Maytas Properties Ltd v. SRS Orion I Investment Ltd. & 3 Ors

Judgment

These three Company Appeals are directed against interlocutory orders passed in Company Petition No.4 of 2009 on the file of the Company Law Board, Principal Bench, New Delhi. Maytas Properties Limited, Maytas Hill County, Bachupally, Miyapur, Hyderabad, (hereafter referred to as ‘the Company’) is the appellant in these three Company Appeals.

2. Background facts, in a nutshell, leading to filing of these three Company Appeals by the Company are: a) Union of India, Ministry of Corporate Affairs, New Delhi, filed Company Petition No.4 of 2009 on the file of the Company Law Board, Principal Bench at New Delhi, under Sections 388-B(1)(a), 397, 398 r/w.401, 402, 403, 406 and 408 of the Companies Act, 1956, (for short, ‘the Act’), for the purpose of enabling the Company Law Board (hereinafter referred to as ‘the CLB’) to enquire into the affairs of the Company as to whether the affairs of the Company have been conducted in a manner referable to playing fraud, misfeasance, persistent negligence or default in carrying out the obligations and functions assigned under Law and also in a manner prejudicial to public interest. Para.58 of the Company Petition deals with various reliefs sought from the CLB. It is trite to extract para.58 of the Company Petition, which reads as hereunder: “58.In the light of the above facts, it is prayed that the Hon’ble Company Law Board may be pleased to pass following ex parte, ad-interim orders during the pendency of the Petition as petitioner apprehends that during the pendency of inspection/investigation the respondents would fritter away the valuable assets of Respondent No.1 and the assets owned them, therefore, (a) Restrain all the current Directors i.e. Respondent No.2 to 4 from acting as Directors; (b) Restrain Respondent No.3 to 5 from alienating mortgaging, creating charges or liens or interest in the properties, assets owned and/or controlled by them without the leave of Company Law Board; (c) Allow, in the interim, the Central Government to appoint ten nominee directors to function as Directors of the Company. In view of the aforesaid prayers, the Petitioner also prays that following main reliefs be allowed:- (i) That by invoking the provisions of Section 388(1)(a) of the Companies Act, 1956, the Hon’ble Company Law Board may declare that none of the Directors shall be eligible for appointment as Director in the any other company; (ii) That, in order to prevent further acts of fraud the continuous misfeasance, breach of trust to the stakeholders of the company, persistent neglect of the obligations and functions to be discharged by the Board, and in public interest, it is prayed that the Company Law Board may empower the Central Government to appoint ten nominee directors on the Board of the Company U/s.408 of the Companies Act, 1956. (iii) The Petitioner seeks the leave of the Hon’ble Board to enlarge the scope of the reliefs sought and prayers made in this Petition by filing any other documents or applications in view of extraordinary nature of the circumstances pertaining to the present Petition. (iv) That the cost of this Petition may be paid by respondents to the Petitioner; (v) Pass any other order (s) as deemed fit and proper under the circumstances by the Hon’ble Board.” b) The parties to the Company Petition are: 1) Maytas Properties Ltd-the Company; 2) Shri B.Teja Raju; 3) Shri B.Rama Raju; 4) Shri D.Gopala Krishnam Raju; 5) M/s.Krishna & Prasad CAs, S.R.Batliboi & Associates; 6) Satyam Computer Services Ltd and 7) Maytas Infra Ltd. SRS Orion I Investments Ltd., SRS Orion II Investments Ltd., and SRI Orion III Investments Ltd., filed Company Application No.95 of 2009 under Regulation 44 of the Company Law Board Regulations, r/w. Order 1, Rule 10 of CPC, seeking their impleadment as party respondents in the Company Petition No.4 of 2009. Apart from seeking their impleadment, various ancillary reliefs have been sought for in the application. They claim to be the investors in the Company holding Compulsory Convertible Debentures (for short, ‘CCDs’) to a tune of Rs.600 Crores. They are willing to convert such of all CCDs to shares to exercise shareholder rights. Since they made substantial investments in the Company, their rights are likely to be affected in the event of any orders are passed without their being impleaded. Some of the shareholders also filed Company Application No.96 of 2009 seeking their impleadment in Company Petition No.4 of 2009. The learned Chairman of the CLB, allowed the impleadment petitions while issuing certain directions, by order dated 05.03.2009. The relevant portion of the order needs to be noted and it is thus: “5. In view of the fact that both the Company and the Central Government have consented for the appointment of one nominee director of this Board on the board of the company, without going into the merits of the case, in terms of Section 402/403 of the Act, I pass the following order: (a) There shall be a nominee of this Board as a director on the board of the Company. Since this Board is not equipped to identify and select a proper person, I authorize the Central Government to appoint, in the name and on behalf of this Board, an eminent person as a director on the board of the company. No Governmental agency-State/Centre shall initiate any criminal or civil or punitive action against this director without the prior approval of this Board. (b) The quorum for board meetings shall be 3 directors including the nominee director and his affirmative vote on any decision is mandatory. (c) All Government agencies including the banks shall cooperate with the board in carrying out the affairs of the company smoothly, more particularly in relation to the present project that is being implemented by the company. (d) Within 10 days of the constitution of new board, it shall convene a meeting of the flat holders to get their feed back on the project under implementation and ensure that their complaints, if any, are attended to without any loss of time. (e) The board shall furnish to the Central Government as well as this Board, a monthly report on the affairs of the company preferably during the 1st week of every month starting from April, 2009. (f) The board shall cooperate with the investigating/inspecting authorities by furnishing all the information/document as required by them.

6. Applications by the shareholders and SRS Orion I, II, III Investments Limited- are allowed. Replies to the petition and the applications to be filed by 31.5.2009 and rejoinder by 31.7.2009. Date of hearing will be notified after completion of pleadings. Liberty granted to the Central Government to file additional affidavit/documents as may be necessary to adjudicate on the petition and also to seek further interim reliefs.” c) Aggrieved by the order with regard to impleadment of SRS Orion Group, the Company has filed Company Appeal No.9 of 2009. Pending disposal of the Company Petition No.4 of 2009, the Company filed Company Application No.24 of 2011 in Company Petition No.4 of 2009 under Section 409 of the Act, seeking inter alia to induct IL & FS Financial Services Limited as the new promoter by assigning the direct management of the affairs of the Company and simultaneously to issue majority holdings to IL & FS Group on certain terms and conditions. The CLB, by order, dated 13.01.2011, granted the prayer sought for in C.A.No.24 of 2011. Thereupon, the impleaded parties in Company Petition No.4 of 2009 filed two applications being Company Application Nos.60 and 61 of 2011 to recall the order, dated 13.01.2011, passed in C.A.No.24 of 2011 and also sought for directions for protection of their interest since they made investment to a tune of Rs.529 Crores and they have to get about Rs.989 Crores from the Company. The said applications came up for consideration on 27.01.2011, on which day CLB directed listing of the said applications on 05.04.2011 to enable the Company to file its response. The impleaded parties in Company Application Nos.60 and 61 of 2011 were also directed to serve notice on IL & FS group and other respondents. Aggrieved by the order, dated

27.01.2011, passed in Company Application No.24 of 2011 as well as the order, dated 13.01.2011, passed in Company Application No.24 of 2011, SRS Orion Investment Ltd filed appeal (Company Appeal 4 of 2011). The said appeal came to be disposed of by this Court directing the CLB to hear all the parties and pass appropriate orders and accordingly, order dated 27.01.2011 passed by the CLB in C.A.Nos.60 and 61 of 2011 stood modified. Pursuant to the directions given by this Court, the CLB took up Company Application Nos.60 and 61 of 2011 for hearing. While so, the impleaded parties moved applications being Company Application Nos.143 and 144 of 2011 seeking amendment of the prayer sought for in Company Application Nos.60 and 61 of 2011. The Company resisted the proposed amendment. The CLB, on hearing the counsel appearing for the parties, proceeded to allow Company Application Nos.143 and 144 of 2011 and thereby, permitted the impleaded parties to incorporate their prayer in Company Application Nos.60 and 61 of 2011, by order, dated 07.04.2011. Assailing the common order passed in Company Application Nos.143 and 144 of 2011, the Company filed Company Appeal Nos.6 and 7 of 2011. The appeals (C.A.Nos.6 and 7 of 2011) filed by the Company came to be disposed of by this Court at the admission stage remanding the Company Application Nos.143 and 144 of 2011 to the CLB for hearing the parties afresh and pass appropriate orders. The Common Judgment passed in Company Appeal Nos.6 and 7 of 2011 came to be challenged before the Supreme Court by filing Civil Appeal No.6123 of 2011. The said appeal came to be allowed remanding the Company Appeal Nos.6 and 7 of 2011 to be considered along with Company Appeal No.7 of 2009. The order passed by the Supreme Court in Civil Appeal No.6123 of 2011 reads as hereunder: “Leave granted. Having heard learned advocates on both sides, we are of the view that the High Court ought to have heard C.A.No.7 of 2009 along with Company Appeal No.6 of 2011 and Company Appeal No.7 of 2011, which has not been done in the present cases. The difficulties arising in these cases are due to the fact that the High Court has not heard both the matters together. In the circumstances, the impugned order is set aside. We request the High Court to decide Company Appeal No.6 of 2011 and Company Appeal No.7 of 2011 with pending C.A.No.7 of 2009 within six weeks from today. The Order of status quo dated 2nd May, 2011, shall continue to operate till the High Court disposes of the above matters within six weeks. The civil appeals are, accordingly, allowed. No order as to costs.” d) Thus all the three Company Appeals are taken-up for final disposal. At the cost of repetition, I may state that the Company has filed Company Appeal No.7 of 2009 assailing the order dated 5.3.2009 of the CLB passed in C.A.Nos.95 of 2009 to the extent of permitting the SRS Orion group to come on record as party respondents in C.P.4 of

2009. Company Appeals 6 and 7 of 2011 are directed against the common order dated 7-4-2011 passed in Company Application Nos.143 and 144 of 2011 in C.A.Nos.60 and 61 of 2010.

3. Heard Sri Arif Bookwala, learned senior counsel appearing for the appellant in Company Appeal No.7 of 2009; Sri Virendra Ganda, learned senior counsel appearing for the appellants in Company Appeal Nos.6 and 7 of 2011; Sri J.J.Bhatt, learned senior counsel appearing for the respondents 1 to 3 in C.A.No.7 of 2009 and for respondents 2 to 4 in C.A.No.6 of 2011; learned Assistant Solicitor General appearing for the respondent No.4-Union of India, in C.A.No.7 of 2009 and for the 1st respondent in C.A.Nos.6 and 7 of 2011 and Sri C.V.Mohan Reddy, learned senior counsel appearing for the respondents 5 & 6 in C.A.No.7 of 2011 and for the respondents 5 to 7 in C.A.No.6 of 2011.

4. Sri Arif Bookwala, learned Senior Counsel appearing for the appellant submits that the implead application filed by the investors came to be allowed without giving an opportunity to the Company to place on record its response to the averments in the implead petitions. He would also submit that SRS Orion group put up option notice, dated 20.01.2009, relinquishing their rights of conversion of debentures into shares and invoked arbitration clause and award came to be passed by the learned arbitrator on 14.08.2009, in which case, it is impermissible for the SRS Orion Group to contend that they continued to be the CCD holders. A further submission has been made that the CLB has not recorded any reasons for permitting the SRS Orion Group to come on record as party respondents in Company Petition No.4 of 2009 and the order being a non-reasoned one, the same is liable to be set aside. In support of his contentions, reliance has been placed on the judgment of the Supreme Court in Victoria Memorial Hall v. Howrah Ganatantrik Nagrik Samity[1], wherein it has been held that reason is the heartbeat of every conclusion. It introduces clarity in an order and without the same, it becomes lifeless. Reasons substitute subjectivity by objectivity. Absence of reasons renders the order indefensible/unsustainable particularly when the order is subject to further challenge before a higher forum. It has been further held that recording of reasons is a principle of natural justice and every judicial order must be supported by reasons recorded in writing. It ensures transparency and fairness in decision making. The person who is adversely affected comes to know as to why his plea has been rejected. It is also contended by the learned senior counsel that though as on the date of application by the SRS Orion Group for their impleadment, they were holding CCDs, but their subsequent conduct of put on option notice and their securing an award in arbitration proceedings disentitled them to come on record as party respondents in the Company Petition. In a way his contention is that developments occurred after initiation of the applications by the SRS Orion Group for their impleadment indicate that they are no more the CCD holders and their status is as that of unsecured creditors. The subsequent development has a fundamental impact on the right to relief and the manner of moulding it and therefore, it needs to be taken note of. In support of his contention, reliance has been placed on the judgment of the Supreme Court in Pasupuleti Venkateswarlu v. Motor and General Traders[2]. Much emphasis has been laid on para.4 of the cited judgment, which reads as hereunder: “We feel the submissions devoid of substance. First about the jurisdiction and propriety vis-a-vis circumstances which come into being subsequent to the commencement of the proceedings. It is basic to our processual jurisprudence that the right to relief must be judged to exist as on the date a suitor institutes the legal proceeding. Equally clear is the principle that procedure is the handmaid and not the mistress of the judicial process. If a fact, arising after the lis has come to court and has a fundamental impact on the right to relief or the manner of moulding it, is brought diligently to the notice of the tribunal, it cannot blink at it or be blind to events which stultify or render inept the decretal remedy. Equity justifies bending the rules of procedure, where no specific provision or fair play is violated, with a view to promote substantial justice, subject, of course, to the absence of other disentitling factors or just circumstances. Nor can we contemplate any limitation on this power to take note of updated facts to confine it to the trial Court. If the litigation pends, the power exists, absent other special circumstances repelling resort to that course in law or justice. Rulings on this point are legion, even as situations, for applications of this equitable rule are myriad. We affirm the proposition that for making the right or remedy claimed by the party just and meaningful as also legally and factually in accord with the current realities, the court can, and in many cases must, take cautious cognisance of events and developments subsequent to the institution of the proceeding provided the rules of fairness to both sides are scrupulously obeyed. On both occasions the High Court, in revision, correctly took this view. The later recovery of another accommodation by the landlord, during the pendency of the case has as the High Court twice pointed out, a material bearing on the right to evict, in view of the inhibition written into S. 10 (3) (iii) itself. We are not disposed to disturb this approach in law or f8inding of fact.” It is nextly contended by the learned senior counsel appearing for the appellant that the Company Petition filed by the Union of India has to stand on its own and could not be supplemented by other materials by any one, in which case, the impleadment of SRS Orion Group is not warranted. In support of his submissions, reliance has been placed on the judgment of the Principal Bench of the Company Law Board, New Delhi, in Union of India v. Premier Automobiles Ltd. & Ors.[3]. A vehement argument has been advanced by the learned senior counsel that in case the SRS Orion Group are allowed to come on record as party respondents, the very nature of the Company Petition moved by the Union of India changes, which is wholly unwarranted circumstances of the case and more particularly, the position of the SRS Orion Group as on this day is only that of a creditor in view of their obtaining an award.

5. Sri JJ Bhatt, learned senior counsel appearing for the SRS Orion Group submits that the implead petitions came to be allowed on hearing both the parties and in which case it is impermissible for the Company to contend that the order impugned in the appeal has been passed in violation of principles of natural justice. He would also contend that the CLB is empowered to order implead petition under Regulation 44 of the Company Law Board Regulations, 1991, r/w. Order 1, Rule 10 & Sec.151 CPC and as the Union of India, who is the petitioner in Company Petition No.4 of 2009 did not choose to oppose the implead petition, the Company being one of the respondents in the Company Petition, cannot resist the SRS Orion Group coming on record in the array of respondents in the Company Petition. Learned senior counsel refers the counter- affidavit filed by the Registrar of Companies, Ministry of Corporate Affairs, A.P., Hyderabad. He drew my attention to para.10 of the counter affidavit, which reads as hereunder: “10) It is submitted that the Central Govt. has made a common petition before Company Law Board seeking relief u/ss.388B/397/398/408 of Companies Act, 1956, as the Central Govt. is empowered to seek relief under the said sections and needed speedy and effective remedy against the mis-managing managerial personnel of the Appellant Company and accordingly filed Petition before Company Law Board. Since the 4th Respondent sought relief against the Appellant Company under various provisions to safeguard the interests of its shareholders, creditors and public, has not opposed the impleading application made by the Respondents Nos.1, 2, 3 and the share holders of the Appellant Company. It is therefore the 4th respondent did not either support or oppose the said application.” Learned senior counsel would further submit that on the date of implead petitions, the SRS Orion Group had CCDs worth of Rs.600 Crores and that would be sufficient to infer that SRS Orion group is necessary party to the Company Petition filed by the Union of India. Even otherwise, the Award has not reached finality since the same has been questioned by the Company by moving petition before the civil Court to set aside the award and as on this day, the SRS Group continues to be holder of the CCDs in the company. Even the Union of India in the Company Petition moved before the CLB admits of the investment made by the SRS Orion Group to a tune of Rs.600 Crores. Learned senior counsel took me to paras.35 and 38 of the Company Petition filed by the Union of India to buttress his submissions, and they are:- “35. As stated elsewhere in the Petition, Resp.No.1 Company has a secured debt exposure in the tune of approxi. 117.78 crores and an unsecured debt exposure of Rs.600 crores. Yet the management of Resp.No.1 has acted in a manner that deserves deprecation and remedial action forthwith.

38. For a Company whose secured debts are in the tune of Rs.117.78 crores and un-secured loans are in the tune of Rs.600 crores, taking its total debt exposure to approx Rs.717.72 crores, it is surprising to say the least that an unsecured loan of Rs.434,228,741 could be given by it to a related Company in which the directors have a declared interest. The moot question is that if Resp. No.1 did indeed have funds of the kind diverted to a Section 301 Company, then whey were those funds not utilized for the benefit of Resp.No.1 and why was a decision taken at the cost of keeping Resp.No.1 trapped in debt. Clearly the management of Resp. No.1 is not interested in safeguarding the interest of the Resp. No.1 but is only interested in furthering interests of related parties.” It is also brought to my notice by the learned counsel that the order, dated

05.04.2009, came to be modified by the CLB on 13.01.2011 in supercession of the earlier order, dated 05.03.2009, in which case, the appeals are liable to be dismissed.

6. The issues that call for adjudication in these Company Appeals are: 1) Whether the CLB assigned any valid reasons for allowing the application of SRS Orion Group seeking their impleadment as party respondents in the Company Petition? 2) Whether the SRS Orion Group and shareholders have offered sufficient reasons for amendment of pleadings in Company Application Nos.60 and 61 of 2011?

7. Point No.1: The SRS Orion Group sought their impleadment as party respondents in the Company Petition on the ground that they are the stakeholders in the Company having invested about Rs.600 crores and holders of CCDs. The general rule in regard to impleadment of parties is that the plaintiff in a suit, being dominus litis, may choose the persons against whom he wishes to litigate and cannot be compelled to sue a person against whom he does not seek any relief. Consequently, a person who is not a party has no right to be impleaded against the wishes of the plaintiff. But this general rule is subject to the provisions of Order I, Rule 10(2) of Civil Procedure Code, which provides for impleadment of proper or necessary parties. The said sub-rule is extracted below: “(2) Court may strike out or add parties.- The Court may at any stage of the proceedings, either upon or without the application of either party, and on such terms as may appear to the Court to be just, order that the name of any party improperly joined, whether as plaintiff or defendant, be struck out, and that the name of any person who ought to have been joined, whether as plaintiff or defendant, or whose presence before the Court may be necessary in order to enable the Court effectually and completely to adjudicate upon and settle all the questions involved in the suit, be added. The said provision makes it clear that a court may, at any stage of the proceedings, either upon or even without any application, and on such terms as may appear to it to be just, direct that any of the following persons may be added as a party: (a) any person who ought to have been joined as plaintiff or defendant, but not added; or (b) any person whose presence before the court may be necessary in order to enable the court to effectively and completely adjudicate upon and settle the question involved in the suit. In short, the court is given the discretion to add as a party, any person who is found to be a necessary party or proper party. A 'necessary party' is a person who ought to have been joined as a party and in whose absence no effective decree could be passed at all by the Court. If a 'necessary party' is not impleaded, the suit itself is liable to be dismissed. A 'proper party' is a party who, though not a necessary party, is a person whose presence would enable the court to completely, effectively and adequately adjudicate upon all matters in disputes in the suit, though he need not be a person in favour of or against whom the decree is to be made. If a person is not found to be a proper or necessary party, the court has no jurisdiction to implead him, against the wishes of the plaintiff.

8. I have gone through the order, dated 05.03.2009, passed in Company Application Nos.95 and 96 of 2009. No reason is spelt out for allowing the application filed by SRS Orion Group. Recording of reasons is a principle of natural justice and every judicial order must be supported by reasons recorded in writing. It ensures transparency and fairness in decision making. The CLB has not assigned any reason for allowing SRS Orion Group to come on record as party respondents in the Company Petition. In these circumstances, I have no option except to set aside the order, dated 05.03.2009, passed in Company Application Nos.95 of 2009 to the extent of impleading the SRS Orion group as party respondents and remand the matter back to the CLB for adjudication afresh on hearing the parties.

9. Point No.2: The Regulation No.44 of the Company Law Board Regulations, 1991, empowers the CLB to pass such orders as may be necessary for the ends of justice or to prevent abuse of the process of the Bench. Regulation No.46 deals with the general power of the CLB with regard to permitting the parties to amend their pleadings. For better appreciation, I may refer Regulation No.46, which reads as hereunder: “46. General power to amend – A Bench may, at any time, and on such terms as to costs or otherwise, as it may think fit, amend any defect or error in any proceeding before it; and all necessary amendments shall be made for the purpose of determining the real question or issue raised by or depending on such proceeding.” A plain reading of the above Regulation indicates that the CLB has power to permit the parties to amend any defect or error in any proceeding before it so also necessary amendments for the purpose of determining the real question or issue raised in the proceedings.

10. The order impugned in the appeals does not indicate that the proposed amendment is essential for the purpose of determination of real question involved in the Company Petition. In these circumstances, I am of the view that the order impugned in the appeals cannot be sustained and the matter needs to be remanded to the Company Law Board for adjudication afresh on hearing the parties.

11. Accordingly, all the three Company Appeals are allowed setting aside the orders impugned therein and remanding the matters back to the CLB for passing the orders afresh after hearing the parties. No order as to costs. ______________________ B.SESHASAYANA REDDY, J. Date:19th September, 2011. THE HON’BLE SRI JUSTICE B.SESHASAYANA REDDY Company Appeal No.7 of 2009 Company Appeal Nos.6 and 7 of 2011 Date:19th September, 2011