts entered into between CPL, VML and CCL are not hit by the provisions of Sections 24, 25, 26, 27, 28, 29 or 30 of the Indian Contract Act, 1872. CCL is only a contractor therefore, ORE cannot seek to set aside the agreements which are properly and validly executed between CPL, VML and CCL. The CLB may not, therefore, amend, vary, modify, cancel the contracts entered between CPL, VML and CCL. In the event of setting aside the aforesaid contracts, among other parties, the material obligation and commitments undertaken by CPL will be seriously affected. CCL could not undertake the project on account of the restraint order passed by the CLB, thereby both CPC and CCL and the shareholders are put into irrepairable loss. 63. According to SBI, Main Branch Erode, CEPL opened a short term deposit o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... redit balance of only ₹ 2394.48. 66. After conclusion of the arguments and when the compromise efforts attempted among the contesting parties failed, ORE came out the following proposal remedying the grievances: (a) to remove KCP as a director, CEO and Managing Director of CEPL with immediate effect; (b) to direct CG Holdings and KCP to return in favour of CEPL and the subsidiaries all assets- moveable and immovables - funds and securities of CEPL and the subsidiaries, misappropriated by them, apart from capital investment of ORE, Athappan, in CEPL; CEPL's shareholding in CPL and VML and all immovable properties belonging to CPL and VML within 14 days of the order of this Bench; (c) to set aside all contracts entered into by CEPL and the subsidiaries in violation of the JVA, with immediate effect; (d) to direct KCP to provide to M/s. Deloitte Haskins and Sells, Chartered Accountants all statutory records, financial statements, bank statements, and other records in order to carry out an audit for the period between 30.01.2004 till date and to carry out valuation of CEPL; (e) to constitute a new Board of directors of CEPL consisting of nominee of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ival claims of the contesting parties are bound to be weighed with reference to the voluminous records made available before me. 68. R. Athappan, is the Principal Officer of M/s First Capital Insurance Company Limited, a group company of OARC, forming part of 'Fairfax Group companies, having its registered office at Stamford, Connecticut, USA, as reflected in the annual report of Fairfax for the year ended 2005. The exchange of e-mail Athappan and KCP time to time, particularly e-mail sent on 03.08.2004 by Gopinath Athappan, son of R. Athappan and e-mail dated 30.09.2005 of R. Athappan would disclose their family acquaintance and close familiarity which existed even prior to the incorporation of CEPL in November 2003, the fact of which has been admitted by KCP and found reflected in the communication dated 04.11.2003 of Athapppan addressed to KCP, the relevant portion of which assuming relevance reads thus: Please refer to your discussion in Singapore with my father Mr. R. Athappan when you expressed your current cashflow difficulties. You had requested for assistance to tide over the cash flow problem and offered to issue new shares to raise cash of IRS 4 crores at a mutu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Limited (UPL) in a manner directed by ORE (clause 2A.6); to amend the articles of association of CPL and VML as specified in Clause 2A.7 to appoint directors of CEPL and its subsidiaries including CPL and VML with the prior written consent of ORE (clause 2A.8); to subscribe ₹ 75 crores by ORE towards equity capital of CEPL (clause 3). to seek and obtain a syndicated credit facility of ₹ 300 crores, to be secured by a corporate guarantee to be issued by OARC (clause 9.1); to pledge the shares of (i) CG Holdings and Athappan in VML; (ii) KCP and his affiliates in UBC and UPL and (iii) Athappan in UPL and UBC in favour of OARC, as security for the grant of a corporate guarantee by OARC (clause 9.1); to prepare a detailed Business Plan by KCP, within its parameters for CEPL on annual basis (clause 10.1); not to carry through any resolutions by the Board, in relation to the specified matters, without an affirmative vote from ORE director, which shall include sale of the property or assets of CEPL or its subsidiaries, other than in the ordinary course of business of CEPL or its subsidiaries (clause 11.3.4/article 88 (xvii); not to car ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs of CEPL emphasizes that the general control, supervision, conduct and management of CEPL should be exercised _by the Board of directors. The proviso to Section 2(26) of the Act makes it abundantly clear that ''a managing director of the company his powers subject to the superintendence control and directions of its Board of directors. In the light of various provisions of the JVA, articles of association of CEPL and of the Act, the responsibilities of carrying on the business and affairs of CEPL lie jointly or severally in the hands of the Board of directors of CEPL. When KCP failed to achieve the business targets of CEPL, in terms of the JVA, neither R. Athappan nor Chandran acted for the paramount interest of CEPL, as laid down by the Supreme Court in Sangramsinh P. Gaekwad and Ors. v. Shantadevi P. Gaekwad and Ors. (supra), by discharging their fiduciary duties in accordance with the JVA. When default occurred in respect of many a matter covered under the JVA, ORE did not choose to act as per Clause 14.2 of the JVA, in declaring such matters as events of default. The default on the part of KCP and the inaction by the remaining directors, in my view, contributed towa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uarantee should be available and is pursuing legal actions against the Company. The Company finds this claim without merit and is vigorously defending the legal actions. 74. It is clear from the above recitals forming part of the annual report of Odyssey Re Holding Corporation, which are not under dispute, that OARC did not dis-own its obligation to provide a guarantee of a credit facility in terms of the JVA, but only denied the existence of the requisite conditions for any future provision of the guarantee any longer on the sole premise that no credit facility has been established by CEPL as of 31.12.2005. However, it is on record that GE Commercial Finance, Gurgaon, had sanctioned in terms of its communication dated 13.09.2004, in favour of CEPL, a term loan of USD 66 million for the purpose of working capital finance, capital expenses and investment in subsidiaries on the terms and conditions specified therein. The categorical assertion of Shri Karthik Seshadri, learned Counsel, that the upfront fees of US D 50,000 remitted by CEPL, at the time of the acceptance of the in-principle offer of GE Commercial Finance, was refunded by it for not having disbursed the sanctioned t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rms of Clause 2A.7 of the JVA. Any appointment by CEPL to the Board of directors of its subsidiaries including CPL and VML should be made only with the prior written consent of ORE, until expiration of the terms of the JVA (clause 2A.8) With the execution of the JVA, the Board of directors of CPL and VML must be reconstituted by inducting CG Holdings nominee, Athappan nominee and ORE representative in the place of the existing directors (clause 2A.9). Athappan and CG Holdings should create a pledge over 2,84,550 and 12,32,740 shares in CPL and 11,62,900 and 12,92,600 shares in VML in favour of ORE. Athappan should pledge 25,05,300 shares in CPL in consideration of ORE having agreed to subscribe to ORE shares {clause The outstanding dues of CPL to Lord Krishna Bank and Tourism Finance Corporation of India Ltd. should be repaid by CPL using funds loaned by CEPL to CPL {Clause 3.2(i)} All shares held by CG Holdings in CPL should be transferred to CEPL {Clause 3.2(iii)} Athappan should transfer his shares in VML and CPL to CEPL {clause 3.2(iv)} The dues of VML to Industrial Development Bank of India Limited (IDBI) should be repaid {clause 3.2(vi)} ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing Company, is entitled to agitate the grievances on account of the subsidiary companies. 78. In view of this, the grievances of ORE, holding 45% of equity shares of CEPL that the subsidiary companies, namely, CPL and VML entered into contracts with CCL in respect of their properties, contrary to the JVA and without any approval of the Board of directors of CEPL can be raised in the present proceedings. The proposition of law advanced by Dr. K.S. Ravichandran, that shareholders of the holding company cannot proceed against the subsidiary for remedying the grievances in the subsidiary companies cannot be applied uniformly, but will depend upon the facts and circumstances of each case. No hard and fast rule can be laid down. The arguments that no transaction which is legal and valid, but oppressive cannot be set aside are misconceived in the light of the principles enunciated by the Supreme Court in Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd. (1981) VoL. 51 CC 743, according to which every action in contravention of law may not per se be oppressive for the purpose of Section 397 of the Companies Act, 1956., a resolution passed by the directors ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4.06.2004 and 12.08.2004 after following the procedure specified in the articles; (b) notices of the Board meetings were sent to R. Athappan and Chandran; and (c) R. Athappan and Chandran participated in this Board meetings. The bare Board minutes, without any corroborative evidence establishing the convening and holding of such Board meetings especially when they are under challenge, cannot sustain any such investment by CEPL in DAIL. 81. Furthermore, the categorical admission of KCP made before the Income Tax authority, which is found reflected in the assessment order dated 23.02.2005 in the matter of SPIL would show that KCP had transferred in anticipation of the approval of the Board of CEPL, a sum of ₹ 33 crores as capital advance to CHPL, which was paid to DAIL and that CEPL Board had subsequently disapproved the said transfer of funds to CHPL for investing in DAIL. It is rather evident from the communication of KCP dated 05.02.2005 addressed to the Income Tax Authority that the investment made in DAIL does not enjoy the authority of the Board of CEPL. It is, therefore, far from doubt that the investment made by CEPL in DAIL is without any authority of the Board of C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7. 11.08.2004 Paul R. Athappan E-mail Called for copies of the Rivett executed agreements in respect of the purchase of DAIL for preparing documentation with respect to loan and security arrangement. 8. 11.08.2004 Paul Prem Watsa E-mail Three different modalities as Rivett OARC discussed with R. Athappan with respect to DAIL refinancing of USD 17 million. 9. 12.08.2004 Paul E-mail Asked for details of US Rivert Bank account of DAIL to (ORE) wire USD 17 million. 10. 12.08.2004 Mark Paul - Rivett Modalities of wiring funds to Welshow DAIL only signing of OARC agreements in India. 11. 24.09.2004 R. Athapp KCP E-mail C alled for annual reports of an DAIL for the years 2001 2002; physical and finan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nappropriately remitted to DAIL in India as payment for accounts payable. In this connection, the recitals forming part of CP. No. 343/111/SRB/2006 filed before the CLB in March 2006 by OARC against CHPL assuming relevance reads as follows: ... in August 2004, the Company and Palanisamy approached the petitioner through ORE, pleading that DAIL was in immediate requirement of a loan of USD 17,000,000 (United States Dollars seventeen million), failing which cheques issued by DAIL would be dishonoured. Palanisamy agreed that this loan would be secured inter alia against his investment in CEPL, which had been routed through another company known as C.G. Holdings Private Limited. A copy of the Non-Disposal Undertaking dated 20.08.2004 is attached hereto as Annexure P2. The petitioner was induced by these representations and assurances made by Palanisamy and agreed to provide the loan. Keeping in mind the exchange control laws of India, the petitioner loaned an amount of USD 17,000,000 (United States Dollars seventeen million) ('loan proceeds') to Data Access America Inc ('DAA'), a body corporate organised under the laws of the State of Delaware, USA, which is a whol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ining to CPL and VML to CEPL in consideration of obtaining 45% stake in CEPL, which was routed through CG Holdings. It may be observed that the transfer of the shares of the subsidiaries, namely, CPL and VML in favour of CEPL is governed by the Share Purchase Agreement dated 13.01.2004 entered into between CG Holdings and CEPL, in pursuance of which CG Holdings sold 1,00,00,000 equity shares of ₹ 10/- each held by it in CPL and 12,92,600 equity shares of ₹ 10/- each in VML in favour of CEPL and in consideration thereof, CG Holdings was allotted 12,41,419 shares of ₹ 100/- each of the issued subscribed and paid up capital of CEPL. Athappan had also similarly sold his shareholding in CPL and VML in exchange for being allotted 2.84,550 equity shares of ₹ 100/- each of the paid up capital of CEPL. The Income Tax Authorities, while arriving at the capital gains of ₹ 70.94 crores in terms of its communication dated 08.06.2005 pointed out that M/s CG Holdings P. Ltd. and Shri Athappan were holding the controlling shares of the Company almost 100% (including those shares presently held by the public agreed to be purchased by Shri K.C. Palanisamy), This right ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interim report of M/s Deloitte Haskins Sells has traced the movement of funds in CEPL books for the year ended 31.03.205, according to which a major portion of ₹ 16.13 crores was moved to group companies/related parties. This movement of funds is not supported by any approvals from the Board of CEPL. 87. The yet another major issue shrouded with controversies are whether the impugned contracts entered into between CPL, VML and CCL are oppressive of ORE and other shareholders of CEPL. There are five agreements, which are (a) agreement of sale-cum-developing dated 28.08.2004 between VML and CCL for sale of the landed property measuring 7.80 acres situated at Coimbatore for a consideration of ₹ 6 crores; (b) agreement of sale-cum-developing dated 28.08.2004 between VML and CCL for sale of landed property measuring 17.15 acres situated at Coimbatore for a consideration of ₹ 60 crores; (c) agreement of sale-cum-developing dated 28.08.2004 between CPL and VML to construct 1,00,000 sq.ft. for apartments in Cherraan Towers for a consideration of ₹ 5 crores; (d) agreement of contracting dated 14.01.2005 between CPL and CCL for construction of a three star hotel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rk. 90. There is nothing on record to show that CPL is empowered, in its ordinary course of business, to construct or develop a hotel or an information technology park. Clause 12.3/article 45 specifies that any decision at a meeting of the shareholders of CEPL in respect of the matters specified therein requires an affirmative vote from ORE and no resolution in relation to such matters should be carried through unless approval of ORE designate is obtained. By virtue of Clause 12.3(vi)/article 45(vi) any investment or other payment made by CEPL or its subsidiaries in excess of USD 1,00,000. requires an affirmative vote from ORE. The investments by CPL in each of the contracts entered into with CCL, exceed the monetary limit of USD 1,00,000 fixed under Article 45(vi). Clauses 11.3.4(vii)/Article 88(a)(vii) further stipulates that entering into Joint Venture Agreement or other business arrangement by CEPL or its subsidiaries require an affirmative vote from ORE director and no resolution in relation to this matter can be carried through without approval of ORE director. 91. CPL or VML has not ensured compliance with these requirements before entering into contracts with CCL and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e valued at ₹ 200 crores, as claimed by KCP in his police complaint dated 27.02.2005 lodged with EOW, Chennai, the present market value of which would have significantly increased. At the Board meeting held on 22.08.2005 the directors present including KCP unanimously resolved that KCP would suspend all the construction activities undertaken by CCL. CCL has not produced any material to show that any development or construction work has been carried out pursuant to the controversial contracts, thereby incurring any expenditure in this behalf. 94. The agreements of sale-cum-developing dated 28.08.2004 in respect of the landed properties comprising of 7.80 acres and 17.15 acres belonging to VML would fetch a total consideration of ₹ 66 crores over a period of ten long years. These properties valued at ₹ 68.60 crores as at 03.01.2003 by Ernst Young Private Limited, if fetch only a sum of ₹ 66 crores after 10 years, can never said to be for the benefit of VML. This consideration of ₹ 66 crores reportedly fixed after taking into account the liabilities and obligations suffered by CPL and VML ought to have been done, after meeting the requirements of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l v. Wonderweld Electrodes Private Limited (b) M. Moorthy v. Drivers and Conductors Bus Service P. Ltd.; and (c) Seth Mohanlal and Anr. v. Grain Chambers Ltd. Muzaffarnagar and Ors. (supra) These agreements are not found to be in the paramount interest of CEPL and, therefore, KCP cannot derive benefit out of the decision in Nanalal Zaver and Anr. v. The Bombay Life Assurance Company and Ors. (supra). Hence, the grievances of ORE shall necessarily be remedied under Section 397, notwithstanding the fact that no relief under Section 402(f) does warrant in the facts of the present case. ORE cannot be said to have misused the provisions of Section 397/398 and the proposed remedy under Section 397 cannot become a source of greater oppression, as found in Raghunath Swarup Mathur v. Har Swarup Mathur (supra). CCL's capacity and capability, demonstrated with reference to the documentary evidence on record in no way would justify the contracts with CPL and VML and overcome the consequent prejudices being suffered by CEPL. KCP undoubtedly had taken enormous steps in safeguarding and enhancing the value of CPL properties as well as bringing VML out of sickness, thereby saving its vast exte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... continue to be in force, in the light of the reliefs proposed to be granted in the interests of CEPL and its shareholders. 99. By virtue of Clause 5.2 of the JVA, KCP as the CEO is bound to devote his full time and diligent efforts to the day-to-day management of CEPL and its subsidiaries. It is obligatory on his part to maintain the statutory and other records of CEPL in the manner as prescribed in the Act and KCP is bound to allow access to these records in favour of other directors of CEPL. Clause 107 of the articles of association of CEPL stipulates that CEPL shall maintain true and proper books of account relating to the business carried on by it and they should be audited by CEPL's auditor. CEPL is under an obligation to deliver to its shareholders, audited annual report and other details of business operations in terms of Clause 108 of the articles of association. 100. The interim report submitted by Deloitte Haskins Sells, Chartered Accountants, appointed by this Bench to carry an independent audit of transactions of CEPL for the year ended 31.03.2005 is inconclusive due to lack of the requisite information which ought to have been furnished by KCP. Moreover the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4.06.2004 to sustain the transfer of funds from CEPL to CHPL in the course of the IT proceedings in connection with SP1L, wherein KCP reported that in anticipation of the approval of CEPL board, funds have been transferred to CHPL and further that CEPL Board subsequently disapproved the same. While the front pages of 19 Board minutes covering the period from 05.12.2003 to 01.06.2005 bear one date, the last page of such minutes bear different dates. These discrepancies remain unexplained. Clause 11.3.2 of the JVA stipulates that no resolution shall be deemed to have been duly passed by the Board by circulation, unless the resolution has been circulated in draft to all the directors and is approved by the entire Board of directors of CEPL. 102. The disputed resolution said to have been passed by circulation on 21.09.2005 authorizing appropriation of the deposits with SB1 branches towards the Income Tax liabilities of CG Holdings and KCP does not meet the requirements of Clause 11.3.2 of the JVA. At the time of conclusion of arguments it has been abundantly made clear on behalf of ORE that the business of CEPL can never be carried on in association of KCP, while the latter asser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mosity and lack of mutual trust as well confidence between them, which would not only come in the way of proper functioning of the Company but would also affect the smooth management of the affairs of the company. Having reached this conclusion, the controversies on account of the Term Sheet, dealing with the manner of terminating the JVA do not assume any significance. Accordingly, I propose to impose suitable conditions to ensure cessation of relationship among KCP, ORE, and Athappan, without suffering any prejudices by them. Any other relief resolving the disputes as putforth by ORE in its memo dated 11.12.2007 will depend upon several of conditionalities on the part of KCP, the fulfillment of which is very much doubted by ORE. 105. In view of the foregoing conclusions and in exercise of the powers under Sections 397 398 read with Section 402 and with a view to bringing to an end the grievances of CG Holdings, KCP, ORE and Athappan, the following order is passed: CEPL shall return a sum of ₹ 75 crores and ₹ 4 crores invested by ORE and Athappan respectively, together with simple interest at the rate of 8% per annum from the date of investment till the date ..... X X X X Extracts X X X X X X X X Extracts X X X X
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