Gopalkumar Puthan Kattoor vs Oil Tools International Services ...

3. Mr. Kunimal Parangattil Venugopal, 701, Apsara Building, Plot No.51, Sector 17, Vashi, Navi Mumbai 400703 Maharashtra. Appellant

Vs

1. Oil Tools International Services Private Ltd, Kharsundi, Post & Taluka Khalapur, District Raigad, Maharashtra 410 202

2. Ace Oil Fields Supply Inc. having its registered Office at P.O. Box 205, Sweeny, Sweeny, Texas, United States of America TX 77480

3. Mr. Paul Waters, 10310, C 321, Sweeny, Texas United States of America, TX 77480

4. Gopalkumar Puthan Kattoor, Puthan Kattoor House, Near Government Hospital, Chalakudy, Trichur, Kerala 679380 Respondents

Company Appeals (AT) Nos.338 and 373 of 2017 2

Present: Dr. U.K. Chaudhary, Senior Advocate with Shri Dhaval Deshpandey and Shri Himanshu Vij, Advocates and Shri Anshul Bhatt, PCS for the appellants. Shri Vivek Kholi, Ms Anubha Singh and Shri Nikhil Mathur, Advocates for Respondents Nos 2 and 3. Shri Rahul Chitnis and Shri Aaditya Pande, Advocates for Respondent No.5

AND

COMPANY APPEAL(AT) NO.373 OF 2017 (ARISING OUT OF ORDER DATED 18TH SEPTEMBER, 2017 PASSED BY NCLT, MUMBAI BENCH, MUMBAI IN T.C.P. NO.44/397-398/2015)

IN THE MATTER OF:

Gopalkumar Puthan Kattoor, Puthan Kattoor House, Near Government Hospital, Chalakudy, Trichur, Kerala 679380 Appellant

Vs

1. Oil Tools International Services Private Ltd, Kharsundi, Post & Taluka Khalapur, District Raigad, Maharashtra 410 202

2. Ace Oil Fields Supply Inc. having its registered Office at P.O. Box 205, Sweeny, Sweeny, Texas, United States of America TX 77480

3. Mr. Paul Waters, 10310, C 321, Sweeny, Texas United States of America, TX 77480

4. Mr. Ajith Kunimal Venugopal, 702Apsara Building, Plot No.51, Sector 17, Vashi, Navi Mumbai 400703 Maharashtra.

5. Mr. Sajith Venugopal, 701, Apsara Building, Plot No.51, Sector 17, Vashi, Navi Mumbai 400703

Company Appeals (AT) Nos.338 and 373 of 2017 3

Maharashtra.

6. Mr. Kunimal Parangattil Venugopal, 701, Apsara Building, Plot No.51, Sector 17, Vashi, Navi Mumbai 400703 Maharashtra. Respondents

Present: Mr. Rahul Chitnis, Mr. Aaditya Pande, Advocates for the Appellant. Dr. U.K. Choudhary, Senior Advocate with Mr Dhayal Deshpande, Mr Hiamnshu Vij, Mr Anshul Bhatt, CS, Advocates for Respondents No.4 to 6 Mr. Vivek Kohli, Mr. Anubha Singh and Mr. Nikhil Mathur for Respondent No. 2 and 3

JUDGEMENT

BALVINDER SINGH, MEMBER (TECHNICAL)

These two appeals, being Appeal No.338/2017 and 373/2017 has been

preferred by the appellants against the common order dated 3rd October,

2017 passed by the National Company Law Tribunal (hereinafter referred to

as 'the Tribunal'), Mumbai Bench, Mumbai in Company Petition No.44 of

2015. In both these appeals the facts are the same, parties are the same and

similar relief has been sought in both the appeals, therefore, we will dispose

off these appeals by a common order/judgement.

2. The Tribunal vide its impugned order dated 3rd October, 2017 has held

as under:

i) Since these Respondents held Board Meeting without calling one of the directors representing majority of the shareholding of the company and general meeting was held without any notice to the Petitioners for increase of authorized share capital, the increase happened in the EOGM held on 28.11.13 is hereby held as invalid.

ii) Allotment of shares to outsider is hereby held as invalid.

iii) The allotment of shares made to R2 and R3 is bad in law and prejudicial to the interest of the Petitioners.

Company Appeals (AT) Nos.338 and 373 of 2017 4

iv) This Bench hereby declares holding of such meeting is bogus because the date of meeting in the notice purportedly sent to P2 is different from the date shown in Form-32, therefore Form 32 filed showing P2 vacated office as invalid.

v) Allotment of shares to R5 itself is when said bad, the company being private company, for there being no valid notice to the petitioners, especially to P2, in appointing R5 as director, appointment of R5 as director of the company, his appointment as director is also declared bad.

vi) This Bench having already held that holding an extra ordinary general meeting on 28.11.2013 without notice to PI is invalid, the alteration of Memorandum of Association and Articles of Association in said meeting automatically would become invalid, therefore, alteration of Memorandum of Association and Articles of Association is hereby declared as invalid and prejudicial to the interest of Pl.

vii) These proceedings are bound by 397-398 of Companies Act, 1956 but not by Companies act 2013

3. The Tribunal has given the following directions:

i)That PI being a majority shareholder, PI through P2 shall take over the management of the Company on restoration of P2 as director of the company and with liberty to the petitioners to appoint more members as directors of RI Company within 15 days from the date Order is made available. R2-R4 will not continue as directors after 15 days from the date of delivery of this Order and they shall not pass any Board Resolution without approval of P2.

ii)A forensic audit is to be conducted from 01.04.2013 till date to find out as to whether funds come to RI Company as stated by the Respondents or not? To conduct audit, M/S. Shah & Gutka are hereby appointed as Auditor with remuneration proportionate to their shareholding of the petitioners and R2-4 in the ratio of 85:15. The Auditor can fix remuneration of him depending on the volume of work involved in this case.

Company Appeals (AT) Nos.338 and 373 of 2017 5

iii)The Petitioners shall provide exit to R2 to R4 on fair valuation taking 31.03.2017 as cut- off date. The valuation of the shares shall be conducted by the same auditor after forensic report has been given by the Auditor.

iv)After ascertainment of infusion of funds from R5, loans given by the shareholders, utilization of the same and company funds and siphoning of funds if any from 31.03.2013 till date, RI Company, as per the report given by the auditor, shall refund the funds actually infused by R5 either in the form of share capital or in the form of loans within three months from the date valuation of share value and after preparation of forensic audit report. If such payment is not made within three months as stated above, the petitioners shall pay interest @10% over the amount payable to R5 after completion of three months as stated above.

4. The brief facts of the case are that the 2nd and 3rd respondents in

appeal had filed a Company Petition No.44/2015 as petitioners before the

Tribunal under Sections 397, 398 read with Section 402 of the Companies

Act, 1956 being aggrieved by the acts of oppression and mismanagement

committed by the appellants (2nd to 4th respondent in Company Petition) in

1st Respondent. It was also alleged in the company petition that the

appellants in collusion and connivance with each other, have illegally and

without any sanction and authority, filed false and frivolous documents with

the Registrar of Companies (ROC) and on inspection of records available with

ROC, it came to the knowledge that the appellants herein have illegally and

unauthorisedly allotted shares of 1st respondent to themselves as well as to

a third party and also fraudulently removed 3rd respondent from the post of

director of 1st respondent.

5. 1st respondent is a company incorporated under the Companies Act,

1956 on 12.01.2005. It is engaged in the business of manufacture of tools

and machineries used in exploration and extraction of oil and gas. The

authorised share capital of 1st respondent is Rs.1,00,00,000 divided into Company Appeals (AT) Nos.338 and 373 of 2017 6

10,00,000 equity shares of Rs.10 each. The minimum paid up share capital

of 1st respondent is Rs.1,00,000. Initially the 1st appellant and one Ms Lizy

Babu holds 7500 shares each in 1st respondent. Subsequently on

resignation of Ms Lizy Babu, her shares were transferred to appellant No.3.

After incorporation the appellants approached the 2nd and 3rd respondents to

enter into a joint venture in order to expand the business of tools and

machineries across the world. Consequently, in the year 2005-2006, 1st

respondent allotted substantial shares to 2nd respondent and a few other

foreign companies and shareholding pattern of 1st respondent as on

30.09.2006 as reflected in annual returns of the 1st respondent for the FY

2005-06 is as follows:

Ace Oilfields Alberta Ltd Hightly Ajith Venugopal Supply Inc Corpn

232320 232269 99553 99700

(34.99%) (34.98%) (14.99%) (15.01%)

6. 2nd respondent acquired the entire shareholding of M/s Highty

Corporation in 1st respondent, whereby its stake in 1st respondent was

increased 34.99% to 49.99%. In the year 2010-11 the 2nd respondent

acquired the entire shareholding of Alberta Limited and its shareholding in

1st respondent was increased from 49.99% to 84.98% and thus 2nd

respondent acquired the majority control of 1st respondent. On 16.2.2011,

Mr. Charles Garvey resigned as Director and 2nd appellant was inducted as

Director w.e.f. 01.04.2011

Company Appeals (AT) Nos.338 and 373 of 2017 7

7. 2nd and 3rd respondent being majority shareholder in 1st respondent

invested huge amount to promote the growth and business of 1st respondent.

2nd respondent acting through 3rd respondent granted huge amount of loan

for management of day to day affairs of 1st respondent.

8. It was agreed that the overall control of the 1st respondent would lie

with the 2nd and 3rd respondent and day to day affairs of the 1st respondent

would be managed by 1st to 3rd appellants under intimation to and prior

approval from the 2nd and 3rd respondents. It was also understanding

between the parties that the 2nd respondent will procure high quality raw

materials from across the world and supply the same to 1st respondent who

will thereafter process the raw materials into final products. After

manufacturing final products, 1st respondent will export them to the 2nd

respondent who will thereafter invest its time and resources to trade the final

products in the market. As per the understanding, 1st respondent was

entitled only to the processing charges for the above manufacturing and

nothing else.

9. Being majority shareholders, 2nd respondent incurred huge

expenditures to meet out the day to day expenses of 1st respondent and paid

monies towards the salary of employees of the company. That the 2nd

respondent made various payments with respect to the business of 1st

respondent and the payment so made have not been accounted for. 2nd and

3rd respondents have been making all efforts to augment the business of 1st

respondent, the appellants have been showing indifferent attitude towards

the investments made by the 2nd and 3rd respondents in 1st respondent. The

Company Appeals (AT) Nos.338 and 373 of 2017 8

appellant issued a Demand Notice dated 28.2.2015 claiming a sum of USD

593605 from the 2nd and 3rd respondent to which the said respondents

replied thereby reiterating the understanding between the parties referred

above. The appellants failed to honour their obligations under the loan

agreement and even did not pay the interest. The appellants induced the 2nd

and 3rd respondents to issue waiver letters towards the interest payable

under the loan agreement.

10. Apprehending malafide on the part of the appellants the 2nd and 3rd

respondent carried out inspection of statutory records filed by appellants

before the Registrar of Companies from where it was revealed that Form

No.23 for registration of an alleged ordinary as well as Special Resolution

dated 28.11.2013 by which the authorised share capital of 1st respondent

has been increased from Rs.1,00,00,000/- to Rs.2,50,00,000/- and the

Memorandum and Articles of Association of 1st respondent has been altered;

Form No.5 notifying the alleged increase in share capital; notice dated

4.10.2013 to shareholders for calling EOGM; Board Resolution dated

4.10.2013 authorising 1st appellant to issue such notice; Form No.2

regarding alleged allotment of shares to appellant and allotment of 1816158

shares to an outsider Mr. Gopal Kumar (4th respondent in Appeal

No.338/2017 and appellant in appeal No.373/2017). 3rd respondent, who

was a director of the company, never received any notice, therefore, the same

is ex facie frivolous and contrary to the provisions of the Act. The aforesaid

act as enumerated above elucidate various acts of oppression of the 2nd and

3rd respondent and mismanagement of affairs of 1st respondent company by

the appellants in both the appeals, therefore, the 2nd and 3rd respondents

Company Appeals (AT) Nos.338 and 373 of 2017 9

filed Company Petition No. TCP/44/397-398/2015 before the Tribunal

seeking various reliefs as prayed for in the Company Petition. After hearing

the parties the Tribunal passed the impugned order dated 3rd October, 2017.

11. Being aggrieved by the said impugned order the appellants herein filed

the above two appeals stating that sending of calendar of events which

discloses when Meeting of the Board of Directors of the company are to be

held is service of notice upon the Directors and stressed that the same is

sufficient notice to the shareholders within the meaning of Section 172 of the

Companies Act, 1956. It is further argued that the appellants were not

required to give separate notice of each meeting to the 2nd and 3rd respondent

as they were not resident in India.

12. It is next argued by the appellants that Section 81 of the Companies

Act, 1956 is not applicable to the private companies and the shares have

been allotted as per Article 5(1) of the Articles of Association of the 1st

respondent. Learned counsel next argued that the allotment of unsubscribed

portion of the rights issues of shares of a private company to a non-

shareholder of that private company is valid and the Tribunal can not set

aside the allotment of unsubscribed portion of the rights issue of shares of a

private company to a non-shareholder and the company is not bound to allot

right issue of shares of a private company to a non-shareholder at a

premium. It is further argued that the appellants did not dilute the

shareholding of the 2nd and 3rd respondent but the 2nd and 3rd respondent

did not subscribe to the rights issue of shares and therefore unsubscribed

portion of the rights issue was allotted to 4th respondent (appellant in appeal

Company Appeals (AT) Nos.338 and 373 of 2017 10

No.373/17), therefore the shareholding of 2nd and 3rd respondent got diluted.

13. It is further argued that the Tribunal cannot adjudicate whether the

private company actually needed the funds when it decided to go in for a

right issue of shares. It is further argued that the 2nd and 3rd respondent

made the enquiries regarding the company and they made enquiry only when

they received notice of their outstanding dues to the 1st respondent. It is

stated that the Tribunal gave undue weightage to the fact that the 1st

respondent did not send notice to 2nd and 3rd respondent, whereas the notice

were actually sent and the courier receipt were shown. It is further stated

that the increase in authorised capital of the company was valid which was

approved at the EOGM on 28th November, 2013 and as per Article 5(1) of the

Articles of Association of the Company and Section 81 of the Companies Act,

1956 is not applicable to private companies. It is further stated that the

Tribunal has wrongly held that the allotment of shares to 4th respondent

(appellant in Appeal No. 373/2017) is not only bad in law but it has reduced

the shareholding of the majority shareholders but is also prejudicial to the

interest of 2nd and 3rd respondent. It is argued that the company was in need

of funds for its survival and therefore decided to allot the unsubscribed

portion of the right issue of share to 4th respondent. It is wrong and denied

that the intention of the appellants in allotting shares to 4th respondent is

primarily to dilute the shareholding of 2nd respondent. It is further stated

that the Tribunal has wrongly interpreted the definition of the private

company as per Section 3(1) (3) of Companies Act, 1956 and stated 4th

respondent as "Public" and "allotment of shares to 4th respondent as

Company Appeals (AT) Nos.338 and 373 of 2017 11

invitation of public". The appellants further stated that if 4th respondent is

an outsider then 2nd respondent is also an outsider.

13. It is stated that the 3rd respondent had vacated the office under Section

283(1)(g) of the Companies Act, 1956 as he did not attend more than 3

consecutive meetings of the Board of Directors of the Company.

14. It is stated that the Tribunal has wrongly held that there is no delay in

filing the petition whereas it is three years delay in filing the petition.

15. It is argued that the Board of Directors were within their rights when

terminating the office of 3rd respondent as director and no notice was

required to be given to that particular director against whom Section

283(1)(g) of the Companies Act, 1956 is being invoked and the said director

had wilfully absented him from attending the Board Meeting.

16. It is argued that the Tribunal has wrongly issued direction that

respondents shall take over the management of the company on restoration

of 2nd respondent as a director and liberty to appoint more members as

directors of the company. The Tribunal has also wrongly reinstated 3rd

respondent after being aware about his intentions while being in the

Management and Tribunal has also wrongly held that the appellants shall

not be director of company and the forensic audit is to be conducted from 1st

April, 2013 till date and the exit route will be provided to the appellants on

fair valuation taking 31st March, 2017 as the cut off date.

Company Appeals (AT) Nos.338 and 373 of 2017 12

17. It is argued that the Tribunal has not considered that the respondents

are liable to pay outstanding amount due to the company for the invoices

raised by the company for processing charges.

18. The respondents stated that sending a calendar of events cannot be

called as service of notice upon them. The respondents stated that the notice

was sent by post from India to America one day before the Meeting. They

further stated that can anybody believe that the postal notice would reach to

US from India the next day. It is stated that 1st respondent is private company

and four elements make a private company different from public limited

company i.e. restriction of right to transfer of shares, limiting the number of

its members to 50, prohibiting any invitation to the public to subscribe for

any shares in, or debentures of, the company, prohibiting any invitation or

acceptance of deposits from persons other than its members, director or their

relatives. Therefore, the subscription of shares by an outsider is prohibited.

Therefore, the allotment of shares to an outsider i.e. appellant in Company

Appeal (AT) No. 373 of 2017 violates the mandate to be followed by the private

company. The respondents herein stated that no notice was given to them

for increasing the authorised share capital, holding Board Meeting, filing

form No.2. It is next argued that Board Resolution dated 30.1.2014 is shown

as 3rd respondent has vacated the office on the basis that 3rd respondent

has not attended a single board meeting, however, Form 32 shows that 2nd

respondent vacated u/s 283 basing on a resolution held on 23.1.2014 that

3rd respondent was not associated with the 1st respondent w.e.f. 14.12.2013.

Company Appeals (AT) Nos.338 and 373 of 2017 13

19. Learned counsel for the 2nd and 3rd respondent argued that the

appellants had over the years not only seized the 1st respondent behind the

back of it, but also ensured that systematic and severe mismanagement is

illicitly administered in order to unlawfully enrich the appellants to the

complete detriment of 1st respondent and 1st respondent is at crossroads with

an inevitable financial crunch. It is further argued that the 3rd respondent

has been removed from the directorship/chairmanship position of 1st

respondent by illegal and allegedly convened Board Meeting dated

30.01.2014, notice for which was received by the 3rd respondent on

28.1.2014 at United States of America. It is argued that on perusal of the

Form No.32 filed by the appellants, the authority to file the said form has

been given to appellant No.1 by an alleged Board Meeting Dated 23.01.2014,

notice of which was never given to the 3rd respondent. It is further stated

that the said Form retrospectively removes the 3rd respondent from

14.12.2013, whereas the Board Meeting was convened on 30.01.2014. It is

stated that 3rd respondent has been removed illegally and shareholding of

the 2nd and 3rd respondent has been diluted through illegal means. It is

argued that in order to reverse the illegalities committed by the appellants,

as per impugned order the appellants were removed from the Board of 1st

respondent 15 (fifteen) days from the date of the said order and 4th

respondent (appellant in appeal No.373/2017) was removed from the

directorship position with immediate effect from the date of the order.

20. It is further argued that the ex parte interim order dated 17.10.2017

passed by the Appellate Tribunal may be vacated as no notice was issued to

Company Appeals (AT) Nos.338 and 373 of 2017 14

the 2nd and 3rd respondents. The company appeal filed by the appellants

were served on respondent on 18.10.2017 at 4.30 PM.

21. We have heard the learned counsel for the parties and perused the

record.

22. The appellants have raised an issue that when a 'calendar of events'

which discloses when meetings of the Board of Director of Company are to

be held is sent is sufficient notice to the shareholders within the meaning of

Section 172 of the Companies Act. The Respondents have argued that no

notice of Board Meeting was received by them. On hearing both the parties

at length, we have come to the conclusion that whenever any meeting is held,

either Board meeting or General Meeting, duty is cast upon the persons

holding meeting to send the respective notice with Agenda items as

prescribed under the Companies Act. Since no such notice has been received

by the 2nd and 3rd respondent, sending a calendar of events cannot be called

as service of notice upon the 2nd and 3rd respondent and calendar is only a

plan for the year giving indication to facilitate the planning by the parties to

be available as and when the notice is received when the details of actual

meeting have been finalised. Sending Notice with Agenda and documents

does not get dispensed. Therefore, we hold that no notice was served upon

2nd and 3rd respondent.

23. The next issue raised is that after increase of authorised share capital,

a Board Meeting was held on 12.12.2013 for allotment of 10000 shares each

to 1st and 3rd appellant at par and filed Form 2 reflecting allotment of shares

Company Appeals (AT) Nos.338 and 373 of 2017 15

to them for which no notice was sent to the respondents. Since no notice was

sent to the existing shareholders (2nd and 3rd respondent), therefore, it is

prejudicial to the interest of the 2nd and 3rd respondent and the allotment is

bad. It is argued by the appellants that a meeting was called on 28.11.2013

in pursuance to Board Resolution dated 04.10.2013 for increase of

authorised share capital and for this purpose in addition to calendar of

events, on 27.11.2013 a reminder letter was sent to 3rd respondent regarding

holding AGM to remind the respondent that EOGM was going to be held on

28.11.2013. Learned counsel for the respondent argued that the reminder

reached to the respondent on 2.12.2013 when the meet was already held.

Learned counsel further argued that the appellant's intention was that the

respondent should not attend the meeting otherwise the appellants could

have intimated them about the EOGM soon after 4.10.2013. We have heard

the parties and would like to mention the observations given by The Tribunal

on this issue:

"14.As to Extra Ordinary General Meeting slated to be held on 28.11.2013 in pursuance of the board resolution dated 04.10.2013, the respondents' Counsel submits that in addition to the calendar of events of Financial year 2013-14, on 27.11.2013, a reminder letter was sent to P2 regarding holding AGM to remind the Petitioners that EOGM was going to be held on 28.11.2013. The answer from the Petitioners' side to this belated reminder is, this reminder reached to them on 0212.2013 i.e. almost 3-4 days after meeting was held. Had there been any intention to these respondents to send notice to the petitioners on time, what prevented them to send this notice immediately after Board Meeting held on 04.10.2013? More than one month fifteen days left in between, they did not admittedly send any notice, perhaps, to ensure that it should not reach to the Petitioners in time, so that they could not attend to the meeting on 28.11.2013. This notice was not sent by e-mail. It was sent by post from India to America one day before the meeting. Could anybody

Company Appeals (AT) Nos.338 and 373 of 2017 16

believe that a postal notice would reach to US from India on the very next day? Would anybody expect that a man living in America, even if it is assumed that it was reached on 27.11.2013, would be able to reach to the meeting scheduled to be held on the very following day? All these actions of the respondents can in clear terms sound that these respondents applied every trick of the trade to ensure that Petitioners do not to attend the meeting dated 28.11.2013.

15.Since these Respondents held Board Meeting without calling one of the directors representing majority of the shareholding of the company and general meeting was held without any notice to the Petitioners for increase of authorized share capital, the increase happened in the EOGM held on 28.11.13 is hereby held as invalid. Moreover, though it has been categorically mentioned u/s 172 of the Companies Act, 1956, every notice shall specify the place and the day and hour of the meeting and shall contain a statement of the business to be transacted there at by sending it 21 days before the date of meeting, sending of calendar of events not giving particulars, place and the day and hour of the meeting and the statement of the business to be transacted as mentioned u/s 172 would never become a notice u/s 172 of the Companies Act, 1956.

That all what has been recorded in the impugned judgement quoted above has again been argued before us. We are not able to convinced that sending a calendar of events in advance and not sending any further notice for the particular meeting alongwith agenda and other necessary papers be treated as a valid notice either under law or as a good corporate practice. Therefore, we hold that that the holding Board Meeting without calling one of the directors of the company and general meeting was held without notice to the contesting respondents for increase of authorised share capital in the EOGM held on 28.11.2013 is invalid.

24. The next issue raised is whether or not bringing an outsider as a

shareholder is in violation of the Articles of Association and constitution of

Private Limited Company. Board of 1st respondent is authorised to increase

the subscribed capital of the company by way of allotment of further shares,

Company Appeals (AT) Nos.338 and 373 of 2017 17

subject to the provisions of Section 81(1A) of Companies Act, 1956, the Board

shall issue such shares in the manner set out in section 81(1) of the Act.

Learned counsel for the appellant argued that the shares have been allotted

as per Section 5 of Articles of Association of the company and the Board is

authorised to increase the subscribed capital of the company. The Learned

counsel for the respondents argued that the shares to the outsider have not

been issued as stipulated in Section 81(1A) of the Companies Act, therefore,

the allotment of shares made to an outsider is invalid. The Tribunal below

has given its observations on this issue as under:

"17.According to Article 5 of Articles of Association of RI company, Board is authorized to increase the subscribed capital of the company by way of allotment of further shares, subject to the provisions of section 81(1A) of Companies Act, 1956, the Board shall issue such shares in the manner set out in section 81(1) of the Act.

18.If we read section 81, it is a section deals with rights issue for allotment of shares offering them to the holders of the equity of the company in proportion to the capital paid up on those shares as on the date of subscription, if any of the existing shareholders, failed to respond to the offer of allotment within 15 days from the date of notice, then it can be deemed as declined by such existing shareholder/s, meaning thereby, these shares could be issued to the remaining existing shareholder/s, this section 81 (1) does not deal with as to the procedure to be followed if such shares are to be issued to outsider.

A separate sub-section has been carved out as section 81 (IA) saying that if such shares are proposed to be offered to any person/s, whether or not those persons are covered under sub-section 81(1), a special resolution has to be passed for allotting those shares to a person other than the persons covered under sub section 81(1). Of course, under sub section 81 (3), it has been said that this proposition is not applicable to a private limited company. But, for it has been specifically incorporated in the Articles of Association of this company that it requires to pass special

Company Appeals (AT) Nos.338 and 373 of 2017 18

resolution, if shares are allotted to an outsider, application of section cannot be found fault with, but for doing the same, the company has to mandatorily follow that procedure. That being the scenario, for allotment of shares to R5, the company ought to have passed a special resolution for allotment of shares to R5, since it is the case of the respondents that shares were allotted to R5 in a Board Meeting held on 14.12.2013 allotting 18,16,158 shares to R5 at par, it can never be an allotment as stated under section 81(1) (A) of the Act 1956. The blunder that has committed by the company is, R5 being an outsider, first shares should not have been issued, if at all any such issue has happened for Articles permitting such allotment of rights issue subject to section 81(1A), the company ought to have passed a special resolution for allotment of shares to R5. For no such special meeting was held and no such special resolution was passed, allotment of shares to R5 is not only bad in law for it has reduced the shareholding of majority to abysmally low, it is prejudicial to the interest of the Petitioners. Thereby allotment to outsider is hereby held as invalid."

Apart from what has been noted in the impugned order, as we have

already held that increase in the authorised share capital is invalid, capital

issued in pursuance of such increased capital cannot be sustained

irrespective of whether proper procedure has been followed or not. Therefore,

we are in agreement with the Tribunal that the allotment of shares to outsider

is invalid.

25. The next issue raised is that while invoking Section 283(1)(g) of the

Companies Act, 1956, the Board of Directors must give notice to that

particular director (against whom the section is being invoked). We have

gone through the record and find that the 3rd respondent is shown as vacated

office on the basis that he has not attended a single board meeting since

April, 2013 till January, 2014, but the appellants filed Form 32 showing as

if 3rd respondent vacated office u/s 283 basing on a resolution allegedly held

on 23.1.2014 stating that 3rd respondent was not associated with the

company w.e.f. 14.12.2013 since he was not attending the meetings. A Board

Meeting notice dated 30.01.2014 was issued on four agendas including

Company Appeals (AT) Nos.338 and 373 of 2017 19

vacation of office by 3rd respondent. The notice for Board Meeting for

30.1.2014 was issued by the appellants and it was not mentioned in the

notice that what meetings have not been attended by 3rd respondent and

when these meeting were held. Form No.32 filed by 1st appellant, it appears

as if Board Meeting was held and resolution was passed on 20.03.2014 with

a confirmation that 3rd respondent is not associated with the company w.e.f.

14.12.2013. All these documents shows that as per notice sent by 1st

appellant to 3rd respondent on 23.1.2014, meeting should have been held on

30.01.2014, whereas in Form 32 it was shown as meeting held on

23.12.2013. Therefore, both the documents are contradictory and 1st

appellant is not certain on which date meeting was held, therefore, the 1st

appellant failed to establish that a Board Meeting was held to pass a

resolution for invoking Section 283(1)(g) to show deemed vacation of 3rd

respondent of 1st respondent. Therefore, we hold that date of meeting in the

notice purportedly sent to 3rd respondent is different from the date shown in

Form 32. Further we have already expressed our opinion that calendar of

events is not a sufficient notice, non-attending of the meeting as per calendar

of events cannot be held against a director for not attending for the purpose

of vacating the office under Section 283(1)(g) of the Companies Act, 1956.

Therefore, vacation of the office by the director in terms of Section 283(1)(g)

is invalid. Form 32 filed showing 3rd respondent vacated office is also invalid.

26. The appellants have raised an issue that the respondents are not

making payment as per their commitment and there was amount due from

the 2nd and 3rd respondent to the company, because of which the company

Company Appeals (AT) Nos.338 and 373 of 2017 20

retained the material of the 2nd and 3rd respondent. On this issue we observe

that making or not making payment as per commitment or contractual terms

is a matter among the appellants, 1st respondent and 2nd and 3rd respondent.

This issue does not come under oppression and mismanagement. Therefore,

the appellant is at liberty to approach appropriate forum for this purpose.

27. During the course of the arguments, the learned counsel appearing on

behalf of the appellant in Appeal No.373/2017 made submissions that he

adopts the arguments made in the main Appeal No.338/2017. The learned

counsel further argued that since he is not otherwise among the original

shareholders and he has been allotted equity by the company, therefore, his

interest should be duly protected as a bona fide investor. He also further

argued that he being an outsider he may not be aversed of getting his

investment back with appropriate interest for the period the funds which has

been used by the company. The learned counsel further argued that he has

also given loan to the company and that amount may be refunded to him

with interest.

28. The argument of the learned counsel for the appellant in Company

Appeal (AT) No.373/2017 is that this appellant gave loan to the extent of

Rs.98600000/- and towards purchase of shares spent to the extent

Rs.18100000/- and he was allotted the unsubscribed shares of the company

and according to him there were no allegations of syphoning and so the

directions for forensic audit was not necessary. We find from impugned order

that direction (iv) uses the words "siphoning of funds, if any". According to

us looking to the impugned order directing take over of the company by the

Company Appeals (AT) Nos.338 and 373 of 2017 21

original petitioners No.1 and 2 and restoration of original petitioner No.2 as

director, the original petitioners can ascertain from the records the infusion

of funds by R5 towards loan and share capital. It would be reasonable and

win win situation for both sides if the petitioners are directed to ascertain

from records the infusion and utilization and if satisfied, immediately pay

back the funds infused by R5 within two months of the order in these

appeals. The disputes qua Respondent No.5 shall then rest at that stage.

The forensic audit directed by NCLT will then be done for other Respondents.

However, if the original petitioners, for any reason, do not pay back the funds

infused by original R5 within the above period, Company should be liable to

pay interest if the auditor later finds that amounts are liable to be refunded

as per directions (iv) of the impugned order, in which case the three months

clause put by the NCLT deserves to be deleted, ad directions modulated.

29. Hence for above reasons we pass the following order:

i) CA(AT) No.338 of 2017 is disposed in terms of Order being passed in

CA(AT) No.338/2017. Parties to bear their own cost.

ii) CA(AT)No.338 of 2017 is partly allowed. Direction No.(i) to (iii) of the

impugned order passed by NCLT Mumbai are maintained.

iii) In place of Direction No.(iv) recorded by NCLT, following direction is

given:

"iv(a) The original petitioners may ascertain from records infusion of

funds by R5 towards loan given by the original R5 to the company and

funds infused for purchase of shares, and utilization and refund the

Company Appeals (AT) Nos.338 and 373 of 2017 22

amount within two months from the date of the order in this appeal.

The shareholding issued to R5 stands quashed.

b) In case original petitioners No1 and 2 for any reasons do not act as

per iv(a) supra, it is directed:-

After ascertainment of infusion of funds from R5, loan given by the

shareholders, utilisation of the same and company funds and

siphoning of funds, if any, from 31.3.2013 till date, R1 company, as

per the report given by the auditor, shall refund the funds actually

infused by R5 either in the form of share capital or in the form of loans,

within three months from the date of forensic audit report, with

interest @ 10% per annum from the date of filing of the company

petition in NCLT, Mumbai. The shareholding issued to R5, stands

quashed.

30. In view of the above order, both the appeals are disposed of

accordingly. Interim order passed, if any, is vacated. No order as to costs.

(Justice A.I.S. Cheema) (Balvinder Singh) Member (Judicial) Member (Technical)

New Delhi Date: 09 -3-2018

Bm `

Company Appeals (AT) Nos.338 and 373 of 2017