2019 (2) TMI 1410 - AT - Companies Law

NCLT validates Company Petition, invalidates agreement, grants reliefs, directs costs for unjustified litigation

The NCLT confirmed the maintainability of the Company Petition, declared the agreement dated 09.10.2003 invalid and not binding, validated certain ... Oppression and mismanagement - contesting Respondents were restrained from interfering with the affairs of the Company by holding themselves out as Managing Director/Directors - HELD THAT:- As seen the consents which were filed with the Company Petition, which were titled as 'Power of Attorney' and detailed recitals are there empowering original Petitioner No.1 to engage and appoint Counsel to conduct and defend legal proceedings in any Court of Law, Tribunal or Company Law Board and to sign Vakalatnama, pleadings etc. These documents are of 2007, copies of which are at Pages - 641 to 667. Going through these documents, it cannot be said that the concerned members, who were referring to their Share Folio numbers and number of shares and who were authorizing the original Petitioner No.1, did not know that they were authorizing the Petitioner No.1 to move Courts, Tribunals, CLB with regard to protecting their interests as well as the interests of the Company. Those Petitioners have not questioned the act of Petitioner No.1 maintaining the Petition on their consent. Contesting Respondents cannot profess to have entered their brains to say that they did not give intelligent consent. Thus, on this count, we do not find that there is any defect made out. No reason to interfere with the Impugned Order except for a small portion. Direction 'A' of the operative order of para - 23 of the Impugned Order (reproduced earlier) was not well worded and needs to be modified. The original Petitioners have not sought declaration of termination of the agreement dated 9th October, 2003. It was an agreement between original Respondents 2 and 3. Whatever legal effect it had viz-a-viz original Respondent No.2, was matter between original Respondent Nos.2 and 3. In the absence of any material to show that the original Petitioners were party to such agreement or that the Company was party to such agreement, the declaration should have been that the said agreement is not binding on the original Petitioners and the Company and would not confer any rights on the contesting Respondents viz-a-viz the shareholders of the Company. Issues Involved:1. Maintainability of the Company Petition under Sections 397 and 398 of the Companies Act, 1956.2. Validity and binding nature of the agreement dated 09.10.2003.3. Validity of re-appointments of the Executive Vice-Chairman and Directors.4. Shareholding and directorship status of Respondents Nos. 3 to 5.5. Reliefs entitled to the Petitioners.Detailed Analysis:1. Maintainability of the Company Petition:The contesting Respondents challenged the maintainability of the Company Petition on the grounds that the Petitioners did not hold the requisite 10% shares as required under Section 399 of the Companies Act, 1956. They also questioned the validity of the Powers of Attorney authorizing the filing of the Petition. The NCLT confirmed that the Petitioners held the necessary percentage of shares at the time of filing the Petition and had validly authorized Petitioner No.1 to file the Petition.2. Validity and Binding Nature of the Agreement Dated 09.10.2003:The agreement dated 09.10.2003, where Respondent No.2 agreed to transfer shares to Respondent No.3, was deemed invalid by the NCLT. The Tribunal observed that the agreement was entered into without the approval of the Board of Directors, shareholders, financial institutions, and BIFR, which was necessary given the company’s status as a sick industrial company under SICA. The NCLT declared the agreement as not binding on the company and its shareholders.3. Validity of Re-appointments of the Executive Vice-Chairman and Directors:The NCLT found that the re-appointments of Respondent No.2 as Executive Vice-Chairman and the appointments of Petitioners 8 and 14 as Directors were valid. The Tribunal noted that there was no evidence of proper and valid appointments of Respondents Nos. 3 to 5 as Managing Director/Directors, as required by the company’s Articles of Association and statutory provisions. The contesting Respondents failed to prove that they were duly appointed by a General Body Meeting of shareholders.4. Shareholding and Directorship Status of Respondents Nos. 3 to 5:The NCLT declared that Respondents Nos. 3 to 5 did not hold any shares in the company and were not validly appointed as Directors. The Tribunal noted that the purported issuance of 1,13,00,000 equity shares by the contesting Respondents was illegal and without authority. The Tribunal further observed that the contesting Respondents continued to interfere in the company’s affairs despite being restrained by judicial orders, which were upheld by higher courts.5. Reliefs Entitled to the Petitioners:The NCLT granted several reliefs to the Petitioners, including:- Declaring the agreement dated 09.10.2003 as terminated and not conferring any rights to Respondents Nos. 3 to 5.- Declaring the Board Meetings and resolutions passed by Respondents Nos. 3 to 5 as illegal.- Declaring the issue and allotment of 1,13,00,000 equity shares as illegal.- Declaring that Respondents Nos. 3 to 5 ceased to be MD/Directors from 02.01.2008.- Restraining Respondents Nos. 3 to 5 from interfering with the company’s affairs.- Directing Respondents Nos. 3 to 5 to pay costs to the Petitioners.Conclusion:The NCLT’s judgment was upheld with a minor modification concerning the declaration of the agreement dated 09.10.2003. The Tribunal clarified that the agreement was not binding on the company and the Petitioners. The contesting Respondents were ordered to pay costs for continuing to drag the company into litigation without any valid case.