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2011 SCC OnLine CLB 180 : (2012) 108 CLA 318

In the Company Law Board†

(BEFORE VIMLA YADAV, J.)

Seagull Buildwell (P.) Ltd. and Others

Versus
Ansal Seagull Sez Developers Ltd. and Others
CA No. 5/2011 in CP No. 112(ND)/2010
Decided on October 3, 2011

Page: 321

ORDER
1. In this order I am considering Company Application No. 5 of 2011 filed by
respondent No. 2, namely, Ansal Colors Engineering SEZ Ltd. [formerly known as
Kamdhenu Agro (P.) Ltd.]. In pursuance of the order of the hon’ble High Court of Delhi
dated 22nd December, 2010 in appeal under section 10F of the Companies Act, 1956
(‘the Act’) in Co.A (SB) No. 56/2010 and CA Nos. 2456/ 2010 and 2457/2010 and
Caveat No. 161-165/2010 against the Company Law Board's (‘CLB's’) order dated 2nd
December, 2010. In CA No. 5/2011 the respondent/applicant has sought vacation of
the CLB's order dated 2nd December, 2010 and dismissal of CP No. 112(ND)/2010 qua
R-2 as the petitioners do not hold the requisite shares as stipulated in section 399 of
the Act. In this matter P-l [Seagull Buildwell (P.) Ltd. in which P-3 (Shri Naresh Jaggi)
and P-2 (Shri Sanjay Sahwney) hold 50 per cent shares each] and APIL (Ansal Prop. &
Infrastructure Ltd.) formed a joint venture company, namely, Ansal Seagull SEZ
Developers Ltd. (R-1) holding 50 per cen shares each. R-2-company [Ansal Colors
Engineering SEZ Ltd. earlier known as Kamdhenu Agro (P.) Ltd.] became 100 per cent
subsidiary company of R-1-company, it had got SEZ Notification for an Engineering
SEZ on 250 acres (271 acres) of land in Village Bhigan and Kurad in District Soriepat
in Haryana. R-2 (Ansal Colors) took a loan of Rs.50 crore from R-18 (L&T) by pledging
100 per cent shares of R-2 held by R-l. On default in payment of loan and interest
thereon R-18 (L&T) invoked its rights under the pledge deed and sold entire
shareholding of R-2 (Ansal Colors) to R-9 (APIL who purchased 51 per cent shares)
and to R-15 (Anand Rathi Financial Services Ltd. who purchased 49 per cent shares)
and, hence, R-2 (Ansal Colors) got de-subsdiarised from R-1 (Ansal Seagull).
2. When on 2nd December, 2010 CP No. 112(ND)/2010 was mentioned by the
petitioners, namely, Segull Buildwell (P.) Ltd. (‘SBPL’), Shri Sanjay Sawhney (‘SS’)
and Shri Naresh Kumar Jaggi (‘NKJ’), against Ansal Seagull SEZ Developers Ltd. and
others the CLB ordered as under :
“CP No.ll2(ND)/2010 mentioned. Only R-l and R-2 and R-9 have entered
appearance. Heard on interim reliefs. In the facts and circumstances of the case,
the petitioners having made out a prima facie case of breach of fiduciary duty and
oppression whereby the substratum of R-1-company is gone, the R-1 and R-2 are
hereby directed to maintain status quo qua immovable assets, shareholding,
composition of the Boards. The R-l and R-2 are hereby restrained from holding any
Board meeting or shareholders’ meeting without the permission of the CLB. Those
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respondents who, though served through courier, have not entered appearance are
at liberty to

Page: 322

apply. All respondents to file reply to the CP within three weeks and the petitioner is
allowed to file rejoinder within two weeks thereafter. Adjourned to 27th January, 2011
at 2.30 PM for arguments. Petitioner to serve this order on the respondents who have
not attended.”

The above order was carried in appeal by Ansal Colors Engineering SEZ Ltd. [R-2 in CP
No.ll2(ND)/2010] contending that the stay order virtually stalls and stops further
development in the entire project as the appellant requires money for creating and
developing necessary infrastructure. It was stated that the appellant has made
investments to the tune of Rs. 103 crore and it is incurring cost of Rs.2 crore per
month. The hon’ble High Court of Delhi required the appellant to file appropriate
pleadings/application before the CLB along with documents in support of their
contentions after serving advance copy of the said application/pleadings on the
counsel for the respondents in appellate proceedings. Hence, CA No. 5/2011 was filed
by Ansal Colors Engineering SEZ Ltd. (R-2) seeking vacation of the order dated 2nd
December, 2010 and dismissal of CP No.ll2(ND)/2010 qua R-2.
3. The petitioners’ case as stated in the company petition is that since they and
their associates were already in possession of 200 acres of land, at village Bhigan and
Kurad, Ebrahimpur near Murthal District, Sonepat, Haryana, the respondent Nos. 5 to
7, the Ansals approached the petitioners and induced them with a proposal for
development of an SEZ. They represented that:
“The location and extent of land was ideal for the development of a Special
Economic Zone (‘SEZ’) :
(i) they had the expertise, wherewithal and reputation for developing
infrastructure and real estate projects;
(ii) the development of the SEZ would greatly enhance the value of the
petitioners’ land;
(iii) the petitioners would only need to contribute the land toward the project and
nothing more and all other financial and other contributions and liabilities
would be the responsibility and liability of the Ansals.”
It was stated that the petitioners who are simple people, believing the Ansals at face
value and believing that the said proposal was bona fide and not realising Ansals’ true
and real intent, on the basis of the representations made and the rosy picture
presented, P-l and R-9 entered into a joint venture agreement. It was contended that
the salient features of the joint venture CJV’) agreement were that the petitioners
would contribute their 200 acres of land and would procure an additional 50 acres of
contiguous land for the development of an SEZ by the JV company, by and at the cost
of the JV company, for which purpose the JV company would avail of loans; the
shareholding in the JV company would be owned equally by the Ansals and the
petitioners; the management of the company would comprise of 4 directors, two each
to be appointed by the Ansals and the petitioners; further funding, to the extent
possible, would be borrowed from financial institutions

Page: 323
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and if the financial resources of the company (including borrowings) were not
sufficient to meet the total cost of the project, the Ansals would bring in extra
amounts up to a value of Rs. 160 crore (being equal to the value of the land earlier
acquired, the land cost), whereafter the petitioners and the Ansals would contribute
equally towards further funding, this provision was made so that there would be
equality in the funding by each of them as contribution to the fund requirement for the
SEZ project; Ansals were responsible for implementing and running the project and
were also exclusively responsible for getting all approvals, clearances, sanctions, etc.
They were to be paid 7 per cent as technical and know how fees. Further, it was
pointed out that for entering into the partnership with Ansals in the said SEZ project,
a sum of Rs. 20 crore were given to petitioners to create a partnership with petitioners
being landholding company. Thereafter, a supplementary agreement dated 7th
February, 2007 to the JV agreement was entered into between respondent No. 9 and
petitioner No. 1/Seagull Buildwell (P.) Ltd. with regard to the purchase of additional
contiguous land of 50 acres required for the project, for which purpose the Ansals
advanced a sum of Rs. 40 crore. Further, the petitioners’ case is that instead of
making available the additional funds for securing the remaining procurement,
respondent Nos. 9 to 11 entered into an understanding with L&T (R-18) whereunder
L&T agreed to grant a loan of Rs. 50 crore to respondent No. 2 for the SEZ project, out
of which Rs. 25 crore (app.) was to be used for purchasing the remaining additional
land, the respondents had drawn up the assistance agreement, which the petitioners
also executed in good faith, the petitioners signed the documents wherever they were
asked to, all in good faith as they were made to believe that all these documents were
standard form routine documents and had to be signed for the loan and that, in any
case, the Ansals, who were basically responsible for and in-charge of financing and
operationalising the project, would arrange funds, both for the repayment of the loan,
as also for meeting further project costs. The petitioners were made to believe that
this was a short-term arrangement and was only being entered into as a bridge loan
till the Ansals made alternate arrangements. Under the assistance agreement, 100 per
cent promoters’ shareholding was pledged to L&T. The petitioners were given to
understand and were assured by the Ansals that for redeeming the
pledge/hypothecation, the Ansals would be wholly responsible for making arrangement
for repayment of the assistance granted by L&T. The petitioners being simple people
and believing the Ansals, executed the agreements in good faith, little realising that
unlike them, the Ansals were anything but simple and, in fact, by this device were
putting into place a plan to usurp and appropriate the only asset of the respondent-
company, namely, respondent No. 2 and its lands. It was reiterated that in terms of
clause 9 of the JV agreement any shortfall in funding was the sole obligation of the
Ansals to the extent of Rs. 160 crore. It was argued that the Ansals failed to perform
their obligations. Not only did they not carry out any developmental work, they did not
bring in any further funds. Nor did they

Page: 324

make any efforts to raise additional funds, either to meet the project cost or to meet
the obligations under the assistance agreement.

4. The petitioners drew my attention to a notice dated 16th June, 2010 addressed
to respondent No. 2 whereby L&T had raised a demand of Rs. 50,06,78,033.62
inclusive of interest overdue and payable on the loan advanced to respondent No. 2
under the assistance agreement. It was pointed out that the notice was not addressed
to the petitioners, who still continued to hold an equal share in the JV company. Even
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though the notices were not addressed to the petitioners they fortuitously learnt of the
same, through an employee of the Ansals. Thereafter, they immediately took up the
matter with the Ansals who assured them that there was nothing to worry and that
they were in contact with L&T who had sent the notice as a formality and that the
Ansals were taking necessary steps to sort out the issue. They also asked the
petitioners to send a response from their end a draft of which was prepared by the
Ansals and given to the petitioners. Consequently, on 19th June, 2010 the petitioners
sent a response to the notice dated 16th June, 2010. The petitioners were still taking
the Ansals at face value, little realising the deep seated conspiracy that was being
played out to the prejudice of the petitioners and the respondent-company. L&T
invoked its rights under the Pledge deed and sold 51 per cent shares to R-9 (APIL)
and 49 per cent shares to R-15 (Anand Rathi Financial Services Ltd.) Under the JV
agreement, it was the sole responsibility of the Ansals to arrange for any additional
funds that may be required for the setting up of the SEZ, including the repayment of
any outstanding loans up to the extent of Rs. 160 crore. The Ansals not only owed
fiduciary responsibility to protect the assets, they were also bound by the terms of
clause 9 of the JV agreement to ensure that the demand of L&T was met. It was
contended that the entire transaction by and between the Ansals, L&T and Anand
Rathi is wholly illegal and is by a process unknown to and in violation of law. By this
dubious sale/purchase of the shares, Ansals/Anand Rathi in collusion with L&T have
pocketed the pledged shares whose worth, even by a conservative standard is more
than Rs. 500 crore, the purported transaction is also in violation of the Contract Act,
especially section 176.
5. When CP No. 112(ND)/2010 was mentioned interim order dated 2nd December,
2010 was given granting liberty to the respondents to apply as all respondents had
not attended. R-2 carried the order dated 2nd December, 2010 in appeal under section
10F wherein the hon’ble High Court at Delhi required the appellant to file
application/pleadings before the CLB. Hence, CA No. 5/2011.
6. The respondent/applicant's case in CA No. 5/2011 is that the respondent No. 2
has been granted extension till 17th June, 2012 to implement the single product
(agrobased) special economic zone being developed by it on approximately 271 acres
of land at Murthal, Sonepat, Haryana (Project) and if the order dated 2nd December,
2010 continues respondent No. 2 will not

Page: 325

be able to implement the project and would suffer a huge loss and in addition loss of
reputation and revenue, one of the major sources of revenue to respondent No. 2 is
through leasing of land in the project and the order dated 2nd December, 2010
restrains the respondent No. 2 from leasing the land in the Project and the said order
has resulted in freezing of stock/ inventory of R-2, respondent No. 2 is receiving
various proposals from various investors/interested parties to take on lease the land in
the Project, however, the respondent No. 2 is unable to issue allotment letters because
of the order dated 2nd December, 2010, due to the restraint imposed upon change in
shareholding, composition of Board of directors and holding of Board meetings vide
order dated 2nd December, 2010. Respondent No. 2 is unable to procure finance/loan
from financial institutions and induct any investor in the Project, in the event the
restraints imposed vide order dated 2nd December, 2010 continue, the respondent No.
2 would suffer a loss of approximately Rs. 110 crore excluding loss of reputation and
revenue, if after finally hearing the matter, the CLB comes to the conclusion that the
petitioners are not entitled to the reliefs prayed for in the petition, by that time, the
shareholders of the respondent No. 2 would have suffered the loss of their entire
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investment, however, the petitioners would not suffer any loss/injury. It is stated that
it is essential that the order dated 2nd December, 2010 be vacated or the petitioners
be directed to deposit Rs. 110 crore before the CLB with the direction that the said
amount would be payable to the respondent No. 2 in the event the petitioners do not
succeed in their petition before the CLB.

7. The counsel for the applicant pointed out that on 26th May, 2006 Ansal
Properties & Infrastructure Ltd. (R-9) and Seagull Buildwell (P.) Ltd. (P-l, a company
promoted by P- 2 and P-3) joined hands on a 50 : 50 basis to set up an SEZ project at
Murthal, Sonepat, Haryana over 250 acres of contiguous land. Ansal Seagull SEZ
Developers Ltd. (R-l) was the resultant JV company (‘JVC) by virtue of the JVA dated
26th May, 2006. In the JVA, following terms were agreed between R-9 and P-l : P-l to
provide 200 acres of contiguous land to R-l for a consideration of 20 crore (Recitals 1
and 2 to JVA clauses 1, 3 and clause 18) additional land of 50 acres contiguous to 200
acres, required for the SEZ project was to be provided by P-l (clause 2 of the JVA) and
the cost of acquisition of additional land was to be borne by R-l for which R-l shall take
loan (clause 18 of the JVA) 50 acres of additional contiguous land was to be made
available by P-1 to R-1, (clause 17 of the JVA read with clause 18). After Rs. 20 crore
was paid by R-9 to P-l and 200 acres was made available by P-l to R-l, the entire cost,
expense, profit and loss was to be shared between P-1 and R-9 on a 50 : 50 basis
(clause 19 of JVA). The said 200 acres of land was to be provided to R-l without
further consideration. R-9 was only responsible for getting all approvals including SEZ
approvals as only R-9 met the eligibility criteria with respect to net worth, etc. (clause
20 of JVA), and provide technical know-how and make payment of Rs. 20 crore in
consideration of 200 acres of contiguous land to be provided by P-1 to R-1 (clause” 18
of JVA). If the SEZ project was not

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approved, R-9 was entitled to the refund of Rs. 20 crore paid by It (clause 22) R-9 and
P-l agreed that any funds which are required for implementation of the SEZ project
would be borrowed, (clause 9 of JVA and clause 18 of the JVA). Pursuant to clause 18
of the JVA, Rs. 20 crore was paid by R-9 to P-l as consideration for the 200 acres of
land, however, the said 200 acres of land was never provided by P-l to R-l.

8. Further, it, was pointed out that R-9 applied for formal approval to the SEZ
project on 14th July, 2006 and on 21st August, 2006 Ministry of Commerce and
Industry, SEZ Section vide its letter dated 21st .August, 2006 granted formal approval
to the SEZ project in the name of R-9 as the developer of the SEZ project. On 5th
January, 2007 R-2 held approximately 43 acres of land, R-l acquired the entire share
capital at face value of R-2 and approximately 43 acres of land was made available to
R-l. On 7th February, 2007 in terms of clause 18 of the JVA, additional land of 50
acres was to be purchased by R-1 through borrowings, however, despite best efforts,
no financial institution provided loan to R-1. P-1 to P-3 requested R-9 to provide Rs. 4
crore to R-1 for the purchase of part of additional land. P-1 to P-3 further requested R-
9 to provide further Rs. 36 crore for purchase of additional land. As R-9 was being
requested to provide funds for purchase of additional land, P-l and R- 9 entered into a
Supplement to the JVA dated 7th February, 2007 (‘S-JVA’) wherein in Annexure B, P-1
again represented that it has agreements with 39 associate companies and co-
partners and the said 200 acres of land would be provided by P-1 to R-1. For the
additional land which was required, R-9 made an excess contribution of Rs. 40 crore.
The S-JVA stipulated that the terms of JVA shall remain same with the addition as
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contained in S-JVA (clause 8 of S-JVA).

9. The applicant has contended that P-l has placed a fabricated S-JVA on record
(pp. 394-398 of CP, vol. HI). It was contended that P-1 had only provided 43 acres of
land against 200 acres of land to be provided by them to R-1 in terms of the JVA.
Since the balance land was not being provided to R-l by P- 1, and as P-1 had failed to
comply with its obligations under the JVA, the understanding recorded in the JVA and
the S-JVA was given a go-by and R-2 had to acquire 228 acres of land for
consideration. R-2 acquired from 1st March, 2007 till 9th January, 2008,122 acres of
land from the parties set out in Annexure B to the S-JVA for approximately Rs. 20
crore. The balance 35 acres of land as contained in Annexure B to the S-JVA was not
available even to be purchased for consideration [200 acres — (43 acres + 122 acres)
= 35 acres] 122 acres of land and additional 106 acres of land was acquired by R-2 for
approximately Rs. 20 crore and Rs. 44 crore respectively. Approximately 271 acres of
land was acquired by R-2 for approximately Rs. 76 crore as reflected in the balance
sheet of R-2 dated 31st March, 2008. The amount of Rs. 76 crore included other costs
such as levelling, registration, stamp duty, etc., paid by R-2 with respect to the land.
10. As the JVA and S-JVA were given a go-by and the entire land was to be

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purchased by R-2, on 1st October, 2007 R-2 requested R-18 to provide a loan of Rs.
50 crore for the purchase of land. The letter of approval received by R-2 from R-18 was
placed before the Board of R-2 on 1st October, 2007. In the meeting of the Board of R
-2 held on 1st October, 2007, the letter of approval received from respondent No. 18
was approved by the Board and the Board of R-2 authorised execution of various
security documents including pledge of 100 per cent of R-1's holding in R-2, the said
meeting was attended by the nominee directors of P-l. On 9th October, 2007 financial
assistance agreement was executed between R-18 and R-2 and a loan of Rs. 50 crore
was granted by R-18 to R-2. Clause 2.13 of the financial assistance agreement sets
out the security documents executed and the pledge of 100 per cent of R-1's holding
in R-2 is at clause 2.13(vi). Clause 7 read with clause 1.1(x) of the financial assistance
agreement defines event of default. Clause 7.02 sets out the rights of R-18 on
occurrence of event of default and clause 7.2(iii) authorises R-18 to repossess, sell or
otherwise dispose of in such manner as R-18 deems fit. The financial assistance
agreement is even executed by P-3 (Shri Naresh Jaggi). My attention was drawn to
some of the security documents executed which are as follows :

(i) The pledge deed by R-l whereby the entire shareholding of R-2 as held by R-l
was pledged. It has been executed on behalf of R-l by petitioner No. 3. Clause 10
of the pledge deed sets out that upon occurrence of an event of default, three
days notice would be given,
(ii) Corporate guarantee by R-9,
(iii) Corporate guarantee by P-l,
(iv) Personal guarantee by Mr. Sushil Ansal,
(v) Personal guarantee by P-2,
(vi) Personal guarantee by P-3.
11. It was pointed out that Rs. 26 crore approx. was repaid by the R-2 to R-9 in
respect of the excess contribution of Rs. 40 crore (under the S-JVA) made by R-9 for
acquisition of land, the refund was made by cheques issued by R-2 which were co-
signed by P-2/P-3. From time-to-time, R-9 had provided funds to the tune of Rs.
20.84 crore for enabling R-2 to repay the loan. P-1 to P-3 had not provided a single
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penny towards the repayment of the loan and purchase of the land.
12. The counsel for the applicant further pointed out that on 17th March, 2008 R-9
requested the SEZ Section of Ministry of Commerce to grant approval for the SEZ
project in the name of R-2. On 18th June, 2008 the SEZ Section of the concerned
Ministry granted approval in the name of R-2 for the SEZ project. The letter of
approval in clause 3(ix) stipulates that the SEZ project has to be developed within 3
years. It was pointed out that in the Board meeting of R-2 held on 18th March, 2009
attended by P-l to P-3. They assured R-2 that they would within 2-3 days provide
funds for the

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repayment of the loan, in that meeting the excess contribution made by R-9 was even
discussed.

13. It was pointed out that on 30th December, 2009 R-18 issued notice under
section 138 of the Negotiable Instruments Act, 1881 to R-2, P-2, P-3 and other
directors of R-2 as the cheques issued by R-2 at the time of availment of the loan were
dishonoured. On 9th March, 2010 R-9 issued a letter to P-2 and P-3 requesting them
to provide funds for the discharge of the loan and informed them that in the event
funds were not provided for the repayment of the loan, security provided to R-18
would be enforced by R-18. On 27th March, 2010 another letter was written by R-9 to
P-2 and P-3 requesting them to provide funds for repayment of the loan. On 29th
March, 2010 R-18 wrote a letter to P-3 calling upon to make the payment towards the
overdue amounts before 31st March, 2010. On 10th April, 2010 another letter was
written by R-9 to P-2 and P-3 requesting them to provide funds for repayment of the
loan.
14. The counsel for the applicants pointed out that on 16th June, 2010 R-18 issued
default notice to R-2 and R-1 in terms of the financial assistance agreement’ and the
pledge deed both dated 9th October, 2007 and called upon R-2 to repay an amount of
Rs. 50,06,78,033.22. R-l was even called upon to pay the said amount failing which
within three days R-18 would sell the shares of R-2 pledged by it to realise the loan.
On 17th June, 2010 the notice of default was forwarded to P-l to P-3 through fax and
email. It was pointed out that in the petition, para 6.23, the petitioners have taken a
stand that they “fortuitously learnt” of the notice of default issued by R-18. However,
during the course of the hearing, the counsel for the petitioners admitted the receipt
of emails dated 17th June, 2010 and 18th June, 2010. R-2 along with its reply has
filed the copy of the default notice denoting the receipt of the same by Mr. Sanjay
Sawhney (P-2). During the course of hearing, the petitioners have admitted receiving
the said physical copy on 18th June, 2010. It was pointed out that in the Board
meeting of R-2 on 18th June, 2010, P-2 and P-3 were present and P-2 and P-3 had
assured R-2 that they will arrange for the 50 per cent of the loan recalled. On 19th
June, 2010 P-2 and P-3 requested R-18 to grant them time for repayment of the loan
on the ground that the financial condition is bad.
15. On 21st June, 2010 R-18 exercised its rights under the pledge deed and sold
the entire share capital of R-2 pledged by R-l to R-9 and R-15. R-9 purchased 51 per
cent of the shares capital of R-2 for approximately Rs. 25 crore and R-15 purchased 49
per cent of the entire share capital of R-2 for approximately Rs. 24 crore. On 21st
June, 2010 R-2 convened a Board meeting on 22nd June, 2010 to take note of non-
payment of loan and enforcement of security the notice for the said meeting was sent
to P-2 and P-3. On 19th July, 2010 the revised shareholding of R-2 was approved by
SEZ Section, Ministry of Commerce. When in October 2010 R-9 was proposing a QIP P-
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2 and P-3 complained to SEBI, BSE and NSE that R-9 has taken away the asset

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of R-l. R-9 through its merchant banker responded to the complaint of P-2 and P-3.
SEBI allowed R-9 to proceed with the QIP.

15. In reply to the contentions of the applicants the counsel for the petitioners/ non
-applicants contended that the liability of P-l to contribute for implementing the SEZ
to arise only after APIL (R-9) has contributed to the SEZ project an amount equal to
the value of 200 acres of land acquired by the petitioners because (a) the petitioners
as well as respondents have attributed same interpretation to clause 9 of the JVA
dated 26th May, 2006 (the JVA). It was pointed out that APIL (R-9) has not filed reply
to the company petition, (b) clause 9 of the JVA stipulates that if for addition to the
initial capital of company further funds are required for implementation of the SEZ
then the same may be borrowed. If, however, for any reason the financial resources of
company together with the aforesaid borrowers are not sufficient to meet the total cost
of SEZ, then in that event the extra amount needed to meet the cost shall be provided
by APIL (R-9) and P-l in equal shares after meeting the land cost, (c) it is the
petitioners’ case that further funding, to the extent possible, would be borrowed from
financial institutions and if the financial resources of the company (including
borrowings) were not sufficient to meet the total cost of the project, APIL (R-9) would
bring in extra amount up to a value of Rs. 160 crore (being equal to the value of land
contributed by the petitioners, i.e., the land cost), whereafter the petitioners and
Ansals would contribute equally towards funding. This provision was made so that
there would be equality in funding by the JV partners (P-1 and R-9), (d) the
respondents admit that all costs, expenses, profit and loss are to be shared on a 50 :
50 basis after payment of Rs. 20 crore, which, according to the respondents is the
consideration of 200 acres of land contributed by the petitioners, (e) thus, there is no
dispute between the petitioners and the respondents with respect to the interpretation
of clause 9 of the JV that the liability of P-l would arise only after APIL (R-9) have
contributed towards the land cost of 200 acres. The only point of dispute is that the
respondents have put a value of Rs. 20 crore as consideration of 200 acres whereas
according to the petitioners, the value of 200 acres of land is Rs. 160 crore, (f) the
contention that the liability of P-l will arise only after the land cost has been met with
by APIL (R-9) is further clear from clause 18 of the JVA which stipulates P-l shall be
entitled to 65 per cent of the share in the SEZ amount realised from leasing out the
areas in SEZ till the entire cost of land falling to the share of P-1 is met out. The said
clause 18 corroborates the avowed. understanding before entering into the JVA that till
the entire cost of land contributed by the petitioners is met out by APIL (R-9), P-1 was
under no obligation to make any contribution and in fact the profit sharing was to be
in the ratio of 65 : 35 between P-l and APIL (R-9) and that the party of 50 : 50, both
with respect to liability as also the profit sharing would arise only after APIL (R-9) has
matched the contribution of 200 acres of land by the petitioners.

Page: 330

16. The counsel for the petitioners reiterated the contention that the value of 200
acres of land contributed by the petitioners is Rs. 160 crore and not 20 crore as
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contended by the respondents because (a) clause 17 of the JVA stipulates that it has
been agreed by the parties that the acquisition cost of the land is at the rate of Rs. 80
lakh per acre, (b) clause A of the supplementary agreement dated 7th February, 2007
defines the 200 acres already acquired/ purchased by P-1 as ‘the said land’, (c) clause
B of the supplementary agreement dated 7th February, 2007 defines further 50 acres
of contiguous land to the existing 200 acres (referred to as the said land) as
‘additional land’, (d) clause B of the supplementary agreement dated 7th February,
2007 further defines ‘the said land’ and the additional land’ collectively as ‘the land’ as
the said land, (e) having defined the 200 acres land and the additional 50 acres of
land collectively as ‘the land’, clause C of the supplementary agreement dated 7th
February, 2007 categorically and in no uncertain terms stipulates that the cost of ‘the
land’ i.e., the 200 acres and the 50 acres as per the JVA has been fixed at Rs. 80 lakh
per gross acre, (f) the above definitions leave no room for any ambiguity with respect
to the price of each and every parcel of the entire land at Rs. 80 lakh per acre. The
argument of the respondents that the definitions have not been strictly used and that
the expressions, ‘the said land’, ‘the additional land’ and ‘the land’ have been used
interchangeably or that there has been error in using these expressions with different
meanings at different places is an eye wash. It was conteded that once the parties to
an agreement have defined terms, it is not open to the parties to later on contend that
the expressions have been loosely used. The law is settled that meaning is to be
attributed to every word used in a document/agreement in the context of such
document/agreement unless such meaning is contrary to the context and leads to
absurdity.
17. Further, it was contended that the petitioners have fully performed their part
under the JVA by contributing 200 acre of land free of cost because (a) before
execution of the JVA and even afterwards (till R-2 was made a fully owned subsidiary
of R-l on 5th January, 2007), R-2 was owned/promoted by P-2 and P-3. At this time R
-2 already owned 43.5 acres of land. Remaining 156.5 acres of land belonging to the
petitioners directly (8.4 acres), through their companies (41.8 acres), through their
family members (12.3 acres), through their partners (Sama family, partners in Haveli
project : 28 acres; Dhingra family, partners in Seagull Steel : 30.8 acres; Jasjeet
Singh, partner in Haveli project : (1 acre), agreement to sell between petitioners and
landowners (10.4 acres), land exchanged against petitioners’ own land (10 acres) and
family friends (6.3 acres), thus, 192.5 acres of land was contributed directly by the
petitioners through themselves or their close relations or close business partners. The
land contributed by the petitioners is the same land mentioned in Annexure A to the
said JVA. It is this very land which has been referred by the respondents in the chart
annexed to the reply of R-2, 4 and 6. The balance land was also acquired and
contributed by the petitioners. The necessity of transferring 157 acres of land (200
acres — 43 acres) already

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in the name of R-2 was for the reason that SEZ permission could only be granted to
the company owning 250 acres of contiguous land. This requirement was brought to
the notice of the petitioners by APIL (R-9) after execution of the JVA. Earlier, the
understanding given by APIL (R-9) to the petitioners was that the SEZ permission
could be taken in the name of Ansal Seagull (R-l). No such requirement that SEZ
permission could be granted only to the company which owned the land, was ever
communicated to the petitioners. Admittedly, though APIL (R-9) was responsible for
getting all approvals including SEZ approvals and it was to provide technical know-
how for implementation of the SEZ. APIL (R-9) miserably failed to perform its
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part/obligate, It is in view of this failure that the land was required to be transferred in
the name of R-2 since 43 acres of land already existed in R-2's name and instead of
250 acres of contiguous land, only 207 acres of contiguous land would be required to
be transferred in the name of R-2. The transfer of remaining 207 acres of contiguous
land in R-2 would have saved Stamp Duty, etc., on 43 acres already in the name of R-
2. In case, the entire 250 acres of contiguous land was to be transferred in the name
of R-l, the same would have required Stamp Duty for the said 43 acres as well, (c) it
was stated that the consideration amounts shown in the registered sale deeds only
reflect the ‘circle rate’ below which the registration of transfer would not have been
possible. It was further stated that the consideration at the circle rate was also never
paid. It was pointed out that the respondents have not filed any documents to show
that the payments were actually made to the owners of the land from whom the land
was purchased. The only document relied by the respondents is the balance sheet of R
-2. However, the balance sheet only reflects the flow of money which in fact is only
towards the purchase of the additional 75 acres of land (25 acres of extra land had to
be purchased to achieve the target of 250 acres of contiguous land as required for
grant of SEZ permission), (d) according to the petitioners, admittedly, the entire land
excluding 43 acres (already existing in the name of R-2) has been purchased for a
total consideration of Rs. 76 crore through the funds (purportedly) provided by APIL (R
-9) and the loan granted by L&T (R-18). Admittedly, APIL (R-9) had received 26 crore
from R-2 from the loan amount of Rs. 50 crore borrowed by R-2 from L&T (R-18).
Thus, admittedly, only 50 crore remained for the purchase of entire land excluding the
said 43 acres. It is also admitted that the rate of additional land has been agreed
under the JVA at Rs. 80 lakh per acre. It is stated and submitted that the remaining
50 crore necessarily were used to purchase the additional land at the rate of Rs. 80
lakh per acre. It was pointed out that 50 crore would be exhausted in purchase of only
62.5 acres of additional land. Admittedly, 71 acres of additional land was purchased
(though, according to the petitioners, 75 acres of additional land was purchased) to
meet the requirement of 250 acres of contiguous land. It is, thus, clear that for the
remaining 8.5 acres (71 acres — 62.5 acres), no resources were available in Ansal
Colors (R-2) from the contribution of APIL (R-9) or from the borrowing from L&T. It
was stated that it is the

Page: 332

petitioners who made payments for the purchase of the said remaining 8.5 acres. For
this purpose, the petitioners used the 20 crore of the said signing amount. It was
contended that it is clearly demonstrated from the admitted position that APIL (R-9)
has not paid any amount towards the said 200 acres and the said 200 acres have been
contributed by the petitioners in the JV free of cost as the petitioners part of promise
under the JVA.

18. The counsel for the petitioners further contended that the petitioners’
contribution of 200 acres of land free of cost has not been disputed by APIL (R-9) till
the present controversy has arisen because (a) at no point in time till the letter dated
27th March, 2010 (reply of R-2, 4 and 6), APIL (R-9) has ever disputed that the
petitioners have not contributed 200 acres of contiguous land. Even this letter does
not state that the petitioners failed to make 200 acres of contiguous land. It only
alleges that 200 acres of contiguous land were not made available for long time, (b)
recital ‘A’ of supplement to the JVA dated 7th February, 2007 (reply of R-2, 4 and 6) it
is categorically set out that out of 250 acres of SEZ project land, 200 acres have
already been purchased by P-l as per the details of the land annexed as Annexure B to
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the said supplement to the JVA, (c) in fact, in the shareholders agreement (‘SHA’)
executed much after the assistance agreement with L&T executed on 9th October,
2007 and also much after the land purchase had been completed, i.e., on 19th July,
2008 it has been admitted by APIL that P-l (Seagull) has acquired 271 acres of land,
(d) further, in the application dated 7th May, 2008 (reply of R-2,4 and 6) made by
APIL (R-9) to the secretary to the Government of India for formal approval for setting
up the SEZ, it has been categorically represented by APIL (R-9) to the Government of
India that the entire land is in the possession of P-l [Seagull Buildwell (P.) Ltd.] and
their associates. It was argued that APIL (R-9) is a known player in the business of
real estate, it does not meet with any reason that APIL (R-9) entered into the JVA, the
supplement to the JVA, and the SHA without proper due diligence with . respect to the
land contribution by the petitioners, the inescapable conclusion is that 200 acres of
land was contributed by the petitioners, the afterthought of the respondents that the
petitioners did not meet with their obligation of contributing 200 acres is belied by the
fact that till the said letter dated 27th March, 2010, there has been no whisper of arty
dispute regarding the petitioners’ contribution of 200 acres.
19. Further, it was contended that there is no admission by the petitioners that the
petitioners were under any obligation to repay any part of the loan/ assistance granted
by L&T (R-18) because : (a) the understanding between APIL (R-9) and the
petitioners that the petitioners’ obligation towards implementation of the SEZ will
arise only after the land cost is met by APIL (R-9) by matching the petitioners’
contribution is an admitted position, the dispute is only with respect to the cost of 200
acres of land, (b) that being the position and since, as demonstrated hereinabove, the
petitioners have contributed 200 acres of land free of cost, there is no occasion for the

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petitioners to admit any liability to repay the said loan/assistance of L&T, (c) the
allegation that the letter dated 19th June, 2010 is an admission by the petitioners that
the liability to repay the loan is theirs is absolutely misleading and mala fide. It is a
fact, evident from the contents of the letter itself, that the same has been drawn up by
APIL (R-9)/Ansals and given to P-2 and P-3 to sign and send under a planned
conspiracy. It is an admitted position that permission, etc. for setting up the SEZ was
the responsibility of APIL (R-9). Para 3 of the said letter dated 19th June, 2010, sets
out that on account of recession “the undersigned was forced to get permission for the
set up of the SEZ....”. From the said content, it is evident that ‘the undersigned’, i.e.,
the petitioners as directors of R-2 were speaking for APIL (R-9), Ansals and not only as
the directors of R-2 and definitely for themselves in their personal capacity. Thus, it
was argued that case is made out for vacation of the order dated 2nd December, 2010.

20. The counsel for the petitioner Nos. 2 and 3 argued that by purchasing 51 per
cent of the shares of Ansal Colors (R-2) and coming into indirect control of 49 per cent
of the shares of Ansal Colors (R-2) through Anand Rathi (R-15), APIL (R-9) (i) has
obtained substantial benefits; (ii) by virtue of its management position in Ansal
Seagull (R-1) and Ansal Colours (R-2); (iii) L&T and Anand Rathi were aware of the
fiduciary position of APIL towards Ansal Seagull, Ansal Colors and the petitioners. In
these circumstances, the sale of the shares of Ansal Colors (R-2) held by Ansal Seagull
(R-l) ought to be set aside.
21. Further, it was argued that by the said transaction APIL (R-9) obtained at least
the following benefits : (f) APIL (R-9) purchased 51 per cent shares of Ansal Colors (R
-2) for Rs. 25.6275 crore. Admittedly, APIL had earlier received Rs. 26 crore from
Ansal Colors (R- 2) from the loan amount of Rs. 50 crore borrowed by Ansal Colors (R-
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2) from L&T (R-18), in this way, APIL purchased the said 51 per cent shares of Ansal
Colors (R-2) for free, (if) in addition, the shares of Ansal Colors (R-2) were sold at a
grossly low price of Rs. 52.2681 crore, the said price was arrived at in a grossly
irregular manner. Firstly, the assets of Ansal Colors were grossly undervalued at Rs.
136.95 crore. The said low valuation was made on the basis of inputs of APIL (R-9) as
on 31st March, 2010. The assets of Ansal Colors (R-2), namely, 271 acres of
contiguous land, had earlier been valued at Rs. 400 crore (as on 1st March, 2009) by a
valuer engaged by APIL (R-9). Secondly, despite that the said shares were being sold
to repay Ansal Colors’ loan liability of Rs. 50 crore toward L&T, the said loan liability
was subtracted from the valuation of the shares of Ansal Colors as if the said loan
remained to be repaid by the purchaser of the said shares of Ansal Colors. It was
pointed out that ordinarily the shares of Ansal Colors ought to have been sold at least
for Rs. 136 crore which was the valuation of the assets of Ansal Colors as on 31st
March, 2010 made on the basis Of the inputs Of APIL (assuming though denying that
this was a fair value of the said shares). L&T could have retained the loan amount

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payable to them and returned the surplus to Ansal Seagull (R-1). By purchasing the
said shares for the price of Rs. 52.2681 crore, APIL gained a further benefit by paying
a price even lower than the grossly low price arrived at on the basis of representations
made by it, (iii) APIL obtained complete control over Ansal Colors (R-2) directly
through its shareholding of 51 per cent and the shareholding of Anand Rathi (R-15).
Hitherto APIL controlled only 50 per cent of the shares of Ansal Colors (R-2) through
its 50 per cent shareholding in Ansal Seagull (R-1), the other 50 per cent being under
the control of the petitioners, (iv) The loan from L&T (R-18) was secured by various
securities other than the pledge agreement dated 9th October, 2007 in respect of the
shares of Ansal Colors (R-2) held by Ansal Seagull (R-1), these securities included an
irrevocable and unconditional corporate guarantee from APIL (R-9) and the personal
guarantee of Mr. Sushi Ansal, chairman, APIL. By contriving, the enforcement of the
pledge agreement dated 9th October, 2007 between Ansal Seagull (R-l) and. L&T (R-
18), APIL prevented the enforcement of the said corporate and personal guarantees
and benefitted itself and its chairman by saving itself and its chairman a liability of at
least Rs. 50 crore.

22. The counsel for the petitioners further contended that APIL (R-9) obtained the
aforesaid benefits only by virtue of its management position in Ansal Seagull (R-1)
and Ansal Colors (R-2) because (f) APIL (R-9) had knowledge of the said sale of
shares only by virtue of being in the management of Ansal Seagull (R-l) and Ansal
Colors (R-2). Admittedly, L&T (R-18) did not publish any advertisement for the sale of
the said nor is there any evidence or averment that L&T had independently approached
APIL. APIL had knowledge of the said sale as APIL's (R-9) nominees on the Board of
Ansal Colors were the designated contact persons in Ansal Colors (R-2) for L&T (R-18)
to approach in relation to the loan. From letters dated 26th November, 2008, 17th
February, 2009 and 21st May, 2009 it is evident that it was APIL's nominees who were
in contact with L&T in relation the repayment of the said loan. Indeed, APIL (R-9) had
arranged for the loan from L&T in the first place. In fact, ties between APIL and L&T
were so close that APIL (R-9) even participated in the pre-sale valuation of the shares
of Ansal Colors (R-2), to the exclusion of P-l to P-3, (ii) the pledge agreement was by
far the most difficult security to enforce, especially compared to the corporate
guarantee of APIL (R-9) and personal guarantee of Mr. Sushil Ansal (R-10) available in
the hands of L&T. It was contended that the said corporate and personal guarantee
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were enforceable merely by the issuance of a demand letter by L&T to the guarantors
and even if there were any disputes between L&T and the guarantors. On the other
hand, any third party purchaser would have bought the shares of Ansal Colors only
after conducting due diligence, an independent valuation of the land. However, taking
advantage of its management position APIL presented itself as a ready buyer
(possessing as it did the requisite information about Ansal Colors’ assets and their
value on account of its fiduciary position). As a result, the pledge agreement dated 9th

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October, 2007 between Ansal Seagull and L&T was the first security to be enforced.

23. Further, it was contended that the counsel for APIL (R-9) did not dispute that
by purchasing the shares of Ansal Colors (R-2) APIL was acting in breach of its
fiduciary position. Nor was it disputed that as a purchaser of the said shares APIL's
interests conflicted with those of Ansal Colors (R-2). It was pointed out that as the
purchaser, it was in APIL's interest to purchase the said shares at the lowest price,
while as a shareholder of Ansal Colors through Ansal Seagull, it was in APIL's interest
to seek the highest price for the said shares. The only response given by APIL's
counsel to the petitioners’ contention on APIL's conflict of interest was that the
repayment of the said loan to L&T (R-18) was the liability of the petitioners, and since
they had defaulted on their said liability, to protect its interests APIL was left with no
choice but to purchase the shares of Ansal Colors from L&T.
24. It was contended that the repayment of L&T's loan was not the liability of the
petitioners. Even assuming that the repayment of the said loan was the petitioners’
liability and they defaulted, it was not legally open to APIL (R-9) to purchase the said
shares [reliance was placed on Regal (Hastings) Ltd. v. Gulliver, (1942) 1 All ER 378
(HL); Ms. Heena Dutt v. Chavi Designs (P.) Ltd., (2007) 80 CLA 404 (CLB)]. However,
it was open to APIL to repay L&T's loan and later recover the said amount from the
petitioners and it was also open to APIL to terminate the JV agreement with the
petitioners and claim damages from the petitioners. At best, APIL (R-9) could have
purchased the shares of Ansal Colors (R-2) held by Ansal Seagull (R-1) after : (i)
making due disclosure to and obtaining the consent of Seagull Buildwell (P-1) which
was a 50 per cent shareholder in Ansal Seagull [Regal (Hastings) Ltd. (supra)]; and
(ii) making due disclosures to and obtaining the consent of its fellow joint ventures Mr.
Sanjay Sawhney (P- 2) and Mr. Naresh Jaggi (P-3) [Dale & Carrington Invt. (P) Ltd. v.
PK Prathapan, (2004) 62 CLA 245 (SC)/ (2005) 1 SCC 112. Further, it was pointed out
that APIL did not disclose to the petitioners that it intended to purchase the shares of
Ansal Colors (R-2) until after it had purchased the shares (though it is denied by the
petitioners that APIL informed them even at this time). On the contrary, APIL (R-9)
admittedly suppressed from the petitioners that: (i) L&T had proceeded to value the
shares of Ansal Colors (R-2) with a view to sell them, (ii) APIL (R-9) was participating
in the valuation of the said shares, (iii) the shargs of Ansal Colors (R-2) had been
valued at a meagre Rs. 52.2681 crore. It was contended that the respondents,
especially APIL (R-9) could not dispute that APIL's interests were in direct conflict with
those of the petitioners (as APIL's partners) and those of Ansal Colors (R-2) while they
contrived a situation to come to pass where L&T (R-18) enforced the pledge of shares
of Ansal Colors (R-2) and chose to not to invoke the personal guarantee of Mr. Sushil
Ansal or the corporate guarantees of APIL (R-9). It obviously was in the interest of
APIL and the Ansals to protect Mr. Sushil Ansal from invocation of his personal
guarantee by L&T (R-18)
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and it was as much against the interest of the petitioners and Ansal Colors (R-2) that
the pledge of shares of Ansal Colors (R-2) is enforced by L&T (R-18).

25. Further, the counsel for the petitioners contended that L&T, APIL and Anand
Rathi acted in collusion to complete the sale of the shares of Ansal Colors (R-2) held
by Ansal Seagull (R-l). The said collusion is borne out by the following circumstances :
(i) the invocation of the pledge agreement dated 9th October, 2007 between Ansal
Seagull (R-1) and L&T (R-18) over and above all other securities including the easily
enforceable corporate guarantee given by APIL (R-9) and the personal guarantee of
Mr. Sushil Ansal, chairman of APIL (R-10), (ii) the opaque manner in which the sale
took place between APIL, Anand Rathi and L&T. The said parties have failed to place on
record any documents to show that any negotiations were held between the said
parties prior to the share purchase, (iii) as is borne out by the assistance agreement
dated 9th October, 2007 between Ansal Colors and L&T, L&T had full knowledge of the
relationship between APIL and the petitioners. L&T still proceeded to sell the shares of
Ansal Colors to APIL, despite being aware that APIL was acting unlawfully in breach of
its fiduciary duty. Therefore, it was argued that in the said circumstances, L&T is not
entitled to retain the benefit received by it (Rs.50.25 crore) [Dubash D K Ibrahim
Sahib v. A K R M K Meyyappa Chettiar], (iv) it is not disputed at all that close familial
ties exist between Anand Rathi and Sushil Ansal. Other than this factum there is no
other explanation for the involvement of Anand Rathi in the purchase of the said
shares of Ansal Colors (R-2). None of the respondents have filed any documents to
explain how, why or in what manner Anand Rathi came to purchase 49 per cent of the
shares of Ansal Coiours (R-2).
26. It was argued that the contention that the APIL (R-9) had no choice but to
purchase the shares of Ansal Colors (R-2) and that L&T (R-18) had no choice but to
sell the same to APIL (R-9) is without any basis and corroborated by documents. In
fact, this position has not even been pleaded by either APIL (R-9) or L&T (R-18) or
even in the reply of R-2, 4 and 6. There is absolutely nothing on record, not even
pleading to the effect which will warrant such sale and purchase as a matter of
compulsion as suggested during oral arguments. It was pointed out that it is
absolutely under how APIL and Anand Rathi, got to know the time and place of the
sale of shares of Ansal Colors (R-2) by L&T. This leads to an inescapable conclusion
that the entire transaction was under dubious circumstances and under a planned
conspiracy between APIL and Anand Rathi and L&T. It was argued that in any event,
the burden of proof (section 106 of the Evidence Act) of the alleged compelling
circumstances whereunder APIL (R-9) had to purchase the shares of Ansal Colors (R-
2) and L&T had to sell the same to APIL (R-9), was on APIL (R-9) and L&T (R-18). The
alleged compelling circumstances are facts which could only be within the knowledge
of APIL (R-9), L&T (R-18) and Anand Rathi. It was prayed that adverse inference
ought to be drawn against

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APIL (R- 9), L&T (R-18) and Anand Rathi as APIL (R-9), L&T (R-18) and Anand Rathi
have miserably failed to discharge their burden under section 106 of the Indian
Evidence Act, 1872.

27. It was further contended by the counsel for the petitioners that the application
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for vacating the stay order of the CLB, does not demonstrate any ground of urgency for
vacation of stay (i) the only ground made by the Ansal Colors (R-2) seeks vacation of
the order dated 2nd December, 2010 passed by the CLB is that the extension of SEZ
approval has been granted till 17th June, 2012 and 3rd extension may not be granted.
The basis for the apprehension that 3rd extension may not be granted is that the
Government of India has earlier refused 3rd extension to one Uppal Developers (P.)
Ltd. It was pointed out that the statement is misleading it has been conveniently
suppressed that Ansal Colors (R-2) has only been granted 1st extension and that 2nd
extension has not even been sought for and, thus, there is no question of comparison
between the extension of SEZ of Ansal Colors (R-2) and that of the said Uppal
Developers (P.) Ltd., (ii) in spite of the directions of the hon’ble High Court by order
dated 22nd December, 2010 in Co.A(SB) No.556/2010 that the respondents ought to
file documents in support of their contention that the “stay order virtually stalls and
stops further development in the entire project...”, no such documents have been
filed. Further, in spite of indications from the CLB that the respondents ought to file
the details of the SEZ project including the status and the position of the prospective
buyers, etc., no details have been set out which would clarify the status of the project.
The petitioners reiterated their prayer that the Ansal Colors’ application for the
vacation of the CLB's order dated 2nd December, 2010 ought to be dismissed and
heavy costs imposed upon the applicants.
28. Responding to the petitioners’ contention that Rs.160 crore was the
contribution by the petitioners and R-9 had to contribute equivalent to Rs. 160 crore
and till that stage petitioners had no liability to infuse funds in either R-1 or R-2, the
counsel for the applicant pointed out that the petitioners have tried to establish this
argument by misinterpreting clause 17 of the JVA which states that ‘acquisition cost’
of the land has been agreed at the rate of Rs. 80 lakh per acre between the parties,
the petitioners have further tried to substantiate the argument by misreading of the
words ‘after meeting the land cost’ in clause 9 of the JVA. The words ‘acquisition cost
as occurring in clause 17 are occurring only in clause 18 of the JVA wherein the
reference is being made to the additional 50 acres of land which is to be acquired by R
-2. Thus, Rs. 80 lakh per acre was the agreed cost for acquisition of additional 50
acres of land which was required to be acquired as the minimum land required for SEZ
project was 250 acres, the cost of acquisition of additional land is to be borne by R-2.
Clause 18 of the JVA further categorically states that Rs. 20 crore is the consideration
paid to P-l and P-l would provide 200 acres of land. Clause 1 of the S-JVA even makes
it clear that Rs. 80 lakh per acre was the agreed cost for acquisition of additional 50
acres of land. Clause

Page: 338

22 of the JVA states that in the event SEZ is not approved R-9 is entitled to refund of
only Rs. 20 crore paid by it to P-l. In the event, R-9 was to pay any amount in addition
to Rs.20 crore, the clause would have read that R-9 would be entitled to the refund of
Rs. 20 crore plus other contributions/ expenses made by it. In case R-9 was to pay Rs.
160 crore for 200 acres of land, the clause would have read that R-9 would be entitled
to refund of Rs. 160 crore. It was contended that the entire JVA and S-JVA nowhere
sets out that R-9 would have to make any contribution in either R-l or R-2 or to P-1
after paying Rs. 20 crore to P-l. Further, clause 19 of the JVA states in categorical
terms that all expenses in the execution terms states that all expenses in the
execution of the project are to be borne by the R-2. There is no obligation on R-9 to
contribute any funds. It was pointed out that on the contrary clause 9 of the JVA
stipulates that if further funds are required the same would be borrowed by R-l and if
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the funds are not sufficient then the extra amount shall be provided by R-9 and P-l in
equal shares. The misinterpreted words ‘after meeting the land cost’ refers to Rs. 20
crore which is to be paid by R-9 to P-l for providing 200 acres of land. It is an
admitted position that the said Rs.20 crore has been paid. It was pointed out that
clause 3.3 of the shareholders agreement even sets out the concept of equal
contribution and there is no mention with respect to the purported contribution of Rs.
160 crore by petitioners. Since 2006 till date there is no letter/document from the
petitioners raising any grievance with respect to non-contribution of purported Rs. 160
crore by R-9 and taking of loan by R-2. The purported contribution of Rs. 160 crore
and the purported obligation of R-9 to contribute Rs. 160 crore is not even reflected in
the balance sheet of either R-l or R-2 which has been signed by the P-2/P-3. In fact
the balance sheet for the year ending on 31st March, 2010 which is signed by the
petitioners shows that instead of amounts being due from R-9 to R-2, amount, approx.
Rs. 58 crore, are shown as due from R-2 to R-9 since R-9 had given advances to the
company for the purchase of land, etc. Further, if R- 9 had to contribute Rs. 160 crore
in R-2 for the 200 acres of land purportedly provided by the petitioners, the balance
sheet would have reflected the same in schedule 8 whereas in the schedule 8 under
the head creditors for land purchase only an amount of Rs. 4 crore approx. is set out.
It was argued that even otherwise, the question of purported contribution of Rs.160
crore does not arise as the said 200 acres of land was admittedly not provided to
either R-l or R-2 by the petitioners free of cost Rs.20 crore were paid to the petitioners
and R-2 had to purchase the said land after paying the consideration for each and.
every sale. It was pointed out that on 9th March, 2010, 27th March, 2010 and 10th
April, 2010 R-9 wrote to the petitioners to contribute towards repayment of the loan,
however, the petitioners did not respond to the said letters. The petitioners even in the
meeting which they had with R-18 which meeting is also referred to by R-18 in its
letter dated 29th March, 2010 did not state that they are not under an obligation to
contribute till R-9 contributes Rs. 160 crore. It was pointed out that the cheques
issued to R-18

Page: 339

towards repayment of the loan by R-2 were dishonoured and R-18 issued statutory
notice with respect to the dishonour of the cheques even to P-2 and P-3 and there was
no response by the petitioners. Thus, the purported stand with respect to Rs.160 crore
is an afterthought. As regards P-2 and P-3's stand that the letter dated 19th June,
2010 has been dictated by R-9 and has been written on behalf of R-2, it was
contended that P-2 and P-3 are educated persons and are carrying on business since
long time, it cannot be believed that any rational person who has no obligation to
contribute towards repayment of the loan would agree to write such a letter and would
not protest that R-9 is to attribute Rs.160 crore. The said letter has been written by
both P-2 and P-3 and had it teen written and signed for and on behalf of R-2, it would
have been on R-2's letterhead and would have been written by one person.

29. The applicant has vehemently denied that the petitioners had provided 200
acres of land. It was pointed out that the petitioners were to provide 200 acres of
contiguous land to R-l and in consideration for providing the 200 acres of land P-l was
paid an amount of Rs-. 20 crore under the JVA (Recital 1 and 2 to JVA). The
petitioners failed to provide 200 acres of contiguous land to R-l or R-2 and only
provided 43 acres of land which was pre-existing in R-2. The failure of the petitioners
to provide 200 acres of contiguous land without any further consideration resulted in R
-2 having to purchase the land after payment of consideration for the same. The
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contention of the petitioners that 200 acres of land was provided by the petitioners to
R-2 is belied from the balance sheet of R-2 as at 31st March, 2007 which denotes that
as on 31st March, 2007 R-2 had only 103 acres of land and the said land was
purchased by R-2 by paying a consideration of approx. Rs. 17 crore. Out of the said
103 acres of land 43 acres of land was pre-existing in R-2. The said balance sheet is
not disputed and has been filed by the petitioners. The entire land which is approx.
271 acres has been purchased by R-2 upon payment of consideration and the
petitioners have merely provided 43 acres of land despite admittedly receiving 20
crore for 200 acres of land. The said stand of R-2 is substantiated by the balance sheet
of R-2 as at 31st March, 2008 which demonstrates that R-2 has acquired by payment
of approx. Rs. 76 crore approx. 271 acres of land. The said balance sheet is signed by
P-3 and has also been annexed to the petition. My attention was drawn to a detailed
chart setting out the details of payments made by R-2 for purchasing 165 acres of
land out of the 200 acres of land which was to be provided by the petitioners without
further consideration, Rs. 20 crore was paid as per JVA. The remaining 35 acres of land
out of the said 200 acres of land was not even available to be purchased. The said 35
acres of land does not form part of the entire 271 acres of land acquired by R-2. Thus,
it was pointed out that the petitioners have failed to provide 200 acres of land despite
having received Rs. 20 crore for the same. During the course of arguments the
petitioners have admitted that the land has been purchased by R-2, however, the
contention of the petitioners was that R-2 has acquired the said land by

Page: 340

payment of amounts equivalent to the circle rate. This stand of the petitioners was not
disclosed in the petition filed by them and they have in the petition falsely asserted
that 200 acres of land has been provided. If the said 200 acres has been paid for by R-
2 it cannot be said to have been provided by the petitioners. The petitioners have
given no explanation as to why R-2 had to make payments for this land whether on
circle rate or otherwise. Further, the petitioners have not placed on record any
document to show that they have paid any amount for the acquisition of the purported
122 acres of land purchased by R-2 from funds provided by R-9 and R-18 (i.e., 165
acres — 43 acres). The petitioners have signed balance sheets which denote that
entire 271 acres of land has been purchased by the R-2 for consideration. Further, my
attention was drawn to a chart which sets out details with respect to payment for
acquisition of entire 271 acres of land.

30. Refuting the petitioners contention that the petitioners are not under an
obligation to contribute for re-payment of loan of Rs. 50 crore taken by R-2 from R-18,
R-18 is only corresponding with R-9 and, therefore, R-18 even understands that the
loan is to be re-paid by R-9 notice of default was not addressed to petitioners and no
intimation received, the counsel for the applicants contended that it is an admitted
position that the loan of Rs. 50 crore was required. Admittedly the financial assistance
agreement and security documents have been signed by the petitioners, P-2 and P-3
had given personal guarantees and P-l had given a corporate guarantee. It was argued
that if Rs. 160 crore was to be contributed by R-9 and no loan was required to be
taken, the petitioners would not have without any protest or even a whisper issued
personal guarantee and corporate guarantee. The Board resolution of R-2 dated 1st
October, 2007 whereby the procurement of loan of Rs. 50 crore by R-2 from R-18 was
sanctioned is admitted by the petitioners in para 2.4 of their petition. The resolution
authorises various persons severally-including Shri D P Dudeja to act for R-2 and even
authorises execution of loan documents, security documents, modifications and
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amendments thereto. Further, it was pointed out that the financial assistance
agreement in clause 9.1 sets out the address for correspondence and the name of the
individuals and R-18 has communicated with R-2 at the said address, the financial
assistance agreement is signed by P-3. Clause 7.2 of the said agreement entitles R-18
to invoke any of the securities. R-l had pledged its holding in R-2 and the said Pledge
Deed is signed by P-3 (Naresh Jaggi) on each and every page and the said deed
authorises R-18 to sell the pledged shares by giving three days notice. The notice of
default and invocation of pledged shares dated 16th June, 2010 was issued to the
borrower (R-2) at the address mentioned in the financial assistance agreement and to
the pledger (R-1).
31. The counsel for the applicant pointed out that during the hearing the petitioners
for the first time have taken a strange stand that the default notice was not received
by them on 18th June, 2010 when they visited R-2's

Page: 341

office for a Board meeting, the said notice was delivered to the petitioners on 18th
June, 2010 at their residence, this strange stand is even not stated in the petition.
Even after admitting the receipt of the e-mail dated 17th June, 2010 vide which the
petitioners were requested to attend the Board meeting being scheduled for 18th
June, 2010 the petitioners have denied attending the Board meeting on 18th June,
2010, the minutes of which record that P-2 and P-3 have attended the said meeting
and had undertaken to repay their part of loan recalled. According to the petitioners
despite the receipt of the notice of default dated 16th June, 2010 they did not bother
to attend the Board meeting scheduled on 18th June, 2010 and thereafter, did not
make any enquires with respect to the invocation notice issued by R-18 and
enforcement of pledge by R-18.

32. It was pointed out that the documents pertaining to re-schedulement of loan
enured to the benefit of R-2 and by no stretch of imagination can these documents be
construed to state that R-9 was to discharge the entire loan liability of R-2 and
petitioners had no obligation to contribute towards repayment of the loan. R-9 had
paid an amount of Rs. 20.84 crore towards repayment of the loan. The enforcement of
pledge was due to the default by the petitioners by failing to contribute funds in R-2
and the petitioners cannot be allowed to take benefits of their own default. As per the
balance sheet of R-2 for the year ending 31st March, 2010 R-9 has contributed Rs.
58,57,01,779 in R-2 and the contribution of the P-l is stated to be NIL. The said
balance sheet is even signed by P-3 (Naresh Jaggi). The loan liability was of R-2 and it
was R-2 which was to discharge its loan and there is nothing on record to suggest that
one promoter group (R-9) was to discharge the entire liability of R-2 and another
promoter group (P-l) was not to contribute in R-2 towards repayment of the loan
liability. Despite not having any obligations to continue to contribute funds into R-2, R
-9 continued to infuse funds in R-2 and as on 30th November, 2010, R-2 owes an
amount of Rs. 73 crore to R-9. The entire case of the petitioners is belied from the
documents on record more particularly, the balance sheet signed by them and the
letter dated 19th June, 2010.
33. The counsel for the applicant contended that as regards the argument with
respect to the invocation of only the shares pledged by R-l and not other securities is
devoid of any merit. It is the prerogative of the lender to choose which security to
enforce and the security enforced by the lender was the most liquid security as R-2 is
developing an SEZ project and enforcement of other securities would either have been
a long drawn process or would have resulted in the denotification of SEZ.
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34. It was further contended that the grievance with respect to purchase of shares
by R- 9 and R-15 and no notice being given to the petitioners is an argument of
desperation. The petitioners admittedly had notice of invocation of pledge issued by R-
18, i.e., letter dated 19th June, 2010 and chose not to approach R-18 or to repay their
part of the outstanding loan

Page: 342

amount. R-9 by this stage had already invested Rs. 73 crore in R-2 and in terms of
SEZ Act and Rules, 2006 [rule 5(4)], for the project to continue as an SEZ project, R-9
was required to hold 26 per cent in R-2. Thus, R-2 had no other option than to
purchase the shares from R-18 after payment of Rs. 26 crore. R-9 had to purchase the
shares already held by it after paying a huge amount of Rs. 26 crore and even after
paying Rs. 26 crore the holding of R-9 remained around the same as before
enforcement of the pledge. After the purchase of shares, R-9 has made an investment
of more than Rs. 100 crore in R-2 and the SEZ project in comparison to nil
contribution by the petitioners. It was contended that the arguments with respect to R
-15 being related to R-9 are even without any basis. R-15 has even purchased 49 per
cent of the issued and subscribed share capital of R-9 for valuable consideration of
approximately Rs. 24 crore.

35. The counsel for the applicants pointed out that the petitioners have made a
fictitious argument that an asset (land) worth Rs. 500 crore has been sold for a
meagre sum of approximately Rs. 52 crore. The petitioners have not placed on record
any document whereby the land is valued at Rs. 500 crore and have lost sight of the
fact that the land was valued by Knight & Frank for approximately Rs. 136 croes. In
the said report, Kinght & Frank has explained as to how the value per acre of land
would differ depending upon the location of the land. It was pointed out that the
equity shares held by R-1 in R-2 were valued by Kalyaniwala & Mistry and while
valuing the equity shares, Kalyaniwala & Mistry have taken into consideration the
value of land as per the report of Knight & Frank and has subtracted the liabilities of R
-2 from the value of land in order to determine the value of equity shares of R-2. This
is as per settled principles of accounting. The said report has been assumed to be
correct more so as there is no report/valuation on record wherein the land has been
valued as a Agro SEZ and the shares of R-2 have been valued. It was pointed out that
both valuers are reputed valuers. The inputs by R-9 in the valuation report as
mentioned in the report of Knight & Frank relate to land and R-9 has no role in the
valuation of equity shares. It was pointed out that the valuation report filed by the
petitioner at the stage of reply arguments has no relevance either to the subject
petition or to the valuation of land. The said valuation report is based upon the land
being sold for engineering units as at that point of time, it was an Engineering SEZ.
However, Engineering SEZ was not getting sold and it was converted into an agro-
based product SEZ. In an agro SEZ the value which the land fetches is lower in
comparison to Engineering SEZ as the parcels of land required to set up a unit in an
agro-based SEZ are larger. The petitioners have not placed on record any document
with respect to the valuation of land in R-2. R-2 is to implement an agro-based SEZ
and the utility of the SEZ on the date of valuation by Knight & Frank was an agro-
based SEZ, the petitioners have nowhere raised any dispute with respect to conversion
of an Engineering SEZ to an agro-based SEZ.
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36. As regards the petitioners’ argument that section 91 of the Evidence Act states
that no evidence shall be given in proof of the terms of a contract other than the terms
of the contract, and that the JVA, S-JVA and shareholders agreement record that the
petitioners have contributed 200 acres of land, it was argued by the counsel for the
applicants that neither the JVA, nor the S-JVA in any manner demonstrate .that the
petitioner had contributed 200 acres of land and the stray reference in the recital of S-
JVA with respect to the 200 acres of land cannot be read to substantiate that 200
acres of land was provided by the petitioners. Further, the said document read with
the balance sheet of R-2 as on 31st March, 2007 demonstrates that the petitioner had
not provided 200 acres of land free of cost to R-2. Further, the said argument becomes
meaningless as the land has been purchased by R-2. With respect to shareholders
agreement, the mention in the recital with respect to 271 acres of land does not state
that the land was provided by the petitioners free of cost as envisaged in the JVA. The
petitioners are approbating and reprobating with respect to their submission
pertaining to section 91 of the Indian Evidence Act. On the contrary, section 91 of the
Indian Evidence Act ensures to the benefit of R-2 as the petitioners are trying to give
an interpretation and lead evidence contrary to the specific terms of the JVA, S-JVA,
shareholders agreement and sale deeds executed by R-2 with respective sellers of land
as reflected in the balance sheet of R-2. The petitioners are trying to deliberately
misread the terms — land, additional land and said land in the S-JVA. Reliance is
placed by the petitioners on Recital B and C of the S-JVA to contend that the term
“the land” in Recital read with Recital B refers to entire 250 acres of land. A bare
reading of S-JVA makes it clear that each and every clause has to be read to
understand the context in which the term land has been used as it has been used
interchangeably for 200 acres of land and additional land although it has been defined.
In clause 4 of the S-JVA the term ‘land’ has been used but it refers to the additional
land which is clear from the reading of the said clause and even the pleadings on
record. Further, ‘land’ being a capitalised term has not been used in the S-JVA in
capitalised form. Even otherwise the petitioners in order to substantiate their
arguments pertaining to section 91 of the Indian Evidence Act have merely placed
reliance upon the recitals of the documents whereas it. is a settled principle of law that
a recital to a document do not constitute terms of the agreement. Reliance was placed
upon the decision of the hon’ble Supreme Court in the case of Gangamma v.
Shivalingaiah, (2005) 9 SCC 359 and also reference was made to the decision in the
case of Gondu Ramasubbu Iyer v. Muthaiah Kone.
37. The counsel for the applicants contended that the argument of breach of
fiduciary duty by the directors/shareholders of R-l belonging to R-9 group does not
hold any water because the shares of R-2 had been pledged against the loan taken
with complete concurrence of the petitioners and the petitioners have even signed the
pledge documents; there is no allegation that the loan was not required or that the
loan was wrongly taken; the

Page: 344

impending sale of shares of R-2 by R-18 and their notice dated 16th June, 2010 was
immediately brought to the notice of the petitioners, but the petitioners could not/did
not make the payment due to R-18 as part of their share; the act of selling the shares
is that of R-18 and not of the directors of R-l and R-2 or that of R-9; sale of shares
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could only have been prevented by the petitioners if they had chosen to make their
contribution for the re-payment of R-18's loan; R-9 had contributed its share into R-2
towards repayment of loan taken from R-18; there is no obligation on R-9 to make
contribution towards the petitioners share in addition to contribution of their own
share; on the shares being sold by R-18, there was no option for R-9 but to purchase
the shares of R-2 to protect its huge investment in the project; not purchasing of R-
2's shares by R-9 would have meant that their entire shareholding would have been
sold to 3rd party which would have been in no ones interest; the argument with
respect to breach of fiduciary duty by R-9 qua the petitioners, R-l and R-2 has been
made by the petitioners to shield the repeated defaults which they continued to
commit more particularly with respect to failing to contribute funds in R-2 in order to
discharge the loan taken from R-18. First and foremost, before asserting the argument
of fiduciary duty, the petitioners ought to have explained their default. The petitioners
have not spelt out any defence other than that they were simple people and have
chosen to deny material resolutions where their presence has been recorded. The
concept of fiduciary duty is based upon the principles of “trust” and the person
purportedly acting in default must have been reposed with some trust and the said
person is said to have acted contrary to the trust imposed upon him. In the facts and
circumstances of the present case, by purchase of equity shares by R-9, R-9 has
protected the interest of R-2 and hence, there cannot be any purported breach of
fiduciary duty towards R-2. The argument with respect to purported breach of fiduciary
duty qua R-l is based on an assumption that R-9 was to continue to discharge all
liabilities of R-2 and was not to protect its investment which was to the tune of Rs. 74
crore on the date of invocation of pledge. The doctrine of fiduciary duty would have no
obligation qua R-l as R-9 had no role in the enforcement of pledge by R-18 and the
said act of enforcement was not attributable to R-9. On the contrary enforcement of
pledge by R-18 was due to default by the petitioners. The doctrine of fiduciary duty
being an equitable doctrine cannot enure to the benefit of a defaulting party. Further,
the purported breach of fiduciary duty by R-9 qua R-l is without any basis as R-18 was
exercising contractual rights under the pledge deed and if R-9 had not purchased the
pledged shares, a third party would have purchased the same and that would not have
placed either R-l or petitioners in better position than they are as on date. Thus, the
entire argument of fiduciary duty is merely to confuse the issue. Further, the
petitioners who are now complaining of breach of fiduciary duties had admittedly not
taken any steps to protect the interest of R-9, R-1, R-2 and their own interest in R-l
and R-2. The petitioners even in the petition have not made an averment

Page: 345

that they were ready and willing to discharge the loan liability of R-2 and were willing
to purchase the equity shares from R-18 upon enforcement of pledge for a
consideration. It would not be out of place to mention that in the High Court R-15 had
offered to sell its holding in R-2 to the petitioners at the value it had purchased plus
reasonable returns and the petitioners had categorically refused the said offer. The
petitioners merely want to hinge on the fictitious argument of Rs. 160 crore and
neither contribute their share nor allow R-2 to survive. The argument of breach of
fiduciary duty qua the petitioners is even baseless in view of aforesaid arguments and
that the petitioners were themselves responsible for enforcement of the pledge and
the R-9 was well within its rights to protect the interest of R-2 and its interest in R-2
by purchasing the pledged shares for a consideration from R-18. The petitioners are
themselves in breach of fiduciary duties as due to their defaults R-2 and R-9 are
suffering and the question of R-9 not disclosing its intention to purchase the shares
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pledged with R-18 in the Board meeting of 18th June, 2010 does not arise as the
petitioners had assured that they would make payment and R-9 believed that the
petitioners would make payment as assured by them to the Board. However, as the
petitioners failed to act upon their assurance, R-9 had no other option to protect its
investment in R-2 and the interest of R-2 by purchasing 50 per cent of the holding of
R-2 from R-18 on 21th June, 2011 for approximately 26 crore. R-9 has merely
purchased its own indirect holding in R-2 and that too by paying a consideration of
approximately 26 crore and R-9 has no control over the acts of R-18 and the choice of
security which it chooses to enforce.

38. It was contended that the petitioners are aggrieved by the action of R-18 to sell
the shares of R-2 held by R-l, actions of R-9 and R-15 in purchasing the said shares
sold by R-18. Neither of the above actions is an action in operation or management of
either R-1 or R-2. The decision to self the shares by R-18 was not a decision taken by
the officers anyone in the management of R-l and R-2. Similarly the purchase of
shares of R-2 by R-9 or R-15, is not an action in management of R-2 or R-l and is
totally independent and cannot constitute oppression of the petitioners or
mismanagement of R-l and R-2. Any such grievance could only be redressed by a civil
suit and not by the CLB. The petition filed by the petitioners is nothing but an abuse of
process of law. Further, the JVA has an arbitration clause and R-9 has already invoked
arbitration. The allegations contained in the petition do not constitute oppression and
mismanagement. Hence, it was contended that even the company petition filed by the
petitioners is not maintainable.
39. Distinguishing the judgment in Ms. Heena Dutt (supra) relied upon by the
petitioner, the counsel for the applicants pointed out that the said judgment has no
application in the facts and circumstances of the present case as the said case relates
to siphoning off funds by directors and discounted sales by directors. In the present
case, the sale/transfer of the pledged shares was by R-18 and not by either the
directors or by R-2 or by R-9. In para 22 of the

Page: 346

said judgment the emphasis is on “any profit by his management directly or

indirectly”. In the present case, there is no instance of either of the respondents
making any profit by their management of either R-1 or R-2. On the contrary, the sale
of the pledged shares was due to default by the petitioners. Further, referring to the
case of P Narayanasamy v. Neela Spinning Mills (P.) Ltd., (2009) 152 Comp Cas 655
(CLB) relied upon by the petitioners, it was contended that in that case the loan was
itself found to be fraudulent and it was further found that the said loan was not
required. In para 12 of the said judgment there is a finding that “the need of the
benefit derived by the company from and out of such borrowing is not established and
lacks bona fide”. In the present case, the necessity of loan taken from R-18 by R-2 is
admitted and for the grant of said loan petitioners have signed the financial assistance
agreement and various security documents. Thus, the judgment has no application in
the present case. As regards the case of P.K Prathapan (supra) relied upon by the
petitioners it was contended that the said judgment relates to a private limited
company and issues pertaining to section 81 of the Act. Paras 13 and 14 of the said
judgment relied upon by the petitioners relates to reproduction of observations made
in some English decisions. Paras 13 and 14 of the said judgment has no application as
none of the directors of either R-l or R-2 have used any powers or have derived any
benefit for themselves. In the present case, it is an admitted position that the
petitioners had notice of the notice dated 16th June, 2010 issued by R-18 and even
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had notice that in the event of non-payment of dues to R-18, R-18 would sell the
shares pledged by R-l. Despite having the said notice, petitioners did not take any
steps to discharge the loan liability of R-2. Further, in the present case R-9 had
invested an amount of approximately Rs. 74 crore in R-2 (SEZ project) and had to
purchase the shares held by itself, as R-9 held 50 per cent of the share capital of R-l
and R-l held 100 per cent of the share capital of R-2, from R-18 after making payment
of approximately Rs. 26 crore. The reason for R-18 selling the shares pledged by R-l
was the default committed by the petitioners. As regards the case of 134 Regal
(Hastings) Ltd. (supra) relied upon by the petitioners, it was pointed out that in the
said judgment the company [Regal (Hastings) Ltd.] was claiming profits derived by
their ex-directors by sale/transfer of shares which the said directors held in the
subsidiary of the said company, the House of Lords in the said judgment after
analysing the pleadings and evidence led before the trial Judge observed with respect
to the said directors that “at all material times they were directors and in a fiduciary
position and they used and acted upon their exclusive knowledge acquired as such
directors. Further, in the said judgment it was the case that the company could have
itself subscribed to the shares of its subsidiary and the directors framed resolutions in
a manner that they made profit for. themselves and subscribed to the shareholding of
the subsidiary, the House of Lords held that the ex-directors had obtained the shares
of the subsidiary “by reason and only reason of the fact that they were directors of the
company and in course of execution of that office are accountable for the

Page: 347

profits which they have made out of them”. Further, in the said judgment the principle
laid down in the case of Keech v. Sandford [ ] () has been relied upon which states
that a trustee for an infant is under a duty to obtain renewal of lease in favour of the
infant on the ground that if trustees are allowed to renew the leases in their own
name, few renewals could be made for the benefit of infant, the said principle has no
application in the present case as that is to ensure that there is no conflict between
the trustee and the beneficiary. Further, the facts on the basis of which the said
judgment was passed has no correlation with the present case. In the present case, R-
9 and R-15 have acquired the shares of R-2 upon enforcement of rights which R-18
had under the pledge deed and R-9 has acquired the shares of R-2 after payment of
consideration to R-18 not out of choice but out of compulsion to safeguard the
investment which it had made in R-2 and to safeguard the interest of R-2 itself. As
regards the judgment in Pierce Leslie & Co. Ltd. v. Miss Violet Ouchterlony Wapshare,
(1969) 3 SCR 203 though cited by the petitioners but was not relied upon by them.
The counsel for the applicants placed reliance on paras 1, 3, 4 and 6 of the said
judgments which strengthen the applicants case. As regards the case of Mittal Dal
Mills (P.) Ltd., In re, it was pointed out that the said judgment relates to a’ private
limited company and the grievance of the petitioners in the said judgment related to
the fact that they had no opportunity to discharge the loan. Further, that the loan was
recalled even when principal was not even due. The CLB in the said facts and
circumstances gave finding of mala fide. It was pointed out that the said judgment
has no application to the present case as in the present ca*se, the loan was due and
payable. Further, the repayment of the loan had been already rescheduled once at the
request of R-2 and R-2 had defaulted in repayment of the loan. Further in the present
case, R-l, R-2, R-9 and the petitioners had notice with respect to the default
committed by R-2 and the intention of R-18 to sell the shares of R-2 pledged by R-l.
Furthermore, in the present case, the default in repayment of the loan was due to the
petitioners. Further, a judgment based upon finding of mala fide cannot be considered
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as a precedent as mala fide is a question of fact which would differ in each case. It
was pointed out that the other Judgments cited by the petitioners have no relevance
to the present case and have no applicability in the facts and circumstances of the
present case and more particularly in respect to vacation of the order passed by the
hob’ble CLB on 2nd December, 2010.

40. The counsel for the applicant pointed out that the sole asset R-2 is the SEZ
project and the said project has to be implemented in a time bound manner. Even
after having gotten 2 extensions R-2 has to implement the SEZ by 17th June, 2012,
no further extension would be given to R-2 to implement the SEZ. For the
implementation of the SEZ project, funds to the tune of approximately Rs. 100 to 120
crore would be required by R-2. One of the sources of funds which R-2 has for
implementation of the SEZ project is through leasing of piece and parcel of land in the
SEZ project. The said land is like stock in trade of R-2. The order dated 2nd December,
2010 restrains R-

Page: 348

2 from leasing/selling the land in the project and, thus, R-2 has been deprived of
major source of funding to implement the project. Further, R-2 in order to implement
the project would have to take finance, execute agreements with third parties, have
investment in R-2, sub-contract various developments in the project, undertake
further issue of capital and explore other possibility of getting funds for the
implementation of the SEZ project. With the present order dated 2nd December, 2010
continuing whereby R-2 has been restrained from holding Board meetings,
shareholders meeting and changing the composition of Board of directors and
shareholders, R-2 would not be able to get appropriate finance required to implement
the SEZ project in a time bound manner. Further, it is impossible to come back to the
CLB with respect to holding of Board meeting to authorise execution of a required
agreement by R-2 and with the passage of time undertaking the said exercise would
be detrimental to the interest of R-2. If the order dated 2nd December, 2010 is not
vacated, R-2 would not be able to implement the SEZ project and the entire SEZ
project would get denotified and the nature of the land held by R-2 would get
converted to agricultural land. Thus, R-2 would suffer by reasonable estimated loss
exceeding Rs. 110 crore. In the event the petition fails at the stage of final
adjudication by no manner R-2 can be placed in the same situation. The contention
that if the order dated 2nd December, 2010 is not be vacated, petitioners should be
directed to deposit an amount of Rs. 110 crore in the CLB to secure part interest of R-
2 was reiterated. It was contended that the balance of convenience is in favour of the
applicant and an irreparable loss shall be cause to the applicant in case the stay
granted vide order dated 2th December, 2010 is not vacated. On the other hand the
petitioners have received Rs. 20 crore for 200 acres of land and have only provided 43
acres of land. On the other side R-9 has contributed Rs. 74 crore in R-2 and has
purchased the shares indirectly held by it for approximately Rs. 26 crore and would
have to further ensure that the SEZ project is implemented. The petitioners insisting
on the continuation of the order dated 2nd December, 2010 demonstrates that the
petitioners are nowhere concerned with the interest of R-2 and have no investment in
R-2. Further, the petitioners interest, if any, can be adequately compensated in terms
of money. It is settled principle of law that while granting restrain orders principles of
equity, balance of convenience and irreparable loss and injury have to be applied.
Reliance is placed on the decision of the hon’ble Supreme Court in the case of
Kishorsinh Ratansinh Jadeja v. Maruti Corporation.
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41. I have considered the rival submissions and the case law cited by the parties.
There is no dispute with the rare law cited but each case turns on its own facts. In the
facts and circumstances of the present case it is noted that the applicants have rightly
distinguished the case law relied upon by the petitioners which are, in fact, not found
applicable to the facts of the present case, and more particularly when CLB is
considering vacation of ad interim orders. On consideration of the facts of the case on
the basis of the documents I produced and averments made and the arguments
advanced it is noted that

Page: 349

the petitioners have failed to meet the contentions of the applicants as noted in this
order, the contentions are not being repeated for the sake of brevity, the petitioners
have failed to provide any answer to the contentions of the applicants which are duly
substantiated by the documents, veracity of which cannot be doubted, the applicants’
contentions remain uncontroverted. The petitioners have failed to make out a case of
breach of fiduciary duties by R-9 qua R-l, R-2, as well as the petitioners as equal
shareholders and having equal representation on the Board as per the JVA. The
petitioners’/non-applicants’ case, in short, is that 200 acres of land was provided by
the petitioners; Rs.160 crore was the contribution by the petitioners and R-9 had to
contribute equivalent to Rs. 160 crore and till that stage petitioners had no liability to
infuse funds in either R-l or R-2; petitioners are not under an obligation to contribute
for re-payment of loan of Rs. 50 crore taken by R-2 from R-18; R-18 is only
corresponding with R-9 and, therefore, R-18 even understands that the loan is to be
repaid by R-9; notice of default was not addressed to the petitioners and no intimation
was received; valuation report undervalues the land and the value of pledged shares,
an asset worth Rs. 500 crore has been sold for a meagre sum of Rs. 52 crore
approximately; there is breach of fiduciary duty; section 91 of the Indian Evidence Act
provides that no evidence shall be given in proof of the terms of a contract other than
the terms of the contract, the JVA and S-JVA and shareholders agreement record that
the petitioners have contributed 200 acres of land; the petitioners being aggrieved by
the act of selling of shares of R-2 held by R-18 and by the acts of R-9 and R-15 in
purchasing of the said shares sold by R-18; R-9 has obtained substantial benefits by
virtue of being in the management of R-l and R-2; what is impugned by way of the
company petition is not the wrongful exercise of rights of R-18 under the pledge
agreement, the essential challenge is the breach of fiduciary duty by R-9 as the JV
partner; CA No. 5/2011 is not maintainable, stay cannot be vacated, there is no
urgency. To support their contentions the petitioners relied upon the case law in Ms.
Heena Dutt (supra); P Narayanasamy (supra); P K Prathapan (supra); Gulliver
(supra); Pierce Leslie & Co. Ltd. (supra); Mittal Dal Mills (P.) Ltd. (supra). It is noted
that the petitioners’ case is prima facie not borne out from the records.

42. The petitioners have admittedly signed all the documents relied upon by the
applicants. The petitioners’ case is that they have signed the documents in good faith
wherever they were asked to. If they feel that they have been duped or/and that the
lender and certain parties have colluded to dupe them, their remedy lies elsewhere,
certainly not before the CLB. It is admittedly the petitioners’ case that the transaction
between R-18, R-9 and R-15 is also in violation of the Contract Act, especially section
176. The applicants have rightly contended that violation, if any, of any contractual
obligation cannot be got enforced through the CLB. Remedy lies before another forum,
certainly not the CLB.
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43. As regards the petitioners’/non-applicants’ contention that R-9 was bound by

the terms of clause 9 of the JVA to ensure that the demand of the L&T was met, it is
noted that the petitioners have attempted to read the clauses of the JVA and S-JVA
differently to make their case that till the cost of the land (which according to them
was Rs. 160 crore) is met, they had no liability/ obligation to repay the loan borrowed
by R-2. For this purpose the petitioners have even relied on the definitions of the said
land’ (clause ‘A’ of S-JAVA), ‘additional land’ (clause 4B’ of S-JVA) and ‘collectively
the land’ (clause ‘B’ of the S-JVA) and further clause ‘B’ of the S-JVA defines the ‘said
land’, ‘additional land’ and ‘the land’. It is noted that the applicants have rightly
contended that the JVA and the S-JVA nowhere stipulate that the cost of 200 acres of
land was Rs. 160 crore (200 acres of land multiplied by the rate of the land, i.e., Rs.
80 lakh per acre as calculated by the petitioners), Rs. 20 crore was duly paid, the
petitioners had not brought in 200 acres of land for free, the balance cost was rriet by
the R-2, the petitioners were also paid further Rs. 40 crore for brining in additional
land of 50 acres of land at the rate of Rs. 80 lakh per acre, the rate of Rs. 80 lakh per
acre was for the additional land and not for the 200 acres of land which the petitioners
and their associates had represented that they had. There is no answer to the
applicants’ contention which they made by reading clause 4 of S-JVA that the
definitions given in the S-JVA were loosely used giving different meanings at different
places otherwise how is it that the amount provided as refundable to R-9, in case the
JVA fails, was Rs. 20 crore (clause 22) and not Rs. 160 crore. In any case a recital to a
document does not constitute terms of the agreement. Further, there is no answer to
the applicants-contentions that there is not a single document produced by the
petitioners that the R-9 had not paid the land cost and till the land cost (Rs. 160
crore) is met, why should they (the petitioners) be asked to repay the loan.
44. It is noted that the counsel for the applicants has objected to the petitioners’
additional affidavit dated 21st July, 2011 whereby the petitioners had placed on record
certain documents without failing to set out any reason as to why those documents
were not placed on record with the rejoinder, it has been rightly contended that the
same cannot be taken on record. However, referring to a statement of account placed
with the affidavit it was contended that the statement demonstrates that all cost and
expenses were to be divided proportionately between respondent No. 9 and petitioner
No. 1, the statement demonstrates that the loan taken from respondent No. 18 was to
be repaid equally by petitioner No. 1 and respondent No. 9 that the said statement
demonstrates that the JV partner had to make equal contribution, however, the falsity
of said statement is evident from the balance sheets of respondent No. 2 and the loan
documents executed with respondent No. 18.
45. The balance sheet of respondent No. 2 as on 31st March, 2007 demonstrates
that 103 acres of land has been purchased for Rs. 17 crore and

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the balance sheet of respondent No. 2 as at 31st March, 2008 and 31st March, 2009
demonstrate that 270 acres of land has been purchased for approximately Rs. 76 crore
that approximate cost of acquisition of land by respondent No. 2 was approximately
Rs. 23.86 lakh per acre, the balance sheets for the years ending 31st March, 2007,
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31st March, 2008 and 31st March, 2009 have been signed by the petitioner Nos. 2 and
3. The documents placed on record fail to demonstrate that Rs. 80 lakh per acre was
agreed between the parties, that the agreed value of land was Rs. 80 lakh per acre
and that the petitioner No. 1 had provided 200 acres of land to the respondent No. 2.
Clause 17 of the JVA has to be read as a whole with respect to Rs. 20 crore paid by
respondent No. 9 to the petitioner No. 1. Clause 18 is very clear. Rs. 80 lakh per acre
was not the agreed value of land and the purpose for which Rs. 20 crore were paid.

46. It is noted that the petitioners’/Not-applicants’ contention that repayment of

loan to R-18 was not their obligation till R-9 had met the land cost (Rs. 160 crore for
200 acres of land at the rate of Rs. 80 lakh per acre) and which according to the
petitioners was not met by R-9 when Rs. 50 crore were borrowed from R-18, is not
borne out from the documents on record. Instead, the documents relied upon by the
applicants show that the petitioners knew very well as to what was the loan about, on
which terms and by giving which securities, they had even executed the documents
including the pledge agreement, they were aware of the default and were only
requesting for further time to be able to repay the loan. Till the arguments
commenced on CA No. 5/11, the petitioners had not produced a- single document
which records that the R-9 was to first bring in funds to the tune of Rs. 160 crore
which would be equal to the cost of land alleged to have been procured for the SEZ
project by the petitioners and its associates without any cost to R-l or R-2, and only
thereafter the petitioners’ will be under any obligation to repay 50 per cent of any
funds borrowed for the additional land/development of the project. Petitioners have
chosen to interpret the clauses of the JVA and the S-JVA to suit their case to read that
“till the land cost was met” meaning thereby Rs. 160 crore when 200 acres of land is
multiplied by the rate of land which according to them is Rs. 80 lakh per acre. The
specific clauses are read to mean that till R-9 had also contributed Rs. 160 crore to
match the cost of land brought in by the petitioners, the petitioners were not to share
any liability towards the repayment of loan.
47. Further, it is noted that the applicants have rightly stated that in an attempt to
substantiate their case the petitioners have even fabricated the S- JVA and a letter
dated 27th May, 2010 to the directors of APIL at page no. 146 (annexed to their
additional affidavit filed on 22th July, 2011) a letter purported to have been written to
say that no interest is payable to R-9 on the funds provided by R-9 and in that letter
for the first time it is mentioned that “you have demanded interest on some of your
contribution in the SEZ project. This is to inform you that according to our JV
agreement there is no

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such clause according to which Seagull Buildwell (P.) Ltd. will pay any interest to APIL
on their investment in the SEZ project until the land cost is met...”, A fabricated S-
JVA is placed on record (pp. 394 to 398 of Company Petition Vol.III). On comparing
the typed copy of S-JVA filed by the petitioners at pp. 394 to 398 at Annexure P-7
with the photocopy of the S-JVA filed by the R-2 at pp. 77 to 80 of Ajmexure C the
following discrepancies, additions, interpolations are noted :

(i) the word ‘Addl.’ is missing before the word ‘general manager’ (at p. 394 — 4th
line of first para);
(ii) a new para is added (at p. 394 — last 3 lines) which reads as-under :
‘(The expression “the second party” wherever it occurs in this agreement shall
and include collectively or individually, wherever the context so requires,
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Seagull Buildwell (P.) Ltd. and its associates . as per Annexure.).’

(iii) the word “under agreement” is added in para A (at p. 395.in 5th line);
(iv) the para (C) of the copy furnished by the respondents which reads’ as under :
“The cost of the land to the JV as per the JV agreement has been fixed at Rs.
80,00,000 per gross acre which includes stamp duty/registration charges,
commission, etc.”
which therein the S-JVA is completely missing (at page 395);
(v) the sentence “/in favour of its subsidiary Kamdhenu Agro (P.) Ltd.” is added in
para (C)” (at p. 395 — 4th line);
(vi) the word “will” is added in place of the word “to” in para (E) (at p. 396 in first
line);
(vii) the date mentioned in para (F) is 31st August, 2006 (at p. 396 — last line);
(viii) the sentence “on the request of the second party” in para (G) is deleted (at p.
396 — first line);
(xi) the word “was” in the first para in first line at p. 397 is replaced with the word
(is and the sentence “provide additional 50 acres of contiguous land. The second
party assures the first party that they have entered into agreements for purchase
of the additional lands with the land owners and are in the process of execution
and registration of sale deed in its favour which process will be completed as
early as possible” is added and some part of original para is deleted (in para 1 at
p. 397);
(x) the words “for which funds are required” are added and some part of original
para is deleted (in para 2 at p. 397);
(xi) the sentence “/Ansal Seagull SEZ Developers Ltd./Kamdhenu Agro (P.) Ltd,” is
added in para (3) (at p. 397 in 5th line);
(xii) there are several changes (in para 5 at p. 397);
(xiii) the word “including” is added in para (6) (at p. 397 in 2nd line);
(xiv) new para is added (at p. 398) which reads as under :

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“Pursuant to the joint venture agreement dated 26th May, 2006, a y company in
the name and style of Ansal Seagull SEZ Developers Ltd. has been
incorporated on 21st September, 2006 for the purpose of setting up of SEZ. It
is agreed that if business exigencies require, the aforesaid work may be
entrusted and to carry out by any of the associate company of the second
party provided the entire share capital of the associate company is held by the
first party and its nominees and the seconds party and its nominees in equal
proportion, i.e., 50 per cent each.”
48. It is noted that during the course of hearing counsel for the petitioners
admitted that the petitioners had received the e-mail dated 17th and 18th June, 2010
vide which the default notice dated 16th June, 2010 was forwarded and a Board
meeting of R-2 was called on 18th June, 2010. Further, it is noted that the petitioners
had concealed this fact in their petition wherein it is stated that :
“Even though the notice were not addressed to the petitioner they fortuitously
learnt of the same, through an employee of the Ansals.”
This is contrary to the admissions made now that the petitioners had formally received
the notice from the respondents via e-mails dated 17th June, 2010 and 18th June,
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2010 and had even signed a copy of the said notice in acknowledgement of the
receipt. The petitioners had even concealed that they had even received the copy of
the default’ notice dated 18th June, 2010 whereas the receipt of the said notice is
acknowledged by P-2 (Sanjay Sawhney). Their contention that they fortuitously learnt
of the L&Ts notice dated 16th June, 2010 is not tenable in view of the e-mails and
their meeting with the respondents and their receipt and knowledge of all the earlier
notices with regard to the principal amount and interest thereon being overdue,
bouncing of the cheques and the consequence which followed as a result of default in
repayment of borrowed funds for which they had executed the pledge document.
49. It is noted that the petitioners have relied heavily on the case law in Gulliver
(supra) to contend that -
“[W]henever it can be shown that the trustee so arranged matters as to obtain
an advantage whether in money or money's worth to himself personally through the
execution of his trust, he will not be permitted to retain, but be compelled to make
it over to his constituent.”
Further, that :
“The duties arising from the relationship are well defined, viz., to exercise their
powers for the benefit of the company, to avoid a conflict of interest, and a duty not
to restrict their right (by contract or otherwise) and freely and fully exercise their
duties and powers. In addition to their fiduciary duties, directors also owe a duty of
care to the company not to act negligently in the management of its affairs, the
standard being that of a reasonable man looking after his own affair.”

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50. A company is a juristic person and it acts through its directors who are
collectively referred to as the Board of directors. A director is in the position of an
agent of the company, charged with the obligation of carrying on its business. The
nature of his duties is determined partly by statute and partly by the law of the
agency. As agent he owes two duties to the company — the duty of loyalty and the
duty of care. A breach of these duties amounts to breach of trust and misfeasance. The
directors are agents of the company to the extent they have been authorised to
perform certain acts on behalf of the company, in a limited sense they are also
trustees for the shareholders of the company. An individual director has no power to
act on behalf of a company of which he is a director unless by some resolution of the
Board of directors of the company specific power is given to him/her. There exists a
relationship of a trustee and cestui que trust as between the directors and the
company. If this trust is found to be violated, the action of the director is liable to be
intervened by the CLB. It is settled law that the directors are supposed to act as the
trustees of companies, and are expected to act only in their fiduciary capacity for the
sole benefit of the company. Directors are required to act on behalf of a company in a
fiduciary capacity and their acts and deeds have to be exercised for the benefit of the
company. The word ‘fiduciary’ is derived from the Latin word ‘Tiduda’ meaning trust
and means (as a noun) a person holding the character of a trustee, or a character
analogous to that of a trustee, in respect to the trust and confidence Involved in it and
the scrupulous good faith and candour which it requires. Although the directors are not
trustees in every sense of the term, they stand in a fiduciary relation towards their
shareholders with respect to the funds and business placed in their charge. The
relationship of trustee and cestui que trust subsists between the directors of
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companies and the shareholder, and the misfeasance of a director constitutes a breach
of trust. Directors of a company occupy a fiduciary position in relation to a company.
They must act bona fide and in the interest of the company. This duty of good faith
which fiduciary relationship imposes is virtually identical with those imposed on
trustees. In this sense directors are trustees. A trustee by his own voice may prevent
anything being done in the trust, which he thinks wrong, and generally he can insist
upon anything being done which he thinks right. This clearly is not so with a director
who may be overcome by a majority of his colleagues. In the absence of special
circumstances, a director of a public company, qua director only, is not such a trustee
as falls under the rule that “a trustee is not to be allowed to make a profit out of his
trust”. The fiduciary capacity within which the directors have to act enjoins upon them
a duty to act on behalf of a company with utmost good faith, utmost care and skill and
due diligence and in the interest of the company they represent, their actions must
conform to the test of utmost good faith, care, skill and due diligence. Directors have a
duty to make full and honest disclosure to shareholders regarding all important
matters relating to the company. It is a well settled principle of company law that
directors of a company are fiduciaries and

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trustees of the company's property and assets and further that directors must use the
company's assets exclusively for the business of the company and must not use them
for their personal benefit. It is equally well settled that use of the company's property
by a director without the authority of the company is wrongful and illegal and the
director who uses it for his personal benefit is liable to restore it to the company, and
is also liable for making good the loss caused by such use and return the profit made
by him by the use of such property. Equity prohibits a trustee from making any profit
for the benefit of directors or merely for an extraneous purpose like maintenance or
acquisition of control over the affairs of the company. It is well settled whilst the
directors do not have legal ownership of the company's assets, they do have effective
control of them, and they must use them and employ them for the proper purposes of
the company, and in the best interests of the company. For example, directors must
not use company funds to pay their own personal debts, or in any other way misuse or
misapply company assets for purposes which are not permitted; otherwise they are in
breach of their duty. Where a director improperly uses the company's assets for the
benefit of himself, his family and his friends, and although that had only a limited
impact on the value of the shares of the petitioner/stakeholders it would nevertheless
constitute unfairly prejudicial conduct. A director is entitled to only the salary, benefits
and perquisites from the company which have been permitted and authorised under
the law and the articles of association or, if the articles so provide, on authority of a
resolution of the Board or of the company passed at a general meeting. Being
fiduciaries towards the company, directors must act bona fide in the interests of the
company and must not exercise their powers for any collateral purpose. Further, a
director must not place himself in a position where his duty to the company and his
personal interest conflict and he must not profit from his position as a director.

51. Ordinarily the directors are not trustees for individual shareholders the standard
of conduct required from a director in relation to dealings with a shareholder will differ
depending upon all the surrounding circumstances and the nature of the responsibility
which in a real and practical sense the director has assumed towards the shareholder.
In the one case there may be need to provide an explicit warning and a great deal of
information concerning the proposed transaction. Except in special circumstances,
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e.g., when they undertake to act as the shareholders’ agents, directors owe duties to
the company, not to the individual members. Directors’ duties are owed collectively to
the company's members rather than to individual members. The directors are not
servants, to obey directions given by the shareholders as individuals; they are not
agents appointed by and bound to serve the shareholders as their principals. They are
persons who may by the regulations be entrusted with the control of the business, and
if so entrusted they can be dispossessed from that control only by the statutory
majority which can alter the articles. Directors are not bound to comply with the

Page: 356

directions even of all the corporators acting as individuals. Of course the corporators
have it in their power by proper resolutions, which would generally be special
resolutions, to remove directors who do not act as they desire.

52. Further, the equitable rule that a director who uses his fiduciary position and
knowledge to make a profit is liable to account for that profit to the company does not
depend on fraud, or on whether the profit would otherwise have gone to the company,
or on whether the company was damaged or benefited by his action. The liability
arises from the mere fact that a profit was made. The liability to account does not
depend upon proof of mala fides. The general rule of equity is that no one who has
duties of a fiduciary nature to perform is allowed to enter into engagements in which
he has or can have a personal interest conflicting with the interest of those whom he is
bound to protect. If he holds any property so acquired as trustee, he is bound to
account for it to his cestui que trust. This rule of equity which insists on those, who by
use of a fiduciary position make a profit, being liable to account for that profit, in no
way depends on fraud, or absence of bona fides. Where a person puts himself in a
position in which his fiduciary duty and his interests conflict, he must account to those
to whom he owed that duty for any profit made, even if it could never have been
obtained by those persons themselves. And the self-dealing rule is founded on and
exemplifies the wide principle that no one who has a duty to perform shall place
himself in a situation to have his interest conflicting with that duty.
53. In the present case the petitioners/non-applicants have failed to make out a
case of breach of fiduciary duties by R-9. In an action of invoking of a lender's (R-
18's) rights provided in the pledge document signed by the petitioners themselves, R-
9 has a limited role to play to the extent of meeting its obligation to repay the loan,
which it did. The decision as to which security to invoke is that of the lender. It is
totally lender's discretion/option to choose as to proceed with invoking of which
security to recover its principal amount and interest on borrowed funds. Furthermore,
the decision to sell at a particular price is also exclusively that of the lender. R-9 could
not have been allowed to play any role in this regard. It is up to the lender as to get it
valued from which valuer, and which valuation report to accept. When the borrowers
including the petitioners got a legal notice to repay within three days, as prudent
businessmen they could have anticipated the consequences of default and the
impending sale of the pledged securities could have very well be anticipated. There
cannot be any legitimate expectation of the petitioners/non-applicants who have equal
shareholding and equal representation on the Board that their liability of repayment of
loan should be met by R-9. It would be very unfair and unjust on the part of the
petitioners to even contemplate that since R-9 and R-10 are big names and could have
repaid and then recover the amounts from the petitioners, and that the R-18 could
have easily invoked the pledge guarantees of R-9 and R-
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10 which, according to the petitioners, were easy to invoke. Instead I find that the
respondents’ contention in this regard that the invoking of rights in pledged shares
was the easiest guarantee to invoke as compared to the other guarantees is tenable as
in other items a suit would have been required to be filed apart from permission from
the statutory authorities. R-9 owed no duty to the petitioners’ to save their shares
being sold off or to come to their rescue by meeting their liability by repaying the loan
amount for repayment of the loan amount, the petitioners had sought extension of
time from R-18, nowhere did they raise objections that they had no obligation to pay
till R-9 had brought in 160 crore to match the cost of land brought in by the
petitioners in the respondent-company. I find no breach by R-9 of fiduciary duty to R-
1, R-2 and the petitioners. R-9 owes no duty to the petitioners in repayment of
petitioners’ share of loan. R-9 was under no obligation to alert the petitioners
regarding implied consequences, an impending consequences of default of repayment
of loan, the default was very much in the knowledge of the petitioners, they were
aware of the necessary consequences in the event of default as recorded in the pledge
document which was executed by them. And default was on their part. Only if they
had risen to the occasion and repaid the loan, this situation could have been avoided.
The petitioners’ deep concern and a keen interest in the affairs of the company would
have saved this situation.

54. The petitioners/non-applicants had despite notice after notice from L&T and
even on reminding and requesting by APIL did not fulfil, their obligation to repay the
amounts due to the lender and it is due to their default in payment that the APIL had
to spend an extra amount of Rs.26 crore to save its own 50 per cent shares in R-1-
company which held 100 per cent shares of R-2 which were pledged with the lender
(L&T) as per the pledge deed. APIL in this transaction has not breached any fiduciary
duty towards R-l/R-2/ petitioners/non-applicants or otter shareholders. They were
under no obligation to save the shareholding of the petitioners/non-applicants due to
whose default APIL had to face this situation, and it had to take care of its own
interest, it had already invested to the extent of Rs. 103 crore it owed no fiduciary
duty or any other type of duties at all to repay the loan amount payable by the
petitioners/non-applicants or to take care and save petitioners’ shareholding from
being sold.
55. I can in no way ignore the ground reality that SEZ is a public purpose. By
purchasing the shares by R-9 and R-15, the continuation of the public purpose has
been retained, the substratum of the company, its only asset, i.e., 271 acres of land
has been saved from going into the hands of the lender. Further, the fact that the SEZ
project is required to be completed by June 2012 cannot be ignored. Nor can I lose
sight of the fact that if the stay granted vide order dated 2nd December, 2010
continues the R-2 and R-l companies shall not be in a position to fulfil their obligations
under the SEZ provisions and Rules making development in a time bound manner.

Page: 358

56. In view of the foregoing, the applicants having succeeded in making out a
prima facie case/ the balance of convenience and inconvenience being in their favour
and against the stay granted which would cause irreparable loss, and injury in case it
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is not vacated as implementation of the SEZ project has come to a grinding halt, and
further no prejudice shall be caused to the petitioners if the R-2 and R-l companies are
permitted to do their business, to safeguard the petitioners’ interest the R-2 and R-1-
companies are hereby directed to deposit the title deeds of the balance land, i.e., 21
acres of land (271 — 250 required for SEZ development) with the CLB within one week
of receipt of this order, and in the interest of the company, to regulate the future
conduct of affairs of the company, the stay order granted on 2nd December, 2010 is
hereby vacated. The R-l and R-2 companies are required to maintain proper accounts
quh development of the land for SEZ purpose and all the acts of the respondents shall
be subject to the outcome of the company petition in which pleadings are required to
be completed within eight weeks (replies be filed within four weeks, rejoinder be filed
within four weeks thereafter). BO to list the company petition for arguments on
completion of pleadings.
57. CA No. 5/2011 is disposed of in the above terms. No order.
———
† Principal Bench at New Delhi

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