TMI Blog2021 (2) TMI 520X X X X Extracts X X X X X X X X Extracts X X X X ..... e respondents to restore the board of directors of EEL to its composition as it stood as on 30 July 2020 and more particularly in respect of Applicant No. 3 being reinstated as a Director on the board of directors at EEL - seeking temporary order of injunction restraining the respondents from any further alteration to the composition of the board of directors of EEL - seeking an order of injunction directing EEL by to send to Applicant No. 3, all notices and communications with respect of affairs of EEL and its board of directors, including but not limited to notices and agenda for all Board meetings of EEL - seeking restraint on Respondents from interfering the in the day to day management of the trade division of SIIL and EEL and to maintain status quo in relation to the functions, operations and present location of the trade division headed by the applicants - seeking Injunct on Respondent No. 3 to Respondent No. 6 from commencing any venture / partnership / management / agreement directly or indirectly competing with the business of SIIL and/or EEL; and/or using the brand name, trade-name, mark or any other intellectual property right relating to SOLAR - seeking Injunct on Re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Form MBP 1 at the initial point of reporting. vii. It is not the case of the Respondents that A1 has participated in the Board Meeting wherein the agreement to be entered with AGT was discussed. Further the pleadings of the Respondents themselves are clear that there were informal discussions between A1 R3 with regard to the shifting of the Administrative Office of R1 in Mumbai. viii. The argument of the counsel for the Applicants that Section 184(1) of the Act requires disclosure of the Director s interest inter alia in a company or companies including shareholding in a prescribed format but it does not speak about any contract or arrangement in which a Director is directly or indirectly interested, which is the subject matter of Section 167(1) (c) (d) and therefore Section 184(1) has no link at all to Section 167(1) (c) (d), cannot prima facie be brushed aside lightly. The matter would require deeper consideration during the hearing of the Company petition. ix. As far as Section 184(2) is concerned it requires a director to disclose the nature of his concern or interests, at the Board Meeting in which the contract or arrangement is discussed and such director has t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hon ble Member (Judicial), Janab Mohammed Ajmal Hon ble Member (Technical), Shri V. Nallasenapathy For the Applicant : Mr. Janak Dwarkadas, Sr. Counsel, Mr. Gaurav Joshi, Sr. Counsel, Mr. Sharan Jagtiani, Sr. Counsel with Mr. Somasekhar Sundaresan, Mr. Sunil K. Jain and Mr. Abishek Venkataraman and Mr. Pulkitesh Dutt Tiwari, Advocates. For the Respondent : Mr. S. N. Mukherjee, Sr. Counsel with Mr. Gopal Sawal and Mr. Yash Katariya, Advocates. For the Respondent 2 : Mr. Mahesh Athavale, Advocate. For the Respondents 3 4 : Mr. Navroj Seervai, Sr. Counsel a/w AZB Partners represented by Mr. V. P. Singh, Mr. Aditya Jalan, Ms. Urvashi Misra, Mr. Atul Menon and Mr. Samarth Luthra, Advocates. For the Respondents 5 to 8 : None Present. For the Respondents 9 to 13 : Mr. Anand Jaiswal, Sr. Counsel with Ms. Radhika Jaiswal, Advocate. For the Respondent 14 : None Present. ORDER Per : V. Nallasenapathy, Member (Technical) 1. The Applicants filed this Application against the Respondents for the following reliefs: A) An order of injunction directing the Respondents to restore the board of the Directors of SIIL to its composition as it stood a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion, for the time being, the Applicants seek to limit their submissions in respect of the following reliefs, reserving their rights for other reliefs as and when required: a) That Respondents by themselves or through their servants, officers and agents be restrained by an order of injunction from acting in furtherance of or implementation of or pursuant of the notice dated 30/07/2020 and intimation of vacation of office made by R1 to the BSE and NSE dated 30/07/2020. b) That Respondents by themselves and/or through their servants, officers and agents be restrained from interfering and obstructing the Applicant No. 1 from acting as Director and Vice Chairman of R1 Company. 3. The Applicants filed petition under Section 241-242 of the Companies Act, 2013 (the Act) alleging oppression and mismanagement meted out to them by the Respondents. The Applicants/Petitioners raised several issues of mismanagement, misconduct, unlawful and unethical activities, fraud and financial mismanagement, conflict of interest, fabrication of corporate and secretarial records, forging of signatures, procurement of stamp papers of previous years and execution of agreement by back dating, cove ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r and wife of R4. Respondent Nos. 7 8 (R7 R8) are the Executive Directors of R1. Respondent Nos. 9 to 13 (R9 to R13) are Independent Directors of R1. Respondent No. 14 (R14) is the Company Secretary of R1. e) R3 to R6 are part of S. N. Nuwal Group. K. C. Nuwal Group holds 29.28% of shares of R1. S. N. Nuwal Groups holds 43.88% of shares of R1, remaining 26.84% are owned by the general public. S. N. Nuwal Group act in complete unison in relation to the affairs of R1 R2 by virtue of their larger shareholding. They are in control of Solar Group of Companies including R1 R2. R1 was incorporated on 24/02/1995 under the Companies Act, 1956. R2 was incorporated by the same co-founders on 16/08/1995 under the Companies Act, 1956. f) Solar Group was co-founded by late Mr. Nandlal Nuwal and his two sons i.e. A1 R3, on the basis of personal relationship of trust and confidence, R1 was incorporated with the objective of manufacturing and supplying of explosives. A1, A2, R3, R4, late Mr. Nandlal Nuwal and Mrs. Sohandevi Nuwal (spouse of Nandlal Nuwal) were initial subscribers to the Memorandum of Association of R1, each family member holding 400 shares. 5. It is submitted tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on against the interest of R1, its shareholders and stakeholders. It is further submitted that efforts are being made to dismantle the present trade division, of which A1 operating from Bhilwara, Rajasthan is in charge, by not supporting its employees, raising frivolous allegations against them to terminate their services and/or coercing them to leave. Payment of utility bill for the trade division offices has been stopped. 9. It is further submitted that the Respondents could not be given a free hand to fabricate and forge the corporate, secretarial and legal documents and also cover up financial mismanagement and acting in conflict of interest. 10. It is submitted that R7 R8, the Executive Directors and R9 to R13, the Independent Directors of R1, entrusted with the fiduciary duty of exercising Independent Judgment, have objectively failed to discharge their duties. The Independent Directors acting in connivance with R3, R4 R14 have intentionally not highlighted the illegalities, unlawful activities, oppression and mismanagement and fabrication of Corporate records of R1 R2. 11. It is further alleged that the R7 to R13 were extremely opaque in their functioning and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 019. This transaction, which SIIL has now become aware of, is a related party transaction as conclusively established by your disclosure dated July 29, 2020. However the transaction was entered into by SIIL without the knowledge of it being a related party transaction and consequently not following the requisite procedure for entering into related party transactions. This way solely due to your failure to make the requisite disclosure in the requisite form at the requisite time . 13. The letter further states that as provided under Section 167 of the Act on account of non-compliance of requirement under Section 184 of the Act, A1 has automatically vacated the office of Director from 07/11/2019. It is submitted that R14 on 30/07/2020 sent letter to the Executive Director (Listing Department) of Bombay Stock Exchange Limited and National Stock Exchange of India Limited informing the cessation of office of A1 as Executive Director and Vice Chairman of R1. It was also stated that A1 vacated the office on account of operation of law arising due to failure to make appropriate disclosure. The said letter is extracted below: July 30, 2020 To, The E ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have concluded that Mr. Kailash Chandra Nuwal s abovementioned acts and omissions are in violation of Regulation 23 of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015. In the light of the same, Mr. Kailash Chandra Nuwal has vacated office with effect from November 7, 2019. We have also made requisite filing with the Registrar of Companies, Mumbai on cessation of Mr. Kailash Chandra Nuwal s office as Director of Solar Industries India Limited on July 30, 2020. Accordingly, as Mr. Kailash Chandra Nuwal has ceased to be Director, the present intimation is being made to the respective stock exchanges as per Regulation 30(2) of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 and any other applicable Regulation thereof. This is your information and record. Kindly acknowledge the receipt of same. Yours Truly, For Solar Industries India Limited. 14. It is submitted that on 28/07/2020 just 3 days before the scheduled Board Meeting on 31/07/2020, A1 sent an email to R3 referring to the agenda item No. 91 to the notice dt. 21/07/2020 of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts thereto and deal in documents on behalf of the Company. 17. Ld. Sr. Counsel for the Applicants submits that Section 184(2) of the Act will not apply to the case on hand. As far as Section 184(1) of the Act is concerned, it is submitted that the lease agreement was executed on 19/11/2019 for leasing of premises of AGT in favour of R1. 18. Ld. Sr. Counsel for the Applicants submits that on a plain reading of Section 184(1) of the Act it is quite clear that it requires disclosure of Director s interest inter alia in company or companies including shareholding, in a prescribed format. The Shareholding and Directorship of A1 A3 in AGT was already informed to R14 on 03/05/2019. Ld. Sr. Counsel submits that hence there is substantial compliance of Section 184(1) of the Act. 19. Ld. Sr. Counsel for the Applicants submits that Section 184(2) requires a Director to disclose: i. The nature of his concern or his interest. ii. At the meeting of the board. iii. In which the contract or arrangement is discussed. iv. Such Director refraining from participation in such discussion. 20. It is further submitted that the purpose of disclosure under Section 184(2) is to: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ice - regardless of whether he receives notice or he is able to read the notice or he is able to attend the Board Meeting. It is further submitted that said interpretation will lead to absurd consequences which must be eschewed. 25. It is submitted that the Respondents have placed heavy reliance on format of disclosure i.e., Form MBP 1 which has been prescribed under Rule 9(1) of the Board Rules, despite the fact that Section 184(2) does not make any reference to any prescribed form. It is submitted that A1 has already made the disclosure on multiple occasions which is disclosure in substance as required under Section 184(2) read with Rule 9(1) of Board Rules. In fact Form MBP 1 contemplates disclosure could also be made by Company Secretary on behalf of the Director. 26. It is submitted that Section 184(2) does not require disclosure in any particular format. R1 is closely held company wherein seven shareholders comprising A1-A3 holding 29.28% and R3- R6 holding 43.88%, together hold 73%. The majority shareholders i.e., S. N. Nuwal Group (R3-R6) are very much in a position to oppress the minority, act prejudicial to the interest of public, despite the company making profit i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e case of Bagree Cereals (P) Ltd...V/s...Hanuman Prasad Bagri (MANU/WB/0256/2000). It is further submitted that in the case of Bagree, if the aggrieved Director is able to show that he was a partner in the quasi partnership, he would be entitled to reliefs on the principles laid down in Ebrahimi...Vs...West Bourne Galleries. Relying on the Judgment of the Hon ble Supreme Court in Kilpest Private Limited (1996 87 Comp Cases 615), the Hon ble Calcutta High Court held that the submission that the limited company should be treated as a quasi partnership should not be easily accepted, was held as per incuriam by the Hon ble Supreme Court in Sangramsinh P. Gaekwad...V/s...Shantadevi P. Gaekwad as it was contrary to the Judgment in the Needle Industries and the same has been correctly noticed by the Hon ble Madras High Court in Ethiraj Case. It is submitted that the Judgment of the Hon ble Supreme Court in Hanuman Prasad Bagree V/s Bagress Cereals (2001) 4 SCC 420, an appeal against the Judgment of the Hon ble Calcutta High Court in Bagri, is distinguishable as in that case:- (a) the issue before the Hon ble Supreme Court was limited to whether facts justified a winding up order as no cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fellow promoters and shareholders of R1. However, the Respondents contend that disclosures not being made in the proper format, they have no knowledge about the relationship between the AGT which is the IT Company referred in the email but claim that A1 automatically vacated office w.e.f 07/11/2019. The extract of the email is as below: Dear Rathi Uncle Ji, This is with reference to our recent meeting held at Mumbai with KCN Uncle Ji on various points mainly as under:- 1. Fund requirement of KCN for starting IT Company and to purchase office space at Mumbai: a. MSN informed that funds in promoter s accounts are available which could be utilised. Initially for immediate need 40 Cr could be transferred in 7 days and 20 Cr by March end, in KCN Account. b. Any shortfall in KCN Account will be arranged by transfer from SNN account temporarily. c. The major investment for office at Mumbai will be for IT Company. 2. KCN raised the need of raising funds in 2019 2020 by diluting some stakes: a. The market sentiments at this stage are not appropriate for equity dilution. This could be explored at an appropriate time, somewhere in the period from June ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Further at that point of time Mr. K. C. Bhadada was employee of Solar Synthetics and he only used to send this kind of communications. Since R14 is the compliance officer, the same was sent to R14. 36. It is submitted that on 22/10/2019, Mr. K. C. Bhadada sent a communication to R1 (a shok.shah@solargroup.com) enclosing an attachment of M/s AGT Private Limited s shareholding and unsecured loan list which shows that the Applicants having shareholding to the extent of 52.95% in AGT. 37. Applicants submit that R14 claimed that since AGT is controlled by A1, it qualifies as a related party. If R14 was unaware of the interest earlier, R14 could not have come to this conclusion. However, on 30/07/2020, R14 claimed that R1 become aware of the related party transaction with AGT only after receipt of disclosures on 29/07/2020 which is yet another contradiction that only exposes the Respondents falsehood. Now, as an afterthought, R1 claims that R14 came to know A1 s interest in AGT after browsing through AGT s website at an unknown date. Despite being a party to these proceedings R14 chose not to file any reply. 38. Applicants further submit that A1 had not even attended the Boar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s) of the Company. An issue with regard to Directorial rights cannot be raised in such an Application. Relying on the Judgment of the Hon ble Supreme Court in the case of Shantiprasad Jain...Vs...Kalinga Tubes Ltd. (MANU/SC/03/68/1965: AIR 1965 SC 1535), it is submitted that the alleged conduct must be burdensome or wrongful and merely lack of confidence between the majority and minority shareholders would not be enough, unless confidence springs from the oppression of minority by a majority in the management of the Company s affairs and such oppression must involve at least an element of lack of probity or fair dealing to a member in the matter of his proprietary right as a shareholder. 43. The above mentioned conditions have not been made out in the Petition or Application. No proprietary rights of the Applicants were affected. It is not the case of the Applicants that the directorship of A1 in R1 is an incident of the shareholding held in R1. The Articles of Association (AoA) of R1 does not provide any right of directorship to the members of R1 and there is no shareholders agreement providing such right to the Applicants. 44. It is submitted that even if a director is ille ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itted that the words prejudicial or oppressive to him cannot be read in isolation and have to be read in conjunction with other requirement of Sections 241-242 of the Act. These sections demonstrate that complaint may only be raised in respect of any prejudice caused to a member in his capacity as such and shareholder of the Company and not on account of violation of any other alleged right including the directorial right. The Applicant s rights as a member of R1 continue to remain un- impacted by the automatic vacation of office of Director by A1. 46. It is submitted that since A1 automatically vacated the office by operation of law, the reliance of the Applicant on Section 241(1)(b) of the Act stating that a member under his complaint is only required to demonstrate that as a consequence of material change in the Board of Directors of the Company it is likely that the affairs would be conducted in the prejudicial manner does not hold good in law. 47. Respondents relying on the Judgment of the Hon ble NCLAT in Upper India Steel Manufacturing Engineering Co. Ltd. Ors... V/s...Gurlal Singh Grewal Ors., 2017 SCC Online NCLAT 339 submitted that when the Applicants fail t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act. 51. R1 contends that an email dated 03/05/2019 sent from Mr K. Bhadada to R14 (referred supra) cannot be taken as disclosure since the email was neither marked to Board of Directors nor did it make any disclosure regarding acquisition of shareholding in AGT by A1. Further, the email did not constitute a disclosure in the prescribed Form MBP 1 as mandated by Section 184 of the Act read with Rule 9 of the Companies (Meetings of Boards and its Powers) Rules, 2014. 52. It is submitted that a duly completed signed disclosure indicating not only the shareholding but also directorship interest as on 01/04/2019 was submitted by A1 to R1, only one month before the acquisition of interest in AGT. However, the Form MBP 1 was not filed despite the knowledge and given the recent acquisition of interest in AGT. Despite being present at the Board Meeting on 09/05/2019, voting on an agenda and considering Form MBP 1 filed by every Director, A1 intentionally did not disclose his interest in AGT even though he had acquired the same only a week prior to the meeting. 53. It is submitted that the contention of A1 that at the meeting on 09/05/2019, A1 allegedly met R14 in person a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e for the disclosure on behalf of the directors which has been expressly attributed to the directors under the Act. In case the intention of the Legislature was that, Section 184 of the Act would have mandated the compliance officer on behalf of the Directors, to fulfil the statutory obligations. 58. It is submitted that the reliefs sought by the Applicants are in no manner connected with the rights of the Applicants as shareholders of R1 and that complaint is regarding the directorial dispute under the guise of an oppression and mismanagement action. Directorial disputes cannot be agitated in a petition under Sections 241-242 of the Act and an action alleging oppression and mismanagement shall be in the nature of complaint regarding lack of probity of fair dealing in the capacity as shareholder of Company. To buttress this proposition the Ld. Senior Counsel appearing for R3 R4 relied on Re Lundie Brothers, [1965] 1 W.L.R. 1051, Pg.20-21; Re Bellador Silk, Ltd. vs. ABC., 1965(1) All. ELR 667, Para 5, Pg. 24-25. 59. It is submitted that in the AoA of R1, A1 has no right of directorship as a consequence of being a shareholder. Further there is no agreement between the shareho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equirement to disclose under Section 184(2) of the Act only arises in the event of directors participating in the meeting wherein the contract in question is being discussed is untenable and such preposterous interpretation has to be rejected as untenable. ANALYSIS: 63. On perusal of the pleadings and after hearing the counsel on either side, the following are the observations of this Bench: i. In the case on hand R1 was founded jointly by father of A1 R3, wherein the family of the father, family of R3 and family of A1 were made as members who were subscriber to the Memorandum of Association and were allotted 400 shares each at the time of incorporation of the Company. ii. We have noticed that there is family settlement entered into between the Applicants and R3 to R6. The family settlement envisages not only the way and manner in which the assets of the family had to be partitioned but there also is an agreement that even in future businesses to be started there shall be a discussion among the family members and the shareholding will be devised in a particular manner. Further, the Family Settlement Agreement was signed by Mr. Nandlal Nuwal Mrs. Sohandevi Nandlalj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nature of his concern or interests, at the Board Meeting in which the contract or arrangement is discussed and such director has to refrain from participating in such discussion. In this case, A1 has not attended the Board Meeting where the contract with AGT was discussed and approved. Since A1 has not participated in the Board Meeting there is no question of A1 refraining from participation in such meeting. x. Section 167(1)(c) provides that the office of the Director shall become vacant in case, he acts in contravention of provision of Section 184 relating to entering into contract or arrangement in which he is directly or indirectly interested. xi. Section 167(1)(d) provides that the office of the Director shall become vacant in case, he fails to disclose his interest in any contract or arrangement in which he is directly or indirectly interested in contravention of provisions of Section 184. xii. Whether there is contravention of provision of Section 184 can be decided only after the final hearing of the Petition. xiii. Even though the Respondents submitted that A1 is not in the active management of R1 and he was not attending the Board Meetings for the past one yea ..... X X X X Extracts X X X X X X X X Extracts X X X X
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