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TMI Blog2016 (3) TMI 929X X X X Extracts X X X X X X X X Extracts X X X X ..... affairs had taken a down turn after the Rights Issue as well as the loan from the bank, there would have been no question of the appellants’ raising any grievance whatsoever even in June, 2007. To enable the appellants to now reprise their role as directors, whilst also giving them the opportunity to avail the Rights issue at this stage would, in effect, amount to handing them the prize without having played the game at all, because the appellants never ran the risk normally associated with business expansions or personal guarantees. To my mind, once it is clear that the decision to infuse capital through the issue of Rights as well as Loans on personal guarantees was bonafide; and the appellants failed to raise any protest in a timely fashion; then regardless of the reasons for the non subscription to the Rights issue, or for not being required to furnish the necessary personal guarantees to the bank; it would be grossly inequitable to now reward the appellants with the rewards sans the risk; and that too at the expense of the respondents who actually did run that risk by putting in their own moneys and personal guarantees on the line, thus facilitating the increase in the comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he appellants group held 33.33% whilst the remaining 66.67% was held by respondents 2 to 5. And, out of the six directors on the board of the company, the appellant s group had two directors. 3. According to the appellants, it was understood by both groups that the company would function in the nature of a partnership, where the first appellant had also provided his own premises to the company to commence business. At the same time, in view of his experience, the second respondent was given a free hand in the belief that he would run the company honestly whilst keeping every shareholder in the loop. However, at the commencement of production, the appellants group was neglected by the respondents, who did not even bother to issue notice of Board Meetings or of the Annual General Meeting to them; and that the respondents also stopped providing copies of the balance sheet and other relevant documents to the appellants; and it was only in May 2007 that the appellants learnt from an official of the Excise Department that the company was not maintaining proper records. The first appellant thereafter wrote to the company on 20.06.2007 seeking audited accounts of the company from the ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eir submission, the appellants contend that the Board Meeting approving the issue of right shares was convened on 5th February, 2005 at 5:00 pm at Faridabad, and the UPC receipt produced by the appellants was also of 5th February, 2005 from Lodhi Road Post Office, since the meeting itself was convened at 5:00 pm, it was impossible for the notice to have been dispatched on the same day. Secondly, for the respondents to have chosen to despatch the notice from Lodhi Road at New Delhi, and not from Faridabad in Haryana, where the meeting was held, is suspicious. (c) Although in the Board Meeting of 5th February, 2005, it was decided that the closing date of the issue was 5th March, 2005, however, the respondents have allotted themselves the rights shares on 2nd March, 2005 itself, i.e. prior to closing date of the issue, thus, foreclosing the rights of the appellants. (d) Even though the balance sheet for the year ended 31st March, 2006 shows ₹ 18,30,745/- as share application money pending for allotment, however, the respondents have proceeded to allot shares to their family members alone. 5. In response, the respondents contend that the share capital of the company was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7,90,166/-. Thereafter raised funds for clearance of loan of HSIDC and for construction of building premises valued at a total amount of ₹ 1,10,93,884/-. Towards meeting some of these expenses, the company raised fund by going for rights issue. The respondent company Board passed a resolution on 5-2-2005 to raise fund by issuing equity shares of 3,30,000 shares of ₹ 10 each in the share capital of the company as rights issue to the members who at the date of offer i.e. 5-2-2005 are holders of the company in proportion of 1:1 ratio. The Board further resolved that the share transfer book should remain closed from 5-2-2005 to March 2, 2005 making last date for acceptance of offer at March 2, 2005. The respondent company sent notices to the petitioners along with resolution indicating to how many proportionate shares the petitioner are entitled. To prove dispatch of notices to the petitioner, the respondents filed UPCs for proving notices have been sent to the shareholders including the petitioner. 8. Regarding the issuance of notice from the Lodhi Road Post Office, the Company Law Board concluded that since it is a closely held company with four directors and about te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppellant No.1 and appellant No.3, who is his wife, had voluntarily resigned from the Board so as to enable the company to raise the said loan. The respondents have also emphasized that, in fact, the appellants did not impeach their removal in their petition before the Company Law Board; and have raised this only in their rejoinder. 11. The issue of removal of the appellants from directorship was decided by the Company Law Board against the petitioners. In that context it stated as follows; 16. It is evident that the petitioners 1 2 were shown removed as directors from April, 2004, there is material showing that loaning Bank could provide loan only when its directors are not defaulters to the Bank, the time of showing their removal as directors is coincidental to the timing Bank indicated loan be provided if no director of the company is defaulter to the Bank. For having the petitioners 1 2 themselves manage their own company i.e. P-4 company, it can be inferred that the petitioners are in know how Board meetings and general meetings take place, and must be knowing how frequent board meetings and general meetings take place, despite knowing all these, these petitioners ne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... does involve substantive questions of law, and it cannot be said that only disputed questions of fact are sought to be re-agitated in this appeal. He submitted that the respondents could not have removed the appellants as directors of the company without their resignation in writing in terms of Articles of Association of the company. Therefore, the so called oral resignations allegedly submitted by the appellants is a misrepresentation and a fraud played on the appellants by the respondents. Further that the increase in capital by the respondents by issuing rights shares to the shareholders of the company, without complying with Section 81(1A) of the Act, was illegal. And that allotment of rights shares to persons who were not the shareholders of the company, is in clear violation of the said section of the Act. Further, the allotments made to Smt. Chand Rani could not have been made since she was not a shareholder of the company at the relevant time. According to him, this amounted to preferential allotment in favour of the said Smt. Chand Rani; but even in such a case, the legal formalities for making allotment of preferential shares to Smt. Chand Rani were not complied with. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... letter received ? VIII. Whether the findings of the CLB, upholding the belatedly raised plea of the Respondents of alleged oral resignation of Appellant No. 1 3, is patently illegal, unreasoned and the one based on conjecture and surmises? IX. Whether the CLB failed to appreciate the case of the Appellants qua the illegal and unauthorized issue of right shares by the Respondents, in its right perspective thereby vitiating the impugned order? X. Whether the so called need/justification for issuance of right shares by Respondent Company, accepted as correct by the learned CLB in para 27 of the impugned order, was borne out of records and even if it was so, whether the findings of the learned CLB are based on complete non-application of mind and bad in law? XI. Whether the decision of issuance of right shares in the meeting of the board of directors purportedly held on 5.2.2005 and subsequent allotment of right shares to the shareholders other than Appellants, is in compliance with various legal provisions and hence lawful? XII. Whether the findings of the learned CLB attributing knowledge of the right issue to the Appellants are legally sustainable in view of specifi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... absence of proper documentation, as prescribed in the Act, is fatal to such allotment of rights shares and hence such allotment is liable to be cancelled, being in violation of Section 81(1A); 15. Section 10F of the Act reads as under: Appeals against the orders of the Company Law Board - Any person aggrieved by any decision or order of the Company Law Board may file an appeal to the High Court within sixty days from the date of communication of the decision or order of the Company Law Board to him on any question of law arising out of such order: Provided that the High Court may, if it is satisfied that the appellant was prevented by sufficient cause from filing the appeal within the said period, allow it to be filed within a further period not exceeding sixty days. Clearly, an appeal would lie only on a substantive question of law; and no disputed questions of fact can be reagitated under Section 10-F. While considering the scope of Section 10-F of the Act in V.S. Krishnan and Others Vs. Westfort Hi-Tech Hospital Ltd. (supra), the Supreme Court has held as under: 16. It is clear that Section 10-F permits an appeal to the High Court from an order of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see whether any prudent Adjudicating Authority could have arrived at the conclusion which has been arrived at by the Company Law Board; and if the answer is yes, then that is the end of the matter. It cannot be reopened once again in an appeal under Section 10F of the Companies Act. However, if the findings are found to be perverse, such perversity would itself become a question of law; and a perverse order is defined as one which is contrary to the facts and evidence on record; which no reasonable Adjudicating Authority could pass after examining the material placed before it. See Dale Carrington Invt. (P) Ltd. and Anr. Vs. P.K. Prathapan and Ors., (2005) 1 SCC 212 (Para 36). In E. ShanmuganVs. APS Cam-O-MatecPvt. Ltd., 2006 (133) DLT 484 (Para 9). 19. An examination of the 19 issues framed by the appellants in the appeal show that primarily, they are all questions of fact, although the learned counsel for the appellants has tried to make out a case that they are not based on proper appreciation of evidence on record before the Company Law Board and hence, perverse. The issues raised in the appeal; that have been reproduced above; revolve around the following subject matters: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the directors and shareholders of the company; and except for the appellants, no other director or shareholder of the company has raised any objection or plea that they did not receive the notice of the meeting for allotment of the Rights Shares. 22. Even though there are other, better ways of issue of notices like Speed Post and Registered A.D. Post, the service of documents on members of the Company under the Companies Act, 1956, is governed by Section 53 of the Act. Sub-Section (1) (2) of Section 53 of the Act read as under:- 1. A document may be served by a company on any member thereof either personally, or by sending it by post to him to his registered address, of if he has not registered address in India, to the address, if any, within India supplied by him to the company for the giving of notices to him. 2. Where a document is sent by post- (a) service thereof shall be deemed to be effected by properly addressing, prepaying and posting a letter containing the document, provided that where a member has intimated to the company in advance that documents should be sent to him under a certificate of posting or by registered post with or without acknowledge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rescribed by the Articles of Association of the company itself. Counsel submits that there was no material whatsoever before the Company Law Board on the basis of which the CLB could have held that the appellants had resigned as directors of the company. There was no resignation letter to enable the CLB to hold that the appellants had resigned as directors. He also contends that if the resignation of the appellants was allegedly accepted in the meeting of the Board dated 05.01.2004; then what prompted the Board to record acceptance of their resignation in the later meeting of the Board of Directors dated 01.04.2004. It is also submitted that there could be no acceptance of resignation twice over by the company. The submissions on the issue of resignation of the appellants as the directors of the company are primarily threefold, viz. (i) The Articles of Association of the Company specifically provide that the resignation of any director has to be in writing, which has admittedly not happened here; (ii) The appellants, as directors, were not present in any of the meetings dated 05.01.2004 and 01.04.2004 and, hence, they could not have orally resigned in the said meetings; and (iii) i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase in this behalf, for the first time. Learned counsel submits that in the absence of any pleadings to this effect before the CLB, appellants cannot raise this plea in appeal under Section 10F before this Court. It is also submitted that after their resignation as directors of the company, the appellants wrote two letters dated 20.06.2007 and 25.10.2007, i.e. almost three years after the acceptance of their resignation; and actual separation from the company; and in those letters also, the appellants did not make any reference to their removal as Directors; or of the meetings of the Board of Directors not being held; or that they had not been invited for the meetings of the Board of Directors. The only grievance raised in the letter dated 20.06.2007 is that the Managing Director of the company has not cared to send the audited statement of accounts for the years 2003-04, 2004-05 and 2005-06, in-spite of an official letter and several reminders over the phone. In the letter dated 25.10.2007 also, the appellant only asserts his legal right to have the notice of the AGM and audited statement of accounts of the company; and of his right to attend the AGM either personally or through p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Mr. Raj Kumar Bhatia in view of certain dues being in default on the certain credited card owned by Mr. Raj Kumar Bhatia, it was suggested by Mr. Raj Kumar Bhatia that he and his wife, Mrs. Kavita Bhatia would resign from the board of directors so that Citibank will then not need the personal guarantee of Mr. Raj Kumar Bhatia and Mrs. Kavita Bhatia. Resolved that the resignation of Mr. Raj Kumar Bhati as Director of the company be and is hereby accepted. Resolved that the resignation of Mrs. Kavita Bhatia as Director of the company be and is hereby accepted. FURTHER RESOLVED that Mr. Anil Anand be and is hereby authorized to file the intimation of the cessation of the directors with Registrar of Companies NCT Delhi Haryana. The Board was informed by the Chairman that at the request of the company, Citibank, N.A. has agreed to provide to the company funded facilities upto ₹ 150 lacs, which includes Term Loan facilities up to ₹ 85 Lacs and working capital facilities upto ₹ 65 Lacs and non-fund based facilities up to Rs.Nil. The company being a Partner of AvLight Automotive works is also required to authorize a representative to sign the documents o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y Law Board much against my wishes. Kindly take this matter seriously. ......... 28. Apart from the above, learned counsel for the respondent argued that assuming without admitting and contrary to the fact, that the resolution removing them from directorship is flawed, the appellants nevertheless had ceased to be Directors of the company by operation of Section 283(1)(g) of the Act, which postulates that if a Director absents himself from three consecutive meetings; or from all meetings of the Board for a continuous period of three months without obtaining leave of absence from the Board, he ceases to be a Director of the company. Section 283(1)(g) reads as under : 283. Vacation of office by Directors (1) The office of a director shall become vacant if- __________________ (g) he absents himself from three consecutive meetings of the Board of Directors, or from all meetings of the Board for a continuous period of three months, whichever is longer, without obtaining leave of absence from the Board; Counsel for the respondents pointed out that the appellants remained absent from all the meetings of the Board of Directors of the company after 1st April, 2014, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nces. The Company Law Board has believed the resignation of the appellants as valid and not oppressive against them. To my mind also, it is obvious that the appellants had communicated a clear animus to resign and to disassociate, to the other members of the small handful that owned and controlled the company; which was then recorded in the minutes under the sanguine belief that it truly reflected the appellants sentiments. Under the circumstances, mere non-insistence for a written resignation from the appellants cannot be termed oppressive, or even an act of mismanagement. 30. The claim of the appellants to be restored as Directors of the Company also fails by virtue of Section 283(1)(g) since they never attended any of the stated 16 meetings of Board of Directors and never ever cared to access or know the outcome of the meetings of the Board. The claim for restoration of directorship is a clear afterthought to somehow regain a foothold in the company. Under the circumstances, and for all the aforesaid reasons, the appellants have not been able to persuade me to conclude that there is any error or perversity in the order of the Company Law Board on this issue. 31. The appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons of the rights issue specifically provide that any person who wanted to renounce the shares will give 15 days notice. Thus, even in terms of this requisition, if somebody had to renounce the shares to which he is entitled under the rights issue, he/she must serve a notice of 15 days to the company. It is submitted that the entire exercise of allotment of shares by way of a rights issue was a camouflage to bring down the holding of the appellants from 33.33% to 15.87%, to render them ineffective in monitoring the affairs of the company. 33. Counsel for the appellants referred to the decision of this Court in Pearson Education Inc. Vs. Prentice Hall India (P) Ltd. Ors., 134 (2006) DLT 450 to submit that the motive of allotment of additional capital by way of rights issue by the respondent was malafide with the sole object of gaining control of the company. He referred to para 16 of the judgment wherein the court also referred to the decision of the Supreme Court in Dale Carrington Invt. (P) Ltd. and Anr. Vs. P. K. Prathapan Ors. (2005) 1 SCC 2012 on the issue of allotment of additional share capital by the company. The said para reads as follows; 16. Recently in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nish personal guarantees for funding the proposed expansion of the factory to increase the capacity and turnover. When the finance was committed by the Bank in 2005, a decision was also taken to increase the corpus, to enable purchase of the land in question for shifting from the rented premises. Learned counsel submits that under the circumstances, the decision to raise the capital through a rights issue became necessary. Therefore, it cannot be said that the exercise of increasing the share capital of the company by way of a rights issue is merely a camouflage to reduce the shareholding of the appellants from 33.33% to 15.87%. 35. Learned counsel further submits that reliance on the judgment in Pearson Education Inc. Vs. Prentice Hall India (P) Ltd. Ors., (supra) by the appellants is misplaced since the facts of the two cases are entirely different. It is submitted that in the case in hand, the appellants themselves had turned away from the company, resigned as directors and had, by their conduct, allowed the respondents to increase their stake in the company since they themselves did not intend to either extend their personal guarantees, or to enhance their risk in the busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the offer within which the offer, if not accepted, will be deemed to have been declined; c) unless the articles of the company otherwise provide, the offer aforesaid shall be deemed to include a right exercisable by the person concerned to renounce the shares offered to him or any of them in favour of any other person; and the notice referred to in clause (b) shall contain a statement of this right; d) after the expiry of the time specified in the notice aforesaid, or on receipt of earlier intimation from the person to whom such notice is given that h e declines to accept the shares offered, the Board of Directors may dispose of them in such manner as they thing most beneficial to the company. Explanation: In this sub-section, equity share capital and equity share have the same meaning as in Section 85. (1A) Notwithstanding anything contained in sub-section (1), the further shares aforesaid may be offered to any persons whether or not those persons include the persons referred to in clause 9a) of sub-section (1) in any manner whatsoever:- (a) If a special resolution to that effect is passed by the company in general meeting, or (b) Where n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decision taken by its Board in this behalf, and a decision taken by a shareholder to renounce shares being offered to him by the company in favour of someone else. The first is a decision by the Board, while the second is a decision by the shareholder to renounce. Here, we are only concerned with the latter, being the exercise of a vested right by an existing shareholder under Section 81(1)(c) of the Companies Act. Furthermore, A. Ramaiya, Guide to the Companies Act, 16th Edition at page 1022, seems to embody the same line of reasoning while stating that; The requirement of passing a special resolution under sub Section (1A) is necessary only when the shares are issued to the public or are placed privately in terms of Section 67 (3) or proposed to be offered to any segment of the shareholders .. to the exclusion of the rest. The shareholders approval is accordingly not required for a rights issue, including the allotment of shares to the renounces, who are not members of the company. It follows, therefore, that Section 81(1A) has no application here and the plea of violation of Section 81(1A) in that context by the learned senior counsel for the appellants cannot be a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tees to the bank; it would be grossly inequitable to now reward the appellants with the rewards sans the risk; and that too at the expense of the respondents who actually did run that risk by putting in their own moneys and personal guarantees on the line, thus facilitating the increase in the company s valuation from ₹ 30 lakhs in 1996 to ₹ 12 crores in 2008. Had the appellants been responsible and conscientious participants, both as directors and shareholders; fully able and ever willing to shoulder their burden of the increased business risk under contemplation, nothing stopped them from taking the required steps; and also approaching the Company Law Board if necessary; in a timely fashion, but they chose not do so. That they chose not to protest the lack of any information about any Board meeting, despite the belief that they were indeed directors, for years together; while duly receiving the annual accounts and dividends throughout; can only lead one to conclude that their interest in the company was limited to their initial shareholding and nothing more. 42. After the venture has clearly fructified; and the associated risks run successfully; to enable the ap ..... X X X X Extracts X X X X X X X X Extracts X X X X
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