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TMI Blog2023 (4) TMI 1142X X X X Extracts X X X X X X X X Extracts X X X X ..... t a director of R-1 Company nor involved into day-to-day management and affairs of the Company, and therefore, even if she participated in the AGM, wherein the new shareholding of R-3 and R-4 were presented in the Annual Report of the company and Profit and Loss Account for the year 2012-13, she did not have any specific knowledge of the change in her own proportionate shareholding as a result of fresh allotment of shares to R-3 and R-4. The Appellant s petition CP 09/2016 is not affected by res judicata and estoppel in that the Appellant did not lose the entitlement to file the company petition. Whether the petition CP No. 09/2016 is beset with delay and laches and is hit by the issue of limitation? - HELD THAT:- When there exists a continuum in the act of oppression and mismanagement which continues up to the date of filing of the petition, any delay and laches cannot take away the right of the petitioner even if the origin of such acts occurred much prior to the institution of the company petition - In the matter of Praveen Shankaralayam v Elan Professional appliances Pvt. Ltd. [ 2017 (1) TMI 61 - NATIONAL COMPANY LAW TRIBUNAL, NEW DELHI ], which has been cited by the Le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Appellant had knowledge of the allotment of shares to R-3 and R-4 which was clearly in contravention of the Articles of Association, she was eligible and entitled to raise the issue of contravention of Articles of Association in allotment of these shares as she was not a person directly responsible for making such an allotment - The Articles of Association are binding on the company and its members and also on Board of Directors and if laid down procedure and principles have not been followed in allotment of shares to R-3 and R-4, the allotment cannot be held as valid. The NCLT committed an error in approving the share transfer to R-3 and R-4 as being in accordance with law and thereafter dismissed CP No. 09/2016. Since it is concluded that the allotment of a total of 1,88,800 shares to R-3 and R-4 is bad in law, the Impugned Order is set aside and the Appeal, is allowed and further it is held that allotment of these shares to R-3 and R-4 by virtue of the Resolution dated 2.12.2011 of the Board of Directors as null and void. Appeal disposed off. - TA No. 88 / 2021 ( Comp. App. ( AT ) No. 148 / 2019 ) - - - Dated:- 24-4-2023 - [ Justice M. Venugopal ] Member ( Judicial ) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent through the record submitted before us. 4. The Learned Counsel for Appellant has argued that the Appellant had sought certain reliefs, namely declaration of the allotment of shares of R-1 Company in favor of R-3 and R-4 and their continued holding them as illegal, and also the resolutions of the board of directors dated 2.12.2011 and 1.2.2012 by which the allotment of shares took place as invalid and illegal, and further restraining R-3 and R-4 from misusing any right or privilege as shareholders of R-1 Company and also from dealing with the properties, funds or assets of the Company. 5. The Learned Counsel for the Appellant has further argued that R-1 Company is a family company in the form of quasi partnership, in which Shri Dasaratha Rami Reddy, Shri Chenna Keshava Reddy, both held interests, while the mining lease for extracting ore was held by Shri Chenna Keshava Reddy. There were certain business arrangements between them, consequent to which Shri Dasaratha Rami Reddy resigned from the directorship of R-1 Company on 18.8.2011 and transferred his entire shareholding of 30% in R-1 Company in favour of the Appellant and her two brothers R-6 and R-7, whereafter the shar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onstitutes an act of oppression, as it converted the shareholding of the Appellant from 28 to 8.64% and made her a very small shareholder. 8. The Learned Counsel for Appellant has cited the judgment of Hon ble Supreme Court in the matter of Claude-Lila Parulekar v. Sakal Papers (P) Ltd. Ors. [(2005) 11 SCC 73], wherein in para 25, the Hon ble Supreme Court has held that the Articles of Association of a company are not only binding on the company, but also on members inter se, and it constitutes a contract between the shareholders and the company and the directors can only exercise those powers conferred by the Articles of Association. He has also referred to the judgment of this Tribunal in TA No. 102021 (M. Appayya and Ors. Vs. Chandrashekar Rao and Ors.), wherein in judgment dated 5.12.2022, it is held that if a company intends to increase its share capital by issue of further shares, such shares shall be first offered to the existing members in proportion to their shareholding and by sending a letter of offer and only when the existing members don t avail of this offer should the company allot the shares to other persons. It is further held that an allotment that causes red ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... one of the respondents had objected to the withdrawal by the Appellant from the previous petition CP No. 59/2014, which she has filed along with her brothers R-6 and R-7. 11. The Learned Senior Counsel for R-3 and R-4 has started his arguments by pointing out that the prayer to the filing of the subject petition CP No. 09/2016, the Appellant was a co-petitioner in CP No. 59/2014, which was filed by the Appellants along with her brothers R-6 and R-7, and in that petition, Appellants had explicitly and unequivocally acknowledged that the issue of allotment of shares to R-3 and R-4 was legally valid. He has referred to para 9 of the CP No. 59/2014 in this regard and contended that once the Appellant had acknowledged this fact in CP No. 59/2014, she had even prayed for a direction to R-3 and R-4 for paying the premium of the shares allotted to them. He has further argued that the Appellant filed a memo for withdrawal as a co-petitioner in CP NO. 59/2014 and NCLT permitted withdrawal with liberty to the Appellants, whereafter misusing the liberty given to the Appellant and abusing the process of law, she initiated a completely new case through CP No. 09/2016 regarding allotment of sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... but not for filing fresh petition based on the same cause of action. 14. Regarding allotment of shares to R-3 and R-4, the Learned Senior Counsel for R-3 and R-4 has argued that there was no illegality in allotment of these shares as the Appellant had acknowledged the allotment as legal and proper in CP No. 59/2014 and now the Appellant cannot do a complete about turn to claim that the allotment was made without her knowledge and in violation of Article 5 of the Articles of Association. He has further pointed out that the allotment of shares has been held to be done as per law in the final order passed by NCLT in CP No. 59/2014 and on this ground also the appeal deserves to be dismissed. 15. The Learned Senior Counsel for R-3 and R-4 has further argued that the original CP No. 09/2016 is not maintainable on the ground of oppression as it has to be first shown that the conduct of the company or the majority shareholders has to be shown as oppressive to the minority shareholder members and that there must be continuous acts on the part of the majority shareholders, continuing up to the date of petition for said company petition to be maintainable on grounds of oppression and m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tment to R-3 and R-4 provide res judicata and estoppel to her raising this issue later in CP No.09/2016? (ii) Whether the petition CP No. 09/2016 is beset with delay and laches and is hit by the issue of limitation? (iii) Whether the allotment of shares to R-3 and R-4 violates the provisions of the Articles of Association of R-1 Company and if so, whether the allotment of shares is null and void on account of contravention of Articles of Association and non-payment of premium? 18. We consider the contention of the Learned Senior Counsel for R-3 and R-4 that the appellant was a co-petitioner in another CP No. 59/2014 in which she was arrayed as petitioner along with her two brothers Shri M.N. Pratap Reddy and Shri M. Kiran Kumar Reddy. 19. It is noted that the Appellant was a co-petitioner along with her brothers Shri M.N. Pratap Reddy and Shri M. Kiran Kumar Reddy in CP No. 59/2014 and she filed a memo for withdrawal from the said company petition on 2.9.2015 and Company Law Board, Chennai permitted her to withdraw from the petition by passing the following order on 18.11.2015 (at pp. 217-218 of the appeal paperbook):- The 3rd petitioner is permitted to withdraw th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 Company was varied after the issue of 1,77,800 new shares to R-3 and R-4 by virtue of Board s resolution dated 2.12.2018 whereby 88,900 shares each were allotted to R-3 and R-4 and they deposited a total sum of Rs.17,77,800 to acquire 64% shareholding in R-1 Company. The resolution of the meeting of Board of Directors held on 2.12.2012, in this connection is as follows: 3. Allotment of Shares The Board re-called the discussions held on 27th August, 2011 with regard to further issue of shares, the chairman informed that the Equity Shares needs to be allotted for the persons, as per the list placed before the board. After discussions, the board passed the following resolutions: RESOLVED THAT approval be and is hereby given for allotment of 177800 Equity Shares of Rs. 10/- each aggregating to Rs. 17,78,000/= as per the list. Sl. No. Name and occupation of the Allottee Address of Allottee Nationality of the Allottee No. of shares allotted Total amount paid including premium (in Rs.) Total amount to be paid on calls (including premium) outstan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er intention to file a fresh company petition while withdrawing from CP 59/2014, when she sought liberty to file a fresh company petition and/or their proceedings. We are of the view that the Appellant, even though she was a co-petitioner in CP No. 59/2014, was not a director of R-1 Company nor involved into day-to-day management and affairs of the Company, and therefore, even if she participated in the AGM, wherein the new shareholding of R-3 and R-4 were presented in the Annual Report of the company and Profit and Loss Account for the year 2012-13, she did not have any specific knowledge of the change in her own proportionate shareholding as a result of fresh allotment of shares to R-3 and R-4. 25. We answer the first question in the following manner: the Appellant s petition CP 09/2016 is not affected by res judicata and estoppel in that the Appellant did not lose the entitlement to file the company petition. 26. Another point raised by the Learned Senior Counsel for R-3 and R-4 is that the filing of CP No. 09/2016 was beset with delay and laches, as the shares allotment was made in the year 2011 but the Appellant filed the company petition in the year 2016. On this issue, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ooked into even if they occurred three years prior to the institution of the petition. Same will be the case if the conduct arising from even a single wrongful act in a given case is such that its effect will be a continuous course of oppression or mismanagement though the wrongful act occurred three years earlier to the date of filing of the petition. It is something akin to the terminology 'continuing cause of action' Whether events complained of form part of continuous acts or not or form part of the same transaction constituting oppression or mismanagement or effect of a particular wrongful act is continuous course of oppression or mismanagement or the wrongful act is stale or is an isolated event, would all be different questions to determine. To this extent, therefore, the preliminary objection regarding maintainability of the present petition on the ground of limitation is overruled. This exercise about the applicability of the provisions of the Limitation Act. 1963 to the application under Ss. 397 and 398 of the Act, would now appear to be academic as after the Companies (Amendment) Act, 1988, applications under these sections lie before the Company Law Board. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thus lays down that new shares shall be offered only to persons, who at the date of the offer are holders of that class of the company and further the offer shall be sent by registered notice to the every member specifying the number of shares offered and limiting a time, not being less than 14 days from the date of the offer from the acceptance of the offer by the said member and only if the member declines the shares offered, the Board of Directors offer the shares in a manner that is most beneficial to the company. There is nothing on record to show that such an offer was made to any of the existing shareholders namely, Shri Dasaratha Rami Reddy, Shri M.N. Pratap Reddy and Shri M. Kiran Kumar Reddy, who were the existing shareholders of the same class by the Company. We note the arguments put forward by the Learned Senior Counsel for R-3 and R-4 that such an offer to and acceptance of shares by R-3 and R-4 was made when Shri Dasaratha Rami Reddy, Shri M.N. Pratap Reddy and Shri M. Kiran Kumar Reddy, (who are close relatives of the Appellant) when they were directors in the Company in the year 2011, but we are of the opinion that such an offer and acceptance of the offer and any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rest of the said shareholders the said act is oppressive. 42. It is contended that the company is a family company and is a quasi-partnership is concerned even though the company is a family-owned company and the entire equity is held by the family members, the law as applicable with regard to further issue of share capital and allotment of shares cannot be violated. Further, the principles of natural justice need to be followed more particularly in a family owned/run company . (Emphasis Supplied) 34. Regarding the fiduciary duty of the directors of a company, the Hon ble Supreme Court has held the following in the matter of Dale and Carrington Invt. P. Ltd. (supra) 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 are taken regarding running the affairs of the company, they are taken by the board of directors. The directors of companies have been variously described as agents, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 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. ( Emphasis Supplied ) 35. We also take note of the observations of the Hon ble Karnataka High Court in the matter of Kobian Pte. Ltd. (supra), wherein the following is held:- '17. The directors are in a fiduciary position vis- -vis company and must exercise their power with utmost faith for the benefit as well as interest of the company and ensure fair play in action in corporate management and further act bona fide in exercise of their vital responsibility in further allotment of shares. While it is the prerogative of the board to allot shares, they have no absolute direction or freedom to allot such shares as, directors of the private limited companies are more onerous than that of a public limited company. Though, section 81 of the Companies Act, 1956, prescribes how further share capital of the company could be issued, the same is not applicable to private limited companies. The directors in a private limited company are expected to make a disclosure to the shareholders of such a company when further shares are ..... X X X X Extracts X X X X X X X X Extracts X X X X
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