S. Balasubramanian, Chairman
1. The main ground on which this petition has been filed is that even though the petitioner, which has acquired the debt of the company, the non-repayment of which would entitle the petitioner to acquire 51 per cent, shares in the company is being denied the shares even though the company has not repaid the debt. The relief sought is that the register of membership should be rectified recording that the petitioner holds 51 per cent, shares. There are certain other allegations and consequential further reliefs have been sought.
2. The facts of the case are : M/s. Jaipur Metals and Electricals Ltd. ("the company") which was incorporated in August, 1943, is presently under the management of the officials of the Government of Rajasthan. The company had availed of loans from the IDBI at different periods by executing various loan agreements. One of the terms of these agreements is that in case of default in repayment of the loan as per the terms of the agreements, IDBI would have the right to convert up to 20 per cent, of the defaulted amount into shares. and that on receipt of notices of conversion, the company shall allot and issue the requisite number of shares. The agreement also provided that IDBI would be entitled to appoint directors on the board of the company.
3. The petitioner being an asset reconstruction and securitisation company, in terms of the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002, by an agreement dated October 11, 2007, purchased from the IDBI all the debts of the company. Since the company had defaulted in repayment of the loan, the petitioner exercised its right of conversion and also nominated two of its nominees on the board of the company. The company did not accept either of these requests and hence this petition.
4. Shri Sarkar, senior advocate, appearing for the petitioner submitted : It is not in dispute that the company had borrowed money from the IDBI by entering into two loan agreements. In terms of the loan agreements dated March 23,1995 and March 21,1996, the lender is entitled to convert, at his option, 20 per cent, of the defaulted amount into fully paid equity shares. To exercise this right, the lender has to issue a notice of intention to convert and on receipt of the notice, the company has to allot and issue requisite number of fully paid-up shares. Further, in terms of the agreement, the lender is also entitled to appoint its nominee as directors. The petitioner is a asset reconstruction company registered under the SARFAESI Act. This Act authorises an asset reconstruction company to acquire debts of a lender with all rights and obligations of such a lender. The petitioner acquired the debts of the company from the IDBI by a deed of assignment dated October 11, 2007 and as such the petitioner has stepped into the shoes of the IDBI. Since the company had defaulted in repayment of the loan, by a letter dated July 25, 2008, the petitioner exercised the option to convert 20 per cent, of the defaulted amount, i.e., Rs. 300 lakhs into 3 lakhs equity shares on the same date. It also nominated 2 of its nominees as directors on the board. However, neither the shares have been allotted nor its nominees have been appointed as directors. On exercising the option to convert, the petitioner has become entitled to hold around 51 per cent, shares in the company and thus has become the majority shareholder. However, the company is not issuing share scrips and has not entered the name of the petitioner in the register of members of the company. Now the Government is proposing to sell 60 per cent, comprising of shares held by it and also of the shares held by the employees' society to an outsider for which it has already invited bids on September 8, 2008, with the last date of submission of the proposal as September 16, 2008. If the proposal of sale goes through, it would be highly detrimental to the interest of the petitioner. It is to be noted that one M/s. Genus Power Infrastructures Ltd., have submitted a bid as early as on August 12, 2008, which is prior in time to the closing date of the offer to sell on September 8, 2008, indicating very clearly that the said party is a preferred party. Since the Government had not disclosed about the entitlement of the petitioner for conversion by which it would become a 51 per cent, shareholder and also about its entitlement to appoint directors in the offer documents, there is suppression of material facts which is against public interest. The proposal for sale is for 60 per cent, shares in the company and also for management control plus revival. It is to be noted that the petitioner itself had given a proposal for revival of the company on April 18, 2007, but without considering the said proposal, the Government have gone in for inviting bids. Therefore, directions should be given to the company for conversion of the debt as requested and the nominees of the petitioner should be taken on the board of the company and the Government should be restrained from going ahead with the bid proposal.
5. Shri Manish Singhvi, additional advocate general initiating arguments on C. A. No. 443 of 2009 challenging the maintainability of the petition submitted : The petitioner is not a shareholder of the company and as such it cannot maintain the petition. In terms of section 399, only a shareholder satisfying the eligibility criteria in that section can file a petition under section 397/398. On this ground alone that the petitioner is not a shareholder, this petition should be dismissed in limine. Further, the admitted fact is that the company had been referred to the BIFR and the BIFR by an order dated September 26, 2002, had recommended winding up of the company and on appeal the AAIFR affirmed the decision of the BIFR on May 11, 2005. The winding up petition is now pending before the Rajasthan High Court. It is settled law that once a winding up proceeding commences, all transactions between the company and the third parties as well as all the pending proceedings against the company pending in various courts and Tribunals come to a stand still. The company court alone is empowered in law to take decisions in pending suits/cases and also to supervise all the transactions of the company. Section 536(2) of the Act prohibits transfer of shares after the commencement of a winding up petition. Therefore, if the reliefs sought are granted, it would be in contravention of law and therefore non est.
6. Learned counsel further submitted : In terms of section 446(3) of the Act, which is still in the statute book, all proceedings against a company pending in any court have to be transferred and disposed of by that court. Therefore, if the Board comes to the conclusion that this petition is maintainable, then, it should transfer the proceedings to the High Court. The Company Law Board by itself cannot decide the petition. Further, the provisions of section 397/398 are alternative to winding up. When there is a winding up petition pending, the question of grant of any relief by this Board does not arise. Even otherwise, since the petitioner has sought for a declaratory relief, the same is in the nature of seeking for specific performance of the contractual terms and therefore, the petitioner should move the civil court. Even the suit for specific performance might be time barred in view of lapse of time and therefore the petitioner cannot be allowed to circumvent the period of limitation by filing this petition. In other words, the petition is an abuse of the process of law.
7. Learned counsel further submitted : The moment the BIFR recommends winding up of a company, the winding up commences from the date of the order. In NGEF Ltd. v. Chandra Developers (P.) Ltd.  127 Comp. Cas. 822 (SC), it has been held that a company declared to be sick in terms of the SICA continues to be sick unless it is directed to be wound up. When the BIFR recommends for winding up, no winding up petition is necessary to be filed in the High Court. Section 20 of the SICA refers to this. The High Court is bound to order winding up when the BIFR recommends. There is no hiatus between the BIFR recommendation and commencement of winding up proceeding before the High Court. The protection given under section 22(2) of the SICA will continue before the company court. Therefore, no order relating to shares or assets of the company can be passed during the interim period. The petitioner has alleged that the company has entered into a memorandum of understanding for sale of the shares of the majority shareholders which could not have been done if according to the respondents winding up proceeding is pending. It is to be noted that in the memorandum of understanding itself, it has been indicated that the High Court will be approached under section 391 of the Act for rehabilitation. It is to be noted that the rehabilitation has to be approved by the High Court as per the directions of the High Court in a writ petition filed by the workers' union. Further, if the petitioner is aggrieved about the action of the shareholders, then it should approach the High Court and not the Company Law Board. According to the petitioner itself the value of assets of the company is about Rs. 350 crores and the petitioner seeks to take control by investment of just about Rs. 12 crores. This itself shows the mala fide intention of the petitioner. Therefore, on no account any relief could be granted in this petition.
8. In the rejoinder, Shri Choudhary, senior advocate appearing for respondent No. 13/14 who are the nominee directors of the petitioner submitted that the authorised capital of the company is Rs. 8 crores consisting of 8 lakhs shares of Rs. 100 each. The present paid-up capital is Rs. 2.89 crores. Therefore, for conversion of the defaulted amount of loan, there is enough authorised capital. In terms of the loan agreement, on default, the lender would automatically become a shareholder and will have the right to appoint its own nominees as directors. On July 25, 2008, the petitioner expressed its intention to convert 20 per cent, of the defaulted amount and therefore, on that day itself the petitioner automatically became a shareholder. In Dhananjay Pande v. Dr. Bais Surgical and Medical Institute (P.) Ltd.  125 Comp. Cas. 626 (CLB), which has been approved by the Nagpur Bench of the Bombay High Court, the Company Law Board has held that having regard to the fact of the case, a party whose name is not entered in the register of members can invoke the provisions of section 397/398. In that case, even though no share had been allotted to the petitioner therein yet this Board has held that mere entitlement to share was sufficient to maintain a petition under section 397/398. In the present case in terms of the memorandum of understanding, the petitioner acquired an indefeasible right on July 25, 2008. Therefore, from July 25, 2008, the petitioner has even become entitled for dividend. In fact, non-endorsement/ inclusion of the petitioner in the register of members itself is a gross oppression. Having intentionally not entering the name of the petitioner in the register of members, the respondent cannot question the locus standi of the petitioner. The stand of the respondents that in view of the alleged pendency of the winding up petition before the Rajasthan High Court, the Company Law Board lacks jurisdiction is misconceived. In Thakursa-vadekar and Co. Ltd. v. Shiv Kumar Shankar Rao Thakur  23 CLA 170 (Bom) it has been held that mere pendency of a winding up petition cannot stand in the way of a shareholder filing a petition under section 397/398 to seek relief against oppression and mismanagement. Section 446 of the Act is not applicable. Similarly 536(2) is also not applicable as it does not prevent addition of members. The recommendation of the BIFR has to be registered before the High Court and has to be mentioned. So far neither the same has been registered nor mentioned. The contention that the petitioner is trying to enforce a contract is not correct as the petitioner had already become a shareholder on the day of exercising its option of conversion. It is to be noted that in the balance-sheet as on March 31, 2001, it has been specifically stated that the IDBI would have the right to convert 20 per cent, of the defaulted amount.
9. Shri Choudhary further submitted : Learned counsel for the respondents relied on NGEF Ltd. v. Chandra Developers (P.) Ltd.  127 Comp. Cas. 822 (SC), to argue that once the BIFR/AAIFR recommend winding up, there is no requirement of filing of a winding up petition. The recommendation made under section 20(2) of the SICA is not binding on the High Court. The correct legal position is that the High Court after considering the facts and circumstances of the case, can confirm or reject the recommendations of the BIFR/AAIFR. In other words the recommendation of the BIFR/AAIFR is not conclusive and the High Court can always examine the correctness of the recommendations after hearing the parties. In J. M. Malhotra v. Union of India  89 Comp. Cas. 600 (Mad), which has been affirmed by the Supreme Court in V. R. Ramaraju v. Union of India  89 Comp. Cas. 609, it has been so held. Therefore, till the High Court forms an opinion, the provisions of Part VII of the Act more particularly sections 443, 446, and 536 are completely inapplicable. It should be noted that while the respondents claim that winding up proceedings has commenced on the recommendations of the AAIFR/BIFR in terms of section 20(2) of the SICA, yet they themselves have initiated proposal for transferring their shares. Therefore, there is absolutely no bar in proceeding with the petition. The respondents have contended that the petitioner is seeking specific performance of a contract. The case of the petitioner is that on the date of expression of interest of conversion it had become the owner of 3 lakhs equity shares amounting to 51 per cent, of the total shareholding in the company and the only formality left is the issuance of share certificates in respect of these shares and entering its name in the register of members. Therefore, the petitioners are not seeking for enforcement of any contract. Further, since the petitioner has invoked clause 6(b) of the loan agreement dated May 23, 1995, vide its letter dated July 25, 2008, nominating two directors on the board, the company is bound to file Form No. 32 in regard to the appointment of directors.
10. Summing up his arguments Shri Choudhary submitted : The acts of oppression and mismanagement covered in the petition are unlawful, refusal of issuing share certificates relating to 3 lakhs shares to the petitioner, the company's refusal to enter the name of the petitioner in the register of members, company's refusal to allow the nominees of the petitioners to participate in the management and failure to file Form No. 32 in regard to the appointment and its attempt to unlawfully changing the equity structure and management by initiating illegal bidding process to suit a particular third party by completely ignoring the rights of the petitioner. Therefore, the company should be directed to issue share certificates in respect of 3 lakhs shares and to enter the name of the petitioner in the register of members and to allow the nominees of the petitioner to participate in the management by filing Form No. 32. The company should also be directed to cancel the disinvestment process already started.
11. I have considered the pleadings and arguments of counsel. The respondents have questioned the locus standi of the petitioner on the ground that it is not a shareholder. It is true that to invoke the provisions of section 397/ 398, one has to be not only a member but also has to qualify in terms of section 399. The admitted position in this case is that, the name of the petitioner is not in the register of members nor has it any share in its name evidenced by share certificates. It only claims membership on the basis that it has an indefeasible right to be a member. It is to be noted that the petitioner is an asset reconstruction and securitisation company incorporated in terms of the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 and registered in terms of section 3 of that Act. Section 5(2) of the said Act reads : "If the bank or financial institution is a lender in relation to any financial assets acquired under sub-section (1) by the securitisation company or the reconstruction company, such securitisation company or reconstruction company shall, on such acquisition, be deemed to be the lender and all the rights of such bank or financial institution shall vest in such company in relation to such financial assets". Further, section 5(3) reads : "Unless otherwise expressly provided by this Act, all contracts, deeds, bonds, agreements, powers of attorney, grants of legal representation, permissions, approvals, consents or no objections under any law or otherwise and other instruments of whatever nature which relate to the said financial asset and which are subsisting or having effect immediately before the acquisition of financial asset under sub-section (1) and to which the concerned bank or financial institution is a party or which are in favour of such bank or financial institution shall, after the acquisition of the financial assets, be of as full force and effect against or in favour of the securitisation company or reconstruction company, as the case may be, and may be enforced or acted upon as fully and effectually as if, in the place of the said bank or financial institution, securitisation company or reconstruction company, as the case may be, had been a part thereto or as if they had been issued in favour of securitisation company or reconstruction company, as the case may be". From these provisions, it is abundantly clear that every right and obligation of the lender would devolve on the securitisation company.
12. In the present case, the admitted fact is that the company had entered into two loan agreements with the IDBI on March 23, 1995 and March 21, 1996, for borrowing Rs. 200 lakhs and Rs. 150 lakhs, respectively. In terms of clause 6.2(a)(i) of the first agreement, the lender has the right to convert, at its option, the whole of the outstanding amount of the loan or a part not exceeding 20 per cent, of the loan, whichever is lower, into fully paid-up equity shares of the borrower, at par, in the manner specified in the notice in writing to be given by the lender to the borrower prior to the date on which the conversion is to take place, which date shall be specified in the said notice. In terms of clause 6.2(a)(ii), on receipt of notice of conversion, the borrower shall allot and issue the requisite number of fully paid-up equity shares to the lenders as from the date of conversion. Further, in terms of clause 6.2(a)(iv), the borrower assures and undertakes that in the event of the lenders exercising the right of conversion as aforesaid, the borrower shall get the equity shares which will be issued to the lender as a result of the conversion listed with the stock exchanges at Mumbai and at such other places as may be notified by the lenders to the borrower. Similar terms are there in the second loan agreement also.
13. As I have observed earlier, the petitioner has stepped into the shoes of the IDBI by acquiring the debt by assignment of the debt in his favour by an agreement dated October 11, 2007 and as such the petitioner has the right of conversion in case of default in repayment of the loan. The admitted fact is that the company has defaulted. On July 25, 2008, the petitioner had exercised the right of conversion seeking 3 lakhs equity shares at the face value of Rs. 300 lakhs being 20 per cent, of the defaulted amount as on that date in respect of both the loans. It had also indicated the date of conversion as August 30, 2008. Therefore, the petitioner became entitled to have the said number of shares as on August 30, 2008.
14. Now the question is whether without the shares having been actually allotted, the petitioner could be considered to be a member in terms of section 399 to invoke the provisions of section 397/398. Shri Choudhary relevantly relied on Dhananjay Pande v. Dr. Bais Surgical and Medical Institute (P.) Ltd.  125 Comp. Cas. 626 (CLB). In that case, while share application money was pending allotment in favour of the petitioner, he filed a petition under section 397/398. A similar objection as in the present case that the petitioner therein was not a shareholder was raised. This Board observed : "the main object of proving certain requirements in section 399 was that only a person who had a stake in the company should have the right to file a petition under section 397/398 of the Act. That stake is membership. The intention of the company that shares were to be allotted to the petitioner was evident from the fact that his investment was being shown as application money for over a period of two years. Since allotment of shares against the application money was within the power of the board, by not allotting shares for over two years against the application money, the respondents could not non-suit the petitioner on the ground that he was not a member of the company. The allotment of shares to the petitioner as claimed by him could not be ruled out. Even assuming that no shares were allotted to him as claimed by the respondents, yet he had to be declared to be a shareholder of shares for the purpose of the petition as he was entitled to allotment of shares against application money" (headnote). In the present case, instead of application money, it is the conversion of loan. In terms of the loan agreements, it was the obligation of the company to allot shares to the petitioner against the conversion of loan. There was not even a discretion to the company whether to allot shares or not. In other words, as rightly contended by the petitioner, it has an indefeasible right to 3 lakhs equity shares. Recently, this Board considered a case of the failure of a company to allot shares against conversion of convertible bonds BNS Steel Trading (P.) Ltd. v. Orissa Sponge Iron and Steel Ltd. order dated October 6, 2009  154 Comp. Cas. 357, this Board held that when there was a conversion clause what had been denied was shares and therefore the non conversion could be agitated under section 397. In the present case, in terms of the loan agreements, conversion actually took place on August 30, 2008 and what was left was only the ministerial act of issuing share certificates and entering the name of the petitioner in the register of members. In other words, non issue of share certificates and failure to enter the name of the petitioner in the register of members are gross acts of oppression against the petitioner and therefore, the petitioner is entitled to agitate the same in a petition under section 397.
15. Learned counsel for the respondents contended that the petitioner is trying to enforce contractual terms. I would have agreed with him if the petitioner had alleged that the company is not permitting conversion in terms of agreement. In this case, the conversion was automatic on August 30, 2008 and the allegation is that the share certificates have not been issued and the name of the petitioner has not been entered in the register of members. Therefore, what the petitioner seeks is not for enforcement of a contract but it is seeking to enforce its statutory right to share certificates for the shares converted on August 30, 2008 and for entering its name in the register of members.
16. Learned counsel for the respondents raised an issue as to whether this Board has the jurisdiction to deal with the petition when winding up proceeding has commenced in view of the recommendation of the BIFR/ AAIFR. He relied on the case of NGEF Ltd. v. Chandra Developers (P.) Ltd.  127 Comp. Cas. 822 (SC). In that case, after the BIFR recommended winding up of the company, the High Court approved sale of certain assets of the company. The Supreme Court held that a company declared sick in terms of the provisions of the SICA continues to be sick unless it is directed to be wound up. It further held that the BIFR was the authority propriovigore which continues to remain the custodian of the assets of the company till a winding up order is passed by the High Court. This judgment has not laid down the proposition that after recommendation of winding up by the BIFR, no proceeding under section 397/398 can be entertained. As a matter of fact, in J. M. Malhotra v. Union of India  89 Comp. Cas. 600, the Madras High Court has taken a view that even if the BIFR recommends winding up of a company, it is open to the High Court to go into the correctness of the recommendation and decide as to whether it should proceed with the winding up. This decision has been upheld by the Supreme Court. On the contrary in Thakursavadekar and Co. Ltd. v. Shiv Kumar Shankar Rao Thakur  23 CLA 170, the Bombay High Court has observed that mere pendency of a winding up petition cannot stand in the way of a shareholder filing a petition under section 397/398 to seek relief against oppression and mismanagement. In a few cases, this Board itself has taken the said view.
17. It is to be noted that section 13 of the SARFAESI Act provides :
"Enforcement of security interest.—(1) Notwithstanding anything contained in section 69 or section 69A of the Transfer of Property Act, 1882 (4 of 1882), any security interest created in favour of any secured creditor may be enforced, without the intervention of the court or Tribunal, by such creditor in accordance with the provisions of this Act".
18. Further, section 17 provides :
"Right to appeal.—(1) Any person (including borrower), aggrieved by any of the measures referred to in sub-section (4) of section 13 taken by the secured creditor or his authorised officer under this Chapter, may prefer an appeal to the Debts Recovery Tribunal having jurisdiction in the matter within forty-five days from the date on which such measures had been taken."
19. The admitted fact is that the petitioner has enforced its rights as specified in the loan agreements, in terms of section 13 of the above Act. If at all, the company was aggrieved with the notice of conversion of the loans into shares, in terms of section 17, it should have filed an appeal before the Debts Recovery Tribunal within 45 days of receipt of notice, which it has not done. Therefore, the conversion of the loan into equity shares by the petitioners is binding on the company. It is to be further noted that section 35 reads :
"The provisions of this Act to override other laws.—The provisions of this Act shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law".
20. In view of this, all the arguments of counsel for the respondents regarding pendency of the winding up petition are of no relevance.
21. On an overall assessment of the facts of the case, it is abundantly clear that by not delivering the share certificates and not entering the name of the petitioner in the register of members in respect of 3 lakhs shares, the respondents have acted in a manner oppressive to the petitioner. Accordingly, I declare/direct as follows : The petitioner had become a shareholder in respect of 3 lakhs shares effective from August 30, 2008 and as such the company shall issue share certificates in respect of these shares on or before November 30, 2009 and enter its name in the register of members and shall also file Form No. 32 in respect of the appointment of the two nominees of the petitioner effective from July 25, 2008. No board meeting shall be held without seven days' notice to these nominees. In case, the company fails to deliver the share certificates and to enter the name of the petitioner in the register of members by November 30, 2009, under the authority of this order, the Registrar of Companies will record, in the documents relating to the company, that the paid-up capital of the company has been increased by the par value of these 3 lakhs shares and that the petitioner is shown as member in respect of 3 lakhs shares. Similarly, if the company does not file Form No. 32 by November 30, 2009, the petitioner itself is authorised to file Form No. 32 appointing these nominees as directors and the Registrar of Companies shall take the same on record.
22. The petitioner has sought for cancelling the disinvestment process started by the State Government. It is to be noted that this disinvestment process has not been started by the company but by shareholders themselves. Since the company is a public company and since the shares are freely transferable and since the petitioner does not have any preemption rights in respect of these shares sought to be disinvested, I do not consider it appropriate to pass any order in this regard. According to the respondents themselves, the disinvestment process has to be approved by the High Court. Therefore, the petitioner, which, by this order, has become a shareholder of 3 lakhs shares, constituting to more than 51 per cent, shares in the company, is at liberty to take such action as it may deem fit in relation to the disinvestment process.
23. The petition is disposed of in above terms with no order as to costs.