Eih Limited And 5 Ors. vs Mashobra Resort Limited, The … on 14 November, 2002

ORDER

S. Balasubramanian

1. In this petition filed under Section 397/98 of the Companies Act, in the matter of M/s Mashobra Resort Limited the acts are that the 2nd respondent – the Govt of Himachal Pradesh (the State) owned a premises known as “Wildflower Hall” in Simla. The State Tourism Department was running this as a hotel which was gutted by fire in 1993. With the view to develop this property into a 5 star Deluxe Hotel, the State invited tenders offering the premises on lease. Finally it entered into a joint venture agreement (JV) with the 1st petitioner (known as Oberoi group) on 30.10.1995. The JV provided for incorporation of the 1st respondent company to develop and manage the proposed hotel. As per the joint venture agreement, the 2nd respondent was to hold not less than 35% shares while the 1st petitioner and its group were to hold not less than 36% and not more than 55% shares in the 1st respondent company. The contribution by the 2nd respondent was to be in kind, that is the transfer of the Wildflower Hall to the company for a value of Rs. 7.5 crores against which shares were to be issued. The 1st petitioner and its group were to invest Rs. 20 crores towards share capital and the responsibility to construct the hotel and make it commercially operational was to be with the 1st petitioner. The Board of the company was to comprise of 7 directors of which 3 including the chairman were to be nominated by the 2nd respondent and 4 including the MD by the 1st petitioner. The JV also provided that in case the hotel did not become fully commercially operational within a period of 4 years from the effective date, extendable by two terms of one year each — subject to payment of Rs. 2 crores for each of the extended years – the shares issued in favour of the petitioners’ group would be surrendered/transferred to the 2nd respondent on payment of 50% of the face value of the shares plus Rs. 10 for the technical services rendered by the Oberoi group. It further provided that the premises with all the improvements thereon on a “as is where is” basis would vest in the second respondent. It also provided for arbitration in case of disputes arising out of the JV. It contained 7 Schedules inter alia including a Draft Memorandum and Articles, shareholders agreement, Draft Allotment Agreements etc. Accordingly in terms of the JV, the 1st respondent company was incorporated on 3.12.1995. Notwithstanding the agreement relating to specific ratio of shareholdings in the company by the 1st petitioner and the 2nd respondent, the shareholding percentage has changed by which the petitioners’ group came to hold about 79% shares in the company while the 2nd respondent about 21%. As per the terms of the JV, the 2nd respondent has 3 directors including the Chairman while the petitioners’ group has 4 directors including the MD. Even though all the 85 rooms envisaged under the JV have been fully constructed, yet, only 28 rooms are operational w.e.f. 30.3.2001 and the operation of the balance rooms are reportedly struck up for want of certain approvals. A writ petition has been filed by the company in HP High Court for directions to the concerned governmental authorities to sanction the approval for the balance 57 rooms.

2. By a letter/notice dated 6th March, 2002, the 2nd respondent conveyed to the 1st petitioner that the Joint Venture Agreement stood automatically terminated w.e.f. 13.10.2001. The said letter reads: “I am directed to say that with reference to the above agreements we find that you have been acting in clear violation of the said agreements and have inter alia committed the following defaults:

1. You have failed to make the hotel fully commercially operational within 4 years from the effective date within the meaning of Clause 10.1(b) of the Joint Venture Agreement and Article 3(2) of the Allotment Agreement.

2. You have failed to perform your obligation as regarding the technical services in the manner and time frame prescribed within the meaning of proviso appended with Clause 11 of the Joint Venture Agreement and Article 1(3) of the Allotment Agreement.

3. You have illegally and unauthorizedly changed the equity distribution ratio without obtaining our permission and consent in terms of the Joint Venture Agreement.

4. You have paid and/or appropriated a large sum of money as payment to your associate companies and other companies under the garb of having obtained technical assistance from them, even though under the agreement, those services were to be provided by you free of charge or in any case that was your responsibility.

5. You have unduly delayed the commissioning of the project and have burdened the joint venture with escalation of more than 100%.

In view of the above, the joint Venture Agreement dated 30.10.95 stands automatically terminated w.e.f. 30.10.2001 in terms of Clause 10.1.(b) of the JVA. Consequently EIH stands disqualified from continuing as a member and/or shareholder of the JV company and the shares held by EIH stand surrendered in favour of the State in terms of Article 3(3) of Allotment Agreement read with Article 10 of the Article of Association of the JV company and Article 5 of the Shareholders Agreement. x x x x x Further, in terms of Clause 11.1 & 11.2 of the JVA, the land, buildings and structures on the Wild Flower Hall Estate together with buildings, structures or any assets etc., which might have been raised by the company stand reverted to the State on a “as is where is” basis. The notice further stated that in view of the termination of the JV Agreement, in terms of the said agreement, the shares held by the petitioners’ group stood transferred to the 2nd respondent for a consideration of 50% of the face value of the shares held by the petitioners plus Rs. 10/- as consideration towards the technical services. A cheque for Rs. 9 crores and Rs. 10 was enclosed with the notice. Thereafter, the 2nd respondent conveyed to the company by a letter dated 7th March, 2002 that in view of the termination of the JV Agreement, the nominee directors of the 1st petitioner including the managing director ceased to hold office as directors of the company and that one Shrikant Baldi had been appointed as Executive Director cum Officer on Special Duty to exercise all the powers of the Managing Director and also be responsible for the day to day running of the company. On 7th March, 2002, a Board Meeting of the company attended only by nominees of the State was held in which resolutions were passed approving the transfer of shares of EIH in favour of the State, changing the authorization of bank operations, appointing of Shri Baldi as the Executive Director cum OSD and that in view of the termination of the JV Agreement, and resultant disqualification of EIH to continue as members, its nominee directors the managing director had ceased to hold office w.e.f. 30.10.2001. This has caused the petitioners to file this petition.

3. Shri Sarkar, Sr. Advocate for the petitioners submitted: The company was incorporated in terms of the JV Agreement dated 30.10.1995. The contribution by the State was by way of land the value of which was assessed at Rs. 7.5 crores and shares worth Rs. 7 crores were allotted to the State and the balance Rs. 50 lacs was taken as loan from the State. As per the JV Agreement and originally incorporated Articles, the State was to have 35% shares. however, whenever further shares were offered, the State did not subscribed the same and presently the State holds only 21% shares in the company while the petitioners’ group hold 71% shares. The entire JV Agreement has been framed on the understanding that the State continues to hold 35% shares and once this condition is no longer fulfilled, even the JVA cannot stand. It is more so when the State itself agreed for alteration in the Articles to provide for the Board to decide the proportion of shareholding of the State and the petitioners’ group. According to Article 6.2, the State has the right to appoint the Chairman of the Board only if it continues to hold 35% shares and not otherwise. Therefore, the decision taken in the Board Meeting held on 7.3.2002 which are impugned in the petition could not have been taken with the presence of the Chairman appointed by the State. Further, as per Article 6.6, 7 days notice is required for any Board Meeting and in terms of Article 6.7, such notice should set out the agenda to be transacted in the Board Meeting convened. As far as the meeting on 7.3.2002 is concerned, neither 7 days notice was given nor the agenda for that meeting had been set out in the notice. Further, in terms of Article 6.8, there should be at least one director from both the sides to constitute the quorum for the meeting. In the absence of a notice, ‘none from the petitioners’ side attended the meeting on 7.3.2002 and the decision taken in that meeting is null and void.

4. He further submitted: The action of the State is illegal and is oppressive. The entire letter of 6th March, 2002 refers only to the breach of the certain terms of the JVA. No pre incorporation/private agreement can have a binding force on the company unless incorporated in the Articles as decided in V.B. Rangaraj v. VB Gopalkrishnan (AIR 1992 SC 453) and SP Jain v. Kalinga Tube Ltd (1965 2 SCR 720). The terms of Articles and the Memorandum alone govern the relationship between the members and bind the company. Even though certain terms of the JVA have been incorporated in the Articles, yet, in the letter dated 6.3.2002, there is no reference to any of the Articles. The main allegation of the State is that the petitioners have not put in operational all the 85 room of the Hotel and as such the petitioners have not made the Hotel fully commercially operational within the specified period. This stand of the State is wholly erroneous. Article 8.1 of the Articles and Clause 10.1 of the JVA provide for of making the Hotel fully commercially operational within 4 years from the date of handing over of the possession of the premises or a further period of two years. However, while the conditions specified in Article 8.1 are based on terms and conditions of the draft Allotment Agreement to be executed between the company and the petitioners, Article 10.1(b) of JVA does not specify allotment agreement. As a matter of fact, the petitioners has not entered into any allotment agreement with the company. Even otherwise, since the premises were handed over to the company only on 3.5.1996, the 6 years period with two years extension impliedly granted by the State would expire only on 3.5.2002 and therefore the act of the State of terminate the JVA effective from 30.10.2001 is illegal. Further, the very provision in the Article 10.1 that if the petitioners fail to comply with the terms and conditions shall disqualify themselves to continue as members and shall be expelled from the membership is illegal and against the provisions of law and as such cannot be sustained. Expelling a member would amount to forfeiture of his shares. Such forfeiture is permissible only when a member fails to discharge his obligations to the company and not on account of breach of a contract with a shareholder. Further, even Article 10.3 which stipulates that the premises of the company would be handed over to the State on a “as is where is” basis is unlawful and unenforceable in as much as two shareholders can never agree on taking over the assets of a company. It is a settled law that no shareholder has a right to a share of the property of a company except on a winding up of company, if there is any surplus. (Bacha F. Gudzar v. CIT-1955 SCR 876).

5. The learned counsel further submitted: The Hotel became fully commercially operational with 28 room with all the facilities on 30.3.2001. Even though other 57 rooms are fully ready, yet the Government has not given permission to operate these rooms. Therefore, the petitioners can never be held responsible for not bringing these 57 rooms operational. Even otherwise, in terms of Clause 4 of Article 3 of the Allotment Agreement, extension can be granted. Even though the original 4 years period expired on 3.5.2000 after handing over the premises on 3.5.1996, yet, no issue was raised regarding the delay by the State afterwards and subsequent to that period, the petitioners have pumped in huge amount of money into the project. Such inaction by the State would amount to implied extension of the period and the State had lost its right of termination. It is for the first time that through a letter dated 6.3.2002 that the State has demanded Rs. 2 crores per year as penalty. In terms of Section 55 of the Contract Act, penalty in terrarium is not valid in law. As per Section 74 of the Contract Act, only reasonable amount for loss can be claimed and the State has not indicated in what way it has lost even assuming that there is default on the part of the petitioners. For damages one has to establish and prove his claim as held in Bhai Panveer v. Bhai Arjun (AIR 1929 PC 179) and UOI v. Rampur Distilliary Ltd (AIR 1973 SC 1098). Further, neither in the JVA nor in the Articles, it is provided that the amount of the penalty is to be given to the State. If at all there is any loss on account of delay, it is the company which has suffered and it alone can claim damage.

6. Summing up his arguments, Shri Sarkar submitted: The act of the Board of Directors consisting of Government nominees is highly oppressive and in breach of their fiduciary duties. Whatever may the agreements between the shareholders, directors have to act in the interest of the company as held in Rolta India Ltd v. Venire Industries Ltd (100 CC 19-Bom). Immediately after issue of the notice dated 6.3.2002, the Government nominees held a Board Meeting without notice to the petitioners. In that meeting far reaching decision were taken without taking into consideration the interests of the company. The Board decided that all the nominees of the petitioners had ceased to be directors of the company and that one Shri Kant Baldi was appointed as the Executive Director with full powers of the Managing Director. The Board of Directors consisting of the Government nominees exclusively has acted in an oppressive manner against the petitioners who have given corporate guarantees of over Rs. 55 crores and the total commitment to the project is over Rs. 100 crores. Further it is the petitioners who held majority shares to the extent of 79% and also had majority on the Board. It is the petitioners who have nurtured the hotel and as held by this Board in VLS Finance Limited v. Sunair Hotel Ltd. (110 CC 772), the persons who have nurtured a project have to have the control of the company. It is a peculiar case where the State takes over the only assets of the company and also the shares held by the petitioners. It is to the knowledge of the State that a Hotel project is a capital intensive one and there is no likelihood of any income for quite some time. That is the reason why the State gave only the premises for development and did not want to subscribe to further shares in spite of right offers made to the State. Without investing any money, the State wants to take over the mortgaged assets of the company on which a lot of value addition has been made by the petitioners by huge investments. Such an action on the part of the State and the consent given by the Board consisting of the nominees of the State is highly oppressive and burdensome not only on the petitioners but also the company. Further, the State cannot wear two caps. While its nominees of the State on the Board approve the plans for construction of the hotel premises, another arm of the State, namely, the Tourism Department declines to give permission to operate the hotel fully. The Supreme Court has approved in Express Newspapers Ltd v. UOI (1986 1 SCC at page 248) the observation in Robertson v. Minister of Pension (1949 1 KB 27) that one arm of the government is bound by the decision of another arm of the same government. As a matter of fact, for whether violation was pointed out, the same have been compounded by payment of compounding fees. By not giving permission, the State being a shareholder has acted against the interests of the company and therefore has no right to take over the premises of the company. Considering the facts of the case in totality that the petitioners are already operating two hotels in Shimla and that they invested huge amount in the project and that they are expert in running a hotel, they should be given complete control of running and managing the hotel. To this end, the status quo ante as prevailed before 7.3.2002 in regard to the control and management of the hotel should be restored or in the alternative the State should be directed to sell its shares to the petitioners on a valuation to be made by an independent valuer. Further, the State should also be directed to grant licence for the balance 57 rooms as the nominees of the State on the Board had approved the construction and for whatever violation was there, the same has been compounded and the compounding amount has been paid.

7. Shri Reddy, Sr. Advocate appearing for the State submitted: In terms of the Arbitration clause in the JVA, the petitioners have already invoked the Arbitration clause and an Arbitral Tribunal has already been constituted and both the sides have filed their claims. This being the case, this Board should either dismiss this petition or stay its proceedings till the conclusion of the Arbitration proceedings. Even though, there is no provision in the present Arbitration Act for stay of proceedings before a court unlike that of 1940 Arbitration Act, this Board should exercise its inherent powers to stay the proceedings to avoid conflict of decisions – one by this Board and another by the Arbitral Tribunal. This could be done either under Section 10 of the Code of Civil Procedure or in terms of Regulation 44 of CLB Regulations. Since the Scheme of Arbitration Act is to give primacy to Arbitration, this Board will be within its discretion to either dismiss or stay the present proceedings. Further, in terms of Section 5 of the Arbitration and Conciliation Act, 1996, when an Arbitral Tribunal has been constituted, if this Board were to continue with this petition, this would amount to interference with the Arbitration proceedings which has been expressly prohibited by this Section. When an Arbitral Tribunal has been constituted, there is no requirement to file an application under Section 8 of the Arbitration Act. In addition, in terms of Section 17 of the Arbitration Act, the Arbitral Tribunal is competent to grant interim relief and as such the petitioners can move that Tribunal for any interim order that they seek to have. The very fact of invoking the Arbitration clause and immediately thereafter filing this petition is nothing but abuse of process of this Board and as such should not be encouraged. This is more so because the entire cause of action in this petition arises out of JVA which has now become the subject matter of Arbitration. The validity of termination has to be adjudicated only by the Arbitral Tribunal and not by this Bench. This Board has held in Dr. Mrs. Mrunalini Devi Paur v. Gaekwar Investment Corporation Private Limited (82 CC 899) that no party can have parallel proceedings side by side and accordingly stayed the proceedings before the CLB. Since in the present case, the Arbitration proceedings have also commenced unlike in the case Bhadresh Kansilal Shah v. AIA Magotteaux International (2000 36 CLA 76-CLB) this Bench should use its discretion to stay the present proceedings. Even though the prayer for referring the parties to arbitration had been rejected by this Bench vide its order dated 19.4.2002, much water has flown thereafter. Both the side have submitted their claims and counter claims to the Arbitral Tribunal. Only after the claims were filed with the Arbitral Tribunal by the petitioners, the State came to know of the reliefs sought by the petitioners and it is seen that the reliefs sought therein are practically similar to the ones that have been sought in the present proceeding. Further, in both the proceedings, the petitioners have sought for reliefs only against the State and not against the company. Once the State has acted in terms of Article/JVA etc., the question of complying with the statutory provisions like Section 108 in respect of transfer of shares and Section 284 in respect of cessation of directors does not arise. The parties having agreed to certain terms cannot impugn them as either illegal or unlawful.

8. The learned counsel further submitted. The petitioners have suppressed vital information in regard to certain disputes going on between the parties even prior to 6.3.2002 as is evident from the copies of the correspondence enclosed with the additional affidavit. These correspondence would reveal that while the State has been seeking to give the premises on long term basis in line with the offer of Holiday Inn, the petitioners made a counter proposal for sale of the shares held by the State to the petitioners. Therefore there was a pending dispute for nearly 3 years. However, on the day of mentioning this petition, the petitioners had misled this Bench by stating that there had been no disputes between the parties prior to 6.3.2002 and that all of a sudden the State had issued the notice of termination. It is seen from the order of this Bench dated 20.4.2002 that this statement of the petitioners had been taken into account in passing the interim order. Thus, the petitioners, by suppressing this vital material, have not come with clean hands and as such as held in Rajabhai Abdul Rehman Munshi v. Vasudev Dhanjibhai Mody (1964 3 SCR 481), Shri Krishna Khanna v. ADM (1975 2 ACC 361) and Needle Industries Case (1981 3ACC 333), Sri Kanta Datta v. Sri Venkateshwara Real Estate Enterprises Pvt. Ltd. (72 CC 211), they are not entitled for any equitable relief from this Bench and as such this petition itself should be dismissed.Further, the petitioners have not been consistent in their pleadings and are approbating and reprobating. While in the petition, they have admitted the execution of allotment agreement with the company, in the rejoinder, they have denied the same.

9. It was further submitted on behalf of the state the petitioners being in control of the management of the company have mismanaged the affairs. The cost of the project has gone up to Rs. 100 crores as against projected cost of Rs. 40 crores. They have been charging the company for provision of technical services which should have been given free of charge in terms of the JVA. For over 3 years, in spite of repeated requests by the State for having the accounts of the company audited by an independent auditor, the petitioners have refused to do so. The suggestion of the State to agree to the lease terms and match the offer made by Holiday Inn has not been agreed to by the petitioners. If the petitioners had agreed for this suggestion, the State would be getting over Rs. 140 crores over a period of 45 years. Presently, in view of the increased cost of the project, there is no possibility of any dividend in the near future and the State cannot derive any income from the project.

10. Dealing with the merits of the case, the learned counsel submitted: The State had exercised its right of terminating the JVA for various acts of commissions/omissions by the petitioners. The JVA and all connected annexure have been adopted in the Memorandum itself at Clause 15 of Incidental Objects and most of the terms of the JVA have also been incorporated in the Articles of Association of the company. This being so, JVA, Articles and all other agreements have to be read together. In terms of Article 8.1, the allotment of shares to the petitioners was conditional on commencement of business by the company fully commercially operational within 4 years from the handing over the possession of the premises and in terms of the JVA the outer limit for making the hotel fully commercially operational was six years which term expired on 30.10.2001. The hotel is to have 85 rooms but only 28 have become operational and other 57 rooms are yet to become operational and they cannot be made operational as the construction has been in violation of building rules and these violations are incapable of being compounded. Since the petitioners had failed in bringing all the 85 room operational by 30.10.2001, the State terminated the JVA with effect from that date by its notice dated 6.3.2002. Therefore, in terms of Article 10.1, the petitioners have been disqualified as members and have been expelled from the membership. This is in line with Clause 10(ii) of the JVA. In Naresh Chandra Sanyal v. Calcutta Stock Exchange Association Ltd (1971 (1) SCC 50), the Supreme Court has upheld the powers of the Board of a company in terms of the Articles, to forfeit his shares and expel him from membership. Further, as per the allotment agreement at page 85 of the petition, which is an annexure to the JVA, the shares allotted to the petitioners shall stand surrendered on termination of the JVA. Once the shares stand surrendered, the petitioners have no locus standi to seek any relief under Sections 397/398 of the Act. While Clause 10 of the JVA vests the right of termination with the State for non fulfilment of the obligations of the petitioners, Clause 11 deals with effects of termination. As per this clause, the State is entitled to require the petitioners to sell their shares to the State and it also provides the consideration to be paid in case of such sale of shares. The same clause also provides that on termination and payment of consideration for the shares, the property of the company shall revert to the State. The JVA, the allotment agreement and the Articles, all provide for timely completion of the project and the therefore time is the essence of the entire project. On breach of the fundamental duty, the petitioners are bound to surrender their shares to the State. This being the case, the moment the JVA is cancelled, the petitioners ceased to be members of the company. In what manner and how the shares held by the petitioners are to be dealt with further is not of any concern of the petitioners. A perusal of the deed of conveyance of the land at page 70 of the reply would indicate that the conveyance was subject to the provisions of JVA.

11. In terms of JVA, shareholders’ agreement, allotment agreement and Memorandum and Articles of the company, it was the duty of the petitioners to make the Hotel fully commercially operational within 6 years from the date of signing of the JVA or within a period of 4 years from the date of possession of the property. The term “fully commercially operational” can only be that not only all the 85 rooms should become operational but also all facilities expected in a 5 Star Hotel. Since the admitted fact is that only 28 rooms are operational the petitioners have not complied with the requirement of the JVA and therefore the State has rightly exercised its right of cancelling the JVA. In view of the termination of the JVA, the State held a Board Meeting on 7.3.2002 and the Board passed resolutions to give effect to the terms of the Articles/JVA and other agreements. By doing so, the State has only enforced its contractual rights and as such cannot be considered to be either oppressive or unlawful. Therefore, this petition should be dismissed.

12. Shri Sarkar, in rejoinder submitted: As far as the argument of the State that the proceedings should be stayed or the petition be dismissed no longer survives in view of the finding given by this Bench earlier in its order dated 20.4.2002, wherein after considering similar arguments, this Bench had declined to either stay its proceedings or dismiss the petition. Further, the petitioners have also not filed any application in terms of Section 8 of the Arbitration Act. Arbitration proceedings and proceedings under Section 397/398 can never be considered to be parallel proceedings in as much as a right to arbitration arises out of a contract while a right to file a petition under Sections 397/398 arises out of a statutory provision. The statutory provisions always prevail over a contractual provision. The question of exercising inherent powers does not arise in respect of a statutory right. It has been held by Supreme Court in P. Anand Gajapati Raju v. PVB Raju (2000 4 SCC 539) that Sub-section (4) of Section 8 of the Arbitration Act creates a right if the person bringing the action to have the dispute adjudicated by the court by the other party has submitted his first statement. In the present case, not only no application under Section 8 of the Arbitration Act has been filed but the State has filed more than one affidavit on the merits of the case. In Gaekwad Investment Company case cited by the State, there was a prior instituted proceeding under Sections 397/398 on similar issues and therefore this Board had stayed its proceedings and as such this case is not relevant. In view of this, there is no scope to exercise inherent powers under Regulation 44 of the CLB Regulations to stay the present proceedings. As far as Section 5 of the Arbitration Act is concerned, it also has no application as this section restricts the intervention of the judicial authority to the situations provided in Part-1 of that Act. It only provides that a judicial authority cannot intervene in the conduct of the arbitration and does not restrict it from matters brought before it when the party do not make any application under Section 8 of the Arbitration Act.

13. The learned counsel further submitted: As alleged by the State, the prayers before the arbitration and in the present petition are not common. While in the arbitration, the petitioners have challenged the termination notice dated 6th March, 2002, in the present proceedings, they have challenged the decision taken by the Board of Directors on 7th March, 2002. In the present proceedings, the petitioners are not challenging the termination notice and they will have the same adjudicated by the Arbitration Tribunal. The shares held by the petitioners cannot be taken away without due process of law by another shareholders and the Board of Directors cannot recognize such taking away of shares. Section 108 of the Act is mandatory as held in Mannalal case (AIR 1977 SC 536) and without the procedure envisaged in that section, no company/Board of Directors could take cognizance of change of ownership. As held in International Credit Co. v. Adham (1994 1 BCLC 66) and in AIR 1941 Mad 354 it has been held that even if the Articles empower the directors to register a transfer without valid instruments of transfer, the same is invalid. Similar is the decision in K.K. Somani v. D.K. Somani-86 CC 911 All). It is a settled law that any provision in the Article contrary to the provisions of law is void in terms of Section 9 of the Act (Madanlal v. Shreechand Feo Sugar Mills Ltd 1962 3 SCR 973). The reliance of Shri Reddy on Calcutta Stock Exchange case on expulsion of a member is not applicable in this case, as in that case, the company was a Section 25 company and the expulsion was on account of non fulfillment of the terms of the bye laws of the company. In the present case, the company is limited by shares and that the expulsion is provided for non fulfillment of a private agreement. Therefore, this Article is invalid. The State has relied on the shareholders’ agreement which is not a part of the JVA. In terms of Allotment Agreement which has also not been executed between the company and the petitioners as is evident from the agenda for the Board Meeting on 24.4.2002, only the company can acquire the shares of the petitioners for the alleged default. The company has not so far done so. Just because the State has written a letter to the company on 7.3.2002 that the shares stood surrendered in favour of the State, the Board of the company could not have passed a resolution that the petitioners’ group had ceased to be members of the company. In the present case, in the Board Meeting held on 7.3.2002, all the decision taken by the Board are on the basis that there have been change in the ownership of shares. The State has relied on the shareholders’ agreement in claiming the shares but this agreement is not a part of the JVA as is evident from Article 19 of JVA in which among the various schedules given, the shareholders’ agreement does not find place. In terms of Article 8.1 of the Articles of Association of the company, the company has the right to acquire the shares in case of non fulfillment of any of the terms of the allotment agreement notwithstanding the fact that this allotment agreement has not been executed between the company and EIH as is evident from the agenda for the Board meeting on 24.4.2002, it as all there is a right to acquire the shares, it is only with the company and not with the State. Just because the State has written a letter to the company on 7.3.2002 that the shares stood surrendered in favour of the State, the Board could not have decided that EIH Group had ceased to be a member of the company. Further when the State, on its own violation, diluted its shareholding by not subscribing to the right offer to a hopeless minority, it cannot take over a company. The ground on which the nominees of EIH had reportedly ceased to be directors was on the basis that EIH and its group had ceased to be members of the company. Such a stand by the Board cannot be sustained in law. The only way by which a person can be declared to have ceased to a director is his removal in terms of Section 28A Act after following the procedure prescribed under that Section. (Bhankerpur Simbholi Breweries P Ltd. v. Sarabjit Singh-86 CC 842).

14. The learned counsel further submitted that the allegations that EIH had suppressed material information that there had been no earlier disputes between the parties is not correct. No doubt, there were certain discussions between the State and EIH regarding restructuring the company but such discussions could never be considered to be disputes between the parties. It is on record that in none of the Board Meetings, there was an dissent and all the Board Meetings were held in a cordial manner. Therefore, non disclosure of discussions does not amount to suppression of material fats and as such none of the cases cited by the learned counsel for the State on the proposition that one has to come with clean hands has any application to the present case.

15. I have considered the pleadings, arguments of the counsel and also the written submission submitted by the parties. Shri Reddy has prayed for either dismissal of the petition or staying of the proceedings on the ground that the Arbitral Tribunal is seized of the matter. The relied on Section 5 of the Arbitration and Conciliation Act of 1996 to advance the argument that no judicial authority shall intervene when arbitration proceedings have commenced. Section 5 of the said Act reads “Notwithstanding anything contained in any other law for the time being in force, in matters governed by this part, no judicial authority shall intervene except where so provided in that part”. When the provisions of this Section was sought to be invoked in VLS Finance v. Sunair Hotels Ltd case, for the proposition as made by Shri Reddy, this Board rejected the said argument relying on its observation in Suresh Kumar Jain v. Hindustan Ferro Industry Ltd (1998 3 CLA 313) wherein this Board had observed “A careful reading of Section 5 would show that it is not that judicial intervention in a matter covered by arbitration agreement is barred. It only provides that no judicial authority shall intervene in matter covered by Part I, except where so provided in that Part. In part I, in various Sections, the role of judicial authority/court has been specifically stipulated and by virtue of Section 5, a judicial authority cannot intervene in any other matters in that Part except as provided in that Part. One such Section which deals with the role of a judicial authority in Section 8 and if we are to approve the arguments of the learned counsel for the applicant, the provisions of Section 8 would become redundant.” This order of this Board in Sunair Hotel was taken on appeal and the High Court upheld the decision. SLP filed thereafter was also dismissed. As a matter of fact even when an application under Section 8 of the Arbitration Act is pending before a judicial authority, Section 8(3) of the said Act permits continuation and completion of arbitration proceedings. Therefore, the provisions of Section 5 of the Arbitration Act do not envisage either staying or dismissal of a petition pending before a judicial authority once arbitration proceedings have commenced. This can be contrasted with provisions of Section 34 of the Arbitration Act of 1940, according to which, a party could ask stay of legal proceeding when there is an arbitration agreement between the parties. Most importantly, the company is not a party to the Arbitration proceeding and this Board has held in AIA Magotteaux case (supra) that a proceeding under Sections 397/98 cannot be referred to Arbitration if the company is not a party to the arbitration. As far as the argument that once Arbitration proceedings have commenced, there is no need to file a petition under Section 8 of the Act is concerned, it is to be noted that in terms of Section 21 of the Arbitration Act, arbitration proceedings commence on the day when notice invoking the arbitration is received by the respondent. On the day when the interim orders were passed by this Board rejecting the prayers of the State to stay these proceedings, the State had received the request of the petitioners to refer the disputes to Arbitration. In other words, the issue relating to stay/dismissal had already been decided by this Bench and there is no scope to reopen the same now.

16. As far as his another ground for seeking stay of the proceedings that there could be a conflict of decisions is concerned, reference may again be drawn to Section 8(3) of the Arbitration Act. Similar argument was rejected by this Board in Sunair Hotels case. The admitted position in the present case is that the respondents had not filed any application under Section 8 of the Arbitration Act seeking for referring the parties to arbitration and they have voluntarily completed the pleadings. Further, I find that in the Arbitration proceedings, the petitioners have challenged the notice of termination dated 6th March, 2002, while in the present proceedings, they have challenged the decisions of the Board in the meeting held on 7th March 2002 both on the grounds that they are illegal and oppressive. Therefore, there is no similarity in the prayers. Further, as rightly pointed out by Shri Sarkar, the petitioners have exercised their statutory right of filing this application and this statutory right could have been curbed only if the respondents had filed an application under Section 8 of the Arbitration Act before submitting their first statement of substance of the dispute. When they have not done so, as decided by the Supreme Court in Anand Ganapati Raju case (supra) that once the other party fails to move the judicial authority to refer the parties to arbitration, a right is created in the person bringing the action to have the dispute adjudicated by the judicial authority. Similar decision is found in State of UP v. Janki Saran (AIR 1973 SC 2071) as pointed out by Shri Sarkar. A right created by the statute cannot be curbed by use in inherent powers by a judicial authority. Therefore, there is no scope either to dismiss this petition or to stay the present proceedings on the ground that arbitration proceedings have commenced.

17. One other ground for seeking dismissal of the petition is that the petitioners have averred that there were no dispute between the parties before 6.3.2002 by suppressing the information relating to the disputes between the parties on restructuring. I have gone through the petition. In para 8(k) of the petition, the petitioners have averred “In between December 13, 1995 till date, the business of the company in accordance with objects and terms of the Articles have been carried on successfully and peacefully. Throughout this period, the Board of Directors of this company including the representative of the petitioner No. 1 and respondent No. 2 have conducted the affairs of the company in accordance with provisions of the Act and the Articles and in furtherance of the aforesaid objects. During this period, the Board of Directors of the company met on number of occasions and except in the meeting held on December, 28, 2001, there was unanimity among the members of the Board. On various issues, the Board of Directors have applied its mind from time to time and approved the business of the company carried on in accordance with the directives of the Board by the officials of the company”. Thereafter, in paragraph 8(n), the petitioners have stated “That as pointed out above, for the first time in the history of the company between 1996 to December, 2001, some difference cropped up between petitioner No. 1 and respondent No. 2 voiced in the meeting of the Board of Directors held on December, 28, 2001”. From these averments, it is apparent that what the petitioners have stated is that there had been no disputes or differences as far as the Board Meetings are concerned. Further, the statement of the petitioners that the business of the company had been carried on without any disputes has been noted by this Bench in its order dated 24.4.2002 as is evident from the extract of the relevant portion of that order: “It is not in dispute, as seen from the copies of various Board Minutes, that the affairs of the company had been carried on by both the parties amicably during the last 6 years. We find that more than 25 Board Meetings had been held without any dissent from either side indicating that neither of them had grievances against the other”. Therefore, it is not that the petitioners had obtained certain orders by concealing vital information. Even assuming that the petitioners should have brought to the notice of the Bench the contents of the correspondence relied on by the learned counsel for the State, yet, I do not find that the contents of the said correspondence are so material that non disclosure of the same would be fatal to the petition. Disputes and discussions are altogether different. I have seen the correspondence exchanged between the parties as enclosed with the supplementary affidavit dated 15.4.2002 filed by the State. It appears from Annexure R/7 to the affidavit that certain discussions took place on 25.11.1998 (i.e. over 3 years back) that the State Government had desired to disinvest in the company and revert back to the initial offer of EIH to take the premises on long term lease. By a letter dated 24.4.1999, EIH had expressed its inability to agree to this suggestion. Thereafter, it appears that there were further correspondence between the parties and in a letter dated 1.6.2001, the State had suggested that EIH should match the original offer of Holiday Inn which was the highest bid for the property on lease hold basis. This suggestion was not acceptable to EIH as is evident from its letter dated 21.9.2001 to the State wherein EIH has given an alternative proposal that the State could sell its shares to EIH on a value to be determined by an internationally recognized independent valuer. No further documents have been filed to ascertain as to what ultimately happened. It is on record that even after 1998, both the parties have been working together and the 28 rooms were made operational in March 2001. In other words these correspondence do not reflect that there had been disputes between the parties and non disclosure of the same would amount to coming to court with unclean hands.

18. Yet another complaint of the State is that the petitioners are changing their stand in regard to the execution of Allotment Agreement. The fact as to whether the same was executed as averred in the petition or not executed as averred in the rejoinder has now been put to rest by the agenda for the Board meeting convened on 6th May. Item No. 4 reads “Execution of the allotment agreement between Mashobra Resort Limited and EIH Limited as per the Board of Directors resolution dated 6th January 1996”. Shri Sarkar fairly admitted that the petitioners had committed an error in the petition by stating that the agreement had been executed. The conduct of the petitioners would have become questionable if after their denial in the rejoinder, it is established that the agreement had in fact been executed. Now from the agenda for the Board meeting it is established that the agreement had not been executed. This being the case, the change of versions by the petitioners does not call for dismissal of the petition.

19. As far as merits of the case are concerned, in view of the statement of Shri Sarkar that this Bench need not deal with the notice of the State dated 6th March 2002 as the matter is before the Arbitral Tribunal, I do not propose to deal with the same even though arguments were advanced by both the sides in connection with the contents of that notice-what is the effective date, what is the meaning of “commercially fully operational”, whether EIH had failed to provide technical services and whether the State can claim Rs. 2 crores as penalty for each year of delay etc. I shall be confining myself only to those issues which directly arise out of the prayers made in the petition mainly connected with the decisions taken in the Board meeting on 7.3.2002. However, since the decision taken in that meeting were in furtherance to the notice dated 6.3.2002, reference to the same would be inevitable.

20. In para 27 of the petition the petitioners have prayed for the following reliefs:

(a) That this Hon’ble Board may be pleased to declare that the meeting of the Board of Directors purported to have been held on March 7, 2002 was illegal and invalid and/or the purported resolutions passed or sought to be passed therein are illegal, invalid, null and void.

(b) That this Hon’ble Board may be pleased to declare that all consequential acts of commission and omission pursuant to the aforesaid Board Resolution dated March 7, 2002 taken by Respondent No. 2, its nominees including Shri Srikant Baldi, the purported Executive Director cum OSD of the company are illegal, invalid and void.

(c) This Hon’ble Board may be pleased to hold and declare that petitioner continue as shareholder and member of Respondent No. 1 company in respect of equity shares held by them as per details given in this petition.

(d) That this Hon’ble Board may be pleased to hold and declare that Respondents 6 to 9 continue to hold their office as Director/Managing Director of Respondent No. 1 company.

(e) That this Hon’ble Board may be pleased to pass such other and further orders with a view to bringing to an end the matter complained of in this petition and as may be deemed necessary in the interest of justice and may pass any or all of the directions provided in Section 402 of the Act including the purchase of shares or interest of Respondent No. 2 by Petitioner No. 1 and/or its nominee.

(f) This Hon’ble Board may be pleased to reserve petitioners right to amend or add to the reliefs as prayed for.

21. The impugned Board meeting was held obviously in response to the letter of the State dated 7.3.2002 addressed to the company, which reads as follows: “This is to inform you that the Government of Himachal Pradesh has terminated the joint venture agreement dated 30.10.1995 between the Govt. of Himachal Pradesh and East India Hotel Ltd. pertaining to Mashobra Resorts Ltd. As a consequence of this termination, EIH stands disqualified from continuing as a member and or shareholder of the joint venture company and the shares held by EIH stand surrendered in favour of the State of Himachal Pradesh in terms of Article 3(3) of Allotment Agreement read with Article 10 of the Articles of Association of the Joint Venture Company and Article 5 of the shareholders’ Agreement. Also the nominee directors of EIH including the Managing Director cease to hold office as directors of Mashobra Resorts Limited. A copy of letter No. TSM-F(6)-1/95-Vol.-7(2) dated 6.3.2002 issued by the Government in this behalf is enclosed herewith. Requisite payment of Share Transfer consideration in terms of the Joint Venture Agreement will also be made along with this letter. As such, Mashobra Resorts Ltd. is required to pass a resolution approving the transfer of 26000000 equity shares held by EIH and their associates in favour of Government of Himachal Pradesh. Shri Kant Baldi is hereby appointed as Executive Director cum Officer on Special Duty of M/s Mashobra Resorts Ltd. till further orders. He shall exercise all powers as vested in the erstwhile Managing Director and shall be responsible for day to day running of the company”.

22. On receipt of the above said letter, the company called for a Board Meeting at 5.00 Pm on 7.3.2002, that is on the same day of the notice, with the following agenda:

(1) To grant leave of absence to Directors not present.

(2) To confirm the minutes of the meeting of the Board of Directors held on 20th December, 2001.

(3) To consent to shorter notice of the Board of Directors meeting.

(4) To consider and approve the transfer of shares and vacation of office of EIH nominee directors.

(5) To consider and appoint officer on special duty.

(6) Change in authorization to operate bank account.

(7) To withdraw power of attorney.

(8) Any other matter that may be placed before the meeting.

23. There is no material on record to show that notice for this meeting was given to the petitioners who have alleged that they have not received any notice. Further, neither of the parties had produced a copy of the minutes of that meeting during the hearing, except that the petitioners had annexed to the petition copies of certain resolutions sent by the company to the Bankers. However, after the hearing was concluded, both the parties were advised to furnish a copy of the minutes. While the petitioners have informed that they had no knowledge of existence of any minutes, the State has furnished a copy of the minutes from which it is seen that all the businesses as per the agenda had been transacted in that meeting which was attended only by 3 of the nominees of the State. In regard to item No. 4 of the agenda, the minutes read:

4. Transfer of shares and vacation of office of EIH nominee directors: Mr. Ashok Thakur informed the Board that the Government of Himachal Pradesh has informed EIH of the “Automatic Termination” of the Joint Venture Agreement dated 30.10.1995 between the Government of Himachal Pradesh and The East India hotels Limited (EIH) pertaining to Mashobra Resort Limited. The letter of termination issued by the State Government to EIH in this regard dated 6.3.2002 was tabled before the meeting. He further informed the board that in terms of the aforesaid letter, as a consequence of this automatic termination EIH stands disqualified from continuing as a member and/or shareholder of the Joint Venture Company and the shares held by EIH stand surrendered in favour of the State of Himachal Pradesh in terms of Article 3(3) of Allotment Agreement read with Article 10 of the Articles of Association of the Joint Venture Company and Article 5 of the Shareholders Agreement. Also the nominee directors of EIH including the Managing Director cease to hold office as Directors of Mashobra Resorts Ltd. and shall not attend meetings of the Board as provided in Article 10 and 18 of the Articles of Association of the Company and the Article 5(3)/6(3) of the Shareholders Agreement dated 30.10.1995 between The East India Hotels Limited and the Governor of Himachal Pradesh. He then informed the Board that the Government has also paid the share transfer consideration in terms of the said agreements. As such the company is required to pass a resolution approving the transfer of 2,60,00,000 shares held by EIH in favour of the Government of Himachal Pradesh. Against the above background, the Board passed the following resolutions:

RESOLVED THAT consequent to the termination of Joint Venture Agreement dated 30.10.1995 and resultant disqualification of EIH to continue as a member and/or shareholder of the Joint Venture Company, the EIH nominee directors, Shri P.R.S. Oberoi, Shri SS Mukherji, Shri Arjun Singh Oberoi (Managing Director) and Shri T.K. Sibal cease to hold office from the date of termination of the Agreement i.e. 30.10.2001″.

FURTHER RESOLVED THAT Mr. Lalji Kumar, Company Secretary be and is hereby authorized to take all the necessary steps to give effect to the same in compliance with the Articles of Association of the company and the Companies Act, 1956″.

‘RESOLVED THAT Share transfer of 2,60,000 equity shares from EIH and its associates as transferor to Governor of Himachal Pradesh as transferee be and is hereby approved and that the share records of the company be amended accordingly”.

‘FURTHER RESOLVED that Mr. Lalji Kumar, Company Secretary be and is hereby authorised to take all the necessary steps to give effect to the same in compliance with the Articles of Association of the company and the Companies Act, 1956″.

24. Through these resolutions the Board had approved the transfer of the shares of EIH in favour of the State and the nominee directors of EIH have been recorded to have ceased to be directors. One of the gravest acts of oppression is depriving a member of his shares in a company excepts on valid grounds and in accordance with law. Likewise, as held by this Board in a number of cases, that in closely held companies, wherein all groups are represented on the Board/management, denial of such representation could also be considered to be oppressive. In the present case since both the acts have taken place, the petitioners have alleged oppression. Therefore, the issue to be examined is whether, the same have been done on valid grounds and in accordance with law.

25. The rights and liabilities of EIH and the State have been elaborated in various documents like JVA, Allotment Agreement, Shareholders Agreement and Articles. According to the learned counsel for the State, all these documents have to be read together to determine the rights and liabilities of the parties since in terms of Clause B-15 of the Memorandum, the company has adopted all pre incorporation agreements between the parties. It is to be seen that this clause only gives the powers to the company to adopt those agreements but a perusal of the minutes of the first meeting of the Board of Directors held on 6.1.1996 and minutes of subsequent meetings, does not disclose any decision adopting these agreements. Even in the Articles of Association, it is stated that Table A in the First Schedule to the Companies Act shall form the Articles of the company. Further, Article 1.1 reads “The present Articles of Association have been formulated in pursuance of JV Agreement dated 30.10.1995 entered into by and between the State of Himachal Pradesh and EIH whereby thy have come together to form and incorporate this company”. The word “pursuance” has been defined in Oxford dictionary as ‘the carrying out or observance of a plain’. Once the Articles have been framed in carrying out the terms of the JVA, the Articles would only govern the relationship among the members inter-se and the company. Shri Sarkar has relevantly referred to the decisions in V.B. Rangaraj and Kalinga Tube Ltd. cases to the proposition that private agreements, unless incorporated in the Articles do not bind the company. The Division Bench of Bombay High Court has gone a step further to hold in Rolta India Ltd. case (supra) that an agreement among the shareholders cannot be construed to be a contract binding on the company even if it is treated as part of the Articles. This view appears to have based on the principle that the directors of a company being under fiduciary obligation to a company, have to act in the best interest of the company. Therefore, if the terms of either the Articles or the agreements among the shareholders containing terms which are prejudicial to the interest of the company, then the Board of Directors is not bound to comply with those terms. In the present case, some of the Articles specifically refer the terms of JVA or other agreements and as such recourse to that clause of the JVA or agreements could be made in so far as that Article is concerned. In case, there is inconsistency between the terms of the Articles and JVA/agreements, then the terms of that Article would prevail as long as they are not against the provisions of law or against the interest of the company. On these premises, I shall first deal with the provisions relating to the Shares.

26. The Articles of Articles of Association of the company dealing with the shares are as follows:

Article 8.1: Provided further that the issue and allotment of the shares to EIH shall be subject to the terms and conditions of the draft allotment agreement to be executed between the company and EIH. Such allotment to EIH is therefore at all times subject to right of the company to acquire shares for non fulfilment of any of the terms of allotment of the allotment agreement.

Surrender of Shares: Article 10: Provided that the allotment of shares to EIH shall be strictly on the terms specified in the allotment agreement to be executed between the company and EIH. Any breach of obligations under the allotment agreement shall entail consequences as under:

Article 10.1: The failure of EIH to comply with the aforementioned terms and conditions shall disqualify it from continuing as member and/or shareholder of the company and consequently, EIH shall be expelled from the membership of the company and shall cease to hold any shares therein. The shares held by EIH shall be surrendered by the company in accordance with the shareholders’ agreement.

Article 10.2: The Board shall then issue the shares held by EIH to the other members and/or shareholders in proportion to their shareholder in the company in accordance with the shareholders’ agreement.

Article 10.3: In the event that EIH continues to hold the shares for any reason whatsoever, it shall exercise its voting rights in such a manner so as to cause the transfer of the premises on a “as is where is” basis to the State subjects to shareholders’ agreement.

Article 32: Compulsory Transfer of Shares: The shares of either EIH or the State shall be transferred to the other or to the public in the event the joint venture agreement by and between the State and EIH on 30th October, 1995 is terminated in accordance with the terms there under. In such an event the transfer of shares shall take place in the mode and mechanism provided in the said agreement.

Terms of Joint Venture Agreement: Clause 11: Effects of Termination:

Article 11.1: If this agreement is terminated pursuant to Article 10, the party terminating this agreement shall be entitled to require the other party in breach to sell its own and its associate companies shareholdings in the joint company at the option of the terminating party: (a) to the terminating party or its associate companies on the terms and conditions set forth in Article 9 hereof. (b) to the public at large by a public offer.

Provided: However that in the event that the termination of the agreement is due to the default of the party of the second part failing to perform its obligations as regards the provision of technical services in the manner and timeframe prescribed, the party of the second part shall sell its shares to the party of the first part on payment of Rs. 10/- at which the technical services are valued plus 50% of the face value of the paid up equity shares held by party of the second part and the part of the first part shall be entitled to acquire the shares.

Terms of Allotment Agreement:

Article 3.3: Yet, in the event hat the aforementioned provisions in Clause 2 of this Article is breached for any reason whatsoever, the shares allotted to the EIH shall stand surrendered in accordance with Articles of Association of the company and the Shareholders’ Agreement.

Terms of Shareholder’s Agreement:

Article 5.2: In the event that EIH fails to provide technical services as aforesaid, it shall surrender and shall transfer or cause to be transferred all the shares held by ti in the State for a consideration of Rs. 10/- at which technical services have been valued plus 50% of the face value of the equity shares held by EIH.

27. A reading of the above provisions extracted from the Article, JVA, Allotment Agreement and Shareholders’ Agreement would reveal that the mode and manner of treatment of the shares of EIH after the termination of the JVA is not uniform. In view of these inconsistencies, the provisions of the Articles would have to prevail. Significantly, in the Board resolution in regard to transfer of shares, there is no reference to the Articles at all. In terms of the Articles of Association, only the company has the right to either acquire the shares held by EIH or expel them as members, that too only in case of breach of the terms of the allotment agreement. Even though, there is a dispute as to whether the allotment agreement has been executed, now it is on record, as is evident from the agenda for the Board Meeting on 10.4.2002 that the allotment agreement is yet to be executed. When the right of the company is regard to EIH shares is subject to execution of allotment agreement, the Board could not have taken any decision in this regard when no allotment agreement had been executed. Further, according to the allotment agreement, shares shall stand surrendered. It would mean that the shares would be surrendered to the company by EIH which is not the position in the present case. At the same time, Article 32 of the Articles of Association of the company stipulates compulsory transfer of shares in the event of termination of the joint venture agreement. In addition while Article 8.1 gives the right to the company to acquire shares of EIH, Article 10(1) stipulates expulsion of EIH as a member. Thus within the Articles themselves,t here are inconsistencies. When there are inconsistencies and infirmities in the Articles, when the company received the letter dated 7.3.2002 from the State, the Board of Directors of the company should have examined all these aspects before taking any decision regarding registration of the transfer of the shares held by EIH in the name of the State. In terms of the Articles, it is the company which should have required EIH to surrender the shares or expelled it from membership. Shri Sarkar questioned the validity of these Articles on the ground that there could be no provisions for surrender or for expulsion of a member in a company with share capital. I do not propose to deliberate on this as the Board of Directors has not passed any resolution either seeking for surrender of the shares or for expelling EIH as a member. Even otherwise, in both the cases, the shares would have been with the company and in terms of Article 10.2, the company is to issue the shares either to the State or to public. However, before exercising this right, the Board is bound to first satisfy itself, assuming that the allotment agreement had been executed, that EIH had breached the terms of the allotment agreement. No such exercise appears to have been carried out by the Board, and it simply acted on the basis of the letter received from the State. The speed with which the nominees of the State held the Board Meeting on the same day of the letter from the State, that too, without notice to the nominee directors of EIH, would indicate that they were simply guided by the terms of the letter/notice without examining the consequencies of the decisions. The company has not become financially self supporting and it is EIH which is meeting all the expenses of the company. Throwing them out of the company would result in closure of the Hotel as the State cannot fund the operations of the hotel. No director can take a decision which is detrimental to the interest of the company and if he does so, it would amount to breach of his fiduciary obligation to the company. The nominee directors of the State had not acted in a manner they should have as per the averment of the State itself in its reply in Page 41 wherein it had stated “As a nominee director of the Board, the person watches the company’s interest and is not acting on executive authority of the Government”. One important aspect as may be seen from the provisions of the Articles, JVA, shareholders Agreement and Allotment Agreement is that no where it is provided that the State can unilaterally declare that the shares stood transferred on its remitting the consideration and that on that basis the Board would approve the transfer. Even though Article 32 provides for compulsory transfer, it does not mean that the State can unilaterally decide that the shares stood transferred in its favour. This Article only provides that the State can compel EIH to transfer its shares in favour of the State. In the process of approving the transfer of shares in a hurried manner, the Board had also overlooked compliance with statutory requirements in terms of Section 108, which are mandatory as per Apex Court decision in Mannalal case. Shri Sarkar relevantly cited certain cases noted as a part of his arguments to the effect that without instruments of transfer properly executed, a company cannot register transfer of shares. As per Article 9 of the JVA, in the event of termination of the JVA, EIH is to sell the shares to the State. As per Article 5.2 of the Shareholders Agreement, EIH is to surrender and shall transfer the shares. Likewise, the Allotment Agreement also stipulates surrender of shares. All these provisions indicate voluntary action on the part of EIH either to surrender or transfer the shares and do not provide for compulsory acquisition by the State, the moment it had issued the termination notice. It appears that the parties themselves did not seem to have visualized the situation of registration of transfer of shares without proper procedure as is evident from Article 10.3, which envisages EIH continuing to hold the shares even after the termination of the joint venture agreement. Therefore, from whatever angle the registration of transfer is examined, the result would be that such registration was not on valid grounds and was not in accordance with the Articles/Act. Accordingly, I declare that the registration of the shares held by EIH in the name of the State as invalid and that EIH had not ceased to be members of the company.

28. As far as directorship is concerned, Article 13 of the Articles of Association provides that the Board shall be comprised of 3 directors nominated by the State and 4 directors nominated by EIH and that any change in the proportion would require a special resolution at a general meeting. Article 14 stipulates that as long as the State holds at least 35% shares, the Chairman of the company shall be appointed by the State. Article 15 provides that as long as EIH holds at least 36% shares, it shall have the right to appoint the Managing Director. Article 18 provides that the quorum for the meeting shall be 50% of the total strength of the directors and that at least one director each representing the State and EIH should be present. It further provides “That the quorum as aforementioned shall be subject to disqualification of the directors by reason of surrender clause”. Article 6.8 of the JVA while providing that the quorum would be completed only when one director each from the State and EIH are present, it further provides “that the quorum above mentioned shall be subject to disqualification of the directors by reason of forfeiture”. Article 3.4 of the Allotment Agreement provides “That neither East India Hotels, its nominees or directors in the Board consequent to any shareholding in the company shall participate in the decision making process with reference to aforesaid surrender of the shares allotted to East India Hotels…..as there shall be deemed to be interested parties for the same”. Article 5.3 of the shareholders’ agreement reads: “In any case subject to Clause 2 above, the directors who are appointees or nominees of EIH shall give up their position as such and shall not attend any meeting of the Board. It is further stipulated that in case the appointees or nominees of EIH attend any meetings of the Board for any reasons whatsoever, the EIH shall exercise its voting right in the company in such a manner as to cause the transfer of the premises on a “as is where is” basis to the State”. None of the above provisions empowers the Board to resolve that the nominees of EIH cease to be directors once the State declares that the shares stood transferred in its favour. These provisions indicate that the directorship of the nominees of EIH is linked to its holding shares. The Board had passed the resolution of cessation of the nominees of EIH as directors on the ground that EIH had ceased to be members of the company on approval of the transfer its shares in favour of the State. Since, I have held that the EIH has not ceased to be members of the company, the question of its nominees ceasing to be directors does not arise and therefore, the Board could not have the impugned resolution in regard to the nominees of EIH.

29. As far as the appointment of Shri Baldi as an Executive Director is concerned, I find from the minutes of the meeting held on 7.3.2002 that he has not been appointed as a Director on the Board but was appointed as the Executive Director cum Officer on Special Duty in terms of Notification of the Government and he was to exercise all the powers of erstwhile Managing Director. Now that I have held that the nominees of EIH on the Board including the managing director had not ceased to be as such, the question of anyone else exercising the powers of managing director does not arise and as such the appointment of Shri Baldi as Executive Director was invalid.

30. One other aspect that deserves to be examined is the stand of the State that the premises of the company stood reverted to the State on “As is where is basis”. The admitted position is that the premises owned by the State were transferred to the company by a conveyance deed for consideration and the company had become the owner of the premises. For reversion of the premises to the State, it has relied on the provision in Clause 11.2 of the JVA which reads “Notwithstanding the foregoing, in any such event, the land, buildings, structures on the Wild Flower Hall Estate together with buildings, structures or any other moveable assets, which might have been raised by the joint company shall revert to the party of the first part on payment stipulated in proviso to Clause of 11.1 of this agreement”. This assertion of the State was conveyed to EIH in the notice of termination dated 6.3.2002. A copy of this notice was sent to the company along with a letter dated 7.3.2002. The minutes of the Board Meeting held on 7.3.2002 do not reflect any discussion on this important matter. The premises are the only asset of the company without which the company cannot carry on business. The inaction on the part of the Board indicates that the Board had consented to the State taking over the premises of the company, without appraising itself of the provisions in the Memorandum and Article Association of the Company. Clause B.8 of the Memorandum reads “To distribute among the members in specie any property of the company or any proceeds of the same on disposal of any property of the company in the event of winding up, but no distribution amounting to a reduction of capital be made except with the sanction for the time being (if any) required by law”. As per Article 23(i) of the Articles of Association of the company, the approval of the Board is required for transfer of interest including sale, exchange, lease, mortgage, surrender or disposal of any asset of the company. In the present case there is no Board resolution nor such a transfer is permissible without following the procedure as per law. The settled principle of law as enunciated as early as in 1897 in Saloman v. Saloman & Co. Ltd. (1897 AC 22) is that once a company is incorporated, it becomes a separate legal entity and must be treated like any other independent person with its own rights and liabilities distinct from those of its shareholders. No shareholder can claim any right over the property of the company and on the basis of a shareholders’ agreement, a shareholder cannot appropriate the assets of a company. The cases cited by Shri Sarkar viz., Bharat Aluminium Company Ltd. v. Special Are Development Authority (51 CC 184 MP) and Tata Engineering and Locomotive Co. Ltd. v. State of Bihar (1964 6 SCR 885) lay down the same principle. The only manner in which a shareholder can share the assets of a company is in the event of winding up of the company and of the surplus if any remaining after discharging the liabilities of the company. The admitted position in this case is that the premises had been mortgaged for raising loans for the company. The present worth of the premises is over Rs. 75 crores as against Rs. 7.5 crores for which the property was transferred by the State to the company. Taking over such a valuable property on which there are charges/mortgage in favour of third parties would be against the interest of the third parties also while the liability towards the third parties will continue with the company. Further, in the present case, without premises, the company cannot carry on any business and to this extent it would amount to transfer of the entire undertaking of the company which can be done only with the general body approval in terms of Section 293 of the Act. (P.S. Offshore Interland Services Pvt. Ltd. v. Bombay Offshore Suppliers and Services. -75 CC 583) A reading of Article 10.3 of the Articles of Association indicates that this position is recognized by the company itself as in terms of this Article EIH shall exercise its voting rights in such a manner so as to cause the transfer of the premises to the State subject to shareholders’ agreement. Therefore, the Board of Directors in the meeting held on 7.3.2002 should have examined all these aspects and should have advised the State that its claim of the premises having reverted to it had no legal validity.

31. In view of the findings that I have given in respect of the resolutions passed in the Board meeting held on 7.3.2002, it is clear that there have been acts of oppression against EIH and as such I declare all the resolutions passed in that meeting as null and void. Since the name of EIH/its group would have been removed from the register of members on approval of the transfer of shares in favour of the State, I direct that the name of EIH should be put back on the register of members immediately on receipt of this order in respect of (SIC) shares. The Board will continue to consist of 7 director–3 (SIC) State and 4 from EIH–as it existed before 7.3.2002. The control and management of the company will continue to be what it was before the Board Meeting held on 7.3.2002 as also the operation of bank accounts and exercise of powers under power of attorney. The State has complained that the company is not furnishing accounting and other information/details sought by it. Since, the State is the only other shareholder and also has nominees on the Board, the company, EIH should provide all information relating to the affairs of the company when sought for. Even though Shri Sarkar pointed out that since the right of the State to appoint the Chairman of the Board had ceased after its shareholding came down below 35%, I do not propose to examine the same as thee is no prayer to that effect in the petition. As far as the prayer of the petitioners that this Bench should give directions to the State to accord permission to operate the remaining 57 rooms in the Hotel is concerned, I am of the view that it is beyond the powers of this Bench to do so in these proceedings in as much as according to the State there have been certain violations of the Building Laws. Further, since the petitioners have already filed a writ prosecute those proceedings.

32. There is a prayer in the petition for direction to purchase the shares of the State by EIH. In a number of cases, with the view to put an end to the disputes, this Board had directed the majority to purchase the shares of the minority. In this case such a direction is amply justified. EIH is holding 79% shares and not withstanding the shares holding ratio prescribed in the JVA and the Articles, the State participated in amending the Articles and did not subscribe the right shares offered to it as a result of which its shareholding has come down to 21%. EIH has given corporate guarantee for the loans taken for the company and it is which is funding the day to day operations of the Hotel/company. Further it is an expert in hotel operation with world wide connections. It has been the prime mover in the endeavour. Therefore, in the interest of the company, there is every justification to direct the State to sell its shareholding in the company to EIH. However, I do not propose to do so for the reason that during the hearing an indication was given that the State was not averse to sell its shares and that it desired to have a proper consideration for the shares. I could appreciate the concern of the State for a proper consideration as it has to protect the interest of the State. EIH is willing to purchase the shares at par even though as per the valuation done by it through a financial institution, the value of the premises was less than the par value of the shares. The state desires that EIH should match the offer of Holiday Inn which comes to about Rs. 148 crores over a period of 45 years. I am of the view that both the sides should take a pragmatic and reasonable stand. EIH should take into consideration its high stake in the company and also that fact that it would become the single owner of the company on purchase of the shares of the State. In the same manner, the State cannot insist on matching the offer of Holiday Inn, the offer of which was not accepted by the State at that time. Further, this amount of Rs. 148 crores was not to be paid in one go, but of a varying amount ranging from Rs. 1.1 crores per years for the first 5 years to Rs. 8.08 crores per year during the last 5 years totalling to about Rs. 148 crores in 45 years. Therefore, this amount has to be discounted at appropriate rate of interest to arrive at the present value, which cannot be more than Rs. 15 crores. Taking this aspect and also the interests of the company, EIH and the State into consideration, I would suggest two alternatives for the consideration of both the sides. In facts of certain cases filed under Sections 397/98 of the Act, while directing one of the parties to sell the shares, this Board did not direct valuation of shares. Instead, the money invested in the shares was ordered to be refunded with a reasonable rate of interest. In the same way, in the present case, the par value of the shares could be deemed to have been invested by the State in cash and interest at a reasonable rate-say 15% per annum or at the bank rate could be added to the par value from the date of handing over the possession of the premises to the company upto 31.12.2002 and the sum so arrived at could be taken as the fair value of the shares. The State can have the option of keeping this amount as loan to the company at the same rate of interest so that the State could get regular income, which, over 45 years period could come to a substantial amount. It can also have a nominee on the Board of the company as long as the loan is kept with the company. Otherwise, it can seek payment at one go. In the alternative, in case the parties are not agreeable to this suggestion, the parties may seek the guidance and advice of the eminent members of the Arbitral Tribunal in arriving at an agreeable consideration for the shares, instead of pressing ahead with their claims and counter claims in the Arbitration proceedings. Amicable settlement of the disputes could also pave way for the State to find out ways and means to get the approval for the balance 57 rooms released as the functioning of the full hotel would be a boost to the development of tourism in the State. This would also be in consonance with the sentiments expressed by both the sides in their meeting held on 25.11.1998. “Hon’ble Chief Minister also assured Mr. Oberoi that his Government is committed to the promotion of tourism and travel trade in the State and in this respect would welcome the enhanced presence of the prestigious Hotel Groups such as EIH Limited in the State of Himachal Pradesh. Mr. Oberoi in his turn thanked the Hon’ble Chief Minister for his good wishes and cooperation extended to his Group in this respect and assured that the EIH would be very happy to invest further in the State of Himachal Pradesh for promotion of tourism” (Page 30 of Supplementary Affidavit of the State).

33. The petition is disposed of in the above terms with no order as to costs.