2018 (4) TMI 918 - AT - Companies Law

Board of Directors rights terminating the office of 3rd respondent as director - Whether no notice was required to be given to that particular director against whom Section 283(1)(g) of the Companies Act, 1956 - sufficient notice to the shareholders within the meaning of Section 172 of the Companies Act - Held that - Whenever any meeting is held, either Board meeting or General Meeting, duty is cast upon the persons holding meeting to send the respective notice with Agenda items as prescribed under the Companies Act. Since no such notice has been received by the 2nd and 3rd respondent, sending a calendar of events cannot be called as service of notice upon the 2nd and 3rd respondent and calendar is only a plan for the year giving indication to facilitate the planning by the parties to be available as and when the notice is received when the details of actual meeting have been finalised. Sending Notice with Agenda and documents does not get dispensed. Therefore, we hold that no notice was served upon 2nd and 3rd respondent. Increase of authorised share capital - We are not able to convinced that sending a calendar of events in advance and not sending any further notice for the particular meeting alongwith agenda and other necessary papers be treated as a valid notice either under law or as a good corporate practice. Therefore, we hold that that the holding Board Meeting without calling one of the directors of the company and general meeting was held without notice to the contesting respondents for increase of authorised share capital in the EOGM held on 28.11.2013 is invalid. Whether or not bringing an outsider as a shareholder is in violation of the Articles of Association and constitution of Private Limited Company? - As we have already held that increase in the authorised share capital is invalid, capital issued in pursuance of such increased capital cannot be sustained irrespective of whether proper procedure has been followed or not. Therefore, we are in agreement with the Tribunal that the allotment of shares to outsider is invalid. While invoking Section 283(1)(g) of the Companies Act, 1956, the Board of Directors must give notice to that particular director (against whom the section is being invoked) - we hold that date of meeting in the notice purportedly sent to 3rd respondent is different from the date shown in Form 32. Further we have already expressed our opinion that calendar of events is not a sufficient notice, non-attending of the meeting as per calendar of events cannot be held against a director for not attending for the purpose of vacating the office under Section 283(1)(g) of the Companies Act, 1956. Therefore, vacation of the office by the director in terms of Section 283(1)(g) is invalid. Form 32 filed showing 3rd respondent vacated office is also invalid. Looking to the impugned order directing take over of the company by the original petitioners No.1 and 2 and restoration of original petitioner No.2 as director, the original petitioners can ascertain from the records the infusion of funds by R5 towards loan and share capital. It would be reasonable and win win situation for both sides if the petitioners are directed to ascertain from records the infusion and utilization and if satisfied, immediately pay back the funds infused by R5 within two months of the order in these appeals. The disputes qua Respondent No.5 shall then rest at that stage. The forensic audit directed by NCLT will then be done for other Respondents. However, if the original petitioners, for any reason, do not pay back the funds infused by original R5 within the above period, Company should be liable to pay interest if the auditor later finds that amounts are liable to be refunded as per directions (iv) of the impugned order, in which case the three months clause put by the NCLT deserves to be deleted, ad directions modulated.

Summary

Issues Involved:
1. Validity of Board and General Meetings without proper notice.
2. Validity of allotment of shares to outsiders.
3. Validity of the removal of a director.
4. Applicability of Section 81 of the Companies Act, 1956 to private companies.
5. Validity of the increase in authorized share capital.
6. Allegations of oppression and mismanagement.
7. Directions for forensic audit and management takeover.

Detailed Analysis:

1. Validity of Board and General Meetings without proper notice:
The Tribunal held that the Board Meeting and General Meeting were invalid as they were conducted without proper notice to the majority shareholders. The appellants argued that sending a calendar of events was sufficient notice. However, the Tribunal concluded that a calendar of events does not replace the requirement of sending a specific notice with agenda items as prescribed under the Companies Act. The Tribunal found that no proper notice was served on the 2nd and 3rd respondents, making the meetings invalid.

2. Validity of allotment of shares to outsiders:
The Tribunal declared the allotment of shares to outsiders invalid. The appellants argued that the shares were allotted as per Article 5(1) of the Articles of Association and that Section 81 of the Companies Act, 1956, which deals with rights issues, does not apply to private companies. However, the Tribunal noted that the Articles of Association required a special resolution for allotment to outsiders, which was not passed. Therefore, the allotment of shares to the outsider (R5) was invalid and prejudicial to the interests of the majority shareholders.

3. Validity of the removal of a director:
The Tribunal found that the removal of the 3rd respondent as a director was invalid. The appellants argued that the 3rd respondent vacated office under Section 283(1)(g) of the Companies Act, 1956, for not attending consecutive meetings. However, the Tribunal observed discrepancies in the dates of the meetings and the notices sent, concluding that the removal was not properly executed. The Tribunal held that the vacation of office and the filing of Form 32 showing the 3rd respondent's removal were invalid.

4. Applicability of Section 81 of the Companies Act, 1956 to private companies:
The appellants argued that Section 81, which deals with rights issues, does not apply to private companies. However, the Tribunal noted that the Articles of Association of the company incorporated the requirement of a special resolution for allotment to outsiders, aligning with Section 81(1A). Since no special resolution was passed, the allotment of shares to the outsider was invalid.

5. Validity of the increase in authorized share capital:
The Tribunal held that the increase in authorized share capital was invalid due to the lack of proper notice to the shareholders. The appellants contended that the increase was approved at the EOGM on 28th November 2013. However, the Tribunal found that the notice for the EOGM was not properly served, making the increase in authorized share capital invalid.

6. Allegations of oppression and mismanagement:
The 2nd and 3rd respondents filed a company petition alleging acts of oppression and mismanagement by the appellants. The Tribunal found that the appellants had committed acts of oppression by holding meetings without proper notice and allotting shares to outsiders without following due process. The Tribunal directed the 2nd respondent, being the majority shareholder, to take over the management of the company.

7. Directions for forensic audit and management takeover:
The Tribunal ordered a forensic audit to investigate the infusion and utilization of funds and any siphoning of funds. The Tribunal appointed M/S. Shah & Gutka as auditors and directed that the petitioners provide an exit to R2 to R4 on fair valuation. The Tribunal also directed the restoration of the 2nd respondent as a director and allowed the petitioners to appoint more directors. The Tribunal's directions aimed to rectify the acts of oppression and mismanagement and ensure proper governance of the company.

Conclusion:
The appeals were disposed of with specific directions to ensure compliance with legal requirements and protect the interests of the majority shareholders. The Tribunal's decision emphasized the importance of proper notice for meetings, adherence to the Articles of Association, and the need for transparency in corporate governance.