Venkat Sudhakar Sattur vs Dictasol (India) Pvt. Ltd. & Ors

IN THE MATTER OF: Before NCLT Before NCLAT

Venkat Sudhakar Sattur S/o Late Appa Rao, 9-2-12/1, MIG-4/2, Pithapuram Colony, Vishakhapatnam 530003. 1st Petitioner 1st Appellant

Vs

1. Dictasol (India) Pvt Ltd HIG-33, 5th Phase, KPHB Colony, Hyderabad 500072 Andhra Pradesh 1st Respondent 1st Respondent

2. Mr. Ramakrishna Reddy Raya, S/o Rosi Reddy Raya, HIG-76, 5th Phase, KPHB Colony, Hyderabad 500072 Andhra Pradesh 2nd Respondent 2nd Respondent

3. Mr. Eturi Jageswara Rao, S/o Eturi Venkata Ramana, H.No. 1-58/A & 1-58/B, F-303, Earthcon Future Plaza, Madinaguda, Hyderabad-500072 Andhra Pradesh 3rd Respondent 3rd Respondent

4. Mrs Sushma Arisetty, W/o Eturi Jagdeswara Rao, H.No.1-58/A & 1-58/B, F-303, Earthcon Future Plaza, Madinaguda, Hyderabad-500072. Andhra Pradesh 4th Respondent 4th Respondent

Company Appeal (AT) No.365 of 2017 2

5. AMK Holdings Limited, S.A. CP 32, 1294 Genthod, Switzerland. 5th Respondent 5th Respondent

6. MR. Kanwaljith Singh Bharj, S/o Pritam Singh Bharj, Chemin de La Pralay 13 Genthod 1294 6th Respondent 6th Respondent

7. Mr. Roland Francois Ferdinand Farina S/o Antonio Farina, Chemin De La Tour-De-Chempel 6, Geneva, 1206 7th Respondent 7th Respondent

For Appellant:- Dr. K.S. Ravichandran, PCS and Ms S. Manjula Devi, Advocate.

For Respondents: - Mr. B.V. Satish Kumar, Advocate and Mr. N. Sudheer, PCS.

JUDGEMENT

BALVINDER SINGH, MEMBER (TECHNICAL)

The appellant, original petitioner, have filed this appeal, under Section

421 of the Companies Act, 2013, being aggrieved by the impugned order

passed in CP No.03/2012 (TP No.61/HDB/2016) filed in National Company

Law Tribunal, Division Bench, Hyderabad Bench, Hyderabad (NCLT in short)

whereby the Company Petition has been dismissed vide impugned order dated

29.8.2017.

2. 1st appellant filed the company petition under Section

111/397/398/402/403 of the Companies Act, 1956 originally before the

Company Law Board and later on the matter was transferred to NCLT,

Hyderabad Bench.

Company Appeal (AT) No.365 of 2017 3

3. The brief facts of the case are that 1st respondent company was

incorporated on 8.9.2009. The capital structure of 1st respondent as at 31st

March, 2011 is as under:

Authorised Capital Rs.5,00,000/- equity shares of Rs.10/- each.

Issued, subscribed and paid up Rs.1,00,000/- equity shares of Capital. Rs.10/- each.

The shareholding pattern of the 1st respondent company was as under:

S.No. Name No.of shares Value of the Status in the shares in Rs. Appeal 1 Mr. Venkat 9,900 99000 1st appellant Sudhakar Sattur 2 Mr Rakakrishna 100 1,000 2nd Reddy Raya Respondent Total 10,000 1,00,000

4. 1st appellant is the founder, chief promoter and majority shareholder

(99%) of 1st respondent which is handling the back office services like Finance

& Accounts, HR, Legal transcription, Call handling and Scanning and

Archiving works of the UK based company viz Duncan Lewis, London, UK. 1st

appellant and 2nd respondent are the promoters and subscribers to the

Memorandum of Association of the Company. Both were the first directors

and shareholders of the 1st respondent as per Article 30 of the Articles of

Association of the 1st respondent. 1st appellant has been the Managing

Director of 1st respondent since its incorporation.

5. It is stated that until the impugned allotment of shares to 2nd to 4th

Respondent on 27th October, 2011, this position continued. 3rd Respondent

was inducted as a director on 20th February, 2010 only by virtue of an

Company Appeal (AT) No.365 of 2017 4

arrangement made by the 1st appellant to meet requirements during his

absence from India.

6. The Annual General Meeting for the year 2010 was not conducted at

all. 2nd and 3rd Respondent signed the account got it audited also.

7. 2nd and 3rd respondent had apparently colluded with each other and

filed Form 32 on 18.10.2011 alleging cessation of directorship of the 1st

appellant with effect from 20.01.2011 on account of non-attending three

Board Meetings dated 20.5.2010, 27.8.2010 and 10.11.2010.

8. On 27th October, 2011 the Board Meeting was held and in the said

meeting 40,000 equity shares of Rs.10/- each totalling Rs.4,00,000/- were

allotted to 2nd to 4th Respondent. The particulars whereof are given below:

S.No. Name of Allottee No.of shares Value of the Status in the shares in Rs. Appeal 1 Mr. Ramakrishna 10,000 1,00,000 2nd Reddy Raya Respondent 2 Mr Jagdeshwara 20,000 2,00,000 3rd Respondent 3 Ms Sushma Arisetty 10,000 1,00,000 4th Respondent Total 40,000 4,00,000

After the allotment of the above shares to the 2nd to 4th respondent, the

shareholding pattern of the 1st respondent company as on 27.10.2011 is as

under:-

S.No. Name of New No.of Total Percentage Status in Allottee shares shares of shares the appeal allotted (existing + new shares) 1. Venkat Nil 9900 19.8% 1st Sudhakar approx. appellant Sattur 2 Ramakrishna 10000 10100 20.2% 2nd Reddy Raya respondent

Company Appeal (AT) No.365 of 2017 5

3. Mr Eturi 20000 20000 40% 3rd Jageswara respondent Rao 4 Ms Sushma 10000 10000 20% 4th Arisetty respondent Total 40000 50000 100%

As a result of the above, the stake of the 1st appellant was reduced from

99% to 19.8%.

9. The Respondent called and held the AGM for 2011 on 25th November,

2011. 1st appellant received notice for AGM on 2nd November, 2011 and he

immediately issued letter dated 11th November, 2011 and stated that the AGM

2011 is unauthorised, invalid and illegal due to several reasons. Notice for

AGM was not a proper notice. Further there was no valid Board of Directors

existing at the relevant time for calling of the AGM not to speak about

approving and authenticating the financial statements for the year 2010-11.

10. Subsequently the authorized capital of the Company has been

increased from Rs.5,00,000/- to Rs.50,00,000/- (500000 shares) in the EGM

held on 7th December, 2011.

11. 1st appellant levelled allegations of threatening him by respondents and

one of his relatives Mr. Sridhar to transfer his shareholding to others. 1st

appellant attended the AGM 2011 and marked his attendance by showing his

protest and asked for copy of the audited accounts which was not provided to

him. On 21st December, 2011 Board Meeting was held and 269634 shares

has been allotted to 5th Respondent. Again on 16.1.2012 Respondent No.5

was allotted 180166 shares on 16.1.2012. The said allotment was further

made to reduce the shareholding of 1st appellant. The shareholding pattern

Company Appeal (AT) No.365 of 2017 6

after allotment of 269634 shares on 21.12.2011 and 180166 shares on

16.1.2012 to 5th respondent is as under:

S.No. Name of New No.of Total Percentage Status in Allottee shares shares of shares the appeal allotted (existing + new shares) 1. Venkat Nil 9900 1.98 1st Sudhakar appellant Sattur 2 Ramakrishna Nil 10100 2.2% 2nd Reddy Raya respondent 3. Mr Eturi Nil 20000 4% 3rd Jageswara respondent Rao 4 Ms Sushma Nil 10000 2% 4th Arisetty respondent 5. AMK 269834 + 450000 90% 5th Holdings Ltd 180166= Respondent 450000 Total 450000 500000 100%

12. 1st appellant issued letter dated 11.11.2011 under Article 31 of the

Articles of Association to five directors. However, when 1st appellant wrote

letter dated 11.11.2011, 1st appellant was not aware that he was removed

from the directorship of the 1st appellant by 2nd and 3rd respondent.

13. Thereafter the authorised share capital of the 1st respondent company

was increased from Rs.50 lakhs (500000 shares) to Rs.1,00,00,000 (1000000

shares) on 24.1.2012 and further 3,30,000 shares were allotted to

Respondent No.5 and thereafter further 168448 shares were allotted to

Respondent No.5 on 6.6.2013. The shareholding pattern of 1st respondent

after allotment of 498448 shares (33000+168448 shares =498448 shares) as

on 6.6.2013 is as under:-

Company Appeal (AT) No.365 of 2017 7

S.No. Name of New No.of Total Percentage Status in Allottee shares shares of shares the appeal allotted (existing + new shares)

1. Venkat Nil 9900 0.99 1st Sudhakar appellant Sattur 2 Ramakrishna Nil 10100 1.01% 2nd Reddy Raya respondent

3. Mr Eturi Nil 20000 2% 3rd Jageswara respondent Rao 4 Ms Sushma Nil 10000 1% 4th Arisetty respondent

5. AMK 330000 + 948448 95% 5th Holdings Ltd 168448= Respondent 498448 Total 498448 998448 100%

14. Therefore, 1st appellant filed company petition alleging oppression and

mismanagement in the year 2012 before the Company Law Board, Chennai.

Later on it was transferred to NCLT, Hyderabad Bench and numbered as TCP

No.61/HDB/2016. During the pendency of the company petition, further

allotment of shares to Respondent No.5 and transfer of shares from 2nd, 3rd,

4th to 5th respondent, resignation of 3rd respondent and appointment of 6th

and 7th respondent as directors was done. Respondents filed their reply. After

hearing the parties, the Tribunal passed the impugned order dated 29.8.2017.

Relevant portion of the impugned order is as under:-

"So far as the enhancement of the Authorised share capital of the Company is concerned, the petitioner was given due notice of the all meetings during EGMs. After giving due notice only, the impugned allotment of shares consecutively was done and the same cannot be found fault with. The petitioner utterly failed to substantiate various material allegations made in the Company Petition. The Petitioner still has not shown any interest in running the affairs of the Company, except making wild allegations against the Company, which is giving employment to more than 100

Company Appeal (AT) No.365 of 2017 8

employees and their families. The petitioner as stated supra, had employment in UK and still he had not shown any interest in running the affairs of the Company though he is invited for the same as stated supra.

19. As stated supra, the respondents have shown their bonafide by their willingness to allot as many shares to the petitioner to subscribe at nominal value of a share, or Sell all the respondents' shares to the petitioner at a fair value, or Buy all the petitioner's shares at a fair value. Any way, it is for petitioner and respondents to settle their issue mutually and we are not expressing anything on this offer.

20. After perusing all the records especially with regard to conducting of meetings of Board where, the petitioner was absent, we are convinced that the petitioner was terminated his Directorship in accordance with law. We are of the view that as per Law, managing Director of a company should be available in the Country to take care of day to day affairs etc. It is relevant to point out here that the petitioner claimed that he is also promoter and Managing Director of the Company. So if he is MD of the Company, he is not expected to live in the other Country unlike a Director. The petitioner failed to make out any case so as to interfere in the case and this it is liable to be dismissed.

21. In view of the above facts and circumstances of the case, the Petitioner has miserably failed to make out even a prima facie case, so as to invoke provisions of Section 111, 297/398, 402, 403 of Companies Act, 1956. Therefore, we hereby dismissed the Company Petition bearing CP No.03 of 2012 (TP No.61/HDB/2016) with a cost of Rs.50,000/- (Rupees Fifty thousand only), which is to be paid by the petitioner to Mr. Ramakrishna Reddy Raya and Mr. E. Jagadeshwara Rao (Respondent No.2 and 3 respectively) within a period of three weeks from the date of order."

15. Being aggrieved by the said order the 1st appellant have filed the present

appeal.

16. 1st appellant has stated that he is the founder and the life time director

as per Article 30 of the Article of Association of 1st respondent (Page 269). 1st

appellant further stated that 2nd respondent just holds 100 shares (1%) as

per Memorandum of Association at Page 263.

Company Appeal (AT) No.365 of 2017 9

17. 1st appellant further stated that no notices were issued for those alleged

meetings and no proof was produced despite sufficient opportunity.

Respondents have only produced some computer printout of the notices

which lets the cat out of the bag.

18. 1st appellant stated that on 20.1.2011, a meeting was held in which the

cessation of directorship of appellant was taken note of but the Form 32 was

filed only on 17.10.2011(Page 374), which was 10 days prior to the impugned

allotment of shares made on 27.10.2011. 1st appellant stated that the only

purpose is to allot shares out of unissued shares and create sufficient number

of members and stake to do away with the power of appellant even in general

meetings.

19. 1st appellant admitted that a Board Resolution on 20.5.2010 was signed

by him and was used by the 1st respondent before the Department of

Telecommunications (Page 529).

20. 1st appellant submitted that he has not acted in any manner prejudicial

to the interest of the 1st respondent. 1st appellant stated that the appellant,

respondents and statutory auditor of 1st respondent have been corresponding

through email almost on a daily basis (Page 387-406)

21. 1st appellant stated that when he was the promoter with 99% stake,

respondents who have no stake could not have done anything worse than this

to achieve a collateral purpose.

22. 1st appellant stated that after his unceremonious and malicious

removal, 10000 shares were allotted to 2nd respondent, 20000 shares to 3rd

respondent and 10000 shares to 4th respondent (Page 379) on 27.10.2011.

1st appellant stated that this date i.e. 27.10.2011 was chosen after creating

Company Appeal (AT) No.365 of 2017 10

records and filing of Form 32 on 17.10.2011 for the alleged cessation of

directorship of appellant. 1st appellant submitted that any allotment of shares

made without the consent of 99% shareholder in any company is

unimaginable and is per se oppressive. 1st appellant stated that the board

constituted by 2nd and 3rd respondent to make this allotment is invalid board

as 3rd respondent has lost his directorship on the date of AGM as he was not

appointed at the AGM (Page 278). Further by allotting 40000 shares to

themselves and 4th respondent being the wife of 3rd respondent is perfectly a

violation of fiduciary duties and breach of trust. No proof was furnished to say

that this sum of money was urgently in need. Even if there was a need

appellant should have had the opportunity to use is Right to subscribe to

additional shares.

23. 1st appellant submitted that the authorised capital consisted of 40000

unissued shares. Therefore, the Respondents have chosen to allot 40000

shares. Anymore allotment would have necessitated calling a general meeting

to increase the authorised share capital. As the appellant with 99% and the

2nd respondent with 1% are only two shareholders prior to this impugned

allotment on 27.10.2011, the question of the Respondents calling general

meeting and forming a quorum and passing resolution without consent of

appellant does not arise. 1st appellant submitted that between March 2010

to October 2011 with more than 18 months of the operations of the company

having been carried on without this sum of Rs.4 lakhs it is exceedingly clear

that the allotment is oppressive and has been done with a malicious motive.

24. 1st appellant submitted that 3rd respondent is not validly continuing in

office. 3rd respondent was appointed on 20.02.2010. 1st appellant stated that

Company Appeal (AT) No.365 of 2017 11

as per Article 32 of the Articles of Association, the person can only be

appointed as an Additional Director or alternate director. The word "co-opting

means appointing as additional director as per the corporate practice (Page

269). 1st appellant stated that without any enabling provision in the articles

of association the Board of a Company cannot appoint a director otherwise

than by way of an additional director. 1st appellant stated that the contention

of the Respondents would have been valid if as required under Section 255 of

the Act. In the absence of such provision in the Articles and in view of specific

language of Article 32 the appointment of 3rd respondent is only by way of

additional director.

25. 1st appellant stated that Section 260 of the Act very clearly establishes

that a person appointed as an Additional Director will continue office only

until the date of AGM. The notice of AGM for 2010 (Page 296) obviously does

not contain any agenda for appointing 3rd respondent as a regular director.

1st appellant submitted that continuation of 3rd respondent after 26.9.2010 is

invalid and he could not legally be forming part of any Board Meeting

thereafter, more particularly the meetings allegedly held on 10.11.2010,

20.01.2011 and 27.10.2011.

26. 1st appellant stated that the validity of the acts of directors as stated in

Section 190 of the Act will not apply to actions purported by 3rd respondent

was not in good faith and in violation of his fiduciary duties. Therefore, any

resolution passed with 3rd respondent forming quorum will have to be set

aside.

27. 1st appellant stated that the AGM 2010 was held without valid notice to

the appellant and in view of the invalidity of the impugned allotment made on

Company Appeal (AT) No.365 of 2017 12

27.10.2011 to 2nd, 3rd and 4th respondent, the quorum for the AGM 2011 with

the presence of 2nd, 3rd and 4th as shareholders is not valid.

28. 1st appellant stated that the notice dated 28.11.2011 for the EGM dated

7.12.2011 was received by him only on 7.12.2011. 1st appellant sent a letter

dated 7.12.2011 (Page 442) in this regard. Therefore, the notice is not valid

and consequently the meeting is also invalid. 1st appellant further stated that

there was no requirement of increasing the authorised capital. The

explanatory statement is inadequate (Page 474 and 580).

29. 1st appellant stated that the allotment of shares made on 21.12.2011,

16.1.2012 and 3.8.2012 and 6.6.2013 are oppressive, invalid and illegal. 1st

appellant stated that the allotment of shares was made by the invalid Board

and without any bonafide reasons for further issue of shares. The shares

were allotted without any consideration. In view of the further allotment of

shares the appellant stake has been reduced to almost 0%. 1st appellant

states that the allotment was made only for the purpose of grabbing the

company from appellant.

30. 1st appellant stated that he has challenged the proposal for allotment

of shares on 10.8.2012 in CA No.137 of 2012 before Company Law Board and

in its order dated 9.8.2012 (Page 674) the CLB has stated that the decisions

taken at the meeting will be subject to outcome of the Company Petition.

Respondents filed Form 2 stating share allotment on 3.8.2012. No Board

Meeting was called on 3.8.2012 not to speak about holding a meeting. The

Notice of Meeting for 10.8.2012 itself was only on 1.8.2012 and therefore, the

question of having a meeting on 3.8.2012 did not arise. This was done by

respondents only to circumvent the order of CLB dated 9.8.2012 that had put

Company Appeal (AT) No.365 of 2017 13

all the decisions to be taken on 10.8.2012 as subject to outcome of the CP.

The respondents have played a fraud on court. Respondents cannot get away

with this by saying it was through inadvertence.

31. 1st appellant stated that allotment and appointment of directors is

invalid. Notice of Board Meeting dated 10.8.2012 was issued on

1.8.2012(Page 635) and Minutes of the Board Meeting dated 3.8.2012 is at

Page 666. 1st appellant stated that even if there had been a Board Meeting on

3.8.2012, as per Company Law Board order, notices ought to be given to

Appellant (Page 674). Therefore, the appointment of directors made on

3.8.2012 is invalid.

32. 1st appellant stated that the transfer of 40,100 shares made on

3.10.2013 from 2nd, 3rd, 4th respondent to 6th respondent is oppressive, in

contravention of articles and oppressive. 1st appellant stated that without

complying with the Articles of Association of the company, no share transfer

could have been made without offering them to the appellant who has pre-

emptive right of first refusal. There was no board meeting at all on 3.10.2013

in which share transfers were recorded. 1st appellant stated that in the

revised annual return made upto 30.9.2014, it is shown that 6th Respondent

has 50000 shares, though he has not been allotted any shares. It is stated

that the shares held in the name of appellant-petitioner too added in the said

shares and the same is reflected in Page No.846.

33. 1st appellant stated that by altering the composition of Board of

Directors, shareholding pattern, by removing the directorship of appellant

w.e.f. 20.1.2011 and allotting shares on 27.10.2011 and constituting the

Board of Directors and allotting shares to 5th Respondent on 21.12.2011,

Company Appeal (AT) No.365 of 2017 14

16.1.2012, 3.8.2012, 6.6.2013 and transferring shares on 3.10.2013 and

resignation of directorship of 3rd Respondent on 12.11.2014, there has been

material change in the company which is against the interest of the

shareholders and the company. It is stated that the status of 5th respondent

whom the shares were allotted frequently is unknown as per the Dun and

Bradstreet India report (Page 540).

34. At last the 1st appellant stated that the NCLT has failed to appreciate

these facts and circumstances and apply ordinary rules to adjudicate the

issues and evidence. NCLT has failed to appreciate that in the above facts

and circumstances even if the meetings had been called and held as per law,

the acts would still remain oppressive and would have been set aside.

35. Reply has been filed on behalf of 1st to 7th Respondent. Respondents in

their reply has stated that the appellant is a person with a fraudulent track

record and that he is a post graduate in Commerce and master degree holder

in Business Administration with fake certificate which came to Respondent

knowledge recently (Page 1173, 1174, 1177 and 1178). Appellant had

fabricated fake education certificates to obtain a work visa under Highly

Skilled Migrant Programme from the Government of U.K. long before lodging

his petition with Company Law Board and at present he is a Permanent

Resident of the United Kingdom.

36. Respondents stated that the appellant has tried to make profit out of

the transactions of the company and appellant had made a nefarious

understanding with the owner of the premises in which the company was

initially started. It is further stated that as per this immoral agreement with

the owner, the appellant would get a monthly kickback of Rs.25,000/- from

Company Appeal (AT) No.365 of 2017 15

the rent paid by the 1st respondent. This continued for two years even after

the appellant moved to UK for employment. The appellant also got a one time

kickback of Rs.2,00,000 from the rental deposit paid by the 1st respondent to

the owner of the premises (Page 1116 to 1120).

37. Respondent stated that the cessation of directorship of appellant is

proper as the Managing Director of the company needs to be present in India

to carry on day to day operations of the company whereas the appellant had

taken up employment in the client company of the 1st respondent and that

too as a Legal Costs Assistant (Page 1070). It is further stated that the Articles

of Association, Clause 35 provides the onus on the Managing Director to hold

the Meeting of the Board. It also provides that the place of the meeting of the

Board should be the Registered Office of the Company and the Board shall

meet at least once in every 3 months (Page 270). Therefore, he cannot take

up employment outside India. Clause 58 of Articles of Association provides

that such Director should provide a declaration pledging himself to observe

strict secrecy with respect of all transactions and affairs of the company, with

the customers (Page 274). The act of joining the client company is in complete

violation of the Articles of Association of the company.

38. Respondents stated that the allotment of shares to 2nd, 3rd and 4th

respondent on 27th October, 2011 is absolutely valid and legal. Form 2 with

respect to the said allotment was also duly filed with the ROC, Hyderabad.

The company, in the course of its business had to raise additional capital and

it is the prerogative of the Board to decide as to in what form funds would be

raised. Clause 4 of Articles of Association (Page 265) provides that the shares

shall be under the control of the Directors, who may allot or otherwise dispose

Company Appeal (AT) No.365 of 2017 16

of the same to such persons on such conditions. Respondents stated that

Section 81 of the Companies Act, 1956 is not applicable to the Private Limited

Companies. Respondents stated even if the appellant was on the Board on

the date of allotment, by majority on the Board the shares would have been

issued. The appellant could have only protested on the same. Respondents

stated that Section 36 of the Companies Act, 1956 provides that the

memorandum and articles shall, when registered, bind the company and the

members thereof to the same extent as if they respectively had been signed

by the company and by each member, and contained covenants on its and his

part to observe all the provisions of the memorandum and of the articles. The

appellant being the first subscriber to the Memorandum and Articles of

Association, by virtue of law, is bound by the same and he cannot contest the

allotment made on 27.10.2011.

39. Respondents stated that the appellant has himself admitted that he had

left India to take up full time employment (Page 1070). Clause 3.1 of his

Employment Contract (Page 1071) mentions that he needs to work in the

company on a full time basis. Clause 4.2.1 (Page 1081) mentions that it is

mandatory for the appellant to devote his whole time and attention and

abilities to the business and affairs of the employer in the UK and nowhere

has he claimed that he had come to India in May, 2010, August 2010 and

November, 2010 and attended any Board Meeting of company. 1st respondent

company is conducting quarterly Board Meeting and for each board meeting

notices were duly sent to the appellant as director but he did not attend the

meeting. Respondent stated that if the appellant was still the Managing

Director, he was responsible for calling and holding Board Meeting but he is

Company Appeal (AT) No.365 of 2017 17

claiming that he has not received the agenda, therefore, his act clarifies that

he is not a Managing Director anymore as claimed by him. Respondent stated

that as the appellant did not attend three consecutive meetings without

claiming any leave of absence, he vacated the office as per the provisions of

Section 283(1)(g) of the Act and, therefore, the 1st respondent company had

filed Form 32 intimating his vacation to the ROC as required under the law.

40. Respondent stated that the appellant has alleged that he has not

received the notice of the Meeting held on 20.5.2010. Respondent stated that

the appellant has received the notice. Respondent further stated that if he

has not received the notice for the meeting then why did the appellant sign

the extract of the minutes of the Meeting dated 20.5.2010. Respondent

further stated that as per Clause 35 of the Articles of Association, the onus is

on the Managing Director to hold the Meeting of the Board and the venue of

the meeting of the Board should be the Registered Office of the company and

the Board shall meet at least once in every 3 months (Page 270). Respondent

stated that appellant did not take initiative to call and hold the meetings of

the Board of Directors from time to time and even after signing the extract of

the Resolution on 20th May, 2010, he did not take any interest in convening

the next board meetings which proves that he had handed over the

management and operations before leaving for the UK.

41. Respondents stated that Clause 4 of the Articles of Association provides

that the shares shall be under the control of the directors, who may allot or

otherwise dispose of the same to other persons. (Page 265). Respondent

further stated that the provisions of Section 81 of the Companies Act, 1956 is

not applicable to the Private Limited Companies and the Articles of

Company Appeal (AT) No.365 of 2017 18

Association provides the power to the Board to allot shares. Respondent

stated that even if the appellant was on the Board on the date of allotment,

by majority on the board the shares would have been issued and the appellant

could have only protested on the same.

42. Respondents stated that there has been email correspondence between

the parties during the relevant period as the appellant was working for the

client company as its employee. Respondent stated that if the emails are

observed the 2nd and 3rd Respondent have used their official email ID like

ireturi@dictasol.in but the appellant had used both his personal and official

email id venkats@duncanlewis.com. Appellant had never used his official

dictasol.in email id. The emails also bring out the fact that the appellant had

given a NOC for the incorporation of another company called Dictasol

Mediscript India Private Ltd to be promoted by the other promoters and the

appellant was withdrawing. This clearly proves that the appellant was not

interested in carrying any business in India as he wanted to settle in the UK.

43. Respondent stated that the appellant may have been in India for

different spells of time for his personal purposes which does not prove

anything about his involvement in the company. Respondent further stated

that after passing the order by the Company Law Board allowing him to attend

the Board Meetings, in the last 5 years he was present in 7 board meetings

only. The appellant is not taking any active participation in the Board

because he is working in the UK and enjoying the fruits and pushing the

Respondent company into legal tangles.

44. Respondent stated that the appellant was given opportunity to

subscribe further share and increase his stake, therefore, there is no question

Company Appeal (AT) No.365 of 2017 19

of oppression. Respondent stated that the appellant's act of leaving the

company within 6 months, and moving to the UK and again claiming his

position back is oppressive in nature. The appellant has not provided

anywhere which acts, provisions, sections have been violated. Respondent

further stated that the appellant was given equal opportunity to invest in

further issue of shares. Respondent stated that the NCLT Hyderabad has

acted in accordance with the law. NCLT has considered the legal and factual

issues and passed the order accordingly. NCLT has clearly understood the

intentions of the appellant and has made a judgement in accordance with law.

NCLT has also seen the motive and conduct of the appellant which was visible

explicitly through his fabricated documents and falsified claims. Respondent

further stated that the NCLT is convinced that the appellant moved to the UK

for permanent residency and could not attend the meeting and the appellant

himself has agreed to sign the extract of the resolution. Respondent stated

that the appellant should understood that the literal meaning of the word

'promoter' is not the one who just establishes a company but the one who has

control over the affairs of the company whether directly or indirectly.

Respondent lastly submitted that the NCLT has done natural justice by

dismissing the company petition.

45. We have heard the learned counsel for the parties and perused the

record.

46. Appellant has argued that 3rd respondent is invalidly continuing as an

additional director or alternate director. We have noted that 3rd respondent

was appointed as an additional director on 20.2.2010 under an arrangement

as per Article 30 of the Articles of Association of 1st respondent (Page No.269

Company Appeal (AT) No.365 of 2017 20

of Vol.II). Further as per Section 260 of Companies Act, 1956, the Act

applicable at that time, 3rd respondent shall hold office only up to the date of

the next AGM of the 1st respondent. After the appointment of 3rd respondent

as additional director on 20.2.2010, the AGM of 1st Respondent was held on

26th September, 2010. Notice for the AGM was issued on 27.8.2010 (Page

296). We have observed from the said Notice dated 27.8.2010 that there is

no agenda item for appointing 3rd respondent as a regular director.

Respondent stated that 3rd respondent has been appointed as a director and

not as additional director. Admittedly Respondents also agree that the

appointment of 3rd respondent was never got approved in the AGM held on

26.9.2010. Even if there is such provision in the Articles of Association not

in consonance with Section 260 of Companies Act, 1956, it would not be a

valid provision. Therefore, we hold that the continuation of 3rd respondent

as additional director after 26th September, 2010, the date of Annual General

Meeting, is not as per law.

47. Appellant argued that cessation of his directorship is oppressive, illegal

and invalid. Appellant further argued that no notices were issued for those

alleged meetings and no proof was produced despite sufficient opportunity.

Appellant argued that he has not acted in any manner prejudicial to the

interest of the company.

48. Counsel for the Respondents argued that notice of the meetings were

received by the appellant and he was aware of the meetings. Counsel further

argued that if the notice of meetings were not received by him then why did

he sign the extract of the minutes of the meeting held on 20th May, 2010.

Counsel further stressed that by signing the extract of the meeting and by not

Company Appeal (AT) No.365 of 2017 21

questioning how the meeting was conducted without his presence, it is proved

that he was aware of the meetings and its Agenda. Appellant has nowhere

claimed that he had come to India in May, 2010, August, 2010 and November,

2010 and attended any board meeting of 1st respondent. For all these

meetings, notices were sent and received by the appellant. Counsel for

Respondent further argued that if the appellant was still the Managing

Director, appellant was the one responsible for calling and holding Board

Meetings and the appellant is claiming that he has not received the Agenda of

the Meeting. Therefore, the appellant's acts clarify that he is not a Managing

Director any more as claimed by him. Counsel for the Respondent further

argued that as the appellant did not attend three consecutive meetings

without claiming any leave of absence, he vacated the office as per the

provisions of Section 283(1)(g) of the Act and therefore, the 1st respondent filed

Form 32 intimating his vacation to the ROC and the vacation of office as

Director of the appellant is legal and valid.

49. After hearing both the parties we have noted that Form No.32 was filed

with ROC (Page 374) intimating that 1st appellant has vacated the office under

Section 283 of the Companies Act,1956 with effect from 20.01.2011 for not

attending three consecutive meetings i.e. 20.5.2010, 27.8.2010 and

10.11.2010. We have also observed from para 9 of the counter filed by

Respondents No.1 to 7 (Page 9) in which the Respondents have stated that

the extract of the meeting dated 20th May, 2010 were signed by the appellant.

The respondents have further stated that "it is proved that he was aware of

the meetings and its agenda." We have seen the said extract, Annexure P-30

at Page 529 and find that the same has been signed by the appellant.

Company Appeal (AT) No.365 of 2017 22

Therefore, we have come to the conclusion that when the extract of meeting

dated 20.5.2010 has been signed by the appellant, it also establishes that

impliedly the leave of absence in defacto is given to the appellant for

20.5.2010. It also proves that the appellant had a cooperative attitude when

signing an extract of the meeting dated 20.5.2010 as it will be in the interest

of the company. Respondents having asked the appellant to sign the extracts

of meeting for the benefit of the company and also denying the leave of

absence as having not been formally applied and allowed would be unfair to

the appellant. Appellant has pointed out that in NCLT Arguments were over

on 20.1.2017 and subsequently with Index dated 30.1.2017 bunch of

documents were filed by Respondents, without affidavit and attaching

computer generated Notices and without giving opportunity to Appellant to

argue NCLT simply held Notices were served. Counsel for Appellant referred

to Memo filed by Appellant in NCLT(Page 246) pointing out that for Meetings

of 20.5.2010, 27.8.2010, 10.11.2010, 20.1.2011 and AGM of 26.9.2010 no

proof of despatch of Notices or proof of service were filed. It is argued that

these objections and arguments were not even referred or dealt with by NCLT

and it simply relied on computer generated Notices and accepted them. We

find substance in this argument. Therefore, the action of the Respondent for

filing Form No.32 with ROC regarding vacation of office by the appellant is not

legal.

50. As regards the appellant's allegations that the notice of meetings were

not received by him. The respondents in brief synopsis has stated that notice

of every meeting has been sent as per Section 286 of the Companies Act, 1956.

We have seen the notice dated 12.1.2012 and telegram sent for EOGM on

Company Appeal (AT) No.365 of 2017 23

16.1.2012 (Page 541 and 542), we noted that the same has been sent at the

address of the appellant at Vishakapatnam. We have also seen the

acknowledgement receipt, Annexure P12, Page 383 and noted that the same

has been sent at the address of the appellant at Vishakapatnam. On this

issue, we are of the view that the respondents were very well aware that the

appellant is in U.K. and the respondents themselves or through their

subordinates are corresponding with the appellant via emails, as is evident

from the various emails which have been annexed in the appeal. Therefore,

the propriety demands that the appellant should have been intimated notices

of meetings also via emails and the appellant being the first founder/promoter

of the company should have been asked his availability in India so that the

meetings can be conducted while he was in India. The good practice requires

that the appellant being founder Director and majority shareholder should

have been given notice at his foreign address. Further the meeting now a days

can be held via video conferencing. Nothing of the sort have been done by the

company especially when on day to day matters, it is having its business with

the foreign countries.

51. The other issue raised by the appellant is that the allotment of 40000

shares to 2nd, 3rd and 4th respondent is illegal and invalid. Appellant argued

that 10000 shares were allotted to 2nd respondent, 20000 shares to 3rd

respondent 10000 shares to 4th respondent on 27.10.2011. Appellant argued

that this date i.e. 27.10.2011 is crucial as the Respondent has cleverly, after

creating records and filing of form 32 on 17.10.2011 for the cessation of

directorship of appellant, allotted the shares to Respondents. Appellant

further argued that the Balance Sheet of 1st respondent for 2010-2011 shows

Company Appeal (AT) No.365 of 2017 24

that there was no need of funds and by allotting 40000 shares to themselves

and 4th Respondent, being wife of 3rd respondent, is a violation of fiduciary

duties and breach of trust.

52. Counsel for the Respondent argued that the company in the course of

its business had to raise additional funds and it is prerogative of the Board of

the company to decide as to and in what form funds would be raised. Clause

4 of Articles of Association provides that the shares shall be under the control

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

on such conditions (Page 365). Counsel for the Respondent further argued

that Section 81 of the Companies Act, 1956 is not applicable to the Private

Limited Companies, and the Articles of Association provide the power to the

Board to allot shares. Counsel for the Respondent further argued that even

if the appellant was on the Board on that date of allotment, by majority on the

Board, the shares would have been issued and the appellant could have only

protested on the same. Counsel for the Respondent further argued that

Section 36 of the Companies Act, 1956 provides that the Memorandum and

Articles shall, when registered, bind the company and the members thereof to

the same extent as if they respectively had been signed by the company and

by each member, and contained covenants on its and his part to observe all

the provisions of the Memorandum and Articles. Counsel for the Respondent

further argued that the appellant being the first subscriber to the

Memorandum and Articles of Association, by virtue of law, is bound by the

same and he cannot contest the allotment made on 27.10.2011. Counsel for

the Respondent argued that the appellant was given opportunity to participate

in further allotments of shares on numerous occasions, but he has never

Company Appeal (AT) No.365 of 2017 25

invested anything above his Rs.99,000/-. Counsel for the Respondent further

argued that they had offered the shares to the appellant even before he had

approached the Company Law Board/NCLT with the petition for oppression

and mismanagement. Counsel for the Respondent argued that the allotment

of shares to 2nd, 3rd and 4th respondent is legal and valid.

53. After hearing both the parties we noticed that as argued by the

respondent Clause 4 of Articles of Association provides that the shares shall

be under the control of Directors, who may allot or otherwise dispose of the

same to such persons on such conditions (Page 365). Counsel for the

Respondent further argued that Section 81 of the Companies Act, 1956 is not

applicable to the Private Limited Companies, and the Articles of Association

provide the power to the Board to allot shares. We have already observed that

3rd respondent was appointed as additional director on 20.2.2010 under an

arrangement. After the appointment of 3rd respondent on 20.2.2010, the AGM

of the 1st Respondent was held on 26.9.2010 and his appointment as

additional director was not regularised. Therefore, we have already held that

his continuation as additional director after 26.9.2010 is not as per law.

Further, as per Section 287 of the Companies Act, 1956 the quorum for a

meeting of the Board of Directors of a company shall be one-third of its total

strength or two directors whichever is higher. As we have already held that

the continuation of 3rd director is not as per law after 26.9.2010, therefore,

the Board Meeting held on 27th October, 2011 in which the decision was taken

to allot 40000 shares to 2nd, 3rd and 4th Respondent is not as per law as for

conducting the Board Meeting the quorum should be complete and one

Director cannot hold the Board Meeting. Similarly the subsequent decisions

Company Appeal (AT) No.365 of 2017 26

to allot 268834, 168448 and 330000 shares to 5th Respondent on

20.12.2011, 16.1.2012 and 3.8.2012 were taken. It is noted that on removal

of appellant on 20.01.2011 and filing the same with ROC on 17.10.2011 (

almost 9 months after removal) (Page 374), immediately allotment of shares

has been made in a very short period thereafter. In fact, allotment of shares

has taken place on 27.10.2011, merely 10 days after filing with ROC on

17.10.2011. Even subsequent two allotment of shares on 20.12.2011 and

16.1.2012 seems to be as if allotment of shares are being hurriedly done to

completely reduce the shareholding of the appellant to hopeless minority.

Therefore, the subsequent actions/decisions such as allotment of 268834,

168448 and 330000 shares to 5th Respondent on 20.12.2011, 16.1.2012 and

3.8.2012 and induction of two other directors etc are also held illegal.

54. The respondents have alleged that the appellant has obtained the

HMSP Visa with the fake educational documents and his conduct is not up to

the mark. The respondent further argued that the appellant is a person with

a fraudulent track record and he is trying to convince the Tribunal that is a

post graduate in Commerce and master decree holder in Business

Administration with fake education certificates to obtain a work visa.

55. On this issue we are of the opinion that NCLT or this Appellate Tribunal

is not proper forum to deal with such matters.

56. Respondents have argued that the company was in need of funds,

therefore, the above shares were allotted to other respondents. After going

through the records we have observed that the appellant was first promoter

and was holding 99% shareholding of 1st respondent. After the allotment of

shares to other respondents, which we have held as illegal, the shareholding

Company Appeal (AT) No.365 of 2017 27

of the appellant has come down from 99% to 0.99%. Further it is noted that

the Meeting dated 10.11.2010 is held after the AGM in the year 2010. We

have already observed above that continuation of 3rd respondent after

26.9.2010 is not as per law. Even if 3rd respondent has attended the meeting

after 26.9.2010 it would be illegal. In the light of the above, three meetings

in which appellant is not alleged to have been attended, we observe that

impliedly leave of absence for meeting dated 20.5.2010 was there. It is in

fairness that the counting of meeting dated 20.5.2010 as having not attended

would not be fair. We also note that it would be desirable that the special

audit of the company may be conducted to see if funds were brought in the

company and if they have been properly used.

57. In the aforesaid discussions we have held that appellant has been

oppressed. However, we have also noted that the company is employing more

than 100 employees and is a running concern. It would not be in the interest

of the company or other stake holders to wind up the company.

58. In the light of the above the appeal is party allowed. In the interest of

justice, the following directions are issued:

i) The appellant is restored as director.

ii) Continuation of 3rd respondent as Director with effect from 26.9.2010

is not valid. Subsequently all decisions to appoint Directors, increase

of share capital and allotment of shares on 27.10.2011, 20.12.2011,

16.1.2012 and 3.8.2012 etc with his/their participation are also

irregular, and set aside.

Company Appeal (AT) No.365 of 2017 28

iii) Appellant and 2nd respondent to take appropriate decisions in the

interest of company and to ensure that adequate funds with the

company are available to keep it ongoing.

iv) Penalty imposed on appellant in the impugned order is set aside.

v) Respondents No.2 and 3, each will pay costs of Rs.1,50,000/- to the

Appellant from their own funds.

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

Dated:08-02-2019

New Delhi.

bm

Company Appeal (AT) No.365 of 2017