TaxTMI 
TaxTMI 
2022 (12) TMI 60
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....f the Respondent No. 1 Company has been dismissed. 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 unsubscri....
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....e Appellants have alleged that after acquiring controlling 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 Appe....
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....operative part of this order is as follows:- "23. In view of the 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 ....
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.... by the Articles of Association and a special resolution is required to be passed authorizing the Board of Directors 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 rega....
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....ng of present petition can also be looked into, if they form a part of continuous series of acts up to the date of filing of the company petition, 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 considerati....
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....er-alia, advising the complainants to move the Company Law Board for getting declaration of the allotment of 984 shares as null and void among other issues. This report also found that a 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 proceedi....
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....our of Respondent No. 54 taking up the project of joint development and therefore Earnest Money Deposit was taken from Respondent No. 4 even before the holding of 61st AGM in which the decision regarding joint development 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:- ....
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.... limitation, i.e., three years prior to the date of filing of the Petition cannot be taken as acts of oppression and mismanagement. (ii) Appellants No. 1 and 2 are the son and wife respectively of Mr. M Ratnavarma Padival and the 3rd Appellant is an employee of Sri Ratnavarma Padival, 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. F....
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....f Association and its validity in allotment of shares in the present case, the issue is no more res integra. The Hon'ble Company Law Board, Chennai Bench has already interpreted and upheld the validity of Article 15 of the AoA in C.P.No.13/111/SRV/97 in the case of R-1 Company. Therefore, the question of once again considering the 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 r....
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....round that theatres that are part of commercial complexes and malls have become popular and successful as against the traditional standalone theatres. (xvi) The Appellants' group filed an application bearing CA 352/2007 in C.P. No.35/1987 before the Hon'ble High Court of Karnataka seeking restraint on considering the agenda for the 61st AGM to consider joint development of Company'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 b....
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.... 5 and 8 do not hold qualifying shares is wholly untenable. Respondent No. 5 holds 45 shares under folio numbers 353 and 421. Similarly, Respondent No. 8 holds 274 shares under folio numbers 357, 390, 408, 415 and 416 in the register of members of the Company. The fact that the shares are held jointly with family members does not disqualify the shareholders from occupying the position of a Director and there is no bar under 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 ....
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....at the Appellants are indulging in forum shopping is absolutely correct. Mr. M. Ratnaverma Padival tried to stall the development process by filing CA 352/2007befoe Hon'ble High Court of Karnataka in the company petition. However, when he failed to get a favourable order and also failed in securing the tender, he orchestrated the company petition through Appellants who are joint shareholders along with him. Issues in the appeal 18. The issues that arise in this 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 wit....
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....th reference to Section 81(1) and 81(1A) of the Companies Act, 1956 which was not done, and hence such an allotment is not legal. 22. Further, it is noted that these 984 shares became relevant when the Company considered the project of joint development of its property and voting took place on the proposal with the new allottees also voting in this resolution. Later, the appellants filed CP No. 71 of 2010 on many issues of alleged oppression and mismanagement, with an important one relating to the 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 we....
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....scribed for a very long period of time, the Board of Directors should not have exercised their power under section 81(1)(d). Since the board has a fiduciary duty in exceptional circumstances like issue of shares towards the members of a company, they should have offered these shares to all the existing shareholders in the ratio of shares held by them under section 81(1) of the Companies Act, 1956'. The report further notes that "the details of allottees reveal that 394 shares were allotted to existing members 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 decla....
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....ached at pp.95-98 of the Rejoinder filed by the Appellants). A perusal of this list, which is not disputed by the respondents clearly shows that the beneficiaries of the allotment of 984 shares are either the existing members themselves or their close relatives and friends. This list makes it clear that the Board of Directors gave selective benefit to only some existing members of the Company and their close relatives or friends and the basis of giving such selective treatment to just some members of the Company was not made clear. Such an act was wholly arbitrary 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 ....
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....judgment, the allotment of 984 shares should be seen as an issue for increase of capital and, therefore, covered by the provision of section 81(1)(a). Further, Hon'ble Supreme Court of India has held in the matter of Union of India (UOI) vs. Allied International Products Ltd. and Ors. (Civil Appeal Nos. 1772 and 1773 of 1970) has held as follows:- "15. The application for allotment of shares and acceptance thereof constitutes a contract between the Company and the applicant. Section 73(1) of the Companies Act imposes a penalty whereby the allotment of shares becomes void on the happening of 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 ap....
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.... in such a manner as it thinks most beneficial to the company. From the aforesaid, it is clear that in the case of a rights issue no public offer is made inviting applications. Therefore, the stage for expressing agreement to subscribe to share capital by persons other than the existing shareholders does not reach before expiry of the time for exercise of the option to accept the offer for allotment of the shares or to renounce such offer of allotment either in full or in part in favour of a third party or refusal to accept the offer fo allotment." (Emphasis Supplied) 33. Thus, in the judgment in the case of In Re: Mafatlal 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....
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....e to the shareholders regarding all important matters, relating to the company. It follows that in the matter of issue of additional shares, the directors owe a fiduciary duty to issue shares for a proper purpose. This duty is owed by them to the shareholders of the company. Therefore, even though Section 81 of the Companies Act which contains certain requirements in the matter of issue of further share capital by a company does not apply to private limited companies, the directors in a private limited company are expected to make a disclosure to the shareholder of such a company when further shares are being issued. This requirement flows from their 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 t....
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....t the task of the State Government, more particularly, the Executive Branch to interpret the law, that is the task of the Courts. Even if the State Government understood the Act in a particular manner, that cannot be a true and correct interpretation unless it is so held by the Courts. Therefore, how the State Government officials understood the Act, is really irrelevant." (Emphasis Supplied) 41. In the light of the above-stated judgements of Hon'ble Supreme Court, we are of the clear opinion that the Board of Directors had a very solemn, fiduciary duty towards the company and its existing members in the allotment of 984 shares, but which they failed to carry with desirable 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 ev....
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....the order dated 6.6.2007 of the Hon'ble High Court of Karnataka in C.A. No. 352/2007 and concludes that the petitioners have failed to make out any case for interference in the matter of Joint Development Agreement. 45. Turning our attention to this issue of the joint development of the Company's land, it is noted that the record and documents submitted by the parties show that matter of the joint development of land on which Jyothi Theatre was situated was taken up in the 61st AGM held on 8.6.2007. The notice for the 61st AGM and the Explanatory Statement sent alongwith with request to the agenda items stated as follows :- "6. To approve the proposed project To consider and if thought fit, 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 incl....
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....esides the income from owning and operating the cinema theatres. Although under the proposal whole or substantially the whole of the undertaking of the company is not being disposed of, requiring the consent of the shareholders, in view of the fact that proportionate undivided interest in the land will be conveyed in favour of the builder/developer and or his nominees, by way of abundant caution, the consent of the shareholders is sought in terms of Section 293(1)(a) of the Companies Act, 1956. The Board of Directors opine that the proposal is in the best interests of the company and therefore recommend adoption of the resolution. No director is personally interested in the resolution." (Emphasis Supplied) 46. A perusal of the minutes 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 ident....
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....lution. The chairman then replied to the letters received on the subject. He said that the earlier Resolution had authorized the Board of Directors to decide on one of the two options of Joint Development or sale of the land and the Board was also authorized to enter into necessary agreements. He then gave details of tendering procedure adopted, tenders received, including the tender from Sr M.R. Padival and key information on the best tender. The chairman informed that as per present indications the Company's annual profit after tax after the development should be very much higher than the current average and could be in the order of eight times, and he strongly recommended that the Resolution be approved. The Resolution was put to vote by show of hands. All voted in favour except 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 bein....
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....should be exercised with the consent of the public company in a general meeting. The resolution adopted in the 61st AGM mentions that the commercial complex to be developed would have two cinema theatres but in the absence of any project report it is not clear how clause 3(o) will be complied with. 55. A perusal of the notice of the 61st AGM dated 19.4.2007 and the Explanatory Statement attached therewith whose relevant portion regarding the Joint Development Agreement is extracted above explains the issue of 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. The Explanatory Statement, which is also extracted above, merely states that 'your Board considering capitalizing on the high value of 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 r....
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....wing order:- "5. In the circumstances, C.A. 352/2007 is rejected recording the submissions of the learned senior counsel appearing for the respondents. After the resolution, respondents are directed to invite tenders and if the applicants are willing to participate, they are at liberty to do so and thereafter it is open for the directors to finalise the dealings considering the best offer received by the company." 58. Thus, the Hon'ble High Court of Karnataka did not give ad-interim order of injunction for considering agenda item no. 6 in the AGM, relating to Joint Development Agreement, in the Company's 61 AGM. It is noted that while the issue of selling or disposal of the Company's land was not considered as being contrary to the clauses of Memorandum of Association, the Hon'ble High Court of Karnataka held that the Directors of the 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 Me....
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.... 62. We also note that the Company decided in 61st AGM to take up a Joint Development project with 50% of built-up area and the commercial complex to be given to the proposed builder/developer. On the basis of this resolution, and with the authorization given to the Board of Directors to undertake the process of joint development project, the Company issues tender notice asking for pre-qualification bid. Thereafter, in the EGM held on 11.02.2008, a decision was taken to sell the property of the Company and the proposal of joint development project was jettisoned. Again, in the 62nd AGM held on 27.08.2008 the Company again took an about-turn and went back on its original proposal of joint development, but this time deciding to give 60% of the built-up area in the proposed commercial complex. While the Company was doing such flip-flops, the records of the 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 mi....
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....i, J., in a decision of the Gujarat High Court in Seth Mohanlal Ganpatram v. Sayaji Jubilee Cotton & Jute Mills Co. Ltd. that "a resolution passed by the directors may be perfectly legal and yet oppressive, and conversely a resolution which is in contravention of the law may be in the interests of the shareholders and the company...." 67. Hon'ble Gujarat High Court has held in the matter of Mohanlal Ganpatram & Anr. vs. Shri Sayaji Jubilees Cotton and Jute Mills Co. Ltd. & Ors. (MANU/GJ/0003/1964) has held as follows:- "It may be that a resolution may be passed by the directors which is perfectly legal in the sense that it does not contravene any provision of law, and yet it may be oppressive to the minority shareholders or prejudicial to the interests of the company." 68. Such an interpretation by Hon'ble Supreme Court and also by Hon'ble Gujarat High Court provides very 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 all....