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TMI Blog2009 (9) TMI 1066X X X X Extracts X X X X X X X X Extracts X X X X ..... (VA), agreeing to transfer the shares of the company to SM for a consideration of Rs. 15 crores, pursuant to which NS, VA and their associates reportedly delivered the share certificates in respect of their holding in the company together with the share transfer forms in favour of SM. The latter lodged the relevant share transfer documents with the company, whereas the board of directors of the company declined to register the transfer of shares in the name of SM for the following, among other reasons: (i) The company is a sick industrial company within the meaning of Section 3(1)(o) of the Sick Industrial Companies (Special Provisions) Act, 1985 and a reference made under Section 15 of the SICA is pending before the BIFR in Case No. 177 of 1989. The BIFR by an order dated February 16, 2006, prohibited any alienation or disposal of shares in the company, whereby the promoters/guarantors should not change their shareholding pattern or alienate or encumber or dispose their shares in the company or there shall not be any changes in the board of the company without the specific permission of the BIFR. SM lodged the shares with the company on March 26, 2008, whereas the afor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pril 1, 2009, has been stayed by the Madras High Court in terms of the order dated April 15, 2009, made in M.P. No. 2 of 2009 in W.P. No. 6432 of 2009. The net effect of these orders is that no order can be passed in Section 111 A proceeding before the Company Law Board, in view of the BIFR orders dated February 16, 2006 and August 7, 2006. (ii) NS has filed O.S. No. 235 of 2008 for an order of permanent injunction restraining the company from effecting the transfer of impugned shares in the name of SM or his nominees as shareholder or director of the company and accordingly obtained an ad interim order dated April 25, 2008, on the premises that (a) the memorandum of understanding/agreement constituted only an arrangement between the parties to facilitate the pledge of shares; (b) the parties were conscious of the legal bar arising out of the BIFR proceedings when the documentation was done; (c) the parties never intended to sell the company or its assets; (d) SM fraudulently attempted to take advantage of the custody of the transfer instruments and share certificates to seek transfer of shares; (e) SM is not entitled to seek the transfer of shares; and (0 the company sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disputes in relation to (a) title of SM to the shares; (b) right of SM to lodge the shares for transfer; and (c) the issue whether the company should give effect to the transfer of shares are pending consideration in O. Section No. 235 of 2008, instituted prior in point of time. These contentious issues are required to be decided before ordering rectification of the register of members and the civil court alone is competent to deal with such issues. The issues pending adjudication in prior legal proceedings initiated in a competent civil court would have a direct bearing on the issues substantially involved in the present company petition. No useful purpose will be served in proceeding with the Company Law Board proceedings, especially when the Company Law Board will have to await the outcome of the pending civil proceedings, before ordering rectification of the register of members. This Board held in Swagath Marine Products P. Ltd. v. K. Muthusamy [2006] 134 Comp Cas 182, that Section 10 of the CPC would be attracted when the issues in both the proceedings directly and substantially are the same and the decision in the previous suit would affect the decision in the later proceedi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ircumstances, all further proceedings in the company petition are to be stayed till the final adjudication of O.S. No. 235 of 2008 and the BIFR restraint orders are vacated, to meet the ends of justice. SM and his associates have filed a civil suit on November 11, 2008, before the District Court, Coimbatore in O.S. No. 98 of 2009 praying for specific performance of the memorandum of understanding dated November 14, 2005, as well as the agreement dated November 19, 2005, which cover the entire shareholding of the company. The company petition is in relation to 90 per cent, of shares, while O.S. No. 98 of 2009 is confined to the remaining 10 per cent, of shares of the company, for which no transfer instruments were executed by the transferors. SM specifically averred in O.S. No. 98 of 2009 that (a) the agreement dated November 19, 2005, was entered into between the parties for transfer of the entire shareholding held by NS, VA and their associates to SM for a valuable consideration of Rs. 15 crores; and (b) NS, VA and their associates failed to fulfil and honour their obligations and commitments under the agreement dated November 19, 2005, compelling SM to seek specific perfor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed on Section 111A of the Act, while NS cannot invoke the jurisdiction of Section 111 A, especially when the shares are in the name of NS and, therefore, the relief of rectification does not arise, driving NS to approach the civil court. 2. Shri R. Srinivas, learned Counsel, appearing for SM, while opposing the company application submitted: The company application is frivolous and filed to delay the proceedings. SM on one hand and NS as chairman as well as VA as director of the company on the other hand entered into the memorandum of understanding dated November 14, 2005, for sale of 20 per cent, of the shares of the company to SM at the rate of Rs. 4.11 per equity share of Rs. 10 each. The annexure forming part of the memorandum of understanding contains the details of the assets and liabilities of the company and payment particulars. This memorandum of understanding was followed by the agreement of sale dated November 19, 2005, between SM and NS as well as VA representing the company and for themselves, for purchase of the entire equity shares and assets of the company for a consideration of Rs. 15 crores, out of which a sum of Rs. 10 crores was paid by way of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rring to the payments, as loan amount cannot establish the theory of loan or pledge, especially when, those letters have not been signed by SM. The consideration of Rs. 15 crores alone is entered in handwriting in the agreement and cannot, therefore, be claimed that the agreement is interpolated and fudged. However, NS and the company have produced copy of the agreement in C.P. No. 3 of 2009, wherein the consideration is stated as Rs. 15 crores and written only by hand. The undated letters of resignation, of all the directors of the company save NS have been handed over to SM, pursuant to the agreement. NS handed over the statutory registers maintained by the company to SM, as acknowledged in terms of his communication dated July 7, 2006. After closure of the Indian Bank dues, all the original title deeds in respect of the company's properties were delivered to SM on October 18, 2006, as confirmed by NS. All the original title deeds in custody of SM have been exhibited to the operating agency and also learned Counsel appearing for the company. These were after passing of the order on February 16, 2006, by the BIFR, where NS failed to disclose anything about the agreement dated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... annual general meeting held on September 29, 2006, is not a valid annual general meeting. There is nothing to show that VA either signed the minutes or participated in the annual general meeting of September 29, 2006. In view of this, the statement made in the balance-sheet for the year ended March 31, 2006, reporting advance made for property has no meaning. The attendance sheet in respect of the board meetings reportedly held on March 3, 2007 and March 10, 2007, would reveal that VA and Kiran Kumar had signed and not NS, whereas NS, VA and Santhosh Kumar were shown as present in the board minutes dated March 10, 2007. No board meeting ever took place on March 10, 2007. The board minutes dated November 20, 2005, approving the transfer of shares from TVK to W, the board minutes dated March 10, 2007, approving the draft rehabilitation scheme of the company, and the board minutes dated June 20, 2007, approving the annual accounts for the period ended June 20, 2007, are signed only by NS and never by VA. There is no material to show that VA and VKK attended the said meetings and supported the resolutions passed at such meetings. The balance-sheets or the annual reports for the years 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany is now governed by the provisions of Section 111A of the Act. Section 155(old) gave way to Section 111 and thereafter Section 111A dealing with public companies. Any transferee of shares is to lodge the share certificates along with duly completed transfer instruments with the company for effecting transfer of name in its register of members. The company has to either register or refuse to register the transfer for sufficient cause within two months from the date of submission of the transfer documents. In case of refusal by the company to transfer the shares without sufficient cause, the transferee can approach the Company Law Board within two months from the date of such rejection. The board of directors of the company, in the present case, has not decided to register the transfer in the name of SM. By virtue of Section 111A of the Act, NS has no right or cause of action to file O.S. No. 235 of 2008. The suit is not maintainable and is barred by law by necessary implication. Section 9 of the CPC explicitly/impliedly excludes the jurisdiction of the civil courts. This Board has exclusive jurisdiction to determine and adjudicate the issue of transfer of shares as well as recti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... numerous civil suits filed by the company and others were pending in civil courts. This judgment of the Madras High Court has been affirmed by the Supreme Court in its judgment reported in Dove Investments P. Ltd. v. Gujarat Industrial Investment Corporation Ltd. [2006] 129 Comp Cas 929 : [2006] 2 SCC 619. The prayer made in O.S. No. 1232 of 2008 filed by the company for a permanent injunction restraining SM and others from seeking transfer of shares in the register of members is not maintainable, since the right of any transferee of shares to seek transfer in accordance with the provisions of the Act cannot be obstructed by an order of injunction. The company, which is to decide the question of rectification, cannot file any suit for restraining the transferee from seeking any transfer of shares. This Bench can ignore these suits, as the civil courts have no jurisdiction in this matter. The agreement is dated November 19, 2005 and, therefore, with a view to save the period of limitation, SM was forced to file civil suit before the remedy is barred by limitation for specific performance of the agreement in respect of 10 per cent, of shares not delivered by NS and for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement of their dues. The entire shareholding of Rs. 94 lakhs were held only by the existing promoters. The BIFR by an order dated August 30, 2001, came to the conclusion that it was just and-equitable in public interest that the company should be wound up under Section 20(1) of the SICA, against which the company preferred an appeal before AAIFR (Appeal No. 321 of 2001), wherein it was pleaded that the company has brought in STML, the new prospective promoters, who are prepared to settle the dues of the Indian Bank on the basis of one-time settlement. The AAIFR, while dismissing the appeal on May 23, 2002, thereby confirming the order of winding up made by the BIFR observed that the plant was being used by the new prospective promoters without making any payment to the Indian Bank and the new prospective promoters were deriving benefits by using the company's plant and operations, without making any payment of any rent or royalty to the Indian Bank. In view of this the BIFR did not order refund of deposit of Rs. 50 lakhs to the prospective promoters. NS was treated as a third party. NS has not disclosed before the BIFR about the acquisition of shares by him. The company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proach the court; and (c) if a litigation withholds a vital document in order to gain advantage on the other side then he would be guilty of playing fraud on the court as well as on the opposite party. By virtue of the BIFR order dated February 16, 2006, restraining the promoters from changing their shareholding pattern or encumbering their shares in the company without the specific permission of the BIFR, the company is refusing to approve the transfer of shares to SM. The board minutes dated June 20, 2007, would disclose the approval of transfer of 98,000 shares of the company from V. Prakash to NS, thereby changing the shareholding pattern, without, however, the specific permission of the BIFR, as stipulated in the BIFR order dated February 16, 2006. This would show that NS is setting up the BIFR orders as a ruse to avoid the transfer of shares to SM. The AAIFR, following the judgment of the Supreme Court in Patheja Bros. Forgings and Stamping v. I.C.I.C.I. Ltd. [2000] 102 Comp Cas 21 AIR 2000 SC 2553, held in the Salading Continental Ltd.--Appeal No. 225 of 2003 (order dated September 5, 2005) that the powers under Section 22A of the SICA cannot be exercised qua any part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as signed; (b) 90 per cent, of shares of the company were handed over to SM with blank transfer forms duly signed by the shareholders; (c) SM had submitted the share certificates along with his nominees for transfer of name in the register. Based on these admissions and in view of the principles of Order 12, Rule 6 of the CPC and Section 111(5) of the Act, the register of members of the company has to be rectified. NS failed to file reply to the application filed by SM under Order 12, Rule 6 of the CPC and Section 111(5) application for several months, despite directions of the Bench. Hence, the stay application may be dismissed, allowing the applications filed under Order 12, Rule 6 of the CPC. By virtue of Clause 10 of the BIFR order dated February 16, 2006, the company shall not alienate in any way any of its fixed or current assets without specific prior approval of the BIFR, whereas the company by means of filing a joint memo in O.S. No. 325 of 2006 on the file of the Subordinate Judge Court, Coimbatore, agreed to convey one of the properties belonging to the company, in favour of the plaintiff therein in gross violation of the BIFR order dated February 16, 2006. This m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts over the same matter; and (ii) save the precious time of the courts, on fulfilment of the pre-requisites stipulated therein. By virtue of regulation 44 the Company Law Board is bestowed inherent power to make such orders as may be necessary for the ends of justice or to prevent abuse of the process of the Bench. This power shall be exercised to do justice between the parties, by making appropriate orders, if any litigant abuses the process of the Bench. In the aforesaid context, the substantial issue in O.S. No. 235 of 2008 as well as C.P. No. 243 of 2008 need to be examined, to resolve the contentious issues raised before me. In the civil suit (O.S. No. 235 of 2008) filed prior in point of time, NS is praying for a judgment and decree of permanent injunction restraining the company from effecting the transfer of shares, being the subject-matter of C.P. Nos. 243 to 252 of 2008, to the name of SM or his nominees in the register of members of the company or in any manner recognising SM or his nominees as shareholders or directors of the company: NS claims in the civil suit that the company being a sick industrial company was in need of funds to discharge the unsecured lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 60 crores as on the date of the memorandum of understanding/agreement, in which case the promoters or the company could not have agreed to sell the company at a meagre consideration of Rs. 15 crores. At the time of execution of the memorandum of understanding/agreement, consideration columns were specifically left blank, which were later unilaterally filled up by SM. This would show that the memorandum of understanding/agreement was executed merely to support the pledge of shares. SM acknowledged in his letters that the payments made to the company as the loan amounts advanced by him. The memorandum of understanding/agreement only speaks of transferring 20 per cent, of shares in the name of SM by December 21, 2005 and 10 per cent, before final payment. There is no provision for the transfer of balance 70 per cent, of shares in the name of SM. The memorandum of understanding/agreement has been executed only by NS and VA, though there are several other shareholders holding substantial shares of the company. All the shareholders would have joined the memorandum of understanding/agreement in the event of any intention to transfer 100 per cent, shares of the compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the relief of rectification of the register of members under Section 111A and relegated the parties to a civil court. In this connection, the observations of a Division Bench of the Bombay High Court in Shirish Finance and Investment P. Ltd. v. M. Sreenivasulu Reddy [2002] 109 Comp Cas 913, while examining the nature of right of a shareholder to have the register rectified, in the light of, inter alia, the aforesaid decisions of the Supreme Court, concluded that a member of a company has the common law right to move the civil court for rectification of the register of members. In this connection, the relevant observations of the High Court assuming importance read thus (page 1028): We find nothing in Section 111A which has the effect of taking away the common law right of a member of a company to seek rectification of the register of members. At best, it can be said that after the insertion of Section 111A with effect from September 20, 1995, a member of a company has no statutory right under the Companies Act to seek rectification of register of members. His common law right, however, remains intact and he can assert that right by filing a suit before a court of competent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in O.S. No. 235 of 2008 filed by NS restraining the company from effecting transfer of shares to the name of SM and O. Section No. 1232 of 2008 by the company for an order restraining SM and his associates from seeking transfer of the shares in the name of SM, will have bearing on the rival claims of the parties before me for stay of the Company Law Board proceedings. The categorical contentions raised on behalf of SM before the High Court in C.R.P. No. 3161 of 2008, which are relevant with reference to the present proceedings, are enumerated here below: The suits in O.S. No. 235 of 2008 and O.S. No. 1232 of 2008 are clear abuse of process of law and the suits are liable to be struck off from the file. By virtue of the agreement dated November 19, 2005, SM had agreed to purchase the entire equity shares along with the movable and immovable properties of the company for a total consideration of Rs. 15 crores, pursuant to which a sum of Rs. 10 crores was paid in advance in the name of the company along with its directors. The company had acknowledged the receipt of demand drafts and handed over 20 per cent, of equity shares in the name of SM and 70 per cent, equity shar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n O.S. No. 235 of 2008 cannot be decided by the authorities under the Companies Act and the civil court alone has jurisdiction to entertain such disputes. The plaintiffs in O.S. No. 235 of 2008 detailed as many as 23 reasons in support of the contention that the memorandum of understanding as well as the agreement executed by SM and the company was not intended to be acted upon, as it was only a pledge of shares for the purpose of advancing money. 10. The High Court after exhaustively considering (a) rival contentions of the parties raised in both the civil suits; (b) the provisions of law concerning rectification proceedings as governed by Sections 155 (old), 111 and 111A; and (c) several decisions reported in (i) Canara Bank v. Nuclear Power Corporation of India Ltd. [1995] 84 Comp Cas 70 : [1995] Supp (3) SCC 81, showing that the Company Law Board has exclusive jurisdiction to determine the issue of transfer of shares and rectification of register of members and the jurisdiction of civil courts is impliedly barred in these matters; (ii) Ammonia Supplies Corporation P. Ltd. v. Modern Plastic Containers P. Ltd. [1998] 94 Comp Cas 310 (SC), reiterating that the Company Law Board ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial court to dispose of the interlocutory application for injunction within four weeks from the date of receipt of a copy of this order. 11. I shall point out that the High Court, despite the vociferous arguments advanced on behalf of SM that the Company Law Board has exclusive jurisdiction to determine the issue of transfer of shares and rectification of register of members and that the jurisdiction of the civil courts is impliedly barred, SM has been directed to approach the trial court by filing appropriate application under Order 7, Rule 11 of the CPC for rejection of the plaints in O. Section No. 235 of 2008 and O.S. No. 1232 of 2008. The High Court further observed that it should also be the endeavour of the trial court to dispose of the interlocutory application for injunction, restraining the company from effecting the transfer of shares in the name of SM, in terms of its order. This will necessarily involve, inter alia, the interpretation of the nature and purport of the memorandum of understanding/agreement as well as its legality and enforceability. The prayer of SM in the company petition for rectification of the register of members in respect of the impugned shares ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt from the title deeds of the properties and the statutory registers maintained by the company. The question as to whether the aforesaid transaction represents the sale or pledge of shares, being litigated before the civil court as well as the Company Law Board, needs no deliberation at this point of time. Nevertheless, when the BIFR by an order dated February 16, 2006, stipulated, inter alia, that (a) the company shall not dispose of, lease out, encumber or alienate in any way any of its fixed or current assets without specific approval of the BIFR; and (b) the promoters/guarantors should not change the shareholding pattern or alienate/ encumber or dispose of their shares in the company in any manner without the specific permission of the Board, the company and NS failed to disclose at the appropriate time, any of the aforesaid actions, keeping away the developments resulted, pursuant to the memorandum of understanding/ agreement. By virtue of delivery of the share certificates together with the signed share transfer forms by NS and VA, it is far from doubt that SM becomes the owner of the beneficial interest though the legal title continues with NS and VA and the relationship of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he rehabilitation schemes on account of, inter alia, who is the promoter, fraud played on the BIFR, binding nature of the BIFR order dated February 16, 2006, in the light of Section 22A of the SICA and sale of the company's property in favour of Sri Ramakrishna Mills (CBE) Ltd., in terms of the conveyance deed executed by the civil court in O.S. No. 325 of 2006 before the Court of Subordinate Judge of Coimbatore on behalf of the company, whether constitutes breach of the BIFR orders are left to be agitated before the BIFR. 13. The prayer of VA and V. Kiran Kumar for transferring their shares in favour of SM and his associates, as reiterated by Shri Sashikumar, learned Counsel, being inter-twined with the disputed agreement and having flown therefrom, cannot be granted until the finality is reached in O.S. No. 235 of 2008. 14. The substantial issues raised in C.A. No. 35 of 2008 in C.P. No. 243 of 2008 are found to have been agitated in C.A. Nos. 36 to 44 in C.P. Nos. 244 to 252 of 2008 and, therefore, the conclusions reached in C.A. No. 35 of 2008 in C.P. No. 243 of 2008 will squarely apply to these company applications. Accordingly, in exercise of the power vested in reg ..... X X X X Extracts X X X X X X X X Extracts X X X X
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