M/S. Span Biotronics Pvt. Ltd vs Dr. Bhagwati Prasad

3. M/s Span Divergent Limited, Formerly known as M/s Span Diagnostics Ltd., 902-904, 9th Floor, Rajhans Bonista, Behind Ram Chowk Temple, Ghod Dod Road, Surat - 395 007, Gujarat. ....Appellants

Vs

1. Dr. Bhagwati Prasad, B-2003, Lake Pleasant Lake Homes, Off. AdiShankaracharya Marg, Powai, Mumbai - 400 076, Maharashtra. ....Respondent

Present:

For Appellants: Shri P. K. Mittal, Shri Hitender Mehta and Shri Hardeep, Advocates

For Respondents: Shri Shakunt Saumitra, Advocate.

Company Appeal (AT) No. 242 of 2017 JUDGEMENT

BANSI LAL BHAT, J.

This appeal is directed against order dated 22nd May, 2017 passed by

Mumbai Bench of the National Company Law Tribunal in CP No. 16/397-

398/CLB/MB/MAH/2016, titled Dr. Bhagwati Prasad Vs Span Biotronics

Private Limited & Others by virtue whereof the petition filed by Dr. Bhagwati

Prasad - Respondent herein alleging oppression and mismanagement has

been partly allowed by directing Arkray Health Care Private Limited -

Appellant no.2 herein to accept the offer of transfer of 500 shares by

Respondent herein as per valuation report dated 1st February, 2014 @

Rs.2064.74 per share. Respondent herein has been granted further relief by

awarding Rs.20 lakhs in lieu of his professional qualification utilized during

the initial days of establishment of Appellant no.1 Company. Aggrieved of the

aforesaid findings and relief granted, the appellants have assailed the

impugned order through the medium of instant appeal on the grounds

mentioned therein.

2. The case set up by the Respondent herein before the National Company

Law Tribunal, Mumbai Bench (hereinafter referred to as 'NCLT') may shortly

be adverted to. The Appellant no.1 M/s Span Biotronics Private Limited was

incorporated under Companies Act 1956 on 8th November, 2006. Respondent

herein was appointed as Vice President (Research & Development) in

Appellant No.1 Company on 22nd January, 2007. On 10th August, 2008, 500

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equity shares having face value of Rs.100 each were allotted to him. While

Respondent herein held 5% shares, remaining 95% shares of Appellant No.1

Company were held by Appellant no.3 - Span Diagnostic Limited. Respondent

herein claimed that as Vice President, he played a key role in activities of the

company looking after the administration and promoting the research and

development business of the company. Appellant no.1 executed royalty

agreement with Appellant no.3 under which Appellant no.3 was granted the

right to possess, manufacture and sell off the instruments developed by

Appellant No.1 Company, for a consideration of a royalty. Respondent herein

was given entitlement of 10% of the gross royalty received by Appellant No.1

Company from licensing the technology developed by the present Respondent.

This was in recognition of his contribution and formed the subject of a royalty

agreement dated 14th May, 2010 executed inter-se Appellant No.1 Company

and the present Respondent. According to the present Respondent, the

smooth functioning of Appellant no.1 Company was disrupted when on 24th

January, 2014, a conference of all the employees of Appellant no.3 Company

was held at Surat where Appellant no.3 Company announced that the process

of selling of the entire diagnostic business was in progress which included the

majority stake in Appellant no.1 Company. On the following day the

employees of Appellant No.3 Company were assured in writing that they

would be retained in their existing positions and all business commitments

would be honoured. Respondent herein alleged that he was not given any

notice about the deal between Appellant no.3 and Appellant no.2 Companies.

Allegedly Appellant no. 2 and 3 acted through Appellant no.1 Company and

Company Appeal (AT) No. 242 of 2017 -4-

connived to harm the Respondent herein by their actions. The Respondent

herein alleged that he was denied participation or involvement. Pursuant to

the aforesaid deal, Appellant no. 1 Company was sold through the transfer of

its bulk shares by Appellant no.3 along with its related business to Appellant

no.2 to the prejudice of Respondent herein.

3. Citing yet another instance of oppression, Respondent herein alleged

that he was not taken into confidence or consulted when Appellant no.3

transferred shares in favour of Appellant no.2 when the shares of Appellant

no. 1 Company were valued by a Chartered Accountant at Rs.2064.74 per

share. After completion of acquisition, the Appellant no.2 Company began

tough oppression of Respondent herein and pressurised him to increase the

speed of work. Business Transfer Agreement inter-se Appellant no. 2 and

Appellant no. 3 was executed on 5th March, 2015 thereby reducing the

Appellant no. 1 Company to the status of a subsidiary of Appellant no. 2. It

was further alleged by the Respondent herein that he was harassed and

hostile conditions were created compelling him to make an offer of exit as a

shareholder from the Appellant no. 1 Company. Meanwhile on 28th May, 2015

termination notice was served upon Respondent herein as Appellant no. 1

communicated its decision to discontinue the business activity w.e.f. 27th

June, 2015. This was followed by one more letter relieving the Respondent

herein. Respondent herein addressed letters to the company raising his

grievance that the entire transaction was carried out without consulting him.

On 31st March, 2015, Chairman of Appellant no. 2 Company informed the

Respondent herein that it was decided to windup the operations of Appellant

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no. 1 Company. Respondent herein objected to the same on the ground that

the same was prejudicial to the interest of the company. Respondent herein

also shot a letter to the company detailing his vital role in growth of the

company. He further emphasized that he was not consulted despite being the

minority shareholder of the company. He also claimed compensation for his

wrongful termination and royalty besides the value of his 500 shares.

4. Appellants, while denying the allegations of oppression and

mismanagement in their reply pleaded that the Respondent herein was one of

the employees of the company and very small royalty income constituted the

share of Respondent. It was further pleaded that acquisition of Appellant no.

3 Company by Appellant no. 2 Company was under due process of law and

the valuation of shares was systematically considered. A second valuation

was done in February, 2015 which valued the equity share at Rs.1165 per

share. This was done to ascertain the quantum of the stamp duty required

to be paid at transfer of shares from Appellant no. 3 Company to Appellant

no. 2 Company. It was further pleaded that the Respondent herein was not

capable of delivering the expected results. Hence it was decided to terminate

his services. It is pleaded that amount of Rs.4,15,183 towards full and final

salary, gratuity Rs.5,14,423, Royalty Rs.3785 from April, 2015 to May, 2015

was paid to Respondent herein through cheque to which he raised no

objection. It was further pleaded that the termination of Respondent was

based upon certain basic irregularities committed on his part and due process

of law was followed in terminating his services. Thus there was no continuing

oppression as alleged. Appellant no. 3 has filed an affidavit affirming therein

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that the Respondent herein was aware about the transfer of shareholding by

Appellant no.3 Company in favour of Appellant no.2 Company. It was pleaded

that the Respondent herein had no locus standi in the said companies and

thus had no legal right to object to such transfer.

5. On consideration of the pleadings of the parties and the documents

placed on record, learned NCLT found that the Respondent herein was

associated with the Appellant no.1 Company in two capacities, one as a vice

president (employee) and two as a shareholder (500 shares). In so far as his

removal from the Vice Presidentship was concerned, NCLT found that the

Respondent herein was not a Director but an employee (Vice President) who

had been removed by the employer. It was found that due legal process had

been adopted in removal of the Respondent from the Vice Presidentship and

Respondent herein had not raised any technical objection to the legal

formalities observed with regard to his removal. In so far as transfer of

shareholding by Appellant no.3 Company in favour of Appellant no. 2 is

concerned, NCLT was of the view that there was nothing on record to establish

that such acquisition was not enforceable in law. It found that in transfer of

shareholding in question due process of law had been adopted. Learned NCLT

was of the view that it was not in interest of the business of the company to

reverse the events, more so as no instances of financial irregularity had been

brought to its notice. Referring to letter dated 17th July, 2015 written by

Appellant no. 1 Company to Respondent herein when the Respondent herein

had expressed his intention to transfer his shareholding in favour of Appellant

no.2 Company, NCLT observed that it was beneficial to Respondent as also

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Appellants 1 and 2 to accept exit plan of the Respondent. It was further of

the view that it would be proper to direct the Appellant no. 2 to accept the

offer of transfer of 500 shares by the Respondent. Rejecting valuation report

dated 16th February, 2016 on the ground that the same was drawn up only

for purpose of payment of stamp duty, the NCLT acted upon valuation report

dated 1st February, 2014 determining the valuation of shares at Rs.2064.74

per share for arriving at the consideration amount of 500 shares to be

transferred by Respondent herein.

6. In so far as claim for a sum of Rs.5 Lakhs towards royalty due on the

Appellant no.1 Company and claim for 'severance pay' of Rs.26,75,000/- set

up by the Respondent herein is concerned, NCLT deemed appropriate to allow

a sum of Rs.20 Lakhs to be disbursed by Appellant no. 2 in favour of

Respondent herein in lieu of his professional qualification utilized during the

initial days of establishment of Company. This lump sum amount appears to

have been awarded in favour of Respondent herein to set at rest the dispute

after prolonged litigation.

7. At one stage we were informed that the parties intended to settle the

dispute on the terms that the Appellant will pay lump sum of Rs.10 lakh in

favour of the Respondent. While no affidavit has been filed on behalf of the

Appellant in this regard, Respondent herein has filed affidavit indicating his

willingness to a reduction in compensation amount from Rs.20 lakhs to Rs.10

lakhs in order to give a quietus to the matter. This claim, according to the

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Respondent shall be in addition to benefit from sale of 500 shares at the rate

of Rs.2064.74 per share. The proposed settlement, however, did not take off.

8. The impugned order has been assailed on the ground that the Appellant

no.1 has made payment of 'severance pay' in accordance with the terms and

conditions of the letter of appointment. It is contended that the Respondent

had resigned as Vice President and after his resignation he was paid salary,

allowances and gratuity thereby severing the relationship of employer and

employee. Since the Respondent had accepted the dues paid to him and

appropriated without any protest and demur, therefore direction to pay a sum

of Rs.20 lakhs was totally illegal and without jurisdiction. It is contended that

as per letter of appointment nothing further was required to be paid by

Appellant no.1 Company to Respondent. It is further contended that the

Respondent has not even alleged any instance of mismanagement. It is

further contended that the direction for purchase of shares of Respondent at

Rs.2064.74 per equity share is unwarranted as even the Appellant no.2 has

purchased the shares held by Appellant no.3 at a rate of Rs.1165 per equity

share. It is contended that the NCLT has arbitrarily decided to adopt

valuation report giving rate of Rs.2064.74 per equity share though the same

was quite old and the working of the company has drastically reduced. It is

further contended that inspite of holding that the Appellants were not guilty

of oppression and mismanagement, exercise of powers beyond the scope of

Section 403 of the Companies Act was illegal.

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9. Heard learned counsel for both the parties and scanned through the

material on record. Findings recorded by the NCLT have been assailed as

being erroneous. Following issues are raised in the appeal:

I:- Whether the Respondent was not entitled to sum of Rs.20 Lakhs in

lieu of his past services rendered as Vice President when he had

been paid salary, allowances and gratuity pursuant to his

resignation in terms of letter of his appointment.

II:- Whether the Appellant no.2 was under no obligation to purchase

the shares held by Respondent at a price of Rs.2064.74 per share

when the shares were earlier purchased by Appellant no. 2 at a price

of Rs.1165 per share.

Issue No. I

10. It is the admitted position in the case that the Appellant no.1 Company

comprised of two shareholders. While Appellant no. 3 - M/s Span Diagnostics

Ltd held 95% shares, Respondent was the minority shareholder holding 5%

share. It was in deference to the professional qualification of the Respondent

that he was invited to join the Appellant no. 1 Company with his designation

approved as 'Vice President (Research and Development)' in terms of his letter

of appointment. Respondent was to devote full time to perform the duties as

envisaged in Annexure to the letter of appointment. His salary was also

decided mutually. According to Respondent, he contributed in a big way in

shaping up the company and it was on account of his hard toil and strenuous

efforts that he Appellant no.1 Company gained a stature. However, tables

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were turned on him when an agreement was reached between Appellant no.3

and Appellant no.1 Company regarding transfer of management in the hands

of Appellant no. 2 Company. According to Respondent, Appellant no. 1

Company granted exclusive right of use of instruments and research activity

to Appellant no. 3, thereby side-lining the Respondent, who alleged that he

was kept in dark about these developments and not informed. Appellants

have effectively repelled this contention of Respondent by pointing out that

the Respondent was in attendance when the board meeting was held on 6th

August, 2014, wherein proposed transfer of 10,000 equity shares of Rs.100

each from Appellant no. 3 to Appellant no. 2 was approved. This comes to

fore from Annexure XIII, Vol. II of the paper book at page 295-296. The new

management was not satisfied with the performance of Respondent, as it

emerges from the correspondence placed on record. These developments

ultimately paved the way for exit of Respondent.

11. Admittedly, Respondent was an employee of Appellant no.1 Company

besides being a minority shareholder, his shareholding being mere 5%. He

was not Director of the company. On transfer of shares from Appellant no. 3

Company to Appellant no. 2, services of Respondent were decided to be

terminated by the new management. The terms and conditions of his

employment were governed by the appointment letter dated 22nd January,

2007 forming Annexure VIII to the paper book at page 272, clause 6 whereof

reads as under:

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"6. Termination of Service/Resignation:

6.1 Subject to sub-Clause 2.5, your services can be

terminated, without any notice or compensation

and without assigning any reason for loss of

confidence, or for any act including dishonesty,

misappropriate of company's money or property,

fraud or any act subversive of discipline which in

the opinion of the management is seriously

detrimental/ prejudicial to the

interest/philosophy of the company and warrants

your termination forthwith

6.2 If you absent your self without leave or remain

absent beyond the period of leave originally

granted or subsequently extended, you shall be

considered as having voluntarily terminated your

employment without giving any notice unless:

i) return to work within 8 (eight) days of the

commencement of such absence and

ii) give an explanation to the satisfaction of the

management regarding such absence.

6.3 Should you desires to resign, you will be required

to give one month's notice in writing or amount

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equivalent to one month's salary (i.e. Basic salary

plus all allowances) in lieu thereof. In case the

company desires to relieve you from the services,

the company shall also give one month's notice in

writing or amount equivalent to one month's

salary (i.e. Basic salary plus all allowances) in

lieu thereof. The condition of one month's notice

as aforesaid may be waived or may be reduced

by the management at the sole discretion of the

management."

12. A bare perusal of the provisions contained in the aforesaid clause

makes it abundantly clear that the employment of Respondent was terminable

on one months' notice from either side which could be waived or reduced by

the management at its sole discretion. The appointment letter further lays

bare that the Respondent was required to serve the company for a minimum

period of three years from the date of joining the company and his services

could not be terminated in the ordinary course during such period except on

grounds of misconduct or breach of contract. The employment was

contractual in nature, terminable at the instance of either party by giving one

months' notice. Admittedly, Respondent served the Appellant no.1 Company

for slightly over eight years. His services were not terminated within three

years of his appointment. Therefore, he was not entitled to claim any

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'Severance Pay' for such termination. However, in terms of agreement dated

14th May, 2010 inter-se the Respondent and Appellant no. 1 Company, the

Respondent was entitled to royalty. Appellants have apart from

demonstrating that the Respondent was aware about the transfer of

shareholding by Appellant no. 3 in favour of Appellant no. 2, pointed out that

the revenue had declined in year 2015 and that the company suffered a loss

which was the compelling reason behind closing down the operations of the

Company. We find considerable force in the argument of the learned counsel

for Appellants that the Respondent had ceased to be a driving force behind

the progress of Company which had started declining gradually. Thus, the

Respondent was not entitled to any compensation for his past services apart

from the benefits paid to him. It is pointed out on behalf of the Appellants

that an amount of Rs.4,15,183/- was paid towards full and final settlement

of salary to Respondent. Besides, an amount of Rs.5,14,423/- was paid as

gratuity and Rs.3,785/- was paid towards royalty. This is duly evidenced by

the documents forming Annexure XVI pages 304 to 309 of paper book Vol. II.

The Respondent appears to have not only accepted such benefits without

demur but has also not raised any legal question on the issue. We accordingly

find ourselves in agreement with the finding returned by the learned NCLT

that due legal process was observed in removal of Respondent from service of

Appellant no. 1 Company. We further find that the Respondent has been paid

all benefits admissible in terms of his contract of employment and royalty

agreement dated 14th May, 2010.

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13. Learned NCLT has allowed a sum of Rs.20 Lakhs in favour of

Respondent in lieu of his professional qualifications utilized during the initial

days of establishment of company. There is no justification in allowing this

sum of money, as the Respondent has been duly compensated and paid all

benefits in terms of his contract of employment. The utilization of professional

qualification of Respondent during initial days of establishment of the

Company would not entitle the Respondent to any additional benefits beyond

the scope of contract of employment and the financial benefits like

remuneration/ salary agreed upon by the parties. Respondent has allowed

his professional qualification to be exploited strictly in adherence to the terms

of contract of employment for which he cannot be held entitled to some further

amount in addition to the amount paid towards full and final settlement of

his claim on account of service benefits admissible in terms of contract of

service. May be, the Respondent, by engaging in research devised products

initially providing company to gain foothold in the market but that was

expected of him as an employee of the status of Vice President who also held

5% shareholding. The contribution made by him for emergence of the

company during its early days cannot be termed something for which he could

expect a windfall. Finding recorded by learned NCLT to award Rs.20 lakhs in

favour of Respondent as a fair and reasonable amount in lieu of his

professional qualification utilized during the initial days of establishment of

Appellant no. 1 Company is unsustainable and cannot be supported. The

claim set up by the Respondent for 'Severance Pay' of Rs.26,75,000 in lieu of

Company Appeal (AT) No. 242 of 2017 -15-

past services and as compensation for alleged unjustified termination is

unsustainable and the same is to be rejected.

14. We find ourselves in complete agreement with the learned NCLT in

holding that nothing has been brought on record to establish that the transfer

of shareholding by Appellant no. 3 in favour of Appellant no. 2 was not

enforceable in law. No financial irregularity has been brought to our notice

and there is no proof of oppression or mismanagement. There is nothing on

record to arrive at a finding that the transfer of shareholding by Appellant no.

3 Company in favour of Appellant no. 2 Company was legally unenforceable.

Contention raised on this count is accordingly repelled.

Issue No. II

15. Learned counsel zfor the Appellants further contended that the learned

NCLT seriously erred in rejecting the valuation per share of Rs.1165 on the

basis of second valuation report and relying upon the first valuation report.

It is contended that the Appellant no. 2 purchased shares held by Appellant

no. 3 at the rate of Rs.1165 per equity share. In the face of such purchase

direction that Appellant no. 2 accept the offer of transfer of 500 shares by the

Respondent at the rate Rs.2064.74 was unwarranted.

16. Per contra it is submitted by learned counsel for Respondent that the

Valuation report dated 16th February 2015 was drawn up solely for the

purpose of payment of stamp duty and the same did not reflect the fair value

of shares of Appellant no. 1. We have given our anxious consideration to the

submissions made at the Bar. From perusal of record it comes to fore that

Company Appeal (AT) No. 242 of 2017 -16-

the Respondent intended to severe relations with Appellant no. 2 Company.

This is reflected from the letter dated 17th July, 2015 addressed by Appellant

no. 1 to the Respondent. It is gathered that the Respondent intended to

transfer his shareholding in favour of Appellant no. 2. This Exit Plan of the

Respondent has been considered as beneficial to both the parties by learned

NCLT and we take no exception to such finding. There is no legal infirmity in

the impugned order in so far as direction to Appellant no. 2 to accept the offer

of transfer of 500 shares by the Respondent is concerned. As regards

valuation, it has rightly been noticed by the learned NCLT that the valuation

report dated 16th February 2015 has been drawn up merely for purpose of

payment of stamp duty and not with the intention to determine the transfer

price of shares. Be it seen that in terms of first valuation report dated 1st

February, 2014 fair and reasonable price for transfer of shares was

determined at Rs.2064.74. Same was adopted by the concerned parties. In

the face of same, the subsequent valuation report dated 16th February, 2015

has rightly been held as farce and undervalued to evade proper stamp duty.

We accordingly find no infirmity in the finding recorded by learned NCLT that

valuation report dated 1st February, 2014 at the rate of Rs.2064.74 was to be

taken into account for arriving at consideration amount of 500 shares to be

transferred by the Respondent. This finding is accordingly upheld.

17. In view of the foregoing discussion this appeal is partly allowed. The

impugned order is set aside to the extent of directing the Appellants to

disburse Rs.20 lakhs in favour of Respondent in lieu of his professional

qualifications utilized during the initial days of establishment of Company.

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The impugned order is maintained in so far as direction to Appellant no. 2 to

accept the offer of transfer of 500 shares by the Respondent at the rate of

Rs.2064.71 per share is concerned. Respondent is also held entitled to simple

interest on the cost of such shares at the rate of 9% per annum from the date

of impugned order. The appeal is disposed of in the aforesaid terms. There

shall be no orders as to costs.

[Justice Bansi Lal Bhat] [Justice A. I. S. Cheema] Member (Judicial) Member (Judicial)

NEW DELHI 7th February, 2018

am

Company Appeal (AT) No. 242 of 2017