2019 (2) TMI 1047 - AT - Companies Law

Oppression and mismanagement - Board of Directors power to appoint Additional Director - option to purchase the shares given to the existing management - HELD THAT - As perused the impugned order dated 7th December, 2017 and noted that no new arguments or facts have been brought to our notice which have not been dealt with by the NCLT. As per Article 23 of the Articles of the Association of the Company, Board of Directors has the power to appoint Additional Director in accordance with Section 260 of the Companies Act, 1956 and the director so appointed shall hold office only upto the date of the next Annual General Meeting following such appointment. The appointment of Directors is regulated under Article 28 of the Articles of Association of the Company. NCLT has discussed this issue in its para 33 of the impugned order. NCLT has made observations on the basis of these articles and the law quoted therein. Therefore, we do not have any alternative but to endorse the observations made by the NCLT on this issue. We are of the considered opinion that where the option to purchase the shares is given to the existing management to avoid prejudice to the interest of the respondent (original petitioners) for various reasons such as diversion of funds/siphoning of funds etc then valuation is done on the date of filing of the company petition. On the other hand, where the first option to purchase the shares is given to who were not in management and who have been oppressed to avoid prejudice to either of the parties the date of valuation should be the date of decision of the company petition. Even the appellant has asked that the valuation should be the date of decision of the company petition. In this case the appellants have been in the management of the company who have been found by the Tribunal to have oppressed the respondent (petitioners), therefore, valuation of shares to be done on the date of decision of the company petition. In view of the above observations and discussions we direct that - In last un-numbered paragraph of the operative order in para 34 of the impugned order dated 7.12.2017 for words - shall determine true and fair value of the shares of 1st respondent company by taking into consideration three financial years w.e.f. 2011 onwards shall be deleted and in their place the following words are substituted - shall determine the true and fair value of the shares of 1st respondent company, as on the date of this decision, i.e. 7.12.2017 . Except for modifications as above in the impugned order, the impugned order is maintained. The appeal is disposed accordingly. Interim order passed, if any, shall stand vacated.

Summary

Issues Involved:

1. Jurisdiction of NCLT under Sections 241 and 242 of the Companies Act, 2013.
2. Legality of share allotments made on 25.04.2008 and 11.08.2010.
3. Appointment and continuation of directors.
4. First option for purchase of shares.
5. Valuation of shares.

Detailed Analysis:

1. Jurisdiction of NCLT:
The appellants contended that the NCLT lacked jurisdiction to grant reliefs under Sections 397 and 398 of the Companies Act, 1956, as the proceedings should be decided under Sections 241 and 242 of the Companies Act, 2013. However, the tribunal did not find merit in this argument and proceeded with the case under the relevant sections of the Companies Act, 2013.

2. Legality of Share Allotments:
The respondents alleged that the appellants resorted to dubious methods to keep them away from the management despite their majority shareholding. The NCLT declared the share allotments of 5,05,000 shares made on 25.04.2008 and 11.08.2010 as illegal, stating that the Board Meetings purportedly held on these dates were not tenable in the eye of law. The tribunal found that the Certificates of Posting used as proof of notice for these meetings were fabricated, as they bore a postal stamp released on 01.03.2009, which could not have been used for a certificate dated 11.04.2008. Additionally, Form 2 for the share allocation was filed with the ROC after 26 months, violating Section 75(1) of the Companies Act, 1956.

3. Appointment and Continuation of Directors:
The NCLT set aside the appointment of the 3rd appellant as a director, stating that as per Article 28(i) of the Articles of Association, directors should be appointed at the AGM, and the appointment made at the Board Meeting dated 22.01.2011 was invalid. The tribunal also found the continuation of the 2nd appellant as a director illegal, as she was not re-appointed at subsequent AGMs as required by Article 28(iii) of the Articles of Association. The tribunal rejected the appellants' argument that Section 290 of the Companies Act, 1956, was ignored, stating that the continuation of the 2nd appellant was illegal due to non-compliance with the Articles of Association.

4. First Option for Purchase of Shares:
The appellants argued against the NCLT's decision to grant the first option to purchase shares to the 2nd and 3rd respondents. The tribunal, however, upheld this decision, emphasizing that reliefs should not reward wrongdoers and should protect the oppressed party. The tribunal referenced the Supreme Court's ruling in MSDC Radharamanan Vs MSD Chandrasekara Raja, which supports the CLB's jurisdiction to pass orders in the company's interest.

5. Valuation of Shares:
The NCLT initially directed that the valuation of shares be based on financial years from 2011 onwards. The appellants argued that the valuation should be as of the decision date of the company petition. The tribunal agreed with this argument, modifying the order to state that the valuation should be as on 07.12.2017, the date of the decision.

Conclusion:
The appeal was disposed of with the modification that the valuation of shares should be as on the date of the decision, 07.12.2017. The impugned order was otherwise maintained, and the interim order, if any, was vacated with no order as to costs.