An order in appeal of the national company law appellate tribunal (NCLAT), principal bench, New Delhi, arising from an order of the national company law tribunal (NCLT), Bangalore bench, dealt with a dispute between the two branches of a family owning a well-known jewellery chain in Bangalore.
The facts weighing on the dispute are numerous, complicated and much disputed. The article does not deal with that part.
One of the critical issues considered in the case involved the validity and operability of a family settlement agreement (FSA) between the two branches entered into some years ago.
This agreement, purportedly, listed out various initiatives and actions to be undertaken by and between the two warring factions that were expected to bring about an amicable settlement to the festering friction.
The FSA was chiselled out with the assistance of various lawyers. The common auditor-CA of the two families, trusted by both, played a key role and was also entrusted with the original copies of the FSA.
In the course of the arguments, one of the families took the stand that the other side failed to honour its end of the bargain as envisaged in the FSA, causing a derailment of the rapprochement.
The other side took the position that the auditor to whom the originals were entrusted was an escrow and he failed to implement the steps that he, as the expert in the domain of law, tax and business, was expected to.
By virtue of this failure on the part of the alleged escrow, the agreement never came to life, was stillborn and cannot be relied upon.
Against this background, the question arose whether the agreement was put in the custody of the auditor in the capacity of an escrow requiring steps to be taken to give life to it or a mere custodian to keep it in safe custody, being trusted by both sides and having played a lead role in putting this FSA together.
In Wharton's Law Lexicon, the effect of an escrow is stated thus:
“Escrow, a writing under seal delivered to a third person, to be delivered by him to the person whom it purports to benefit upon some condition. Upon the performance of the condition it becomes an absolute deed; but if the condition be not performed, it never becomes a deed. It is not delivered as a deed, but as an escrow, i.e. a scroll, or writing which is not to take effect as a deed till the condition be performed.”
In layman’s language, when parties to an agreement or the executants of a document place the agreement or, as the case may be, the document in escrow, the parties intend that pending the fulfillment of certain conditions which they stipulate, the document will be held in custody by the person with whom it is placed.
Notwithstanding the execution of the agreement or the execution of the document, the act of placing the instrument in escrow evinces an intent that the document would continue to lie in escrow until a condition which is precedent to the enforceability of the document comes to exist.
The instrument becomes valid and enforceable in law only on the due fulfilment of a prerequisite and, often, the parties may stipulate the due satisfaction of a named person on the fulfillment of the condition.
In Halsbury's Laws of England, the following is elaborated of placing a document in escrow:
“An intended deed may, after sealing and any signature required for execution as a deed, be delivered as an escrow (or scroll), that is as a simple writing which is not to become the deed of the party expressed to be bound by it until some condition has been performed.
“Thus, a conveyance on sale or a mortgage or a surrender discharging a mortgage may be delivered in escrow so as to be binding on the grantor only if the grantee pays the consideration money or only if the grantee executes a counterpart or some other deed or document as agreed with the grantor. Like delivery as a deed, delivery as an escrow may be made in words or by conduct although it need not be made in any special form or accompanied with any particular words, the essential thing in the case of delivery as an escrow being that the party should expressly or impliedly declare his intention to be bound by the provisions inscribed, not immediately, but only in the case of and upon performance of some condition then stated or ascertained. In the absence of direct evidence whether or not a deed of conveyance was delivered as an escrow, the fact that only part of the purchase price has been paid at the time of delivery justifies the inference that the deed was delivered as an escrow pending payment of the balance.”
These principles find support in a judegment of the Bombay High Court in Hira Mistan vs Rustom-
“An escrow has been held to be a document deposited with the third person to be delivered to the person purporting to be benefited by it upon the performance of some condition, the fulfillment of which is only to bring the contract into existence. Oral evidence is admissible under this proviso to show that the Deed was executed or delivered conditionally as an escrow. Escrow has also been explained as an intended Deed after sealing and any signature required for execution as a deed, be delivered as an escrow, that is as a simple writing which is not to become the deed of the party expressed to be bound by it until some condition has been performed. Escrow has also been defined to mean that where an instrument is delivered to take effect on the happening of a specified event or upon condition that it is not to be operative until some condition is performed then pending the happening of that event or the performance of the condition the instrument is called an escrow.”
Before NCLAT, the auditor was also arrayed as a respondent, given the dispute about his capacity and the role in the case. The auditor submitted the following to explain his role-
The shareholders of the 1st respondent company are members of the same family. There were certain differences between the shareholders in the 1st respondent company, at which point in time, they decided to execute a family settlement agreement, which could resolve the issues between them. All parties and their respective counsels worked on the said family settlement agreement for several months and the terms of the family settlement agreement were finalised and the agreement was executed on 9 January 2014.
It is submitted that the 8th respondent is not a signatory of the said document. As a chartered accountant (CA), the 8th respondent had extended his expertise in mediating and reaching a consensus amongst the parties to reach a settlement. As the 8th respondent enjoyed the confidence of all parties to the said agreement, after the agreement was executed, the original of the agreements in two sets was handed over to the 8th respondent for safekeeping.
It is pertinent to point out that the 8th respondent is referred to as an 'expert' in the FSA and his role in the FSA is also expressed in the said agreement.
At no point in time was the 8th respondent called upon by any party of the said agreement to act as an 'escrow' or to perform any act as an escrow. This role as an expert and to perform as required under the said agreement was dependent on whether the parties required any assistance.
If assistance was sought, the 8th respondent would have considered providing his expertise. If no assistance was sought, the question of being an expert is of no consequence. The tribunal accepted the position that the FSA was not placed in escrow with the auditor, but went further to issue the following instructions, far-reaching in effect that one rarely comes across!
“In the facts and circumstances of the case, particularly since both groups have equal voting rights leading to irretrievable deadlock in the conduct of the affairs of the R1 company, we hereby order to regulate the affairs of the R1 company under Section 242 of the Act. All directors will continue to remain the director of the R1 company but one additional director i.e. Mr. Shyam Ramadhayani, CA, who is well versed with the affairs of the R1 company and is a professional, is nominated to act as the chairman and managing director. In order to ensure the smooth functioning of R1 company, and with a view to ensuring that family dispute is settled, we direct that Mr Shyam Ramadhayani, CA, who is appointed as a director and chairman of the board of directors and will continue to function for one year to begin with. He will be paid ₹5 lakhs per month till a period of one year from the issue of the orders. He will provide monthly reports to NCLT Bengaluru bench. Detailed procedural orders, if required, be issued in this regard by NCLT BB. Necessary intimation be given to the Registrar of companies also.”
It is only to be assumed that NCLAT would have ascertained the willingness of the auditor to change his hat before appointing him as the CMD.
Was the auditor pleased by this dispensation and saw the change in his role as a promotion, or likely to create a commotion in his practice, cannot be deciphered from the order!
(Ranganathan V is a CA and CS. He has over 44 years of experience in the corporate sector and in consultancy. For 17 years, he worked as Director and Partner in Ernst & Young LLP and three years as a senior advisor post-retirement, handling the task of building the Chennai and Hyderabad practice of E&Y in tax and regulatory space. Currently, he serves as an independent director on the board of four companies.)
