TMI Blog2019 (7) TMI 511X X X X Extracts X X X X X X X X Extracts X X X X ..... ther or not entry made in the Register of Members could be upheld. There is no substance in the arguments of the contesting Respondents that Section 59 could not be resorted to if the effect would be reduction in capital under Section 66 of the Act. Contesting Respondents who have held back the copy of Resolution of the Board of Directors dated 26th March, 2018, cannot be heard on this count without they first showing justification as to how they entered disputed shares against the name of Appellant in the Register of Members. Again, even if a Resolution was taken by Promoter Directors on their own, in the face of facts of the matter and Articles of Association, the same would be and has to be termed as illegal. We direct cancellation of entry of the name of Appellant in the Register of Members of Respondent No.2 showing 906599 equity shares purported to have been credited on the basis of conversion of 906599 CCDs standing in the name of the Appellant - Appeal allowed. - Company Appeal (AT) No.334 of 2018 - - - Dated:- 28-5-2019 - Mr. A.I.S. Cheema Member (Judicial) and Balvinder Singh Member (Technical) For Appellant : Shri Arun Kathpalia, Senior Advocate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r part-financing cost of 700W Coal Fired Thermal Power Plant at Orissa (the Project ). The said Agreement was entered into in March, 2010 and it came to be modified in March, 2017 between Respondent No.4 and the lenders. Respondent No.2 Company came to be incorporated in December, 2014. Investment Agreement dated 25.06.2015 entered As per record, Appellant and Respondent No.13 (The Investors Investor 2 and Investor 1 respectively) entered into Investment Agreement (Appeal Page 130) on 25th June, 2015 with the Promoter Group consisting of Respondent No.7, Shri K. Raghu Rama Krishna Raju and Sriba Seabase Pvt. Ltd. (the promoters) and Respondents 1, 2 and 4. In terms of the said Investment Agreement, the Appellant and Respondent No.13 lent a sum of ₹ 780 Crores. The Appellant had agreed to subscribe to 906599 compulsory convertible debentures (CCD) and had also taken one equity share for aggregate consideration of ₹ 99,99,990/- while Respondent No.13 subscribed to 6990 non-convertible debentures (NCD) for an aggregate consideration of ₹ 699 Crores. Company Petition No.248/59/HDB/2018 filed The Company Petition (Pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o.3 sought calling of EOGM 5. When there was non-compliance, record shows that the Appellant and Respondent No.13 issued letters/Notices dated 5th September, 2017 (Page 265 and 267 respectively) to the promoters and Respondents 1, 2 and 4 (Contesting Respondents) and Arkay Energy Rameswaram Ltd., inter alia, Appellant calling upon them to convert CCDs into equity shares and claimed that in terms of the Investment Agreement, they were required to complete the process of conversion within a period of 5 days from the issuance of Notice. Respondent No.3 Vistra sent Notice under Section 100(2) of the Act to Respondent No.2 on 12th September, 2017 (Page 270) exercising right under Debenture Trust Deed, the Share Pledge Agreement and the power of attorney it had, calling upon Respondent No.2 to convene EOGM within 21 days to convert CCDs and remove the Directors/Additional Directors. It is stated that the Joint Lender Forum of Respondent No.4 had also convened meeting of lenders of Respondent No.4 on 26th September, 2017 in which Respondents 1 and 2 failed to attend the same in spite of Notice. Respondent No.1 rushed into litigation On the same date ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as Respondent No.1. Other present Companies were also parties. The Order of withdrawal in para 5 read as under:- 5. In view of the above facts and circumstances of the case the present Company Petition bearing CP No.235 100 115 169 HDB-2017 is disposed of as withdrawn, by granting liberty to the Petitioner to file a fresh Company Petition, if the Petitioner is aggrieved by the action of the Respondent. Since the restraint Order passed by the Tribunal stands vacated by virtue of disposal of the present Company Petition the Respondent -1 may conduct the EOGM in accordance with law and also follow principles of natural justice. Accordingly CA Nos.178 177 of 2017 also stands disposed of. [Emphasis supplied] Notice issued for Board Meeting on 26.03.2018 10. As per Record, after such withdrawal of the Company Petitions, Respondent No.2 issued Notice on 17th March, 2018 (Page 400) to convene meeting of Board of Directors on 26.03.2018 for conversion of CCDs into equity shares. Appellant and Respondent No.13 now opposed the unilateral conversion sought 11. The Appellant and Respondent No.13 responded to such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, void and invalid. It was informed:- 3. As we had stated in the said Letters, any purported conversion of the compulsory convertible debentures (CCDs) held by us in IBTPL into equity shares is contrary to the terms of the said debentures and the articles of association on the Company. 4. Despite our letters as aforesaid, and despite our nomine directors pointing out the above in the said meeting, you purported to proceed with the meeting to discuss the agenda in relation to the conversion of CCDs which was not only ultra vires the articles of Association but also based on deliberate misinterpretation of the Order dated March 6, 2018 passed by the Hon ble National Company Law Tribunal, Hyderabad ( said Order ). Our nominee directors thereupon resigned from the Board. 5. We call upon you to ensure that the CCDs are not converted into equity shares without our prior written consent for the reasons mentioned in our said Letters. 6. Please note that any resolution or decision or action of the board of the Company or the Company to convert the CCDs into equity shares ultra vires, void and invalid and would amount to contempt of the said Order besides ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y shares of Respondent No.2 credited to the account of the Petitioner pursuant to the illegal instruction/corporate action on the basis of the resolution passed by the erstwhile Board of Directors (Respondent Nos. 7 to 12) in contravention of the Articles of Association of Respondent No.2; d. pass such orders as it deems necessary for the rectification of the register of members of Respondent No.2; and e. pass such further or other orders as this Ld. Tribunal may deem fit and proper in the facts and circumstances to meet the ends of justice and equity. The Defence 14. Respondents 1 and 2 filed their Replies in NCLT. In the Replies in substance, these Respondents appear to have claimed that the relief claimed in the Petition was beyond the scope of Section 59 of the Act and that issues raised required detailed trial and interpretation of Agreements which had been executed between the parties. They referred to the statement in the Company Petition where Petitioner had stated that the Act of Respondent No.2 converting the CCDs was act of oppression and mismanagement for which the Petitioner was reserving right to file necessary proceedings, if ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the passage of 5 days of the receipt of Notice, conversion of CCDs could have been done or not was question of law. For such and other reasons, as recorded in the Impugned Order, the NCLT went on to dismiss the Company Petition. The Arguments in short 16. We have already referred to the case put up by Appellant, using the words it is stated but for contents of the documents, we have looked into the documents. At the time of hearing before us, the learned Counsel for the Appellant has then taken us through the contents of the Investment Agreement dated 25th June, 2015 and the Articles of Association in which the Clauses of the Agreement were got incorporated and made part of the Articles of Association. The Counsel pointed out that the Articles of Association referred to the Appellant and Respondent No.13 as the investors and the Articles provided that the Board of Directors shall at all times comprise maximum of 5 Directors of which NCD holder has the right to appoint and maintain 2 Directors. It is argued that there is provision even regarding quorum of meeting in which also at least one of the Company Investor Director has to be present throughout the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lled for meeting to convert the CCDs, the Appellant had in writing informed that now the CCDs cannot be converted and the nominee Directors of the Investors also protested in the meeting and even resigned and the Board was left without quorum and thus, could not have proceeded further if the Articles of Association are considered. It is argued that although the Appellant had sought conversion of the CCDs into equity shares, the Respondent No.2 had not taken action and when subsequently, Respondent No.2 wanted to take action, the Appellant had by then withdrawn its consent to convert and when this is so, the post conversion on the part of the Respondent No.2 was illegal and there is no substance in the stand taken by Respondents that the Appellant had become the majority shareholder. According to the Counsel, the Respondents 1 and 2 along with the promoters continued to control Respondent No.2. Only because Appellant sought conversion of CCDs, when contesting Respondents declined and resorting to litigation, the conversion had not taken place. It is argued that on the basis of pleas raised by the Respondents, the NCLT erred in observing that there were contentious issues. It is argu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... espondent No.2 could not be faulted with and there was sufficient cause for the Respondent No.2 to concert the CCDs into shares in favour of the Appellant. 19. It appears, and the learned Counsel for the Respondents accepted that copy of the Board Resolution dated 26th March, 2018 has not been put on record. The learned Counsel referred to the Memorandum of Association to say that the Arbitration Act is applicable. The learned Counsel submitted that the Appeal deserved to be dismissed. According to the learned Counsel, the issues raised could not be dealt with and decided under Sections 59 and Section 430 of the Act will not be helpful, for, according to the Counsel, Section 430 applies when the Tribunal is empowered to determine a factor. Under Section 59 of the Act, NCLT was empowered to consider registration and transfer or refusal to transfer of existing shares without sufficient cause but it could not consider, if the same was contrary to the Articles of Association or Investment Agreement which has Arbitration Clause. Certain aspects hardly or not in dispute 20. In this matter, there does not appear to be dispute with regard to the execution of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to prima facie show whether or not the act or omission is without sufficient cause, but the Company, which is in control of the Register of members, will have larger burden and must put on record all evidence to justify the act or omission to show that the act or omission is not without sufficient cause. 23. Undisputedly, the Appellant has had held one share in the Company. Its grievance is regarding making entry in the Register of Members showing another 906599 equity shares treating the same as having been converted from CCDs. As per Section 59, the only question relevant is whether the name of Appellant has been entered regarding shares said to have been issued against CCDs to be without sufficient cause . In this matter although there is Investment Agreement, we will not dwell much on the Agreement as admittedly, the protection sought by the Appellant and Respondent No.13 while entering into the Investment Agreement was translated into amendment of the Articles of Association which clearly has a higher binding nature and protection as the Company as well as all the shareholders including Directors become bound by the same. Relevant Articles of Association ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Company Investor Directors, present throughout the meeting, unless otherwise agreed with the Investors Consent. 60.4 The quorum for a meeting of the shareholders of the Company shall include representatives of the Investors, present throughout the meeting, unless otherwise agreed with the Investors Consent. Without prejudice to Article 0 (Reference: 60.2), no Reserved Matter will be discussed or approved without the presence of a Company Investor Director; unless the Investors Consent in respect of such Reserved Matter has been received prior to the commencement of such meeting. Reserved matters are in Article 62 and relevant portions of 62.1 and 62.2 read as follows:- 62.1 Post Completion, no action or decision (including any steps being commenced or taken for any action or decision) relating to any of the Reserved Matters as set out in Article 62.2 below with respect to the Company and/or IBEUL shall be proposed, taken or given effect to (whether by the board, any director, any committee, the senior management or the shareholders of IBPIL, or the Company, or IBEUL; or any of the employees, officers, managers of IBPIL, Company or IBEUL) unle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any Director nominated by the Promoters to exercise their voting rights in a meeting of the Board to approve the conversion of the CCDs. Analysis 25. It is apparent from the above Articles that the Appellant and Respondent No.13 had taken sufficient precautions while investing money in the Company, to safeguard their interests. When the Appellant and Respondent No.13 claimed that there was default, and wanted to invoke their rights on 29th August, 2017 and sent the letter (Page 258), the contesting Respondents did not act as per the Articles of Association referred above. The Appellant and Respondent No.13 again sent two letters/Notices dated 5th September, 2017 (as can be seen at Page 265 and 267) clearly calling upon the contesting Respondents to do the needful conversion within a period of 5 days of the issuance of the Notice. They referred to the Investment Agreement in this context (which is part of Articles of Association also). When in spite of the Articles of Association providing right regarding conversion, the contesting Respondents did not act in 5 days as per Articles of Association, the Respondent No.3 issued requisition Notice dated Septemb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... holders and the record shows that when, after withdrawing the Company Petitions by the Respondent No.1, Respondent No.2 proposed to hold Board Meeting for converting the CCDs, the Appellant had opposed and claimed that such meeting could not be held and the CCDs could not be converted. The learned Counsel for the Appellant submitted that in response to the Agenda (Page 400) circulated by the Respondent No.2 so as to hold Board Meeting on 26th March, 2018, the Appellant and Respondent No.13 had both opposed and sent letter (Page - 414) with regard to the Notice dated 17th March, 2018 (sic 2017). It is rightly argued by the learned Counsel for the Appellant that by this communication, the Appellant clearly conveyed to the contesting Respondents that it had withdrawn its option to convert CCDs sent on 5th September, 2017. 27. It is apparent on record that when contesting Respondents still wanted to go ahead, the Appellant and Respondent No.13 sent yet another communication dated 26th March, 2018 wherein, inter alia, it was mentioned:- 3.1 Any change to the share capital of IBTPL requires our consent under the terms of the Investment Agreement dated June 25, 2015 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... L and contrary to the agreements entered into by IBTPL will render them personally liable for the breach of their fiduciary duties. 28. The record speaks for itself. As on the part of contesting Respondents, they have not even put on record copy of the Board Resolution dated 26th March, 2018 to let the Tribunal know as to how and on what basis they proceeded. The Company cannot hold back material documents and expect the Tribunal to find that the Company had sufficient cause for inserting the concerned shares against the name of the Appellant. The Appellant has sufficiently put on record the evidence to show that the contesting Respondents and, especially, Respondent No.2 Company did not have sufficient cause to enter shares against the name of the Appellant purporting to have been converted from CCDs. We do not find that there are any contentious issues involved as being tried to be projected by the Respondents. Only because the Appellant took separate action against Respondent No.4 under Insolvency and Bankruptcy Code, 2016 with regard to bridge loan relating to OCDs, which related to a bridge loan, there did not arise any contentious issue for decision in this matter w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he questions whether the Appellant rightly invoked the Agreement or not. We are concerned with the question of entry made in Register of Members. Whether there was sufficient cause or not to enter name is matter which only NCLT can decide under Section 59 of the Act. Change of law under Companies Act, 2013 31. The contesting Respondents have relied on Judgement in the matter of Ammonia Supplies Corporation (P) Ltd. Versus Modern Plastic Containers Pvt. Ltd. and others reported in 1998 7 SCC 105 and the learned NCLT has also referred to this Judgement of the Hon ble Supreme Court so as to state that there are contentious issues and they cannot be looked into under Section 59 Petition of the Act. This Tribunal had the occasion of considering Section 59 in the changed context of the Companies Act, 2013 coming into force in the matter of Smiti Golyan Ors. Vs. Nulon India Limited Ors. reported in MANU/NL/0118/2019. We had observed in that Judgement as under:- 21. In para 31 of the Judgement in the matter of Ammonia Supplies portions of which we have reproduced above, the Hon ble Supreme Court had observed that there was nothing under the C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te Tribunal is empowered to determine by or under this Act or any other law for the time being in force and no injunction shall be granted by any court or other authority in respect of any action taken or to be taken in pursuance of any power conferred by or under this Act or any other law for the time being in force, by the Tribunal or the Appellate. The effect of the aforesaid provision is that in matters in respect of which power has been conferred on the NCLT, the jurisdiction of the civil court is completely barred. It is not in dispute that were a dispute to arise today, the civil suit remedy would be completely barred and the power would be vested with the National Company Law Tribunal (NCLT) under Section 59 of the said Act . We are conscious of the fact that in the present case, the cause of action has arisen at a stage prior to this enactment. However, we are of the view that relegating the parties to civil suit now would not be the appropriate remedy, especially considering the manner in which Section 430 of the Act is widely worded. We are thus of the opinion that in view of the subsequent developments, the appropriate course of action would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ne without Investor s consent, which as per Articles 59.1 meant prior written consent . In fact, in present matter, leave apart consent, there was recorded opposition. We reject the argument made in Appeal by the Counsel for contesting Respondents that conversion was only a ministerial act. Had it been so, these Respondents would not have called the Board Meeting with agenda in the first place. There is no substance in the arguments of the contesting Respondents that Section 59 could not be resorted to if the effect would be reduction in capital under Section 66 of the Act. Contesting Respondents who have held back the copy of Resolution of the Board of Directors dated 26th March, 2018, cannot be heard on this count without they first showing justification as to how they entered disputed shares against the name of Appellant in the Register of Members. Again, even if a Resolution was taken by Promoter Directors on their own, in the face of facts of the matter and Articles of Association, the same would be and has to be termed as illegal. 34. For such reasons, we are unable to maintain the Impugned Judgement and we set aside the same. We direct cancellation of entry of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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