2018 (2) TMI 1452 - AT - Companies Law

Comply with the arbitration award - Violation of the provisions of the Companies Act, 2013 - whether the Company can convert a loan into equity shares if at the time of raising the money, the company had not passed special resolution? - removal of the Petitioners as Directors - Held that - The arguments of the learned counsel for the Appellants is that this Section could not have been applied and if at all Section 81 of the Old Act would be relevant, as according to him, when the loans were raised, at that time the New Act was not in force. We find that there is no substance in this argument. When the New Act is in force and conversion of loan has to be done, the conversion would be permissible only as per the new provisions. In view of sub-Section (3) of Section 62 when the question of issue of further share capital is taken up, conversion of loan into share capital would be permissible provided there was special resolution passed by the company in General Meeting which granted option as a term attached to the loan raised by the Company permitting conversion of such loan into shares of the company. It cannot be that moment a document is executed, the party goes and takes over the Companies and starts doing whatever he likes without following any procedure for transfer of shares, administration etc. Till the Petitioners resigned as Directors or were removed under established procedure under the Companies Act, or in execution, it will not be permissible not to send any notices to them and declare that they have not attended meetings and they discontinued to be Directors under Section 167 of the New Act. The Appellants themselves in the NCLT relied on Section 167 to claim that the Original Petitioners were not Directors. As such, they were bound to show that duly notified and called meetings were not attended to so as to attract Section 167 of the New Act. Original Petitioners have filed an Execution Petition before the High Court of Calcutta to give effect to the award. Even the Appellant No. 1 has filed application under Section 17 of the Arbitration Act as has been referred above. It would be more appropriate for the parties to cooperate with each other and comply with the Arbitration Award as has been passed between the signatory parties and do the necessary legal compliances as per the Arbitration Award for implementation/execution of the same. If it is done mutually, execution would not be necessary, otherwise the aggrieved parties would naturally have the option of the execution of the award. Till that time, it is necessary for the parties not to commit such acts as would attract violation of the provisions of the Companies Act, 2013. For such reasons, we are unable to interfere with the impugned order. We decline to interfere with the impugned order. The appeal is disposed of accordingly. We, however, make it clear that the Appellant No. 1 and Respondents are free to either mutually comply with the Arbitral Award or take steps permissible, under provisions of the Companies Act, 2013 or resort to Execution under the Arbitration and Conciliation Act, 1996.

Summary

Issues Involved:
1. Validity of the allotment of 26,000 equity shares.
2. Legality of the removal of Original Petitioners as Directors.
3. Effect of the arbitration award on the disputes.
4. Compliance with statutory provisions under the Companies Act, 2013.

Issue-wise Detailed Analysis:

1. Validity of the Allotment of 26,000 Equity Shares:
The NCLT cancelled the allotment of 26,000 equity shares made in favor of Original Respondent No. 2 (Appellant No. 1), citing non-compliance with Section 62(3) of the Companies Act, 2013. The NCLT observed that there was no evidence of a special resolution being passed at the time of raising the loan, which is a prerequisite for converting loans into equity shares. The Appellants argued that Section 81 of the Companies Act, 1956 should apply since the loans were raised before the new Act came into force, but this argument was dismissed. The Tribunal upheld the cancellation, emphasizing the need for compliance with the current statutory provisions.

2. Legality of the Removal of Original Petitioners as Directors:
The NCLT found the removal of Original Petitioners as Directors invalid due to the lack of evidence showing that statutory notices were issued for the Board meetings where their removal was decided. The Tribunal highlighted that under Section 167(1)(b) of the Companies Act, 2013, a Director vacates office if they fail to attend meetings for 12 months without leave of absence. However, the meetings must be validly held with proper notice. The Appellants failed to prove that such notices were served, leading to the reinstatement of the Original Petitioners as Directors.

3. Effect of the Arbitration Award on the Disputes:
The Appellants contended that the arbitration award, which allocated the company to Original Respondent No. 2, should preclude the Original Petitioners from filing the Company Petition. The Tribunal noted that while the arbitration award decided the division of assets, it did not automatically effectuate the transfer of shares or directorships under the Companies Act. The award required further compliance with legal procedures for its implementation. The Tribunal emphasized that until such compliance is achieved, the Original Petitioners retain their rights and positions within the company.

4. Compliance with Statutory Provisions under the Companies Act, 2013:
The Tribunal stressed the necessity for all parties to adhere to the statutory requirements of the Companies Act, 2013, for any changes in shareholding or directorship to be legally valid. The arbitration award, while binding, does not override the need for procedural compliance under the Act. The Tribunal encouraged the parties to mutually cooperate to implement the award or seek execution through legal channels to avoid violations of the Companies Act.

Conclusion:
The appeal was dismissed, and the NCLT's order was upheld. The parties were advised to either mutually comply with the arbitration award or pursue execution through the appropriate legal processes. The Tribunal declined to interfere with the NCLT's findings on the invalidity of the share allotment and the improper removal of Directors, emphasizing the importance of following statutory procedures under the Companies Act, 2013.