TaxTMI 
TaxTMI 
2016 (3) TMI 929
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....pondents 2 to 5. And, out of the six directors 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, th....
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....ue of right shares was convened on 5th February, 2005 at 5:00 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 we....
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....nstruction of building premises valued at a total amount of Rs. 1,10,93,884/-. Towards meeting 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 resolu....
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....ed from the Board so as to enable the company to raise the said loan. The respondents have also emphasized that, 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 w....
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....aid that only disputed questions of fact are sought to be re-agitated in this appeal. He submitted that the respondents could not 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 ....
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.... VIII. Whether the findings of the CLB, upholding the belatedly raised plea of the Respondents of alleged oral resignation of Appellant No. 1 & 3, is patently illegal, unreasoned and 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....
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....ves of some of the shareholders. He submits that absence of proper documentation, as prescribed in the Act, is fatal to such allotment of rights shares and hence such allotment is liable to be cancelled, being in violation of Section 81(1A); 15. Section 10F of the 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....
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....ea of perversity is to be examined at the threshold to see whether any prudent Adjudicating Authority could have arrived at the conclusion which has been arrived at by the Company Law Board; and if the answer is yes, then that is the end of the matter. It cannot be reopened once again in an appeal 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 reproduc....
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....ificate. He also submitted that same mode of service was adopted for all the directors and shareholders of the company; and except for the appellants, no other director or shareholder of the company has raised any objection or plea that they did not receive the notice of the meeting for allotment of the Rights Shares. 22. 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 ....
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....d is; how could a director be removed in the absence of any resignation, 'in writing', as prescribed by the Articles of Association of the company itself. Counsel submits that there was no material whatsoever before the Company Law Board on the basis of which the CLB could have held that the appellants had resigned as directors of the company. There was no resignation 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 0....
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..... It was only during the course of arguments before the CLB that they tried to make out a case in this behalf, for the first time. Learned counsel submits that in the absence of any pleadings to this effect before the CLB, appellants cannot raise this plea in appeal under Section 10F before this Court. It is also submitted that after their resignation as directors of 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....
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....Savita Anand Mrs. Renu Sharma RESIGNATION AS DIRECTORS Pursuant to Citibank not accepting the personal guarantee of Mr. Raj Kumar Bhatia in view of certain dues being in default on the certain credited card owned by Mr. Raj Kumar Bhatia, it was suggested by Mr. Raj Kumar Bhatia that he and his wife, Mrs. Kavita Bhatia would resign from the board of directors so that Citibank will then not need the personal 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 facili....
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.... through proxy. I am not aware what is happening in company for all these years. I therefore call upon you to send the latest Audited Statement of Accounts for the year ending 31-03-07 to me immediately together with notice of AGM failing which I will refer the matter to R.O.C./ Company Law Board much against my wishes. Kindly take this matter seriously. ........." 28. Apart from the above, learned counsel for the respondent argued that assuming without admitting and contrary to the fact, that the resolution removing them from directorship is flawed, the appellants nevertheless had ceased to be Directors of the company 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 D....
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....re no longer the directors of the company. The issue of Form-32 submitted with the Registrar of Companies recording 'resignation letter received' has been explained by the respondents as an inadvertent error, which even though not found plausible by the Company Law Board was accepted in view of the accompanying circumstances. The Company Law Board has believed the resignation of the appellants as valid and not oppressive against them. To my mind also, it is obvious that the appellants had communicated a clear animus to resign and to disassociate, to the other members of the small handful that owned and controlled the company; which was then recorded in the minutes under 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 re....
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....im of having acted under Section 81(1)(c) of the Act. It is submitted that the Company Law Board had completely ignored the fact that no such resolution was passed, and therefore, the allotment of shares in the meeting on 02.03.2005 could not have been made. It is further submitted that even the terms and conditions of the rights issue specifically provide that any person who wanted to renounce the shares will give 15 days' notice. Thus, even in terms of this requisition, if somebody had to renounce the shares to which he is entitled under the rights issue, he/she must serve a notice of 15 days to the company. It is submitted that the entire exercise of allotment of shares by 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 referre....
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....nd the consequent need to generate funding, they approached the Citi Bank for loan. The bank agreed to advance a loan of Rs. 1.5 crores on the condition, inter alia, that the company must purchase its own land and move in to its own premises within 12 months, from the rented premises; and the directors of the company furnish personal guarantees for funding the proposed expansion of the factory to increase the capacity and turnover. When the finance was committed by the Bank in 2005, a decision was also taken to increase the corpus, to enable purchase of the land in question for shifting from the rented premises. Learned counsel submits that under the circumstances, the decision to raise the capital 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 sub....
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.... date of the offer, are holders of the equity shares of the company, in proportion, as nearly as circumstances admit, to the capital paid up on those shares at that date; b) the offer aforesaid shall be made by notice specifying the number of shares offered and limiting a time not being less than fifteen days from the date of the offer within which the offer, if not accepted, will be deemed to have been declined; c) unless the articles of the company otherwise provide, the offer aforesaid shall be deemed to include a right exercisable by the person concerned to renounce the shares offered to him or any of them in favour of any other person; and the notice referred to in clause (b) shall contain a statement of this 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) Not....
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.... sub-clause (c) of Section 81(1). There is no need to bring in Section 81(1A) which envisages further issue of capital by offering further shares of the company to any person, whether or not that person includes the person referred to in clause (a) of sub-section (1). There is a clear difference between an offer of allotment by a company pursuant to a decision taken by its Board in this behalf, and a decision taken by a shareholder to renounce shares being offered to him by the company in favour of someone else. The first is a decision by the Board, while the second is a decision by the shareholder to renounce. Here, we are only concerned with the latter, being the exercise of a vested right by an existing shareholder under Section 81(1)(c) of the Companies Act. Furthermore, 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....