Aarti Sponge and Power Ltd. vs Bimal Kumar

The instant appeal has been filed u/s 10F of the Companies Act, 1956 (''the Act'') against the impugned interlocutory order dated 6th October, 2010 passed by member, Company Law Board (''CLB''), Principal Bench, New Delhi, whereby learned Member of the CLB, finding that the settlement process has fully failed in the matter, directed the parties to present their case on merits on the company petition (''CP'') and all pending Company Applications (''CAs'').Section 10F of the Act reads as under :

10F. Appeals against the order of the Company Law Board. - Any person aggrieved by any decision or order of the Company Law Board [made before the commencement of the Companies (Second Amendment) Act, 2002] may file an appeal to the High Court within sixty days from the date of communication of the decision or order of the Company Law Board to him on any question of law arising out of such order :

Provided that the High Court may, if it is satisfied that the appellant was prevented by sufficient cause from filing the appeal within the said period, allow it to be filed within a further period not exceeding sixty days.

Brief facts, in nutshell, as emerged from the pleadings of both the parties, are that Mr. Bimal Kumar Agrawal, Mr. Rajiv Bimal Agrawal and Mr. Amit Agrawal filed the Company Petition No. 129 of 2007 under sections 397, 398, 402 and 406 read with sections 235 and 239 read with sections 539-545 of the Act against Aarti Sponge & Power Ltd. and others.

It is apparent that until March 2006 the appellant-company was being managed by four families, namely, Agrawal family through Shri Rajiv. Agrawal. Mundra family through Shri Chhagan Lal Mundra, Atlani family through Shri Suresh Atlani and Modi family through Shri Tara Modi. The Atlani family and Modi family wanted to disassociate from the appellant-company, whereas the other two families agreed to settle their shares as soon as replacement groups were available. The petitioners and appellant No. 2, who are well matured businessmen wanted to be inducted as the substitutes of the two outgoing families. There were discussions between the petitioners and outgoing families regarding transfer of their shares in favour of the appellant No. 2 family and with the other two families regarding induction into the Board of directors and transfer of management and control of the manufacturing unit. After discussion it was made clear and they agreed to provide personal guarantees to the company''s bankers, who were the sole institutional financers. They offer their properties as collateral securities and infuse fresh funds to the tune of Rs. 10 crore in appellant No. 1-company and Rs. 5 crore on along term basis in the respondent No. 4-company immediately. The petitioners settled their consideration money with the two families and acquired 2996 shares of the total paid-up capital but excluding the share application money, which stood received as on 31st March, 2006.

The case of the petitioners is that they are having 29 per cent of the shares in the company. The appellant-company had undertaken fresh allotment of the shares and accordingly several Forms 2 were filed before the Registrar of Companies, indicating the details of allotment. Those alleged allotments were made without any notice to the petitioners and further, no notices of any extraordinary general meetings were served to them. Therefore, any such meetings and their minutes are false and fabricated. Further, such allotments of shares have been made by the appellant-company in violation and contravention of the provisions of the Act. Out of three petitioners, only Mr. Bimal Kumar Agrawal (petitioner No. 1) was appointed as one of the directors of the company, with effect from 1st April, 2006. The petitioners did not agree to bring Rs. 10 crore as long-term loan and they never brought Rs. 220 lakh in the appellant-company as a trade deposit. This amount was brought in on a long-term basis. Petitioner No. 1 has not deposited a sum of Rs. 58 lakh with the respondent No. 4 (Aarti Buildcon & Infrastructure Ltd.). The petitioners are ready and willing to exit from the appellant-company on'' reasonable and fair terms, as stated in the CP.

It is evident that during the pendency of the company petition, after hearing the counsel for the parties on 14th July, 2009, learned Chairman (Mr. S Balasubramanian) of the CLB passed an order on 16th July, 2009 (Annexure A/2) which reads as follows

The counsel for the parties have agreed before me today (14th July, 2009) that the petitioners would go out of the company on receipt of fair value for their shares to be determined by an independent valuer and on return of their unsecured loans to both the company and sister concerns, if any, and also on release of personal guarantees given by them in favour of the company/sister concerns. They have also agreed that Ernst & Young could be appointed to determine the fair value of the shares. Accordingly, I appoint Ernst & Young to determine the fair value of the shares on the basis of the balance sheet as on 31st March, 2007. The company will negotiate the fees payable to the valuers and pay the same. Both the sides will provide whatever information that is needed by the valuers and also are at liberty to make both oral and written submissions before the valuers. The valuers will take into consideration these submissions while determining the fair value of the shares. The valuation report should be submitted latest by 30th September, 2009. The company shall serve a copy of this order on Ernst & Young to do the needful.

On going through the impugned order dated 6th October, 2010 passed by the Member (Vimla Yadav) of the CLB it is evident that prior to the date of hearing when the impugned order was passed, learned Member asked learned counsel for the petitioners to present arguments on merits on the company petition, learned counsel appearing for the respondents (appellant-company) had drawn attention to the above quoted order dated 16th July, 2009, passed by the Chairman of the CLB and contended that there is already a consent order which is Part I of the order and only Part II has to be ordered by the CLB after hearing the parties on fair valuation and thereafter order is to be passed on the schedule of payments after considering the respondents'' request for giving installments for payments.

It was further submitted by learned counsel appearing for the appellant-company before the Member, CLB that consent is final and the executing court cannot go behind the decree and the matter cannot be argued on merits.

On the other hand, learned counsel appearing for the petitioners, objecting to the submissions made on behalf of the appellant-company, submitted that the matter should be heard on merits, pointing out that on 14th July, 2009 the petitioners had agreed to go out of the company on receipt of fair value for their shares to be determined by an independent valuer and the going out was also on return of their unsecured loans given to the company and the sister concerns. It is evident that, during the pendency of the company petition interest payment on deposits was directed along with the schedule of payments but as on 6th September, 2010 nothing was paid to the petitioners except releasing their personal guarantees.

It is further evident that both the parties had objected to the valuation of the share at Rs. 40.4. According to the petitioners the value of per share works out to Rs. 67.86 for their actual 29 per cent shares as on 31st March, 2006 when the actual paid-up capital of the company was Rs. 3,57,17,000, divided into 35,71,700 shares of Rs. 10 each and not 7 crore divided into 60 lakh shares of Rs. 10 each, as is shown in the manipulated balance sheet as on 31st March, 2007. The illegal increase is reducing the petitioners'' shareholding to 17.29 per cent, which is under challenge in the petition and it is also one of the objections made to the valuer. In this view of the matter it was submitted on behalf of the petitioners that the company petition is not merged in the order dated 16th July, 2009.

Learned Member, CLB, having perused all the earlier orders passed in the company petition, including the order dated 16th July, 2009, pleadings and the arguments of the parties as well as the case laws cited before it by the respondents, clarified that the order dated 16th July, 2009 is not a full and final consent order and the appellant-company have themselves admitted that it was only Part I of the consent order but on facts and law it was not a consent order, it was only one of the orders in the settlement process attempting to get the matter settled with the approval of the CLB. The petitioners had agreed to go out of the company on receipt of fair value for their shares, which was to be got done by an independent valuer and that going out was subject to certain conditions. By way of Company Application Nos. 134/2010 and 178/2010 the respondents have sought setting aside of the valuation done by an independent valuer. The subsequent proposals given, subsequent to the order dated 16th July, 2009, are not acceptable to the petitioners. The proposals are not acceptable to the parties and the parties have failed to reach to a settlement. There is no situation before the CLB in which any consent order (according to the appellant-company Part II of the consent order) can be given and no consent order is available on the record of the CLB disposing of the company petition. There is no final consent decree and the company petition is pending for adjudication. The valuer has not been able to meet the petitioners'' objection No. 1 regarding actual paid-up capital as on 31st March, 2006 and as shown on 31st March, 2007, i.e., the date of valuation fixed by the CLB as per practice and settled position. The valuer has admitted that the issue of shareholding/actual paid-up capital is beyond the scope of the terms of reference to the valuer, which can be adjudicated upon only by the CLB. Thus, finding that there is no other way to hear such objections but by hearing the company petition on merits as settlement process has fully failed in the matter, the parties were directed to present their case on merits on the company petition and all pending company applications.

Being aggrieved by the above impugned order dated 6th October, 2010 the appellant-company has filed the instant appeal.

We have heard learned counsel appearing for the respective parties and perused the papers available on record.

The question of law involved in the instant appeal for consideration is as under :

(i) Whether the order dated 16th July, 2009, passed by the Chairman of the CLB, Principal Bench, New Delhi was a consent order and was binding upon the parties in terms of determination of the fair value of the shares by the independent valuer (Ernst & Young) on the basis of the balance sheet as on 31st March, 2007.

(ii) Whether the order dated 16th July, 2009, could be reviewed by the Member of the CLB, Principal Bench, New Delhi by the impugned order dated 6th October, 2010, directing hearing of the company petition on merits.

(iii) Whether the CLB was required to pass a final order in the Company Petition No. 129/2007 in terms of the valuation report of the valuer, in accordance with the order dated 16th July, 2009.

Learned counsel appearing for the appellant-company has vehemently argued that even if the impugned order dated 6th September, 2010 is regarded as an interlocutory order, the same is covered under the ambit of section 10F of the Act. There is only a singular requirement for an appeal u/s 10F that a question of law should arise out of such order. Though the impugned order does not end the company petition and is apparently an interlocutory order, it is a final order in regard to its subject-matter. Therefore, the instant appeal is maintainable. In fact, by passing the impugned order the CLB has reviewed the order dated 16th July, 2009, which is wholly unauthorised. The CLB being a quasi-judicial authority is not vested with the power of review under the Company Law Board Regulations, 1991. Earlier it was only regulation 27 which provided review and the same was omitted vide CLB (Amendment) Regulations, 1992 vide GSR 492(E) dated 14th May, 1992. Even if there could be a review in the event of an order sought to be reviewed suffers from some mistake or error apparent on the face of the record but in the instant matter no such mistake or error is apparent on the face of the record.

Learned counsel appearing for the appellant-company next submitted that the order dated 16th July, 2009, was an order passed with the consent of the parties. The CLB was never called upon either by way of an application or even on oral submissions to review/recall the consent order. There was no iota of material before the CLB to establish that there was an element of fraud, coercion or mistake while passing the consent order dated 16th July, 2009. Therefore, the order dated 16th July, 2009, could not have been interfered with by the impugned order dated 6th October, 2010. The parties cannot be relegated to their original position unless the consent order is diluted or nullified on grounds of fraud or coercion or mistake. The petitioners have not challenged the order dated 16th July, 2009, in the courts above. The consent order operates in different ways, namely, a contract, a judicial imprimatur, res judicata, estoppels and representation by conduct.

Learned counsel appearing for the appellant-company next submitted that section 402 of the Act bestows wide powers upon the CLB for resolving the dispute between the rival groups. Under this provision the CLB can direct the purchase of the shares or interests of any members of the company by other members thereof or by the company to put an end to the dispute between the rival groups. The valuer has furnished its report in compliance of the consent order dated 16th July, 2009. The valuation of shares involves complex questions of facts and figures which require intricate knowledge and expertise in the field. The sanctity of the valuation report ought to be maintained and respected. Such report should not be interfered with unless it is established that it is erroneous or unreasonable. Once a valuer has been appointed on the basis of consent of the parties, the parties to the lis are bound to accept the valuation report. The appellant-company is ready and willing to accept the valuation report and make payment of shares to the respondents pursuant to the valuation report.

Learned counsel for the appellant-company has placed reliance on a decision of the Supreme Court in Manish Mohan Sharma v. Ram Bahadur Thakur Ltd. [2006] 71 CLA 288 (SC)/[2006] 67 SCL 91.

On the other hand learned counsel appearing for the petitioners (respondent Nos. 1 to 3 herein this appeal) while supporting the impugned order has argued that the consent order dated 16th July, 2009, was strictly to the effect that "the petitioners would go out of the company on receipt of fair value for their shares to be determined by an independent valuer" and "on return of their unsecured loans to both the company and sister concerns" and also "on release of personal guarantees given by them in favour of the company/sister concerns". Thus, the consent order dated 16th July, 2009, was a conditional order and the effect of the same is not that as soon as the valuer will submit its report, the same would be binding on the parties and the matter would come to an end.

Learned counsel appearing for the petitioners further submitted that there is no illegality, perversity or jurisdictional error in the order dated 6th October, 2010. Learned Member, CLB, finding that the parties are not satisfied with the valuation report and the valuer has admitted that the issue of shareholding/actual paid-up capital is beyond the scope of the terms of reference to the valuer, has rightly proceeded to hear and decide the company petition itself on merits.

In Manish Mohan Sharma''s case (supra), the hon''ble Apex Court has held that the powers u/s 402 are residuary in nature and in addition to the powers available to the CLB u/s 397(2) and section 398(2) which permit the CLB to make such order as it thinks fit with a view to bringing to an end the matters complained of u/s 397(1) and with a view to bringing to an end or preventing the matters complained or apprehended u/s 398(1). Para 19 is relevant here and quoted below :

In our opinion the order dated 19th August, 1999 was not an interim order as contended by the respondents. The issues resolved thereby could not be reopened or reargued for a different disposal of those issues. The order was passed expressly u/s 402 of the Companies Act which reads :

Powers of Tribunal on application u/s 397 or 398. - Without prejudice to the generality of the powers of the Tribunal u/s 397 or 398, any order under either section may provide for -

(a) the regulation of the conduct of the company''s affairs in future;.

(b) the purchase of the shares or interests of any member of the company by other members thereof or by the company;

(c) in the case of a purchase of its shares by the company as aforesaid/the consequent reduction of its share capital;....

(d) any other matter for which in the opinion of the Tribunal it, is just and equitable that provision should be made.

It has been further held in paras 23 and 24 that the words "any order" used in the opening of section 634A of the Act indicate that all orders made by the CLB on an application under sections 397 and 398 are enforceable like decrees without any limit on the nature of the order passed by the CLB. All decrees whether preliminary or final are susceptible to execution.

Since the CLB when it deals with an application u/s 634A sits as an executing court it is subject to all the limitations to which a court executing a decree is subject to. An executing court cannot go behind the decree, unless the decree sought to be executed is a nullity for a lack of inherent jurisdiction. A decree is without jurisdiction if the court passing the decree usurps a jurisdiction which it did not have and which could not be waived by the parties. Further, the lack of jurisdiction must be patent on the face of the decree in order to enable the executing court to come to the conclusion that the decree is a nullity (Para 27).

The Apex Court further held in paras 19 and 21 that the order dated 19th August, 1999 was not an interim order as contended by the respondents but it was a consent order. The issues resolved thereby could not be reopened or reargued for a different disposal of those issues. The order was passed expressly u/s 402 of the Act. Doubtless in the said order the CLB speaks of "final disposal of the petition and the various interim applications". This was because in terms of the order itself (which included MOFA and the transfer document), various steps had to be taken to complete the severance of the relationship finally between the MMS group and the respondents. This did not make the affirmation of MOFA and the transfer document an interim arrangement. The operative portion of the order directed the execution of MOFA and the transfer document by the parties after completion of the schedules thereto. The entire order was passed by consent. The parties cannot resile therefrom. Therefore, the order cannot be described as an interim order in the sense that the issues decided thereby could be reopened.

The Apex Court has also held that consent decree has been held to be a contract with the imprimatur of the court superadded. It is something more than a mere contract and has the elements of both a command and a contract. In the said case, the order dated 19th August, 1999, was a consent order. Its terms and conditions were contained in MOFA and the transfer document which expressly formed an integral part of the order itself. In this context, para 28 is relevant here and quoted below :

Further more, the order dated 19th August 1999, was a consent order. Its terms and conditions were contained in MOFA and the transfer document which expressly formed an integral part of the order itself. A consent decree has been held to be a contract with the imprimatur of the court superadded. It is something more than a mere contract and has the elements of both a command and a contract - {See C.F. Angadi Vs. Y.S. Hirannayya, As was said by the Privy Council as early as 1929 :

The only difference in this respect between an order made by consent and one not so made is that the first stands unless and until it is discharged by mutual agreement or is set aside by another order of the court; the second stand until and unless it is discharged on an appeal - See AIR 1929 289 (Privy Council)

The Supreme Court has ultimately :

[B]oth the CLB and the High Court erred in refusing to execute the consent order, i.e., order dated 19th August, 1999, u/s 634A of the Act. They have thereby failed to exercise the jurisdiction with which they were vested. The failure is heightened given the nature of the order which they were bound to execute. They have erroneously proceeded upon principles applicable to contracts alone and have ignored the fact that the agreement between the parties had culminated in a consent order of the CLB. The plea of the respondents that the Supreme Court should not interfere in the matter under article 136 by reason of any alleged misconduct on the part of the appellants in managing the five estates which were transferred in terms of the said order is unacceptable. The appellants'' alleged lack of efficiency in running of the five tea estates is not a material consideration for deciding whether the order dated 19th August, 1999, should be enforced. It has been further held that it is unnecessary to go into the powers of the parties to rescind the settlement (assuming that such rescissions were at all possible at this stage) as neither of the groups has taken any steps to issue any notice of rescission till today.

In view of the above discussion, we are of the considered opinion that the order dated 16th July, 2009 is a consent order and it is binding upon the parties to the lis unless it is challenged and the same is interfered with by the courts above. The matter is to be settled on the basis of the valuation report submitted by the independent valuer appointed by the order dated 16th July, 2009, itself. The finding of the learned Member, CLB in the impugned order dated 6th October, 2010 that the issue of shareholding/actual paid-up capital is beyond the scope of the terms of reference to the valuer, is not sustainable. In our opinion, even if, there is no specific wordings used in the consent order dated 16th July, 2009, in regard to shareholding/actual paid-up capital, the valuer appointed by the consent order was required to furnish the valuation report after obtaining information that was needed by it and after considering the oral and written submissions made by the parties. Therefore, the whole dispute and subject-matter involved in the company petition was required to be looked into by the valuer, while furnishing the valuation report. The effect of the impugned order dated 6th October, 2010, directing the parties to present their case on merits on the company petition and all pending company applications would be reviewing the consent order dated 16th July, 2009, which was passed by the Chairman of the CLB after hearing the counsel for the parties on 14th July, 2009, which was not within the domain of learned Member of the CLB.

If the valuation report was objected to by the parties, the objections could have been referred to the valuer for giving valuation report, including valuation of shares afresh, upon considering the objections or any other independent valuer could be appointed for furnishing valuation report afresh, considering the objections raised by the parties. But in any case for that purpose the consent order was not liable to be reviewed. In view of the foregoing, the appeal is allowed. The impugned order dated 6th October, 2010 is set aside. The CLB is directed to pass appropriate order in Company Petition No. 129/2007, in accordance with law. The valuer may be directed to submit valuation report afresh after considering the objections of the parties or if need be so, some other independent valuer may be appointed for the purpose and thereafter the CLB shall pass the final order having regard to the spirit of the consent order dated 16th July, 2009. No order as to costs.