2022 (12) TMI 60 - AT - Companies Law

Oppression and mismanagement of the Respondent No. 1 Company - section 421 of the Companies Act, 1956 - alleged illegal allotment of 984 shares - participation of interested directors in the board meeting for allotment of 984 shares - the conduct of 61st and 62nd AGMs, wherein the resolutions relating to alleged illegal allotment of 984 shares were approved - resolutions relating to Joint Development Agreement relating to the property of R-1 Company were also approved - non-registration of shares transfer - non-payment of dividend - restriction on shareholders voting rights under Article 15 of the R-1 Company s Articles of Association. Allotment of 984 unsubscribed shares - HELD THAT - The AoA of R-1 Company indicates the right of the Directors to allot the shares. Article 4 of the AoA stipulates that the shares shall be under the control of the Directors, who may allot or otherwise dispose of the same to such persons on such terms and conditions and at such times, as the Directors think fit, and with full powers to give any person the call on any shares either at par or at a premium and for such time and for such consideration as the Directors think fit - the inquiry report mentions that the R-1 Company provided its comments vide letter dated 28.2.2008 on the said complaints and after receiving the comments and reply from the R-1 Company, the ROC found that that though these 984 shares were issued prior to the period 1965-66 and remaining unsubscribed for a very long period of time, the Board of Directors should not have exercised their power under section 81(1)(d). Since the board has a fiduciary duty in exceptional circumstances like issue of shares towards the members of a company, they should have offered these shares to all the existing shareholders in the ratio of shares held by them under section 81(1) of the Companies Act, 1956 . It can be concluded the Company has violated the provisions of section 81(1) and 81(1A) of the Companies Act, 1956. As the allotment was done against the provisions of the Companies Act, 1956, the complainant may be directed to approach the company law board under the provisions of Sec.397/398 of the Act for declaring the allotment as null and void. 984 shares which were meant for increase of the company s capital should have been allotted as prescribed by section 81 of the Companies Act, 1956 to such persons/entities who at the date of offer were holders of the equity shares of the company, in proportion to the capital paid-up of those shares on that date. The Explanatory Statement merely states the intention of the Company and its Board of Directors, but it does not provide even the slightest indication or explanation on the actual shape and size of the project, total built-up area, its financial features and the basis non which R-1 Company proposed to give 50% of built-up area to the builder/developer with proportionate share in undivided land on which the project would be built. While observing so, we are conscious of the fact that the only asset of the Company i.e. the land plot TS 168 Mangalore, is the subject matter of the joint development project and its failure in the absence of due diligence may result in a severe blow to the future of the Company. The Hon ble High Court of Karnataka did not give ad-interim order of injunction for considering agenda item no. 6 in the AGM, relating to Joint Development Agreement, in the Company s 61 AGM. It is noted that while the issue of selling or disposal of the Company s land was not considered as being contrary to the clauses of Memorandum of Association, the Hon ble High Court of Karnataka held that the Directors of the Company will invite tenders and finalise the dealing in a transparent manner. It is also noted that this order dated 6.6.2007 was not appealed against and has, therefore, assumes relevance insofar as the undertaking of the joint development project is concerned - Once 984 shares are allotted to the beneficiaries, this allotment is followed closely by the issue of joint development project raises which certainly question about the intention for allotment of 984 unsubscribed shares. This intention of the company and its Board of Directors is not explained to its members with any coherence, and raises question of transparency and reasonable expectation about growth in business of the Company. The issue of proxies was enquired into by the ROC, Karnataka and in the report dated 1.5.2008 in other matters as well as about proxies, he has inferred that since the proxies were duly signed by the members, they may not consider a wrongful act. Since there is no way at this stage of verifying the signatures of members signing the proxies. Thus, on the basis of available record, this issue is not held to be an act of oppression or mismanagement. This Tribunal is of the clear-cut view that the R-1 Company and its Board of Directors subjected its shareholders with acts of oppression and also indulged in mismanagement of the Company s affairs, while allotting the 984 shares and also in the proposal for the Joint Development Project, culminating in the signing of the Joint Development Agreement. These acts continued since the year 2007 and the Appellants have succeeded in making a clear cut case for their oppression by the Company and its Board of Directors as well as mismanagement of the Company s affairs. Appeal disposed off.

Summary

Issues Involved:

1. Legality of the allotment of 984 unsubscribed shares.
2. Validity and fairness of the Joint Development Agreement.
3. Allegations of using unverified proxies, registration of shares, and adherence to Article 15 of the Articles of Association.

Issue-wise Detailed Analysis:

1. Legality of the Allotment of 984 Unsubscribed Shares:

The appellants argued that the allotment of 984 unsubscribed shares to Respondent Nos. 3 to 53 was in violation of sections 81(1) and 81(1A) of the Companies Act, 1956. They claimed that the shares were allotted to relatives and friends of the directors at an undervalued price, without the need for additional funds, and without offering them to existing shareholders first. The respondents countered that the allotment was legal, done at a premium, and within the powers of the Board as per the Articles of Association. The tribunal found that the allotment was not done in a fair and transparent manner, and the directors failed in their fiduciary duties by indulging in favoritism. The tribunal held that the allotment of 984 shares constitutes an act of oppression and mismanagement and declared the allotment null and void from the date of the judgment.

2. Validity and Fairness of the Joint Development Agreement:

The appellants contended that the Joint Development Agreement for the company's land was done without proper valuation, due diligence, and transparency, primarily benefiting Respondent No. 54. The respondents argued that the decision was taken in the best interest of the company, following a transparent tender process. The tribunal noted that the explanatory statement for the AGM lacked details on the project's valuation and financial features, and the company's flip-flopping on the project raised questions about its intentions. The tribunal directed a fresh valuation of the land and a new Joint Development Agreement to ensure the company benefits from the appreciated value of its property.

3. Allegations of Using Unverified Proxies, Registration of Shares, and Adherence to Article 15:

The appellants alleged that proxies used in the AGMs were unverified and invalid, and the registration of shares was delayed. They also questioned the adherence to Article 15 of the Articles of Association, which restricts voting rights. The tribunal found no substantial evidence to prove that the proxies were invalid or used with malafide intent. The issue of non-transfer of shares was considered a procedural matter without significant impact on the overall decision. The tribunal did not find these acts to constitute oppression or mismanagement.

Conclusion:

The tribunal concluded that the R-1 Company and its Board of Directors engaged in acts of oppression and mismanagement concerning the allotment of 984 shares and the Joint Development Agreement. The NCLT's order was set aside, and the company was directed to carry out the tribunal's orders within three months to ensure compliance with the law and benefit its members.