2017 (6) TMI 26 - Tri - Companies Law

Oppression and mismanagement - Invoking power of the NCLT to call for meetings, rectification of the register of members and investigation into the affairs of the company respectively - Held that - The petition is allowed. In the light of the above contentions, it is therefore concluded that the acts of the Respondents amount to oppression against the Petitioner. Therefore, it is directed that the Petitioner s shareholding is reinstated to before the resolution for increase in the authorised capital was passed on 28th March, 2014. In addition to this, the share transfer of 31.11% shareholding in the Company, made to R12 is reversed as the same was done without the approval of the Board in a meeting of 26th July, 2014 for which no notice was served upon the Petitioner as well. As a consequence, R13, R15 and R16 are hereby directed to refund the money in lieu of the transfer of the aforementioned shares to R12. Moreover, it is directed that the appointments of R18 to R21 as additional directors be reversed as the same was done without the approval of the Board and the notices for the meetings held on 15th July, 2014 and 26th July, 2014 were never served upon the Petitioners. The Company is directed to hold an AGM within 3 months from the date of Order. Also, an exit option is hereby given to both the Petitioners and the Respondents with a preference to given to the Petitioners for exiting the Company. Preliminary decree is being passed in the matter the present petition for valuation of main business by an independent valuer. Both the groups of shareholders are being directed to give the name of an independent valuer through consensus within seven days from the date of order, failing which both the groups will have the option to give names of three independent valuers within one week thereafter, so that the Tribunal may issue order to the valuer for valuation of the aforesaid company and report for valuation may be called within three months and expenditure of independent valuer will be borne by both the Petitioners and Respondents in equal proportion. Based on the current valuation by the registered valuer, either of the parties may then sell its shares to the other that it holds in the Company and subsequently exit the Company within three months after valuation, with a preference to be given to the Petitioner. Parties are to bear their own costs.

Summary

Issues Involved:
1. Legality of the transfer of shares to R12 by R13, R15, and R16.
2. Legality of the appointment of R18 to R21 as additional directors.
3. Legality of the increase in the authorized share capital on 28th March 2014.
4. Allegations of oppression and mismanagement by the Respondents.

Issue-wise Detailed Analysis:

1. Legality of the Transfer of Shares to R12:
The transfer of 31.11% of the shareholding to R12 by R13, R15, and R16 was deemed illegal. The Articles of Association stipulated that no shares shall be transferred to a non-member without offering them to existing members at a fair value. The transfer notice was not given to the company, and no offer was made to the Petitioners. The transfer was not approved by the Board of Directors, making it invalid and deserving reversal.

2. Legality of the Appointment of R18 to R21 as Additional Directors:
The appointments of R18 to R21 as additional directors on 15th July 2014 and 26th July 2014 were found to be illegal. The Petitioners, despite being majority shareholders, were not notified of these meetings. The appointments were made without the Petitioners' knowledge or participation, violating the statutory provisions and the Articles of Association. Consequently, these appointments were directed to be reversed.

3. Legality of the Increase in Authorized Share Capital:
The increase in authorized share capital from ?2 Crores to ?2 Crores 10 Lakhs on 28th March 2014 was declared illegal. No notice was served to the Petitioners for the meeting where this resolution was passed. The compliance certificate indicated that no Extraordinary General Meeting (EoGM) was held during the financial year ending 31st March 2014, contradicting the claim of such a meeting. The alteration of the Memorandum of Association without the Petitioners' consent violated the Companies Act, 1956, making the resolution invalid.

4. Allegations of Oppression and Mismanagement:
The Respondents' actions, including not serving notices of meetings, appointing new nominees to the Board, and transferring shares to a non-member, were found to be oppressive. The Petitioners were denied access to books and records, and meetings were held without proper notice, violating statutory provisions. The diversion of funds and business to a rival company (R17) further substantiated the claims of mismanagement. The Tribunal concluded that the Respondents' conduct amounted to oppression against the Petitioners.

Conclusion and Order:
The Tribunal allowed the petition, declaring the Respondents' actions as oppressive. The Petitioners' shareholding was reinstated to its status before the unauthorized capital increase. The share transfer to R12 was reversed, and R13, R15, and R16 were directed to refund the money. The appointments of R18 to R21 as additional directors were annulled. The company was ordered to hold an AGM within three months.

An exit option was provided to both parties, with a preference for the Petitioners to exit. A preliminary decree was issued for the valuation of the company's main business by an independent valuer, with costs shared equally by both parties. Based on this valuation, either party could sell its shares to the other and exit the company within three months, with a preference given to the Petitioners. Parties were to bear their own costs.