Full Text
HIGH COURT OF DELHI
Date of Decision: 11th April, 2022
M/S. ARSHIYA LIMITED ..... Plaintiff
Through: Mr. Jayant Mehta, Senior Advocate with Ms. Sonia Dube, Mr. Shatadru Chakraborty and Ms. Surbhi Anand, Advocates.
Through: Mr. Kuljeet Rawal and Mr. Vikram Alung, Advocates for D-1.
Mr. Gaurav Malik and Ms. Richa Narang, Advocates for D-2.
JUDGMENT
Procedure, 1908 seeking ad interim ex-parte temporary injunction against
Defendant No. 1)
1. Defendant No. 1, was employed as ‘senior vice-president’ in the Plaintiff-company through a Letter of Appointment dated 15th June, 2018. In September, 2019, the Plaintiff introduced ‘Arshiya Limited Employee Stock Option Scheme 2019’ for its employees [hereinafter, “ESOP Scheme”], under which, Plaintiff offered 7,50,000 stock Options [hereinafter 2022:DHC:1356 “Options”] to Defendant No. 1 on 30th January, 2020. Each Option entitled Defendant No. 1 to acquire one equity share at a price of Rs. 2/- per share or any other price as determined by the Plaintiff. Defendant No. 1 accepted the Options vide letter dated 30th January, 2021. Consequently 7,50,000 shares were allotted to Defendant No. 1 with the approval of Board of Directors of the Plaintiff company vide Resolution dated 10th February, 2021.
2. Subsequently, Plaintiff allegedly found Defendant No. 1 to be in breach of his terms of employment by being guilty of misconduct. Accordingly, his services were terminated vide termination letter dated 8th September, 2021. Since the termination was premised on several grounds relating to his service, inter-alia being poor performance, misconduct and misappropriation of office funds and utilities, Plaintiff asserts that Defendant No. 1 has fraudulently secured the Options, in breach of his employment contract. The vested Options are ‘fruits of fraud’ – which Defendant No. 1 ought not to be allowed to enjoy. Plaintiff relies upon, inter alia, the legal tenet that ‘fraud vitiates all’. Additionally, Plaintiff places reliance on Clause 13.[4] of the ESOP Scheme that prohibits any employee, whose services are terminated for misconduct, from exercising rights under the vested Options. Reliance is also placed upon Clause 13.[6] which provides that exercise of vested Options shall be on hold during the adjudication of the dispute between Employee and the Company.
3. Mr. Jayant Mehta, Senior Counsel for the Plaintiff, relying upon the afore-noted clauses, amongst others, argues that Defendant No. 1’s misconduct is manifest from undisputed documents placed on record – all of which show that Defendant No. 1 was acting for other companies, such as one EWYN Services Private Limited [hereinafter, ‘EWYN’], during the term of his employment with the Plaintiff-company. He places categorical reliance upon:
(i) Recruitment Agency Agreement dated 16th October, 2019 signed by
(ii) Invoices of EWYN containing signatures of Defendant No. 1.
(iii) Description of Defendant No. 1 as part of EWYN’s team.
(iv) Defendant No. 1’s directorship in various other companies as per
(v) Paragraphs no. 3(b), 4(g) and 5 of Defendant No. 1’s additional written statement dated 26th February, 2022.
4. Mr. Mehta argues that in the course of his employment, Defendant No. 1 was also attending to his personal/family business(es) during office hours. Various customers have levelled serious allegations of misappropriation of monies. Defendant No. 1 has committed fraud upon the Plaintiff-company by attending to other business(es) and other employment(s) (part or full time) – during his employment. He has fraudulently received 7,50,000 Options, which have been converted into shares before such a fraud could be discovered. Although Defendant No. 1 has sold 50,000 of the 7,50,000 shares, the remaining 7,00,000 remain unsold. Since the record prima facie manifests that Defendant No. 1 acted in breach of his employment contract, Plaintiff is entitled to an injunction restraining Defendant No. 1 from selling 7,00,000 shares till such time the dispute raised in the present suit is adjudicated as per Clauses 13.[4] and 13.[6] of the ESOP Scheme.
5. Mr. Mehta emphasises that Defendant No. 1 cannot be allowed to retain the Options, and thereby, enjoy the fruits of his fraud, and places reliance upon the judgments in Meghmala v. G. Narasimha Reddy,[1] Yadavendra Chitbahal Yadav v. General Secretary,[2] and Bank of India v. Avinash.[3] Additionally, Mr. Mehta argues that the balance of convenience lies in favour of Plaintiff, and in case Defendant No. 1 trades in the remaining 7,00,000 shares, Plaintiff would be left remediless and would suffer irreparable loss.
6. On the other hand, Mr. Kuljeet Rawal, counsel for Defendant No. 1, controverts the allegations made by Mr. Mehta and places reliance upon Clause 10.[2] of the ESOP Scheme to say that in terms thereof – the actual vesting of Options at the end of respective time periods in the hands of the employee, is on the basis of performance grade of the employee under the annual performance appraisal system of the Plaintiff. Further, as per Plaintiff’s own letter dated 1st April, 2019 with the subject “Compensation Revision 2019-20”, Defendant No. 1’s performance for the years 2018-19 was rated as “Leading”, and consequently, his salary stood increased by 15% to Rs. 18 lakhs per month. The benefit under the ESOP Scheme was, therefore, extended under the annual performance appraisal system of the Plaintiff-company and has nothing to do with the period subsequent thereto. (2010) 8 SCC (paragraphs no. 32 to 34 and 36) 2018 SCC OnLine Bom 1312 (paragraphs no. 4, 6, 11, 16, 21 and 22) The termination of Defendant No. 1’s employment has no relevance to the benefit accrued under the ESOP Scheme. In terms of Clause 9.[4] read with Clause 10.[2] as well as other clauses, the benefit in favour of Defendant NO. 1 stands concluded, and there is no provision to reverse the same. Plaintiff has misinterpreted the ESOP Scheme, without understanding that once the granted Option stands vested on the basis of an annual performance appraisal system – it amounts to a concluded contract, and there is no granted Option in existence that could be terminated. Mr. Rawal also made detailed submissions controverting the allegations of misconduct on merits, and argues that the charges are misconceived and unsubstantiated, stating that the termination was without any show-cause notice, warning or hearing afforded to Defendant No. 1, and is, therefore, illegal. Analysis:
7. The Court has considered the submissions advanced by counsel for the parties. In a nutshell, Plaintiff’s suit seeks declaration that Defendant NO. 1 is not entitled to transact the 7,00,000 Options granted to him by Plaintiffcompany in view of the alleged misconduct, leading to the termination of his employment on 8th September, 2021. In addition, thereto, Plaintiff seeks a declaration that Defendant No. 1 is liable to compensate it for the market price of the 50,000 shares already sold by him. Besides, Plaintiff seeks injunctive relief – both concerning 50,000 shares already sold and the 7,00,000 unsold shares. (2005) 7 SCC 690 (paragraphs no. 11 and 12)
8. At this stage, the short question before the Court is whether Plaintiff is entitled to an injunction restraining Defendant No. 1 from transferring and/or dealing with and/or creating any encumbrance in respect of the 7,00,000 shares granted to him by the Plaintiff, in view of his alleged misconduct leading to his termination of service vide letter dated 8th September, 2021, during the pendency of the suit.
9. To adjudicate upon the Plaintiff’s application, a prima facie view has to be formed regarding Plaintiff’s rights to seek reversal of the Options, on the basis of the grounds urged above and in light of provisions of the ESOP Scheme. Plaintiff has asserted that since termination was on account of grave charges of misconduct, Defendant No. 1 cannot enjoy the benefit of ESOP granted to him whilst he was in employment, and is instead liable to compensate the Plaintiff for the same.
10. Before proceeding, it is imperative to take a look at relevant clauses of the ESOP Scheme. The same read as under: “8 Grant of Option 8.[1] The Committee, in accordance with the terms and conditions of the Scheme and subject to Employee's continuity in the employment, his performance, hierarchy and other parameters as set out by the Committee may grant Options to an Employee from time to time. 8.[2] to 8.[8] xx … xx … xx 9 METHOD OF ACCEPTANCE 9.[1] to 9.[3] xx … xx … xx 9.[4] Subject to the terms contained herein, the acceptance in accordance with this clause, of a Grant made to a Grantee, shall conclude a contract between the Grantee and the Company, pursuant to which each Option shall, on such acceptance, be an Unvested Option. 10 VESTING OF OPTIONS 10.[1] Unless otherwise specified in the Grant, all Grants made to any employee shall Vest, in the following manner: Sr. No. Vesting Date Maximum number / % of Options that shall Vest 1 1 Year from the Grant Date 100 (One Hundred)% In case where Options are granted by a company under an ESOP in lieu of Options held by a person under an ESOP in another company which has merged or amalgamated with that company, the period during which the Options granted by the transferor company were held by him shall be adjusted against the minimum vesting period required. 10.[2] Actual Vesting of Options at the end of respective time periods, in the hands of the Employee shall further be evaluated on the basis of the Performance Grade of the Employee, in Annual Performance Appraisal system of the Company. The Committee may, at its sole & absolute discretion, lay down performance metrics which shall inter-alia include business performance and achievement of set business targets on the achievement of which such Options would vest, the detailed terms & conditions relating to such performance-based vesting and the proportion in which Options granted would vest. 10.[3] On Vesting, the Grantee shall be eligible to exercise some or all the Vested Options within the Exercise Period. 10.[4] The Committee shall have the power to modify the vesting schedule on a case-to case basis subject to the minimum gap of 1 (One) year between the grant and first vesting and the maximum vesting period of 4 (Four) years from the date of Grant. 10.[5] The Options which do not get vested due to Performance Appraisal in any of the vesting, will get lapsed from the hands of the Employee and will add-back to the pool of ungranted Options of this Scheme, and be available for further Grants under the scheme. 13 CESSATION OF EMPLOYMENT 13.[1] In the event of Resignation, all Unvested Options, shall expire on the date of exit and stand terminated with effect from that date unless otherwise determined by the Committee whose determination will be final and binding. However, all Vested Options as on that date shall be exercisable by the Grantee immediately but not later than 1 (One) Month/ 3 (Three) Months, as the case may be, from the date of submission of resignation. 13.[2] xx … xx … xx 13.[3] xx … xx … xx 13.[4] In the event of Termination of the Employment for misconduct of a Grantee, all Options granted, whether vested or unvested, shall stand terminated, with immediate effect unless otherwise determined by the Committee, whose determination will be final and binding. The Committee, at its sole discretion shall decide the date of termination of a Grantee, and such decision shall be binding on all concerned. ‘Misconduct shall mean, as determined by the Committee,
(i) the continued and gross failure of the Employee to substantially perform his duties to the Employer Company, (other than any such failure resulting from retirement, death or permanent disability, voluntary retirement),
(ii) the engaging by the Employee in wilful, reckless or grossly negligent misconduct which is determined by the Committee to be detrimental to the interest of the Company or any of its Subsidiaries or its Holding Company, monetarily or otherwise,
(iii) the Employee's pleading guilty to or conviction of a felony.
(iv) fraud, misfeasance, breach of trust committed by an Employee or disclosure by the Employee to any outside party, of any confidential information relating to the Plan and /or the Employer Company, or
(v) employment of the Employee in any other organisation or provision of services by the Employee for any other organisation whilst in the employment of the Company without the previous written consent of the Company.
(vi) the Employee is declared bankrupt.”
13.[5] xx … xx … xx 13.[6] In the event where arises a Dispute between Employee and the Company, exercise will be put on hold till the date of settlement of such dispute.)”
11. A bare perusal of the afore-noted clauses indicates that the Plaintiff has misconstrued the terms of the ESOP Scheme. By its very name, an Option means a right, but not an obligation, granted by the company to an employee. The Option is settled in the form of ESOPs, at a pre-determined price under the ESOP Scheme. Plaintiff’s offer of equity compensation to employees in the form of Options is aimed at, amongst others, to motivate employees to contribute to the growth and profitability of the company; to retain the employees; and to provide means to enable the company to attract and retain human talent. For granting Employee Stock Options to the employees, the ESOP Scheme sets out eligibility criteria which are determined by a Committee, on the basis of internal ratings, loyalty performance and designation of the employees. As per the ESOP Scheme, based on the employee’s continuity in the employment, his performance, hierarchy and other parameters, the Committee grants Options to an employee from time to time. The Committee also determines the quantum and number of Options to be granted to each employee, and the times at which such grant shall be made.
12. The ESOP Scheme contemplates vesting of Option under Clause 10 (extracted above). A vested Option means an Option which has vested with the employee pursuant to the afore-noted Clause and has thereby become exercisable. On vesting, the employee/grantee becomes eligible to exercise some or all the vested Options within the time period specified for exercise of his right to apply for shares against the Option vested.
13. The ESOP Scheme also defines ‘Unvested Option’ to mean an Option that is not a ‘vested Option’. Once the company Grants an Option to an employee/grantee, he has to communicate acceptance to the same, by delivering an ‘Option Acceptance Agreement’, on or before the closing date specified in the grant letter. Clause 9.[4] provides that the acceptance of a Grant made to a Grantee shall conclude a contract between the Grantee and the Company, pursuant to which each Option shall, on acceptance, be an Unvested Option. All Grants to an employee vest after the expiry of 1 year from the Grant Date. The actual vesting of the Option at the end of the time period specified, in the hands of the employee, is evaluated on the basis of performance grade of the employee in annual performance appraisal system of the company. In terms of Clause 10.3, on vesting, the grantee becomes eligible to exercise some or all of the Vested Options within the exercise period. The exercise period, under Clause 12.[2] of the ESOP Scheme, commences from the date of vesting and expires not later than one year from the date of vesting of Options or such other period as may be decided by the Board/Committee. If an employee exercises the Option within the period specified and pays the exercise price, shares are allotted, subject to the approval of the Board.
14. In the instant case, the Plaintiff issued a grant letter on 30th January, 2020, which was accepted by the Defendant No. 1 by letter of the same date. Thereafter, when the Option stood vested, pursuant to his annual performance appraisal, Defendant No. 1 exercise his right to convert the said Option to shares, which was consented to by the Board of Directors and accordingly, 7,50,000 equity shares were allotted to Defendant No. 1 on 10th February 2021. This signifies that all the conditions specified in the ESOP Scheme stood fulfilled. The exercise price (in accordance with the ESOP Scheme) also stood paid. Thus, the Options stood converted into shares, and they are they no longer Vested or Unvested Options. Therefore, prima facie, the restriction regarding Vested and Unvested Option, on cessation of employment of an employee, as contemplated in the ESOP Scheme, is no longer applicable.
15. The clauses strongly relied upon by the Plaintiff company for seeking a restraint order, apply to Options (Vested or Unvested). Once the shares were issued and allocated against vested Options, Defendant No. 1 immediately became a shareholder and gained equity ownership in the Plaintiff-company, including all the rights attached to such shares. The shares in question, therefore, became the property of Defendant No. 1, which entitles him to trade or keep the same, as he pleases. The contract, in other words, stood concluded upon Defendant No. 1 making payment for the allotment of such shares. Therefore, no merit is found in the submission that Defendant No. 1 is liable to be restrained from trade in the Options. As per the ESOP Scheme, the allotment of shares culminates in a concluded contract between the parties. In other words, the concept of Unvested / Vested Options has ceased, as the shares stand transferred conclusively and irrevocably in favour of Defendant No. 1.
16. It is noticed that the main prayer in the application, viz. – “Grant ex parte ad interim injunction restraining the defendant no. 1 from transferring and/or dealing with and/or creating any encumbrance and/or third party right in respect of the 7,00,000 ESOP's granted to him by the plaintiff in view of his conduct leading to his termination of service vide letter dated September 8, 2021” is very cleverly worded. As discussed above, Defendant No. 1 has already exercised his Option, much prior to termination, culminating into allotment of shares. There are thus no ESOPs as on date. The afore-noted relief is contrary to the provisions of the ESOP Scheme, and cannot be entertained. For the same reason, there is no ‘dispute’ which requires settlement, as contemplated under Clause 13.[6] of the ESOP Scheme, which could entitle the Plaintiff to seek hold on ‘Exercise of Option’. Plaintiff has wholly misinterpreted Clauses 13.[4] and 13.[6] of the ESOP Scheme, which, in the prima facie opinion of the Court, has no applicability.
17. As regards the claim that the allotment of shares are ‘fruits of fraud’, it must only be noted that such grave allegations cannot be accepted on face value. The same would require adjudication. Although the termination letter levels allegations which hint misconduct, the same would have to be proved by the Plaintiff. No communication has been placed on record to indicate that during the course of employment spanning three years, Plaintiffcompany ever issued any show-cause notice upon Defendant No. 1 or complained about his poor-performance. There is also no material placed on record that would show that prior to termination, any enquiry was held, affording an opportunity to Defendant No. 1 to defend himself on the charges levelled against him. Although, Mr. Mehta has strongly relied on the fact that the termination has not been assailed or challenged, however that cannot be construed against Defendant No. 1, as he does not wish to continue with the employment and therefore has no real cause to assail the termination. In any event, now that Plaintiff has linked the termination with the benefits of ESOP scheme, Defendant No. 1 has strongly controverted their stance and contended that there was no show-cause notice. Even prior to termination, there has been no determination on the charges, before any Independent Authority. Thus, today, the Court cannot form a prima facie view to hold Defendant No. 1 to be guilty of such charges. During the course of arguments, Mr. Mehta suggested that there has been some enquiry by the Plaintiff-company, however, no documentation to this effect was shown to the court. In any event, the same would require an independent adjudication and Plaintiff cannot be a judge in its own cause. Moreover, and undisputedly, the benefits of the ESOP scheme stood accrued to Defendant No. 1 during the period when his appraisal ratings were found to be meritorious.
18. For the foregoing reasons, Plaintiff has failed to make out a prima facie case in its favour. The balance of convenience lies in favour of Defendant No. 1 who has the right to sell the shares already allotted to him. If Defendant No. 1 is restrained from selling the shares and there is a fall in price, Defendant No. 1 would be seriously prejudiced. Further, no case of irreparable loss is made out. If the restraint order is not passed and the shares are sold, the Plaintiff can always be compensated in terms of money if he ultimately succeeds in the suit. In these circumstances, the Court is of the opinion that the Plaintiff has no right to divest the shares allotted to Defendant No. 1. Plaintiff also has no legal right to seek restraint of Defendant No. 2 from paying the amount towards the sale of 50,000 equity shares. The reliefs in the application are misconceived.
19. In view of the above, the Court does not find any merit in the present application.
20. Dismissed.