National Company Law Appellate Tribunal
Ms. M. Nandana Reddy vs M/S. Sri Lakshmi Narasimha Mining Co. P ... on 24 April, 2023
NATIONAL COMPANY LAW APPELLATE TRIBUNAL
CHENNAI BENCH
(Appellate Jurisdiction)
TA No. 88/2021 (Comp. App. (AT) No.148/2019)
(Appeal under Section 421 of the Companies Act, 2013)
(Arising out of the order dated 22.03.2019 in C.P. No.09 of
2016 in T.P. No.83 of 2016 passed by the National Company
Law Tribunal, Bengaluru Bench)
In the matter of:
M. Nandana Reddy
1004m Block-2, Suncity Apts.,
Sarjapur Outer Ring Road.
Bellandpur, Bangalore-560103. ...Appellant
Vs.
M/s. Sri Lakshmi Narasimha
Mining Co. (P) Ltd., No. 83, Ground Floor,
6th Cross, AG's Layout, New BEL Road,
Bengaluru-560054. ... Respondent No. 1
Shri R. Swaroop Reddy, No.9, Ranjith Road, Surya Nagar, Kotturpuram, Chennai-600085. ... Respondent No. 2 Shri Yathin Reddy, ... Respondent No. 3 No.9, Ranjith Road, Surya Nagar, Kotturpuram, Chennai-600085.
Ms. Jansi Reddy, ... Respondent No. 4 No.9, Ranjith Road, Surya Nagar, Kotturpuram, TA No. 88/2021 (Comp. App. (AT) No.148/2019) Page 1 of 33 Chennai-600085.
Shri Imran Pasha, ... Respondent No. 5 No.9, Ranjith Road, Surya Nagar, Kotturpuram, Chennai-600085.
Shri M.N. Pratap Reddy, Flat No. 205, 2nd Floor, Vishwa Parkruthi Haveli, Above Reliance Fresh, Amruthahalli Main Road, Bengaluru-560024. ... Respondent No. 6 Shri M. Kiran Kumar Reddy Sri Lakshmi Nilayam No. 266, 2nd Block, RMV 2nd Stage, 4th Cross, 80 Feet Road, Sanjaynagar, Bangalore-560094. ... Respondent No. 7 Present:
For Appellants : Mr. S. Vivekananda,
Advocate
For VGB Associates
For Respondent Nos.6 & 7 : Mr. D.Abhinav Rao, Advocate
Judgment
(Virtual Mode)
(Date: 24.4.2023)
[Per: Dr. Alok Srivastava, Member (Technical)] The present appeal has been filed by the Appellant under TA No. 88/2021 (Comp. App. (AT) No.148/2019) Page 2 of 33 section 421 of the Companies Act, 2013 aggrieved by the order dated 22.3.2019 (in short 'Impugned Order') passed by National Company Law Tribunal, Bengaluru Bench in CP No. 09 of 2016 (T.P. No. 83 of 2016).
2. The facts of the case relevant to this appeal, as stated and argued by the Appellant are that the Appellant along with her father Shri Dasaratha Rami Reddy, and her two brothers Shri M.N. Pratap Reddy and Shri M. Kiran Kumar Reddy (Respondents No. 6 and 7 respectively) in this appeal were subscribers to the Memorandum of Association of R-1 Company (in short 'R-1'). Further, Sri Dasaratha Rami Reddy, and the two brothers (R-6 and R-7 respectively) were each holding 30% shares and the Appellant held 10% in the R-1 Company. Subsequently Shri Dasaratha Rami Reddy transferred his shares to his sons and Appellant, and thus as on 18.8.2011 R- 6 and R-7 each held 36% of shares in the paid-up capital and the Appellant held 24% shares in R-1 company. It is further stated by the Appellant that though she was a shareholder in R-1 Company, she was not a director of the company at any point of time, nor involved in the day-to-day affairs of the company. The Appellant has further stated that in the year 2011 an allotment of 1,77,800 equity shares of R-1 at Rs. 10 each in favour of Shri Yathin Reddy and Ms. Jansi Reddy, who are Respondents No. 3 and 4 in the TA No. 88/2021 (Comp. App. (AT) No.148/2019) Page 3 of 33 present appeal, was done by the company and thus 88,900 shares were allotted to R-3 and similar number of 88,990 shares were allotted to R-4, at Rs. 10 per share without the knowledge of the Appellant, and thus R-3 and R-4 became 64% shareholders in the company and the Appellant's proportionate shareholding was reduced from 28% to 8.64%. She challenged the issue of illegal allotment of shares to R-3 and R-4 in CP No. 09/2016, which was dismissed by NCLT by the Impugned Order, and therefore, aggrieved by this order the Appellant has filed this appeal.
3. We heard the arguments presented by the Learned Senior Counsel/Counsels for the Appellant and the Respondents and went through the record submitted before us.
4. The Learned Counsel for Appellant has argued that the Appellant had sought certain reliefs, namely declaration of the allotment of shares of R-1 Company in favor of R-3 and R-4 and their continued holding them as illegal, and also the resolutions of the board of directors dated 2.12.2011 and 1.2.2012 by which the allotment of shares took place as invalid and illegal, and further restraining R-3 and R-4 from misusing any right or privilege as shareholders of R-1 Company and also from dealing with the properties, funds or assets of the Company.
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5. The Learned Counsel for the Appellant has further argued that R-1 Company is a family company in the form of quasi partnership, in which Shri Dasaratha Rami Reddy, Shri Chenna Keshava Reddy, both held interests, while the mining lease for extracting ore was held by Shri Chenna Keshava Reddy. There were certain business arrangements between them, consequent to which Shri Dasaratha Rami Reddy resigned from the directorship of R-1 Company on 18.8.2011 and transferred his entire shareholding of 30% in R-1 Company in favour of the Appellant and her two brothers R-6 and R-7, whereafter the shareholding of R-6 and R-7 in R-1 Company became 38% each and the Appellant's shareholding became 24%. The Learned Counsel for Appellant has further argued that without the knowledge of Appellant, R-6 and R-7 were illegally and unlawfully allotted shares amounting to 64% of the company's total shares i.e. 1,77,800 equity shares (88,900 shares in favour of R-3 and 88,900 shares in favour of R-4). He has further alleged that R-3 and R-4 were brought in without consultation with other family members including the Appellant. Moreover, the shares in question were allotted in December 2011 when mining operations of the Company had stopped in August, 2011, and the Company was not in any need of infusion of funds.
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6. The Learned Counsel for the Appellant has further argued that allotment of 64% shares to R-3 and R-4 was done at a throwaway price in violation of the Articles of Association and the Appellant as an existing shareholder should have been offered the new shares through a formal notice, which was not done and this action of R-1 company to allot shares to R-3 and R-4 resulted in Appellant becoming a minority shareholder, which caused oppression to her and therefore, she has filed CP No. 09/2016 to seek redressal. He has further clarified that the Appellant was never a director in R-1 Company, and was, therefore, not aware of the allotment of shares to R-3 and R-4 and this fact has been incorrectly noted by the NCLT in the Impugned Order, wherein it is stated that she was signatory in the board meetings, where shares were allotted to R-3 and R-4,
7. The Learned Counsel for the Appellant has further contended that Clause 5 of Articles of Association stipulates that new shares shall be offered to persons, who at the date of the offer are holders of that class of shares of the Company, and in proportion as nearly as possible to the capital paid up of those shares on that date. Further, Article 5 provides that the offer should be first made to TA No. 88/2021 (Comp. App. (AT) No.148/2019) Page 6 of 33 existing members specifying the number of shares offered and only after the members do not accept the offer or the time limit runs out, can the Board of Directors dispose of such shares in the manner they think is most beneficial to the company. The Learned Counsel has argued that this laid-down procedure in the Articles of Association was not followed in the allotment of the shares to R-3 and R-4 and therefore was it constitutes an act of oppression, as it converted the shareholding of the Appellant from 28 to 8.64% and made her a very small shareholder.
8. The Learned Counsel for Appellant has cited the judgment of Hon'ble Supreme Court in the matter of Claude-Lila Parulekar v. Sakal Papers (P) Ltd. & Ors. [(2005) 11 SCC 73], wherein in para 25, the Hon'ble Supreme Court has held that the Articles of Association of a company are not only binding on the company, but also on members inter se, and it constitutes a contract between the shareholders and the company and the directors can only exercise those powers conferred by the Articles of Association. He has also referred to the judgment of this Tribunal in TA No. 102021 (M. Appayya and Ors. Vs. Chandrashekar Rao and Ors.), wherein in judgment dated 5.12.2022, it is held that if a company intends to increase its share capital by issue of further shares, such shares shall be first offered to the existing members in proportion to their TA No. 88/2021 (Comp. App. (AT) No.148/2019) Page 7 of 33 shareholding and by sending a letter of offer and only when the existing members don't avail of this offer should the company allot the shares to other persons. It is further held that an allotment that causes reduction in shareholding of the other shareholders whom shares have not been allotted, would be considered detrimental to the interest of the such shareholders and would be an oppressive practice. Further, even in a family-owned company, which is in the form of quasi-partnership, the law as applicable with regard to further issue of share capital and allotment of shares cannot be violated.
9. The Learned Counsel for Appellant has also referred to the judgment of Kobian Pte. Ltd. v. Kobian India P. Ltd. 7 Ors [(2011) 162 Company Cases, 357], wherein it is held that the directors are in a fiduciary position vis-à-vis the company and its members and while it is the prerogative of the board to allot shares, they don't have absolute discretion or freedom to do so. Further, it is held in the matter of Dale and Carrington Invt. P. Ltd. v. P.K. Prathapan [(2004) 122 Comp Cas 161] that the extent of powers of directors are clearly spelt out in the memorandum and articles of association of the company, the directors hold a fiduciary duty to the shareholders to make a full and honest disclosure to them regarding various issues including allotment of new/additional shares. TA No. 88/2021 (Comp. App. (AT) No.148/2019) Page 8 of 33
10. The Learned Counsel for Appellant has also argued that his company petition before NCLT was not affected by the issue of limitation, delays and laches, since in case of oppression and mismanagement if the events have a continuous impact on the affairs of the company, there would be a 'continuing cause of action'. In this regard, he has referred to the judgment of Hon'ble Delhi High Court in the matter of Surinder Singh Bindra v. Hindustan Fasteners (P) Ltd. LAWS(DLH) 1989 5 27, where it is held that illegal allotment of shares has a continuous impact on the affairs of the company and if it makes the appellant a minority shareholder through illegal allotment of shares, hence there exists a continuing cause of action. He has also claimed that there is no res judicata as per the Indian Evidence Act, 1872 by stating that the Appellant only did not raise this issue earlier, when the Appellant joined hands with her brothers R-6 and R-7 in filing CP No. 59/2014, and filed the CP 9/2016 after she became fully aware of the allotment of new shares to R-3 and R-4, and therefore reliance cannot be placed on sections 114 and 115 of the Indian Evidence Act,1872 about res judicata and estoppel and further, none of the respondents had objected to the withdrawal by the Appellant from the previous petition CP No. 59/2014, which she has filed along with her brothers R-6 and R-7. TA No. 88/2021 (Comp. App. (AT) No.148/2019) Page 9 of 33
11. The Learned Senior Counsel for R-3 and R-4 has started his arguments by pointing out that the prayer to the filing of the subject petition CP No. 09/2016, the Appellant was a co-petitioner in CP No. 59/2014, which was filed by the Appellants along with her brothers R-6 and R-7, and in that petition, Appellants had explicitly and unequivocally acknowledged that the issue of allotment of shares to R-3 and R-4 was legally valid. He has referred to para 9 of the CP No. 59/2014 in this regard and contended that once the Appellant had acknowledged this fact in CP No. 59/2014, she had even prayed for a direction to R-3 and R-4 for paying the premium of the shares allotted to them. He has further argued that the Appellant filed a memo for withdrawal as a co-petitioner in CP NO. 59/2014 and NCLT permitted withdrawal with liberty to the Appellants, whereafter misusing the liberty given to the Appellant and abusing the process of law, she initiated a completely new case through CP No. 09/2016 regarding allotment of shares to R-3 and R-4, whereas she was covered by the res judicata and estoppel from raising the issue of allotment of shares to R-3 and R-4 in view of her pleadings in CP No. 59/2014.
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12. The Learned Senior Counsel for R-3 and R-4 has further claimed that there is collusion between her two brothers R-6 and R- 7 , who have propped her up for filing the frivolous CP No. 09/2016, as the Appellant at the time of filing CP No. 09/2016 had only 8.64% shares in the Company and did not have locus standi under section 244 of the Companies Act, 2013 to file CP No. 09/2016, but to facilitate this frivolous and unnecessary action of the Appellant, they illegally transferred 1.64% shares to the Appellant thereby increasing her shareholding to 10% to enable her to meet the threshold requirement for filing a company petition regarding oppression and mismanagement. He has further claimed that this transfer of 1.64% shares to the Appellant is violation of Article 7 of the Articles of Association and further since there was no approval from the Board for the said transfer, it also violates section 56 of the Companies Act, 2013.
13. The Learned Senior Counsel for R-3 and R-4 has also argued that the CP No. 09/2016 was barred by limitation as a petition for operation should have been filed within three years as per Article 137 of the Limitation Act, and arguably if the allotment of shares to R-3 and R-4 was the cause of action as claimed by the Appellant to file CP No. 09/2016, the same was barred by limitation, since shares allotment was made on 2.12.2011, while the Company Petition was TA No. 88/2021 (Comp. App. (AT) No.148/2019) Page 11 of 33 filed in January 2016. In this connection, he has cited the judgment in the matter of Praveen Shankaralayam v Elan Professional Appliances Pvt. Ltd. [MANU/NC/0079/2016], wherein the issue of delay and laches has been upheld in filing of similar company petition, and that the Appellant did not state any ground in the said memo for her withdrawal and therefore, a fresh suit can only be filed if the pre-condition for withdrawal is satisfied and established in the fresh petition, whereas the memo did not give any pre-condition. He has referred to the judgment of Hon'ble Supreme Court in the matter of V. Rajendran v. Annasamy Pandian [(2017) 5 SCC 63] and claimed that the NCLT has correctly followed that the liberty was granted to the Appellant to only withdraw from the earlier company petition, but not for filing fresh petition based on the same cause of action.
14. Regarding allotment of shares to R-3 and R-4, the Learned Senior Counsel for R-3 and R-4 has argued that there was no illegality in allotment of these shares as the Appellant had acknowledged the allotment as legal and proper in CP No. 59/2014 and now the Appellant cannot do a complete about turn to claim that the allotment was made without her knowledge and in violation of Article 5 of the Articles of Association. He has further pointed out that the allotment of shares has been held to be done as per law in TA No. 88/2021 (Comp. App. (AT) No.148/2019) Page 12 of 33 the final order passed by NCLT in CP No. 59/2014 and on this ground also the appeal deserves to be dismissed.
15. The Learned Senior Counsel for R-3 and R-4 has further argued that the original CP No. 09/2016 is not maintainable on the ground of oppression as it has to be first shown that the conduct of the company or the majority shareholders has to be shown as oppressive to the minority shareholder members and that there must be continuous acts on the part of the majority shareholders, continuing up to the date of petition for said company petition to be maintainable on grounds of oppression and mismanagement, which is not the ground claimed by the Appellant. Further, he has pointed out that in the Board meeting dated 2.12.2011, in which the Company decided to allot shares to R-3 and R-4, the two brothers R-6 and R-7 of the Appellant, who were present in the Board meeting and took the decision to allot the new shares. He has further argued that in the AGM, which followed immediately thereafter, for the year 2011-12, the Appellant was present and the fresh allotment of shares was included in the balance sheet for the year 2011-12, which was provided to the Appellant as agenda note of the AGM, but now she is giving a lame excuse that though she was provided with the said documents, she did not know how to read and interpret these financial documents, which is clearly an afterthought and a TA No. 88/2021 (Comp. App. (AT) No.148/2019) Page 13 of 33 lame excuse.
16. Further, the Learned Senior Counsel for R-3 and R-4 has claimed that regarding payment of premium for the said shares allotted to R-6 and R-7, no valuation of shares was ever undertaken and thus, there was never any question of payment of premium nor any premium was ever demanded by the company, even though the company was at that time being managed by the promoters group, which included the Appellant and her two brothers and after a delay of more than three years, the Appellant had suddenly woken up to the fact that no premium was paid, which is definitely an afterthought and bogey. Further, he has pointed out that after the Board's Resolution dated 2.12.2011, Form 2 and balance-sheets for the years 2011-12 and 2012-13 filed with the Registrar of Companies very clearly bear out that the shares were allotted to R- 3 and R-4 at par and not at a premium. He has also argued that averments made by the Appellant in her rejoinder that the Auditors have found the allotment of shares made to R-3 and R-4 to be in violation of Articles of Association is misconceived and the NCLT has clearly held that there is no violation of Articles of Association and also that the Auditor's report is not germane to these proceedings. TA No. 88/2021 (Comp. App. (AT) No.148/2019) Page 14 of 33
17. The issues that arise for consideration in the present appeal are as follows:-
(i) Whether the Appellant's knowledge of the allotment of shares having been made to R-3 and R-4 in the year 2011 and her maintaining silence from 2011 to 2016 regarding the allotment, and also that she, inter alia, acknowledged the fact of the shares' allotment to R-3 and R-4 provide res judicata and estoppel to her raising this issue later in CP No.09/2016?
(ii) Whether the petition CP No. 09/2016 is beset with delay and laches and is hit by the issue of limitation?
(iii) Whether the allotment of shares to R-3 and R-4 violates the provisions of the Articles of Association of R-1 Company and if so, whether the allotment of shares is null and void on account of contravention of Articles of Association and non-payment of premium?
18. We consider the contention of the Learned Senior Counsel for R-3 and R-4 that the appellant was a co-petitioner in another CP No. 59/2014 in which she was arrayed as petitioner along with TA No. 88/2021 (Comp. App. (AT) No.148/2019) Page 15 of 33 her two brothers Shri M.N. Pratap Reddy and Shri M. Kiran Kumar Reddy.
19. It is noted that the Appellant was a co-petitioner along with her brothers Shri M.N. Pratap Reddy and Shri M. Kiran Kumar Reddy in CP No. 59/2014 and she filed a memo for withdrawal from the said company petition on 2.9.2015 and Company Law Board, Chennai permitted her to withdraw from the petition by passing the following order on 18.11.2015 (at pp. 217-218 of the appeal paperbook):-
"The 3rd petitioner is permitted to withdraw the petition with liberty. The other petitioners are directed to amend the company petition after removing the name of 3rd petitioner from the array of parties within a period of three weeks and serve copies on the other side. The matter is posted on 21.1.2016 at 10.30 am."
20. The Learned Counsel for the Appellant has claimed that the liberty sought by the Appellant which is entered in the memo for withdrawal from CP No. 59/14 (at page 27 of the appeal paperbook) made it clear that the Appellant sought leave to withdraw from the said company petition with liberty to 'file fresh company petition and/or other proceedings'. It is thus clear that the Appellant contemplated filing of fresh company petition and therefore, liberty granted to her was in connection with filing of a TA No. 88/2021 (Comp. App. (AT) No.148/2019) Page 16 of 33 fresh company petition, which she did in the form of Company Petition No. 09/2018.
21. We note that before the transfer of shares to R-3 and R-4, the Appellant held 10% shares and her father Shri Dasaratha Rami Reddy and her two brothers Shri M.N. Pratap Reddy and Shri M. Kiran Kumar Reddy each individually held 30% shares in R-1 Company and Shri Dasaratha Rami Reddy and his two sons Shri M.N. Pratap Reddy and Shri M. Kiran Kumar Reddy were the first directors of the Company. We also note that the mining lease was held by Shri Chenna Keshava Reddy, brother of Shri Dasaratha Rami Reddy. It is also noted that while the application for renewal of mining lease was pending consideration, Shri Dasaratha Rami Reddy entered into two agreements, viz. a Job Work Agreement dated 15.10.2015 with M/s. Auro Logistics Limited (In short "ALL") represented by Mr. Yathin Reddy (R-3) as its Managing Director and another Sale Agreement dated 15.10.2005 with M/s. Trans India Shipping Services Pvt. Ltd. (TISSPL) represented by Ms. Jansi Reddy (R-4) as its Managing Director and further that Shri R. Swarup Reddy (R-2) is father and husband of R-3 and R-4 respectively. While the lease-hold rights for the mining lease was in favour of Dasaratha Rami Reddy to be transferred to the company once the lease was renewed, the TA No. 88/2021 (Comp. App. (AT) No.148/2019) Page 17 of 33 Job Work Agreement and Sale Agreement were also to be transferred in the name of company after the mining lease was renewed.
22. It is noted that the Appellant Ms. M. Nandana Reddy filed CP No. 09/2018 before the NCLT claiming that her shareholding, which was at 10% of the total shares in R-1 Company was varied after the issue of 1,77,800 new shares to R-3 and R-4 by virtue of Board's resolution dated 2.12.2018 whereby 88,900 shares each were allotted to R-3 and R-4 and they deposited a total sum of Rs.17,77,800 to acquire 64% shareholding in R-1 Company. The resolution of the meeting of Board of Directors held on 2.12.2012, in this connection is as follows:
"3. Allotment of Shares The Board re-called the discussions held on 27th August, 2011 with regard to further issue of shares, the chairman informed that the Equity Shares needs to be allotted for the persons, as per the list placed before the board.
After discussions, the board passed the following resolutions:
RESOLVED THAT approval be and is hereby given for allotment of 177800 Equity Shares of Rs. 10/- each aggregating to Rs. 17,78,000/= as per the list.
TA No. 88/2021 (Comp. App. (AT) No.148/2019) Page 18 of 33 Sl. Name and Address of Nation No. of Total Total No occupation Allottee ality of shares amount amou . of the the allotted paid nt to Allottee Allotte includin be e g paid premiu on m (in calls Rs.) (inclu ding premi um) outsta nding (in Rs.)
1. Jansi No. 9, Ranjith Indian 88900 889000 NIL Swarup Road, Surya Reddy Nagarf,Kottur Business puram, Chennai 600085.
2. R. Yathin No. 9, Ranjith Indian 88900 889000 NIL Reddy Road, Surya Business Nagarf,Kottur puram, Chennai 600085 RESOLVED FURTHER that the Share Certificates be issued pursuant to this allotment under the provisions of companies (issue of share certificates) Rules, 1960 under the signature of Mr. M N Pratap Reddy, Director and Mr. M Kiran Kumar Reddy, Director of the company and Mr. B Venkata Rami Reddy, Authorised Signatory and the common seal of the company be fixed on the share certificates in the presence of Mr. M N Pratap Reddy."
23. It is further noted that this change in shareholding and the increase in the paid-up capital of R-1 Company was presented through Directors' report along with audited accounts for the year TA No. 88/2021 (Comp. App. (AT) No.148/2019) Page 19 of 33 ending 31.3.2012 in the AGM held to consider the Annual Report and audited accounts. The relevant portion of the balance sheet as on 31.3.2013, which is part of the appeal memo (attached at pg. 199 of the appeal paperbook) shows increase in share capital to Rs.29,78,000. In addition, the balance sheet also contains details of shares held by each shareholder holding more than 5% shares, as included in the Profit & Loss Account for the year ending 31.3.2013 (at page 201 of the appeal paperbook) which shows that Jansi Reddy held 88,900 shares on 31.3.2012 and also on 31.3.3013. Additionally, R. Yathin Reddy (R-3) also held 88,900 shares as on 31.3.2012 and also on 31.3.2013.
24. The Learned Senior Counsel for R-3 and R-4 has taken the position in arguments that since the Appellant had joined other co-petitioners in filing CP No. 59/2014, wherein she has admitted and accepted the shareholding of R-3 and R-4, she was estopped into raising this issue in a fresh company petition, which is CP No. 09/2016. Regarding this issue, the Appellant has claimed that the allotment of substantial number of shares to non-existing members R-3 and R-4, was in violation of the Article 5 of the Articles of Association of the company, and she had expressed her intention to file a fresh company petition while withdrawing from CP 59/2014, when she sought liberty to file a fresh company TA No. 88/2021 (Comp. App. (AT) No.148/2019) Page 20 of 33 petition and/or their proceedings. We are of the view that the Appellant, even though she was a co-petitioner in CP No. 59/2014, was not a director of R-1 Company nor involved into day-to-day management and affairs of the Company, and therefore, even if she participated in the AGM, wherein the new shareholding of R-3 and R-4 were presented in the Annual Report of the company and Profit and Loss Account for the year 2012-13, she did not have any specific knowledge of the change in her own proportionate shareholding as a result of fresh allotment of shares to R-3 and R-4.
25. We answer the first question in the following manner: the Appellant's petition CP 09/2016 is not affected by res judicata and estoppel in that the Appellant did not lose the entitlement to file the company petition.
26. Another point raised by the Learned Senior Counsel for R- 3 and R-4 is that the filing of CP No. 09/2016 was beset with delay and laches, as the shares allotment was made in the year 2011 but the Appellant filed the company petition in the year 2016. On this issue, we note that the shareholding of the Appellant, which had initially become 28% on account of transfer of shares of the Appellant's father Shri Dasaratha Rami Reddy to her and her two TA No. 88/2021 (Comp. App. (AT) No.148/2019) Page 21 of 33 brothers, was reduced to 8.64% after allotment of 88,900 shares each to R-3 and R-4. Such an allotment of shares was to the disadvantage and detriment of the Appellant and the existence of such a condition from the date of allotment of shares to R-3 and R-4 to the filing of the company petition by the Appellant constitutes a continuous act of oppression and therefore she was fully entitled to raise the question of her oppression and mismanagement once she satisfied the threshold shareholding of 10%, irrespective of the manner in which she obtained such a threshold shareholding, and no reason of delays or laches can take away her right to raise such an issue. On this issue we rely on the judgment of Hon'ble Delhi High Court in the matter of Surinder Singh Bindra (supra), wherein the following has been held: -
"11. It is thus clear that there have to be continuous acts complained of continuing up to the date of the petition showing that the affairs of the company are being conducted in a manner oppressive to some part of the members or in a manner prejudicial to public interest or in a manner prejudicial to the interest of the company, Examined in this view, it, therefore, cannot be said that the events which occurred three years prior to the date of filing of the petition cannot be looked into if those events form continuous acts complained of continuing up to the date of the petition. Therefore, though I am of the view that provisions of Art. 137 of the Schedule to the Limitation Act. 1963 are applicable to a petition under S. 397 and/or S. 398 of the Act, I TA No. 88/2021 (Comp. App. (AT) No.148/2019) Page 22 of 33 am in respectful disagreement with the view expressed by the aforesaid Calcutta High Court decision that the events prior to the period of three years of the date of filing of the petition cannot be looked into.
12. These can be looked into if they form part of a continuous process continuing up to the date of petition showing that the affairs of a company are being conducted in a manner stipulated in Ss. 397 and 398 of the Act. This, in fact, is the requirement of these provisions. Further, if the acts complained of form part of the same transaction constituting oppression or mismanagement these acts can also be looked into even if they occurred three years prior to the institution of the petition. Same will be the case if the conduct arising from even a single wrongful act in a given case is such that its effect will be a continuous course of oppression or mismanagement though the wrongful act occurred three years earlier to the date of filing of the petition. It is something akin to the terminology 'continuing cause of action' Whether events complained of form part of continuous acts or not or form part of the same transaction constituting oppression or mismanagement or effect of a particular wrongful act is continuous course of oppression or mismanagement or the wrongful act is stale or is an isolated event, would all be different questions to determine. To this extent, therefore, the preliminary objection regarding maintainability of the present petition on the ground of limitation is overruled. This exercise about the applicability of the provisions of the Limitation Act. 1963 to the application under Ss. 397 and 398 of the Act, would now appear to be academic as after the Companies (Amendment) Act, 1988, applications under these sections lie before the Company Law Board."
27. It is thus clear that when there exists a continuum in the TA No. 88/2021 (Comp. App. (AT) No.148/2019) Page 23 of 33 act of oppression and mismanagement which continues up to the date of filing of the petition, any delay and laches cannot take away the right of the petitioner even if the origin of such acts occurred much prior to the institution of the company petition.
28. In the matter of Praveen Shankaralayam v Elan Professional appliances Pvt. Ltd. (supra), which has been cited by the Learned Senior Counsel for R-3 and R-4, the NCLT, New Delhi has held as follows:-
"23. We have heard learned counsel for the parties at length and are of the view that the instant petition is hopelessly barred by limitation as per the provisions of Limitation Act. It has already been pointed out that for action like the one complained of by the petitioner, the period of limitation provided by the Limitation Act is three years. The petitioner as has acquired knowledge of all the facts as per his own showing by his reply sent to the Assistant Registrar of Companies on 23.2.2011."
29. Therefore, our answer to the second question is that the company petition CP No. 09/2016 does not suffer from delay and laches.
30. Regarding the issue of violation of the provisions of the Articles of Association, we note the Clause 5 of the Articles of Association of R-1 Company (attached at pp. 110-121 of appeal paperbook) which stipulates as follows:-
TA No. 88/2021 (Comp. App. (AT) No.148/2019) Page 24 of 33 "5. Where it is proposed to increase the subscribed capital of the Company by the issue of new shares, then:
Such new shares shall be offered to the persons who at the date of the offer are holders of that class of shares of the Company, in the proportion as nearly as the circumstances admit to the capital paid-up on those shares at that date.
The offer aforesaid shall be sent by registered notice to the registered address of every member specifying the number of shares offered and limiting a time, not being less than fourteen days from the date of the offer, within which the offer, if not accepted will be deemed to have been declined.
After the expiry of the specified time in the notice aforesaid, or on receipt of earlier intimation from the person to whom such notice is given that he declines the shares offered, the Board of Directors may dispose them in such manner as they think most beneficial to the Company."
31. The clause 5 of the Articles of Association thus lays down that new shares shall be offered only to persons, who at the date of the offer are holders of that class of the company and further the offer shall be sent by registered notice to the every member specifying the number of shares offered and limiting a time, not being less than 14 days from the date of the offer from the acceptance of the offer by the said member and only if the member declines the shares offered, the Board of Directors offer the shares in a manner that is most beneficial to the company. There is nothing on record to show that such an offer was made to any of TA No. 88/2021 (Comp. App. (AT) No.148/2019) Page 25 of 33 the existing shareholders namely, Shri Dasaratha Rami Reddy, Shri M.N. Pratap Reddy and Shri M. Kiran Kumar Reddy, who were the existing shareholders of the same class by the Company. We note the arguments put forward by the Learned Senior Counsel for R-3 and R-4 that such an offer to and acceptance of shares by R-3 and R-4 was made when Shri Dasaratha Rami Reddy, Shri M.N. Pratap Reddy and Shri M. Kiran Kumar Reddy, (who are close relatives of the Appellant) when they were directors in the Company in the year 2011, but we are of the opinion that such an offer and acceptance of the offer and any approval given by the Board of Directors, should have been in accordance with the Articles of Association of the Company, and therefore allotment of shares to R-3 and R-4 without complying with the provisions of the Articles of Association cannot be termed as legal.
32. In respect to the sanctity of the Articles of Association, we are guided by the judgment of Hon'ble Supreme Court in the matter of Claude-Lila Parulekar vs. Sakal Papers Pvt. Ltd. & Ors. (2005 11 SCC 73), wherein in para 25 of the judgment, it is held as follows:-
"25. Section 36 of the Companies Act, 956 makes the memorandum and articles of the company, when registered, binding not only on the company but also the members inter se TA No. 88/2021 (Comp. App. (AT) No.148/2019) Page 26 of 33 to the same extent as if they had been signed by the company and by each member and covenanted to by the company and each shareholder to observe all the provisions of the memorandum and of the articles. The articles of association constitute a contract not merely between the shareholders and the company but between the individual shareholders also. The articles are a source of power of the Directors who can as a result exercise only those powers conferred by the articles in accordance therewith. Any action referable to the articles and contrary thereto would be ultra vires."
(Emphasis Supplied)
33. Further in the matter of M. Appayya & Ors Vs. Chandrashekar Rao & Ors. [TA No. 10/2021 CA (AT) No. 184/2019], this Tribunal through its judgment dated 5.12.2022, held the following:-
"41. The above provision of law is clear that if a company intend to increase its share capital by issue of further shares, such shares shall be offered to the existing members in proportion to their shareholding and by sending a letter of offer. In the present case, this Tribunal does not find any substantial proof that the notices have been issued for convening the EOM to all the members and issued any letter of offer to the existing shareholders for subscribing to the shares in proportion to their shareholding. In such a situation, the allotment of shares exclusively made to certain group by excluding the other members leads to dilution of shareholding of the members whom the shares were not offered and allotted. Thereby the said allotment causes the reduction in shareholding of the other shareholders whom the shares have not been allotted, is detrimental to the interest of the said shareholders the said act is oppressive.
42. It is contended that the company is a family company TA No. 88/2021 (Comp. App. (AT) No.148/2019) Page 27 of 33 and is a quasi-partnership is concerned even though the company is a family-owned company and the entire equity is held by the family members, the law as applicable with regard to further issue of share capital and allotment of shares cannot be violated. Further, the principles of natural justice need to be followed more particularly in a family owned/run company".
(Emphasis Supplied)
34. Regarding the fiduciary duty of the directors of a company, the Hon'ble Supreme Court has held the following in the matter of Dale and Carrington Invt. P. Ltd. (supra) -
"A company is a juristic person and it acts through its directors who are collectively referred to as the board of directors. An individual director has no power to act on behalf of a company of which he is a director unless by some resolution of the board of directors of the company specific power is given to him/her. Whatever decisions are taken regarding running the affairs of the company, they are taken by the board of directors. The directors of companies have been variously described as agents, trustees or representatives, but one thing is certain that the directors act on behalf of a company in a fiduciary capacity and their acts and deeds have to be exercised for the benefit of the company. They are agents of the company to the extent they have been authorized to perform certain acts on behalf of the company. In a limited sense they are also trustees for the shareholders of the company. To the extent the powers of the directors are delineated in the memorandum and articles of association of the company, the directors are bound to act accordingly. As agents of the company they must act within the scope of their authority and must disclose that they are acting on behalf of the company. The fiduciary capacity within which the directors have to act enjoins upon them a duty to act on behalf of a company with utmost good faith, TA No. 88/2021 (Comp. App. (AT) No.148/2019) Page 28 of 33 utmost care and skill and due diligence and in the interest of the company they represent. They have a duty to make full and honest disclosure to the shareholders regarding all important matters relating to the company. It follows that in the matter of issue of additional shares, the directors owe a fiduciary duty to issue shares for a proper purpose. This duty is owed by them to the shareholders of the company. Therefore, even though section 81 of the Companies Act which contains certain requirements in the matter of issue of further share capital by a company does not apply to private limited companies, the directors in a private limited company are expected to make a disclosure to the shareholders of such a company when further shares are being issued. This requirement flows from their duty to act in good faith and make full disclosure to the shareholders regarding the affairs of a company. The acts of directors in a private limited company are required to be tested on a much finer scale in order to rule out any misuse of power for personal gains or ulterior motives. Non applicability of section 81 of the Companies Act in the case of private limited companies casts a heavier burden on its directors. Private limited companies are normally closely held, i.e. the share capital is held within members of a family or within a close-knit group of friends. This brings in considerations akin to those applied in cases of partnership where the partners owe a duty to act with utmost good faith towards each other. Non applicability of section 81 of the Act to private companies does not mean that the directors have absolute freedom in the matter of management of affairs of the company."
(Emphasis Supplied)
35. We also take note of the observations of the Hon'ble Karnataka High Court in the matter of Kobian Pte. Ltd. (supra), wherein the following is held:-
'17. The directors are in a fiduciary position vis-à-vis TA No. 88/2021 (Comp. App. (AT) No.148/2019) Page 29 of 33 company and must exercise their power with utmost faith for the benefit as well as interest of the company and ensure fair play in action in corporate management and further act bona fide in exercise of their vital responsibility in further allotment of shares. While it is the prerogative of the board to allot shares, they have no absolute direction or freedom to allot such shares as, directors of the private limited companies are more onerous than that of a public limited company. Though, section 81 of the Companies Act, 1956, prescribes how further share capital of the company could be issued, the same is not applicable to private limited companies. The directors in a private limited company are expected to make a disclosure to the shareholders of such a company when further shares are being issued. Any issue of shares solely to gain control over the company is not permissible.
36. It is, therefore, quite evident from the above-stated judgments that the Memorandum and Articles of Association of a Company are sacrosanct and they represent a binding contract between the members and the company also the members inter se and further, the directors in a company are in a fiduciary position and they must exercise their powers with utmost care and faith for the benefit as well as in the interest of the company and the shareholders are entitled to know the details when new shares are being issued. When we examine the allotment of shares to R-3 and R-4 by the R-1 Company, it is clear that the then directors of R-1 Company, who were father and brothers of the Appellant, did not exercise necessary care and caution in the allotment of the fresh shares, which quite clearly should have TA No. 88/2021 (Comp. App. (AT) No.148/2019) Page 30 of 33 been done in accordance with the Articles of Association of the Company. Our answer to the question of violation of Articles of Association in the allotment of shares to R-3 and R-4 is in the positive.
37. Regarding payment of premium, it is noted that 1,77,800 equity shares were allotted to Jansi Reddy and R. Yathin Reddy, by a resolution of the Board of Directors dated 2.12.2011 and the approval was given for allotment of these shares @ Rs. 10 per share and therefore, there is no document or record to show that any premium was required to be paid by the allottees for allotment of shares but since the allotment of shares to R-3 and R-4 has been found to be null and void, hence the question of payment of premium pales into insignificance.
38. On the basis of analysis in the aforementioned paragraphs, we are of the view that even if the Appellant had knowledge of the allotment of shares to R-3 and R-4 which was clearly in contravention of the Articles of Association, she was eligible and entitled to raise the issue of contravention of Articles of Association in allotment of these shares as she was not a person directly responsible for making such an allotment. Further, the Appellant, who was not involved into day-to-day affairs of the TA No. 88/2021 (Comp. App. (AT) No.148/2019) Page 31 of 33 Company, cannot be supposed to have kept track of reduction in percentage of her shareholding and the issue of delays and latches was continuing even after reduction in her percentage shareholding, till the date of filing Company Petition 09/2016. The Articles of Association are binding on the company and its members and also on Board of Directors and if laid down procedure and principles have not been followed in allotment of shares to R-3 and R-4, the allotment cannot be held as valid.
39. We, therefore, arrive at an inescapable conclusion that the NCLT committed an error in approving the share transfer to R-3 and R-4 as being in accordance with law and thereafter dismissed CP No. 09/2016. Since we come to the conclusion that the allotment of a total of 1,88,800 shares to R-3 and R-4 is bad in law, we set aside the Impugned Order and allow the 'Appeal', and further hold that allotment of these shares to R-3 and R-4 by virtue of the 'Resolution' dated 2.12.2011 of the Board of Directors 'as null and void'. Consequent corrections should be made in 'Register of Members' of R-1 Company within a period of thirty days from the date of this order.
40. With the above-stated directions, the appeal is disposed of. TA No. 88/2021 (Comp. App. (AT) No.148/2019) Page 32 of 33
41. In the facts of the case, there is no order as to costs.
[Justice M. Venugopal] Member (Judicial) [Dr. Alok Srivastava) Member (Technical) New Delhi 24th April, 2023 /aks/ TA No. 88/2021 (Comp. App. (AT) No.148/2019) Page 33 of 33