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2017 (11) TMI 781 - Tri - Companies LawOppression and mismanagement - Conducting the affairs of R1 Company prejudicial to the interest of the Petitioners - Whether or not increase of authorized share capital is prejudicial to the interest of the Petitioners? - Held that - Since these Respondents held Board Meeting without calling one of the directors representing majority of the shareholding of the company and general meeting was held without any notice to the Petitioners for increase of authorized share capital, the increase happened in the EOGM held on 28.11.2013 is hereby held as invalid. Moreover, though it has been categorically mentioned u/s 172 of the Companies Act, 1956, every notice shall specify the place and the day and hour of the meeting and shall contain a statement of the business to be transacted there at by sending it 21 days before the date of meeting, sending of calendar of events not giving particulars, place and the day and hour of the meeting and the statement of the business to be transacted as mentioned u/s 172 would never become a notice u/s 172 of the Companies Act, 1956. Whether or not bringing an outsider as a shareholder is in violation of the Articles of Association and constitution of Private Limited Company? - Held that - A separate sub-section has been carved out as section 81(1A) saying that if such shares are proposed to be offered to any person/s, whether or not those persons are covered under sub-section 81(1), a special resolution has to be passed for allotting those shares to a person other than the persons covered under sub-section 81(1). Of course, under sub-section 81(3), it has been said that this proposition is not applicable to a private limited company. But, for it has been specifically incorporated in the Articles of Association of this company that it requires to pass special resolution, if shares are allotted to an outsider, application of section cannot be found fault with, but for doing the same, the company has to mandatorily follow that procedure. That being the scenario, for allotment of shares to R5, the company ought to have passed a special resolution for allotment of shares to R5, since it is the case of the respondents that shares were allotted to R5 in a Board Meeting held on 14.12.2013 allotting 18,16,158 shares to R5 at par, it can never be an allotment as stated under section 81(1)(A) of the Act 1956. The blunder that has committed by the company is, R5 being an outsider, first shares should not have been issued, if at all any such issue has happened for Articles permitting such allotment of rights issue subject to section 81(1A), the company ought to have passed a special resolution for allotment of shares to R5. For no such special meeting was held and no such special resolution was passed, allotment of shares to R5 is not only bad in law for it has reduced the shareholding of majority to abysmally low, it is prejudicial to the interest of the Petitioners. Thereby allotment to outsider is hereby held as invalid. Whether or not allotment of shares to Respondent Nos. 2, 3 and Respondent No. 5 is prejudicial to the interest of the Petitioners? - Held that - If really the case of the Respondents is, the Petitioners not responding to the offer, allotment should have been done on premium, without taking valuation into consideration, without giving an opportunity to the existing shareholder, if any allotment is made at par, it could only be understood that allotment is for the gain of the persons getting shares at the cost of dilution of shareholding of other shareholders, here it is the Petitioners. The ground the respondents raised for allotment of shares is that the company needs fund to carry on the functioning of the company. But the ground of necessity of funds cannot become a ground to avoid issuing notice to the petitioners, by seeing the conduct of the Respondents; it appears that the intention of the respondents is primarily for diluting the shareholding of the P1. In view of the reasons aforementioned the allotment made to R2 and R3 is bad in law and prejudicial to the interest of the Petitioners. Whether or not removal of P2 as director of the company u/s 283(1)(g) of the Companies Act, 1956 is prejudicial to the interest of P1? - Held that - Unless and until all these details are given, proof is placed, the Board of Directors are not supposed to invoke Section 283 to arbitrarily terminate the office of the Director under the cover of section 283(l)(g). By seeing this exercise made by these Respondents, it appears fraud is writ at large in removing the Petitioner as director of R1 company henceforth we hereby hold that such removal is bad in law. Accordingly, this Bench hereby declares holding of such meeting is bogus because the date of meeting in the notice purportedly sent to P2 is different from the date shown in Form-32, therefore Form 32 filed showing P2 vacated office as invalid. There is an argument saying that removal of director will not become a complaint in the case of oppression and mismanagement, but in a case like this, where P2 has been appointed as representative of P1 to protect the interest of P1, especially in a company like this where only two shareholders are present, it cannot be brushed away saying it is a directorial compliant when a director representing majority shareholding is removed as director. Whether or not appointment of R5 as director of the company is prejudicial to the interest of the Petitioners? - Held that - The company being private company, for there being no valid notice to the petitioners, especially to P2, in appointing R5 as director, appointment of R5 as director of the company, his appointment as director is also declared bad. Whether alteration of Articles of Association by Respondents 2-4 is prejudicial to the interest of the Petitioner No. 1 or not? - Held that - For this Bench having already held that holding an extra ordinary general meeting on 28.11.2013 without notice to P1 is invalid, the alteration of Memorandum of Association and Articles of Association in said meeting automatically would become invalid, therefore, alteration of Memorandum of Association and Articles of Association is hereby declared as invalid and prejudicial to the interest of P1. Whether this Bench has jurisdiction to pass orders under 1956 Act? - Held that - Accordingly, this point is decided that these proceedings are bound by 397-398 of Companies Act, 1956 but not by Companies Act, 2013. In view of the reasons aforesaid given, we hereby hold that the conduct of respondents in dealing with the affairs of R1 Company is oppressive against the Petitioners and prejudicial to the interest of P1, therefore, by invoking section 402 of the Companies Act, 1956.
Issues Involved:
1. Increase of authorized share capital. 2. Bringing an outsider as a shareholder. 3. Notice and effective service of notice. 4. Allotment of shares to R-2, R-3, and R-5. 5. Removal of P2 as director. 6. Appointment of R5 as director. 7. Alteration of Articles of Association. 8. Jurisdiction of the Tribunal under the Companies Act, 1956 or 2013. Detailed Analysis: 1. Increase of Authorized Share Capital: The Tribunal examined whether the increase of authorized share capital was prejudicial to the Petitioners. It was found that the Board Meeting held on 04.10.2013 to resolve the holding of an EOGM on 28.11.2013 for the increase of authorized share capital was conducted without proper notice to the Petitioners. The Respondents failed to provide proof of notice, and sending a calendar of events was deemed insufficient. The Tribunal held that the Board Meeting and subsequent EOGM were invalid due to the lack of proper notice, making the increase in authorized share capital invalid. 2. Bringing an Outsider as a Shareholder: The Tribunal discussed the violation of the Articles of Association and the constitution of a Private Limited Company by allotting shares to an outsider (R5). Section 81(1A) of the Companies Act, 1956, requires a special resolution for such allotment, which was not passed. The Tribunal declared the allotment of shares to R5 as invalid and prejudicial to the Petitioners' interests. 3. Notice and Effective Service of Notice: The Tribunal examined whether notices were served upon the Petitioners as prescribed under law. It was found that the Respondents did not provide proper notice for the Board Meeting on 04.10.2013 and the EOGM on 28.11.2013. The Tribunal held that sending a calendar of events did not meet the legal requirements for notice, and the meetings held without proper notice were invalid. 4. Allotment of Shares to R-2, R-3, and R-5: The Tribunal found that the allotment of shares to R2, R3, and R5 was done without proper notice to the Petitioners and at par value, which was prejudicial to the Petitioners. The necessity of funds was not a valid ground to bypass the requirement of notice. The Tribunal declared the allotment of shares as invalid and prejudicial to the Petitioners' interests. 5. Removal of P2 as Director: The removal of P2 as director was examined under Section 283(1)(g) of the Companies Act, 1956. The Tribunal found inconsistencies in the Respondents' documentation regarding the dates of meetings and resolutions. The Tribunal held that the removal of P2 was not conducted properly and was invalid. The Tribunal declared the removal of P2 as director as fraudulent and invalid. 6. Appointment of R5 as Director: The Tribunal held that the appointment of R5 as director was invalid because the allotment of shares to R5 was already declared invalid. The appointment was made without proper notice to the Petitioners, especially to P2. The Tribunal declared the appointment of R5 as director as invalid. 7. Alteration of Articles of Association: The Tribunal found that the alteration of the Memorandum of Association and Articles of Association in the EOGM held on 28.11.2013 was invalid due to the lack of proper notice to the Petitioners. The Tribunal declared the alteration of the Articles of Association as invalid and prejudicial to the Petitioners' interests. 8. Jurisdiction of the Tribunal: The Tribunal discussed whether the Companies Act, 1956, or the Companies Act, 2013, was applicable. It was held that the proceedings were bound by the Companies Act, 1956, as the acts and offenses occurred before the advent of the Companies Act, 2013. The Tribunal cited legal principles and precedents to support this conclusion. Conclusion: The Tribunal concluded that the conduct of the Respondents was oppressive and prejudicial to the Petitioners. The Tribunal directed the following: 1. P1, through P2, shall take over the management of the Company, and R2-R4 shall not continue as directors after 15 days from the date of the order. 2. A forensic audit from 01.04.2013 till date shall be conducted by M/s. Shah & Gutka. 3. Petitioners shall provide an exit to R2-R4 on fair valuation as of 31.03.2017. 4. R1 Company shall refund the funds infused by R5 within three months from the date of the forensic audit report. The Company Petition was disposed of accordingly.
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