Case: Akshaya Textiles Ltd. Vs S. Martin. Company Law Board
| Judges | K.K. Balu, Vice Chairman |
| Issue | Company Law |
| Citation | [2010] 155 CompCas 572 (CLB) |
| Judgement Date | September 11, 2009 |
| Court | Company Law Board |
Order:
K.K. Balu, Vice Chairman, (Chennai Bench)
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This is an application filed by Akshaya Textiles Ltd. ("the company") under regulation 44 of the Company Law Board Regulations, 1991, for stay of all further proceedings in C.P. No. 243 of 2008 initiated by Section Martin (SM), seeking directions against the company to register the impugned transfer of shares, from the name of the transferor-second respondent (S.N. Santhosh Kumar) to the transferee-petitioner (SM), pending final adjudication of O.S. No. 235 of 2008 on the file of the Court of Subordinate Judge, Coimbatore and until vacation of the restraint order passed by the Board for Industrial and Financial Reconstruction (BIFR) against the transfer of shares, being the subject-matter of C.P. No. 243 of 2008, in support of which Shri R. Vidya Shankar, learned Counsel, appearing for the applicant submitted:
SM allegedly entered into a memorandum of understanding on November 14, 2005 and an agreement dated November 19, 2005, with S.A. Narahari Setty (NS) and V. Anjayaneyalu (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 aforesaid restraint order of the BIFR continues to be in force till date. The BIFR by yet another order made on August 7, 2008, allowed one more opportunity to the company to settle the disputes amicably with SM within a period of two months and further directed that the company even by way of compromise should not bring about any change of management. The concept of the promoters as commercially understood only means persons presently owning substantial stake in the company by way of shareholding and management. The Securities and Exchange Board of India Regulations, 1997, defines the term promoter as the person or persons who are in control of the company, directly or indirectly, whether as a shareholder, director or otherwise. The order dated May 23, 2005, of the AAIFR dismissing the appeal (Appeal No. 321 of 2001) recognised the fact that M/s. Sreekakulam Textiles Ltd., controlled by NS is the new prospective promoter of the company. The BIFR order dated August 27, 2007, deals with, inter alia, the management and shareholding pattern of the company. NS, VA and S.N. Santhosh Kumar are directors of the company. NS being the chairman is in charge of the overall operations of the company. S.N. Santhosh Kumar, is the managing director taking care of production, quality control and administration of the company. VA is looking after the finance and marketing of cotton. NS and VA are holding the entire 100 per cent, shares of the company. The promoters should (a) guarantee the projections of profitability, cash flow, etc. (b) make good any shortfall in resources for meeting the capital expenditure or future cash flows; and (c) infuse interest free funds of Rs. 298.34 lakhs. These directions are only against the present shareholders. The aforesaid BIFR orders are in force and, therefore, this Bench cannot proceed with the present company petition de hors the BIFR orders. By virtue of Section 32(1) of the SICA, the provisions of the SICA and rules or schemes made thereunder shall have overriding effect over the Company Law Board proceedings. The BIFR order dated March 16, 2009, clarified that the proceedings before the BIFR will not be prejudicial to any order, which may be passed in the proceedings before the Company Law Board in relation to the company. This direction came to be deleted by virtue of the BIFR order dated April 1, 2009. The order of the BIFR made on April 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 should not give effect to the transfer of shares based on the documents lodged by SM. In the present proceedings, SM is enforcing the memorandum of understanding, due to failure on the part of NS to meet his commitments. By virtue of the prohibition contained in Section 22(1) of the SICA, any proceedings for recovery and enforcement of guarantee cannot be proceeded, without the concurrence of the BIFR, as held by this Board in Shapoorji Pallonji Finance Ltd. v. Mideast (India) Ltd. [2002] 110 Comp Cas 868.
The Company petition seeking directions for registration of the transfer of shares from the name of N. Santhosh Kumar to SM is based on the memorandum of understanding/agreement. The original memorandum of understanding produced by NS is left blank in relation to consideration column, while consideration column in paragraph 1 of duplicate copy of the memorandum of understanding in the custody of SM is found to be unilaterally filed, and interpolated. The preamble forming part of the memorandum of understanding would show that NS approached SM for financial assistance on the basis of the stipulations specified therein. The payments received by NS as borne out by several of receipts produced by SM, are towards the loans extended to the company. The memorandum of understanding is the subject-matter of O.S. No. 235 of 2008 and O.S. No. 98 of 2009 before the District Court, Coimbatore. The cause of action for O.S. No. 235 of 2008 arose, among other dates, on November 14, 2005 and November 19, 2005, when the memorandum of understanding and the agreement were executed. The rights of SM are flowing from the memorandum of understanding and the agreement. The plaint sets out in paragraph 8 the entire details of loans advanced to the company, which accounted for Rs. 10.55 crores and does not speak of any transfer of shares by the promoters to SM. The main prayer of NS in O.S. No. 235 of 2008 is to restrain the company from effecting the impugned transfer of shares in favour of SM or his nominees in the register of members of the company. The civil court before granting this prayer will adjudicate the character of the disputed transaction, namely, whether it would constitute sale or transfer of shares. This is a triable issue involved in O.S. No. 235 of 2008. Thus, the material issue before the civil court as well as the Company Law Board is the same. The serious 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 proceedings. The Company Law Board is not bound to give any relief under Section 111/111A of the Companies Act, 1956, if it finds that complicated questions of facts or law or disputes of a complicated nature or serious disputes relating to title are involved. The proper course in such cases of complexity, necessitating investigation, is to relegate the parties to a civil suit as held by this Bench in D.R. Talayar-khan v. Transgene Biotek Ltd. [2007] 138 Comp Cas 727. This Board similarly in Shiv Dayal Agarwal v. Sidhartha Polyster P. Ltd. [1997] 88 Comp Cas 705...
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