AI Drafter 
TaxTMI 
TaxTMI 
2018 (12) TMI 1546
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....8 of the Companies Act, 2013 (hereafter referred as 'Act') in C.P. No.9 of 2016. By such Impugned Order, NCLT directed the Appellant herein to register the transfer of 25 shares transferred by the 10th Respondent - Mrs. Beena George to the first Respondent transferee/original Petitioner. 3. Company Appeal (AT) No.98 of 2018 is arising out of Impugned Order dated 27.03.2018 passed by National Company Law Tribunal, Chennai Bench ('NCLT', in short) under Section 58 of the Companies Act, 2013 (hereafter referred as 'Act') in C.P. No.10 of 2016. By such Impugned Order, NCLT directed the Appellant herein to register the transfer of 10 shares transferred by the 10th Respondent - Mr. C.J. George to the first Respondent transferee/original Petitioner. 4. Aggrieved, the original Respondent No.1 which is the - Company in the two Company Petitions has filed these Appeals against the two Impugned Judgements and Orders. 5. Foundational facts of both the matters are similar and we will be referring to the pleadings and documents mainly from CA 97 of 2018 (except where we specifically refer to record from CA 98 of 2018). We will refer to the Appellant (original Respondent No.1) as "the Co....
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....mpany moved ROC as the Central Government had delegated concerned powers to ROC. While that procedure was in process, the Respondent No.10 in these Appeals, namely Mrs. Beena George and Mr. C.J. George transferred 25 and 10 shares out of the shares held by them to the original Petitioners - M/s. Plant Lipids (P) Ltd. and M/s. Aromatic Ingredients (P) Ltd., who were outsiders to the Company. It is the case of the Appellant that such transferees - Petitioners moved the Company by sending letter on 1st September, 2016 to record transfers of shares to them. The second Proviso to Sub-Section (1) of Section 14 came into force with effect from 1st June, 2016. The Appellant filed application under Section 14 of the Act before NCLT on 20th September, 2016. On 28.09.2016, the Appellant Company informed M/s. Plant Lipids (P) Ltd. and M/s. Aromatic Ingredients (P) Ltd. that the transfer forms were not complete. These parties did the necessary compliance and the matter came up before the Board of Directors on 26.10.2016 and for reasons recorded, it was decided that it was not desirable to admit these transferees to membership of the Company. Accordingly, these Applicants (original Petitioners i....
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....etitioner Company was major competitor of the Respondent Company. The counter traced the history to show as to how the Company came to be established and the competitor company - Plant Lipids (P) Ltd. was established by the promoters of the Company in 1979 to process cocoa beans and the said promoters had 64% shares in that Company - Plant Lipids (P) Ltd. till end of 1988. According to the Appellant Company, Plant Lipids (P) Ltd. was not established to do same kind of business as the Appellant Company. It is claimed in the counter that things were fine till 1988. The Appellant Company was manufacturing and exporting spices oils and oleoresins and Plant Lipids (P) Ltd. was processing cocoa beans. However, during that period Mr. C.J. George (Respondent No.10 in CA 98/2018) began to develop his own ambitions and increased his share capital in Plant Lipids (P) Ltd. without knowledge of the promoters of the Appellant Company and systematically diluted the shareholding of the Appellant Company in Plant Lipids (P) Ltd. to just 8% by March, 1996. The counter gives particulars as to how ultimately Mr. C.J. George started to step into the area of operations of the Appellant Company and began....
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....of the Companies Act, 2013 permitting a private company to have upto 200 shareholders. Such special resolution at the annual general meeting was passed much before the purported board resolution of the petitioner company dated 31st August 2016 produced by the petitioner regarding the intention to acquire 15,000 shares of the respondent company by purchase from existing members or by off-market transaction. It is the petitioner company knowing fully well that steps have been taken to reconvert the company into private company with malafide intention has acquired the shares with an intention to cause prejudice. Produced herewith are the filings made with the Registrar of Companies to show that a special resolution for conversion was passed much earlier [ANNEXURE C]. The allegation that the conversion of the company into private company is based on wrong principal, that the directors did not act in the general interests of the company and was made with the oblique motives of obtaining the entire control of the company are all false, baseless and wholly unfounded. Likewise, the allegation that the directors acted arbitrarily and that the collateral and group motives to keep their own g....
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....edients (P) Ltd. as well as M/s. Plant Lipids (P) Ltd. and both the Companies had passed Resolutions to buy 15,000 shares of the Appellant Company. The issued share capital of the Company being only 1,05,900 shares of Rs. 100/- each, such Resolutions by these Companies clearly showed that they wanted to interfere with the running of the business of the Appellant Company. It has been argued that although the present 2 Company Petitions were filed for transfer only of 25 and 10 shares respectively, it was with the objective of lodging further claims by others so as to increase members at a time when the Appellant Company had already passed Resolution to convert into private limited company. It is argued that although the Appellant had moved NCLT for conversion of the Company into private limited company under Section 14 of the new Act, the Petition was being delayed by C.J. George and others on some pretext or the other. The learned Counsel submitted that in this design, the present transfers were made and the Company considered all necessary aspects and passed the Board Resolution dated 26.10.2016 recording reasons and also communicated the detailed reasons to the original Petitione....
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..... The learned Counsel referred to Board Resolution of M/s. Plant Lipids (P) Ltd., copy of which is at Page - 120 of the Appeal to show that M/s. Plant Lipids (P) Ltd. had decided to buy 15,000 shares of the Appellant Company. [M/s. Aromatic Ingredients (P) Ltd. also had passed similar Resolution on the same date of 31.08.2016 as can be seen at Page - 106 of CA 98 of 2018.] 16. Learned Counsel for the Appellant referred to Judgement in the matters of "Harinagar Sugar Mills Ltd. versus Shyam Sunder Jhunjhunwala and Others" reported in (1962) 2 SCR 339, (2) "Shree Krishna Agency Ltd. versus The Commissioner of Income Tax, Central, Calcutta" reported in 1971 (3) SCC 377 and (3) "Messer Holdings Limited v. Shyam Madanmohan Ruia and Others" reported in 2010 SCC OnLine Bom 1284 (which differed from Judgement in the matter of "Western Maharashtra Development Corpn. Ltd. versus Bajaj Auto Ltd." reported in 2010 SCC OnLine Bom 229 relied on by Petitioners) to show as to how the law has evolved with regard to discretion vested in the Directors as regards refusal to register. The argument is that although in the Indian Companies Act, 7 of 1913, there were no provisions similar to Section 11....
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....ree transfer permitted under Section 58 (2). Section 10F of the Companies Act, 1956, provides that an appeal against an order passed by the Company Law Board can be filed before the High Court on questions of law. Right to refuse registration of transfer on sufficient cause is a question of law and whether the cause shown for refusal is sufficient or not in a given case, can be a mixed question of law and fact." [Emphasis supplied] 17. On such basis, the Counsel for Appellant argued that Articles of Association is a contract and that the Directors of the Appellant exercised their discretion in the interest of the Company and if the exercise is bona fide, it cannot be questioned on judicial side and the same could not have been doubted as has been done by the NCLT. 18. Against this, the learned Counsel for the Respondents referred to the case put up by the original Petitioners in NCLT and according to him, the Article 23A was incorporated in the Articles of Association by special Resolution dated 25.09.2015 wherein it was purported to be decided to convert itself into a private limited company. The argument is that under Section 14(1) of the Act, the conversion will t....
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....for Respondent No.1 - original Petitioners that the shares they sought to be transferred in their name were miniscule and it could not be said that there was any effort at hostile takeover. It is argued that the original Petitioners - Companies did resolve to buy 15,000 shares in the Appellant Company, and, if they had tendered such number of shares, there may be justification to refuse but there was no justification to refuse the small number of shares which the original Petitioners had sought to be transferred in their names. 20. The learned Counsel for the Appellant argued referring to the pleadings (which we have already referred) to submit that there were admitted pleadings regarding hostility and that they were competitors and still the NCLT held that there was nothing on record to suggest that there has been any instance which goes to show that the Petitioner Company was competitor and had derived benefits which were otherwise to be enjoyed by the Company. The learned Counsel submitted that although there were similar allegations in the pleadings itself that there were efforts by the other side to poach employees and create unhealthy competition, the learned NCLT still re....
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....ise original Appellate Jurisdiction and sit in Appeal on question of fact. The judicial review while hearing in Appeal from decision of CLB would be limited to see whether there was a bona fide exercise of power by the Board of Directors while refusing to register the transfer of shares. Thus the Judgement of the Hon'ble Supreme Court considered facts of that matter to decide the same. Keeping the principles of law as appearing in that matter, we have to decide the present matter. 23. Judgement in the matter of Bajaj Auto Limited was under the old Act of 1956. Now the new Act of 2013 has been enforced. We have already reproduced Sub-Section (2) and (4) of Section 58 of the new Act. With reference to these new provisions, Judgement in the matter of "Mackintosh Burn Ltd. vs. Sarkar and Chowdhury Enterprises Private Limited" has been relied on by the learned Counsel for the Appellant. Para - 13 of that Judgement (reproduce earlier) makes it clear that the right to refuse registration of transfer of sufficient cause is a question of law and whether the cause shown for refusal is sufficient or not in a given case, can be a mixed question of law and fact. Keeping this in view, it woul....
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....mendment of MOA and AOA. Resolution 6.2 Item No.6 resolved was as under:- "Item No.6. Conversion of the Company into a Private Limited Company: The Chairman read out the following motion: RESOLVED THAT pursuant to the provisions of Section 13, 14, 18 and other applicable provisions, if any, of the Companies Act, 2013 read with the Companies (Incorporation) Rules, 2014 (including any statutory modification(s) or re-enactment thereof, for the time being in force) and subject to the required approvals and sanctions, the consent of the members be and is hereby given to convert the Company into a Private Limited Company. RESOLVED FURTHER THAT the name of the Company be changed from Synthite Industries Limited to Synthite Industries Private Limited and thereby incorporating that change in the Memorandum of Association and Articles of Association of the Company. RESOLVED FURTHER THAT the Articles of Association of the Company be altered by inserting following new Articles 3A and 23A before the existing Articles 4 and 24, respectively. "3A. The Company shall be a Private Limited Company and accordingly- (a) restricts the rights....
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....is a public limited Company but it is not a listed company and is closely held between small groups. The decision to convert was taken in view of the Act of 2013 coming into force which would open the number of memberships beyond 50 which was earlier limit under the old Act. 27. At Page - 120 of the Appeal, there is extract of Resolution of the Board of Directors of M/s. Plant Lipids (P) Ltd. dated 31st August, 2016 which reads as under:- "11. Investment in the shares of Synthite Industries Ltd. 1. "RESOLVED that consent of the Board of Directors be and is hereby given to the company making an investment up to the extent of 15000 Shares in the equity capital of M/s. Synthite Industries Ltd by purchasing the shares of the said company from open market or off market as the case may be and that the Director of the company Mr. John George Nechupadom be and is hereby authorized to sign the Transfer Deeds as may be necessary to transfer the shares on behalf of the company." 2. FURTHER RESOLVED THAT the specimen signature of the Authorized Signatory and a copy of this resolution be submitted to 'M/s Synthite Industries Ltd duly certified by the Managing Direc....
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....e number of shares, market price and the name of the proposed transferee. No transfer of shares shall be made or registered without the previous sanction of the Board of Directors, except when the transfer is made by any member of the Company to another member or to transferor member's spouse or child or children or his/her heirs and the Directors may decline to give such sanction without assigning any reason, subject to the provisions of Companies Act". The lodgment of instrument of transfer is in violation of the said Article. 2. It is mentioned in Article 24(2) that the Board of Directors may refuse to register any transfer of share where the directors are of opinion that it is not desirable to admit the proposed transferee to membership. The Board has perused this matter in details at its meeting held on 26.10.2016. The Board has reason to believe that the proposed transferee, Plant Lipids Private Limited is a major competitor of the Company and the Board is of the view that the admission of the proposed transferee to membership will not be in the interests of the Company and will in fact be prejudicial. 3. The resolution of Board of Directors of Aromatic Ingr....