IN THE HIGH COURT OF HIMACHAL PRADESH, SHIMLA Company Appeal No. 3 of 2006 and Company Appeal No. 3 of 2007. Reserved on.: 26.9.2008. Date of decision: 29.12.2008 Company Appeal No. 3 of 2006 & Company Appeal No. 3 of 2007 Ajay Kapoor Appellant. Versus M/s Hitkari Industries Ltd and others Respondents. Coram The Hon’ble Mr.Justice Deepak Gupta, J. The Hon’ble Mr. Justice V.K.Ahuja, J. Whether approved for reporting? Yes. For the appellant: Mr. Krishnendu Datta, Advocate and Mr. Goverdhan Sharma, Advocate. For the respondents: Mr. R.L.Sood, Sr. Advocate with No. 2, 3, 7 and 8. Mr. Arjun Lal, Advocate. Per Deepak Gupta, J. By this order the aforementioned two appeals are being disposed of, since common questions of law and fact arise for decision. The undisputed facts are that Hitkari Industries Ltd. (HIL), Hitkari Potteries Ltd. (HPL) and Hitkari China Ltd. (HCL) are all part of the Hitkari group of Companies. These companies were set up by late Shri K.P.Kapoor, father of the appellant and Mr. Ved Kapoor the principal respondent. Unfortunately, Shri K.P.Kappor 2 expired in 1999. After his death, disputes arose between the two wings of the family, here-in-after referred to as the Ajay Kapoor Group and the Ved Kapoor Group. The appellant alleged that he and his family were being excluded from the Hitkari Group of companies and the Ved Kapoor Group was indulging in various acts of oppression and mismanagement. On these grounds, the appellant filed Company Petition No. 74 of 2003 title as Ajay Kapoor vs. Hitkari Industries Ltd. and others under Section 379, 398, 402 and 403 of the Companies Act, 1956 (here-in-after referred to as the Act) before the Company Law Board (CLB). It is not necessary to go into the detailed allegations and counter allegations levelled by each group against the other group. It would, however, be pertinent to mention that Shri Ved Kapoor also filed a petition under Section 397 and 398 of the Companies Act, 1956 before the CLB in relation to the affairs of HCL levelling allegations of mismanagement against the appellant Shri Ajay Kapoor. Keeping in view the fact that the main dispute was between two groups of the same family, the Company Law Board made serious attempts to have the disputes amicably resolved by way of settlement between the parties. Meetings between the parties were held under the aegis of the CLB and finally the broad terms of the compromise were reduced in writing in the order dated 12.8.2004, which reads as follows:- “Terms of compromise discussed with the parties in my chamber in respect of Hitkari Potteries, China and Industries. It has been agreed that valuation of all these three companies will be determined by joint 3 Valuers Shri Bhalla and Shri Subhash Malhotra, Chartered Accountants. It has also been agreed that after valuation, Shri Ajay Kapoor will have the right to take over HCL & HPL without any consideration to Ved Kapoor Group. In case he decides not to take over these two companies, he will pay 50% of the excess liability over the assets of the company subject to a maximum of Rs.1 Crore.” Subsequently, the compromise in respect of HIL only was modified with the consent of the parties. Both groups agreed that instead of getting the shares of HIL evaluated, the parties would bid for the shares and the highest bidder would have the right to purchase the shares of HIL. Consent order in this regard was passed on 24.10.2004, relevant portion of which reads as follows:- “In modification of the consent order dated 12.8.2004 now the parties have agreed that as far as HIL is concerned there need not be any valuation and instead the parties may bid for the shares and the higher bidder would purchase the shares of the other at that price. In so far as HCL and HPL are concerned the earlier order will continue. To enable the petitioner to bid for the shares of HIL, it has been agreed to by the parties that Ajay Kapoor will be at liberty to inspect all books of accounts and other records after giving notice to the other side. The inspection will be restricted to a period of seven days from the date of commencement which will be within 15 days. The same will apply to HCL and HPL. The company employees will render all assistance to the petitioner for inspection. It is agreed that none of the information collected will be used except for the purpose of the proceedings before court. Date of bidding will be 30.11.2004.” A bare perusal of these two orders read jointly leaves no manner of doubt that as far as HPL and HCL were concerned, the 4 appellant Ajay Kapoor was given the right to take over the said company without payment of any consideration to the Ved Kapoor group. As far as HIL is concerned, though in the order dated 12.8.2004 the agreement was that either group would be entitled to purchase the shares of the other group at the value determined by the valuers, by consent of the parties, this order was modified and the parties were permitted to bid for the shares. It was made clear that the highest bidder would have the right to purchase the share at the price so bid by him. Shri Ajay Kapoor was given the liberty of inspection of all the books of account and other records of HIL. According to the appellant, though the Ved Kapoor Group had agreed to render all cooperation and give inspection of the books, actually, this was not done and therefore, the appellant filed an application before the CLB seeking direction to the Ved Kapoor Group to place on record before the CLB the copies of the records of the Company. This application was decided by the CLB on 3.12.2004. The order dated 3.12.2004 passed by the CLB reads as follows:- “It has been agreed that photocopies of the documents duly authenticated by the Co. Secy. listed in the note will be deposited with the Bench Officer on 6th December, 2004. The petitioner is at liberty to inspect these documents before the BO and take notes. No copy of the documents will be made. The inspection can be done by the petitioner/his two representatives from 7 to 14th December. Bidding on 6.1.2005 at 4.30 p.m.” 5 The petitioner then alleges that despite the clear cut orders and the consent of the Ved Kapoor Group before the CLB, the Ved Kapoor Group suppressed vital documents and information. According to the appellant, he noticed various discrepancies in the documents. The appellant, thereafter filed an application before the CLB seeking certain warranties and indemnities from the Ved Kapoor Group. The main prayer made in the application with which we are concerned in the present appeal reads as follows:- “Ved Kapoor Group hereby indemnifies the Ajay Kapoor Group in respect of all current assets of the Company comprising inventories, work in progress, raw and process material, finished goods and merchandise whether in hand or in transit both in terms of quantities and values as reflected in the stock registers and/or the stock statements furnished to the Company’s Bankers from time to time and any shortfall therein shall be to the account of the Ved Kapoor Group.” This application appears to have been filed on 4th January, 2004. However, no orders were passed on this application and bidding took place as per the previous orders on 10.1.2005. It is not disputed that the bidding started at Rs.30/- per share of HIL and Shri Ved Kapoor raised the bid till Rs.49/- but Shri Ajay Kapoor was the highest bidder at Rs.50/- per share. He also, in terms of the compromise, opted to take over HPL and HCL. Thereafter, the CLB heard the matter further on 17.1.2005 and a detailed order was passed on 1.2.2005, which reads as follows:- “In 3 companies viz. Hitkari China Limited (HCL), Hitkari Industries Limited (HIL) and Hitkari Potteries Limited (HPL), Ved Kapoor Group and Ajay Kapoor Group hold substantial shares. TFPL is a wholly owned 6 subsidiary of HIL. While Ajay Kapoor Group filed a petition under Sections 397/398 of the Companies Act, 1956 (the Act) alleging oppression and mismanagement in the affairs of HIL, Ved Kapoor Group filed a similar petition in respect of HCL. While the hearing in respect of HIL was concluded and order reserved, the petition in respect of HCL was part heard. Considering the close relationship between the parties that Ajay Kapoor is son of the brother of Ved Kapoor, I impressed upon the parties to settle the disputes amicably. Extensive discussions took place between the parties in my Chamber on 12.8.2004 and terms of compromise arrived at between the parties were recorded in the order dated 12.8.2004. Thereafter, the said order was modified with the consent of the parties vide order dated 24.10.2004 by which both the sides were given the liberty to bid for the shares in HIL and as far as the other two companies are concerned, the choice of taking over the control of these two companies was given to Ajay Kapoor. 2. The date of the bidding was fixed on 10.1.2005. In the meanwhile, both Ajay Kapoor and Ved Kapoor filed two applications seeking for decision on certain matters before the bidding took place. Both the applications were heard. In regard to most of the issues raised in these two applications, consensus emerged, while a few of them were left to my decision. Thereafter, the bidding process started and Ajay Kapoor emerged as the higher bidder at Rs.50/- per share in respect of HIL. He also opted to take over HPL and HCL. The total number of shares involved in respect of HIL as far as Ved Kapoor Group is concerned is 14,97,137 and the total consideration comes to Rs.7,48,56,850. I have noted that the shareholders collectively holding the above mention shares from Ved Kapoor Group have given letters agreeing to sell their shares. 3. The following terms were agreed to by the parties: 1. 20% of the total consideration will be paid by 10.2.2005 and the balance by 10.7.2005 in one or more installments. 2. On payment of 20% consideration, Ajay Kapoor Group will take over the management of the company and the Board of all the three companies will be reconstituted with 3 persons from Ajay Kapoor Group and 2 from Ved Kapoor Group. 3. Ved Kapoor Group would continue to be on the Board of HIL only till the entire consideration is paid by Ajay Kapoor Group and in HCL and HPL, till their personal guarantees are released. 4. Ajay Kapoor Group will release Ved Kapoor Group from all their personal guarantees given in the interest of the 4 companies 7 including TFPL, by 10.4.2005 and Ajay Kapoor Group will execute an indemnity bond undertaking to release Ved Kapoor Group from their personal guarantees within the stipulated time. 5. The main fixed assets and stock on hand shall be as reflected in the documents filed before the Bench. 6. The transfer of shares held by Ved Kapoor Group shall be effected only after receipt of full consideration from Ajay Kapoor Group and till then, no voting rights shall be exercised on the shares by either side. 7. Ved Kapoor Group shall not sell or transfer any of the shares held by that group and to ensure the same, they shall immediately inform the concerned Depositories in which they hold their de mat accounts about this order and get their acknowledgements to the effect the all their accounts have been frozen and file the same with the Bench Officer with a copy to Shri Ajay Kapoor. 8. Personal loans and advances of Ved Kapoor Group as per the books of accounts of HIL will be paid by 10.1.2006. 9. Ajay Kapoor Group shall not sell or dispose of fixed assets including plant and machinery of HIL or TFPL till the entire consideration is paid except for replacement of the personal guarantees of Ved Kapoor Group. 10. Except in the normal course of business, any expenditure of over Rs.5 lacs in HIL shall be with the consent of Ved Kapoor Group. 4. In respect of the following issues, the parties have left the decision to me: 1. Payment of dues from HIL and its subsidiary TFPL to Ved Kapoor Group and companies and firms controlled by that Group. 2. Similar dues from HCL and HPL. 5. In the hearing held on 17.1.2005, Ajay Kapoor Group tendered a cheque for Rs.1,49,71,370 being the 20% of the consideration for the shares to Ved Kapoor Group. Accordingly, by an order on that day, the Boards of Directors of all the 3 companies were directed to be reconstituted with immediate effect with Shri R.N.Khanna, Mrs. Usha Kapoor, Shri Ajay Kapoor, Shri Ved Kapoor and Shri Jaiwant Bery as Directors. Shri R.K.Dalmia, Bench Officer was directed to take inventory of all the assets and documents in all the 4 companies immediately in the presence of nominees of Ved Kapoor Group and Ajay Kapoor Group and hand over the same to Ajay Kapoor Group under acquaintance. Ajay Kapoor Group was directed to execute an indemnity bond in favour of Ved Kapoor Group in the format handed over during the hearing after obtaining all the details from Ved Kapoor Group. 8 6. In furtherance to that order, following directions are given: (a) All major business decisions shall be taken in Board Meetings with 7 days notice to all the directors together with agenda with liberty to both sides to apply if there is any difficulty in the meetings of the Boards of HIL/TFPL (b) The two directors from Ved Kapoor group will continue as such only up to the date on which the entire amount of the consideration is paid by Ajay Kapoor Group and personal guarantees are released. (c) All the terms agreed upon between the parties as indicated in paragraph 3 above shall be strictly followed by the parties. 7. In regard to the amount due from HCL and HPL to Ved Kapoor Group, the decision of which has been left to me, I find that in the application filed by Ved Kapoor Group on 10.1.2005, prayer has been made in the following terms: “Provide for take over of all BIFR responsibilities and entire payment of liabilities by the buyer group. In case of any delay in the payment of OTS of Canara Bank or in the implementation of the BIFR scheme and/or default, due to any reason, then any existing liabilities and subsequent liabilities arising shall be the sole responsibility of the buyers group”. In view of this prayer in the application, the dues by HCL and HPL to Ved Kapoor Group shall be in accordance with the BIFR scheme, except amounts due to them on their personal account like loans etc about which I shall decide after the full consideration for the shares is paid. As far as amounts payable by HIL to Hibar Packaging Private Limited, Packit, and Shri Ved Kapoor (HUF) and also amount payable by TFPL to Hibar Packaging Private Limited are concerned, the same shall be in accordance with the terms of the contracts and in case the amounts are over due, then, the same shall be paid on or before 10.7.2005. The fixed deposits receipt of Rs.100 lacs given by Jaiwant Bery against loans availed by TFPL shall also be replaced/substituted by 10.5.2005. 8. In case, Ajay Kapoor Group fails to release the personal guarantees or to pay the full consideration for the shares by due dates the management of the company shall revert back to Ved Kapoor Group who shall refund all the consideration received till then from Ajay Kapoor Group. 9. Since settlement of disputes between the groups is for the benefit for the companies and the shareholders at large, in terms of Section 402, I direct that none of the Regulations of the SEBI, more particularly, the Take Over Code shall not apply in respect of the sale and purchase of the shares between the two groups. 9 10. Banks and financial institutions connected with the companies shall render all assistance to the parties to ensure compliance with this order more particularly in replacement of guarantees as per this order. 11. Likewise, governmental, both State and Central shall render all assistance, if need be, to give effect to this order. 12. The hand written order on 18.1.2005 shall be read as a part of this order. 13. The parties should cooperate with each other to ensure in implementing this order and are at liberty to approach this Bench in case of any difficulty in working out this order. “ The appellant alleges that in terms of the agreement entered into between the parties and the orders passed by the CLB, he took over the management and possession of HIL on 20.1.2005. The Bench Officer of the CLB was present and inventory of the stocks was prepared by the said officer in the presence of both parties, which is duly signed by them. According to the appellant, after it took over the management of the company it found that the assets were not as per the stock statements filed before the Bench. According to the appellant, the Ved Kapoor Group on the basis of the inflated and over valued stock statements had got the working capital limit enhanced and had in fact utilized the entire working capital by the time management was taken over. The appellant further alleges that since it apprehend that the value of the stocks was not properly reflected in the stock statements by the Ved Kapoor Group, it made a note in the stock statements submitted to the State Bank of Bikaner and Jaipur (SBBJ) that the figures of the stock statements are provisional and subject to stock audit. The appellant also requested Shri J.C.Bhalla, Chartered Accountant to make the valuation of the stock handed over by the Ved Kapoor Group in accordance with the norms stipulated by the SBBJ. The SBBJ itself got an independent audit 10 conducted of the stocks of HIL. The auditors appointed by the SBBJ submitted their report on 22.8.2005 and found that the Ved Kapoor Group had over valued the stocks and including the printing cylinders. It also found that the number of cylinders had been inflated. According to the appellant, if the valuation method followed by the independent auditor is followed, the total value of stocks works out to Rs.4,61,27,392.38/- only and in case the value of the cylinders and flexo plates belonging to the 3rd parties is excluded the value of stocks is only Rs.3,98,56,548.38/-. The appellant alleges that, therefore, he is entitled to recover Rs.2,88,46,524/- from the Ved Kapoor Group of short fall of stocks and offered to pay the value of the shares after deducting this amount. He thereafter filed an application before the CLB praying for the grant of following reliefs:- 1. The Ved Kapoor Group is liable in the sum of Rs.2,52,06,529/- or such other sum as may be finally determined by the Bank Auditor on account of the shortfall in the stocks worth Rs.7,08,93,388/-. 2. The Ajay Kapoor Group is only liable to pay to Ved Kapoor group a sum of Rs.3,46,78,951/- as the balance sale consideration for the purchase price of all the shares of the HIL. 3. Permit the Companies Hitkari Potteries Ltd. and Hitkari China Ltd. to issue duplicate shares directly in the name of Ajay Kapoor and/or his nominee(s) in lieu of the shares of the Ved Kapoor group which have purportedly been lost/misplaced by the Ved Kapoor group as set out in Annexure “U”. 4. Permit/direct the transfer of the HIL shares belonging to the Ved Kapoor group in favour of Ajay Kapoor and/or his nominees in respect of the shares of HIL after mandates and transfer instructions to the depositories have been received in respect of the shares of the Ved Kapoor group. 5. Permit release of payment of a sum of Rs.3,46,78,951/- to the Ved Kapoor group in respect of all the shares of HIL only after all the mandes and transfer instructions have been received in respect of all the shares of HIL as er prayer 4 above. 6. Pending receipt of mandate and transfer instructions in respect of all the shares of HIL of the Ved Kapoor group, permit the applicant to deposit 11 demand draft for a sum of Rs.3,46,78,951/- with the Bench Officer of this Hon’ble Board. 7. Pass an order directing that the balance sum of Rs.2,52,06,529/- be kept in a separate interest bearing account till disposal of the present application. 8. Pass an order directing the Ved Kapoor group to forthwith return the Ajay Kapoor group the three Cars (Skoda Octavia, Hyundai Accent and Honda City) belonging to HIL which are in the possession of the Ved Kapoor Group. 9. Direct the Ved Kapoor group to forthwith pay to HIL a sum of Rs.2 lakhs as set out in paragraph 29 above. Vide order dated 10.7.2005 the CLB directed the appellant to pay the balance sale consideration for the shares of the Ved Kapoor Group and admittedly, the balance sale consideration was actually paid on 11.7.2005. The Ved Kapoor Group also filed an application before the CLB praying for the following reliefs:- (a) Make the payment of a sum of Rs.2,63,888/- to Mr. Ved Kapoor (HUF) as per earlier order dated 1.2.2005. (b) Make the payment of a sum of Rs.51,86,092.71 to Packit as per earlier order dated 1.2.2005. (c) Make the payment of a sum of Rs.6,40,746.76 to HIBAR as per earlier order dated 1.2.2005. (d) Make the payment for a sum of Rs.16,00,000/- to HIBAR from TFPL as per earlier order dated 1.2.2005. (e) Make the payment of Gratuity due to Mr. Jaiwant Bery for a period of 10 years. (f) Make the payment for a sum of Rs.36,000/- to Mr. Jaiwant Bery being expenses incurred by him for the purpose of Company prior to 17th January, 2005. (g) Direct the respondents/petitioners to make the payments to Ved Kapoor group as per the annexure L annexed with the application as per the earlier order dated 1.2.2005. (h) Direct HIL, it managing Diector, manager, agents or athorised representative to hand over the files and samples of Packit forthwith as inspite of the direction given by this Hon’ble Board after the biding. 12 Both parties contested the respective applications. The applicant in relation to the application filed by the Ved Kapoor Group raised certain additional claims in respect of the dues payable to HIL by another Hitkari Group Company called Himachal Folien Ltd. It also challenged the validity of the claims made by respondent Mr. Jaiwant Bery who is admittedly the son-in-law of Mr. Ved Kapoor and sought refund of the salary and other benefits availed of by Mr. Bery. The CLB vide order dated 2.8.2006 rejected the submissions of the appellant in respect of the valuation of actual stocks and also held HIL liable to pay Rs.51,86,092/- to M/s Packit and Rs.6,40,746/- to M/s Hibar and further held that M/s Hitkari Terrafilms is liable to pay an amount of Rs.16,00,000/- to M/s Hibar. Claims of the appellant in regard to Himachal Folien Ltd and Mr. Jaiwant Bery were rejected. It would be pertinent to mention that the CLB in its order held that the method of valuation of the stocks adopted by the previous management i.e. Ved Kapoor Group was being followed for a number of years. It came to the conclusion that neither the bank nor the statutory auditors had ever challenged the method of valuation. It also came to the conclusion that even the Ajay Kapoor Group had followed a similar system of valuation after taking over the company. The CLB further held that the warranties submitted by the Ved Kapoor Group pursuant to the earlier orders of the CLB were only in relation to the numbers of stock and