TaxTMI 
TaxTMI 
2016 (3) TMI 929
X X X X Extracts X X X X
X X X X Extracts X X X X
....tors on the board of the company, the appellant's group had two directors. 3. According to the appellants, it was understood by both groups that the company would function in the nature of a partnership, where the first appellant had also provided his own premises to the company to commence business. At the same time, in view of his experience, the second respondent was given a free hand in the belief that he would run the company honestly whilst keeping every shareholder in the loop. However, at the commencement of production, the appellants group was neglected by the respondents, who did not even bother to issue notice of Board Meetings or of the Annual General Meeting to them; and that the respondents also stopped providing copies of the balance sheet and other relevant documents to the appellants; and it was only in May 2007 that the appellants learnt from an official of the Excise Department that the company was not maintaining proper records. The first appellant thereafter wrote to the company on 20.06.2007 seeking audited accounts of the company from the year 2003 onwards, to which, no response was received. In support of this, the appellants rely on UPC receipts. Ultimatel....
X X X X Extracts X X X X
X X X X Extracts X X X X
....pm at Faridabad, and the UPC receipt produced by the appellants was also of 5th February, 2005 from Lodhi Road Post Office, since the meeting itself was convened at 5:00 pm, it was impossible for the notice to have been dispatched on the same day. Secondly, for the respondents to have chosen to despatch the notice from Lodhi Road at New Delhi, and not from Faridabad in Haryana, where the meeting was held, is suspicious. (c) Although in the Board Meeting of 5th February, 2005, it was decided that the closing date of the issue was 5th March, 2005, however, the respondents have allotted themselves the rights shares on 2nd March, 2005 itself, i.e. prior to closing date of the issue, thus, foreclosing the rights of the appellants. (d) Even though the balance sheet for the year ended 31st March, 2006 shows Rs. 18,30,745/- as share application money pending for allotment, however, the respondents have proceeded to allot shares to their family members alone. 5. In response, the respondents contend that the share capital of the company was increased after following due process; and that the requisite forms were filed with the ROC. They claimed that the provisions of Section 81(1A) of t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....eting some of these expenses, the company raised fund by going for rights issue. The respondent company Board passed a resolution on 5-2-2005 to raise fund by issuing equity shares of 3,30,000 shares of Rs. 10 each in the share capital of the company as rights issue to the members who at the date of offer i.e. 5-2-2005 are holders of the company in proportion of 1:1 ratio. The Board further resolved that the share transfer book should remain closed from 5-2-2005 to March 2, 2005 making last date for acceptance of offer at March 2, 2005. The respondent company sent notices to the petitioners along with resolution indicating to how many proportionate shares the petitioner are entitled. To prove dispatch of notices to the petitioner, the respondents filed UPCs for proving notices have been sent to the shareholders including the petitioner." 8. Regarding the issuance of notice from the Lodhi Road Post Office, the Company Law Board concluded that since it is a closely held company with four directors and about ten shareholders, it makes no difference from where they sent the paper of their resolution and notice to the shareholders. On the matter of closing of the issue on 2nd March, 20....
X X X X Extracts X X X X
X X X X Extracts X X X X
....at, in fact, the appellants did not impeach their removal in their petition before the Company Law Board; and have raised this only in their rejoinder. 11. The issue of removal of the appellants from directorship was decided by the Company Law Board against the petitioners. In that context it stated as follows; "16. It is evident that the petitioners 1 & 2 were shown removed as directors from April, 2004, there is material showing that loaning Bank could provide loan only when its directors are not defaulters to the Bank, the time of showing their removal as directors is coincidental to the timing Bank indicated loan be provided if no director of the company is defaulter to the Bank. For having the petitioners 1 & 2 themselves manage their own company i.e. P-4 company, it can be inferred that the petitioners are in know how Board meetings and general meetings take place, and must be knowing how frequent board meetings and general meetings take place, despite knowing all these, these petitioners never made any complaint to the company until May, 2007, especially when they have been admittedly receiving dividend from the company........ The petitioners perhaps remained silent when....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... have removed the appellants as directors of the company without their resignation in writing in terms of Articles of Association of the company. Therefore, the so called oral resignations allegedly submitted by the appellants is a misrepresentation and a fraud played on the appellants by the respondents. Further that the increase in capital by the respondents by issuing rights shares to the shareholders of the company, without complying with Section 81(1A) of the Act, was illegal. And that allotment of rights shares to persons who were not the shareholders of the company, is in clear violation of the said section of the Act. Further, the allotments made to Smt. Chand Rani could not have been made since she was not a shareholder of the company at the relevant time. According to him, this amounted to preferential allotment in favour of the said Smt. Chand Rani; but even in such a case, the legal formalities for making allotment of preferential shares to Smt. Chand Rani were not complied with. 14. The appellants claim that the following questions of law arise in this appeal; I. Whether the alleged resignation of Appellant No. 1 & 3 from the directorship of the Company could be hel....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nd the one based on conjecture and surmises? IX. Whether the CLB failed to appreciate the case of the Appellants qua the illegal and unauthorized issue of right shares by the Respondents, in its right perspective thereby vitiating the impugned order? X. Whether the so called need/justification for issuance of right shares by Respondent Company, accepted as correct by the learned CLB in para 27 of the impugned order, was borne out of records and even if it was so, whether the findings of the learned CLB are based on complete non-application of mind and bad in law? XI. Whether the decision of issuance of right shares in the meeting of the board of directors purportedly held on 5.2.2005 and subsequent allotment of right shares to the shareholders other than Appellants, is in compliance with various legal provisions and hence lawful? XII. Whether the findings of the learned CLB attributing knowledge of the right issue to the Appellants are legally sustainable in view of specific plea of Appellants of receiving no notice/offer from Respondent No. 1, for subscribing to the right issue? XIII. Whether patent illegalities committed by the Respondents in relation to the issue of ri....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Act reads as under: "Appeals against the orders of the Company Law Board - Any person aggrieved by any decision or order of the Company Law Board may file an appeal to the High Court within sixty days from the date of communication of the decision or order of the Company Law Board to him on any question of law arising out of such order: Provided that the High Court may, if it is satisfied that the appellant was prevented by sufficient cause from filing the appeal within the said period, allow it to be filed within a further period not exceeding sixty days." Clearly, an appeal would lie only on a substantive question of law; and no disputed questions of fact can be reagitated under Section 10-F. While considering the scope of Section 10-F of the Act in V.S. Krishnan and Others Vs. Westfort Hi-Tech Hospital Ltd. (supra), the Supreme Court has held as under: "16. It is clear that Section 10-F permits an appeal to the High Court from an order of the Company Law Board only on a question of law i.e. the Company Law Board is the final authority on facts unless such findings are perverse, based on no evidence or are otherwise arbitrary. Therefore, the jurisdiction of the appellate ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....eal under Section 10F of the Companies Act. However, if the findings are found to be perverse, such perversity would itself become a question of law; and a perverse order is defined as one which is contrary to the facts and evidence on record; which no reasonable Adjudicating Authority could pass after examining the material placed before it. See Dale & Carrington Invt. (P) Ltd. and Anr. Vs. P.K. Prathapan and Ors., (2005) 1 SCC 212 (Para 36). In E. ShanmuganVs. APS Cam-O-MatecPvt. Ltd., 2006 (133) DLT 484 (Para 9). 19. An examination of the 19 issues framed by the appellants in the appeal show that primarily, they are all questions of fact, although the learned counsel for the appellants has tried to make out a case that they are not based on proper appreciation of evidence on record before the Company Law Board and hence, perverse. The issues raised in the appeal; that have been reproduced above; revolve around the following subject matters: (i) Appellants not being informed of the meeting of the Board of Directors held on 05.02.2005; and the alleged notice sent under UPC informing the appellants of the decisions taken there, being a forgery. (ii) Unauthorized removal of the....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Even though there are other, better ways of issue of notices like Speed Post and Registered A.D. Post, the service of documents on members of the Company under the Companies Act, 1956, is governed by Section 53 of the Act. Sub-Section (1) & (2) of Section 53 of the Act read as under:- "1. A document may be served by a company on any member thereof either personally, or by sending it by post to him to his registered address, of if he has not registered address in India, to the address, if any, within India supplied by him to the company for the giving of notices to him. 2. Where a document is sent by post- (a) service thereof shall be deemed to be effected by properly addressing, prepaying and posting a letter containing the document, provided that where a member has intimated to the company in advance that documents should be sent to him under a certificate of posting or by registered post with or without acknowledgement due and has deposited with the company a sum sufficient to defray the expenses of doing so, service of the document shall not be deemed to be effected unless it is sent in the manner intimated by the member; and (b) such service shall be deemed to have ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....on letter to enable the CLB to hold that the appellants had resigned as directors. He also contends that if the resignation of the appellants was allegedly accepted in the meeting of the Board dated 05.01.2004; then what prompted the Board to record acceptance of their resignation in the later meeting of the Board of Directors dated 01.04.2004. It is also submitted that there could be no acceptance of resignation twice over by the company. The submissions on the issue of resignation of the appellants as the directors of the company are primarily threefold, viz. (i) The Articles of Association of the Company specifically provide that the resignation of any director has to be in writing, which has admittedly not happened here; (ii) The appellants, as directors, were not present in any of the meetings dated 05.01.2004 and 01.04.2004 and, hence, they could not have orally resigned in the said meetings; and (iii) if the resignation had been orally conveyed to any other director who participated in the aforesaid meetings, then record thereof must contain the relevant details in the minutes as to whom the resignation was orally conveyed; and who then conveyed it to the Board. Learned coun....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the company, the appellants wrote two letters dated 20.06.2007 and 25.10.2007, i.e. almost three years after the acceptance of their resignation; and actual separation from the company; and in those letters also, the appellants did not make any reference to their removal as Directors; or of the meetings of the Board of Directors not being held; or that they had not been invited for the meetings of the Board of Directors. The only grievance raised in the letter dated 20.06.2007 is that the Managing Director of the company has not cared to send the audited statement of accounts for the years 2003-04, 2004-05 and 2005-06, in-spite of an official letter and several reminders over the phone. In the letter dated 25.10.2007 also, the appellant only asserts his legal right to have the notice of the AGM and audited statement of accounts of the company; and of his right to attend the AGM either personally or through proxy. The appellant in the said letter again called upon the company to send an audited statement of accounts for the year ending 31st March, 2007 together with the notice of AGM. Learned counsel submits that nowhere in the said letters have the appellants complained of their re....
X X X X Extracts X X X X
X X X X Extracts X X X X
....onal guarantee of Mr. Raj Kumar Bhatia and Mrs. Kavita Bhatia. "Resolved that the resignation of Mr. Raj Kumar Bhati as Director of the company be and is hereby accepted. "Resolved that the resignation of Mrs. Kavita Bhatia as Director of the company be and is hereby accepted." FURTHER RESOLVED that Mr. Anil Anand be and is hereby authorized to file the intimation of the cessation of the directors with Registrar of Companies NCT Delhi & Haryana. The Board was informed by the Chairman that at the request of the company, Citibank, N.A. has agreed to provide to the company funded facilities upto Rs. 150 lacs, which includes Term Loan facilities up to Rs. 85 Lacs and working capital facilities upto Rs. 65 Lacs and non-fund based facilities up to Rs.Nil. The company being a Partner of AvLight Automotive works is also required to authorize a representative to sign the documents on behalf of the company. -:SD:- Chairman CERTIFIFED TRUE EXTRACT OF THE MINUTES OF RESOLUTION PASSED AT BOARD MEETING OF AVLIGHT AUTOMOTIVES LIMITED HELD ON THURSDAY 1ST APRIL 2004 AT 23/7, MATHURA ROAD, FARIDABAD, AT 11 A.M. The Board has received the resignation of Mr. Raj Kumar Bhatia and Mrs. Ka....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ny by operation of Section 283(1)(g) of the Act, which postulates that if a Director absents himself from three consecutive meetings; or from all meetings of the Board for a continuous period of three months without obtaining leave of absence from the Board, he ceases to be a Director of the company. Section 283(1)(g) reads as under : "283. Vacation of office by Directors (1) The office of a director shall become vacant if- __________________ (g) he absents himself from three consecutive meetings of the Board of Directors, or from all meetings of the Board for a continuous period of three months, whichever is longer, without obtaining leave of absence from the Board;" Counsel for the respondents pointed out that the appellants remained absent from all the meetings of the Board of Directors of the company after 1st April, 2014, without seeking any leave of absence from the Board; and that at least 16 meetings were held during this period in which there was no participation by the appellants. Significantly, throughout this period, the appellants did not even bother to seek any information with regard to the meetings with the Board of Directors. Nor did they raise any issue i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r the sanguine belief that it truly reflected the appellants' sentiments. Under the circumstances, mere non-insistence for a written resignation from the appellants' cannot be termed oppressive, or even an act of mismanagement. 30. The claim of the appellants to be restored as Directors of the Company also fails by virtue of Section 283(1)(g) since they never attended any of the stated 16 meetings of Board of Directors and never ever cared to access or know the outcome of the meetings of the Board. The claim for restoration of directorship is a clear afterthought to somehow regain a foothold in the company. Under the circumstances, and for all the aforesaid reasons, the appellants have not been able to persuade me to conclude that there is any error or perversity in the order of the Company Law Board on this issue. 31. The appellants next contend that the issue of rights shares by the company in the meeting of the Board of Directors of the company dated 02.03.2005 was in violation of Section 81(1A) of the Act; and consequently the said allotment of rights shares is liable to be set aside; and the act of the Company in allotting Rights shares to outsiders, in the absence of any in....
X X X X Extracts X X X X
X X X X Extracts X X X X
....y way of a rights issue was a camouflage to bring down the holding of the appellants from 33.33% to 15.87%, to render them ineffective in monitoring the affairs of the company. 33. Counsel for the appellants referred to the decision of this Court in Pearson Education Inc. Vs. Prentice Hall India (P) Ltd. & Ors., 134 (2006) DLT 450 to submit that the motive of allotment of additional capital by way of rights issue by the respondent was malafide with the sole object of gaining control of the company. He referred to para 16 of the judgment wherein the court also referred to the decision of the Supreme Court in Dale & Carrington Invt. (P) Ltd. and Anr. Vs. P. K. Prathapan & Ors. (2005) 1 SCC 2012 on the issue of allotment of additional share capital by the company. The said para reads as follows; "16. Recently in the case of Dale & Carrington Invt. (P) Ltd. & Another v. P. K. Prathapan and Ors., V (2004) SLT 784= IV (2004) CLT 25 (SC)=(2005) 1 SCC 212, The Supreme Court had the occasion to dwell on this aspect in detail by taking note of most of the available judgments on the subject. It may be noted that the facts of that case bear close proximately with that of the present case in....
X X X X Extracts X X X X
X X X X Extracts X X X X
....apital through a rights issue became necessary. Therefore, it cannot be said that the exercise of increasing the share capital of the company by way of a rights issue is merely a camouflage to reduce the shareholding of the appellants from 33.33% to 15.87%. 35. Learned counsel further submits that reliance on the judgment in Pearson Education Inc. Vs. Prentice Hall India (P) Ltd. & Ors., (supra) by the appellants is misplaced since the facts of the two cases are entirely different. It is submitted that in the case in hand, the appellants themselves had turned away from the company, resigned as directors and had, by their conduct, allowed the respondents to increase their stake in the company since they themselves did not intend to either extend their personal guarantees, or to enhance their risk in the business of the company. According to him, the appellants were not interested in the rights issue because between 2004 and 2006 the level of business risk was extremely high since the company was indebted to the bank and had also ventured into something which was ambitious at that time, and the appellants obviously did not consider it worth their while. The appellants, thus, did not....
X X X X Extracts X X X X
X X X X Extracts X X X X
....his right; d) after the expiry of the time specified in the notice aforesaid, or on receipt of earlier intimation from the person to whom such notice is given that h e declines to accept the shares offered, the Board of Directors may dispose of them in such manner as they thing most beneficial to the company. Explanation: In this sub-section, "equity share capital" and "equity share" have the same meaning as in Section 85. (1A) Notwithstanding anything contained in sub-section (1), the further shares aforesaid may be offered to any persons whether or not those persons include the persons referred to in clause 9a) of sub-section (1) in any manner whatsoever:- (a) If a special resolution to that effect is passed by the company in general meeting, or (b) Where no such special resolution is passed, if the votes case (whether on a show of hands, or on a poll, as the case may be) in favour of the proposal contained in the resolution moved in that general meeting (including the casting vote, if any, of the Chairman) by members who, being entitled so to do, vote in person, or where proxies are allowed, by proxy, exceed the votes, if any, cast against the proposal by members ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....urthermore, A. Ramaiya, Guide to the Companies Act, 16th Edition at page 1022, seems to embody the same line of reasoning while stating that; "The requirement of passing a special resolution under sub Section (1A) is necessary only when the shares are issued to the public or are placed privately in terms of Section 67 (3) or proposed to be offered to any segment of the shareholders ..... to the exclusion of the rest. The shareholders' approval is accordingly not required for a rights issue, including the allotment of shares to the renounces, who are not members of the company." It follows, therefore, that Section 81(1A) has no application here and the plea of violation of Section 81(1A) in that context by the learned senior counsel for the appellants cannot be accepted for all these reasons. 39. The reliance by the appellants on the decision in Pearson Education Inc. Vs. Prentice Hall India (P) Ltd. & Ors. (supra) is misplaced in the facts of the case in hand. In the present case, the appellants voluntarily resigned as directors of the company since the lending bank had laid a pre-condition that none of the directors of the company should be a defaulter of the bank whereas the ....