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TMI Blog2019 (6) TMI 1031X X X X Extracts X X X X X X X X Extracts X X X X ..... der Section 111/397/398/402/403 of the Companies Act, 1956 originally before the Company Law Board and later on the matter was transferred to NCLT, Hyderabad Bench. 3. The brief facts of the case are that 1st respondent company was incorporated on 8.9.2009. The capital structure of 1st respondent as at 31st March, 2011 is as under: Authorised Capital Rs. 5,00,000/- equity shares of Rs. 10/- each. Issued, subscribed and paid up Rs. 1,00,000/- equity shares of Capital. Rs. 10/- each. The shareholding pattern of the 1st respondent company was as under: S. No. Name No.of shares Value of the shares in Rs. Status in the Appeal 1 Mr. Venkat Sudhakar Sattur 9,900 99000 1st appellant 2 Mr Rakakrishna Reddy Raya 100 1,000 2nd Respondent Total 10,000 1,00,000 4. 1st appellant is the founder, chief promoter and majority shareholder (99%) of 1st respondent which is handling the back office services like Finance & Accounts, HR, Legal transcription, Call handling and Scanning and Archiving works of the UK based company viz Duncan Lewis, London, UK. 1st appellant and 2nd respondent are the promoters and subscribers to the Memorandum of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iately issued letter dated 11th November, 2011 and stated that the AGM 2011 is unauthorised, invalid and illegal due to several reasons. Notice for AGM was not a proper notice. Further there was no valid Board of Directors existing at the relevant time for calling of the AGM not to speak about approving and authenticating the financial statements for the year 2010-11. 10. Subsequently the authorized capital of the Company has been increased from Rs. 5,00,000/- to Rs. 50,00,000/- (500000 shares) in the EGM held on 7th December, 2011. 11. 1st appellant levelled allegations of threatening him by respondents and one of his relatives Mr. Sridhar to transfer his shareholding to others. 1st appellant attended the AGM 2011 and marked his attendance by showing his protest and asked for copy of the audited accounts which was not provided to him. On 21st December, 2011 Board Meeting was held and 269634 shares has been allotted to 5th Respondent. Again on 16.1.2012 Respondent No.5 was allotted 180166 shares on 16.1.2012. The said allotment was further made to reduce the shareholding of 1st appellant. The shareholding pattern after allotment of 269634 shares on 21.12.2011 and 180166 shares ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order dated 29.8.2017. Relevant portion of the impugned order is as under:- "So far as the enhancement of the Authorised share capital of the Company is concerned, the petitioner was given due notice of the all meetings during EGMs. After giving due notice only, the impugned allotment of shares consecutively was done and the same cannot be found fault with. The petitioner utterly failed to substantiate various material allegations made in the Company Petition. The Petitioner still has not shown any interest in running the affairs of the Company, except making wild allegations against the Company, which is giving employment to more than 100 employees and their families. The petitioner as stated supra, had employment in UK and still he had not shown any interest in running the affairs of the Company though he is invited for the same as stated supra. 19. As stated supra, the respondents have shown their bonafide by their willingness to allot as many shares to the petitioner to subscribe at nominal value of a share, or Sell all the respondents' shares to the petitioner at a fair value, or Buy all the petitioner's shares at a fair value. Any way, it is for petitioner and responde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... power of appellant even in general meetings. 19. 1st appellant admitted that a Board Resolution on 20.5.2010 was signed by him and was used by the 1st respondent before the Department of Telecommunications (Page 529). 20. 1st appellant submitted that he has not acted in any manner prejudicial to the interest of the 1st respondent. 1st appellant stated that the appellant, respondents and statutory auditor of 1st respondent have been corresponding through email almost on a daily basis (Page 387-406) 21. 1st appellant stated that when he was the promoter with 99% stake, respondents who have no stake could not have done anything worse than this to achieve a collateral purpose. 22. 1st appellant stated that after his unceremonious and malicious removal, 10000 shares were allotted to 2nd respondent, 20000 shares to 3rd respondent and 10000 shares to 4th respondent (Page 379) on 27.10.2011. 1st appellant stated that this date i.e. 27.10.2011 was chosen after creating records and filing of Form 32 on 17.10.2011 for the alleged cessation of directorship of appellant. 1st appellant submitted that any allotment of shares made without the consent of 99% shareholder in any company is un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erson appointed as an Additional Director will continue office only until the date of AGM. The notice of AGM for 2010 (Page 296) obviously does not contain any agenda for appointing 3rd respondent as a regular director. 1st appellant submitted that continuation of 3rd respondent after 26.9.2010 is invalid and he could not legally be forming part of any Board Meeting thereafter, more particularly the meetings allegedly held on 10.11.2010, 20.01.2011 and 27.10.2011. 26. 1st appellant stated that the validity of the acts of directors as stated in Section 190 of the Act will not apply to actions purported by 3rd respondent was not in good faith and in violation of his fiduciary duties. Therefore, any resolution passed with 3rd respondent forming quorum will have to be set aside. 27. 1st appellant stated that the AGM 2010 was held without valid notice to the appellant and in view of the invalidity of the impugned allotment made on 27.10.2011 to 2nd, 3rd and 4th respondent, the quorum for the AGM 2011 with the presence of 2nd, 3rd and 4th as shareholders is not valid. 28. 1st appellant stated that the notice dated 28.11.2011 for the EGM dated 7.12.2011 was received by him only on 7 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... without complying with the Articles of Association of the company, no share transfer could have been made without offering them to the appellant who has preemptive right of first refusal. There was no board meeting at all on 3.10.2013 in which share transfers were recorded. 1st appellant stated that in the revised annual return made upto 30.9.2014, it is shown that 6th Respondent has 50000 shares, though he has not been allotted any shares. It is stated that the shares held in the name of appellant-petitioner too added in the said shares and the same is reflected in Page No.846. 33. 1st appellant stated that by altering the composition of Board of Directors, shareholding pattern, by removing the directorship of appellant w.e.f. 20.1.2011 and allotting shares on 27.10.2011 and constituting the Board of Directors and allotting shares to 5th Respondent on 21.12.2011, 16.1.2012, 3.8.2012, 6.6.2013 and transferring shares on 3.10.2013 and resignation of directorship of 3rd Respondent on 12.11.2014, there has been material change in the company which is against the interest of the shareholders and the company. It is stated that the status of 5th respondent whom the shares were allotte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... take up employment outside India. Clause 58 of Articles of Association provides that such Director should provide a declaration pledging himself to observe strict secrecy with respect of all transactions and affairs of the company, with the customers (Page 274). The act of joining the client company is in complete violation of the Articles of Association of the company. 38. Respondents stated that the allotment of shares to 2nd, 3rd and 4th respondent on 27th October, 2011 is absolutely valid and legal. Form 2 with respect to the said allotment was also duly filed with the ROC, Hyderabad. The company, in the course of its business had to raise additional capital and it is the prerogative of the Board to decide as to in what form funds would be raised. Clause 4 of Articles of Association (Page 265) provides 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 conditions. Respondents stated that Section 81 of the Companies Act, 1956 is not applicable to the Private Limited Companies. Respondents stated even if the appellant was on the Board on the date of allotment, by majority on the Board the shares w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of Association, the onus is on the Managing Director to hold the Meeting of the Board and the venue of the meeting of the Board should be the Registered Office of the company and the Board shall meet at least once in every 3 months (Page 270). Respondent stated that appellant did not take initiative to call and hold the meetings of the Board of Directors from time to time and even after signing the extract of the Resolution on 20th May, 2010, he did not take any interest in convening the next board meetings which proves that he had handed over the management and operations before leaving for the UK. 41. Respondents stated that Clause 4 of the Articles of Association provides that the shares shall be under the control of the directors, who may allot or otherwise dispose of the same to other persons. (Page 265). Respondent further stated that the provisions of Section 81 of the Companies Act, 1956 is not applicable to the Private Limited Companies and the Articles of Association provides the power to the Board to allot shares. Respondent stated that even if the appellant was on the Board on the date of allotment, by majority on the board the shares would have been issued and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the NCLT is convinced that the appellant moved to the UK for permanent residency and could not attend the meeting and the appellant himself has agreed to sign the extract of the resolution. Respondent stated that the appellant should understood that the literal meaning of the word 'promoter' is not the one who just establishes a company but the one who has control over the affairs of the company whether directly or indirectly. Respondent lastly submitted that the NCLT has done natural justice by dismissing the company petition. 45. We have heard the learned counsel for the parties and perused the record. 46. Appellant has argued that 3rd respondent is invalidly continuing as an additional director or alternate director. We have noted that 3rd respondent was appointed as an additional director on 20.2.2010 under an arrangement as per Article 30 of the Articles of Association of 1st respondent (Page No.269 of Vol.II). Further as per Section 260 of Companies Act, 1956, the Act applicable at that time, 3rd respondent shall hold office only up to the date of the next AGM of the 1st respondent. After the appointment of 3rd respondent as additional director on 20.2.2010, the AGM of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 283(1)(g) of the Act and therefore, the 1st respondent filed Form 32 intimating his vacation to the ROC and the vacation of office as Director of the appellant is legal and valid. 49. After hearing both the parties we have noted that Form No.32 was filed with ROC (Page 374) intimating that 1st appellant has vacated the office under Section 283 of the Companies Act,1956 with effect from 20.01.2011 for not attending three consecutive meetings i.e. 20.5.2010, 27.8.2010 and 10.11.2010. We have also observed from para 9 of the counter filed by Respondents No.1 to 7 (Page 9) in which the Respondents have stated that the extract of the meeting dated 20th May, 2010 were signed by the appellant. The respondents have further stated that "it is proved that he was aware of the meetings and its agenda." We have seen the said extract, Annexure P-30 at Page 529 and find that the same has been signed by the appellant. Therefore, we have come to the conclusion that when the extract of meeting dated 20.5.2010 has been signed by the appellant, it also establishes that impliedly the leave of absence in defacto is given to the appellant for 20.5.2010. It also proves that the appellant had a cooper ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... requires that the appellant being founder Director and majority shareholder should have been given notice at his foreign address. Further the meeting now a days can be held via video conferencing. Nothing of the sort have been done by the company especially when on day to day matters, it is having its business with the foreign countries. 51. The other issue raised by the appellant is that the allotment of 40000 shares to 2nd, 3rd and 4th respondent is illegal and invalid. Appellant argued that 10000 shares were allotted to 2nd respondent, 20000 shares to 3rd respondent 10000 shares to 4th respondent on 27.10.2011. Appellant argued that this date i.e. 27.10.2011 is crucial as the Respondent has cleverly, after creating records and filing of form 32 on 17.10.2011 for the cessation of directorship of appellant, allotted the shares to Respondents. Appellant further argued that the Balance Sheet of 1st respondent for 2010-2011 shows that there was no need of funds and by allotting 40000 shares to themselves and 4th Respondent, being wife of 3rd respondent, is a violation of fiduciary duties and breach of trust. 52. Counsel for the Respondent argued that the company in the course of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Board to allot shares. We have already observed that 3rd respondent was appointed as additional director on 20.2.2010 under an arrangement. After the appointment of 3rd respondent on 20.2.2010, the AGM of the 1st Respondent was held on 26.9.2010 and his appointment as additional director was not regularised. Therefore, we have already held that his continuation as additional director after 26.9.2010 is not as per law. Further, as per Section 287 of the Companies Act, 1956 the quorum for a meeting of the Board of Directors of a company shall be one-third of its total strength or two directors whichever is higher. As we have already held that the continuation of 3rd director is not as per law after 26.9.2010, therefore, the Board Meeting held on 27th October, 2011 in which the decision was taken to allot 40000 shares to 2nd, 3rd and 4th Respondent is not as per law as for conducting the Board Meeting the quorum should be complete and one Director cannot hold the Board Meeting. Similarly the subsequent decisions to allot 268834, 168448 and 330000 shares to 5th Respondent on 20.12.2011, 16.1.2012 and 3.8.2012 were taken. It is noted that on removal of appellant on 20.01.2011 and f ..... X X X X Extracts X X X X X X X X Extracts X X X X
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