Mrs Proddaturi Malathi vs Srp Logistics Pvt Ltd & Ors

(arising out of Order dated 27th April, 2017 passed by NCLT, Hyderabad in C.P. No.36/241/HDB/2017)

IN THE MATTER OF:

Mrs Proddaturi Malathi W/o P. Gopala Krishna, R/o P.No.8, H.No.40-434, Gopalnagar, Moula-Ali, Hyderabad-500040 Appellant

Vs

1. SRP Logistics Pvt Ltd & Ors Regd Office 1-11-242/1, Flat No.304, 3rd Floor, Kishan Residency, Begumpet, Hyderabad-500016.

2. Mr. Sekhar Pendam, S/o P. Narayana, Plot No. 14, Prasarina Apartments, D-5, Saibaba Colony, Sitarampur, Bowenpally, Secundeerabad-5000 11

Also at

H.No.8-7-198/5/A, Plot No.131, PV Enclave; Samatha Nagar, Old Bowenpally, Secunderabad-50001 1.

3. Mrs Salalitha Parsha W/o Sekhar Pendam, Plot No. 14, Prasanna Apartments, D-5, Saibaba Colony, Sitarampur, Bowenpally, Secundeerabad-5000 11

Also at

H.No.8-7-198/5/A, Plot No. 131, PV Enclave, Samatha Nagar, Old Bowenpally, Secunderabad-50001 1. 4. Mr Mallesham Mekala, S/o Laxman, H.No.1-3-47/ 1, Shanthi Nagar, Peddapalli, Karimnagar-505 172

5. Mr. Proddaturi Rama Krishna, S/o P. Krishna P.No. 8, H .No.40-434, Gopalnagar, Moula-Ali, Hyderabad-500040

6. The Registrar of Companies, Andhra Pradesh and Teingana, 2nd Floor, Corproate Bhavan, Near Central Water Board, Bandlaguda, Nagole, Hyderbad-500068 Respondents

Present: For Appellants:-Mr. V. Seshagiri with Mr. Anchit Tripathi, Advocates.

For Respondent: - Sh P. Chidambaram Company Secretary in Practice for Respondent No.1 and 2. Mr. Yogesh Raavi, Advocate for Respondent No.2.

JUDGEMENT

BALVINDER SINGH, MEMBER TECHNICAL

1. The appellant has filed the present appeal under Section

421 of the Companies Act, 2013 thereby challenging the

order dated 27.04.20 17 passed by the National Company

Law Tribunal, Hyderabad (hereinafter referred to as the

"Tribunal") in CP No.36/241/HDB/2017 whereby and

where under the Tribunal disposed of the petition while

passing the following order:

"10. In view of the facts and circumstances of the case, we are of the considered view that it would be just and equitable to dispose of the company petition with the following directions:

3.

a) The Resolution No.1 passed on 10. 4.2017 in EOGM with regard to the removal of the [petitioner is set aside.

b) Respondent N6.1 Company is given liberty to conduct fresh EOGM within a period of two months from date of the receipt of copy of the order;

c) If company still wants to remove the petitioner as Director of the company, the Company is directed to give proper notice by assigning reasons for her removal and also grant proper time for her response;

d) Company is directed to follow all applicable provisions of the Companies Act, Articles of Association, Memorandum of Association and principles of natural justice in taking decisions.

e) The petitioner is at liberty to approach this Tribunal, f she is aggrieved.

f) With the above directions, CP No.36/241/HDB/201 7 is disposed of.

2. Aggrieved by the said, order dated 27.42017 the

appellant has filed the present appeal and sought for the

following relief inter-alia:

a) That this Hon'ble Tribunal be pleased to set aside

the impugned order, being Order dated 27.4.20 17 -

passed by the NCLT at Hyderabad.

b) That this Hon'ble Tribunal be pleased to call for

records from the NCLT, Hyderabad and decide the

case on its merits.

c) That this Hon'ble Tribunal be pleased to declare

the impugned transfer of shares from Respondent 4.

No.5 shown in the Annual Return filed for the year

2006 as null and void.

d) That this Hon'ble Tribunal be pleased to declare

the impugned Allotment of shares made on

30.09.2015 and 26.11.2016 as null and void.

e) That this Hon'ble Tribunal be pleased to declare

the impugned Board Meeting held on 30.09.2015,

31.10.2016, 26.11.2016 and 15.7.2017 as null

and void.

1) That this Hon'ble be pleased to declare the

impugned EOGM held on 26.11.2016 as null and

void.

g) That this Hon'ble tribunal be pleased to declare

the impugned appointment of Mr. Mallesham

Mekala (Respondent No.2) as Additional Director

as null and void.

h) That this Hon'ble Tribunal be pleased to declare

Annual Return filed for the period 31.3.2016 as

null and void.

i) That this Hon'ble Tribunal may be pleased to set

aside the Board Meeting held on 15.7.2017 as

null and void.

5.

3. Similar reliefs were sought by the appellant in the

Company Petition filed before the National Company Law

Tribunal, Hyderabad Bench, Hyderabad.

4. This Tribunal vide order dated 28.07.2017 directed

that "In the meantime, if any Boards Resolution is

passed for removal of appellant from the post of

Director, the same shall not be given effect to until

further orders of the Appellate Tribunal."

5. Back ground facts in a nut shell as are as follows:

I. M/s SRP Logistics Pvt Ltd i.e. 1st Respondent was

incorporated as private company by the Appellant

and Respondent No.5 along with Mr. Sekhar Pendam

(2nd Respondent). The Company was incorporate

with authorised share capital of Rs. 500000 (50000

equity shares of Rs. 10 each). At the time of

incorporation Appellant and 2nd Respondent

subscribed for 5000 shares each and 5th Respondent

was allotted with 10 shares constituting ratio in

percentage 49.99, 49.99 & 0.10 respectively. The 18t

Respondent Company issued 39,990 equity shares

Of Rs. 10 each during the financial year 2005-2006 to

the existing shareholders maintaining the same ratio 6.

but replaced 5th Respondent as a shareholder of 18t

Respondent with 3rd Respondent who is wife of 2nd

Respondent.

II. On 30.9.20 15 by passing a shareholder special

resolution the authorised capital raised from

5,00,000 (50000 shares of Rs. 10 each) to a

15,00,000 (150000 of 10 each) Board Resolution was

passed whereby the paid up capital of the 1st

Respondent was increased from Rs.5,00,000/- to

Rs.15,00,000/- & allotted increased 1,00,000

shares. With allotment of those shares the

shareholding pattern changed and shareholding of

Appellant reduced from 49.99% to 28.58%.

III. During the Board Meeting dated 21.10.2015 a Notice

was issued to convene EOGM on 25.11.2016 for

further increasing the share capital of the 18t

Respondent and on the said date the share capital

was further increased to Rs. 40,00,000. On

26.11.2016 a General Meeting and Board Meeting

was conducted for further allotment which further

reduced shareholding of Appellant to 14.29%, 4th

Respondent was also inducted into the 1st

Respondent as Additional Director. 7.

IV A Notice for conducting an Extra-Ordinary General

Meeting on 10.04.20 17 was served with an agenda to

remove the Appellant as a Director of the Company

and to regularize 4th Respondent as the Director.

Aggrieved by the Notice and the acts of the 1St

Respondent, the appellant approached Tribunal.

The Tribunal passed an interim order "It is not in

dispute that 1st Respondent has a right to remove a

Director unless he has been appointed as Life Time

Director. It is also not in dispute that anq "shareholder

has a riqht to qive notice to 1st Respondent for removal

of any director, by citing sufficient reasons for the

same. In pursuant to such notice, the Board of

directors, is supposed to consider the reasons, if any,

is satisfied; then the concerned Director can be given

notice qivinq opportunity to respond. In the instance

case, as stated above, the notice for removal and

notice qiven to the petitioner is on the same date,

which shows how mechanicaihi the respondents are

acting on their whims and fancies.

We have perused the notice dated 15.03201 7 and it

did not contain reasons for the proposal for removal of

the petitioner as Director. There is no reason assigned 8.

in the notice, then petitioner cannot be expected to

qive rephi

In view of the above facts and circumstances, we are

of the considered opinion that the proposed EGM,

going to be held on 10. 04.2017 is permitted to be

continued and the decision taken against the interest

of the petitioners shall be kept pendinq until further

orders. Post the case on 27.04.2017"

6. The appellant stated that in the year 2005-2006, the

shareholding of the 5th Respondent was transferred to 3rd

Respondent in violation of Section 56 of the Companies Act,

2013.It is further alleged that the Company right from its

inception was making profits and there was no occasion for

it to increase its authorized capital. However, the very

purpose of increasing authorized capital without following

the due procedure as contemplated under the Companies

Act, 2013 was to oppress appellant.

7. It is further contended that appellant challenged the

allotment of shares made by the 2nd Respondent in favour

of 3rd Respondent in blatant violation of Section 62 of the

Companies Act, 2013 as being oppressive and prejudicial

to the appellant and the 1st Respondent. 9.

S. It was further pointed out by the Appellant that the

share application money available with the 18t Respondent

for allotment of shares as demonstrated in the Balance

Sheet for 2014-15 was Rs.842601/- The allotment of

Rs. 10,00,000/- was made in excess of the share

application money. It is stated that the differential amount

of Rs. 1,57,399 was received by the Respondents in cash

which is impermissible under the provisions of the

Companies Act, 2013. Due date for allotment of shares

against which allotment was pending as on 31St March,

2015 was 1St June, 2015 as per the Notification dated 31St

March, 2015' issued by the Ministry of Corporation Affairs.

It was categorical submission of the appellant that no

notice for the said increase of share capital along with the

said allotment was issued to the appellant.

9. In response the respondents while denying the

allegations has submitted that the share allotments on

30.09.2015 were made with due notice and complete

knowledge of the appellant. Shares were allotted to the

appellant to the extent of share application money pending

and receivedfrom the appellant. This allotment of shares

was done with the consent and presence of all the three

directors of the company who were also 100% shareholders 10.

of the company. Therefore, appellant's allegations qua

Section 62 of the Companies Act, 2013 are meritless. It was

further argued that Appellant does not dispute that she

was a participant and signatory to this Boardi Meeting and

she had full knowledge of the allotments of shares that

were made on 30.09.2015. The appellant also attended the

Board Meetiig dated 31.10.2016. The appóllant herself

attended EGM dated 25.11.2016 and participated in the

resolutions. It is further submitted that 10 shares held in

the name of 5th Respondent were transferred to 3rd

Respondent with clear consent and understanding and

where 5th Respondent had never challenged the transfer.

10. We have heard the parties and perused the record;

before projecting our opinion on impugned order it is

necessary to discuss Section 62 of the Companies Act,

2013.

62. Further issue of share capital (1) Where at any time, a company having a share capital proposes to increase its subscribed capital by the issue of further shares, such shares shall be offered--

(a) to persons who, at the date of: the offer, are holders of equity shares of the company in proportion, as nearly as circumstances admit, to the paid-up share capital -

on those shares by sending a letter of offer subject to the following conditions, namely: - 11.

(i) the offer shall be made by notice specifying the number of shares offered and limiting a time not being less than fifteen days and not exceeding thirty days from the date of the offer within which the offer, if not accepted, shall be deemed to have been declined;

(ii) unless the articles of the company otherwise provide, the offer aforesaid shall be deemed to include a right exercisable by the person concerned to renounce the shares offered to him or any of them in favour of any other person;

and the notice referred to in. clause (i) shall contain a statement of this right,

(iii) after the expiry of the time specified in the notice aforesaid, or on receipt of earlier intimation from the person to whom such notice is given that he declines to accept the shares offered, the Board of Directors may dispose of them in such manner which is not dis-

advantageous to the shareholders and the company;

(b) to employees under a scheme of employees' stock option, subject to special resolution passed by company and subject to such conditions as may be prescribed;

or

(c) to any persons, if it is authorised by a special resolution, whether or not those persons include the persons referred to in clause, (a) or clause

(b), either for cash or for a consideration other than cash, if the price of such shares is determined by the valuation : report of a iegistered valuer subject to such conditions as may be prescribed.

(2) The notice referred to in sub-clause (i) of clause (a) of sub-section (1) shall be 12. dispatched through registered post or speed post or through electronic mode to all the existing shareholders at least three days before the, opening of the issue.

(3) Nothing in this section shall apply to, the increase of the subscribed capital of a company caused by the exercise of an option as a term attached to the debentures issued or loan raised by the company to convert such debentures or loans into shares in the company: Provided that the terms of issue of such debentjtres or loan containing such an option have been approved before the issue of such debentures or the raising of loan by a special resolution -passed by the company in general meeting.

XXXX

11. On perusal of the Section 62 read with its

corresponding Section 81 of Companies Act, 1956 brings

out the notable change in the applicability of the Provision

of further issue of shares in private companies. Section 81

of the Companies Act, 1956 was not applicable to private

companies even though Apex Court in various cases has

caste heavier duty on the Directors to act bona fide in the

interest of the company. Hon'ble Supreme Court in Dale &

Carrington Invt (P) Ltd. V. P.11. Prathapan, (2005) 1 SCC

212 at page 224 has held that:

"11. Validity of allotment of equity shares

(d) We may also test the alleged act of allotment of equity shares in favour of Ramanujarn from a legal angle. Could it be said to be a bona fide act in the interest of the company on the part of Directors of the 13. company? At this stage it may be appropriate to consider the legal position of Directors of companies registered under the Companies Act. A company is a juristic' person and it acts through its Directors who are collectively referred to as the Board of Directors.

An individual Director has no power to act on behalf of a company of which he is a Director unless by some resolution of the Board of Directors of the company specific power is given to him/her. Whatever decisions are taken regarding running the affairs of the company, they are taken by the Board of Directors. The Directors of companies have been variously described as agents, trustees or representatives, but one thing is certain that the Directors act on behalf of a company in a fiduciary capacity and their acts and deeds have to be exercised for the benefit of the company. They are agents of the company to the extent they have been authorised to perform certain acts on behalf of the company. In a limited sense they are also trustees for the shareholders of the company. To the extent the power of the Directors dre delineated in the Memorandum and Articles of Association of the compahy, the Directors are bound to act accordingly. As agents of the company they must act within the scope of their authority and must disclose that they are acting on behalf of the company. The fiduciary capacity within which the Directors have to act enjoins upon them a duty to act on behalf of a Company with utmost good faith, utmost care and skill and due diligence and in the interest of the company they represent.

They have a duty to make full and honest disclosure to the shareholders regarding all important matters relating to the company. It follows that in the matter of issue of additional shares, the Directors owe a fiduciary duty to issue shares for a proper purpose. This duty is owed by them to the shareholders of the company. Therefore, even though Section 81 of the Companies Act, 1956 which contains certain requirements in the matter of issue of further share capital by a company does not apply to private limited companies, the Directors in a private limited company are expected to make a disclosure to the shareholders of such a company when further shares are being issued. This requirement flows from their duty to act in good faith and make full disclosure to the shareholders regarding affairs of a company. The acts of Directors in a private limited company are required to be tested on a much finer scale in order to rule out 14. any misuse of power for personal gains or ulterior motives. Non-applicability of Sectióñ 81 of the Companies Act in case of priv4te limited companies casts a heavier burden on its Directors.

Private limited companies are normally closely held i.e. the share capital is held within members of a family or within a close-knit group of friends. This brings in considerations akin to those applied in cases of partnership where the partners owe a duty to act with utmost good faith towards each other. Non- applicability of Section 81 of the Aót to private compdnies does not mean that the Directors have absolute freedom in the matter of management of affairs of the company. In the present case Article 4(iii) of the Articles of Association prohibits any invitation to the public for subscription of shares or debentures of the company. The intention from this appears to be that the share capital of the company remains within a close-knit group. Therefore, if the Directors fail to act in the manner prescribed above they can in the sense indicated by us earlier be held liable for breach Of trust for misapplying funds of the company and for misappropriating its assets.

26. On the question of issue of fresh share capital, it was held to be illegal to issue shares to only one shareholder. This was held to be a violation of common-law right of every shareholder. Common law recognised a pre-emptive right of a shareholder to participate in further issue of shares. However, in India in view of Section 81 of the Companies Act, such a right cannot be found for sure. However, the test to be applied in such cases, which requires the court to examine as to whether the shares were issued bonàflde and for the benefit of the company, would import such considerations In case of private limited companies under the Indian law. Existence of right to issue shares to one director may technically be there, but the question whether the right has been exercised bona fide and in the interests of the company has to be considered in the facts of each case and if it is found that it is not so, such allotment is liable to be set aside."

15.

12. The provisions with regard to further issue of capital

contained in Section 62 of Companis Act, 2013 is now

made applicable to the private companies as well. The

mandatory requirements of Section 61 are that existing

equity shareholder of the company shall get an offer of

further issue of shares in proportion to their holding, time

to be given to accept or reject the offer, renounce in favour

of the any other person. The issuance of further, shares to

any other person than existing shareholders or employees

of the company shall be at fair value reached at by the

valuation report of registered valuers.

13. The 18t Respondent is a closely held company which

increased its authorised share capital twice and paid

capital thrice since its incorporation. We have noticed that

the company is running into profits. The contention of the

Appellant that there were no new requirements of funds in

the company and such increase in subscribed & paid share

capital has been made to oppress her by reducing her

shareholding to minority. The appellant has raised

questions of the acts of the respondent which have not

been dealt with in the impugned order the Tribunal. Here

reference is required to be made on the clause 2(4) of

Articles of Association of respondent no. 1 which says that

"the shares shall be under the control of the Directors who 16.

may allot or otherwise dispose of the same or: any of them

to such persons, either at premium or at par or discount

and at times as the directors may think fit. .." The above

provision shows the discretion of the Directors to allot

shares but such discretion can be exercised by the Board

of Directors in a duly conducted meeting in absence of

which there is no allotment. The Appellant has challenged

the board meetings held; the tribunal should have reached

to some finding to such challenge.

Further, the averment raised by the appellant as to

whether company has complied with notification G.S.R.

241(E) issued by Ministry of Corporate Affairs dated

31.03.2015 also requires due consideration of the

Tribunal.

14. It is worth noticing from the impugned order itself

that the Appellant approached the Tribunal and put its

grievances under section 59, 241, 242, 244 of the

Companies Act with prayers of transfer of shares, allotment

of shares and meetings deciding allotment to be declared

null and void. Tribunal except deciding on the issue of

removal of the appellant/ petitioner, has not dealt with any

other grievances/ prayer of the Appellant and disposed of

the petition without dealing with the merits. Allotment of 17.

equity shares disproportionate to the holding of the existing

shareholders is act of oppression of R-2 and R-3 was one

of the main issues put for consideration before the

Tribunal. The shareholding of the appellant reduced to

almost 14% from 49.99.

15. Yet the Tribunal without going into the Imerits of the

case had disposed of the Company Petition. Section 62

clearly specifies the manner in which the shares of a

company are., to be offered and it is only when the party to

whom it has been offered declines or is deemed to have

declined, that the shares are to be distributed among the

other shareholders of the company. The appellant further

argued that the increased of paid up capital of the 1st

Respondent is in violation of Section 62 of the Companies

Act, 2013 which brought the combined shareholding of 2nd

and 3rd Respondent at more than 50% of the total

shareholding of the 1st Respondent & reduced the

shareholding of the appellant to 14.29% on 26th November,

2016 prejudicial to the interest of the appellant with the

sole view to oppress her.

16. We have seen the facts of the case and to our mind

the approach of NCLT, Hyderabad to pick and choose the

issues is not appropriate on not giving any findings on the 18.

oppression committed against the appellant, if any. The

Tribunal has not given any findings on the issues relating

to share capital and oppression committed against the

appellant and have dealt with the matter relating to

removal of the appellant from the directorship.

17. We, therefore, remand back the matter to the

Tribunal to deal with the issues raised in the petition on

merit. However, in the meantime National Company Law

Tribunal, Hyderabad may pass an order that if any Board

Resolution is passed for removal of the appellant from the

post of Director, the same shall not be given effect till the

disposal of the case by it. We expect that the National

Company Law Tribunal (NCLT), Hyderabad will decide the

matter expeditiously in terms of Section 422 of the

Companies Act, 2013.

(Justice S.J. Mukhopadhaya) Chairperson

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

New Delhi Dated: 06-11-2017

61