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2020 (12) TMI 419 - Tri - Insolvency and BankruptcyCancellation of shares - Petitioners have contended that the cancellation of shares were done without obtaining consent and without giving opportunity to the petitioners to place their arguments as against such cancellation and such a reduction of share capital did not have the approval of the Hon'ble High Court of Madras as the provisions of Section 100 of the Companies Act, 1956 were not followed - HELD THAT - FIPB and RBI have categorically stated that there has been no violation in the acquisition of shares as there was no infusion of foreign exchange for the purchase of the same and also in view of the fact that the shares were held on non-repatriation basis. The adjudicating authority of FEMA has also categorically stated that the onus to adhere to the provisions of rules and regulations of FEMA while issuing shares of the amalgamated company to non-resident shareholders, laid on the company issuing such shares and not on the individual shareholders and therefore it has been stated that the adjudicating authority does not order for the confiscation of 3,32,640 shares/securities of Kumudam Publications Private Limited allotted to Noticee No. 3 (Shri A. Jawahar Palaniappan). After imposing penalties as above, the adjudicating authority also dropped the Charge of Regulation 5(1) of FEM (transfer or issue of security by a person resident outside India) Regulation 2000 r/w clause (b) of sub-section (3) of Section 6 Section 47 of FEMA, 1999 against all the three noticees. All these orders of the adjudicating authority, FIPB and RBI have held that there has been no violation on the part of the 1st petitioner and the adjudicating authority has not confiscated the shares issued to the 1st petitioner. However, AA has imposed penalties under Section 13, Sub-Section 1 of the FEMA for violation of Regulations. The respondents have stated that the adjudicating authority did not order for the confiscation of shares as it has already been cancelled/nullified by the respondents and therefore nothing is left to be confiscated. Such interpretation is somewhat inconsistent with the findings of the adjudicating authority that the responsibility to adhere to the provisions of rules and regulations of FEMA laid on the company issuing such shares and not on the individual share holders. Such an interpretation, as contended by the respondents, would deprive the property rights of the 1st petitioner and in such an eventuality, the adjudicating authority would have ordered for the amount which has been kept in the escrow account to be paid to the 1st petitioner on a non-repatriation basis. It is hereby declared that the Form-32 filed by R2 with RoC, Chennai regarding the intimation of cessation of petitioners as directors of the R1 Company with effect from 02.01.2012 is invalid and non-est in law. It is seen that even though the board of the R1 Company was functioning, there had been no Extraordinary General Meeting/AGM from 2010 to the present day. Hence the petitioners who are the majority shareholders could not express or participate in the affairs of the company in any effective manner. As directed in paragraphs 17 23 of the Order of this Tribunal, the Register of Members of R1 company has to be rectified to restore 3,32,440 shares of ₹ 100/- each in the name of the 1st petitioner. Since it has been held by this Tribunal that the removal of the petitioners as board of directors is also invalid, it is considered that the continuation of the clauses 31(a), 32 and 39(b) are totally against the interest of the majority shareholders and hence it is ordered that the above mentioned clauses may be deleted and the Articles of Association thus stand amended of the R1 company. This Tribunal holds that the resolutions passed by the Board Meeting held on 28.09.2011 of the respondents without the presence of the petitioners is invalid and hence the cancellation of 3,32,400 equity shares of ₹ 100/- each held by the 1st Petitioner has been held as illegal, invalid and non-est in law. In the same analogy, subsequent cancellation of 200 shares of the 1st Petitioner is held to be invalid and illegal - his Tribunal holds that the resolutions passed by the Board Meeting held on 28.09.2011 of the respondents without the presence of the petitioners is invalid and hence the cancellation of 3,32,400 equity shares of ₹ 100/- each held by the 1st Petitioner has been held as illegal, invalid and non-est in law. In the same analogy, subsequent cancellation of 200 shares of the 1st Petitioner is held to be invalid and illegal. Petition allowed.
Issues Involved:
1. Cancellation of Shares. 2. Removal of Directors. 3. Amendments to Articles of Association. 4. Allegations of Oppression and Mismanagement. Issue-Wise Detailed Analysis: 1. Cancellation of Shares: The petitioners argued that the cancellation of 3,32,440 shares held by the 1st petitioner was done without proper consent and in violation of Section 100 of the Companies Act, 1956. The respondents contended that the shares were cancelled due to violations of FEMA and FDI regulations. However, the FIPB and RBI clarified that there was no violation in the acquisition of shares as they were held on a non-repatriation basis. The adjudicating authority also did not order the confiscation of shares but imposed penalties on the company and its directors. The Tribunal held that the cancellation of shares was invalid and non-est in law, and ordered the rectification of the Register of Members to restore the shares to the 1st petitioner. 2. Removal of Directors: The petitioners were removed from directorship for not attending three consecutive board meetings. The petitioners argued that the meetings they convened were inquorate due to the absence of R2, and hence, they did not miss three consecutive meetings. The Tribunal found that the removal of the petitioners from directorship was oppressive and invalid, especially given that the cancellation of shares had already reduced them to a minority. The Form-32 filed for their removal was declared illegal and non-est in law. 3. Amendments to Articles of Association: The amendments to the Articles of Association (Clauses 31(a), 32, and 39(b)) were made to entrench the position of R2 and were oppressive to the petitioners. These clauses allowed R2 to remain as Managing Director and draw remuneration up to 11% of the net profits, among other privileges. The Tribunal ordered the deletion of these clauses, finding them against the interest of the majority shareholders. 4. Allegations of Oppression and Mismanagement: The petitioners alleged several instances of mismanagement, including failure to meet export obligations under the EPCG Scheme, excessive remuneration to R2, and related party transactions without proper approvals. The Tribunal did not find merit in most of these allegations, either because they were business decisions that went wrong or because the petitioners themselves were part of the Board when these decisions were made. However, the Tribunal noted that the overall conduct of the respondents was oppressive, especially in the context of the cancellation of shares and removal from directorship. Summary of Orders: 1. The cancellation of 3,32,440 equity shares of ?100/- each held by the 1st petitioner is declared illegal, invalid, and non-est in law. 2. The Register of Members of the R1 Company is to be rectified to restore 3,32,640 equity shares of ?100/- each in the name of the 1st petitioner. 3. The Form-32 filed by the R2 with RoC, Chennai, regarding the cessation of petitioners as directors of the R1 Company with effect from 02.01.2012 is declared illegal and non-est in law. 4. Clauses 31(a), 32, and 39(b) of the Articles of Association are ordered to be deleted. 5. The petitioners are allowed to nominate two more Directors in the Board of Directors of the R1 Company, bringing the total number of Directors to six. 6. A Chairman is appointed for six months to implement the orders of the Tribunal.
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