Kabul Chawla & Ors v. Cpi India I Limited & Ors

\J * IN THE HIGH COURT OF DELHI AT NEW DELHI % Judgment Pronounced on : November 09, 2012 + FAO(OS) 508/2012 KABUL CHAWLA & ORS Appellants Represented by: Mr.Harish Salve, Sr.Advocate & Mr.Sandeep Sethi, Sr.Advocate instructed by Mr.Rudreshwar Singh, Mr.Hardeep Sachdeva, Mr.Kamal Shankar, Mr. Kaushik Poddar, Advocates. versus CPI INDIA LIMITED & ORS Respondents Represented by: Mr.N.K.Kaul, Sr.Advocate & Mr.Rajiv Nayar, Sr. Advocate instructed by Ms.Bindi G.Dave, Mr. Sameer Pandit, Mr. Aman Raj Gandhi, Mr.Kapil Rustagi, Mr. Karan, Ms. Naomi & Mr.Rohan Jaitley, Advocates for R.l. CORAM: HON'BLE MR. JUSTICE PRADEEP NANDRAJOG HON'BLE MR. JUSTICE MANMOHAN SINGH PRADEEP NANDRAJOG, J. For orders see FAO(OS) No.538/2012. NOVEMBER 09, 2012/dk (PRADEEP NANDl JUDGE (MANMOHAN SINGH) JUDGE % + IN THE HIGH COURT OF DELHI AT NEW DELHI Judgment Pronounced on : November 09. 2012 t FAC)(0S) 538/2012 CPI INDIALIMITEDi ' Appellant Represented by; Mr.N.K.Kaul, Sr.Advocate & Mr.Rajivl^ayar, Sr. Advocateinstructedby Ms.Bindi G.Dave.]\|Ir. SameerPandit,Mr. Aman Raj Gandhi, Mr.Kapil Rustagi, Mr. Karan, Ms. Naomi & Mr.Rohan Jaitley, Advocates versus j BPTP LIMITED&ORS Respondents Represented by; Mr.Harish Salve, Sr.Advocate & Mr.SandeepSethi,Sr.Advocateinstructedby Mr.RudreshwarSingh,Mr.HardeepSachdeva, Mr.Karaal Shankar, Mr. Kaushik Poddar, Advocates for R.l. FAO(OS) 507/2012 BPTP LIMITED | Appellant Represented by; Mr.Harish Salve, Sr.Advocate& ' Mr.SandeepSethi,Sr.Advocateinstructedby Mr.RudreshwarSingh,Mr.PIardeepSachdeva, Mr.Kamal Shankar, Mr. Kaushik Poddar, Advocates. I versus | i i CPI INDIALIMITED 8^ ORS Respondents Representeldby; Mr.N.K.Kaul,Sr.Advocate& Mr.Rajiv Nayar, Sr. Advocate instructed by Ms.Bindi G.Dave,M|r. SameerPandit, Mr. Aman Raj Gandhi, FAO (OS) Nos.53H-'?.()l2, 507;2()I2 & i()Sa0l2 Page I of 13 + Mr.Kapiliustagi,,Mr.Karan,Ms. Naomi &Mr.Rohan Jaitley, Advocates for R. 1. FAO(OS) 508/2012 • I ^ • KABUL CHAWLA&pRS Appellants Represented by: Mr.Harish Salve, Sr.Advocate & Mr.SandeepSethi, Sr.Advocateinstmctedby Mr.Rudreshwar Singh, Mr.Hardeep Sachdeva, Mr.Kamal Shankar,Mr. Kaushik Poddar,Advocates. versus CPI INDIALIMITED&ORS Respondents Represented by; Mr.N.K.Kaul, Sr.Advocate & Mr.RaJivj^^ayar,Sr. Advocateinstructedby Ms.Bindi G.Dave,Mr. SameefPandit,Mr. Aman Raj Gandhi,. Mr.Kapil Rustagi, Mr. Karan, Ms. Naomi' & Mr.Rohan vocates for R.l. Jaitley, Ad HON'BLE MR. JUSTICE PRADEEP NANDRAJOG HON'BLE MR. JUSTICE MANMOHAN SINGH I

¶1CPI India Ltd., the appellant of FAO(OS) No.538/2012had filed a petition under Section 9 of the Arbitration and ConciHation Act 1996 i impleading25 respondents,tljree ofwhich are BPTP Ltd. and its directors I Kabul Chawlaand AnjaliChajwla. The other22 respondentsare companies statedto be affiliatesof BPTP Ltd. It was the case of CPI Ltd. that relying upon representationsand warr|antiesmade by Kabul Chawla,it had invested FAO (OS) Nos.538/2ni2. 507/2012 cf-508/2012 V ^322.5 crores in BPTP Ltd. by subscribing to 13,551,971 equity shares as well as 22,500,000CompulsoiilyConvertiblePreferenceshares on"the terms set out in the Share Subscription Agreement dated August 10, 2007 (SSA), and as on the date of the petition it held 5.67% of the Paid Up Capital of BPTP Ltd. It was asserted that the rights are further governed by a Memorandum of Understandjng(MOU) dated December 19, 2009. The dispute projected was that on the respondents failing to achieve the Qualified Initial Public Offering by .TulyiOS,2011, a requirement under clause 4 and 10 of the MOU dated September 19, 2009, followed by unauthorized debts ^ I being raised, CPI India was[entitledto the remedies of the Swap Option I rights or under the Put Option or to enforce the right under clause-10 of the MOU; as per which the eight projects listed in Schedule-A to the Agreement had to be executedbyputtingthe money generatedin an escrow accountand shareofCPI Indiain the profitsgeneratedwould be as listedin Schedule-A. We highlight that CPI's share in the profits range between 50% to 58%. .Grievance made was that Out of the 8 projects, the respondents had commencedunilateraldeveloiijmentand bookingpertainingto project'M' af Faridabad and 'A' at Gurgaoni I

¶2In a nutshell the case |was that the last alternativei.e. right under clause-10 of the MOU was violated by BPTP Ltd. and funds were being siphonedaway. Resolutionsjjassedon June 29, 2012 at the Board Meeting were prayed to be stayed alleging that the effect thereof would be to dilute I theinterestofCPI India. !

¶3OnJuly 4,2012, whichWas thefirst date of hearingand on which"date t counselappearedfor BPTP, t^e followinginterim order was passed;- "1. Notice. Mr. Kamal Shankar, learned counsel acceptsnoticeon jbehalfofthe Respondents. I F/IO fOSJ Nos.53S/2ni2.507/2012<S; 508\2Q12 Page3 of13 to

¶2During the course of the arguments it has been agreed by leamqd Senior counsel for the Respondents, on instructions, tliat within the next week, a meeting M'ill : he held between the representatives of Respondent No.l BPTP Limited ajid the PetitionerCPI India Limited to examine what alternative options can be explored including reworking the shareholders agreement which is the subjectmatterof the presentpetition. Respondent No.l will disclose to the Petitioner the exact amounts of statutory and government dues which are to be paid by Respondent No. II. The Petitioner will also be informed as to which ; unencumbered properties/assets of Pvespondent No.lj company will be earmarked to secure the investment made by the Petitioner thus far. It is made clearthatthis wouldbe withoutprejudiceto rights and contentions o:feither party.

¶3Liston 26^'!July 2012. ,4. Till the n4xt-date of hearing, RespondentNo.l will not give effect to the Resolution passed by the Board of Directo^rs of RespondentNo.l at the meeting held on 29"^ June 2012. It is clarifiedthat none of the 'Selected Projects' the list of which is at page 138 of the , documents volume, shall be sold, alienated or otherwise • encumberedby l^espondentNo.1tillthenext date." I !

¶4The OMP filed by CPI jndiaLtd. has been disposedofvide impugned orderdated October03, 2012 by passingthe followingdirections;- >: "41. In conclusion, it is directed as under;-'

(i) The interiiY order passed by this Court on 4^ July, 2012 is directed to continue till such'time the arbitral Tribunalpasses an order, including by way of modification or v|ariation of this order, in accordance with law in an application that may be filed by either party under Sectiqn 17 of the Act.

(ii) BPTP willIflirnish to CPI, within,two weeks from today, the accounts'of the monies collectedby it • by sale of units in Projects A and M, including the manner of disbursing of such monies collected by it. FAO (OS) Nos.53S/2ni2,507/2012A 508/2012 Page4 of13 ,, th -J Till further orders that may be passed by the arbitral Tribunal, BPTP pill cease further activity in relation to Projects A and M and maintain status quo in relation to the Selected Projects. I i

(iii) It will beiopen to the parties to rely on the pleadings, documents and reports forming part of the record of the ; present petition in the arbitral proceedings." ;

¶5Whereas Kabul Chawjla and the associate companies have filed I FAO(OS)No.508/2012challengingthe final order passed disposingofthe i OMP, BPTP Ltd. has joiied in the challenge by filing FAO(OS) No.507/2012. CPI hidia Ltd. has also challengedthe impugned order by filing FAO(OS) No.538/2012.

¶6The principal grievance of BPTP Ltd. and Kabul Chawla and others is that the result ofthe impugnedorder is that the two ongoingprojectshave been stayed as per directionjNo.(ii) and this would cause injury to the company and as a consequence to all its shareholders which Avould include I CPI India Ltd. Furthergrievancewas that as per directionNo.(i), interim I order passed on July 04, 2012 was continued and since on July 04, 2012 interim order was to restrainIBPTP to give effect to the Board Resolution dated June 29, 2012, the said companywas prohibitedfrom obtaininga loan which was sanctioned by IFCl in sum of ?125 crores which was to be utilizedto pay dues to the Governmentof Haryanawith respectto the other six projectslistedin ScheduleI'A' totheMOU. It was highlightedthat if the dues were not paid, the valuq of the land would fall causing injury to all. The backdropofthe principal'grievanceurgedwas the expressrecordingby the learned Single Judge that he was not going into the merits of the rival versions because the parties |had already appointed a Sole Arbitrcitor to FAO (OS) No5.538/2ni2.507/20J2 508/2012 V I decide the substantive dispkes and Section 17 of the Arbitration and I ConciliationAct 1996 wouldl be the proper forurn for the parties to obtain interim measures. It was argued that the sine qua non for an interim order is I a prima facie finding recorded in favour of the party in whose fevour an interim order is passed.

¶7The grievance of CPI ^ filed by BPTP, it had collecte ndia is that admittedly, as per the documents 1^213 crores for projects 'A' and 'M' and had not deposited the same in an escrow account as per the MOU. With referenceto a cash flow statementshowing status of the projects up to September30, 2012 it was highlightedthat it appears to be a case where ^111.3 crores out of ?213 crores generatedfrom projects 'A' and 'M' had It was thus urged that the appeals filed by deservedto'be dismissedand appeal filed by it need to be alloAvedand dirdctionsbe issuedthat ?213 crores generatedby BPTP Ltd. bedirectedto be depositedwiththis Court.

¶8In response,BPTP Ltd! and Kabul Chawlaurged that letters written I • - by RBI to them would revealjthat the Swap Option,put option as also the conditionofthe MOU,creatinginterestin land (8 projects)on the strengthof been diverted by BPTP Ltd. BPTP Ltd. and Kabul Chawl; claim, are contrary to Foreign Exchange which CPI India has laid £ Management Act.

¶9We had heard learned c some time and had adjourned recorded in the order-sheet, du counselfor the parties on October 31, 2012 for ihe matterto November07, 2012. Thoughnot jringargumentscertainproposalshad emerged from both sides so that the jappeals could be disposed of with consent directionsand Ave had impressedupon learned counsel that this would be the bestsolutionkeepingin view the fact thaton the one hand the learnedSingle Judgehas expresslydeclinedt|) dealwiththe.meritsofthe contentionsurged FAO (OS) NOS.53S/20I2. 507/2012 508/ 20J2 -J by both'parties by observing tliat the parties would be free to approachthe I learned Arbitrator, by way of an application under Section 17 of the Arbitration and Conciliation|Act 1996, but has given some prima facie I findings, but making it expressly clear that these would not influence the i learned Arbitrator and thereby limiting the directions till such time the learned Arbitrator passed interim orders.

¶10Now, it is apparent that notwithstanding the pious intention of the learned Single Judge, a problem in lav/ has arisen inasmuch as the fulcrum ( of the challenge in the appeals filed by BPTP and Kabul Chawla is that the I halfbaked order has causedprejudiceto them and that the sine qua non for passing interim orders is prima facie findings being recorded; not in the I manner as done by the learned Single Judge, but by consideringthe rival viewpoints. |

¶11, Indeed, the signature tune of the impugned order is that ?322.5 crores investedby CPI India in BPTI' Ltd. needs to be protectedand that there is a violationof the MOU. But, the learnedSingleJudge has just not discussed ! whetherthe shareholdersagreementand the MOU foul Foreign Exchange .Management Act.

¶12We do understandthe dilemma faced by the learned Single Judge, who was advised not to delve deep into the matter considering the voluminousrecord and thought it advisablethat keeping in view that the I > partieshad appointedan arbitijatorhe would be the best Fora where interim I orders could be obtained. i

¶13But a hiatus has come into existence as noted above. I I

¶14We were keen not to Reflect upon the merits and find a workable solution till the Arbitrator could decide on the interim measure. We were informed that the learned Abitrator has fixed the schedule by which I FAO (OS) Nos.538/2()l2,507/3012 508/2012 . Page 7of13 pleadingshave to be completi;dand the date is mid March 2013. In other words, by April 2013 the leariiedArbitratorwould be in a positionto hear the partieson interimmeasm-e.^andpass directions.

¶15The only problem would be, what to do till April 2003? In other I words, what should be the ad-interim order and not the interim order? 'Ad-interim'we have used the phr£[sefor the reasonpartiesagreedbeforeus that I the Arbitratorwouldbe the besjtForato pass 'interim'orders. I

¶16Since parties could not|agree to a consent interim arrangement,we had heard learnedcounselfor partieson November07, 2012,'limitedto the issue of balanceof conveniencealone and notwithstandinglearned counsel I for parties repeatedlyattemptingto urge on the merits, we had repeatedly brought them about to address arguments on balance of convenience. \ ^

¶17Now, the blanket restraintorder as per directionNo.(ii) in the final order dated October 03, 201^, that BPTP will cease further activity in I relationto projects 'A' and '1^' and maintain status quo in relation to the I selectedprojectshas adversel}^affectedrights of third parties. Nearly 50% I of flats in one projectand 70% flats in the otherprojecthave been booked. Third parties have made payments to the tune of ^213 crores. It is settled law that interim orders affectijigthird party rights should normallynot be passed. Balance of conveniencerequires interim orders of a kind which affect thiixlparties not to be pa$sed.

¶18Pending adjudicationof|the dispute, whether clause-10of the MOU fouls Foreign ExchangeManagementAct or not and whether letters to said effect obtained by BPTP froip. RBJ are self-servingletters, procured on selectiveinformationmade aviiiableto RBI; a charge levied by CPI India Ltd., which would be debated;by the parties before the learnedArbitrator, only on balanceof convenience,the second directionin directionNo.(ii) in I FAO (OS) Nos.538/2012,507/2012&5nS/2'ni2 Page Sof13 the order dated October 03, 2012 needs to be vacated. But upon the term that further money received with respect to projects 'A' and 'M'; which would include further installments payable by the existing flat buy^;rs would I be put in an escrowaccount,detailswhereofwould be made availableto the Arbitrator within two weeks from today and utilization of the said amount would be only with the permission of the learned Arbitrator.

¶19We note that the learn^ Single Judge, in the first part of direction No.(ii), has directed accounts to be furnished with respect to monies collected by sale of units in projects 'A' and 'M' and in the second part of directionNo.(ii) has restrainedBPTP Ltd. from continuingwith any activity in relation to the two projects. This would mean that BPTP cannot collect any further money payable towards installments by the flat buyers and ! construction activity has to ceise with respect to the under-construction flats. This directionis likely to invlite litigationby the flat buyers against BPTP I Ltd. and would be detrimental to the interest of even CPI India Ltd.

¶20As a result of our propjDseddirection,third party litigationwould be i avoided. Money which has been prohibited to be received by BPTP Ltd.would be received by BPTP Ltd. and put in an escrow account; ] operation whereof would be subject to orders which may be passed by the learned Arbitrator and this would be beneficial to CPI India Ltd. as well. I

¶21Now we highlight the problem with respect to direction No.(i) in the orderdatedOctober03, 2012.|

¶22It continues the injunctita passed on July 04, 2012 i.e. prohibits BPTP j to give effect to the resolution!passed by the Board of Directors on June 29, 2012. I I

¶23With respect to the various resolutionspassed at the Board Meeting I on June 29, •2012, Sh.Rajjiv Nayar, Sr.Advocate and Sh.N.K.Kaul, FAO (OS) Nos.538/2012,507/2012<Sc 508\20!2 Page 9of13 Sr.Advocateconcededthat such resolutionswhich were passed unanimously need not be stciyedand suitableordersbe passed. Howeyer,learnedcounsel submittedthat the resolutionjpermittingthe company to raise a loan from IFCI Ltd. be stayedinview ofthe factthat Kabul Cha.wlaand othermajority directorshave siphonedaway the funds thereby diminishingthe interestof t their clients and any further encumberanceon the assets of the company would be detrimental to the interest of CPI India Ltd. I I ' - •

¶24The contentionurged lijy Sh.HarishSalve, learnedsenior counselfor BPTP Ltd. was that the loan was sanctionedby IFCI Ltd. on June 20, 2012 for the purpose of rumiing the business of BPTP Ltd. and discharge government dues which was vital for the sui-vival of the company. The interimorder, on the principleofbalanceof convenience,A-vouldjeopardize 'usinessof the companywhich is executing25 the running and established b projects by itself or through its subsidiary companies. Learned senior counsel highlighted that the k other lands available with th and of the other six projects was available and company, as per valuation by Cushman & Wakefieldwere in sum of^11176.6crores. Learnedseniorcounselurgedthat the interest of CPI India Ltd.!is fully protected and that the loan would be I strictly used to pay governme^Titdues, payment whereof Avould enhancethe valueofthe landsheld. j j

¶25Once again, the suggestionand the argumentAvas met by projecting merits of the controversy,an| area which we refused to enter and caution I counselrepeatedlynot to enteij

¶26Now, we have already highlighted that only such interim measure needs to be put into place -vyhich would enure for the next four months •because by then the learnedArbitratorwouldbe in a positionto pass interim orders. We have alreadyhighlightedthat exceptfor balanceof convenience, FAO (OS) Nos.53S/2ni2.507/2012 j08/';20I2 I nothing else would and should weigh with the Court when the mode of disposal of the matter adopted is not to decide even prima facie the rival i contentions. 1j

¶27Now, whatevermay bei the disputeon the evaluationby Cushman & Wakefield/wehave to keep in mind that the investmentby CPI Ltd. is in sum of ^322.5 crores and the date of the investmentis August 10, 2007. As a thumb rule, even if we were to take interest at a reasonable rate to secure pies, the interestwhich needs to be secured is its interest on equitable princi around ^500 crores.

¶28Discounting by 50% tl: e valuation by Cushman & Wakefield where the assets have been valued at ^1176.6 crores, assets available with BPTP Ltd. would be around ^500 crores. It may be true that BPTP Ltd. has received^213 crores from projects'A' and 'M' and it has acted as a Judge of its own cause by breachingthe MOU on the reasoningthat clause-10of the MOU violates Foreign ExchangeManagementAct, but CPI India Ltd! can be well protected by directingthe balanceamountsrealizablewhich we are informed would be to the same amount i.e. ^f213 crores from the flat buyers to be put in the escrc Ltd. to raise the loan from iw account and simultaneously permit BPTP IFCI but upon the condition that existing shareholdingin the companyjwould not be altered and the loan would be utilizedfor paying governmentdues and particularsthereofbe disclosedto the learnedArbitrator;clarilyiigthatthe loans couldbe paid with respectto lands held in the associatecompaniesas well inasmuchas they are more in the nature of Special Purpose Yehicles. I

¶29We highlightthatthe interimorderpassedby the learnedSingleJudge is likelyto stop vital oxygensupplyto BPTP Ltd: and ifthe companydies it would be prejudicial to the intQrestof CPI India Ltd. FAO (OS) NOS.53S/2012,507/2012A508/pI2 Page II of 13

¶30We accordingly dispose of all the three appeals modifying the directionsissued by the learne|dSingleJudge resultingin the OMP filed by CPI India Ltd. being disposed of by directing that subject to the learned Arbitrator passing interim orders, BPTP Ltd. and its directors shall;-

(1)

(li)

(V) be periiiitted to raise ^125 crores .by way of loan from IFCI Ltd. but I without altering the shareholding of BPTP Ltd.; the loan would be used to pay Government dues by BPTP Ltd. or its associate companies and details would be furnished to the learned Arbitrator;

(iii) BPTP Ltd. shall continue with the ongoing projects pertaining to the lands mentioned as Project 'A' and Project 'M' in the Schedule to the MOU, which A¥Ould enti|tleBPTP Ltd. to enlist forther flat buyers for the remainingtowers proposedto be constructedin the two projects ! and BPTP Ltd. wouldb^ permittedto receivemoney from the existing i flat buyers and flirther kiroll flat buyers but would open an escrow I account within a week fr|om today, details whereof would be llirnished I to the learnedArbitratorjandthe amounts realizedAvould be deposited ! in the said account;utilizationwhereofwould be as per interimorders obtainedfrom the learnekArbitrator;

(iv) BPTP Ltd. wouldnot talle any furtherdecisionpertainingto obtaining loans or encumberingaiiy of its asset and likewiseneitherassociated i company, Avhich has been impleaded as a respondent in the OMP, would do so; BPTP Ltd. shall provide, by filing an affidavit of Sh.Kabul Chawla ator within four weeks from today, a detail of /ho have booked flats in the two projects 'A' before the learned Arbitr the existing flat buyers a-and 'M' Avith details of the amountsreceived from them includingthe FAO (OS) Nos.538/2ni2, 507/2012 ct-508/2012 n v*^i|KK ,;, w 1'? • 'A' ^ r '- .^ySMry- , fef .. r i".. ii;. • 1:^3 • [' ' y ' \ S3.':i;'0'vV5v-/i|H~/^'j ' 'ajT ^ 1'^^ 'j^'L-^:-:N-'j ' '(j^^ ' ' V- •&~-L. in Kaul C]/> detailsas to howthe moneyreceivedwas utilized;and

(vi) BPTP Ltd. shallnot commenceany bookingofflats in the remaining six projectsenlistedin the Scheduleto the MOU dated December19, 2009.

¶31No costs. NOVEMBER 09, 2012/dk (PRADEEP NANM JUDGE JUDGE JOG) A c/) ^fs i>Jo ly ^1 sif <5^ • pl^?•(^OS)^fosJ38/2072,507/2012&508/2012 ,Page 13 of13