Supreme Court Upholds 9% Interest on Share Sale in Company Dispute: Vinod Krishan Khanna & Ors. vs. Amritsar Swadeshi Woollen Mills Private Limited (23 February 2021)

Introduction

Date of the Judgment: 23 February 2021
Citation: 2021 INSC 76
Judges: Hon’ble Mr. Justice Rohinton Fali Nariman and Hon’ble Mr. Justice B.R. Gavai
Can a higher appellate court reduce the interest awarded by a lower court when only one party appeals, and the other party does not? The Supreme Court of India addressed this question in a case involving a dispute over the sale of shares in a private company. The core issue revolved around whether the National Company Law Appellate Tribunal (NCLAT) could reduce the interest rate on the share sale when only the company appealed the order of the National Company Law Tribunal (NCLT). The Supreme Court, in this judgment, clarified that the NCLAT was incorrect in doing so, thereby upholding the original interest rate granted by the NCLT. The judgment was delivered by a bench comprising of Hon’ble Mr. Justice Rohinton Fali Nariman and Hon’ble Mr. Justice B.R. Gavai.

Case Background

The case began with a company petition filed by Vinod Krishan Khanna and others (the Appellants) in 2007 against Amritsar Swadeshi Woollen Mills Private Limited (the Respondent company) and its directors. The Appellants, holding 14.62% of the company’s paid-up share capital, alleged oppression and mismanagement under Sections 397 and 398 of the Companies Act, 1956. The Company Law Board (CLB) initially handled the matter and eventually ordered the Appellants to sell their shares. A valuer was appointed to determine the fair price of the shares as of March 14, 2007, the date the petition was filed.

The valuation process concluded with a report valuing each share at INR 10.35. The National Company Law Tribunal (NCLT) then directed the Appellants to sell their shares at this price to the Respondents (either the company or its directors). The NCLT also ordered the Respondents to pay a simple interest of 9% per annum on the share value from April 1, 2007, until the date of payment. Only the Respondent company appealed this order to the NCLAT, contesting only the interest rate and the date from which it was calculated. The directors did not appeal the order.

Timeline

Course of Proceedings

The Company Law Board (CLB) initially handled the company petition filed by the Appellants. The CLB eventually accepted that the Appellants would sell their shares and appointed a valuer to determine the fair price. The proceedings then moved to the National Company Law Tribunal (NCLT), which, based on the valuation report, ordered the sale of shares at INR 10.35 each with a 9% interest from April 1, 2007. The Respondent company, dissatisfied only with the interest rate and the date from which it was calculated, appealed to the National Company Law Appellate Tribunal (NCLAT). The NCLAT, however, not only reduced the interest rate to 6% but also suo moto altered the order to specify that only the directors, and not the company, would purchase the shares. This was despite the fact that the directors had not filed any appeal. The Appellants then appealed to the Supreme Court against the NCLAT’s order.

Legal Framework

The case primarily involves Sections 397 and 398 of the Companies Act, 1956, which deal with oppression and mismanagement in a company. These sections allow minority shareholders to seek redressal when the affairs of the company are being conducted in a manner that is prejudicial to their interests. The Supreme Court also considered the principles of equity in determining the appropriate interest rate. The court also referred to the decision of the Hon’ble Supreme Court in the matter of Dr. Renuka Datla Vs. Solvay Pharmaceuticals B.V., particularly paragraph 19, which dealt with the payment of interest on monies retained by the respondents.

Arguments

Arguments of the Appellants (Vinod Krishan Khanna & Ors.):

• The primary argument of the Appellants was that the NCLAT erred in reducing the interest rate from 9% to 6%. They argued that the directors of the company (Respondent Nos. 2 to 9), who were also bound by the NCLT order, had not appealed the NCLT’s decision. Therefore, the NCLAT should not have reduced the interest rate, as it would benefit parties who had accepted the NCLT order.
• The Appellants contended that the NCLT had correctly awarded 9% interest based on the principle of equity, as the company had utilized their funds for its business since 2007.

Arguments of the Respondent Company (Amritsar Swadeshi Woollen Mills Private Limited):

• The Respondent company argued that interest could only be claimed in equity and that no grounds were established for interest in equity by the Appellants. They contended that the Appellants should not have been awarded interest at all.
• The company argued that if interest was to be awarded, the reduction from 9% to 6% was justified, as awarding 9% would unjustly enrich the Appellants.
• The Respondent company also argued that instead of interest, the Appellants should be awarded a pro-rata percentage of the company’s profits from 2007 to 2018, which they calculated to be approximately INR 48.98 lakhs.

Arguments of the Third Group of Shareholders:

• The third group of shareholders, represented by Shri Ritin Rai, argued that they were affected by the NCLAT’s decision to remove the Respondent company as a buyer of its own shares. They contended that the NCLAT should not have suo moto altered the order without hearing their side.

[TABLE] of Submissions

Issues Framed by the Supreme Court

The Supreme Court framed the following key issue:

1. Whether the NCLAT was correct in reducing the interest rate from 9% to 6%, when the directors of the company, who were also bound by the NCLT order, had not appealed the order.
2. Whether the NCLAT could suo moto raise a point and answer it without hearing the affected parties.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

Cases Relied Upon by the Court:

• Dr. Renuka Datla Vs. Solvay Pharmaceuticals B.V. [CITATION NOT PROVIDED IN SOURCE] – The Supreme Court referred to this case, particularly paragraph 19, which dealt with the payment of interest on monies retained by the respondents.

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• Dr. Renuka Datla Vs. Solvay Pharmaceuticals B.V. – The Court followed the principle laid down in this case that interest should be awarded on monies retained by the respondents.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the principle of equity and the procedural impropriety of the NCLAT’s order. The Court emphasized that the NCLT had correctly applied equitable principles by awarding interest at 9% per annum, given that the Respondent company had utilized the Appellants’ funds for its business since 2007. The Court also noted that the NCLT had considered that all parties had agreed upon the date of filing the petition as the valuation date for the shares to enable the Appellants to exit the company. The Court found no perversity in this reasoning of the NCLT. The Supreme Court also highlighted that the NCLAT had acted improperly by reducing the interest rate, which would benefit parties who had not appealed the NCLT order. Additionally, the NCLAT had erred by suo moto raising a point and answering it without hearing the affected parties.

Fact:Law Ratio:

Logical Reasoning:

The Court rejected the argument that the Appellants should receive a pro-rata share of the company’s profits instead of interest. The Court emphasized that the company’s earnings have no direct relation to the valuation of shares, which fluctuate based on various factors in the share market. Furthermore, the Court noted that if the company had made losses, it would be inequitable to award nothing to the Appellants.

The Supreme Court also rejected the challenge to the date from which interest was granted, holding that the NCLT had rightly directed that interest was payable from 01.04.2007, shortly after the date when the Company Petition was filed. This was because more than a decade had elapsed since the filing of the petition, during which time the Respondent company had utilized the funds of the Appellants for its business.

The Supreme Court stated that the NCLAT should not have suo moto raised a point by itself and answered it without hearing the affected parties. The Court held that the NCLAT’s decision to alter the order regarding who would purchase the shares was incorrect.

The Court stated, “Going by the above decision of Hon’ble Supreme Court since the monies which were otherwise payable to the Petitioners having been retained all along by the Respondents and having utilized the same, we feel that the ends of justice could be adequately met if the Respondents in the main C.P. are directed to pay interest @9% per annum on simple Interest basis.”

The Court also stated, “Pertinently, the NCLT also noted that all parties had agreed upon the date of filing the petition as the valuation date for the shares in order to enable the Appellants to walk out of the company. We do not find anything perverse in this reasoning of the NCLT.”

Further, the Court stated, “We also allow Civil Appeal No. 8907/2019 [Item No. 5.2] and Civil Appeal No. 8912/2019 [Item No. 5.3], as the NCLAT should not have suo moto raised a point by itself and answered it without hearing Shri Ritin Rai’s clients.”

Key Takeaways

• The Supreme Court upheld the NCLT’s decision to award 9% simple interest on the share value from April 1, 2007, until the date of payment.
• The NCLAT cannot reduce interest rates awarded by a lower court if the affected party does not appeal the order.
• Appellate tribunals should not suo moto raise and decide issues without hearing all affected parties.
• The principle of equity supports awarding interest when funds have been utilized by one party while rightfully belonging to another.
• The valuation of shares is not directly linked to the company’s profits or losses.

Directions

The Supreme Court directed that the Respondent Nos. 1-9 before the NCLT will be made to pay the Appellants the requisite consideration for the shares, together with simple interest at 9% per annum from 01.04.2007 till the date of payment, within a period of four months from the date of the judgment.

Development of Law

The Supreme Court’s judgment reinforces the principle that appellate courts should not modify orders to the detriment of parties who have not appealed. The judgment also reaffirms the importance of considering equitable principles when awarding interest in company disputes. The ratio decidendi of this case is that an appellate tribunal cannot suo moto alter an order to the detriment of a party who has not appealed the order. The judgment also clarifies that interest can be awarded on monies that have been retained and utilized by one party while rightfully belonging to another.

Conclusion

The Supreme Court’s decision in Vinod Krishan Khanna & Ors. vs. Amritsar Swadeshi Woollen Mills Private Limited underscores the importance of adhering to procedural correctness and equitable principles in company law disputes. The Court’s decision to reinstate the 9% interest rate and the original order of the NCLT highlights that appellate tribunals should not alter orders to the detriment of parties who have not appealed. This judgment provides clarity on the scope of appellate review and reinforces the principle that interest can be awarded when funds have been utilized while rightfully belonging to another party. The Supreme Court allowed the appeals, setting aside the NCLAT’s decision and reinstating the NCLT’s order.