Proddaturi Malathi vs Srp Logistics Private Limited

[Arising out of Order dated 19.12.2017 passed by National Company Law Tribunal, Hyderabad Bench, Hyderabad in C.P. No.36/241/HDB/2017]

IN THE MATTER OF:

Mrs. Proddaturi Malathi P. No.8, H. No. 40-434. Gopalnagar, Moula-Ali, Hyderabad - 500 040 ...Appellant (Original Petitioner) Versus

1. M/s. SRP Logistics Private Limited 1-11-242/1, Flat No.304, 3rd Floor, Kishan Residency, Begumpet, Hyderabad - 500 016

2. Mr. Sekhar Pendam Plot No.14, Prasanna Apartments, D-5, Saibaba Colony, Sitarampur, Bowenpally, Secunderabad - 500 011

Also at: H. No.8-7-198/5/A, Plot No.131, PV Enclave, Samatha Nagar, Pld Bowenpally Secunderabad - 500 011

3. Mrs. Salalitha Parsha Plot No.14, Prasanna Apartments, D-5, Saibaba Colony, Sitarampur, Bowenpally, Secunderabad - 500 011

Also at: H. No. 8-7-198/5/A, Plot No.131, PV Enclave, Samatha Nagar, Old Bowenpally Secunderabad - 500 011

4. Mr. Mallesham Mekala H. No. 1-3-47/1, Shanthi Nagar, Peddapalli, Karimnagar - 505 172

Company Appeal (AT) No.08 of 2018 2

5. Mr. Proddaturi Rama Krishna P. No.8, H. No.40-434, Gopalnagar, Moula - Ali, Hyderabad - 500 040

6. The Registrar of Companies Andhra Pradesh and Telangana, 2nd Floor, Corporate Bhavan, Near Central Water Board, Bandlaguda, Nagole, Hyderabad - 500 068 ...Respondents (Original Respondents)

Present: Shri V. Seshagiri, Shri Anchit Tripathi and Shri Adhish Rajvanshi, Advocates for the Appellant

Shri S. Chidambaram, PCS for Respondent Nos.1 to 4 Shri Vikas Reddy for Respondent No.5

JUDGEMENT

A.I.S. Cheema, J. :

1. The Appellant (Original Petitioner) filed CP 36/241/HDB/2017

before the National Company Law Tribunal, Hyderabad Bench, Hyderabad

(hereinafter referred as 'NCLT') making various grievances regarding

oppression and mismanagement on the part of Respondents 2 and 3

helped by Respondent No.4 in the affairs of Respondent No.1 Company.

The Company Petition filed on 19th March, 2017 came to be dismissed by

Impugned Order dated 19.12.2017. Thus this Appeal.

(2) In short, the grievances raised by the Appellant can be stated to

be as follows:-

a) The Appellant and Respondent No.2 as well as Respondent No.5

incorporated the Respondent No.1 Company in 2003. At that time, their

Company Appeal (AT) No.08 of 2018 3

shareholding was:-

1. Appellant - 49.95% (5000 shares)

2. Respondent No.2 - 49.95% (5000 shares)

3. Respondent No.5 - 0.10% (10 shares)

b) In 2005 - 2006, 39,990 equity shares of Rs.10/- each were issued

to existing shareholders namely, the Appellant and Respondent No.2.

Respondent No.3 - wife of Respondent No.2 came to be substituted as

shareholder of the 10 shares held by Respondent No.5. The Annual

Returns of the Company for the year 2006 showed the shareholding as :-

1. Respondent No.2 - 49.99% (24,995 shares)

2. Appellant - 49.99% (24,995 shares)

3. Respondent No.3 - 0.02% (10 shares) (impugned transfer)

The Appellant claims that she came to know about such

substitution subsequently and thus impugned the induction of

Respondent No.3 - the wife of Respondent No.2 as holder of 10 shares in

place of Respondent No.5. According to her, because of the induction of

Respondent No.3 (the wife of Respondent No.2), the collective shareholding

of Respondents 2 and 3 couple (hereafter also referred as - "Respondents")

went beyond 50% of the total. In the Company Petition brought by the

Appellant, she questioned this issue of shares to Respondent No.3.

Company Appeal (AT) No.08 of 2018 4

c) The Appellant then in the Company Petition, impugned Board

Resolution calling for EOGM dated 30th September, 2015 to increase

authorized share capital of the Company and the EOGM held on 30th

September, 2015, by which authorized share capital of the Company was

increased from Rs.5 lakhs to Rs.15 lakhs. She challenged the distribution

of the shares after the EOGM (dated 30th September, 2015) in Board

Meeting said to have been held on 30th September, 2015 after the EOGM.

The division of shares done on 30th September, 2015 questioned by

Appellant is as under:-

1. Respondent No.2 - 39.08% (58615 shares)

2. Appellant - 28.58% (42,875 shares)

3. Respondent No.3 - 32.34% (48510 shares)

(Impugned transfer)

She has impugned the number of shares issued to Respondent

No.3 on the basis that there was no equitable distribution between the

shareholders and the shareholding of the Respondents 2 and 3 couple

went up to 71.42%. She also claimed that she had no Notice of any such

Board Meeting for distribution of the shares.

d) The Appellant claimed that there was yet another Board Meeting

Resolution dated 31.10.2016, to call EOGM on 25th November, 2016 to

further increase the authorized share capital from 15 lakhs to 40 lakhs.

She claimed that such calling of EOGM and holding of the same to increase

Company Appeal (AT) No.08 of 2018 5

the authorized share capital was illegal as well as the Board Meeting dated

26.11.2016 allotting shares to Respondent No.2 and to an outsider Shri

Mallesham Mekala - Respondent No.4 was illegal as according to her,

shares were issued to Respondent No.2 and Respondent No.4 by

preferential allotment and private placement basis without following the

necessary procedure. According to the Appellant, after the meeting dated

26.11.2016, the shareholding constituted as under:-

1. Respondent No.2 - 69.51% (2,08,615 shares)

2. Appellant - 14.29% (42,875 shares)

3. Respondent No.3 - 16.17% (48,510 shares)

4. Respondent No.4 - 0.03% (100 shares)

It is claimed by the Appellant that because of such illegal acts, the

Respondent Nos.2 and 3 couple illegally took over the control of the

Company to oust the Appellant by reducing her shareholding which was

initially 49.95% to just 14.29%.

e) In the Company Petition, there were pleadings of the Appellant to

say that she did not receive Notices for the various Board Meetings and

EOGMs. She pleaded that she had little knowledge regarding affairs of the

Company as the Respondent No.2 was Managing Director and taking care

of the affairs. According to her, she had no invitation for Board Meetings

and General Meetings. It was closely held company and in good faith,

Petitioner signed some papers given by the Respondent No.2. She claimed

Company Appeal (AT) No.08 of 2018 6

that it was understanding between the parties not to deviate from

shareholding without knowledge of the other party but Respondent No.2

violated the terms and conditions. The Company Petition claimed that the

Petitioner received Notice dated 04.03.2017 with regard to Board Meeting

dated 15.03.2017. She objected to the same vide letter dated 11.03.2017

questioning how Respondent No.4 could be regularized as Director and

how it was being proposed to remove her from the position of Director. The

Petitioner claimed that after she sent letter, Respondent No.2 talked to her

on phone and lured her with certain promises, which she has detailed in

the petition and according to her due to such promises she went for

attending the Board Meeting on 15.03.2017 but was not allowed to enter

into the venue of Board Meeting. The Company Petition claimed that the

Appellant - Petitioner then received Notice dated 15.03.2017 of EOGM to

be conducted on 10th April, 2017 with the agenda of removing her from the

post of Director. She then filed the Company Petition on 19.03.2017.

f) The Company Petition raised these aspects as acts of oppression

and mismanagement.

3. The Impugned Order shows (in para - 11) that NCLT had passed

Order dated 06.11.2017 inter alia directing not to give effect to Resolution

on the issue of removal of the Appellant as Director. The learned NCLT

while rejecting other claims of the Appellant regarding oppression and

mismanagement, on the basis that she had been attending the concerned

meetings, did not find fault even with the decision taken by Respondents

Company Appeal (AT) No.08 of 2018 7

to remove the Appellant from the post of Director and observed that the

Company was free to take appropriate decision according to law.

4. We have heard learned counsel for both sides and perused the

Impugned Order as well as the record placed before us. We proceed to take

up the various grievances raised making reference to the arguments and

recording our reasons and findings.

Substitution of Respondent No.3 in place of Respondent No.5 in 2005 - 2006

5. First is the issue raised by Appellant regarding substitution of

Respondent No.3 in place of Respondent No.5 who held 10 shares when

the Company was incorporated. Copy of the minutes of Board of Directors

dated 16th June, 2005 is at Page - 69 filed with the counter affidavit on

behalf of Respondents 1 and 2 (Diary No.3258). In this meeting, the

Appellant and Respondents 2 and 3 are shown as present. The Respondent

No.2 is shown as Managing Director and the Appellant and Respondent

No.3 are shown as Directors. The approval for transfer of shares appears

to have been recorded which states that P. Rama Krishna (Respondent

No.5) who was holding 10 shares has filed transfer deed. The Resolution

then records transfer of 10 shares to Respondent No.3.

5.1 This is an old Resolution of 2005 and Appellant who was full-time

Director for so many years even after 2005 did not question the transfer

till 2017. Respondent No.5 himself did not file any proceedings or complain

Company Appeal (AT) No.08 of 2018 8

to claim that he had not transferred the shares to Respondent No.3. In this

matter by Appellant, however, Respondent No.5 is supporting the

Appellant in the arguments. The grievances raised in this regard are

hopelessly delayed and do not merit consideration.

Increase of Share Capital from 5 Lakhs to 15 Lakhs and allotments

6. The next issue refers to the increasing share capital from Rs.5

lakhs to Rs.15 lakhs. The Statement No.2 below the Notice of Meeting

(Appeal - Annexure A-9 Page - 158) reads as under:

"2. Statement pursuant to section 102 of the Companies Act,

2013 relating to resolutions 1 to 3 under Special

Business:

It has been decided by the Board of Directors to enhance

the paid up capital of the Company by allotting shares to

the existing shareholders to the extent of share

application money contributed by them. This requires

enhancement of authorised capital. Keeping this in view

and also future requirements in mind the Board proposes

resolutions at 1 to 3 under Special Business of the notice

above.

The Directors are interested to the extent their

shareholding in the company and to the extent they may

participate in the further issue of them."

Company Appeal (AT) No.08 of 2018 9

7. Thus the Notice issued by Respondent No.2 under Orders of the

Board of Directors, itself mentioned and showed that there was share

application money lying and share capital was to be increased so as to allot

shares to the extent of share application money contributed. At the time of

arguments, the learned counsel for the Appellant submitted that the

Appellant is not disputing the fact that AGM dated 30th September, 2015

took place and there was increase in the share capital but according to

him, the Appellant was disputing the manner in which distribution of the

increased share capital was made. According to the counsel, the Appellant

had no Notice of alleged Board Meeting dated 30th September, 2015. To

recall, the Appellant had pleaded in the Company Petition that she had

merely signed documents given by Respondent No.2 in good faith. At Page

- 295, there is Board Meeting Resolution dated 30th September, 2015

which has signatures of the Appellant as Director along with the

Respondent No.2 as Chairperson. The first page of the Resolution mentions

that the AGM had been held on the same date and Resolution had been

passed regarding increase of share capital from Rs.5 lakhs to Rs.15 lakhs.

The other decision relates to allotment of equity shares which reads as

under:

"ALLOTMENT OF EQUITY SHARES:

The chairman further informed the Board that share

application money pending in the books of account since a

long time has to be allotted to the persons depositing the above

Company Appeal (AT) No.08 of 2018 10

money as per books. After due discussions it has been decided

to allot shares to the persons mentioned in the books under

share application money and the following resolution is

passed.

"Resolved that Equity Share Capital to the extent of the Share

Application money pending allotment as on 30/09/2015 be

allotted to persons in whose name the above share application

is pending for allotment. It is further resolved that Shri P.

Shekar, Director of the Company be and is hereby authorized

to sign in physical or digitally the various statutory forms and

documents as and when required to effect the above."

8. Along with minutes, there is chart at Page - 297 which inter alia

shows the number of shares held by the Appellant and Respondents 2 and

3 as on 30th September, 2015 before and after the allotment done on that

date. Respondents 1 and 2 have, with the counter affidavit, filed Annexure

R-4 (Page 71 - Diary No.3258) chart of share application money lying as

till then and shares allotted and balance to be allotted as on 30th

September, 2015.

9. The Appellant has questioned such allotment of shares after the

meeting on the basis that in the Annual Return of 2015 - 2016 which was

filed (copy of which is at Page - 120 of the Appeal), the entries relating to

Board Meetings held during the year (at Page - 130) did not mention

holding of Board Meeting dated 30th September, 2015. We find that this

Company Appeal (AT) No.08 of 2018 11

may be error as on the same page the document does refer to the AGM

dated 30th September, 2015. Apart from this, the Balance Sheet for the

year ending 31st March, 2016 (see Page - 184 to 187) does show the

allocation of the shares. This document bears signatures of the Appellant

along with Respondent No.2 authenticating the entries. At Page - 187 with

reference to the holdings which were more than 5%, the entries read as

under:

"Holding more than 5%

Particular 31-03-2016 31-03-2015 31-03-2014 No. of Shares No. of Shares No. of Shares

1. P. Shekar 58615 24995.00 24995

2. P. Malathi 42875 24995.00 24995

3. P.Salalitha 48510 0.00 0

"

10. Appellant is more aggrieved by shares allotted to Respondent No.3.

Looking to such documents signed by the Appellant herself, only by

turning around disowning contents saying that she signed in good faith is

not enough. The Appellant is stated to have been a full-time Director. When

this is so, official records cannot be simply wished away.

11. It has been argued by the learned counsel for the Appellant that

after passing of the Companies Act, 2013, Section 74 was introduced in

the New Act requiring repayment of deposits accepted before

commencement of the Act. According to him, the deposits received towards

Company Appeal (AT) No.08 of 2018 12

share application money were thus required to be refunded. The counsel

then referred to Notification No. GSR 241(E) (Appeal - Page 298) issued by

the Ministry of Corporate Affairs exercising powers under Sections 73 and

76, dated 31st March, 2015 which amended Companies (Acceptance of

Deposits) Rules, 2014 ("Deposit Rules" in short) relating to the acceptance

of deposits by the Companies. In the definition of "deposit" under Rule

2(1)(c) - (a) in sub-clause (vii), in Explanation (a), this Notification added

proviso. As per Clause (c) of the above Rules "deposit" includes any receipt

of money by way of deposit or loan or in any other form by a company, but

does not include the amounts as stated in the various Sub-Clauses

mentioned in the Rule. The amendment which was brought on 31st March,

2015 reads as under:-

"2. In the companies (Acceptance of Deposits) Rules,

2014.--

(1) in rule 2, in sub-rule (1), in clause (c).--

(a) in sub-clause (vii), in Explanation (a), the following

proviso shall be inserted, namely:--

"Provided that unless otherwise required under the

Companies Act, 1956 (1 of 1956) or the Securities and

Exchange Board of India Act, 1992 (15 of 1992) or rules

or regulations made thereunder to allot any share, stock,

bond or debenture within a specified period, if a

company had received any amount by way of

Company Appeal (AT) No.08 of 2018 13

subscriptions to any shares, stock, bonds or debentures

before the 1st April, 2014 and disclosed it in the balance

sheet for the financial year ending on or before the 31st

March, 2014 against which the allotment is pending on

the 31st March, 2015, the company shall, by the 1st June

2015, either return such amounts to the persons from

whom these were received or allot shares, stock, bonds

or debentures or comply with these rules."

12. The argument is that in view of this Proviso added, the Respondent

No.1 Company was required to allot the shares by 1st June, 2015 or else it

was required to return the amounts received from the persons for

allotment of the shares. It is argued that as shares were allotted on 30th

September, 2015, which was beyond 1st June, 2015 prescribed by the

above Proviso, the acts committed by the Respondents were not

maintainable.

13. We recall that the Appellant herself has been party to such

Resolutions being passed and also the allotment of shares in which she

was herself a beneficiary. Her grievance is only regarding the division.

Apart from this, the Rules of 2014 in Rule 21 prescribe for punishment for

contravention and if there has been a contravention the learned Registrar

of Companies would be duty bound to look into the same. There is no

dispute that the share application money was lying with the Company and

in view of Section 74 of the New Companies Act, 2013, read with window

Company Appeal (AT) No.08 of 2018 14

opened by the above Notification, Company was required to act - either

return the money - or allot shares. The Company took decisions (may be,

late) as mentioned above and against the share application monies

received the shares were allotted. The Appellant who was herself party to

the acts cannot be heard questioning the same. R.O.C. however, will have

option to take action deemed fit regarding violating Deposit Rules.

14. The learned NCLT discarded the claim of the Appellant with

reference to the EOGM held on 30th September, 2015 and subsequent

allocation of the shares on the basis of share application monies which

had been received. We do not find any reason to interfere with this part of

the Judgement of the learned NCLT.

Further increase of Share Capital from 15 Lakhs to 40 Lakhs and allotments

15. The 3rd issue relates to Respondents holding Board Meeting dated

31st October, 2016 and calling of EOGM on 25th November, 2016 to further

increase the share capital from 15 lakhs to 40 lakhs and then in Board

Meeting dated 26.11.2016 allocating of 1,50,000 shares to Respondent

No.2 "at par" and also issuing 100 shares "at par" to Respondent No.4 who

was admittedly an outsider.

16. Regarding this Annexure A6 Form No. MGT - 14 (Page - 144 of

Appeal), shows reference to Notice dated 31st September, 2016 and

Resolution dated 25th November, 2016 with the subject being increase of

share capital from 15 lakhs to 40 lakhs and alteration of Memorandum of Company Appeal (AT) No.08 of 2018 15

Association. Annexure A-7 (Page - 148) is Return of allotment in Form PAS

- 3 showing allotment of equity shares pari passu with existing shares.

Then there is Annexure A-8 From No.DIR-12 (Page - 153) with reference to

appointment of Respondent No.4 as Additional Director on 26.11.2016.

17. In this regard, learned PCS for the Respondents referred to Page -

261 of the appeal which is Attendance Sheet of the Board of Directors dated

31st October, 2016. It includes the Appellant and her signature. The

minutes of the Board of Directors meeting dated 31st October, 2016 are at

Page - 262 regarding presence of the Appellant. The Board resolved

regarding EOGM required to be called for increasing the share capital from

15 lakhs to 40 lakhs. Page - 300 is the Attendance Sheet of the members

in the EOGM dated 25th November, 2016. The Appellant was present even

in this EOGM as per the Attendance Sheet. The minutes of the said

meeting are at Page 301 which shows that the authorized share capital

was increased from 15 lakhs to 40 lakhs. Regarding allotment of the equity

shares, the Resolution was as under:-

"3. ALLOTMENT OF EQUITY SHARES

RESOLVED THAT pursuant to 62(1)(c) and other applicable

provisions, if any, of the Companies Act, 2013, the Board of

Directors be and is hereby authorized to issue 2,50,000 (Two

Lakhs Fifty Thousands) equity shares of Rs.10/- (Rupees Ten)

each the company by way of private placement or preferential

allotment, whether at par or at premium and such shares be

Company Appeal (AT) No.08 of 2018 16

offered to any person whether members of the company or not,

as the Board of Directors may deem fit."

18. Then there is Attendance Sheet of the Board of Directors meeting

dated 26th November, 2016 which is at Page - 264 of the Appeal. This

document also shows presence of the Appellant and she is signatory. The

Minutes of the Board of Directors meeting dated 26th November, 2016 are

at Page 265. Regarding allotment of equity shares, the Resolution was as

under:

"ALLOTMENT OF EQUITY SHARES OF THE COMPANY

The Chairman informed the Board that the Company has

received share application money from applicants of the

Company towards the Share Capital. The Board discussed

further and passed the following resolutions unanimously.

"RESOLVED THAT the consent of the Board be and is hereby

accorded for the allotment of 1,50,100 (One Lakh Fifty

Thousand One Hundred) Equity Shares of face value of

Rs.10/- (One Ten Only) each at par per share aggregating to

Rs.15,01,000/- (Rupees Fifteen Lakhs One Thousand) to the

applicant mentioned below from whom the money had been

received by the Company and the entries be made in the

Register of Members of the Company."

Company Appeal (AT) No.08 of 2018 17

S Name & Address No. of Amount Face No. Occupation Shares Rs. Value of allottee per Share in Rs.

1 Sekhar S/o. Narayana 1,50,000 15,00,000 10/-

Pendam Pendam,

Occ: Plot Business No.14,Prasanna Apts, D-5 Saibaba Colony, Sitarampur, Bowenpally Secunderabad 500011 2 Mallesha M S/o. Laxman 100 1000 10/- Mekala Mekala,

H.No.1-3-47/1, Occ: Shanti Nagar, Business Peddapalli, Karimnagar, Telengana - 505172 TOTAL 1,50,100 15,01,000 "

19. The Respondent No.4 was thus allotted 100 shares at par along

with 1,50,000 shares allotted to Respondent No.2 at par.

20. In this regard, the Appellant has raised legal issue regarding the

procedure adopted for raising the share capital from 15 lakhs to 40 lakhs

and then allotment of shares on preferential basis and private placement

basis.

21. The learned PCS for Respondents 1 to 4 pointed out the

documents relating to Board Meeting Resolution dated 31.10.2016,

Company Appeal (AT) No.08 of 2018 18

Resolution of EOGM dated 25.11.2016 and Resolution of Board Meeting

dated 26.11.2016 to show presence of the Appellant in these meetings.

However, one of the grievances of the Appellant is that she did not have

notice of these meetings. It may be noted that by the time these meetings

came about, Respondent 2 and 3 had already firmed up their position after

the enhancement of share capital from Rs.5 lakhs to Rs.15 lakhs. Thus,

the Appellant by this time, may not have been in that asserting position.

As it appears from records that these meetings were called with the object

of resorting to Section 62(1)(c) of the new Act, certain procedural

requirements were required to be complied which included Notice in

particular format (which we will refer [infra]). We need to mention here

itself that Notice complying with procedural requirements for increasing

subscribed capital and further issue under Section 62(1)(c) of the new Act

have neither been brought to our Notice by the learned PCS for the

Respondents nor proof of service of such Notice on the Appellant has been

shown.

22. In this regard, the learned counsel for the Appellant has submitted

that for making preferential allotment under Section 62(1)(c) of the new

Act, it is necessary that Valuation Report of registered Valuer is obtained

before any such issue can be there. According to the counsel, Section

62(1)(c) permits passing of such Resolution and issue of shares on

preferential basis if the price of the shares has been determined by the

Valuation Report of the registered Valuer and it is further subject to such

Company Appeal (AT) No.08 of 2018 19

conditions as may be prescribed. According to the counsel in this regard,

the legislature has passed "Companies (Share Capital and Debentures)

Rules, 2014" ("Rules of 2014" in short) and procedure has been prescribed

under Rule 13. It is also submitted by the learned counsel that the Rules

further require compliance with provisions of Section 42 of the Act.

According to him, neither these Rules nor provisions of Section 42 of the

new Act were complied to increase this subscribed capital by issue of

further shares nor preferential allotment was made to Respondent No.2

complying the provisions and the procedures were not followed for private

placement when at par shares were issued to Respondent No.4, an outsider

by picking him up and allotting shares at par. The counsel argued that

there is nothing to show as to how Respondent No.4 was picked up for

preferential allotment of shares at par. This being legal issue, we have

heard parties with regard to the same and take it up for consideration.

23. The Judgement of the learned NCLT does not appear to have gone

into these details regarding increase of share capital from 15 to 40 lakhs

and allotments as the Judgement shows that while dealing with the

increase of share capital from 5 to 15 lakhs on 30th September, 2015, the

learned NCLT collectively dealt with the subject even with regard to EOGM

dated 25.11.2016 and while observing that the Appellant was party, did

not deal with the other details and legality. The raising of share capital

with reference to EOGM dated 30th September, 2015 was in the context of

allotment of shares to existing members considering the share application

Company Appeal (AT) No.08 of 2018 20

money pending which appears to have become necessary in view of the

amendments in the Act of 2013. But the raising of authorized share capital

in EOGM dated 25th November, 2016 and the subsequent allotment of

shares are on different footing. The portions which we have extracted from

the EOGM, minutes of 25th November, 2016 and the portion extracted from

Board Meeting dated 26.11.2016 which we have reproduced above shows

that the Respondents 2 and 3 who by now had become majority

shareholders were now aiming at Section 62(1)(c) for making private

placement as well as preferential allotments (to themselves) and thus

brought about these resolutions. Section 62(1) of the new Companies Act

as at the time concerned read as under:-

"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:--

(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

Company Appeal (AT) No.08 of 2018 21

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 disadvantageous 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

Company Appeal (AT) No.08 of 2018 22

shares is determined by the valuation report of a

registered valuer subject to such conditions as may be

prescribed."

24. Thus, as per Sub-Clause (c) of Sub-Section (1) of Section 62, if the

shares are to be issued to any person who is not included in Clause (a) or

Clause (b) it can be done provided the pricing of such shares is determined

by the valuation report of a registered Valuer. The provision is further

subject to such conditions as may be prescribed. Admittedly, in the present

matter, there is nothing to show that any report of registered Valuer was

taken to issue shares on preferential basis at par to Respondent No.2 or at

par to Respondent No.4 who was an outsider. Again the Resolution

adopted in the EOGM dated 25th November, 2016 would require a Board

of Directors Resolution whether to issue the shares "at par or at premium".

There is nothing to show that there was any deliberation or decision in the

Board Meeting of 26.11.2016 to issue the shares at par or at premium.

25. Learned counsel for the Appellant argued that Rule - 13 of the

Companies (Share Capital and Debentures) Rules, 2014 which came into

force on 01.04.2014 and as it stood at the time of present allotments

requires:

"Issue of shares on preferential basis

13. (1) For the purposes of clause (c) of sub-section (1) of

section 62, if authorized by a special resolution passed in a

Company Appeal (AT) No.08 of 2018 23

general meeting, shares may be issued by any company in any

manner whatsoever including by way of a preferential offer, to

any persons whether or not those persons include the persons

referred to in clause (a) or clause (b) of sub-section (1) of

section 62 and such issue on preferential basis should also

comply with conditions laid down in section 42 of the Act:"

[Emphasis supplied]

26. The explanation below Sub-Rule (1) and, inter alia, material

portions of Sub-Rule (2) of the above Rule - 13 are reproduced as under:-

"Explanation.-- For the purpose of this rule,

(i) the expression 'Preferential Offer' means an issue of

shares or other securities, by a company to any select person

or group of persons on a preferential basis and does not

include shares or other securities offered through a public

issue, rights issue, employee stock option scheme, employee

stock purchase scheme or an issue of sweat equity shares or

bonus shares or depository receipts issued in a country

outside India or foreign securities;

(ii) the expression, "shares or other securities" means

equity shares, fully convertible debentures, partly convertible

debentures or any other securities, which would be convertible

into or exchanged with equity shares at a later date.

Company Appeal (AT) No.08 of 2018 24

(2) Where the preferential offer of shares or other

securities is made by a company whose share or other

securities are listed on a recognized stock exchange, such

preferential offer shall be made in accordance with the

provisions of the Act and regulations made by the Securities

and Exchange Board, and if they are not listed, the preferential

offer shall be made in accordance, with the provisions of the

Act and rules made hereunder and subject to compliance with

the following requirements, namely:-

(a) the issue is authorized by its articles of association;

(b) the issue has been authorized by a special

resolution of the members;

[(c) ***]

(d) The company shall make the following disclosures

in the explanatory statement to be annexed to the notice of the

general meeting pursuant to section 102 of the Act.

(i) the objects of the issue;

(ii) the total number of shares or other securities to be

issued;

(iii) the price or price band at/within which the

allotment is proposed;

Company Appeal (AT) No.08 of 2018 25

(iv) basis on which the price has been arrived at along

with report of the registered valuer;

(v) relevant date with reference to which the price has

been arrived at;

(vi) the class or classes or persons to whom the

allotment is proposed to be made;

(vii) intention of promoters, directors or key managerial

personnel to subscribe to the offer;

(viii) the proposed time within which the allotment shall

be completed;

(ix) the names of the proposed allottees and the

percentage of post preferential offer capital that

may be held by them;

(x) the change in control, if any, in the company that

would occur consequent to the preferential offer;

(xi) the number of persons to whom allotment on

preferential basis have already been made during

the year, in terms of number of securities as well

as price;

(xii) the justification for the allotment proposed to be

made for consideration other than cash together

with valuation report of the registered valuer."

[Emphasis supplied]

Company Appeal (AT) No.08 of 2018 26

*** (Omitted w.e.f. 19.07.2016)

27. The Rule further requires disclosure on pre issue and post issue

position of shareholding pattern of the company in the format prescribed

in the Rule which has to be part of the explanatory statement to be

annexed to the Notice. Under Sub-Rule (2) there are further requirements

as specified under 2(e) to (j).

27.1 Thus, if the Company having a share capital proposes to increase

its subscribed capital by issue of further shares and such shares are to be

offered to any persons as covered under Section 62(1)(c), the above Rule

lays down conditions for such actions. The Rule also requires complying

with Section 42 of the new Act. (In fact, Companies (Amendment) Act,

2017, w.e.f. 09.02.2018 has further amended Section 62(1)(c) to require

compliance with applicable provisions of Chapter III (which includes

Section 42) of New Act - making object of Legislature more clear). Section

42 deals with offer or invitation for subscription of securities on private

placement. There are various compliances required to be done. As per Sub-

Section (1) of Section 42 without prejudice to provisions of Section 26, a

Company may, subject to the provisions of Section 42, make private

placement through issue of private placement offer letter. Explanation II

below Sub-Section (2) of Section 42 in Clause (ii) explains "private

placement" as under:-

"(ii) "private placement" means any offer of securities or

invitation to subscribe securities to a select group of

Company Appeal (AT) No.08 of 2018 27

persons by a company (other than by way of public offer)

through issue of a private placement offer letter and

which satisfies the conditions specified in this section."

28. Sub-Section (5) of Section 42 reads as under:-

"(5) All monies payable towards subscription of

securities under this section shall be paid through cheque

or demand draft or other banking channels but not by cash."

29. Sub-Section (7) of Section 42 is as follows:-

"(7) All offers covered under this section shall be

made only to such persons whose names are recorded by

the company prior to the invitation to subscribe, and that

such persons shall receive the offer by name, and that a

complete record of such offers shall be kept by the company

in such manner as may be prescribed and complete

information about such offer shall be filed with the Registrar

within a period of thirty days of circulation of relevant

private placement offer letter."

30. "Companies (Prospectus and Allotment of Securities) Rules, 2014"

requires under Rule 14 dealing with private placement that for the

purposes of Sub-Section (1) of Section 42, a company may make an offer

or invitation to subscribe the securities through issue of a private

Company Appeal (AT) No.08 of 2018 28

placement offer letter in format PAS 4. There are further compliances

specified in this Rule.

31. If the present matter is perused, the Minutes of Board Meeting

dated 26th November, 2016 show the Company taking Resolution to file

Return of allotment in E-Form PAS-3. As mentioned, this Return of

allotment is at Annexure A-7 of the Appeal. Form PAS-3 is pursuant to

Section 39(4) and 42(9) of the Companies Act, 2013 and Rule 12 and 14 of

Companies (Prospectus and Allotment of Securities) Rules, 2014. Thus,

the Respondents cannot deny the applicability of Section 42 of new Act.

Sub-Section (9) of Section 42 required the Company making allotment of

securities under Section 42 to file with the Registrar, Return of allotment

in the manner prescribed. When this is so, the contesting Respondents 2

and 3 have not shown issue of Notice making disclosures in the

explanatory statement to be annexed to the Notice of the General Meeting

as detailed in Rule 13(2) of the Rules of 2014. There is no material to show

that value of the shares was got fixed. The Respondent Nos.2 and 3 -

husband and wife who were by this time in a better controlling position

compared to the Appellant in the Board Meeting, simply issued large

number of shares to Respondent No.2 by way of preferential allotment and

that too at par.

32. If Notice as required by Rule 13(d) of the Rules of 2014 has not

been issued along with the disclosures as mentioned in the Rule,

preferential allotments cannot be made as permitted by Section 62(1)(c) of

Company Appeal (AT) No.08 of 2018 29

the new Act. The Notice is mandatory and compliances required as per the

Rule would have to be shown as done before the General Body Meeting.

The Respondents have not shown either compliances or issue of such

Notice along with disclosures nor service of such Notice on the Appellant.

33. Nothing is shown as to how Respondent No.4, an outsider, was

selected for making private placement of shares to him and that too at par.

Looking to Section 42 as well as Section 62(1)(c) of the new Act read with

the Rules mentioned above, it appears necessary that before decision is

taken for allotment by way of private placement, it would be necessary to

follow the procedure of selecting the person/s to whom issue of private

placement offer letter is to be made and then further comply with

provisions of Section 42. If this is done, it would reflect in decision of

General Body. In present matter, this does not appear to be there. Again

the Board of Directors Resolution dated 26.11.2016 (Page - 265) does not

show how money had been received and if Section 42(5) had been

complied. Records do not show that for Respondent No.4, compliances as

per Section 42(7) had been made.

34. For the view, we are taking, need to discuss further arguments of

parties regarding Board Meetings dated 31.10.2016 and 26.11.2016 and

EOGM dated 25.11.2016 is not there.

35. We find Respondents 2 and 3 to have acted in an oppressive

manner with the Appellant, when such Board Meetings dated 31.10.2016

Company Appeal (AT) No.08 of 2018 30

and 26.11.2016 and EOGM dated 25.11.2016 were conducted. Acting on

the basis of their majority shareholding, Respondents 2 and 3 went ahead

with the EOGM against the provisions of law and made preferential

allotment of shares to Respondent No.2 and private placement of shares

was made to Respondent No.4, an outsider. Having gained in numbers in

such manner and having brought in Respondent No.4 with token shares,

Respondents 2 and 3 appear to have then proceeded to get rid of

directorship of Appellant. Thus, calculatively, Appellant was oppressed. In

the process, Company was mismanaged by illegal increase and

distribution of capital. Winding up of the Company would unfairly

prejudice the Appellant who is a member, but otherwise the facts justify

the making of a winding up order on the ground that it is just and equitable

that the Company should be wound up.

36. We pass the following order:-

A. We hold that the Board Meeting Resolutions dated

31.10.2016 and 26.11.2016 and the Resolution of

EOGM dated 25.11.2016 cannot be maintained

regarding increase of share capital and the

allotments made. These Resolutions are quashed.

The increase of share capital from Rs.15 lakhs to

Rs.40 lakhs and the subsequent allotment of shares

to Respondent Nos.2 and 4 are quashed and set

aside.

Company Appeal (AT) No.08 of 2018 31

B. Consequent to the above directions, further steps

taken by Respondents 2 and 3 to induct Respondent

No.4 as Director and the Resolution taken pending

litigation to remove the Appellant from the post of

Director, are also quashed and set aside.

C. Respondents 2 and 3 are directed to refrain from

indulging in oppressive acts and mismanagement as

mentioned in this Judgement.

D. The appeal is thus partly allowed as above.

Respondents 2 and 3 shall each pay costs of Rs.1

lakh, from their own funds, to the Appellant.

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

[Balvinder Singh] Member (Technical)

New Delhi

24th July, 2018

/rs/nn

Company Appeal (AT) No.08 of 2018