Mr. Vyomesh M. Shah & Anr vs Vinca Developer Pvt. Limited & Anr

(Arising out of order dated 17th January, 2017 passed by National Company Law Tribunal, Mumbai Bench, Mumbai in CP No. 39/Mah/2016)

IN THE MATTER OF:

Mr. Vyomesh M. Shah & Anr. .Appellants

V.

Vinca Developer Pvt. Limited & Anr .Respondents

JUDGEMEN

SUDHANSU JYOTI MUKHOPADHAYA, J.

This appeal has been preferred by the Appellants against

order dated 17111 January 2017 passed by National Company Law

Tribunal (hereinafter referred to as Tribunal) Mumbai Bench,

Mumbai in Company Petition No. 39/Mah/2016 whereby and

whereunder the application preferred by Appellants under

Section 241, 242, 244 and 246 of the Companies Act, 2013 has

been dismissed with observation that the petition is vexatious

and frivolous and a cost of Rs.50,000 has been imposed.

2. The relevant facts for determination of case is that the

Respondents filed the application under Section 241 and 242 of

the Companies Act, 2013 alleging 'oppression and

mismanagement' by the Appellants:-

3. Ld. Tribunal noticed the case of the Appellants, as referred

to in para 2 of the impugned order and quoted below:-

"The entire case of the Petitioners is rest on an argument that the investment structure conceived by FMO (foreign investor invested Rs. 418 crores in the year 2009) for bringing foreign investment into Aniazia' and Rubix (both. are 100% subsidiaries of Vinca) routing through Vinca is in breach of FEMA, therejbre the rights accrued to FMO on Rs. 418 crores invested by Vinca by it shall not be exercised and all the rights vested with FMO shall be set aside by this Bench holding FMO exercising its rights-for realisation of its money as oppressive conduct against the petitioners so that the petitioners need not coin ply with the I-Ion 'ble Supreme C.'ourt (:)rder dated 15" November, 2016."

4. Keeping into consideration all facts as alleged,

including the subscription dated 20th November 2009 with

FMO (a foreign company), which invested Rs.4 18 crores by

allotment of fully paid up transferable, non-marketable,

unsecured, fully and mandatorily convertible INR

denominated debentures of 'Vinca' to 2nd Respondent into

two tranches and by allotment of 1244. class 'A' equity

shares of 'Vinca' to 2nd Respondent with 10% of the voting 3

rights of the entire share capital of the company as

submitted by 'Vinca' came to a conclusion that the

Appellants cannot impose obligation upon nominee directors

of FMO to exercise their affirmative vote for conversion

Optionally Partially Convertible Debentures (hereinafter

referred to as OPCDs) into shareholding. The Tribunal held

that no case is made out under Section 241 of the

Companies Act, 2013.

5. The brief facts of the ,case as highlighted by Appellant is as

follows:

The 2nd Respondent (FMO) o the basis of a Subscription

Agreement invested in Vinca partly by way of

Compulsorily Convertible ,Deb' ires ("CCDs") and partly in

equity. The equity, comprised 10% of the voting rights. The CCDs

were to be converted into equity after 60 months, giving FMO 99%

voting rights in Vinca.

6. The entire amount of Rs.4 18 crores was required to be and

was immediately invested by Vinca' in Optionally and Partially

Convertible Debentures ("OPCDs") in "Amazia" and Rubix which 4

are both 100% subsidiaries of "Vinca" on the basis of Clause 2.3

and Clause 6.3 1 o the Subscription Agreement.

7. The Articles of Association ("AoA") of 'Vinca' have been

amended and 3rd and 4th Respondents are the nominee directors

of FMO in 'Vinca'. Article 2(uu) of AoA provides for "Reserved

Matters" which includes all matters pertaining to investment by

FMO in 'Vinca' and investments of 'Vinca' in "Amazia" and 'Rubix'

and all matters pertaining to the "two permitted projects" of the

business of 'Vinca'.

8 Article 2(qq) of AoA of 'Vinca' defines the "permitted

projects" to be the development of 'Ackruti Trade Centre" by

"Amazia" and the slum development project by 'Rubix'. Article 12

of AoA of Vinca defines th sine, of 'Vinca' to be only these

"permitted projects". Article 60 of AoA of 'Vinca' stipulates that

in case of "Reserved Matters" the nominee directors of FMO can

only vote in Board Meetings and Articles 62 and 63 of AoA of

'ymca' require all decisions in respect of "Reserved Matters" to be

taken in Board's Meeting and decision on a "Reserved Matter" not

taken in accordance with the procedure set out therein.

9. 3rd Respondent is also a nominee director of "Amazia" and

'Rubix'. The 10th Respondent is the Debenture Trustee in respect of OPCDs issued by "Amazia" and 'Rubix'. Under the OPCDs the

coupon rate is 14.5% per annum and in the event of default of

payment of the same, an option is provided to 'Vinca' to either

convert the debentures• into further shares in "Amazia" and

'Rubix' or to call back the entire investment and in default of the

entire investment being returned 'Vinca' could invoke the

corporate guarantee for the entire amount against 5th

Respondent. The OPCDs have also been secured by mortgage of

all assets of "Amazia" and 'Rubix' which estate

companies.

10. Ld. Counsel for the Appellants submitted that the 3rd and

4th Respondents have acted in a manner oppressive to Appellants

and in a maimer prejudicial to the interest of 'Vinca'. They are

directors o espondent as a director of 'Amazia'

and 'Rubix' have a fiduciary duty to 'Vmca' whose only business

carried on through its two 100% subsidiaries is not prejudiced

They were aware that 'Amazia' and 'Rubix' at present are not in a

position to serve the debenture on 'Amazia' and 'Rubix' failing to

serve the debentures, 3rd and 4th Respondents could call up the

monies that are due under the same and thereafter proceed

against its securities for recovery or invoke the corporate 6

guarantee against 5th Respondent or in the alternative convert the

OPCDs of 'Amazia' and 'Rubix' into equity.

11. It was contended that 3rd and 4th Respondents by not

converting the OPCDs into equity or granting extension of time to

'Amazia' and 'Rubix' to serve the debentures and instead seeking

to enforce the security and invoke the guarantee have in effect

acted against the interest of 'ymca' as this step will result in

closing of the business of 'Arnazia' and 'Ruhix' and thereby

destroy the only business of 'ymca'.

12. This conduct on the part of 'Vinca' atthe instance of 3rd

and 01 Respondents is further compounded by the fact that at

the instance of 3icl and 4 lents permission has been

withheld by the debenture trustees for sale/lease/license of

premises belonging to 'Am azia'.

13. According to the Ld. Counsel, on the one hand, at the

instance of 3rd and 4th Respondents, 'Amazia' has not been

permitted to sell/lease/license assets and thereby have access to

funds, and on the other hand at the instance of 3rd 4th and 10th

Respondents have called up the entire amount due under the

debentures from 'Amazia' and 'Rubix' and sought to invoke the 7

Corporate Guarantee against 5th Respondent which on payment

would result in the guarantor i.e. 5th Respondent to proceed

against both 'Amazia' and 'Rubix' and thereby kill the only two

businesses of 'Vinca'.

14. It was further submitted that preventing 'Vinca' carrying on

its "real estate" business through 'Amazia' and 'Rubix' on the one

hand by refusing permission to deal with their assets and at the

same time insisting on the coupon rate of the OPCDs to be paid

and insisting on recovery-of entire,.": investment of Rs.418 crores

shows that FMO wanted to stop,,the business of 'Vinca'. In doing

:ecl prejudicially to

the interest of 'Vinca'.

15. In fact, thespecific grievance of the appellants is that

though AoA of 'Vinca' required all decisions pertaining to

"Reserved Matters" to he taken at Board's Meeting, such decisions

were not being taken at the Board's Meeting and instead taken

through unilateral directions issued by 3rd and 4th Respondents

to the Debenture Trustee viz. 10th Respondent. In doing so, the

appellants have been denied the role to participate through

discussions in the decision making and decisions which are void 8

under Article 63 of AoA of 'Vinca' are being implemented. These

decisions being contrary to the AoA of 'Vinca' are oppressive.

16. According to Appellants, the dismissal of the Company

Petition on the ground that the same was vexatious and frivolous

or in abuse of process could not have been done at the threshold

and could have only been done after a trial, the basis of such

findings are non-existent.

17 Further according to Appellants, the findings of Tribunal

that if a party acts in accordancc with Articles t cannot

be oppressive is also incorree law, as if such action is not for

the best interest of the company or oppressive the same can be

challenged. Ld. Tribunal 1ailed to appreciate the specific case of

the 8,:, is, t at Articles were being abused to kill the

business o n through its two 100% subsidiaries

'Amazia' and 'Rtthd.:::' and thttoo by taking decisions which were

not in compliance with Articles 60 and 62 of the AoA of 'Vinca'

and thereby null and void.

18. It was also submitted that the finding of Ld. Tribunal that

the investment structure was not violative of FEMA is perverse

and contrary to records as the Hon'ble Apex Court in its order has 9

directed the suit filed by 10th Respondent against 5th Respondent

to be decided expeditiously without being influenced by

observations of the Hon'ble Supreme Court.

19. Further according to Appellants, as funds have been used

for real estate, there is clear violation of Regulations 3 to 6 of

FEMA (Borrowing or Lending in Foreign Exchange) Regulations,

2000, particularly and Clause 4 of Schedule to the same and

Circular 60 dated 21.05.2007 of RBI which expressly prohibits

borrowings in Real Estate. The fact that-,,the Appellants were

party to the Subscription Agreement and to53he amendments

made to the AoA of Vinca' is of no consequence as there can be

no estoppel against statute. Reliance was placed on decisions of

Hon'blc Supreme Court and other Courts but it is not required to

be referred, in view of finding as recorded below.

20. The stand of the Respondents, as highlighted are as follows.

According to the Respondents, overview of the broad

transaction structure agreed to between the parties and recorded

Binding Agreement have not been correctly reflected by the

Appellants.

21. It was submitted that by way of a Share Subscription

Agreement dated 20th November 2009, FMO invested Rs. 418 10

crores into 'Vinca' thus holding 10% equity shareholding in

Vinca' along with 3 CCDs. Hubtown Ltd. - 5th Respondent, was

a party to the said Agreement (signed by Appellant No. 1 on behalf

of Hubtown) which records several representations, warranties,

indemnities and covenants of Hubtown Ltd., given to the

Respondents in relation to this Respondent's investment into

Vinca' Hubtown is a company promoted and controlled by the

Appellants and the Appellants are directors of Hubtown In fact,

Appellant No. 1 is the Managing Director

The Articles of Association of Vinca' were accordingly

amended in view of the said investment.

22. .OLt,. of th6:s.ad invested amcuntof Rs. 418 crores, the

following amounts wcre advanced by 'Vinca' to its wholly owned

m subsidiaries 'Aazia' and 'Rubix'.

(i) Rs. 150,00,00,000/- to 'Amazia' and

(ii) Rs. 128,50,00,000/- to 'Rubix'.

Pursuant to the same, Optionally Partially Convertible

Debentures (OPCDs) were issued by 'Amazia' and 'Rubix' to

Vinca'. The said transactions are recorded in the respective

Debenture Trust Deeds both dated 1st December 2009 ITSL was 11

appointed as debenture trustee of cVinca under the said

Debenture Trust Deeds. Under the said agreements, 'Amazia' and

'Rubix' were inter alia required to make regular payments to

Vinca' including interest payments at regular intervals as more

particularly recorded therein. In order to ensure due and

punctual payment by 'Amazia' and 'Rubix' to 'Vinca' of all dues

under the aforementioned Debenture Trust Deeds, certain

security documents were executed including-the following -

(a) Deed of Corporate

executed by Hubtown

(as debenture trustee for the benefit of Vinca' and

b) Indenture of Mortgagc exccuted by 'Amazia in respect of 11

(eleven) ATC Units in the building Akcruti Trade Center and

also in respect of the Trust and Retention Account which

would hold all the proceeds of lease rents received by

'Amazia' from the ATC Units.

23. According to Respondents, the Appellants, by this

proceeding, are seeking to overturn the promises made by way of

a solemn contract at the time that this Respondent was induced

into investing a sum of Rs. 418 crores in companies owned and 12

controlled by the Appellants (including 'Vinca', 'Amazia' and

'Rubix') and guaranteed by Hubtown Ltd., whose control also lies

in the hands of the Appellants. It is patently dishonest and too

late for the Appellants to contend now that the contractual terms

should be held to be oppressive when companies controlled by

them (i.e. Hubtown Ltd.) have been called upon to deposit/repay

the said sums which were received by ther

24. It was also submitted that the Appellants have suppressed

several material documents which alonc is sufficient to deny

grant of any reliefs. The conduct of the ants displays a

complete lack of probity, an observation made even by the Hon'ble

Supreme Court of India in its judgment dated 15th November

2016.

25. It was also submitted that the direction issued by

debenture trustees (ITSL -10th Respondent) without convening

the Board's meeting cannot be termed as an act of 'oppression'.

Under the aforesaid Debenture Trust Deeds, it has been clearly

and unequivocally recorded that ITSL (debenture trustee) is to act

on the sole instructions of the Nominee Directors. 13

Referring to the impugned judgement, Ld. Counsel submitted all

related matters have been noticed and decided by the Tribunal.

26. We have noticed the rival contentions and perused the

record.

27. The Appellants have referred to Article 60(d) and 63 of the

AoA of '\Tinca' to contend that the said provisions require the

Nominee Directors to obtain consent of the Board of Directors

before taking any decision, on matters contemplated in the said

provisions of the AoA. Pe evident from the

Appellants' pleadings in I the the acts of the

Nominee Directors which the Appellants are aggrieved by are

those by which the Nominee Directors have instructed ITSL to

take actions amounts from 'Amazia' and 'Rubix' on

account of their defaults towards payment obligations under the

terms of the Debenture Trust Deeds as well as actions taken

towards enforcement of securities given to 'Vinca' under the

transaction including by initiation of legal proceedings in respect

thereof against Hubtown, 'Amazia', etc. The said actions

complained of are clearly matters relating to OPCD Documents. 14

28. In this background, it is pertinent to examine the wordings

used in Article 60(d) of the AoA which are clear and unequivocal

in stating that the ACL Directors (which includes the Appellants

herein) are deemed to have a conflict of interest inter alia on all

matters relating to OPCD Documents and that the Nominee

Directors shall on such matters constitute a quorum and shall

have the sole right make any decision, take any action, etc in

respect of the said matters.

29. The Tribunal has correctly dealt with the said contentions

in paragraph 23 of the Impugned Order in which paragraph it has

been held that it is clear and unambiguous that the Nominee

Directors have been given full liberty to give instructions to ITSL

e Appellants' contention that the

instructions should be routed through the Board of Directors is nH

untenable on the fulcrum of oppression and mismanagement.

30. The Appellants have attempted to cause confusion between

'Reserved Matters' as per Article 63 of the AoA and 'matters

wherein the Appellants have a conflict of interest' as per Article

60(d). The contentions raised by the Appellants which pertain to

alleged unauthorized instructions given by the Nominee Directors 15

to ITSL relate to matters concerning OPCD documents and thus

fall within the ambit of Article 60(d) and not under Article 63.

31. In fact, money is recoverable by 'Vinca' pursuant to legal

proceeding initiated by ITSL on behalf of 'Vinca'. It was pointed

out by the Ld. Counsel for the Respondents that the present

proceedings are fundamentally premised on the contention that

the subject transaction is illegal and/or colorable device to

circumvent FEMA in order that FMO can secure for itself an

assured return which it can repatriate out of the country. On this

basis, the Appellants have contended that the actions of ITSL

including of taking out legal proceedings for the enforcement of

security given by or on behalf of 'Amazia' and 'Rubix' under the

subject transaction are actu e benefit of FMO.

32. In this context, itis::per:tiflent to note that in Summons for

Judgment proceedings in the Summary Suit filed by ITSL against

Hubtown before the Hon'ble Bombay High Court to enforce its

rights under the Corporate Guarantee, the defence raised by

Hubtown Ltd., i.e. Hubtown's contentions in relation to the

subject transaction are identical to the Appellants' contentions in

the present proceedings as set out above on which contentions

the present proceedings are premised.

16

33. By a Judgment dated 15th November 2016 passed in the

aforementioned Summons for Judgment proceedings, the Hon'ble

Supreme Court inter alia held that (a) Prima facie, the subject

transaction is not in violation of FEMA Regulations; (b) Since FMO

becomes a 99% shareholder of 'Vinca' after the requisite time

period has elapsed, FMO may at that stage utilize the funds

received pursuant to the overall structure agreements in India

and therefore, prima facie, there is no' : ',breach of FEMA

Regulations; (c) At the stage that FMO wants to repatriate funds,

RBI permission would be n f RBI permission is not

granted, then again there would be no infraction of FEMA

Regulations; (d The transaction of the purchase of shares and

espondent is not alleged to be violative

of FEMA Regulations; c) As regards the defences raised by

Hubtown Ltd., there is a real doubt about Hubtown's good faith

and the genuineness of such a triable issue. Thus the defences

raised by Hubtown Ltd. are plausible but improbable.

34. From the aforementioned findings of the Hon'ble Supreme

Court, it is clear that the Hon'ble Supreme Court recognizes that

the transaction is not violative of FEMA and that the funds

realized by 'ymca' upon enforcement of the security offered by 17

and on behalf of 'Amazia' and 'Rubix' would remain with 'Vinca'

and is thus for the benefit of 'ymca' and not FMO. Therefore, by

way of the aforementioned relief sought in the Company Petition,

it appears that the Appellants are attempting to obstruct receipt

of funds by 'ymca' upon enforcement and realization of its

securities under the subject transaction and acting in a manner

prejudicial to the interests of 'Vinca'.

35. IA. Counsel for the Respondents pointe ut that in so far

as affairs of 'Vinca' is concerned, the allegation of Appellants they

are being conducted in a manr rejudicial to the public interest

were not highlighted by the Appellants befbre the Tribunal. No

pleading was made in the Company, petition preferred before the

Tribunal. Once the Hon'blc Supreme Court held that such

transaction causes no infraction of FEMA laws

and if and when F4Q seeks to repatriate the amounts outside the

country, RBI permissiOn would be required without which the

repatriation would not be possible. The question of any infraction

of FEMA laws in such circumstances does not arise and no public

interest being prejudiced.

18

36. We find no merit in this appeal. It is accordingly dismissed.

However, in the facts and circumstances there shall be no cost.

(Mr. Balvinder Singh) (Justice S.J. Mukhopadhaya) Member (Technical) Chairperson

NEW DELHI

2017