The Karnataka High Court has held that the company court was wrong in permitting UB (Holdings) Ltd to sell the shares of United Spirits Ltd (USL) without an investigation into serious allegation about diversion of Rs 4,000 crore to a British Virgin Island by USL for acquiring a Scottish distillery.
In its December 20 verdict of declaring as ‘void’ the permission granted by a single judge bench (acting as a company court) for selling 1.36 crore shares, a Division Bench has said that “…when such serious allegations are made, without investigation of the facts, he (company judge) could not have granted the permission.”
“If the aforesaid facts (allegations) are true, it shows that the company (UBHL) has not come to the Court with clean hands and the transaction in question is not a bona fide one. In other words, without investigation of serious allegations made attacking the transaction in question, the learned company judge has granted the permission, which is not proper,” the Bench comprising Justice N. Kumar and Justice Rathnakala said.
The Bench pointed out that the company judge, while dealing with the allegation had observed that USL was not a party to the proceedings and that monies, invested in the acquisition Scottish Distillery, Whyte & Mackay a wholly owned subsidiary of USL, was through financial assistance obtained from City Bank, London in full compliance with the Foreign Exchange Regulations, and hence the judge was of the opinion that “an investigation into the aforesaid allegations at this stage of the proceedings in the company petition is neither desirable nor called for. Therefore, he (company judge) was of the opinion that is a matter to be investigated,” the Bench observed.
It has been claimed by BNP Paribas, a French Bank and one of the creditors of UBHL, that diversion of Rs 4,000 crore was contrary to the interest of the creditors of UBHL as such a diversion was bound to have an indirect impact on UBHL as well as its creditors by virtue of a 27.72 per cent stake held at the material time by UBHL in USL.
It had raised question on such valuable assets being parked in a “tax haven” (a British Virgin Island) “without proper explanation or supporting document.”
BNP chargeThe Bench also took note of the other allegation made by BNP Paribas that the UBHL had “suppressed” details on other financial transactions, worth around Rs 1,000 crore, which were undertaken with Diageo on November 9, 2012, the same day on which UBHL entered into an agreement to sell USL shares.
Paribas had told the Bench that Diageo had informed the London Stock Exchange about the two other transactions: First one, on payment of $35 million (about Rs 219 crore) relating to a joint venture brewery in South Africa to UB Group’s Vijay Mallya.
And the second one, a conditional back-stock guarantee for $135 million (about Rs 823 crore) being arranged by the Diageo Holdings, The Netherlands, for paying to Standard Chartered Bank in respect of liabilities of Watson Ltd, an overseas company through which Mallya inter alia controls his interests in a Formula One Racing team. It has been claimed that Watson Ltd reported to be 20.19 per cent shareholding in UBHL.
While citing these details, the Bench said that company court should have ensured that all the materials showing the conduct of UBHL as well as all the creditors were before it prior to hearing application seeking permission for selling shares.