Vijaya Hospitality vs Tony P.A

NATIONAL COMPANY LAW APPELLATE TRIBUNAL AT CHENNAI (APPELLATE JURISDICTION) COMPANY APPEAL (AT) (CH) NO. 18/2021 (IA Nos. 207/2021, 279, 280, 553/2023) (Filed under Section 421 of the Companies Act, 2013)

(Arising out of the Impugned Order dated 10/03/2021 in CP No. 122/KOB/2019, passed by the National Company Law Tribunal, Kochi Bench, Kerala)

In the matter of : 1. Vijaya Hospitality and Resorts Limited, Represented through its Managing Director, 3rd Floor, Dorr No.53/361 F, Chakkalakkal Towers, Chettichira, Subhash Chandra Bose Road, Vyttila, Kochi - 682 019 ....Appellant No. 1

2. Mr. K C Baboo @ K C Babu, s/o C K Krishnankutty Individual, Indian inhabitant, Chanjamattathil House, Piravom P O, Ernakulum - 686 664 ....Appellant No. 2

Versus

1. Tony P.A, s/o A.A. Paulose, Individual, Indian inhabitant, 147/23, Ambalathinkal House, Vaikom Road, Thripunithura, Ernakulam - 682 301 .....Respondent No. 1

C.A. (AT) (CH) No. 18/2021 Page 1 of 27 2. Sijo Tony, w/o Tony PA, Individual, Indian inhabitant, 147/23, Anbalathinkal House, Vaikom Road, Thripunithura, Ernakulam - 682 301 ...Respondent No. 2

3. Manju Sudhesh, w/o Sudhesh Thankappan, Individual, Indian inhabnitant, Mecheril, Mannankarachira, Thiruvalla, Pathanamthitta - 689 102 ....Respondent No. 3

4. Sudhesh Thankappan, s/o E.K. Thankappan, Individual, Indian inhabitant, Mecheril, Mannankarachira, Thiruvalla, Pathanamthitta - 689 102 ...Respondent No. 4

5. Registrar of Companies, Company Law Bhawan, BMC Road, Thrikkakara, Kochi - 682 021 ...Respondent No. 5 Present : For Appellant : Mr. P.H. Arvindh Pandian, Sr. Advocate For Mr. Anant Merathia, Advocate For Respondents : Mr. Renjitha Rajappan, Advocate, For R1 & R2 Mr. R. Venkatavaradan, Advocate, For R3 & R4

JUDGMENT

(Virtual Mode)

[Per: Shreesha Merla, Member (Technical)]

1. Challenge in this Company Appeal (AT) (CH) No. 18/2021 is to the

impugned Order dated 10/03/2021, passed by the National Company Law

C.A. (AT) (CH) No. 18/2021 Page 2 of 27 Tribunal, Kochi Bench in CP/122/KOB/2019, by which Order NCLT has

cancelled the allotment of 1,10,00,000 equity shares of the Respondent No. 1

Company to Appellant No. 2 in exercise of its jurisdiction under Section 59 of

the Companies Act, 2013 (hereinafter referred to as 'the Act').

2. M/s Vijaya Hospitality and services Limited is the 1st Appellant Company

and the original Respondent in the Company Petition No. 122/KOB/2019. The

2nd Appellant is the Chairman and Managing Director of the 1 st Appellant

Company, holding 52.86 % of the total shareholding of the Company. The

Learned Senior Counsel for the Appellant submitted that the authorised share

capital of the Company is Rs. 22,00,00,000/- comprising of 2,20,00,000 equity

shares of Rs. 10/- each. The issued, subscribed and paid-up share capital is

Rs. 21,87,16,860/- comprising of 2,18,71,686 equity shares of Rs. 10/- each. It

is stated that the Respondent Nos. 1-4 are minority shareholders of the Appellant

No. 1 Company who hold 80,000 equity shares, that is 0.37 % of the total

shareholding. Respondent Nos. 1-4 were the original Petitioners in the main

Company Petition filed under Section 59 and 62 of the Companies Act, 2013. It

is seen from the record that TCP No. 185/2016 was filed by the 2nd Appellant and

Mr. CK Sibi to address various disputes among the shareholders and was initially

filed before the Company Law Board thereafter, transferred to NCLT, Chennai.

CA 1/2016 was filed by the 2nd Appellant and Mr. CK Sibi, seeking direction to

allow them to infuse necessary funds into the first Appellant Company towards

C.A. (AT) (CH) No. 18/2021 Page 3 of 27 share capital for the purpose of repayment to Federal Bank as the Company was

in financial distress and the Federal Bank initiated proceedings under the

Securitisation Act, 2002, seeking to enforce its mortgage over the property of the

first Appellant Company including "The Elephant Court" Hotel and had the

Federal Bank been allowed to proceed with this course of action, it is submitted

that the 1st Appellant Company would effectively have become a dead company

as it's main business would have been taken away. It is submitted that as CA

1/2016 has allowed the Appellant to infuse the 'funds' into Respondent No. 1

Company as the 'Share Capital' and the amount was appropriated against the dues

of Federal Bank.

3. It is submitted that TCP 185/2016 was allowed and the Interim Order dated

12/01/2017 in CA 1/2016 was confirmed and made a part of the Final Order dated

18/04/2017. The said Order was challenged before this Tribunal by way of

Company Appeal (AT) (CH) No. 168/2017 which was dismissed vide Order

dated 14/12/2018. This was challenged before the Hon'ble Supreme Court vide

Civil Appeal No. 4482/2019 which was dismissed vide Order dated 6 th May 2019.

4. It is the case of the Appellant that CP/122/KOB/2019 was filed under

Sections 59 and 62 of the Companies Act, 2013 and that Section 59 of the Act

only applies to cases where a transfer of existing shares of existing shareholders

is recorded in the Register of Members without sufficient Cause. It is submitted

that NCLT had failed to take into account that Second Appellant was allowed

C.A. (AT) (CH) No. 18/2021 Page 4 of 27 fresh shares in pursuance of the directions given by NCLT vide Orders dated

12/01/2017 and 18/04/2017 and therefore, even if Section 59 was to be made

applicable to the present case, the allotment of Shares to the 2nd Appellant was

with sufficient cause, the Orders dated 12/01/2017 and 18/04/2017 attained

finality, right up to the Hon'ble Supreme Court of India and the Respondents have

failed to answer the issue of res judicata raised by the Appellants. The Learned

Senior Counsel appearing for the Appellants denied that the minority

shareholders of the 1st Appellant Company were kept in the dark with respect to

the allocation of shares. It is submitted that the Impugned Order is effectively

modifying and reviewing the Orders dated 12/01/2017 and 18/04/2017, which

have actually attained finality. A perusal of the Order dated 12/01/2017 makes it

clear that it was made considering the emergency situation where funds were

infused into the Appellant No. 1 Company ensuring its continued survival and the

Order was passed in pursuance of the wide powers that are conferred upon NCLT,

under Section 241-242 of the Companies Act.

5. The Learned Counsel also submitted that the inherent powers under Rule

11 of the NCLT Rules, 2016 also allows the Tribunal to make such Orders that

may be necessary for meeting the ends of Justice. It is submitted that while

passing an Order for allotment of Shares in its exercise of powers under the Act,

NCLT is not bound to follow Section 62 of the Act which is applicable for when

the Company voluntarily wants to allot shares. NCLT has failed to take into

C.A. (AT) (CH) No. 18/2021 Page 5 of 27 account the effect of Section 242 sub sections (5) & (6) of the Act which provide

for any alteration made in the Memorandum of Association of a Company in

pursuance of an Order passed under Section 242 of the Act which shall have the

same effect as if it had been duly made by the Company in accordance with the

Provisions of the Act. It is submitted that Section 242 sub Sections (5) & (6)

specifically protect the amendment made to the Memorandum of Association of

the 1st Appellant Company which was in pursuance of and for the purpose of

implementing the Orders dated 12/01/2017 and 18/04/2017.

6. It is contended that the decision of this Tribunal in Company Appeal (AT)

No. 1351/2017 has no bearing upon the present case as the same deals with the

scope of the inherent powers available to NCLT under Rule 11 of the NCLT,

Rules, 2016 whereas the Orders dated 12/01/2017 and 18/04/2017 were under

Section 242 of the Act and not under the NCLT Rules, 2016. This is not a case

whether NCLT resorted to its inherent jurisdiction but it is a case where its

ordinary jurisdiction under Sections 242 of the Act was pressed into action. The

allotment was done not in furtherance of Section 62, but is a result of the Orders

dated 12/01/2017 and 18/04/2017 under Section 242 of the Act and hence, the

procedural requirements in respect of such allotment is dispensed with. The

NCLT while passing an Order under Section 242 of the Act is guided solely by

the objective, 'bringing to an end the matters complied of' and in the interest of

Justice. The Application for infusing funds as share capital came to be made by

C.A. (AT) (CH) No. 18/2021 Page 6 of 27 minority shareholders when the Company was in grave risk and in these

circumstances no 'sub Resolution' could possibly have been passed for allotment

of shares. Therefore, any insistence upon complying with Rule 13 of the

Companies (Share Capital and Debentures) Rules, 2014 would have frustrated

the Order of NCLT.

7. The Learned Counsel for the Respondents Nos. 1-4 submitted that Mr.

K.C. Baboo had invested a sum of Rs. 11,00,00,000/- into the Company for

clearing the arrears due to the Federal Bank and by virtue of the Order of NCLT,

was entitled to have shares allotted on "preferential basis by way of private

placement". A Chartered Accountant was appointed for over-seeing the proper

implementation of the NCLT Order. However, the new management did not

permit the Chartered Accountants to get involved in the process of the

implementation of the NCLT's Order and proceeded on its own. A Resolution

was passed in the General Meeting of the Shareholders, held on 15/06/2017, to

increase the share capital to Rs. 22,00,00,000/-. On 11/07/2017, the Board of

Directors took a decision to allot shares at par to Mr. K.C. Baboo against the sum

of Rs. 11,00,00,000/- infused by him. It is the case of the Respondents that

without making a valuation of shares, the allotment was made to Mr. K.C. Baboo

by virtue of which allotment, he became the largest shareholder with shareholding

rising from 4 % to 52.86 %. The Learned Counsel paced reliance on the decision

of the Hon'ble Supreme Court of India in the matter of 'M/s Ammonia Supplies

C.A. (AT) (CH) No. 18/2021 Page 7 of 27 Corporation (P) Ltd. Vs. M/s. Modern Plastic Containers Pvt. Ltd.' reported in

[(1998) 7 SCC 105], wherein it was held that Section 155 deals with the power

of Company Court to rectify the Register of Members maintained by the

Company. The very word rectification connotes something what ought to have

been done and what ought not to have been done was done requiring correction.

Rectification in other words is a failure on the part of the Company to comply

with the directions under the 'Act'. In order to qualify any rectification, every

procedure as prescribed under the 'Act' before recording the name in the Register

of the Company has to be stated to be complied with by the Applicant. The word

'sufficient cause' is to be tested in relation to the Acts and the Rules. It is

submitted that based on the ratio of this Judgment there cannot be any hesitation

regarding the maintainability of an Application for rectification in a case where

the allocation of shares was done in violation of the mandatory statutory

provisions. The Learned Counsel also placed reliance on the Judgment of

Hon'ble Delhi High Court in the matter of 'SAS Hospitality Vs. Surya

Constructions' reported in [(2018) SCC Online Del 11909] in which the Hon'ble

High Court has held that the remedy in such a case is to apply for rectification

under Section 59 of the 'Act'.

8. As regarding the submission of the Learned Counsel that when allocation

was made as per Orders of the Tribunal in an Application under Sections 241 &

242, valuation of shares as contemplated under Section 62 of the 'Act', is not

C.A. (AT) (CH) No. 18/2021 Page 8 of 27 required, the Learned Counsel for the Respondent submitted that whenever an

allocation is made by way of 'private placement on preferential basis', valuation

has to be done as contemplated by Section 62 of the 'Act' and the relevant Rules.

It is contended that the Board of Directors in this case without making any

valuation, decided to allocate the shares at a basic rate which is an error and can

be rectified only under Section 59 of the 'Act'. As regarding the Order in

C A 1/2016 having attained finality, the Learned Counsel for the Respondent

submitted that the Order only says that the allocation of shares would be done on

'preferential basis only by way of private placement', but has not specifically

observed that the allocation need not be made under the Provisions of Section 62

or that the valuation of Rs. 10 to be given for the said allotment. Rule 13(g) of

Companies (Share capital and Debentures) Rules, 2016 stipulates that the

valuation of shares issued on preferential basis, either for cash or for

consideration, shall be determined on the basis of a Valuation Report of a

Registered Valuer. In the Form PAS-3 allotting shares to the 2nd Appellant, the

allotment was styled as one under Section 62 (1) (a) by describing the allotment

as barred as "pari passu" with the existing shareholding.

9. The Learned Counsel for the Respondents also submitted that the Order

dated 12/01/2017 passed by NCLT, does not dispensed with the mandatory

requirements of Section 62 (1) (c) of the Act and that the Company cannot be an

Appellant as the Company is not an Aggrieved Party.

C.A. (AT) (CH) No. 18/2021 Page 9 of 27

10. The Learned Counsel for the Respondents placed reliance on the Judgment

of Hon'ble Supreme Court in the matter of 'IFB Agro Industries Ltd. Vs.

SICGIL India Ltd.' reported in [(2023) 4 SCC 209] in support of his submission

regarding the power of rectification of Register of Members under Section 59 of

the Act. The relevant portion from the said Order, as relied upon by the Learned

Counsel for the Respondent, is extracted as below:

"21. The scope and ambit of Section 155 of the 1956 Act, as it then existed, fell for consideration in a decision of this Court in Ammonia Supplies 1 . The application for rectification in Ammonia case¹ was filed under Section 155, and it was submitted that the scope for rectification under Section 155 is enlarged in comparison with the position as it were under Section 38 of the 1913 Act. Rejecting the argument, this Court in Ammonia¹ held that the jurisdiction exercised by the court for rectification of the register of members is essentially limited. The comparative analysis in Ammonia¹ assumes importance as a similar submission is made before us by Mr Chidambaram that the scope and jurisdiction of the Tribunal under Section 59 of the 2013 Act is wide when compared with Section 111- A of the 1956 Act as amended in 1996.

22. The relevant portion of the judgment in Ammonia is as under: (SCC pp. 119-22, paras 26- 28 & 31) "26.... there could be no doubt any question raised within the peripheral field of rectification, it is the court under Section 155 alone which would have exclusive jurisdiction. However, the question raised does not rest here. Error would only mean everything as required under the law has been done yet by some mistake the name is either omitted or wrongly recorded in the Register of the Company...

C.A. (AT) (CH) No. 18/2021 Page 10 of 27 28. Question for scrutiny before us is the peripheral field within which the Court could exercise its jurisdiction for rectification. As aforesaid, the very word "rectification"

connotes something what ought to have been done but by error not done and what ought not to have been done was done requiring correction. Rectification in other words is the failure on the part of the company to comply with the directions under the Act.

31. Sub-section (1)(a) of Section 155 refers to a case where the name of any person is without sufficient cause entered or omitted in the Register of Members of a company. The word "sufficient cause" is to be tested in relation to the Act and the Rules. Without sufficient cause entered or omitted to be entered means done or omitted to do in contradiction of the Act and the Rules or what ought to have been done under the Act and the Rules but not done. Reading of this subclause spells out the limitation under which the court has to exercise its jurisdiction. If it truly is rectification, all matters raised in that connection should be decided by the court under Section 155 and if it finds adjudication of any matter not falling under it, it may direct a party to get his right adjudicated by a civil court."

11. The Learned Counsel also submitted that the Judgments relied upon by the

Appellant would not be applicable as the decisions broadly pertain to the powers

of the Tribunal under Sections 397, 398 and 402 of the Companies Act, 1956 and

the decisions do not in any manner direct the dispensation of the compliances

with the mandatory provisions of the Companies Act, 2013. The Authorities

primarily dealt with the exercise of powers of the Tribunal under Section 397,

398 and 402 of the Companies Act, 1956 in the context of dispensation of

C.A. (AT) (CH) No. 18/2021 Page 11 of 27 convening of Shareholder Meetings. The issue in this case, does not pertain to

the convening of Shareholders Meeting for seeking their approval for preferential

allotment. It is settled law that the Shareholders Meeting cannot be conducted to

defeat the Orders of the Tribunal. The issue before this Tribunal pertains to the

compliance with the mandatory procedures for share price determination under

Section 62 (1) (c) of the Act and has nothing to do with the principles relied upon

by the Learned Counsel for the Appellant.

Assessment :

12. The main issue which arises in this Appeal is whether 'allotment of shares'

on 'Preferential basis by way of private placement', in pursuant to an Order

passed under Section 241-242 of the Companies Act, 2013 requires adherence to

Section 62 (1) (c) of the Act read with the applicable Companies Act (Share

capital and Debentures) Rules, 2014.

13. It is the main case of the Appellants that CA 1/2016 was allowed permitting

the 2nd Appellant herein to infuse funds in the first Appellant Company as 'Share

Capital' to discharge the dues of the Federal Bank and the first Appellant

Company was directed to issue shares on preferential basis by way of 'private

placement on preferential basis' and that this interim Order dated 12/01/2017 in

CA 1/2016 was confirmed and made part of the Final Order dated 18/04/2017

passed in TCP No. 185/2016 and has since attained finality as the Appellate

Tribunal has confirmed this Order in Company Appeal (AT) No. 168/2017. This

C.A. (AT) (CH) No. 18/2021 Page 12 of 27 Judgment was also challenged before the Hon'ble Supreme Court of India by way

of Civil Appeal No. 4482/2019, which was dismissed on 6th May, 2019.

14. At the outset, the specific directions given by NCLT in CA 1/2016, which

the Appellants are relying upon in support of their submission that the allotment

of shares has attained finality and now cannot be interfered with by NCLT, is to

be examined and for ready reference the said directions are reproduced as

hereunder:

"In the light of the above discussions, the settlement of legitimate dues of R7 bank and for the purpose of saving valuable assets of the company, C.A. 1 of 2016 is allowed with tire following directions :-

i) Applicants/Petitioners and their nominees are permitted to infuse funds in R1 company as share capital within a reasonable time, which shall duly be appropriated against the dues of R1 bank;

ii) R7 bank is directed to open "No lien Account"

in the name of R1 company so that the deposits by the Applicants/Petitioners and their nominees could be made and appropriated against the dues of the bank;

iii) the "No lien Account" shall be jointly operated by Applicant No. 1 and R7 bank and not by R2 to R6;

iv) If any part of dues to be paid to R7 bank is disputed' the same shall be paid to the bank under protest till the claim/dispute is settled either mutually or under legal proceedings, if any, initiated; and

C.A. (AT) (CH) No. 18/2021 Page 13 of 27

v) R1 company is directed to issue shares on preferential basis by way of private placement in favour of Applicant/Petitioners and their nominees in consideration of infusing funds as share capital of R1 company.

9. The Applicants/Petitioners have also prayed for appointment of Advocate Commissioner but it is felt that an expert person can only carry out auditing of Ri company' Therefore, we appoint M/s Sundaram and Srinivasan, Chartered Accountants to go through the statutory records of R 1 company for conducting audit from 1st March 2017, till date.

The CA is directed to submit report to this Bench within a period of three months from the date the copy of this order is received. The CA is authorised to supervise the implementation of the above given directions in letter and spirit. The CA is permitted to fix his remuneration as per the practice in vogue and inform the Applicants/Petitioners, who shall pay the same. Accordingly, C.A. 1 of 2016 is disposed of."

(Emphasis Supplied)

15. This direction was made part of the Order in TCP 185/2016 dated

18/04/2017, the NCLT in Para 7 has concluded as follows:

"The counsel for petitioners has drawn our attention to the Articles of Association wherein under Para 15(b) at Page 26 of the typeset it has been mentioned that the first directors of the company are C.K.Vijayan, C.K.Thampi Krishna, C.K.Sibbi (P1) and C.K.Babu (P2). C.k. Thampi Krishna expired while petitioners 1 & 2 were removed from the Directorship. Neither notice was given nor Board's resolution was passed. However, R1 to R4 and R6 have not properly controverted the allegations levelled in the company petition and in the absence of reasonable explanation, the illegal actions are not sustainable as there is non-compliance with the provisions of

C.A. (AT) (CH) No. 18/2021 Page 14 of 27 the Companies Act. The detailed allegations in the CP and the documents filed in support thereof established that the answering respondents have been running the company without following the provisions of law and taken decisions to have control over the 1st respondent company and sidelined the petitioners for holding the AGM. Therefore, as Directors and shareholders, their rights were being violated continuously, which constitutes oppression. The element of mismanagement is also established against the respondents because due to diversion of funds there is huge liability of 1st Respondent company, for which R8 has already taken steps to recover the entire outstanding. However, this Bench vide order dated 12.01.2017 has passed directions permitting the petitioners to infuse funds in order to satisfy the claim of R8, i.e. Federal Bank. The said order shall form part of this order."

(Emphasis Supplied) Pursuant to the above Order, the NCLAT and the Hon'ble Supreme Court of India

have confirmed the aforenoted directions.

16. This Tribunal is of the considered view that what has to be examined at the

outset is whether there was any specific direction given by the NCLT regarding

the valuation and 'allotment of shares' which has attained finality. The directions

given by NCLT on 12/01/2017 in CA 1/2016 is with respect to 'issuance of

shares on preferential basis by way of private placement' in favour of the

Petitioners and their nominees in consideration of infusing the funds towards

'Share Capital' of first Appellant Company. A bare reading of these directions

does not anywhere specify that provisions of Section 62 (1) (c) have to be

dispensed with. Section 62 of the Companies Act, 2013 reads as hereunder:

C.A. (AT) (CH) No. 18/2021 Page 15 of 27

62. (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 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.A. (AT) (CH) No. 18/2021 Page 16 of 27

(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 registered 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 despatched 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 debentures 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.

(4) Notwithstanding anything contained in sub-

section (3), where any debentures have been issued, or loan has been obtained from any Government by a company, and if that Government considers it necessary in the public interest so to do, it may, by order, direct that such debentures or loans or any part thereof shall be converted into shares in the company on such terms and conditions as appear to the Government to be reasonable in the circumstances of the case even if terms of the issue of such debentures or the raising of such loans do not include a term for providing for an option for such conversion: Provided that where the terms and conditions of such conversion are not acceptable to the company, it may, within sixty days from the date of communication of such

C.A. (AT) (CH) No. 18/2021 Page 17 of 27 order, appeal to the Tribunal which shall after hearing the company and the Government pass such order as it deems fit.

(5) In determining the terms and conditions of conversion under sub-section (4), the Government shall have due regard to the financial position of the company, the terms of issue of debentures or loans, as the case may be, the rate of interest payable on such debentures or loans and such other matters as it may consider necessary.

(6) Where the Government has, by an order made under sub-section (4), directed that any debenture or loan or any part thereof shall be converted into shares in a company and where no appeal has been preferred to the Tribunal under sub-section (4) or where such appeal has been dismissed, the memorandum of such company shall, where such order has the effect of increasing the authorised share capital of the company, stand altered and the authorised share capital of such company shall stand increased by an amount equal to the amount of the value of shares which such debentures or loans or part thereof has been converted into.

(Emphasis Supplied)

17. Section 62 (1) (c) specifies 'issuance of share capital to any persons, if it is

authorised by a said Resolution, whether or not these persons including the

persons referred to in Clause (a) or Clause (b) either for cash or for consideration

other than cash, if the price of such shares is determined by the valuation report

[of a registered valuer, subject to the compliance with the applicable provisions

of Chapter III and any other conditions as may be prescribed]. Merely because

the direction given by NCLT does not specifically mention the fulfilment of

mandatory requirements of Section 62 (1) (c), it cannot be said that those

C.A. (AT) (CH) No. 18/2021 Page 18 of 27 Provisions need not be complied with as it has not been specifically mentioned in

the 'directions' and the same has been confirmed by both NCLAT and the

Hon'ble Apex Court. Under Rule 13 (g) of the Companies (Share Capital and

Debentures), Rules 2014 and Rule 12 (7) of the Companies (Prospectus and

Allotment of Securities) Rules, 2014 framed under the said Provision, details the

procedure to be followed in this regard. The relevant portion from the said Rules

are reproduced herein for ready reference.

"Rule 13 (g) - the price of the shares or other securities to be issued on a preferential basis, either for cash or for consideration other than cash, shall be determined on the basis of valuation report of a registered valuer;

Rule 12 (7) - In case the shares have been issued in pursuance of clause (c) of sub-section (1) of section 62 by a company other than a listed company whose equity shares or convertible preference shares are listed on any recognised stock exchange, there shall be attached to Form PAS-3, the valuation report of the registered valuer."

(Emphasis Supplied)

18. It is not in dispute that the shares were allotted at face value of Rs. 10/-

each without conducting any valuation. It is significant to mention that the

Appellants have convened an Extraordinary General Meeting on 15/06/2017 to

discuss the agenda of amendment to the Company's Memorandum of Association

for increasing the authorised share capital of the 1 st Appellant Company. A

perusal of the Notice dated 20/05/2017 shows a reference to legal advice provided

for the dispensation of the requirement for the shareholders approval. The reason

C.A. (AT) (CH) No. 18/2021 Page 19 of 27 accorded for convening the General Meeting is for complying with the 'MCA

Software requirement' and for the purpose of complying with the NCLT Order

dated 12/01/2017. As per Sections 242(5) and 242(6) of the Companies Act, only

such Orders which specifically provide for alteration to Memorandum of

Association would be deemed to have been passed in accordance with Law and

the Company accordingly needs to take steps to put the Order into effect. It is the

case of the Respondents that the NCLT Order dated 12/01/2017 merely provides

for allotment of shares on a preferential basis and does not indicate anything

pertaining to the alteration of the Memorandum of Association for increasing the

authorised share capital and that consequently, the Notice referring to the

dispensation of the requirement for the shareholders' approval for alteration of

the Memorandum of Association and placing the MCA Portal requirements on a

higher pedestal compared to the mandatory legal requirements under the

Companies Act, 2013, is wholly erroneous.

19. The contention of the Learned Counsel for the Appellants that the names

of the 1st and 2nd Respondents are reflected in the Attendance Register of the

Minutes Book of the Annual General Meeting held on 15/06/2017 and therefore,

they consented to the said allotment of Rs. 10 face value, cannot be sustained as

the Register only reflects the assent of Respondents to the increase in the

authorised share capital and does not in any manner indicate the consent to the

issuance at face value. The said allotment at face value is voted upon only

C.A. (AT) (CH) No. 18/2021 Page 20 of 27 through the Board of Directors dated 11/07/2017. There is no documentary

evidence to substantiate the plea of the Appellants that the Respondents have

categorically agreed or given their consent to the allotment of shares at 'Face

Value'.

20. The Learned Counsel for the Appellants placed reliance on the Judgment

of the Company Law Board, Southern Regional Bench in the matter of

'Bhupinder rai and Ors. Vs. S.M. Kannappa Automobiles Pvt. Ltd.' reported in

[(1996) 86 CC 18 CLB] wherein it was held that in a Petition under Section 111,

the question of malafides and bonafides of any allotment cannot be either agitated

or enquired into. However, on an Appeal in C A 5/2005, the Hon'ble High Court

of Karnataka remanded the matter back to the Company Law Board. The

Company Law Board, Mumbai Bench passed an Order reported in [(2014) SCC

OnLine 288] directed the allotment of shares, but not without valuation.

Therefore, this Tribunal is of the view that the decision which was put forth by

the Learned Counsel for the Appellant cannot be relied upon. The Learned Senior

Counsel also placed reliance on the Judgment of the Hon'ble High Court of Delhi

in the matter of 'Sanjay Gambhir and Ors. Vs. D.D. Industries Limited and

Ors.' reported in [(2013) 177 Comp Cas 99 (Delhi)] in which the Hon'ble High

Court while dismissing the Appeal, held that 'there was no difficulty in

reconciling the provisions of section 403 with sections 169 and 186 of the Act.

The facts and circumstances of each case would determine the extent to which it

C.A. (AT) (CH) No. 18/2021 Page 21 of 27 was practicable to hold meetings of a company. Where the unilateral acts of a

managing director representing a minority group of share holders resulted in

their capturing the board of directors a situation of a minority oppressing the

majority could be said to exist. It would be futile for the majority shareholders

to expect the meeting to be convened on their making a request to the board of

directors under section 169 of the Act. These factors would weigh with the

Company Law Board while exercising its powers under section 403 of the Act

while considering the request to convene an extraordinary general meeting. The

Company Law Board had rightly observed that it was pointless for the B group

to send a notice under Section 169 of the Act to the board of directors comprised

entirely of directors of the A group for convening an extraordinary general

meeting. In all probability that request could have been rejected. In the face of

the unilateral acts of the managing director, the B group was not acting

unreasonably in anticipating rejection of the request by the board of directors

constituted only by the directors of the A group. The interest of the A group who

continued as minority shareholders of the first respondent company and who

were represented by the managing director on the board of directors were

accounted for. No ground had been made to interfere with the orders of the

Company Law Board. (The appeal was dismissed with costs.)'. This principle is

also not applicable to the facts of the attendant case as in that very same Judgment

in Para 26 it is observed that 'the language in fact appears to indicate to the

C.A. (AT) (CH) No. 18/2021 Page 22 of 27 contrary. It permits the Company Law Board to pass orders as long as it is in

the interests of the proper conduct of the affairs of the company and it is 'just and

equitable' to pass such order. Whether in fact the order is justified will of course

depend on the facts of each case.' We are of the earnest view that in the facts of

this case, 'private placement by preferential shares, allotment' has attained

finality, but the 'procedure' to be adopted in this allotment has not been

specifically stated by NCLT and we observe that in the interest of the proper

conduct of the affairs of the Company and for it to be 'just and equitable', it is

imperative that the procedural requirements under Section 62 (1) (c) read with

the relevant Rules under this Provision, be complied with. The Learned Senior

Counsel also placed reliance on the Judgment of the Hon'ble High Court of

Bombay in the matter of 'Trackparts of India Limited and Ors. Vs.

K.N. Bhargava and Ors.' reported in [(2002) 109 CC 350] in which the Hon'ble

High Court has opined that the exercise of powers by the Company Law Board

under Sections 397, 398 and 402 of the Act is not subject to the rectification or

approval by the Shareholders and that CLB has wide powers for making any

Order under these Sections, which is 'just and equitable'. It is reiterated that the

principle outlined in the aforenoted judgments are with respect to the powers of

the Company Law Board passing Orders as long as it is in the interest of the

affairs of the Company and are 'just and equitable'. There is no specific mention

C.A. (AT) (CH) No. 18/2021 Page 23 of 27 with respect to the valuation of shares which could be done at face value and if

the same would be in the interest of the Company or would be 'just and equitable'.

21. It is the case of the Appellants that the present issue would not be covered

under Section 59 of the 'Act', since there is no transfer of shares involved and the

allotment of shares in favour of the 2nd Appellant was pursuant to the Order of

the Tribunal. It is observed that even as per the Order dated 12/01/2017 the

directions would involve a rectification of the Register of Members as regarding

the issue whether the allotment of shares would be covered under Section 59 of

the Companies Act, 2013. This Tribunal places reliance on the Judgment of

NCLAT, Principle Bench in the matter of 'E to E Transportaion Infrastructure

(P) Ltd. Vs. Zephyr Peacock India' reported in [2022 SCC OnLine NCLAT

1994] wherein it is observed as hereunder:

21. From the above provision of law, it is clear that any aggrieved person may appeal to the Tribunal for rectification of the register. After filing of the application, the Tribunal (NCLT) either dismiss the appeal or direct rectification of the records of the register and has power to direct the company even to pay damages if any sustained by the party aggrieved. Therefore, the Tribunal has power to direct the authorities to rectify the Register of the Members by cancelling the shares. However, the NCLT in the impugned order taken a stand that the Appellant has not approached the Registrar of Companies.

24. As per the above provision of law, the NCLT has power to order/direct the concerned authorities to rectify the register of members even by cancelling the excess shares. However, the NCLT erred in observing that the appellant has not

C.A. (AT) (CH) No. 18/2021 Page 24 of 27 approached the Registrar of Companies. This tribunal is of the view that the NCLT miserably failed to exercise the power and its jurisdiction as vested in it. Further the NCLT ought to have considered on the factual aspect of the inadvertent error and the appellant company bonafidely informed the RBI and its Regulators with regard to the inadvertent error/bonafide mistake crept in and sought permission to rectify the mistake by cancelling the excess shares. Even the R 1 company also through its Board Resolution expressed their No Objection for cancellation of excess shares."

22. From the aforenoted ratio it is seen that NCLT has the power to direct the

concerned authorities to rectify the Register of Member even by cancelling their

allotted shares. The Judgment relied upon by the Respondents in the matter of

'IFB Agro Industries Ltd. Vs. SICGIL India Ltd.' reported in [(2023) 4 SCC

209] wherein the Hon'ble Apex Court has discussed the scope of Section 155 of

the Companies Act, 1956 is applicable to the facts of this case.

23. The Hon'ble Delhi High Court in the matter of 'SAS Hospitality Pvt. Ltd.

Vs. Surya Constructions Pvt. Ltd.' reported in [(2018) SCC OnLine Del 11909]

has held that any dispute pertaining to rectification of Register of Members can

be decided under Section 59 of the Act and the Paragraph relevant to this

proposition is detailed as hereunder:

"13. The effect of the increase in the share capital and allotment of the same to any person has an automatic effect, i.e., it results in the alteration of the register of members under Section 59 of the 2013 Act. Thus, while the power to issue share capital vests in the company, the said power, without the section implementing the said issuance, is of no effect, and has no consequence. Any dispute

C.A. (AT) (CH) No. 18/2021 Page 25 of 27 in respect of rectification of the register of members under Section 59, can be raised by any person aggrieved to the Tribunal i.e., the NCLT."

(Emphasis Supplied)

24. In the light of the aforenoted decision, this Tribunal is of the earnest view

that the issue regarding cancellation of allotment of shares to the 2 nd Appellant

would fall within the scope and ambit of Section 59 of the Act. As regarding the

submission of the Learned Counsel for the Appellants that NCLT has wide scope

of powers under Section 241 and 242 of the Act and any direction given in this

Section would not contemplate compliance to Section 62 (1) (c) of the Act, cannot

be sustained. It is held that even if NCLT has directed allotment of shares under

Section 241 and 242 of the Act, the procedural requirements in respect of such

allotment, has to be met. The Hon'ble Supreme Court of India in the matter of

'Om Prakash Gupta Vs. Rattan Singh and Anr.' in CA No. 5341/1962 observed

that 'the Tribunals under the act being Creatures of the Statute have limited

jurisdiction and have to function within four corners of the Statute creating them'.

Though Rule 11 of the NCLT Rules, 2016 gives inherent power, but power under

this Section cannot be used 'dehors' the statutory Provisions of Law. The

contention of the Appellants that Section 62 of the 'Act' need not be adhered to,

does not hold good as it is a settled rule of interpretation of Statutes that when

power is given under the Statute to do a certain thing in a certain way, the thing

must be done in that way or not at all. The Hon'ble Supreme Court in a catena

of Judgments has reiterated this Principle. This Tribunal is of the earnest view

C.A. (AT) (CH) No. 18/2021 Page 26 of 27 that the direction given by the NCLT, vide Order dated 12/01/2017 has to be

complied within the framework of Law as provided for under Section 62 (1) (c)

of the Companies Act, 2013. Keeping in view the aforenoted reasons, this

Tribunal is of the earnest view that allotment of shares leading to alteration in the

Register of Members can be challenged before the NCLT under Section 59 of the

'Act'. Finally, it is observed that the issue which has attained finality is the

'allotment of shares' and not the 'procedure to be adopted for allotment'.

25. For all the aforegoing reasons, this Company Appeal (AT) (CH) No.

18/2021 is dismissed as devoid of merit. No Order as to Cost. All Connected

pending Interlocutory Applications are closed.

[Justice M. Venugopal] Member (Judicial)

[Shreesha Merla] Member (Technical) 15/09/2023 SPR/TM

C.A. (AT) (CH) No. 18/2021 Page 27 of 27