Arrow Syntex Pvt. Ltd. and ors. Vs. Coral Newsprints Ltd. and ors. - Court Judgment

Excerpt:
1. the petitioners claiming to hold 11.51 % shares and claiming the entitlement for further 23% shares in m7s coral newsprint limited(the company) have filed this petition alleging oppression and mismanagement in the affairs of this company.2. the facts as per the petition, in short, are that the petitioners, jalan group entered into an mou in the form of a term sheet with the respondents, namely, chauhan group on 11.10.2003 by which chauhan group agreed to transfer their entire holding of about 33.31% shares held by them in the company for a total consideration of rs. 590 lacs. since the company was already registered with bifr, it was also agreed that the parties would submit an appropriate scheme to bifr for its sanction, the responsibility of obtaining the consent of the bifr being with chauhan group. chauhan group was to clear rs. 563 lacs payable to secured creditors before effecting the change of management. this amount was to be provided by jalan group to be adjusted against the consideration of rs. 590 lacs. pursuant to the said agreement, chauhan group transferred 11.51% shareholding in favour of jalan group and the share certificates relating to the balance 23% shares were kept with an escrow agent, namely, s.s. khetawat along with instruments of transfer.the petitioners took over the management of the affairs of the company on 2nd november, 2003. jalan group also appointed 5 directors on the board. disputes and differences had arisen thereafter between jalan group and chauhan group resulting in filing of this petition. the main prayers made in this petition are that to direct the company/respondents to register transfer of balance 23% shares, to remove respondents 2 to 5 as directors of the company.3. shri choudhary appearing for the petitioners submitted: the company was sick and therefore it was registered with bifr. since chouhan group could not revive the company, they agreed to transfer their entire holding 33.31% shares for a total consideration of rs.590 lacs. a agreement in the form of a term sheet was entered into on 11.3.2003 immediately where after chauhan group transferred 11.3% shares to jalan group. intimation of the transfer was given as per the sebi take over code. as is evident from annexures p-1 and p-2, in terms of the term sheet, it is the responsibility of chauhan group to get the approval of bifr for changing the management but with ulterior motive, chauhan group did not do so. of the total consideration of rs. 590 lacs, jalan group were to clear the dues of secured creditors of rs. 563 lacs over a period of 6 to 12 months. from the date of taking over of the factory of the company and till 13.5.2004, jalan group had invested rs. 403 lacs including clearing the dues of secured creditors to the tune of about rs. 195 lacs. however, in the month of may i.e. within 6 months of the handing over the factory premises to jalan group, chauhan group illegally and forcefully re-possessed the factory and has now leased the factory to an mp. they have also filed a suit and obtained a restraint order against the petitioners from interfering with the management. presently, inspite of huge investment made by jalan group, it has been kept completely in dark about the affairs of the company.while the petitioners have complied with the terms of the agreement, yet, the chouhan group breached the terms, by not obtaining the sanction of bifr for change in the management but have also repossessed the factory. since chauhan group did not apply to bifr, the petitioners themselves applied to bifr but their application was rejected by bifr.jalan group have filed an arbitration petition under section 11 of the arbitration and conciliation act before delhi high court which is pending. since jalan group have invested over rs. 400 lacs in the company, the chauhan group should be directed to transfer the balance 23% shares, that they should be directed to apply to bifr and that they should directed not to deal with 23% shares which are to be transferred to the petitioner, that they should also restore the factory premises to jalan group without any interference. in the alternative, they should be directed to go for arbitration in terms of clause 10 of the term sheet. in case, they are willing for arbitration, the petitioners will not press this petition.4. the learned counsel appearing for the respondents submitted: the entire dispute arose only because jalan group did not comply with the terms of the agreement. liabilities were not discharged on time and even those which were discharged were out of the money siphoned of by jalan group from the company. they did not bring any of their own funds into the company as alleged. the stock and finished goods were diverted to their own sister concerns. even though, in terms of the agreement, the company was to have only one bank account, jalan group opened 3 bank accounts only for the purpose of diverting the funds of the company. the petitioners have not given details as to how they acquired 11.5% shares as they were to be transferred only after the approval of bifr. all these shares along with share certificates were deposited with the escrow agent and there are no details how the petitioners got the shares transferred in their names on 24.5.2004 as seen from annexure p-1. as per the minutes of the meeting held between the two groups on 16th january, 2004 ( annexure p-8), the shares were to be handed over to the escrow agent, namely, s.s. khetawat by 31.1.2004 after payment of a sum of rs. 5.7 lacs by jalan group only after all other terms as per that agreement had been complied with, khetawat was to hand over shares to jalans. the same provision is there in the escrow agreement with shri khetawat. therefore, even the claim of the petitioners that they are shareholders holding 11.51% shares is questionable.5. the learned counsel further submitted: jalans are guilty of forum shopping. they have filed an arbitration petition and have now filed this present petition and in these proceedings, the subject matter is the term sheet. by this petition, the petitioners are seeking not only the shares but also the management. by an order dated 29.9.2004, the bifr has expressly rejected the application of the jalans group for being in management. since bifr is seized of the issue relating to management, in terms of section 26 of sica which bars jurisdiction of any other judicial forum, clb cannot look into this aspect. further, jalans have already filed an appeal against bifr's decision. the term sheet specifically provides that approval of bifr was a pre condition both for transfer of shares as well as management and as such no right under the term sheet would accrue to the petitioners till the approval of bifr is obtained. in the petition, the petitioners have not disclosed the bifr order and thus they have not come with clean hands.in the two petitions filed by the petitioners under sections 9 and 11 of the arbitration and conciliation act, the petitioners have sought more or less identical reliefs as in the present petition. the delhi high court has already appointed an arbitrator. the reason for repossession of the company by chauhan group was to prevent the petitioners from siphoning of the funds of the company and also to protect the interest of the respondents as jalans have failed to release the personal guarantees of chauhan's group. further, jalan group fraudulently created charge on the property of the company in favour of the petitioners but the same has not been disclosed in the petition. on this, the company has already filed a criminal case. thus, it would be evident that not only the jalan group has acted in breach of the terms of the term sheet, they have also siphoned of the funds of the company, and are guilty of forum shopping, therefore, the petition deserves to be dismissed.6. in rejoinder, shri choudhary submitted: the chauhan's group has admitted all the facts stated in the petition about the term sheet, handing over the management of the factory etc. they cannot raise any doubt about the transfer of 11.51% shares to the petitioners as the shares are in de-mat form and as such no fraud can be played. it is the company, which, by a letter dated 8.4.2004 informed the jalan group that 11.51% shares had been transferred in their favour and that they should get the shares demated within a period of 30 days failing which the shares certificates would be sent to jalan group in physical form.on that basis, the jalan group got the shares demated. national depository issued a statement recognizing jalan group as the beneficial owner of these shares. therefore, the respondents cannot challenge the transfer of 11.51% shares and as such the petitioners, being shareholders, have the locus standi to file the petition. it is also wrong ton the part of the respondents to contend that in view of bifr rejecting the application of the petitioners, jalans cannot seek management of the company. that application was rejected only because the petitioners had applied which actually in terms of the term sheet, the respondents should have applied. by this inaction to approach bifr, the respondents have acted in an oppressive, harsh, dishonest and burdensome manner. an arbitrator cannot decide whether an act is oppressive or not. main challenge in the petition is not 11.51% share but the balance about 23% shares. further, the allegation of fraud etc.on the part of the petitioners as alleged is not supported by any particulars.7. i have considered the pleadings and arguments of the counsel. the respondents have questioned the locus standi of the petitioners to file the petition on the ground that the claim of jalans on 11.75% shares in the company is unsustainable. it was also contended that since all the share certificates were with shri khetawat, how jalans got these shares. in my order dated 1.3.2006, i had directed shri khetawat to file an affidavit in this regard. accordingly, he has filed an affidavit stating that share scripts for 5,81,400 equity shares were handed over to one mehboob hussain, the representative of shri chetan chauhan as they wanted to transfer the said shares in favour of jalan group. accordingly, the share scripts were handed over. he has also stated in his affidavit that the remaining shares are still in his custody. it is on record that by a letter dated 8.4.2004 ( annexure a to the rejoinder), the company itself had informed jalans of the approval of transfer by the company and also asking the petitioner to inform the company whether the shares should be recorded in the de-mat form. in the petition, the petitioners have enclosed their demat account showing that they are the beneficial owners of the impugned shares. further, in the petition at annexure -b, the petitioners also have enclosed the details of the consideration paid for the shares.under these circumstances, the question of challenging the entitlement of the petitioners for the impugned shares does not arise. the respondents argued that the shares could be transferred only after the approval of bifr in terms of agreement between the parties. considering the fact that the petitioners have paid consideration for the shares and that at the request of chouhan group, shri khetawat handed over the share scripts to chouhan group and the fact that the company had approved the transfer and that presently the demat shares stand in the name of the petitioners, the question of examining whether the transfer is in violation of the terms of agreement is no longer relevant.therefore, i hold that this petition is maintainable.8. as far as the prayer for transfer of the balance 23% shares and direction to the respondents to apply to bifr for change in the management as proposed in the agreement etc. are beyond the purview of a petition under sections 397/398 of the act. further, the respondents have already obtained a restraint order from the civil court restraining the petitioners from interfering in the management of the company. the petitioners have also invoked arbitration as provided in the term sheet. while the jalan group claims that they have complied with the terms of the agreement in mobilizing funds to clear the liabilities, the same is disputed by chauhan group. most importantly, the company is before bifr and therefore either for acquiring the controlling interest in the company or the management of the company, approval from bifr has to be obtained. in view of this, no effective relief can be granted to the petitioners other than confirming that they are the shareholders of 11.51% shares.9. accordingly the petition is disposed of in the above terms with no order as to cost.

Judgment:
1. The petitioners claiming to hold 11.51 % shares and claiming the entitlement for further 23% shares in M7S Coral Newsprint Limited(the company) have filed this petition alleging oppression and mismanagement in the affairs of this company.

2. The facts as per the petition, in short, are that the petitioners, Jalan Group entered into an MOU in the form of a Term Sheet with the respondents, namely, Chauhan Group on 11.10.2003 by which Chauhan Group agreed to transfer their entire holding of about 33.31% shares held by them in the company for a total consideration of Rs. 590 lacs. Since the company was already registered with BIFR, it was also agreed that the parties would submit an appropriate scheme to BIFR for its sanction, the responsibility of obtaining the consent of the BIFR being with Chauhan Group. Chauhan Group was to clear Rs. 563 lacs payable to secured creditors before effecting the change of management. This amount was to be provided by Jalan Group to be adjusted against the consideration of Rs. 590 lacs. Pursuant to the said agreement, Chauhan Group transferred 11.51% shareholding in favour of Jalan Group and the share certificates relating to the balance 23% shares were kept with an escrow agent, namely, S.S. Khetawat along with instruments of transfer.

The petitioners took over the management of the affairs of the company on 2nd November, 2003. Jalan Group also appointed 5 directors on the board. Disputes and differences had arisen thereafter between Jalan Group and Chauhan Group resulting in filing of this petition. The main prayers made in this petition are that to direct the company/respondents to register transfer of balance 23% shares, to remove respondents 2 to 5 as directors of the company.

3. Shri Choudhary appearing for the petitioners submitted: The company was sick and therefore it was registered with BIFR. Since Chouhan Group could not revive the company, they agreed to transfer their entire holding 33.31% shares for a total consideration of Rs.590 lacs. A agreement in the form of a Term Sheet was entered into on 11.3.2003 immediately where after Chauhan Group transferred 11.3% shares to Jalan Group. Intimation of the transfer was given as per the SEBI Take Over Code. As is evident from Annexures P-1 and P-2, in terms of the Term Sheet, it is the responsibility of Chauhan Group to get the approval of BIFR for changing the management but with ulterior motive, Chauhan Group did not do so. Of the total consideration of Rs. 590 lacs, Jalan Group were to clear the dues of secured creditors of Rs. 563 lacs over a period of 6 to 12 months. From the date of taking over of the factory of the company and till 13.5.2004, Jalan Group had invested Rs. 403 lacs including clearing the dues of secured creditors to the tune of about Rs. 195 lacs. However, in the month of May i.e. within 6 months of the handing over the factory premises to Jalan Group, Chauhan Group illegally and forcefully re-possessed the factory and has now leased the factory to an MP. They have also filed a suit and obtained a restraint order against the petitioners from interfering with the management. Presently, inspite of huge investment made by Jalan Group, it has been kept completely in dark about the affairs of the company.

While the petitioners have complied with the terms of the agreement, yet, the Chouhan Group breached the terms, by not obtaining the sanction of BIFR for change in the management but have also repossessed the factory. Since Chauhan Group did not apply to BIFR, the petitioners themselves applied to BIFR but their application was rejected by BIFR.Jalan Group have filed an arbitration petition under Section 11 of the Arbitration and Conciliation Act before Delhi High Court which is pending. Since Jalan Group have invested over Rs. 400 lacs in the company, the Chauhan Group should be directed to transfer the balance 23% shares, that they should be directed to apply to BIFR and that they should directed not to deal with 23% shares which are to be transferred to the petitioner, that they should also restore the factory premises to Jalan Group without any interference. In the alternative, they should be directed to go for arbitration in terms of Clause 10 of the Term Sheet. In case, they are willing for arbitration, the petitioners will not press this petition.

4. The learned Counsel appearing for the respondents submitted: The entire dispute arose only because Jalan Group did not comply with the terms of the agreement. Liabilities were not discharged on time and even those which were discharged were out of the money siphoned of by Jalan Group from the company. They did not bring any of their own funds into the company as alleged. The stock and finished goods were diverted to their own sister concerns. Even though, in terms of the agreement, the company was to have only one bank account, Jalan Group opened 3 bank accounts only for the purpose of diverting the funds of the company. The petitioners have not given details as to how they acquired 11.5% shares as they were to be transferred only after the approval of BIFR. All these shares along with share certificates were deposited with the escrow agent and there are no details how the petitioners got the shares transferred in their names on 24.5.2004 as seen from Annexure P-1. As per the minutes of the meeting held between the two groups on 16th January, 2004 ( Annexure P-8), the shares were to be handed over to the escrow agent, namely, S.S. Khetawat by 31.1.2004 after payment of a sum of Rs. 5.7 lacs by Jalan Group only after all other terms as per that agreement had been complied with, Khetawat was to hand over shares to Jalans. The same provision is there in the escrow agreement with Shri Khetawat. Therefore, even the claim of the petitioners that they are shareholders holding 11.51% shares is questionable.

5. The learned Counsel further submitted: Jalans are guilty of forum shopping. They have filed an arbitration petition and have now filed this present petition and in these proceedings, the subject matter is the Term Sheet. By this petition, the petitioners are seeking not only the shares but also the management. By an order dated 29.9.2004, the BIFR has expressly rejected the application of the Jalans group for being in management. Since BIFR is seized of the issue relating to management, in terms of Section 26 of SICA which bars jurisdiction of any other judicial forum, CLB cannot look into this aspect. Further, Jalans have already filed an appeal against BIFR's decision. The Term Sheet specifically provides that approval of BIFR was a pre condition both for transfer of shares as well as management and as such no right under the Term Sheet would accrue to the petitioners till the approval of BIFR is obtained. In the petition, the petitioners have not disclosed the BIFR order and thus they have not come with clean hands.

In the two petitions filed by the petitioners under Sections 9 and 11 of the Arbitration and Conciliation Act, the petitioners have sought more or less identical reliefs as in the present petition. The Delhi High Court has already appointed an arbitrator. The reason for repossession of the company by Chauhan Group was to prevent the petitioners from siphoning of the funds of the company and also to protect the interest of the respondents as Jalans have failed to release the personal guarantees of Chauhan's Group. Further, Jalan group fraudulently created charge on the property of the company in favour of the petitioners but the same has not been disclosed in the petition. On this, the company has already filed a criminal case. Thus, it would be evident that not only the Jalan group has acted in breach of the terms of the Term Sheet, they have also siphoned of the funds of the company, and are guilty of forum shopping, Therefore, the petition deserves to be dismissed.

6. In rejoinder, Shri Choudhary submitted: The Chauhan's group has admitted all the facts stated in the petition about the Term Sheet, handing over the management of the factory etc. They cannot raise any doubt about the transfer of 11.51% shares to the petitioners as the shares are in de-mat form and as such no fraud can be played. It is the company, which, by a letter dated 8.4.2004 informed the Jalan Group that 11.51% shares had been transferred in their favour and that they should get the shares demated within a period of 30 days failing which the shares certificates would be sent to Jalan Group in physical form.

On that basis, the Jalan Group got the shares demated. National Depository issued a statement recognizing Jalan Group as the beneficial owner of these shares. Therefore, the respondents cannot challenge the transfer of 11.51% shares and as such the petitioners, being shareholders, have the locus standi to file the petition. It is also wrong ton the part of the respondents to contend that in view of BIFR rejecting the application of the petitioners, Jalans cannot seek management of the company. That application was rejected only because the petitioners had applied which actually in terms of the Term Sheet, the respondents should have applied. By this inaction to approach BIFR, the respondents have acted in an oppressive, harsh, dishonest and burdensome manner. An arbitrator cannot decide whether an act is oppressive or not. Main challenge in the petition is not 11.51% share but the balance about 23% shares. Further, the allegation of fraud etc.

on the part of the petitioners as alleged is not supported by any particulars.

7. I have considered the pleadings and arguments of the counsel. The respondents have questioned the locus standi of the petitioners to file the petition on the ground that the claim of Jalans on 11.75% shares in the company is unsustainable. It was also contended that since all the share certificates were with Shri Khetawat, how Jalans got these shares. In my order dated 1.3.2006, I had directed Shri Khetawat to file an affidavit in this regard. Accordingly, he has filed an affidavit stating that share scripts for 5,81,400 equity shares were handed over to one Mehboob Hussain, the representative of Shri Chetan Chauhan as they wanted to transfer the said shares in favour of Jalan Group. Accordingly, the share scripts were handed over. He has also stated in his affidavit that the remaining shares are still in his custody. It is on record that by a letter dated 8.4.2004 ( Annexure A to the rejoinder), the company itself had informed Jalans of the approval of transfer by the company and also asking the petitioner to inform the company whether the shares should be recorded in the de-mat form. In the petition, the petitioners have enclosed their demat account showing that they are the beneficial owners of the impugned shares. Further, in the petition at Annexure -B, the petitioners also have enclosed the details of the consideration paid for the shares.

Under these circumstances, the question of challenging the entitlement of the petitioners for the impugned shares does not arise. The respondents argued that the shares could be transferred only after the approval of BIFR in terms of agreement between the parties. Considering the fact that the petitioners have paid consideration for the shares and that at the request of Chouhan Group, Shri Khetawat handed over the share scripts to Chouhan Group and the fact that the company had approved the transfer and that presently the demat shares stand in the name of the petitioners, the question of examining whether the transfer is in violation of the terms of agreement is no longer relevant.

Therefore, I hold that this petition is maintainable.

8. As far as the prayer for transfer of the balance 23% shares and direction to the respondents to apply to BIFR for change in the management as proposed in the agreement etc. are beyond the purview of a petition under Sections 397/398 of the Act. Further, the respondents have already obtained a restraint order from the civil court restraining the petitioners from interfering in the management of the company. The petitioners have also invoked arbitration as provided in the Term Sheet. While the Jalan Group claims that they have complied with the terms of the agreement in mobilizing funds to clear the liabilities, the same is disputed by Chauhan Group. Most importantly, the company is before BIFR and therefore either for acquiring the controlling interest in the company or the management of the company, approval from BIFR has to be obtained. In view of this, no effective relief can be granted to the petitioners other than confirming that they are the shareholders of 11.51% shares.

9. Accordingly the petition is disposed of in the above terms with no order as to cost.