Subhash Arora and Another vs Star Realty Pvt. Ltd. and Others

Sanjiv Khanna, J.—Case of both parties is predicated on oral agreements.

M/s. Star Reality Pvt. Ltd.-defendant No. 1 has acquired title and ownership rights in respect of property No. 12, measuring 7127 sq.mt. at Manglam Palace, Rohini, Delhi 110085 (hereinafter referred to as Plot, for short) on payment of Rs. 48.5 crores in the auction held by Delhi Development Authority (hereinafter referred to as DDA, for short) on 25th September, 2006. Thereafter on 24th April, 2007, DDA executed a conveyance deed in favour of defendant No. 1. A hotel is to be constructed on the plot.

Mr. Prem Arora, Mrs. Geeta Arora and M/s. Prem Arora and Sons (HUF) defendant Nos. 2-4 alongwith a Company, M/s. Arora Credits Ltd-defendant No. 5 are shareholders of defendant No. 1.

The plaintiffs, Mr. Subhash Arora and Mr. Ankur Arora are related to defendant Nos. 2 and 3 and it is an admitted case of the plaintiffs and defendant Nos. 2-5 that there was an oral agreement between the parties that the plaintiffs would become shareholders and directors of defendant No. 1-Company. It is also an admitted case of the parties that the plaintiffs through their company M/s. Rupabh Developers Pvt. Ltd. and M/s. Arora Developers had paid Rs. 20,95,69,578/- during the period from 25th September, 2006 till November, 2007 (including Rs. 15,39,578/- paid on 28th March, 2008) to defendant No. 1 and the said amount was mostly utilized for payment of consideration to DDA for purchase of the said Plot.

Factum that there was an oral understanding and agreement between the parties that the plaintiffs would be allotted shares and made directors is also established from the project report of defendant No. 1-Company submitted to Punjab National Bank- defendant No. 6 apropos sanction of loan. The plaintiffs have also given personal guarantees for the loan procured from defendant No. 6-Bank. Personal guarantees continue to subsist. It is the case of the plaintiffs that they were promised 46.66% shareholding, while the defendant Nos. 1-5 group were to have 53.34% shareholding.

It is apparent that the plaintiffs were not made shareholders or directors and no share scrips were in fact issued to them. In the records of the Registrar of Companies, plaintiffs are not shareholders or directors of defendant No. 1. In fact no letter or communication asking for issue of shares or staking claim as directors has been placed on record by the plaintiffs.

Both the plaintiffs and defendant Nos. 1-5 agree that there was a second oral agreement between the parties but there is a dispute about the date and the terms thereof. Defendant Nos. 1- 5 claim that disputes arose and in October 2007, it was mutually decided that one of the groups shall move out and in terms thereof, Rs. 10,90,69,578/- (less Rs. 15,39,578/- which was subsequently repaid vide cheque on 28th March, 2008) was refunded to M/s. Rupabh Developers Pvt. Ltd. and M/s. Arora Developers on different dates upto 31st March, 2008, leaving a balance of Rs. 10.05 crores. Defendant Nos. 1-5 claim that the refund was made as it was settled and orally agreed between the parties, that plaintiffs were to be paid the entire amount along with interest @ 14% p.a. The earlier oral agreement was terminated. The plaintiffs on the other hand, had submitted that the oral agreement was not terminated or cancelled but there was modification, with the plaintiffs agreeing to reduce their shareholding to 38.46% with allotment of 50 lakh equity shares of Rs. 10/- each and the defendant Nos. 1-5 were to hold 70 lakh equity shares of Rs. 10/- each. Therefore payment made by them was partly refunded leaving balance of Rs. 10.05 crores with defendant No. 1-Company.

It is not possible at this stage to decipher the correct and true factual position. It is word of mouth against word of mouth. However, I may note factors which support the case/claim of defendant Nos. 1-5. The plaintiffs have stated that the cost of the entire project was Rs. 139.38 crores. Investment of Rs. 5 crores by plaintiffs and Rs. 7 crores by defendant Nos. 1-5 would not have been sufficient to meet the capital cost. The huge gap required for the project remains unexplained. Loan of Rs. 20/30 crores granted by defendant No. 6-Bank after mortgage was not sufficient. At a time when infusion was required, withdrawal of money by plaintiffs, keeping in mind the size of the project, does leave gaping holes. I may note here that defendant Nos. 1-5 have been making payment of monthly equated installments fixed by defendant No. 6-Punjab National Bank in terms of loan of Rs. 20 crores. The said payments are not being made by the plaintiffs. As per plaintiffs under the original oral agreement it was agreed that they would have 46.67% shareholding in the defendant No. 1-Company and under the subsequent oral agreement their shareholding was reduced to 38.46%. This results in a reduction of about 12%, but what has been refunded by defendant Nos. 1-5 to the plaintiffs is more than half of their total investment of Rs. 20,95,69,578/-, leaving a balance of Rs. 10.05 crores.

Defendant Nos. 1-5 have placed on record affidavit of one Mr. Anju Jhullar who has stated that there was an agreement between the parties and a memorandum of understanding was executed pursuant thereto. Defendant Nos1-5 were discharged from all liabilities, except liability to pay Rs. 10.05 crores which was to be paid on or before 31st July, 2008 in full and final settlement, failing which defendant No. 1 was to pay interest @ 18% p.a. It is claimed that the said memorandum of understanding after signatures was torn by the plaintiffs and the lower half portion was taken away by them on 6th June, 2008. These are disputed questions of fact which will require evidence and the said affidavit is therefore not being taken into consideration.

Defendant Nos. 1 to 5 have also relied upon payment of Rs. 15,39,578/- included in cheque date 14th March, 2007 paid to M/s. Rupabh Developers Pvt. Ltd. in support of their contention that the plaintiffs had agreed to refund with interest @14% p.a. It was submitted by the learned Counsel for the defendant Nos. 1-5 that Rs. 15,39,578/- is a precise amount and an odd figure and perfectly corresponds to interest calculated @ 14% p.a. w.e.f. 1st April, 2007. I may note here that the plaintiffs have repaid Rs. 15,39,578/- to defendant No. 1 in the month of March 2008 itself. Rs. 15,39,578/- is an odd figure and to that extent supports the claim of defendant Nos. 1-5 but it is very difficult to give a firm opinion in favour of any one party at this stage, especially when M/s. Rupabh Developers Pvt. Ltd. have refunded Rs. 15,39,578/- and the said refund has been accepted. What were the exact terms of the second oral agreement remain uncertain.

Learned Counsel for the defendant Nos. 1-5 had tried to co-relate refund of Rs. 15,39,578/- with the sale deed executed by M/s. Geetha Arora-defendant No. 3 of plot No. 6, Green Park, measuring 273.262 sq.mts. in favour of wife of plaintiffs No. 1, Mrs. Rama Arora for Rs. 5.50 crores. It was stated that the transfer of the said plot was made at the cost price as Mrs. Geetha Arora had purchased the said plot in 2006 in a DDA auction for Rs. 5.45 crores (Rs. 4.98 crores purchase price plus other charges). It was submitted that the sale consideration was reduced to compensate and set off interest @ 14% p.a. payable on the amount which had already been refunded and paid back to M/s. Rupabh Developers Pvt. Ltd. and M/s. Arora Developers. Again it is very difficult for this Court to give a firm opinion one way or the other without oral evidence. We have a written document in form of a sale deed mentioning the total sale consideration paid as Rs. 5.50 crores. Once sale consideration is mentioned in a document, it cannot be disregarded without material and evidence to the contrary. Whether or not a party should be allowed to raise a plea of this nature is another aspect. Learned Counsel for the plaintiffs had submitted that plaintiffs had prior interest in the said Plot and had paid substantial amount to one, Mr. Anil Batra, with whom defendant No. 3 at one time had entered into an agreement to sell. This plea of the plaintiffs does not prima facie appeal to me for there is a deed of cancellation dated 29th March, 2007 to which defendant No. 3, M/s. Rupabh Developers Pvt. Ltd., Mr. Vipin Kumar and Mr. Anil Batra were parties. The onus will be on the plaintiffs to correlate this deed of cancellation executed in March, 2007 with the transfer made after one year vide registered sale deed executed in May, 2008.

There are two aspects in favour of the plaintiffs inasmuch as Rs. 10.05 crores is still with the defendant Nos. 1-5 and there is also material to show that originally there was an oral understanding between plaintiffs and defendant Nos. 1-5 under which the plaintiffs were to become shareholders and directors of defendant No. 1 company. To this extent, there is prima facie case in favour of the plaintiffs. However, there is ambiguity and doubt what transpired thereafter, but as stated above there is evidence in favour of the defendant Nos. 1-5 in form of refund/repayment of more than Rs. 10 crores by defendant Nos. 1-5 to the plaintiffs or their group (Refer paragraph 8). Whether there was termination of contract and on what terms or there was merely amendment or modification of the contract is a dispute that can be finally resolved only after evidence is recorded. Rs. 10.05 crores paid by the plaintiffs is still with defendant Nos. 1-5.

Balance of convenience and irreparable harm and loss are two important considerations which have to be kept in mind while deciding an application for grant of interim injunction. As per the plaintiffs themselves, the total project cost for constructing hotel is about Rs. 139.38 crores. The hotel has to be constructed to comply with the terms and conditions of the auction before the Commonwealth Games, 2010. Keeping in mind inter se disputes between the parties it is impossible for them to pull along with each other and complete the project jointly. Substantial infusion of funds is required to save the plot and comply with the terms and conditions of allotment. Funds have to come from a third party. Admittedly, as of now the plaintiffs do not hold any shares and are not directors of defendant No. 1-Company. Even in the returns filed by the plaintiffs group, the amount paid was shown as sale price of plot and not as sale consideration for issue of shares. In these circumstances, I do not think interim injunction should be granted against defendant Nos. 1-5 from entering into any joint venture with a third party in respect of the hotel project. The same would jeopardize interest and would cause irreparable loss to defendant Nos. 1-5 and even the plaintiffs themselves in case there is violation of terms of allotment. Balance of convenience does not justify passing of such restraint order.

Learned Counsel for the plaintiffs submitted that the defendant Nos. 1-5 should before they enter into a joint venture give right of first option to the plaintiffs to purchase shares and step into the shoes of a third party. At first sight, the proposal appears reasonable but on deeper scrutiny it is difficult to accept the same as it will only lead to further round of litigation and disputes. Investment required in the entire project is substantial and the time is running out. Project costs are bound to increase due to delay, inflation and interest which has to be paid to defendant No. 6-Bank. Joint venture agreements in such cases are fairly complex and require adjustment of rights, understanding, good-faith, etc. Balancing and counter balancing rights of the parties in a joint venture agreement is a necessity. With a rider of the first option, it will not be possible for the defendant Nos. 1-5 to negotiate and enter into a viable joint venture. It would dissuade any third party from entering into negotiations and finalizing a joint venture and is a threat that will make any party wary and a joint venture agreement uncertain. Terms and conditions of the joint venture are unknown, unpredictable and to a larger extent would depend upon the infusion of funds by defendant Nos. 1-5 in the project as well as their capacity to negotiate terms with a joint venture partner. Passing any such order would substantially jeopardize the rights of defendant Nos. 1-5, in a case where the plaintiffs have withdrawn almost 50% of the money deposited by them and their entire claim is for minority shareholding. The said claim is still to be established, both as a matter of right and also on the question of quantum.

In these circumstances balancing out equities, balance of convenience and to avoid irreparable harm as well as to protect interest of both plaintiffs and defendant Nos. 1-5, the following interim order is passed:

(i). Defendant Nos. 1-5 may enter into a joint venture or sell/transfer their shareholding in defendant No. 1- Company to any third party but subject to the condition that if at any time shareholding of defendant Nos. 2-5 becomes less than 38.46% or there is complete transfer, they shall deposit in Court Rs. 10.05 crores plus interest @16% p.a. on the amounts paid by the plaintiffs w.e.f. 25th September, 2006 till the date payment is deposited. Interest will be calculated on the amount outstanding in the name of the plaintiffs and will take into account payments made and refunds received by the plaintiffs from time to time. Deposit will be made within 10 days from the date of transfer/reduction. Deposit will be kept in a fixed deposit to earn maximum interest and will abide by orders that may be passed.

(ii). In case the plaintiffs succeed and the suit is decreed, the Court will be competent to issue suitable directions to protect interest of plaintiffs in the defendant No. 1-Company.

(iii) Defendant Nos. 1-5 will take steps for discharge of personal guarantees given by plaintiffs to the defendant No. 6-Bank. The said process must be completed by defendant Nos. 1-5 within three months.

Learned Counsel for defendant Nos. 1-5 had submitted that the present suit for mandatory and permanent injunction suffers from a legal defect in view of Section 41 of the Specific Relief Act, 1963. The said question is debatable but the learned Counsel for the plaintiffs during the course of hearing had given an undertaking that an application for amendment of the suit would be made to incorporate and introduce a relief seeking specific performance. The said statement is taken on record.

Application is accordingly disposed of with above directions. There will be no order as to costs.