Full Judgment Text
IN THE HIGH COURT OF DELHI AT NEW DELHI
CO.A (SB) No. 102 of 2012
WORLD PHONE INDIA PVT. LTD. & ORS. ..... Appellants
Through: Mr. U.K. Choudhary, Senior Advocate
with Ms. Srishti Jai Singh,
Ms. Maneesha Dhir, Mr. Hemant
Sharma and Mr. Kshitij
Khera, Advocates
versus
WPI GROUP INC., USA ..... Respondent
Through: Mr. Virender Ganda, Senior Advocate
with Mr. S.K. Giri & Mr. Shubham
Aggarwal, Advocates
CORAM: JUSTICE S. MURALIDHAR
O R D E R
15.03.2013
1. The challenge in this appeal under Section 10F of the Companies Act,
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1956 (‘Act’) is to an order dated 15 November 2012 passed by the
Company Law Board (‘CLB’) in an application, CA. No.566 of 2012, in
Co. Pet. No. 102(ND) of 2010 filed by the Respondent, WPI Group Inc.,
USA (‘WPIGI’), to declare a Board meeting of World Phone India Pvt. Ltd.
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(‘WPIPL’), Appellant No.1 held on 31 October 2012 as null and void.
2. The facts in brief for the purposes of this appeal are that Appellant No.1,
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WPIPL, is a private company incorporated on 7 September 1992 under the
Act within the jurisdiction of the Registrar of Companies (‘ROC’), Delhi
and Haryana, having its registered office at D-100, IInd Floor, Okhla
Co.A (SB) No. 102 of 2012 Page 1 of 15
Industrial Area, Phase-I, New Delhi-110020. The Respondent, WPIGI holds
43.75% of the total paid up equity share capital of WPIPL. While Mr. Vivek
Dhir, Appellant No.2, holds 43.75% of the equity shares of WPIPL, Mr.
Pankaj Patel held the balance 12.5%. WPIGI is represented by its Chairman,
Mr. Aditya Ahluwalia.
3. The case of WPIGI in Co. Pet. No. 102(ND) of 2010 before the CLB
under Sections 397 and 398 of the Act read with Sections 402, 403, 406 and
408 thereof was that the Annual General Meeting (‘AGM’) of the company
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for the financial year ended 31 March 2010, which ought to have been held
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on or before 30 September 2010, was not so held. Meanwhile, the shares
of Mr. Pankaj Patel, who was arrayed as Respondent No.3 in Co. Pet.
No.102 (ND) of 2010 in the CLB had, according to WPIGI, been transferred
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on 22 September 2009 jointly to Mr. Vivek Dhir and his wife, Ms. Malini
Dhir (Appellant Nos.2 and 3 herein). As a result, Appellant Nos.2 and 3
came to hold 56.25% of the paid up equity share capital of Appellant No.1.
This, according to Mr. Aditya Ahluwalia, came to light when he received
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the draft annual accounts for the year ending 31 March 2010 which showed
an increase in the salary of Mr. Vivek Dhir. It may be mentioned that on
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20 September 2010, Ms. Malini Dhir was appointed as an Additional
Director of the Appellant No.1. Consequently, as on date, there are three
Directors in the Appellant No.1: Mr. Vivek Dhir, Ms. Malini Dhir and Mr.
Aditya Ahluwalia.
4. According to Mr. Ahluwalia, there were discrepancies noticed by him in
the accounts and the notice for the AGM, which was to be held to consider
Co.A (SB) No. 102 of 2012 Page 2 of 15
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the accounts for the year ending 31 March 2010, which he brought to the
notice of Appellant Nos.2 and 3. He alleges, however, that he subsequently
downloaded the annual accounts filed by Appellant No.2 with the ROC
which showed that they had been approved by the Board of Directors
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(‘BoD’) on 22 July 2010 and that the AGM was held on 20 September
2010. According to him, the documents sent to him mentioned the date of
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the Board meeting for approval of accounts as 9 August 2010 and the date
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of the AGM as 12 September 2010. The petition also listed out all the
instances of oppression and mismanagement, including the legality of the
appointment of Appellant No.3 as a Director of the company, the holding of
postponed AGM, non-receipt of notices of Board meetings and the
shareholders meetings and, in particular, the validity of the transfer of
18,663 equity shares from Mr. Pankaj Patel to Appellant Nos. 2 and 3
jointly. The case of Mr. Aditya Ahluwalia is that as a result of this transfer,
there was an imbalance in the shareholding pattern. It was initially agreed
that Mr. Pankaj Patel would transfer shares in equal proportion both to Mr.
Vivek Dhir and WPIGI. However, as a result of his entire shareholding
being transferred to Appellant Nos.2 and 3 jointly, WPIGI was reduced to a
minority shareholder. WPIGI also alleged siphoning off of funds and
mismanagement in maintenance of records and filing them with the ROC.
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The said petition was filed on 18 October 2010. The pleadings in the said
petition are complete and it is stated to be at the stage of final hearing before
the CLB.
5. While the petition was pending in the CLB, WPIGI represented by Mr.
Aditya Ahluwalia filed an application, being CA No. 566 of 2012 under
Co.A (SB) No. 102 of 2012 Page 3 of 15
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Sections 402 and 403 of the Act, in which he stated that a notice dated 23
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October 2012 had been issued, proposing to hold a Board meeting on 31
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October 2012 which was received on 26 October 2012 at his New Delhi
address. He stated that at that time he was in the United States of America
(‘USA’). He was caught in a hurricane which hit the Eastern coast and,
therefore, he sent an e-mail requesting that the meeting be postponed. The
meeting was to consider the proposal to go in for a rights issue of 1,49,303
equity shares of the company having a face value of Rs.100 each and
offering them to the existing shareholders in 1:1 ratio. It is alleged that the
agenda for the Board meeting was sent without giving any details of
financial projections and how the figure of 1,49,303 equity shares was
arrived at. This meant that if Mr. Aditya Ahluwalia had to subscribe to the
rights issue, he would have to infuse Rs. 25 lakhs without any interest.
6. It is not in dispute that there was a joint venture agreement (‘JVA’) dated
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1 May 1999 entered into between the parties, in terms of which Mr. Aditya
Ahluwalia had an affirmative vote in matters relating to the company. It was
under the same JVA that the shareholding pattern of Mr. Vivek Dhir,
WPIGI and Mr. Pankaj Patel was decided. Despite Clause 6.2 of the JVA
giving an affirmative vote to Mr. Aditya Ahluwalia at the Board meeting
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held on 31 October 2012 the resolution for approving the rights issue as
proposed was approved without his being present and voting. This
according to him, therefore, severely prejudiced his rights.
7. One of the questions that was considered by the CLB in CA No. 566 of
2012 was whether Clause 6.2 incorporated in the JVA could ipso facto bind
Co.A (SB) No. 102 of 2012 Page 4 of 15
the company inasmuch as there was no corresponding amendment to the
articles of association (‘AoA’) of the company. The question framed by the
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CLB, as is evident from the impugned order dated 15 November 2012 was
whether the approval of WPIGI was required to raise equity for the
company and whether Mr. Ahluwalia had sufficient time to examine issues
since at the relevant time he was in New Jersey (USA) which was hit by a
hurricane.
8. The findings of the CLB in the impugned order were that since the
company was a private one and not covered by Sections 81 to 89 and 171 to
176 of the Act, it had the liberty to carve out the rules which were not
repugnant to the other provisions of the Act. The company was governed by
the AOA as to its internal management. Therefore, any agreement entered
into amongst the shareholders “is not binding to the extent repugnant to the
AOA of the company.” The CLB further proceeded to hold that Section 9 of
the Act which stated that the Act prevailed over both the Memorandum of
Association (‘MoA’) and AoA, was not applicable to a private company
like Appellant No.1. It was further held that the terms and conditions in the
JVA were not inconsistent with the AoA, nor were they explicitly barred
under the AoA. The cases cited by the Appellants were distinguished by the
CLB on the ground that they did not relate to instances involving a JVA.
9. The CLB held that, in the present case, since there were only three
shareholders and all of them were also Directors, the holding of the Board
meeting in the absence of a party who had an affirmative vote was in
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violation of the JVA. Consequently, the Board meeting of 31 October 2012
Co.A (SB) No. 102 of 2012 Page 5 of 15
was held null and void and a direction was issued to hold a fresh Board
meeting over the rights issue in compliance with Clause 6.2 of the JVA.
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10. When the present appeal was listed before the Court on 12 December
2012, the following order was passed:
“ Co.A(SB) 102/2012 and Co. Appl. 2405/2012 (stay)
This appeal has been directed against the order passed by the
Company Law Board (CLB) dated 16.11.2012 wherein the prayer
made in the application filed by the non-applicant/respondent had
been allowed and it was held that the board meeting held by the
company on 31.10.2012 and all consequential acts thereof not being
in accordance with law, the respondent company had been directed
to hold a fresh board meeting by giving notice to the parties.
Let notice of this appeal be issued to the respondent on the appellant
taking effective steps by ordinary process, registered A.D. as also
courier returnable on 11.03.2013.
Resolutions passed in the fresh board meeting shall not be given
effect till the next date of hearing.
Order dasti.”
11. The Court has heard the submissions of Mr. U.K. Choudhary, learned
Senior counsel appearing for the Appellants and of Mr. Virender Ganda,
learned Senior counsel for the Respondent.
12. The first question that arises for consideration is whether the CLB was
justified in holding that since there was no bar to the affirmative vote in the
AoA of the company, Clause 6.2 of the JVA which provides for the
affirmative vote must be given effect to. This, in turn, requires the
Co.A (SB) No. 102 of 2012 Page 6 of 15
interpretation of Section 9 of the Act which the CLB has understood as not
being applicable to private companies.
13. Section 9 of the Act reads as under:
“9. Act to override memorandum, articles, etc. – Save as
otherwise expressly provided in the Act—
(a) the provisions of this Act shall have effect notwithstanding
anything to the contrary contained in the memorandum or articles of
a company, or in any agreement executed by it, or in any resolution
passed by the company in general meeting or by its Board of
directors, whether the same be registered, executed or passed, as the
case may be, before or after the commencement of this Act; and
(b) any provision contained in the memorandum, articles, agreement
or resolution aforesaid shall, to the extent to which it is repugnant to
the provisions of this Act, become or be void, as the case may be.”
14. While Sections 81 to 89 and 171 to 186 of the Act insofar as they relate
to issuance of shares do not apply to private companies, there is no basis for
concluding that Section 9 of the Act per se does not apply to private
companies. A plain reading of Section 9 makes no such exception. The
following features of Section 9 are required to be noted:
(a) The very title to the provision makes it clear that it has an overriding
effect over the MoA and AoA of the company.
(b) Section 9 is subject to other provisions of the Act which may provide to
the contrary. At the same time, Section 9(a) makes it clear that the Act
would have effect notwithstanding anything to the contrary in the MoA or
the AOA of the company, “or any agreement executed by it or the
Co.A (SB) No. 102 of 2012 Page 7 of 15
resolution passed by the company in general meeting or by its board of
directors.”
(c) Section 9 (a) makes no distinction between agreements entered into by
the company itself or agreements entered into between the directors or
shareholders of the company. Section 9 makes no distinction between a
public company and a private company.
(d) Section 9 (b) clearly states that if any provision in the MoA, AoA,
agreement or resolution “is repugnant to the provisions of the Act”, such
provision in the MoA/AoA would be void. This further underscores the
overriding effect of the provisions of the Act.
15. The legal position is that where the AoA is silent on the existence of an
affirmative vote, it will not be possible to hold that a clause in an agreement
between the shareholders would be binding without being incorporated in
the AoA. The question to be asked is whether the provisions of an
agreement, that are not inconsistent with the Act, but are also not part of the
AoA, can be said to be applicable. All that Section 9 states is that clauses in
the agreement that are ‘repugnant’ to the Act shall be ‘void’. This does not
mean that clauses in the agreement which are not repugnant to the Act
would be enforceable, notwithstanding that they are not incorporated in the
AoA.
16. Mr. Virender Ganda, learned Senior counsel for the Respondent, has
placed extensive reliance on the decision of the Supreme Court in Reliance
Natural Resources Limited v. Reliance Industries Limited (2010) 7 SCC 1
Co.A (SB) No. 102 of 2012 Page 8 of 15
(hereinafter referred to as the ‘ RNRL case ’) and, in particular, the
observations made in paras 56 and 59 thereof. In the said case, a submission
was made on behalf of RNRL that, in terms of the ‘doctrine of
identification’, Reliance Industries Limited (‘RIL’) was identified by “such
of its key personnel through whom it workss”, and that in that case, the key
persons were Smt. Kokilaben Ambani, Mr. Mukesh Ambani and Mr. Anil
Ambani, who had entered into a family arrangement which was reduced in
writing in the form of a Memorandum of Understanding (‘MoU’). The
submission was that in terms of the said doctrine of identification, the
actions of the key personnel should be taken to be the actions of the
company itself. Mr. Ganda has submitted that in the present case, the JVA
was in the nature of an agreement between the key personnel of the
Appellant No.1 company and since their actions were taken to be the actions
of the company itself, Clause 6.2 which provided for an affirmative vote
should be taken to be applicable and enforceable notwithstanding the fact
that no amendment was made to the AoA to incorporate such an affirmative
vote of WPIGI.
17. The above submission overlooks the fact that even in the RNRL case ,
the Supreme Court was not prepared to treat the MoU as binding. It was
emphasised that the company in that case, i.e., Reliance Industries Limited
was ‘separate’ from the key personnel. The observations made in para 58 of
the said judgment that the doctrine of identification “may be applicable only
in respect of small undertakings” does not mean that irrespective of the facts
of the case, it would be applicable to all small undertakings.
Co.A (SB) No. 102 of 2012 Page 9 of 15
18. The ratio of the decision in the RNRL case must be understood by the
conclusions in para 125 of the judgment, which reads as under:
“125. The MoU was signed as a private family arrangement or
understanding between the two brothers, Mukesh and Anil Ambani,
and their mother. Contents of the MoU were not made public, and
even in the present proceedings, they were revealed in parts.
Clearly, the MoU does not fall under the corporate domain – it was
neither approved by the shareholders, nor was it attached to the
scheme. Therefore, technically, the MoU is not legally binding.
Nevertheless, cognizance can be taken of the fact that the MoU
formed the backdrop of the scheme and therefore, contents of the
scheme have to be interpreted in the light of the MoU.”
19. The offshoot of the above discussion is that the JVA in the present case
cannot be said to bind the company as such. What the company can do has
to be ascertained with reference to the AoA. In the present case, although
the JVA was entered into in 1999 itself, there was no move made by Mr.
Aditya Ahluwalia or WPIGI to have the AoA amended at any point in time
to incorporate the affirmative vote provided to WPIGI under Clause 6.2 of
the JVA. Nothing prevented WPIGI from doing so. Unless the AoA was
actually amended, WPIGI could not insist on exercise of the affirmative
vote. This law has been clearly explained by the Supreme Court in V.B.
Rangaraj v. V.B. Gopalakrishnan AIR 1992 SC 453 . Referring to the
decision in S.P. Jain v. Kalinga Tubes Ltd. [1965] 2 SCR 720 , the Supreme
Court observed:
“it was also a case of a battle between two groups of shareholders led
by P & L as they were named in the decision. In July 1954 these two
groups who held an equal number of shares of the value of Rs. 21
lakhs, out of a total share capital of Rs. 25 lakhs, in the company
which was then a private company, entered into an agreement with
Co.A (SB) No. 102 of 2012 Page 10 of 15
the appellant who was a third party and certain terms were agreed to.
Various resolutions were passed by the company to implement the
agreement. However, neither the Articles of Association were
changed to embody the terms of the agreement nor the resolutions
passed referred to the agreement. In 1956-57, the company desired to
raise a loan from the Industrial Finance Corporation and as per the
requirement of the Corporation, in January 1957 the company was
converted into a public company and appropriate amendments for the
purpose were made in the Articles. However, even on this occasion,
the agreement of July 1954 was not incorporated into the Articles.
Disputes having arisen, the matter reached the Court. The appellant
claimed the benefit of the agreement of July 1954. It was held by this
Court that the said agreement was not binding even on the private
company and much less so on the public company when it came into
existence in 1957. It was an agreement between a non-member and
two members of the company and although for some time the
agreement was in the main carried out, some of its terms could not be
put in the Articles of Association of the public company. As the
company was not bound by the agreement it was not enforceable.”
Further, in V.B. Rangaraj v. V.B. Gopalakrishnan , the Supreme Court
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quoted Palmer’s Company Law (24 Edn.) and observed:
“ In Palmer's Company law (24th Ed.) dealing with the 'transfer of
shares' it is stated at page 608-9 that it is well-settled that unless the
Articles otherwise provide the shareholder has a free right to transfer
to whom he will. It is not necessary to seek in the Articles for a power
to transfer, for the Act (the English Act of 1980) itself gives such a
power. It is only necessary to look to the Articles to ascertain the
restrictions, if any, upon it. Thus a member has a right to transfer his
share/shares to another person unless this right is clearly taken away
by the Articles.”
20. The above decision was followed by the Bombay High Court in IL and
FS Trust Co. Ltd. v. Birla Perucchini Ltd.[2004] 121 Comp Cas 335
(Bom) . It was held that the decision of the Supreme Court could not be
Co.A (SB) No. 102 of 2012 Page 11 of 15
confined only to a situation involving transfer of shares but also to other
situations, including share subscription agreement which provided for
continuance of the nominee of a certain group on the board of directors
without any corresponding amendment to the AoA. In the present case as
well there was no amendment to the AoA to provide for the affirmative vote
for WPIGI and, therefore, the CLB was in error in proceeding on the basis
that Clause 6.2 of the JVA had to be applied to decide the validity of the
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decision taken at the Board meeting held on 31 October 2012.
21. Mr. Ganda referred to the decision in M.S. Madhusoodhanan v. Kerala
Kaumudi (P) Ltd. (2004) 9 SCC 204 which in turn discussed the decision in
V.B. Rangaraj v. V.B. Gopalakrishnan but proceeded on the basis that
under Section 10 of the Specific Relief Act 1963 “specific performance of a
contract for transfers of shares in a private limited company could be
granted.” The decision in V.B. Rangaraj v. V.B. Gopalakrishnan was held
to be “entirely distinguishable on facts.” The present case does not involve
any restriction on the transfer of shares but the existence of an affirmative
vote which cannot be recognized without a corresponding amendment to the
AoA.
22. Lastly, it was submitted that even a conduct which is technically and
legally correct, may still justify the grant of relief in a petition under
Sections 397 and 398 of the Act on the application of the ‘just and
equitable’ jurisdiction. Conversely, a conduct involving illegality may not
warrant the grant of any remedy. Reliance is placed on the decision of the
Supreme Court in Sangramsinh P. Gaekwad v. Shantadevi P. Gaekwad
Co.A (SB) No. 102 of 2012 Page 12 of 15
(2005) 11 SCC 314 . Mr. Ganda contended that in the present case it was
just and equitable for the CLB to have granted relief to the Respondent
notwithstanding the fact that the decision in the Board meeting may have
been “technically legal and correct.”
23. The above observations in Sangramsinh P. Gaekwad were made in the
context of the question whether an isolated act of oppression may be
sufficient to grant relief. That question was answered in the negative. It was
further observed that the test of lack of bonafides should be applied “in both
the winding up petition and while determining an application under Section
397.” However, the question whether any just and equitable relief ought to
be granted has to be tested in the facts and circumstances of each case.
24. There were two grounds on which the CLB proceeded to interfere with
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the decision of the Board meeting held on 31 October 2012. One of those
grounds was that the decision could not have been taken without the
affirmative vote of WPIGI. For the reasons explained above, this Court is
unable to sustain the above finding as it is based on an erroneous reading of
Section 9 of the Act. Accordingly, this Court sets aside the above finding.
25. The other ground on which the CLB interfered with the decision at the
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Board meeting held on 31 October 2012 was that the notices of the Board
meeting were issued at a time when the Respondent was not in the country
and was stuck in New Jersey, USA, which was admittedly hit by a
hurricane. While the notice was properly delivered to the Respondent, its
request for adjournment of the meeting could have been easily
Co.A (SB) No. 102 of 2012 Page 13 of 15
accommodated by the Appellants. Nevertheless, they went ahead and held
the meeting. This has been sought to be remedied by the impugned order of
the CLB by directing that a fresh Board meeting be convened. In the facts
and circumstances, the CLB was justified in issuing the said direction. What
however cannot be sustained in law is the direction that in the fresh Board
meeting, effect must be given to Clause 6.2 of the JVA. That portion of the
impugned order is, therefore, set aside.
26. During the pendency of the present appeal, the Board meeting was held
with the same result that by majority the resolution to go in for the rights
issue was approved. Obviously, for the reasons explained the decision could
not be faulted on the ground that the affirmative vote under Clause 6.2 of
the JVA was not given effect to.
27. However, that will not bring the matter to an end. The above Board
meeting was held pending the decision of the CLB on the main petition
under Section 397 of the Act filed by the Respondent. One of the grounds
urged in the said petition concerns the legality of the transfer of 12.5%
shares of Mr. Pankaj Patel in favour of Appellant Nos.2 and 3. Therefore,
the validity of any of the decisions taken subsequent to the transfer will
depend on the outcome of the final decision in the petition under Section
397 of the Act filed by the Respondent.
28. In the circumstances, it is considered appropriate to direct that the
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interim order passed by this Court on 12 December 2012 to the effect that
the resolution passed in the fresh Board meeting “shall not be given effect”
Co.A (SB) No. 102 of 2012 Page 14 of 15
is directed to continue for another period of eight weeks or till such time the
CLB passes a final order in the petition filed by the Respondent, which
decision, in any event, should not be later than 12 weeks from today. If for
some reason, the CLB is unable to pronounce its final order in the petition
within twelve weeks then, it will be open to either party to approach this
Court for further directions. In that event, the interim order passed by this
Court will continue till further orders are passed by this Court.
29. It is clarified that this Court has not expressed any opinion on the
principal contentions of the parties on the other issues which will be
examined by the CLB on merits.
30. The appeal is disposed of in the above terms, but in the circumstances,
with no order as to costs.
S. MURALIDHAR, J.
MARCH 15, 2013
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