2022 (1) TMI 518 - Tri - Companies Law

Oppression and Mismanagement - reconstitution of shareholders at a meeting of the shareholders of the Company to be convened by and conducted under the supervision of this Tribunal - direction to place for consideration or the shareholders all related party transactions for the years 2015-16, 2016-2017 and 2017-18 in a meeting of the shareholders of the Company to be convened by and conducted under the supervision of this Tribunal - direction to refund to the Company all amounts in related party transactions which do not obtain the approval or the shareholders in a meeting of the shareholders of the Company to be convened by and conducted under the supervision of this Tribunal - reopening of financial statements - HELD THAT - When a company enters into a related party transaction, covered under Section 188 of the act, this requires the consent of the company's Board of directors. Also, if such a transaction exceeds the monetary thresholds prescribed under Rule 15(3) of the Companies (Meeting of Board and its Powers) Rules, 2014, approval of the shareholders will also be required by way of an ordinary resolution. Such consent can be obtained prior to, or within three months after, entering into the transaction. However, in these matters such an action has not done by the Respondents 2 3. The related party contracts are to be disclosed in the Board of Directors' Report and in a register of such contracts is to be maintained. It is also seen from the records that the respondent companies have not obtained permission from the Board of Directors to enter into these related party transactions. Hence, the contention of the Respondents that these are not Related Party Transactions and that it is Simple Commercial Transactions cannot be accepted. The Related Party Transactions done by the Respondents are contrary to the provisions of law and in breach of the Articles of Association of the Respondent Company and, therefore, the said Related Party Transactions are hereby declared as invalid and all the proceedings which have been done in violation of the Articles of Associations are also hereby declared as invalid - Since it is declared that the action of the Respondents are illegal, any investigation into the Respondent Companies affairs is not ordered and no penalty imposed on the Respondents for non-compliance of the rules/articles of the Company. Petition disposed off.

Summary

Issues Involved:
1. Maintainability of the Company Petition.
2. Violation of the Articles of Association by the 2nd Respondent.
3. Existence and validity of related party transactions.

Issue-wise Detailed Analysis:

1. Maintainability of the Company Petition:
The Tribunal examined Notification No. 464(E) of MCA dated 05.06.2015, which the Respondents claimed provided certain exemptions under Sections 185 and 188 of the Companies Act, 2013. The Tribunal found that the exemption applies only if the shareholders' interests are protected. It was determined that the 2nd and 3rd Respondents had siphoned funds prejudicially to other shareholders, making the exemption inapplicable. The Tribunal emphasized that the burden of proof for claiming exemptions lies with the Respondents, who failed to demonstrate eligibility. Consequently, the objection regarding the maintainability of the petition was rejected.

2. Violation of the Articles of Association by the 2nd Respondent:
The Tribunal noted the importance of the Articles of Association in governing a company's internal management. It referred to precedents, including the Hon’ble Company Law Board's decision in Mrs. Senthmarai Munuswamy Vs. Microparticle Engineers Private Limited and the Hon’ble Supreme Court's decision in Naresh Chandra Sanyal vs. Calcutta Stock Exchange, emphasizing that actions contrary to the Articles are invalid. The Tribunal found that the Respondent Companies had not convened Annual General Meetings (AGMs) from 2015-2016 to 2018-2019, violating Section 96 of the Companies Act, 2013. The Tribunal concluded that the Respondents failed to provide evidence of proper notice for AGMs, rendering the meetings non-compliant with statutory requirements and the Articles of Association.

3. Existence and Validity of Related Party Transactions:
The Tribunal reviewed the definition and regulation of "related party" and "related party transactions" under Sections 2(76) and 188 of the Companies Act, 2013. It was evident from the records that loans were given by M/s. RBG Enterprises Pvt. Ltd. to M/s. Sri Rubber Industries and M/s. RBG Trading Corporation Pvt. Ltd. without the Board's consent. The Tribunal emphasized that related party transactions require Board consent and, if exceeding certain thresholds, shareholder approval. The Respondents failed to obtain such approvals and did not disclose these transactions in the Board's report. Therefore, the Tribunal declared the related party transactions invalid and in breach of the Articles of Association. Consequently, all proceedings violating the Articles were also declared invalid.

Conclusion:
The Tribunal disposed of Company Petition No. 114/KOB/2019, Company Petition No. 119/KOB/2019, and Company Petition No. 125/KOB/2019, declaring the related party transactions invalid and non-compliant with the Articles of Association. No investigation into the companies' affairs or penalties were imposed, as the primary relief was the invalidation of the respondents' actions. All pending Interlocutory Applications were also disposed of.