2014 (9) TMI 1279 - Board - Companies Law

Preferential allotment - Under valuation of shares under Section 397/398 proceedings - major thrust of the submissions of the petitioners is based on the concept of equal shareholding of the parties which has been claimed to exist since the inception of the company - HELD THAT - The original partnership for running Glamor Polish Industries (GPI) which was subsequently taken over by the respondent company was not set up by joint participation of Late father of petitioner No. 1 and Late father of respondent No. 2. Further the father of petitioner No. 1 became director in the company only on 14.10.1958 while the company was established in 1950. No further evidence has been brought on record by the petitioners to justify setting of the company jointly by the Late father of petitioner No. 1 and Late father of respondent No. 2. Therefore the contentions of the petitioners that the company has been run on quasi-partnership principle having equal shareholding between the petitioners group and the respondents group are not acceptable. Allotment of shares - HELD THAT - There is no loss of negative control of the petitioners group as a result of impugned allotment. The case of Clemens is distinguishable because in that case there were only two shareholders and a closely held family company between an aunt (55%) and a niece (45%) unlike the present case where there are numbers of shareholders and also directors some of whom are outsiders. It is also pertinent to mention that the Articles of Association in the Clemens case contained a negative covenant that provided non-transfer of shares unless a family member declines to accept the same which is not the case in the instant petition. Thus the relevant case is of no assistance to the petitioners. Time limitation - HELD THAT - The petitioners did not challenge the impugned allotment within the limitation period as prescribed in law which is three years. In the case of ABP 2008 (1) TMI 967 - COMPANY LAW BOARD it has been held that wrongful allotment of shares can have continuous effect so as to support a case of this nature. However it is an admitted position in the instant case that post 1995 allotment petitioner No. 1 and petitioner No. 2 have continuously accepted dividends based on their changed shareholdings without any opposition and thus have acquiesced to the same and accordingly are now estopped from raising any contention to the contrary - the petitioners have failed to make out any case against the rights issue of shares made in 1995 and therefore no interference is called for on this aspect. Preferential allotment of 4, 00, 000 equity shares of 10/- each in consequence of an EoGM dated 21.08.2009 for cash at a premium of 5/- per share - HELD THAT - With the evidence placed on records it can be safely presumed that notice was received by petitioner No. 1 who chose not to attend as has been his practice of not attending any general meeting since 1999 - there is no plausible reason available to the petitioner to contend that notice was not received in 2009. Further emphasis has been placed by the respondents on the fact that majority of other shareholders have received such notices under UCP and had attended the meetings. Allotment of 2, 00, 000 equity shares made on 23.03.2011 - HELD THAT - The notices for convening of EoGM dated 23.03.2011 were duly received by petitioner No. 1 and petitioner No. 2 and the explanatory statements were also sent along with such notices. Special Resolution under Section 81(1A) of the Companies Act 1956 was adopted in EoGM held on 23.03.2011 and the minutes in this regard clearly show that special resolutions were passed unanimously. Petitioner No. 1 and petitioner No. 2 did not attend such EoGM in spite of receipt of notices and did not place any objection to the passing of resolutions in the said meeting. Valuation of shares arrived at by the company - HELD THAT - Since the special resolutions have been passed by requisite number of shareholders and there has been strict compliance of Unlisted Public Companies (Preferential Allotment) Rules 2013 duly certified by statutory auditors towards the allotment of shares and in absence of any ulterior motive which can be imputed on the respondent group of shareholders no interference is called for towards preferential allotment of shares as per EoGM dated 23.03.2011. Issue of bonus shares - HELD THAT - There cannot be any complaint with regard to bonus shares as it was issued to all shareholders including petitioners. The bonus shares appear to have been issued in accordance with law and no ground has been made out by petitioners to show that issue of such bonus shares are in violation of the provisions of the Companies Act 1956. Accordingly no Interference is called for against such issue of bonus shares and the ground raised by the petitioners in this respect fails. Allegation of lack of fiduciary duty on the part of the respondents to acquire a BMW car costing 51 lakhs when the average profit of the company was 35.06 lakhs per year - HELD THAT - The necessary explanation has been provided by the respondents as recorded in para 3 (xxiv) of this order and there are no irregularity or defect in acquiring such BMW car for official use in running the business affairs of the company and there has been no financial impropriety or lack of probity in such acquisition of car resulting in alleged mismanagement of the company. On determination of the value in case the respondent group is willing to purchase the shares held by the petitioner group they should pay the consideration within four weeks thereafter. Otherwise the respondent company will purchase the shares and reduce the share capital of the company to the extent of the face value of the shares. On receipt of consideration the petitioners shall hand over the shares along with transfer deeds duly signed for further necessary action in accordance with law. After carrying out the mutual obligations cast on the petitioners and respondents as per this order an affidavit of compliance shall be drawn by both the parties within 7 days of such compliance and the same should be produced before the Bench Officer for taking the same on record. The statutory auditor after complying with the directions contained in this order shall draw an affidavit to the said effect and furnish the same to the Bench Officer within 7 days of such compliance for keeping the same on record also. Petition disposed off.

Summary

Issues Involved:

1. Alleged wrongful rejection of share applications in 1995.
2. Removal of Petitioner No. 1 as Whole Time Director in 2003.
3. Alleged wrongful and illegal allotment of shares in 2009.
4. Alleged mismanagement and diversion of company resources.
5. Alleged wrongful and illegal allotment of shares in 2011.
6. Alleged misuse of company funds for personal expenses.
7. Alleged non-disclosure of related party transactions.
8. Alleged improper issuance of bonus shares in 2011.
9. Alleged undervaluation of shares.

Issue-wise Detailed Analysis:

1. Alleged wrongful rejection of share applications in 1995:
The petitioners argued that their share applications were wrongfully rejected in 1995, reducing their shareholding from 33% to 22%, while the respondents' shareholding increased from 33% to 49%. The rejection was claimed to be on flimsy grounds, such as the second holder's name being mentioned and the absence of a PAN number. The petitioners claimed this was a device to reduce their shareholding into a minority. However, the respondents contended that the applications were defective, and the rejection was legitimate. The court found that the petitioners had acquiesced to the shareholding changes by accepting dividends without protest and thus were estopped from challenging the 1995 allotment.

2. Removal of Petitioner No. 1 as Whole Time Director in 2003:
Petitioner No. 1 was removed as Whole Time Director in 2003, allegedly without valid reasons and without an opportunity to explain his absence from board meetings. The respondents argued that the removal was due to Petitioner No. 1's failure to attend five consecutive board meetings, invoking Section 283(1)(g) of the Companies Act, 1956. The court found that the removal was in accordance with the law and did not interfere with the decision.

3. Alleged wrongful and illegal allotment of shares in 2009:
The petitioners challenged the allotment of 4,00,000 shares in 2009, alleging that no special resolution was passed, no notice of the EoGM was given, and the allotment was made to convert the petitioners into a hopeless minority. The respondents contended that the allotment was done in compliance with Section 81(1A) of the Companies Act, 1956, and notices were sent under Certificate of Posting. The court found that the petitioners had not attended general meetings since 1999 and had not proven that they did not receive the notices. The court upheld the 2009 allotment.

4. Alleged mismanagement and diversion of company resources:
The petitioners alleged that the respondents diverted business to another company, Waxpol Hotel & Resorts Private Limited (WHRL), and misused company resources for personal gain. The respondents contended that WHRL was marketing the company's resort and earning a commission, with no diversion of business. The court found no merit in the allegations, as WHRL did not own any hotel or resort, and there was no evidence of diversion of business.

5. Alleged wrongful and illegal allotment of shares in 2011:
The petitioners challenged the allotment of 2,00,000 shares in 2011, alleging that the explanatory statement regarding a joint venture in Sri Lanka was inadequate. The respondents argued that the allotment was made in compliance with the Companies Act, 1956, and the petitioners had received notices but did not attend the EoGM. The court found that the special resolutions were passed unanimously, and the petitioners had not objected to the resolutions. The court upheld the 2011 allotment.

6. Alleged misuse of company funds for personal expenses:
The petitioners alleged that the respondents used company funds for personal expenses, including the purchase of a BMW car and financing the education of the respondents' children. The respondents provided explanations for the expenses, including financing the car through a bank loan. The court directed the statutory auditor to examine the books of accounts to verify the allegations and quantify any inadmissible expenses.

7. Alleged non-disclosure of related party transactions:
The petitioners alleged that related party transactions were not fully disclosed in the annual report and filings before the RoC. The court did not find sufficient evidence to support these allegations and did not interfere with the respondents' actions.

8. Alleged improper issuance of bonus shares in 2011:
The petitioners challenged the issuance of 1,81,727 bonus shares in 2011, alleging that it served no purpose towards the benefit of the company. The respondents argued that the bonus shares were issued to celebrate the company's platinum jubilee and were approved by the shareholders. The court found no irregularity in the issuance of bonus shares and upheld the decision.

9. Alleged undervaluation of shares:
The petitioners contended that the shares were undervalued during the allotments in 2009 and 2011. The respondents argued that the valuation was done by statutory auditors based on accepted principles. The court found that the valuation was in compliance with the Unlisted Public Companies (Preferential Allotment) Rules, 2013, and upheld the allotments.

Conclusion:
The court directed the respondents to purchase the shares held by the petitioners at a fair value determined by an independent valuer, based on the Balance Sheet as of 31st March 2013. The valuation report would be binding on both parties, and the respondents were to pay the consideration within four weeks of the determination. The statutory auditor was directed to examine the books of accounts for any inadmissible expenses and ensure compliance with the court's order. The petition was disposed of with no order as to costs.