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TMI Blog2021 (7) TMI 621X X X X Extracts X X X X X X X X Extracts X X X X ..... lted in payment of loan taken in personal capacity and Petitioner has chosen to not to subscribe to the right issue having been offered to them on the same terms and conditions as well. Thus, requirement of raising funds for the purpose of running business of the Company appears to exist - there is no justification for staying or keeping the right issue in abeyance at this initial stage. The prayer made by the Petitioners for interim relief is rejected. It is made clear that this interim order cannot be construed as an expression of any opinion on the merits of other issues, if any, raised in the present petition filed under Section 241 and 242 of the Companies Act, 2013. - CP/4(MP)2021 - - - Dated:- 9-7-2021 - Dr. Deepti Mukesh, Member (J) And Virendra Kumar Gupta, Member (T) For the Appellant : Navin Pahwa, Learned Senior Counsel For the Respondents : Saurabh Soparkar, Learned Senior Counsel and Manoj Munshi, Learned Counsel ORDER 1. This petition has been filed claiming acts of oppression and mismanagement perpetrated by Respondents under Section 241-242 of the Companies Act, 2013. Various main reliefs have been sought, however, the Petitioners have sou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re was no legitimate purpose for raising funds and it was exercised to reduce certain shareholders into minority, such a right issue could be cancelled on the ground of breach of fiduciary duty and relationship between directors. Qua this proposition, he placed strong reliance on the order of Hon'ble Supreme Court in the case of Dale Carrington Invt. (P) Ltd. and Another v. P.K. Prathapan and Ors. (2005) 1 SCC 212 and drew our attention to relevant paras of this order, which are as under: 11(d) We may also test the alleged act of allotment of equity shares in favour of Ramanujam from a legal angle. Could it be said to he a bona fide act in the interest of the Company on the part of Directors of the Company? At this stage it may be appropriate to consider the legal position of Directors of companies registered under the Companies Act A company is a juristic person and it acts through its Directors who are collectively referred to as the Board of Directors. An individual Director has no power to act on behalf of a company of which he is a Director unless by some resolution of the Board of Directors of the Company specific power is given to him/her. Whatever decisions a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions akin to those applied in cases of partnership where the partners owe a duty to act with utmost good faith towards each other. Non-applicability of Section 81 of the Act to private companies does not mean that the directors have absolute freedom in the matter of management of affairs of the company. In the present case Article 4(iii) of the Articles of Association prohibits any invitation to the public for subscription of shares or debentures of the company. The intention from this appears to be that the share capital of the company remains within a close knit group. Therefore, if the directors fail to act in the manner prescribed above they can in the sense indicated by us earlier be held liable for breach of trust for misapplying funds of the company and for misappropriating its assets. 20. The principle deduced from these cases is that when powers are used merely for an extraneous purpose like maintenance or acquisition of control over the affairs of the company, the same cannot be upheld. 21. Courts in the Commonwealth countries including England and Australia have emphasized that the duty of the Directors does not stop at to act bona fide requirement They have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... la fide, the said act must ordinarily be considered to be an act of oppression to the said member. The member who holds the majority of shares in the company is entitled by virtue of his majority to control, manage and run the affairs of the company. This is a benefit or advantage which the member enjoys and is entitled to enjoy in accordance with the provisions of company law in the matter of administration of the affairs of the company by electing his own men to the Board of Directors of the company. 25. On the question of relief the court observed: A majority shareholder should not ordinarily be directed to sell his shares to the minority group of shareholders, if per chance through fortuitous circumstances or otherwise, the minority group of shareholders comes into power and management of the company. The majority shareholders by virtue of their majority will usually be in a position to redress all wrongs done and to undo the mischief done by the minority group of shareholders, as it will always be possible for the majority group of shareholders to regain control of the company so long as they remain in majority in the company by virtue of the majority. Except in unu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... may be said that although the power of issuing shares is given to directors primarily for the purpose of enabling them to raise capital when required for the purpose of the company, this was not the object of the directors in this case... 28. It will be seen from the judgments in Needle Industries and Tea Brokers that the courts in India have applied the same tests while testing exercise of powers by directors of companies as in other Commonwealth countries. 29. In the present case we are concerned with the propriety of issue of additional share capital by the Managing Director in his own favour. The facts of the case do not pose any difficulty particularly for the reason that the Managing Director has neither placed on record anything to justify issue of further share capital nor it has been shown that proper procedure was followed in allotting the additional share capital. Conclusion is inevitable that neither was the allotment of additional shares in favour of Ramanujam was bona fide nor it was in the interest of the company nor was a proper and legal procedure followed to make the allotment. The motive for the allotment was mala fide, the only motive being to gain co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h can save Company from facing legal actions. He further contended some of the creditors have already sent legal notice to the Company for repayment and arrears of interest. The Company may have to face legal action. To further support the necessity for raising funds, the learned Sr. Counsel for Respondents further drew our attention to the negative cash flows, unsecured loans being raised by the Company to meet out the business exigencies in the previous F.Y.(s). Hence, considering these aspects, there was no merit in the claims made by the Petitioner that funds were raised with an ulterior motive to reduce them to minority shareholding. Thereafter, the learned Sr. Counsel for the Petitioner contended that Company was in the business of real estate and the properties were not readily saleable as claimed by the Petitioners considering market conditions in real estate world as well as the fact that several properties were agricultural lands and land use had to be changed. The learned Sr. Counsel for Respondents further submitted that even the owners of such properties had not been fully paid and a sum of ₹ 4 crores (approx.) is outstanding, which would also be required in due ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all others in the same proportion, no prejudice, whatsoever, could have been caused to them. It is not in dispute even by the Petitioners that the need for more funds was an admitted position. In Needle Industries this Court has pointed out if there is a need for funds the fact that the Directors have incidentally enriched themselves would not entail a court to set aside the issue of shares. In fact, no unfair prejudice has been caused to the petitioners. CLB failed to take note of all these vital aspects and relied on irrelevant materials. Apart from these, it is pointed out that the Company having turned the corner and doing well, it would be fair exercise of having turned the corner and doing well, it would be fair exercise of discretion by this Court not to interfere with the High Court judgment. 7. We have considered the submissions made by both the sides for interim relief as regard to stay of right issue. It is a settled law from judicial precedents that while considering interim relief, the Tribunal has to look into the aspect of balance of convenience between the parties. The interim relief is discretionary and the Court is also required to consider whether Petitioner ..... X X X X Extracts X X X X X X X X Extracts X X X X
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