M.A.S. Subramanian vs T.S. Sivakumar

[Arising out of order dated 03.10.2017passed by National Company Law Tribunal, Chennai in TCP 157/2016 (No.6/2015)]

IN THE MATTER OF:

1. Dr. M.A.S. Subramanian S/o Late Mr. M.A. Shanmugam "Selvanayagam Illam" No.83, 2nd Cross Vasan Nagar, Lawspet Puducherry - 605 008 ...Appellant No.1 (Original Respondent No.2)

2. Mrs. Santhi Subramanian W/o Dr. M.A.S. Subramanian "Selvanayagam Illam" No.83, 2nd Cross Vasan Nagar, Lawspet Puducherry - 605 008 ...Appellant No.2 (Original Respondent No.3)

3. [Mr. S. Suresh (deceased) S/o Dr. M.A.S. Subramanian (died on 01.04.2016)] - Deceased ...Appellant No.3 (Original Respondent No.4)

4. Mr. S. Sundar S/o Dr. M.A.S. Subramanian "Selvanayagam Illam" No.83, 2nd Cross Vasan Nagar, Lawspet Puducherry - 605 008 ...Appellant No.4 (Original Respondent No.5)

5. Mrs. Suganthi Prabhakar W/o Mr. Prabhakar No.27, First Cross Street Natesan Nagar, Puducherry - 605 005 ...Appellant No.5 (Original Respondent No.6) Versus

Company Appeal (AT) No.12 of 2018 2

1. Mr. T.S. Sivakumar S/o Late Mr. T. Sivaraman, Flat No.5, Subramaniya Appt Old No.135/1, Santhome High Road, Mylapore, Chennai - 600 004 ...Respondent No.1 (Original Petitioner No.1) 2. Mr. T. Thiagarajan S/o Late Thillai Govindan No.7, 2nd Cross Street Anna Nagar Puducherry - 605 005 ...Respondent No.2 (Original Petitioner No.2) 3. Mrs. Rani Mangammal W/o Mr. G. Elangovan "Chez Nous", 4165, 13a Main Hal, 2nd Stage Indira Nagar Bengaluru - 560 008 ...Respondent No.3 (Original Petitioner No.3)

4. Mr. T. Senthil Kumar S/o. Mr. T. Thiagarajan No.7, 2nd Cross Street Anna Nagar Puducherry - 605 005 ...Respondent No.4 (Original Petitioner No.4)

5. Mrs. T. Valli W/o Mr. Murugan No.7, 2nd Cross Street Anna Nagar Puducherry - 605 005 ...Respondent No.5 (Original Petitioner No.5)

6. M/s. Vee Pee Estate and Hotels Pvt. Ltd. No.16, ECR-Cuddalore Main Road Kirumampakkam, Puducherry - 607 402 ...Respondent No.6 (Original Respondent No.7)

7. M/s. Hotel Mass Private Limited Nos.152 and 154, Maraimalai Adigal Salai Orleanpet Puducherry - 605 001 ...Respondent No.7 (Original Respondent No.1)

Company Appeal (AT) No.12 of 2018 3

Present: Shri A.K. Mylsamy, Ms. Shalini Kaul, Shri Chaman Lal Choudhary, Advocates for the Appellants

Shri R. Jawahar Lal, Advocate for Respondent Nos.1 to 5

Respondent No.6 - served by public notice - Absent.

JUDGEMENT

A.I.S. Cheema, J. :

1. This appeal has been filed by original Respondents 2 to 6 being

aggrieved by the orders passed by the National Company Law Appellate

Tribunal, Division Bench, Chennai in TCP 157/2016 on 3rd October, 2017.

(The Impugned Order in the number of the Company Petition has

mentioned "(No.6/2015)" as the number of the Petition as originally

registered but copy of the Company Petition with the Appeal mentions the

Company Petition as originally filed before CLB having "No.16/2014").

2. The Impugned Order has been passed in the Company Petition

filed by present Respondents 1 to 5, who are the original Petitioners in the

Company Petition. Respondent No.6 of the appeal is original Respondent

No.7 and the Company concerned M/s. Hotel Mass Private Limited was

Respondent No.1 in the Company Petition and has been arrayed here in

Appeal as Respondent No.7.

2.1 We will refer to the parties in the manner in which they have been

arrayed in the NCLT in the Company Petition.

Company Appeal (AT) No.12 of 2018 4

Case of Original Petitioners

3. The Company Petition (Annexure A - 33 Page - 442 of the Appeal)

shows the case of Petitioners in brief as under:-

a) The Company Petition refers to the different shares held by the

original Petitioners and refers to the Respondent No.1 - M/s. Hotel Mass

Private Limited (hereinafter referred as the Company) stating that the same

was incorporated in 1982. The object of the Company was to carry on

business of restaurants and refreshment rooms. Original Respondent No.2

Dr. M.A.S. Subramanian (Appellant No.1) is son of Late Shri M.A.

Shanmugam. The Company Petition gives details regarding other

Respondents 3 to 6 which shows that they are relatives of the Respondent

No.2. According to the Company Petition, the Company was incorporated

in 1982 by Late Shri M.A. Shanmugam, his wife (Late) Mrs. S.

Senganiammal and the second Petitioner (Thiagarajan). The petition states

as to how subsequently the shares were allotted to other Petitioners and

Respondents. As per the petition, vide Form No.2 dated 14.03.1983,

30,000 equity shares were allotted to the family members out of which

17820 were allotted as payable in cash and remaining 12180 equity shares

of Rs.100/- each were allotted for a consideration otherwise than in cash

to Late M.A. Shanmugam in lieu of selling his property being plot of land

measuring 52 Kuzhies and 14 Veesams situated at Pudupalayam

Villagem, as described in the petition. The land had unfinished building

constructed over it. The shares were allotted to Late M.A. Shanmugam

before execution of sale deed. However, the Company was put in Company Appeal (AT) No.12 of 2018 5

possession of the land and it completed the construction for setting up the

hotel. The Company was in the nature of quasi partnership under the guise

of private limited company. Directions had fiduciary duty towards

members. Late Shri M.A. Shanmugam died on 06.06.1984 before he could

execute the sale deed. Subsequently, Respondent No.2, son of M.A.

Shanmugam being eldest educated member of the family who took control

of all the affairs of the Company, took over the entire 16,000 equity shares

which had stood in the name of Late M.A. Shanmugam, taking consent of

other legal heirs. The 12180 equity shares which had been allotted to Late

M.A. Shanmugam for consideration payable otherwise than in cash after

he had promised to register the land in the name of the Company reflected

in the balance sheet of the Company and the Company was in possession

of this land and was the real owner.

(b) The Petitioners claimed that wife of Shanmugam expired and her

shares were also allotted in the name of Respondents 3 to 6. Petition claims

that the Petitioners learnt that Respondent No.2 in connivance with

Respondents 3 to 6 held various meetings between 1998 to 2003 to

increase authorized issued paid up capital without giving Notice to other

members of the Company and that the Petitioners were kept in the dark

as no Notices were received by them. The further issued shares were

distributed by the Respondents between themselves without offering the

same to other members in violation of Section 81 of the Companies Act.

The petition gives particulars regarding the shareholding on 31.03.2011.

According to the Petitioners, Clause 3 and 15 of the Articles of Association Company Appeal (AT) No.12 of 2018 6

prohibited transfer of shares to persons other than members. Clause 16

gives rights to members of pre-emption, if any member wants to sell the

shares. The petition makes further averments regarding acts of

Respondent No.2 and other Respondents to claim that the requests of

Petitioners for information were being denied in spite of letters. Petitioners

claimed that their enquiries in September, 2014 disclosed that the

Respondents 2 to 6 had sold off the land standing in their name while the

actual ownership was vesting with the Company, along with other lands of

Respondent No.7 by sale deed dated 31.10.2011 which was registered as

document No.1844 of 2013 in the office of District Registrar, Puducherry.

Petitioner claimed that the Respondent No.2 with his family members had

clandestinely sold their shares in the Company along with the assets of the

Company. These facts were never informed to the Petitioners by the

Respondents 2 to 7. The selling of shares by Respondent No.2 and his

family along with assets of the Company was surreptitiously done with

mala-fide intentions. The Petitioners had not received any Notice regarding

such sale. The same deserves to be set aside. Respondent No.2 as MD sold

the buildings, movables and fixtures of the Company for Rs.3,93,80,706/-

to Respondent No.7, which was much less than the book value of the

building disclosed in balance sheet of Financial Year 2010 - 2011. The

substratum of the Company had been completely lost.

c) Thus, the petition claimed various reliefs as mentioned in the

Company Petition seeking accounts, audit and directions to Respondent

Nos.2 to 6 to deposit Rs.58.50 crores received from Respondent No.7 and Company Appeal (AT) No.12 of 2018 7

also investigation into the affairs of the Company as well as setting aside

of 3,15,860 equity shares sold by Respondents 2 to 6 to Respondent No.7.

Case of Original Respondents 2 to 6

4. The learned NCLT referred to these pleadings of the Petitioners

and also referred to the Reply filed by original Respondents 2 to 6. Copy of

the Reply is at Page - 466 of paper book of this appeal. These Respondents

claimed in NCLT that the immovable property did not belong to the

Company. They denied that 12,180 equity shares were allotted for

consideration other than money. NCLT referred to the response of these

Respondents 2 to 6 that there was sum of Rs.3,80,23,656/- as unsecured

loan at the end of March, 2011 and Rs.49,52,892/- as secured loan with

accumulated loss of Rs.736.67 lakhs. These Respondents claimed that

there was loan from Tourism Finance Corporation of India Ltd. and thus

gave reasons as to why authorised share capital was required to be

increased on 14.06.1999. NCLT referred to the claim of Respondents that

the wives of original Petitioner No.1 and Petitioner No.2 had filed O.S. No.

3 of 1996 where similar issue as in the petition was raised and the same

was compromised. These Respondents had claimed in NCLT that O.S.

68/2014 was filed by the wife of first Petitioner and thus they claimed that

the petition was hit by res judicata. These Respondents claimed that the

shares of Respondents 2 to 6 were transferred and conveyed along with

land and building which was owned, possessed and enjoyed by

Respondents 2 to 6 as on 31.10.2011 and that they do not have any right

Company Appeal (AT) No.12 of 2018 8

or interest in the first Respondent Company and the records pertaining to

Respondent No.1 Company were in the custody of 7th Respondent. They

claimed that the sale was legal, valid and binding. According to them, had

the property not been sold at appropriate time, the Company would have

ended up in winding up.

Impugned Order in brief

5. The Impugned Order shows that the learned NCLT considered

the rival pleadings and the Rejoinder as well as Counter in CA 15 of 2017

filed by Respondents/Petitioners. Reference was also made to the

pleadings relating to lease deed which appears to have been executed by

original Respondent No.2 in favour of the Company and the fact that the

same was not property stamped.

6. The Impugned Order till Page - 34 keeps referring to the

pleadings. From Page - 34 of Impugned Order, there are reasons referring

to pleadings and findings. It would be more appropriate to reproduce the

same as it is:-

"The Respondents/petitioners have sought to set

aside the sale of 3,15,860 equity share of Rs.100/- each

sold by the applicants/Respondents 2 to 6. In this

connection, it is seen that the applicants/Respondents

have not adduced any material evidence to prove that the

issue of share capital was raised in the Board Meeting and

Company Appeal (AT) No.12 of 2018 9

the same was approved as being beneficial to the R1

Company. The applicants/Respondents have stated that

there is no violation of Clause 15(3) of the Articles of

Association but this has not been proved as could be seen

from reading of the relevant provisions contained in the

Articles of Association.

Moreover, before selling the shares to R-7, the

shares should have been offered to the other shareholders.

On their refusal to exercise the right only the shares should

have been allotted to the Respondents. But no records have

been adduced which will substantiate the statement made

by the Respondents.

The other major issue raised by the petitioners

with the sale of immovable property which was to be

transferred in the name of the R1 Company for the initial

allotment of 12180 equity shares for a consideration,

otherwise in cash to late Mr. M.A. Shanmugam. The shares

were allotted to late Mr. M.A. Shanmugam in lieu of selling

his property being plot of land measuring 52 kuzhies and

14 veesams situated at Pudupalayam Village, Oreleanpet,

Pudupalayam Village, Puducherry together with an

unfinished building constructed over the aforesaid

property.

Company Appeal (AT) No.12 of 2018 10

According to the petitioners, this was done before

the shares were allotted in favour of late Mr. M.A.

Shanmugam prior to the execution of the sale deed for the

above land and building. The R1 company, however, was

put in possession of the said land and had completed the

construction activities for setting up the hotel. The

petitioners have also annexed Form No.2 dt. 14.03.1983 in

support of their contention. Since late Mr. M.A.

Shanmugam died on 06.06.1984 the sale could not be

executed in favour of the Company and after death his son,

the R2 controls the Company and its affairs. The entire

shareholding of the late M.A. Shanmugam amounting to

16000 equity shares were transferred with the consent of

the legal heirs based on the promise of R2 that he will

transfer the aforesaid property to the Company for the

benefit of all the members of the R1 Company. The property

has also been shown as an asset of the R1 Company as on

31.03.2011 and the notes to the Balance Sheet also

amplify the above statement. The various averments made

by the petitioners and respondents have been discussed

above. The petitioners have stated that the Respondents

No.2 to 6 had sold the lands belonging to R-1 company

along with certain other lands to R7 Company by a sale

Company Appeal (AT) No.12 of 2018 11

deed dt. 31.10.2011 registered as the document No.1844

of 2013 in the office of District Registrar, Puducherry.

The petitioners have further stated that the

Companies property including building, movables and

fixtures were sold for Rs.3,93,80,706/- to R7 Company

which was much less than the book value of the buildings

disclosed in the Balance Sheet for the financial year 2010

-11. The respondents have not shown any proof that the

valuation was done for the properties of the R1 Company

which were sold which due to non execution of the sale

deed was held in trust by the R2. The Respondents have

also not submitted a Special Resolution with the approval

to sell the Company's properties by special resolution

approved by AGM/EGM. In view of the fact, that it has been

established that the property in question pertains to R1

Company, the sale consideration has not been shown by

the Respondents 2 to 6 to have been debited to the books

of accounts of R1 Company.

In view of this, we make the order as follows:-

ORDER

In view of the facts discussed above, it is clear

that the Respondents 2 to 6 have sold their entire

shareholding to the R7 Company. They have also sold the

properties shown in the last available balance sheet for the Company Appeal (AT) No.12 of 2018 12

year 31.03.2001 of the 1st Respondent Company. All these

points have been, at length, discussed above. Both the

petitioners and the Respondents have not produced any

documents or the accounts of the R1 Company for the

subsequent years which could clearly indicate clear

financial position of the R1 Company.

To enable this Tribunal to arrive at a decision

based on facts, it is hereby ordered;

1. That an independent Auditor may be appointed,

through mutual consent among the parties, to arrive

at the value of the property and the buildings of R1

Company when it was sold to the R7 Company. (as on

31.10.2011 in terms of the sale deed attached with

the petition). the auditor may also ascertain whether

the proceeds have been brought into the books of R1

Company. The independent auditor will also update

the accounts of the Company from 01.04.2011

onwards till the current date to ascertain the factual

and financial position, with the comments, if any loss

has been caused to the 1st Respondent Company by

the Respondents 2 to 7, and if so, to quantify the

same.

2. A Practicing Company Secretary may also be

appointed through mutual consent among the

Company Appeal (AT) No.12 of 2018 13

parties to verify whether the procedures and the

practices required to be followed in compliance to the

Companies Act and various other rules have been

followed while selling the shares of R2 to R6 together

with the sale of the R1 Company's assets to R7.

3. The Practicing Company Secretary may also provide

the details regarding shareholding pattern in the

R1 and R7 Companies together with the

particulars of their Board of Directors at the time

when the assets of the Company and the shares held

by respondents No.2 to 6 were sold/transferred to

Respondent No.7.

4. The independent Auditor and Practicing Company

Secretary may submit their reports within two

months after their date of appointment.

5. In case, the petitioners and Respondents are unable

to arrive at a consensus for appointing an

independent auditor and Practicing Company

Secretary the parties may approach this Tribunal

for their appointments.

6. The fees to be paid to the independent auditor and

the Practicing Company Secretary shall be borne by

the R1 Company.

Company Appeal (AT) No.12 of 2018 14

The Registry shall place the matter before bench

after the receipt of the repot of Auditor and Practicing

Company Secretary."

The Arguments

7. In this present appeal filed by original Respondents 2 to 6,

referring to written submissions the learned counsel for the Appellants

submitted that 34 pages of the Impugned Order merely refer to pleadings

and there is hardly any discussion of the various rival claims. It has been

argued that NCLT did not apply its mind to the dispute. According to the

Appellants, after the death of M.A. Shanmugam, the LRs namely four

daughters and the only son of Late M.A. Shanmugam executed lease deed

on 11.06.1984 relinquishing all the rights, titles in the estate of M.A.

Shanmugam in favour of wife of Shanmugam. Later on, wife of

Shanmugam, on 04.07.1984 executed settlement deed in favour of the

original Respondent No.2 (Appellant No.1) and the settlement deed

includes the land on which the hotel stood. Mutation was carried out even

in revenue records. Respondent No.2 executed lease deed of the land in

favour of the hotel registered as document 5890/98. According to the

Appellants, the original Petitioners were aware of these things. It has been

argued that one of the daughters of Late M.A. Shanmugam had filed CS

352/1985 for partition of the assets, which included the land on which

hotel stood. She challenged the lease deed and the settlement deed but the

suit entered into compromise on 19.02.1987. Another daughter of Late

M.A. Shanmugam filed application wanting to be transposed as plaintiff in Company Appeal (AT) No.12 of 2018 15

the said suit and the suit was transferred to District Court, Pondicherry as

OS 3/1986. Another modified Compromise Memo was filed on 03.03.1997

before the District Judge, Pondicherry. The Appellants argued that original

Petitioners 1 and 2 are the husbands of said daughters of Late M.A.

Shanmugam who litigated at the High Court and District Court and thus

the original Petitioners have not come with clean hands. According to the

Appellants, original Petitioners 1 to 3 had even received dividends. It is

argued that original Petitioners did not disclose in NCLT regarding lease

deed, settlement deed and various litigations and had thus suppressed

material facts. The counsel for Appellants referred to these documents,

copies of which have now been filed in the appeal. It has been argued by

the Appellants that NCLT did not apply its mind and merely repeated the

pleadings viz the allegations in the Company Petition, counter statements,

applications filed by the Respondents and counter filed by the Petitioners.

According to the Appellants, based on Form 2 regarding allotment of

shares, NCLT concluded that the land belonged to the Company without

considering the counter filed by these Appellants who were Respondents.

Investigation has been ordered on the basis that documents after

31.03.2011 have not been filed by the parties. Appellants have referred to

some Judgements, which are not necessary to quote as different on facts,

to basically assert the principles that to invoke equity, Petitioners need to

be with clean hands (but supressed litigation by their wives against family)

and thus suppressed facts and are not entitled to relief. The Appellants

thus claim setting aside of the Impugned Order.

Company Appeal (AT) No.12 of 2018 16

8. Against this, counsel for Respondents 1 to 5 (original Petitioners

1 to 5) submitted that these original Petitioners are minority shareholders.

The Appellant No.1 (original Respondent No.2) has been Managing Director

of the Company and was controlling the affairs. According to these original

Petitioners, the land stood in the name of the Company as per balance

sheet for 2010 - 2011. These original Petitioners referred to the document

to show that in the balance sheet, the land was shown as fixed asset of the

Company having value to the extent of Rs.2 lakhs. They also referred to

Form - 2 (Page - 112 of paper book) which is dated 14th March, 1983 to

show allotment of shares against the land. It is argued that the Company

had only this piece of land on which the structure was standing. Reference

is also made to the Auditor's Notes for the Financial Year 1987 - 1988,

copies of which have been filed (page 165 - 166). The argument is that the

land belonged to the Company as well the structure on it, and the

Respondents could not have transferred the land and disposed of their

shares in favour of original Respondent No.7 - M/s. Vee Pee Estate and

Hotels Pvt. Ltd. without holding an EOGM or AGM with specific Resolution

on this count. According to original Petitioners, the Articles of Association

give rights to the other members and without offering the shares to them,

the Respondents could not have transferred their shares to Respondent

No.7 who was admittedly not a member of the Company. No Board of

Directors' approval or copy of meeting is shown. According to the original

Petitioners, they were not served with any Notices regarding any such

meetings.

Company Appeal (AT) No.12 of 2018 17

9. In the arguments and in this matter, the main stress of the

original Petitioner is on 3 aspects:-

1) The Petitioners are minority shareholders and original

Respondent No.2 (Appellant No.1) was looking after the affairs of the

Company along with the other original Respondents 3 to 6 who are his

immediate family members and although the land belonged to the

Company, these Respondents illegally transferred the land as well the

structure of the Company to original Respondent No.7 (Respondent No.6

in this appeal) and thus, the substratum was transferred.

2) The other dispute mainly stressed is that original Respondents 2

to 6 sold off their shares to an outsider - original Respondent No.7 - M/s.

Vee Pee Estate and Hotels Pvt. Ltd. in violation of the Articles of

Association and without offering the same to the other members of the

Company.

3) The land of the Company and the structure of the Company as

well as the business has been sold off to original Respondent No.7 and

substratum has been disposed by the original Respondents 2 to 6 without

holding any EOGM on the subject and without Notice to other members.

Discussion of Points raised by Parties and Findings

10. In the Company Petition, the original Petitioners raised points as

mentioned in Para - 9 (supra) (see para - 12 of the Company Petition

[Annexure A - 33 at Page - 453]) but the stand taken by the Appellants

(Original Respondents 2 to 6) in their reply (copy of which is Annexure A

Company Appeal (AT) No.12 of 2018 18

34 Page 466 of the Appeal) shows the pleadings of these Appellants as

under:-

"19) .............The allegations made in para 12 are

without any basis. The conveyance of land and transfer of

share to the seventh respondent made by respondent 2-6

are valid and legally binding on the parties. The allegation

that there has been fabrication of accounts and

mismanagement of company are false and the petitioner is

put to strict proof of the same.

From and out of the sale proceedings only the

loan of Tourism and Finance Corporation of India and

other financial institutions with interest was repaid. It is to

be noted that respondents 2 to 6 have sold their movables

and immovables to liquidate the outstanding of the first

respondent company with TFCI Ltd and other institutions.

The allegations as though the petitioners did not have any

knowledge of the sale are false. The intent of late M.A.

Shanmugam cannot be spoken by the petitioners herein

who do not have any personal knowledge. The allegations

of relinquishment of right are denied. The petitioners do

not have any right other than the present share holding,

which they still own, in the first respondent company.

Company Appeal (AT) No.12 of 2018 19

20) With regard to para 13, it is submitted that the

sale made with the respondent is legal, valid and binding.

This respondent submits that proper notice was issued to

the petitioners. The allegation that the sale was done

suruptiously and with malafide intention is false. There is

no necessity for the second respondent to harass the

petitioners or oppress the minority share holders as

claimed by the petitioners. But for the act of the

respondents 2 to 6 in selling their movables and

immoveables standing in their name and discharging the

loan availed from various financial institutions and

individual, the 1st respondent would have been liquidated

by winding up or any other recovery proceedings initiated

by the creditors. The respondents 2 to 6 submit that the

sale made by them is legal, valid and binding and has been

done in accordance with law. Special resolution dt:

25/6/11 was properly passed and the sale was executed

by the respondent 2 to 6................."

11. The Petitioners in the petition have pleaded in paragraphs - 14,

15 and 16 of the Company Petition that the Original Respondents 2 to 6

had sold off their entire equity shares held by them to Respondent No.7 in

contravention of the Articles of Association and the original Respondent

No.2 had sold off the buildings, movables and fixtures to Respondent No.7

at an amount which was much less than book value of the building and Company Appeal (AT) No.12 of 2018 20

that such alienation would require a special Resolution of the General

Body but there was no Notice of General Body Meeting and the only

business had been sold off lock, stock and barrel without informing other

shareholders; and that the substratum had been lost. In reply to these

averments in the Company Petition in paragraphs - 14, 15 and 16, the

Appellants - original contesting Respondents in Para - 21 of their reply

merely stated that the allegations in paragraphs - 14, 15 and 16 with

regard to the sale deed are matter of record and claimed that the sale was

according to the law and added that even after receipt of Notice, the

Petitioners or other shareholders did not choose to attend the meeting.

They claimed that the sale consideration had been fixed properly for the

movables and immovables. These Appellants added that due to financial

status of the Company, they were forced to sell the movables and

immovables. They added that the rights of the original Petitioners as

shareholders were still intact.

12. Looking to the above pleadings, it is clear that the fact that the

contesting Respondents have sold off the movables and immovables of the

Company and have transferred all their shares is not at all in dispute. This

is thus admitted fact. Although the Appellants - original Respondents

claimed in their reply that there was a special Resolution dated

25.06.2011, no such Resolution has been pointed out to the NCLT nor to

us. We have already referred to the reasonings recorded by NCLT which

includes the observation that the Respondents have also not submitted a

special Resolution that the approval to sell the Company's properties by Company Appeal (AT) No.12 of 2018 21

special Resolution approved by AGM/EGM. At the time of arguments

before us, we pointedly asked the learned counsel for the Appellants

referring to the copy of sale deed dated 31.10.2011 (Volume II Page 343)

which sale deed, along with other properties includes the land on which

the Company is standing, to show us where is the Resolution of the

Company to transfer the land as well as the structure to original

Respondent No.7. The learned counsel for the Appellant stated that the

Resolution to sell is not there. The sale deed shows that the original

Respondents 2 to 5 joined the sale deed as vendors 1 to 4 and the Company

was added as vendor No.5 through the original Respondent No.2 - M.A.S.

Subramanian claiming to be duly authorized to sell and these original

Respondents 2 to 4 along with their other properties appear to have sold

off the land of the Company to original Respondent No.7 - M/s. Vee Pee

Estate and Hotels Pvt. Ltd. The sale deed is dated 31st October, 2011 but

appears to have been recorded in the office of concerned Registrar on 7th

October, 2014. The Company Petition was filed on 25th October, 2014.

Thus, there is no substance in the claims of the Appellants regarding delay.

13. At the time of arguments, the learned counsel for the Appellants

was confronted with this sale deed and when he was asked to show the

Resolution to sell property of the Company, he merely stated that the land

belonged to original Respondent No.2 while the factory building belonged

to the Company.

Company Appeal (AT) No.12 of 2018 22

13.1 Even regarding this claim of the Appellants, at the time of

arguments before us, we had noticed as pointed out by the learned counsel

for the original Petitioners, Form 2 (Page 112 and 113 of the Appeal) which

recorded and which was signed by the Managing Director that there were

12180 shares allotted for a consideration otherwise than in cash and in

the concerned column, the plot of land measuring 52 Kuzhies and 14

Veesams as described in the Form 2 was recorded. There is no dispute

regarding the fact that late Shri M.A. Shanmugam had established this

Company and being the owner of this land and while establishing the

Company, he showed the land as consideration given to the Company

against which he was allotted 12180 shares. This document is of 1983 and

there is no reason to doubt the same. Then there are Notes of Balance

Sheet for the year ending 31.03.1988 (Appeal page 165) which refer to the

Pondicherry Municipality levying municipal tax, the quantum of which had

been disputed and the fact that the Appellate Authority has reduced the

same but that the Commissioner had gone in revision to the High Court.

These notes dated 31.03.1988 mentioned in Note No.4 that the title deeds

are still in the name of the Directors and steps are being taken to get them

transferred in the name of the Company. The learned counsel for the

original Petitioners referred to schedule annexed to the Balance Sheet of

the Company as on 31st March, 2006 (page 256 of Appeal) where also in

Schedule - A relating to share capital, there is mention that out of

subscribed and paid up capital 323860 equity shares, 12180 shares had

been allotted as fully paid up without payments being received in cash.

Company Appeal (AT) No.12 of 2018 23

Part of this Balance Sheet, Schedule - E (Page 273 of the appeal) shows

that land was counted along with building and other movables when the

Company book shown for the purpose of depreciation. Of course, again the

land depreciation shown was zero and in the net block, value of the same

was recorded. The latest Balance Sheet available is of 31.03.2011 (Page -

316) where also in the details of fixed assets, land and its value have been

shown.

14. All these documents clearly show that late Shri M.A. Shanmugam

was issued shares to the extent of 12180 against the land, possession of

which was handed over to the Company and the Company had even made

structure of the same and the land and structure were shown as property

of the Company and was treated accordingly right from 1983 till 2011. It

appears that Shri M.A. Shanmugam after establishing the Company in

1983, suddenly passed away on 6th June, 1984. It is not in dispute that

the shares of late Shri M.A. Shanmugam have come down to the present

Appellant No.1 (original Respondent No.2). Thus, the Appellant No.1 who

were managing the affairs of the Company had the fiduciary duty to protect

such land which was in possession of the Company by way of part-

performance of the contract. This Appellant No.1 on 16.09.1998 preferred

to get a lease deed recorded (Appeal Page - 189) of the land of the Company.

It is an interesting document. The lessor is the Appellant No.1 holding

himself out as Managing Director and the lessee is M/s. Hotel Mass Private

Limited (the present Company) represented by the same Appellant No.1

again describing himself as Managing Director of the Company to be the Company Appeal (AT) No.12 of 2018 24

lessee. Thus, the lease deed was created by Appellant No.1 in two

capacities and he acted for the lessor and lessee both and created the

document to be a lease for 27 years, fully loaded in his favour in individual

capacity putting the liability on the Company to pay 32 lakhs as rental

interest free deposit with other conditions like the company may make a

fresh construction and when the lease expires, the structure will have to

be left at the time of expiry of the lease. He even brought into existence

another rectification deed (Page - 218) on 2nd March, 1999. Thus this

Appellant No.1 who was Managing Director of the Company which was

established on such land and as a trustee of the shareholders, instead of

ensuring that sale deed of the land is executed in favour of the Company,

appears to have committed breach of trust by first creating a lease deed

(although the Company was in possession as a prospective purchaser who

has transferred the consideration namely the shares) and then instead of

trustee protecting the possession of land with the Company holding it in

Part Performance of Contract, Appellant No.1 sold off the land to original

Respondent No.7.

15. Even regarding transfer of shares, when the learned counsel for

the Appellant has referred to Page - 440 of the appeal which is part of the

search Report, he accepted that the document shows the shareholding

pattern as on 29.09.2011. The search Report shows 3 persons on Board

of Directors No.1 - Kumaravel Varatha Rajan and No.2 - Jayanthi

Kumaravel (both appointed as Additional Directors on 31.10.2011) and

No.3 - Manikandan Kumaravel appointed as Additional Directors on Company Appeal (AT) No.12 of 2018 25

31.08.2012. The learned counsel for the Appellants accepted that the

original Respondents 2 to 6 had transferred all their shares in favour of

these 3 persons. This date of 31.10.2011 is the same date on which the

sale deed (Page - 344) selling all the properties in favour of original

Respondent No.7 was passed. This Kumaravel Varatha Rajan signed that

sale deed representing original Respondent No.7 - Vee Pee Estate and

Hotels Pvt. Ltd. We have already referred to the pleadings of the Appellants

- original Respondents that there is no denial regarding the fact of transfer

of the Company properties and also the shares by them. The counsel for

Appellants when asked at the time of the arguments was unable to show

us any document or Notice by appellants to other shareholders offering

them the shares or to show us any procedure which was followed or

adopted for transferring the shares to original Respondent No.7 - Vee Pee

Estate and Hotels Pvt. Ltd. The counsel was unable to show us any

document on that count. The Appellants in the Company Petition and in

this Appeal have referred to Article 4 of the Articles of Association (Page -

98 and 99 of Appeal). According to the Appellants as per Article 4, the

shares of the Company are under the control and discretion of the

Directors who may allot, transfer or otherwise dispose the same to such

person or persons and for such consideration upon such terms and

conditions and at such time as Directors may in their absolute discretion

think fit. The argument is that this gave discretion to the Directors to

transfer all the shares as per their will and wish. We find that Article 4 is

part of Articles 3 to 7 under the heading of Share Capital. These Articles

Company Appeal (AT) No.12 of 2018 26

cannot be read in isolation and are required to be read along with Articles

15 to 27 of the Articles of Association, which Articles are under the heading

of "Transfer on Shares" (should be Transfer of Shares). Admittedly, this

was not a new allotment or transfer of shares at the time of incorporation.

The Appellants (original contesting Respondents) admittedly transferred

the shares which had come to them after the incorporation of the Company

and on death of late Shri M.A. Shanmugam and then his wife. Reading

Article 4 with Articles 15 to 27 makes it clear that the shares cannot be

transferred to any person who is not a member of the Company so long as

any other member is willing to purchase the same at fair value. Articles 15

to 27 have detailed procedure in this regard. There is nothing on record to

show that the Appellants had followed any procedure under the Articles of

Association or the Companies Act. They appear to have treated the land

and the structure and the shares of the Company as their private property

and simply sold off the same and walked away. Thus, the synopsis of the

appeal in para - 6 claims that 97.83% of the paid up share capital of the

Company was held by the Appellant No.1 and his family and the Appellants

negotiated with the 6th Respondent (original Respondent No.7) - Vee Pee

Estate and Hotels Pvt. Ltd. for sale of properties and the shares held by

Appellants and that they handed over 3,23,860 shares and transfer deeds

to the Directors of Respondent No.6 (in Appeal). As per synopsis, in this

regard sale deed was executed by all the Appellants and the Company on

31.10.2011 in favour of the 6th Respondent (Original Respondent No.7) and

on 31.10.2011, shares were transferred to 1) Mr. V. Kumaravel 2) Mrs. K.

Company Appeal (AT) No.12 of 2018 27

Jayanthi and 3) Mr. K. Manikandan. In the face of such stand taken by

the Appellants themselves, and on their apparent failure to show any

notice to any other shareholders regarding holding EOGM to transfer the

properties and business of the company and failure to show any Board

Meeting relating to transfer of shares, really speaking there is not much

required to be stated as a whole that the acts of the Appellants were clearly

oppressive of the minority shareholders and their actions of transferring

the land as well as structure and business of the Company to original

Respondent No.7 as well as their transfer of shares without following any

procedure cannot be upheld. However, we have recorded the above

reasonings in some details as this is last court of facts. The Appellants

criticized the Judgement of the learned NCLT claiming that it did not

record much reasonings. We find that looking to the pleadings as were

there in the record, really there was no much to be stated but the learned

NCLT did observe that the shares had been allotted to late Shri M.A.

Shanmugam in lieu of selling his property being plot of land measuring 52

Kuzhies and 14 Veesams together with unfinished building constructed

over the property. The reasonings show that the NCLT was aware of the

fact that possession of the land had been handed over to the Company

which completed the construction for setting up the hotel and that Form

No.2 dated 14.03.1983 was there in support. NCLT noticed the early death

of M.A. Shanmugam before execution of the sale deed and that the property

had been shown in the assets of the Company even as on 31.03.2011.

NCLT found that the Respondents did not show any proof that valuation

Company Appeal (AT) No.12 of 2018 28

was done on the properties which were being sold. NCLT found that it was

established that the property in question pertained to Respondent No.1

Company. According to us, when the learned NCLT noticed and even found

that the property in question was pertaining to Respondent No.1 Company

and when it was finding that the burden on the Respondents had not been

discharged by them, the NCLT was duty bound to set aside the sale deed

transferring the land which was in possession of the Company. Looking to

the pleadings, it was necessary that NCLT should have also directed setting

aside of the shares which had been transferred without following any

procedure.

16. We reject the averments made by the Appellants that the land

belonged to them. The land was in possession of the Company under an

agreement which can be seen from the records that against the transfer of

shares the original owner of the land had agreed to sell the land to the

Company. For long the land was in possession of the Company and the

Company was in possession by way of part-performance of the contract

and there was nothing remaining to be done by the Company except that

late Shri M.A. Shanmugam had to execute and register the sale deed which

unfortunately he could not do as he suddenly passed away in a year of

incorporation. The Appellants cannot take advantage of the positon they

hold as trustees to deprive the Company of the possession of its land. The

Appellants have argued that the wives of original Petitioners 1 and 2 who

were also near relatives of the Appellants had litigated with them regarding

the partition of the properties left by late Shri M.A. Shanmugam in which Company Appeal (AT) No.12 of 2018 29

litigation the present land was also included. The Appellants have given

details regarding those litigations and their ending into compromise to

argue that original Petitioners had knowledge about the disputes and thus

they must be said to have come without clean hands. We find that even if

the wives of the original Petitioners 1 and 2 had any litigation with

reference to the properties left by Shri M.A. Shanmugam and their

relationships with the Appellants, those disputes cannot be basis to say

that the original Petitioners who are shareholders in their own rights can

be debarred from making the claims they made in the Company Petition.

We have already discussed as to how the sale deed dated 31.10.2011 was

executed which came to be entered into books of the District Registrar as

Document No.1844/2013 and that the Company Petition filed on

25.10.2014 could not be said to be delayed. The argument of the

Appellants that the original Petitioners did not disclose in the NCLT the

lease deed, settlement deed and litigations have no substance. We hold

that the petitioners could maintain the petition in their individual rights

as shareholders. We reject the arguments that the original Petitioners

brought the Company Petition without having clean hands or that they

had suppressed material facts.

17. In appeal, when this matter came up before us and the

arguments had begun, we had expressed to the learned counsel for the

Appellants that looking to the pleadings and admitted facts and the state

of record, the NCLT should have set aside the sale deed as well as transfer

of shares but had instead directed audit and asked the Company Secretary Company Appeal (AT) No.12 of 2018 30

to be appointed to verify if the procedure had been followed. We had asked

the learned counsel if he still wants to continue with the arguments of the

appeal. The learned counsel preferred to argue the appeal and thus we

have heard the whole appeal on merits and now we have come to this

conclusion that the transfer of assets and business of the Company as well

as transfer of shares is not liable to be upheld. Although the Respondents

- original Petitioners did not file the appeal and appear to have gone along

with the Impugned Order which is more in the nature of Interim Orders,

we find that looking to the provisions of the Companies Act, 2013, when

there is sufficient material to record a finding that the acts of the

Appellants - original Respondents were oppressive to the other members

of the Company, it is necessary to safeguard the interest of the Company.

The admitted facts of the present matter show not only oppression on the

part of original Respondents 2 to 6 but also mismanagement as in the

name of clearing loans, the whole Company itself has been transferred

without letting the other shareholders know. The present appeal being

continuation of the original Company Petition, we can exercise powers

which were required to be exercised by the learned NCLT under Sections

241 and 242 of the Companies Act, 2013 read with Rule 11 of the National

Company Law Tribunal Rules, 2016 as well as Rule 11 of National

Company Law Appellate Tribunal Rules, 2016. We find that at present,

passing of Orders of winding up the Company would unfairly prejudice

members, but otherwise the facts justify the making of a winding up order

considering the acts committed by the Appellants. If in spite of the efforts

Company Appeal (AT) No.12 of 2018 31

as per Order we propose to pass don't succeed, NCLT may consider

directing steps for winding up. The ends of justice require this Appellate

Tribunal to pass necessary orders although these orders are required to be

passed against the Appellants who have come up in the appeal as we find

that this is necessary in the interest of the Company which was established

by late Shri M.A. Shanmugam. We thus pass the following order:-

Order

We maintain direction 1 issued by the learned

NCLT in the Impugned Order that an Independent

Auditor should be appointed to carry out audit as

proposed by the learned NCLT. The fees of the Auditor to

be appointed by NCLT shall be borne by the original

Respondent No.1 Company. The other directions 2 to 6

of the Impugned Order are quashed and set aside.

We quash and set aside the shares transferred by

original Respondents 2 to 6 in favour of three persons -

1) Kumaravel Varatha Rajan, 2) Jayanthi Kumaravel and

3) Manikandan Kumaravel. We restore the shareholding

of the Company as on 29.09.2011.

We declare that the sale deed dated 31.10.2011

executed by original Respondents 2 to 6 in favour of

original Respondent No.7 as not binding on the

Respondent No.1 Company.

Company Appeal (AT) No.12 of 2018 32

The NCLT shall immediately appoint an

Administrator to take over the land and structure of the

Respondent No.1 Company and to manage the affairs of

the Company. The NCLT is requested, under Section

242(2)(k) of the Companies Act, 2013, to appoint such

number of persons as Directors of the Respondent No.1

Company as it finds appropriate to manage the affairs of

the Company under supervision of the Administrator

and to ensure holding of free and fair EOGM for the

shareholders to decide future course of action for the

Company.

It would be open for learned NCLT to later

consider, if necessary, if Orders of winding up need to be

passed.

The appeal is disposed accordingly.

There shall be no Orders as to costs.

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

[Balvinder Singh] Member (Technical) New Delhi 12th July, 2018

/rs/nn Company Appeal (AT) No.12 of 2018