DSLV Ventures LLC and Others vs Dr. Kamakshi Memorial Hospital Pvt. Ltd. and Others

K.B.K. Vasuki, J.—The Petitioners in C.P. No. 25 of 2011 are the Appellants herein. The present Appeal is filed against the Order passed by the Company Law Board, thereby dismissing their Company Petition as not maintainable. For the sake of convenience, the parties are referred to as per their rank in C.P. No. 25/2011.

The questions of law arises for consideration before this Court are as follows:

(a) Whether the Company Law Board failed in following the procedure prescribed in Regulation 15 of the Company Law Board Regulations, 1991 by not granting an opportunity to the Appellants in responding to the issue relating to the maintainability of Petition raised by the office of the Bench?

(b) Whether the Company Law Board failed to appreciate the fact that maintainability cannot be decided as a preliminary issue when intricate questions of law and fact are involved in the Petition?

(c) Whether the Company Law Board failed to appreciate the fact that the petition was a composite petition u/s 111(4) read with Sections 397, 398 & 402 and Schedule XI and other applicable provisions of the Companies Act 1956 and therefore the Company Law Board had power and jurisdiction to enquire into the shareholding of the Respondent Company and to come to the conclusion that the Respondents 2 & 3 had tampered the records and made false and fictitious entries in the Register of Members of the 1st Respondent-Company? and

(d) Whether the Company Law Board failed to appreciate the fact that when the acts of oppression are continuous in nature and where false and fabricated records are filed with the Registrar of Companies denying the Appellants the membership of the Company, a composite Petition u/s 111(4) read with Sections 397, 398 & 402 and Schedule XI and other applicable provisions of the Companies Act, 1956 is maintainable?

Out of four questions of law framed by this Court, the first question of law need not be going into for the simple reason that the impugned Order was passed, after giving opportunity of being head and after hearing both the parties.

Regarding other questions of law, few facts, which are relevant for consideration herein are as follows:

The Appellants herein filed the Company Petition for the following reliefs: (i) to enquire and determine the shareholding of the Petitioners and to direct the Company (ii) to allot the same to the Petitioners on the basis of such determination (iii) to rectify the Members'' Register of the Company accordingly (iv) to annul/set aside and declare all the Forms filed by the Company in January 2011 with the ROC, Chennai as being fraudulent, void and not binding on the Company (v) consequently to rectify the Members'' Register of the Company reflecting the current shareholding of 100% shares to the Respondents 2 & 3 alone (vi) to supersede the Board of Directors of the Company and to reconstitute the Board in accordance with the shareholding in the Company (vii) to alter the Article of Association of the Company to capture all the rights of the Petitioners in accordance with the share Subscription Agreement dated 31.3.2006 (viii) to cause an independent audit of the books and records of the Company from its inception, and (ix) to surcharge all those, who are responsible for causing a loss under Schedule XI of the Companies Act, 1956. In short, the Company Petition is filed for declaring the right of the Petitioners for allotment of shares in the Company and for including them as members in the register concerned and to reconstitute the Board in accordance with such revised shareholding in the Company, etc.

The circumstances under which the Company Petition came to be filed are that the First Respondent/Dr. Kamakshi Memorial Hospital Private Ltd. is incorporated on 24.11.2004 to establish, construct, erect, maintain, run, manage, develop, own, acquire, purchase, undertake, improve, equip, promote, initiate, encourage, subsidies and organise hospitals, dispensaries, clinics, diagnostic centres, polyclinics, pathology laboratories, research centers, operation theaters, chemist shops, blood banks, eye banks and kidney banks, nursing homes, physiotherapy centers, investigation centers and other similar establishments for providing treatment and medical reliefs in all its branches by all available means to public at large on suitable fees, concessional fees or on free of charge basis.

The First Petitioner/DSLV Ventures LLC is a Limited Liability Company, which is according to the petitioners, managed by the second Petitioner. The Petitioners 3 & 4 are the husband and wife and the Third Petitioner runs a business called "Custom Solution" providing custom made Software Services. The Fourth Petitioner is the elder brother of the Second Petitioner and a Bank employee of the 5th Respondent-Bank ever since 1982.

The Respondents 2 & 3 are the signatories to the Memorandum of Association of First Respondent-Company. The authorised capital of the Company was Rs. 5,00,000/- divided into 50,000 equity shares of Rs. 10/- each and paid up capital of Rs. 1,00,000/- divided into 10,000 equity shares of Rs. 10 each. During 2004, the Company sustained financial crisis and approached the 6th Respondent/State Bank of India for financial assistance and even thereafter the problem was not over. At that juncture, the Second Petitioner at the instance of the Fourth Petitioner became interested in making investment in the First Respondent-Company and accordingly agreed to invest Rs. 5 crores payable in four installments on certain terms and conditions and the same were reduced into writing by way of Share Subscription Agreement dated 31.3.2006. The same was entered into between the promoter by name Dr. T.G. Govindarajan/2nd Respondent, the investor by name Venkataramani Swaminathan/2nd Petitioner and the Company by name Dr. Kamakshi Memorial Hospital Private Ltd./1st Respondent, as per the terms of which, the investors shall make the investments in four installments of Rs. 1.25 crores each on or before the specified date between 31.3.2006 and 15.8.2006 for proportionate allotment towards subscription of the equity shares of Rs. 10/- each of the Company at the premium of not exceeding Rs. 15/- per share, subject to condition that the promoter shall take steps to increase the authorised capital of the Company to the required level and the Company takes steps to issue and offer the new shares to the investor. Thereafter, the investor agreed to arrange for remittance of the required amount on or before the due dates on the Company confirming the increase in authorised capital and offering the new shares to the investor. Both the investor and promoters agreed that the investor shall have 20% of the equity capital of the Company and balance 80% shall be held by the promoters and the total investment both by the promoters and the investor shall be at Rs. 25 crores of which Rs. 20 crores to be brought in by the promoters and Rs. 5 crores by the investor. Of the total investment, 40% shall be towards equity capital and the balance 60% shall be towards share premium account. The amount brought in by the investor shall be first utilised by the Company to settle its unsecured creditors with high rate of interest. The Agreement contains other terms and conditions including conciliation and arbitration clauses to settle all disputes arising between the parties from and out of the Share Subscription Agreement. The Arbitral Tribunal consist of the Presiding Arbitrator and two Arbitrators, each one nominated by the respective parties.

It is not in dispute that in pursuance of the Agreement, the amounts to the tune of Rs. 99,84,894/-, Rs. 30,78,948/- and Rs. 81,59,388/- were received from the First Petitioner/DSLV Ventures on 4.4.2006, 1.2.2007 & 9.5.2007. It is also not in serious dispute that the amounts so paid were on behalf of the Second Petitioner. In the meanwhile, misunderstanding arose between the parties regarding the implementation of terms of the Subscription Agreement. While according to the Petitioners, the amount was invested for allotment of shares and the failure on the part of the Respondents to allot shares is in violation of the contractual obligations, according to the Respondents the money invested was only by way of financial assistance and the Subscription Agreement was signed by the parties without knowing the nature of the Agreement. Even otherwise, the agreement, having been entered into between the Second Petitioner and the Respondents 1 & 2 and as the amount was paid only by the First Petitioner-Company and as the entire amount was not paid, the question of allotment of shares to the Petitioners 2 to 4 does not arise herein. It is also stated that unless and otherwise the rights of the parties under the Agreement are crystallized through appropriate Civil forum either through arbitration or through Civil Suit, further reliefs as sought for herein are not maintainable. It is also their case that the Petitioners, having been not made as members of the Company, they are not entitled to maintain the Petition and the remedy available to the Petitioners is to first enforce the agreement and not to straight away seek the reliefs as sought for herein.

Heard the rival submissions made on both sides.

As already stated above, the rights based on which the reliefs sought for herein, are in the capacity of the Petitioners as the proposed shareholders of the Company and such right is admittedly claimed on the strength of the Subscription Agreement dated 31.3.2006. It is not in dispute that the Subscription Agreement is between the Second Petitioner/investor, the Second Respondent/promoter and the First Respondent-Company. Neither the First Petitioner nor other Petitioners 3 & 4 are parties to the Agreement. While the Fourth Petitioner is the brother of the Second Petitioner, the Third Petitioner is none else than the wife of the Second Petitioner. Though the expression "promoter" in the Subscription Agreement includes his Legal Heirs, successors and assigns, the Petitioners 3 & 4 cannot be recognised as the legal heirs, successors or assigns of the promoter. It is nobody''s case that there is any assignment in favour of the Petitioners 3 & 4 as such, the Petitioners 3 & 4 are in no manner associated with the rights and liabilities of the parties to the Agreement.

As far as the First Petitioner-DSLV Ventures LLC is concerned, the same is admittedly foreign based Company. It may be true that the amounts are received by the First Respondent-Dr. Kamakshi Memorial Hospital Private Limited from DSLV Ventures as foreign investor. Though the payments under the Agreement are by the First Petitioner, neither the First Petitioner nor the Second Petitioner sent any communication to the First Respondent-Company regarding the party on whose behalf the investments are made by the First Petitioner-Company. Going by the details furnished by the First Respondent-Company, which are enclosed at Pages 105, 106 & 107 of the typed set filed by the Appellants, the investments are received from the foreign investor by name DSLV Ventures LLC, by the First Respondent Company. If that is so as there is no Agreement between the parties, the investments, if any made by the same shall be treated only as investments and not otherwise. As far as the Second Petitioner is concerned, he has no right to claim allotment of shares for the payments so made by the Second Petitioner. Viewing from any angle, neither of the Petitioners have any right to maintain any claim as made herein on the strength of Subscription Agreement dated 31.3.2006.

Even otherwise, the Petitioners'' right to become shareholders on the strength of Subscription Agreement in the First Respondent-Company is yet to be crystallized. It may be true that the parties to the agreement agreed to allot certain shares to the investor in proportion to the investments made in 4 installments within the specified time. Admittedly no investment is made in the manner as agreed between the parties as per Clause (1) of the Subscription Agreement. Out of Rs. 5 crores, nearly 50% of the amount was alone invested and balance 50% remains to be payable. Even such payment of approximately 50% of the amount was beyond the time specified in the agreement. While payment of first two installments were to be made on or before 31.3.2006 and 15.5.2006, the second payment as per the documents filed herein, was made on 6.6.2007. Though the Petitioners have furnished the particulars regarding more payment, no material is made available to prove all the payments made. The documents enclosed at Pages 105 to 107 relate to the payment made by the First Petitioner-Company to the tune of Rs. 799,84,894/-, Rs. 730,78,948/- and Rs. 781,59,388/- on the dates mentioned in the documents. Further, the Subscription Agreement do not only provide for the rights of the parties, but also impose obligations to be fulfilled by the parties concerned. While the investment shall be made by the investor, the promoters shall take steps to increase the authorised capital of the Company and the Company shall take steps to offer new shares to the investor in accordance with the procedure laid down under the provisions of the Companies Act. The remittance by the investor shall be only after the Company confirming the increase in authorised capital and in offering new shares to the investor. The rest of the terms and conditions of the Subscription Agreement relate to conduct of the affairs of the Company and the right of the investor to participate in the same. Such right accrues to the investor only after shares are allotted and only so long as the investor holds the shares of the Company. In short, the right and liabilities under the Agreement ought to have been first recognised and legally enforced and only thereafter, the investor''s right and liabilities as shareholder/member of the Company accrues and thereafter, the shareholder is entitled to seek the reliefs as sought for herein. In other words, the right of the Petitioners to claim the reliefs as sought for herein is, after their being allotted shares and their becoming shareholders of the Company. Till then, no such right to make any claim against the Company and its directors before the Company Law Board accrues to either of the Petitioners herein.

The other view strongly expressed by the Respondents against locus standi of the Petitioners is as follows: The allegations raised in the Petition before the Company Law Board are regarding alleged oppression of the minority shareholders and mismanagement by majority share holders and such Petition is not maintainable unless the Petitioners satisfy the requisite qualification to maintain such Petition as contemplated under the Companies Act in this regard. The investors have in their Petition raised the issues relating to failure to allot their shares to make rectification in the Register of Members, to appoint its nominee as Director on the Board of the Company, etc. All these matters are undisputedly arising out of the Subscription Agreement, as such, all the allegations raised in the Company Petition are to be necessarily examined only with reference to share Subscription Agreement which is hence the foundation of the Company Petition and the decisions against the right and liabilities of the parties under the Agreement shall be depending upon the enforceability of the Agreement and the enforceability of the Agreement is by way of Specific Performance, which is not the issue one falls within the ambit and jurisdiction of Company Law Board, but it is outside the jurisdiction of Company Law Board.

As rightly argued by the learned Counsel for the Respondents, all the issues relating to right of the parties for allotment of shares and consequential right to make rectification in members of the register and Memorandum of Articles of Association and other acts in accordance with the right of new shareholders are complicated issues and fall outside the jurisdiction of Company Law Board or Company Court, as such, the appropriate forum to decide the same is either by the Civil Court or through arbitration and not by Company Law Board.

It is observed by the Hon''ble Supreme Court that while dealing with the dispute relating to rectification of Register of Members that in order to qualify for rectification, every procedure as contemplated under the Companies Act before recording the name in the register of the Company has to be stated to have been complied with by the Applicant. According to the Hon''ble Supreme Court, the Court has given the jurisdiction to examine on the facts of each case, whether the Application is for rectification or something else and under field or peripheral jurisdiction of the Court within which is the jurisdiction to rectify the said mistake. That being so, if the facts of the present case are appreciated in the light of the above legal premises, it would clearly show that the rectification sought for in the register is not a simple rectification, but adjudication of basic right of the parties for allotment of the shares to become members. Unless and otherwise such right is decided, the shares are allotted and the Petitioners are made as shareholders in the manner known to Company law, the omission to record their name in the register cannot be construed as an error to resort to the relief of rectification.

The Hon''ble Supreme Court and Bombay and Kerala High Courts under given situation in the following authorities: (i) M/S. Ammonia Supplies Corporation (P) Ltd. Vs. M/S. Modern Plastic Containers Pvt. Ltd. and Others, ; (ii) Kumaran Potty Vs. Venad Pharmaceuticals and Chemicals Ltd. and Another, and (iii) National Insurance Company Ltd. Vs. Glaxo India Ltd., (Bombay High Court have discussed in detail as to what is rectification of register and the circumstances under which the relief can be sought for and the party, who is entitled to invoke such provision and the matters to be decided in such petition. It is held by the Supreme Court at Page 325 that in case any claim is based on some seriously disputed Civil rights or title, denial of any transaction or any other basic facts, which may be the foundation to claim a right to be a member and if the Court feels such claim does not constitute to be a rectification, but instead seeking adjudication of basic pillar of some such facts falling outside the rectification, the Court has discretion to find whether the dispute raised is really for rectification or is of such a nature, unless decided first it would not come within the purview of rectification. While holding so, it is further observed that the word "rectification" itself connotes some error which has crept in, requiring correction and error would only mean everything as required under the law has been done yet by some mistake the name is either omitted or wrongly recorded in the register of the Company. The Hon''ble Supreme Court in the same page extracted the definition of the expression "rectification" as given in T.P. Mukherjee''s Law Lexicon Fifth Revised Edition, Stroud''s Judicial Dictionary and in Venkataramaiya''s Law Lexicon, 2nd Edition, which read as follows:

In T.P. Mukherjee''s Law Lexicon, Fifth Revised Edition:

The expression rectification of the Register used in Section 155 is significant and purposeful. ''Rectification'' implies the correctness of an error or removal of defects or imperfections. It implies prior existence of error, mistake or defect... the Register kept by the Company has to be shown to be wrong or defective.

According to Stroud''s Judicial Dictionary:

Rectify--Altering the Register of a Company so as to make it conformable with a lawful transfer.

In Venkataramaiya''s Law Lexicon, 2nd Edn.:

The act to be done under the powers of that Section is the ''rectification'' of the Register, a term which itself implies that the Register, either in what is, or what is not upon it, is wrong; but the Register cannot be wrong unless there has been a failure on the part of the Company to comply with the directions in the Act as to the kind of Register to be kept: for if the Act has been complied with, the Register must be right and not wrong.

As rightly pointed out by the learned Counsel for the Respondents, the status of the Petitioners as shareholders are yet to be decided and there are number of formalities for getting authorised share capital of the Company increased and before allotting shares to the Petitioners, as such the question of asking for alteration in the Memorandum of Articles of Association or rectification of Register of Members in the Company, etc. cannot be straight away sought for. It remains equally unedited that in order to become the member or to purchase the shares of the Company, a procedure is prescribed under the Companies Act which has to be followed before the shares could be transferred. In this case, no such procedure is admittedly yet to be followed to allot shares to the Petitioners.

The Kerala High Court in its Judgment cited supra, required the identically placed person therein to make Application u/s 41(2) for allotment of shares and to pass resolution of the Board of Directors for allotting the shares and on his failure to make one such Application and to pass one such resolution, the Kerala High court was of the view that the petitioner has having no title to become a shareholder. It is also held by Kerala High Court that when the Petitioner is neither member nor shareholder, he cannot come under any of three categories referred to u/s 155(1) (old) so as to invoke the rectification clause. It is also observed therein that only when a person becomes a member or shareholder, the question of default or delay in entering the fact of having become a member or shareholder will arise u/s 155(1)(b) and in order to become a shareholder, there must be an Agreement by him "in writing" u/s 41(2), which provision of law, according to Kerala High Court, indicate, by necessary implication that an Application for allotment of shares should be made in writing. The Kerala High Court, having found that the amount paid was not for shares and it was not validly converted into shares, ultimately held that the question of having a title to become a shareholder will not arise and the persons having monetary claims against the Company by way of loan or otherwise cannot come u/s 155 and claim that they may be made shareholders by converting the credit into shares and rectify the Share Register and such claims for money could only be through Civil forum and in that case, the remedy available to the Petitioner is only through a Civil Court for realisation of the amount and the Company Petition is ill or misconceived and is a short cut method of realisation by conversion into shares.

The Bombay High Court has under identical circumstances held that the Company Court would be the Court of exclusive jurisdiction in so far as rectification of the Register of Members of a Company is concerned. But whenever issues arise as to whether the Applicant is the owner of the shares; whether there is fraud or forgery in holding the shares or the very title to the shares, then such issues will be beyond the jurisdiction of the Company Court and will have to be decided by the Civil Court. It is specifically observed that if the issues which have to be answered are not peripheral to rectification, but issues regarding title, etc. then such other issues will have to be decided by the Civil Court. The Bombay High court, by applying the same view of the Hon''ble Supreme Court in The Public Passenger Service Limited Vs. M.A. Khader and Others, ; and in M/S. Ammonia Supplies Corporation (P) Ltd. Vs. M/S. Modern Plastic Containers Pvt. Ltd. and Others, , was pleased to set aside the order of the Company Law Board mainly on the ground that there are complicated questions of fact, which the Company Law Board cannot go into. The issue decided by the Bombay High Court is also regarding the very transaction which is not merely a matter for rectification and it is not merely the case of the Appellant being the owner of the shares and the Company for wrong reasons refusing to rectify the register without cause and the disputes whether the Appellants are the owners of the shares would not be a case exclusively pertaining to rectification which could be decided by the Company Law Board.

As against the legal objection raised and discussed above, the learned Counsel for the Appellants herein cited the authorities of the Hon''ble Supreme Court reported in M/s. World Wide Agencies Pvt. Ltd. and another Vs. Mrs. Margarat T. Desor and others, , and Delhi High Court reported in Charanjit Khanna and Others Vs. Khanna Paper Mills Ltd. and Others, . In the case decided by the Delhi High Court, the maintainability of the composite Petition under Sections 397, 398 & 111A of the Companies Act was questioned. The Appellants therein filed the Petition under Sections 397 & 398 of the Act against the Respondents on the ground of oppression and mismanagement and when the maintainability of the Petition was challenged, the Appellants moved an Application for amendment of the Petition by incorporating relief u/s 111A of the Act. The Company Petition was dismissed on the ground that since the names of the Appellants no longer appeared in the Register of Members, they lacked the requisite eligibility u/s 399 of the Act to maintain such a Petition and the Appellants were granted liberty to file a Petition u/s 111A of the Act for rectification of the Register of Members. The correctness of such order was questioned before the High Court, wherein, the question as referred to above arose for consideration. The High Court, having found that the primary allegations of oppression and mismanagement raised in the Company Petition are that the faction that it is in control of the Company has either intentionally reduced the rival faction to less than one tenth of the total number of members of the Company or removed the rival faction from the Register of Members, observed that in such cases, where the allegations of oppression and mismanagement are inextricably intertwined with the issue of maintainability of the Petition u/s 399 of the Act, a composite Petition has to be held as maintainable and the Petitioner need not be directed to file two separate Petitions.

Whereas in the case dealt with by the Hon''ble Supreme Court, the maintainability of the Petition under Sections 397 & 398 by the Legal Representatives of deceased member of the Company was raised and the same was answered in favour of the Legal Representatives, by holding that after death of the member, whose name is still in Register of Members, his Legal Heirs are entitled to maintain a Petition under Sections 397 & 398 even though they are not registered as members. It is held so, by treating the word "members" as applicable to the Legal Representatives, without any right to vote in regulating the conduct of the Company''s affairs, which registration would give him. It is held so, on the ground that when the member dies, his estate is entrusted in the Legal Representatives and the succession is not kept in abeyance and the property of the deceased member vests in the Legal Representatives on the death of the deceased and they should be permitted to act for the deceased member for the purpose of transfer of shares u/s 109 of the Act. It would, therefore, be wrong to insist that their names must be first put on the register before they can move an Application under Sections 397 & 398 of the Act.

In my considered view, the observations of both Hon''ble Apex Court and Delhi High Court in both the citations (cited supra) are not applicable to the facts of the present case as they are factually distinguishable. In the case decided by the Hon''ble Supreme Court, the Appellants are the Legal Representatives of deceased member of the Company, whose name is still in Register of Members and they are treated to be members by virtue of the right devolved on them by the death of the member, which is not the case herein. In other case decided by Delhi High Court, the dispute was between the past member whose shareholding was reduced and whose name was removed and the present members, which is also not the case herein.

Here is the case, wherein the parties to the agreement and by whom the amount was paid and the parties, who are entitled to become member are in dispute. The other complication involved herein is as to whether such party performs their part of the contract within the time specified in the Agreement and he is hence entitled to enforce the terms of the Agreement. If so, before ever, such right of the parties to allot the shares is determined, other statutory formalities for increasing the share capital and for making an Application calling the Company to offer new shares and to allot the shares to become members of the Company, etc. are to be complied with. That being the nature of the complicated issues involved herein, the same are outside the jurisdiction of the Company Law Board and are to be determined by the Civil Court or through arbitration as held by the Supreme Court in the decisions cited on the side of the Respondents and as held by the Company Law Board in (i) (1999) 96 CompCas 323 ; (ii) (2005) 123 CompCas 280 ; and (iii) (2005) 123 CompCas 280 .

In all the cases cited on the side of the Respondents, the Hon''ble Supreme Court, other High Courts and Company Law Board are of the view that the matters pertaining to issues falling outside the jurisdiction of Company Law Board can be decided only in Civil Suit. As a matter of fact, the Company Law Board in the 3rd case cited above, referred to arbitration clause in Joint Venture Agreement and observed that the matters were to be referred to arbitration as envisaged under Clause 35 of the Joint Venture Agreement. In all the three cases (cited supra), the Company Law Board was of the view that the allegations relating to the matters covered under the contract containing an arbitration clause and when the issues are such that it cannot be effectively decided without reference to the basic Agreement, the Company Law Board is bound to refer the matters for arbitration and in all other cases, before the Civil Court. That being the factual and legal issues involved herein, this Court is of the view that the Company Law Board is right in dismissing the Company Petition on the issue of maintainability and the Petitioners/Appellants have not made out legally valid ground to interfere with the same. In the result, this Company Appeal is dismissed.