Case Notes – Fall 2014

By Aseem Chawla and Shamik Saha

The Effect On Tenancy Of  Demolition And Destruction Of The Rented Premises

The Supreme Court of India has held recently that the destruction of a rented building does not terminatethe lease solong as the land on which the building stood continues to exist.M/S Shaha Ratansi Khimji & Sons vs. Proposed Kumbhar Sons Hotel P. Ltd, 2014 (8) SCALE 455.

The respondent had purchased 11/16thofthe disputed propertythrough two sale deeds in 1971 and 1978. Subsequently, in 1990, the respondent purchased the remaining portion of the property from the owner, to whom theappellant was paying rent as a tenant.

Further, the respondent had started digging in preparation of constructing a hotelwhen he told the workers of theappellant to vacate the warehouse, which the appellant was renting from the previous owner. As a result of thiswork, the walls of the warehouse collapsed.

The tenanteventually filed a lawsuit in the civil court, which dismissed the claimholdingthat the sale of the land to the hotel developer extinguished the tenant’s rights in the premises.Subsequently, the appellate court, and eventuallythe Bombay High Court,affirmed the trial court on the ground that the appellant’s tenancy had been extinguished by the sale, and thus the appellant had failed to state a claim for which relief could be granted.The tenant then filed a petition for a writ of certiorari to the Supreme Court, which was granted.

Prior to this case, the Supreme Court had issued twoprominent,though contradictory, judgmentsaddressing thescope of a tenant’s rights in destroyed buildings. On the one hand, in, Vannattankandy Ibrayi v. Kunhabdullah Hajee,([2001] 1 SCC 564), the Court held that tenancy ended with the destruction of a building.On the other hand,inT. Lakshmipati v. R. Nithyananda Reddy([2003] 5 SCC 150), the Court held that even if abuilding is destroyed or demolished, the lease does not end solong as the land beneath continues to exist (which, of course, it would in most imaginable circumstances). Both cases had been decided by different benches of two justices each.

In light of these conflicting precedents, in Proposed Kumbhar Sons Hotel,the Supreme Court granted certiorari and referred the case to a bench of three justices whichoverruled Vannattankandy Ibrayiand upheld T. Lakshmipthi. The Court held that the demolition and destruction of the property subject to the tenancy did not extinguish the lease. The Court further explained that therespondent had merely purchased the right and interest of ownership of property, which remained subject to the tenant’s leasehold interest. Therefore,the lease persistedeven after the respondent purchased the land because the acquisition of ownershiprights did not include the tenant’s leasehold interest, which had beenexpressly carved out by the lease. Accordingly, the Supreme Court directed the respondent to pay a sum of ₹2 millionto the tenant as compensation for depriving him of the use of his leasehold interest in the property for two months with interest at six percent accruing from the date of the judgment.

THE SUPREME COURT LIMITS THE CIRCUMSTANCES UNDER WHICH AN OPEN OR PUBLICTAKEOVER OFFER FOR SHARES MAY BE WITHDRAWN

In Securities & Exchange Board of India v. Akshya Infrastructure Pvt. Ltd.(AIR2014 SC 1963), the Supreme Court has heldthat a corporationcannot withdraw an open (public) offerfor shares on the grounds that the offer has become uneconomical or lacks commercial reasonableness.

Akshya Infrastructure Pvt. Ltd, a part of the Promoter Group of MARG Limited (the “Target Company”), had made several acquisitions between 2006 and 2010 in excess of the five percent creeping acquisition limit permitted under the Substantial Acquisition of Shares and Takeovers Regulations (the “Takeover Regulations”), and, therefore, was required to comply with the provisions of Regulation 11 of the Takeover Regulations under which share offers of more than five percent must be made in the form of a public announcement.

In 2011, Akshya made a voluntary open offer through a public announcement published in several major national newspapers in compliance with Regulation 11.However, due to certain events, in 2012 Akshya expressed its intention to withdraw the open offer pursuant to Regulation 27 of the Takeover Regulations. Akshya justified its withdrawal of the open offer on the ground that the transaction was no longer economically expedient or commercially reasonable.

In late 2012, the appellant, the Securities and Exchange Board of India(“SEBI”) raised questions and concerns to Akhsya about the proposed withdrawal. SEBI took the view that permitting withdrawals of public offers is harmful shareholders who have accepted such offers.Akshya challenged SEBI’s comments before the Securities Appellant Tribunal (the “SAT”) alleging that SEBI’s delay in forwarding its comments and concerns made the offer economically unviable. The SAT allowed Akshya to withdraw the open offer and to deposit an escrow amount to cover the amounts involved.

Aggrieved by decision of the SAT, SEBI appealed to the Supreme Court. A Division Bench of two justices found that Akshya had acquired shares in excess of thefive percent creeping acquisition limit. The court also found that the Akshya had failed to comply with Regulation 11,but held that the SEBI was justified in takingthe non-compliance into consideration whenassessingthe feasibility of the public offer madein 2011.In dicta the court also criticized SEBI for its 13-month delayin issuing its letter of comments on the offer letter.

Furthermore, theCourt held unequivocally that Regulation 27 precludes any corporation from withdrawing a public offer regardless of whether the offer is voluntary or triggered by Regulation 11. However, the Court acknowledged a narrow exception to this prohibition; valid withdrawals mustsatisfy the requirementsset forthin Regulation 27(1)(b), (c) and (d). The Supreme Court concluded thatas there isnodistinction between a triggered public offer and a voluntary public offer,both types of offers are governed under the same prohibition.

The Supreme Court rejected Akshya’s contention thatNirma Industries Ltd. &Anr. vs. SEBI ([2013] 8 SCC 2),was distinguishable on the facts. In Nirma Industries,the Court had held that withdrawal of an open offer under the Takeover Regulations is permitted, but only in the narrowest of circumstances, such as a statutory bar to the offer. Economic hardship is not sufficient ground for withdrawal of an open offer.

Accordingly, the Court reversed the order of the Securities Appellate Tribunalandprohibitedthe Akshya from withdrawing its open offer. The decision reiterates that open takeover offers are made for the benefit of the shareholders of the target, and cannot be withdrawn except in the narrowest of circumstances. It puts the offeror on notice that it must be confident of seeing the offer through and assume the risk of unanticipated events.

Aseem Chawla is the founding partner of MPC Legal in New Delhi and leads the firm’s tax practice group. He is currently Vice Chair of India Committee & Asia Pacific Committee of the ABA Section of International Law. He is the Co-Chairman of the Direct Taxes Committee of PHD Chamber of Commerce and Industry. He can be reached at aseem.chawla@mpclegal.in.

Shamik Saha is a member of Bar Council of Delhi and isan associate in the Corporate Law team of MPC Legal, New Delhi. He can be reached at shamik.saha@mpclegal.in.

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