TaxTMI 
TaxTMI 
TaxTMI 
2025 (10) TMI 916
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...., Adbhut Vincom Pvt. Ltd., and directed the cancellation of 210,000 equity shares of Hotel Birsa Pvt. Ltd. (Respondent No. 1) allotted to the appellants, Axis Nirman and Industries Limited (Appellant No. 1) and Axis Overseas Limited (Appellant No. 2). Additionally, the NCLT ordered the refund of Rs. 2,10,00,000/- paid by the appellants for these shares, on the ground that the resolutions to increase authorized share capital and the allotment of shares were not compliant with the Companies Act, 1956 (hereinafter referred to as 'Act'). 2. The appellants here assert that the NCLT's findings ignored material evidence, failed to recognize procedural compliance, and caused them undue financial and reputational harm. They contend that their investments were lawful, made in good faith based on representations by the company's promoters, and utilized to revive the company's stalled projects. Brief facts of the Case 3. The facts of the case are as follows: (i) Respondent No. 1/ Hotel Birsa (P) Ltd., is a private limited company incorporated under the Companies Act, 1956. It operates in the hospitality sector, managing hotels, restaurants, and related businesses. (i....
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.... 4. Learning about the appellants' investments and consequent dilution of its shareholding, Respondent No. 2, Adbhut Vincom Pvt. Ltd. which held 49% shares (2,08,250 shares) of Hotel Birsa, filed Company Petition No. 370 of 2010 in May 2010 before the NCLT wherein he alleged the following: (i) That the Respondents No. 3/ Sh. Prem Rajesh Soy and Respondent No.4 Smt. Salini Soy had allegedly mismanaged the company's affairs and manipulated its capital structure without proper approvals. (ii) The shares allotted to the appellants were claimed to have been issued in violation of statutory provisions. (iii) The resolutions increasing the authorized share capital and subsequent share allotments were challenged as being non-compliant with the Companies Act, 1956. 5. The appellants in the present case, on their part, filed Company Petition No. 5 of 2016 on 21.09.2016 under Sections 241 and 242 of the Companies Act, 2013, alleging Oppression and Mismanagement of the company by Respondents Nos. 2/ Sh. Prem Rajesh Soy, Respondent No.3/ Smt. Salini Soy, and Respondent No.4/ Adbhut Vincom Pvt. Ltd. and misuse of the Rs. 2.10 crore invested by the appellants and f....
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....Prem Rajesh Soy and Mrs. Shalini Soy, while 49% was held by Adbhut Vincom Pvt. Ltd. (Respondent No. 2). Despite being a substantial stakeholder, Adbhut Vincom exhibited no interest in supporting the company during its financial difficulties. Instead, it executed a Memorandum of Understanding (MOU) on 29.09.2009 to sell its entire shareholding of 2,08,250 shares, representing 49% equity, to one Libra Retailers Pvt. Ltd.. Libra Retailers paid Rs. 1 crore as an advance, and the MOU, originally valid for 60 days, was mutually extended several times, with the last extension ending on 16.02.2010. 13. The Counsel further submitted that, in 2009, Mr. Prem Rajesh Soy, erstwhile Director of Hotel Birsa, sought financial assistance from the appellants, Axis Nirman and Industries Ltd. (formerly Peacock Pigments Pvt. Ltd.) and Axis Overseas Ltd., to address the company's critical liquidity needs. The appellants were approached, because Adbhut Vincom had demonstrated no intention of supporting the company or fulfilling its financial obligations. Mr. Soy assured the appellants that their investments would be safeguarded, and they would be issued shares commensurate with their financial contrib....
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....r board meeting on 14.04.2010 approved the issuance of 1,20,000 additional shares at Rs. 100 each, valued at Rs. 1.2 crores, to Axis Overseas Ltd. to meet further financial requirements. Invitations for subscription were sent to all shareholders, including Adbhut Vincom, through UPC mode with a deadline of 06.04.2010. Once again, Adbhut Vincom neither responded nor expressed interest in subscribing to the shares. Consequently, these shares were also allotted to the appellants, who infused Rs. 1.2 crores into the company. 18. The Appellants state that these investments significantly altered the shareholding structure of Hotel Birsa. The new shareholding stood as follows: Mr. & Mrs. Soy - 34%, Adbhut Vincom - 32.75%, and the appellants (Axis Nirman and Axis Overseas) - 33.25%. The infusion of Rs. 2.10 crores by the appellants stabilized the company, enabling it to settle outstanding debts, including the HUDCO loan, and complete its hotel project. 19. It is further submitted that the allotment of shares to the appellants was lawful, proper, and carried out following statutory requirements. Adbhut Vincom had already divested its interest in the company through the MOU with Libra ....
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.... (i) On 18.01.2010, the Board resolved to call an Extraordinary General Meeting (EoGM) on 18.02.2010 to increase the company's authorized share capital and amend Clause V of the MOA. However, the Articles of Association (AOA) of the company did not contain any provision permitting such an alteration. (ii) Section 94(1) of the Companies Act, 1956, mandates that a company can alter its share capital only if expressly authorized by its AOA. The failure to amend the AOA prior to altering the MOA renders the entire process invalid. (iii) Section 31 of Companies Act 1956, which governs the amendment of the AOA, requires a special resolution to incorporate such enabling provisions. The notice issued for the EoGM did not propose any such amendment to the AOA, and no special resolution was passed. 24. Counsel for Respondent further submits that the notice dated 18.01.2010, calling for the EoGM, lacked transparency and procedural compliance. The notice stated two agenda items: (i) Increasing the authorized share capital from Rs. 4.25 crores to Rs. 10 crores. (ii) Amending Clause V of the MOA. However, the notice did not mention any proposal t....
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....f these shares but was deliberately denied this right. (i) The offer letters for these issuances did not include renunciation rights, a mandatory requirement under Section 81(1)(c). (ii) These offer letters were allegedly served via certificate of posting, which lacks credibility. No evidence of dispatch or delivery was presented, making the process highly suspect. 29. Counsel for Respondent asserts that the issuances were not undertaken for any bona fide corporate purpose. The Appellants failed to demonstrate how the Rs. 2.10 crores raised through these issuances were utilized in the interest of the company. The sole intent was to dilute the Respondent's shareholding from 49% to 32.75% and consolidate control over the company in favor of the Appellants. 30. Counsel for Respondent draws attention to the judgment in Dale and Carrington Investment (P) Ltd. v. P.K. Prathapan [(2005) 1 SCC 212], which held that issuing shares with the sole motive of diluting a shareholder's stake constitutes oppression. Similarly, in Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd. [(1981) 3 SCR 698], the Hon'ble Supreme Court emphasized that direct....
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....of filing of the Company Petition bearing no. 370/2010 before the Hon'ble NCLT. She has continued as promoter Director of the Company since inception. 37. The counsel submitted that through the present Appeal the Appellants have wrongly challenged the impugned order dated 07.04.2017, passed by the Hon' ble NCLT, Kolkata Bench in the company petition bearing C.P. no 370 of 2010 filed by the Respondent no. 2 herein under section 397/398 of the Companies Act, 1956, ("the Act") on the frivolous and illegal grounds and thus liable to be dismissed with hefty cost. 38. The counsel stated that Hon'ble NCLT has allowed the Petition filed by the Respondent no. 2 (Adbhut Vincom Pvt. Ltd.) herein and passed the impugned order that the actions of the majority shareholders (Respondent no. 3, Mrs. Salini Soy) were oppressive and falls under statutory violation. 39. That being the-Promoter/Director of the Company, the Respondent no. 3 being the majority shareholder, only had the right to challenge the impugned order passed by the Hon'be NCLT and as the same was not challenged by the Respondent no. 3 herein, within the statutory prescribed period, under the Act, the same at....
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.... The NCLT, in its impugned order dated 07.04.2017, ruled in favor of Respondent No. 2, holding that the share capital increase and allotment were unlawful. Consequently, the NCLT canceled the share allotments to the appellants and directed a refund of the amount paid by them. Additionally, the NCLT ordered the forced sale of Respondent No. 2's shares to Libra Retailer Pvt. Ltd., which was presented as a resolution to the ongoing dispute. 45. Aggrieved by the direction for mandatory sale to Libra Retailers Pvt. Ltd., Respondent No. 2 filed Company Appeal (AT) No. 162 of 2017 before the this Appellate Tribunal, arguing that the forced sale of its shares was beyond the relief sought and was unjustified. This Appellate Tribunal, in its order dated 11.08.2017, ruled in favor of Respondent No. 2 and set aside the forced sale, holding that such a direction was beyond the scope of the NCLT's jurisdiction and not legally tenable. This Appellate Tribunal upheld the cancellation of the appellants' share allotments, affirming that the increase in share capital and subsequent allotment was conducted in an oppressive and illegal manner, violating corporate governance norms and statutory provi....
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....956? (iii) Whether these actions on the part of the appellants, Respondent No.1 & Respondent No.3 vis-à-vis Respondent No.2 can be termed as Oppression and Mismanagement under Sections 397, 398 and 399 of the Companies Act, 1956? 51. The issues in Serial number (i) and (ii) are interlinked and they would be examined together. 52. The main contention of the appellant is that the amendments to AoA and MoA were carried out in accordance with relevant provisions of the Companies Act, 1956 and therefore the impugned order needs to be set aside by this Appellate Tribunal. 53. Per contra the contention of Respondent No.2 and Respondent No.3 is that the impugned order is a well-reasoned order passed by the Ld. NCLT and the same needs to be upheld by this Tribunal. This appeal is a waste of judicial time and the appeal needs to be dismissed with cost. 54. In this regard, we take a look at the relevant Sections of the Act relating to amendment of AoA and MoA:- Section 31. Alteration of articles by special resolution - (1) Subject to the provisions of this Act and to the conditions contained in its memorandum, a company may, by special resolution,....
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....in the memorandum; (f) to sell or dispose of the whole, or any part, of the undertaking, or of any of the undertakings, of the company; or (g) to amalgamate with any other company or body of persons. 55. We can see from the Section 31 that amendment to AoA requires a special resolution. Similarly, Section 16 (3) of the Act provides that other provisions contained in the memorandum including those relating to the appointment of a Managing Director, or Manager may be altered in the same manner as the articles of the company. Other items in memorandum which are covered in any provision of the Act can be altered in the manner provided for the same. Section 17 thereafter has listed out cases wherein special resolution is required for alteration of memorandum. Section 94 (1) prescribes the procedure for increasing the authorised share capital of the company. 56. It is clear from the aforesaid Section that the companies requiring increase in authorised share capital require an enabling provision in the AoA. In case such an enabling clause is not there in the AoA, the AoA has to be amended. Such an amendment requires a special resolution to be passed by Members of t....
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....he purpose the Authorised Capital of the company is proposed to be increased to Rs. 10 crores from the existing Rs. 4.25 crores by the creation of further equity shares. Pursuant to section 94 of The Companies Act, 1956 your approval is being sought to the resolution stated in item No.1 of the annexed notice for the increase notice for the increase in Authorized Capital. The Board recommends the resolution. None of the Directors are interested in the passing of the resolution. Item No.2: As a consequence to the proposed increase in Authorised Capital the clause V of the Memorandum of Association shall be altered to reflect the increased authorised capital. Pursuant to section 17 of the Companies Act, 1956 your approval is being sought to resolution stated in Item No.2 for altering the clause in the Memorandum of Association. The Board recommends the resolution. None of the Directors are interested in the passing of the resolution." [emphasis supplied] 58. We notice that both the agenda items proposed in the notice dated 18.02.2010 are proposed as ordinary resolution. However, in the explanatory statement below the notice i....
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.... To comply with the provisions of the Companies Act, 1956 the two sub clauses as stated in the resolution in Item no. 3(A) of the notice shall be added in clause no. 3 of the Articles of Association. Pursuant to Section 31, of the Companies Act, 1956 your approval is being sought to the proposed alteration of clause of Articles of Association. The Board recommends the resolution None of the Directors are interested in the passing of the resolution. Item no. 3(B) To avoid the necessity of changes in the Articles pursuant to change in Authorized Capital it is proposed to substitute the clause no. 5 of the Articles of Association. Your approval is being sought in terms of Section 31 of The Companies Act, 1956 to the proposed insertion of Articles of Association. The Board recommends the resolution None of the Directors are interested in the passing of the resolution. By Order of the Board For Hotel Birsa Private Limited Sd/- (Director) Place: Ranchi Date: 18th January 2010 60. This notice has been disputed by the Respondent No.2 claiming that the same has been created by the appellants and Res....
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..... The quorum being present the Chairman declared the meeting open The notice of the meeting having been circulated among members was taken as ready. INCREASE IN AUTHORISED CAPITAL-ORDINARY RESOLUTION The Chairman informed the members about the requirements of funds and the proposal to mobilize the -illegible- of shares. He then stated that the authorised capital of the company is proposed to be increased to Rs. 10,00,00,000 and requested the members to consider the same. The following resolution was proposed by Mr. Sanjay Sahu and seconded by Mr. Sunil Kumar. - Resolved that consent of the members be-illegible- is hereby - illegible- Section -illegible of The Companies Act, 1956 to increase the Authorised Capital of the company from the existing Rs. 42,500,000/- (Rupees Four Crores Twenty Five Lacs only) divided into 4,25,000 equity shares of Rs. 100/, each to Rs. 10,00,00,000/- (Rupees Ten Crores only) divided into 10,00,000 equity shares of Rs. 100/- each and Clause V of the Memorandum of Association of the company be altered as follows: In clause V of the Memorandum of Association in places where Rs. 4,25,00,000/- (Rupees Four Crores ....
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....ential that notice for any special resolution to be taken up by the members of the company is received by the Respondent No.2. In this regard, we also have a look at the Section 189 of the Act regarding ordinary and special resolution:- 189. Ordinary and special resolutions - (2) A resolution shall be a special resolution when- (a) the intention to propose the resolution as a special resolution has been duly specified in the notice calling the general meeting or other intimation given to the members of the resolution; (b) the notice required under this Act has been duly given of the general meeting; and (c) the votes cast in favour of the resolution (whether on a show of hands, or on a poll, as the case may be), by members who, being entitled so to do, vote in person, or where proxies are allowed, by proxy, are not less than three times the number of the votes, if any, cast against the resolution by members so entitled and voting. [Emphasis supplied] 68. We note that in the first notice of EoGM the resolution of amendment to MoA has been listed as ordinary resolution, even though the explanatory note lists it as special resolution ....
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....tion that this Board hereby takes note of the immediate requirement of Rs. 90,00,000 (Ninety Lacs only) for working capital and the suggestion to seize the same by issuing shares. Resolved further that the consent of the Board be and is hereby given for issuing 90000 equity shares of Rs. 100/- each at par by way of right shares to the existing shareholders in the ratio of their present holding of equity shares and any one of the director be authorized to determine the number of shares to be offered to the respective shareholders. Resolved that the shareholders be given 20 days time to accept or reject the offer with a stipulation that non-receipt of any communication within the given time deemed as rejection of offer and in the event of rejection the Board shall have the power to issue the share to any interested person/entity and for the purpose the draft of the letter of offer, placed in the meeting be and is hereby approved and that any one of the director be and is hereby authorized to sign the letter and arrange dispatch of the same to the shareholders." 71. Two things emerged from the above. If the aforesaid board meeting was held on the 18.02.2010, then ....
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...." We find no mention about the right of renunciation being given to existing members in this letter. 73. The modalities for further issuance of share capital of a limited company are governed by Section 81 of the Act which is extracted below: Section 81 Further issue of Capital - (1) Where at any time after the expiry of two years 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 capital of the company by allotment of further shares, then- (a) Such further shares shall be offered to the persons who, at the date of the offer, are holders of the equity shares of the company, in proportion, as nearly as circumstances admit, to the capital paid-up on those shares at that date; (b) The offer aforesaid shall be made by notice specifying the number of shares offered and limiting a time not being less than fifteen days from the date of the offer within which the offer, if not accepted, will be deemed to have been declined; (c) Unless the articles of the Company otherw....
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....ht Automobiles Ltd., [2016 SCC OnLine Del 1256] to contend that Adbhut Vincom's non-participation in the rights issue indicated disinterest, justifying the allotment of shares. However, the Judgment supra applies only when shareholders voluntarily choose not to subscribe. In the instant case, Adbhut Vincom was prevented from participating due to non- receipt of letter, the seizure of their documents by the Income Tax and the company's refusal to issue duplicate share certificates. It is also seen that the notice did not provide for renunciation of rights which is mandatory as per Section 81(1)(c) of The Act. The absence of a fair opportunity to participate in the rights issue makes this judgment inapplicable to the present situation. (iii) The appellant has argued that there is collusion among Respondent No. 2/Adbhut Vincom, Sh. Prem Rajesh Soy and Smt. Salini Soy/ Respondent No.3 in challenging the rights issue with fraudulent intent. In this regard, they have cited Hon'ble Supreme Court's Judgment in Shri Shashi Kumar v. Dharam Pal Sharma & Anr., [1981 SCC OnLine Del 14]. However, the Judgment supra establishes that collusion must be proven with direct evidence of fraudu....
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.... Articles of Association (AoA), (ii) issuing 2,10,000 shares only to the appellants, which reduced Respondent No. 2's stake from 49% to 32.75%, (iii) failing to follow Section 81 of the Companies Act, 1956, which requires new shares to be first offered to existing shareholders, and also giving a right of renunciation to existing shareholders; and (iv) multiple procedural violations, including issuing two conflicting EoGM notices, backdating resolutions, and failing to properly notify Respondent No. 2. These actions show that the share allotment was not conducted in a fair and legal manner. 80. The increase in share capital was not carried out in accordance with procedure laid down by law. Section 94(1) of the Companies Act, 1956, states that a company can increase its share capital only if the AoA allows it. However, the company's AoA did not have any such provision. Under Section 31, the company should have first amended its AoA by passing a special resolution. The failure to do this makes the share capital increase invalid. Also, the first notice for the Extraordinary General Meeting (EoGM) dated 18.01.2010, which proposed this change, did not mention any amendment to the AoA,....
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....ed that changing a shareholder's stake unfairly without following due process is a form of oppression, and that is exactly what happened in this case. 84. The issue of whether the appellants are entitled to interest on the money paid for the cancelled shares is covered by Reliance Cellulose Products Ltd. v. ONGC Ltd. [(2018) 9 SCC 266], wherein the Hon'ble Supreme Court held that interest cannot be awarded when the claim itself arises from wrongful conduct. The appellants are seeking interest on the Rs. 2.1 crore they paid for the cancelled shares. However, since the allotments have been declared illegal by NCLT, they cannot claim compensation for an invalid transaction. Following Reliance Cellulose, the respondent argues that granting interest to the appellants would reward their wrongful conduct, which is legally unsustainable. Hon'ble SC in Ashok Kapil v. Sana Ullah [(1996) 6 SCC 342] held that a party cannot claim financial benefits arising from its own wrongful acts. 85. In the instant case, the appellants, in collusion with Shri Prem Rajesh Soy (Deceased Promoter-Director) and Respondent No. 3 acquired 2,10,000 shares of the Respondent No.1 in violation of laid down pro....
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....any Words importing the singular number only includethe plural number and "vice versa" Document 2 Words importing persons include corporations. 2. Save as provided hereinafter , the Regulations contained in Table 'A' in the first Schedule (hereinafter referred to as Table 'A ) to the Act apply to the Company. 3. Regulations 36 to 40, 64 & 66 of Table 'A' shall not apply to the company and clauses hereinafter contained shall be applicable. 4 The company is a Private Company within the meaning of sections 2(35) and 3(1)(iii) of the Act and accordingly :- 1) No invitation shail be issued to the public to subscribe for any share, or debenture of the company. 2) The number of members of the Company (exclusive of persons in the employee of the company and of person who, having been formerly in the employment of the company were its members while in that employment, and have continued to be members after the employment ceased) shall be limited to fifty, provided' that, for the purposes of this provision when two or more persons Jointly hold one or more shares in the company, they shall be treniod as a single member. 3) The right to transfer share in the company is....