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TMI Blog2019 (2) TMI 1410X X X X Extracts X X X X X X X X Extracts X X X X ..... Gupta, Advocates JUDGMENT A.I.S. Cheema, Judicial Member. - This Appeal has been filed against Impugned Order dated 15th May, 2017 passed by National Company Law Tribunal, Hyderabad Bench ('NCLT', in short) in CP No.87/2007 (T.P. No.15/HDB/2016) which had initially been filed before the Company Law Board ('CLB', in short) on 28.09.2007. The Company Petition had been filed by present Respondents 2 to 51 as Petitioners (hereafter referred as 'Petitioners') against the Appellants. The Appellant No.1 Company was arrayed as Respondent No.1 in the Petition. We will refer to this Appellant as 'Company'. The Appellants 2 to 4 were original Respondents 3 to 5. We will refer to them as 'contesting Respondents' or by their number as they were arrayed in NCLT. The present Respondent No.1 in Appeal - D. Srinivasa Rao was Respondent No.2 in the Company Petition. We will refer to him as 'Respondent No.2'. The original Petitioners filed the Company Petition against Respondent No.2 - D. Srinivasa Rao and the contesting Respondents, inter alia, making grievances of oppression and mismanagement of the Company on the part of Respondent No.2 who, it wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d with the production. As shareholders, Petitioners had faith in Respondent No.2. The poor financial condition of the Company forced the Board of Directors consisting of Respondent No.2 and original Petitioners 8 and 14 to close down the operations and the affairs were carried on with skeleton staff. Total net worth eroded. In such situation, Respondent No.2 filed reference before Hon'ble Board of Industrial and Financial Reconstruction (BIFR) under Section 15(1) of the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA) and it was registered as Case No.366/2001 on 17.09.2002. BIFR appointed IDBI as Operating Agency under Section 16(2) of the SICA. According to the Petitioners, there was AGM of shareholders in 2002 when the accounts were last produced and thereafter, there was EOGM on 26.12.2006 held at the instance of Respondent No.2. Only on 26.12.2006 in the EGM, Petitioners came to know that original Respondent No.2 had entered into an agreement on 09.10.2003 with original Respondent No.3 and he had agreed to transfer shares for Rs. 1 crore, subject to conditions as mentioned in the agreement. According to the Petitioners, Respondent No.2 did not have authority ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ince 4 years on electricity bills, which itself showed maximum output. 3.6 According to the Petition, the agreement between Respondent No.2 and Respondent No.3 was entered privately. The Petitioners claimed that they had asked Respondent No.2 to remove Respondents 3 to 5 and restore himself as Executive Vice Chairman and rest are persons who were on the Board before illegal agreement. Petitioners claimed that shareholders passed Resolution directing Respondent No.2 to take over possession of the factory. 3.7 Respondent No.2 could not sell shares on behalf of others knowing well that it is sick company and there could not be change of management without permission of BIFR and also, when the shares were already pledged. Petition claimed that Respondent No.3 is a politician with political clout and was holding on to the possession even though he and his associates did not have a single share in the Company. 3.8 Petitioners and other shareholders requested for calling EGM on 03.09.2007 under Section 169 of the Companies Act, 1956 ('old Act', in brief) in order to pass Resolution for removal of Respondents 3 to 5 and to take other decision. The Notice of 03.08.2007 for EGM fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th Registrar of Companies only on 5th August, 2008. The Petitioners pointed out that in OS 469/2007 filed by the contesting Respondents even in 2007, they had claimed that the paid-up share capital was only Rs. 11.70 crores. 3.12 The Company Petition claimed removal of Respondents 3 to 5 as Managing Director/Directors and to hold that their actions did not bind the shareholders of the Company; to declare agreement dated 9th October, 2003 as not binding on the Company or Petitioners; investigate the affairs and award damages of Rs. 2 crores against contesting Respondents; declare that the Board consisting of Respondent No.2 and Petitioners 8 and 14 as the legal Board of Directors; to declare the Board Meetings and Resolutions held and passed by contesting Respondents as illegal; to declare the issue of 1,13,00,000 as equity shares issued by contesting Respondents are not binding on the Company. 4. Perusal of the Impugned Order shows that the learned NCLT took note of such Company Petition and documents relied on. The contesting Respondents appear to have filed Reply dated 07.07.2010 followed by written submissions dated 13th March, 2017. NCLT noted their defence. The contesting Re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds before entering into agreement as he was hopeful that core issues of the Company would be settled. He claimed that the EGM dated 26.12.2006 was held by the shareholders and the shareholders resolved to restore the position of Respondent No.2 and original Board of Directors and to take over the possession of the Company. According to him, the agreement was only as security for possible investment. The agreement was not adopted by memorandum or Articles of Association. This Respondent again referred to the Orders passed by CLB dated 16.07.2008 that Respondents 3 to 5 have no authority to manage the affairs or alienate or sell assets. The Order came to be upheld by the High Court on 28.01.2009 and Hon'ble Supreme Court declined to interfere. He claimed that contesting Respondents fabricated balance sheets and the proceedings were illegal. 6. The learned NCLT heard detailed arguments of the parties and in para - 9 of the Impugned Order framed following issues:- "(i) Whether the present Company Petition is maintainable under sections 397 and 398 of the Companies Act, 1956 since respondents are questioning the maintainability itself on the ground that petitioners are not holdin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ely and unconditionally so as to manage the affairs of Company by duly elected Board of Directors as restored by shareholders in their meeting dated 26.12.2006 and 02.01.2008. The Shareholders of the Company are free to manage its affairs as per law; (g) Respondent Nos.3 to 5 are directed to pay a cost of Rs. 1,00,000/- (Rupees One Lakh) each to the Petitioners amounting to a total cost of Rs. 3 lakhs within a period three weeks from date of receipt copy of this order." 7. Aggrieved, the Appellants - original contesting Respondents have filed this Appeal arraying the Company as Appellant No.1. The Appeal is raising various grounds and it is argued by the learned counsel for Appellants that the original Petitioners were not holding minimum 10% of the requisite shares considering the further shares which had been issued by the contesting Respondents, and the share capital of the Company was 11.7 crores. It is also argued that NCLT could not have terminated the agreement dated 9th October, 2003 as the validity of the agreement was subject matter for Civil Court to decide. According to him, original Respondent No.2 had received consideration of Rs. 100 lakhs and this should have bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the learned Counsel that although original Respondent No.3 paid the amount as per the agreement to original Respondent No.2 but Respondent No.2 failed to transfer the shares. According to him, the contesting Respondents have support of the 468 shareholders to whom contesting Respondents had issued shares after EOGM held by them on 31.05.2004. It is argued that those people should have been made party to the litigation. 11. The original Respondent No.2 (present Respondent No.1 in Appeal) argued the Appeal in person. He submitted that on 16.07.2008, CLB had restrained the contesting Respondents from interfering with the affairs of the Company and the High Court and the Supreme Court upheld the Orders and thus acts of contesting Respondents in continuing to interfere with the affairs of the Company were illegal and they could not have represented the Company before BIFR. He referred to the Judgment passed in OS 86/2008 whereby vide Order dated 5th November, 2015, contesting Respondents were held as no more Directors of the company and that they could not hold themselves out as Directors. According to him, although he personally entered into agreement with Respondent No.3, the Respond ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o Notice of any such EGM. It is argued by the original Petitioners that the contesting Respondents filed Forms - 23, 29 and 32 with RoC on 08.03.2004 relating to their appointments as MD/Directors in Board of Directors' Meeting dated 06.02.2004, which was subject to approval of financial institutions and shareholders at ensuing AGM. According to original Petitioners, the shareholders did not give their approval to contesting Respondents and they should be treated as having ceased to be MD/Directors w.e.f. 02.09.2004 in view of Section 260 of the Companies Act, 1956. The Board Meetings dated 30.04.2004 and 02.06.2004 held by contesting Respondents have no legal effect as there was no approval of financial institutions and no approval of shareholders was obtained for appointing the contesting Respondents as Directors. It has been argued by learned Counsel for original Petitioners that on 27.12.2004, BIFR declared the Company as a sick company and appointed IDBI as Operating Agency. At that time, BIFR did not treat the contesting Respondents as the Director and treated original Respondent No.2 as representing the Company. It is argued that in the EGM held on 26.12.2006, original R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ves of 4 banks and ESIC, and directed further investigations into the accounts of the Company. IDBI was appointed as Operating Agency under Section 16(2) of the SICA. 14. It appears that subsequently on 9th October, 2003, original Respondents 2 and 3 entered into agreement (copy at Page - 678) where original Respondent No.2 represented himself as "seller" and claimed that he was representing himself and shareholders of 80 lakhs equity shares in the Company. Original Respondent No.3 was shown as the "buyer". The introductory clause mentioned that the "Sellers and Buyers have discussed the various issues involved and have decided to carry out the change of management of the Priyaranjani Fibres Ltd. from the sellers to the buyers". The Seller - original Respondent No.2 claimed that he was holding 80 lakhs equity shares together with his relatives, friends and associates, which they would like to dispose of. On the date of the agreement, it appears that only Rs. 8 lakhs out of Rs. 100 lakhs were paid. Clause 4 of the agreement stated that the seller agreed to continue as Director on the Board of Directors of the Company until the transfer of management to the buyer is agreed to by all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2003 inducting Respondent No.3 as Additional Director and also appointing him as Managing Director subject to approval in AGM. The Resolution also recorded that the original Respondent No.2 was tendering resignation as Executive Vice Chairman and MD and that he will continue as Director. The complete Resolution is not before us and we do not know if the other two Directors (original Petitioners 8 and 14) were or not present in any such meeting. This act, in the face of agreement dated 9th October, 2003 is also prior to the agreement dated 9th October, 2003. 15.1 Then there is what is shown as EGM dated 29th September, 2003 (Page - 684) appointing Respondent No.3 as Managing Director for 5 years w.e.f. 3rd September, 2013. This is again before the said agreement dated 9th October, 2003. Even for this alleged AGM, there is no material to show that the shareholders had been given Notice and that the same were served on the shareholders. Then there is a Form 23 (Page - 686) filed appointing original Respondent No.3 as Managing Director by way of ordinary Resolution of the Board. The Resolution is attached (Page - 687) claiming that Respondent No.3 was appointed as MD for 5 years w.e.f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany. Thus we find no reason to not accept the submissions made for Petitioners. 16. Now on one hand, we have the present original Respondents 3 to 5 who have not proved on record that there was any duly constituted and held General Body Meeting of the shareholders in which they were continued as Directors. On the other hand, we have the original Petitioners and original Respondent No.2 claiming that there was an EOGM held on 26th December, 2006. Original Respondent No.2 appears to have sent a Notice dated 14th October, 2006 to the contesting Respondent No.3 (Page - 1240) terminating the agreement dated 9th October, 2003. We are not entering into the legal niceties regarding the termination of the agreement. We have referred to this document in the factual background. After this termination dated 14th October, 2006, original Respondent No.2 appears to have sent Notice dated 30.11.2006 to the shareholders (copy at Page -1235) calling for EOGM on 26th December, 2006. He has sent the Notice claiming to be Director. There is copy of Resolution of the said EOGM at Page - 1242 of the Appeal where details were recorded that earlier Form - 32 had been submitted of Respondent No.2 resignin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rd September, 2007, issued the Notice for holding the EOGM on 2nd January, 2008 (Page - 1273) and it appears that EOGM was held and the extract of the Resolution has been filed at Page - 1275 removing contesting Respondents from the positions of Directors. Other Resolutions also appear to have been passed. 19. At Page - 283 of the Appeal, there is copy of CLB Order dated 16.07.2008. CLB took note of the litigation between the parties and also took note of the proceedings which had taken place till then, before BIFR. NCLT noted the Meetings on which the contesting Respondents were relying to claim their rights and observed:- "The aforesaid meetings, not making any reference to the agreement dated 09.10.2003, though seriously disputed, the respondents have not chosen to produce any materials whatsoever, other than the bare minutes or extract of minutes of the relevant meetings, to substantiate any proper and valid appointment of the third respondent as Managing Director of the Company. All these developments are subsequent to the reference made to BIFR and when BIFR is seized of the matter, without however, consent or approval of BIFR and hence the appointment of the respondents 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppointing IDBI as its operating agency, sets out the facts that the 2nd respondent herein has made certain attempts to part with the shares of the company in favour of the 3rd respondent and that an attempt has also been made to change the composition of the Board of Directors. But, importantly, the same has not been approved by the BIFR. BIFR continued to recognize the 2nd respondent as the Executive Vice chairman-cum-Managing Director of the 1st respondent company as of 27.12.2004. It had therefore doubted the locus of the 3rd respondent/appellant to have taken part in the proceedings before the BIFR. It is worthy to notice that these vital issues have not yet been resolved by the BIFR so far. In this context and fact situation, can it be said that the Company Law Board does not have any jurisdiction to entertain the application moved by the respondents - petitioners?" In 2009, when Hon'ble High Court was deciding such Appeals of the contesting Respondents, competency of the original Petitioners to maintain the Company Petition was not disputed. It was observed by the High Court "On the count of the competency of the petitioners, who have approached the Company Law Board, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th No.CC 6539/2011 and the same was dismissed by the Hon'ble Supreme Court on 1st August, 2011 observing that the SLP being against Interim Order, the same was being dismissed (Page - 336). 21. From the developments as noted above, the legal position is that the contesting Respondents were restrained from interfering with the affairs of the Company by holding themselves out as Managing Director/Directors. With such Order being in force since 16.07.2008, which was upheld till the Hon'ble Supreme Court, the contesting Respondents do not appear to have paid respect to the Judicial Orders. 22. The contesting Respondents in spite of CLB Order dated 16.07.2008 which restrained them, went ahead to file on 5th August, 2008 back dated Resolutions and Forms to show that in 2004, Notice dated 01.05.2004 (Page - 767) had been issued to increase issued and subscribed capital of the Company and that EOGM was held on 31.05.2004 (Page - 769) permitting issue and allotment of 1,13,00,000 shares to investors (may be members or not) and that earlier Board Meeting has been held on 30.04.2004 (page 770) to convene the EOGM and that on 02.06.2004, Board Meeting was held accepting applications ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the contesting Respondents and deliberated as to which group is in actual control of the Company. BIFR appears to have been impressed with the payments made by contesting Respondent No.3 to the Banks and observed in the last para of the proceeding that the Bench was satisfied that the group of contesting Respondents has been managing the Company since 2003 and has mobilized substantial fund to discharge the Company's liabilities. It went on to observe that the Bench was satisfied that original Respondent No.2 had duly sold all his 80 Lakhs shares for a consideration to Respondent No.3 in 2003 and that he had never denied this sale. It further went on to declare that Respondent No.3 does not hold any shares in the sick company. It went on to refer that Respondent No.3 Company should continue to manage the affairs of the Company. Although such Order was passed by BIFR and the contesting Respondents want to rely on the same, fact remains that original Respondent No.2 carried Appeal No.31/2012 before Appellate Authority for Industrial and Financial Reconstruction (Copy of the Order is at Page - 1686) and the Appellate Authority stayed this Order dated 22.11.2011 till the Appeal i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hare in the Company and are not even Directors, we would not rely on such Respondents. 25. Before parting, we are disposing of one contention raised by the learned counsel for Appellants that the Power of Attorneys executed by original Petitioners 2 to 50 in favour of original Petitioner No.1 did not duly authorize original Petitioner No.1 with power to file the Company Petition. The argument is that under Sub-Section (3) of Section 399 of the Companies Act, 1956 where members give consent in writing to another member to file the Petition, it has to be an intelligent consent and there cannot be blanket consent. The Counsel placed reliance on Judgment in the matter of "M.C. Duraiswami v. Sakthi Sugars Ltd." [1980] 50 Camp case 154 (Mad.)" which Judgment was followed in the matter of "Kuttanad Rubber Co. Ltd. v. K.T. Ittiyavirah [1997] 88 Camp case 438 (Ker.)." We have gone through these Judgments. Facts of the matter of M.C. Duraiswami show that the Appellant therein had filed with the Petition, letter of consent signed by 147 shareholders to satisfy the requirements of Section 399 of the old Act. The Company filed preliminary objections and in support of the objections, 73 Affidav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he absence of any material to show that the original Petitioners were party to such agreement or that the Company was party to such agreement, the declaration should have been that the said agreement is not binding on the original Petitioners and the Company and would not confer any rights on the contesting Respondents viz-a-viz the shareholders of the Company. We are proceeding to modify the Impugned Order only to that extent. However, we will impose costs on the Appellants for continuing to drag the company in litigation, although the contesting Respondents have no case. 27. We pass following Order:- ORDER (A) We maintain the Impugned Order passed by the learned NCLT with modification in direction 'A' of para - 23. We substitute direction 'A' of the Impugned Order with the following:- "A. We hereby declare the agreement dated 09.10.2003 as not binding on the Respondent Company and the Petitioners - shareholders. The said agreement, which is between original Respondents Nos.2 and 3, is not binding on the Company and other shareholders and does not confer rights viz-a-viz the Company and original Petitioners." (B) Except for this modification in Impugned Order, the Appeal s ..... X X X X Extracts X X X X X X X X Extracts X X X X
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