2023 (9) TMI 1670 - AT - Companies Law

Allotment of shares on a preferential basis by way of private placement pursuant to an order under Sections 241-242 of the Companies Act 2013 - adherence to Section 62(1)(c) of the Act along with the applicable Companies Act (Share Capital and Debentures) Rules 2014 or not - HELD THAT - Section 62 (1) (c) specifies issuance of share capital to any persons if it is authorised by a said Resolution whether or not these persons including the persons referred to in Clause (a) or Clause (b) either for cash or for consideration other than cash if the price of such shares is determined by the valuation report of a registered valuer subject to the compliance with the applicable provisions of Chapter III and any other conditions as may be prescribed . Merely because the direction given by NCLT does not specifically mention the fulfilment of mandatory requirements of Section 62 (1) (c) it cannot be said that those Provisions need not be complied with as it has not been specifically mentioned in the directions and the same has been confirmed by both NCLAT and the Hon ble Apex Court. Under Rule 13 (g) of the Companies (Share Capital and Debentures) Rules 2014 and Rule 12 (7) of the Companies (Prospectus and Allotment of Securities) Rules 2014 framed under the said Provision details the procedure to be followed in this regard. It is not in dispute that the shares were allotted at face value of Rs. 10/- each without conducting any valuation. It is significant to mention that the Appellants have convened an Extraordinary General Meeting on 15/06/2017 to discuss the agenda of amendment to the Company s Memorandum of Association for increasing the authorised share capital of the 1st Appellant Company. A perusal of the Notice dated 20/05/2017 shows a reference to legal advice provided for the dispensation of the requirement for the shareholders approval - As per Sections 242(5) and 242(6) of the Companies Act only such Orders which specifically provide for alteration to Memorandum of Association would be deemed to have been passed in accordance with Law and the Company accordingly needs to take steps to put the Order into effect. The Hon ble Delhi High Court in the matter of SAS Hospitality Pvt. Ltd. Vs. Surya Constructions Pvt. Ltd. 2018 (12) TMI 1123 - DELHI HIGH COURT has held that any dispute pertaining to rectification of Register of Members can be decided under Section 59 of the Act. This Tribunal is of the earnest view that the issue regarding cancellation of allotment of shares to the 2nd Appellant would fall within the scope and ambit of Section 59 of the Act. As regarding the submission of the Learned Counsel for the Appellants that NCLT has wide scope of powers under Section 241 and 242 of the Act and any direction given in this Section would not contemplate compliance to Section 62 (1) (c) of the Act cannot be sustained. It is held that even if NCLT has directed allotment of shares under Section 241 and 242 of the Act the procedural requirements in respect of such allotment has to be met. Conclusion - This Tribunal is of the earnest view that allotment of shares leading to alteration in the Register of Members can be challenged before the NCLT under Section 59 of the Act . Finally it is observed that the issue which has attained finality is the allotment of shares and not the procedure to be adopted for allotment . Appeal dismissed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The primary issue in this appeal is whether the allotment of shares on a "preferential basis by way of private placement," pursuant to an order under Sections 241-242 of the Companies Act, 2013, requires adherence to Section 62(1)(c) of the Act, along with the applicable Companies Act (Share Capital and Debentures) Rules, 2014. The appeal challenges the National Company Law Tribunal's (NCLT) order canceling the allotment of shares to the appellant, arguing that the allotment was made with sufficient cause and had attained finality through previous orders.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Compliance with Section 62(1)(c) of the Companies Act, 2013

- Relevant legal framework and precedents: Section 62(1)(c) of the Companies Act, 2013, requires that any issuance of share capital to any person, authorized by a special resolution, must be determined by a valuation report of a registered valuer. The Companies (Share Capital and Debentures) Rules, 2014, and Companies (Prospectus and Allotment of Securities) Rules, 2014, outline the procedural requirements for such issuance.

- Court's interpretation and reasoning: The Tribunal emphasized that the directions given by the NCLT did not specifically dispense with the fulfillment of Section 62(1)(c). The Tribunal held that compliance with these procedural requirements is mandatory, even if the allotment was directed under Sections 241-242.

- Key evidence and findings: The Tribunal noted that the shares were allotted at face value without conducting a valuation, which is a requirement under Section 62(1)(c). The appellants convened an Extraordinary General Meeting to discuss the amendment to the Company's Memorandum of Association for increasing the authorized share capital, indicating the procedural steps were not fully adhered to.

- Application of law to facts: The Tribunal applied Section 62(1)(c) and related rules, concluding that the procedural requirements for valuation and allotment were not met. The Tribunal found that the absence of specific directions in the NCLT's order regarding the dispensation of these requirements did not exempt the appellants from compliance.

- Treatment of competing arguments: The appellants argued that the allotment attained finality and was conducted under the NCLT's wide powers. However, the Tribunal held that the procedural compliance with Section 62(1)(c) is necessary, and the previous orders did not explicitly waive these requirements.

- Conclusions: The Tribunal concluded that the allotment of shares must comply with Section 62(1)(c) and related procedural rules, and the failure to do so justified the NCLT's order to cancel the allotment.

Issue 2: Applicability of Section 59 of the Companies Act, 2013

- Relevant legal framework and precedents: Section 59 of the Companies Act, 2013, deals with the rectification of the register of members. The Tribunal considered precedents such as 'IFB Agro Industries Ltd. Vs. SICGIL India Ltd.' and 'SAS Hospitality Pvt. Ltd. Vs. Surya Constructions Pvt. Ltd.' to determine the scope of Section 59.

- Court's interpretation and reasoning: The Tribunal interpreted Section 59 as applicable to the rectification of the register of members, including the cancellation of shares if issued without compliance with statutory requirements.

- Key evidence and findings: The Tribunal found that the allotment of shares without valuation and procedural compliance constituted grounds for rectification under Section 59.

- Application of law to facts: The Tribunal applied Section 59 to the facts, concluding that the allotment could be challenged and rectified due to non-compliance with statutory procedures.

- Treatment of competing arguments: The appellants contended that Section 59 was inapplicable as there was no transfer of shares. However, the Tribunal held that the rectification of the register due to procedural non-compliance falls within the ambit of Section 59.

- Conclusions: The Tribunal concluded that the issue of procedural non-compliance in the allotment of shares falls within the scope of Section 59, allowing for rectification of the register of members.

3. SIGNIFICANT HOLDINGS

- Core principles established: The Tribunal affirmed that compliance with Section 62(1)(c) and related procedural rules is mandatory for the allotment of shares, even if directed under Sections 241-242. The Tribunal also established that issues of procedural non-compliance in share allotment fall within the scope of Section 59 for rectification.

- Final determinations on each issue: The Tribunal dismissed the appeal, upholding the NCLT's order to cancel the allotment of shares due to non-compliance with statutory procedures. The Tribunal emphasized the necessity of adhering to procedural requirements for share allotment and the applicability of Section 59 for rectification.