National Company Law Appellate Tribunal
Gautam R Padival & Ors vs The Karnataka Theatres Limited & Ors on 30 November, 2022
NATIONAL COMPANY LAW APPELLATE TRIBUNAL AT
CHENNAI (APPELLATE) JURISDICTION
TA NO. 186 OF 2021 (Company Appeal (AT) No. 261 of 2019)
(Appeal under section 421 of the Companies Act, 2013)
In the matter of
Gautam R. Padival & Ors. ...Appellants
Vs.
Karnataka Theatres Ltd. & Ors. ... Respondents
Present:
For Appellants: Mr. T.K. Bhaskar, Advocate
For Respondents: Mr. P.H. Aravindh Pandian, Senior Advocate
with Mr. Raj Kumar Jhabakh, Advocate for R-1,
R-7, R-8 and R-9.
Mr. Jerin Asher Sojan & Mr. Pawan Jhabakh,
Advocates for R-54.
ORDER
(Date: 30.11.2022) [Per.: Dr. Alok Srivastava, Member (Technical)] This appeal is filed under section 421 of the Companies Act, 1956 against order dated 25.6.2019 in C.P. No. 71/2020 (T.P. 24 of 2016) (hereinafter called 'Impugned Order') passed by National Company Law Appellate Tribunal, Bangalore Bench (hereinafter called 'NCLT') whereby TA NO. 186 OF 2021 (Company Appeal (AT) No. 261 of 2019) Page 1 of 73 the company petition filed by the petitioners under sections 111(A), 397, 398 and 406 of the Companies Act, 1956 for various alleged acts of the oppression and mismanagement of the Respondent No. 1 Company has been dismissed.
2. The facts of the case, as stated and argued by the Appellants, are that the Respondent No. 1 Company (in short 'R-1') was incorporated as an unlisted public company on 1.10.1945 with an authorised share capital of 10,000 equity shares of Rs. 100/- each, out of which 6000 shares were issued in the year 1945 and in these shares, 5016 shares were subscribed and 984 shares were left unsubscribed. The Appellants have further stated that they own 605 shares of R-1 and Mr. M. Ratnavarma Padival, father of Appellant No. 1 (in short 'A-1') has been shareholder of R-1 Company since 1960 and 802 shares held by him were transferred to the Appellants and are now held by them, and thus the appellants at the time of filing the company petition owned 1407 shares of the R-1 company. The Appellants have claimed that they owned a substantial shareholding out of 5016 subscribed shares in R-1 Company and have been subjected to continuous acts of oppression by R-1 Company and to various acts of mismanagement in the R-1 Company.
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3. Insofar as the present appeal is concerned, the Appellants' case is that R-1 Company decided to allot the unsubscribed 984 shares of the company to Respondent Nos. 3 to 53 by a Board Resolution dated 7.3.2007, which was in violation of section 300 and section 81(1A) of the Companies Act, 1956 (which correspond to section 189 and 62 of the Companies Act, 2013). The Appellants have further claimed that the company's main object is to run cinema theatre in Bangalore city and in fulfilment of this object R-1 purchased "Jyothi Theatre" located in the heart of the city for showing movies to public on payment. The Appellants have further stated that with passage of time, the city grew with manifold increase in commercial activities, thereby resulting in huge appreciation in the value of the property (land) on which the theatre was located. The Appellants have also stated that to fulfil an illegal objective, the Board of Directors of R-1 Company has been making attempts to alter the Object Clause of the Memorandum of Association including at earlier Annual General Meetings (AGM) but such repeated attempts were thwarted by the shareholders.
4. The Appellants have alleged the Respondent Nos. 2 to 9 had plans to demolish the present cinema theatre and build a mall/commercial complex (through a Joint Development Agreement) in its place on the related land, and to that end the R-1 Company and Respondent Nos. 2 to TA NO. 186 OF 2021 (Company Appeal (AT) No. 261 of 2019) Page 3 of 73 9 initiated a move to allot 984 unsubscribed equity shares to Respondent Nos. 3 to 9 and their relatives, friends and business associates (who are Respondent Nos. 10 to 53) for a undervalued sum of Rs.2000/- per share even though the Company did not need any extra funds and there was no necessity and purpose for the said allotment. The appellants have further stated that this allotment of 984 shares was done in a malafide' manner by a simple Board resolution and later in the AGM in which Respondent Nos. 2 to 9 participated, while they were interested parties in the allotment of these 984 shares and should not have done so.
5. The Appellants have added that through such allotment of 984 shares to related parties by the directors of the R-1 Company, the shareholding of the Respondents' group increased from 500 shares to 1722 shares, thus giving them a controlling stake in the R-1 Company, and two major beneficiaries of this allotment were Respondents No. 46 and 47, who were daughters of Sudhir Shetty who was given the project for joint development on R-1's land.
6. The Appellants have alleged that after acquiring controlling stake in R-1 Company, Respondents No. 2 to 9 passed an ordinary resolution at the 61st AGM of R-1 Company held on 8.6.2007 granting the Board of Directors of R-1 Company the authority to enter into a Joint Development TA NO. 186 OF 2021 (Company Appeal (AT) No. 261 of 2019) Page 4 of 73 Agreement and such resolution was illegally approved without amending the Memorandum of Association/Articles of Association, and as was expected, the Respondents voted en bloc with 2890 shares in favour of the resolution for joint development, and the voting included a number of proxy votes which were of doubtful authenticity, and some votes cast through illegal polling procedures.
7. The Appellants have further stated that out of the six directors in the Company, five directors allotted shares to themselves as well as their relatives and close acquaintances, and this Board Resolution was in violation of section 300 of the Companies Act, 1956. Their allegation is that thus the management of the Company has unjustly enriched themselves by allotting shares to themselves and their relatives, friends and associates, when such shares had been dormant for more than 70 years after their first issue.
8. The Appellants have further alleged that after 61st AGM, the Directors of R-1 Company went ahead and passed an illegal resolution in a BOD meeting, wherein Appellants No. 1 to 3 raised the issue about irregularity and illegality in transfer of 984 shares, being a simple resolution for authorising the Board of Directors to execute a Joint Development Agreement.
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9. The Appellants have further stated that some Appellants raised the issue of defective proxies and illegal approval of resolution relating to Joint Development Agreement by making complaints to the Company's top management and Secretary, Ministry of Corporate Affairs in the year 2007, pointing to the illegalities in the acts of R-1 Company leading to oppression of the Company members and mismanagement, and the complaints were inquired into by the relevant authorities leading to a report by the Registrar of Companies, Karnataka (in short 'ROC').
10. The Appellants have submitted that the R-1 Company and its Board of Directors took a decision for joint development of the Company's land on which Jyothi Theatre was situated in a big hurry without proper valuation of the land in question, which was purportedly to give benefit to R-54 Charisma Builders represented by Sudhir V. Shetty, and whose daughters Shruthi S. Shetty and Shradha S. Shetty (Respondents No. 46 and 47) were allotted shares respectively in the 984 shares allotment. They have further alleged that the initially the proposal for Joint Development Agreement related to R-1 for obtaining at least 50% of the total build up area of the proposed commercial complex with right to retain proportionate undivided interest in the land, which was subsequently, in the 62nd AGM held on 27.8.2008, changed to R-1 TA NO. 186 OF 2021 (Company Appeal (AT) No. 261 of 2019) Page 6 of 73 Company's share at least 40% of the total built area with all other terms and conditions approved in the earlier resolution dated 8.6.2007 in 61st AGM remaining unaltered with such a change being decided without any proper due diligence.
11. The Appellants have preferred this appeal, being aggrieved by dismissal of their company petition by the NCLT.
12. While the appeal was under consideration, the Appellants filed an Interlocutory Application bearing No. IA 481 of 2021 for interim directions to prevent the demolition of the subject matter Jyothi Theatre of the appeal, which was heard by this Bench and disposed of by order dated 10.5.2022. The operative part of this order is as follows:-
"23. In view of the discussion in above-mentioned paragraphs, we are of the view that no relief can be granted to the Appellants in in I.A. No. 481 of 2021 regarding maintenance of status quo ante with respect to the assets of Respondent No. 1 including Jyothi Theatres. We make it clear that we have not made any comment or expressed any view regarding the merits of the case in respect of the prayers of the appellants in CA (AT) No.261 of 2019, which shall be decided on the merits of case."
13. The main appeal is now, therefore, considered on merits based on the grounds raised in the appeal and disposed of by this judgment. TA NO. 186 OF 2021 (Company Appeal (AT) No. 261 of 2019) Page 7 of 73
14. The Appellants have challenged the Impugned Order on numerous grounds of oppression and mismanagement, which include alleged illegal allotment of 984 shares, participation of interested directors in the board meeting for allotment of 984 shares, the conduct of 61st and 62nd AGMs, wherein the resolutions relating to alleged illegal allotment of 984 shares were approved and resolutions relating to Joint Development Agreement relating to the property of R-1 Company were also approved, and certain other grounds relating to non-registration of shares transfer and non- payment of dividend, restriction on shareholders' voting rights under Article 15 of the R-1 Company's Articles of Association.
15. We heard the arguments of the Learned Counsel and Senior Counsel of the Appellants and Respondents respectively and perused the record.
16. Arguments of the Learned Counsel for Appellants
(i) The management of Respondent No. 1 had the intention to sell the entire assets of the Company and Jyothi Theatre and the related plot of land to a favoured third party and in pursuance of such intention, the management and Board of Directors embarked on illegal allotment of 984 unsubscribed shares of Respondent No.1 Company to the relatives, close acquaintances TA NO. 186 OF 2021 (Company Appeal (AT) No. 261 of 2019) Page 8 of 73 and friends of the directors and some members of Respondent No. 1 Company, in order to seek their assistance in approving illegal and wholly unnecessary resolution for joint development of the company's only property i.e. the land on which Jyothi Theatre is situated.
(ii) The 984 shares were issued to Respondents No. 5 to 53, which was not in the best interest of the Company as there was no urgent requirement of funds by the company. This allotment violated sections 81(1) and 81(1A) of the Companies Act, 1956, which stipulates that such shares issued to increase the subscribed shares capital of the Company ought to have been offered for allotment to the existing shareholders of the Company and if they are allotted to non-members of the Company, a special resolution should have been passed in accordance with section 81(1A) of the Companies Act, 1956, whereas no such resolution was passed before making shares allotment to a number of non-members.
(iii) Section 81(1) of the Companies Act, 1956 mandates that all shareholders should be allotted unsubscribed shares in the Company, but in reality only some members of the Company TA NO. 186 OF 2021 (Company Appeal (AT) No. 261 of 2019) Page 9 of 73 received allotment from amongst 984 unsubscribed shares, and moreover, shares were allotted to 38 non-members without complying with the requirement of section 81(1A) of the Companies Act, 1956 and the Unlisted Public Shares (Preferential Allotment) Rules, 2003.
(iv) Respondent No. 1 company has not complied with the Unlisted Public Company (Preferential Allotment) Rules, 2003, which stipulates in Rule 4 that the preferential allotment cannot be made unauthorised by the Articles of Association and a special resolution is required to be passed authorizing the Board of Directors to do the same. Rule 6 of these Rules also specify that disclosures regarding the proposed allotment should be made by the Company in the form of explanatory statement to the shareholders. Thus both rules 4 and 6 were infringed while making the allotment of 984 unsubscribed shares.
(v) In the R-1 Company's Board meeting held on 7.3.2007, the resolution for allotment of 984 shares was approved to the related parties of the directors of the Company, and the directors were present in the meeting voting on the said resolution, whereas section 300 of the Companies Act, 1056 TA NO. 186 OF 2021 (Company Appeal (AT) No. 261 of 2019) Page 10 of 73 mandates that a director, who is directly or indirectly interested in any contract or arrangement entered into by the company, shall not participate in the voting of such resolution. In support, the Learned Counsel for Appellants has cited the judgment in the matter of Sri Gopal Jalan and Co. v Calcutta Stock Exchange Association Limited (AIR 1964 SC 250) wherein it is held that allotment of shares by a company constitutes binding contract between the proposed shareholders and the company regarding the offer and its acceptance to take the shares. He has also cited the judgment of Hon'ble Supreme Court in Union of India v Allied International Products Ltd. & Ors. (AIR 1971 SC 251), wherein the same position is reiterated.
(vi) The allotment of 984 shares was not done in the best interest of the Company, since it is not the case of Respondents that the company required additional funds, but for the sole benefit of directors, their relatives and friends. This act of personal aggrandisement by the directors and some existing members was in abandonment of their fiduciary duties and was bereft of fairness, transparency and probity in the conduct of the Company's affairs done in a completely illegal manner without TA NO. 186 OF 2021 (Company Appeal (AT) No. 261 of 2019) Page 11 of 73 any reference to legal provisions for allotment of new shares. Such an act amounts to oppression of the Appellants, who are members of the R-1 Company. In support the judgments of Hon'ble Supreme Court in Nanalal Zaver & Rs. V Bombay Life Assurance Co. Ltd. & Ors. (MANU/SC/0003/1950) and Dale & Carrington Invt (P) Ltd. & Anr vs P.K. Prathapan & Others (MANU/SC/0748/2004) have been cited.
(vii) Moreover, the value of Rs. 2000 per share at which the 984 shares were allotted was an undervalued figure and in view of the high value of land at the time of allotment of 984 shares it should have been much higher, but the Board did not exercise adequate care and caution and accepted such a low value for allotment of shares. Thus, illegal and wrongful gain was given to the new shareholders.
(viii) It is a well settled principle of law that in cases filed under sections 397, 398 and 402 of the Companies Act, 1956, what may be perfectly legal may still be oppressive to minority shareholders. Thus, without admitting that the allotment of 984 shares is legal, the oppressive character and improper TA NO. 186 OF 2021 (Company Appeal (AT) No. 261 of 2019) Page 12 of 73 management practices by Respondent No. 1 Company and its Board of Directors is abundantly clear. In support, the judgments of Hon'ble Supreme Court and Hon'ble Gujarat High Court in the matters of Needle Industries (India) Ltd. & Ors. V Needle Industries Newey (India) Holding Ltd. 7 Ors. [(1981) 3 SCC 333) and Mohanlal Ganpatram & Anr v Shri Sayaji Jubilee Cotton and Jute Mills co. Ltd. & Ors (MANU'GJ/0003/1964 respectively were cited by the Ld. Counsel for Appellants.
(ix) Also, events that occurred three years prior to the filing of present petition can also be looked into, if they form a part of continuous series of acts up to the date of filing of the company petition, and this view is supported by the ruling of Hon'ble High Court of Delhi in Surinder Singh Bindra & Ors. V Hindustan Fasteners (P) Ltd. (1989 SCC Online Del 197).
(x) The Joint Development Agreement entered into by the R-1 Company with Respondent No. 54 Charisma Builders suffers from inadequate due diligence in the proposed joint development of the Company and lack of transparency and material irregularities and the information disclosed to the TA NO. 186 OF 2021 (Company Appeal (AT) No. 261 of 2019) Page 13 of 73 shareholders. It shows that the R-1 Company was in a hurry to grant the project fo joint development to R-54 Charisma Builders.
(xi) In the notice of 61st AGM, item no. 6 pertains to resolution authorising the Board of Directors to enter into a Joint Development Agreement for construction of a multi-facility commercial complex with the Company retaining 50% of the built-up area of the commercial building. The explanatory statement to the notice states that the company will enter into a Joint Development Agreement with a builder to develop a shopping mall and the entire consideration to the Company would be in the form of 50% of the built-up area therein and there will be no cash consideration even though the Memorandum of Association requires that explicit consideration should be paid when property of the company is sold or disposed of.
(xii) In the 61st AGM held on 8.6.2007, Mr. M. Ratnavarma Padival raised questions about the valuation of the property and the basis of the Joint Development Agreement, where the chairman responded that it will not be sale of land, but for a joint venture TA NO. 186 OF 2021 (Company Appeal (AT) No. 261 of 2019) Page 14 of 73 where the value of land is to be assessed by the joint venture partner. This decision was amended in the 62nd AGM held on 27.8.2008 whereby a modified resolution was passed by which the Company would obtain at least 40% of the total built-up area and giving away property ownership of the land to the builder. The Company changed its stance of receiving 50% of total built-up area to receiving 40% of built-up area without adequate valuation and due-diligence, in order to provide extra and illegal benefit to the prospective builder R-54.
(xiii) The proxies which were used in the voting in the 61st AGM were objected to, which is recorded in the minutes of 61st AGM, but no redressal of such complaint was taken by the Chairman of the Board and the complaint was not adequately addressed.
(xiv) A member Shri M.S. Karantha raised a number of issues including illegal allotment of 984 shares in his complaint, since they were not offered to existing shareholders in proportion of their shareholding and absence of a special resolution under section 81(1A) in the AGM as well as defective proxies, and the approval of resolution regarding Joint Development Agreement, but such objections were set aside cursorily.
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(xv) Mr. Gautam R. Padival (A-1) made complaint to the Secretary, Ministry of Corporate Affairs vide letter dated 5.9.2007 against the Board of Directors for intentional violation of the provisions of the Companies Act, 1956 and also to other government authorities. Mr. M.S. Karantha also raised these issues in a separate letter dated 21.9.2007 addressed to the Secretary, Ministry of Corporate Affairs. These complaints were examined and investigated by the Registrar of Companies, Karnataka, who submitted his report dated 7.5.2008 pointing out various irregularities committed by the R-1 Company and its Board of Directors, inter-alia, advising the complainants to move the Company Law Board for getting declaration of the allotment of 984 shares as null and void among other issues. This report also found that a resolution by the General Body without amending the Object Clause of the Memorandum of Association to enable the Company to sell, lease, dispose of the built-up areas was also not done.
(xvi) The explanatory statement to the notice of 62nd AGM gives no indication of the valuation of the property and any project report for joint development, which the members were entitled TA NO. 186 OF 2021 (Company Appeal (AT) No. 261 of 2019) Page 16 of 73 to know so they could take a considered decision, and thus another resolution amending the earlier resolution passed in the 61st AGM was passed without proper and adequate due diligence, which affects the interest of Company and its shareholders leading to their oppression.
(xvii) Mr. M. Ratnavarma Padival filed Company Application 352 of 2007 in CP No. 35 of 1987 before the Hon'ble High Court of Karnataka challenging agenda item no. 6 of the 61st AGM which was on an entirely different cause of action, being reissue of 1455 forfeited shares on 15.11.1986. Also, the Appellants were not parties to the said proceedings in CA 352 of 2007 before Hon'ble High Court of Karnataka, and the proceedings of 61st AGM were not subject matter of CP No. 35 of 2007. Thus, the cause of action in respect of CP No. 35 of 1987 and the present company Appeal are based on two entirely different issues. Therefore, the disposal of CA 352 of 2007 does in no way put estoppel to the present proceedings. Moreover, CA 352 of 2007 was not rejected but only disposed of with a direction to the Respondent No. 1 Company to conduct a fair and transparent tendering process.
TA NO. 186 OF 2021 (Company Appeal (AT) No. 261 of 2019) Page 17 of 73 (xviii) Since the Agenda Item No. 6 of 61st AGM did not contemplate any tendering process, and it was about a Joint Development Agreement with a builder/developer by the Board of Directors., it cannot be said that the Hon'ble High Court of Karnataka has upheld the validity of the tendering process but only allowed the Company to undertake tendering process in a fair and transparent manner and also permitted Mr. Ratnavarma Padival's company to participate in the tendering process. Moreover, the issue of illegal allotment of 984 shares was not considered by the Hon'ble High Court of Karnataka nor any findings in that regard were given. It is clear that if votes had not been cast on behalf of these 984 shares, which were not allotted legally, the resolution relating to item no. 6 in 61st AGM could not have been passed.
(xix) The conduct of the Respondents after the order of Hon'ble Karnataka High Court in CP No. 35 of 1987 and Company Application 352 of 2007 has been less than fair and shows their malafide intention smacking of favouritism and lacking fairness and transparency. The malafide intention is also clearly visible in the decision taken in the Extraordinary General Meeting (EGM) held on 11.8.2008, wherein a proposal was placed for TA NO. 186 OF 2021 (Company Appeal (AT) No. 261 of 2019) Page 18 of 73 abandoning the Joint Development Agreement proposal and instead opt for complete disposal of the entire assets to a buyer. The explanatory statement with the notice for this EGM admitted that pre-qualification bids with respect to the tender invited for development contained a value of property was a much lower price than that of adjoining properties, and therefore approval in the EGM was sought for selling the entire property rather than undertaking joint development. (xx) Even the tender process undertaken was an eyewash, as Respondents were from the very beginning in favour of Respondent No. 54 taking up the project of joint development and therefore Earnest Money Deposit was taken from Respondent No. 4 even before the holding of 61st AGM in which the decision regarding joint development of Company's properties was taken for the first time. Later, the Board of Directors changed their opinion and instead opting of sale of the entire property, passed a resolution in 62nd AGM to amend the earlier resolution regarding joint development, whereby the Company would receive only 40% of the built-up area of the commercial complex as compared to 50% built-up area which was contemplated earlier and approved in 61st AGM. The TA NO. 186 OF 2021 (Company Appeal (AT) No. 261 of 2019) Page 19 of 73 absence of due diligence and correct valuation of land in such a proposal is borne from the explanatory statement attached with notice of 62nd AGM, wherein there is no indication of any valuation or estimation about the actual valuation of the land and possible returns to the Company have not been considered. (xxi) It is abundantly clear that the proposed Joint Development Agreement is ultra-vires of the Objects of the Company, because in the Memorandum of Association the main objects of the Company are outlined as follows:-
"3. The objects of which the company is established are :-
(a) To negotiate for the purchase of Karnataka Theatre", now owned and run by Badavara Bandhu Printing Press Ltd. of Mangalore,
(b) To establish one or more cinema theatre or theatres in the down of Mangalore and elsewhere in the country with such branches as and when Company thinks fit".
Xxx xxx xxx xxx
(o) To build, alter, demolish, construct, maintain or hire any buildings or works or workshops for the purpose of the business of the Company or which can be conveniently used in connection therewith, One of the subordinate objects of the Company in clause (u) of the Memorandum of Association is "to sell and in any other TA NO. 186 OF 2021 (Company Appeal (AT) No. 261 of 2019) Page 20 of 73 manner deal with or dispose of the undertaking or property of the Company or any part thereof, for such consideration as the Company may think fit".
Thus, none of the objects, as enumerated in the Memorandum of Association, contemplate explicitly that the Company should establish a commercial complex either by itself or in collaboration with any other entity. Therefore, Registrar of Companies, Karnataka through his report dated 16.5.2008 made prima facie finding that the Company should approach the General Body before finalising the Joint Development Agreement by placing the draft of the Joint Development Agreement before the shareholders and also amend the Objects of the Company to enable it to sell the built-up area other than the cinema theatre in the proposed commercial complex.
17. Arguments of the Learned Senior Counsel for Respondents
(i) The present proceedings are motivated, belated and bereft of any merit. Further, the Appellants filed the Company Petition belatedly after a period of more than three years from the date of allotment of shares in the TA NO. 186 OF 2021 (Company Appeal (AT) No. 261 of 2019) Page 21 of 73 year 2007 to stall the development projects of the Company for the personal benefit and gain of the Appellants. The shares were allotted on 07.03.2007 and after a period of more than three years i.e., on 08.08.2010, the Company Petition was filed by the Appellants before the Company Law Board, Chennai. This Hon'ble Tribunal in the matter of M/s Esquire Electronics Inc. & Another Vs. Netherland India Communications Enterprises Ltd and others, Company Appeal (AT) No.26 of 2016 vide order dated 15.02.2017 has held that the issues which are barred by period of limitation, i.e., three years prior to the date of filing of the Petition cannot be taken as acts of oppression and mismanagement.
(ii) Appellants No. 1 and 2 are the son and wife respectively of Mr. M Ratnavarma Padival and the 3rd Appellant is an employee of Sri Ratnavarma Padival, and the Appellants together held 605 shares. Further, 802 shares which were solely held by Mr. Ratnavarma Padival are now jointly held by Appellants No.1, 2 and Mr. TA NO. 186 OF 2021 (Company Appeal (AT) No. 261 of 2019) Page 22 of 73 Ratnavarma Padival. The Appellants No.1 and 2 thus hold 1406 shares jointly with Mr.Ratnavarma Padival.
(iii) The issued share capital of the company consists of 6000 shares. Out of the said issued capital, 984 shares were left unsubscribed. The Board of Directors of the R-1 Company who are authorized under the Memorandum & Articles of Association in this regard have taken a decision to allot the said unsubscribed shares in favour of the new allottees by virtue of the Board Resolution dated 07- 03-2007. The allotment of shares has been undertaken by following the prescribed procedure of receiving application from the aspirants and the allotment made after receipt of consideration amount. The allotment is legal and valid. For allotment of unsubscribed shares, the provision of Section 81(1) and Section 81(1A) of the Companies Act,1956 have no application. This has been clarified by the D epartment of Company Affairs vide its letter No.2 (27)/56-PR dated 4-1-1976 addressed to Registrar of Companies, Madras. The Board has exercised the power vested in it as per law and in the interests of the Company and the allotment of shares has been reported to the Registrar of Companies by filing TA NO. 186 OF 2021 (Company Appeal (AT) No. 261 of 2019) Page 23 of 73 Form 2. The allotment of these shares is neither harsh nor burdensome to any member. Further, Respondents No. 2 to 9 have not personally gained from the allotment of shares to the new members.
(iv) The Board of Directors have issued the unsubscribed 984 shares in exercise of its powers under the Articles of Association and in accordance with procedure prescribed by law. These shares were issued at a price of Rs. 2000/- per share, i.e, at a premium of Rs.1900 and not at par value of Rs.100/-, and the valuation was done by a qualified chartered accountant. The Company had inadvertently not mentioned the premium amount in Form 2, which was later rectified by the Company.
(v) Though Appellants were aware of the allotment of shares from 19th April 2007 they did not challenge the said allotment for more than three years until the tender filed by the Appellants was rejected and therefore their petition is barred due to efflux of time.
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(vi) The Appellants have relied on provisions of Section 300 to w r o n g l y contend that the allotment of shares in question is vitiated as shares were allotted to the Directors who participated and voted in the meeting in which the shares were allotted. Sections 299 and 300 of Companies Act, 1956 prescribe a duty on the part of a director when he is interested in a contract or arrangement of the company, whereas in according approval to a transfer of shares, no element of contract or arrangement is involved.
(vii) With the idea to promote widespread shareholding, an Article 15 was included in the Company's Articles of Association which provides that no member shall at any time hold shares exceeding 1/10th of total number or value of shares issued by the Company. There is also a restriction with regard to the voting rights of th of total members holding shares in excess of 1/10 shares.
(viii) With regard to Article 15 of the Articles of Association and its validity in allotment of shares in the present case, the issue is no more res integra. The Hon'ble Company Law Board, TA NO. 186 OF 2021 (Company Appeal (AT) No. 261 of 2019) Page 25 of 73 Chennai Bench has already interpreted and upheld the validity of Article 15 of the AoA in C.P.No.13/111/SRV/97 in the case of R-1 Company. Therefore, the q u e s t i o n o f o n c e again considering the validity of Article 15 in the present proceedings does not arise. Under provisions of the Companies Act 1913, the Company had power to restrict the voting rights of its members by placing restrictions on the voting rights through its AoA. Similarly, under Section 86 of the Companies Act, 1956, a company has power to issue shares with differential rights including differential voting rights and Section 47 of the new Companies Act, 2013 provides for similar powers. The Appellants, who are joint shareholders of shares with Mr. M Ratnavarma Padival who was the Petitioner Before the Hon'ble Company Law Board Chennai Bench, had in C.P.No.13/lll/SRV/97 raised the same issue, and therefore, they are bound by the order of the Hon'ble Company Law Board and are precluded from re- agitating the same in the present proceedings.
(ix) Regarding the report dated 7.5.2008 addressed by ROC to the Regional Director, Southern Region which infers TA NO. 186 OF 2021 (Company Appeal (AT) No. 261 of 2019) Page 26 of 73 that the 984 shares were allotted in violation of section 81 of the Companies Act, 1956, it is submitted that the said letter cannot be taken into consideration by this Hon'ble Tribunal as the opinion/ finding of the ROC is contrary to Circular No.2 (27)/56-PR dated 4.1.1976.
(x) The averments regarding allotment of shares to the daughters of Proprietor of Respondent No. 54 are wholly irrelevant. At any rate, the shareholders who have been allotted shares on 7.3.2007 are majors who are holding shares in their individual names.
(xi) The Respondents No. 1 and 8 submitted that the shares were worth Rs. 30,000/- as of 2007 and more than Rs.50,000/- per share is not correct. As stated Supra, the shares were issued by the Company at Rs. 2,000 per share as per the valuation obtained by the Company, wherein the shares were valued at Rs.1313 per share. Further, the Appellants themselves have purchased the shares of the Respondent No.1 Company for Rs. 4,000 in the year 2010.
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(xii) A company petition bearing C.P. No. 11/1967 was filed by Mr. Ratnavarma Padival which was dismissed by Hon'ble High Court of Mysore vide order dated 11.01.1968. Mr. Ratnavarma Padival again filed Company Petition 35/1987 before the Hon'ble High Court of Karnataka.
(xiii) Mr. Ratnavarma Padival also made an application bearing C.A. No.352/2007 in C.P. No. 35/1987 before the Hon'ble High Court of Karnataka seeking to restrain the Company from altering, alienating, leasing, disposing off or dealing with the property of the Company. The Hon'ble High Court of Karnataka vide order dated 06.06.2007 dismissed the said application.
(xiv) Apart from the v e r y s u c c e s s f u l theatre business, the Company does not h a v e any other business till now, and the Directors have been considering the question of commencing some other business, in view of the fact that the Company owns a large extent of 1 immovable property in the heart of Mangalore town, which could be exploited commercially. The Appellants have continuously scuttled such attempts.
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(xv) With regard to the Joint Development of the immovable property i.e. land of the R-1 Company, a decision was taken by majority in the 61st AGM held on 08- 06-2007 for joint development of Company's property on the ground that t heatres that are part of commercial complexes and malls have become popular and successful as against the traditional standalone theatres.
(xvi) The Appellants' group filed an application bearing CA 352/2007 in C.P. No.35/1987 before the Hon'ble High Court of Karnataka seeking restraint on considering the agenda for the 61st AGM to consider joint development of Company's land. The same was declined by order dated 06.06.2007. Thereafter tenders were called and as permitted by the Hon'ble High Court of Karnataka, Mr. Ratnavarma Padival's company also participated in the tender process alongwith other parties and when they were unsuccessful in securing the said joint development project he and his family members embarked on a company petition to thwart the company's effort for joint development project.
TA NO. 186 OF 2021 (Company Appeal (AT) No. 261 of 2019) Page 29 of 73 (xvii) Nine parties submitted tenders for pre-qualification.
The Company informed them the date and time of opening of applications for pre-qualification. These applications were opened and considered in the presence of eight members including the representative of M/s Padival Brothers. The R - 1 C ompany then considered a proposal for disposal the property by sale in view of the high appreciation in land costs and so the process of evaluation was postponed. Therefore, on 29.03.2008 the Company informed the unsuccessful applicants regarding the rejected applications and while all the pre-qualified applicants purchased tender forms, only four submitted f i l l e d i n f i n a l tenders. These tenders were opened in the presence of the representative of the Appellants' group on 15.06.2008. The tender committee approved the salient features of the tenders received to the Board of Directors on 17.06.2008. The Board of Directors in the meeting dated 26.08.2008 decided to award the work to the Respondent No. 54. The tender of M/s Padival Brothers, Mangalore was rejected as the same was incomplete. Thus, R-1 Company followed a TA NO. 186 OF 2021 (Company Appeal (AT) No. 261 of 2019) Page 30 of 73 transparent process on consideration and final award of tender to R-54.
(xviii) Even though the Company intended to sign the agreement before March 2009, for various reasons the same was delayed and finally the joint development agreement was finalized and signed on 23.09.2009. (xix) The Memorandum of Association of the company specifically authorizes the company to go for joint development of its property (land) in view of the Objects of the Company contained therein. Further in the AoA, Article 3(o) deals with power of the company to build, alter, demolish, construct, maintain or hire any building or works for the purpose of business of the company. Article 3(q) empowers a joint venture with any person or firm or company. Article 3(u) permits sale or disposal of property for consideration. (xx) Taking note of the provisions in the MOA, the Hon'ble High Court of Karnataka in C.A. No. No.352/2007 vide order dated 06.06.2007 categorically held that the TA NO. 186 OF 2021 (Company Appeal (AT) No. 261 of 2019) Page 31 of 73 Company has power under the MOA to deal with the property of the Company. It is submitted that the Tribunal after taking note of the proceedings before the Hon'ble High Court, the provisions of the MOA and the tender process has rightly concluded in paragraph 17 of the impugned order. Mr. M Ratnavarma Padival has not challenged the tender process before the Hon'ble High Court in C.P. No.35/1967 and has accepted the results of the tender and so his family members do not have the right to challenge the joint development agreement in the instant petition and appeal thereon.
(xxi) The allegation that Respondents No. 5 and 8 do not hold qualifying shares is wholly untenable. Respondent No. 5 holds 45 shares under folio numbers 353 and 421.
Similarly, Respondent No. 8 holds 274 shares under folio numbers 357, 390, 408, 415 and 416 in the register of members of the Company. The fact that the shares are held jointly with family members does not disqualify the shareholders from occupying the position of a Director and there is no bar under the AoA of the Company for TA NO. 186 OF 2021 (Company Appeal (AT) No. 261 of 2019) Page 32 of 73 joint shareholders occupying the position of a Director in the company. 1 (xxii) With regard non-transfer of 101 shares, the Appellant No. 1 lodged the share certificates for transfer on 26.08.2009. The company had time up to 26.10.2009 for considering the share transfer applications by placing the same before the Board of Directors. The issue of transfer of shares was considered in the next immediate board meeting dated 23-09-2009. However, in the intervening period the books of the company were closed prior to holding of AGM between 15-09-2004 to 24-09-2009. Therefore, the transfer of shares took effect from 25-09- 2009. The members who held the 101 shares had issued proxies in favour of Appellant No.3 to exercise the rights and vote in respect of the 101 shares of the Company in the 63rd AGM. Therefore, though the shares were not transferred in the name of the Appellant No. l, the rights in respect of the 101 shares have been effectively exercised by the Appellants.
TA NO. 186 OF 2021 (Company Appeal (AT) No. 261 of 2019) Page 33 of 73 (xxiii) The averment that large numbers of shareholders were going against the proposals of the Board of Directors, therefore, the board feared it would lose control over the Company, is baseless and false. In the 61st AGM, the votes in favour of the Resolution for Joint Development Agreement were 2890 votes and votes against the Resolution were 1307 votes. Even if the votes in respect of 984 impugned shares are removed from the voting, the votes in favour of the resolution would be 1906 votes with 1307 votes against the resolution in question. (xxiv) The reason behind the prior deposit of the Earnest Money Deposit is that the company had entered into a dialogue with some real estate developers even before the 61st AGM took place. In this context discussions were also held with Respondent No. 54 Charisma Builders and two other builders viz., Chartered Housing Private Limited, Bangalore and Plasma Developers Limited, Mangalore. All the three had deposited Rs 2 lakhs as Earnest Money alongwith their bids. Thereafter, it was decided to go for a public tender. Therefore, the EMD by the other two were returned as they did not participate in TA NO. 186 OF 2021 (Company Appeal (AT) No. 261 of 2019) Page 34 of 73 the public tender, whereas the amount paid by Respondent No. 54 was retained.
(xxv) The Respondents No. 1 and 8 submitted t h a t the objects of the Company not allow for construction of a commercial complex. As stated earlier, Articles 3(o), (q) and (u) authorizes the Company to deal with the property of the Company in any manner it deems fit and the same has been upheld by the Hon'ble High Court of Karnataka in its order dated 06.06.2007 in CA 352/2007.
(xxvi) All the proxies that were used for marking attendance and in voting in the Annual General Meetings were neither illegal or unverified proxies and there was not any mala fide intent in considering them valid for passing the proposed resolutions. The proxies were used only after proper validation from the scrutinizers. Further, till date there has been no complaint from any shareholder with regard to use of the proxies in the 61st and 62nd AGMs.
TA NO. 186 OF 2021 (Company Appeal (AT) No. 261 of 2019) Page 35 of 73 (xxvii)The observation of the NCLT that the Appellants are indulging in forum shopping is absolutely correct. Mr. M. Ratnaverma Padival tried to stall the development process by filing CA 352/2007befoe Hon'ble High Court of Karnataka in the company petition. However, when he failed to get a favourable order and also failed in securing the tender, he orchestrated the company petition through Appellants who are joint shareholders along with him. Issues in the appeal
18. The issues that arise in this appeal are as follows: -
(i) Whether the allotment of 984 unsubscribed shares through resolutions in the Board of Directors' meeting and in the 61st and 62nd AGMs was done in accordance with the provision of law, and whether such allotment made to some relatives and friends of existing members and director of R-1 Company constitutes an act of oppression and mismanagement?
(ii) Whether the Joint Development Agreement, approved through a resolution in the 61st AGM and thereafter modified TA NO. 186 OF 2021 (Company Appeal (AT) No. 261 of 2019) Page 36 of 73 through another resolution in the 62nd AGM with prior notice for the AGMs and Explanatory Statements sent with notice fulfilled the requirements of legal provisions and maintained fairness and transparency complying with the fiduciary duty of the company towards its members, and if it was not done, would it constitute an act of oppression and mismanagement?
(iii) Whether the alleged issues of useing of unverified proxies in the 61st and 62nd AGMs, registration of 101 shares of Appellant No. 1, allotment of 100 shares to R-46 and R-47, adherence to Article 15 of the Articles of Association despite contrary provision in the Companies Act, 1956 have any illegality associated with them, and whether such acts also constitute acts of oppression and mismanagement perpetrated by the R-1 Company and its management affecting its members?
Analysis and Findings
19. The NCLT has, on the above-mentioned issues, not granted any of the reliefs sought for by the petitioners and has dismissed the company TA NO. 186 OF 2021 (Company Appeal (AT) No. 261 of 2019) Page 37 of 73 petition bearing C.P. No. 71 of 2010. In the light of the adjudication by NCLT, we now examine the above stated issues in the light of pleadings made by the parties and oral arguments made thereon by the rival parties.
20. We note that argument of the Learned Senior Counsel for Respondents who has stated that the Appellants are now agitating issues relating to the allotment of 984 shares, an act which was done by the Company in the year 2007, and an act that has continued for such a long time with no adverse consequences to the company and the members cannot be called an act of oppression.
21. We find that the allotment of 984 shares was first discussed by the Company's Board of Directors in its meeting dated 7.11.2006, and later in the Board of Directors' meeting held on 7.3.2007 the list of prospective allottees of 984 shares was finalized. At the beginning of the 61st AGM wherein the allotment of 984 shares was decided, a member Mr. M.S. Karantha gave a letter dated 7.6.2007 to the Chairman, Board of Directors of the Company alleging irregularity and illegality in the allotment of these shares. Further, the same issue was the basis of a complaint made by Mr. M.S. Karantha to the Secretary, Ministry of Corporate Affairs vide letter dated 21.9.2007 and by Mr. Gautam Padival in a complaint dated TA NO. 186 OF 2021 (Company Appeal (AT) No. 261 of 2019) Page 38 of 73 10.10.2009 to the ROC, Karnataka. These issues were enquired into by the ROC, Karnataka and a report dated 7.5.2008 was submitted to the Regional Director, Southern Region, Ministry of Corporate Affairs. This report holds that the allotment of 984 shares should have been done with reference to Section 81(1) and 81(1A) of the Companies Act, 1956 which was not done, and hence such an allotment is not legal.
22. Further, it is noted that these 984 shares became relevant when the Company considered the project of joint development of its property and voting took place on the proposal with the new allottees also voting in this resolution. Later, the appellants filed CP No. 71 of 2010 on many issues of alleged oppression and mismanagement, with an important one relating to the allotment of 984 equity shares. This company petition, later labelled as TP no. 24 of 2016, came to be decided by the NCLT, Bangaluru Bench on 25.6.2019. Thus, it is quite clear from the turn of events that even though the allotment of 984 shares pertain to the year 2007, the Appellants or some other members have raised the issue of their illegal allotment before different authorities and courts, and thus, they are well within their rights to raise this issue in appeal, filed against the Impugned Order dated 25.6.2019.
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23. The Impugned Order dated 25.6.2019 held that the allotment of 984 shares was done from the unsubscribed portion of the issued 6000 shares of R-1 Company, which were unsubscribed, and the directors are empowered to dispose of the shares of the Company in accordance with Article 4 of Articles of Association (in short 'AoA'), and restrictions imposed on the allotment. It has, further, held that the issue of 984 shares is not the Rights Issue and is only the unsubscribed portion of authorised 6000 shares that were issued initially, and therefore, there is no bar imposed by section 81(1) and 81(1(A) and section 300 of the Companies Act, 1956 regarding issue of those shares by the directors of the Company as they deem fit. The Impugned Order, therefore, holds that 'the allotment of impugned shares are allotted strictly following extant provisions AoA of the company and the law on the issue'.
24. Insofar as the allotment of 984 unsubscribed shares is concerned, we note that the AoA of R-1 Company indicates the right of the Directors to allot the shares. Article 4 of the AoA stipulates that the shares shall be under the control of the Directors, who may allot or otherwise dispose of the same to such persons on such terms and conditions and at such times, as the Directors think fit, and with full powers to give any person the call on any shares either at par or at a premium and for such time and for such consideration as the Directors think fit. We also note that the TA NO. 186 OF 2021 (Company Appeal (AT) No. 261 of 2019) Page 40 of 73 allotment of 984 unsubscribed shares became a contentious issue from the year 2007 onwards, when Mr. M.S. Karantha (Appellant No. 3) sent a representation to the Chairman, Board of Directors of R-1 Company through a letter dated 7.6.2007 (attached at pp.216-217 of the appeal paperbook). Later, Appellant No. 1 Gautam Padival also filed a complaint about the irregular allotment of 984 shares vide letter dated 10.10.2009 addressed to the Registrar of Companies, Karnataka (in short 'ROC'). These complaints were enquired into by the ROC and the inquiry report (attached at pp. 254-263 of the appeal paperbook), sent to the Regional Director, Southern Region, Ministry of Company Affairs provides a detailed examination and inference on the issues raised in the complaints.
25. The inquiry report mentions that the R-1 Company provided its comments vide letter dated 28.2.2008 on the said complaints and after receiving the comments and reply from the R-1 Company, the ROC found that 'that though these 984 shares were issued prior to the period 1965- 66 and remaining unsubscribed for a very long period of time, the Board of Directors should not have exercised their power under section 81(1)(d). Since the board has a fiduciary duty in exceptional circumstances like issue of shares towards the members of a company, they should have offered these shares to all the existing shareholders in the ratio of shares held by them under section 81(1) of the Companies Act, 1956'. The TA NO. 186 OF 2021 (Company Appeal (AT) No. 261 of 2019) Page 41 of 73 report further notes that "the details of allottees reveal that 394 shares were allotted to existing members and 590 shares were allotted to 23 new persons. Since shares were allotted to less than 50 new persons this allotment of shares cannot be considered as a public issue. Similarly, the company need not file statement in lieu of prospectus and the filing of statement in lieu of prospectus would arise only once in a life time of a company on its incorporation, Therefore, it can be concluded the Company has violated the provisions of section 81(1) and 81(1A) of the Companies Act, 1956. As the allotment was done against the provisions of the Companies Act, 1956, the complainant may be directed to approach the company law board under the provisions of Sec.397/398 of the Act for declaring the allotment as null and void."
26. For ease of understanding and better appreciation, Sections 61(1) and 81 (1) and (d) and 81(1A) of the Companies Act, 1956 are as reproduced below :-
81. FURTHER ISSUE OF CAPITAL (1) Where at any time after the expiry of two years from the formation of a company or at any time after the expiry of one year from the allotment of shares in that company made for the first time after its formation, whichever is earlier, it is proposed to increase the subscribed capital of the company by allotment of further shares, then, -
TA NO. 186 OF 2021 (Company Appeal (AT) No. 261 of 2019) Page 42 of 73
(a) such further shares shall be offered to the persons who, at the date of the offer, are holders of the equity shares of the company, in proportion, as nearly as circumstances admit, to the capital paid- up on those shares at that date;
xx xx xx xx
(d) after the expiry of the time specified in the notice aforesaid, or on receipt of earlier intimation from the person to whom such notice is given that he declines to accept the shares offered, the Board of Directors may dispose of them in such manner as they think most beneficial to the company.
xx xx xx xx (1A) Notwithstanding anything contained in sub-section (1), the further shares aforesaid may be offered to any persons [whether or not those persons include the persons referred to in clause (a) of sub-section (1)] in any manner whatsoever -
(a) if a special resolution to that effect is passed by the company in general meeting."
27. We note that the Annual Report presented in the 61st AGM states that out of 6000 shares that were issued initially, 984 shares were left unsubscribed and were lying dormant. These shares were allotted at a premium of Rs. 1900 per share by the Board of Directors. It is also note that when a resolution was passed to issue the 984 unsubscribed shares at a price of Rs. 2000/- per share in the Board of Directors meeting held on 7.3.2007, the list of allottees were finalised at the Board meeting, which contained the names of the Respondents No. 3 to 53 to the exclusion of the Appellants and Mr. M.R. Padival, and that most of the TA NO. 186 OF 2021 (Company Appeal (AT) No. 261 of 2019) Page 43 of 73 allottees in the impugned allotment are relatives, friends or close acquaintances of the Directors and some member who had never held any shares in the Company prior thereto. (The list of the allottees of these 984 shares is attached at pp.95-98 of the Rejoinder filed by the Appellants). A perusal of this list, which is not disputed by the respondents clearly shows that the beneficiaries of the allotment of 984 shares are either the existing members themselves or their close relatives and friends. This list makes it clear that the Board of Directors gave selective benefit to only some existing members of the Company and their close relatives or friends and the basis of giving such selective treatment to just some members of the Company was not made clear. Such an act was wholly arbitrary and smacked of favouritism and was clearly militating against the fiduciary duties of the Board of Directors where the legal provisions of Section 81 for allotment of shares for increase in capital of the Company had been given a complete go by.
28. We refer to section 81(1)(a) and 81(1)(d) of the Companies Act, 1956 to examine the need for infusion of capital in the Company and the manner in which these 984 shares were allotted. We find that these shares were allotted after more than seven decades from the last allotment and that too when the Board of Directors did not project any real need of funds for the Company's business. Thus, it is difficult to TA NO. 186 OF 2021 (Company Appeal (AT) No. 261 of 2019) Page 44 of 73 appreciate whey the Board of Directors went for an increase in the share capital. Further, the notices of 61st AGM and the Board of Directors meeting held prior to 61st AGM do not in any way show that the Company was in any need of additional funds or finances. This action of the Company in going for increasing its share capital, though legally tenable does appear to have been done with some other objective than for infusion of capital. The subsequent allotment in favour of existing members of the Company and not to some other members, who were not beneficiary in the new allotment is not explained by the company's Board of Directors, except to say that directors possessed the right to make allotment in any manner they thought fit. It is also noted that the proportionate shareholding of old members came down in the overall share capital of the Company, after the allotment of 984 new shares to new allottee which was to their detriment.
29. Section 300 of the erstwhile Companies Act, 1956 provides as hereunder:
"300. INTERESTED DIRECTOR NOT TO PARTICIPATE OR VOTE IN BOARD'S PROCEEDINGS (1) No director of a company shall, as a director, take any part in the discussion of, or vote on, any contract or arrangement entered into, or to be entered into, by or on behalf of the company, if he is in any way, whether directly or indirectly, concerned or interested in the contract or arrangement; nor shall his presence count for the TA NO. 186 OF 2021 (Company Appeal (AT) No. 261 of 2019) Page 45 of 73 purpose of forming a quorum at the time of any such discussion or vote; and if he does vote, his vote shall be void."
30. Hon'ble Supreme Court of India has held in the matter of Sri Gopal Jalan and Co. vs. Calcutta Stock Exchange Association Ltd. [(1964) 3 SCR 698: AIR 1964 SC 250 : (1963) 33 Comp Cas 862] has held as follows:-
"We agree with the learned Judges of the High Court that a re- issue of a forfeited share is not an allotment of share within Section 75 (1). The word 'allotment' has not that the meaning of that word is well understood and no decision has been brought to our notice to indicate that any doubt has ever been entertained as to it. As Chitty, J. put it in In re Florence Land and Public Works Company, "What is termed 'allotment' is generally neither more nor less than the acceptance by the company of the offer to take shares."
31. In the light of this judgment, the allotment of 984 shares should be seen as an issue for increase of capital and, therefore, covered by the provision of section 81(1)(a). Further, Hon'ble Supreme Court of India has held in the matter of Union of India (UOI) vs. Allied International Products Ltd. and Ors. (Civil Appeal Nos. 1772 and 1773 of 1970) has held as follows:-
"15. The application for allotment of shares and acceptance thereof constitutes a contract between the Company and the applicant. Section 73(1) of the Companies Act imposes a penalty whereby the allotment of shares becomes void on the happening of the contingency specified therein."
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32. The various concepts of subscribed, unsubscribed shares and allotment of shares has been explained by the Hon'ble Gujarat High Court has held in the matter of In Re: Mafatlal Industries Ltd. (MANU/GJ/0197/1996) wherein it is held as hereunder:-:-
"29. We may at the outset state that the terms "subscription' or 'subscribed capital' or 'unsubscribed capital' have different meanings depending upon the context in which the term has been used. While referring to the capital structure of the Company to be stated in the prospectus inviting applications for share allotment, the terms used are authorised, issued, subscribed and paid-up capital. Here, "authorised share capital" means the number and par value of each class of shares that the company may issue in accordance with its instrument of incorporation. This is also described as "nominal share capital", "issued share capital" means that the portion of the authorised share capital which had actually been offered for subscription. "Subscribed share capital" means that portion of the issued share capital which has actually been subscribed and allotted. This also includes fixed shares allotted to corporate enterprises and "paid-up share capital" means that part of the subscribed/issued capital for which consideration in cash or otherwise has been received. This also includes bonus shares allotted to corporate enterprises. Therefore, the term "subscription" used in the financial statement of the company is not relatable merely to shares for which application has been made but refers to shares for which applications have been made and actually allotted. It is to be seen that in Section 81 of the Act the terms used "Where... it is proposed to increase the subscribed capital of the company by allotment of further shares". Here also, subscribed capital refers to allotted shares and not to the applied shares. It provides that capital shall be increased by further allotment of shares in the manner prescribed under Section 81.
Xxx xxx xxx xxx TA NO. 186 OF 2021 (Company Appeal (AT) No. 261 of 2019) Page 47 of 73
31. The scheme of the provisions is very clear that such new shares can be offered only to the persons who on the date of such offer are holders of equity shares of the company. The offer is to be made in proportion to the capital paid-up on those shares as on the date of offer. This clearly goes to show that in the in the first instance the entire issue is to be offered by the company to the existing shareholders in proportion to which they held shares. No one is entitled to claim anything more than what has been offered as proportionate shares of capital issue to such shareholders....It is only after the expiry of the time specified in the notice aforesaid or on receipt of earlier intimation from such shareholders to whom notice is given that he declines to accept the shares offered that the Board of Directors may dispose of such shares by which the subscribed capital was proposed to be increased in such a manner as it thinks most beneficial to the company. From the aforesaid, it is clear that in the case of a rights issue no public offer is made inviting applications. Therefore, the stage for expressing agreement to subscribe to share capital by persons other than the existing shareholders does not reach before expiry of the time for exercise of the option to accept the offer for allotment of the shares or to renounce such offer of allotment either in full or in part in favour of a third party or refusal to accept the offer fo allotment."
(Emphasis Supplied)
33. Thus, in the judgment in the case of In Re: Mafatlal Industries Ltd. (supra), Hon'ble Gujarat High Court has held that the terms "subscription", "subscribed capital" or "unsubscribed capital'" have different meanings depending upon the context in which the term has been used. The judgment further observes that "...Capital shall be increased by further allotment of shares in the manner prescribed under Section 81." This judgment was delivered in the year 1996 when Companies Act, 1956 was in operation. In the light of these observations TA NO. 186 OF 2021 (Company Appeal (AT) No. 261 of 2019) Page 48 of 73 of the Hon'ble Gujarat High Court, it is noted by us that section 81 refers to "further issue of capital" and for further issue of capital, the method by which allotment of shares in the company will be done is provided in section 81.
34. Thus, it is clear that the 984 shares which were meant for increase of the company's capital should have been allotted as prescribed by section 81 of the Companies Act, 1956 to such persons/entities who at the date of offer were holders of the equity shares of the company, in proportion to the capital paid-up of those shares on that date.
35. With regard to the allotment of 984 shares and the duty of the Company to do it in a fair and rational manner, the Learned Counsel for Appellants has brought to our attention the judgment of Hon'ble Supreme Court in the matter of Nanalal Zaver & Ors. Vs. Bombay Life Assurance Co. Ltd. (supra) wherein the following is held :-
"40. It is well established that directors of a company are in a fiduciary position vis-à-vis the company and must exercise their power for the benefit of the company. If the power to issue further shares is exercised by the directors not for the benefit of the company but simply and solely for their personal aggrandisement and to the detriment of the company, the court will interfere and prevent the directors from doing so. The very basis of the Court's interference in such a case is the existence of the relationship of a trustee and cestui que trust as between the directors of the company."
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36. The fiduciary duty of the company's directors is further emphasised in the judgment in the matter of Dale & Carrington Invt.(P) Ltd. 7 Anr. Vs. P.K. Prathapan & Ors. (supra), where the following is held by the Hon'ble Supreme Court :-
"12. ...........[A] company is a juristic person and it acts through its Directors who are collectively referred to as 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............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 shareholder 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 affairs of a company."
(Emphasis Supplied)
37. Hon'ble Supreme Court of India has held in the matter of Union of India (UOI) vs. Allied International Products Ltd. and Ors. (MANU/SC/0043/1970) held as follows :-
TA NO. 186 OF 2021 (Company Appeal (AT) No. 261 of 2019) Page 50 of 73 "15. The application for allotment shares and acceptance thereof constitute a contract between the Company and the applicant...."
38. We are, therefore, of the view that the directors of the R-1 Company who had interest in the allotment of 984 shares as they were related to the prospective beneficiaries should have refrained from participating in the meeting wherein the list of beneficiaries was decided. The list of beneficiaries which is attached in the appeal paperbook points to the relationship between certain directors and the prospective beneficiaries. Therefore, it is amply clear that the directors did not conduct themselves in a fair and just manner, which was expected of them, when deciding on the prospective allottees. The allotment of 984 shares, therefore, suffers from this shortcoming too.
39. The Learned Counsel for Respondents has shown a valuation of the shares done by P.M. Hegde & Co., Chartered Accountants vide letter dated 14.9.2006 to claim that valuation of shares was found to be Rs. 1313 per share. This valuation was based on the paid-up capital, reserves and surplus as per Balance Sheet and Profit & Loss Appropriation Balance, but the valuation did not consider the value of the land property of the Company. While it is not necessary to go into the technical aspects of the valuation report, the valuation of the shares should have certainly factored into account the value of the Company's only property i.e. land, TA NO. 186 OF 2021 (Company Appeal (AT) No. 261 of 2019) Page 51 of 73 which later become a very relevant factor when the said land of the Company was to be used for the Joint Development Project and which would have brought windfall gains to the shareholders and also to the allottees of 984 shares. It is quite evident that the valuation of shares was bound to be higher if the current value of the land asset of the Company would have been considered, but which was not done for reasons that are not clear when the premium was fixed for new allotment of shares.
40. We have considered the argument of the Learned Senior Counsel for Respondents that the Department of Company Affairs, through clarificatory letter No. 2 (27)/56-PR, dated 4.10.1976, opined that the allotment of 984 shares should not be considered a new share issue which will invite applicability of Section 81. This argument has been rebutted by the Learned Counsel for Appellants, who has cited the Hon'ble Supreme Court's judgment in the matter of Bhuwalka Steel Indus. Ltd. & Ors.
Vs. Bombay Iron and Steel Labour Bd. And Ors.
(MANU/SC/1905/2009) where it is held as below :-
"40. The argument is clearly erroneous for the simple reason that it is not the task of the State Government, more particularly, the Executive Branch to interpret the law, that is the task of the Courts. Even if the State Government understood the Act in a particular manner, that cannot be a true and correct interpretation unless it is TA NO. 186 OF 2021 (Company Appeal (AT) No. 261 of 2019) Page 52 of 73 so held by the Courts. Therefore, how the State Government officials understood the Act, is really irrelevant."
(Emphasis Supplied)
41. In the light of the above-stated judgements of Hon'ble Supreme Court, we are of the clear opinion that the Board of Directors had a very solemn, fiduciary duty towards the company and its existing members in the allotment of 984 shares, but which they failed to carry with desirable transparency and fairness, by indulging in favouritism and nepotism. The new shareholders were recipients of sudden benefits, just because they were either related to or close to the existing members and directors of the Company. Moreover, the Learned Counsel of Respondents' argument that section 81 and 81(1)(a) are not applicable, since the allotment of 984 shares from amongst un-subscribed shares does not convince us as section 81 is regarding further issue of capital and allotment of 984 shares even if unsubscribed earlier are considered allotment to increase the share capital and would be squarely covered under section 81(1) and 81(1A) of the Companies Act, 1956.
42. Section 81(1)(a) of the Companies Act, 1956 outlines the manner of infusion of capital through allotment of shares which provide a fair, just and transparent manner, where equal preference should have been given to the existing members of the Company in the first instance, and if some TA NO. 186 OF 2021 (Company Appeal (AT) No. 261 of 2019) Page 53 of 73 members chose not to receive such allotment, such shares could have been allotted on some other rational basis. The Board of Directors of the Company failed to carry out its fiduciary duties in a rational, fair and logical manner, and therefore the allotment of 984 unsubscribed shares by the Company constitutes an act of oppression by the directors and R-1 Company to its members, particularly the Appellants who have come forward to complain about the same. This also constitutes a glaring act of mismanagement by the Board of Directors of the R-1 Company.
43. On the issue of allotment of 984 shares, we are therefore inclined to hold the opinion that the allotment of unsubscribed shares after a passage of almost six decades of their lying dormant and the subsequent decision of the Company, including its General Body for allotting 984 shareholders seems to have been done with a motivation that cannot be considered sacrosanct and fair upholding the fiduciary duties of the Company and its Board of Directors and it was not done in accordance with the provisions of sections 81(1) and 81(1A) of the Companies Act, 1956.
44. We now turn our attention to examine the issue no. (ii) framed by us earlier, which is regarding the Joint Development Agreement. This issue is considered and adjudicated in the Impugned Order, wherein it is TA NO. 186 OF 2021 (Company Appeal (AT) No. 261 of 2019) Page 54 of 73 held that the Company possesses the right to demolish, construct, maintain or hire any buildings or workshops for the purpose of business of the Company or which can be used conveniently in connection therewith; to enter into partnership or into any partnership or into any arrangement for sharing profits, amalgamations, to sell and in any other manner deal with or dispose of the undertaking or property of the Company or any part thereof, for such consideration as the Company may think fit. The Impugned Order also considers the tender process undertaken by R-1 Company in the light of the order dated 6.6.2007 of the Hon'ble High Court of Karnataka in C.A. No. 352/2007 and concludes that the petitioners have failed to make out any case for interference in the matter of Joint Development Agreement.
45. Turning our attention to this issue of the joint development of the Company's land, it is noted that the record and documents submitted by the parties show that matter of the joint development of land on which Jyothi Theatre was situated was taken up in the 61st AGM held on 8.6.2007. The notice for the 61st AGM and the Explanatory Statement sent alongwith with request to the agenda items stated as follows :-
"6. To approve the proposed project To consider and if thought fit, to pass with or without modification(s), the following resolution as an Ordinary Resolution:
TA NO. 186 OF 2021 (Company Appeal (AT) No. 261 of 2019) Page 55 of 73 'RESOLVED that pursuant to the provisions of Section 293(1)(a) of the Companies Act, 1956 and other applicable provisions if any, consent of the members be and is hereby accorded to the Board of Directors of the Company to offer the property of the company bearing T.S. No. 168 Mangalore for joint development by construction of a multi facility commercial complex thereon including at least two cinema theatres with any reputed builder/developer identified by the Board of Directors to the end intent that the company obtains atleast 50.0% of the total built-up area of the proposed commercial complex with the right to retain proportionate undivided interest in the land.' Explanatory Statement as required under Section 173:
ITEM No. 6:
The shareholders are aware that the company has been successfully operating the business of running a cinema theatre on the property bearing T.S. No. 168 Mangalore. The shareholders are further aware that the said property of the company is situated in a prime locality in Mangalore. The Board of Directors feel that the property could be commercially exploited to the best advantage of the company. The shareholders are further aware that the latest trend is for development of prime city properties into shopping malls which will include two or more cinema theatres, and such malls have proved to be a great success in metropolitan cities like Delhi, Mumbai and Bangalore, and this trend has been spreading to tier II cities like Mangalore. With a view to deriving maximum benefit out of the prime property belonging to the company, and at the same time continuing the business of owning and operating cinema theatres, the Board of Directors feel that the company's property could best be developed under a joint development arrangement with a reputed builder/developer. The company could negotiate delivery of possession of atleast 50.0% of the total built-up area of the proposed commercial complex including two cinema theatres and the balance portion would be TA NO. 186 OF 2021 (Company Appeal (AT) No. 261 of 2019) Page 56 of 73 retained by the builder/developer with proportionate undivided interest in this land.
Under the proposal only built-up area is proposed to be obtained from the builder/developer in exchange for his right to develop and retain a portion of the built-up area and no cash transaction is contemplated. The Board of Directors also proposes to reserve the right to dispose of in future, by way of sale, lease, tenancies or otherwise built-up area delivered to it, subject however to retention of the cinema theatres and continuing to carry on the business of the owning and operating the same. If the proposal is given effect to, the revenue stream of the company would be augmented by way of rental income from the shops and commercial space, besides the income from owning and operating the cinema theatres. Although under the proposal whole or substantially the whole of the undertaking of the company is not being disposed of, requiring the consent of the shareholders, in view of the fact that proportionate undivided interest in the land will be conveyed in favour of the builder/developer and or his nominees, by way of abundant caution, the consent of the shareholders is sought in terms of Section 293(1)(a) of the Companies Act, 1956. The Board of Directors opine that the proposal is in the best interests of the company and therefore recommend adoption of the resolution.
No director is personally interested in the resolution."
(Emphasis Supplied)
46. A perusal of the minutes of the 61st AGM (attached at pp. 202-208 of the appeal paperbook) shows that in Item No. 6 to consider the proposed project, a resolution was adopted to authorise the Board of Directors of the Company to offer the property of the Company bearing T.S. No. 168 Mangalore for joint development by construction of a multi TA NO. 186 OF 2021 (Company Appeal (AT) No. 261 of 2019) Page 57 of 73 facility commercial complex thereon, including at least two cinema theatres with any reputed builder/developer identified by the Board of Directors to the end intent that the Company obtains at least 50% of the total built-up area of the proposed commercial complex with the right to retain proportionate undivided interest in the land.
47. The 61st AGM further resolved to authorise the Board of Directors to enter into the necessary Joint Development Agreement with the power to dispose of and/or give on rent the built up area delivered to the Company in terms of the Joint Development Agreement at a future date, on such terms and conditions as the Board of Directors may deem fit, subject however to the cinema theatres forming part of the built up area delivered to the Company being retained and the business of owning the cinema theatres and operating then same either directly or through licensees appointed by the Company.
48. We also note that Shri M.Ratnavarma Padival raised the issue about the valuation of the property. The minutes of the 61st AGM record that 'Sri. M.R. Padiwal asked about valuation of the property and the basis of joint venture agreement, Chairman replied that this will not be a sale of land, but a joint venture where the value of land is assessed by the joint venture partner.' Thus, this issue about the valuation of land and how it would provide a proper basis to the joint venture agreement has not been TA NO. 186 OF 2021 (Company Appeal (AT) No. 261 of 2019) Page 58 of 73 dealt with in any logical and proper manner by the Board of Director or the Company's management.
49. The 62nd AGM of the Company again took up the issue of joint development project and related agreement. The minutes of meeting record in item No. 6 are as follows:-
"The Charman proposed and Sri David. J Pinto seconded the following as an Ordinary Resolution.
"RESOLVED THAT PURUSANT TO THE PROVISIONS OF SECTION 293(1)(a) OF THE COMPANIES ACT, 1956 AND OTHER PROVISIONS, IF ANY AND IN NPARTIAL MODIFICATION OF THE RESOLUTION NPASSED AT THE 61ST ANNUAL GENERAL MEETING OF THE COMPANY HELD ON 08-06-07, THE COMPANY DO OFFER THE PROPERTY OF THE NCOMPANY BEARING TS NO. 168, MANGALORE FOR JOINT DEVELOPMENT SUBJECT TO THE COMPANY OBTAINING ATLEAST 40% OF THE TOTAL BUILT UP AREA WITH ALL OTHER TERMS AND CONDITIONS, CONSENT AND APPROVAL ACCORDED AND NPOWER GRANTED IN TERMS OF THE EARLIER RESOLUTION DATED 08-06-07 REMAINING UNALTERED."
The Chairman mentioned that Sri M.R. Padival and Dr. Bhasker Shetty had already spoken on this Resolution. The chairman then replied to the letters received on the subject. He said that the earlier Resolution had authorized the Board of Directors to decide on one of the two options of Joint Development or sale of the land and the Board was also authorized to enter into necessary agreements. He then gave details of tendering procedure adopted, tenders received, including the tender from Sr M.R. Padival and key information on the best tender. The chairman informed that as per present indications the Company's annual profit after tax after the development should be very much higher than the current average TA NO. 186 OF 2021 (Company Appeal (AT) No. 261 of 2019) Page 59 of 73 and could be in the order of eight times, and he strongly recommended that the Resolution be approved.
The Resolution was put to vote by show of hands. All voted in favour except four members voted against the Resolution and two of them requested for vote by poll."
50. There is no mention in the minutes of the 61st AGM and 62nd AGM about the actual valuation of the project land and the basis on which the joint development of the Company's only land property was being proposed nor there is any project report by any real estate expert as to how such development was being proposed. The bases of deciding to give 50% of built-up area to the developer is provided in the Explanatory Statement as required under section 173 sent with the notice dated 19.4.2007 for the 61st AGM. The Explanatory Statement merely records that the Company has an intention to commercially exploit the land property to derive maximum benefit for the Company but there is no description or explanation as to how delivery of possession of 50% of total built-up area with proportionate undivided interest in land. There is no detail in the Explanatory Statement as to how this figure of 50% has been arrived.
TA NO. 186 OF 2021 (Company Appeal (AT) No. 261 of 2019) Page 60 of 73
51. Section 293 (1) of the erstwhile Companies Act, 1956 provides for the sale, leasing or otherwise disposal of the undertaking of the company as follows:-
"293. RESTRICTIONS ON POWERS OF BOARD (1) The Board of Directors of a public company, or of a private company which is a subsidiary of a public company, shall not, except with the consent of such public company or subsidiary in general meeting, -
(a) Sell, lease or otherwise dispose of the whole, or substantially the whole, of the undertaking of the company, or where the company owns more than one undertaking, of the whole, or substantially the whole, of any such undertaking".
52. The Memorandum of Association of the R-1 Company provides in clauses 3(o) and 3(u) as follows:-
3(o) To build, alter, demolish, construct, maintain or hire any buildings as works or workshops for the purpose of the business of the Company or which can be conveniently used in connection therewith.
3(u) To sell and in any other manner deal with or dispose of the undertaking or property of the Company or any part thereof, for such consideration as the Company may think fit.
53. The Memorandum of Association provides for building, altering or constructing any building for the purpose of the business of the company and also to sell or dispose of the property of the Company or any part thereof, for such consideration as the Company may deem fit. TA NO. 186 OF 2021 (Company Appeal (AT) No. 261 of 2019) Page 61 of 73
54. From a perusal of section 293(1)(a) of the Companies Act, 1956 and clauses 3(o) and (u) of the Memorandum of Association, it is clear that the Company can sell, lease or otherwise dispose of whole or a substantial part of the undertaking of the Company for the purpose of its business, and section 293(1) stipulates that such powers should be exercised with the consent of the public company in a general meeting. The resolution adopted in the 61st AGM mentions that the commercial complex to be developed would have two cinema theatres but in the absence of any project report it is not clear how clause 3(o) will be complied with.
55. A perusal of the notice of the 61st AGM dated 19.4.2007 and the Explanatory Statement attached therewith whose relevant portion regarding the Joint Development Agreement is extracted above explains the issue of joint development by construction of a multi facility commercial complex thereon including at least two cinema theatres with any reputed builder/developer identified by the Board of Directors. The Explanatory Statement, which is also extracted above, merely states that 'your Board considering capitalizing on the high value of the property on which our cinema theatre is located. We believe our old theatre has outlived its life and we must move with the changing times.' The Explanatory Statement also mentions that the development proposal is TA NO. 186 OF 2021 (Company Appeal (AT) No. 261 of 2019) Page 62 of 73 part of the agenda of the Annual General Body meeting when some details of the proposal shall be given. The Explanatory Statement with regard to the Joint Development Agreement as required under section 173 is available (at page 193 of the appeal paperbook). This Explanatory Statement makes it clear that the Board of Directors feel that the property could be commercially exploited to the best advantage of the company and with a view to driving maximum benefit out of the prime property belonging to the Company, and at the same time continuing the business of owning and operating cinema theatres, the Board of Directors feel that the company's property could best be development under a joint development arranged with a reputed builder/developer. The Explanatory Statement further states that the company could negotiate delivery of possession of atleast 50.0% of the total built-up area of the proposed commercial complex including two cinema theatres and the balance portion would be retained by the builder/developer with proportionate undivided interest in this land.
56. Thus, the Explanatory Statement merely states the intention of the Company and its Board of Directors, but it does not provide even the slightest indication or explanation on the actual shape and size of the project, total built-up area, its financial features and the basis non which R-1 Company proposed to give 50% of built-up area to the TA NO. 186 OF 2021 (Company Appeal (AT) No. 261 of 2019) Page 63 of 73 builder/developer with proportionate share in undivided land on which the project would be built. While observing so, we are conscious of the fact that the only asset of the Company i.e. the land plot TS 168 Mangalore, is the subject matter of the joint development project and its failure in the absence of due diligence may result in a severe blow to the future of the Company.
57. This issue of joint development agreement was again considered in the 62nd AGM held on 27.8.2008, when a resolution as extracted supra was adopted. The operative portion of the resolution states that the Company is offering the property of the Company bearing TS No. 168, Mangalore for joint development, subject to the Company obtaining at least 40% of the total built-up area, with all other terms and conditions. Consent and approval of the Board granted in terms of the earlier resolution dated 8.6.2007 remaining unaltered. Later, Mr. M. Ratanvarma Paidval raised this issue in CA No. 352 of 2007 in Company Petition No. 35 of 1987. CA No. 352 of 2007 was disposed of by Hon'ble High Court of Karnataka with the following order:-
"5. In the circumstances, C.A. 352/2007 is rejected recording the submissions of the learned senior counsel appearing for the respondents. After the resolution, respondents are directed to invite tenders and if the applicants are willing to participate, they are at liberty to do so and thereafter it is open for the directors to TA NO. 186 OF 2021 (Company Appeal (AT) No. 261 of 2019) Page 64 of 73 finalise the dealings considering the best offer received by the company."
58. Thus, the Hon'ble High Court of Karnataka did not give ad-interim order of injunction for considering agenda item no. 6 in the AGM, relating to Joint Development Agreement, in the Company's 61 AGM. It is noted that while the issue of selling or disposal of the Company's land was not considered as being contrary to the clauses of Memorandum of Association, the Hon'ble High Court of Karnataka held that the Directors of the Company will invite tenders and finalise the dealing in a transparent manner. It is also noted that this order dated 6.6.2007 was not appealed against and has, therefore, assumes relevance insofar as the undertaking of the joint development project is concerned.
59. Thus, on the basis of the available material and in the light of the Memorandum of Association and the Objects of the Company stated therein, as well as the order of Hon'ble High Court of Karnataka in CA No. 352 of 2007, it is correct that the Company could sell, lease or dispose of in any manner its property wholly or substantially by passing a special resolution under section 293(1) of the Companies Act, 1956.
60. We have noted earlier that the notice for 61st AGM dated 19.4.2007 is attached with an Explanatory Statement about the proposed joint TA NO. 186 OF 2021 (Company Appeal (AT) No. 261 of 2019) Page 65 of 73 development project and this statement (attached at pg. 193 of the appeal paperbook) recognise the fact that the Board of Directors, in the best interest and advantage of the Company, would like to commercially exploit TS-168 Mangalore, which is the Company's sole landed property. There is nothing in the Explanatory Statement to show how 50% of the built-up area is calculated and decided to be given to the proposed developer in lieu of developing the entire commercial complex. The Explanatory Statement also states that proportionate undivided interest in the land will be conveyed in favour of builder/developer or his nominees, but there is no indication, in any clear term, as to what the consideration for such a transaction will be.
61. This matter of joint development project was again discussed in the 62nd AGM, when the General Body decided to give 60% of the total built- up area with all the earlier terms and conditions to the proposed developer/builder and retain 40% to itself with proportionate interest in undivided land to both the parties. This is a major change in the proportion of built-up area to be given to the developer/builder, but there are no evident project details showing proper due diligence regarding the valuation of land, the Floor Area Ratio (FAR) applicable in the area, the proposed built-up area etc. to enable the Company's shareholders to take a well-considered decision in the matter. In light of the aforesaid, we also TA NO. 186 OF 2021 (Company Appeal (AT) No. 261 of 2019) Page 66 of 73 find that once 984 shares are allotted to the beneficiaries, this allotment is followed closely by the issue of joint development project raises which certainly question about the intention for allotment of 984 unsubscribed shares. This intention of the company and its Board of Directors is not explained to its members with any coherence, and raises question of transparency and reasonable expectation about growth in business of the Company.
62. We also note that the Company decided in 61st AGM to take up a Joint Development project with 50% of built-up area and the commercial complex to be given to the proposed builder/developer. On the basis of this resolution, and with the authorization given to the Board of Directors to undertake the process of joint development project, the Company issues tender notice asking for pre-qualification bid. Thereafter, in the EGM held on 11.02.2008, a decision was taken to sell the property of the Company and the proposal of joint development project was jettisoned. Again, in the 62nd AGM held on 27.08.2008 the Company again took an about-turn and went back on its original proposal of joint development, but this time deciding to give 60% of the built-up area in the proposed commercial complex. While the Company was doing such flip-flops, the records of the AGMs, EGM as well the BOD meetings do not give any clear indication or idea why such changes were being proposed. The notices TA NO. 186 OF 2021 (Company Appeal (AT) No. 261 of 2019) Page 67 of 73 and Explanatory Statements sent with the notices of the 61st and 62nd AGMs record very vague reasons as to why the Company intended to undertake the joint development project. Moreover, as an instance of mismanagement, the Company accepted Earnest Money Deposit from some builders when the first decision was taken for joint development in the 61st AGM. At this stage the nature and the specifications of the project were not known. This kind of action in dealing with the only land- property of the Company can be either labelled as totally slip-shod management or seen as an effort to handover the project to some pre- decided builder without going through a fair and transparent process of selecting the best bidder.
63. It was, therefore, incumbent on the Company's Board of Directors and top management to undertake such a sensitive and important project, in view of the fact that this land and theatre situated thereon is the Company's only business, without adequate proper thought and due diligence. A real estate project undertaken without proper and in-depth planning and execution can spell havoc, and in the instant case, could be disastrous for the Company and its future.
64. Insofar as the matter of proxy votes in the polling in the 61st AGM and 62nd AGM is concerned, the issue was raised by Mr. M.S. Karnatha TA NO. 186 OF 2021 (Company Appeal (AT) No. 261 of 2019) Page 68 of 73 vide his letter dated 7.6.2007, which was handed over to the Chairman, Board of Directors at the beginning of the 61st AGM held on 8.6.2007. The matter of proxies was dealt in the following manner in the minutes of the 61st AGM meeting.:
"The Chairman added that all the proxies received were valid as no objections had been received except for a statement made by Sr M.R. Padival that several defective and invalid proxies were observed during the inspection."
65. The issue of proxies was enquired into by the ROC, Karnataka and in the report dated 1.5.2008 in other matters as well as about proxies, he has inferred that since the proxies were duly signed by the members, they may not consider a wrongful act. Since there is no way at this stage of verifying the signatures of members signing the proxies. Thus, on the basis of available record, this issue is not held to be an act of oppression or mismanagement.
66. Further, Hon'ble Supreme Court has held in the matter of Needle Industries (India) Limited vs. Needle Industries Newey (India) Holding Limited & Ors. (1981 3 SCC 333) as follows :-
49. The question sometimes arises as to whether an action in contravention of law is per se oppressive. It is said, as was done by one of us, Bhagwati, J., in a decision of the Gujarat High Court in Seth Mohanlal Ganpatram v. Sayaji Jubilee Cotton & Jute Mills Co. Ltd. that "a resolution passed by the directors may be perfectly legal and yet oppressive, and conversely a resolution which is in TA NO. 186 OF 2021 (Company Appeal (AT) No. 261 of 2019) Page 69 of 73 contravention of the law may be in the interests of the shareholders and the company...."
67. Hon'ble Gujarat High Court has held in the matter of Mohanlal Ganpatram & Anr. vs. Shri Sayaji Jubilees Cotton and Jute Mills Co. Ltd. & Ors. (MANU/GJ/0003/1964) has held as follows:-
"It may be that a resolution may be passed by the directors which is perfectly legal in the sense that it does not contravene any provision of law, and yet it may be oppressive to the minority shareholders or prejudicial to the interests of the company."
68. Such an interpretation by Hon'ble Supreme Court and also by Hon'ble Gujarat High Court provides very wide ambit to the acts of oppression and mismanagement that could be inflicted by a company, and therefore the various acts alleged by the appellants as constituting acts of oppression and mismanagement are viewed in this context.
69. We now come to the question of how to deal with 984 shares allotted to new allottees. In view of the fact that this allotment was done in the year 2007 and many decisions would have been taken by the Company with the participation of such allottees with these shareholders taking part in various General Body meetings etc., we think it would be prudent and reasonable, if such shares are not to be considered as null and void from the date of their allotment in the year 2007. In the interest of justice, and further on the basis of transparency, fairness and TA NO. 186 OF 2021 (Company Appeal (AT) No. 261 of 2019) Page 70 of 73 reasonability, we hold that the 984 shares allotment shall be considered null and void from the date of this judgment. The Company is thereafter free to allot these 984 shares with due regard to the provisions of the Companies Act, 2013, considering such allotment as allotment of new shares for increase of capital of the Company.
70. Insofar as the decision regarding Joint Development Agreement is concerned, while it is true that related decisions were taken when the Impugned 984 shares had been allotted and the members holding them voted in the 61st and 62nd AGMs, we are conscious of the fact that Hon'ble High Court of Karnataka had held that if the Company follows transparency and fairness in the tendering process, there is no bar to the Company going for the joint development project. The issue that has come, therefore, before us regarding the company not employing a fair and transparent process in the valuation of the property and whether the Company received the best advantage through a fair deal since there were allegations about favouritism towards Respondent No. 54. On this issue, we are of the clear view that the Company should get a valuation of the land done in the present context since the demolition of the building has only recently taken place and new construction shall take place only in the near future, which leads us to direct that since the new construction shall take place only now, the benefits as would accrue to TA NO. 186 OF 2021 (Company Appeal (AT) No. 261 of 2019) Page 71 of 73 the Company in the present time should be considered. A fresh Joint Development Agreement should be then entered as per the terms decided by the Board of Directors and the General Body of the Company on the basis of valuation as ordered above, so that the Company gets the benefit of the appreciated value of its property of land.
71. On the basis of abovementioned detailed discussion in preceding paragraphs, this `Tribunal' is of the clear-cut view that the R-1 Company and its Board of Directors subjected its shareholders with acts of oppression and also indulged in mismanagement of the Company's affairs, while allotting the 984 shares and also in the proposal for the Joint Development Project, culminating in the signing of the Joint Development Agreement. These acts continued since the year 2007 and the Appellants have succeeded in making a clear-cut case for their oppression by the Company and its Board of Directors as well as mismanagement of the Company's affairs. Therefore, this `Tribunal' finds that the `National Company Law Tribunal', Bangalore Bench has erred in holding to the contrary and hence the `impugned order', dated 25.06.2019 in C.P. No. 71/2020 (T.P. 24 of 2016) is set aside by this `Tribunal' with directions as given in the aforementioned paragraphs. These directions should be carried out by the Respondent No. 1 Company and its Board of Directors, within TA NO. 186 OF 2021 (Company Appeal (AT) No. 261 of 2019) Page 72 of 73 three months from the date of this order, to provide a closure to the above stated issues and to enable the Company to function within the ambit of the provisions of law for the benefit of its members and in consonance with its stated objects as enshrined in the Memorandum of Association. Accordingly, the instant Company Appeal (AT) No. 261 of 2019 (T.A. No. 186 of 2021), stands disposed of. There shall be no order as to costs, based on the facts and circumstances of the instant case.
(Justice M. Venugopal) Member (Judicial) (Dr. Alok Srivastava) Member (Technical) New Delhi 30th November, 2022 /aks/ TA NO. 186 OF 2021 (Company Appeal (AT) No. 261 of 2019) Page 73 of 73