TMI Blog2019 (2) TMI 1410X X X X Extracts X X X X X X X X Extracts X X X X ..... oard and to sign Vakalatnama, pleadings etc. These documents are of 2007, copies of which are at Pages - 641 to 667. Going through these documents, it cannot be said that the concerned members, who were referring to their Share Folio numbers and number of shares and who were authorizing the original Petitioner No.1, did not know that they were authorizing the Petitioner No.1 to move Courts, Tribunals, CLB with regard to protecting their interests as well as the interests of the Company. Those Petitioners have not questioned the act of Petitioner No.1 maintaining the Petition on their consent. Contesting Respondents cannot profess to have entered their brains to say that they did not give intelligent consent. Thus, on this count, we do not find that there is any defect made out. No reason to interfere with the Impugned Order except for a small portion. Direction 'A' of the operative order of para - 23 of the Impugned Order (reproduced earlier) was not well worded and needs to be modified. The original Petitioners have not sought declaration of termination of the agreement dated 9th October, 2003. It was an agreement between original Respondents 2 and 3. Whatever legal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s started managing the affairs of the Company without being shareholders and even if they were introduced as Additional Directors, it was without their confirmation in General Body Meeting, which was not held. Thus, Petitioners claimed that these persons were not even Directors. 2. It would be appropriate to refer to the contentions as were raised by the original Petitioners in the Company Petition. 3. Copy of the amended Company Petition is filed by the Appellants as Annexure - 'E'. In brief, original Petitioners claimed in the Company Petition:- 3.1 The Company is a public limited company incorporated in February, 1991. Authorized share capital is ₹ 23 crores divided into 2,30,00,000 equity shares of ₹ 10/- each. Paid-up share capital is of ₹ 11,70,00,000/- divided into 1,70,00,000 (sic) equity shares of ₹ 10/-each. The Company was incorporated to carry on business of spinning and weaving mills. The company availed term loan of ₹ 16 Crores from IDBI and working capital from State Bank of India, Allahabad Bank, etc. Original Respondent No.2 and his friends and relatives mortgaged their properties as securities and had given personal g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Petitioners, totalling to an extent of 51%, were pledged with IDBI and thus shares belonging to Respondent No.2, other family members or other promoters could not be sold or transferred to anybody. The Petition claimed that in such meeting on 26.12.2006, Petitioners came to know regarding activities of Mr. K. Ranganathan, Chartered Accountant who was an associate of Respondent No.3 and had brought about such agreement. The Company Petition claims that Respondent No.3 using signed letters of Respondent No.2 and printing his own letterheads, got up various Board Resolutions appointing himself and his relatives - Respondent Nos.4 and 5 as Additional Directors. Further Resolutions were got up of Board and General Meeting purported to have been held on 29.09.2003, whereby Respondent No.3 appointed himself as Managing Director for 5 years with effect from 03.09.2003. Petitioners claimed that no such AGM was held and the Petitioners had no Notice of any such AGM and the Minutes were fabricated. 3.4 The Petitioners further claimed that Respondent No.3 while filing Form No.23 changed his own stand claiming that he was appointed as Managing Director on 6th February, 2004 in the Board Me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The actions of contesting Respondents were in violation of SICA. The agreement was illegal. The Respondents gained access to the factory by backdoor entry without the consent of BIFR or the shareholders or the banks and the financial institutions. The shareholders never approved the contesting Respondents as Directors. 3.9 It is the case that temporary injunction obtained in OS 469/2007 was later on vacated and EOGM was held on 2nd January, 2008. 3.10 As per the Company Petition, the Petitioners filed the Company Petition and Company Law Board on 16.07.2008 by Interim Orders restrained contesting Respondents from functioning as Managing Director/Directors. Against the said Order, CA 14 and 16 of 2008 was filed in the High Court of Andhra Pradesh. The Company Appeals came to be dismissed in favour of the Petitioners. 3.11 The amended Company Petition claims that the Petitioners filed CA 43/2009 and particulars of the amendments, which were sought, are also included. The Company Petition referred to the fact that the Respondent did not file counter in the proceedings and only filed CA raising preliminary issues of maintainability. The Petitioners referred to the counter they ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ondents claimed before NCLT that the amended Company Petition was filed at the instigation of original Respondent No.2. The Petitioners were kith and kin namely, son, daughter, wives, sister-in-law, cousins and employees of Respondent No.2. Original Petitioners 8 and 14 were Directors and they were reappointed on 26.12.2006 is not borne out from their affidavit, it was claimed. 4.1 Contesting Respondents denied that Respondent No.2 was working as Executive Chairman. They claimed that he does not have the requisite value of shares. They denied that Petitioners held 10.33% of total paid-up share capital. According to them, original Respondent No.2 resigned in 2003 and he was not a shareholder nor Director. The contesting Respondents denied EGM dated 26.12.2006 held at the instance of original Respondent No.2. They claimed that illegal Resolutions were passed. According to the contesting Respondents, when most of the Petitioners were residing with Respondent No.2, they could not claim that they do not have knowledge of agreement dated 9th October, 2003. It was claimed that Respondent No.2 agreed to transfer shares and received ₹ 100 Lakhs between 09.10.2003 till 13th February ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... basis for the entire dispute in question is validly executed and, if so, whether it is binding on the Company and its shareholders, what rights accrues to Respondents No.3 to 5 and whether it is still valid or not etc. (iii) Whether the re-appointments of Respondents No.2, 8 14 as Executive Vice-Chairman and Managing Director and the Directors are valid under law or not. (iv) Whether the Respondent Nos.3 to 5 are holding any shares in the Respondent No.1 Company and hold any position especially, after their removal as such as per EGM dated 02.01.2008. (v) If so, what is the relief, the petitioners are entitled for. The reasons recorded by the NCLT show that the NCLT answered the issues in favour of the original Petitioners and in para - 23 passed the following Orders:- 23. In the result, the Company petition bearing CP No.87 of 2007 is disposed of with the following directions: (a) We hereby declare that the agreement dated 9.10.2003 deemed to be terminated, and it would not confer any rights to respondent Nos.3 to 5 in respect of any terms and conditions mentioned therein; (b) We hereby declare that holding of Board Meeting and passing of resol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contesting Respondents entered into one-time settlement with secured creditors and dues of banks, creditors, employees and statutory authorities were settled. The NCLT failed to consider BIFR Order which held EGMs conducted by the original Respondent No.2 to be invalid. IDBI Bank had requested Stressed Assets Stabilization Fund to provide update relating to issues of change of management and which had submitted Report to BIFR and it was observed that original Respondent No.3 should be recognised as the promoter of the Company. It is argued that the criminal proceedings initiated by original Respondent No.2 were decided in favour of the contesting Respondents. The learned Counsel for the Appellants referred to the Resolutions passed where original Respondent No.2 and Petitioner Nos.8 and 14 resigned as Directors and the contesting Respondents came to be appointed as Directors. According to him, Respondent No.2 had sold shares as per agreement, to the original Respondent No.3 and did not hold any share and could not have conducted EOGMs to take back the control of the Company. 8. Learned Counsel for the Appellants referred to Notice which was issued (Page - 767) to increase issue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... riginal Petitioners constituted 10.33% of the total paid-up share capital and CLB had decided the maintainability of the Petition by detailed order dated 16.07.2008 and contesting Respondents were restrained from functioning as Managing Director/Directors. The said Order became final when it was dismissed by the Hon'ble High Court on 28th January, 2009 and the SLP filed against the High Court Order came to be dismissed by the Hon'ble Supreme Court. Although the Appellants have tried to question maintainability on the basis that wife of original Respondent No.2 died during pendency of the Petition, it is argued by the Counsel for original Petitioners that maintainability of the Petition is based on the date of filing of the Company Petition and on that date, the Petitioners did have the required percentage. The original Petitioners support the Power of Attorney filed by the shareholders in favour of Petitioner No.1. It is argued that original Respondent No.3 colluded with CA - K. Ranganathan and other non-shareholders to forge Minutes dated 29.09.2003 (Page 477) to show his appointment as MD and Auditor respectively. The Counsel referred to the names appearing in the said do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... filed, the learned Counsel for original Petitioners submitted that CLB vide Order dated 16.07.2008, restrained contesting Respondents from functioning as MD/Directors or from alienating or selling assets of the Company. These Respondents filed OS 469/2007 dated 19.03.2011 (Page - 712) before City Civil Court, Hyderabad to stall the EGM. The Civil Court and High Court allowed the holding of EGM and the EGM was held on 02.01.2008, which became final and it was uncontested in any Court. The OS 469/2007 filed by the Appellants was dismissed for default on 19.03.2011 and thus, the EGM dated 2nd January, 2008 held by the shareholders of the Company cannot be questioned. The contesting Respondents opened bank account in Syndicate Bank violating BIFR Order dated 27.12.2004 to illegally take away money of the sale of yarns. The balance sheets filed with ROC between 2003 - 2004 till 2008 - 2009 were fabricated as the contesting Respondents could not be treated as Directors. The contesting Respondents issued bogus shares of ₹ 11.30 crores violating Sections 63, 81 and 67 of the Act without there being any real infusion of money. It is argued that there was no Notice of any such EGM issu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent, there was any Board Resolution of the Company or any decision of the shareholders of the Company authorising the original Respondent No.2 to promise to transfer 80 Lakhs shares, which were admittedly not fully belonging to the Respondent No.2. More importantly, when the agreement was claiming transfer of management, there is nothing to show that there was any shareholders' Meeting or decision to permit one of the Directors - Respondent No.2 to part with the Management of the Company to the Respondent No.3. Clause - 4 of the Agreement itself states that for transfer of management, the institutions, Banks and BIFR, etc. have to agree. Nothing is shown that any such consents were sought and granted. If the substratum of the Company itself was being handed over, according to us, it could not have been done without a prior approval of the shareholders in meeting of the shareholders. Apart from this, when jurisdiction of BIFR had already been invoked and BIFR had already directed investigation/enquiry under Section 62 of the SICA, in our view, it was a subject matter before BIFR to decide whether the Company has become a sick industrial company and whether it is practicable for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w.e.f. September, 2009. If he had already been appointed for 5 years on 3rd September, 2003, there would not be need arising to again appoint him for 5 years on 6th February, 2004. Yet again, there is a document of Board Meeting chaired by original Respondent No.3 dated 6th February, 2004 (Volume - 5 - Page 1212) co-opting contesting Respondents 4 and 5 as Additional Directors and regarding that, original Respondent No.2 and the other two Directors (Petitioners 8 and 14) had resigned. Resignation of original Petitioners 8 and 14 do not appear to be there. The original Petitioners have questioned these Resolutions. According to Petitioners, there was no meeting of any EOGM to permit appointment of original Respondent No.3 as Managing Director and there was no AGM in which the shareholders agreed to continue these contesting Respondents as regular Directors. Contesting Respondents have not shown us any Notices being issue of said EGMs. Even if it was to be stated that original Respondent No.2 cooperated with the contesting Respondents initially for passing of such Resolutions, there is no material to show that the other two Directors - original Petitioners 8 and 14 were given Noti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of BIFR dated 27.12.2004, this aspect was noted and that the Resolution noted that original Respondent No.2 being Chief Promoter would be continued as Director in the light of BIFR proceedings dated 27.12.2004. Taking such stock, the Resolution came to be passed that original Respondent No.2 is being appointed as Executive Vice Chairman for 5 years. Appointments of original Petitioners 8 and 14 were also made as Directors. 17. Original Petitioners and original Respondent No.2 are in agreement of such Resolution passed on 26.12.2006. The Appellants 2 to 4 (contesting Respondents) who have not been able to show us that they were continued as Directors by the General Body or that they are shareholders, can hardly be heard questioning the procedure of holding such EOGM. 18. Apart from the EOGM on 26th December, 2006, we have on record Notice dated 03.08.2007 (Page - 707) issued by original Respondent No.2 under Section 169 of the old Companies Act seeking to hold the EOGM on 3rd September, 2007. By this Notice, EOGM was sought to be called for removing Respondents 3 to 5 from the position of Directors. This Notice was challenged by original Respondents 3 to 5 by filing Original S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in K. Sitarama Raju v. Board for Industrial and Financial Reconstruction (supra). The assertion of Shri V.S. Raju, learned Counsel, that any change in the management has to be approved by BIFR is equally applicable to the appointment of the respondents 3 to 5 as Managing Director/Directors of the company, especially when such contentious appointment has been made when the reference made under SICA is pending before BIFR. The representation of the third respondent as director of the Company, at the BIFR proceedings held on 27.12.2004 has not been recognised by BIFR. CLB then referred to the proceeding dated 27.12.2004 before BIFR where BIFR had questioned the CA as to what authority Respondent No.3 had to attend the hearing and whether introduction of Respondent No.3 will not amount to backdoor change of management . Some explanations were given by the CA to come out of the queries raised, which is not material for us. Thus, learned CLB taking overall conspectus of the developments till then, came to a conclusion at the preliminary stage of this Company Petition itself so as to direct:- In view of my foregoing conclusions and considering paramount interest of the Comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tter, the Company Petition could be maintained, and analysing the facts and the law it was observed :- Bearing these legal principles in mind, if we examine and analyse the fact situation prevailing, the following facts are liable to be held as established. (1) The 1st respondent company has been registered under Section 16 of the SICA Act on 17.9.2002 by the BIFR at the instance of the 2nd respondent. (2) The 2nd respondent and the 3rd respondent have entered into an agreement subsequently thereto on 9.10.2003. (3) No prior permission of the BIFR has been obtained for effecting any change of the constitution of the Board of Directors. (4) There are grave discrepancies noticed in the assertions of the 3rd respondent with regard to the agreement referred to supra, the dates of induction of the respondents 3 to 5 and the dates on which the necessary meetings, which are said to have been conducted, be it the meetings of the General Body or the Board of Directors. (5) That the company is being operated as is prima facie shown from the monthly electrical energy consumption to the order of nearly ₹ 3.00 lakhs, but however, no corresponding sales have b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs [page - 776 to 815]). Such filings done after the Restraint Order of CLB, were not only in violation of CLB Order but in the circumstances, we accept the arguments of the learned Counsel for original Petitioners that these were back dated got-up documents which cannot be relied on. It is rightly argued by the learned Counsel for original Petitioners that if really contesting Respondents had brought about an EOGM on 31.05.2004 and increased the subscribed share capital, it is surprising that when they had earlier filed OS 469/2007 (Page - 712 of the Appeal), they still pleaded in para - 3(b) that the issued subscribed and paid-up capital of the Plaintiff No.1 Company is ₹ 11.70 crores divided into 1,17,00,000 equity shares of ₹ 10/- each. This does not take account of what is said to have been issued in 2004. According to him, this itself shows that the claim of issue of further shares was not true and these documents were unreliable. It has also been argued that there is no material to show that other than taking share application money, any other amount was received. It is further argued by the learned Counsel for original Petitioners that the Annual Reports filed f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... kruptcy Code coming into force and further developments, the proceeding before BIFR and the Appellate Authority under SICA have abated. Apart from this, although the Appellants wanted to rely on the BIFR Order, it was clearly passed without considering the CLB Order dated 16.07.2008 and the High Court Order dated 28.01.2009 as can be seen from para - 1.4 of that proceeding and the fact that there was no discussion of these judicial orders passed maintained till the Hon'ble Supreme Court. In our view, when such Order of CLB was there, even if it was at the interim stage, when it had been maintained, the contesting Respondents could not have continued to project themselves as Managing Director/Directors before BIFR and any such actions could not be given any legal recognition. Again it was beyond the jurisdiction of BIFR, if the 80 Lakh shares had been duly sold. There is yet another Judgment (Page - 370) in the matter of OS 86/2008 dated 05.11.2015 passed by III Additional District Judge, Ranga Reddy in Suit filed at the instance of original Respondent No.2 against contesting Respondents seeking to restrain contesting Respondents from interfering into the affairs of the Compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the Annexures to the Petition, were filed. The contention in those Affidavits was that these persons were asked by the Appellant that an Extraordinary General Meeting was to be called for in connection with fixation of cane price, they should sign a letter or statement of consent to that effect and that it was in that context that they signed the paper placed before them by the Appellant. The Affidavits claimed that those persons never gave the consent to a Company Petition being instituted by the Appellant therein. It was in this context that the Hon'ble High Court had found that requirements to Section 399(3) of the old Act were not satisfied. In the present matter, however, we have seen the consents which were filed with the Company Petition, which were titled as 'Power of Attorney' and detailed recitals are there empowering original Petitioner No.1 to engage and appoint Counsel to conduct and defend legal proceedings in any Court of Law, Tribunal or Company Law Board and to sign Vakalatnama, pleadings etc. These documents are of 2007, copies of which are at Pages - 641 to 667. Going through these documents, it cannot be said that the concerned members, who were r ..... X X X X Extracts X X X X X X X X Extracts X X X X
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