National Company Law Appellate Tribunal
Axis Nirman And Industries Limited & Anr vs M/S Hotel Birsa Pvt Ltd & Ors on 7 March, 2025
NATIONAL COMPANY LAW APPELLATE TRIBUNAL
PRINCIPAL BENCH, NEW DELHI
Company Appeal (AT) No. 175 of 2017
IN THE MATTER OF:
Axis Nirman and Industries Ltd.
Regd. Office:-
Plot No. 163/164, Mandhna Bithoor Road,
Kanpur, U.P.-290219.
Also at:
70, Golf Links, 2nd Floor, New Delhi.
Axis Overseas Ltd.
Regd. Office:
21A, Shakespeare Sarani,
2nd Floor, Kolkata - 700017.
Also at:
70, Golf Links, ....Appellants
2nd Floor, New Delhi.
Versus
1.M/s Hotel Birsa Pvt. Ltd.
Regd. Off.:
Hawai Nagar, Hinoo Khunti Road, ...Respondent No.1
Ranchi-834003.
2.Adbhut Vincom Private Ltd.
Regd. Off.:
Prafulla Sarkar Street,
Kolkata-700072. ....Respondent No.2
3. Salini Soy
C/o Hinoo Khunti Road,
P.O. Railway Colony,
Hatia, Ranchi-834003. ....Respondent No. 3
4. Mr. Sunil Toshniwal
Add:- 493/B/1, G.T. Road (South), ....Respondent No. 4
Shibpur, Howrah - 711102.
5. Mr. Amit Sarda
Add:- 187, Rabindra Sarani, ....Respondent No. 5
Kolkata-700007.
Cont'd..../
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Present:
For Appellants: Mr. C.S. Chauhan, Mr. Sunil and Mr. Amit Kumar
Jha (proxy), Advocates.
For Respondents: Mr. Gaurav Mitra, Mr. Pranav & Mr. Ishan Roy
Chowdhury, Advocates for R-2.
Mr. Vivek Sinha, Mr. Vivek Malik, Mr. Shubham
Bharara, Advocates for R-3.
J U D G M EN T
(7th March, 2025)
INDEVAR PANDEY, MEMBER (T)
This appeal has been filed under Section 421 of the Companies Act,
2013, challenging the judgment and order dated April 7, 2017, passed by
the National Company Law Tribunal (NCLT), Kolkata Bench, in Company
Petition No. 370 of 2010. In its order, the NCLT allowed the petition filed
by Respondent No. 2, Adbhut Vincom Pvt. Ltd., and directed the
cancellation of 210,000 equity shares of Hotel Birsa Pvt. Ltd. (Respondent
No. 1) allotted to the appellants, Axis Nirman and Industries Limited
(Appellant No. 1) and Axis Overseas Limited (Appellant No. 2).
Additionally, the NCLT ordered the refund of Rs.2,10,00,000/- paid by the
appellants for these shares, on the ground that the resolutions to increase
authorized share capital and the allotment of shares were not compliant
with the Companies Act, 1956 (hereinafter referred to as 'Act').
2. The appellants here assert that the NCLT's findings ignored material
evidence, failed to recognize procedural compliance, and caused them undue
financial and reputational harm. They contend that their investments were
lawful, made in good faith based on representations by the company's
promoters, and utilized to revive the company's stalled projects.
Company Appeal (AT) No. 175 of 2017
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Brief facts of the Case
3. The facts of the case are as follows:
(i) Respondent No. 1/ Hotel Birsa (P) Ltd., is a private limited company
incorporated under the Companies Act, 1956. It operates in the
hospitality sector, managing hotels, restaurants, and related
businesses.
(ii) The initial authorized share capital of the company was
Rs.4,25,00,000/-, which was allegedly increased to
Rs.10,00,00,000/- in February 2010, following an Extraordinary
General Meeting (EOGM) on February 18, 2010. The issued and
subscribed share capital was subsequently raised from Rs.
4,25,00,000/- to Rs. 6,35,00,000/-.
(iii)These changes in the capital structure were alleged to have been
carried out without proper statutory compliance, forming the basis
of the dispute raised in Company Petition No. 370 of 2010.
(iv) In early 2010, Shri Prem Rajesh Soy and Smt. Salini
Soy/Respondent No. 3, identifying themselves as the promoters of
Respondent No. 1, approached the appellants with an investment
proposal. The respondents represented that the company required
immediate funds to Repay HUDCO liabilities amounting to Rs.11
crore, which would prevent the company's account from being
classified as a Non-Performing Asset (NPA) and revive the stalled
hotel project of Respondent No. 1, which had been delayed due to a
lack of funds.
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(v) The respondents assured the appellants that the resolutions to
increase authorized share capital and other necessary procedural
formalities had been duly passed and complied with under the
Companies Act, 1956 (hereinafter referred to as the 'Act'). The
appellants were further promised that their investments would yield
substantial returns as the company resumed its business
operations.
(vi) Based on these assurances, the appellants agreed to invest
substantial amounts in the company. Appellant No. 1 subscribed to
90,000 equity shares of Respondent No. 1 at a face value of Rs.100
per share, making a total investment of Rs.90,00,000 on
19.03.2010. These funds were acknowledged by the company and
utilized to clear part of its HUDCO liabilities. Further, Appellant No.
2 subscribed to Rs.1,20,000 equity shares of Respondent No.1, at
face value of Rs.100 per share, contributing Rs. 1,20,00,000 on
14.04.2010. These funds were again utilized for clearing debts and
other operational requirements.
(vii) A total investment of Rs.2,10,00,000/- was made by the
appellants, and share certificates for the same were duly issued to
them. These shares were recorded in the company's register, with
the distinctive numbers 425001 to 515000 for Appellant No. 1 and
515001 to 635000 for Appellant No. 2.
4. Learning about the appellants' investments and consequent dilution of
its shareholding, Respondent No. 2, Adbhut Vincom Pvt. Ltd. which held
Company Appeal (AT) No. 175 of 2017
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49% shares (2,08,250 shares) of Hotel Birsa, filed Company Petition No. 370
of 2010 in May 2010 before the NCLT wherein he alleged the following:
(i) That the Respondents No. 3/ Sh. Prem Rajesh Soy and Respondent
No.4 Smt. Salini Soy had allegedly mismanaged the company's affairs
and manipulated its capital structure without proper approvals.
(ii) The shares allotted to the appellants were claimed to have been issued
in violation of statutory provisions.
(iii) The resolutions increasing the authorized share capital and
subsequent share allotments were challenged as being non-compliant
with the Companies Act, 1956.
5. The appellants in the present case, on their part, filed Company
Petition No. 5 of 2016 on 21.09.2016 under Sections 241 and 242 of the
Companies Act, 2013, alleging Oppression and Mismanagement of the
company by Respondents Nos. 2/ Sh. Prem Rajesh Soy, Respondent No.3/
Smt. Salini Soy, and Respondent No.4/ Adbhut Vincom Pvt. Ltd. and misuse
of the Rs.2.10 crore invested by the appellants and failure to protect the
appellants' rights and interests as shareholders.
6. The appellants sought a joint hearing of CP No. 370 of 2010 and CP
No.5 of 2016, given the interrelated issues and shared parties. However, the
NCLT denied this request of appellants.
7. On November 5, 2016, the appellants received a notice for an Annual
General Meeting (AGM) scheduled on December 30, 2016. The appellants
challenged the notice, citing that:
Company Appeal (AT) No. 175 of 2017
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(i) The AGM for the financial year 2014-15 had not been conducted,
making it legally impermissible to hold the AGM for 2015-16.
(ii) The notice contained procedural irregularities and was non-
compliant with the Companies Act, 2013.
8. Appellant No. 2 filed I.A. No. 81 of 2016 before the NCLT, seeking an
injunction to prevent the AGM. However, the NCLT deferred its decision on
this application, choosing to resolve the issue alongwith CP No. 370 of 2010.
9. The NCLT passed its order in CP No. 370 of 2010 on 07.01.2017,
holding that:
(i) The resolutions to increase the company's authorized share capital to
Rs.10 crore and subsequent share allotments to the appellants
violated provisions of the Companies Act, 1956.
(ii) The 210,000 equity shares allotted to the appellants were invalid and
ordered to be canceled.
(iii)The appellants' total subscription amount of Rs.2.10 crore was to be
refunded by Respondent No. 1.
10. Aggrieved by the aforesaid order of the NCLT the appellants have filed
this appeal.
Submission of the appellant
11. It is submitted by Ld. counsel for Appellants that Respondent No. 1,
M/s Hotel Birsa Pvt. Ltd., through its Director, Mr. Prem Rajesh Soy (now
deceased), approached Housing and Urban Development Corporation
(HUDCO) in May 2005 to seek financial assistance for completing and
Company Appeal (AT) No. 175 of 2017
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renovating its hotel project in Ranchi. HUDCO initially sanctioned a term
loan of Rs. 5.73 crores, and later revised it to Rs. 5.58 crores on 29.03.2006.
However, due to cost overruns and delays, the company faced acute
financial challenges, leading the loan account to be categorized as a Non-
Performing Asset (NPA). With no other immediate options, Hotel Birsa
urgently needed funds both to complete the hotel project and to repay the
term loan.
12. The counsel for Appellants highlighted that the shareholding structure
of Hotel Birsa at this stage was 51% held by Mr. Prem Rajesh Soy and Mrs.
Shalini Soy, while 49% was held by Adbhut Vincom Pvt. Ltd. (Respondent
No. 2). Despite being a substantial stakeholder, Adbhut Vincom exhibited no
interest in supporting the company during its financial difficulties. Instead,
it executed a Memorandum of Understanding (MOU) on 29.09.2009 to sell
its entire shareholding of 2,08,250 shares, representing 49% equity, to one
Libra Retailers Pvt. Ltd.. Libra Retailers paid Rs. 1 crore as an advance, and
the MOU, originally valid for 60 days, was mutually extended several times,
with the last extension ending on 16.02.2010.
13. The Counsel further submitted that, in 2009, Mr. Prem Rajesh Soy,
erstwhile Director of Hotel Birsa, sought financial assistance from the
appellants, Axis Nirman and Industries Ltd. (formerly Peacock Pigments Pvt.
Ltd.) and Axis Overseas Ltd., to address the company's critical liquidity
needs. The appellants were approached, because Adbhut Vincom had
demonstrated no intention of supporting the company or fulfilling its
Company Appeal (AT) No. 175 of 2017
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financial obligations. Mr. Soy assured the appellants that their investments
would be safeguarded, and they would be issued shares commensurate with
their financial contributions.
14. The counsel for appellant states that on 16.02.2010, the Income Tax
Department conducted a raid at the premises of Adbhut Vincom, seizing its
share certificates and related documents. This unforeseen development
disrupted the transfer of shares to Libra Retailers under the MOU. Adbhut
Vincom subsequently wrote to Hotel Birsa on 17.03.2010, requesting
duplicate share certificates, but the company denied this request, citing that
such an issuance would contravene statutory provisions. From this point
onward, Adbhut Vincom stopped participating in board meetings, as it had
effectively exited the company through its agreement with Libra Retailers.
15. The Counsel submitted that a board meeting of Hotel Birsa was held
on 18.01.2010 in Kolkata, where it was resolved to convene an
Extraordinary General Meeting (EOGM) on 18.02.2010 to deliberate on
increasing the company's authorized share capital and amending the
Articles of Association. Notices for the EOGM were duly sent to all
shareholders, including Adbhut Vincom, via Under Postal Certificate (UPC)
mode, which was a valid method of service under Section 53 of the
Companies Act, 1956. Despite receiving the notice, Adbhut Vincom did not
attend the EOGM, as it had already agreed to sell its shares.
Company Appeal (AT) No. 175 of 2017
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16. The Appellants emphasize that during the EOGM held in Ranchi on
18.02.2010, the Articles of Association were amended to enable the
company to issue new shares for raising funds. In a subsequent board
meeting held on 19.02.2010 in Kolkata, the urgent need for Rs. 90 lakhs as
working capital was discussed. To address this requirement, the board
resolved to issue 90,000 equity shares of Rs. 100 each, offering these first to
existing shareholders on rights basis. The terms clearly stated that failure to
respond by the specified deadline of 11.03.2010 would be treated as
rejection of the offer. The intimation about the aforesaid rights offer was sent
to Respondent 2 /Adbhut Vincom through UPC mode. However, Adbhut
Vincom, neither responded to the offer nor attended the subsequent board
meeting, which was held in Kolkata on 19.03.2010, wherein it was resolved
that the Peaccock Pigments Pvt. Ltd. (Now known as Axis Nirman &
Industries Ltd.)/Appellant 1 has been allotted 90000 equity shares of Rs.
100/- each for a consideration of Rs. 90 lakhs.
17. The counsel for Appellants further state that another board meeting
on 14.04.2010 approved the issuance of 1,20,000 additional shares at Rs.
100 each, valued at Rs. 1.2 crores, to Axis Overseas Ltd. to meet further
financial requirements. Invitations for subscription were sent to all
shareholders, including Adbhut Vincom, through UPC mode with a deadline
of 06.04.2010. Once again, Adbhut Vincom neither responded nor expressed
interest in subscribing to the shares. Consequently, these shares were also
allotted to the appellants, who infused Rs. 1.2 crores into the company.
Company Appeal (AT) No. 175 of 2017
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18. The Appellants state that these investments significantly altered the
shareholding structure of Hotel Birsa. The new shareholding stood as
follows: Mr. & Mrs. Soy - 34%, Adbhut Vincom - 32.75%, and the appellants
(Axis Nirman and Axis Overseas) - 33.25%. The infusion of Rs. 2.10 crores
by the appellants stabilized the company, enabling it to settle outstanding
debts, including the HUDCO loan, and complete its hotel project.
19. It is further submitted that the allotment of shares to the appellants
was lawful, proper, and carried out following statutory requirements.
Adbhut Vincom had already divested its interest in the company through
the MOU with Libra Retailers and was estopped from challenging the
allotments. The petition filed by Adbhut Vincom, seeking to cancel the share
allotment, was an afterthought aimed at regaining control over the company
after it was revived through the appellants' investments.
20. The Appellants contend that the National Company Law Tribunal
(NCLT), Kolkata Bench, erred in cancelling the allotments based on the
invalidity of service via UPC mode. This finding ignored the statutory validity
of UPC service under Section 53 of the Companies Act, 1956, as supported
by judicial precedents. The appellants have relied on Judgments of Hon'ble
Supreme Court in following cases: V.S. Krishnan & Ors. v. Westfort Hi-Tech
Hospital Ltd. & Ors., (2008) 3 SCC 363; Shri Shashi Kumar v. Shri Dharam
Pal Sharma & Anr., 1981 SCC Online Del 14; and Mohd. Asif Nazeer v. West
Watch Company, 2020 (17) SCC 136, in support of their arguments.
Company Appeal (AT) No. 175 of 2017
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21. In conclusion, the Appellants pray that this Hon'ble Tribunal set aside
the NCLT's order and restore their status as shareholders of Hotel Birsa Pvt.
Ltd. Alternatively, they seek a refund of their investment of Rs. 2.10 crores,
along with interest at the rate of 15% per annum from the date of
investment until realization.
Submissions of Respondent No.2
22. Ld. Counsel for Respondent states that the present appeal challenges
the order dated 07.04.2017 passed by the Hon'ble NCLT, Kolkata, in CP
370/2010 under Sections 397, 398, 399, 402, and 406 of the Companies
Act, 1956. The NCLT, after an in-depth analysis of facts, evidence, and
statutory provisions, concluded that the actions of the Appellants were
oppressive, illegal, and intended to dilute the shareholding and management
rights of the Respondent. The order effectively annulled all impugned
resolutions, including those relating to the alteration of the Articles of
Association (AoA) and Memorandum of Association (MoA); increase in
authorized share capital; increase in paid up capital; and the subsequent
allotments of 90,000 and 1,20,000 shares to the Appellants.
23. Counsel for Respondent highlights that the Appellants unilaterally
increased the authorized share capital of M/s Hotel Birsa Pvt. Ltd.
(hereinafter "the Company") from Rs.4,25,00,000 to Rs.10,00,00,000 without
adhering to the mandatory requirements under the Companies Act, 1956. In
this regard he highlighted the following points:
Company Appeal (AT) No. 175 of 2017
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(i) On 18.01.2010, the Board resolved to call an Extraordinary
General Meeting (EoGM) on 18.02.2010 to increase the company's
authorized share capital and amend Clause V of the MOA. However,
the Articles of Association (AOA) of the company did not contain any
provision permitting such an alteration.
(ii) Section 94(1) of the Companies Act, 1956, mandates that a
company can alter its share capital only if expressly authorized by its
AOA. The failure to amend the AOA prior to altering the MOA renders
the entire process invalid.
(iii) Section 31 of Companies Act 1956, which governs the
amendment of the AOA, requires a special resolution to incorporate
such enabling provisions. The notice issued for the EoGM did not
propose any such amendment to the AOA, and no special resolution
was passed.
24. Counsel for Respondent further submits that the notice dated
18.01.2010, calling for the EoGM, lacked transparency and procedural
compliance. The notice stated two agenda items:
(i) Increasing the authorized share capital from Rs.4.25 crores to Rs.10
crores.
(ii) Amending Clause V of the MOA.
However, the notice did not mention any proposal to amend the AOA,
which was a legal precondition for such changes. Moreover, the resolutions
passed were ordinary resolutions, despite the requirement for special
resolutions for these changes under the Companies Act, 1956.
Company Appeal (AT) No. 175 of 2017
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25. Counsel for Respondent emphasizes that the Respondent, holding
49% of the company's shares, was deliberately excluded from the decision-
making process. The Appellants claim that the notice for the EoGM was
served via "certificate of posting," a method that has been widely discredited
for its susceptibility to misuse. Judicial precedents, including Judgment of
Hon'ble Supreme Court in M.S. Madhusoodhanan and Ors. v. Kerala
Kaumudi Pvt. Ltd. [(2004) 9 SCC 204], which emphasize that the burden
of proving proper service lies with the sender, which the Appellants failed to
discharge. No dispatch register, postal receipts, or other corroborative
evidence was produced.
26. Counsel for Respondent argued that the EoGM itself was fraught with
several procedural irregularities:
(i) Individuals who were neither shareholders nor directors--namely,
Mr. Sanjay Sahu and Mr. Sunil Kumar--proposed and seconded the
resolutions.
(ii) The resolutions passed during the EoGM on 18.02.2010 were
manipulated retrospectively to include an agenda item for amending
the AOA. This was a clear attempt to cover up procedural lapses, as
no such resolution was mentioned in the original notice.
(iii)Form 5, filed with the Registrar of Companies (RoC) on 16.03.2010,
failed to include any documentation or evidence of a valid resolution
amending the AOA. This omission further underscores the illegality
of the process.
Company Appeal (AT) No. 175 of 2017
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27. Counsel for Respondent contends that the Appellants unlawfully
issued additional shares in two tranches following the unauthorized
increase in share capital:
(i) On 19.02.2010, the Board issued 90,000 shares at Rs.100 each,
amounting to Rs.90 lakhs, which were allotted to Appellant No. 1.
(ii) On 14.04.2010, the Board issued 1,20,000 shares at Rs.100 each,
amounting to Rs.1.2 crores, which were allotted to Appellant No. 2.
28. Counsel for Respondent states that these issuances were in clear
violation of Section 81 of the Companies Act, 1956, which mandates that
further shares must first be offered to existing shareholders on a pro-rata
basis. The Respondent was entitled to a proportionate offer of these shares
but was deliberately denied this right.
(i) The offer letters for these issuances did not include renunciation
rights, a mandatory requirement under Section 81(1)(c).
(ii) These offer letters were allegedly served via certificate of posting,
which lacks credibility. No evidence of dispatch or delivery was
presented, making the process highly suspect.
29. Counsel for Respondent asserts that the issuances were not
undertaken for any bona fide corporate purpose. The Appellants failed to
demonstrate how the Rs.2.10 crores raised through these issuances were
utilized in the interest of the company. The sole intent was to dilute the
Respondent's shareholding from 49% to 32.75% and consolidate control
over the company in favor of the Appellants.
Company Appeal (AT) No. 175 of 2017
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30. Counsel for Respondent draws attention to the judgment in Dale and
Carrington Investment (P) Ltd. v. P.K. Prathapan [(2005) 1 SCC 212],
which held that issuing shares with the sole motive of diluting a
shareholder's stake constitutes oppression. Similarly, in Needle Industries
(India) Ltd. v. Needle Industries Newey (India) Holding Ltd. [(1981) 3
SCR 698], the Hon'ble Supreme Court emphasized that directors must act
in good faith and for a proper purpose while issuing shares.
31. Counsel for Respondent submits that the minutes of the EoGM dated
18.02.2010 were fabricated to include a resolution amending the AOA by
special resolution. This alteration was a clear afterthought to cover up the
procedural defects. The manipulation of corporate records further highlights
the mala fide intent of the Appellants.
32. Counsel for Respondent emphasizes that all notices, including those
for the EoGM and subsequent Board meetings, were deliberately served in a
defective manner to exclude the Respondent. The reliance on certificate of
posting and the absence of corroborative evidence undermines the
Appellants' claims of valid service.
33. Counsel for Respondent states that the NCLT, recognizing the illegality
of the share issuances, rightly directed the refund of Rs.2.10 crores (Rs.90
lakhs + Rs.1.2 crores) to the Appellants without interest. The claim for
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interest is untenable, as interest cannot be awarded for amounts invested in
furtherance of illegal transactions.
34. Counsel for Respondent relies on the judgment of Hon'ble Supreme
Court in Ashok Kapil v. Sana Ullah [(1996) 6 SCC 342], which held that a
party cannot benefit from its own wrong. Similarly, Hon'ble Supreme Court
in Reliance Cellulose Products Ltd. v. ONGC Ltd. [(2018) 9 SCC 266],
ruled that restitution, not compensation, is the appropriate remedy for
transactions tainted with illegality.
35. Counsel for Respondent concluded with the assertion that the
Appellants' actions, including the unauthorized increase in share capital,
illegal share issuances, and manipulation of corporate records, constitute
clear oppression under Section 397 of the Companies Act, 1956. The NCLT's
order is legally sound, equitable, and in line with judicial precedents. The
Respondent respectfully prays that this Appellate Tribunal dismiss the
appeal with costs to deter such oppressive practices and uphold the
principles of corporate governance.
Submissions of Respondent No. 3, Smt. Salini Soy
36. Ld. Counsel for Respondent no. 3 stated that she was the
Promoter/Director of M/s. Hotel Birsa (P) Ltd. at the relevant time, holding
the position in the Board of the Company along with her husband Late Mr.
Prem Rajan Soy, along with whom she held 51% of shareholding of the
Respondent no. 1 Company at the time of filing of the Company Petition
Company Appeal (AT) No. 175 of 2017
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bearing no. 370/2010 before the Hon'ble NCLT. She has continued as
promoter Director of the Company since inception.
37. The counsel submitted that through the present Appeal the Appellants
have wrongly challenged the impugned order dated 07.04.2017, passed by
the Hon' ble NCLT, Kolkata Bench in the company petition bearing C.P. no
370 of 2010 filed by the Respondent no. 2 herein under section 397/398 of
the Companies Act, 1956, ("the Act") on the frivolous and illegal grounds and
thus liable to be dismissed with hefty cost.
38. The counsel stated that Hon'ble NCLT has allowed the Petition filed by
the Respondent no. 2 (Adbhut Vincom Pvt. Ltd.) herein and passed the
impugned order that the actions of the majority shareholders (Respondent
no. 3, Mrs. Salini Soy) were oppressive and falls under statutory violation.
39. That being the-Promoter/Director of the Company, the Respondent
no. 3 being the majority shareholder, only had the right to challenge the
impugned order passed by the Hon'be NCLT and as the same was not
challenged by the Respondent no. 3 herein, within the statutory prescribed
period, under the Act, the same attained finality and the instant Appeal is
non-est.
40. Ld. counsel for Respondent No.3 argued that through the instant
Appeal, the Appellants are trying to take a derivative action on behalf of the
Company and the Respondent no. 3, to file the instant Appeal, as the
Appellants have no right to file the same as the Appellants are not directly
being affected by the Impugned Order as allegedly claimed by them stating
Company Appeal (AT) No. 175 of 2017
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frivolous grounds in the Appeal, without any authority to do so. He further
submitted that a derivative action cannot be taken by the Appellants to file
the instant Appeal, being against the law of the land.
41. Ld. counsel further submitted that it is apposite to mention that as
the Appellants are a third party and has no right to challenge the impugned
order passed by the Hon'ble NCLT, which was passed against the majority
shareholder, without any rightful authority to do so and the same only being
done for an ulterior motive.
42. Finally the counsel for R-3 submitted that the Appellant, cannot be
allowed to take benefit of the derivative action being taken on behalf of the
Respondent no. 3 and get benefited for its own wrong doing and illegal
action by way of allowing the instant appeal. The counsel stated that in light
of the above circumstances and arguments the instant appeal deserves to be
dismissed with heavy cost.
Analysis and findings
43. We have heard the Learned counsels in detail, examined the
voluminous records and have gone through the written submissions of
appellants, Respondent No.2 and Respondent No.3. All parties were asked to
submit their written submissions but the same has been submitted by
appellants, Respondent No.2 and Respondent No.3 as these were the
contesting parties.
44. We find it essential to trace the sequence of legal proceedings that have
led to the present appeal. The current dispute arose when Adbhut Vincom
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Pvt. Ltd. (Respondent No. 2) filed Company Petition No. 370 of 2010 before
the National Company Law Tribunal (NCLT), Kolkata Bench, alleging
oppression and mismanagement in M/s Hotel Birsa Pvt. Ltd.. Respondent
No.2 challenged the increase in authorized share capital and the allotment
of 2,10,000 shares to Axis Nirman and Industries Ltd. & Anr. (the
Appellants herein), claiming that these actions were taken without proper
statutory compliance and were aimed at diluting its shareholding. The
NCLT, in its impugned order dated 07.04.2017, ruled in favor of Respondent
No. 2, holding that the share capital increase and allotment were unlawful.
Consequently, the NCLT canceled the share allotments to the appellants and
directed a refund of the amount paid by them. Additionally, the NCLT
ordered the forced sale of Respondent No. 2's shares to Libra Retailer Pvt.
Ltd., which was presented as a resolution to the ongoing dispute.
45. Aggrieved by the direction for mandatory sale to Libra Retailers Pvt.
Ltd., Respondent No. 2 filed Company Appeal (AT) No. 162 of 2017 before
the this Appellate Tribunal, arguing that the forced sale of its shares was
beyond the relief sought and was unjustified. This Appellate Tribunal, in its
order dated 11.08.2017, ruled in favor of Respondent No. 2 and set aside the
forced sale, holding that such a direction was beyond the scope of the
NCLT's jurisdiction and not legally tenable. This Appellate Tribunal upheld
the cancellation of the appellants' share allotments, affirming that the
increase in share capital and subsequent allotment was conducted in an
oppressive and illegal manner, violating corporate governance norms and
statutory provisions.
Company Appeal (AT) No. 175 of 2017
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46. The appellants, in Company Appeal (AT) No. 175 of 2017, contested
the cancellation of their share allotments, asserting that they were legally
valid and should not have been annulled. However, this Appellate Tribunal,
in its order dated 23.08.2017, dismissed their appeal relying on its findings
in Company Appeal (AT) No. 162 of 2017.
47. The appellants, thereafter, filed an appeal, Civil Appeal No. 2604 of
2018 before the Hon'ble Supreme Court arguing that the NCLAT had failed
to properly examine the validity of the share cancellations and disposed of
their case without a reasoned adjudication. The Hon'ble Supreme Court, in
its order dated 23.07.2018, found merit in the appellants' argument and
ruled that Company Appeal (AT) No. 175 of 2017 should have been
adjudicated solely on the primary grievance of appellants, namely,
cancellation of the shares allotted to them which has not been done by the
Ld. Appellate Tribunal. Hon'ble SC remanded the matter back to this
Tribunal with a direction to dispose off the Company Appeal (AT) No. 175 of
2017 on merits after hearing all the parties.
48. We accordingly first take up the matter of locus of the appellants to
challenge the impugned order which has been pleaded by Respondent No. 3,
Salini Roy. She argues that the appellants lack authority to file this appeal,
as only she had the right to challenge the order, which has attained finality
since she did not appeal within the statutory period. She further claims that
the appellants are improperly pursuing a derivative action on her behalf.
49. However, we find no merit in her plea to dismiss the appeal on these
grounds. The maintainability of this appeal is not in question, as the Hon'ble
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Supreme Court has already remanded the matter for adjudication on its
merits. Accordingly, her request to dismiss the appeal at the threshold is
rejected, and the case is taken up for consideration on merits.
50. The key issues to be determined in this case are the following:
(i) Whether the amendment to Articles of Association (AoA) and
Memorandum of Association (MoA) of the company have been carried
out in accordance with the provisions of Companies Act, 1956?
(ii) Whether the fresh issue of shares after the alleged increase in
authorized share capital of the company has been done in accordance
with relevant provisions of Companies Act, 1956?
(iii) Whether these actions on the part of the appellants, Respondent No.1
& Respondent No.3 vis-à-vis Respondent No.2 can be termed as
Oppression and Mismanagement under Sections 397, 398 and 399 of
the Companies Act, 1956?
51. The issues in Serial number (i) and (ii) are interlinked and they would
be examined together.
52. The main contention of the appellant is that the amendments to AoA
and MoA were carried out in accordance with relevant provisions of the
Companies Act, 1956 and therefore the impugned order needs to be set
aside by this Appellate Tribunal.
53. Per contra the contention of Respondent No.2 and Respondent No.3 is
that the impugned order is a well-reasoned order passed by the Ld. NCLT
Company Appeal (AT) No. 175 of 2017
-22-
and the same needs to be upheld by this Tribunal. This appeal is a waste of
judicial time and the appeal needs to be dismissed with cost.
54. In this regard, we take a look at the relevant Sections of the Act
relating to amendment of AoA and MoA:-
Section 31. Alteration of articles by special resolution -
(1) Subject to the provisions of this Act and to the conditions
contained in its memorandum, a company may, by special
resolution, alter its articles :
(2) Any alteration so made shall, subject to the provisions of this
Act, be as valid as if originally contained in the articles and be
subject in like manner to alteration by special resolution.
[Emphasis supplied]
Section 94 (1) in The Companies Act, 1956 -
(1) A limited company having a share capital, may, if so
authorised by its articles, alter the conditions of its
memorandum as follows, that is to say, it may-
(a) increase its share capital by such amount as it thinks
expedient by issuing new shares;
"Section 16. Alteration of memorandum -
(1) A company shall not alter the conditions contained in its
memorandum except in the cases, in the mode, and to the extent,
for which express provision is made in this Act.
(2) Only those provisions which are required by section 13 or by
any other specific provision contained in this Act, to be stated in the
memorandum of the company concerned shall be deemed to be
conditions contained in its memorandum.
Company Appeal (AT) No. 175 of 2017
-23-
(3) Other provisions contained in the memorandum, including those
relating to the appointment of a managing director, or manager,
may be altered in the same manner as the articles of the company,
but if there is any express provision in this Act permitting of the
alteration of such provisions in any other manner. They may also be
altered in such other manner.
(4) All references to the articles of a company in this Act shall be
construed as including references to the other provisions aforesaid
contained in its memorandum.
Section 17 - Special resolution and confirmation by
Company Law Board required for alteration of memorandum
-
(1) A company may, by special resolution, alter the provisions of its memorandum so as to change the place of its registered office from one State to another, or with respect to the objects of the company so far as may be required to enable it :
(a) to carry on its business more economically or more efficiently;
(b) to attain its main purpose by new or improved means;
(c) to enlarge or change the local area of its operations;
(d) to carry on some business which under existing circumstances may conveniently or advantageously be combined with the business of the company;
(e) to restrict or abandon any of the objects specified in the memorandum;
(f) to sell or dispose of the whole, or any part, of the undertaking, or of any of the undertakings, of the company; or
(g) to amalgamate with any other company or body of persons.
55. We can see from the Section 31 that amendment to AoA requires a special resolution. Similarly, Section 16 (3) of the Act provides that other Company Appeal (AT) No. 175 of 2017 -24- provisions contained in the memorandum including those relating to the appointment of a Managing Director, or Manager may be altered in the same manner as the articles of the company. Other items in memorandum which are covered in any provision of the Act can be altered in the manner provided for the same. Section 17 thereafter has listed out cases wherein special resolution is required for alteration of memorandum. Section 94 (1) prescribes the procedure for increasing the authorised share capital of the company.
56. It is clear from the aforesaid Section that the companies requiring increase in authorised share capital require an enabling provision in the AoA. In case such an enabling clause is not there in the AoA, the AoA has to be amended. Such an amendment requires a special resolution to be passed by Members of the Company in the Extra Ordinary General Meeting (EoGM) as prescribed by Section 31 (1) of the Act.
57. In this regard, we have a look at the notice issued for EoGM of the company dated 18.02.2010 is reproduced below:
"Notice Notice is hereby given that an Extra Ordinary General Meeting of the company will be held on Thursday, the 18th February, 2010 at 11 a.m. at the Registered Office at Birsa Club, Hawai Nagar, Khunti Road, Ranchi, Jharkhand-834003, to transact the following:
Special Business:
1. To consider and if thought fit to pass with or without modification the following resolution as Ordinary Resolution: "Resolved that consent of the member be and is hereby given in terms of Section 94 of The Companies Act, 1956, to increase the Authorized Capital from the existing Rs.4,25,00,000/-(Rupees Four Crores Twenty Five Company Appeal (AT) No. 175 of 2017 -25- Lacs only) divided into 4,25,000 equity shares of Rs. 100/- each to Rs. 10,00,00,000/-(Rupees Ten Crores only) divided into 10,00,000 equity shares of Rs. 100/- each
2. To consider and if thought fit to pass with or without modification the following resolution as Ordinary Resolution. "Resolved that consequent to increase in Authorised Capital, consent of the members be and is hereby given pursuant to section 17 of the Company Act, 1956 for altering clause V of the Memorandum of Association in the following manner.
In clause V of the Memorandum of Association in places where Rs.4,25,00,000/- (Rupees Four Crores and Twenty Five Lacs) and 4,25,000 -illegible- shall be substituted by Rs. 10,00,00,000/- (Rupees Ten Crores) and 10,00,000 respectively.
By Order of the Board For Hotel Birsa Private Limited Place: Ranchi Date; 18th January, 2010 NOTES:
1. Any member entitled to attend and vote as the meeting shall be entitled to appoint a Proxy to attend and vote for himself at the meeting and such proxy need not be a member of the company.
Proxy forms in order to be valid must be submitted at the registered office at least 48 (forty eight) hours before the commencement of the meeting.
2. Explanatory Statement in respect of items of Special Business is annexed.
EXPLANATORY STATEMENT PURSUANT TO SECTION 173(2) OF THE COMPANIES ACT Item No.1:
Your directors to mobilize the additional working capital by the issue of shares and for the purpose the Authorised Capital of the Company Appeal (AT) No. 175 of 2017 -26- company is proposed to be increased to Rs. 10 crores from the existing Rs.4.25 crores by the creation of further equity shares. Pursuant to section 94 of The Companies Act, 1956 your approval is being sought to the resolution stated in item No.1 of the annexed notice for the increase notice for the increase in Authorized Capital. The Board recommends the resolution.
None of the Directors are interested in the passing of the resolution. Item No.2:
As a consequence to the proposed increase in Authorised Capital the clause V of the Memorandum of Association shall be altered to reflect the increased authorised capital. Pursuant to section 17 of the Companies Act, 1956 your approval is being sought to resolution stated in Item No.2 for altering the clause in the Memorandum of Association. The Board recommends the resolution.
None of the Directors are interested in the passing of the resolution."
[emphasis supplied]
58. We notice that both the agenda items proposed in the notice dated 18.02.2010 are proposed as ordinary resolution. However, in the explanatory statement below the notice it is mentioned that proposal to approve Item No.2 is in accordance with Section 17 of the Act. We also notice that Section 17 provides for special resolution. It is clear from the same notice that matters requiring approval by special resolution have been proposed as ordinary resolution in the notice to members.
59. It appears on the same day another notice for EoGM was issued having additional agenda items. The second notice is reproduced below:
"NOTICE Notice is hereby given that an Extra Ordinary General Meeting of the company will be held on Thursday, the 18 February, 2010 at 11 Company Appeal (AT) No. 175 of 2017 -27- am at the Registered Office at Birsa Club, Hawai Nagar, Khunti Road, Ranchi, Jharkhand-834003, to transept the following:
Special Business
3. To consider and if thought fit to pass with or without modification the following resolution as Special Resolution:
"Resolved that in terms of Section 31 of the Companies Act, 1956 consent of the members be and is hereby given for alteration of Articles of Association in the following manner:
(A) Clause no. 4 of Articles of Association:
in clause no. 4 the following subclauses shall be added after the subclause no. 3
4. Prohibits any invitation or acceptance of any deposits from the persons other than the members, directors or their relatives.
5. The minimum paid up capital of the company is Rs. 1,00,000/- (Rupees One Lacs only) (B) Clause no. 5 of Articles of Association: The existing clause nos shall be deleted and substituted by the following clause.
5.The Authorised Capital of the company shall be such amount as may be determined and stated in clause V of the Memorandum of Association.
By Order of the Board Company Appeal (AT) No. 175 of 2017 -28- For Hotel Birsa Private Limited Place: Ranchi Date; 18th January, 2010 Notes:
1. Any member entitled to attend and vote at the meeting shall be entitled to appoint a Proxy to attend and vote for himself at the meeting and such proxy need not be a member of the company.
Proxy forms in order to be valid, must be submitted at the registered office at least 48 (forty-eight hours before the commencement of the meeting.
2. Explanatory Statement in respect of items of Special Business is annexed.
EXPLANATORY STATEMENT PURSUANT TO SECTION 173(1) OF THE COMPANIES ACT Item No.3 (A) To comply with the provisions of the Companies Act, 1956 the two sub clauses as stated in the resolution in Item no. 3(A) of the notice shall be added in clause no. 3 of the Articles of Association. Pursuant to Section 31, of the Companies Act, 1956 your approval is being sought to the proposed alteration of clause of Articles of Association.
The Board recommends the resolution None of the Directors are interested in the passing of the resolution. Item no. 3(B) Company Appeal (AT) No. 175 of 2017 -29- To avoid the necessity of changes in the Articles pursuant to change in Authorized Capital it is proposed to substitute the clause no. 5 of the Articles of Association.
Your approval is being sought in terms of Section 31 of The Companies Act, 1956 to the proposed insertion of Articles of Association.
The Board recommends the resolution None of the Directors are interested in the passing of the resolution.
By Order of the Board For Hotel Birsa Private Limited Sd/-
(Director) Place: Ranchi Date: 18th January 2010
60. This notice has been disputed by the Respondent No.2 claiming that the same has been created by the appellants and Respondent No.3 when they discovered that MoA cannot be amended without amending enabling clauses of AoA.
61. From the above we observe the following:
Company Appeal (AT) No. 175 of 2017 -30-
(i) That for the same EoGM scheduled on 18.02.2010, two sets of notices have been issued on the same day i.e. 18.01.2010 having two sets of agenda.
(ii) the first notice for EoGM is issued or given for two items both of which are proposed as ordinary resolution.
(iii) For Agenda Item No.2 in the first notice relating to amendment of Memorandum of Association, thereby proposing to raise the authorised capital of the company is covered under Section 17 of the Act, which provides for special resolution.
(iv) The explanatory statement for Agenda Item No.2 also refers to approval for increase in authorised capital of the company under Section 17 of the Act.
(v) There is no mention of amendment to Articles of Association of the company in the aforesaid EoGM notice.
(vi) The second notice allegedly issued on the same day has agenda items Nos 3 (A) and 3 (B) for amending the Articles of Association of the company.
62. The relevant portion of AoA of the company are extracted below:
Company Appeal (AT) No. 175 of 2017 -31- Company Appeal (AT) No. 175 of 2017 -32- In the 'capital' portion of AoA an insertion has been made in para 5 with notes thereon that the same has been inserted at EGM held on 18.02.2010. We have seen earlier that in the first notice for EoGM issued on Company Appeal (AT) No. 175 of 2017 -33- 18.01.2010 there is no such agenda for amendment of AoA. The same has been proposed through another notice which has been issued on the same day. The notice for the same has been sent through 'under Certificate of Posting' to the three members viz. Mr. Prem Rajesh Soy, Mrs. Shalini Soy (Respondent No.3) and M/s Adbhut Vincom (Respondent No.2).
63. We now have a look at the minutes of the EoGM held on 18.02.2010 which are extracted below:
"MINUTES OF THE PROCEEDINGS OF THE EXTRA ORDINARY GENERAL MEETING OF THE MEMBERS OF BIRSA HOTEL PVT. LTD. HELD AT ITS REGISTERED OFFICE AT BIRSA CLUB, HAWAI NAGAR, HINOO KHUNTI ROAD, RANCHI, JHARKHAND-843003 ON 18TH FEBRUARY, 2010 AT -11.00 Α.Μ:
PRESENT:
Mr. Prem Rajesh Soy - Director & Member Mrs. Shalini Soy - Director & Member Mr. Anil Kumar Sarda - Director Mr. Sunil Toshniwal - Director The common consent Mr. Prem Rajesh Soy was elected as Chairman of the meeting.
The quorum being present the Chairman declared the meeting open The notice of the meeting having been circulated among members was taken as ready.
INCREASE IN AUTHORISED CAPITAL-ORDINARY RESOLUTION The Chairman informed the members about the requirements of funds and the proposal to mobilize the -illegible- of shares. He then stated that the authorised capital of the company is proposed to be increased to Rs. 10,00,00,000 and requested the members to Company Appeal (AT) No. 175 of 2017 -34- consider the same. The following resolution was proposed by Mr. Sanjay Sahu and seconded by Mr. Sunil Kumar.
- Resolved that consent of the members be-illegible- is hereby - illegible- Section -illegible of The Companies Act, 1956 to increase the Authorised Capital of the company from the existing Rs.42,500,000/- (Rupees Four Crores Twenty Five Lacs only) divided into 4,25,000 equity shares of Rs.100/, each to Rs.10,00,00,000/- (Rupees Ten Crores only) divided into 10,00,000 equity shares of Rs. 100/- each and Clause V of the Memorandum of Association of the company be altered as follows:
In clause V of the Memorandum of Association in places where Rs.4,25,00,000/- (Rupees Four Crores and Twenty Five Lacs) and 4,25,000/- -illegible- shall be substituted by Rs. 10,00,00,000/- (Rupees Ten Crores) and 10,00,000 respectively.
The resolution was put to vote by show of hands and carried out unanimously.
ALTERATION OF ARTICLES OF ASSOCIATION RESOLUTION SPECIAL The Chairman then informed the Board about the various clauses in the Articles of Association of the company which requires alteration to comply with the provisions of the Companies Act, 1956. He then placed the list showing the respective clauses requiring alteration and requested the Board to consider the same. The matter was discussed and the following resolution was passed "Resolved that subject to consent of the members, approval of the Board be and is hereby given for alteration of the following clauses of Articles of Association as stated below:"
Company Appeal (AT) No. 175 of 2017 -35-
64. We observe that the minutes do not reflect agenda wise discussion. The members of the company should have taken up agenda Item Nos. 1, 2 and 3 (A) & 3 (B) specifically and voted on each of the specific resolution. The minutes seems to have been prepared to incorporate the details of agenda items of second notice and first notice together. In fact, the first agenda should have been the amendment to the Articles of Association followed by amendment to Memorandum of Association and this should have been followed by raising the authorised capital of the company.
65. It appears that the appellants and Respondent No.3 when they realise that they could not have increased the authorised share capital without amending the AoA they created the second set of documents including minutes of the EoGM. However, they could not put the items agenda wise as the first two items in that case would have been invalid in absence of the first action requiring amendment to Articles of Association. All other items had to be subsequent to amendment of articles.
66. The issuance of two notices for same EoGM and preparation of minutes of meeting in a complex manner instead of making it agenda wise creates serious doubts in our mind regarding the actual issuance of the second notice.
67. Respondent No.2 is 49% shareholder of the Hotel Birsa Pvt. Ltd./Respondent No.1 before the increase in share capital and no special resolution could have been passed without his presence in the meeting. Therefore, it was absolutely essential that notice for any special resolution to be taken up by the members of the company is received by the Company Appeal (AT) No. 175 of 2017 -36- Respondent No.2. In this regard, we also have a look at the Section 189 of the Act regarding ordinary and special resolution:-
189. Ordinary and special resolutions -
(2) A resolution shall be a special resolution when-
(a) the intention to propose the resolution as a special resolution has been duly specified in the notice calling the general meeting or other intimation given to the members of the resolution;
(b) the notice required under this Act has been duly given of the general meeting; and
(c) the votes cast in favour of the resolution (whether on a show of hands, or on a poll, as the case may be), by members who, being entitled so to do, vote in person, or where proxies are allowed, by proxy, are not less than three times the number of the votes, if any, cast against the resolution by members so entitled and voting.
[Emphasis supplied]
68. We note that in the first notice of EoGM the resolution of amendment to MoA has been listed as ordinary resolution, even though the explanatory note lists it as special resolution under Section 17 of the Act.
69. We find that only mode of intimation of notice of EoGM or Board meeting by the company has been through 'certificate of posting'. The same mode of communication for the EoGM was followed by the Respondent No.1. The Respondent No.2 has emphatically denied that he received the notice for EoGM proposed on 18.02.2010. Had the appellants proven the service of notice upon Respondent No.2, we would not have any doubt that the Company Appeal (AT) No. 175 of 2017 -37- Respondent No.2 was not keen to participate in the matters relating to the company as argued by the appellants. Only a receipt of Certificate of Posting cannot be relied upon as a conclusive proof that the notices have been received by the Respondent No.2. No other mode of communication has been attempted to serve such notices. In absence of any other piece of evidence to substantiate the claim of notices being served, it can be concluded that the Appellants and Respondent No.1 were in default. Hon'ble Supreme court in the case of Mohd. Asif Naseer vs West Watch Company [AIR Online 2020 SC 514] has laid down that producing the mere receipt of notice having been sent under certificate of posting, in itself, may not be sufficient proof of service, but if the same is coupled with other facts and circumstances which go to show that the party had notice, the same could be held to be sufficient service on the party.
70. We also observe that consequent upon the EoGM on 18.02.2010 at Ranchi, a board meeting of the company was called in Kolkata on the very same day at 3.00 P.M., though in some documents its mentioned as 19.02.2010. In this meeting, the modalities for issuing the additional share capital were finalised. The relevant extracts of the meeting are as under:
"The chairman informed the Beard about the immediate requirements of funds for working capital and requested for mobilizing the same by issue of right shares to the existing shareholders. The chairman further stated that the offer could be made giving 20 days time to the shareholders par value with the entire amount thereof payable on application. The chairman then tabled the draft of the Letter to be addressed to the shareholders offering the shares. The Board was requested to consider the matter Company Appeal (AT) No. 175 of 2017 -38- and authorize a Director to attend to the required formalities. The matter was discussed and the following resolution was passed:
Resolution that this Board hereby takes note of the immediate requirement of Rs.90,00,000 (Ninety Lacs only) for working capital and the suggestion to seize the same by issuing shares.
Resolved further that the consent of the Board be and is hereby given for issuing 90000 equity shares of Rs. 100/- each at par by way of right shares to the existing shareholders in the ratio of their present holding of equity shares and any one of the director be authorized to determine the number of shares to be offered to the respective shareholders.
Resolved that the shareholders be given 20 days time to accept or reject the offer with a stipulation that non-receipt of any communication within the given time deemed as rejection of offer and in the event of rejection the Board shall have the power to issue the share to any interested person/entity and for the purpose the draft of the letter of offer, placed in the meeting be and is hereby approved and that any one of the director be and is hereby authorized to sign the letter and arrange dispatch of the same to the shareholders."
71. Two things emerged from the above. If the aforesaid board meeting was held on the 18.02.2010, then it was a physical impossibility to reach Kolkata at 3.00 P.M. after conducting the EoGM at 11.00 A.M on the same day at Ranchi. The second issue which emerges from the same is that the notice for the Board meeting could have been issued only after EoGM had approved the changes to AoA and MoA, as the decision to issue further shares was dependent on changes to AoA and MoA. The Tribunal has recorded that the notice for the meeting on 19.02.2010 was issued on the Company Appeal (AT) No. 175 of 2017 -39- very same day. This part has not been denied by the appellants/ Respondent No.1 or Respondent No.3. This clearly shows the intention of appellants and Respondent No.1 & 3 to keep Respondent No.2 out of decision-making process at every stage in violation of provisions of the Act, even though he held 49% of the shares of the company and no special resolution could have been passed without his consent.
72. Further, based on the decision of the Board the following letter was sent to all shareholders including Respondent No.2/ Adbhut Vincom:-
"HOTEL BIRSA PRIVATE LIMITED Dated: 19.02.2010 To M/s. Adbhut Vincom Pvt. Ltd.
13, Prafulla Sarkat Street Ground Floor, Kolkata-700072.
Sub: Offer to subscribe for the Equity shares at par Dear Shareholders, This is to inform you that the Board of Directors at their meeting held on date resolved to issue 90000 equity shares of Rs.100/- each at par and to offer the same to the existing shareholders.
Being an equity shareholder of the company based on the shares held on date, you are hereby offered 44100 equity shares of Rs.100/-each at par. The relevant share application form is being sent herewith. The entire amount toward the shares is payable on application and therefore Company Appeal (AT) No. 175 of 2017 -40- you are requested to send your cheque for the amount together with the application form duly completed.
Please note that the last date for receipt of your duly filled application. form with cheque for the shares has been fixed as 11.03.2010. In case we do not receive any communication from your end by 11.03.2010, it will be deemed that you have rejected the offer and therefore the Board of directors shall proceed to issue and allot the shares to any interested person as they may deem fit and proper.
Thanking you Yours faithfully For Hotel Birsa Pvt.. Ltd.
Sd/-
Director"
We find no mention about the right of renunciation being given to existing members in this letter.
73. The modalities for further issuance of share capital of a limited company are governed by Section 81 of the Act which is extracted below:
Section 81 Further issue of Capital -
(1) Where at any time after the expiry of two years the formation of a Company or at any time after the expiry of one year from the allotment of shares in that company made for the first time after its formation, whichever is earlier, it is proposed to increase the subscribed capital of the company by allotment of further shares, then-
(a) Such further shares shall be offered to the persons who, at the date of the offer, are holders of the equity shares of the Company Appeal (AT) No. 175 of 2017 -41- company, in proportion, as nearly as circumstances admit, to the capital paid-up on those shares at that date;
(b) The offer aforesaid shall be made by notice specifying the number of shares offered and limiting a time not being less than fifteen days from the date of the offer within which the offer, if not accepted, will be deemed to have been declined;
(c) Unless the articles of the Company otherwise provide, the offer aforesaid shall be deemed to include a right exercise 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 (b) shall contain a statement of this right;
(d) After the expiry of the time specified in the notice aforesaid, or on receipt of earlier limitation 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 as they think most beneficial to the Company.
(emphasis supplied)
74. It can be seen from Section 81 (1) (c) above that a right of renunciation has to be provided in favour of person, who can renounce his shares in full or part to any other person. We have seen from the letter sent to the Respondent No.2 that no such option was provided by the Respondent No.1 to Respondent No.2. The compliance with aforesaid Section is mandatory. It appears that the Sh. Prem Rajesh Soy (Deceased Promoter/ Director), and Respondent No.3 were in a hurry to allot the shares to the appellant, due to which such right was not provided to the shareholders of the company. We have also seen that the Articles of Associations of the company have no such enabling clause under which renunciation right of existing shareholders Company Appeal (AT) No. 175 of 2017 -42- could be waived. This is an express violation of provision of Section 81 (1) (c) of the Act.
75. The appellant has cited various judicial precedents to justify the validity of the rights issue, service of notice, and share allotments. We have considered the citations of the Appellant in each case and its applicability to the present case:
(i) The appellant relies on Hon'ble Supreme Court Judgment in V.S. Krishnan & Ors. v. Westfort Hi-Tech Hospital Ltd., (2008) 3 SCC 363 to argue that UPC service was valid. However, in V.S. Krishnan, the recipient did not contest receipt, creating a presumption of valid service. In the present case, Adbhut Vincom/ Respondent No.2 has vehemently denied receiving the notice in all cases, shifting the burden of proof to the appellant, which failed to provide corroborative evidence. We, therefore, see that the ratio of the aforesaid Judgment does not apply to the present case.
(ii) The appellants cite the Judgment of Hon'ble Supreme Court in the case of Raj Kumar Bhatia & Ors. v. M/s. A V Light Automobiles Ltd., [2016 SCC OnLine Del 1256] to contend that Adbhut Vincom's non-participation in the rights issue indicated disinterest, justifying the allotment of shares. However, the Judgment supra applies only when shareholders voluntarily choose not to subscribe. In the instant case, Adbhut Vincom was prevented from participating due to non- receipt of letter, the seizure of their documents by the Income Tax and the company's refusal to issue duplicate share certificates. It is also Company Appeal (AT) No. 175 of 2017 -43- seen that the notice did not provide for renunciation of rights which is mandatory as per Section 81 (1) (c) of The Act. The absence of a fair opportunity to participate in the rights issue makes this judgment inapplicable to the present situation.
(iii) The appellant has argued that there is collusion among Respondent No. 2/Adbhut Vincom, Sh. Prem Rajesh Soy and Smt. Salini Soy/ Respondent No.3 in challenging the rights issue with fraudulent intent. In this regard, they have cited Hon'ble Supreme Court's Judgment in Shri Shashi Kumar v. Dharam Pal Sharma & Anr., [1981 SCC OnLine Del 14]. However, the Judgment supra establishes that collusion must be proven with direct evidence of fraudulent intent. We find that the appellant has provided no such evidence. It is seen that the respondents' opposition to the rights issue was based on violations of procedure laid down under Section 81 of The Act. We find no fraudulent intent on the part of Respondent No. 2. On the contrary, we find the appellants colluding with Respondent No. 1 and 3 to deprive Respondent No. 2 of their rights.
(iv) The appellant has cited the Hon'ble Supreme Court's Judgment in Mohd. Asif Nazeer v. West Watch Company, [2020 (17) SCC 136] to asserts that the rights issue was lawfully conducted. However, the Judgment supra upheld a rights issue, where procedural compliance was established and no shareholder was unfairly prejudiced. In contrast, the present case involves procedural irregularities, exclusion of Adbhut Vincom, and dilution of its shareholding without a fair Company Appeal (AT) No. 175 of 2017 -44- opportunity to participate. We, therefore, hold that the appellant's reliance on this precedent is misplaced.
76. Based on the above discussion, we find that the amendments to AoA and MoA and subsequent issue of fresh share capital has not been done in accordance with provision of Act.
77. We now consider the third issue viz. whether the actions of the Appellants, Respondent No. 1, and Respondent No. 3 constitute Oppression and Mismanagement under Sections 397, 398, and 399 of the Companies Act, 1956?
78. The law protects minority shareholders from unfair treatment by the majority. Sections 397 and 398 of the Companies Act, 1956, ensure that company affairs are conducted fairly and without harming the interests of shareholders. The Hon'ble Supreme Court in Dale and Carrington Investment (P) Ltd. v. P.K. Prathapan, [(2005) 1 SCC 212], ruled that if the majority unfairly reduces a shareholder's stake without a valid business reason, it amounts to oppression. Further, Hon'ble SC in Tata Consultancy Services Ltd. v. Cyrus Investments Pvt. Ltd., (2021) 9 SCC 351, also held that mismanagement is not limited to financial losses but includes any serious wrongdoing that affects the company's governance and fairness.
79. In this case, the actions of the appellants and Respondent No. 3 clearly show a deliberate attempt to adversely affect the rights of Respondent No. 2. This was done by (i) increasing the company's authorized share capital from Rs.4.25 crore to Rs.10 crore without first changing the Company Appeal (AT) No. 175 of 2017 -45- Articles of Association (AoA), (ii) issuing 2,10,000 shares only to the appellants, which reduced Respondent No. 2's stake from 49% to 32.75%,
(iii) failing to follow Section 81 of the Companies Act, 1956, which requires new shares to be first offered to existing shareholders, and also giving a right of renunciation to existing shareholders; and (iv) multiple procedural violations, including issuing two conflicting EoGM notices, backdating resolutions, and failing to properly notify Respondent No. 2. These actions show that the share allotment was not conducted in a fair and legal manner.
80. The increase in share capital was not carried out in accordance with procedure laid down by law. Section 94(1) of the Companies Act, 1956, states that a company can increase its share capital only if the AoA allows it. However, the company's AoA did not have any such provision. Under Section 31, the company should have first amended its AoA by passing a special resolution. The failure to do this makes the share capital increase invalid. Also, the first notice for the Extraordinary General Meeting (EoGM) dated 18.01.2010, which proposed this change, did not mention any amendment to the AoA, making the process legally defective.
81. The company later issued a second notice for the same EoGM, this time including an amendment to the AoA. This was disputed by Respondent No.2 claiming that it was a subsequent creation. The very fact that two different notices were issued on the same date raises serious doubts authenticity of the second notice. It strongly suggests that the appellants and Respondent No. 3 realized their violation of various provisions of the Act and tried to fix it afterward. Such actions amount to mismanagement under Company Appeal (AT) No. 175 of 2017 -46- Section 398. Hon'ble Supreme Court in Vodafone International Holdings B.V. v. Union of India, [(2012) 6 SCC 613], held that lack of transparency in corporate actions must be strictly examined to prevent misuse of power.
82. Another important fact is that the share allotment unfairly reduced Respondent No. 2's ownership which amounts to oppression as seen earlier. The company issued 90,000 shares to Appellant No. 1 on 19.03.2010 and 1,20,000 shares to Appellant No. 2 on 14.04.2010, but Respondent No. 2 was not given a proper opportunity to buy these shares. Section 81 of the Companies Act, 1956, requires that new shares must first be offered to existing shareholders in proportion to their current holdings. The company claims it sent a rights issue notice to Respondent No. 2 by Under Postal Certificate (UPC). However, there is no proof that Respondent No. 2 actually received it. The Hon'ble Supreme Court in M.S. Madhusoodhanan v. Kerala Kaumudi Pvt. Ltd., [(2004) 9 SCC 204], held that UPC alone is not enough proof of delivery, especially if the recipient denies receiving the notice. The appellants failed to show any supporting evidence, like an acknowledgment receipt or dispatch register, which suggests that Respondent No. 2 was deliberately left out of the share issuance process.
83. Another major legal violation was the failure to allow renunciation rights, which is a key requirement under Section 81(1)(c) of the Companies Act, 1956. The law gives existing shareholders the right to transfer their entitlement to another person if they do not wish to buy the new shares themselves. By not giving this option to Respondent No. 2, the company further restricted their rights and made the share allotment unfair. The Company Appeal (AT) No. 175 of 2017 -47- Supreme Court in Tata Consultancy Services Ltd. v. Cyrus Investments Pvt. Ltd. (supra) has clearly stated that changing a shareholder's stake unfairly without following due process is a form of oppression, and that is exactly what happened in this case.
84. The issue of whether the appellants are entitled to interest on the money paid for the cancelled shares is covered by Reliance Cellulose Products Ltd. v. ONGC Ltd. [(2018) 9 SCC 266], wherein the Hon'ble Supreme Court held that interest cannot be awarded when the claim itself arises from wrongful conduct. The appellants are seeking interest on the Rs. 2.1 crore they paid for the cancelled shares. However, since the allotments have been declared illegal by NCLT, they cannot claim compensation for an invalid transaction. Following Reliance Cellulose, the respondent argues that granting interest to the appellants would reward their wrongful conduct, which is legally unsustainable. Hon'ble SC in Ashok Kapil v. Sana Ullah [(1996) 6 SCC 342] held that a party cannot claim financial benefits arising from its own wrongful acts.
85. In the instant case, the appellants, in collusion with Shri Prem Rajesh Soy (Deceased Promoter-Director) and Respondent No. 3 acquired 2,10,000 shares of the Respondent No.1 in violation of laid down procedure in The Act. Allowing the appellants to profit from these unlawful allotments would be against the principles of fairness and justice and this is squarely covered by Judgments of Hon'ble SC in Reliance Cellulose (supra) and Ashok Kapil (supra). We, therefore, endorse the decision of NCLT not to grant any interest on the share allocation money paid by appellants. Company Appeal (AT) No. 175 of 2017 -48-
86. Considering all these factors which include legal and procedural lacuna in increasing the authorised and paid-up share capital; unfair share allotment; failure to notify Respondent No. 2 properly; denial of renunciation rights; and manipulation of corporate records, we hold that the actions of the appellants and Respondent No. 3 amount to both oppression and mismanagement under Sections 397 and 398 of the Companies Act, 1956. The company's decision-making process was neither fair nor legal, and it was clearly designed to reduce Respondent No. 2's stake and control.
87. Based on these findings, we dismiss the appeal with the direction that the Respondent No.1 would refund Rs. 2.1 crore, the amount paid by appellants towards purchase of 210000 shares of Respondent-1 within a period of 60 days. No order as to costs. IAs if any, are closed.
[Justice Rakesh Kumar Jain] Member (Judicial) [Mr. Naresh Salecha] Member (Technical) [Mr. Indevar Pandey] Member (Technical) SA Company Appeal (AT) No. 175 of 2017