2021 (11) TMI 616 - AT - Companies Law

Rights Issue - Seeking to raise additional share capital to enable the company to discharge the loans borrowed from the lenders - allegation of Right Issue is for a mala fide purpose and is the modus operandi to siphon further funds from the first Respondent Company - status-quo of shareholding pattern - It is the main contention of the Appellant that the loans/borrowings raised are not genuine and that they are related party transactions - Section 62 (1) of the Companies Act, 2013 - HELD THAT - The nature of relationship between the Corporate Lenders and the second Respondent has also not been explained or corroborated by any documentation and we observe that the said loans do not fall within the ambit of the definition of Related Party Transactions as envisaged under Section 188 of the Companies Act, 2013. Be that as it may, keeping in view the Ledger Accounts, the Balance Sheets, the Respondents have sufficiently substantiated their contention that the money received from the two Corporate Lenders was a genuine loan. The material on record evidences that there is a Status Quo Order passed by the III Additional Chief Judge, City Civil Court, Hyderabad in I.A. No.2371 of 2005 in OS No.328 of 2005, whereby and whereunder the City Civil Court restrained Company from alienating, transferring or encumbering the immovable property in any manner pending disposal of the Suit. The Company Law Board vide Order dated 14.07.2006 directed the Company to maintain Status Quo in regard to the immovable properties held in the name of the Company, until further Orders. The inter-corporate loans were genuine and observe that if the debt due is not paid, there was a possibility that the Lenders could have taken coercive action for the recovery of their dues, the prayer sought for by the Respondents seeking Additional Capital by going for Rights Issue, is justified. When there is a need for funds and there is a Status Quo Order restraining the Company from sale of any immovable property, the direction given by NCLT to allow the Respondent Company to raise Additional Capital by issuing Additional Shares for discharging the debt due to the Creditors is upheld. NCLT has noted in the concluding para that the person acquiring shares in pursuance of Rights Issue cannot exercise additional Voting Rights to the extent of shares accrued in the Rights Issue until further Orders or till disposal of the main Petition, whichever is earlier. Appeal dismissed.

Issues Involved:
1. Legitimacy of loans/borrowings raised by the Respondent Company.
2. Whether the loans qualify as 'related party transactions'.
3. Justification for raising additional capital through Rights Issue.
4. Compliance with 'Status Quo' orders regarding the company's assets and shareholding.
5. Pending applications and their relevance to the current decision.

Issue-wise Detailed Analysis:

1. Legitimacy of Loans/Borrowings:
The Appellants contended that the proposed Rights Issue was a mala fide attempt to siphon funds, arguing that the loans were not necessary as the Respondent Company had been non-operational for over 20 years. They cited a Commissioner’s Report indicating no manufacturing activity since 1991 and claimed the loans were from companies related to the second Respondent. The Respondents countered that the loans were genuine, supported by ledger extracts and auditor certifications showing outstanding dues. The tribunal found that the loans were indeed genuine, evidenced by RTGS receipts, ledger accounts, and TDS certificates. The increase in the company’s turnover post-loans further substantiated their necessity.

2. Related Party Transactions:
The Appellants argued that the loans were 'related party transactions' due to the familial relationships between the directors of the lending companies and the second Respondent. However, the tribunal found no substantial evidence to support this claim. The nature of the relationship between the corporate lenders and the second Respondent was not corroborated by any documentation. The tribunal concluded that the loans did not fall within the ambit of 'related party transactions' as defined under Section 188 of the Companies Act, 2013.

3. Justification for Raising Additional Capital through Rights Issue:
The Respondents argued that the Rights Issue was necessary to repay inter-corporate loans amounting to ?1.10 Crores. The tribunal noted that the company could not raise funds from banks due to 'Status Quo' orders on its immovable properties. The tribunal upheld the NCLT’s decision, stating that the Rights Issue was justified to discharge the debt, especially given the genuine nature of the loans and the substantial increase in the company’s turnover post-loans. The tribunal also referenced the Supreme Court’s observation in 'Shri V.S. Krishnan & Ors. Vs. M/s. Westfort Hi-Tech Hospital' that a need for funds justifies a Rights Issue, even if directors incidentally enrich themselves.

4. Compliance with 'Status Quo' Orders:
The tribunal acknowledged the 'Status Quo' orders from the City Civil Court and the Company Law Board, which restrained the company from alienating its immovable property and maintaining the shareholding pattern. The tribunal found that the NCLT’s direction to allow the Rights Issue did not violate these orders, as it was a necessary measure to raise funds for discharging debts. The tribunal emphasized that the additional shares issued through the Rights Issue would not confer additional voting rights until further orders or the disposal of the main petition.

5. Pending Applications and Their Relevance:
The Appellants argued that the NCLT should have decided on their pending applications before ruling on the Rights Issue. These applications sought the appointment of an auditor, verification of fixed assets, and inspection of books and records. The tribunal found this contention untenable, noting that the NCLT’s order dealt specifically with the Rights Issue and did not preclude the adjudication of the pending applications. The tribunal refrained from making any observations on the appointment of an auditor or valuation of assets, as these issues were pending before the NCLT.

Conclusion:
The tribunal found no illegality or infirmity in the NCLT’s well-reasoned order, which allowed the Respondent Company to raise additional capital through a Rights Issue to discharge its debts. The appeal was dismissed with no order as to costs.

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