2022 (8) TMI 658 - Tri - Companies Law

Oppression and mismanagement - issuance of 30,000 equity shares by private placements - purchase of 15626 shares of the Respondent No. 1 from Mr. Parasmal Lodha, the present petitioner and other shareholders - hit by provisions of MRTP Act, 1969, the Securities Contracts (Regulations) Act, 1956 and Companies Act, 1956 or not. HELD THAT - A petition under S. 397 398 of the Companies Act, 1956 may be resisted not so much as by Limitation Act as on principles of delay and latches - Even otherwise, assuming the Limitation Act were to apply, even then it is a well settled principle of law as reiterated by the Hon'ble Supreme Court of India in RAMESH B. DESAI VERSUS BIPIN VADILAL MEHTA 2006 (7) TMI 325 - SUPREME COURT that the plea of limitation is a mixed question of law and fact. The substance of the allegation of the Petitioner relates to allotment to parties who had a close nexus with Respondents no. 2 3 and which has been claimed to be oppressive. Furthermore, there are other allegations of oppression and mismanagement also which acts took place on various dates which the Petitioner contends that it learnt of only later on. On the other hand, the Respondent has not produced proof that the Petitioners were aware of these facts at a time prior to 3 years from date of filing of the petition. It would therefore, not be proper to dismiss the petition on ground of delay or limitation - the acts of oppression and mismanagement in question are of continuing acts even on the date of filing of this petition and therefore this petition in no way can be said to be barred by limitation. Allotment of 30,000 shares of Respondent no. 1 to other respondents - HELD THAT - The issuance and allotment of the said 30,000 shares in favour of the allottees thereof, including respondent Nos. 14, 15 and 16 was certainly a dishonest act of the Respondent Nos. 2 and 3 that resulted in not only in oppression insofar as the shareholders are concerned, but also an act of intentional mismanagement, if not a fraud in the Company itself on the company itself. It is now well entrenched in legal jurisprudence that fraud unravels everything - the explanatory note given along with the notice of 54th annual General Meeting was not a proper one and was violative of Section 173(2) of the Companies Act, 1956. On the issue of necessity for issuance of 30,000 additional equity shares it would be appropriate to note that the Respondents have contended that the capital was required by Respondent No. 1 and that it was merely complying with RBI's guidelines. Furthermore, the Respondents have contended that at the time these 30,000 shares were issued, Respondent no. 1's financial condition was in doldrums and that it was difficult for Respondent no. 1 even to find any investors in the Company. It was contended that the investment certificates of the investors were actually a liability rather than assets - the aforementioned reason may or may not be a plausible reason for issuance of the 30,000 equity shares. However, it is an undisputed fact that no such reasoning has been provided for either in the notice of the annual general meeting or the explanatory note annexed along with the notice. The Respondent ought to have given these explanations to its shareholders who have right to know the reasons for issuance of additional equity shares and for the consequent change in the shareholding structure of Respondent No. 1. It ought to have been disclosed that allotments would be made to persons who may have nexus with Respondents no. 2 3. Nexus between the allottees of these 30,000 shares for benefit for Respondent No. 2 and 3 and the relationship between them - HELD THAT - In/around September 1988, Respondent no. 1 company sanctioned a clean unsecured advance of Rs. 3 crores to Respondent no. 30 company, which is owned by Respondent no. 31 company. The relationship between Respondent no. 31 and Respondent no. 2 dates back to several years. Pertinently, at the time of sanctioning the loan, the paid up capital of Respondent no. 30 was merely Rs. 200/-. In para 79 of the reply, Respondent no. 2 contends that Rs. 30 lacs was advanced by Respondent no. 1 to Respondent no. 30 on 30.04.1989 and another sum of Rs. 2.70 crores on 21.4.1989 and that both loans were for 3 years carrying interest at 20% and that the loans had been advanced without touching certificate holders monies. But the fact remains that loans were advanced by Respondent no. 1 to Respondent no. 30 for which there is no explanation - It is the settled principle that the corporate veil of the company can be lifted for the advantage of the Company. A This is a fit case where the corporate veil of the other Respondent Companies should be lifted. Applicability of provisions of The Monopolies and Restrictive Trade Practices Act, 1969 (MRTP, 1969) - HELD THAT - Explanation III to Section 2(v) of the MRTP Act clearly states that For removal of any doubt, an investment company shall also be deemed to be an undertaking for the purpose of this Act. Section 3 lists out the exclusions on which the MRTP Act would not apply. A perusal of Section 3 would show that Respondent no. 1 Company is not covered under any of the exclusions. Although, Section 26 stood repealed by the MRTP (Amendment) Act, 1991, the law, as it existed at the relevant time was that any enterprise on which part 'A' of the MRTP Act was applicable, was liable to be registered under the MRTP Act - The nature of services undertaken by Respondent no. 1 and the assets of Respondent no. 1 as they existed at the relevant period would clearly show that Respondent no. 1 was liable to be registered under the MRTP Act and the provisions of the Act were applicable on Respondent no. 1. The manner in which these 30,000 shares have been allocated to the Respondent allottees is questionable, and from the materials on record it does appear that the Company's money has been used for purchase of its shares by the allottees. The Respondents have not shown by producing material on record what was their source of money for purchase of the shares and that the funds used for purchase of the same were not in any manner linked to the Company. As the law then stood, this was not a permissible transaction. Disputes qua purchase of 15,626 shares of Parasmal Lodha and others by the respondents - whether Respondent nos. 26 and 28 are in fact controlled and managed by Respondent no. 2 and 3? - HELD THAT - The amounts advanced by Respondent no. 2 to Respondent no. 26 was in fact to buy shares of Respondent no. 1 Company from the present Petitioner. Again, it is admitted that Respondent no. 1 company had made a fixed deposit of Rs. 50 lacs in May 1988 with Standard Chartered bank. It is also admitted that the Respondent no. 2 had taken a loan of Rs. 40 lacs from the same bank - The reason for the Company depositing money with the Bank at times when personal loans were being taken by the Respondent no. 2 from same bank, and the proximity of these transactions with the purchase of shares by Respondent no. 26 etc. from the present petitioner leads to believe that the transactions were not independent of each other - The company issued bonus shares in the ratio of 1 1 in the year 1987 and 1991 and bonus shares in the ratio of 15 1 in the year 1994. Since, the initial purchase was void any action subsequent thereto must naturally be void as well. From the facts of this case, it is clear that Respondent nos. 2 and 3 had allotted shares of Respondent no. 1 Company to either their relatives, or the Companies indirectly controlled by them. This was done without disclosing the full facts - it is a fit case to exercise powers conferred on this Tribunal under sections 397, 398 and 402 of the Companies Act, 1956, or for that matter, under section 241-242 of the Companies Act, 2013. The issuance and allotment of 30,000 no. of shares made to the Respondents pursuant to the 54th Annual General Meeting dated 30.12.1987 are declared to be void. The dividend received by the allottee shareholders and/or their nominee or assigns be cancelled and be directed to be returned back to the respondent company No. 1 within 30 days - Issuance and allotment of 15,626 shares to Respondents no. 26 28 of Respondent no. 1 Company is declared as null and void. The holders of these shares are directed to return the shares, bonus shares and accrued dividend thereon to previous shareholders i.e. the transferors within 30 days. Petition allowed.

Summary

Issues Involved:

1. Alleged oppression and mismanagement of Respondent No. 1 by Respondent No. 2 and his associates.
2. Legality of the issuance of 30,000 equity shares by private placement.
3. Legality of the purchase of 15,626 shares from Mr. Parasmal Lodha and others, in light of MRTP Act, 1969, the Securities Contracts (Regulations) Act, 1956, and Companies Act, 1956.

Issue-wise Detailed Analysis:

1. Alleged Oppression and Mismanagement:

The petitioners argued that Respondent No. 2 and his associates engaged in oppressive and mismanaged activities, including the issuance and allotment of 30,000 equity shares to themselves and their associates to gain control over Respondent No. 1. The Tribunal noted that the case had a long litigation history and multiple rounds before various forums, ultimately being transferred to the National Company Law Tribunal (NCLT) by the Supreme Court.

2. Issuance of 30,000 Equity Shares by Private Placement:

The Tribunal found that the issuance and allotment of 30,000 shares were done without proper disclosure and in violation of Section 173(2) of the Companies Act, 1956. The explanatory note accompanying the notice for the 54th Annual General Meeting was deemed insufficient and misleading. The shares were allotted to entities closely associated with Respondent Nos. 2 and 3, some of which did not exist at the time of the resolution. The Tribunal concluded that the issuance of shares was done to benefit Respondent Nos. 2 and 3, constituting an act of oppression and mismanagement. The Tribunal declared the issuance and allotment of these shares void.

3. Purchase of 15,626 Shares from Mr. Parasmal Lodha and Others:

The petitioners contended that the purchase of 15,626 shares was in violation of Section 77 of the Companies Act, 1956, as Respondent Nos. 2 and 3 used the company's funds to facilitate the purchase. The Tribunal found that the transactions were closely linked and not independent, violating the prohibition on financial assistance for the purchase of shares. Additionally, the Tribunal held that the acquisition was also in violation of Section 30B of the MRTP Act, 1969, as prior approval from the Central Government was not obtained. The Tribunal declared these transactions null and void.

Conclusion:

The Tribunal allowed the petition, declaring the issuance and allotment of 30,000 shares and the purchase of 15,626 shares void. It appointed a Special Officer to ensure compliance with the Tribunal's directions and to investigate the company's accounts. The Tribunal emphasized that the acts of Respondent Nos. 2 and 3 were oppressive and constituted mismanagement, warranting the exercise of powers under Sections 397, 398, and 402 of the Companies Act, 1956, or Sections 241-242 of the Companies Act, 2013.