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TMI Blog2007 (12) TMI 531X X X X Extracts X X X X X X X X Extracts X X X X ..... stigate into the investments made by AKSH towards the share capital of the Company; d) to appoint a team of Chartered Accountant(s)/Chartered Engineer(s) to evaluate the quantum of work done by AKSH; declare that the investments of AKSH over and above the said quantum of work to have been issued without consideration and consequently annul the said shares and direct the modification of the shareholding of the Company; and e) to vest the day-to-day administration of the Company in a Committee of directors comprising of a nominee from each of the groups, namely the petitioners, AKSH and ATPS. 2. The facts, in brief, leading to the main petition are: The Government of Andhra Pradesh conceived a project to create a state telecommunications network linking all the 23 districts, by means of a single consolidated network known as AP Broadband Network , offering triple play for voice, video and data. Towards this end, APTS awarded the project in favour of AKSH being the lowest bidder, with a stipulation that the actual implementation of the project would be carried out by a special purpose vehicle, pursuant to which the first respondent Company came to be incorporated. The fir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inst AKSH and in view of its merger with AOFL the latter becomes a necessary party and accordingly AOFL came to be substituted in the place of AKSH in the main petition. There are several disputed questions of fact involved in the present proceedings. The facts on record would not be sufficient to establish the acts of oppression and mis-management in the affairs of the Company, but require oral evidence for deciding the case on hand as under: a) to establish that no tangible work under EPC contract has been performed by AKSH; b) to prove the mismanagement of funds and activities of the Company at the instance of AKSH; c) to establish the circumstances under which the disputed payments were made by the second petitioner through a number of cheques signed and issued by him; d) to weigh the veracity of the statements raised in the counter by the respondents; e) to bring out the collusive course of action adopted by the respondents 2-5 and 6, with a view to eliminate the petitioners from the Company; f) to prove that the first petitioner had furnished all the securities to the sixth respondent as envisaged in Intercorporate Deposit Agreement ( ICD Agreement ) an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... now produced for inspection are fabricated for the purpose of the present company petition. AKSH, reportedly supplied cables worth ₹ 114 crores, which are not supported by the invoices and all the invoices produced are bogus documents. No goods worth ₹ 114 crores as claimed by AKSH have been supplied under the EPC contract. The petitioners have produced a copy of the unsigned letter dated 14.06.2007 addressed by Managing Director, APTS Limited, in favour of the Secretary II, IT C Department, Government of Andhra Pradesh, disclosing the irregularities in supply of the materials by AKSH. It speaks of the physical verification conducted by APTS Engineers, the project status etc under EPC contract. The main grievances of the petitioners that AKSH had dumped inferior quality cables, inflated the invoices, raised bogus invoices and failed to achieve any connectivity inspite of spending huge monies can be established by summoning the said letter dated 14.06.2007, as sought in C.A. No. 183 of 2007. Shri Ravi learned Counsel, on merits of the main petition submitted: As per the SHA the first petitioner has to bring in ₹ 37 crores, out of which ₹ 22.20 cr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e documents, which are cooked up for the purpose of, the company petition. The acknowledgements have been obtained from low cadre employees of the Company, which cannot be relied upon, as all the signatures appear to have been done at one and the same time. The supply of cables is only on paper and AKSH dumped defective, sub-standard and non-functioning cables in its own godowns, without obtaining the endorsement or acknowledgement from the second petitioner on any of the invoices or challans. AKSH has produced a series of statements disclosing the particulars of stock of materials lying with various contractors. These statements are unsigned by any one and must be ignored. Similarly, the statements of contractors on record cannot be linked to supply of materials to the Company. These statements cannot have any evidentiary value and are liable to be ignored. The insurance policies relied on by AKSH cannot prove the existence of goods, in the absence of the stock register maintained by the Company. The auditors' report dated 10.07.2006 forming part of the balance sheet for the year ended 31.03.2006 would indicate that no physical verification of fixed assets has been carrie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... res in the Company with the sixth respondent, a company under the control of the third respondent to raise finances towards subscription of their share of equity capital in the Company. As against the loan amount of ₹ 33 crores, which ought to have been released, the sixth respondent has so far released to the petitioners only an amount of ₹ 11.10 crores. The sixth respondent colluding with the respondents 2 to 5 is refusing either to release the balance loan amount or the proportionate number of shares out of the total shares pledged with them to raise finance with any third party so as to pay the second and final call money, demanded by the Company. In the meanwhile, if the shares of the petitioners are forfeited, they will be put to irreparable loss. The petitioners have made serious allegations against the sixth respondent, which are to be answered by them and therefore, the sixth respondent even though not a shareholder becomes a necessary party to the present company petition. The respondents are insisting for payment of second and final call amount of ₹ 14.77 crores by the petitioners, with a view to divert the said amount. The first petitioner is ready and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he High Court, with a view to delay payments payable towards the share capital. Furthermore, the Bench directed on 20.03.2007 that the operation of the Bank account of the Company must be by the nominee director of APTS, whereas the respondents have opened by means of an alleged circular resolution dated 02.04.2007 without even circulating the alleged resolution to the second petitioner, two accounts with Dhanalakshmi Bank Limited, in the name of the Company, one of which is operated by the second respondent in violation of the order of the Bench. At the board meeting held on 06.05.2006, it was decided to have a new registered office of the Company and further resolved that the first floor and fifth floor of this office shall be used by the first petitioner, to which the second petitioner and respondent Nos. 2 to 4 were parties. The Company paid a security deposit of ₹ 18 lakhs for its new registered office premises, which included an amount of ₹ 4.5 lakhs in respect of the first and fifth floors forming part of the same registered office premises taken for the first petitioner. This amount of ₹ 4.5 lakhs paid on behalf of the first petitioner was to be adjus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... counts, bring back the monies misappropriated by it and also contribute its part of the unpaid share capital, for which the Bench may appoint a team of Chartered Accountants to evaluate the quantum of work done by AKSH and assess the monies spent by AKSH. No revenue is being generated by the Company with the reported investment of ₹ 110 crores in the Company. The Company has not started its business and hence selling of one's shares to the other shareholder on valuation of the shares of the Company does not arise. The first petitioner has entered into a marketing agreement with the Company, while AKSH got the benefit of EPC Contract. The first petitioner has genuine interest in the marketing agreement, which is attempted to be cancelled by the respondents in respect of which appropriate remedies will be worked out by the petitioners. The CLB has wide powers under Section 402(e) of the Act to set aside the third party contract. AKSH has no capacity to execute the contract and therefore, the EPC Contract may be terminated by resorting to Clause 24 of the EPC Contract. Therefore, the EPC Contract may be entrusted to any of the reputed contractors and AKSH can also reap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consequences of which are enumerated in article 17 of the contract, thereby providing inherent protection against any default by AKSH to the Company. APTS is not a party to the CLB proceedings and therefore, EPC Contract cannot be cancelled, since it would adversely affect APTS. By virtue of article 18, any dispute arising out of the contract, may be referred to arbitration. The notification dated 10.08.2007 providing right of way by the Government of Andhra Pradesh in favour of AK.SH would show that APTS will not cancel the contract. In view of this, the unsigned letter of APTS dated 14.06.2007 obtained illegally by the petitioners does not assume any relevance at all. All the grievances set out in the company petition arising out of the contractual obligations under the EPC Contract, with respect to which mis-management is alleged by the petitioners, do not in any way relate to rights of the petitioners as shareholders and fall outside the scope of Sections 397 and 398, whereas, in a petition under Section 397/398, it is the right of a member that could only be agitated in terms of the decision in M.L. Thukral and Ors. v. Krone Communications Limited and Ors. (1996) Vol. 86 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the CLB. Entering into and termination of commercial agreements are purely within the purview of the board of directors and, in their commercial wisdom, they may do whatever they consider appropriate. The courts cannot intervene in these matters, unless otherwise they fall within the parameters of the provisions of Sections 397/398 and therefore, there is no scope for the CLB to intervene in the matter of the EPC Contract between a shareholder and the Company. During the pendency of the present proceedings, AKSH has been merged with AOFL, which does not in any manner affect the EPC Contract. The rights and obligations of AKSH under the EPC Contract remain affected after merger and the Scheme of Merger provides a suitable clause to this effect. Article 5 of the SHA specifies the shareholding pattern of the Company in the ratio of 64.6%, 21.1% and 14.3% to be contributed by AKSH, first petitioner and APTS respectively. Accordingly, the first petitioner has to bring in ₹ 36,97,50,000 out of which a sum of ₹ 22,20,00,000 has been remitted towards its share of the capital. AKSH has contributed ₹ 88,14,25,000 and yet to contribute ₹ 24,83,25,000. APTS ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dent is neither a necessary nor a proper party and therefore, he is liable to be struck off from the array of parties. The first petitioner has not been able to raise funds on its own, without the support of the respondents, to make their equity contribution in the Company and has always been dependent on the respondents. Thus, the first petitioner has not contributed any amount from their own coffers towards the share capital of the Company. The petitioners 2 to 4 hold 50000 shares of ₹ 5/- each and their stake in the Company is only ₹ 2,50,000/-. As on the date of filing of the petition, 7,38,75,000 shares of the first petitioner are partly paid up, namely, ₹ 3/- per share and the balance final call due at the rate of ₹ 2/- per share amounting to ₹ 14,77,50,000/-, has not been paid, despite extending time till 28.08.2006 for the first time and thereafter till 25.11.200ft at the request of the first petitioner, compelling the Company to convene a board meeting in December 2006 for the purpose of giving a final notice to the first petitioner and AKSH to pay the call due on the shares held by them, failing which the shares on which the call money were d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... court must come with clean hands; (b) a litigant who approaches the court, is bound to produce all the documents executed by him which are relevant to the litigation. If he withholds a vital document in order to gain advantage he would be guilty of playing fraud on the court as well as on the opposite party; (c) a person whose case is based on falsehood, has no right to approach the Court; and (d) fraud avoids all judicial acts, ecclesiastical or temporal. The High Court of Karnataka in Srikanta Datta Narasimharaja Wadiyar v. Sri Venkateswara Real Estate Enterprises Private Limited (1991) Vol. 72 CC 211 categorically held that the relief under Sections 397 and 398 is an equitable relief, which is entirely left to the discretion of the company court and they will be granted only to persons who approach the Court in good faith and the parties who apply for equitable reliefs must come with a clean record and hands. The communications of the second petitioner on record do not complain of the grievances set out in the company petition but various other issues in the affairs of the Company, namely, payment of commission, internet loss, Cisco Service poles, cable TV equipments, financial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... supplied by AKSH under the EPC Contract. The auditors' certificate dated 05.02.2007, based on the ledger account of the Company in the books of account of AKSH would reveal that AKSH supplied materials and rendered services to the Company during the period 2005-2006 2006-2007 upto 30.09.2007 to a tune of ₹ 152 crores. The payments to the contractors are kept pending, since the reconciliation and verification of the work have not been done by the contractors. AKSH never fraudulently inflated the bills or dumped any defective fibre optic cables. All the materials supplied by AKSH have been duly verified and the petitioners' charges are baseless. The plea of the petitioners that 25% of the EPC Contract of ₹ 370 crores ought to have been completed with the amount of ₹ 100 crores withdrawn by AKSH, whereas, not even a single district or the Secretariat has achieved the connectivity is not logical. No petition can be entertained on speculative premises and with the object of engaging in fishing expedition and making a roving enquiry as held in Ashok Kumar Pandey v. The State of West Bengal (2004) 1 L.W. (CrL) 369. The plea of fraud put forth by the petitioner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct came to be awarded in favour of AKSH on account of the extensive knowledge and expertise of AKSH in the area of broadband networks, telecommunication and information technology and not on account of the efforts of the petitioners as claimed by them. Thus, the second petitioner having made personal gains, has been acting prejudicially to the interest of the Company. 5. I have considered the pleadings and arguments of learned Senior Counsel for the parties. The main issue for consideration is whether the grievances complained of by the petitioners warrant intervention of the Company Law Board, in exercise of the powers under Sections 397 398 read with Section 402 of the Act. All the preliminary issues, being inter twined with series of contentious issues raised before me will appropriately be dealt along with the merits of the main petition. At this point of time it is relevant to observe that when the respondents sought to modify the ex parte, interim order made on 05.12.2006, whereby it was directed that any decision that may be taken at the board meeting of 08.12.2006 on inter alia the forfeiture of shares of the petitioners in relation to the partly paid shares, shall not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rawn, out of the equity capital of ₹ 110 crores put into the Company by the petitioners and AKSH, about ₹ 100 crores, without performing any tangible work and the work done for the Company is not equivalent to ₹ 100 crores. There is not even a single triple play connectivity that has been established as per the EPC Contract in any place, whereas by having drawn an amount of ₹ 100 crores, AKSH ought to have completed 25% of the work, namely, at least six districts should have achieved connectivity. AKSH initiated steps, with ulterior motive, to merge itself with AOFL, a listed company belonging to AKSH, without even a proper notice of the amalgamation scheme and without approval of the ATPS and Govt. of Andhra Pradesh (6.16), which is violative of the executed agreements. AKSH fraudulently inflated the bills, dumped defective fibre optic cables in their own godowns, raised invoices and withdrawn monies to the tune of ₹ 100 crores, without achieving any connectivity and tangible work on ground. AKSH is obliged to open a bank guarantee of ₹ 50 lakhs in terms of the EPC Contract, which has not been complied with. The respondents 2 to 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... parties, which are summarised herebelow: A) AGREEMENT DATED 21.04.2005: The agreement is subject to fulfilment of several conditions stipulated therein, which shall include issuance of Government Orders for right of way by Government of Andhra Pradesh (Article 4). AKSH, as the principal shareholder shall implement the project in a timely and cost effective manner (Article 5.1). The Company shall ensure that the project is implemented as specified and in terms of specifications given in Schedule I (Article 5.4). If the Company fails to complete the project as specified in the project plan, it shall pay liquidated damages as per Schedule V, save in the case of any delay on account of a Force Majeure Condition (Article 9). The Government of Andhra Pradesh shall provide free right of way facilitating the implementation of the project in terms of the agreement. (Article 10.1). The parties to the agreement shall constitute a Project Implementation (PIC), which will oversee the implementation of the project (Article 12.1.1). The role and responsibilities of PIC are specified (Article 12.1.2). The Company shall provide progress reports giving in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urrency of the EPC contract (Article 12). Events of default on the part of AKSH and the consequences of such events of default are specified, which shall include termination of the EPC contract and payment of liquidated damages of beyond ₹ 500 lakhs (Article 16 17). Any dispute arising out of the EPC contract, if not resolved amicably within the stipulated time, the parties may refer the dispute to arbitration in the specified manner (Article 18). C. SHAREHOLDERS AGREEMENT DATED 04.06.2005: The capital structure of the Company, the contribution of the shareholders towards their share of the capital and the manner in which the shareholders shall subscribe to the shares of the Company are specified (Article 5). Article 6 specifies the role and responsibilities of the shareholders of the Company, namely, AKSH, APTs and the first petitioner are enumerated. Accordingly AKSH will enter into the EPC contract with the Company for complete turnkey execution or implementation of the project in the specified manner. AKSH will be responsibilities for completion of the project by the Company in terms of the EPC Contract (Article 6). The constitution of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceeding under Section 397/398 the acts of oppression and mismanagement complained of must affect the person concerned in his capacity or character as a member of the company and such conduct can be oppressive only when it is burdensome, harsh, and wrongful, involving an element of lack of probity and fair dealing to members in matters of the proprietary right as shareholders. The project has been awarded by APTS in favour of AKSH to be implemented by the first respondent Company, which is closely held by the petitioners as well as AKSH. According to the petitioners their rights as shareholders and their rights under the EPC contract are interwoven, while it is strenuously contended by the respondents that it is only the Company and not the petitioners, being shareholders of the first respondent Company can invoke the jurisdiction of the CLB for the alleged breach of the terms of the EPC contract, by AKSH. The general rule as laid down in Foss v. Harbottle (supra) is that in the case of an injury to the corporation, it is for the corporation to sue in its own name and individual shareholders cannot assume to themselves the right of suing in the name of the corporation. The effect of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es during the period between 10.06.2005 and 23.05.2006 in favour of AKSH by means of as many as eight cheques signed by the second petitioner reportedly towards supply of materials and rendering of services by AKSH under the EPC contract. It is relevant to observe that the board meetings were held on 01.07.2005, 17.09.2005, 30.11.2005, 15.12.2005, 04.03.2006, 10.07.2006 and 08.12.2006, after release of the funds in favour of AKSH by the Company under the EPC contract. Nevertheless the charges presently levelled by the petitioners on defective supply of the cables, siphoning of the Company's funds against factious bills, etc. have been neither raised nor deliberated at any of the aforesaid board meetings. The second petitioner neither put forth all these charges at the annual general meeting of the members of the company held on 02.08.2006, whereas the board of directors of the Company, which included the second petitioner thanked, among others, AKSH for their co-operation in the directors' report, forming part of the annual report for the year 2005-2006. The second petitioner in his communication dated 22.08.2006 addressed to AKSH while complaining of non-payment of commiss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the meeting of the Management Committee. The second petitioner is a party to the deliberations took place at the meeting of Managing Committee as borne out by the minutes of the meeting, signed by the second petitioner. There is nothing to suggest that the second petitioner raised at the aforesaid meeting the serious issues in relation to supply of poor quality and sub-standard materials while implementing the project or siphoning of monies to a tune of ₹ 100 crores by AKSH at the implementation stage, against the fictitious invoices or any other substantial charges set out in the company petition. The Management Committee meeting was held on 20.11.2006, just two weeks prior to filing of the company petition on 04.12.2006. Nevertheless, the minutes of the Management Committee meeting are silent on every one of the petition mentioned allegations save the default committed by AKSH towards the contractors. There is nothing whatsoever to show that the second petitioner being a director in charge of the day-to-day management of the Company and forming part of the Project Implementation Committee, ever exercised due diligence either in monitoring the progress of the project or i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t to a tune of ₹ 94.43 crores during the period 2005-2006, which is broadly in consonance with the figure of ₹ 94.73 crores, being the value of cables and other accessories held by the Company reflected in the balance sheet for the year ended 31.03.2005 of the Company. However, the supplies made by AKSH to the Company during the year 2006-2007, as certified by the statutory auditors of AKSH are not taken cognisance, in view the disputes raised by the petitioners. The e-mail communication dated 25.11.2006 from APTS emanated ten days prior to the petitioners approaching the CLB would indicate the deficiencies in implementing the EPC contract and non-payment to the contractors by AKSH. The Communication dated 04.12.2006 addressed to the second petitioner by an employee of AKSH on non-receipt of materials despite of receipt of as many as 78 invoices amounting to ₹ 62.19 crores, does not assume any significance in view of the fact that the company petition has been signed on 02.12.2006, two days prior to the said communication, and further that the company petition has been filed on 04.12.2006. Similarly, APTS has given on 19.01.2007, after initiation of the present pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at its meeting held on 24.05.2006 resolved to make a call for payment of balance call money at ₹ 2/- per share on equity shares of ₹ 5/- each due from the shareholders, upon which the first petitioner was served with a call notice dated 29.05.2006 for payment of the balance call money of ₹ 14,77,50,000/- due on 7,38,75,000 equity shares. In response to the said call notice, the first petitioner in its letter dated 21.08.2006, sought extension of time for payment of the last call on its shares, which became due on 28.08.2006, by another term of three months owing to the unforeseen circumstances that the expected funds could not be mobilised to meet the demand of the Company. The first petitioner in yet another communication dated 25.11.2006, sought for a further period of six months on the ground that the sixth respondent had failed to release the balance inter corporate deposit of ₹ 21.9 crores in terms of the agreement dated 25.03.2006. The first petitioner further accused the second respondent for obstructing the release of the balance amount of inter corporate deposit amount for personal reasons. In the meanwhile, the board of directors of the Company at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the petitioners on the part of AKSH with sixth respondent will neither arise for consideration. 11. The apprehension of the petitioners on account of the probable cancellation of the marketing agreement at the instance of AKSH, not affecting the rights of the petitioners qua shareholders is not amenable to the jurisdiction of the CLB, in the light of the judgment of the Karnataka High Court rendered in M.L. Thukral and Ors. v. Krone Communications Limited and Ors. (supra) justifying the order of the Company Law Board in having refused to exercise the jurisdiction in respect of distributorship agreement. Having come to the conclusion that the CLB cannot exercise its equitable jurisdiction to adjudicate the disputes raised by the petitioners, emanating from the EPC contract, for the reasons elaborated elsewhere, the requirement of oral evidence for the deciding the case before me does not arise and therefore, the decision of the High Court of Andhra Pradesh in Sri Ramadas Motor Transport Limited and Ors. v. Karedla Suryanarayana and Ors. (supra), wherein, it was held that when the CLB exercises judicial functions the elementary principle of adjudicatory process is observance of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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