Ajay Kumar Agrawal & Ors vs Rancy Construction Private Limited & ...

Ajay Kumar Agrawal & Ors. ....Appellants

Vs.

Rancy Construction Pvt. Ltd. & Ors. ....Respondents

Present: For Appellant:- Mr. Abhijeet Sinha, Sr. Adv. with Mr. Milan Singh Negi, Mr. Akshat Singh, Mr. Bhanu Gupta, Ms. Dacchita Shahi, Mr. Utkarsh Kandpal and Mr. Nikhil Jha, Advocates

For Respondent:- Mr. Jatin Mongia, Mr. Anatesh Banon, Adv. for R1 to 3 Mr. Gaurav Mitra, Mr. Dhruv Suri, Adv. for R5 to 19.

ORDER

Per: Justice Rakesh Kumar Jain:

This appeal is directed against the order dated 05.05.2022, passed by

the National Company Law Tribunal, New Delhi. Bench-V (in short

'Tribunal') in CP/170/241-242/2019 (in short 'main petition'), setting

aside the lease deed dated 26.08.2019, directing the sub-registrar, Agra to

cancel the purported registered deed dated 26.08.2019, restraining

Respondents therein from transferring, pledging, encumbering, alienating

or creating third party rights in respect of Astha City Centre i.e. the sole

asset of Respondent No. 1 Company (Rancy Construction Pvt. Ltd.),

imposing Rs 5 lacs cost penalty upon Respondent No. 2 and 3 therein who

were responsible for execution of the illegal lease deed and passing of the

board resolution in contravention to the provisions of the Companies Act,

Company Appeal (AT) No. 88 of 2022 2

2013 (in short 'Act') and recommending to the Company that it may proceed

as per law against Respondent No. 2 and 3 therein in their personal

capacity for recovery of any loss sustained by the company due to unlawful

exercise of their powers as the directors.

2. In brief, Rancy Construction Pvt. Ltd. (Respondent No. 1) was

incorporated on 31.10.2005 and is engaged in the business of real estate

development.

3. Ajay Kumar Agrawal (Appellant No. 1) and Sunil Kumar Agrawal

(Appellant No. 2) collectively hold 26.34% shares of Respondent No. 1 while

Respondent No. 5 to 19 (Pvt. Ltd. Companies) collectively hold 73.66%

shares of Respondent No. 1. Respondent No. 1 owns a developed

commercial mall in Agra comprising 39,112 sq. meters area called 'Astha

City Centre' at a construction cost of more than Rs. 50 Cr. which is the only

immovable property and the entire undertaking of Respondent No. 1.

4. Respondent No. 1 alleged to have passed a resolution in a meeting of

the board of directors held in its registered office on 23.08.2019. The text of

the resolution is reproduced as under:-

"Resolved that the consent of the board of directors be and is hereby given to authorize Mr. Neeraj Singh s/o Shri Mani Ram r/o village Akbara, Tehsil, Kiraoli, Distt. Agra to sign and execute the lease deed to lease the land and building in the name of the company and to execute all the necessary documents and do all such acts and deeds as required to give effect to the same with regard to the lease of land and building of the company having total land area of 39112 sq. mt. and having total covered area of 7940 sq. met. Situated at Khasra No. 2080, Jeoni Mandi, Agra (detailed as per the draft lease deed placed before the board and

Company Appeal (AT) No. 88 of 2022 3

taken on record by the board) in favour of TX Homes LLP (LLPIN:

AAE4614) Whereas the said authorized person would mandatorily require the identity proof with photograph to do such certified copy of the board resolution duly signed by the director(s) of the company including his specimen signature to give effect to the above mentioned assigned work before the concerned authority. It is further resolved that Mr. Neeraj Singh, the authorized personnel be and is hereby authorized to do such acts and things as may be necessary in this regard to give effect to the same and the company would be bound by his acts to the extent of authority granted above for the purpose of execution of the lease deed in favour of TX Homes LLP."

5. As per the above resolution, the board of directors authorized Neeraj

Singh (R4) to sign and execute the lease deed of 'Astha City Centre' in

favour of TX Home LLP (Appellant No. 3).

6. On 26.08.2019 the lease deed was executed between Respondent No.

1 through Neeraj Singh (R4) and TX Homes LLP (Appellant No. 3) of the

multistoried commercial complex known as 'Astha City Centre' (leased

premise) commencing from 26.08.2019 till 25.08.2048 (29 years) on a

yearly rent of Rs. 20 Lacs for the first five years and thereafter rent was to

increase @ 10 % of the last paid rent after every block of five years.

7. It is alleged that Appellant No. 3 is a partnership of Appellant No. 1's

(Ajay Kumar Agarwal) own son Shobhit Agarwal. Respondent No. 5 to 19

(holding 73.66% of the paid up share capital of R1) felt aggrieved of the

illegally executed lease deed, the terms of which are stated to be

unconscionable, filed a petition (CP NO. 170/241-242/2019) under Section

Company Appeal (AT) No. 88 of 2022 4

241 and 242 of the Act r/w Rule 4 of the NCLT Rules, 2013 (in short

'Rules') before the Tribunal seeking relief against the illegal and oppressive

act of the Appellants.

8. In the aforesaid petition, the order of stay was passed on 20.12.2019

which is reproduced as under:-

"Ld. Counsel for the Petitioner has drawn attention to this bench to the covenants of the lease deed dated 26.08.2019 which he alleges are harsh. Reliance is placed on certain observations of the civil court at Agra. Keeping in view, the submissions made and the terms and conditions which provide that the during the term of the lease, which is for 29 years, the lessee shall be entitled to sub- lease, assign or transfer rights in the lease hold property of the respondent company without any written consent of the lessor. We find the said terms are not only harsh and oppressive but also detrimental to the interest of the petitioner. The same being against the general terms and conditions of law. It is therefore directed that respondent no. 4 who is the lessee and is represented by Mr. K Dutta, Ld. Counsel shall maintain a status quo with respect to possession of the lease hold property of the respondent company till further orders. No sub-lease, assignment, transfer or encumbrance shall be created over the property of the respondent company without prior permission of this bench. List the case on 30.01.2020.

9. The aforesaid order is not challenged by the Appellant by way of an

appeal.

10. The Tribunal finally allowed the main petition by way of the

impugned order dated 05.05.2022 after recording a categoric finding not

only on the issue of law emerging from Section 188(3) and (4) of the Act but

also clause 36(ii) of the Article of Association (AoA) of Respondent No. 1 as Company Appeal (AT) No. 88 of 2022 5

on 23.08.2019, in which it is categorically provided that "the board of

directors shall not except with the written consent of 100% members of the

company in duly convened general meeting, sell, exchange, mortgage, lease

or enter into any part of contract related to construction or otherwise

dispose of absolutely or conditionally, whole or any part or portion of any

undertaking or immoveable property of the company." No such consent of

the shareholders was taken at any general meeting of R1 prior to the

purported lease deed. The Tribunal allowed the main petition and made the

following observations in the impugned order which read as under:-

"10. Further, as mentioned above, the alleged illegal lease deed has caused a huge monetary loss to the Respondent Company i.e. to the extent of crores. As per Sec 188(4) of the Companies Act, 2013, it shall be open to the company to proceed against a director or any other employee who had entered into such contract or arrangement in contravention of the provisions of this section for recovery of any loss sustained by it as a result of such contract or arrangement. We find it appropriate to recommend to the Company that it may proceed as per law against the defaulting directors (Respondent 2 & 3) in their personal capacity for recovery of any loss sustained by the company due to unlawful exercise of their powers as the Directors.

11. As per the provisions in Section 188(5)(ii) of the Companies Act, in case of any other Company, the responsible Directors are liable to a penalty upto the extent of Rs 5 lakh each. We further deem it just and impose upon the Responsible Directors i.e. R2 and R3 (who are now ex-Directors) who were responsible for the execution of the alleged illegal deed and passing of the Board Resolution in contravention to the provisions of the Act, to a penalty of Rs 5,00,000 each.

Company Appeal (AT) No. 88 of 2022 6

12. Hence, we SET ASIDE the Lease deed dated 26.08.2019 and direct the concerned sub-registrar in Agra to cancel the purported registered deed dated 26.08.2019. Also, we restrain the Respondents from transferring, pledging, encumbering, alienating or creating third party rights in respect of the "Astha City Centre"

i.e. the Sole Asset of the Respondent 1."

11. Assailing the validity of the impugned order, Counsel for the

Appellant has submitted that the Tribunal has contravened the doctrine of

res sub-judice by setting aside the lease deed while the issue of validity of

lease deed is pending adjudication before the Civil Court. In this regard, it

is submitted that that the Appellant No. 3 (lessee) had filed a Civil Suit in

the Court of Civil Judge (Sr. Division) Agra being CS (OS) No. 1338 of 2019

on 03.10.2019 seeking permanent injunction against Respondent No. 1

(lessor). It is submitted that the order passed by the Civil Court was in

operation when the main petition was decided and by setting aside the lease

deed by virtue of the impugned order, the civil suit filed by the Appellant

No. 3 has been rendered infructuous. It is submitted that the Tribunal has

exceeded its jurisdiction while passing the impugned order as the

appropriate forum for determining the validity of the lease deed is civil court

where the suit was pending. In support of his arguments, he has relied

upon a decision of the Hon'ble Supreme Court rendered in the case of

Aruna Oswal Vs. Pankaj Oswal, (2020) 8 SCC 79. He has also submitted

that the Tribunal has further erred in deciding the main petition i.e. CP No.

170 of 2019, ignoring the petition (CP No. 175 of 2019) filed by the

Appellants. It is submitted that both the parties have raised grievances of

oppression and mismanagement in Respondent No. 1 Company but the Company Appeal (AT) No. 88 of 2022 7

Tribunal chose to decide only CP No. 170 of 2019. It is further submitted

that the resolution passed by the board of directors on 23.08.019 is valid

and the registered lease deed executed pursuant thereto is a valid

instrument which is in furtherance of the oral family settlement.

12. In reply, Counsel for Respondent No. 1 to 3 has submitted that there

is no error committed by the Tribunal in allowing the main petition because

the board resolution dated 23.08.2019 and the subsequent lease deed

dated 26.08.2019 are both patently illegal. In this regard, he has referred to

Article 36(ii) of the AoA as on 23.08.2019 in which it is provided that "the

board of directors shall not except with the written consent of 100%

members of the company in duly convened general meeting, sell, exchange,

mortgage, lease, or enter in to any part of contract related to construction

or otherwise dispose of absolutely or conditionally whole or any part or

portion of any undertaking or immovable property of the company". It is

further submitted that the resolution passed by the board of directors on

23.08.2019 is without the consent of the 100% members of the company

(R1) much less in any duly convened general meeting. It is further

submitted that there was no oral settlement between the parties as noting

is brought on record in this regard and the lease deed was itself ex-facie

against the interest of R1 Company because it has mentioned in the lease

deed that "the owner of the property i.e. R1 is restricted from transferring or

disposing off the property without permission of the purported lessee i.e.

(R4) for the entire term, i.e. 29 years, the purported lessee i.e. Appellant

No. 3 is permitted without any approval from R1, to sub-lease, assign,

transfer or dispose off his purported lease hold rights in the property, create

Company Appeal (AT) No. 88 of 2022 8

tenancy of third party rights, create mortgage, charge, lien or any other

encumbrance in favour of any financial institution, Respondent No. 1

cannot terminate the lease deed even if the purported lessee (Appellant No.

3) does not pay rent". It is also submitted that the lease has been executed

at a meager amount of Rs. 20 lakh per annum, though it can fetch the rent

between Rs. 4 to 5 Cr. per annum as the total cost of construction of the

mall is more than Rs. 50 Cr.. It is also submitted that the lease deed is a

related party transaction which is inviolation of the provisions of the Act. It

is argued that the Appellants have deliberately not made Rohit Agarwal and

Shobhit Agarwal as parties to the present appeal even though they were

respondents in the main petition in order to mischievously conceal the fact

that Shobhit Agarwal who is the son of Appellant No. 1 (Ajay Kumar

Agrawal) is a partner of Appellant No. 3 (TX Homes LLP) and as per

Section 188 r/w 2(76) of the Act and Rule 4 of Companies (Specification of

Definition Details) Rules, 2014 the lease deed therefore would be a related

party transaction which itself on the part of the Appellants warrants

dismissal of the present appeal with costs. It is further submitted that the

first proviso to Section 188(1) of the Act r/w Rule 15 of the companies

(Meeting of board and its powers) Rules 2014, a company can lease

property which is at least 10% of the company's turnover to a related party

only through a resolution passed at a general meeting. It is argued that the

property in question having a value of far more than 10% of R1's turnover

could not have been leased to a related party without a resolution passed at

a general meeting which has not been done in this case. It is also

submitted that in terms of Section 188(3) of the Act, Respondent No. 1 also

Company Appeal (AT) No. 88 of 2022 9

duly avoided the purported lease deed vide meeting held on 24.10.2019.

Noting the company secretary's certificate stating that no board meeting

was held on 23.08.2019. The Appellant did not challenge the minutes of

meeting held on 24.10.2019 and the certificate of company secretary before

the Tribunal. It is also submitted that the Tribunal has wide powers under

Section 241 and 242 of the Act including the power to set aside the lease

deed. It is further argued that the impugned order is not passed in

contravention of the doctrine of res sub-judice as alleged because the

doctrine of res sub-judice bars the trial of a suit or an issue in which the

matter directly and substantially in issue is pending adjudication in a

previous suit. The objective of the doctrine of res sub-judice is to prevent

competent courts of concurrent jurisdiction from trying parallel suits on the

same matter in issue. It is submitted that the jurisdiction of civil court is

barred under Section 430 of the Act and therefore, the Tribunal only has

the authority, power and competence to determine whether the actions of

the ex-directors of R1 in alienating the sole property of R1 to a related

party of the said ex-directors on grossly unfair terms, were in violation of its

AoA and provisions of the Act and further whether the affairs of R1 are

being conducted in a manner prejudicial to the interest of R1 or oppressive

to the members of R1. It is further submitted that the alleged civil suit is

only for the purpose of protecting possession as it has been filed for seeking

permanent injunction and no declaration of the ownership has been sought

whereas in the present case the lease deed which is affecting the ownership

rights of R1 has been determined by the Tribunal, therefore, both the cases

are not alike. In the end, it is submitted that the Tribunal has rightly

Company Appeal (AT) No. 88 of 2022 10

decided the main petition i.e. CP No. 170 of 2019 ignoring CP No. 175 of

2019 because CP No. 170 of 2019 is regarding the execution of the illegal

lease deed which is against the interest of the company and has been

executed in violation of the Act and AoA whereas the CP No. 175 of 2019

has been filed by the Appellants for seeking to set aside certain actions,

the board decision and shareholder decision, inter alia, including a minor

increase in the share capital of R1, removal of Appellants No. 1 and 2 from

the board etc. therefore, the subject matter of the two company petitions

were totally different and are dealing with difference causes of action.

13. Counsel for Respondent No. 5 to 19 has supported the case of

Respondent No. 1 to 3. It is submitted by him that Respondent No. 1

company did file a counter claim in January, 2020 but it was immediately

withdrawn since only the Tribunal has the jurisdiction to hear the present

claim pursuant to section 430 of the Act. It is also submitted that

judgment relied upon by the Appellant in the case of Aruna Oswal (Supra)

is distinguishable on its facts because in that case the civil suit in question

pertained to adjudication of ownership rights whereas the civil suit in the

present case has only been filed for the purpose of protecting the

possessory rights as a lessee.

14. We have heard Counsel for the parties and perused the record with

their able assistance.

15. The bedrock of this case is the lease deed dated 26.08.2019, executed

pursuant to the resolution dated 23.08.2019 which is not only contrary to

the provisions of Section 188(1) of the Act r/w Rule 15 of the companies

(Meeting of board and its powers) Rules 2014 but also clause 36(ii) of the

Company Appeal (AT) No. 88 of 2022 11

AoA as on 23.08.2019, which provides that the board of directors shall not,

without consent of 100% members of the company, in duly convened

general meeting can lease and dispose of the property of the company by

way of lease etc. and that the consent of 100% members of the company in

a duly convened general meeting is conspicuous by its absence. There are

no traces of the alleged oral settlement which has been made the basis of

the lease, the terms of which are more against the company (R1) than its

favour, therefore, these are unconscionable terms and conditions which

would attract the provisions of Section 241 and 242 of the Act. We also do

not find any substance in the argument of the Appellant that there is a

violation of principle of res sub-judice because the civil suit pending in the

Civil Court at Agra is in respect of permanent injunction and no declaration

has been sought in respect of the ownership of the property in question

much less the entitlement on the basis of which the resolution dated

23.08.2019 was passed and the lease deed was executed three days

thereafter on 26.08.2019, therefore, the judgment relied upon by the

Appellant in the case of Aruna Oswal (Supra) is not applicable to the facts

of this case.

16. Moreover, the Appellant did not deliberately implead Rohit Agarwal

and Shobhit Agarwal as parties to the present appeal though they were

respondents in the main petition only in order to conceal the fact that

Shobhit Agarwal who is the son of Appellant No. 1 (Ajay Kumar Agrawal), is

a partner of Appellant No. 3 (TX Homes LLP) whereas as per Section 188

r/w 2(76) of the Act and Rule 4 of Companies (Specification of Definition

Details) Rules, 2014, the lease deed would not have been executed in favour

Company Appeal (AT) No. 88 of 2022 12

of the related party. The power under Section 241 and 242 of the Act would

include the power to set aside the lease deed which has been executed on

behalf of R1 in violation of mandatory provisions of the Act, AoA and terms

and conditions of the impugned lease deed are against the very interest of

R1 and is oppressive, therefore, the lease deed has rightly been set aside by

the Tribunal.

17. Thus, looking from any angle, it is a fit case in which the Tribunal

has interfered and set aside the registered lease deed and as such, the

impugned order does not call for any interference by this Court, the same is

hereby upheld and the appeal is hereby dismissed though without any

order as to costs.

[Justice Rakesh Kumar Jain] Member (Judicial)

[Mr. Ajai Das Mehrotra] Member (Technical)

New Delhi

10th April, 2024

Sheetal

Company Appeal (AT) No. 88 of 2022