2019 (6) TMI 1032 - AT - Companies Law

Appointment of Respondent Nos.3, 6, 7 and 8 as Directors in the first meeting - transfer of shares - HELD THAT - If illegal transfer of 9040 shares to Respondent No.2 to 6 had been set aside, the privilege shares could not have been issued to them. We discard this argument. The reason for this is that although the NCLT while dealing alleged transfer of 9040 shares stated that the transfer of 9040 shares cannot be held to be valid and was liable to be set aside, what NCLT actually was doing was to direct following of procedure for rectification of register of members by omitting entry made without following proper procedure for making the entry. It is quite apparent and clear that the NCL was accepting that there has been a transfer with regard to ownership of these shares in 1998 itself. As such only the following of procedure for making entry in the register of members was the requirement which was to be duly conducted. The transferees had paid in 1998 will not lose right or title to the shares only because proper procedure was not followed by the company while taking note of the transfer. Consequently, there would be no justification to deprive them of subsequent rights issue. Appeal dismissed.

Issues Involved:
1. Illegal appointment of Respondent No.6 and 7 as Directors.
2. Illegal transfer of 9040 shares.
3. Illegal resignation of Respondent No.20 as Director.
4. Illegal appointment of Respondent No.3 and 8 as Directors.
5. Illegal rights issue of 27081 equity shares.

Detailed Analysis:

Issue 1: Illegal appointment of Respondent No.6 and 7 as Directors
The appellants argued that Respondents 6 and 7 were appointed as Directors in a Board Meeting on 14.8.2010, but no such meeting took place, and forged documents were filed. The NCLT noted that the Form 32 for the appointment was filed seven months later on 22.3.2011, and there was no practice of issuing formal notices for Board Meetings. Despite these irregularities, the NCLT did not find substantial evidence to invalidate the appointments and directed fresh decisions to be taken in the first meeting of the company's members.

Issue 2: Illegal transfer of 9040 shares
The appellants claimed that the transfer of 9040 shares to Respondents 2 to 6 on 14.8.2010 was illegal as it violated the Articles of Association. The NCLT found that the consideration for these shares was paid in 1998, but the transfer deeds were executed only in 2010. The NCLT set aside the transfer due to procedural lapses but acknowledged that the consideration had been paid and directed the company to take a fresh decision on the transfer.

Issue 3: Illegal resignation of Respondent No.20 as Director
The appellants contended that Respondent No.20 never resigned and that the resignation letter was forged. The NCLT observed that the authenticity of the resignation letter could not be determined in summary proceedings and noted that no resolution accepting the resignation was passed. The NCLT restored the original Board of Directors, including P2, R2, and R20, and directed the company to take fresh decisions regarding the appointment of new directors.

Issue 4: Illegal appointment of Respondent No.3 and 8 as Directors
The appellants argued that the appointments of Respondents 3 and 8 as Directors on 16.8.2012 were illegal as no proper Board Meeting was held. The NCLT noted that the appellants had remained silent for over two years before filing the petition and concluded that the continuity in the company's business and management had to be upheld. The NCLT directed the company to follow proper procedures for future appointments.

Issue 5: Illegal rights issue of 27081 equity shares
The appellants claimed that the rights issue on 13.10.2012 was illegal and aimed at creating an illegal majority for the Respondent Group. The NCLT found that notices for the Board Meetings were properly sent, and the appellants did not apply for the rights issue despite receiving the offer letter. The NCLT concluded that the additional equity shares were required for the company's modernization and expansion and that the appellants were estopped from challenging the decision due to their inaction.

Conclusion:
The NCLT's directions included restoring the original Board of Directors, requiring fresh decisions on the appointment of new directors and the transfer of 9040 shares, and ensuring compliance with the Companies Act for future meetings. The NCLT found no substantial mismanagement by the Respondent Group and upheld the rights issue. The appeal was dismissed, and the NCLT's order was affirmed.

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