2019 (6) TMI 1031 - AT - Companies Law

Oppression and Mismanagement - allotment of shares - Appellant has argued that 3rd respondent is invalidly continuing as an additional director or alternate director - HELD THAT - 3rd respondent was appointed as an additional director on 20.2.2010 under an arrangement as per Article 30 of the Articles of Association of 1st respondent (Page No.269 of Vol.II). Further as per Section 260 of Companies Act, 1956, the Act applicable at that time, 3rd respondent shall hold office only up to the date of the next AGM of the 1st respondent. After the appointment of 3rd respondent as additional director on 20.2.2010, the AGM of 1st Respondent was held on 26th September, 2010. Notice for the AGM was issued on 27.8.2010 (Page 296). We have observed from the said Notice dated 27.8.2010 that there is no agenda item for appointing 3rd respondent as a regular director - the continuation of 3rd respondent as additional director after 26th September, 2010, the date of Annual General Meeting, is not as per law. The action of the Respondent for filing Form No.32 with ROC regarding vacation of office by the appellant is not legal. Appellant s allegation is also that the notice of meetings were not received by him - HELD THAT - The respondents were very well aware that the appellant is in U.K. and the respondents themselves or through their subordinates are corresponding with the appellant via emails, as is evident from the various emails which have been annexed in the appeal. Therefore, the propriety demands that the appellant should have been intimated notices of meetings also via emails and the appellant being the first founder/promoter of the company should have been asked his availability in India so that the meetings can be conducted while he was in India. Other issue raised by the appellant is that the allotment of 40000 shares to 2nd, 3rd and 4th respondent is illegal and invalid - HELD THAT - As we have already held that the continuation of 3rd director is not as per law after 26.9.2010, therefore, the Board Meeting held on 27th October, 2011 in which the decision was taken to allot 40000 shares to 2nd, 3rd and 4th Respondent is not as per law as for conducting the Board Meeting the quorum should be complete and one Director cannot hold the Board Meeting. Similarly the subsequent decisions to allot 268834, 168448 and 330000 shares to 5th Respondent on 20.12.2011, 16.1.2012 and 3.8.2012 were taken. It is noted that on removal of appellant on 20.01.2011 and filing the same with ROC on 17.10.2011 ( almost 9 months after removal) (Page 374), immediately allotment of shares has been made in a very short period thereafter. In fact, allotment of shares has taken place on 27.10.2011, merely 10 days after filing with ROC on 17.10.2011. Even subsequent two allotment of shares on 20.12.2011 and 16.1.2012 seems to be as if allotment of shares are being hurriedly done to completely reduce the shareholding of the appellant to hopeless minority. Therefore, the subsequent actions/decisions such as allotment of 268834, 168448 and 330000 shares to 5th Respondent on 20.12.2011, 16.1.2012 and 3.8.2012 and induction of two other directors etc are also held illegal. Respondents have alleged that the appellant has obtained the HMSP Visa with the fake educational documents and his conduct is not up to the mark - respondent further argued that the appellant is a person with a fraudulent track record and he is trying to convince the Tribunal that is a post graduate in Commerce and master decree holder in Business Administration with fake education certificates to obtain a work visa - HELD THAT - We are of the opinion that NCLT or this Appellate Tribunal is not proper forum to deal with such matters. Respondents have argued that the company was in need of funds, therefore, the above shares were allotted to other respondents - HELD THAT - Three meetings in which appellant is not alleged to have been attended, we observe that impliedly leave of absence for meeting dated 20.5.2010 was there. It is in fairness that the counting of meeting dated 20.5.2010 as having not attended would not be fair. We also note that it would be desirable that the special audit of the company may be conducted to see if funds were brought in the company and if they have been properly used. The appellant has been oppressed - also the company is employing more than 100 employees and is a running concern. It would not be in the interest of the company or other stake holders to wind up the company - appeal allowed in part.

Issues Involved:

1. Validity of the cessation of directorship of the appellant.
2. Legality of the allotment of shares to the respondents.
3. Validity of the meetings held and notices issued.
4. Allegations of oppression and mismanagement by the respondents.
5. Validity of the continuation of the third respondent as a director.
6. Allegations of fraudulent activities by the appellant.
7. Appropriateness of the NCLT's decision and the imposed penalty.

Detailed Analysis:

1. Validity of the cessation of directorship of the appellant:
The appellant argued that his cessation from directorship was oppressive, illegal, and invalid, asserting that no notices were issued for the meetings and no proof was produced despite sufficient opportunity. The respondents contended that the appellant vacated his office under Section 283(1)(g) of the Companies Act, 1956, for not attending three consecutive meetings. The tribunal concluded that the appellant's cessation was not legal, noting that the appellant had signed the extract of the meeting dated 20.5.2010, implying a cooperative attitude and de facto leave of absence.

2. Legality of the allotment of shares to the respondents:
The appellant claimed that the allotment of shares to the respondents was done with malicious intent to reduce his shareholding. The tribunal observed that the allotment of 40,000 shares to the 2nd, 3rd, and 4th respondents on 27.10.2011, and subsequent allotments to the 5th respondent, were not as per law since the continuation of the 3rd respondent as a director was invalid. The tribunal held that the board meetings where these decisions were taken lacked the necessary quorum and were thus illegal.

3. Validity of the meetings held and notices issued:
The appellant argued that he did not receive proper notices for the meetings. The tribunal noted that the respondents were aware of the appellant's residence in the UK and should have sent notices via email or to his foreign address. The tribunal found that the notices were not properly served, and the meetings held without proper notice were invalid.

4. Allegations of oppression and mismanagement by the respondents:
The appellant alleged that the respondents engaged in oppressive acts to reduce his shareholding and control over the company. The tribunal agreed with the appellant, noting that the actions of the respondents, including the hurried allotment of shares, were done to reduce the appellant's stake to a hopeless minority, constituting oppression.

5. Validity of the continuation of the third respondent as a director:
The tribunal found that the continuation of the 3rd respondent as a director after 26.9.2010 was not as per law, as his appointment was not regularized in the AGM. Consequently, all decisions taken with his participation, including the allotment of shares and appointment of directors, were invalid.

6. Allegations of fraudulent activities by the appellant:
The respondents alleged that the appellant had a fraudulent track record, including obtaining a visa with fake educational documents. The tribunal opined that such matters were not within its jurisdiction to adjudicate.

7. Appropriateness of the NCLT's decision and the imposed penalty:
The tribunal found that the NCLT failed to appreciate the facts and circumstances and did not apply ordinary rules to adjudicate the issues and evidence. The tribunal set aside the penalty imposed on the appellant and directed the respondents to pay costs to the appellant.

Conclusion:
The tribunal partly allowed the appeal, restoring the appellant as a director and invalidating the continuation of the 3rd respondent as a director. It set aside all decisions taken with the participation of the 3rd respondent, including the allotment of shares. The tribunal directed the appellant and the 2nd respondent to take appropriate decisions in the interest of the company and set aside the penalty imposed on the appellant. The respondents were ordered to pay costs to the appellant.

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