2023 (10) TMI 896 - AT - Companies Law

NCLAT Halts Implementation of EGM Resolutions, Citing Non-Compliance with Companies Act Section 5(4) Until Final Decision

The NCLAT set aside the impugned order, granting interim relief to the Appellants by restraining the implementation of the EGM resolutions dated ... Grant of Interim Order - stay order on the implementation of the resolutions approved in the EGM - balance of convenience. Whether the Appellants were able to make out a case in their favour for interim order regarding the EGM dated 3.5.2019, and since the EGM took place on 3.5.2019, for granting stay order on the implementation of the resolutions approved in the EGM? HELD THAT:- It is clear from the ad-interim injunction given by NCLT vide order dated 18.11.2016 that EGM dated 21.11.2016 was allowed to be conducted to discuss only the ordinary business of Orbit Electricals and to only take necessary steps connected with statutory compliances required to be made urgently. Further, Orbit Electricals and other Respondents were restrained from not alienating the moveable assets as listed in the agenda of EGM scheduled to be held on 21.11.2016. The essence of this ad-interim injunction, even though granted only till the next date of hearing, is that Ld. NCLT, after considering and noticing relevant facts and arguments of the parties, allowed the EGM dated 21.11.2016 to be conducted to only discuss the ‘ordinary business’ and take necessary approvals connected with the filing of the statutory compliances. The ad-interim injunction also restrained the Respondents from alienating the moveable assets to those that were enlisted in the agenda of the EGM to be held on 21.11.2016. The Learned Senior Counsel for Respondents has argued that the Articles 59 and 60 were not designated as ‘entrenched articles’ as neither a specific notice under section 5(5) was given and moreover, only four out of thirteen members attended the EGM of Orbit Electricals Pvt. Ltd. held on 30.9.2014, which does not fulfil the requirement of section 5(4) - we are satisfied after considering the arguments and averments that Articles 59 and 60 can in a ‘prima facie’ manner be considered as ‘entrenched articles’ and therefore, their amendment/deletion in the EGM dated 3.5.2019 could have been done, after satisfaction of the provisions of sub-sections (3) and (4) of section 5 of the Companies Act, 2013. In particular, sub-section (4) of section 5 of the Companies Act, 2013 makes it necessary that an amendment in the Articles should be agreed to by all the members of the company, in the case of a private company. In order to consider whether a ‘prima facie’ case has been made out in favour of the Appellants regarding the EGM dated 3.5.2019 and the implementation of the Resolutions passed in this EGM, we also look at the voting share of members present and voting in the EGM. It is noted that the shareholding of Prakash Pralhad Chhabria in R-1 company became 70.1% resulting in his having achieved majority shareholding in R-1 Company, was due to the fact that a Gift Deed was executed in his favour by his father Pralhad P. Chhabria on 28.3.2019, and subsequently, the Securities Transfer Form was also signed and executed on the same date i.e. 28.3.2019. The prima facie view that the Gift Deed, Securities Transfer Form and the holding of Board meeting on 31.3.2016 are all under a cloud of suspicion, especially since they sought to override the stated view and intention of PPC to apportion the business of the Finolex Group companies between his own children and nephews. Of course, the non-holding of Board Meeting on 31.3.2016 will be decided by the NCLT in CP 47/2016 which is pending - the balance of convenience lies in favour of Deepak Chhabria, the appellant who by virtue of being AR of Orbit Electricals in FCL has been able to continue as Chairman of FCL. The issue decided in favour of the Appellants by directing that, since EGM dated 3.5.2019 has taken place, the resolutions passed in the said EGM may not be acted upon and such an interim order should continue till the time CP No. 47/2016 is finally decided. Appeal disposed off. Issues Involved:1. Legality of the Board of Directors Meeting dated 31.03.2016.2. Validity of the Gift Deed and Securities Transfer Form dated 28.03.2016.3. Approval and Implementation of Resolutions in the Extraordinary General Meeting (EGM) dated 03.05.2019.4. Interim Relief sought in MA 1449/2019.Summary:1. Legality of the Board of Directors Meeting dated 31.03.2016:The Appellants challenged the legality of the Board of Directors Meeting dated 31.03.2016, alleging that it did not actually take place. They contended that the meeting's minutes and resolutions, including the resignation of PPC and the transfer of shares to PC, were fabricated. Evidence such as telephone transcripts suggested PPC's inability to chair the meeting, raising doubts about its occurrence. The NCLT was to adjudicate on this issue in CP No. 47/2016.2. Validity of the Gift Deed and Securities Transfer Form dated 28.03.2016:The Appellants questioned the authenticity of the Gift Deed and Securities Transfer Form, citing discrepancies in the execution dates and stamp duty. The Gift Deed and Transfer Form were executed on 28.03.2016, but the stamp duty was purchased on 30.03.2016, indicating potential irregularities. The NCLT was to decide on the legality of these documents in CP No. 47/2016.3. Approval and Implementation of Resolutions in the EGM dated 03.05.2019:The EGM held on 03.05.2019 approved resolutions to amend and delete Articles 59 and 60 of the Articles of Association (AoA) of Orbit Electricals. The Appellants argued that these articles were 'entrenched articles' and could not be amended without unanimous consent, which was not achieved as Deepak Chhabria dissented. The NCLAT found that the resolutions did not satisfy the requirements of Section 5(4) of the Companies Act, 2013, making the amendments/deletions prima facie illegal.4. Interim Relief sought in MA 1449/2019:The Appellants sought interim relief to restrain the implementation of resolutions passed in the EGM dated 03.05.2019 until the final disposal of CP No. 47/2016. The NCLAT held that the balance of convenience and potential irreparable loss favored the Appellants. It directed that the resolutions passed in the EGM should not be acted upon until CP No. 47/2016 was finally decided.Conclusion:The NCLAT set aside the impugned order, granting interim relief to the Appellants by restraining the implementation of the EGM resolutions dated 03.05.2019 until the final adjudication of CP No. 47/2016. The judgment emphasized the need for early adjudication of the main petition to settle the contentious issues.