M/S. Therm Flow Engineers Private ... vs Mr. Bhavesh Narumalani & Anr

(Arising out of Order dated 15th March, 2017 passed by the National Company Law Tribunal, Ahmedabad Bench, Ahmedabad in TP No. 106/397-398/NCLT/AHM/2016]

IN THE MATTER OF:

M/s. Therm Flow Engineers Private Limited & Ors. ...Appellants

Vs

Mr. Bhavesh Narumalani & Anr. ...Respondents

Present: For Appellants:- Mr. Ashok Lal Bhai, Mr. Arvind Kumar, Ms. Hena George and Ms. Purti Marwaha Gupta, Advocates.

For Respondents: - Mr. Krishnendu Datta, Ms. Prachi Johri and Ms. Malvika Awasthi, Advocates for Respondent No.1.

With Company Appeal (AT) No.198 of 2017

(Arising out of Order dated 15th March, 2017 passed by the National Company Law Tribunal, Ahmedabad Bench, Ahmedabad in TP No. 106/397-398/NCLT/AHM/2016]

IN THE MATTER OF:

Mr. Bhavesh Narumalani ...Appellant

Vs

M/s. Therm Flow Engineers Private Limited & Ors. ...Respondents

Company Appeals (AT) Nos. 159 & 198 of 2017 2

Present: For Appellant: - Mr. Krishnendu Datta, Ms. Prachi Johri and Ms. Malvika Awasthi, Advocates

For Respondents: - Mr. Ashok Lal Bhai, Mr. Arvind Kumar, Ms. Henna George, Ms. Purti Marwaha Gupta, Advocates for Respondent nos. 1 to 11 & 13, Advocates.

JUDGMENT

SUDHANSU JYOTI MUKHOPADHAYA, J.

The cross appeals have been preferred by the Petitioners and the

Respondents against common order dated 15th March, 2017 passed by

the National Company Law Tribunal, Ahmedabad Bench, ("Tribunal" for

short). They were heard together and disposed of by this common

judgment.

2. The Appellant- Mr. Bhavesh Narumalani (hereinafter referred to as

"Petitioner") preferred an application under Sections 397, 398 and 402 of

the Companies Act, 1956 claiming to be entitled to 25% of the issued

subscribed and paid up share capital of the M/s. Therm Flow Engineers

Pvt. Ltd & Ors. (hereinafter referred to as "Company") and alleged that by

issue and allotment of further shares his percentage of shareholding of

25% has gone down to insignificant percentage of 8.33% by the 2nd and

3rd Respondents. The Tribunal by impugned judgment dated 15th March,

2017 in TP No. 106/397-398/NCLT/AHM/2016 held that the act on the

part of the 2nd and 3rd Respondents is only to enrich the persons in the

Company Appeals (AT) Nos. 159 & 198 of 2017 3

'Narayanbhai Patel Group' at the cost of other shareholders of the

Company amounting to financial mismanagement and passed following

orders: -

"153. The aforesaid case of the respondents 2 and

3 in the management and affairs of the first respondent

company are harsh, burdensome and detrimental to

the interest of the petitioner. Therefore, finding of this

Tribunal is that, respondents 2 and 3 committed act of

oppression, mis-management in the conduct of the

affairs and business of the first respondent company.

The acts cases of oppression and mismanagement

warrant passing winding up order but such order

prove to be detrimental not only to the interest of the

petitioner but to the first respondent company.

Therefore, this Tribunal is passing the following order:

(1) Increase in the share capital from Rs. 1.00 lac

to Rs. 2.00 lacs of the first respondent

company that took place on 21/12/2009 and

from Rs. 2.00 lacs to Rs. 3.00 lacs on

28/9/2010 is declared as illegal and set

aside.

(2) Allotment of 2500 shares to Respondent No.4

on 21/9/2010, allotment of 2500 shares each

to Respondent No.5 to Respondent No.10 on

Company Appeals (AT) Nos. 159 & 198 of 2017 4

18/1/2011 and allotment of 2500 shares to

Respondent No.11 on 4/7/2003 is declared

as illegal and set aside.

(3) Transfer of shares of Respondent no.1 to

Respondent no. 2 and 3 is set aside.

(4) Shares of respondent No. 12 shall be re-

allotted to the shareholders by duly following

the procedures laid down under the

Companies Act and Articles of Association.

(5) This Tribunal is not inclined to grant other

reliefs prayed in the petition.

The petition is disposed of accordingly. There is no order

as to costs. The pending application TP 106-A/2016 (CA

35/2016) stands closed."

3. The contesting Respondents along with the Company has

challenged the judgment on merit (Company Appeal (AT) No. 159/2017).

4. The Petitioner Mr. Bhavesh Narumalani has preferred the appeal

against the said order on limited ground that the consequential

declaration has not been passed by the Tribunal.

5. The brief facts of the case are as follows: -

5.1 The Petitioner alleged that, at the time of incorporation of the

Company, he held 25% of the issued and subscribed and paid up equity

Company Appeals (AT) Nos. 159 & 198 of 2017 5

share capital of the Company (M/s. Therm Flow Engineers Pvt. Ltd. &

Ors.) but the shareholding of the Petitioner has been illegally reduced

from 25% to 8.33% by the 2nd and 3rd Respondents which is an act of

oppression on the part of the Respondents.

5.2 Further, according to Petitioner, he was one of the four members

of the Company but subsequently while issuing and allotting shares to

others, the number of members have been increased to ten members and

he was not allotted any share.

5.3 It was alleged that the share certificates in respect of his

shareholding have not been issued by the Company but the annual

return of 2nd Respondent as on 30th September, 2009 and the annual

return of the 1st Respondent as on 30th September, 2014 filed before the

Registrar of Companies, Mumbai, reflects the shareholding of the

Petitioner.

5.4 The petitioner claims that he and his father Mr. Dev Narumalani

are only referred in the Company as "the Narumalani Group". The

Company which presently owns about 27% equity shares of the 13th

Respondent (another Company) controls the affairs of 13th Respondent

(the other Company) whereas 2nd Respondent to 11th Respondent are

mainly the shareholders of the 1st Respondent Company.

5.5 The main allegation of the Petitioner is that he was not informed of

the change in the shareholding which the Petitioner came to know from

Company Appeals (AT) Nos. 159 & 198 of 2017 6

the search of records of the Registrar of Companies. No notice of the

Board of Directors Meeting was issued during the years 2010, 2011 and

2013 nor served on the Petitioner and the Annual Returns for the

respective years were not filed before the Registrar of Companies on time.

5.6 According to the Petitioner, the notice of the Extra Ordinary

General Meeting held on 28th September, 2010 was not forwarded and

the shares were allotted to 5th to 10th Respondents at a discount of

99.83% and thereby, the valuation of the Petitioner's shares was brought

down.

5.7 It was further alleged that the Petitioner was not served with the

minutes of the meetings of the Board of Directors dated 1st November,

2014 and 22nd June, 2015 and therefore, there was no occasion to raise

objection or no occasion to file for leave of absence.

6. The Respondents in their reply disputed the allegations and also

raised question of maintainability of the Petition under Sections 397 and

398 of the Companies Act, 1956 on the ground that the Petitioner is not

eligible. It was submitted that the Petitioner is not having 1/10th of the

share capital of the 1st Respondent Company and is not entitled to file

the petition under Sections 397 and 398 of the Companies Act, 1956.

7. According to Respondents, the shares of the 1st Respondent

Company to 4th, 5th and 10th Respondents were allotted pursuant to the

Board's Resolutions dated 29th January, 2010 and 19th February, 2011

Company Appeals (AT) Nos. 159 & 198 of 2017 7

respectively and at all times it was within the knowledge of the Petitioner.

It was also submitted that the Petitioner being a subscriber to the

Memorandum of Association of the Company at the time of incorporation

of the Company on 29th August, 2002, share certificates for 2500 equity

shares were issued and allotted to the Petitioner.

8. According to Respondents, the Petitioner cannot allege that the

share certificates were not issued to him till 2014, after lapse of thirteen

years from the date of subscription of the Memorandum of Association.

However, such submissions cannot be accepted in view of the fact that

the Petitioner does not have any grievance with regard to issuance of the

original share certificates and has made grievance with regard to fresh

certificates issued between 2010 and 2013.

9. Next, it was contended on behalf of the Respondents that notice of

the Board of Directors meeting in which fresh issuance of shares had

taken place in the years 2010, 2011 and 2013 were sent to the Petitioner

and that Annual Returns for the respective years have also been filed with

the Registrar of Companies. The Petitioner was duly served with notices

of the concerned Extra Ordinary General Meeting dated 21st December,

2009, by which, the authorised share capital was increased from Rs. 1

lac to Rs. 2 lacs and 2500 shares to 4th Respondent in the year 2010.

10. The Respondents disputed the allegations that in the year 2010

shares were issued at a discount of 99.85% to the 4th Respondent. They

Company Appeals (AT) Nos. 159 & 198 of 2017 8

also disputed the allegation that wrong method was used to ascertain the

valuation of the shares and denied the allegation that the Petitioner came

to know of the same in the year 2014.

11. According to Respondents, notice of concerned Extra Ordinary

General Meeting dated 28th September, 2010 and the notice of the Board

of Directors meeting of the 1st Respondent Company were duly issued to

the Petitioner and only thereafter, it was decided to allot shares in favour

of 5th to 10th Respondents.

12. Learned counsel appearing on behalf of the Respondents

(Appellants in Company Appeal (AT) No. 159 of 2017) submitted that the

13th Respondent (the other Company), M/s. Patel Air Temp Ltd. and the

father of the Petitioner was a Whole Time Director in 13th Respondent

Company and has always been aware about the operations of both the

entities. The 13th Respondent Company was incorporated prior to 1st

Respondent Company and its value has always been substantial. On the

contribution of the Petitioner in the affairs of the 1st Respondent

Company was the initial subscription money of Rs. 25,000/- for 2,500

shares, which were allotted to him as a gesture of good faith in view of

his father being the Whole Time Director of the 1st Respondent Company.

13. It was further submitted that the Petitioner is a signatory to bank

accounts of the 1st Respondent Company and has also signed the relevant

bank form pursuant to the resolution dated 1st October, 2009. Learned

Company Appeals (AT) Nos. 159 & 198 of 2017 9

counsel for the Respondents also contended that the share capital of the

1st Respondent Company was duly increased on 21st December, 2009 and

28th September, 2010 and the allotment of shares that took place on 29th

January, 2010, 18th January, 2011 and 4th July, 2013 were in the

knowledge of the Petitioner at the relevant point of time.

14. Learned counsel for the Respondents submitted that no case of

'oppression and mismanagement' has been made as alleged by the

Petitioner as he had been seeking leave of absence from Board Meetings

held on different dates. Reference was made to a letter dated 7th July,

2015 written by the Petitioner seeking leave of absence from the meeting

which was to be held on 11th July, 2015. It was further contended that

shares of the 12th Respondent were offered for purchase to the Petitioner

vide letter dated 23rd June, 2015, however, Petitioner did not reply to

such offer. It was submitted that the Petitioner intentionally and

deliberately did not challenge the aforesaid increase in share capital or

allotment of shares.

15. The main grievance of the Petitioner is that though the Tribunal

has accepted 'oppression' by Respondents but no consequential relief has

been granted apart from the relief as noticed in the preceding paragraphs.

Learned counsel for the Petitioner submitted that once the 'oppression' is

held, the Tribunal ought to have granted consequential relief by

cancelling shares which were illegally issued to 5th to 10th Respondents.

Company Appeals (AT) Nos. 159 & 198 of 2017 10

16. So far as the maintainability of the Petition is concerned, we hold

that the Tribunal rightly rejected the objection of the Respondents. Once

the share of the member is reduced below 1/10th of the total share capital

of the Company without information and knowledge to the member, the

application under Sections 397 & 398 of the Companies Act, 1956 (now

Section 241 of the Companies Act, 2013) cannot be opposed on the

ground that the member has less than 1/10th of the share capital.

17. In Anup Kumar Aggarwal Vs. Crystal Thermotech Ltd. & Ors.

[Company Appeal(AT) No. 17 of 2016], this Appellate Tribunal considered

the crucial date when an applicant is required to satisfy the requirements

under Section 399 of the Companies Act, 2013 so as to make the

requirement of having an aggregate of 1/ 10th of share out of the total

shareholding of the company, if the appellant alleges oppression in

bringing down his shareholding. In the said case, this Appellate Tribunal

noticed the Hon'ble Supreme Court's decision in "Bhagwati Developers

Private Limited" and "Rajahmundry Electric Supply Corporation

Ltd.," wherein the Apex Court held that the requirement of 1/ 10th of

holding of the total share is to be examined in the light of whether

such a number is maintained on the actual date of presentation of

the company petition in the court (emphasis added). This Court while

discussing the decision of Hon'ble Supreme Court in "Bhagwati

Developers Private Limited" and "Rajahmundry Electric Supply

Corporation Ltd." held that the said principle, which was made

Company Appeals (AT) Nos. 159 & 198 of 2017 11

applicable in the case of winding up, will not be applicable where

applicant alleges oppression and mismanagement in bringing down the

shareholding below 1/ 10th of the total share of the company. This

Appellate Tribunal further observed that if the principles laid down by

Supreme Court in "Bhagwati Developers Private Limited" and

"Rajahmundry Electric Supply Corporation Ltd.," which related to

cases of winding up, is made applicable in the case of alleged 'oppression

and mismanagement' in bringing down the minimum requirement of

shareholding, then the applicant (s) will be remediless. This Appellate

Tribunal thereby held that the crucial date for determination of

requirements under Section 399 will be the date the alleged date of

oppression and mismanagement in bringing down the shareholding

below 1/ 10th of the total shareholding of the company took place.

18. The Respondents though have taken plea that notice convening

meetings of the Board of Directors dated 1st September, 2014, 15th

November, 2014 and 25th March, 2015 were issued to the Petitioner and

the Petitioner has orally informed the Respondents on each occasion that

he being busy on account of personal reasons requested for leave of

absence, but there is nothing on the record to suggest that the notice of

the meetings dated 1st September, 2014, 15th November, 2014 and 25th

March, 2015 were served on the Petitioner.

19. The stand of the Respondents is that the Petitioner orally informed

the Respondents on each occasion being busy on account of personal

Company Appeals (AT) Nos. 159 & 198 of 2017 12

reasons and requested for leave of absence which was granted to him is

also not based on record. There is nothing on the record to suggest that

even the minutes of the meetings of the Board of Directors dated 1st

November, 2014 and 22nd June, 2015 were served on the Petitioner.

20. The Tribunal noticed the stand taken by the Petitioner that the

minutes of the Board meetings held on 29th January, 2010, 18th January,

2011 and 4th July, 2013, in which additional allotments were made to 4th

to 11th Respondents are not at all legitimate and have been fabricated

only with the intention to mislead the Tribunal. However, no such opinion

having been expressed by the Tribunal on such stand taken by the

Petitioner, we are not deliberating on such issue. In the present case, as

it is clear that the further shares were allotted to the 4th to 11th

Respondents, without notice to the Petitioner, the Respondents cannot

raise objection of the maintainability of the Petitioner.

21. Admittedly, on 21st December, 2009 share capital of the 1st

Respondent Company was increased from Rs. 1 lac to Rs. 2 lacs and

relevant form was filed with Registrar of Companies on 1st January, 2010.

Admittedly, on 29th January, 2010, 2500 shares were allotted to 4th

Respondent and it was shown in the annual return of the 1st Respondent

Company filed with Registrar of Companies on 18th October, 2010.

Because of this, rise in the share capital and allotment of 2500 equity

shares of the face value of Rs.10/- each to 4th Respondent, percentage of

the Petitioner in the paid up share capital of the 1st Respondent Company

Company Appeals (AT) Nos. 159 & 198 of 2017 13

reduced from 25% to 20%. According to the petitioner, the value of each

equity share of the 1st Respondent Company as on 25th September, 2010

was Rs. 6719.69/-, but it was allotted at a base value of Rs. 10/- each to

the Respondents.

22. Further, on 28th September, 2010, share capital of the 1st

Respondent Company was increased from Rs. 2 lacs to Rs. 3 lacs.

Relevant forms were filed with Registrar of Companies on 18th October,

2010. On 11th October, 2011, 5th Respondent to 10th Respondent were

allotted 2500 shares each of face value of Rs. 10/- and thereby the share

value of the Petitioner is reduced to 9.09%. According to the Petitioner,

value of the share as on 24th November, 2011 was Rs. 5908.62. On 4th

July, 2013, in the meeting of Board of Directors, 2500 equity shares of

the value of Rs. 10/- each were allotted to 11th respondent. Value of the

share as on 4th July, 2013 was Rs. 3230.64/-. This allotment of shares

of 11th Respondent reduced percentage of share capital of the Petitioner

to 8.33%.

23. Provisions of the Companies Act, 1956 and Articles of Association

of the Company require that a notice in writing shall be given to the

Directors for the Board Meetings as well as to all the members for Annual

General Meetings. In the present case, we also find that the 2nd and 3rd

Respondents have thoroughly violated the provisions of the Companies

Act, 1956 as also the Articles of Association of the Company. No notice

has been given to the Petitioner and any of the member, nor such notice

Company Appeals (AT) Nos. 159 & 198 of 2017 14

has been brought on record. There is no evidence to suggest that notices

were served on the Petitioner and other members. It is the case of the

Petitioner that he had total faith on 2nd and 3rd Respondent and therefore,

he did not bother about the manner in which the affairs of the 1st

Respondent Company have been conducted till June, 2015.

24. It is an admitted fact that the Company who is holding 27% share

capital i.e. 13,65,512 shares of the 13th Respondent (another Company)

which is listed in Bombay Stock Exchange. It is also not disputed that

"Narayanbhai Patel Group", during the financial year 2014-15, advanced

an amount of Rs. 07,01,30,000/- to the 1st Respondent Company as

short term borrowings. The said amount was used by the 1st Respondent

Company to purchase shares of 13th Respondent from 2nd and 3rd

Respondents from Bombay Stock Exchange. The 1st Respondent

Company made provisions of Rs. 40,60,111/- by way of interest to

"Narayanbhai Patel Group" (2nd Respondent to 11th Respondent) for

payment of interest on short term borrowings. There was no urgent and

acceptable need placed on record by the 2nd and 3rd Respondents for

increase in the share capital of 1st Respondent Company and allotment

of shares to 2nd Respondent to 11th Respondent. There is no material on

record to show that offer was made to the Petitioner and 12th Respondent

about the allotment of shares made to the relative of the 2nd and 3rd

Respondents.

Company Appeals (AT) Nos. 159 & 198 of 2017 15

25. The decision for allotment of shares were taken in Extra Ordinary

General Meeting but not during Annual General Meeting without

intimation to the Petitioner. All the additional shares on account of the

rise in the share capital were allotted at a price of Rs.10/- per share. The

Petitioner has placed on record that the value of the shares of the 1st

Respondent Company on the basis of the market price of, shares of 13th

Respondent at annexures 5 & 6 at pages 54 and 55 of the rejoinder.

26. The face value of the shares allotted to the 4th Respondent to 11th

Respondent in the years 2010, 2011 and 2013 have been noticed by the

Tribunal and shown in the table below:-

Dates of Allotted to Allotment Intrinsic fair Discount

allotment (Respondent) Price (Rs.) given

29.01.2010 R4 10 5946.02 99.84%

18.01.2011 R 5 to R 10 10 5414.04 99.82%

04.07.2013 R 11 10 3230.64 99.70%

27. In the present case, we find that the Petitioner addressed e-mail to

the representative of 1st Respondent Company and requested to provide

audited balance sheet for the financial year ended 31st March, 2015 but

there was no response to the said e-mail from the 1st Respondent

Company. On 16th June, 2015, the Petitioner received a notice of the

meeting of the Board of Directors of the 1st Respondent Company to be

held on 22nd June, 2015. In the said notice, agenda was to appoint

Additional Director on the Board of the 1st Respondent Company. In the

Company Appeals (AT) Nos. 159 & 198 of 2017 16

Board Meeting held on 22nd June, 2015, the Petitioner was given minutes

of the meeting of the Board of Directors of the 1st Respondent Company

held on 1st September, 2014, statement of Profit and Loss Account,

Balance Sheet and Cash Flow Statements for the year ended 31st March,

2015 without notes. Apart from the said documents, there is no material

placed on records by the Respondents to suggest that before 22nd June,

2015, the Petitioner had knowledge about the increase in share capital.

28. In the aforesaid background, the Tribunal has declared the

increase in the share capital from Rs.1 lac to Rs. 2 lacs of the 1st

Respondent Company that took place on 21st December, 2009 and from

Rs. 2 lacs to Rs. 3 lacs on 28th September, 2010 as illegal and set aside

the allotment of 2500 shares to 4th Respondent on 21st September, 2010

and to the 5th Respondent to 11th Respondent on 18th January, 2011 and

allotment of 2500 shares to 11th Respondent on 4th July, 2003 has been

also declared illegal and set aside. Apart from that, the transfer of shares

of 1st Respondent to 2nd Respondent and 3rd Respondent having set aside

in addition to order for the allotment of shareholders of the shares of the

12th Respondent by duly following the procedures laid down under the

Companies Act and Articles of Association, no interference is called for.

We are of the view that apart from the just and proper order passed by

the Tribunal, it has also passed consequential reliefs of setting aside

illegal allotment and therefore, no further relief can be granted to the

Petitioner.

Company Appeals (AT) Nos. 159 & 198 of 2017 17

29. We find no merit in these appeals. Both the appeals are accordingly

dismissed. However, in the facts and circumstances of the case, there

shall be no order as to cost.

(Justice S.J. Mukhopadhaya) Chairperson

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

NEW DELHI 22nd December, 2017

AR

Company Appeals (AT) Nos. 159 & 198 of 2017