2018 (9) TMI 940 - AT - Companies Law

Breach of trust by trustee by selling the assets of the Company - oppression and mismanagement - sale of immovable property - value of the property and the buildings of the R1 company when it was sold to the R7 Company - Held that - Respondents 2 to 6 have sold their entire shareholding to the R7 Company. They have also sold the properties shown in the last available balance sheet for the year 31.03.2001 of the 1st Respondent Company. The admitted facts of the present matter show not only oppression on the part of original Respondents 2 to 6 but also mismanagement as in the name of clearing loans, the whole Company itself has been transferred without letting the other shareholders know. The present appeal being continuation of the original Company Petition, we can exercise powers which were required to be exercised by the learned NCLT under Sections 241 and 242 of the Companies Act, 2013 read with Rule 11 of the National Company Law Tribunal Rules, 2016 as well as Rule 11 of National Company Law Appellate Tribunal Rules, 2016. At present, passing of Orders of winding up the Company would unfairly prejudice members, but otherwise the facts justify the making of a winding up order considering the acts committed by the Appellants. If in spite of the efforts as per Order we propose to pass don t succeed, NCLT may consider directing steps for winding up. The ends of justice require this Appellate Tribunal to pass necessary orders although these orders are required to be passed against the Appellants who have come up in the appeal as we find that this is necessary in the interest of the Company which was established by late Shri M.A. Shanmugam. Order - We maintain direction 1 issued by the learned NCLT in the Impugned Order that an Independent Auditor should be appointed to carry out audit as proposed by the learned NCLT. The fees of the Auditor to be appointed by NCLT shall be borne by the original Respondent No.1 Company. The other directions 2 to 6 of the Impugned Order are quashed and set aside. We quash and set aside the shares transferred by original Respondents 2 to 6 in favour of three persons - 1) Kumaravel Varatha Rajan, 2) Jayanthi Kumaravel and 3) Manikandan Kumaravel. We restore the shareholding of the Company as on 29.09.2011. We declare that the sale deed dated 31.10.2011 executed by original Respondents 2 to 6 in favour of original Respondent No.7 as not binding on the Respondent No.1 Company. The NCLT shall immediately appoint an Administrator to take over the land and structure of the Respondent No.1 Company and to manage the affairs of the Company. The NCLT is requested, under Section 242(2)(k) of the Companies Act, 2013, to appoint such number of persons as Directors of the Respondent No.1 Company as it finds appropriate to manage the affairs of the Company under supervision of the Administrator and to ensure holding of free and fair EOGM for the shareholders to decide future course of action for the Company. It would be open for learned NCLT to later consider, if necessary, if Orders of winding up need to be passed.

Summary

Issues Involved:
1. Whether the sale of shares by Respondents 2 to 6 to Respondent 7 was valid.
2. Whether the sale of the company’s immovable property was valid.
3. Whether the company’s procedures and practices were followed in compliance with the Companies Act.
4. Whether the acts of Respondents 2 to 6 were oppressive to the minority shareholders and constituted mismanagement.

Issue-wise Detailed Analysis:

1. Validity of Sale of Shares:
The original Petitioners claimed that Respondents 2 to 6 sold their shares without offering them to other members, violating the Articles of Association. The NCLT found that Respondents did not provide material evidence to prove that the issue of share capital was raised in a Board Meeting and approved as beneficial to the company. The shares should have been offered to other shareholders before being sold to Respondent 7, but no records substantiated this procedure. The Appellate Tribunal upheld this finding, noting that the transfer of shares without following proper procedures was oppressive to minority shareholders.

2. Validity of Sale of Immovable Property:
The Petitioners argued that the land belonged to the company, as shares were allotted to late Mr. M.A. Shanmugam in lieu of selling his property to the company. The NCLT found that the property was shown as an asset of the company in the balance sheet as of 31.03.2011. The Respondents did not show any proof of valuation for the properties sold or a special resolution approving the sale. The Appellate Tribunal confirmed that the land was in possession of the company and the sale deed executed by Respondents 2 to 6 was not binding on the company.

3. Compliance with Companies Act Procedures:
The NCLT ordered the appointment of an independent auditor and a practicing company secretary to verify whether the procedures required by the Companies Act were followed. The Appellate Tribunal maintained this direction, emphasizing the need for an audit to ascertain the value of the property and whether the proceeds were brought into the company's books. The Tribunal also highlighted the requirement to update the company's accounts and verify compliance with statutory procedures.

4. Oppression and Mismanagement:
The Appellate Tribunal found that the acts of Respondents 2 to 6 were oppressive to the minority shareholders and constituted mismanagement. The Respondents sold the company's assets and transferred their shares without informing other shareholders or holding an EOGM/AGM. The Tribunal noted that the actions of the Respondents deprived the company of its property and business, which was established by late Mr. M.A. Shanmugam. The Tribunal concluded that the sale of assets and shares was not in the interest of the company and its shareholders.

Orders:
1. An independent auditor should be appointed to carry out an audit as proposed by the NCLT, with fees borne by the company.
2. The shares transferred by Respondents 2 to 6 to three individuals were quashed, and the shareholding as of 29.09.2011 was restored.
3. The sale deed dated 31.10.2011 executed by Respondents 2 to 6 was declared not binding on the company.
4. The NCLT was directed to appoint an Administrator to manage the company's affairs and ensure a fair EOGM for shareholders to decide the company's future course of action.
5. The NCLT may consider directing steps for winding up if necessary.

The appeal was disposed of with no orders as to costs.