Sunday, May 1, 2016

Messer Holdings: Supreme Court Refuses to Decide on the Enforceability of Share Transfer Restrictions

As we have previously discussed on several occasions (here and here), the question of enforceability of share transfer restrictions in Indian companies has been a vexed one. Although the Bombay High Court has sought to bring about some resolution of the issues in its leading judgments of Messer Holdings v. Shyam Madanmohan Ruia and Bajaj Auto Ltd. v. Western Maharashtra Development Corporation Ltd., and Parliament has sought to clarify the position in the proviso to section 58(2) of the Companies Act, 2013, several ambiguities continue.

In this background, it was reasonable for one to anticipate clarity from the Supreme Court in the appeal that was preferred from the Messer Holdings judgment of the Bombay High Court. A couple of weeks ago, the Supreme Court delivered its judgment in Messer Holdings Ltd. v. Shyam Madanmohan Ruia. However, not only did it refuse to answer the questions of law posed before it, but it also criticized the parties for unreasonably taking up valuable time of the court. Hence, no further guidance has come forth from the Supreme Court on the question of the validity and enforceability of share transfer restrictions in Indian companies.

In this case, the Supreme Court considered different appeals from four separate suits preferred by the parties, all relating to a series of transactions involving restrictions on transfer of shares. The detailed facts of the case are not entirely relevant for the discussion in the present post. One suit stood withdrawn. Certain others were affected by a settlement agreement subsequently entered into between the relevant parties. The Supreme Court found that no dispute survives on the transfer restrictions in view of the settlement agreement between the parties, and hence the suits are to be dismissed without any cause of action. Consequently, all interim orders passed by various courts in earlier proceedings also lapse.

The Court came down heavily on the parties as follows:

40. We make it clear that we are not deciding by this order, the existence or otherwise of any right or its enforceability in the … shares of [the company] …. It is open to them to establish their right in [the suit]. The defendants in the [suit] are at liberty to raise every defence available in law and fact to them.

41. A great deal of effort was made both by [the parties] to convince the court that in view of the protracted litigation between the parties this court should examine all the questions of rights, title and interest in these shares between the various parties as if this were the court of first instance trying these various suits.

43. The net effect of all the litigation is this. For the last 18 years, the litigation is going on. Considerable judicial time of this country is spent on this litigation. The conduct of none of the parties to this litigation is wholesome. The instant [special leave petitions] arise out of various interlocutory proceedings. … We believe that it is only the parties who are to be blamed for the state of affairs. This case, in our view, is a classic example of the abuse of the judicial process by unscrupulous litigants with money power, all in the name of legal rights by resorting to halftruths, misleading representations and suppression of facts. Each and every party is guilty of one or the other of the above-mentioned misconducts. It can be demonstrated (by a more elaborate explanation but we believe the facts narrated so far would be sufficient to indicate) but we do not wish to waste any more time in these matters.

44. This case should also serve as proof of the abuse of the discretionary Jurisdiction of this Court under Article 136 by the rich and powerful in the name of a ‘fight for justice’ at each and every interlocutory step of a suit. Enormous amount of judicial time of this Court and two High Courts was spent on this litigation. Most of it is avoidable and could have been well spent on more deserving cases. …

45. We therefore, deem it appropriate to impose exemplary costs quantified at Rs.25,00,000.00 (Rupees Twenty Five Lakhs only) to be paid by each of the three parties ... The said amount is to be paid to National Legal Services Authority as compensation for the loss of judicial time of this country and the same may be utilized by the National Legal Services Authority to fund poor litigants to pursue their claims before this Court in deserving cases.

In the light of these observations, it is not clear as to what effect this would have on the judgment of the Bombay High Court in the Messer Holdings case in so far as its holdings on the position of law on share transfer restrictions are concerned. But, since the Bombay High Court adopted a similar approach in the Western Maharashtra Development Corporation case, the law as set forth in that case will in any event hold good, at least as of now.


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