CS (OS) No. 2011/2008 Page 1 of 33 IN THE HIGH COURT OF DELHI AT NEW DELHI CS(OS) 2011/2008 & IAs 11686, 11687, 12820, 12822, 12823/2008 Reserved on: July 17, 2009 Decision on : August 25, 2009 HB STOCKHOLDINGS LTD. ..... Plaintiff Through Mr. Anant Haksar, Senior Advocate with Mr. H.S. Chandhoke, Advocate versus DCM SHRIRAM INDUSTRIES LTD & OTHERS ..... Defendants Through Mr. T.K. Ganju, Senior Advocate with Mr. Ramesh Singh, Mr. A.T. Patra, Ms. A. Patra and Ms. Roopa Dayal, Advocates for D-1 to 13. Mr. I. Ghosh with Mr. Sandeep Mahapatra, Advocate for D-14. CORAM: HON'BLE DR. JUSTICE S. MURALIDHAR 1.Whether reporters of the local newspapers be allowed to see the judgment? No 2.To be referred to the Reporter or not ? Yes 3. Whether the judgment should be reported in the Yes Digest? JUDGMENT 25.08.2009 S. Muralidhar,J. IA No. 12820/2008 1. This is an application under Order VII Rule 11 read with Section 151 of the Code of Civil Procedure 1908 („CPC‟) seeking rejection of the plaint. The case of the Plaintiff 2. The Plaintiff H.B. Stockholdings Limited („HBSL‟) claims to hold 24.8% of expanded issued and paid-up capital of DCM Shriram CS (OS) No. 2011/2008 Page 2 of 33 Industries Limited („DSIL‟), Defendant No.1 and thereby being its single largest shareholder. On 22nd September 2008, the Plaintiff received the Annual Report and audited accounts of DSIL for the year ending 31st March 2008, which had been approved by the Board of Directors of DSIL on 25th June 2008. According to the Plaintiff, the Annual Report and audited accounts revealed that they were “grossly inaccurate and/or lacking in several material particulars” and “do not reflect a true and fair view of the Company‟s affairs, apart from being in violation of the provisions of the Companies Act, 1956 („Act‟), the provisions of the Listing Agreement with the Bombay Stock Exchange (BSE) and the Company‟s own Code of Business Conduct and Ethics.” It is claimed that these constituted “unjust and unlawful acts of the Defendants” which were likely to “cause irreparable harm and injury not only to the Plaintiff but also to over one lakh other shareholders of the Defendant No.1 company.” 3. Tracing the background to the present suit, it is stated in the plaint that Versa Trading Limited („VTL‟) was a wholly owned subsidiary of DSIL. In September 2002, DSIL sold 50.02% of its shareholding in VTL at 10 paise per share against its acquisition price of Rs.10/- per share to three entities viz., AKS International Limited (AIL), RPG Securities Limited (RSL) and Indus Netlink Limited (INL). However, a perusal of the Annual Reports of these three companies for the year ending 31st March 2006 did not reflect any investment in VTL. It had, therefore, to be inferred that the three companies were benami holders of the said shares. The balance 49.98% shares held by DSIL in VTL CS (OS) No. 2011/2008 Page 3 of 33 were claimed to have been sold in 2007-08 but the price at which they were sold was not known. According to the Plaintiff, it was strange that DSIL would sell its shareholding in VTL when it knew that more than Rs.18 crores would be raised by VTL itself for investment in DSIL. Moreover, VTL owed DSIL about Rs.7.8 crores as on 31st March 2007. Out of this debt, a sum of Rs.7 crores was converted into redeemable non-cumulative preference shares. However, the Directors‟ Report dated 30th July 2007 of DSIL as well as of VTL did not reflect any increase in the authorized capital of VTL. They also made no mention of the issuance of any preference shares in lieu of the debt owed by VTL to DSIL. It is stated that VTL could not have possibly invested Rs.18.63 crores in DSIL instead of repaying the debt. DSIL‟s balance sheet showed that DSIL had made a 100% provision for the Rs.7 crores invested in VTL. 4. According to the Plaintiff, the Annual Return of VTL dated 30th August 2007 filed with the Registrar of Companies („ROC‟) did not reflect the increase in the share capital or the issuance of preference shares to DSIL. The shareholding pattern in terms of the Annual Return showed that DSIL held 49.98% shares, and the three companies AIL, RSL and INL 16.67%, 16.67% and 16.68% shares respectively. The six individuals shown as the remaining shareholders of VTL were either DSIL‟s or VTL‟s employees. As already mentioned in the Annual Returns of the three companies i.e AIL, RSL and INL for the years ending 31st March 2006 and 31st March 2007, their investment in VTL was not shown. The Auditors‟ Report of CS (OS) No. 2011/2008 Page 4 of 33 VTL for the year ending 31st March 2007 showed that VTL had accumulated losses exceeding the company‟s share capital, and yet it was investing Rs.18.63 crores in DSIL. 5. According to the Plaintiff, although DSIL itself had not indicated how and to whom it had sold the remaining 49.98% shares held by it in VTL, enquiries revealed that they were sold to DCM Hyundai Limited („DHL‟). Also AIL, RSL and INL sold their 50.02% shares in VTL to DHL. 6. On 16th October 2007, a resolution was passed by the Board of Directors of DSIL by which 7 lakh share warrants were to be issued to the Promoters/Promoter Group companies including VTL. 6.99 lakh warrants in the sum of Rs.18.63 crores were allotted to VTL. This despite the fact that VTL had a negative net worth and was prohibited by the Reserve Bank of India („RBI‟) by an order dated 24th November 2001 from transacting the business of a non-banking financial institution. Also, VTL was not authorized by its Memorandum and Articles of Association to make such investments. The minutes of the meeting of the Board further show that rights issue was never discussed in detail and Letters of Intent had been received by the proposed allottees including VTL. 7. On 18th October 2007, a notice was sent to the shareholders of DSIL under Section 192A of the Act stating that the purpose of the preferential issue was to raise funds for working capital purposes and CS (OS) No. 2011/2008 Page 5 of 33 supplementing bank finance. The notice did not state the number of warrants to be allotted to each of the six proposed entities. The amount proposed to be raised in terms of the notice was approximately Rs.12 crores, spread over the next 18 months. 8. On 15th November 2007, VTL passed three resolutions at an Extraordinary General Meeting (EGM): (a) to increase its authorized capital to Rs.32 crores; (b) to issue and allot 2 crore equity shares of Rs.10 each to DHL which was now suddenly referred to as its Holding Company; and (c) to obtain the approval of shareholders under Section 372 A (1) of the Act for the purpose of making an investment of Rs.18.63 crores for subscribing to 6.9 lakh warrants at Rs.90/- per share issued by DSIL. Thus, as on 16th October 2007 the Letter of Intent by VTL to DSIL to subscribe to the proposed issue of warrants was without authority and hence void. According to DSIL itself, the price of the warrants was revised only on 21st November 2007 from Rs.57/- per share (set on 8th November 2007) to Rs.90/- per share. It was therefore strange that VTL would have offered to subscribe to warrants at Rs.90/- per share on 15th November 2007 when the DSIL‟s Board meeting determined this price only on 21st November 2007. 9. In order to consolidate its shareholding, HBSL made a public announcement on 19th November 2007 under Regulations 10 and 14 of the SEBI (Substantial Acquisition of Shares and Takeovers) CS (OS) No. 2011/2008 Page 6 of 33 Regulations, 1997 (SEBI Takeover Code) for acquisition of 35 lakhs equity shares of DSIL. 10. According to the Plaintiff, due to various acts of oppression and mismanagement perpetrated by the promoters and directors of DSIL, the HBSL was constrained to approach the Company Law Board („CLB‟) with a petition under Sections 397 and 398 of the Act. In the said petition, which is pending adjudication, it was inter alia mentioned by the Plaintiff that on 29th November 2007, it had written a letter to DSIL urging it to go in for a rights issue and even offering to have the same underwritten. The Plaintiff had further made an offer of subscribing to the warrants proposed to be issued at a price of Rs.120/- per share rather than the price of Rs.90/- per share that had been proposed. However, the said letter was completely ignored and warrants allotted to the six entities. It is stated that DSIL had raised Rs.18.9 crores by the allotment of shares although it required only Rs.12 crores. Further the actual receipt of moneys of Rs.18.9 crores was not evidenced except for the certificate given by Defendant No.14 A.G. Ferguson & Co. No information was given as to the utilization of the moneys allegedly raised for the payment of cane arrears. The Plaintiff also stated that it had come to know that DSIL had raised Rs.87.752 crores from the Sugar Development Fund and a consortium of Banks between April 2007 and April 2008 of which Rs.45.752 crores was specifically earmarked for the purpose of payment and sugarcane arrears. Therefore, the reason given for raising funds through allotment of shares was apparently false. It is CS (OS) No. 2011/2008 Page 7 of 33 submitted by the Plaintiff that reasons given by DSIL for raising funds has kept changing from time to time. It is further pointed out that although the shares were to be allotted in three tranches, DSIL issued the entire shares by 1st April 2008. Further, 20.7 lakhs shares were allotted to VTL. 11. On 26th March 2008, a resolution was passed by the Board of Directors of VTL stating that it was now a wholly owned subsidiary of DHL which had proposed to extend its financial year by six months i.e. ending on 30th September 2008 and, therefore, it was now extending its financial year likewise. 12. As regards DHL enquiries revealed that DSIL held 49.28% shareholding in DHL plus 100% of optionally convertible preference shares amounting to Rs.12.85 crores. Moreover, the Articles of Association of DHL gave substantial control to DSIL over the management and composition of its Board of Directors. The pattern and composition of the Board of Directors of DHL revealed that the DHL is in fact a subsidiary of DSIL. Further, DHL had pledged all its movable and immovable properties to DSIL which had in turn undertaken to repay all DHL‟s loans to banks and financial institutions. However this had not been reflected in the accounts of DSIL. 13. DHL has been a loss making company since 1995 and it had been declared „sick‟ by the Board for Industrial and Financial CS (OS) No. 2011/2008 Page 8 of 33 Reconstruction („BIFR‟) on 28th July 1998. It is currently under a scheme of rehabilitation which had been sanctioned by the BIFR in 2007. According to the report of the Board of Directors of DHL, DSIL had written-off loans of over Rs.75 crores of DHL. The Plaintiff has sought to explain how DSIL first financed VTL and DHL and then wrote off crores of dues from both these companies thereby depleting the shareholder value of DSIL. Notwithstanding the write offs, both these companies still owed DSIL several crores of outstanding dues. Instead of paying off these dues, DHL purportedly bought 49.98% shareholding of DSIL in VTL and the 50.02% shareholding from the three benami entities. DHL further gave VTL Rs.20 crores to subscribe to warrants issued by DSIL, while DHL itself was under a Scheme of Rehabilitation sanctioned by the BIFR. On its part, VTL, while still owing money to DSIL, instead of repaying those dues, subscribed to 6.9 lakh warrants allotted by DSIL, which formed part of the promoter holding of DSIL. According to the Plaintiff, the above facts demonstrated that the Defendants had siphoned off the funds of DSIL to the detriment of the shareholders of DSIL by borrowings from banks and using them to fund DHL. These acts were detrimental to the interests of the shareholders of DSIL. It is further pointed out that since DHL was a sick company it could not have possibly raised funds on its own. 14. It is stated that that none of the above facts have been reflected in the Annual Report of DSIL. The plaint acknowledges that there is pending litigation before the CLB, this Court and the Securities CS (OS) No. 2011/2008 Page 9 of 33 Appellate Tribunal („SAT‟) in which the DSIL had been bearing the cost of litigation initiated/defended by it. However, the promoters of DSIL have been benefited by the fraud and it is solely at their behest and for their benefit that the litigation was being carried out in the name of DSIL. According to the Plaintiff, the Auditors (Defendant No.14) of DSIL had also committed a breach of the provisions of the Act by failing to report the above position in their Report. The Plaintiff alleges that there is a breach of fiduciary duty cast on the Board of Directors and the individual directors have been arrayed as Defendant Nos. 2 to 11. In para 14 of the plaint, numerous irregularities in the Annual Report and the Accounts have been set out. According to the Plaintiff, the Defendants had violated Sections 209 to 211, 215, 217, 219 and 227 of the Companies Act, 1956 and “several provisions of the Listing Agreement with the Bombay Stock Exchange including but not limited to Clause 32, Clause 41, and Clause 49.” 15. In para 19 of the plaint, it is stated as under: “19. The Plaintiffs are agitating issues with regard to mismanagement and oppression of the minority before the Hon‟ble Company Law Board, and on issues with regard to the violation of the SEBI Act and Regulations before the Hon‟ble Securities Appellate Tribunal. The reliefs claimed in this suit have not been claimed elsewhere and are solely within the jurisdiction of this Hon‟ble Court.” 16. On the basis of the above pleadings the following reliefs are sought in the suit: CS (OS) No. 2011/2008 Page 10 of 33 “(a) Pass a decree in favour of the Plaintiff and against the Defendants, declaring the Annual Report of the Defendant No.1 along with the Accounts, the Directors Report, the Auditors Report and annexures thereto, for the year ending 31.03.2008 as currently circulated to the shareholders after approval by the Defendants on 25th June 2008, as null and non est and the same be treated as cancelled. (b) Pass a decree of mandatory injunction directing appointment of an independent and qualified Chartered Accountant to carry out a fresh audit of the books of account of the Defendant No.1 company and the Defendants to provide the shareholders with the true and fair state of affairs by circulating for the shareholders approval in a duly constituted shareholders meeting, a fresh Annual Report and Accounts prepared in accordance with the provisions of law; (c) pass a decree of permanent injunction in favour of the Plaintiff, restraining the Defendants, their respective officers, agents, etc from passing proposed Resolution No.1 (to adopt the Directors Report, the Audited Balance Sheet and the Profit & Loss), Resolution No. 3 (Re-appointment of Mr. Madhav Shriram as a Director), and Resolution No. 6 (to reappoint M/s. A.P. Ferguson & Co. as the auditors of the Company), as stated in the Notice for the AGM dated 25th June 2008, in the Annual General Meeting proposed to be held on 25th September 2008; (d) Pass a decree of permanent injunction in favour of the Plaintiff, restraining the Defendants their respective officers, agents, etc. from acting upon or giving effect to the Annual Report and Audited Accounts as approved by the Defendants on 25th June 2008 for the year ending 31st March 2008, and upon the proposed Resolutions No. 1, 3 and 6; and (e) grant costs in favour of the Plaintiff and against the Defendants.” 17. Along with the suit, the Plaintiff also filed IA No. 11686 of 2008 under Order XXXIX Rules 1 and 2 read with Section 151 of CPC in which prayer was made for an ad interim injunction to restrain the defendants from proposing or passing the resolution adopting or from giving effect to the Annual Report and Audited Accounts for the year CS (OS) No. 2011/2008 Page 11 of 33 ending 31st March 2008 at the Annual General Meeting (AGM) proposed to be held on 25th September 2008 and for a direction for a fresh audit of the books of account of DSIL to be carried out by an independent and qualified Chartered Accountant. 18. On 23rd September 2008, this Court directed summons to issue in the suit and notice in the aforementioned application. However, no interim injunction was granted since it was felt that if the resolution in question were stayed, irreparable injury could be caused to DSIL. The court took note of the contention of learned Senior counsel for Defendant No.1 who appeared on caveat and pointed out that similar points were urged by the Plaintiff before the CLB and before SEBI/SAT but without success. 19. After the AGM was held on 25th September 2008 and the resolution in question passed, the Plaintiff filed IA No. 12823 of 2008 under Order VI Rule 17 CPC for amending the plaint to challenge the said decision. Meanwhile, the Defendant DSIL had filed IA No. 12820 of 2008 under Order VII Rule 11 CPC. Application IA No. 12822 of 2008 was filed by Defendant No.1 DSIL for suspending the time for filing the written statement. Along with the plaint, the Plaintiff also filed IA No. 11687 of 2008 under Order II Rule 2 CPC seeking leave to sue for in respect of any other cause of action that may arise after the assessment and investigation of the damage caused to DSIL and in the event of any misappropriation being discovered subsequently. CS (OS) No. 2011/2008 Page 12 of 33 20. Defendant No.11 did not appear despite service. No written statement was filed in the suit by the other defendants. Pleadings were complete in IA No. 12820 of 2008 under Order VII Rule 11 CPC, which, with the consent of parties, was heard finally. The case of the Defendant 21. The contentions of DSIL in the said application under Order VII Rule 11 CPC are as follows: (a) The allegations in the suit were really in the nature of oppression and mismanagement for which a remedy was provided under the Act. Alternatively, the alleged violations were of the provisions of Securities & Exchange Board of India Act, 1992 („SEBI Act‟) and the Regulations framed thereunder. Therefore alternate/efficacious remedies were available to the Plaintiff either before the CLB or before the SEBI and the Securities Appellate Tribunal (SAT). It is submitted that the jurisdiction of the civil court is barred in view of Section 9 CPC read with Section 41 (h) of the Specific Relief Act 1963 („SRA‟) and Section 15 Y of the SEBI Act. (b) The very grievance raised in the present suit is already the subject matter of proceedings before the CLB, SEBI and SAT. Therefore, the present suit was case of forum shopping particularly since no interim relief was granted to the Plaintiff by the CLB and SEBI. The suit is also therefore an abuse of the process of the court. (c) The suit was a personal action brought about by a single shareholder against the manner of preparation of company‟s accounts. In any event none of the other shareholders had made complaint about the alleged lack of proper notice/particulars/disclosures in the Annual Accounts and CS (OS) No. 2011/2008 Page 13 of 33 Auditors Report. The decision of the majority of the shareholders had to prevail. (d) The present suit insofar as seeks the removal of Defendant No.14 as an Auditor is barred since there is specific procedure outlined in Section 225 of the Act for removal or appointment of an Auditor. That cannot be short circuited by resorting to a civil suit. (e) At the AGM held on 25th September 2008 the Plaintiff was represented by Mr. Anil K. Mittal who demanded poll on several items on the agenda. Poll was accordingly taken on the following day i.e. 26th September 2008. The result thereof was announced by the Chairman based on the scrutinizer‟s report. All the seven agenda items were passed with more than the requisite votes. Since the Plaintiff had participated in the said meeting it should be deemed to have abandoned the present proceedings and therefore the cause of action leading to the filing of the present suit did not survive any more. (f) Towards implementation of the said resolutions, copy of balance sheet, profit and loss account and related documents were filed with ROC at New Delhi and they were taken on record by the said office. The Annual Report has also been uploaded on SEBI‟s web-site on 29th September 2008 in terms of the Listing Agreement. Reappointments/ appointments of the Directors have also been given effect to by filing the statutory Form 32 with the ROC. Minutes of meeting have been also sent to the BSE on 3rd October 2008. It is submitted that in view of the above developments the cause of action had disappeared. Accordingly it is prayed that the plaint must be rejected. CS (OS) No. 2011/2008 Page 14 of 33 The Plaintiff’s reply 22. In its reply to the IA under Order VII Rule 11 CPC, the Plaintiff submitted that in view of the subsequent developments, the application had become infructuous. It is further submitted that the ground on which the DSIL seeks rejection of the plaint is not one of the grounds enumerated under Order VII Rule 11 CPC. It is submitted that the reference to Section 41 (h) SRA is misplaced. It is further submitted that the challenge to the audited accounts adopted by the DSIL for the financial year ending 2007-2008 is not the subject matter of any other petition before the CLB or SEBI/SAT and, therefore, the present civil suit is maintainable. Merely on account of the commonality of the background facts leading up to the present suit, it could not be concluded that the issues involved in the suit were common to the proceedings before the CLB or the SAT. The issues in this suit are distinct and separate. It is urged that violations complained of and the reliefs claimed in the suit have not been urged or claimed by the Plaintiff before any other forum. It is stated that there is no provision of law pointed out by DSIL according to which a single individual shareholder cannot maintain a suit against a company. The mere approval of the annual accounts at the AGM of DSIL cannot render the suit infructuous since a shareholder cannot possibly give consent to an act that is in violation of the law. Submissions of Counsel 23. Mr. Anant Haksar, Senior counsel appearing for the Plaintiff/non- applicant in IA No. 12820 of 2008 submits that the question to be addressed first was whether in terms of Section 9 CPC there was an CS (OS) No. 2011/2008 Page 15 of 33 express or an implied bar to this court entertaining the suit? Secondly, whether Section 41 (h), SRA constituted a bar to the maintainability of the suit? Thirdly, whether a suit seeking the relief of a bare declaration without a consequential relief of injunction can be maintainable? 24. It is submitted by Mr. Haksar that Section 41 (h) SRA is only a bar to the court granting an injunction in a given context. It does not bar the maintainability of the suit itself. In any event, the relief concerning the removal of the auditor has not been claimed by the Plaintiff before