Chembra Peak Estates Ltd vs Registrar Of Companies, Karnataka

[Arising out of order dated 5th December, 2018 passed by National Company Law Tribunal, Bengaluru Bench, Bengaluru in CP No. 459/BB/18]

M/s Chembra Peak Estates Limited, No. 2, 5th Main, RMS Layout, Post Office Road, Sanjay Nagar, Banglore- 560 094 .. Appellant

Vs.

Registrar of Companies, Karnataka, E Wing, 2nd Floor, Kendriya Sadana Koramangala, Bangalore, Karnataka - 560 034 .. Respondent

Present:

For Appellant: Mr. Shivam Narang, Mr. Saumabho Ghosh, Mr. Raza Abbas, Advocates

For Respondent: Mr. P.S. Singh with Mr. Raj Pal Singh, Mr. M. Yadubhushana Rao Advocates

JUDGMENT

(11th December, 2019)

KANTHI NARAHARI, MEMBER(T)

The Appellant- M/s Chembra Peak Estates Limited filed the

appeal aggrieved by order dated 5th December, 2018 passed by

National Company Law Tribunal, Bengaluru Bench, Bengaluru (in

short NCLT), whereby NCLT dismissed the petition filed by the

Appellant herein.

Company Appeal (AT) No. 36 of 2019 Page 1 of 14

2. The Appellant filed petition before the NCLT under Section

61(1)(b) of the Companies Act, 2013 read with Rule 71 of NCLT

Rules, 2017 for the purpose of consolidation of division of equity

share of the Company. The NCLT passed the order and the operative

portion of the order at paragraph-6 is reproduced here at:

...

"6. Furthermore, on perusal of the Circular No.

SEBI/HO/MRD/DSA/CIR/P/2016/110 dated

October 10, 2016 at the Annexure-A, para (vi), the

Promoters are liable to acquire shares that are not

offered under the exit offer up to a period of one

year from the completion of offer. However, it

appears the Promoters of the Company have not

utilized this provision to acquire all the shares of

the public shareholders after completion of one

year. Instead, they have appeared before this

Tribunal for purchasing shares and providing an

exit route to the public shareholders, but under

the pretext of consolidation of the share capital.

This evinces an intention to avoid compliance with

necessary provisions of Companies Act, 2013 and

SEBI regulations. We are also concerned about

the interests of the minority shareholders that

Company Appeal (AT) No. 36 of 2019 Page 2 of 14 expressed their concern of reduction in their voting

percentage in an arbitrary manner."

...

3. From the perusal of the impugned order, NCLT relied upon

SEBI Circular No. SEBI/HO/MRD/DSA/CIR/P/2016/110 dated

October 10, 2016 and one of its clauses viz. that the Promoter are

liable to acquire shares that are not offered under the existing offer

period of one year from the completion of the offer. The finding of

the Tribunal is that the Promotors have not utilised this provision

to acquire shares of public after completion of one year. Further,

Tribunal expressed its concern about the interest of minority

shareholders whereby the minority shareholders expressed their

concern of reduction in their voting percentage in an arbitrary

manner if the consolidation of shares is allowed. With the aforesaid

observation, learned Tribunal dismissed the petition.

4. FACTS:

4.1 Learned Counsel for the Appellant contended that one of the

findings given by the learned Tribunal with regard to purchasing of

shares by the Promotors is concerned, it is stated that there was no

such stipulation by SEBI in its circular dated 10th October, 2016

and submits that the Company had no intention to affect the

concern and interest of the minority shareholder. He further

submitted that the Appellant Company was always in compliance

of the provisions of the Companies Act, 2013 and applicable SEBI

Company Appeal (AT) No. 36 of 2019 Page 3 of 14 regulations and in pursuance thereof a valid offer was made for

acquiring shares.

4.2 Shri P.S. Singh, learned Counsel appearing for the Registrar

of Companies (in short ROC) submitted that they have filed affidavit

vide Diary No. 10731 dated 15.03.2019 and Additional Affidavit vide

Diary No. 13311 dated 23.07.2019. He submitted that in its first

report dated 15.03.2019 it is stated that the ROC Karnataka,

Bangalore had received objection from Mr. Mahendra Girdharilal,

Shri P.P. Zibi Jose, Ms. Kavitha, Ms. G. Jaiyashri, Mr. R.M.

Govindan, Mr. S. Gopalkrishna Pai and Shri S. Rajjeevi R Pai

against consolidation stating that the scheme of consolidation of

shares by changing the face value of the shares from Rs. 10/- to Rs.

60,500/- is against the interest of minority shareholders and

violates the principle of public policy.

4.3 Learned Counsel for the ROC further submitted that the

above objections of the shareholders were taken up with the

Company and the Appellant-Company has submitted its reply

stating that the Company has followed due process of law under the

Companies Act, 2013 and out of the above seven shareholders

objecting to the scheme, three of them have already sold their

respective equity shares on 18th June, 2018 left with 4

shareholders'.

5. Heard learned Counsel for respective parties. Perused

pleadings, documents filed in their support. The Appellant

Company Appeal (AT) No. 36 of 2019 Page 4 of 14 Company was incorporated as a Public Limited Company by shares.

The authorized share capital of the Company is Rs. 75 lakhs divided

into 6,05,500 equity shares of face value of Rs. 10/- each and

14,500 Redeemable Cumulative Preference shares of value of Rs.

100/- each. It is seen that the equity shares of the company were

initially listed on various stock exchanges. The Security Exchange

Board of India vide its circular No.

SEBI/HD/MRD/DSA/CIRP/P/2016/110 dated 10.10.2016

stipulated the procedure and process for exit of Exclusively Listed

Companies from the Dissemination Board. Based on the same, the

Promotors of the Company provided an exit opportunity to all the

public shareholders by offering to buy the equity shares of the

company. The Exit Offer was valid upto 18.03.2017. The National

Stock Exchange, listing Department, vide its circular dated

18.10.2017 (Page-88 of the Paper Book) had been removed the

Appellant Company from the Dissemination Board, shown at serial

no. 17 of the Circular. At page 90 of the Paper Book, the reason for

removing from Dissemination Board shown as Exit option. The Exit

option was initially valid up to 18.03.2017 for purchase of shares

at the same price. However, the option was extended one more year

i.e. upto 18.03.2018 to provide exit to the public shareholders who

hold small number of equity shares and who did not or could not

participate in exit offer.

Company Appeal (AT) No. 36 of 2019 Page 5 of 14

6. The Appellant company in its Board Meeting held on

19.03.2018 passed a resolution for consideration of consolidation

of equity shares of the Company (page -92 of the Paper Book) in

which the Board discussed the SEBI Circular and the procedure

and process for exit opportunity to the public shareholders to buy

equity shares of the company. It is made clear that shares of the

company are unlisted that it does not have liquidity, the Board

considered and passed the resolution. The Bench posed a question

to the learned Counsel for the Appellant that what steps are being

taken to protect the interest of small/fractional shareholders if they

are not willing to exit from the company. The learned Counsel for

Appellant has drawn our attention to the Board Resolution of the

Appellant Company at page-93 of the Paper Book whereby it was

resolved that a Trust is required to be created and Trustee will be

appointed as per the resolution of Board Meeting dated 19.03.2019

for the purpose of aggregating the fractional entitlements resulting

from the consolidation into whole equity shares and will hold the

same until its disposal at a fair price equal to Rs. 76/- being more

than 15% above the Exit Price arrived at during the Exit Offer

provided to the Public Shareholders by the Company and for

proportional distribution of the proceeds among the shareholders

who would otherwise entitled to fractional entitlement. Further it

was resolved that fair value of the shares will represent an attractive

exit payment to the shareholders who would otherwise receive

fractional entitlement pursuant to the consolidation. The Trustee

Company Appeal (AT) No. 36 of 2019 Page 6 of 14 will give effect to the disposal of the fractional shares and distribute

the proceeds thereof.

7. From the perusal of the minutes of the Board Meeting dated

19.03.2019 (Page 91 of Paper Book) it is also seen that the Company

proposed to alter Memorandum of Association (in short 'MOA') and

Articles of Association (in short 'AOA') of the Company with regard

to the authorised share capital by deleting existing Clause-5 and by

substituting new clause -5 as mentioned in paragraph-5 of page-96

of Paper Book. We had a doubt whether the Article of Association

permit the Company to consolidate and divide the shares. We

perused the Article of Association of the Company (Page 51 of Paper

Book) of the Company and Article 41(a) refers to the consolidation

and divide of all or any of its share capital into shares of larger

amount than its existing shares. After decision taken in the Board

Meeting dated 19.03.2018, the Company held its Extra Ordinary

General Meeting (in short EGM) on 14.04.2018.

8. The resolution passed therein (vide page 101 of the Paper

Book) wherefrom EGM resolved to alter Memorandum of

Association(MOA) and Articles of Association (AOA) by substituting

the clause as per the decision taken in the Board Meeting and in

EGM respectively.

9. The Practicing Company Secretary of the Company submitted

his report dated 18.04.2018 to the Whole Time Director and

Company Appeal (AT) No. 36 of 2019 Page 7 of 14 Chairman of the EGM duly enclosing the minutes at pages 101 to

104 of the Paper Book wherefrom it is evident that 95.12% votes

cast in favour of the resolution for consolidation and 3.10% votes

cast against the said resolution. Therefore, the resolution was

approved with majority.

10. The Board also resolved to appoint Trustee at Clause-7of its

minutes of the Board Meeting dated 19.03.2018 (page -98 of the

Paper Book) wherefrom it is apparent that the Fractional

Entitlements resulting from the consolidation shall be aggregated

into whole equity shares and the number of whole shares so arising

shall be held by a Trustee who shall dispose off the said whole

equity shares and proceeds of sale of such whole equity shares shall

be distributed proportionately among the shareholders who would

otherwise be entitled to Fractional Entitlements.

11. When the matter was listed on 13.11.2019 before us, learned

Counsel for the Appellant stated that Mr. Mr. Mahendra Girdharilal,

who was Objector before the NCLT and whose objection was taken

into consideration by the NCLT in passing the impugned order (at

paragraph-3 of the impugned order) has already transferred his

shares to the Promotor of the Company in which the learned

Counsel filed an affidavit vide diary No. 14424 dated 09.09.2019.

Further this Bench directed learned Counsel for the Appellant to

file affidavit with regard to other objections raised by some of the

shareholders apart from Mr. Mr. Mahendra Girdharilal. In

Company Appeal (AT) No. 36 of 2019 Page 8 of 14 compliance thereof, learned Counsel filed an Affidavit vide diary No.

16144 dated 19.11.2019. Before proceeding with the contents of the

Affidavit, it is to be noted that NCLT at paragraph 4(b) (page-29 of

the Paper Book) referred to the objections received by the RoC,

Karnataka referred to the shareholder's who were against the

consolidating of shares.

...

"4(b) The office has received objections from Mr.

Mahendra Girdharilal, Shri P.P. Zibi Jose, Ms. Kavitha,

Ms. G. Jaiyashri, Mr. R.M. Govindan, Mr. S.

Gopalkrishna Pai and Shri S. Rajjeevi R Pai against

consolidation stating that the scheme of consolidation of

shares by changing the face value of the shares from

Rs. 10/- to Rs. 60,500/- is against the minatory

shareholders and violates the principle of public policy.

The said objections were taken up with the Company

and vide letter dated 25.07.2018, the Petitioner

Company has submitted its reply stating that the

Company has followed the due process of law under the

Companies Act, 2013 and that out of the

aforementioned 7 shareholders objecting to the scheme,

3 of them have already sold their respective equity

shares on 18.06.2018"

...

Company Appeal (AT) No. 36 of 2019 Page 9 of 14

12. Page-3 at paragraph -3 of the Affidavit, vide Diary No. 16144

dated 19.11.2019, filed by the learned Counsel for the Appellant,

the names of seven shareholders, who objected to consolidation of

shares and some of them have sold their shares, is given and the

same is extracted herein below:

...

"3. That it is stated that during the pendency of this Appel

the majority of the objecting shareholders have sold their

shares in full to the promoters of the Appellant Company. That

the shareholding of the shareholders in the Appellant Company

as on date is mentioned herein below:

Serial Name of the No. of No. of Comments No. Shareholder Shares Shares held as held as on on EGM 14.11.2019 1. Mr. Mahendra 9515 NIL Sold on

Girdharilal 09.07.2019

2. Shri PP Zibi 6820 NIL Sold on

Jose, 08.02.2019

3. Ms. Kavitha, 922 NIL Sold on

03.07.2018

&

11.08.2018

Company Appeal (AT) No. 36 of 2019 Page 10 of 14 4. Ms. G 90 NIL Sold on

Jaiyashri 03.07.2018

&

11.08.2018

5. Mr. R M 100 NIL Sold on

Govindan 03.07.2018

&

11.08.2018

6. Mr. Gopal 172 172 Continues

Krishna Pai to be

shareholder

7. Smt. S. 335 335 Continues

Rajeevi to be

Ramananda shareholder

Pai

" [Emphasis supplied] ...

13. From the perusal of the list, 5 out of 7 shareholders have sold

their shares on respective dates as stated supra two shareholders

i.e. Mr. Gopal Krishna Pai holding 172 shares at Sl. No. 6 and Smt.

Rajeevi Ramachandra Pai holding 352 shares at Sl. No. 7, continue

to be shareholders of the Company. It is submitted that Mr. Laxmi

Kant Mohta, the whole time Director of the Appellant- Company,

who deposed this Affidavit at Para 4 of the Affidavit states that, he

acquired shares of above 5 shareholders in his individual capacity

Company Appeal (AT) No. 36 of 2019 Page 11 of 14 and copies of de-materialization delivery instruction was also filed.

It is stated that the Appellant-Company had complied with all the

provisions of the Companies Act, 2013 and not acted in any manner

prejudicial to the interest of the shareholders of the Company. The

ROC in their Additional Report vide diary No. 13311 dated

27.03.2019 have stated that the Appellant-Company filed an

Affidavit providing information with regard to number of

shareholder's pre-consolidation and post-consolidation under

Section 61(1)(b) of the Companies Act, 2013 along with clarification

as to why the option of 'Buy Back' under Section 68 of the

Companies Act, 2013 could not be exercised. The Affidavit of ROC,

on the basis of Appellant-Company's stand, states that the

Appellant-Company is making losses for the last two Financial Years

and it did not have requisite cash flow to initiate 'Buy Back' of the

shares under Section 68 of the Companies Act, 2013. Therefore, the

Board of Directors of the Company after considering the options

available, based on the financial position of the Company, have

proposed for consolidation of share capital under Section 61 of the

Companies Act, 2013. At paragraph-3 of this Additional Report of

ROC it states that the appeal may be considered on merits of the

case.

14. The objections taken by seven shareholders with the ROC

regarding consolidation of shares is reduced and five out of seven

shareholders have also sold their shares as evident from the records,

Company Appeal (AT) No. 36 of 2019 Page 12 of 14 to the Director of the Appellant-Company and remaining two

shareholders holding 172 and 335 shares respectively continue to

be shareholders of the Company. So far as remaining two

shareholders and their apprehensions are concerned, the Appellant-

Company provided a clause to appoint a Trustee to take care of such

shareholders in case share capital of the Company is consolidated.

Further the Appellant- Company had complied with all the

provisions of the Companies Act, 2013.

15. CONCLUSION:

We are satisfied with the submission made by the learned

Counsel for the Appellant, the records submitted and the documents

filed in its support. We are of the view that the apprehension as

expressed by minority shareholders with regard to consolidation of

shares is concerned, the Company has well taken care of their

concern. The Company having complied with the statutory

requirement, as contemplated in the Act, we are of the view that the

appeal deserves to be allowed.

16. The reason taken for dismissal of Company Petition by the

NCLT does not have any substance. As on the date of EGM, it is

evident that the votes cast in favour of the resolution for

consolidation of shares is more than 95%. It is noteworthy to

mention that during pendency of the Appeal, most of the

shareholders, who objected for consolidation of shares, have sold

their shares to the Director of the Appellant-Company. Considering

Company Appeal (AT) No. 36 of 2019 Page 13 of 14 and taking into consideration the transfer of shares, more than 95%

of shareholding, appears to be in favour of consolidation of shares.

From the records, only two shareholders holding 172 and 335 shares

respectively remained as shareholders of the Company and

unequivocally their percentage is very minimal and their rights are

well protected.

17. Therefore, considering the above, the facts and law, we hereby

allow the appeal in terms of Section 61(1)(b) of the Companies Act,

2013, by allowing the Appellant-Company for consolidations of its

share capital. The Impugned order dated 05.12.2018 passed by

NCLT is quashed and set aside. No costs.

[Justice A.I.S. Cheema] Member (Judicial)

(Kanthi Narahari) Member(Technical)

(V P Singh) Member(Technical) Akc

Company Appeal (AT) No. 36 of 2019 Page 14 of 14