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TMI Blog2022 (1) TMI 518X X X X Extracts X X X X X X X X Extracts X X X X ..... the Companies (Meeting of Board and its Powers) Rules, 2014, approval of the shareholders will also be required by way of an ordinary resolution. Such consent can be obtained prior to, or within three months after, entering into the transaction. However, in these matters such an action has not done by the Respondents 2 3. The related party contracts are to be disclosed in the Board of Directors' Report and in a register of such contracts is to be maintained. It is also seen from the records that the respondent companies have not obtained permission from the Board of Directors to enter into these related party transactions. Hence, the contention of the Respondents that these are not Related Party Transactions and that it is Simple Commercial Transactions cannot be accepted. The Related Party Transactions done by the Respondents are contrary to the provisions of law and in breach of the Articles of Association of the Respondent Company and, therefore, the said Related Party Transactions are hereby declared as invalid and all the proceedings which have been done in violation of the Articles of Associations are also hereby declared as invalid - Since it is declared that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t to the accounts of the Company an amount of INR 36,00,000/- (Rupees Thirty-Six Lakhs); or such amount as may be determined by the auditor to be appointed by the shareholders in a meeting of the shareholders of the Company to be convened by and conducted under the supervision of this Hon'ble Tribunal; being the rental income due from 'RBG Trading Corporation Pvt. Ltd.' being the rental income due from 'RBG Trading Corporation Pvt. Ltd.' for the period 01.04.2018 to 30.09.2019. vi. Direct the 2nd 3rd Respondents to refund to the Company all amounts in related party transactions which do not obtain the approval of the shareholders in a meeting of the shareholders of the Company to be convened by and conducted under the supervision of this Tribunal. vii. Issue a direction to the 1st Respondent Company and to the 2nd and 3rd Respondents that the financial statements and annual accounts of the Company for the years 2015-16, 2016-17 2017-18 be reopened under Section 130 of the Companies Act, 2013. viii. Issue a direction to the 1st Respondent Company to appoint a new auditor in a meeting of the shareholders of the Company to be convened by and cond ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y an order that the Board of Directors of the 1st Respondent Company be reconstituted by the shareholders at a meeting of the shareholders of the Company to be convened by and conducted under the supervision of this Tribunal. ii. Issue a direction to the 1st Respondent Company and to the 2 and 3 Respondents that the financial statements and annual accounts of the Company for the years 2015-16, 2016-17, 2017-18 and 2018-2019 be re-opened under Section 130 of the Companies Act, 2013. iii. Issue a direction to the 1st Respondent Company to appoint a new auditor in a meeting of the shareholders of the Company to be convened by and conducted under the supervision of this Tribunal to scrutinize all transactions and to audit the accounts of the Company for the years 2015-16, 2016-17, 2017-18 and 2018-2019; and to finalize the accounts for the years 2015-16, 2016-17, 2017-18 and 2018-2019 within a period stipulated by this Tribunal. iv. Direct the 2nd and 3rd Respondents to place for consideration of the shareholders all related party transactions for the years 2015-16, 2016-17, 2017-18 and 2018-2019 in a meeting of the shareholders of the Company to be convened by and condu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... may be necessary, under Section 448 of the Companies Act, 2013 for submission of false statements and reports for the years 2015-16, 2016-17 2017-18. xiv. Issue a direction to the Registrar of the Companies, Kochi to initiate appropriate action against the 2nd and 3rd Respondents for failure to disclose interests as contemplated under Section 184 of the Companies Act, 2013. xv. Issue a direction to the Registrar of the Companies, Kochi to initiate appropriate action against the 2nd and 3rd Respondents under Section 185 of the Companies Act, 2013, for failure to report to shareholders the related party transactions during the years 2015-16, 2016-17, 2017-18 and 2018-2019. 4. The Company Petition No. 125/KOB/2019 has been filed by Smt. Minakshi Gupta and Sulochan Gupta against M/s. RBG Retail Pvt. Ltd. and Others seeking the following reliefs: i. This Tribunal direct by an order that the Board of Directors of the 1st Respondent Company be reconstituted by the shareholders at a meeting of the shareholders of the Company to be convened by and conducted under the supervision of this Tribunal. ii. Direct the 2nd and 3rd Respondents to place for consideration or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng with the provisions of Section 96 of the Companies Act, 2013. xi. Issue a direction to the Registrar of the Companies, Kochi to initiate appropriate action against the 2nd and 3rd Respondents, and all other persons as may be necessary, under Section 448 of the Companies Act, 2013 for submission of false statements and reports for the years 2015-16, 2016-17 2017-18. xii. Issue a direction to the Registrar of the Companies, Kochi to initiate appropriate action against the 2nd and 3rd Respondents for failure to disclose interests as contemplated under Section 184 of the Companies Act, 2013. xiii. Issue a direction to the Registrar of the Companies, Kochi to initiate appropriate action against the 2nd and 3rd Respondents under Section 185 of the Companies Act, 2013, for failure to report to shareholders the related party transactions during the years 2015-16, 2016-17 2017-18. The brief introduction of the Petitioners in each case is as under:- 5. CP/114/KOB/2019 The Petitioners are shareholders of M/s. RBG Enterprises Private Limited. The 1st Petitioner holding 4750 equity shares of ₹ 1000/- each constituting 14.83% of the total paid up capital of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ness as manufacturers, retailers, general merchants, commission agents, exporters, importers, traders, distributors, marketers and representators of all kinds of textiles and ready-mades; consumer durables, gems and jewellery, health and personal care products/accessories; antiques, arts and artifacts, processed and unprocessed food and food products; sports goods, stationery, medicines, machineries, tools and implements, packing and building materials. The authorised share capital of the Company is ₹ 3,21,00,000/- divided into 32100 equity shares of ₹ 1000/- each. The present issued, subscribed and fully paid-up capital of the Company is ₹ 3,20,00,000/- divided into 32000 equity shares of ₹ 1000/- each. The brief facts of the case are as under:- 8. The Respondent Companies are family enterprises. The management of the Companies vests in Board of Directors and not in any one individual, including the Managing Director. It is specifically alleged that, the 2nd Respondent, has failed to hold the Annual General Meeting for many years. It is further stated that, the 2nd Respondent is acting as the Managing Director, who in collusion with the 3rd Responden ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ip firm M/s. Sri Rubber Industries'. The 2nd 3rd Respondents in 2018 displayed sign boards to the effect that the space has been rented to 'RBG Trading Corporation Private Limited', in which the Petitioners along with shareholders Radha Ballabh Gupta, and Radha Ballabh Gupta (HUF), Mahesh Kumar Gupta, and, Mahesh Kumar Gupta (HUF) have substantial stake. The 2nd 3rd Respondents have not disclosed the rental income due from M/s. Sri Rubber Industries in the first instance and from 'M/s. RBG Trading Corporation Private Limited' in the subsequent years in the financial statements of the Company for the relevant years. The Petitioners contended that M/s. Sri Rubber Industries is liable to pay rental income of approximately ₹ 2,00,000/- per month for the years 2010 to 2018, i.e., the date disclosed in Certificate of Registration dated 06.09.2019 under KVAT Act 2005. 11. It is stated that the total amount due on this score from 'M/s. Sri Rubber Industries' is estimated at ₹ 1,92,00,000/-. The rental income due from 'M/s. RBG Trading Corporation Private Limited' is estimated to be ₹ 36,00,000/- (Rupees Thirty-Six Lakhs from 01.0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 310/2019 with I A. No. 2023/2019 before the Munsiff's Court, Kochi and has obtained an interim injunction restraining the Respondents therein from disturbing the assets and companies presently in the management of the Plaintiff ( 2nd Respondent ). It is further stated that the suit which the 2nd Respondent has filed and the interim injunction which he has obtained therein cannot be treated as a ruse and excuse to commit statutory defaults. 14. It is stated that the majority shareholders including the Petitioners have sought the intervention of this Tribunal under Sections 96 Section 97(1) of the Companies Act, 2013, for a direction to the 2nd Respondent to convene the Annual General Meetings through Company Petitions 98/KOB/2019, 99/KOB/2019, 100/KOB/2019, 101/KOB/2019, 102/KOB/2019 103/KOB/2019. This Tribunal has directed the Respondent Companies and the 2nd 3rd Respondents through its Order on 03.10.2019, to furnish their responses by 17.10.2019. As an interim measure, this Tribunal restrained the 2nd and 3rd Respondents from operation of Related Party Transactions in the Bank account of the Company. It is stated that the 2nd Respondent has failed to discharge his ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ondent before this Tribunal to unauthorizedly participate in the meeting. The disapproval of the majority shareholders in this regard was treated with contempt by the 2nd Respondent. The 2nd Respondent ordered a poll on the approval of the financial statements and the appointment of the Statutory Auditor. The majority Shareholders have not approved the financial statements with its accompanying documents, as also the appointment of the Statutory Auditor. It is stated that the 2nd Respondent refused to announce the result but he assured that the result would be displayed on 01.11.2019 in the notice sent. The Petitioners have sought clarification on the outcome of the poll through an e-mail communication dated 01.11.2019 since the 2nd Respondent has failed to fulfil his word. 17. It is stated that there was an AGM of M/s. RBG Retail Pvt. Ltd. held on 31.10.2019, in which also similar actions and events took place. 18. It is stated that the 2nd Respondent in collusion with the 3rd Respondent has been managing the Respondent Companies in a manner prejudicial to the interests of the public; and importantly to the interests of the Petitioners and the shareholders Radha Ballabh Gupt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted the related party transactions are grouped as follows:- i. Interest received from the Related parties. ii. Loans given/refunded by the Related parties. iii. Remuneration drawn by the Managing Director. iv. Commission Received. v. Remuneration paid to Anika Gupta. vi. Remuneration paid to Ritu Gupta. i. Loans/Interest received: The Respondents submit that the loans provided to Related parties are outside the scope of Section 188 and are not governed by Section 188. In any case all such loan transactions referred by the Petitioners carried interest @ between 9% to 12% depending on market conditions, which therefore come under commercial transactions, which are done on arm's length basis and fully exempted under the 3rd proviso of Section 188 (1). The Statutory Auditors of the Company have not made any adverse comments on the above transactions which are also fully disclosed in the respective Balance Sheets of each year. Company has only benefitted by such pooling of resources to one of the family concerns and for the year 2015-16 total interest received was ₹ 16,64,740/-, for the year 2016-17 the total interest received was ₹ 2,37,666.00/- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ole Time Directors of the Company are governed by different Sections of the Companies Act and the Company is fully compliant on this. iii. Commission paid The Commission paid during the year 2015-16 was ₹ 75,000/-, for the year 2016/17 it was ₹ 1,02,500/- and for the year 2017-18 it was ₹ 3,16,000/- from a family concern for using the Open Vacant spaces and warehouse space at the Warehouse at South Vazhakulam, which on and off was in existence from the year 2008 onwards and the Company benefitted by such arrangement as such open vacant spaces, are not available elsewhere. The Petitioners have not alleged anything wrong about the transaction of over payment. The 2nd Respondent stated that the above transaction benefitted the company and its shareholders. 22. It is stated that the remuneration paid to the Whole Time Director is a normal routine business matter decided by the Board considering the workload of the concerned Director and he is being paid remuneration from the company since 2011-2012. 23. It is stated that the usage of open area drying yard and warehouse space for export processing belong to another family concern is on an arrangement of pay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce of provisions of the Companies Act and authorized by the Board. Similarly, the salaries paid to employees who are related to Directors are also paid for their services as employees. 29. It is stated that the name board of Sri Rubber Industries was placed at the Warehouse building of M/s. RBG Enterprises Private Limited around 12 years back but no activity of Sri Rubber Industries is done at the warehouse and the name board is kept only for Sale Tax purpose. There was a name sake agreement entered into between the Company and Sri Rubber Industries during 2009 which incidentally was signed by Mr. Mahesh Kumar Gupta, husband of Petitioner No. 2 on behalf of Sri Rubber Industries. This also further proves that due to family disputes, such allegations are made by the petitioner. These arrangements were done many years ago and are well known to all the stakeholders in the RBG Family Group including the petitioners and their family members. The facilities used by RBG Trading Corporation Pvt. Ltd. in the warehouse of the Respondent Company are disclosed in the Balance Sheet. There is no facility used by Sri Rubber Industries at the warehouse and hence no payment is made. The only re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is related party transactions and has not commented upon adversely. It is stated that M/s. M/s. RBG Enterprises Private Limited has refunded Deposits on rental space amounting to ₹ 43.80 lakh in the normal course of business with the reputed parties namely with M/s. AVT Natural products Ltd. and with M/s. Johnson Johnson Ltd. 31. It is stated that the Smt. Sulochana Gupta is a housewife who cannot read or write English and is an aged person with indifferent health. The Company Petition has been signed by her without any understanding of the contents therein since the same is orchestrated by Mr. Mahesh Kumar Gupta who is one of the Directors of the Company, on account of the family disputes. The audit of the Company is done by the same Statutory Auditors who are auditing since the inception of the Respondent Company two other companies belonging to the RBG Family Group. For re-opening of the Books of Accounts under Section 130 the Petitioners are required to place proof of fraudulent matters before this Tribunal rather than bringing the disclosed particulars available in the Balance Sheet in the public domain. It is further stated that the communication sent by Petition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es are paid from the year 2011-2012 onwards. 34. It is stated that the AGM of M/s. RBG Retail Pvt. Ltd. was held on 31.10.2019 lead by Respondent No. 4 who is also a Director of the Company who tried to disrupt the AGM proceedings and the discussions mostly on family partition. All the questions related to Company's affairs were answered by the 2nd Respondent who was the Chairman of the meeting. On account of the disruptions, the Chairman announced that the AGM is adjourned to 07.11.2019 and at the adjourned meeting on 07.11.2019, the disruptions by Respondent No. 4 continued. The Chairman, therefore announced that voting will be done for all the agenda items as required by some of the shareholders especially Mr. Mahesh Kumar Gupta, Respondent No. 4. The voting results were duly published in the Notice Board of the Company on 07.11.2019 as declared by the Chairman of the meeting at the venue. The appointment of Mr. K.O. Kuriachan as Company Secretary, appointment of Mr. Radha Ballabh Gupta as Director is denied by the Respondents as the AGM Notice did not have any such agenda items and no notice of such Resolutions as required under Section 111 were received by the Company. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any prayer for Notice to Central Government, Income Tax Authorities without which no proceedings can be initiated u/s. 130. The Petitioners have merely and casually stated that the Accounts should be reopened without substantiating or following the procedure u/s. 130. The Petitioners have conveniently brought the RBG HUF family disputes to this Tribunal and is attempting to take over the Companies based on the numerical advantage in the shareholdings held by their group in the RBG HUF family by passing the HUF concept of all assets belonging equally to all the coparceners of the RBG HUF irrespective of the fact that the shares are held in uneven proportions. 37. It is also stated that the RBG HUF consists of seven (7) Companies and several partnerships and proprietorship. It is the understanding of the RBG HUF that all the businesses whether it is carried or managed by an individual personal or the shares are unevenly held, all the assets, all the businesses belong to everyone in the RBG HUF. The Petitioners have also applied to the Registrar of Companies under Section 206 of the Companies Act for Inquiry and Investigation on exactly similar allegations contained in the Company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers are protected. We have gone through the various related party transactions which would reveal that the 2nd and 3rd Respondents have siphoned funds to the prejudice of the other shareholders. The said fact is clear from the statements of the Respondents. Hence no exemption can be claimed by the 2nd and 3rd Respondent, based on the said notification. The term interest is wider than the term rights [Chancery Court in Sam Weller 1990 Ch. 682]. Where the Board has acted with the dominant purpose of discriminating between shareholders, it would tantamount to prejudice. In the said case, the Court held that whilst the Board drew remuneration, the non-payment of dividend unfairly prejudiced the members of the Company. For interpretation of the Circular, the following aspects should be taken into consideration: a) A person who claims an exemption has to establish that he is eligible for the exemption-Constitution Bench of the Hon'ble Supreme Court in Hari Chand Shri Gopal and Others (2011) 1 SCC 236 [Para 22]. The Respondents have failed to discharge this burden of proof and demonstrate how they are eligible to claim the exemption. The said burden of proof lies on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... establish a contract between the Company and the members and between the members inter se. The contract governs the ordinary rights and obligations incidental to membership in the Company. In the absence of any provisions contained in the Indian Companies Act which prohibit a Company from forfeiting a share for failure on the part of the member to carry out an undertaking or an engagement the Articles of a Company which provide that in certain events membership rights of the shareholder including his right to the share will be forfeited are binding. The Articles of Association of the Exchange expressly provide that in the event of the member failing to carry out the engagement and in the conditions specified therein his share shall stand forfeited. Articles 22, 24, 26, 27 29 of the Exchange relating to forfeiture of shares in certain events are therefore valid. 45. In this respect, it is beneficial to quote the Clauses 34 and 44 of the Articles of Association of the Respondent Companies and those Clauses are reproduced hereunder:- Clause 34:-The business of the Company shall be managed by the Directors who may pay all expenses incurring in setting up and registering th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he manner prescribed by the statute. Annual General Meeting is very important for a company because of the business transacted at that meeting is to be known to all members. Section 96 and 102(2) of the Companies Act describe the very purpose and nature of the business which is to be transacted in such meetings. Annual General Meeting as the name itself signifies is an annual meeting of every company irrespective of its being a private company or a public company, having a share capital limited or unlimited, must hold this meeting as per the mandate of Section 96 of the Act. Since we found that the AGM for the years 2015-16, 2016-17, 2017-18 have not been conducted according to the Companies Act and based on the Articles of Association of the Companies. The objection raised by the Respondents are merely incongruous, and therefore, holds no water. Hence, we cannot accept the contention of the Respondents. 49. Issue number (iii):-In order to obtain clarity on this issue, we have gone through the definition of related party in the Companies Act, 2013 which is quoted hereunder:- 2 (76) related party , with reference to a company, means-- (i) a director or his relative ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... share capital of not less than such amount, or transactions exceeding such sums, as may be prescribed, shall be entered into except with the prior approval of the company by a [resolution]: Provided further that no member of the company shall vote on such [resolution], to approve any contract or arrangement which may be entered into by the company, if such member is a related party: Provided also that nothing in this sub-section shall apply to any transactions entered into by the company in its ordinary course of business other than transactions which are not on an arm's length basis: Provided also that the requirement of passing the resolution under first proviso shall not be applicable for transactions entered into between a holding company and its wholly owned subsidiary whose accounts are consolidated with such holding company and placed before the shareholders at the general meeting for approval. Explanation.--In this sub-section,-- (a) the expression office or place of profit means any office or place-- (i) where such office or place is held by a director, if the director holding it receives from the company anything by way of remuneration over ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith fine which shall not be less than twenty-five thousand rupees but which may extend to five lakh rupees. 51. We have also gone through the transactions held in the Respondent Companies and financial statements filed before the Registrar of Companies. It is evident that there is loan given by M/s. RBG Enterprises Pvt. Ltd. to M/s. Sri Rubber Industries. M/s. RBG Enterprises Pvt. Ltd. to M/s. RBG Trading Corporation Pvt. Ltd. 52. It is evident from the records that there are various transactions between Ritu Gupta (wife of Respondent No. 2) and Anika Gupta (wife of Respondent No. 3). This was done without the consent of the Board of Directors of the Respondent Company. 53. A company typically enters into various transactions with different parties, including related parties. Any contract or arrangement with the related party(ies) falls within the ambit of Section 188 of the Act, if it relates to, inter alia, the sale, purchase or supply of goods or materials; selling, buying or leasing property of any kind; and availing or rendering any services beyond the ordinary course of business or as an arm's length transaction. 54. When a company enters into a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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