TaxTMI 
TaxTMI 
2022 (12) TMI 60
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....issed. 2. The facts of the case, as stated and argued by the Appellants, are that the Respondent No. 1 Company (in short 'R-1') was incorporated as an unlisted public company on 1.10.1945 with an authorised share capital of 10,000 equity shares of Rs. 100/- each, out of which 6000 shares were issued in the year 1945 and in these shares, 5016 shares were subscribed and 984 shares were left unsubscribed. The Appellants have further stated that they own 605 shares of R-1 and Mr. M. Ratnavarma Padival, father of Appellant No. 1 (in short 'A-1') has been shareholder of R-1 Company since 1960 and 802 shares held by him were transferred to the Appellants and are now held by them, and thus the appellants at the time of filing the company petition owned 1407 shares of the R-1 company. The Appellants have claimed that they owned a substantial shareholding out of 5016 subscribed shares in R-1 Company and have been subjected to continuous acts of oppression by R-1 Company and to various acts of mismanagement in the R-1 Company. 3. Insofar as the present appeal is concerned, the Appellants' case is that R-1 Company decided to allot the unsubscribed 984 shares of the company to Respondent Nos.....
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....ling stake in R-1 Company, Respondents No. 2 to 9 passed an ordinary resolution at the 61st AGM of R-1 Company held on 8.6.2007 granting the Board of Directors of R-1 Company the authority to enter into a Joint Development Agreement and such resolution was illegally approved without amending the Memorandum of Association/Articles of Association, and as was expected, the Respondents voted en bloc with 2890 shares in favour of the resolution for joint development, and the voting included a number of proxy votes which were of doubtful authenticity, and some votes cast through illegal polling procedures. 7. The Appellants have further stated that out of the six directors in the Company, five directors allotted shares to themselves as well as their relatives and close acquaintances, and this Board Resolution was in violation of section 300 of the Companies Act, 1956. Their allegation is that thus the management of the Company has unjustly enriched themselves by allotting shares to themselves and their relatives, friends and associates, when such shares had been dormant for more than 70 years after their first issue. 8. The Appellants have further alleged that after 61st AGM, the Direc....
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.... discussion in above-mentioned paragraphs, we are of the view that no relief can be granted to the Appellants in in I.A. No. 481 of 2021 regarding maintenance of status quo ante with respect to the assets of Respondent No. 1 including Jyothi Theatres. We make it clear that we have not made any comment or expressed any view regarding the merits of the case in respect of the prayers of the appellants in CA (AT) No.261 of 2019, which shall be decided on the merits of case." 13. The main appeal is now, therefore, considered on merits based on the grounds raised in the appeal and disposed of by this judgment. 14. The Appellants have challenged the Impugned Order on numerous grounds of oppression and mismanagement, which include alleged illegal allotment of 984 shares, participation of interested directors in the board meeting for allotment of 984 shares, the conduct of 61st and 62nd AGMs, wherein the resolutions relating to alleged illegal allotment of 984 shares were approved and resolutions relating to Joint Development Agreement relating to the property of R-1 Company were also approved, and certain other grounds relating to non-registration of shares transfer and non-payment of di....
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....rectors to do the same. Rule 6 of these Rules also specify that disclosures regarding the proposed allotment should be made by the Company in the form of explanatory statement to the shareholders. Thus both rules 4 and 6 were infringed while making the allotment of 984 unsubscribed shares. (v) In the R-1 Company's Board meeting held on 7.3.2007, the resolution for allotment of 984 shares was approved to the related parties of the directors of the Company, and the directors were present in the meeting voting on the said resolution, whereas section 300 of the Companies Act, 1056 mandates that a director, who is directly or indirectly interested in any contract or arrangement entered into by the company, shall not participate in the voting of such resolution. In support, the Learned Counsel for Appellants has cited the judgment in the matter of Sri Gopal Jalan and Co. v Calcutta Stock Exchange Association Limited (AIR 1964 SC 250) wherein it is held that allotment of shares by a company constitutes binding contract between the proposed shareholders and the company regarding the offer and its acceptance to take the shares. He has also cited the judgment of Hon'ble Supreme Court in Un....
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....n, and this view is supported by the ruling of Hon'ble High Court of Delhi in Surinder Singh Bindra & Ors. V Hindustan Fasteners (P) Ltd. (1989 SCC Online Del 197). (x) The Joint Development Agreement entered into by the R-1 Company with Respondent No. 54 Charisma Builders suffers from inadequate due diligence in the proposed joint development of the Company and lack of transparency and material irregularities and the information disclosed to the shareholders. It shows that the R-1 Company was in a hurry to grant the project fo joint development to R-54 Charisma Builders. (xi) In the notice of 61st AGM, item no. 6 pertains to resolution authorising the Board of Directors to enter into a Joint Development Agreement for construction of a multi-facility commercial complex with the Company retaining 50% of the built-up area of the commercial building. The explanatory statement to the notice states that the company will enter into a Joint Development Agreement with a builder to develop a shopping mall and the entire consideration to the Company would be in the form of 50% of the built-up area therein and there will be no cash consideration even though the Memorandum of Association r....
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.... resolution by the General Body without amending the Object Clause of the Memorandum of Association to enable the Company to sell, lease, dispose of the built-up areas was also not done. (xvi) The explanatory statement to the notice of 62nd AGM gives no indication of the valuation of the property and any project report for joint development, which the members were entitled to know so they could take a considered decision, and thus another resolution amending the earlier resolution passed in the 61st AGM was passed without proper and adequate due diligence, which affects the interest of Company and its shareholders leading to their oppression. (xvii) Mr. M. Ratnavarma Padival filed Company Application 352 of 2007 in CP No. 35 of 1987 before the Hon'ble High Court of Karnataka challenging agenda item no. 6 of the 61st AGM which was on an entirely different cause of action, being reissue of 1455 forfeited shares on 15.11.1986. Also, the Appellants were not parties to the said proceedings in CA 352 of 2007 before Hon'ble High Court of Karnataka, and the proceedings of 61st AGM were not subject matter of CP No. 35 of 2007. Thus, the cause of action in respect of CP No. 35 of 1987 an....
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.... of Company's properties was taken for the first time. Later, the Board of Directors changed their opinion and instead opting of sale of the entire property, passed a resolution in 62nd AGM to amend the earlier resolution regarding joint development, whereby the Company would receive only 40% of the built-up area of the commercial complex as compared to 50% built-up area which was contemplated earlier and approved in 61st AGM. The absence of due diligence and correct valuation of land in such a proposal is borne from the explanatory statement attached with notice of 62nd AGM, wherein there is no indication of any valuation or estimation about the actual valuation of the land and possible returns to the Company have not been considered. (xxi) It is abundantly clear that the proposed Joint Development Agreement is ultra-vires of the Objects of the Company, because in the Memorandum of Association the main objects of the Company are outlined as follows:- "3. The objects of which the company is established are :- (a) To negotiate for the purchase of Karnataka Theatre", now owned and run by Badavara Bandhu Printing Press Ltd. of Mangalore, (b) To establish one or more cinema the....
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...., and the Appellants together held 605 shares. Further, 802 shares which were solely held by Mr. Ratnavarma Padival are now jointly held by Appellants No.1, 2 and Mr. Ratnavarma Padival. The Appellants No.1 and 2 thus hold 1406 shares jointly with Mr.Ratnavarma Padival. (iii) The issued share capital of the company consists of 6000 shares. Out of the said issued capital, 984 shares were left unsubscribed. The Board of Directors of the R-1 Company who are authorized under the Memorandum & Articles of Association in this regard have taken a decision to allot the said unsubscribed shares in favour of the new allottees by virtue of the Board Resolution dated 07-03-2007. The allotment of shares has been undertaken by following the prescribed procedure of receiving application from the aspirants and the allotment made after receipt of consideration amount. The allotment is legal and valid. For allotment of unsubscribed shares, the provision of Section 81(1) and Section 81(1A) of the Companies Act,1956 have no application. This has been clarified by the Department of Company Affairs vide its letter No.2 (27)/56-PR dated 4-1-1976 addressed to Registrar of Companies, Madras. The Board has....
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....e validity of Article 15 in the present proceedings does not arise. Under provisions of the Companies Act 1913, the Company had power to restrict the voting rights of its members by placing restrictions on the voting rights through its AoA. Similarly, under Section 86 of the Companies Act, 1956, a company has power to issue shares with differential rights including differential voting rights and Section 47 of the new Companies Act, 2013 provides for similar powers. The Appellants, who are joint shareholders of shares with Mr. M Ratnavarma Padival who was the Petitioner Before the Hon'ble Company Law Board Chennai Bench, had in C.P.No.13/lll/SRV/97 raised the same issue, and therefore, they are bound by the order of the Hon'ble Company Law Board and are precluded from re-agitating the same in the present proceedings. (ix) Regarding the report dated 7.5.2008 addressed by ROC to the Regional Director, Southern Region which infers that the 984 shares were allotted in violation of section 81 of the Companies Act, 1956, it is submitted that the said letter cannot be taken into consideration by this Hon'ble Tribunal as the opinion/ finding of the ROC is contrary to Circular ....
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....y's land. The same was declined by order dated 06.06.2007. Thereafter tenders were called and as permitted by the Hon'ble High Court of Karnataka, Mr. Ratnavarma Padival's company also participated in the tender process alongwith other parties and when they were unsuccessful in securing the said joint development project he and his family members embarked on a company petition to thwart the company's effort for joint development project. (xvii) Nine parties submitted tenders for pre-qualification. The Company informed them the date and time of opening of applications for pre-qualification. These applications were opened and considered in the presence of eight members including the representative of M/s Padival Brothers. The R-1 Company then considered a proposal for disposal the property by sale in view of the high appreciation in land costs and so the process of evaluation was postponed. Therefore, on 29.03.2008 the Company informed the unsuccessful applicants regarding the rejected applications and while all the pre-qualified applicants purchased tender forms, only four submitted filled in final tenders. These tenders were opened in the presence of the representative of the App....
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....r the AoA of the Company for joint shareholders occupying the position of a Director in the company. 1 (xxii) With regard non-transfer of 101 shares, the Appellant No. 1 lodged the share certificates for transfer on 26.08.2009. The company had time up to 26.10.2009 for considering the share transfer applications by placing the same before the Board of Directors. The issue of transfer of shares was considered in the next immediate board meeting dated 23-09-2009. However, in the intervening period the books of the company were closed prior to holding of AGM between 15-09-2004 to 24-09-2009. Therefore, the transfer of shares took effect from 25-09-2009. The members who held the 101 shares had issued proxies in favour of Appellant No.3 to exercise the rights and vote in respect of the 101 shares of the Company in the 63rd AGM. Therefore, though the shares were not transferred in the name of the Appellant No. l, the rights in respect of the 101 shares have been effectively exercised by the Appellants. (xxiii) The averment that large numbers of shareholders were going against the proposals of the Board of Directors, therefore, the board feared it would lose control over the Company, ....
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....appeal are as follows: - (i) Whether the allotment of 984 unsubscribed shares through resolutions in the Board of Directors' meeting and in the 61st and 62nd AGMs was done in accordance with the provision of law, and whether such allotment made to some relatives and friends of existing members and director of R-1 Company constitutes an act of oppression and mismanagement? (ii) Whether the Joint Development Agreement, approved through a resolution in the 61st AGM and thereafter modified through another resolution in the 62nd AGM with prior notice for the AGMs and Explanatory Statements sent with notice fulfilled the requirements of legal provisions and maintained fairness and transparency complying with the fiduciary duty of the company towards its members, and if it was not done, would it constitute an act of oppression and mismanagement? (iii) Whether the alleged issues of useing of unverified proxies in the 61st and 62nd AGMs, registration of 101 shares of Appellant No. 1, allotment of 100 shares to R-46 and R-47, adherence to Article 15 of the Articles of Association despite contrary provision in the Companies Act, 1956 have any illegality associated with them, and whether....
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....he allotment of 984 equity shares. This company petition, later labelled as TP no. 24 of 2016, came to be decided by the NCLT, Bangaluru Bench on 25.6.2019. Thus, it is quite clear from the turn of events that even though the allotment of 984 shares pertain to the year 2007, the Appellants or some other members have raised the issue of their illegal allotment before different authorities and courts, and thus, they are well within their rights to raise this issue in appeal, filed against the Impugned Order dated 25.6.2019. 23. The Impugned Order dated 25.6.2019 held that the allotment of 984 shares was done from the unsubscribed portion of the issued 6000 shares of R-1 Company, which were unsubscribed, and the directors are empowered to dispose of the shares of the Company in accordance with Article 4 of Articles of Association (in short 'AoA'), and restrictions imposed on the allotment. It has, further, held that the issue of 984 shares is not the Rights Issue and is only the unsubscribed portion of authorised 6000 shares that were issued initially, and therefore, there is no bar imposed by section 81(1) and 81(1(A) and section 300 of the Companies Act, 1956 regarding issue of tho....
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....mbers and 590 shares were allotted to 23 new persons. Since shares were allotted to less than 50 new persons this allotment of shares cannot be considered as a public issue. Similarly, the company need not file statement in lieu of prospectus and the filing of statement in lieu of prospectus would arise only once in a life time of a company on its incorporation, Therefore, it can be concluded the Company has violated the provisions of section 81(1) and 81(1A) of the Companies Act, 1956. As the allotment was done against the provisions of the Companies Act, 1956, the complainant may be directed to approach the company law board under the provisions of Sec.397/398 of the Act for declaring the allotment as null and void." 26. For ease of understanding and better appreciation, Sections 61(1) and 81 (1) and (d) and 81(1A) of the Companies Act, 1956 are as reproduced below :- 81. FURTHER ISSUE OF CAPITAL (1) Where at any time after the expiry of two years from the formation of a company or at any time after the expiry of one year from the allotment of shares in that company made for the first time after its formation, whichever is earlier, it is proposed to increase the subscribed c....
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....y and smacked of favouritism and was clearly militating against the fiduciary duties of the Board of Directors where the legal provisions of Section 81 for allotment of shares for increase in capital of the Company had been given a complete go by. 28. We refer to section 81(1)(a) and 81(1)(d) of the Companies Act, 1956 to examine the need for infusion of capital in the Company and the manner in which these 984 shares were allotted. We find that these shares were allotted after more than seven decades from the last allotment and that too when the Board of Directors did not project any real need of funds for the Company's business. Thus, it is difficult to appreciate whey the Board of Directors went for an increase in the share capital. Further, the notices of 61st AGM and the Board of Directors meeting held prior to 61st AGM do not in any way show that the Company was in any need of additional funds or finances. This action of the Company in going for increasing its share capital, though legally tenable does appear to have been done with some other objective than for infusion of capital. The subsequent allotment in favour of existing members of the Company and not to some other mem....
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....f the contingency specified therein." 32. The various concepts of subscribed, unsubscribed shares and allotment of shares has been explained by the Hon'ble Gujarat High Court has held in the matter of In Re: Mafatlal Industries Ltd. (MANU/GJ/0197/1996) wherein it is held as hereunder:-:- "29. We may at the outset state that the terms "subscription' or 'subscribed capital' or 'unsubscribed capital' have different meanings depending upon the context in which the term has been used. While referring to the capital structure of the Company to be stated in the prospectus inviting applications for share allotment, the terms used are authorised, issued, subscribed and paid-up capital. Here, "authorised share capital" means the number and par value of each class of shares that the company may issue in accordance with its instrument of incorporation. This is also described as "nominal share capital", "issued share capital" means that the portion of the authorised share capital which had actually been offered for subscription. "Subscribed share capital" means that portion of the issued share capital which has actually been subscribed and allotted. This also includes fixed shares allotted t....
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....fatlal Industries Ltd. (supra), Hon'ble Gujarat High Court has held that the terms "subscription", "subscribed capital" or "unsubscribed capital'" have different meanings depending upon the context in which the term has been used. The judgment further observes that "...Capital shall be increased by further allotment of shares in the manner prescribed under Section 81." This judgment was delivered in the year 1996 when Companies Act, 1956 was in operation. In the light of these observations of the Hon'ble Gujarat High Court, it is noted by us that section 81 refers to "further issue of capital" and for further issue of capital, the method by which allotment of shares in the company will be done is provided in section 81. 34. Thus, it is clear that the 984 shares which were meant for increase of the company's capital should have been allotted as prescribed by section 81 of the Companies Act, 1956 to such persons/entities who at the date of offer were holders of the equity shares of the company, in proportion to the capital paid-up of those shares on that date. 35. With regard to the allotment of 984 shares and the duty of the Company to do it in a fair and rational manner, the Lear....
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....r duty to act in good faith and make full disclosure to the shareholders regarding affairs of a company." (Emphasis Supplied) 37. Hon'ble Supreme Court of India has held in the matter of Union of India (UOI) vs. Allied International Products Ltd. and Ors. (MANU/SC/0043/1970) held as follows :- "15. The application for allotment shares and acceptance thereof constitute a contract between the Company and the applicant...." 38. We are, therefore, of the view that the directors of the R-1 Company who had interest in the allotment of 984 shares as they were related to the prospective beneficiaries should have refrained from participating in the meeting wherein the list of beneficiaries was decided. The list of beneficiaries which is attached in the appeal paperbook points to the relationship between certain directors and the prospective beneficiaries. Therefore, it is amply clear that the directors did not conduct themselves in a fair and just manner, which was expected of them, when deciding on the prospective allottees. The allotment of 984 shares, therefore, suffers from this shortcoming too. 39. The Learned Counsel for Respondents has shown a valuation of the shares done by P....
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....transparency and fairness, by indulging in favouritism and nepotism. The new shareholders were recipients of sudden benefits, just because they were either related to or close to the existing members and directors of the Company. Moreover, the Learned Counsel of Respondents' argument that section 81 and 81(1)(a) are not applicable, since the allotment of 984 shares from amongst un-subscribed shares does not convince us as section 81 is regarding further issue of capital and allotment of 984 shares even if unsubscribed earlier are considered allotment to increase the share capital and would be squarely covered under section 81(1) and 81(1A) of the Companies Act, 1956. 42. Section 81(1)(a) of the Companies Act, 1956 outlines the manner of infusion of capital through allotment of shares which provide a fair, just and transparent manner, where equal preference should have been given to the existing members of the Company in the first instance, and if some members chose not to receive such allotment, such shares could have been allotted on some other rational basis. The Board of Directors of the Company failed to carry out its fiduciary duties in a rational, fair and logical manner, an....
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....it, to pass with or without modification(s), the following resolution as an Ordinary Resolution: 'RESOLVED that pursuant to the provisions of Section 293(1)(a) of the Companies Act, 1956 and other applicable provisions if any, consent of the members be and is hereby accorded to the Board of Directors of the Company to offer the property of the company bearing T.S. No. 168 Mangalore for joint development by construction of a multi facility commercial complex thereon including at least two cinema theatres with any reputed builder/developer identified by the Board of Directors to the end intent that the company obtains atleast 50.0% of the total built-up area of the proposed commercial complex with the right to retain proportionate undivided interest in the land.' Explanatory Statement as required under Section 173 : ITEM No. 6 : The shareholders are aware that the company has been successfully operating the business of running a cinema theatre on the property bearing T.S. No. 168 Mangalore. The shareholders are further aware that the said property of the company is situated in a prime locality in Mangalore. The Board of Directors feel that the property could be commercially ex....
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....es of the 61st AGM (attached at pp. 202-208 of the appeal paperbook) shows that in Item No. 6 to consider the proposed project, a resolution was adopted to authorise the Board of Directors of the Company to offer the property of the Company bearing T.S. No. 168 Mangalore for joint development by construction of a multi facility commercial complex thereon, including at least two cinema theatres with any reputed builder/developer identified by the Board of Directors to the end intent that the Company obtains at least 50% of the total built-up area of the proposed commercial complex with the right to retain proportionate undivided interest in the land. 47. The 61st AGM further resolved to authorise the Board of Directors to enter into the necessary Joint Development Agreement with the power to dispose of and/or give on rent the built up area delivered to the Company in terms of the Joint Development Agreement at a future date, on such terms and conditions as the Board of Directors may deem fit, subject however to the cinema theatres forming part of the built up area delivered to the Company being retained and the business of owning the cinema theatres and operating then same either d....
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....cept four members voted against the Resolution and two of them requested for vote by poll." 50. There is no mention in the minutes of the 61st AGM and 62nd AGM about the actual valuation of the project land and the basis on which the joint development of the Company's only land property was being proposed nor there is any project report by any real estate expert as to how such development was being proposed. The bases of deciding to give 50% of built-up area to the developer is provided in the Explanatory Statement as required under section 173 sent with the notice dated 19.4.2007 for the 61st AGM. The Explanatory Statement merely records that the Company has an intention to commercially exploit the land property to derive maximum benefit for the Company but there is no description or explanation as to how delivery of possession of 50% of total built-up area with proportionate undivided interest in land. There is no detail in the Explanatory Statement as to how this figure of 50% has been arrived. 51. Section 293 (1) of the erstwhile Companies Act, 1956 provides for the sale, leasing or otherwise disposal of the undertaking of the company as follows:- "293. RESTRICTIONS ON POWE....
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....f the property on which our cinema theatre is located. We believe our old theatre has outlived its life and we must move with the changing times.' The Explanatory Statement also mentions that the development proposal is part of the agenda of the Annual General Body meeting when some details of the proposal shall be given. The Explanatory Statement with regard to the Joint Development Agreement as required under section 173 is available (at page 193 of the appeal paperbook). This Explanatory Statement makes it clear that the Board of Directors feel that the property could be commercially exploited to the best advantage of the company and with a view to driving maximum benefit out of the prime property belonging to the Company, and at the same time continuing the business of owning and operating cinema theatres, the Board of Directors feel that the company's property could best be development under a joint development arranged with a reputed builder/developer. The Explanatory Statement further states that the company could negotiate delivery of possession of atleast 50.0% of the total built-up area of the proposed commercial complex including two cinema theatres and the balance porti....
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....e Company will invite tenders and finalise the dealing in a transparent manner. It is also noted that this order dated 6.6.2007 was not appealed against and has, therefore, assumes relevance insofar as the undertaking of the joint development project is concerned. 59. Thus, on the basis of the available material and in the light of the Memorandum of Association and the Objects of the Company stated therein, as well as the order of Hon'ble High Court of Karnataka in CA No. 352 of 2007, it is correct that the Company could sell, lease or dispose of in any manner its property wholly or substantially by passing a special resolution under section 293(1) of the Companies Act, 1956. 60. We have noted earlier that the notice for 61st AGM dated 19.4.2007 is attached with an Explanatory Statement about the proposed joint development project and this statement (attached at pg. 193 of the appeal paperbook) recognise the fact that the Board of Directors, in the best interest and advantage of the Company, would like to commercially exploit TS-168 Mangalore, which is the Company's sole landed property. There is nothing in the Explanatory Statement to show how 50% of the built-up area is calcula....
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....he AGMs, EGM as well the BOD meetings do not give any clear indication or idea why such changes were being proposed. The notices and Explanatory Statements sent with the notices of the 61st and 62nd AGMs record very vague reasons as to why the Company intended to undertake the joint development project. Moreover, as an instance of mismanagement, the Company accepted Earnest Money Deposit from some builders when the first decision was taken for joint development in the 61st AGM. At this stage the nature and the specifications of the project were not known. This kind of action in dealing with the only land-property of the Company can be either labelled as totally slip-shod management or seen as an effort to handover the project to some pre-decided builder without going through a fair and transparent process of selecting the best bidder. 63. It was, therefore, incumbent on the Company's Board of Directors and top management to undertake such a sensitive and important project, in view of the fact that this land and theatre situated thereon is the Company's only business, without adequate proper thought and due diligence. A real estate project undertaken without proper and in-depth pla....
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....y wide ambit to the acts of oppression and mismanagement that could be inflicted by a company, and therefore the various acts alleged by the appellants as constituting acts of oppression and mismanagement are viewed in this context. 69. We now come to the question of how to deal with 984 shares allotted to new allottees. In view of the fact that this allotment was done in the year 2007 and many decisions would have been taken by the Company with the participation of such allottees with these shareholders taking part in various General Body meetings etc., we think it would be prudent and reasonable, if such shares are not to be considered as null and void from the date of their allotment in the year 2007. In the interest of justice, and further on the basis of transparency, fairness and reasonability, we hold that the 984 shares allotment shall be considered null and void from the date of this judgment. The Company is thereafter free to allot these 984 shares with due regard to the provisions of the Companies Act, 2013, considering such allotment as allotment of new shares for increase of capital of the Company. 70. Insofar as the decision regarding Joint Development Agreement is ....