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TMI Blog2023 (4) TMI 1142X X X X Extracts X X X X X X X X Extracts X X X X ..... i Dasaratha Rami Reddy, and her two brothers Shri M.N. Pratap Reddy and Shri M. Kiran Kumar Reddy (Respondents No. 6 and 7 respectively) in this appeal were subscribers to the Memorandum of Association of R-1 Company (in short 'R-1'). Further, Sri Dasaratha Rami Reddy, and the two brothers (R-6 and R-7 respectively) were each holding 30% shares and the Appellant held 10% in the R-1 Company. Subsequently Shri Dasaratha Rami Reddy transferred his shares to his sons and Appellant, and thus as on 18.8.2011 R-6 and R-7 each held 36% of shares in the paid-up capital and the Appellant held 24% shares in R-1 company. It is further stated by the Appellant that though she was a shareholder in R-1 Company, she was not a director of the company at any point of time, nor involved in the day-to-day affairs of the company. The Appellant has further stated that in the year 2011 an allotment of 1,77,800 equity shares of R-1 at Rs. 10 each in favour of Shri Yathin Reddy and Ms. Jansi Reddy, who are Respondents No. 3 and 4 in the present appeal, was done by the company and thus 88,900 shares were allotted to R-3 and similar number of 88,990 shares were allotted to R-4, at Rs. 10 per share without the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of funds. 6. The Learned Counsel for the Appellant has further argued that allotment of 64% shares to R-3 and R-4 was done at a throwaway price in violation of the Articles of Association and the Appellant as an existing shareholder should have been offered the new shares through a formal notice, which was not done and this action of R-1 company to allot shares to R-3 and R-4 resulted in Appellant becoming a minority shareholder, which caused oppression to her and therefore, she has filed CP No. 09/2016 to seek redressal. He has further clarified that the Appellant was never a director in R-1 Company, and was, therefore, not aware of the allotment of shares to R-3 and R-4 and this fact has been incorrectly noted by the NCLT in the Impugned Order, wherein it is stated that she was signatory in the board meetings, where shares were allotted to R-3 and R-4, 7. The Learned Counsel for the Appellant has further contended that Clause 5 of Articles of Association stipulates that new shares shall be offered to persons, who at the date of the offer are holders of that class of shares of the Company, and in proportion as nearly as possible to the capital paid up of those shares on that d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lot shares, they don't have absolute discretion or freedom to do so. Further, it is held in the matter of Dale and Carrington Invt. P. Ltd. v. P.K. Prathapan [(2004) 122 Comp Cas 161] that the extent of powers of directors are clearly spelt out in the memorandum and articles of association of the company, the directors hold a fiduciary duty to the shareholders to make a full and honest disclosure to them regarding various issues including allotment of new/additional shares. 10. The Learned Counsel for Appellant has also argued that his company petition before NCLT was not affected by the issue of limitation, delays and laches, since in case of oppression and mismanagement if the events have a continuous impact on the affairs of the company, there would be a 'continuing cause of action'. In this regard, he has referred to the judgment of Hon'ble Delhi High Court in the matter of Surinder Singh Bindra v. Hindustan Fasteners (P) Ltd. LAWS(DLH) 1989 5 27, where it is held that illegal allotment of shares has a continuous impact on the affairs of the company and if it makes the appellant a minority shareholder through illegal allotment of shares, hence there exists a continuing cause o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y increasing her shareholding to 10% to enable her to meet the threshold requirement for filing a company petition regarding oppression and mismanagement. He has further claimed that this transfer of 1.64% shares to the Appellant is violation of Article 7 of the Articles of Association and further since there was no approval from the Board for the said transfer, it also violates section 56 of the Companies Act, 2013. 13. The Learned Senior Counsel for R-3 and R-4 has also argued that the CP No. 09/2016 was barred by limitation as a petition for operation should have been filed within three years as per Article 137 of the Limitation Act, and arguably if the allotment of shares to R-3 and R-4 was the cause of action as claimed by the Appellant to file CP No. 09/2016, the same was barred by limitation, since shares allotment was made on 2.12.2011, while the Company Petition was filed in January 2016. In this connection, he has cited the judgment in the matter of Praveen Shankaralayam v Elan Professional Appliances Pvt. Ltd. [MANU/NC/0079/2016], wherein the issue of delay and laches has been upheld in filing of similar company petition, and that the Appellant did not state any ground ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... how to read and interpret these financial documents, which is clearly an afterthought and a lame excuse. 16. Further, the Learned Senior Counsel for R-3 and R-4 has claimed that regarding payment of premium for the said shares allotted to R-6 and R-7, no valuation of shares was ever undertaken and thus, there was never any question of payment of premium nor any premium was ever demanded by the company, even though the company was at that time being managed by the promoters group, which included the Appellant and her two brothers and after a delay of more than three years, the Appellant had suddenly woken up to the fact that no premium was paid, which is definitely an afterthought and bogey. Further, he has pointed out that after the Board's Resolution dated 2.12.2011, Form 2 and balance-sheets for the years 2011-12 and 2012-13 filed with the Registrar of Companies very clearly bear out that the shares were allotted to R-3 and R-4 at par and not at a premium. He has also argued that averments made by the Appellant in her rejoinder that the Auditors have found the allotment of shares made to R-3 and R-4 to be in violation of Articles of Association is misconceived and the NCLT has c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iberty granted to her was in connection with filing of a fresh company petition, which she did in the form of Company Petition No. 09/2018. 21. We note that before the transfer of shares to R-3 and R-4, the Appellant held 10% shares and her father Shri Dasaratha Rami Reddy and her two brothers Shri M.N. Pratap Reddy and Shri M. Kiran Kumar Reddy each individually held 30% shares in R-1 Company and Shri Dasaratha Rami Reddy and his two sons Shri M.N. Pratap Reddy and Shri M. Kiran Kumar Reddy were the first directors of the Company. We also note that the mining lease was held by Shri Chenna Keshava Reddy, brother of Shri Dasaratha Rami Reddy. It is also noted that while the application for renewal of mining lease was pending consideration, Shri Dasaratha Rami Reddy entered into two agreements, viz. a Job Work Agreement dated 15.10.2015 with M/s. Auro Logistics Limited (In short "ALL") represented by Mr. Yathin Reddy (R-3) as its Managing Director and another Sale Agreement dated 15.10.2005 with M/s. Trans India Shipping Services Pvt. Ltd. (TISSPL) represented by Ms. Jansi Reddy (R-4) as its Managing Director and further that Shri R. Swarup Reddy (R-2) is father and husband of R-3 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accounts for the year ending 31.3.2012 in the AGM held to consider the Annual Report and audited accounts. The relevant portion of the balance sheet as on 31.3.2013, which is part of the appeal memo (attached at pg. 199 of the appeal paperbook) shows increase in share capital to Rs.29,78,000. In addition, the balance sheet also contains details of shares held by each shareholder holding more than 5% shares, as included in the Profit & Loss Account for the year ending 31.3.2013 (at page 201 of the appeal paperbook) which shows that Jansi Reddy held 88,900 shares on 31.3.2012 and also on 31.3.3013. Additionally, R. Yathin Reddy (R-3) also held 88,900 shares as on 31.3.2012 and also on 31.3.2013. 24. The Learned Senior Counsel for R-3 and R-4 has taken the position in arguments that since the Appellant had joined other co-petitioners in filing CP No. 59/2014, wherein she has admitted and accepted the shareholding of R-3 and R-4, she was estopped into raising this issue in a fresh company petition, which is CP No. 09/2016. Regarding this issue, the Appellant has claimed that the allotment of substantial number of shares to non-existing members R-3 and R-4, was in violation of the Arti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g that the affairs of the company are being conducted in a manner oppressive to some part of the members or in a manner prejudicial to public interest or in a manner prejudicial to the interest of the company, Examined in this view, it, therefore, cannot be said that the events which occurred three years prior to the date of filing of the petition cannot be looked into if those events form continuous acts complained of continuing up to the date of the petition. Therefore, though I am of the view that provisions of Art. 137 of the Schedule to the Limitation Act. 1963 are applicable to a petition under S. 397 and/or S. 398 of the Act, I am in respectful disagreement with the view expressed by the aforesaid Calcutta High Court decision that the events prior to the period of three years of the date of filing of the petition cannot be looked into. 12. These can be looked into if they form part of a continuous process continuing up to the date of petition showing that the affairs of a company are being conducted in a manner stipulated in Ss. 397 and 398 of the Act. This, in fact, is the requirement of these provisions. Further, if the acts complained of form part of the same transactio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r from delay and laches. 30. Regarding the issue of violation of the provisions of the Articles of Association, we note the Clause 5 of the Articles of Association of R-1 Company (attached at pp. 110-121 of appeal paperbook) which stipulates as follows:- "5. Where it is proposed to increase the subscribed capital of the Company by the issue of new shares, then: Such new shares shall be offered to the persons who at the date of the offer are holders of that class of shares of the Company, in the proportion as nearly as the circumstances admit to the capital paid-up on those shares at that date. The offer aforesaid shall be sent by registered notice to the registered address of every member specifying the number of shares offered and limiting a time, not being less than fourteen days from the date of the offer, within which the offer, if not accepted will be deemed to have been declined. After the expiry of the specified time in the notice aforesaid, or on receipt of earlier intimation from the person to whom such notice is given that he declines the shares offered, the Board of Directors may dispose them in such manner as they think most beneficial to the Company." 31. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... conferred by the articles in accordance therewith. Any action referable to the articles and contrary thereto would be ultra vires." ( Emphasis Supplied ) 33. Further in the matter of M. Appayya & Ors Vs. Chandrashekar Rao & Ors. [TA No. 10/2021 CA (AT) No. 184/2019], this Tribunal through its judgment dated 5.12.2022, held the following:- "41. The above provision of law is clear that if a company intend to increase its share capital by issue of further shares, such shares shall be offered to the existing members in proportion to their shareholding and by sending a letter of offer. In the present case, this Tribunal does not find any substantial proof that the notices have been issued for convening the EOM to all the members and issued any letter of offer to the existing shareholders for subscribing to the shares in proportion to their shareholding. In such a situation, the allotment of shares exclusively made to certain group by excluding the other members leads to dilution of shareholding of the members whom the shares were not offered and allotted. Thereby the said allotment causes the reduction in shareholding of the other shareholders whom the shares have not been allotte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 shareholders 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 the affairs of a company. The acts of directors in a private limited company are required to be tested on a much finer scale in order to rule out any misuse of power for personal gains or ulterior motives. Non applicability of section 81 of the Companies Act in the case of private limited companies casts a heavier burden on its directors. Private limited companies are normally closely held, i.e. the share capital is held within members of a family or within a close-knit group of friends. This brings in considerations akin to those applied in cases of partnership where the partners owe a duty to act with utmost good faith towards each other. Non a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re allotted to Jansi Reddy and R. Yathin Reddy, by a resolution of the Board of Directors dated 2.12.2011 and the approval was given for allotment of these shares @ Rs. 10 per share and therefore, there is no document or record to show that any premium was required to be paid by the allottees for allotment of shares but since the allotment of shares to R-3 and R-4 has been found to be null and void, hence the question of payment of premium pales into insignificance. 38. On the basis of analysis in the aforementioned paragraphs, we are of the view that even if the Appellant had knowledge of the allotment of shares to R-3 and R-4 which was clearly in contravention of the Articles of Association, she was eligible and entitled to raise the issue of contravention of Articles of Association in allotment of these shares as she was not a person directly responsible for making such an allotment. Further, the Appellant, who was not involved into day-to-day affairs of the Company, cannot be supposed to have kept track of reduction in percentage of her shareholding and the issue of delays and latches was continuing even after reduction in her percentage shareholding, till the date of filing C ..... X X X X Extracts X X X X X X X X Extracts X X X X
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