AI Drafter 
TaxTMI 
TaxTMI 
TaxTMI 
2019 (7) TMI 511
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....nt - MAIF Investment India PTE Ltd. under Section 59 of the Companies Act, 2013 (Act - in short). 2. The Appellant - original Petitioner filed the Company Petition claiming rectification in the Register of Members of Respondent No.2 - "M/s. Ind-Barath Thermotek Private Limited" (IBTPL) (hereafter referred, also as "Company"). Parties inter -se Respondent No.1 - M/s. IND - Barath Power Infra Limited (IBPIL) is shareholder of Respondent No.2 Company holding 99.99% shares of Respondent No.2. Respondent No.2 - the Company we are concerned with, is subsidiary of Respondent No.1. Respondent No.3 - M/s. Vistra ITCL (India) Limited (earlier IL&FS Trust Company Limited) (Vistra - in short) is debenture trustee in respect of non-convertible debenture holder in Respondent No.2 i.e. Respondent No.13. Respondent No.4 - M/s. IND-Barath Energy (Utkal) Limited (IBEUL) is subsidiary of Respondent No.2. Respondent No.5 - Karvy Computershare Limited is Registrar and Transfer Agent of Respondent No.2 and Respondent No.6 - National Securities Depository Limited is depository of securities of Respondent No.2. Respondent No.7 is Managing Director of Respondent No.2 while Respondent No.8 and 9 ar....
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....ave been secured by pledge of shares under Share Pledge Agreement executed between Respondents 1, 2 and 4 and Respondent No.3. It is stated that the Appellant and Respondent No.13 lent Rs. 780 Crores to Respondent No.2 by way of subscription of debentures and acquired one equity share each in the Respondent No.2 and 4 in view of the Investment Agreement and this happened in July of 2015. Appellant provided a bridge loan for a sum of Rs. 102 Crores by subscribing to 10,200,000 Optionally Convertible Debentures (OCDs) of Respondent No.4 at Rs. 100/- per OCD (in February, 2017) for Rs. 102 Crores. Conversion sought by Appellant - Letter dated 29.08.2017 The Appellant claimed that no interest payments were made by Respondent No.2 within 12 months of the completion date under the Investment Agreement and record shows that the Appellant and Respondent No.13 in view of default sought to exercise their rights under the Investment Agreement together with Share Pledge Agreement and had sent a letter to the promoters, Respondents 1, 2, 4 and Arkay Energy Rameswaram Ltd. (Arkay - in short) on 29th August, 2017 (Page - 258) claiming inter alia, penal interest and called upon the promoters....
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.... that the Petition under Section 9 of the Arbitration Act came to be withdrawn on 13th October, 2017. It is stated that Respondent No.1 then on 17th October, 2017 filed 2 Petitions before NCLT - a. Company Petition 235/2017 under Section 110, 115 and 169 of the Act, and b. Company Petition 243/2017 under Section 59 of the Act. Record shows, NCLT, Hyderabad on 27th October, 2017 stayed (Page - 310 @ 334) the EOGM which was scheduled on 1st November, 2017 as had been called by Respondent No.3 - Vistra. The stay came to be extended on 17.11.2017 till 12.12.2017 (Page - 335) (whereafter it does not appear to have been continued). 8. According to the Appellant, Respondents 1 and 2 protracted matter in the garb of settlement discussions. As per Appellants, in January, 2018, they had invited the lenders to the site and on 6th February, 2018, they had sent e-mail to Power Finance Corporation Limited informing that the site visit had revealed grave situation and it was very difficult to take over the project without revised debt package. Respondent No.1 - withdrew its Company Petitions - Order dated 06.03.2018 9. According to Appellant, The Respondent No.1 init....
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....iterated the contents of letter dated 20th March, 2018 in their letter dated 26.03.2018 (Page 416) and informed:- "31. Any change to the share capital of IBTPL requires our consent under the terms of the Investment Agreement dated June 25, 2015 in relation to IBTPL (the Investment Agreement) and the Articles of Association of IBTPL. Accordingly, any purported conversion of the CCDs and issuance of equity shares of IBTPL without our consent is ultra vires IBTPL and the corporate authority of the board of directors of IBTPL. 32. ............ 33. ............. 34. Since IBTPL has, due to the actions of its promoters, breached the terms of the agreements with us, we are withdrawing our nominee directors on the Board. Please note we reserve all our rights under the IA and applicable law and will nominate an observer to the Board of Directors of IBTPL in accordance with the Investment Agreement." Company Investor Directors Resigned: No Quorum The nominee Directors of the Appellant and Respondent No.13 resigned from the Board of Respondent No.2 (Page - 418 and 419). Appellant and Respondent No.13 addressed yet another letter (Page - 420) on 28.03.....
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....tions 13. It is stated that the Appellant later came to know on 06.04.2018 when SBI-SG Global Securities intimated that the CCDs had been converted. As per Appellant, in spite of the above action on the part of the Appellant and RespondentNo.13, the Board of Directors went ahead to convert the CCDs of the Appellant into equity shares. Because of this, the Company Petition came to be filed with the following prayers:- "8. RELIEF SOUGHT In view of the facts and circumstances mentioned above, the Petitioner prays for the following reliefs in the interest of justice, viz. that this Ld. Tribunal be pleased to: a. declare that the board resolution dated March 26, 2018 passed by the erstwhile Board of Director authorizing the conversion of the compulsory convertible debentures into equity shares of Respondent No.2 is ultra vires the Articles of Association. Respondent No.2 (as also the terms of the CCDs as set out in Schedule 9 Part B of the Investment Agreement), illegal and void ab initio and set aside the same; b. declare that the conversion of the compulsory convertible debentures is ultra vires and contrary to the Articles of Association of Resp....
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....ch, 2018, Respondent No.2 took action to comply with Notices issued by the original Petitioner on 29.08.2017 read with Notice dated 05.09.2017. These Respondents claimed that the CCDs were converted in accordance with the Investment Agreement read with Subscription Agreement on election of the Petitioner (Appellant). The stand of these Respondents is that the original Petitioner had not taken steps to stop recalling/invocation which had already been done and when original Petitioner had invoked the pledge, it had become major shareholder of Respondent No.2 and even when meeting of Board of Directors of Respondent No.2 was convened on 26.03.2018 to give effect to the conversion of CCDs, the original Petitioner did not take steps to withdraw/recall the pledge which was already invoked by them. NCLT - dismissed the Petition 15. It appears that the learned NCLT heard the parties and was of the view that the issues raised were contentious issues which also required looking into Section 29(A) of the Insolvency and Bankruptcy Code, 2016; the question of dealing with Section 8 of Arbitration Act was also involved and it was contentious issue; that the Act of original Petitioner retra....
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.... Stay, the Respondents 1 and 2 and promoter Directors went on prolonging the litigation and in the meanwhile, the Appellant found that the project concerned was in grave situation due to the acts of Respondents 1 and 2 and the promoters. It is argued for the Appellant that the Stay continued till 12th December, 2017 but the Petitions remained pending and the Respondent No.1 withdrew the Company Petitions only on 6th March, 2018. The learned Counsel stated that if the Articles of Association are kept in view, the Respondents were required to convert the CCDs within 5 days of the Notice and when this had not been done, without exercise of fresh option from the side of the Appellant, the Respondents could not have, after prolonging the matter in litigation on their own, proceeded to convert the CCDs. The argument is that having the option of 5 days in the Articles of Association was with a purpose and the purpose was that when the Appellant exercises the option, it is aware with regard to the situation and standing of Respondent No.2. However, as Respondent No.1, which is the holding Company of Respondent No.2, indulged in litigation, the Appellant was later in no position to assess a....
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....ccording to the Counsel, the CCDs were converted contrary to the Articles of Association and there was no affirmative consent of the Appellant for conversion of the CCDs, at the time of Board Meeting, and that the Board Meeting held was without proper quorum and thus, there was no sufficient cause for the Respondent No.2 Company to reflect in the Register of Members that securities had been issued in favour of the Appellant against the conversion of CCDs. 18. Against this, the learned Counsel for Respondents 1, 2, 7 and 8 (Contenting Respondents) supported the Impugned Order. According to the Counsel, the remedy with regard to CCDs for the Appellant was to resort to arbitration. As the Appellant had invoked the pledge, it had become 51% shareholder. The documents referred to and relied on by the Appellant, have been referred by the learned Counsel for Respondents also and it is stated that in view of the Appellant and Respondent No.13 exercising their rights vide communication dated 29th August, 2017 (Page - 258) and letters dated 5th September, 2017 (Pages 265 - 267), the Respondent No.2 proceeded to call for meeting on 26th March, 2018, once the Company Petition filed by Respo....
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....sting Respondents is that the Petition being under Section 59 of the Act, the NCLT could not go into issues relating to arbitration; the effect of Appellant invoking Insolvency and Bankruptcy proceedings against Respondent No.4; the interpretation of the Investment Agreement and the Articles of Association, which it is argued NCLT found to be contentious issues which the NCLT could not go in, in Petition under Section 59 of the Act. 22. Sub-Section (1) of Section 59 of the Act which Section deals with Rectification of Register of Members reads as under:- "(1) If the name of any person is, without sufficient cause, entered in the register of members of a company, or after having been entered in the register, is, without sufficient cause, omitted therefrom, or if a default is made, or unnecessary delay takes place in entering in the register, the fact of any person having become or ceased to be a member, the person aggrieved, or any member of the company, or the company may appeal in such form as may be prescribed, to the Tribunal, or to a competent court outside India, specified by the Central Government by notification, in respect of foreign members or debenture holders....
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....l comply with their obligations under these Articles and applicable Law, including in respect of the Exit Options, the Accrued Return, the Coupon Payment, and the conversion of the CCDs; and (c) the Promoters, the Company and IBEUL shall waive any rights, remedies or claims which they may have in respect of the legal enforceability of the Exit Options or any rights of the Investors hereunder." b) Article 59.1 (Page 621) under Article 59 - "Investor Director" is as under:- "59.1 The Board shall at all times comprise a maximum of 5 (five) directors, of whom NCD Holder shall have the right to appoint and maintain in office 2 (two) directors (and to remove from office any director(s) so appointed and to appoint another in the place of the director(s) so removed) (such directors are referred to as the "Company Investor Directors" or "Investor Directors")." NCD holder is the Respondent No.13 c) Article 60.2 and Article 60.4 read as follows:- "60.2 The quorum for a meeting of the Board (or committee of the Board) shall be one-third of its total strength (any fraction contained in that one-third being rounded up to one) or two directors (whichever is hig....
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....D holders ("Conversion Due Date"). (b) The holder of the CCDs shall have the option to convert the CCDs, in whole or in part, before the Conversion Due Date in accordance with Article 0 below." The relevant portion of Conversion Procedure is at Article 77.4(d) which is as under:- "(d) Conversion Procedure The CCDs shall be converted, when pursuant to Article 0(a), in the following manner: (i) The Company shall convert the CCDs upon recipe of a written notice (the "Conversion Notice") by the CCD holders. The conversion of the CCDs shall be completed within a period of 5 (five) days from the date of receipt of the Conversion Notice. (ii) Within a period of 5 (five) days from the date of receipt of the Conversion Notice: (A) The Company shall issue and allot to the CCD holders one Equity Share for each CCD converted by them, and shall deliver duly stamped share certificates in respect thereof. (B) The Company shall update its registers of debenture holders and members to record the conversion of the CCDs. (iii) The Company and the Promoters shall do all such acts and deeds to give effect to the provisions....
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.... exercise of option of the Appellant. There is substance in the argument of the learned Counsel that when there is specific provision made in the Investment Agreement and incorporated in Articles of Association, the period of 5 days had its own value. The learned Counsel rightly submits that the Investor may be in a position to know the financial and other standing of the Company on the particular date when he wants to exercise option but if Respondents by their conduct declined and went into litigation, the investor later, may not be in a position to judge the financial standing and viability of the Company and the Company cannot subsequently turn around and force the conversion on the Investor, claiming that you asked for it. If the Articles of Association prescribe or act to be done in a particular manner, the Company, Directors, shareholders are all bound to do the act in the particular manner prescribed, as Articles of Association is heart and soul of the Company, we find. 26. We also find substance in the submissions of the learned Counsel for the Appellant who pointed out Article 59.1 which makes it mandatory that the Board shall at all times comprise a maximum of 5 Direc....
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....pite our nominee directors pointing out the above in the said meeting, you purported to proceed with the meeting to discuss the agenda in relation to the conversion of CCDs which was not only ultra vires the articles of Association but also based on deliberate misinterpretation of the Order dated March 6, 2018 passed by the Hon'ble National Company Law Tribunal, Hyderabad ("said Order"). Our nominee directors thereupon resigned from the Board. 5. We call upon you to ensure that the CCDs are not converted into equity shares without our prior written consent for the reasons mentioned in our said Letters. 6. Please note that any resolution or decision or action of the board of the Company or the Company to convert the CCDs into equity shares is ultra vires, void and invalid and would amount to contempt of the said Order besides being in direct breach of the articles of association of the Company as also the Investment Agreement dated June 25, 2015, in which case we will proceed under legal advice. 7. We would like to remind the directors of IBTPL of other fiduciary duties which they owe to IBTPL and its shareholders. Acting contrary to the terms of the Artic....
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....utes or differences arising between the company and any other person whosoever (other than a Director of the Company) in connections with or in respect of any matter relating to the business or affairs of the company to arbitration in such manner and upon such terms as the company and such other person may mutually agree upon in each case, and such reference to arbitration may be in accordance with the provisions of the Indian Arbitration Act or the Rules of the International Chamber of Commerce relating to arbitration or otherwise." Clause 40 as mentioned above, is not part of Articles of Association but is part of the Memorandum of Association which is dated 4th December, 2014 (which is before the Investment Agreement dated 25th June, 2015). The Clause apparently shows that matters relating to business or affairs of the company can go to arbitration "in such manner and upon such terms as the company and such other person may mutually agree". Thus, it is only an enabling Clause which would be subject to the Agreement to be entered into with such other person. If we come back to Clause 29(1) of the Investment Agreement as referred above, in this matter, we are not dealing with t....
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....nies Act, 1956 (relating to rectification of register on transfer) and noticed above Judgement in the matter of "Ammonia Supplies". It was observed:- "Learned counsel for the appellants has drawn our attention to the view expressed in Ammonia Supplies Corporation (P) Ltd. vs. Modern Plastic Containers Pvt. Ltd. and Others (1998) 7 SCC 105, to canvass the proposition that while examining the scope of Section 155 (the predecessor to Section 111), a view was taken that the power was fairly wide, but in case of a serious dispute as to title, the matter could be relegated to a civil suit. The submission of the learned counsel is that the subsequent legal developments to the impugned order have a direct effect on the present case as the Companies Act, 2013 has been amended which provides for the power of rectification of the Register under Section 59 of the said Act. Learned counsel has also drawn our attention to Section 430 of the Act, which reads as under:- "430. Civil court not to have jurisdiction.- No civil court shall have jurisdiction to entertain any suit or proceeding in respect of any matter which the Tribunal or the Appellate Tribunal is empowered t....
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....erwise is expected to always keep interest of the Company in forefront, cannot be treated as unequipped only because the Petition is under Section 59 of the Act. In the present matter, firstly, we are of the view that there were really no complex questions involved and even if it was to be said that there were any complex questions, the same had to be decided by the NCLT and in Appeal, this Tribunal is bound to consider whether or not entry made in the Register of Members could be upheld. 33. When we look at the facts of the present matter and the concerned documents and developments, it is apparent that for the Board of Directors to take a decision, Article 59.1 and 60.2 required presence of the Company Investor Directors and there could not be quorum unless one of the two Company Investor Directors remains present throughout the meeting. It is clear that Board of Directors could not on their own have taken any decision with regard to the conversion. In the context of Article 62.1 read with Section 62.2, conversion of CCDs was "reserved matter" which also required change in the subscribed or paid-up equity and this could not be done without Investor's consent, which as per Arti....