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2015 (4) TMI 1053 - HC - Companies LawWill purportedly executed by demised - suppression and prevarication of facts - Held that - Under Section 8 of the Hindu Succession Act, 1956, the property of a male Hindu dying intestate shall devolve firstly upon Class-I heirs. Under Section 9 thereof, all the Class-I heirs shall take simultaneously to the exclusion of all other heirs. Thus, pending adjudication of the suit filed by appellant No.1, it must be assumed that appellant No.1 and respondent Nos.2 to 4 are entitled to 1/4th share each in 4,00,961 shares in the company held by Late Dr. Vijay Kumar Datla. Thus, for the present, pending adjudication of the suit filed by appellant No.1, she and respondent Nos.2 to 4, must be treated as having more or less equal shares. Though there appear to exist simmering differences between appellant No.1 on the one side and respondent Nos.2 to 4 on the other, considering the fact that they are no other than mother and daughters who can sink their differences in their own interest and in the interest of the company, it is desirable that only these persons manage its affairs, lest any outsiders interference may lead to the company which is stated to be on profit making spree getting derailed and losing its rhythm. Therefore, instead of appointing an outsider as the administrator/receiver, keeping in view the interests of the company as of paramount importance, the following arrangement is made 1. An adhoc Board of Directors is constituted with appellant No.1 as the Executive Director and respondent Nos.2 to 4 as the Directors of respondent No.1-company. Appellant No.1 shall discharge the functions of the Managing Director of the company. 2. The adhoc Board is responsible for the day-to-day functioning of the company and shall carry out the statutory obligations under the Act. 3. All the decisions shall be taken by the Board based on unanimity and consensus. If consensus on any aspect relating to the day-day-day affairs of the company is eluded among the Board members, appellant No.1, as the Managing Director, shall approach the Company Law Board for appropriate directions. 4. The Board shall not transfer or deal with 81% shares held by Late Dr. Vijay Kumar Datla in any manner till the dispute on the issue of succession is adjudicated in O.S.No.184 of 2014. 5. The Board shall not take any major policy decisions unless there is unanimity among all its members and without the prior approval of the Company Law Board. 6. The adhoc Board shall continue to function till O.S.No.184 of 2014 is disposed of and appropriate orders in C.P.No.36 of 2014 are passed thereafter. 7. The Company Law Board shall keep C.P.No.36 of 2014 pending till O.S.No.184 of 2014 is finally disposed of. The Company Appeal is accordingly allowed to the extent indicated above. As a sequel to the disposal of the Company Appeal, Company Application Nos.1331 & 1332 of 2014 and Company Application Nos.7 & 8 of 2015 are disposed of as infructuous.
Issues Involved:
1. Whether respondent No. 5 has ceased to be a Director of respondent No. 1-company w.e.f. 6-4-2013? 2. Whether meetings dated 9-4-2013, 10-4-2013, and 11-4-2013 of the Board of Directors were validly held? 3. Whether respondent Nos. 2 to 4 were validly appointed as the Directors of respondent No. 1-company? 4. Whether the transfer of 81% shareholding in favor of respondent No. 2 is valid? 5. Whether appellant No. 1 has recognized the reconstituted Board of Directors by her subsequent conduct, and if so, whether she is not entitled in law to challenge the appointment of respondent Nos. 2 to 4 as Directors and respondent No. 2 as the Managing Director and the action of the Board of Directors in transferring 81% shareholding in favor of respondent No. 2? 6. Whether the Annual General Meeting, dated 18-12-2013 was validly held and the resolutions passed therein cure the defects, if any, in the decisions taken in the Board meetings dated 9-4-2013, 10-4-2013, and 11-4-2013? 7. Whether the acts done by the Board on 9-4-2013, 10-4-2013, and 11-4-2013 are saved by Section 290 of the Act? Detailed Analysis: Re Point No. 1: Respondent No. 5, G.V. Rao, addressed a resignation letter to the Board on 6-4-2013, expressing his wish to relinquish his role as Director "with immediate effect." According to Article 129(m) of the Articles of Association, the office of a Director becomes vacant once a Director sends a resignation notice in writing to the company. The resignation does not require acceptance to take effect. Consequently, respondent No. 5 ceased to be a Director from 6-4-2013. His subsequent letter on 9-4-2013 to withdraw the resignation was invalid as it was not accepted by the Board. Re Point Nos. 2 to 4: With the resignation of respondent No. 5, the number of Directors fell below the minimum required under Section 252(2) of the Act. The purported Board meetings on 9-4-2013, 10-4-2013, and 11-4-2013 were held without quorum and were thus invalid. Consequently, the appointments of respondent Nos. 2 to 4 as Directors and the transfer of 81% shares to respondent No. 2 were illegal. The participation of interested Directors in the meeting on 10-4-2013 violated Section 300 of the Act. Additionally, the transfer of shares did not comply with Article 70 of the Articles of Association, which requires the production of original share certificates. Re Point No. 5: Appellant No. 1's subsequent conduct, including letters dated 15-4-2013, 24-5-2013, 19-10-2013, and 20-10-2013, and her participation in the Board meeting on 22-8-2013, did not constitute recognition of the reconstituted Board. The letter dated 15-4-2013 is subject to controversy, and its validity cannot be determined at this stage. Appellant No. 1 consistently opposed the actions of respondent Nos. 2 to 5, indicating her non-acceptance of the reconstituted Board. Re Point No. 6: The Annual General Meeting (AGM) held on 18-12-2013 was not validly convened, as the appointments of respondent Nos. 2 to 4 as Directors were illegal. The respondents failed to provide notice or minutes of the AGM. Therefore, the AGM did not cure the defects in the decisions taken in the Board meetings on 9-4-2013, 10-4-2013, and 11-4-2013. The doctrine of necessity cannot justify the respondents' actions, as they had alternative legal remedies under Sections 169(4), 169(7), and 186 of the Act. Re Point No. 7: Section 290 of the Act, which validates acts done by a person as a Director despite subsequent discovery of invalid appointment, does not apply to cases of total absence of appointment or fraudulent usurpation of authority. The benefit of Section 290 is generally available to third parties dealing with the company in good faith, not to Directors who usurp their office. Conclusion: The Court found all the issues against the respondents. The appointments of respondent Nos. 2 to 4 as Directors and the transfer of 81% shares to respondent No. 2 were illegal. The AGM held on 18-12-2013 did not cure the defects in the Board meetings. The doctrine of necessity does not apply, and Section 290 of the Act does not validate the respondents' actions. The Court constituted an ad hoc Board of Directors with appellant No. 1 as the Executive Director and respondent Nos. 2 to 4 as Directors, responsible for the day-to-day functioning of the company until the civil suit is adjudicated.
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