Focus Energy Ltd vs Reebok India Ltd. And Ors

Ina Malhotra, J

CA-309/2017 filed by the respondent has been pending and is now being pressed for disposal. Vide the prayer made in the said application, the respondent/applicants pray for converting 0% Compulsory Convertible Debentures issued to Respondent No.7 to equity shares.

Brief facts of the case, as argued, are that on account of large-scale fraudulent acts by the respondents, the business of the respondent company showed enormous losses. To overcome this financial crunch, the respondent company raised money by issuance of CCDs to Respondent No. 7. Two tranches of the CCDs were issued i.e. on 1st February, 2013 and 2nd August, 2013 respectively for a period of 5 years, at the end of which the amount, was to be converted into equity shares of Rs. 100/-, at par in favour of respondent-7 which already held 93% controlling interest in the respondent no.1 company. Initially when the petition had been filed in 2015, the respondents considered that since the term of the CCD was till 2018, they voluntarily made a statement before the Bench that they would not convert the CCDs in the near future, hoping that the petition itself would be disposed of before the CCDs matured for conversion. Now, keeping in view the pendency of the petition and the fact that the tenure under the CCD has expired, the respondents pray for permission to issue shares against the CCD which have matured. This application is therefore being pressed for disposal. It is argued by the id. Sr. Counsels that the respondent company is necessarily required to convert the CCDs to equity by allotment of equity shares in favour of Respondent No. 7, the parent holding company in the USA.

The Petitioner/non-applicant has resisted the prayer tooth and nail. It is submitted by the ld. Counsel for the non-applicant the said act of the respondents shall cause prejudice to their interest as their equity shall get diluted. It is submitted that their earlier equity had been reduced from 20% to 6.85% With the aforesaid conversion, their equity would be further reduced to a negligible figure. Ld. Counsel for the Petitioner/Non-Applicant has raised several points in support of their objection to this application, primarily being:

(I) The conversion of the CCD into equity in favour of Respondent No 7 is to increase its control over in the respondent company by issuing 17,17,70,780 and 1,04,87,640 shares against the same number of CCDs. issued at par, on the basis of the Audited Financial Statement for the financial Year 2011-2012. It is submitted that before subscribing to the CCD, the respondent company, at the behest of Respondent No. 7 & 8 declared unprecedented losses of Rs. 1528 Crores in Financial Year 2011-2012 which is attributed by the Petitioner to the fraudulent acts of the Respondent No. 1 and its management. The valuation of every share fell by Rs. 6681/-, so that respondent no. 1 could allot shares at par, instead of allotting them at Rs. 2906/- as valued by an Arbitral Tribunal.

(ii) The respondents have allegedly indulged in large seale siphoning off money which had culminated in the financial distress. The petitioner's allegations are that respondent-7 has been the beneficiary and recipient accruing from the alleged acts of mismanagement on account of which the petitioner has suffered. As per the report of the SFIO the losses shown were on account of fictitious sales on which fictitious royalties and management charges were received by respondent no.7. Ld. Counsel has pointed out that the detailed investigation affirmed the fraud played in the company and is evidenced through the SFIO's report. Criminal actions have been initiated. In view of the same, it is argued that it would be just and equitable to first decide the case for oppression and mismanagement on merits without giving effect to the prayer made herein, which would further reduce their equity and be prejudicial to their interest, rendering the present petition infructuous.

(iii) Ld. Counsel for the Petitioner has argued that they have questioned the issuance of the CCDs which is the subject matter of the main petition. They have pointed out to the illegalities resorted to in the issuance of the CCDs which as they allege was without notice to the shareholders. Ld. Counsel has argued that the entire scam which has benefitted respondents 7 & 8 is under a scanner and the SFIO's report indicting the respondents has given rise to criminal proceedings. It is also submitted that the losses shown in the Audited Financial statement have already been claimed by Respondent No. 8, the holding company under the Global Insurance Policy.

(iv) With respect to issuance of the CCD, it is further alleged that they were issued without the requisite permission of the FIPB. Due objection was raised by the Petitioner, but despite several written communication to the respondent company, details of the terms and conditions of the CCD were not made available to them nor any reply given whether prior permission of the Government was obtained or not. It is therefore stated that the entire allotment is shrouded with illegally.

(v) Another point raised by the ld. Counsel for the Petitioner/non-applicant is that hearing and disposal of the present application by a Single Judge would be against Rule 64 of the NCLT Rules 2016. As per rule 64(2), all matters previously pending before the Hon'ble CLB, should be disposed off by a Bench consisting of not less than two members of the Tribunal.

Ld. Sr. Counsel for the applicant on the other hand seeks to negate the arguments in his rejoinder. It is their case that as per the provisions of the erstwhile Companies act 1956 the consent of the shareholders was not required. However, for the CCDs allotted to Respondent No. 7 on 18.12.2015 and 09.09.2016, EOGMs were duly convened, notice of which was served on the Petitioner. It is also submitted that at the time of allotting the CCDs, no objection was raised by the representative of the Petitioner in the EOGM held on 31.08.2016. Reliance is placed upon the specific agreement and the minutes of the EOGM held on 11.12.2015 and 31.08.2016 respectively, as well as the FDI policy now in force. Ld. Sr. Counsel has submitted that the FDI Policy of 2012 as well as the succeeding policy for the year 2013 onwards allows FDI by way of automatic route for wholesale trading, which means that no government approval is required.

This Bench is further apprised that the statement not to convert the CCD was volunteered by the respondents in view of the fact that it was expected that the main petition would be decided before expiry of the tenure under the CCD. Since the main petition has remained pending for so long the subscribers are pressing for allotment of their equity.

Ld. Sr. Counsel for the applicant has drawn the attention of this Bench to arbitration proceedings wherein an Award had been announced quantifying and ascertaining the number of shares to be allotted to the petitioner and its price being fixed. The said award was challenged before the Hon'ble Delhi High Court, which opined that since the award was delivered abroad, objections to the same could not be entertained in Delhi as it lacked jurisdiction. Ld. Sr. Counsel submits that since the petitioners have not impugned the Award before a Court of competent-jurisdiction, it has attained finally It is submitted that under such circumstances since the number of shares and its valuation in favour of the petitioner shall remain undisturbed, the question of diluting their equity is inconsequential.

Ld. Counsel for applicant has also apprised this Bench that all proceedings relating to investigation arising out of the SFIO's report have been stayed by the various Courts and therefore at present, there is no criminal prosecution being conducted.

After hearing Ld. Counsels for both sides, this Bench is of the opinion that though disposal of this application is prayed for by the applicant, it would be just and equitable to consider all facts and circumstances which are required to be adjudicated to lay the entire matter to rest. This Bench finds merit in the arguments advanced by the id. Counsel for the Petitioner/Non-applicant that if the interim relief has the effect of deciding the main petition, the same should be resisted by the Court. This opinion is fortified by decisions taken in a catena of cases by the Superior Courts. Ld. Counsel for the Petitioner has also laid stress on an earlier order of this Bench wherein it was categorically directed that the present CA-309/2017 shall be heard and disposed of with the main petition. A perusal of the averments made in the main petition confirms that the Petitioner has challenged the validity of the allotment of the CCD to Respondent No. 7. If this Bench was to consider the prayer of the Respondent/applicant in the present CA, objections raised in the main petition for issuing CCDs without adhering to the statutory or regulatory provisions would become infructuous.

The prayer for allotment of shares against the CCD involves consideration of several factors. This Bench reiterates its opinion that the present CA should be heard and disposed off with the main petition and cannot be entertained piecemeal. The CA therefore stands dismissed. The applicant shall be at liberty to raise all these issues at the time of final disposal.

Last but not the least, is the objection of the Petitioner that the matter should be heard by Division Bench and not by a Single Bench in terms of the rules of the NCLT. This Bench does not wish to raise a controversy, legitimate or otherwise, and therefore deems it fit that the same be heard by the Regular Bench.