2018 (7) TMI 459 - AT - Companies Law

Oppression and mismanagement - ineligible allotment of shares - invalid BOD meetings - proof of service of Notice of Board Meeting - Held that - On the basis of a letter of 2009 from the Bank, suddenly on 28th February, 2011 large numbers of equity shares were issued and convertible debentures were issued without there being material to show that majority shareholders, i.e. the Appellants were involved in the decision making. The Appellants 2 and 3 were Directors and proof of service of Notice of Board Meeting to them was necessary. What is shown by the Respondents, we find as not reliable. If things were in order, Respondents would have referred in correspondence to the change of shareholding. NCLT accepted defence on this count of need of funds without seeking documents. Merely showing terms laid by bank for credit limit or loan is not enough. For such reasons, we find that the reasonings recorded by the learned NCLT in upholding allotment of 95,500 equity shares to Respondents 4 and 5 cannot be upheld by us. NCLT did not also look into the correctness of issue of convertible debentures on 28.02.2011. The debentures issued were soon converted into shares by the Respondents 2 and 3, to the extent of 80010 equity shares which was done on 19.04.2011 in Board Meeting. We find that the NCLT wrongly held POD 9 in favour of the Respondents. The EOGM called suffered from sufficient Notice to the Appellants, who are majority shareholders and thus, the decisions taken for increase in authorised share capital cannot be upheld and deserve to be set aside. Respondents 2 and 3 are guilty of oppression and mismanagement. Winding up of the Company, however, we find will not be in interest of Members. We agree with NCLT on this count. To conclude - We note NCLT has already set aside 80010 equity shares by conversion in Meeting dated 19.04.2011 and 80010 shares issued on 25.07.2012. a) We set aside the allotment of 95,500 equity shares to Respondents 4 and 5 and the decision to issue convertible debentures as taken by Respondents 2 and 3 on 28.02.2011. b) We set aside the Resolutions taken in Board Meeting dated 18.05.2011 and E Form 32 dated 18.05.2011 submitted to the ROC and removal of Appellants 2 and 3 as Director in Board Meeting dated 02.07.2011. Appellants 2 and 3 shall be treated to have been Directors. c) We set aside Resolution and increase of Authorized Share Capital as done in EOGM dated 18.06.2011. d) We set aside the Resolutions taken in Board Meeting dated 02.07.2011 and 3,83,334 equity shares allotted to Respondent No.4 regarding which Respondents 2 and 3 took decision on 02.07.2011 and which were issued on 07.07.2011. e) We set aside the Resolution dated 18.09.2011 and the 3,87,066 equity shares allotted to Respondents 4 and 6 on 18.09.2011. We hold that decisions taken in the Board Meetings, EOGMs and AGM discussed in this Judgement regarding which there was no Notice or short Notice to the Appellants, are not binding on the Appellants. We restore shareholding as it stood ante 28.02.2011. The parties between themselves were also of the view that first option should be for the Respondents 2 and 3 to buy out the shares of the Cima Group. Reading the Judgement of NCLT with the findings recorded by us, all the shares issued to Respondents 4 to 7 stand set aside. We hold that there appears to be no scope for the groups of Appellants on one side and Respondents 2 and 3 on the other to work together and run the Company. We further direct - It is just and expedient, as directed by the learned NCLT, to direct that the accounts of first Respondent Company be audited by a Chartered Accountant from the date of incorporation of the Company till the date of Order passed by NCLT taking into consideration the cancellation of all shares allotted to Respondents 4 to 7 and fix the shareholding of Petitioners and Respondents 2 and 3 which shall be one of the basis for determining the fair value of shares for Respondent No.1 Company. After the Report of the Chartered Accountant is finalized, the fair value of equity shares of the 1st Respondent Company shall be assessed by an Independent Valuer. As directed by the NCLT, the date of valuation is the date of filing of the Company Petition in NCLT. 4 M/s. A.R. Gaudana & Associates, at 502-D, Shaily Complex, B/h. Old Gujarat High Court, Opp Loha Bhavan, Navrangpura, Ahmedabad 380009 is appointed as Independent Valuer to value the shares of the 1st Respondent Company as on the date of filing of petition. The Respondents 2 and 3 will have the first right to purchase the shares of the Appellants original Petitioners in 1st Respondent Company, but not below the fair value fixed by Valuer, and in case Respondents 2 and 3 fail to purchase the shares of the Petitioners Appellants at the value fixed by the NCLT, the Respondents 2 and 3 must sell their shares at the fair value determined by the Independent Valuer to the Petitioners Appellants. After filing of the Report by the Independent Valuer, the Appellants and Respondents 2 and 3 would be at liberty to file application before the NCLT within two weeks from the date of service of the Valuer Report on them, to determine the mode and manner in which the transfer of shares shall take place. NCLT may, if necessary, extend the above date fixed for Audit Report and date fixed for Report of Independent Valuer, if necessary. NCLT will ensure carrying out of these Orders and if Auditor/Valuer have any difficulties, or for any other reasons it becomes necessary, may pass such further and other Orders deemed fit in the interest of justice to both sides. The appeal is allowed in terms of above directions and orders with costs quantified at ₹ 1 lakh to be paid by Respondent No.2 Mr. Jaimin Girish Patel and ₹ 1 lakh by Respondent No.3 - Mr. Hemal Patel from their personal accounts, to the Appellants.

Summary

Issues Involved:
1. Validity of amendments curing technical defects.
2. Binding nature of the Letter of Intent and draft Shareholders Agreement.
3. Entitlement to file a petition under Sections 397 and 398 without arbitration.
4. Non-provision of share certificates and its implications.
5. Legality of the removal of a director under Section 283.
6. Validity of the issue of equity shares and convertible debentures.
7. Validity of the conversion of debentures into equity shares.
8. Validity of resolutions passed in a Board Meeting.
9. Validity of the increase in authorized share capital and issue of equity shares.
10. Prevention from attending a Board Meeting and the validity of a rights issue.
11. Validity of the issue of equity shares.
12. Validity of an EGM on the grounds of short notice.
13. Validity of the issue of equity shares in a Board Meeting.
14. Validity of an AGM on the grounds of short notice.
15. Failure to provide inspection of books and records.
16. Relief to be granted.

Issue-wise Detailed Analysis:

1. Validity of Amendments Curing Technical Defects:
The NCLT found that the amendments made as per the Company Law Board's order on 22.08.2014 addressed the technical defects pointed out by the Respondents.

2. Binding Nature of the Letter of Intent and Draft Shareholders Agreement:
The NCLT held that the Letter of Intent dated 03.10.2008 and the draft Shareholders Agreement of August 2010 were binding on the parties concerning the shareholding pattern of the first Respondent Company as 51%:49%.

3. Entitlement to File a Petition Under Sections 397 and 398 Without Arbitration:
The NCLT concluded that the Petitioners were entitled to file the petition claiming reliefs under Sections 397 and 398 without resorting to arbitration as provided in the draft Share Purchase Agreement.

4. Non-provision of Share Certificates and Its Implications:
The NCLT found that the non-provision of share certificates to Belfin amounted to an act of oppression or mismanagement.

5. Legality of the Removal of a Director Under Section 283:
The NCLT did not record a clear finding on whether the removal of Mr. Sergio Bellazzi as Director under Section 283 was illegal, noting that the issue related to the notice to the Petitioners regarding the Board Meeting.

6. Validity of the Issue of Equity Shares and Convertible Debentures:
The NCLT upheld the issue of 95,500 equity shares to Shyam Group and the issuance of 228,600 convertible debentures in the Board Meeting on 28.02.2011, despite the Petitioners' claim of no proper notice. However, the Appellate Tribunal found the meeting's agenda vague and the notice insufficient, setting aside the allotment and issuance.

7. Validity of the Conversion of Debentures into Equity Shares:
The NCLT invalidated the conversion of 35% of debentures into equity shares, issuing 80,010 equity shares to Shyam Group on 19.04.2011, on the grounds of no proper notice.

8. Validity of Resolutions Passed in a Board Meeting:
The NCLT found no material to show that notice of the Board Meeting on 18.05.2011 was sent to the Petitioners, invalidating the resolutions passed in that meeting.

9. Validity of the Increase in Authorized Share Capital and Issue of Equity Shares:
The NCLT upheld the increase in authorized share capital and the issue of equity shares in the EGM on 18.06.2011, despite the Petitioners' claim of short notice. However, the Appellate Tribunal found the notice insufficient and set aside the resolutions.

10. Prevention from Attending a Board Meeting and the Validity of a Rights Issue:
The NCLT did not find the Board Meeting on 02.07.2011 invalid, despite the Petitioners' claim of being prevented from attending. However, the Appellate Tribunal found the Respondents' actions oppressive and set aside the resolutions passed in that meeting.

11. Validity of the Issue of Equity Shares:
The NCLT upheld the issue of 3,83,334 equity shares to Shyam Group on 07.07.2011. However, the Appellate Tribunal set aside the allotment due to the invalidity of the preceding Board Meeting on 02.07.2011.

12. Validity of an EGM on the Grounds of Short Notice:
The NCLT found that the Petitioners could not claim short notice for the EGM on 11.08.2011, as the notice period was consistent with the Articles of Association.

13. Validity of the Issue of Equity Shares in a Board Meeting:
The NCLT invalidated the issue of 3,87,066 equity shares to Shyam Group on 18.09.2011 due to the lack of notice to the Petitioners.

14. Validity of an AGM on the Grounds of Short Notice:
The NCLT upheld the validity of the AGM on 27.09.2011, despite the Petitioners' claim of short notice.

15. Failure to Provide Inspection of Books and Records:
The NCLT found that the Respondents failed to provide inspection of books and records to the Petitioners, amounting to an act of oppression.

16. Relief to Be Granted:
The Appellate Tribunal directed the accounts of the first Respondent Company to be audited by a Chartered Accountant from the date of incorporation until the date of the NCLT's order. The fair value of equity shares would be assessed by an Independent Valuer, with the first right to purchase the shares given to the Respondents 2 and 3, failing which the Petitioners would have the right to buy out the Respondents' shares. The Appellate Tribunal restored the shareholding to its status before 28.02.2011 and set aside all disputed allotments and resolutions. Costs were awarded to the Appellants.