National Company Law Appellate Tribunal
Niklesh Tirathdas Nihalani vs Shah Poddar Nihlani Organisers Pvt Ltd & ... on 2 August, 2021
NATIONAL COMPANY LAW APPELLATE TRIBUNAL
PRINCIPAL BENCH, NEW DELHI
Company Appeal (AT) No. 167 of 2020
[Arising out of combined judgment and final Order dated 3rd August
2020 passed by the Adjudicating Authority/National Company Law
Tribunal, Ahmedabad Bench, Ahmedabad in CANo. 34/59/NCLT/2017
CP No. 24/NCLT/AHM/2018]
IN THE MATTER OF:
Niklesh Tirathdas Nihalani
2-A Ratnamilan Apartment,
Ravidham Complex
PanjaraPole, GhodDod Road Appellant
Surat - 3950007
Versus
1. Shah Poddar Nihlani Organisers Pvt Ltd
(R-1 in Company Appeal 34 of 2017
and CP 24 of 2018)
1A, Merushikhar Apt, Opp. Jivan Bharti
Rotary Hall, Timaliyawad, Nanpura,
Surat - 395001
2. Dinesh Chandra Chandulal Shah
(R-2 in Company Appeal 34 of 2017
and CP 24 of 2018)
7B, SiddhShila Apartment
Timaliyawad, Nanpura,
Surat - 395001
3. Rajeshkumar Balkishan Poddar
(R-3 in Company Appeal 34 of 2017
and CP 24 of 2018)
7A, Ratanshyam Apartment
Ravidham Complex, GhodDod Road
Majura, Surat - 395001
4. Tulsidas Tirathdas Nihalani
(R-4 in Company Appeal 34 of 2017
and CP 24 of 2018)
302 A Building, Four Seasons Apt
Opp Ginger Hotel, Piplod, Surat- 395007
Company Appeal (AT) No. 167 of 2020 1 of 34
5. Madhav Bhageria
(R-5 in Company Appeal 34 of 2017
and CP 24 of 2018)
B-375, New Friends Colony
New Delhi - 110065
6. Sanjay Poddar HUF
(R-6 in Company Appeal 34 of 2017)
35, Reshamwala Market
Ring Road, Surat - 395001
7. Rajesh Poddar HUF
(R-7 in Company Appeal 34 of 2017)
35, Reshamwala Market
Ring Road, Surat - 395001
8. BalkishanPoddar HUF
(R-8 in Company Appeal 34 of 2017)
35, Reshamwala Market
Ring Road, Surat - 395001
9. Rahul Nihalani
(R-9 in Company Appeal 34 of 2017)
302 A Building, Four Seasons Apt
Opp Ginger Hotel, Piplod, Surat- 395007
10. Nimmi Nihalani
(R-10 in Company Appeal 34 of 2017)
302 A Building, Four Seasons Apt
Opp Ginger Hotel, Piplod, Surat- 395007
11. Suken Shah
(R-11 in Company Appeal 34 of 2017)
1-A & B, Merushikhar Apt
Opp. Jiwan Bharti Rotary Hall
Surat - 395001
12. Azimuth Investments Ltd
(R-12 in Company Appeal 34 of 2017)
43, Community Centre
New Friends Colony
New Delhi - 110065
13. Sanjay Poddar
(R-13 in Company Appeal 34 of 2017)
35, Rishamwala Market
Ring Road, Surat - 395001
Company Appeal (AT) No. 167 of 2020 2 of 34
14. Sunita Poddar
(R-14 in Company Appeal 34 of 2017)
35, Rishamwal Market
Ring Road, Surat - 395007
15. Agam Shah
(R-15 in Company Appeal 34 of 2017)
2-B, Merushikhar Apt
Opp. Jiwan Bharti Rotary Hall
Surat - 395001
16. Rameshkumar Juneja
(R-16 in Company Appeal 34 of 2017)
G-01, Unicorn Palazzo
OppSwastik woods Apartment
Vesu, Surat ... Respondents
Present:
For Appellant : Mr Dhiren R Dave, PCS for Appellant.
For Respondent : MrJigar Kumar Gandhi, PCS for R1.
J U D G M E N T
[Per; V. P. Singh, Member (T)] This Appeal emanates from the combined judgment and final Order dated 3rd August 2020 passed by the Adjudicating Authority/National Company Law Tribunal, Ahmedabad Bench, Ahmedabad in Company Appeal No. 34/59/NCLT/2017 in CP No. 24/NCLT/AHM/2018 whereby learned NCLT has rejected Company Appeal No. 34 of 2017 filed under Section 59 of the Companies Act, 2013 as barred by limitation, givenSection 433 of the Act. By the same common Order, the NCLT has dismissed the Company Petition being CP No. 24 of 2018, filed under Sections 241 and 242 of the Companies Act 2013. The Petitioner has failed to prove any Company Appeal (AT) No. 167 of 2020 3 of 34 ingredient of operation and mismanagement. The Parties are represented by their original status in the Company Petition for the sake of convenience. Brief facts Company Appeal No. 34 of 2017
2. The Appellant, one of the Shareholders of 'M/S Shah PoddarNihlani Organisers Private Limited &Others'(now on will be referred "SPNOPL') holding 4000 shares applied under Section 59 of the Companies Act, 2013 challenging the transfer of the shares of the Respondent No 1 Company to outsiders,i.e.not from the family of existing Shareholders, totally in disregard of the pre-emptive right available to the existing Shareholders under Article13 of AOA, on getting the knowledge when the third party introduced himself as a partner in Respondent No. 1 Company, i.e. 'SPNOPL'.
3. The Respondent No. 1 Company, 'Shah PoddarNihlani Organisers Private Limited &Others', was constituted by three families, namely, Shah family, Nihalani family, and Poddar Family the Company's name itself reflects.
4. Respondent No. 1 Company "SPNOPL" was incorporated by three families to invest in bigger land jointly with its sole purpose to reap the fruits jointly. Their family shareholding percentages were 18%, 31.67% and 50.33%, respectively. The Appellant is representing the Nihlani family, holding 4000 shares, i.e. 8% in the Respondent No. 1 Company.
Company Appeal (AT) No. 167 of 2020 4 of 34
5. Respondent No. 1 Company has not done any business activity since incorporation except the acquisition of land. The Appellant came to know from other sources that the Company's land has been transferred to some other persons by transferringthe Company's shares.
6. The Appellant alleges that there had been an illegal transfer of 3250 shares of Respondent No. 1 from Pratima D Shah to Sanjay Poddar; 1045 shares from Suken Shah to SunitaPoddar; 1000 shares from Sanjay Poddar to Aagam Shah; 1595 shares from Suken Shah to Ramesh Juneja' and 1055 shares from Dinesh Shah to Aagam Shahin complete disregard of Articles of Association about the transfer of shares,more specifically Articles 13 to 20 of AOA. These provisions were not followed by the management and were done fraudulently. As the Company has no business activities and there were no plans to sell or dispose of assets. The Directors have no other role to play in the Company except to do their fiduciary duties, as stated in Section 166 of the Companies Act, 2013.
7. The Appellant alleges that on account of non-compliance of law and procedure on the internal rule of management, namely Articles of Association of the Company; mysteriously, fraudulently and indirectly transferring shares without following necessary procedures as required under the Companies Act 2013 read with erstwhile Articles 13 to 20 of the Articles of Association of the Respondent No. 1 Company.
8. With such acts, they completely changed the Company's shareholding pattern by introducing outsider persons as shareholders without transfer.
Company Appeal (AT) No. 167 of 2020 5 of 34 By the alleged fraudulent transfer, the shareholding of the Shah family was reduced from 18% to 4.11%. But the shareholding Nihlani family's and Poddarfamily's remained static at 31.67% and 50.33%, respectively. As a result, the newer shareholders (outsiders) acquired 13.89% shareholding in the Respondent No.1 Company. The Appellant alleges that inducting new shareholders, i.e. outsiders in the family company and providing them 13.89% shareholding is an act of fraud on the Appellant,as an existing shareholder of the Company was not offered shares in the exercise of their pre-emptive right as per Article 13 of the Articles of Association. Appellant was left with no option in the circumstances hencefiled a Company Appeal under Section 59 of the Companies Act, 2013 for rectification of register of members; being CA No.34 of 2017.
9. The said Company Appeal No. 34 of 2017 was listed before the learned NCLT on 11th October 2017, 25th October 2017 and 5th December 2007. However, instead of appearing before the NCLT, Respondent No. 2 to Respondent No.16 issued notices of shareholders meeting on 16th November 2017 and convened EGM and 12th December 2017andsnatched their pre- emptive rights by altering theArticle of Association.
10. The said Company Appeal was listed 17 times before NCLT, but Respondents No.2 to Respondent No. 16 never appeared. Instead of defending before the NCLT in Company Appeal No. 34 of 2017 filed under Section 59 of the Companies Act, for rectification of register of members, they convened EGM and with their brutal majority amended the entire set of Company Appeal (AT) No. 167 of 2020 6 of 34 Articles of Association, in which there is no right offered to fellow Shareholders to exercise their pre-emptive right before transfer of shares.
11. This reflects that they were very much aware of the consequences of their illegal acts. They were conscious of and were under the fear that their wrong deeds,unearthed in Company Appeal No. 34 of 2017 and NCLT and it may reverse the illegal and fraudulent allotment of shares done by them, so with the sole intention to regularise the illegalities, the Articles of Association was amended pending the Company Appeal No. 34 of 2017 for rectification of register of members.
12. Such an act is nothing but an act of grass oppression and mismanagement on the minority shareholder, especially the Appellant, who has already challenged the illegal and fraudulent share transfer before the NCLT. Hence Appellant was left with no other option but to move before the NCLT with the Company Petition No. 24 of 2018 filed under Sections 241 and 242 read with Section 244 of the Companies Act, 2013 against alleged acts of oppression and mismanagement.
13. In all such matters, RespondentNo. 1 Company is only a symbolic party and not supposed to file a reply unless the Bench/Court specifically orders it. However, in this matter, no other Respondent except the Company has filed a reply. Probably no Director or Shareholders wanted to make a false submission on affidavit in reply as prima facie, no evidence in support of their misdeeds have been available and produced till date.
Company Appeal (AT) No. 167 of 2020 7 of 34
14. The National Company Law Tribunal heard both the matters jointly and disposed of by the common impugned Order, challenged in this Appeal. Respondent No.1 'Shah PoddarNihlani Organisers Pvt Ltd's contention
15. Respondent alleges that the Company was incorporated as a private limited Company by three families doing business of land organiser and developer. The name reflectsthe name of the families. All three family members have one representative as the Director of the Company. The Company was incorporated on 20th December 2005. The subscribers agreed on the Memorandum and of the Company. Accordingly, the Board of Directors of the Company has made all the transfers of shares during the Financial Year 2012-13 and 2013-14, within the powers provided by the shareholders in Article 13 of the Articles of Association of the Company as provided under the original AOA.
16. Under Article 13 of the Board of Directors has the power to select any desired person in the interests of the Company to admit to membership whichis willing to purchase the same at the fair price. Accordingly, the Board of Directors had transferred shares in compliance with Article 13 of the Article of Associations(in short 'AOA') of the Company,in the interest of the Company. Therefore, the transfer of shares as claimed is illegal and made ina non-transparent manner is incorrect. The transfer of shares was carried out during the Financial Year 2012-13. The Company had disclosed Company Appeal (AT) No. 167 of 2020 8 of 34 the facts in the returns filed for the Annual General Meeting (in short 'AGM' held in 2012 and 2013, showing status as of the members' in respective years Annual General Meeting. The Company had filed all its annual returns for the Annual General Meeting held in 2012 on 8th January 2013 and for the year 2013 on 14th August 2014, in which the effect of transfer of shares has been disclosed. Therefore, the plea taken that the transfer of shares had taken place in a non-transparent manner is away from the truth and incorrect. Moreover, the documents submitted by the MCA are public documents and can be assessed by any person; therefore, the Petitioner could have very well verified the contents of the annual return from the MCA website.
17. This Petition was presented before the learned NCLT on 19th September 2017 under Section by disclosing transfer of sharesunder Section 59 of the Companies Act 2013. Section 59 of the Companies Act 2013 came into force on12th September 2013, and no period of limitation is provided for filing a petition under Section 59 of the Companies Act 2013. Section 433 of the Companies Act, 2013 says that the provision of the limitation act applies to the proceedings or appeals before the Tribunal or the Appellate Tribunal. The Petition is filed almost after three years after records made available to the public in the annual return by filing same on the portal of the Ministry of Corporate Affairs for the Financial Year 2012-13 on 8th January 2013 and for the Financial Year 2013-14 on 14th August 2013 by disclosing transfer of shares.
Company Appeal (AT) No. 167 of 2020 9 of 34
18. The Limitation Act 1963 provides that it is an act to consolidate and amend the law for the limitation of suits and other proceedings and the purposes connected herewith.Moreover, Article 137 of the schedule to the Limitation Act, 1963 provides the limitation period of 3 years dealing with "any other application for which no period of limitation is provided elsewhere in this division".
19. The Petitioner holding is only 8% of equity shares of the total paid-up share capital of the Company, and he is not eligible to file a Petition under Sections 241, 242 read with Section 244 of the Companies Act, 2013. Moreover, if hypothetically it is considered that the outcome of CP No. 34 of 2017 is decided in favour of the Petitioner as claimed, even then the purchaser is not going to be the shareholders of the Company and right of the shares will go to the original shareholders, not to the petitioners, in that case also the Petitioner shareholding is not going to be raised beyond 8%. Hence, he is not eligible to file a Petition under Sections 241, 242 and 244 of the Companies Act, 2013.
20. We heard the arguments of the learned Counsels for the parties and perused the record. Based on the contention of the parties following issues arise for our consideration:
a. Whether the Application filed under Section 59 of the Companies Act, 2013 is barred by limitation?
Company Appeal (AT) No. 167 of 2020 10 of 34
b. Whether transfer of shares without providing the pre-emptive
right to the existing shareholders was permitted as per the Article of Association and Memorandum of Association of the Respondent No 1 Company?
c. Whether the amended Articles of Association of Respondent No.1Company extinguishing the existing shareholders' pre-
emption right is valid?
d. Whether the transfer of shares to outsiders, in violations of pre-
emptive rights of the Appellant under Article 13 of AOA, amounts to Oppression and Mismanagement under Sections 241 and 242 of the Companies Act,2013?
Discussion and findings on Issues 1,2,3&4
21. Admittedly,Company Appeal No. 34/59/NCLT/AHM/2017 was filed u/s 59 of the Companies Act 2013 to rectifythe Register of Members on 19th September 2017. After that,Appeal was listed before the National Company Law Tribunal on 11th October 2017, 25th October 2017 and 5th December 2017. Pending this Appeal, suddenly,Respondents convened EGM dated 12th December 2017, seeking replacement of the entire set of Articles of Association of the Company with the new set of AOA.Consequently, the Shareholders' pre-emptive rights, in case of transfer of shares, were removed. The Appellant contends that this was a deliberate attempt with its sole motive to frustrate the outcome of the Company Appeal No. 34 of 2017. The learned Counsel for the Appellant argues that amendment in the AOA is Company Appeal (AT) No. 167 of 2020 11 of 34 made to view that if the transfer of shares to the outsiders,i.e. outside the family, is set aside by the NCLT, then the Respondent may affect those transfers again under the pretext of the amended Articles of Association.
22. The learned Counsel for the Appellant also argued that he had moved an Application before the NCLT seeking a stay on EOGM, but the time got wasted. As a result, EOGM was over, and IA becomes infructuous.
23. Respondent No. 1, in its response to Appeal, has filed an affidavit wherein it is stated that;
Para 11 "I further see that the Board of directors of the Company has made all the transfer during the financial year 2012-13 within the powers provided by the shareholders in the article 13 of the Articles of Association of the Company same can be verified from at page number 86 of the original Application submitted by the applicant, same is reproduced for understanding.
Article 13 "save as hereinafter provided no shares shall be transferred to a person who is not a member of company so long as any member or who is desirable in the interest of the company admitted to membership is willing to purchase the same at the fair price selected by directors as one whom it is desirable in the interest of the company admit to membership is willing to purchase the same at the fair price."
24. Respondent contends that as per Article 13 of the Articles of Association of the Company, the Board of Directors hadthe power to select Company Appeal (AT) No. 167 of 2020 12 of 34 any desired person in the interest of the Company to admit to membership which is willing to purchase the same at the fair price.
25. Respondent No. 1 has further stated in its reply that after taking extreme care, considering all the Stakeholders' overall benefit, the Company's Board of Directorshad transferred the shares. At the time of incorporation, the subscribers, with their mutual consent, have vested powers in the hands of the Directors, who represented the respective families to transfer shares in the interest of the Company to a Member of the Company or any other person selected by the Board of Directors. Since the Board of Directors could not find a suitable person, thus the saving clause underArticle 13 of AOA comes into play,and shares were transferredunder powers vested in the Directors of the Company.
26. Respondent No. 1, in its reply, has further stated that the extraordinary general meeting(in short 'EOGM') was called on the request of the Shareholders of the Nehlani family for altering Articles of Association in tandem with the provisions of the newly enacted Companies Act,2013 for better corporate governance, by sending 21 days' notice to all the shareholder's including the applicant. After getting the notice, the Petitioner had filed an interim Application (IA No. 395 of 2017) before the NCLT seeking a stay on holding EOGM, but it was not granted.
27. Based on the pleadings, it is undisputed that the amendment in the Articles of Association of the Company was made during the pendency of Company Appeal (AT) No. 167 of 2020 13 of 34 Appeal before NCLT, filed under Section 59 of the Companies Act 2013. However, the Respondent Company pleaded that the amendment was incorporated to align AOA in line with the newly incorporated Companies Act 2013.
28. Before analysing further, it is necessary to go through the relevant Articles of Association with the amendment incorporated.
29. The Appellant has filed the copy of the order sheet of NCLT of theCompany Appeal No. 34/59/NCLT/AHM/2017 dated 25th October 2017, which shows that learned NCLT admitted the Appeal and after thattime was provided to the Respondents to file a reply. Respondent No. 1Company gave anundertaking that Company will not affect the transfer of shares until the next date of hearing.
30. On perusal of the order sheet of the NCLT dated 5th December 2017, it appears that the NCLT had extended the validity of the Order dated 25th October 2017 till further orders.
31. However, after making an appearance in Company Appeal No. 34/59/NCLT/AHM/2017 and giving an undertaking that the Company is not going to affect the transfer of shares, the Articles of Association was amended in the EOGM dated 12th December 2017. It is also an admitted fact that the Appellant had moved an IA seeking a stay of EOGM.But, the learned NCLT, keeping in consideration the undertaking of Respondent No. 1, had not stayed the EOGM. Thus, Respondentcan notdefend that the Company Appeal (AT) No. 167 of 2020 14 of 34 Appellant had filed an IA seeking a stay of EOGM, but it was not granted. Therefore, undisputedly the entire set of Articles of Association has been amended during the pendency of the Appeal before NCLT, filed under Section 59 of the Companies Act 2013.
32. The amended Articles of Association provides that the shares in the capital of the Company shall be under the control of the Directors,who may issue, allot or otherwise dispose of the same, or any of them to such persons, in such proportion and on such terms and conditions and either at a premium or at par and at such terms as they may from time to time think fit.
33. Prior to amendment,Article13 specifically provided that"no shares shall be transferred to a person who is not a member of the company".
34. The learned Counsel for the Respondent contends that original Article 13 itself provides a saving clause. It says that no shares shall be transferred to a person who is not a member of Company so long as any member or any person selected by directors as one whom it is desirable in the interest of the Company to admit to membership is willing to purchase the same at the fair price. '
35. Respondent No. 1 contends that the saving clause is generally used in a repealing act to preserve rights and claims otherwise lost.
Company Appeal (AT) No. 167 of 2020 15 of 34
36. Respondent further argued that Article 13 of the AOA of the Company authorises the Board to select any person who is desired in the interest of the Company to admit to membership,and is willing to purchase the same at afair price. The subscribers to the AOA have vested such powers in the hands of Directors.
37. The Appellant has annexed the original Articles of Association (pages 81 to 95 of the Appeal Paper). Accordingly, the relevant part of 'AOA' that deals with the transfer and transmission of shares is on pages 83 and 84 of theAppeal Paper Bookis reproduced as under:
"TRANSFER AND TRANSMISSION OF SHARES Restriction on transfer of share
13. Save as hereinafter provided no share shall be transferred to a person who is not a member of Companyso long as any Member or any person selected by the Directors as one whom it is desirable in the interest of the Company to admit to membership is willing to purchase the same at the fair value.
Directors' discretion to decline registration of any transfer
14. The Directors may at any time in their absolute and uncontrolled discretion and without assigning any reason whatsoever, decline or acknowledge any proposed transfer of shares and their power or discretion to refuse such transfer shall not be affected by the fact that the proposed transferee is already a registered member of the Company. Without prejudice to the generality of the aforesaid power the Directors Company Appeal (AT) No. 167 of 2020 16 of 34 may in particular so decline in any case in which the Company has a lien upon the shares [for any of them] or whilst any shareholder executing the transfer is either alone or jointly with any person or persons indebted to the Company on any account whatsoever or whilst any moneys in respect of the shares desired to be transferred [or any of them] remain unpaid or unless the transfer is approved by the Board. The registration of the transfer shall be conclusive evidence of the approval of the transferee by the Board.
Transfer of shares how to be made
15. Except where the transfer is made pursuant to Article 20 the person proposing to transfer any share [hereinafter called "proposing transferor"] shall give notice in writing [hereinafter called "the Notice"] to the Company that he desires to transfer the same. Such notice shall specify the sum he fixes as fair value of the shares and shall constitute the Directors as agent for the sale of the shares to any member of the Company or person selected as aforesaid willing to purchase the shares [hereinafter called the "Purchasing Member"]at aprice so fixed or at the option of the purchasing member at the fair value to be fixed in accordance with the Article 17 hereinafter appearing. A transfer notice may include several cases and in such case it would operate as if it were a separate notice of each share. A transfer notice shall not be revoked except with the sanction of the Directors.
Shares comprised in the transfer notice how to be dealt
16. Except where the transfer is made pursuant to Article 20, the shares comprised in any transfer notice shall be dealt with as under:
Company Appeal (AT) No. 167 of 2020 17 of 34
[a] The Board shall forthwith give notice to all the members
of the Company and specify the price of the shares to be sold and invite each of them to state in writing within 7 days from the date of the said notice whether he is willing to purchase any and if so what maximum number of the said shares.
[b] After the expiration of said 7 days the Board shall allocate the said shares comprised in the transfer notice to or amongst the members or member who shall have expressed their or his willingness to purchase as aforesaid, but so that in case of competition, they shall rank for acceptance paripassu in proportion to shares held by them and if any shares cannot be apportioned, such shares shall be offered to them in Order determined by lots and directors shall cause such lots to be drawn accordingly.
[c] If shares are not taken up by the person to whom they are offered in accordance with the foregoing provisions and the Company finds a purchasing member within the space of three months after the expiration of the said 7 days it shall give notice thereof to the purchasing member and proposing transferor who shall be bound upon payment of their value as fixed in accordance with Article 17 hereof to transfer the shares to such purchasing member or members. Fair value of the shares to be fixed by the Auditor
17. The fair value of the shares shall be the fair value fixed by the Directors. If the purchasing member wants that the fair value of the shares notified for the transfer shall be fixed by the Auditor of the Company, the Directors shall refer the matter to the Auditors of the Company and Auditors shall certify in writing the sum which in their Company Appeal (AT) No. 167 of 2020 18 of 34 opinion is the fair value and while so certifying, the Auditors shall be considered to be acting as experts and not as arbitrators and accordingly the provisions of the Indian Arbitration Act shall not apply.
Procedure when proposing transferor makes default in transferring
18.[1] In any case where the proposing transferor after having become bound as aforesaid makes default in transferring, the Directors may receive the purpose money and the proposing transfer shall be deemed to have appointed any one Director or the Secretary of the Company as his agent to execute transfer of shares to the purchasing members and upon the execution of such transfer, the Company shall hold the purchase money in trust for proposing transferor. The receipt of the Company for the purchase money shall be a good discharge to the purchasing member and after his name being entered in the Register of Members in purported exercise of the aforesaid power, the validity of the proceedings shall not be questioned by any person.
[2] If share Certificate/Certificates in respect of the shares transferred as mentioned above is/are not delivered to the Company by the former holder of such share/shares distinguishing it in such manner as they may think fit from the certificate/certificates not so delivered.
Right of the proposing transferor when the Company does not find a purchasing member
19. If the Directors shall not within the space of the said three months find a purchasing member Company Appeal (AT) No. 167 of 2020 19 of 34 after giving notice in the aforesaid manner, the proposing transferor share any time within three months afterwards be at liberty subject to Article 14 hereof to sell and transfer the share to any person and at a price not less than the fair value as fixed in accordance with Article 17 hereof."
(verbatim copy]
38. Original Article 13 of AOA lays the conditions forthe transfer of shares. These are;
a. That no shares shall be transferred to a person who is not a member of the Company;
b. So long as any member or any person selected by the directorsas one who is desirable in the interest of the Company;
c. Admitted to membership,is willing to purchase the same at afair value.
39. Clause 17 of the original Articles of Association lays down the procedure for fixing the fair value of shares. It provides that the fair value of shares shall be the fair value fixed by the Directors. Further, that the Auditor of the Company shall fix the fair value of the shares notified for the transfer, the Directors shall refer the matter to the Auditors of the Company. Auditors shall certify in writing the sum which, in their opinion, is the fair value. While so certifying, the auditors shall be considered to be acting Company Appeal (AT) No. 167 of 2020 20 of 34 as experts and not as Arbitrators and accordingly, the provisions of the Indian Arbitration act shall not apply.
40. Based on the above discussion, it is clear that the Respondent No 1 Company was constituted by three families, namely Shah, Nihalani and Poddar, as the name reflects. In case of transfer of shares of the Company, the Articles of Association provided pre-emptive rights to the shareholders. However, the alleged transfer of shares was made to the outsiders, i.e. not to the Company's existing shareholders and without giving them the right under Articles of Association to exercise their pre-emptive right. The Appellant, being aggrieved by the said transfer of shares and getting the knowledge of the transfer, had filed Appeal U/S 59 of the companies act 2013 before the NCLT. However, during the pendency of the Appeal, the Respondents called EOGM and replaced the entire sets of Articles of Association of the Company and removed the pre-emptive right given to the existing shareholders. Therefore, the transfer of shares to outsiders was not permitted under the Articles of Association of the Company. Therefore,it is evident that the Respondents have transferred shares in complete violation of the Articles of Association of the Company. Respondent's contention cannot be accepted that the Articles of Association itself provided the right to transfer shares outside the family in the interest of the Company because no procedure was adopted for the transfer of shares as provided under Articles 13 to 19 of the Association Articles of Association of the Company. Article 13 of the Articles of Association permits the transfer of shares at a Company Appeal (AT) No. 167 of 2020 21 of 34 fair price. How the fair price is to be obtained is also stated in the Articles of Association. However, no evidence is produced with regard to obtaining the fair value of shares by the Board of Directors. Hence, even on the stand taken in the affidavit of the Company that the shares have been transferred as per Article 13 is unsustainable because the Company has failed to produce evidence of obtaining fair value as stated in Articles 14 to 20 of the Articles of Association.
41. The Articles of Association provides that "if the Board of Directors were not able to find a suitable person" Articles 14 to 20 of Articles of Association mandates to find out the suitable person from fellow shareholders by giving them pre-emptive right to purchase shares on fair value. It is admitted that they have not complied with Articles 14 to 20 of the Articles of Association.
Limitation point
42. Respondent No. 1 contends that the entire transfer of shares as claimed is illegal and carried out in a non-transparent manner during the Financial Year 2012-13, and the Company had disclosed the facts in the returns filed for the AGM held in years 2012 and 2013. However, the documents submitted with the MCA are public documents and can be assessed by any person.Therefore, the Petitioner could have very well verified the contents of the annual return from the MCA website.
Company Appeal (AT) No. 167 of 2020 22 of 34
43. Section 59 of the Companies Act 2013 came into force on12th September 2013, and no limitation is provided for filing a Petition/Appealunder Section 59 of the Companies Act. However, Section 433 of the Companies Act 2013 says that the provisions of the limitation act are applicable to the proceedings or appeals before the Tribunal or the Appellate Tribunal. Section 433 came into effect on1st June 2016. This Petition was presented before the NCLT on 19th September 2017, i.e. after three years of transfer of shares and records submitted to the Registrar of Companies on 14th August 2014. Article 137 of the schedule to the Limitation Act, 1963 provides the limitation period of 3 years dealing with "any other application for which no period of limitation is provided elsewhere in this division".
44. Respondent No. 1 further placed reliance on the judgement of the Hon'ble Supreme Court AIR 1977 SC 282,Kerala state electricity board v T K Kmhaliumma.
"In the case of Kerala State Electricity Board v. T.P. Kunhaliumma, (1976) 4 SCC 634 at page 636 Hon'ble Supreme Court held:
"7. The view of the Kerala High Court is that Article 137 of the Limitation Act, 1963 has the same meaning as Article 181 of the Indian Limitation Act, 1908.
8. Article 181 of the Indian Limitation Act, 1908 was as follows:
"Description of Period of Time from which
Company Appeal (AT) No. 167 of 2020 23 of 34
Application limitation period begins to
run
Applications for which Three years When the right to
no period of limitation is apply accrues
provided elsewhere in
this schedule or by
Section 48 of the Code of
Civil Procedure"
9. In the Kerala State Electricity Board casethe High Court held that in view of the decision of this Court in Town Municipal Council, Athani v. Presiding Officer, Labour Court, Hubli[(1969) 1 SCC 873 : (1970) 1 SCR 51] the same construction should be put upon Article 137 as had been put upon Article 181. In the Athani Municipal Council case [(1969) 1 SCC 873 : (1970) 1 SCR 51], the workmen applied to the Labour Court under Section 33C(2) of the Industrial Disputes Act for computation of benefit in respect of overtime. The Labour Court accepted the Application of the workmen. The Athani Municipal Council challenged the decision of the Labour Court in a writ petition. On Appeal to this Court it was contended that the jurisdiction of the Labour Court was barred by the provisions of Minimum Wages Act, 1948 and second the applications to the Labour Court were timebarred under Article 137 of the Limitation Act 1963. This Court held as follows: The alteration in the 1963 Limitation Act in Article 137, namely, the inclusion of the words "other proceedings" in the long title to the 1963 Limitation Act, the omission of the preamble and the change in the definition so as to include Petition in the word "application" do not show any intention to make Article 137 applicable to proceedings before bodies other than courts such as quasi-judicial tribunals and executive bodies. The word "other" in the first column of the article giving the description of the application "any other application for Company Appeal (AT) No. 167 of 2020 24 of 34 which no period of limitation is provided elsewhere in this division" indicates that the interpretation of Article 181 in the 1908 Limitation Act on the basis of ejusdem generis should be applied to Article 137. The Application was presented to the Labour Court, a tribunal which was not a court governed by the Civil or Criminal Procedure Codes, and, therefore, the applications are not governed by Article 137 of the Limitation Act, 1963.**
18. The alteration of the division as well as the change in the collocation of words in Article 137 of the Limitation Act, 1963 compared with Article 181 of the 1908 Limitation Act shows that applications contemplated under Article 137 are not applications confined to the Code of Civil Procedure. In the 1908 Limitation Act there was no division between applications in specified cases and other applications as in the 1963 Limitation Act. The words "any other application"
under Article 137 cannot be said on the principle of ejusdem generis to be applications under the Civil Procedure Code other than those mentioned in Part I of the third division. Any other application under Article 137 would be Petition or any application under any Act. But it has to be an application to a court for the reason that Sections 4 and 5 of the 1963 Limitation Act speak of expiry of prescribed period when court is closed and extension of prescribed period if applicant or the Appellant satisfies the court that he had sufficient cause for not preferring the Appeal or making the Application during such period.
21. The changed definition of the words "applicant" and "application" contained in Sections 2(a) and 2(b) of the 1963 Limitation Act indicates the object of the Limitation Act to Company Appeal (AT) No. 167 of 2020 25 of 34 include petitions, original or otherwise, under special laws. The interpretation which was given to Article 181 of the 1908 Limitation Act on the principle of ejusdem generis is not applicable with regard to Article 137 of the 1963 Limitation Act. Article 137 stands in isolation from all other articles in Part I of the third division. This Court in Nityananda Joshi case has rightly thrown doubt on the two-Judge Bench decision of this Court in Athani Municipal Council case where this Court construed Article 137 to be referable to applications under the Civil Procedure Code. Article 137 includes petitions within the word "applications". These petitions and applications can be under any special Act as in the present case."
45. Based on the above caselaw, it is clear that Article 137 using the phrase "Any other Application" under Article 137 would be a Petition or any Application under any Act. Thus it is clear thatArticle 137 of the Limitation Act was applicable for any application under any Act. Therefore, even if no limitation is provided for filing an Application under Section 59 of the Act, the limitation will be three years from when the right to apply accrues. In the instant case,Respondent No. 1 is claiming that the Appellant was in the knowledge of the transfer of shares from 14th August 2014, i.e. when the records of transfer shares were presented before the Registrar of Companies. At the same time,this Petition was presented before the NCLT on 19th September 2017, i.e. after the expiry of three years of transfer of shares and records submission of records to the Registrar of Companies.
Company Appeal (AT) No. 167 of 2020 26 of 34
46. It is pertinent to mention that limitation starts from the time when the right to apply accrues.Appellant claims that he could gather information of transfer of shares only on getting knowledge from the third party when it introduced himself as a partner in Respondent No. 1 Company, i.e. 'SPNOPL'. Whereas Respondent No. 1 contends that the Appellant knew the transfer of shares from the date when the records relating to the transfer of shares were submitted to the Registrar of Companies, i.e. from 14th August 2014.
47. The Appellant's contention about the knowledge of the alleged transfer of shares is supported by an affidavit, not contradicted by any other Shareholder Director/Directors. Therefore, Respondent No. 1 Company was not in a position to dispute the Appellant's contention regarding the knowledge of the alleged transfer of shares.
48. Limitation starts from the date of knowledge of the acts done by the wrongdoers and correspondence with the Company. The Appellant is a Shareholder and not doing any business. Therefore, it has a right to rely on the 'Indoor Management' doctrinethat Directors must be doing their duty piously and responsibly as per Section 166 of the Act. It is further pleaded that limitation does not apply to fraud.
49. However, it is undisputed that the Respondent No. 1 Company is a family Company and Articles of Association further laid down the restriction on the transfer of shares of the Company to the outsiders only when the Company Appeal (AT) No. 167 of 2020 27 of 34 existing Shareholders refused to exercise their pre-emptive rights of acquiring shares at the fair market value.
50. Based on the above discussion, the Appellant could not have imagined the transfer of shares of the Respondent No.1 Companyagainst the Company's Constitution, enshrined in the Articles of Association. Moreover, while the Petition under Section 59 was pending in the instant case, the entire set of Articles of Association was replaced with the new set of 'AOA'. Consequently, the right of pre-emption given to the existing shareholders was extinguished. In such a scenario, knowledge of the alleged transfer of shares from the record of the ROC could not have been expected.
51. The learned NCLT has rejectedthe Petition filed under Section 59 of the Companies Act 2013 as time-barred. Section 17 of the Limitation Actprovides the computation of the period of limitation in case of fraud or mistake. Section 17 is reproduced as under;
"Section 17. Effect of fraud or mistake
17. Effect of fraud or mistake - (1)Where, in the case of any suit or Application for which a period of limitation is prescribed by this Act,--
(a) the suit or Application is based upon the fraud of the defendant or Respondent or his agent; or
(b) the knowledge of the right or title on which a suit or Application is founded is concealed by the fraud of any such person as aforesaid; or Company Appeal (AT) No. 167 of 2020 28 of 34
(c) the suit or Application is for relief from the consequences of a mistake, or
(d) where any document necessary to establish the right of the plaintiff or applicant has been fraudulently concealed from him;
the period of limitation shall not begin to run until the plaintiff or applicant has discovered the fraud or the mistake or could, with reasonable diligence, have discovered it, or in the case of a concealed document, until the plaintiff or the applicant first had the means of producing the concealed document or compelling its production:
Provided that nothing in this section shall enable any suit to be instituted or Application to be made to recover or enforce any charge against, or set aside any transaction affecting, any property which--
(i) in the case of fraud, has been purchased for valuable consideration by a person who was not a party to the fraud and did not at the time of the purchase know, or have reason to believe, that any fraud had been committed, or
(ii) in the case of mistake, has been purchased for valuable consideration subsequently to the transaction in which the mistake was made, by a person who did not know, or have reason to believe, that the mistake had been made, or
(iii) in the case of a concealed document, has been purchased for valuable consideration by a person who was not a party to the concealment and, did not at the time of Company Appeal (AT) No. 167 of 2020 29 of 34 purchase know, or have reason to believe, that the document had been concealed.
(2) Where a judgment-debtor has, by fraud or force, prevented the execution of a decree or Order within the period of limitation, the court may, on the Application of the judgment-creditor made after the expiry of the said period extend the period for execution of the decree or Order:
Provided that such Application is made within one year from the date of the discovery of the fraud or the cessation of force, as the case may be.
52. In the instant case, the Appellant claims that he was unaware of the transfer of shares and came to his notice from the person who introduced himself as a Partner/Shareholder. The Appellant's contention about the knowledge of the alleged transfer of shares is supported by an affidavit not contradicted by any other Shareholder/Director of the Company. Accordingly, Respondent No. 1 Company was not in a position to dispute the Appellant's contention regarding the knowledge of the alleged transfer of shares.
53. Respondent No. 1 contends that the Appellant knew the transfer of shares from the date when the records relating to the transfer of shares were submitted to the Registrar of Companies, i.e. from 14th August 2014.
54. The Appellant contends that Directors are the Trustees of the Company and are supposed to act fairly as per Section 166 of the Companies Act 2013. However, in the present matter,Directors have Company Appeal (AT) No. 167 of 2020 30 of 34 admitted all the averments of non-compliance of law and procedure and opted not to file any reply.
55. In the instant case, it is admitted that all the Directors and Shareholders have abstained from defending their deeds, thereby admitting the entire averments made before NCLT and NCLAT. Therefore, this is a case ex-party qua all the Directors and Shareholders. The law of limitation starts from the date of knowledge of the acts complained, especially in fraud or suppression of facts.
56. Based on the above discussion, webelieve that the learned National Company Law Tribunal's finding that the Petition filed under Section 59 of the Companies Act 2013 is barred by limitation is erroneous.
57. It is also evident that during the pendency of the Appeal under Section 59 of the Companies Act 2013 for rectification of register of members before the NCLT, EGM was convened on 12th December 2017, the Respondents amended an entire set of Articles of Association of the Company with the brutal majority in the Board of Directors of the Respondent No.1 Company. Moreover, in a new set of Articles of Association, Respondents deliberately removed the shareholders' pre-emptive rights in case of transfer of shares. This was with the sole motive to frustrate the outcome of the Company Appeal No. 34 of 2017, and even if the transfer is set aside, they may give effect to those transfers again.
Company Appeal (AT) No. 167 of 2020 31 of 34
58. Admittedly, the Respondent No.1 Companyconsists of 3 families, namely Shah, Nihalani and Poddar, with their respective shareholdings of 18%, 31.67%, and 50.33%. However, the Respondents with their brutal majority the Board of Directors transfer the Company's shares to the outsiders, against the original Articles of Association of the Company. This has caused a reduction in the Appellant's shareholding in the Respondent No.1 Company. This appears to be a deliberate act with the sole motive to frustrate the Company Appeal No. 34 of 2017 filed under Section 59 of the Companies Act 2013.
59. Therefore, in the circumstances stated above, the transfer of shares without providing the pre-emptive right to the existing shareholders against the Article of Association and Memorandum of Association of the Respondent No 1 Company is not sustainable. Therefore, the said amendment in the Articles of Association by the EOGM dated 12th December 2017 is declared oppressive, discriminatory deserves to be set aside.
60. Based on the above discussion, the Appeal filed against the common impugned Order in Company Appeal 34 of 2017 under Section 59 of the Companies Act 2013 dated 3rd August 2020 and CP No. 24/NCLT/AHM/2018 u/s241 and 242 of the Companies Act,2013 accordingly deserves to be allowed.
ORDER
Company Appeal (AT) No. 167 of 2020 32 of 34
Appeal filed against the impugned Order in Company Appeal No. 34 of 2017 under Section 59 of the Companies Act 2013 dated 3rd August 2020 is allowed with the directions as mentioned below.
Further, the Appeal against the judgement passed inCP No. 24/NCLT/AHM/2018u/s241 and 242 of the Companies Act,2013is allowed, and the impugned judgement is set aside with the following directions. No order as to costs.
1. Accordingly, transfer of 3250 shares of Respondent No. 1 fromPratima D Shah to Sanjay Poddar; 1045 shares from Suken Shah to SunitaPoddar; 1000 shares from Sanjay Poddar to Aagam Shah; 1595 shares from Suken Shah to Ramesh Juneja' and 1055 shares from Dinesh Shah to Aagam Shah which are in complete disregard of Articles of Association is cancelled. Accordingly, we declare the transfer of shares as void ab initio.
2. Accordingly, Respondent No. 1 Company is directed to rectify the register of Members within 30 days from the date of Order and submit compliance before the Registrar of Companies.
3. The share Application money received from the transferee of shares shall be refunded within one month from the date of this Order.
4. It is further directed that if the transfer of shares is necessary and the Board of directors considers it essential, this can be Company Appeal (AT) No. 167 of 2020 33 of 34 done after adopting the due process under Articles 13 to 20 of the original Articles of Association of the Company.
5. Amendment in the Articles of Association about the transfer of shares, based on the EOGM dated 12th December 2017, is also declared illegal and oppressive against the interestof the shareholder'sof the Company.
6. Therefore, the amendment in the Articles of Association in pursuance of a resolution of the EOGM dated12th December 2017 about the transfer of shares shall not be given effect.
[Justice Jarat Kumar Jain] Member (Judicial) [V. P. Singh] Member (Technical) NEW DELHI 2nd August 2021 pks Company Appeal (AT) No. 167 of 2020 34 of 34