Hasmukhlal Madhavlal Patel vs Ambika Food Products Pvt. Ltd

[Against the order dated 17.05.2017 passed by the National Company Law Tribunal, Ahmedabad Bench, Ahmedabad in TP No.197/397- 398/NCLT/AHM/2016 (NEW) C.P. No.16/397-398/CLB/MB/2012 (Old)]

With

Company Appeal (AT) No.273 of 2017

[Against the order dated 17.05.2017 passed by the National Company Law Tribunal, Ahmedabad Bench, Ahmedabad in TP No.10/397- 398/NCLT/Ahm/2016 (New) [C.P. 86 of 2010 (old)]

IN THE MATTER OF: 1. Hasmukhlal Madhavlal Patel 174, Satyagrah Chawani Sector - 7, Satellite Road, Jodhpur, Ahmedabad ...Appellant No.1 (Original Respondent No.2)*

2. Dilipkumar Madhavlal Patel 174, Satyagrah Chawani Sector - 7, Satellite Road, Jodhpur, Ahmedabad ...Appellant No.2 (Original Respondent No.3)*

Vs.

1. Ambika Food Products Pvt. Ltd. National Highway NC 8A Rajoda Post Bavia District Ahmedabad, Gujarat ...Respondent No.1 (Original Respondent No.1)*

2. Manish Vipinchandra Patel 8, Manichandra Society Vibhag - 1 Surdhara Circle, Drive in Road Ahmedabad ...Respondent No.2 (Original Petitioner No.1)*

Company Appeal (AT) No.272 and 273 of 2017 2

3. Krunal Vipinchandra Patel 8, Manichandra Society Vibhag - 1 Surdhara Circle, Drive in Road Ahmedabad ...Respondent No.3 (Original Petitioner No.2)*

4. Kiritkumar Ochachhavlal Sheth 67, Surdhara Bunglows, Nr. Sal Hospital Surdhara circle Drive in Road Ahmedabad ...Respondent No.4 (Original Respondent No.4)*

5. Ashwinkumar Kiritkumar Ochachhavlal Sheth 67, Surdhara Bunglows, Nr. Sal Hospital Surdhara circle Drive in Road, Ahmedabad ...Respondent No.5 (Original Respondent No.5)*

6. The Registrar of Companies Opp. Rupal Park, Nr. Ankur Bus Stand Naranpura, Ahmedabad ...Respondent No.6 (Original Respondent No.6)*

* As in TP 197 of 2016

 Cause title in both Appeals is same.

Present: Shri Ashok Mehta, PCS and Shri Shwetank Sailakwal, Shri Yash Agarwal, Shri Vijay Assudani and Shri Pradeep Tiwari, Advocates for the Appellants

Shri Malak Bhatt and Ms. Sonali Malik, Advocates for Respondents Nos.2 and 3

Shri Sujeet Gupta, Shri Anmol Tayal and Shri Vikas Agarwal, Advocates and Shri Rameez Ahmed, CS for Respondent Nos.4 and 5

JUDGEMENT

A.I.S. Cheema, J. :

Both these appeals have been filed by original Respondent Nos.2 -

Hasmukhlal Madhavlal Patel and 3 - Dilipkumar Madhavlal Patel against

Company Appeal (AT) No.272 and 273 of 2017 3

the same impugned order dated 17.05.2017 passed by the National

Company Law Tribunal, Ahmedabad Bench, Ahmedabad ("NCLT", in

short). In the NCLT, TP 197/2016 (new) CP 16/2012 (old) was filed by

Manish Vipinchandra Patel and Krunal Vipinchandra Patel (Original

Petitioners 1 and 2). Before this petition was filed earlier, Company Petition

TP 10/2016 (new) (CP 86/2010) (old) had been filed by Kiritkumar

Ochachhavlal Sheth (Respondent No.4 in T.P. 197/2016). Both the

Company Petitions raised grievances of oppression and mismanagement.

The NCLT disposed both the Company Petitions by common Judgement.

Parties have been referred in the Judgement in the manner in which they

were arrayed in TP 197/2016. We will also refer to them in the same

manner as arrayed in TP 197/2016 and as indicated above against names

of parties of CA 272/2017.

2. The parties have been referred by the NCLT also by their group

names and which may be reproduced as under:-

Sl. No. Parties Group Name Arrayed as 1. Manish Vipinchandra Patel VP Patel Group Original and Krunal Vipinchandra Patel Petitioners 1 & 2

2. Hasmukhlal Madhavlal Patel HM Patel Group Original and Dilipkumar Madhavlal Patel Respondents 2 & 3

3. Kiritkumar Ochachhavlal Sheth Sheth Group Respondents 4 & 5 and Ashwinkumar Kiritkumar Ochachhavlal Sheth

3. Sheth Group filed the Company Petition TP 10/2016 earlier on

28.10.2010. VP Patel Group filed TP 197/2016 in February, 2012. NCLT

Company Appeal (AT) No.272 and 273 of 2017 4

has treated TP 197/2016 as the main matter and referred to the cases put

up by the parties accordingly.

Petitioners claimed before NCLT that the Original Respondent No.1

Ambika Food Products Private Limited is a private limited company with

authorized share capital of Rs.1 crore consisting of Rs.10 lakhs equity

shares each of Rs.10/-. The paid up share capital is also the same. The

petitioners claimed that the shareholdings of the parties were as follows:-

1) HM Patel Group - 30.80%

2) VP Patel Group - 24.20%

3) Sheth Group - 45%

4. The Original Petitioners and Sheth Group claimed before NCLT that

earlier the three groups were running the company smoothly but later on

differences came up. Three groups decided to amicably settle the accounts

and separate the business. Consequently, Sheth Group and Vipinchandra

Patel (father of Original Petitioners), who was functioning as Director,

resigned from posts of Directors on 11.04.2009. Original Petitioners and

HM Patel Group continued on the Board of Directors. The parties had

earlier decided to settle the accounts of Sheth Group. However, after

resignation of the Sheth Group, Respondents 2 and 3 (hereafter referred

as contesting Respondents or Appellants) continued with oppressive acts

as mentioned in the petition. The Petitioners came to know that

Respondents 2 and 3 unilaterally submitted forms 5 and 23 on 12.02.2010

with Registrar of Companies without conducting meetings to increase

Company Appeal (AT) No.272 and 273 of 2017 5

authorized share capital. The Petitioners sent letter dated 18.12.2009

(Volume II page 389) to Registrar of Companies to mark the Company as

disputed company. Petitioners with the support of Sheth Group gave

Resolution on 22nd February, 2010, under Section 169 of the Companies

Act, 1956 (old Act - in short) for removal of Respondents 2 and 3 from the

posts of Directors. Requisition dated 23.02.2010 was given to call EOGM

on 05.03.2010. Notice was given on 23.02.2010 to contesting

Respondents. Public notice of EOGM was also given in newspapers on

25.02.2010. In the EOGM dated 05.03.2010, Respondents 2 and 3 were

removed as Directors. The Petitioners and Sheth Group have made

allegations of siphoning also against contesting Respondents.

5. Original Petitioners claimed before NCLT that after the EOGM dated

05.03.2010, Sheth Group filed TP 10/2016 (CP 86/2010) in collusion with

HM Patel Group.

6. Original Respondent No.4 who filed TP 10/2016 claimed before the

NCLT that it was rather the HM Patel Group and VP Patel Group who were

working against the interest of the Company. The Petitioners had filed

Special CA 6090/2010 before High Court of Gujarat which came to be later

on withdrawn. Although contesting Respondents had been ousted as

Directors, there was still time to control the affairs of the Company.

7. Original Petitioners claimed that they and Vipinchandra Patel were

guarantor of the Company and had given personal property as security for

Company Appeal (AT) No.272 and 273 of 2017 6

facilities availed from Bank of Baroda. Original Petitioners had received

notice from DRT for recoveries.

8. The Original Petitioners in their petition prayed that the Registrar of

Companies should be directed to take on record the forms submitted by

them regarding removal of Respondents 2 and 3 as Directors. They sought

setting aside of resolutions, deeds, acts done by contesting Respondents

after 05.03.2010 the date of E.O.G.M. called by them. They also wanted

that the forms submitted by contesting Respondents relating to increase

of authorized share capital should be set aside. Other reliefs were also

claimed. Sheth Group also in their petition claimed removal of contesting

Respondents and that the increase of authorized share capital should be

restrained. Further reliefs were also claimed.

9. In the NCLT, the contesting Respondents 2 and 3 claimed that the

Original Petitioners had earlier filed Special CA 6090/2010 before High

Court of Gujarat claiming similar reliefs which were withdrawn and thus

the petition was not maintainable. It was also claimed that the T.P.

197/2016 was not maintainable as the Petitioners had not filed reply in

the petition field by Sheth Group. These contesting Respondents claimed

that it was rather they who were looking after the whole business of the

Company. The Original Petitioners and Sheth Group had illegally taken

possession of the records, properties and assets of the Company and were

obstructing the contesting Respondents. They claimed that the Petitioners

and Sheth Group were acting in oppressive manner. They claimed that

Company Appeal (AT) No.272 and 273 of 2017 7

Original Respondent No.2 had given personal guarantee to banks for

financial assets of the Respondent Company and DRT had issued notice to

Respondent No.2. These Respondents gave particulars before the NCLT as

to the manner in which they were conducting the business claiming that

Vipinchandra Patel, father of Original Petitioner No.1 was generally a

spectator of the business affairs of the Company. He was rather looking

after the business of Ambika Rice Mills. In short it has been claimed that

the business of Respondent No.1 Company was developed by them.

Contesting Respondents further claimed that in 2008-2009, Sheth Group

had taken away more than Rs.98.72 lakhs from the Company. Further

allegation in the nature of siphoning of money by Sheth Group were made

for the year 2008-2009. These contesting Respondents claimed that the

Original Petitioners and Sheth Group prepared frivolous notice on

23.02.2010 for removal of contesting Respondents from Board of Directors

and on 22.02.2010 they falsely informed the banks regarding disputes to

mark the bank accounts as disputed. They had accordingly moved the

Registrar of Companies also. These Respondents submitted particulars

regarding financial transactions done by them. It was claimed that there

was shortage of funds in the Company and the Company through

Respondent No.2 approached Bank of Baroda on 20.11.2009 to provide

further loans. The Bank by letter dated 24.11.2009 asked the Company to

maintain good, debt, equity ratio and to increase the share capital. The

matter was discussed in the Board meeting and it was decided to increase

further capital. Notice was given on 24.12.2009 to shareholders to consider

Company Appeal (AT) No.272 and 273 of 2017 8

increase in the share capital. There was meeting of shareholders on

27.01.2010. From 9th February, 2010 to 12.02.2010 allotment of shares

was completed and relevant forms were filled up. The Petitioners were

aware of the ongoing discussions and need of the Company and allotment

of further shares. The Original Petitioners and Sheth Group without

complying the provisions of Companies Act illegally removed contesting

Respondents from the Board of Directors.

10. The contesting Respondents further claimed before NCLT that on 4th

March, 2010 arbitrators as mentioned were appointed for distribution of

the properties of the Company and the document executed on this count

was signed by the father of Petitioner No.1 as well as Petitioner No.2 and

contesting Respondents as well as Respondent No.5 for the 3 groups.

These Respondents claimed that the arbitrators had given their decision

on 18.07.2010 regarding the properties and the properties of Respondent

No.1 Company were to be handed over to the present contesting

Respondent Nos.2 and 3. The decision was signed by Vipinchandra Patel,

the father of petitioners, the contesting Respondents as well as the Original

Petitioners. There was compromise and accordingly Special CA 6090/2010

came to be withdrawn. There was yet another document dated 14.01.2011

executed between the parties regarding distribution of the properties in

dispute between the parties. Contesting Respondents thus claimed before

the NCLT that by virtue of the legal authority and settlement between the

parties, Respondent No.1 Company belongs to them. These Respondents

Company Appeal (AT) No.272 and 273 of 2017 9

claimed that as on the date of filing of the petition, the shareholding of the

groups was as follows:-

1. Sheth Group (Original Respondents 4 and 5) - 23.68%

2. HM Patel Group (Original contesting Respondents) - 63.58%

3. VP Patel Group (Original Petitioners) - 12.74%

This shareholding was claimed on the basis of further issue of share

capital.

12. In the rejoinder, the Original Petitioners denied claims of the

contesting Respondent regarding the manner in which the share capital

was increased and share allotted. They claimed that they did not have any

notice of such developments. They claimed that no share had been offered

to them. The Petitioners and Sheth Group both claimed that they had

written letters on 07.01.2010 and 08.01.2010 to the Company enclosing

Demand Draft seeking that every communication should be sent to them

by Registered Post with acknowledgement due. The Demand Drafts were

deposited by Company in its accounts. Although they had made a request

for notices by Registered Post acknowledgement due no such notice with

acknowledgement due were sent. They claimed that contesting

Respondents only made a show of sending of notices. When some of the

envelopes were opened they contained papers in respect of working of the

Company and not regarding Extraordinary General Meeting. They could

show such envelopes. It was thus claimed that the contesting Respondents

Company Appeal (AT) No.272 and 273 of 2017 10

had committed fraud as the envelopes did not contain the alleged notices

of EOGM.

13. Considering the rival cases put up by the parties, the NCLT framed

following points for consideration:-

"(i) Whether dismissal of CA 39 of 2011 would have any

effect on the reliefs prayed in CP 16 of 2012?

(ii) Whether filing of CP 16 of 2012 by VP Patel group

without filing their reply in CP 86 of 2010 is valid or not?

(iii) Whether increase in paid up share capital from rupees

one crore to rupees two crores in the EOGM dated

27.01.2010 is an act of oppression or not?

(iv) Whether removal of respondents 2 and 3 as Directors of

the company in Extra Ordinary General Meeting held on

05.03.2010 is valid or not?

(v) What is the outcome of financial irregularities alleged by

all the three groups of shareholders in both these

petitions?"

14. NCLT recorded reasons. NCLT found that vide CA 39/2011, the

Original Petitioners had moved the Company Law Board seeking directions

for the Registrar of Companies to take on record Form - 32 filed on 9th

March, 2010 relating to removal of contesting Respondents. The Company

Law Board had dismissed the said CA on 16.08.2011 observing that it did

Company Appeal (AT) No.272 and 273 of 2017 11

not want to entertain the said CA at the stage concerned. Thus, NCLT

found that it was only an Interim Order and dispute regarding removal of

Respondents 2 and 3 was not yet finally decided.

15. This finding below point (i) is not disputed before us. The finding

regarding point No.(ii) by the NCLT was also in negative and even this

aspect is not disputed before us. Even otherwise we find no error on these

counts.

16. As regards point No.(iii), the NCLT gave reasons to come to a

conclusion that the acts of the Respondents 2 and 3 relating to increase of

share capital in the EOGM dated 27.01.2010 could not be said to be act of

oppression. It was of the view that the increase in the share capital and

allotment of shares by itself were not acts of oppression of the rights of the

shareholders viz the VP Patel Group and the Sheth Group. As regards point

No.(iv) relating to removal of contesting Respondents from the post of

Directors in the EOGM held by the Petitioners on 05.03.2010, the NCLT

gave reasons and referring to Section 169 of the old Act found that the

removal of contesting Respondents was not valid.

17. NCLT observed (in para 91 of the impugned order) that there were

no established acts of oppression and mismanagement but that the

financial irregularities alleged require examination by Auditors. In the

interest of the Company and in the interest of 3 groups of shareholders,

NCLT directed that the increase in the share capital was valid and binding

Company Appeal (AT) No.272 and 273 of 2017 12

on all the shareholders but that the allotment of shares needs to be made

to all the existing shareholders as on 18.12.2009 in proportion to their

shareholdings and in case any of the shareholders is not willing to

subscribe for additional shares then those shares shall be allotted to other

shareholders taking their option again proportionate to their shareholding.

NCLT set aside the removal of Respondents 2 and 3 as Directors. It gave

further directions of audit of accounts for Financial Year 2009 - 2010 and

steps to be taken when the report of Auditor becomes available. It

appointed M/s. A.R. Sulakhe & Co. of Ahmedabad as Auditors. Directions

were also given regarding appointment of independent valuer A.S. Gupta

& Co. of Ahmedabad to assess fair value of shares as on the date of filing

of the petition. It directed that pending completion of the entire process,

there shall not be any alienation of properties both movable and immovable

of the Respondent No.1 Company. It was further directed that pending

completion of the entire process as per the orders of the NCLT, there shall

not be any allotment of shares or transfer or sale of shares except as

indicated. Further incidental directions were also given.

18. Against the impugned order, the Original Respondents 2 and 3 have

filed these 2 appeals as there were 2 Company Petitions in NCLT. Their

main grievance is that when it was found that EOGM held on 27.01.2010

was legal and valid and not an act of oppression, in that case giving of right

to shareholders of the Company as on 18.12.2009 to subscribe to the

shares as illegal and once the allotment has been done there cannot be

Company Appeal (AT) No.272 and 273 of 2017 13

re-allotment of the shares. Reference is made to the Arbitration Agreement

between the parties to claim that the entire disputes have already been

settled and could not have been reopened. When CP 6090/2010 had been

withdrawn, the reliefs as sought by the Petitioners could not have been

granted. When siphoning and embezzlement was found in 2005 - 2006,

direction of audit from 2009 - 2010 was not proper. Thus, the Appellants

- Original Respondents 2 and 3 want impugned order modified where it

directs giving option to the shareholders as on 18.12.2009 to subscribe.

The Appellants also want that the audit of accounts should be from 2005

- 2006. They want that the arbitral award dated 18.07.2010 and

14.01.2011 should be complied by the parties.

19. Counsel for the Appellants - Original Respondents 1 and 2 have

submitted that although the NCLT observed that oppression and

mismanagement except some financial irregularities was not established,

the NCLT has sufficient powers to pass appropriate orders. Referring to the

Impugned Order, it is stated that the present Company is a private limited

company and under old Section 81(3) private companies were excluded

and thus it was not necessary for these Appellants to make specific offer

of new shares, however, according to him the record shows that the

Appellants - Respondents 2 and 3 had offered the shares to all existing

shareholders so that they could subscribe. According to the counsel on

increase of authorized share capital, once the shares have been offered to

the existing members, legally it cannot be directed that the shares should

Company Appeal (AT) No.272 and 273 of 2017 14

be offered again. The learned counsel referred to Board Meeting dated

09.02.2010 to state that as the other groups in the Company did not take

up the offer, Board of Directors allotted the shares as can be seen in the

resolution. It is stated that after the meeting, Form - 5 was submitted to

the Registrar of Companies but it could not be recorded as the Company

had been marked as Company in dispute. According to the learned

counsel, the Respondents of the appeals cannot challenge the findings

which are in favour of the present Appellants. It is argued that the NCLT

found that Section 160 of the old Act had not been complied and so

removal of the Appellants was set aside. The Respondents have not filed

appeal and so this finding should be treated as final.

20. The PCS (Practicing Company Secretary) for the Appellant in CA

273/2017 adopted the argument of the learned counsel for the Appellant

in CA 272/2017 and submitted that the various forms submitted to RoC

were pending due to the Company in dispute.

21. It has been argued on behalf of the Original Petitioners that record

shows that the Appellants - Original Respondents 2 and 3 issued notice of

EOGM along with offer to subscribe for new shares presuming that the

attempt to increase shareholding would be passed. It is stated that such

procedure is not permissible. According to him, the Original Petitioners

had asked contesting Respondents to send communication by Registered

Post AD and keeping in view Section 53 of the old Act, it was necessary for

Respondents 2 and 3 to send communication by Registered Post AD. This

Company Appeal (AT) No.272 and 273 of 2017 15

was not done and thus, according to the counsel, there was no notice of

the EOGM. It is further argued that Original Respondents 2 and 3 had

issued notice offering existing members to subscribe for new shares in the

ratio of 1:1 but the forms submitted by members of HM Patel Group show

that they calculated in advance and applied for new shares beyond the

ratio of 1:1. The counsel submitted that this is not the correct procedure

and the correct procedure is that after the new shares are offered in the

ratio of existing shares, the unsubscribed shares are required to be

thereafter again offered to other members. It has been argued that these

Original Petitioners had also filed the appeal against Impugned Order but

it got dismissed as time barred. The counsel submitted that although their

appeal has been dismissed as time barred, they are entitled to question all

the findings recorded in the Impugned Order.

22. Counsel for Original Respondents 4 and 5 (Sheth Group) submitted

that NCLT did not consider if notices of all the Board Meetings and EOGM

were duly sent and served. Although the Sheth Groups was not now part

of the Board of Directors, the learned counsel for these Respondents still

raised question regarding notice of Board Meeting dated 08.12.2009.

23. Learned counsel for Original Respondents 4 and 5 submitted that if

the Articles of Association relating to division of capital and General

Authority (Page 199 of paper book) are seen, they are required to be read

along with Section 81 of the old Act and if after increase of authorized

share capital, new shares have not been picked up, it was necessary to

Company Appeal (AT) No.272 and 273 of 2017 16

again offer the same to remaining members. It is stated that the record

showing that person holding 20 shares from HM Patel Group picked up

98,000 shares and was allotted the same. This according to the counsel

was not presumable and the Impugned Order rightly directed that

allotment of shares in respect of increased share capital shall be made to

all the existing shareholders as on 18.12.2009. Thus, according to him,

the appeal should not be allowed.

Increase in Share Capital

24. Having heard counsel for both sides and on perusing the documents,

we proceed to first consider the dispute with regard to EOGM dated

27.01.2010 relating to increase of share capital.

25. On this count, firstly, there is letter dated 8th December, 2009

(Appeal Volume I - Page 66) sent by Original Respondent No.2 -

Hasmukhlal Madhavlal Patel to the Directors convening meeting on 18th

December, 2009 with Agenda Item No.4, being - to consider increase in

authorized share capital of the company from Rs.1 crore to Rs.2 crores.

The Agenda refers to letter dated 24th November 2009 (Page 65) received

from Bank of Baroda advising the company to increase share capital to

minimum level of Rs.2 crores with reference to the proposal for term loan.

Then there is Notice/Letter from the Respondent Company to the

shareholders (page 68) attaching copy of notice of Extra Ordinary General

Meeting of shareholders as approved by Board of Directors on 18.12.2009,

Company Appeal (AT) No.272 and 273 of 2017 17

informing that the EGM is scheduled on 27.01.2010. The Notice informs

the shareholders that as decided in the Board Meeting, Company has

proposed to issue further shares to existing members in the ratio of 1:1

and, therefore, interested members would be required to exercise their

rights on or before 5th February, 2010. The Notice states that it was

"Advance intimation" and eligibility to apply for shares will be subject to

approval of the increase in authorized share capital by the shareholders in

EGM on 27.01.2010. The Notice records that application form to apply for

shares, is attached with the letter.

26. Then there is Notice to Directors (Page 69) dated 24.12.2009

attaching the agenda papers of meeting of Board of Directors to be held on

27th January, 2010 itself. Agenda and copy of the Notice of EOGM to

shareholders was stated to be attached and the Notice states:

"Further, we would like to inform you that as decided in the

last Board Meeting, Company has proposed to issue further

shares to its existing members in the ratio of 1:1 and therefore,

interested members of the Board, who are also share holders

of the Company are requested to make payment on or before,

5th February, 2010, so as soon as Authorised Share Capital is

increased. Application Form for applying shares is attached

with this letter."

Agenda shows this meeting of Board of Directors was scheduled at

3.00 PM on 27.02.2010.

Company Appeal (AT) No.272 and 273 of 2017 18

With the Appeal at page - 72, is the Minutes of the EOGM dated

27.01.2010 held at 11.00 AM which shows increase in the share capital.

At page - 74 are the Minutes of meeting of Board of Directors on the same

date of 27.01.2010 taking note that the authorized share capital has been

increased. Another Resolution is that as per Notice already circulated last

date of receipt of applications for allotment of the increased shares was 5th

February, 2010 and thus, scheduled the next meeting on 9th February,

2010. Copy of Board Meeting dated 09.02.2010 is in CA 273 of 2017 at

Page - 137.

27. We will deal with the question of allotment of shares separately. Here

the question is whether this increase in share capital can be upheld or (as

the Petitioners want) it should be held as illegal. In this regard, what

appears is that the Original Petitioners VP Patel Group and Sheth Group

initially took a stand that no notices were issued of the EOGM. They appear

to have sent letters dated 07.01.2010 and 08.01.2010 to the Company

claiming that communication to them should be sent not merely by

Registered Post but it should also be with Acknowledge Due. Obviously,

these dates were subsequent to the Notice of EOGM dated 24.12.2009,

copy of which is at page - 68. Thus merely because they subsequently sent

letters seeking communication by Registered Post Acknowledgement Due,

it would not be sufficient to find fault with communications already sent.

Company Appeal (AT) No.272 and 273 of 2017 19

28. It appears later the VP Patel Group and HM Patel Group before NCLT

took up stand that the postal covers sent did not contain papers of Notice

but they contained some other communications relating to the company.

Thus in effect they tried to claim before the NCLT that the HM Patel Group

was playing fraud. However, as the impugned order shows, the learned

NCLT had taken up the contention on these grounds and although it was

demonstrated before the NCLT that on opening the envelope cover, it had

some papers other than Notice of EOGM, NCLT found that bare perusal of

the envelopes which were being shown, it could be seen by naked eye that

they were once opened and again sealed. Looking to such approach of

these litigants, we will not like to trust their contentions that they did not

get notice of the EOGM.

It appears that on 18.12.2009, in Board Meeting there was a decision

taken to go to EOGM for increase in authorized share capital. Original

Petitioner No.1 - Manish Vipinchandra Patel sent off a letter on 18.12.2009

itself to the Registrar of Companies (Volume II - Page 389) and raised

various grievances with the Registrar of Companies and also inter alia

mentioned that original Respondent No.2 - Hasmukhlal Madhavlal Patel

and Original Respondent No.3 - Dilipkumar Madhavlal Patel may increase

authorized share capital and allot shares to them. The learned NCLT

rightly referred to such correspondence and the instance in NCLT to

conclude that the Original Petitioners did have knowledge about the

increase in authorized share capital which was being proposed. The NCLT

Company Appeal (AT) No.272 and 273 of 2017 20

found that the sending of Notices by Registered Post was sufficient

compliance and it concluded that the VP Patel Group and Sheth Group

had chosen not to attend the EOGM in spite of knowledge. NCLT concluded

that the Extra Ordinary General Meeting was held complying provisions of

the Companies Act and the Articles of Association and Resolution

regarding increase of authorized share capital was passed. The learned

NCLT took note of the letter of the Bank of Baroda dated 24.11.2009 and

the circumstances as to why it was necessary to increase the share capital.

NCLT took note of the sequence of the events as to how the Original

Respondent No.2 had approached Bank of Baroda for additional finance

and the Bank of Baroda vide letter dated 24.11.2009 suggested increase

in paid up share capital because of which the EOGM was required to be

called. The NCLT thus found that the increase in the share capital was

justified and the increase in the share capital was done after following due

procedure.

29. We do not find that there is error in these conclusions drawn by the

learned NCLT. Thus, on this count, we do not wish to interfere.

Removal of Original Respondents 2 and 3 from posts of Directors

30. The other dispute raised is regarding removal of Original

Respondents 2 and 3 from the posts of Directors. The Resolution on this

count appears to have been passed by the Petitioners (Appellants) with the

assistance of the Sheth Group in EOGM dated 5th March, 2010. This

removal of the contesting Respondents 2 and 3 has been set aside by the

Company Appeal (AT) No.272 and 273 of 2017 21

learned NCLT. The Original Petitioners came up with a grievance that in

spite of Resolution taken by them in EOGM, the Form 32 submitted by

them to ROC was not accepted. In fact, they had themselves earlier moved

the ROC on 18.12.2009 (Page 389) because of which ROC was treating the

Company as in dispute.

31. Regarding this removal of Original Respondents 2 and 3, although

Original Petitioners were part of the Board of Directors, they appear to have

given requisition on 22.02.2010 (Page 235) along with draft Resolution

(Page 236). They appear to have on the same day sent off letter to Banks

to suspend withdrawal. The requisition (Page 235) dated 22nd February,

2010 from the Petitioners to the Board of Directors claimed that they were

giving special Notice of their intention to propose the attached Draft

Resolution (Page 236) as ordinary resolution for removal of Original

Respondents 2 and 3 as Directors of the Board and that pursuant to the

provision of Section 169 of the old Act they proposed to conduct Extra

Ordinary General Meeting on 5th March, 2010. They requested the Board

of Directors to do needful to give effect to the Special Notice. It appears that

they also published in newspapers (Pages 239 and 240) the calling of the

EOGM on 05.03.2010. The Minutes of the said EOGM dated 5th March,

2010 have been filed (Page 251).

32. The learned NCLT referred to Section 169 of the old Act to find fault

with this procedure adopted by the Petitioners. The NCLT observed as

under:

Company Appeal (AT) No.272 and 273 of 2017 22

"It is clear from the material on record that, without calling

any Board Meeting to consider the requisition for removal of

respondents 2 and 3 as directors, straight away Extra

Ordinary General Meeting was convened on 05.03.2010.

Section 169 of the Companies Act, 1956 says that, "The Board

of Directors of a company shall, on the requisition of such

number of members of the company as is specified in sub-

section (4) forthwith proceed duly to call an extraordinary

general meeting of the company". Therefore, when it is

mandatory that Board of Directors of the Company shall call

Extra Ordinary General Meeting on the requisition given by

required number of members, calling of Extra Ordinary

General Meeting by one of the Directors without convening a

Board Meeting and without passing any Board Resolution, it

is not valid convening of Extra Ordinary General Meeting."

33. Sub-Section (6) of Section 169 of the old Act provided that if

the Board does not, within 21 days from the date of deposit of a valid

requisition in regard to any matters, proceed duly to call a meeting

for the consideration of those matters on a day not later than 45

days from the date of the deposit of the requisition, the meeting may

be called by the requisitionists themselves. Although the Petitioners

were part of the Board of Directors, the requisition (Page 235) of

special notice for removal of Directors was given by the Original

Company Appeal (AT) No.272 and 273 of 2017 23

Petitioners as shareholders. It is not that any Board Resolution as

such had been passed. In such circumstances, looking to the

reasonings recorded by the learned NCLT and considering the

provisions of Section 169 as mentioned above, we do not find that

the decision recorded by the learned NCLT that removal of

Respondents 2 and 3 was not valid, could be found fault with. Thus

we do not interfere on this count also.

Efforts at Compromise

34. It appears that the groups have been struggling between

themselves and have tried to mutually settle disputes also. At page

- 87 of Appeal, there is translation (which appears with infirmities of

translation) of some document dated 4th March, 2010 (this will be

subsequent to the above stated EOGM dated 05.03.2010) which was

signed by Vipinchandra Patel - the father of Original Petitioners and

the Original Petitioners as well as Original Respondents 2 and 3 and

Original Respondent No.5, Ashwinkumar on behalf of his family

appointing what is translated as "arbitrators" for "just distribution

between whosoever partnership for these properties". The properties

referred in the initial part relate to the Respondent Company,

Ambika Food Products Pvt. Ltd. and some "Shree Ambika Rice Mills".

Then it appears that some arbitrators resigned and then there is

another document (Appeal - page 94) with the translation reading

something like "Distribution Agreement of joint property of three

Company Appeal (AT) No.272 and 273 of 2017 24

sons of Madhavlal Damodardas Patel". This document is dated

18.07.2010 and at page - 102 shows to have been signed by Original

Petitioners and Original Respondents 2 and 3 as well as

Vipinchandra Patel. The arbitrators and advisors also appear to have

singed. The contesting Respondents 2 and 3 claim on the basis of

this document that the Respondent Company has come to them.

These documents may be efforts between some or the other

groups of the Company to settle between them. Company as such

does not appear to be party, nor Company as such appears to have

accepted or adopted the documents. Then there appears to be

compromise pursis dated 11.08.2010 (paper book page 112) and

Order passed in the Special Civil Application No.6090 of 2010 by the

Hon'ble High Court of Gujarat at Annexure - A/13 (Page 113)

regarding the compromise between the Original Petitioners and

contesting Respondents 2 and 3. In the compromise pursis, these

parties recorded consents regarding working of the bank account,

the compromise note which was arrived at between the parties

"without prejudice to the rights and contentions of the parties".

35. The Hon'ble High Court appears to have given instructions to

the HDFC Bank and the petition before High Court was disposed of

without expressing opinions on merits. If the Special Civil

Application 6090 of 2010 (Page 117) is seen, it appears to have been

filed by the Original Petitioners seeking directions for the ROC to

Company Appeal (AT) No.272 and 273 of 2017 25

take on record Form No.32. Even if such petition was withdrawn, we

do not find that it created bar for the Petitioners in the matter before

NCLT.

36. There is yet another document dated 14.01.2011 (Page 135)

with the translation claiming that it is "Draft of distribution

regarding land properties and rice mill of joint partners of Village

Bavla". The first party is shown as Original Respondents 4 and 5 and

second party is shown as Original Respondents 2 and 3 and the third

party is shown as Vipinbhai Madhavlal Patel. At page - 141 of the

Appeal is a communication dated 01.03.2011 from two persons

claiming themselves to be, what is translated as "arbitrators with

consent of all" seeking certain compliance from these parties. We are

not commenting on nature of these documents which claim to be

regarding efforts before "arbitrators".

37. In spite of such documents being shown, the parties continue

to make allegations and counter allegations against each other with

regard to the EOGM called by Respondents 2 and 3 on 27.01.2010

and the EOGM called by the Original Petitioners on 05.03.2010 and

whether or not the allotment of shares after the increase in share

capital was correct or not. The arguments of the Appellants (Original

Respondent Nos.2 and 3) to rely on above documents dated

18.07.2010 and 14.01.2011 and on that basis to set aside the

Impugned Order directing distribution of increased share capital,

Company Appeal (AT) No.272 and 273 of 2017 26

cannot be accepted as neither Company was party to them nor

Company adopted them and question of oppression and

mismanagement can be decided only by NCLT, which has much

broader Jurisdiction to take decisions with regard to interest of

Company.

Allotment of Shares on increase of Share Capital

38. Now we proceed to discuss the dispute regarding allotment of

shares in respect of increased share capital on its merit. It has been

argued by the learned counsel for the Appellants (Original

Respondents 2 and 3) that the learned NCLT in concluding part of

para 78 of Impugned Order observed "therefore, increase in share

capital and allotment of shares itself is not an act of oppression of

the rights of the other shareholders viz VP Patel Group and Sheth

Group." It is argued that once having made such observation, the

NCLT erred in its operative Order para - 92(a) where it was directed

that the allotment of shares in respect of increased share capital

shall be made to all the existing shareholders of the Company as on

18.12.2009 in proportion to their shareholding. According to the

learned counsel for Appellants - the Original Respondents 2 and 3,

this part of the impugned Order needs to be set aside as well as the

directions for valuation of shares. Against this, the learned counsel

for the Respondents in Appeal submitted that apart from their

challenge in NCLT to the increase in share capital, they had

Company Appeal (AT) No.272 and 273 of 2017 27

questioned the manner in which the increased share capital was

allotted, and so Impugned Order on that count may not be disturbed.

39. If the impugned Order is seen, in para - 68 point No.(iii) taken

up was "Whether increase in paid up share capital from rupees one

crore to rupees two crores in EOGM dated 27.01.2010 is an act of

oppression or not?". Thus the point raised was not regarding

allotment of share capital increased. In the paragraphs that followed,

the learned NCLT discussed the documents regarding increase of

share capital and in para - 78 took up discussion regarding

sequence of events because of which increase in share capital

became necessary and in that context dealt with the case of the

contesting Respondents that from 09.02.2010 till 12.02.2010

allotment of shares was completed and relevant forms were filed with

Registrar of Companies and again reverted to the question of

knowledge of the Sheth Group and VP Patel Group regarding

increase in share capital and concluded the point No.(iii) which it

had taken up for discussion by observing that increase in share

capital and allotment of shares by itself are not an act of oppression

of rights of the other shareholders. There does not appear to be any

discussion regarding the allotment of the shares. In the operative

order, NCLT directed in para - 92(a):-

"(a) In view of the findings on point No.3 it is held that increase

Company Appeal (AT) No.272 and 273 of 2017 28

in the authorized share capital of company from rupees

one crore to two crores is valid and binding on all the

shareholders. However, the allotment of shares in respect

of increased share capital shall be made to all the existing

shareholders of the company as on 18.12.2009 in

proportion to their shareholding. In case if any shareholder

is not willing to subscribe for additional shares, then those

shares shall be allotted to other shareholders taking their

options again proportionate to their shareholding."

40. Act of decision that shares will be allotted in ratio of 1:1 by

considering the likely increase, by itself may not be oppressive, but the

manner in which the allotment is actually done may be illegal and thus

oppressive. Although there is no specific discussion finding fault with the

manner of allotment of shares in respect of increased share capital, this

direction in final Order of the NCLT is not without basis in the records.

The learned counsel for Respondents in Appeal, referred to the documents

filed by the Appellants (Original Respondents 2 and 3) with Company

Appeal (AT) 273 of 2017. Reference is made to Page - 149 to 162 in that

Appeal as the application form which had been submitted by members of

the HM Patel Group. It has been argued that these documents are

application forms of applicants to get equity shares allotted in the

Respondent Company pursuant to the decision taken by the Board of

Directors in the meeting held on 18th December, 2009 which would be

Company Appeal (AT) No.272 and 273 of 2017 29

before EOGM. These forms are dated 4th February, 2010 and if these

documents are seen, they show that the applications were not in the ratio

of 1:1 but much much beyond that. It is argued by Respondents in Appeal,

that example would be the form submitted by Disha Ben, wife of Original

Respondent No.2 having just 20 equity shares applying for 98,000 equity

shares. It has been argued by the learned counsel for Respondents 2 and

3 in this Appeal that these members of the HM Patel Group calculated in

advance and applied so as to consume the whole of increased share

capital, anticipating in advance that they can get it. It has been argued by

the learned counsel for Respondents 2 and 3 in Appeal (Original

Petitioners) that in this regard the Articles of Association need to be seen.

The counsel referred to the Articles of Association (Page 198 of CA 274 of

2017) and referred to the "General Authority" mentioned (at page - 199)

which reads as under:

"General Authority

Wherever in the Companies Act, 1956 it has been provided

that the Company shall have any right, privilege or authority

or that Company can not carry out any transaction unless the

Company is so authorised by its Articles then in that case,

Articles hereby authorise and empower the Company to have

such rights, privilege or authority and to carry out such

transaction as have been permitted by the Companies Act,

1956."

Company Appeal (AT) No.272 and 273 of 2017 30

41. It has been argued that in view of this Article of Association

applicable to the Respondent Company, Section 81 of the old Act would be

applicable and even if the Original Respondents 2 and 3 had issued notice

in anticipation for the members to apply for shares on increase of share

capital (which was till that point of time still to be decided) the offer could

not have been of more than 1:1 and the right procedure would have been

that after the share capital was increased claims of 1:1 should have been

considered and only thereafter the unsubscribed portions could be offered.

42. Learned counsel for the Respondents Nos.2 and 3 in Appeal referred

to Judgement in the matter of "Dale & Carrington Invt. (P) Ltd. and

Another versus P.K. Prathapan and Others" (2005) 1 SCC 212, to submit

that even if it was to be said that Section 81 of the old Act did not apply,

the burden would be still higher on the Original Respondents 2 and 3

(Appellants) to demonstrate that they did not abuse their position when

allotment of shares was taken up. According to him, good faith in the

matter of allocation of shares after the increase in share capital is missing.

We find that although the act of increase in the share capital can be

upheld, the distribution of shares on increase of the share capital is

defective. In anticipation of increase in share capital, even if applications

in proportion to shares already held could be made, unsubscribed shares

could be disposed only after there is decline to accept the share offered.

For this, there could not have been applications in anticipation.

Company Appeal (AT) No.272 and 273 of 2017 31

The learned counsel for the Appellants (Original Respondents 2 and

3) referred to para 172 of the Judgement in the matter of "Sangramsinh

P. Gaekwad and Others versus Shantadevi P. Gaekwad (Dead) Through

LRs and Others" (2005) 11 SCC 314 to argue that only one pre-emptive

offer is required to be made which is otherwise to be accepted or not at all.

We find, in the facts of present matter that proper and legal procedure for

distribution of the additional shares after increase in share capital has not

been properly followed and thus, the Board Resolution dated 9th February,

2010 (Page 137 of CA 273 of 2017) regarding allotment of increased share

capital cannot be upheld. Thus it cannot be said that the offer as made

was legally executed. NCLT rightly directed allotment of shares in respect

of increased share capital to be made to all existing shareholders of the

Company as on 18.12.2009.

43. Looking to the submissions, we find substance in what the learned

counsel for Original Petitioners is submitting. Thus, although the learned

NCLT did not record in so many words as to why it was directing that the

allotment in respect of increased share capital still needs to be made, there

is no reason why we should interfere with the above direction of NCLT in

para - 92 (a) of the impugned order.

44. One of the arguments raised by the learned counsel for the

Appellants (Original Respondents 2 and 3) is that NCLT directed audit of

accounts from 2009 - 2010 on the basis of allegations regarding siphoning

but the Order shows that NCLT noted there were allegations of siphoning

Company Appeal (AT) No.272 and 273 of 2017 32

even for period earlier than 2009-2010. In this regard, Impugned Order

shows NCLT considering the grievances of the parties in paragraphs - 36

to 41 and in paragraphs - 85 to 88. It considered the grievances and

observed need of audit. Considering the grievances made by parties and

observations of NCLT, audit of the accounts may be done since 2008 -

2009. The impugned Order needs to be modified only to that extent.

45. For the above reasons, we pass the following order:-

Order

In the impugned Order in directions Para - 92(c), instead of

words "financial year 2009 - 2010", we substitute the words

"financial year 2008 - 2009".

Rest of the directions given by NCLT in the impugned Order

para - 92 are maintained.

Both these appeals are disposed accordingly.

No orders as to costs.

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

[Justice Bansi Lal Bhat] Member (Judicial) New Delhi 2nd April, 2018

/rs/nn

Company Appeal (AT) No.272 and 273 of 2017