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TMI Blog2023 (9) TMI 1670X X X X Extracts X X X X X X X X Extracts X X X X ..... sions of Chapter III and any other conditions as may be prescribed]. Merely because the direction given by NCLT does not specifically mention the fulfilment of mandatory requirements of Section 62 (1) (c), it cannot be said that those Provisions need not be complied with as it has not been specifically mentioned in the 'directions' and the same has been confirmed by both NCLAT and the Hon'ble Apex Court. Under Rule 13 (g) of the Companies (Share Capital and Debentures), Rules 2014 and Rule 12 (7) of the Companies (Prospectus and Allotment of Securities) Rules, 2014 framed under the said Provision, details the procedure to be followed in this regard. It is not in dispute that the shares were allotted at face value of Rs. 10/- each without conducting any valuation. It is significant to mention that the Appellants have convened an Extraordinary General Meeting on 15/06/2017 to discuss the agenda of amendment to the Company's Memorandum of Association for increasing the authorised share capital of the 1st Appellant Company. A perusal of the Notice dated 20/05/2017 shows a reference to legal advice provided for the dispensation of the requirement for the shareholders approval - As per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inal Respondent in the Company Petition No. 122/KOB/2019. The 2nd Appellant is the Chairman and Managing Director of the 1st Appellant Company, holding 52.86 % of the total shareholding of the Company. The Learned Senior Counsel for the Appellant submitted that the authorised share capital of the Company is Rs. 22,00,00,000/- comprising of 2,20,00,000 equity shares of Rs. 10/- each. The issued, subscribed and paid-up share capital is Rs. 21,87,16,860/- comprising of 2,18,71,686 equity shares of Rs. 10/- each. It is stated that the Respondent Nos. 1-4 are minority shareholders of the Appellant No. 1 Company who hold 80,000 equity shares, that is 0.37 % of the total shareholding. Respondent Nos. 1-4 were the original Petitioners in the main Company Petition filed under Section 59 and 62 of the Companies Act, 2013. It is seen from the record that TCP No. 185/2016 was filed by the 2nd Appellant and Mr. CK Sibi to address various disputes among the shareholders and was initially filed before the Company Law Board thereafter, transferred to NCLT, Chennai. CA 1/2016 was filed by the 2nd Appellant and Mr. CK Sibi, seeking direction to allow them to infuse necessary funds into the first App ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Order dated 12/01/2017 makes it clear that it was made considering the emergency situation where funds were infused into the Appellant No. 1 Company ensuring its continued survival and the Order was passed in pursuance of the wide powers that are conferred upon NCLT, under Section 241-242 of the Companies Act. 5. The Learned Counsel also submitted that the inherent powers under Rule 11 of the NCLT Rules, 2016 also allows the Tribunal to make such Orders that may be necessary for meeting the ends of Justice. It is submitted that while passing an Order for allotment of Shares in its exercise of powers under the Act, NCLT is not bound to follow Section 62 of the Act which is applicable for when the Company voluntarily wants to allot shares. NCLT has failed to take into account the effect of Section 242 sub sections (5) & (6) of the Act which provide for any alteration made in the Memorandum of Association of a Company in pursuance of an Order passed under Section 242 of the Act which shall have the same effect as if it had been duly made by the Company in accordance with the Provisions of the Act. It is submitted that Section 242 sub Sections (5) & (6) specifically protect the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of the Respondents that without making a valuation of shares, the allotment was made to Mr. K.C. Baboo by virtue of which allotment, he became the largest shareholder with shareholding rising from 4 % to 52.86 %. The Learned Counsel paced reliance on the decision of the Hon'ble Supreme Court of India in the matter of 'M/s Ammonia Supplies Corporation (P) Ltd. Vs. M/s. Modern Plastic Containers Pvt. Ltd.' reported in [(1998) 7 SCC 105], wherein it was held that Section 155 deals with the power of Company Court to rectify the Register of Members maintained by the Company. The very word rectification connotes something what ought to have been done and what ought not to have been done was done requiring correction. Rectification in other words is a failure on the part of the Company to comply with the directions under the 'Act'. In order to qualify any rectification, every procedure as prescribed under the 'Act' before recording the name in the Register of the Company has to be stated to be complied with by the Applicant. The word 'sufficient cause' is to be tested in relation to the Acts and the Rules. It is submitted that based on the ratio of this Judgment there cannot be any hes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on'ble Supreme Court in the matter of 'IFB Agro Industries Ltd. Vs. SICGIL India Ltd.' reported in [(2023) 4 SCC 209] in support of his submission regarding the power of rectification of Register of Members under Section 59 of the Act. The relevant portion from the said Order, as relied upon by the Learned Counsel for the Respondent, is extracted as below: "21. The scope and ambit of Section 155 of the 1956 Act, as it then existed, fell for consideration in a decision of this Court in Ammonia Supplies 1. The application for rectification in Ammonia case¹ was filed under Section 155, and it was submitted that the scope for rectification under Section 155 is enlarged in comparison with the position as it were under Section 38 of the 1913 Act. Rejecting the argument, this Court in Ammonia¹ held that the jurisdiction exercised by the court for rectification of the register of members is essentially limited. The comparative analysis in Ammonia¹ assumes importance as a similar submission is made before us by Mr Chidambaram that the scope and jurisdiction of the Tribunal under Section 59 of the 2013 Act is wide when compared with Section 111- A of the 1956 Act as amended ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the convening of Shareholders Meeting for seeking their approval for preferential allotment. It is settled law that the Shareholders Meeting cannot be conducted to defeat the Orders of the Tribunal. The issue before this Tribunal pertains to the compliance with the mandatory procedures for share price determination under Section 62 (1) (c) of the Act and has nothing to do with the principles relied upon by the Learned Counsel for the Appellant. Assessment : 12. The main issue which arises in this Appeal is whether 'allotment of shares' on 'Preferential basis by way of private placement', in pursuant to an Order passed under Section 241-242 of the Companies Act, 2013 requires adherence to Section 62 (1) (c) of the Act read with the applicable Companies Act (Share capital and Debentures) Rules, 2014. 13. It is the main case of the Appellants that CA 1/2016 was allowed permitting the 2nd Appellant herein to infuse funds in the first Appellant Company as 'Share Capital' to discharge the dues of the Federal Bank and the first Appellant Company was directed to issue shares on preferential basis by way of 'private placement on preferential basis' and that this interim Order dated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... implementation of the above given directions in letter and spirit. The CA is permitted to fix his remuneration as per the practice in vogue and inform the Applicants/Petitioners, who shall pay the same. Accordingly, C.A. 1 of 2016 is disposed of." (Emphasis Supplied) 15. This direction was made part of the Order in TCP 185/2016 dated 18/04/2017, the NCLT in Para 7 has concluded as follows: "The counsel for petitioners has drawn our attention to the Articles of Association wherein under Para 15(b) at Page 26 of the typeset it has been mentioned that the first directors of the company are C.K. Vijayan, C.K. Thampi Krishna, C.K.Sibbi (P1) and C.K. Babu (P2). C.k. Thampi Krishna expired while petitioners 1 & 2 were removed from the Directorship. Neither notice was given nor Board's resolution was passed. However, R1 to R4 and R6 have not properly controverted the allegations levelled in the company petition and in the absence of reasonable explanation, the illegal actions are not sustainable as there is non-compliance with the provisions of the Companies Act. The detailed allegations in the CP and the documents filed in support thereof established that the answering respondents h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clude a right exercisable by the person concerned to renounce the shares offered to him or any of them in favour of any other person; and the notice referred to in clause (i) shall contain a statement of this right; (iii) after the expiry of the time specified in the notice aforesaid, or on receipt of earlier intimation from the person to whom such notice is given that he declines to accept the shares offered, the Board of Directors may dispose of them in such manner which is not dis-advantageous to the shareholders and the company; (b) to employees under a scheme of employees' stock option, subject to special resolution passed by company and subject to such conditions as may be prescribed; or (c) to any persons, if it is authorised by a special resolution, whether or not those persons include the persons referred to in clause (a) or clause (b), either for cash or for a consideration other than cash, if the price of such shares is determined by the valuation report of a registered valuer subject to such conditions as may be prescribed. (2) The notice referred to in sub-clause (i) of clause (a) of sub-section (1) shall be despatched through registered post or speed post ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lue of shares which such debentures or loans or part thereof has been converted into. (Emphasis Supplied) 17. Section 62 (1) (c) specifies 'issuance of share capital to any persons, if it is authorised by a said Resolution, whether or not these persons including the persons referred to in Clause (a) or Clause (b) either for cash or for consideration other than cash, if the price of such shares is determined by the valuation report [of a registered valuer, subject to the compliance with the applicable provisions of Chapter III and any other conditions as may be prescribed]. Merely because the direction given by NCLT does not specifically mention the fulfilment of mandatory requirements of Section 62 (1) (c), it cannot be said that those Provisions need not be complied with as it has not been specifically mentioned in the 'directions' and the same has been confirmed by both NCLAT and the Hon'ble Apex Court. Under Rule 13 (g) of the Companies (Share Capital and Debentures), Rules 2014 and Rule 12 (7) of the Companies (Prospectus and Allotment of Securities) Rules, 2014 framed under the said Provision, details the procedure to be followed in this regard. The relevant portion from th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Book of the Annual General Meeting held on 15/06/2017 and therefore, they consented to the said allotment of Rs. 10 face value, cannot be sustained as the Register only reflects the assent of Respondents to the increase in the authorised share capital and does not in any manner indicate the consent to the issuance at face value. The said allotment at face value is voted upon only through the Board of Directors dated 11/07/2017. There is no documentary evidence to substantiate the plea of the Appellants that the Respondents have categorically agreed or given their consent to the allotment of shares at 'Face Value'. 20. The Learned Counsel for the Appellants placed reliance on the Judgment of the Company Law Board, Southern Regional Bench in the matter of 'Bhupinder rai and Ors. Vs. S.M. Kannappa Automobiles Pvt. Ltd.' reported in [(1996) 86 CC 18 CLB] wherein it was held that in a Petition under Section 111, the question of malafides and bonafides of any allotment cannot be either agitated or enquired into. However, on an Appeal in C A 5/2005, the Hon'ble High Court of Karnataka remanded the matter back to the Company Law Board. The Company Law Board, Mumbai Bench passed an Order r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Board to pass orders as long as it is in the interests of the proper conduct of the affairs of the company and it is 'just and equitable' to pass such order. Whether in fact the order is justified will of course depend on the facts of each case.' We are of the earnest view that in the facts of this case, 'private placement by preferential shares, allotment' has attained finality, but the 'procedure' to be adopted in this allotment has not been specifically stated by NCLT and we observe that in the interest of the proper conduct of the affairs of the Company and for it to be 'just and equitable', it is imperative that the procedural requirements under Section 62 (1) (c) read with the relevant Rules under this Provision, be complied with. The Learned Senior Counsel also placed reliance on the Judgment of the Hon'ble High Court of Bombay in the matter of 'Trackparts of India Limited and Ors. Vs. K.N. Bhargava and Ors.' reported in [(2002) 109 CC 350] in which the Hon'ble High Court has opined that the exercise of powers by the Company Law Board under Sections 397, 398 and 402 of the Act is not subject to the rectification or approval by the Shareholders and that CLB has wide powers f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the RBI and its Regulators with regard to the inadvertent error/bonafide mistake crept in and sought permission to rectify the mistake by cancelling the excess shares. Even the R 1 company also through its Board Resolution expressed their No Objection for cancellation of excess shares." 22. From the aforenoted ratio it is seen that NCLT has the power to direct the concerned authorities to rectify the Register of Member even by cancelling their allotted shares. The Judgment relied upon by the Respondents in the matter of 'IFB Agro Industries Ltd. Vs. SICGIL India Ltd.' reported in [(2023) 4 SCC 209] wherein the Hon'ble Apex Court has discussed the scope of Section 155 of the Companies Act, 1956 is applicable to the facts of this case. 23. The Hon'ble Delhi High Court in the matter of 'SAS Hospitality Pvt. Ltd. Vs. Surya Constructions Pvt. Ltd.' reported in [(2018) SCC OnLine Del 11909] has held that any dispute pertaining to rectification of Register of Members can be decided under Section 59 of the Act and the Paragraph relevant to this proposition is detailed as hereunder: "13. The effect of the increase in the share capital and allotment of the same to any person has an auto ..... X X X X Extracts X X X X X X X X Extracts X X X X
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