2020 (2) TMI 762 - AT - Companies Law

Financial mismanagement - manipulation of annual financial statements - siphoning off of funds - HELD THAT - Smt Shashi Gupta wife of appellant No.2 was appointed and was paid salary of ₹ 50000/- per month and before her appointment no prior approval was obtained. Appellants are unable to convince why her name is not mentioned in the list of employees of the appellant company. NCLT has rightly held that there is deadlock in the company and there is no possibility that the deadlock can be resolved and the business can be operated with the shareholder agreement, MOA and AOA of the appellant company. As the NCLT has allowed the company petition and directed that the increase in authorised capital from ₹ 5 lacs to ₹ 40 lacs by Resolution dated 27.9.2013 is illegal and void. Consequently, Form II filed with the Registrar of Companies is cancelled. NCLT has further directed that there are instances regarding manipulation of annual financial statements and siphoning of funds from the appellant company, therefore, direct to appoint an independent auditor who can perform audit of the financial mismanagement and siphoning of the funds of the appellant company. Appeal dismissed.

Issues Involved:
1. Increase in share capital without proper procedure and major shareholder consent.
2. Allegations of oppression and mismanagement towards the company.
3. Appointment of Smt Shashi Gupta without consent leading to siphoning of funds.
4. Dispute over the subscription of increased share capital by the Respondent.
5. Need for appointment of independent auditor and valuer for financial mismanagement.

Issue 1: Increase in Share Capital
The appeal was filed against the judgment of the National Company Law Tribunal (NCLT) regarding the increase in share capital of the appellant company without following due procedure and obtaining consent of major shareholders. The NCLT found the increase in share capital from ?5 lakhs to ?40 lakhs to be illegal and oppressive, leading to dilution of the Respondent's shareholding. The NCLT concluded that the appellant failed to establish the necessity for the capital increase and did not infuse funds as claimed.

Issue 2: Allegations of Oppression and Mismanagement
The Respondent alleged oppression and mismanagement by the appellants, stating that the increase in share capital was done without their knowledge and consent. Additionally, the appointment of Smt Shashi Gupta, wife of one of the appellants, without proper disclosure and payment of ?3,22,220/- as salary, was deemed prejudicial to the company's interests. The NCLT found merit in these allegations, leading to the decision in favor of the Respondent.

Issue 3: Appointment of Smt Shashi Gupta
The appointment of Smt Shashi Gupta was a contentious issue, with the appellants arguing that the Board had the authority to make such appointments without explicit consent. However, the NCLT held that the act of appointing her without prior approval and the subsequent payment of salary amounted to siphoning of funds, contributing to the overall mismanagement within the company.

Issue 4: Dispute over Subscription of Increased Share Capital
The Respondent claimed that they did not subscribe to the increased share capital, contrary to the appellant's assertion. The NCLT examined bank statements provided by the Respondent, showing frequent fund transfers to the appellant company. The NCLT found discrepancies in the appellant's arguments regarding the subscription amount, leading to the dismissal of their claims.

Issue 5: Appointment of Independent Auditor and Valuer
In light of the financial mismanagement and siphoning of funds, the NCLT directed the appointment of an independent auditor to conduct an audit and evaluate the company's main business. This decision aimed to address the concerns raised during the proceedings and ensure transparency in the financial operations of the appellant company.

In conclusion, the National Company Law Appellate Tribunal affirmed the NCLT's order, dismissing the appeal and upholding the decision in favor of the Respondent. The judgment highlighted various instances of non-compliance, oppression, and financial irregularities within the company, emphasizing the need for corrective measures to address the ongoing issues.

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