| SooperKanoon Citation | sooperkanoon.com/47718 |
| Court | Company Law Board CLB |
| Decided On | Apr-19-2002 |
| Judge | A Banerji, S Balasubramanian |
| Appellant | In Re: Eih Limited and ors. |
| Respondent | Mashobra Resort Limited and ors. |
Excerpt:
1. in this order, we are considering as to whether the petitioners have established a prima facie case for grant of interim prayers as sought for in ca no. 52 of 2002 in cp no. 12 of 2002 and if so, what are the interim reliefs to be granted.2. the facts of the case are that the 2^nd respondent-the govt of himachal pradesh-owned a property known as "wildflower hall" in simla.with the view to develop the property into a 5 star deluxe hotel, it entered into a joint venture agreement (jv) with the 1^st petitioner (known as oberoi group) on 10.10.1995. the jv provided for incorporation of the 1^st respondent company to develop and manage the proposed hotel. as per the joint venture agreement, the 2^nd respondent was to hold not less than 25% shares while the 1^st petitioner ad its group were to hold not less than 36% and not more than 55% shares in the 1^st respondent company. the contribution by the 2^nd respondent was to be in kind, that is the transfer of the wildflower hall to the company for a value of rs. 7.5 crores against which shares were to be issued. the 1^st petitioner and its group were to invest rs 20 crores forwards share capital and the responsibility to construct the hotel and make it commercially operational was to be with the 1^st petitioner. the board of the company was to comprise of 7 directors of which 3 including the chairman were to be nominated by the 2^nd respondent and 4 including the md by the 1^st petitioner. the jv also provided that in case the hotel did not become fully commercially operational within a period of 4 years from the effective date, extendable by two terms of one year each -- subject to payment of rs. 2 crores for each of the extended years - the shares issued in favour of the petitioners' group would be surrendered/transferred to the 2^nd respondent on payment of 50% of the face value of the shares plus rs. 10 for the technical services rendered by the oberoi group. it further provided that the premises with all the improvements thereon would vest in the second respondent. it also provided for arbitration in case of disputes arising out of the jv. it contained 7 schedules inter alia including a draft memorandum and articles, shareholders agreement, draft allotment agreements etc. accordingly in terms of the jv, the 1^st respondent company was incorporated on 3.12.1995. notwithstanding the agreement relating to specific ration of shareholdings in the company by the 1^st petitioner and the 2^nd respondent, the share holding percentage has changed by which the petitioners' group came to hold about 79% shares in the company while the 2^nd respondent about 21%. as per the terms of the jv, the 2^nd respondent has 3 directors including the chairman while the petitioners' group has 4 directors including the md. even though all the 85 rooms envisaged under the jv have been fully constructed, yet, only 28 rooms are operational w.e.f.30.3.2001 and the operation of the balance rooms are reportedly struck up for want of certain approvals. a writ petition has been filed by the company in hp high court for directions to the concerned governmental authorities to sanction the approval for the 57 rooms.3. by a letter/notice dated 6^th march, 2002, the 2^nd respondent conveyed to the 1^st petitieonr that the joint venture agreement stood automatically terminated w.e.f. 13.10.2001 in view of the following: 1. you have failed to make the hotel fully commercially operational within 4 years from the effective within the meaning of clause 10.1(b) of the joint venture agreement and article 3(2) of the allotment agreement. (2) you have failed to perform your obligation as regarding the technical services in the manner and time frame prescribed within the meaning of proviso appended with clause 11 of the joint venture agreement and article 1(3) of the allotment agreement (3) you have illegally and unauthorizedly changed the equity distribution ration without obtaining our permission and consent in terms of the joint venture agreement. (4) you have paid and/or appropriated a large sum of money as payment to your associate companies and other companies under the garb of having obtained technical assistance from them, even though under the agreement, those services were to be provided by you free of charge or in any case that was your responsibilities. (5) you have unduly delayed the commissioning of the project and have burdened the joint venture with escalation of more than 100%.4. the notice further stated that in view of the termination of the jv agreement, in terms of the said agreement, the shares held by the petitioners' group stood transferred to the 2^nd respondent for a consideration of 50% of the face value of the shares held by the petitioners plus rs. 10/- as consideration towards the technical services. a cheque for rs. 9 crores and rs. 10 was enclosed with the notice. the notice also stated that the land, buildings and structures standing on the loan stood reverted to the 2^nd respondent on "as is where is basis". thereafter, the 2^nd respondent conveyed to the company by a letter dated 7^th march, 2002 that in view of the termination of the jv agreement, the nominee directors of the 1^st petitioner including the managing director ceased to hold office as directors of the company and that one shrikant baldi has been appointed as executive director cum officer on special duty to exercise all the powers of the managing director and also be responsible for the day to day running of the company. on 7^th march, 2002, a board meeting of the company was held in which resolutions were passed for changing the authorization of bank operations, appointment of shri baldi as the executive director cum osd and that in view of the termination of the jv agreement, the nominee directors of the petitioners including the managing director had ceased to hold office w.e.f. 13.10.2001. no notice of this meeting was given to the directors from the petitioners's group.5. on receipt of the letter/notice dated 6^th march, 2002 from the 2^nd respondent, the 1^st petitioner issued a legal notice dated 12^th march, 2002 to the 2^nd respondent challenging the grounds on which the notice of termination had been issued and had also invoked the arbitration clause in the jv agreement suggesting the name of justice r.s. pathak as sole arbitrator. the notice also indicated that the cheque sent by the 2^nd respondent towards consideration for the shares would be returned. thereafter the instant petition was filed on 13^th march, 2002.6. when the petition was mentioned on 13.3.2002, after hearing shri dave, sr. advocate for the petitioner, this bench passed an order directing the maintenance of status quo as on date in respect of the composition of the board as well as in respect of the movable and immovable assets of the company. the respondents were directed to file their reply to the interim applicaiton. on 18.3.2002, this bench advised the parties to amicably resolve the disputes and report on 1.4.2002. on this day, the learned counsel for the respondents submitted that his clients would be willing to go out of the company if the petitioners were to pay rs. 20 to rs. 25 crores which was not acceptable to the petitioners who suggested that valuation should be done by an independent financial institution. in view of this, we suggested to the counsel for the respondents that it would be appropriate to have the valuation determined by an independent valuer acceptable to both the sides and the learned counsel desired some time to consult his clients. in the subsequent hearing, the counsel for the respondents submitted that, at the time when the 2^nd respondent had called for proposals for developing a 5 star deluxe hotel, it had got an offer for rs. 145 corers and as such if the petitioners were prepared to offer that amount, the 2^nd respondent would be willing to go out of the company. since there was no agreement between the parties on the valuation, we heard the counsel extensively on the interim prayers sought for by the petitioners.7. even though the counsel appearing for the parties argued extensively referring to the jv agreement, annexures thereto and the articles, we do not propose to elaborate the same in this order as, at present, we are only examining whether there is a prima facie justification and balance of convenience in favour of the petitioners for grant of any interim relief pending the final disposal of the petition.8. shri dave argued: the claim of the 2^nd respondent that the shares held by the petitioners stood transferred to the 2^nd respondent and its claim that the nominees of the petitieonr had ceased to be the directors of the company cannot be sustained in law. by claiming so, the 2^nd respondent has sought to oust the petitioners form the company not withstanding the fact that they have invested over rs 90 crores in the project and have also given personal guarantee to icici for a loan of rs. 55 crores. the foundation of the claim of the 2^nd respondent is that the petitioners had failed to make the hotel fully commercially operational within 4 years of the effective dated and that the effective date is the date of the agreement on 3010.1995. the stand of the 2^nd respondent regarding the effective date is erroneous in as much as article 8(1) indicates the effective date as the date of handing over the possession of the premises by the 2^nd respondent. the premises were actually handed over to the company only on 3.5.96 and this fact has been recorded in the minutes of a board meeting also. in terms of the jv agreement the period of 4 years is extendable for a period of two terms of one year each. thus, even in term of the jv agreement the period of 6 years would expire only on 3.5.2002. even though, all the 85 rooms with full facilities of a deluxe 5 star hotel were ready as early as on 30.3.2001, only 28 rooms could be commissioned on that dated due to non receipt of necessary approval in respect of the balance 57 rooms. in other words full commercial operation commenced on 30.3.2001 itself which is within 5 years of the effective date. therefore, the foundation on which the notice has been issued terminating the jv agreement does not exist. further, the action of the 2^nd respondent in terms of the notice dated 6.3.2002 is not sustainable in law for the following reasons: 1. the terms of the jv agreement are not binding on the company as it is not a party to the jv ( s.p. jain v. kalinga tubes ltd. -- 1965 2 scr 720 ) 2. even if the terms of the jv are part of the articles, it will not have any binding force on the company; ( rolta india ltd. v. venire industries ltd. 100 cc 19) 3. in terms of section 9 of the act, any provision in the articles/agreement, contrary to the provisions of the act is void; ( madanlal faquir chand dudhediya v. shri changdeo sugar mills ltd. - 1962 3 scr 973) 4. the alleged transfer of shares of the petitioner to the 2^nd respondent is in violation of the provisions of section 108 the compliance of which is mandatory: (mannalal v. kedarnath - air 1977 sc 536) 5. no director can be removed without following the provision of section 284 of the act; 6. the holding of the board meeting on 7.3.2002 without notice to the nominees of the petitioners is unlawful and invalid (parmeshwari prasad v. uoi air 1973 sc 2389) ; 7. there could be no agreement or provision in the articles for transfer of the properties of a company to a shareholder for the alleged breach of terms of an agreement as the property of the company belongs to it and the shareholders cannot have nay claim over it or appropriate the same- bacha f guzdar v. cit - 1955 scr 878); lic v. escorts ltd.- air 1986 sc 1370).9. summing up his arguments, the learned counsel submitted that the nominee directors of the 2^nd respondent, being in government service, have acted in breach of their fiduciary duties to the company, in implementing the directions of government, without taking into consideration the legal aspect of the case and also the interest on the company. in other words they have exhibited that they own duty to a shareholder and not to the company. by implementing the directions of the government, the property of the company has been handed over to the government, the nominees of the largest stake holder have been ousted from the board, the day to day management of the hotel has been taken over. all these acts are oppressive to the petitioner and would adversely affect the interest of the company. with commencement of summer, the peak tourist season has started and only the petitioners with their expertise and net work could ensure higher occupation and better service to the customers. if the day to day operation of the company is with government servants having no expertise in hotel management, it would adversely affect the interest of the company.accordingly he prayed the till the disposal of the petition, as an interim measure, the respondents should be restrained from giving effect to any of the decisions taken in the board meeting held on 7.3.2002 and also from interfering with the day to day management, control and functioning of the company, form holding any board meeting except in accordance with the articles with adequate notice to the nominee directors of the 1^st petitieonr, that the respondents should be directed to maintain the status que of the board as existed on 5th march 2002 and that the 2^nd respondent should be restrained from (sic) treating the assets of the company as reverted to the 2^nd respondent.10. according to shri mukul rohtagi, asg appearing for the respondents, the proceedings before the bench should be stayed in view of the arbitration clause in the jv agreement, more so, since the 1^st petitioner has already invoked the arbitration clause. according to him, if the substance of the matters covered in the petition are subject matter of arbitration, the same should be referred to arbitration (gurnir singh gill v. saz international private ltd. - 62 cc 197). further, sine the petitioners have invoked the arbitration clause, to avoid parallel proceedings, the present proceedings should be stayed. even though the company is not a party to the jv agreement, yet, the company owes its birth to the terms of the jv and these terms are the guiding star of the company and as a matter of fact, a perusal of the various articles would indicate that the company has adopted many of the terms of the agreement and as such they are binding on the company and the shareholders. even action taken by the 2^nd respondent is in accordance with the jv agreement and articles. one of the main conditions of allotment of shares to the petitioners group as per the allotment agreement was that the hotel should become fully commercially operational within 4 years plus 2 years. since the effective date of the agreement is 30.10.1995, the six years period expired on 30.10.2001 but only 28 room out of 85 rooms became operational. therefore, in terms of the jv agreement, allotment agreement and article 8.1, the 2^nd respondent is entitled to terminate the jv and takeover the shares held by the petitioners. further the petitioners have also changed the proportion of the shareholding without amendment to the jv, by which they have acquired a larger proportion of shares than what was envisaged in the jv. they are also responsible for escalation in the cost of the project and in view of this, the 2^nd respondent cannot expect any dividend for a number of years to come. the second respondent being a state government, it has to keep in mind the public interest and since the property belonged to the state earlier, in view of the breach of the terms of the jv, the state has the right to revert the property right to itself in public interest. since as per the terms of the jv and the articles, the petitioner group will have to go out of the company, whether the shares are surrendered or transferred or forfeited, the mode is of no consequence as the result of any oen of them is that the petitieonr would be out of the company. a company has full rights to forfeit the shares on any ground as provided in the articles. (naresh chandra sanyal v. the calcutta stock exchange association ltd. - air 1971 sc 422). article 10.1 clearly provides that breach of the jv would result in expulsion form membership and surrender of the shares held by the petitioners to the 2^nd respondent.once they cease to the shareholders, they cannot have any representation on the board as is evident form article 18. he further submitted that the nominees of the 2^nd respondents are capable of running the company effectively and as such no interim relief should be granted and the earlier interim order should be vacated.11. we have very carefully considered the arguments of the counsel. as far as staying our proceedings is concerned, such a stay was possible earlier at the discretion of the court under section 34 of the arbitration act 1940. but, after coming into force of the arbitration and conciliation act 1996, stay of proceedings by a court is no longer possible. section 8 of his act only enjoins a judicial authority to refer the parties to arbitration if the requirements of this section are fulfilled. fro referring the parties to arbitration, a party should apply not later than when submitting his first statement on the substance of the dispute. shri dave referred to the decisions in vls finance ltd. v. sunair hotels ltd- (cp45/1998-clb) and p anand gajapathi raju v. pvg raju- (2000 4 scc 539). in the present case, admittedly, the respondents have not filed any applicaiton under section 8. instead, they have filed a reply to the interim application touching upon extensively on the substance of the disputes. this is not withstanding the argument of shri dave that the company is not a party to the jv to bind it with the arbitration clause. therefore, the question of staying our proceedings or referring the matter to arbitration does not arise. as far as parallel proceedings are concerned, section 8 itself contemplates, in sub-section (3) such parallel proceedings.12. the main ground for seeking interim reliefs is that the 2^nd respondent, after ousting the petitioner form membership and directorship, has taken over the day to day management of the hotel which would not be in the interest of the company and that non grant of the interim reliefs sought for would be prejudicial to the interest of the petitioners. the normal principles to be applied for grant of interim relief are that there is a serious dispute in question to be tries, that the court's interference is necessary to protect the parties from injury, that a prima facie case has ben established and that the balance of convenience is in favour of the petitioners. it is also a settled principle that at the interim stage the court is not justified in embarking on anything resembling a trial in order to evaluate the strength of either party's case. it is also a settled principle that where the factors appear to be evenly balanced, it is a counsel of prudence to take such measures as are calculated to preserve the status quo. applying these principles, if we consider the facts of the case, it is crystal clear that the various legal issues raised by the learned counsel for the petitioners as indicated in paragraph 8 ante are extremely valid requiring determination at the time of hearing f the main petition. these would also indicate that there is prima facie justification to protect the interests of the petitioners and that the balance of convenience is in their favour. it is not in dispute, as seen from the copies of various board minuts, that the affairs of the company had been carried on by both the parties amicably during the last 6 years. we find that more than 25 board meetings had been held without any dissent from either side indicating that neither of them had grievances against the other. it is on record that the petitioners had been executing the project and had been in control of the day to day affairs of the company all these years. we also note that the petitioners have moved this board within the shortest possible time after occurrence of the events complained of. considering the fact that the financial exposure of the petitioners is to the extent of over rs 90 crores (with personal guarantee of over rs 50 crores) and that the 2^nd respondent had chosen the 1^st petitieonr as a joint venture partner because of its expertise in management of hotels, it is necessary that the petitioners are associated with the affairs of the hotel till the petition is finally disposed of. the admitted position is that the company is nothing but a hotel project.t it the premises of the hotel were to vest in the government, there will be no activity for the company and association of the petitioners with the management of the company would be of no consequence. we are of the prima facie view, even assuming that the 2^nd respondent had the right to the shares of the petitioners in terms of the jv and articles, that the property of the company could not be taken over by the 2^nd respondent especially when there is a huge liability against the company.13. thus, considering the fact in totality and taking into consideration the interest of the company, in exercise of our power under section 403 of the act, we direct as follows: a. the entire hotel complex will be treated as the property of the company and the company alone will have the right to the full usage of the hotel complex. b. all the decisions taken in the board meeting on 7.3.2002 are stayed. c. the board of the company will be reconstituted with 4 directors- 2 form the petitioner's side and two from the 2^nd respondent. one of the nominees of the petitieonr will be the md and one of the 2^nd respondent's will be the chairman. the nominations should be forwarded to the company and the respective parties at the earliest and the first board meeting should be held latest by 30.4.2002. the md will be in charge of the day to day management and control of the company. all policy decisions will be taken only in board meetings for which 7 clear days notice with agenda should be given to all directors. both the sides will be at liberty to bring proposals to the board. only unanimous decision of the board will be implemented. the md should circulate, on a fortnightly basis, summary of the performance of the hotel to all the directors. d. as far as the shares of the petitioners are concerned, we do not propose, for the present, to give any directions, other than stipulating that none of the shares of the company shall be dealt with in any manner and that no general meeting of the company will be convened or held so that there will be no need to exercise voting rights on the shares.14. ca 52 of 2002 is accordingly disposed of. the respondents to file their detailed reply to the petition by 31.5.2002 and the rejoinder to be filed by 30.6.2002. the petition will be heard on 11th and 12^th july at 2.30 p.m. liberty given to both the sides to apply.15. before we apr with the order we consider it appropriate to observe that the disputes between the parties deserve to be settled amicably.even assuming that the government has acted in accordance with law in issuing the termination notice and taking over the shares of the petitioners, we feel that it would not be in the interest of the government to run the hotel on a long term basis especially when the hotel has a liability of over rs. 50 crores. in view of the strained relationship between the parties, it may also not be possible for them to carry on together also. under the circumstances, we would suggest that the government should consider disinvesting the shares held by it in the company for a consideration which could be based on the value of the land against which shares were issued. in case the government is inclined to accept our suggestion of disinvesting the shares on the basis of the valuation of the land, the same may be reported to as on 3^rd may 2002 at 2.30 p.m. in that case, it would be in the interest of the petitioners also to agree to the suggestion so that they could become the exclusive owner of the company. if both the parties agree, we shall appoint an independent valuer to value the land on that day.
Judgment: 1. In this order, we are considering as to whether the petitioners have established a prima facie case for grant of interim prayers as sought for in CA No. 52 of 2002 in CP No. 12 of 2002 and if so, what are the interim reliefs to be granted.
2. The facts of the case are that the 2^nd respondent-the Govt of Himachal Pradesh-owned a property known as "Wildflower Hall" in Simla.
With the view to develop the property into a 5 star Deluxe Hotel, it entered into a joint venture agreement (JV) with the 1^st petitioner (known as Oberoi group) on 10.10.1995. The JV provided for incorporation of the 1^st respondent company to develop and manage the proposed hotel. As per the joint venture agreement, the 2^nd respondent was to hold not less than 25% shares while the 1^st petitioner ad its group were to hold not less than 36% and not more than 55% shares in the 1^st respondent company. The contribution by the 2^nd respondent was to be in kind, that is the transfer of the Wildflower Hall to the company for a value of Rs. 7.5 crores against which shares were to be issued. The 1^st petitioner and its group were to invest Rs 20 crores forwards share capital and the responsibility to construct the hotel and make it commercially operational was to be with the 1^st petitioner. The board of the company was to comprise of 7 directors of which 3 including the chairman were to be nominated by the 2^nd respondent and 4 including the MD by the 1^st petitioner. The JV also provided that in case the hotel did not become fully commercially operational within a period of 4 years from the effective date, extendable by two terms of one year each -- subject to payment of Rs. 2 crores for each of the extended years - the shares issued in favour of the petitioners' group would be surrendered/transferred to the 2^nd respondent on payment of 50% of the face value of the shares plus Rs. 10 for the technical services rendered by the Oberoi group. It further provided that the premises with all the improvements thereon would vest in the second respondent. It also provided for arbitration in case of disputes arising out of the JV. It contained 7 Schedules inter alia including a Draft Memorandum and Articles, shareholders agreement, Draft Allotment Agreements etc. Accordingly in terms of the JV, the 1^st respondent company was incorporated on 3.12.1995. Notwithstanding the agreement relating to specific ration of shareholdings in the company by the 1^st petitioner and the 2^nd respondent, the share holding percentage has changed by which the petitioners' group came to hold about 79% shares in the company while the 2^nd respondent about 21%. As per the terms of the JV, the 2^nd respondent has 3 directors including the Chairman while the petitioners' group has 4 directors including the MD. Even though all the 85 rooms envisaged under the JV have been fully constructed, yet, only 28 rooms are operational w.e.f.
30.3.2001 and the operation of the balance rooms are reportedly struck up for want of certain approvals. A writ petition has been filed by the company in HP High Court for directions to the concerned governmental authorities to sanction the approval for the 57 rooms.
3. By a letter/notice dated 6^th March, 2002, the 2^nd respondent conveyed to the 1^st petitieonr that the Joint Venture Agreement stood automatically terminated w.e.f. 13.10.2001 in view of the following: 1. You have failed to make the hotel fully commercially operational within 4 years from the effective within the meaning of Clause 10.1(b) of the Joint Venture Agreement and Article 3(2) of the Allotment Agreement.
(2) You have failed to perform your obligation as regarding the technical services in the manner and time frame prescribed within the meaning of proviso appended with Clause 11 of the Joint Venture Agreement and Article 1(3) of the Allotment Agreement (3) You have illegally and unauthorizedly changed the equity distribution ration without obtaining our permission and consent in terms of the Joint Venture Agreement.
(4) You have paid and/or appropriated a large sum of money as payment to your associate companies and other companies under the garb of having obtained technical assistance from them, even though under the agreement, those services were to be provided by you free of charge or in any case that was your responsibilities.
(5) You have unduly delayed the commissioning of the project and have burdened the joint venture with escalation of more than 100%.
4. The notice further stated that in view of the termination of the JV Agreement, in terms of the said agreement, the shares held by the petitioners' group stood transferred to the 2^nd respondent for a consideration of 50% of the face value of the shares held by the petitioners plus Rs. 10/- as consideration towards the technical services. A cheque for Rs. 9 crores and Rs. 10 was enclosed with the notice. The notice also stated that the land, buildings and structures standing on the loan stood reverted to the 2^nd respondent on "as is where is basis". Thereafter, the 2^nd respondent conveyed to the company by a letter dated 7^th March, 2002 that in view of the termination of the JV Agreement, the nominee directors of the 1^st petitioner including the managing director ceased to hold office as directors of the company and that one Shrikant Baldi has been appointed as Executive Director cum Officer on Special Duty to exercise all the powers of the Managing Director and also be responsible for the day to day running of the company. On 7^th March, 2002, a Board Meeting of the company was held in which resolutions were passed for changing the authorization of bank operations, appointment of Shri Baldi as the Executive Director cum OSD and that in view of the termination of the JV Agreement, the nominee directors of the petitioners including the managing director had ceased to hold office w.e.f. 13.10.2001. No notice of this meeting was given to the directors from the petitioners's group.
5. On receipt of the letter/notice dated 6^th March, 2002 from the 2^nd respondent, the 1^st petitioner issued a legal notice dated 12^th March, 2002 to the 2^nd respondent challenging the grounds on which the notice of termination had been issued and had also invoked the arbitration clause in the JV Agreement suggesting the name of Justice R.S. Pathak as sole arbitrator. The notice also indicated that the cheque sent by the 2^nd respondent towards consideration for the shares would be returned. Thereafter the instant petition was filed on 13^th March, 2002.
6. When the petition was mentioned on 13.3.2002, after hearing Shri Dave, Sr. Advocate for the petitioner, this Bench passed an order directing the maintenance of status quo as on date in respect of the composition of the Board as well as in respect of the movable and immovable assets of the company. The respondents were directed to file their reply to the interim applicaiton. On 18.3.2002, this Bench advised the parties to amicably resolve the disputes and report on 1.4.2002. ON this day, the learned counsel for the respondents submitted that his clients would be willing to go out of the company if the petitioners were to pay Rs. 20 to Rs. 25 crores which was not acceptable to the petitioners who suggested that valuation should be done by an independent financial institution. In view of this, we suggested to the counsel for the respondents that it would be appropriate to have the valuation determined by an independent valuer acceptable to both the sides and the learned counsel desired some time to consult his clients. In the subsequent hearing, the counsel for the respondents submitted that, at the time when the 2^nd respondent had called for proposals for developing a 5 star Deluxe Hotel, it had got an offer for Rs. 145 corers and as such if the petitioners were prepared to offer that amount, the 2^nd respondent would be willing to go out of the company. Since there was no agreement between the parties on the valuation, we heard the counsel extensively on the interim prayers sought for by the petitioners.
7. Even though the counsel appearing for the parties argued extensively referring to the JV agreement, annexures thereto and the Articles, we do not propose to elaborate the same in this order as, at present, we are only examining whether there is a prima facie justification and balance of convenience in favour of the petitioners for grant of any interim relief pending the final disposal of the petition.
8. Shri Dave argued: The claim of the 2^nd respondent that the shares held by the petitioners stood transferred to the 2^nd respondent and its claim that the nominees of the petitieonr had ceased to be the directors of the company cannot be sustained in law. By claiming so, the 2^nd respondent has sought to oust the petitioners form the company not withstanding the fact that they have invested over Rs 90 crores in the project and have also given personal guarantee to ICICI for a loan of Rs. 55 crores. The foundation of the claim of the 2^nd respondent is that the petitioners had failed to make the hotel fully commercially operational within 4 years of the effective dated and that the effective date is the date of the agreement on 3010.1995. The stand of the 2^nd respondent regarding the effective date is erroneous in as much as Article 8(1) indicates the effective date as the date of handing over the possession of the premises by the 2^nd respondent. the premises were actually handed over to the company only on 3.5.96 and this fact has been recorded in the minutes of a Board meeting also. In terms of the JV Agreement the period of 4 years is extendable for a period of two terms of one year each. Thus, even in term of the JV Agreement the period of 6 years would expire only on 3.5.2002. Even though, all the 85 rooms with full facilities of a Deluxe 5 Star Hotel were ready as early as on 30.3.2001, only 28 rooms could be commissioned on that dated due to non receipt of necessary approval in respect of the balance 57 rooms. In other words full commercial operation commenced on 30.3.2001 itself which is within 5 years of the effective date. Therefore, the foundation on which the notice has been issued terminating the JV Agreement does not exist. Further, the action of the 2^nd respondent in terms of the notice dated 6.3.2002 is not sustainable in law for the following reasons: 1. The terms of the JV agreement are not binding on the company as it is not a party to the JV ( S.P. Jain v. Kalinga Tubes Ltd. -- 1965 2 SCR 720 ) 2. Even if the terms of the JV are part of the Articles, it will not have any binding force on the company; ( Rolta India Ltd. v. Venire Industries Ltd. 100 CC 19) 3. In terms of Section 9 of the Act, any provision in the Articles/agreement, contrary to the provisions of the Act is void; ( Madanlal Faquir Chand Dudhediya v. Shri Changdeo Sugar Mills Ltd. - 1962 3 SCR 973) 4. The alleged transfer of shares of the petitioner to the 2^nd respondent is in violation of the provisions of Section 108 the compliance of which is mandatory: (Mannalal v. Kedarnath - AIR 1977 SC 536) 5. No director can be removed without following the provision of Section 284 of the Act; 6. The holding of the Board meeting on 7.3.2002 without notice to the nominees of the petitioners is unlawful and invalid (Parmeshwari Prasad v. UOI AIR 1973 SC 2389) ; 7. There could be no agreement or provision in the Articles for transfer of the properties of a company to a shareholder for the alleged breach of terms of an agreement as the property of the company belongs to it and the shareholders cannot have nay claim over it or appropriate the same- Bacha F Guzdar v. CIT - 1955 SCR 878); LIC v. Escorts Ltd.- AIR 1986 SC 1370).
9. Summing up his arguments, the learned counsel submitted that the nominee directors of the 2^nd respondent, being in government service, have acted in breach of their fiduciary duties to the company, in implementing the directions of Government, without taking into consideration the legal aspect of the case and also the interest on the company. In other words they have exhibited that they own duty to a shareholder and not to the company. By implementing the directions of the Government, the property of the company has been handed over to the government, the nominees of the largest stake holder have been ousted from the Board, the day to day management of the hotel has been taken over. All these acts are oppressive to the petitioner and would adversely affect the interest of the company. With commencement of summer, the peak tourist season has started and only the petitioners with their expertise and net work could ensure higher occupation and better service to the customers. If the day to day operation of the company is with government servants having no expertise in hotel management, it would adversely affect the interest of the company.
Accordingly he prayed the till the disposal of the petition, as an interim measure, the respondents should be restrained from giving effect to any of the decisions taken in the Board meeting held on 7.3.2002 and also from interfering with the day to day management, control and functioning of the company, form holding any Board meeting except in accordance with the Articles with adequate notice to the nominee directors of the 1^st petitieonr, that the respondents should be directed to maintain the status que of the Board as existed on 5th March 2002 and that the 2^nd respondent should be restrained from (SIC) treating the assets of the company as reverted to the 2^nd respondent.
10. According to Shri Mukul Rohtagi, ASG appearing for the respondents, the proceedings before the Bench should be stayed in view of the arbitration clause in the JV Agreement, more so, since the 1^st petitioner has already invoked the arbitration clause. According to him, if the substance of the matters covered in the petition are subject matter of arbitration, the same should be referred to arbitration (Gurnir Singh Gill v. Saz International Private Ltd. - 62 CC 197). Further, sine the petitioners have invoked the arbitration clause, to avoid parallel proceedings, the present proceedings should be stayed. Even though the company is not a party to the JV Agreement, yet, the company owes its birth to the terms of the JV and these terms are the guiding star of the company and as a matter of fact, a perusal of the various Articles would indicate that the company has adopted many of the terms of the agreement and as such they are binding on the company and the shareholders. Even action taken by the 2^nd respondent is in accordance with the JV agreement and Articles. One of the main conditions of allotment of shares to the petitioners group as per the allotment agreement was that the hotel should become fully commercially operational within 4 years plus 2 years. Since the effective date of the agreement is 30.10.1995, the six years period expired on 30.10.2001 but only 28 room out of 85 rooms became operational. Therefore, in terms of the JV agreement, allotment agreement and Article 8.1, the 2^nd respondent is entitled to terminate the JV and takeover the shares held by the petitioners. Further the petitioners have also changed the proportion of the shareholding without amendment to the JV, by which they have acquired a larger proportion of shares than what was envisaged in the JV. They are also responsible for escalation in the cost of the project and in view of this, the 2^nd respondent cannot expect any dividend for a number of years to come. The second respondent being a state government, it has to keep in mind the public interest and since the property belonged to the State earlier, in view of the breach of the terms of the JV, the state has the right to revert the property right to itself in public interest. Since as per the terms of the JV and the Articles, the petitioner group will have to go out of the company, whether the shares are surrendered or transferred or forfeited, the mode is of no consequence as the result of any oen of them is that the petitieonr would be out of the company. A company has full rights to forfeit the shares on any ground as provided in the Articles. (Naresh Chandra Sanyal v. The Calcutta Stock Exchange Association Ltd. - AIR 1971 SC 422). Article 10.1 clearly provides that breach of the JV would result in expulsion form membership and surrender of the shares held by the petitioners to the 2^nd respondent.
Once they cease to the shareholders, they cannot have any representation on the Board as is evident form Article 18. He further submitted that the nominees of the 2^nd respondents are capable of running the company effectively and as such no interim relief should be granted and the earlier interim order should be vacated.
11. We have very carefully considered the arguments of the counsel. As far as staying our proceedings is concerned, such a stay was possible earlier at the discretion of the Court under Section 34 of the Arbitration Act 1940. But, after coming into force of the Arbitration and Conciliation Act 1996, stay of proceedings by a Court is no longer possible. Section 8 of his Act only enjoins a judicial authority to refer the parties to arbitration if the requirements of this Section are fulfilled. Fro referring the parties to Arbitration, a party should apply not later than when submitting his first statement on the substance of the dispute. Shri Dave referred to the decisions in VLS Finance Ltd. v. Sunair Hotels Ltd- (CP45/1998-CLB) and P Anand Gajapathi Raju v. PVG Raju- (2000 4 SCC 539). In the present case, admittedly, the respondents have not filed any applicaiton under Section 8. Instead, they have filed a reply to the interim application touching upon extensively on the substance of the disputes. This is not withstanding the argument of Shri Dave that the company is not a party to the JV to bind it with the arbitration clause. Therefore, the question of staying our proceedings or referring the matter to arbitration does not arise. As far as parallel proceedings are concerned, Section 8 itself contemplates, in sub-section (3) such parallel proceedings.
12. The main ground for seeking interim reliefs is that the 2^nd respondent, after ousting the petitioner form membership and directorship, has taken over the day to day management of the hotel which would not be in the interest of the company and that non grant of the interim reliefs sought for would be prejudicial to the interest of the petitioners. The normal principles to be applied for grant of interim relief are that there is a serious dispute in question to be tries, that the court's interference is necessary to protect the parties from injury, that a prima facie case has ben established and that the balance of convenience is in favour of the petitioners. It is also a settled principle that at the interim stage the court is not justified in embarking on anything resembling a trial in order to evaluate the strength of either party's case. It is also a settled principle that where the factors appear to be evenly balanced, it is a counsel of prudence to take such measures as are calculated to preserve the status quo. Applying these principles, if we consider the facts of the case, it is crystal clear that the various legal issues raised by the learned counsel for the petitioners as indicated in paragraph 8 ante are extremely valid requiring determination at the time of hearing f the main petition. These would also indicate that there is prima facie justification to protect the interests of the petitioners and that the balance of convenience is in their favour. It is not in dispute, as seen from the copies of various Board Minuts, that the affairs of the company had been carried on by both the parties amicably during the last 6 years. We find that more than 25 Board Meetings had been held without any dissent from either side indicating that neither of them had grievances against the other. It is on record that the petitioners had been executing the project and had been in control of the day to day affairs of the company all these years. We also note that the petitioners have moved this Board within the shortest possible time after occurrence of the events complained of. Considering the fact that the financial exposure of the petitioners is to the extent of over Rs 90 crores (with personal guarantee of over Rs 50 crores) and that the 2^nd respondent had chosen the 1^st petitieonr as a joint venture partner because of its expertise in management of hotels, it is necessary that the petitioners are associated with the affairs of the hotel till the petition is finally disposed of. The admitted position is that the company is nothing but a hotel project.t It the premises of the hotel were to vest in the government, there will be no activity for the company and association of the petitioners with the management of the company would be of no consequence. We are of the prima facie view, even assuming that the 2^nd respondent had the right to the shares of the petitioners in terms of the JV and Articles, that the property of the company could not be taken over by the 2^nd respondent especially when there is a huge liability against the company.
13. Thus, considering the fact in totality and taking into consideration the interest of the company, in exercise of our power under Section 403 of the Act, we direct as follows: a. The entire hotel complex will be treated as the property of the company and the company alone will have the right to the full usage of the hotel complex.
b. All the decisions taken in the Board meeting on 7.3.2002 are stayed.
c. The Board of the company will be reconstituted with 4 directors- 2 form the petitioner's side and two from the 2^nd respondent. One of the nominees of the petitieonr will be the MD and one of the 2^nd respondent's will be the Chairman. The nominations should be forwarded to the company and the respective parties at the earliest and the first Board meeting should be held latest by 30.4.2002. The MD will be in charge of the day to day management and control of the company. All policy decisions will be taken only in Board meetings for which 7 clear days notice with agenda should be given to all directors. Both the sides will be at liberty to bring proposals to the Board. Only unanimous decision of the Board will be implemented.
The MD should circulate, on a fortnightly basis, summary of the performance of the hotel to all the directors.
d. As far as the shares of the petitioners are concerned, we do not propose, for the present, to give any directions, other than stipulating that none of the shares of the company shall be dealt with in any manner and that no general meeting of the company will be convened or held so that there will be no need to exercise voting rights on the shares.
14. CA 52 of 2002 is accordingly disposed of. The respondents to file their detailed reply to the petition by 31.5.2002 and the rejoinder to be filed by 30.6.2002. The petition will be heard on 11th and 12^th July at 2.30 p.m. Liberty given to both the sides to apply.
15. Before we apr with the order we consider it appropriate to observe that the disputes between the parties deserve to be settled amicably.
Even assuming that the Government has acted in accordance with law in issuing the termination notice and taking over the shares of the petitioners, we feel that it would not be in the interest of the Government to run the hotel on a long term basis especially when the hotel has a liability of over Rs. 50 crores. In view of the strained relationship between the parties, it may also not be possible for them to carry on together also. Under the circumstances, we would suggest that the Government should consider disinvesting the shares held by it in the company for a consideration which could be based on the value of the land against which shares were issued. In case the Government is inclined to accept our suggestion of disinvesting the shares on the basis of the valuation of the land, the same may be reported to as on 3^rd May 2002 at 2.30 p.m. In that case, it would be in the interest of the petitioners also to agree to the suggestion so that they could become the exclusive owner of the company. If both the parties agree, we shall appoint an independent valuer to value the land on that day.