2018 (7) TMI 2105 - Tri - Companies Law

Conversion of Private Company into Public Company - illegal and fraudulent allotment of shares - HELD THAT - In terms of the reliefs sought by the Petitioners the rights issues ought to have been made by the Company to all the existing shareholders at the relevant points of time. In this case the Company has not intimated or gave any chance to the Petitioners to acquire the shares at the value for which it was offered to the Respondents - In this case the Respondents have not denied this fact but have stated that since the Petitioners were interested in exiting the Company it was considered that they will not be interested in subscribing to the rights issue of the Company. The mere fact that the Petitioners had intent to exit the Company is not a ground for denying their right to subscribe to additional shares in proportion to their shareholdings vis-a-vis that of the total paid-up capital of the Company. The Tribunal hereby cancels the allotment of shares made on 09.04.2007 and 27.09.2010 as being in violation of provisions of section 81 of the Companies Act, 1956 - the Company may refund the amount on account of the additional issue of shares to the 2nd, 4th, 5th, 6th, and 7th Respondents made on 07.04.2007 and 27.09.2010 and accordingly rectify the register of members after making the refund to the concerned Respondents. Petition disposed off.

Summary

Issues Involved:
1. Legality of share allotments in 2007 and 2010.
2. Compliance with the Articles of Association and Companies Act, 1956.
3. Rights of existing shareholders to subscribe to new shares.
4. Validity of Extraordinary General Meetings (EGMs) and resolutions passed.
5. Rectification of the register of members.

Detailed Analysis:

1. Legality of Share Allotments in 2007 and 2010:
The Petitioners argued that the share allotments made on 09.04.2007 and 27.09.2010 were illegal and fraudulent. They claimed these allotments were done without their knowledge and in violation of the Articles of Association and the Companies Act, 1956. The Tribunal found that the company failed to notify the Petitioners or give them the opportunity to subscribe to the shares, which constituted a violation of Section 81 of the Companies Act, 1956. Consequently, the Tribunal canceled the allotments made on these dates.

2. Compliance with the Articles of Association and Companies Act, 1956:
The Petitioners contended that the company did not comply with its Articles of Association, particularly Section 46(1)(a), which mandates offering new shares to existing shareholders first. The Tribunal noted that the company had not followed the required procedures and had not obtained the necessary audit certificates as per the Unlisted Public Companies (Preferential Allotment) Rules, 2003. This non-compliance further invalidated the share allotments.

3. Rights of Existing Shareholders to Subscribe to New Shares:
The Petitioners argued that they were deprived of their right to subscribe to new shares, which were instead allotted to the Respondents at par value. The Tribunal agreed, stating that the Petitioners' intent to exit the company did not justify denying their right to subscribe to additional shares. The Tribunal emphasized that the rights issue should have been offered to all existing shareholders.

4. Validity of Extraordinary General Meetings (EGMs) and Resolutions Passed:
The Petitioners claimed that the EGMs held on 20.02.2006 and other dates were fabricated and that no notices were sent to them. The Tribunal found inconsistencies in the records, such as the delayed filing of Form 23 for the EGM dated 20.02.2006, which was filed only on 08.06.2010. This delay indicated that the proceedings were concocted, and the resolutions passed were not valid.

5. Rectification of the Register of Members:
The Petitioners sought the rectification of the company's register of members to reflect the cancellation of the illegal share allotments. The Tribunal ordered the company to refund the amounts related to the additional issue of shares to the Respondents and rectify the register of members accordingly. This rectification would ensure that the shareholding structure accurately reflected the legitimate shareholdings.

Conclusion:
The Tribunal concluded that the share allotments made on 09.04.2007 and 27.09.2010 were in violation of Section 81 of the Companies Act, 1956, and the company's Articles of Association. The Tribunal canceled these allotments and directed the company to refund the amounts to the Respondents and rectify the register of members. Additionally, the Tribunal ordered a valuation of the company's shares to determine their market value and facilitate the exit of the Petitioners from the company. The case, TCP 96/2016 (Old CP No.42/2012), was disposed of with no order as to costs.