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PETITIONER: YASHRAJ GOVINDBHAI PATEL & ORS.

       Vs.

RESPONDENT: PATEL ENGINEERING CO.LTD. & ORS.

DATE OF JUDGMENT25/07/1995

BENCH: MAJMUDAR S.B. (J) BENCH: MAJMUDAR S.B. (J) AHMADI A.M. (CJ) BHARUCHA S.P. (J)

CITATION:  1995 SCC  Supl.  (3) 307 JT 1995 (5)   535  1995 SCALE  (4)567

ACT:

HEADNOTE:

JUDGMENT:           JUDGMENT MAJMUDAR, J.      Leave granted.      By consent  of learned  counsel for parties, the appeal was finally  heard. A  short question  centring round clause 21.3(a) of  the consent  terms filed  by parties  in Company Appeal 2/94  before the  learned Company  Judge, Bombay High Court falls  for determination.  The said  clause  reads  as under:- <SLS>           "the valuation  per share  made  by      the expert  shall be  deemed to  be  the      valuation  per   share  made  under  the      consent  order  (including  the  consent      terms) dt 5.3.93 passed by the CLB." <SLE>      A few  facts leading to this appeal may be noted at the outset. Respondent  No.1, Patel Engineering Company Limited, is a  public limited  company  registered  and  incorporated under the  Companies Act.  The shares  of  the  company  are closely held  between two  groups who are contesting parties before us.  Appellants nos.1  to 5  represent one  group and Respondents nos.2  to 8  represent the  other one.  We shall refer to  the respondents’  group as  Pravin Patel group and the appellants’  group as  K.Y.Patel group  for the  sake of convenience. K.Y.  Patel group  filed Petition  No. 28/91 in October,  1991  before  the  Company  Law  Board  under  the provisions of  Sections 397 & 398 of the Companies Act,1956. They  contended   that  the  affairs  of  the  company  were conducted in  a manner  prejudical to  the interest  of  the company  and   public  interest.  They  also  sought  for  a direction that  the resolutions  passed at the Extraordinary General Meeting  should not  be given effect to. The parties arrived at  conset terms  signed on February 11, 1993 before

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the Company  Law Board  and in pursuance thereof the company Law Board  disposed of  the petition  by its  consent  order dated 5.3.93.  The consent  terms provided  that both groups would deposit  their shares  with Company  Law Board and one Shri.M.Vatsaraj would  determine the  fair value  per share. Accordingly, K.Y. Patel group, that is the appellants’ group deposited 91,702  shares and the respondents’ group, that is Pravin Patel  group deposited  1,04,299 shares. Clause 21 of the consent terms reads as under:- <SLS>      "Agreed and  ordered that the Company do      pay the value per share as determined by      the valuer  for the  shares belonging to      K.Y.Patel Group  and the  supporters  of      K.Y. Patel  group in  manner  following.      The  said   instalments  shall   include      interest on  the outstanding  amount  at      15% per  annum  from  the  date  of  the      valuer’s decision.  The amounts  so paid      by the  company shall  remain  deposited      with M/s.  Mulla & Mulla & Craigie Blunt      and Caroe  till the  entire  amount  has      been paid  and the said shares have been      duly delivered  by Company  Law Board to      the company.      (i).......%  within.........month/months      of the  receipt by  the Company  of  the      Valuation report  but at  any  rate  not      before 1st  April, 1993 plus interest on      the entire  amount at 15% per annum from      the date  of the  decision till the date      of the payment of the instalment.      (ii) .......%  within.........months  of      the  receipt   by  the  Company  of  the      Valuation report  plus  nterest  on  the      outstanding amount at 15% per annum from      the  date   of  the   payment  of  first      instalment till  the date of the payment      of the second instalment.      (iii)    the    balance......%    within      .......months  of  the  receipt  by  the      Company of  the  Valuation  report  plus      interest on  the outstanding  amount  at      15% per  annum  from  the  date  of  the      payment of the second instalment." <SLE>      As  per   clause  16   of   the   consent   terms   one Shri.Mangalbhai  Vatsaraj,   partner  of   M/s.  Vatsaraj  & Company,  Chartered   Accountants  being   the  auditor   of Respondent no.1  company  was  appointed  for  valuation  of shares of Respondent no.1., company. as per clause 19 it was agreed that  the  valuer  shall  report  to  the  Board  his decision as  to the  valuation per  share and forward copies thereof to  the company  as also  to M/s.  Mulla &  Mulla  & Craigie Blunt  & Caroe,  Advocates for  the K.Y. Patel group and M/s.  Bachubhai Munim  & Co.,  Advocates for  the Pravin Patel group.  As per  clause 23  it was  agreed that  on the company making  full payment  with  interest  for  the  said shares the said shares shall be delivered by the Company Law Board to  the company and shall stand cancelled. Thus on the payment being made by the company as per clause 21 K.Y.Patel group, that  is the appellants’ group had to walk out of the company. However,  there was  a default  clause provided  by clause 28(a) in the consent terms which reads as under:- <SLS>

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         "In  the   event  of   the  company      failing to  make  payment  of  the  full      purchase price,  or of  any two  of  the      instalments of  price on the dates fixed      by clause  21 above,  the company  shall      lose its  rights to  purchase the shares      of  the   K.Y.  Patel  group    and  the      petitioners   shall   automatically   be      entitled to  purchase the  shares of the      Pravin patel Group (i.e.shares listed in      part 1  of Schedule  II and  such shares      listed in  part II  of  Schedule  II  in      respect of  which written  confirmations      and undertakings  have been furnished as      aforesaid) at  the price per share fixed      by the Valuer under clause 16 above. The      date of  the last instalment or the date      of the  second instalment  in respect of      which the  default has  been  committed,      whichever is  earlier, shall be the date      on   which    the   petitioners    shall      automatically be  entitled  to  purchase      the said  shares and  such date shall be      referred to as "the date of purchase". <SLE>      It is  not in  dispute between  the  parties  that  the Company Law  Board fixed  the instalments  of  the  purchase price of  the shares  of K.Y.  Patel group  as  provided  by clause 21  of the consent terms by directing that 30% of the amount be  paid within  two monnths  of the  receipt of  the valuation report  but at any rate not before 1st April, 1993 plus interest on the entire amount at 15% per annum from the date of the decision till the date of payment of instalment. The second  instalment was fixed by providing for payment of 40% within  6 months of the receipt of valuation report plus interest on the outstanding amount at 15% per annum from the date of the payment of the first instalment till the date of the payment  of the second instalment and the balance of 30% was ordered  to be  paid  within  9  months  of  receipt  of valuation report  plus interest on the outstanding amount at 15% per  annum from  the date  of the  payment of the second instalment. Accordingly, the dates of instalments worked out are as under:-           1st instalment - 30th November,1993           2nd instalment - 31st March, 1994           3rd & last instalment - 30th June, 1994      As Shri.M.Vatsaraj  valued the  shares at  Rs.194/- per share by  his report  dated 30.9.93 Respondent no.1, company tendered on  1.10.93 the  entire  amount  and  purported  to cancel the  appellants’ shares even before the same has been delivered by  the Company Law Board. The amount tendered was not accepted  by the  appellants. On  7.10.93 the appellants filed  Application  259/93  before  the  Company  Law  Board impugning the valuation of shares as made by Shri.M.Vatsaraj alleging it to be vitiated by fraud relying in particular on the affidavit  of Chartered Accountant, Shri. Dilip Thakker. The Company  Law Board  by  order  dated  5.11.93  overruled Respondent   no.1’s    preliminary    objection    to    the maintainability of the aforesaid application. Thereafter, on 14.12.93 Respondent  no.1 filed  Company Appeal  2/94  under Section 10(F)  of the Companies Act against the order of the Company Law  Board. The  appeal was  admitted by the learned Company Judge of the High Court and interim orders were made protecting the  interests of  both parties.  The  amount  of Rs.1,77,92,128 tendered  by the  company was permitted to be

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invested. At  the time  of final  hearing of  the appeal the contesting parties came to further consent terms pursuant to which a  consent order  was made whereunder Shri.N.V.Iyer of CC Chokshi  & Co.  was appointed  as an  expert  to  examine whether the  valuation made  by Shri.M.  Vatsaraj on 30.9.93 was proper and correct. The order provided that if Shri Iyer came to  the conclusion  that Shri. Vatsaraj’s valuation was not proper  and correct,  then he  should himself  make  the valuation. The  expert was  requested to  decide before 13th June, 1994.  as noted  earlier clause  21.(3) (a)  of  these consent terms  provided that valuation per share made by the expert that is Shri Iyer shall be deemed to be the valuation per share  made under  the consent order dated 5.3.93 passed by the Company Law Board.      On  21st   October,  1994  Shri  Iyer  held  that  Shri Vatsaraj’s valuation  was not  proper  and  correct  and  he valued  the   shares  at   Rs.450/-  per  share  as  against Shri.Vatsaraj’s valuation  of Rs.194, that is Rs.4,12,65,900 for 91,702 shares. The first respondent, company offered the said amount  with interest,  only from 21.10.94, the date on which Shri  Iyer gave  his report.  The appellants contended that as  per clause  21 of  the consent order of 5.3.93 read with clause  21.(3) (a)  of the  consent order dated 21.4.94 the appellants were entitled to Rs.4,12,65,900 and a further sum of  Rs.66,13,850 being the interest payable thereon from 30.9.93, the  date of  Shri Vatsaraj’s decision and that the amount tendered  by the  company  did  not  constitute  full payment as  required under  the consent  terms.  On  9.11.94 Company Appeal  2/94 was disposed of by taking the valuation of Rs.450 per share on record. The appellants contended that if full  amount including  interest from 30.9.93 as required by clause  21 was  not paid  the consequences  of default as provided in  the consent  terms would  follow. The company’s advocate however  informed the appellants that the amount of interest was  to be  paid only  from 21.10.94.  Under  these circumstances, the  company filed Company Application 411/94 in disposed  company appeal  for  clarification.The  learned Single Judge  of the  High Court  however rejected  the said application on  14.11.94 observing  that the order of 5.3.93 subject to  modification by  the order of 29.4.94 would have to be  executed in  the manner available in law. Under these circumstances,   the   company   preferred   Appeal   891/94 challenging the  order of  the learned  Single  Judge  dated 14.11.94. The  said appeal was allowed by the Division Bench of the High Court. It took the view that interest was payble by Pravin  Patel group  only from  21.10.94 and directed the Company Law  Board to  deliver the appellants’ shares to the company. The  aforesaid order of the Division Bench has been challenged by special leave.      Shri  Nariman,   learned  counsel  for  the  appellants contended that  clause 21.(3)  (a) of  the consent  terms of 29.4.94 will  have to  be read with clause 21 of the consent terms of  February,  1993.  It  has  to  be  held  that  the valuation made  by Shri  M. Vatsaraj  was superseded  by the valuation made  by  Shri  Iyer  and  therefore  the  correct valuation of  the shares  of the  appellants will have to be taken as  Rs.450/- per share and that figure will have to be treated  to   have  been   arrived  at  on  30.9.93  itself. Consequently, 15%  interest on  the purchase  price  as  per valuation of  shares will  have to  be interest from 30.9.93 and not from the date on which Shri Iyer gave his valuation’ report on  29.10.94. If that is so, the respondents’ company was in  default in  not paying  interest on  the  additional amount to  the tune  of Rs.  66 lakhs.  As a  sequel to  the aforesaid submission  Shri Nariman  further  contended  that

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once that  happened the  default clause 28(a) of the consent terms  got   attracted  and   therefore  automatically   the appellants’ got  a right  to  purchase  the  shares  of  the respondents’ group  and that  the High  Court  had  patently erred in  holding that the interest on the additional amount was payable  only from  the date  of  Shri.Iyer’s  valuation dated  29.10.94.   Refuting  these   submissions  Shri  Soli Sorabjee, the  learned counsel for the respondents contended that clause  21.(3) (a)  of the  consent  order  of  29.4.94 provided that  the valuation  of the  shares as made by Shri Iyer will be deemed to be the valuation per share made under the earlier consent terms. But it had nothing to do with the interest amount  payable on the valuation of the share price computed by  the expert.  Shri. Sorabjee  further  contended that if  Shri Nariman’s contention is right and 15% interest is to  run from  30.9.93 then  an impossible  and  anomalous position would  arise. He submitted that in such a case even assuming that  Pravin Patel  group had  committed default it would be impossible to work out the right of the appellants’ group to  purchase the  shares of  Pravin Patel group as per default clause  28(a) itself, as the date of purchase by the appellants’ group  as per  the said clause would be the date of last  instalment or second instalment in respect of which the default is deemed to have been committed by the company, whichever is  earlier. In  such a case as per sub-clause (c) of clause  28 the appellants’ company would be liable to pay up the  entire purchase  price of the shares of Pravin Patel group as  per the  instalments laid  down therein  and these instalments will have to be paid within the concerned months of the  date of purchase by the appellants. These dates were already left  behind when  the valuation  of Shri  Iyer  was made. Consequently,  it would  be impossible  even  for  the appellants to  comply with  the  scheme  of  instalments  of paying the  purchase price with interest even as per default clause  28(c)   of  the  consent  order  of  5.3.93.  Giving retrospective effect  to the  valuation by  the force of the deeming fiction as found in clause 21.(3) (a) of the consent order of  29.4.94 also  for the  purpose of  interest  would therefore  make   the  scheme   of  default  clause  totally unworkable for  both the  groups. He  however fairly  stated that the  respondents in order to bury the hatchet will have no objection  in paying  even now  an amount  of Rs.66 lakhs more  to  the  appellants’  which  may  meet  their  alleged grievance about  non-payment of  interest from  30.9.93 till 21.10.94  and  the  respondents  are  willing  to  pay  this additional amount  and put  an end  to this litigation. They have also  no objection to the appellants retaining even the additional amount  of Rs.11 lakhs which is already deposited by the  respondents uptill now to cover the interest amount. In short,  according to  Shri Sorabjee  the respondents  are willing to  pay  a  total  amount  of  Rs.77  lakhs  to  the appellants  towards  the  disputed  claim  of  interest.  He further contended  that clause 28 being a default clause has to be  strictly construed  on the  express  wording  of  the default clause,  there is  no provision made for any adverse consequence flowing  from the  alleged non-payment  of  full amount of interest and that the default clause would operate only if  the company  fails to make payment of full purchase price or  any of the two instalments as fixed by the Company Law Board  under clause 21 of the consent terms of February, 1993.      Having  given   our  anxious   consideration  to  rival contentions we  find that  there is  substance in  what Shri Nariman submits  to the  effect that clause 21.(3)(a) of the consent  terms  dated  24.4.94  will  have  to  be  read  in

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conjunction with clause 21 of the consent terms of February, 1993. Therefore,  the valuation  of shares  at Rs.450/-  per share as  made by  Shri Iyer will have to be treated to have been made  under the  consent order  dated 5.3.93  passed by Company Law Board. As the other clauses of the consent terms have remained untouched, it may prima facie be felt that 15% interest would  become payable on the valuation per share as made by  Shri Iyer  on 21.10.94 right from 30.9.93, the date on which  Shri Vatsaraj  made lower  valuation and which got superseded and  substituted by  the later  valuation of Shri Iyer. However, it is not necessary for us to closely examine this aspect  of the  matter and  reach any  final conclusion thereon, in  view of  the fair  stand taken  by the  learned counsel Shri  Sorabjee. Once  the  respondents  have  agreed before us  to pay a total amount of Rs. 77 lakhs as interest towards the  disputed dues and once they are prepared to pay Rs.66 lakhs  in addition  to Rs.11  lakhs which  are already deposited by  them the  first grievance made by Shri Nariman would pale into insignificance.      However, so  far  as  the  second  contention  of  Shri Nariman is  concerned it  is not  possible to agree with him that the  default clause 28 got attraced on the facts of the present case.  The reasons  are obvious.  The default clause has to be strictly construed. A close examination of default clause makes  it clear that the consequence provided therein would follow  if the  company fails  to make payment on full purchase price  or of two instalments. It has to be recalled at this  stage that  clause 21  of the consent terms makes a clear distinction  between the value per share as determined by the  valuer and the interest on the outstanding amount of such valuation.  When clause 21 is read with clause 28(a) it becomes clear  that even  though the  instalment may include interest at 15% that interest is to run on the entire amount of valuation  of shares,  namely, the  purchase price of the shares as determined by the valuer. The default clause 28(a) provides that  the company  will be  liable  to  suffer  the consequence of  default in payment of full purchase price or instalment of the price. It nowhere refers to the default in payment of  interest on the concerned instalment even though each instalment  of purchase  price was to be accompanied by 15% interest  thereon as  laid down  by  clause  21  of  the consent order.  In  any  case  it  must  be  held  that  the respondents appeared  to have  bona fide  believed that they were not  liable to  pay interest  at 15%  on the difference amount as  per higher  valuation of  Shri Iyer from any date prior to  29.10.94. Not  only that  they also approached the learned Single Judge by filing Company Application 411/94 on 14.11.94 requesting  the learned  Single Judge to clarify as to from which date they have to pay interest.That  shows the respondent  company,  had  not  taken  up  any  cantankerous attitude and at the earliest opportunity within one month of the report  of the  valuation they filed Company Application 411/94 for  clarification. It was that application which was rejected by the learned Single Judge and which resulted into the appeal  from which  the present  proceedings  arise.  It cannot be  therefore said  that the  respondent company  had deliberately and  knowingly defaulted in payment of interest which attracted  default clause  28(a) of the consent terms. The second  contention canvassed  by Shri  Nariman therefore stands rejected.      In the result this appeal is disposed of subject to the direction to  the respondents as agreed to by them that they will pay  to the  appellants an  additional amount  of Rs.66 lakhs in  the  manner  provided  by  the  consent  terms  of February, 1993  and as  laid down by the consent order dated

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5.3.93, within  a period  of eight  weeks  from  today.  The amount of  Rs.11 lakhs  already deposited  by the respondent will also  enure for  the  benefit  of  the  appellents.  On payment  of  this  additional  amount  of  Rs.66  lakhs  the directions contained  in the  judgment  under  appeal  shall become operative  and shall be carried out by all concerned. There will be no order as to costs.