2014 (6) TMI 578 - Board - Companies Law

Appointment of receiver - Validity of sale of shares - whether the alleged allotment of 50,00,000 shares made in the Board Meeting of the Company purportedly held on 21/05/2013 is prima facie non-est, illegal and liable to be cancelled for the reasons stated hereinafter - Held that - Ajay Singh Group was under an obligation to take consent of IL & FS Group and/ or obtain the affirmative vote of their directors before making such an allotment. Furthermore, taking into consideration the reasons pleaded by the Petitioners challenging the validity of the Board Meeting purportedly held on 21/05/2013 prima facie, I find that the said Board Meeting was not held by following due process of law - while granting an ad-interim injunction order, the Court is required to examine not only the prima facie case , but also the other factors, like balance of convenience and question of irreparable loss . Admittedly, IL & FS Group has made huge financial exposure in the Company and its interest is at stake now after losing the Appeal in the DRAT. I am, therefore, of the view that in case, the proposed settlement does not get through by the shareholders of the Company in the EOGM, that may be held by the Company for the purpose, the Petitioners may suffer irreparable loss as compared to the Ajay Singh Group. Therefore, in my considered view, both the factors are found in favour of the Petitioners. - Decided in favour of applicants.

Issues Involved:

1. Legality of the allotment of 50,000,000 Class C equity shares.
2. Validity of the Board Meeting on 21/05/2013.
3. Compliance with Share Subscription and Shareholders Agreements.
4. Interim reliefs sought by the Petitioners.
5. Balance of convenience and irreparable loss.

Detailed Analysis:

1. Legality of the Allotment of 50,000,000 Class C Equity Shares:

The Petitioners, Deora Group and IL & FS Group, challenged the allotment of 50,000,000 Class C equity shares to M/s Cross Links, alleging it was non-est, illegal, and void. They argued that the shares were allotted at a nominal value of Rs. 1/- per share, significantly lower than the rate at which shares were allotted to other investors, violating the provisions of the Companies Act and the Share Subscription and Shareholders Agreements.

2. Validity of the Board Meeting on 21/05/2013:

The Petitioners contended that the Board Meeting held on 21/05/2013, where the shares were purportedly allotted, was illegal. They argued that the agenda for the meeting did not include the allotment of shares to M/s Cross Links, and the meeting was conducted by directors who had ceased to hold office due to related party transactions without Board approval. Additionally, the meeting appointed additional directors illegally and allotted shares to M/s Cross Links at a substantially lower rate.

3. Compliance with Share Subscription and Shareholders Agreements:

The Petitioners cited violations of specific clauses in the Share Subscription and Shareholders Agreements dated 25/09/2007 and 29/12/2008. These agreements included provisions for valuation protection and supermajority items, requiring prior written consent or affirmative vote from the investors before any equity allotment or related party transactions. The Petitioners argued that these provisions were not followed, rendering the allotment invalid.

4. Interim Reliefs Sought by the Petitioners:

The Petitioners sought interim relief to stay the allotment of the 50,000,000 Class C equity shares and restrain M/s Cross Links from exercising any rights, including voting rights, on the basis of the impugned shares. They argued that the allotment was under challenge and should be stayed until the validity of the shares was determined by the Board.

5. Balance of Convenience and Irreparable Loss:

The Court examined the balance of convenience and the potential for irreparable loss. It noted that IL & FS Group had significant financial exposure in the Company and faced a risk of irreparable loss if the proposed settlement with ARCIL did not proceed due to the disputed shares. The Court found that the balance of convenience favored the Petitioners, as their interests were at greater risk compared to the Ajay Singh Group.

Conclusion:

The Court held that the Petitioners had established a prima facie case for the grant of interim reliefs. It directed that while the cancellation of the allotment of shares would be considered in the final order, M/s Cross Links was restrained from exercising any rights, including voting rights, on the basis of the impugned shares at any EOGM convened for the purpose of settlement with ARCIL. The interim reliefs were disposed of accordingly, and the matter was scheduled for final hearing on April 24, 2014.

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