2025 (10) TMI 916 - AT - Companies Law

Amendment and share allotment invalid for lack of special resolution and defective notice; oppression under ss.397-398

Axis Nirman and Industries Ltd. And Axis Overseas Ltd. Versus M/s Hotel Birsa Pvt. Ltd., Adbhut Vincom Private Ltd., Salini Soy, Mr. Sunil Toshniwal and Mr. Amit Sarda, Kolkata

NCLAT held the amendments to the AoA/MoA and the increase and allotment of share capital were invalid for noncompliance with the Companies Act (no special ... Oppression and mismanagement - Increase in authorized share capital and the allotment of shares - Cancellation of Equity shares alloted - refund paid by the appellants for the shares, on the ground that the resolutions to increase authorized share capital and the allotment of shares were not compliant with the Companies Act, 1956. Whether the amendment to Articles of Association (AoA) and Memorandum of Association (MoA) of the company have been carried out in accordance with the provisions of Companies Act, 1956? - Whether the fresh issue of shares after the alleged increase in authorized share capital of the company has been done in accordance with relevant provisions of Companies Act, 1956? - HELD THAT:- Section 31 that amendment to AoA requires a special resolution. Similarly, Section 16 (3) of the Act provides that other provisions contained in the memorandum including those relating to the appointment of a Managing Director, or Manager may be altered in the same manner as the articles of the company. Other items in memorandum which are covered in any provision of the Act can be altered in the manner provided for the same. Section 17 thereafter has listed out cases wherein special resolution is required for alteration of memorandum. Section 94 (1) prescribes the procedure for increasing the authorised share capital of the company. It is found that only mode of intimation of notice of EoGM or Board meeting by the company has been through ‘certificate of posting’. The same mode of communication for the EoGM was followed by the Respondent No.1. The Respondent No.2 has emphatically denied that he received the notice for EoGM proposed on 18.02.2010. Had the appellants proven the service of notice upon Respondent No.2, there are no doubt that the Respondent No.2 was not keen to participate in the matters relating to the company as argued by the appellants - Hon’ble Supreme court in the case of Mohd. Asif Naseer vs West Watch Company [2020 (4) TMI 891 - SUPREME COURT] has laid down that producing the mere receipt of notice having been sent under certificate of posting, in itself, may not be sufficient proof of service, but if the same is coupled with other facts and circumstances which go to show that the party had notice, the same could be held to be sufficient service on the party. It can be seen from Section 81 (1) (c) that a right of renunciation has to be provided in favour of person, who can renounce his shares in full or part to any other person. It is seen from the letter sent to the Respondent No.2 that no such option was provided by the Respondent No.1 to Respondent No.2. The compliance with aforesaid Section is mandatory. It appears that the Sh. Prem Rajesh Soy (Deceased Promoter/ Director), and Respondent No.3 were in a hurry to allot the shares to the appellant, due to which such right was not provided to the shareholders of the company. The amendments to AoA and MoA and subsequent issue of fresh share capital has not been done in accordance with provision of Act. Whether these actions on the part of the appellants, Respondent No.1 & Respondent No.3 vis-à-vis Respondent No.2 can be termed as Oppression and Mismanagement under Sections 397, 398 and 399 of the Companies Act, 1956? - HELD THAT:- The law protects minority shareholders from unfair treatment by the majority. Sections 397 and 398 of the Companies Act, 1956, ensure that company affairs are conducted fairly and without harming the interests of shareholders. The Hon’ble Supreme Court in Dale and Carrington Investment (P) Ltd. v. P.K. Prathapan [2004 (9) TMI 385 - SUPREME COURT], ruled that if the majority unfairly reduces a shareholder’s stake without a valid business reason, it amounts to oppression. Further, Hon’ble SC in Tata Consultancy Services Ltd. v. Cyrus Investments Pvt. Ltd. [2021 (3) TMI 1181 - SUPREME COURT], also held that mismanagement is not limited to financial losses but includes any serious wrongdoing that affects the company’s governance and fairness. The increase in share capital was not carried out in accordance with procedure laid down by law. Section 94(1) of the Companies Act, 1956, states that a company can increase its share capital only if the AoA allows it. However, the company’s AoA did not have any such provision. Under Section 31, the company should have first amended its AoA by passing a special resolution. The failure to do this makes the share capital increase invalid. Also, the first notice for the Extraordinary General Meeting (EoGM) dated 18.01.2010, which proposed this change, did not mention any amendment to the AoA, making the process legally defective. In the instant case, the appellants, in collusion with Shri Prem Rajesh Soy (Deceased Promoter-Director) and Respondent No. 3 acquired 2,10,000 shares of the Respondent No.1 in violation of laid down procedure in The Act. Allowing the appellants to profit from these unlawful allotments would be against the principles of fairness and justice and this is squarely covered by Judgments of Hon’ble SC in Reliance Cellulose [2018 (7) TMI 2273 - SUPREME COURT] and Ashok Kapil [1996 (9) TMI 615 - SUPREME COURT] - the decision of NCLT not to grant any interest on the share allocation money paid by appellants. Considering all these factors which include legal and procedural lacuna in increasing the authorised and paid-up share capital; unfair share allotment; failure to notify Respondent No. 2 properly; denial of renunciation rights; and manipulation of corporate records, it is held that the actions of the appellants and Respondent No. 3 amount to both oppression and mismanagement under Sections 397 and 398 of the Companies Act, 1956. The company’s decision-making process was neither fair nor legal, and it was clearly designed to reduce Respondent No. 2’s stake and control. The appeal is dismissed with the direction that the Respondent No.1 would refund Rs. 2.1 crore, the amount paid by appellants towards purchase of 210000 shares of Respondent-1 within a period of 60 days. ISSUES PRESENTED AND CONSIDERED 1. Whether the amendment to the Articles of Association (AoA) and Memorandum of Association (MoA) was carried out in accordance with the Companies Act, 1956. 2. Whether the increase in authorised share capital and subsequent allotment of fresh shares complied with statutory provisions, including Section 94(1), Section 31, Section 16 and Section 81 of the Companies Act, 1956. 3. Whether the actions constituting the increase in capital and allotment of shares amounted to oppression and mismanagement under Sections 397, 398 and 399 of the Companies Act, 1956. 4. Whether service of notices by Under Postal Certificate/Certificate of Posting (UPC/CoP) sufficed to deprive a shareholder of participation in meetings and rights issues in the facts of the case. 5. Whether money paid for allotments declared void is refundable and whether interest is payable on such refunds. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of amendment to AoA and MoA Legal framework: Sections 31, 16 and 17 of the Companies Act, 1956 govern alteration of articles and memorandum and require special resolution where prescribed; Section 94(1) prescribes that increase of authorised capital is permitted only if authorised by the AoA. Precedent treatment: No precedent overruled; statutory text applied to facts. Interpretation and reasoning: The Tribunal examined the notices and minutes of the Extra Ordinary General Meeting (EoGM) dated 18.02.2010 and found two conflicting notices issued for the same EoGM with differing agendas. The first notice proposed amendment of MoA/ increase of authorised capital as ordinary resolutions despite explanatory statements referencing Section 17 (which requires special resolution). A second notice (allegedly issued the same day) disclosed AoA amendments but its issuance and authenticity were doubtful. Minutes did not proceed agenda-wise and incorporated disparate items together, creating serious doubt about procedural regularity and timing (including impossibility of holding a board meeting in Kolkata at 3:00 p.m. the same day after an 11:00 a.m. EoGM in Ranchi). Ratio vs. Obiter: Ratio - AoA amendment requires special resolution and clear, agenda-wise notice; defective notices/minutes render subsequent amendments suspect. Obiter - comments on manner of suspicious document preparation and timing. Conclusions: Amendments to AoA and consequent amendment to MoA were not carried out in compliance with statutory requirements; the proceedings and records suffer material irregularities making such amendments invalid. Issue 2 - Validity of increase in authorised share capital and allotment of shares (including compliance with Section 81) Legal framework: Section 94(1) (increase of authorised capital subject to AoA), Section 31 (alteration of articles by special resolution), Section 16 (alteration of memorandum) and Section 81 (further issue of capital - offer to existing shareholders, minimum 15 days, right of renunciation). Precedent treatment: Authorities on notice/service (e.g., Mohd. Asif Nazeer; V.S. Krishnan) considered for applicability regarding service sufficiency; Dale & Carrington and Needle Industries relied upon for 'proper purpose' doctrine in share issuances. Interpretation and reasoning: The Tribunal found that (a) the AoA did not initially authorise increase of authorised capital and no valid special resolution amending AoA preceded the increase; (b) two notices for the EoGM and manipulated minutes raised doubt over genuineness of AoA amendment; (c) the rights offer letter lacked explicit renunciation rights as required by Section 81(1)(c); (d) service relied solely on Certificate of Posting without corroborative evidence, and recipient denied receipt; (e) procedural prerequisites for valid rights issue (proper notice, renunciation, and proportionate offer) were not complied with. Ratio vs. Obiter: Ratio - increase in authorised capital and subsequent allotments are invalid where AoA does not permit increase and requisite special resolution/ statutory formalities under Section 81 are not complied with. Obiter - factual observations on timing and logistics undermining authenticity of records. Conclusions: The increase in authorised share capital and issuance/allotment of 210,000 shares were not in accordance with the Companies Act, 1956 and are invalid. Issue 3 - Oppression and mismanagement under Sections 397-399 Legal framework: Sections 397-399 of the Companies Act, 1956 protect minority/shareholder interests; jurisprudence (Dale & Carrington; Needle Industries; Tata Consultancy Services v. Cyrus Investments) establishes that issuing shares for purpose of diluting a shareholder's stake or otherwise for improper purpose constitutes oppression and mismanagement. Precedent treatment: The Tribunal applied established tests for 'proper purpose' and oppression, relying on Supreme Court pronouncements that dilution without valid business reason and lack of transparency can amount to oppression/mismanagement. Interpretation and reasoning: The Tribunal found cumulative facts demonstrating oppressive conduct: deliberate exclusion of a 49% shareholder from decision-making; defective notice/service; absence of renunciation rights; creation of two notices and suspect minutes suggesting after-the-fact rectification; allocation of shares only to particular investors thereby diluting the 49% shareholder to 32.75%; and absence of proof that allotments served bona fide corporate purpose. These actions indicated mala fide intent and breach of statutory procedure amounting to both oppression and mismanagement. Ratio vs. Obiter: Ratio - conduct involving procedural violations that intentionally dilute a significant shareholder and exclude participation constitutes oppression/mismanagement under Sections 397-399. Obiter - observations on motivations and contemporaneous conduct (seizure of documents by tax authorities and alleged sale-MOU) as contextual facts. Conclusions: The allotments and related corporate actions amounted to oppression and mismanagement; cancellation of the allotments was legally justified. Issue 4 - Sufficiency of service by UPC/Certificate of Posting Legal framework: Principles concerning service of corporate notices; precedents recognize that mere receipt of certificate of posting is not conclusive proof of delivery where recipient denies receipt and no corroborative evidence exists (Mohd. Asif Nazeer; M.S. Madhusoodhanan). Precedent treatment: The Tribunal distinguished authorities where UPC sufficed because receipt was not contested or was corroborated by other circumstances; here, recipient denied receipt and no corroboration presented. Interpretation and reasoning: In absence of dispatch registers, postal receipts, or other corroborative evidence, a certificate of posting alone did not discharge the burden of proving notice delivery. The Tribunal applied the principle that UPC may suffice only when coupled with other facts showing receipt or knowledge; such coupling was absent. Ratio vs. Obiter: Ratio - UPC/CoP alone is insufficient proof of service when the addressee denies receipt and no corroborative evidence exists. Obiter - guidance that UPC may suffice when coupled with circumstantial proof of actual notice. Conclusions: Service by UPC/CoP was not proved; therefore procedural notice requirements were not met. Issue 5 - Refundability and entitlement to interest on amounts paid for void allotments Legal framework: Restitutionary principles and precedents (Ashok Kapil; Reliance Cellulose) that a party should not be permitted to benefit from its own wrong; courts may order restitution but deny interest where claim arises from illegality/wrongful conduct. Precedent treatment: Reliance Cellulose and Ashok Kapil applied to deny interest where transaction is tainted with illegality or the claimant seeks to benefit from wrongful acts. Interpretation and reasoning: Having held allotments invalid and conduct oppressive/illegal, the Tribunal directed refund of Rs. 2.1 crore within 60 days but declined interest, concluding that interest cannot be awarded where the underlying transaction was unlawful and would otherwise allow recovery that rewards wrongful conduct. Ratio vs. Obiter: Ratio - restitution (refund) is appropriate for void/illegal allotment but interest is not payable where the claim arises from wrongful conduct. Obiter - remarks on equities and deterrence. Conclusions: Refund of the investment ordered; no interest awarded. Cross-references Issues (1) and (2) are interlinked and examined together regarding requisite sequence of AoA amendment followed by MoA amendment and increase of authorised capital; Issue (4) on service is central to Issues (1)-(3) because valid notice is antecedent to valid resolutions and rights issue; Issue (5) follows from the findings on invalidity and oppression in Issues (2)-(3).