2016 (12) TMI 421 - Tri - Companies Law

Creation of mortgage of the property and fixed assets - mortgage by the Respondents over the assets of the First Respondent Company to secure a loan/credit facility to an extent of ₹ 5,95,76,764 - Held that - Petitioners and Respondents 2 to 7 have a common stand as against the notice issued by the Bank under the provisions of SARFAESI Act, 2012. To that extent during March, 2015 and thereafter till filing of Writ Petition in the High Court, there was no conflict of interest among the Directors, including petitioners and the Respondents 2 to 7. The conflict has cropped up only after dismissal of the Writ Petition by the High Court of Allahabad. It is an admitted fact that Bank has approached the Debt Recovery Tribunal and the proceedings are pending there. We therefore, are constrained to infer that this Tribunal s jurisdiction is invoked by the parties under section 397 and 398 of the Act to foil the proceedings pending before the Debt Recovery Tribunal. This Tribunal for the aforesaid reasons, find that it cannot be declared as such that the mortgage of the Company s property in favour of Bank of Baroda, the 8th Respondent herein, was unlawful, illegal, null and void, as claimed by the petitioners. We place on record that our observations, if any, would not stand in the way of the Debt Recovery Tribunal to decide the validity of mortgage, if raised before it, in accordance with law. It is suggested to the Respondent No. 8 Bank to take initiative to pursue the Company to hold Annual General Meeting and get ratification for the authorisation given to the Directors to create mortgage over the assets of the Company towards corporate guarantee. We are alive to the fact that there is conflict among the directors and therefore, it is necessary to place this subject in the agenda before the AGM. - Decided against petitioner. Unlawful appointment of directors in the meeting of the Board - Held that - The letters of appointment issued to the Respondents 5 to 7 are in pages 364, 365 and 366 of the Petitioner s paper book and these letters are not disputed by the respondents. These documents show that the Respondents 5 to 7 are appointed as Directors and not as Additional Directors . In From DIR-12 (page No. 352 of the Petitioners paper Book) also shows that it is appointment of Director . This is therefore clearly in defiance of Sec. 260 of the Act, in as much of the Board of Directors has no power and authority to appoint Directors. It is not the case of the Respondents that the Respondents 5 to 7 are appointed as Additional Directors and later appointed as Directors in the annual general meeting of members. In view of the precedent reported in Varshaben S Trivedi vs. Shree Sadguru Switchgears Pvt Ltd. (2014 (3) TMI 1070 - COMPANY LAW BOARD MUMBAI) we hold that the appointment of Respondents 5 to 7 as Directors of the Company is unauthorized, and against the provisions of law and thus, is liable to be set aside.- Decided in favour of the petitioners.

Summary

Issues Involved:
1. Legality of mortgage creation on the company's assets.
2. Legality of the appointment of Respondents 5 to 7 as Directors.

Issue-wise Detailed Analysis:

1. Legality of Mortgage Creation on the Company's Assets:

The petitioners challenged the mortgage created on the company's property to secure a loan for M/s Shambhu Steel & Forgings Pvt Ltd, arguing that it was unauthorized and amounted to mismanagement. They claimed that no board meeting was held on 8.3.2013 to approve the mortgage, and no notice of such a meeting was served on them, violating Section 286 of the Companies Act, 1956. The respondents, however, contended that the mortgage was approved in a duly convened board meeting and necessary filings were made with the Registrar of Companies.

The Tribunal noted that the respondents failed to provide evidence of notice being served to the petitioners for the meeting on 8.3.2013. The Tribunal emphasized that notice to all directors is a condition precedent for the validity of a board meeting, citing Parmeshwari Prasad Gupta vs. The Union of India (1973) 2 SCC 543. The respondents did not produce original documents such as the dispatch register or attendance register to prove the meeting's validity. Consequently, the Tribunal drew an adverse inference against the respondents for non-production of these documents.

However, the Tribunal also considered Section 402 of the Companies Act, 1956, which allows the Tribunal to set aside transactions within three months before the application under Sections 397 or 398. Since the petitioners filed the application beyond this period, the Tribunal concluded that it could not declare the mortgage as void. The Tribunal also highlighted that the Bank of Baroda did not appear to contest the matter, raising concerns about protecting public funds.

2. Legality of the Appointment of Respondents 5 to 7 as Directors:

The petitioners contended that the appointment of Respondents 5 to 7 as directors in the board meeting on 20.3.2015 was illegitimate because no notice was served on them, and the board can only appoint 'additional directors' under Section 260 of the Companies Act, 1956. The Tribunal found that the respondents did not provide evidence of notice being served for the meeting on 20.3.2015. The Tribunal drew an adverse inference due to the non-production of original documents.

Legally, the Tribunal noted that the appointment of directors must be done in a general meeting, and the board can only appoint additional directors. The letters of appointment and Form DIR-12 indicated that Respondents 5 to 7 were appointed as directors, not additional directors, violating Section 260. The Tribunal cited Varshaben S Trivedi vs. Shree Sadguru Switchgears Pvt Ltd. (2015) 188 CompCas 485 (CLB) to support its decision that the appointments were unauthorized and set them aside.

Result:

The Tribunal partly allowed the company petition, declaring the appointment of Respondents 5 to 7 as directors in the board meeting on 20.3.2015 as illegal and set aside. However, it dismissed the petition regarding the creation of the mortgage by the respondents over the company's assets to secure a loan/credit facility. Both parties were directed to bear their respective costs of the proceedings.