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TMI Blog2017 (11) TMI 781X X X X Extracts X X X X X X X X Extracts X X X X ..... s 172 of the Companies Act, 1956. Whether or not bringing an outsider as a shareholder is in violation of the Articles of Association and constitution of Private Limited Company? - Held that:- A separate sub-section has been carved out as section 81(1A) saying that if such shares are proposed to be offered to any person/s, whether or not those persons are covered under sub-section 81(1), a special resolution has to be passed for allotting those shares to a person other than the persons covered under sub-section 81(1). Of course, under sub-section 81(3), it has been said that this proposition is not applicable to a private limited company. But, for it has been specifically incorporated in the Articles of Association of this company that it requires to pass special resolution, if shares are allotted to an outsider, application of section cannot be found fault with, but for doing the same, the company has to mandatorily follow that procedure. That being the scenario, for allotment of shares to R5, the company ought to have passed a special resolution for allotment of shares to R5, since it is the case of the respondents that shares were allotted to R5 in a Board Meeting held on 14. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at such removal is bad in law. Accordingly, this Bench hereby declares holding of such meeting is bogus because the date of meeting in the notice purportedly sent to P2 is different from the date shown in Form-32, therefore Form 32 filed showing P2 vacated office as invalid. There is an argument saying that removal of director will not become a complaint in the case of oppression and mismanagement, but in a case like this, where P2 has been appointed as representative of P1 to protect the interest of P1, especially in a company like this where only two shareholders are present, it cannot be brushed away saying it is a directorial compliant when a director representing majority shareholding is removed as director. Whether or not appointment of R5 as director of the company is prejudicial to the interest of the Petitioners? - Held that:- The company being private company, for there being no valid notice to the petitioners, especially to P2, in appointing R5 as director, appointment of R5 as director of the company, his appointment as director is also declared bad. Whether alteration of Articles of Association by Respondents 2-4 is prejudicial to the interest of the Petitioner N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 625 of the Companies Act, 1956. 6. To direct that any resolution passed by R1 company either in the Board meeting or the General meeting be subject to the approval of the Petitioners. 7. To restrain the Respondents from conducting the meetings of the directors of R1 Company in the absence of P2 and from passing any board resolution thereafter. 8. To direct that no resolution be passed without affirmative vote of the Petitioners. 9. To rectify the register of members of R1 Company on the basis of annual returns of the company filed with RoC for the financial year 2012-13 and 10. To pass such other orders as this Bench may deem fit and proper in the facts and circumstances of this case. Brief facts of the Case: R1 Company was incorporated on 02.01.2005 with two shareholders i.e. R2 and one Ms. LizyBabu holding 7,500 shares each and they continued for some time as first directors of R1 Company to carry out the business of manufacture, export, import and trade in the tools and the machineries used in oil and gas exploration. Subsequently, on resignation of Ms. LizyBabu on 18.7.2005, her shares were transferred to R3. 2. First Petitioner namely Ace Oilfield ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny as reflected in the audited balance sheet filed for the year 2012-13. But it is noteworthy that payments come from P1 have not been properly accounted for by R2-4. In the meanwhile, P1 received a demand notice dated 28.2.2015 from the Respondents claiming an alleged sum of USD 593,605 towards certain alleged invoices raised by them. Since the business arrangement between R1 and the Petitioner being R1 required exporting final product to the Petitioners, the Petitioners would trade the same as final product in market. To meet the formalities in the customs, the Custom invoices are issued whenever product has been sent to P1 so as to comply with the export norms. This kind of arrangements could not be treated as liability against the Petitioner, because P1 is nothing but holding company of R1 Company. On the contrary, these respondents failed to honour their obligations in respect of the loan amount of USD 1,329,471 due and payable till date, instead of paying interest over this loan; R2-4 with an intention to defraud the Petitioners regularly induced the Petitioners to issue waiver letters towards the interest payable under the said loan agreement. One of the reasons for incur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve. 6. To which R2-4 and R5 filed replies independently, all this story came out when R1 Company on 28.02.2015 issued legal notice to P-1 for the recovery USD 5,93,605 from P1, these Respondents submit that the petitioners, instead of clearing the liabilities, set up this case as counter blast to the legal notice issued on 28.02.2015. The respondents submit that the Petitioners ignored R1 and its operations by refusing to fulfil its obligations in respect to bringing sufficient business, by which, R1 accumulated huge losses year to year, in a situation like this, R2-4, in order to bail out R1 from this financial difficulty, has gone for rights issue for bringing in capital, thereby the respondents submit, this necessity of funding to R1 Company could not be clouded with an allegation that the respondents made allotment to themselves to reduce the shareholding of P-l, this reduction is only a consequential outcome in pooling funds to R1 Company by allotment as well as credit facility from R5, therefore this bonafidely done allotment cannot be seen as an act oppressive to one of the shareholders of R1 Company. The respondents further submit that main modus operandi of the Petit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pondents submit, it could not be said that the Respondents brought in a new investor without putting it to the Petitioners. For the Petitioners were reluctant to pump in more capital, R2-4 were unable to fund the losses for they being only 15% shareholders of the company, as there was no go, R1 Company went for the rights issue and made allotment of shares to R5, for R5 agreed not only to invest into the capital of the company but also to provide loan to the company. Since losses were as on 31.03.2013 accumulated to ₹ 5.2 crores, R2-4 allotted shares to R5 by themselves getting their shareholding diluted from 15.2% to 4.39%, therefore, the Petitioners should not and ought not to have made this allegation that P1 shareholding alone was diluted. As P-2 remained absent to the board meeting dated 22.7.2013, the offer letter as per the calendar was couriered on 26.7.2013 notifying the decision of going for rights issue to the Petitioners. Since the Respondents already sent a detailed calendar of events with specific agenda items with respect to rights issue mentioning that the offer period was specifically set to begin from 28.11.2013 to 12.12.2013, authorized capital was increase ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urier on 18.03.2013, thereby no occasion arose for again sending another notice to the board meeting held on 14.12.2013. 10. In view of the same, the Counsel for the Respondents submit that Respondents have not conducted affairs of the company prejudicial to the interest of the petitioners, whereby this petition is liable to be dismissed. On hearing the submissions, the Petitioners counsel and the respondents counsel, the points drawn out for consideration are as follows: 1. Whether or not increase of authorized share capital is prejudicial to the interest of the Petitioners. 2. Whether or not bringing an outsider as a shareholder is in violation of the Articles of Association and constitution of Private Limited Company. 3. Whether or not notices have been served upon the Petitioners as prescribed under law and whether or not sending calendar of events far before holding such meetings amount to effective service against the petitioners as prescribed under law. 4. Whether or not allotment of shares to R-2, 3 and R-5 is prejudicial to the interest of the Petitioners. 5. Whether or not removal of P2 as director of the company under section 283(1)(g) of Companies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... one crore to two crore fifty lakhs by sending a notice to the Petitioners, on the contrary, the Petitioners submit no notice was sent to the Petitioners and no courier receipt was filed by the Respondents to prove that holding a board meeting was intimated to the Petitioners. Since the Respondents have not filed any proof showing a notice was sent intimating the Petitioners to hold a Board Meeting on 04.10.2013 to propose an EOGM to be held on 28.11.2013 for increase of authorized share capital, it can be safely inferred that Board Meeting was held on 4.10.2013 without any notice to the petitioners. 13. To justify their argument, the respondents relied upon section 53 of Companies Act 1956 to say that since the petitioners do not have any registered office in India, they sent calendar of events for the year 2013 to the Petitioners enabling them to appear to the respective meetings without remain waiting for an independent notice to each of the meetings scheduled to be held in R1 company in the year 2013-2014. To which the Petitioners counsel submits that whenever any meeting is held, either Board meeting or General meeting, duty is cast upon the persons holding meeting to send ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t large, cannot be compromised to saying since the petitioners do not have registered address in India, they need not serve notice u/s 53 of Companies Act, 1956. By looking at the correspondence between the respondents and P1, it appears that P1 has e-mail address as well as a website in its name. These Respondents have not made any effort to send notice to the petitioners through this mode. Laws and compliance thereof, has to be understood contemporarily, can these Respondents explain away not serving notice upon the petitioners on the ground since the petitioners have no registered office in India, they are under no obligation to serve notice upon the petitioners. In any event, holding a meeting without giving notice to the Petitioners is invalid, not sending a notice though e-mail address is available indicates that respondents consciously did not send notice to the petitioners with mala fide intention to suppress the fact of holding Board Meeting and EoGM from the notice of the Petitioners is clearly oppressive in nature thereby holding such a meeting is hereby declared as oppressive in nature. 14. As to Extra Ordinary General Meeting slated to be held on 28.11.2013 in pursu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sociation and constitution of Private Limited Company. 16. R1 is a private limited company incorporated long before R-2 came in contact with the Petitioners. It need not be said separately what is meant by a private company, four elements that make a private company different from public limited company, that is - restriction of right to transfer of shares, limiting the number of its members to 50, prohibiting any invitation to the public to subscribe for any shares in, or debentures of, the company, prohibiting any invitation or acceptance of deposits from persons other than its members, directors or their relatives. These being the elementary principles that are followed in a private limited company; it is obvious that subscription of shares by an outsider is prohibited. Here in this, case allotment was made to an outsider i.e. R5, violating the mandate to be followed by private limited company. 17. According to Article 5 of Articles of Association of R1 company, Board is authorized to increase the subscribed capital of the company by way of allotment of further shares, subject to the provisions of section 81(1A) of Companies Act, 1956, the Board shall issue such shares i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to outsider is hereby held as invalid. Point # 3: Whether or not allotment of shares to Respondent Nos. 2, 3 and Respondent No. 5 is prejudicial to the interest of the Petitioners. 19. After increase of authorized share capital, a board meeting was held on 12.12.2013 for allotment of 10,000 shares each to R2 and R3 and subsequently filed Form-2 reflecting allotment of shares to R2 and R3 on 26.12.2013, the Petitioners say, for which also no notice was given to the Petitioners. Since shares are being issued at par, without notice to the remaining existing shareholder, it would be not only invalid but also prejudicial to the interest of the Petitioners. Hence this allotment is also declared as bad for the reasons below: Common point that is answerable to the above two points is necessity of funds, it does not mean that if funds are required to cater the needs of the company, the Respondents are at liberty to raise funds by not giving notice to the petitioners, when such notice has not been given, notwithstanding the necessity of funds to the company, such allotment has to be declared invalid, because increasing capital, allotment of shares and further deplorable issue is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tating that Board had proposed the rights issue of shares for the required amount of financial assistance to the company for want of working capital and day to day activities of the company operation and also since P2 had not been attending to a single meeting (Board and General) since April 2013 till date, considering the provisions of section 283(l)(g) of Companies Act, 1956, the board has taken woeful decision to vacate P2 from the Board of Rl Company on the basis of not attending the board meeting by P2 in continuation of three consecutive meetings and within 3 months of period by enclosing Board Meeting notice dated 30.01.2014. In the notice enclosed to this letter, it shows that meeting would be held on 30.01.2014 on four Agenda items; one - to confirm the minutes of the previous meeting, two - to take a general view of the performance of the company, three - to consider and note vacation of office by Mr. Paul Douglass Waters, four - any other business with the permission of the Chairman. Since the respondents themselves filed these documents authenticity of the documents need not be doubted therefore, it has to be taken that according to the respondents meeting was to be hel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed to invoke Section 283 to arbitrarily terminate the office of the Director under the cover of section 283(l)(g). By seeing this exercise made by these Respondents, it appears fraud is writ at large in removing the Petitioner as director of R1 company henceforth we hereby hold that such removal is bad in law. Accordingly, this Bench hereby declares holding of such meeting is bogus because the date of meeting in the notice purportedly sent to P2 is different from the date shown in Form-32, therefore Form 32 filed showing P2 vacated office as invalid. 24. There is an argument saying that removal of director will not become a complaint in the case of oppression and mismanagement, but in a case like this, where P2 has been appointed as representative of P1 to protect the interest of P1, especially in a company like this where only two shareholders are present, it cannot be brushed away saying it is a directorial compliant when a director representing majority shareholding is removed as director. Point # 5: Whether or not appointment of R5 as director of the company is prejudicial to the interest of the Petitioners? The same discussion made in the above case is applicable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he section says that the matters mentioned in sub-section (2) of 465 of the new Act shall not be held to prejudice the general application of Section 6 of the General Clauses Act, with regard to the effect of the repealed enactments. 30. Since Section 6 of the General Clauses says that the repeal shall not affect any legal proceeding pending immediately before passing new enactment, the acts or offences ante to the new Act will be governed by the repealed enactment. For it has been said whatever said in sub-section 2 shall not be held to prejudice the general application of Section 6 of the General Clauses Act with regard to the effect of repeal of the repealed enactments as if the Registration of Companies (Sikkim) Act, 1961 were also a Central Act. Here it shall not be confused by seeing induction of Registration of Companies (Sikkim) Act, this was added to say that this Act also be treated as Central Act, because General Clauses Act is applicable to Central Acts alone. It is slightly ticklish, at least to me, to understand that whether it is applicable to all repealed enactments or only to Registration of Companies (Sikkim) Act, but on proper reading, it would be clear that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 06, section 324 of IPC was compoundable with the permission of the court, but by the advent of Criminal Procedure (Amendment) Act, 2005, it was made non-compoundable. This predicament was resolved by the Supreme Court saying there can t be any retrospective operation over the offences occurred before 23-5-2006, therefore it is hereby held that it could be dealt with under old dispensation. 37. Accordingly, this point is decided that these proceedings are bound by 397-398 of Companies Act, 1956 but not by Companies Act, 2013. The Counsel for R1-R4 relies upon two citations in between Punj Jarnail Singh v. Bakshi Singh AIR 1960 Punj. 455 (Paras 15 and 21) , Narandas Munmohandas v. Indian Manufacturing Co. Ltd. AIR 1953 Bom. 433 to say that in a private company when number of members do not go beyond 50, every joint shareholder shall be treated as a single member for the purposes of the definition thereby R 2 3, though joint shareholders they have to be treated as individual members, this principle indeed against the basic proposition of Companies Act any way since that distinction will not bring to turn the case in favour of the Respondents, we hereby hold that this ratio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e this ratio is not applicable to this case. The Counsel for R1-R4 relied upon Rahul Shah v. Avi Sales (P.) Ltd. (2008) 141 Comp. Cas 505 CLB , to say that when sufficient reason has not been given for filing a Petition after a delay of three years, it has to be considered that Petitioner has not come with clean hands, in case any director has been removed after due notice then it has to be taken as tacit consent of such director about his removal from the Board. The factual situation is not akin to the facts of the above case, and this petitioner did not keep quite after knowing these facts, P2 complained various authorities, therefore it can t be equated to a case three years delay happened, moreover gross injustice done to the petitioner having 85% shareholding in the company. 38. In view of the reasons aforesaid given, we hereby hold that the conduct of respondents in dealing with the affairs of R1 Company is oppressive against the Petitioners and prejudicial to the interest of P1, therefore, by invoking section 402 of the Companies Act, 1956 this Bench hereby directs as follows: 1. That P1 being a majority shareholder, P1 through P2 shall take over the management ..... X X X X Extracts X X X X X X X X Extracts X X X X
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