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Rachakonda Siva Kumar v/s Zetatek Engineering Systems P. Ltd.

    C.P. No. 58 of 2015 and T.P. No. 80/HDB of 2016

    Decided On, 23 October 2017

    At,

    By, THE HONOURABLE MR. RAJESWARA RAO VITTANALA
    By, JUDICIAL MEMBER & THE HONOURABLE MR. RAVIKUMAR DURAISAMY
    By, TECHNICAL MEMBER

    For the Appellant: S. Chidambaram, Practising Company Secretary. For the Respondents: R1 to R3, Y. Suryanarayana, Advocate.



Judgment Text

Rajeswara Rao Vittanala.,

1. The present company petition bearing C.P. No. 58 of 2015 (T.P. No. 80/HDB/2016) is filed by Mr. Rachakonda Siva Kumar (the petitioner), under sections 81, 111, 397, 398, 399, 402 and 403 read with Schedule XI of the Companies Act, 1956 against the Zetatek Engineering Systems P. Ltd., by, inter alia, seeking to the following reliefs:

(a) To declare the fake board resolutions uploaded with Form No. MGT-14 transferring 500 shares by the second respondent to the third respondent as void and illegal and violative of provisions of articles 17-22 of the articles of association of the first respondent-company and set aside the said Form No. MGT-14 as illegal;

(b) To declare the allotment of 90,000 shares solely to the second respondent at the purported board meeting dated September 3, 2014 as void and illegal, and declare Form PAS-3 filed by the respondents as null and void;

(c) Order respondents Nos. 1 and 2 to convene and conduct the annual general meeting for the year March 31, 2014 immediately as per the approved annual accounts at the board meeting held on September 3, 2014.

2. The case was initially filed before the then Company Law Board, Chennai Bench, and subsequently transferred to this Bench. Accordingly, the case is listed before this Bench for hearing on various dates, viz.: July 27, 2016, November 11, 2016, November 18, 2016, December 8, 2016, December 20, 2016, January 20, 2017, February 6, 2017, February 27, 2017, March 1, 2017, June 1, 2017, June 2, 2017, June 7, 2017 and October 23, 2017. After hearing the case, the parties requested time to file their respective gist of arguments. Accordingly, they have filed their written arguments subsequently.

3. The brief facts of the case, which are relevant to the issue in question, are as follows:

(1) Zetatek Engineering Systems P. Ltd. (which is hereinafter referred to as the company) is a private limited company incorporated under the provisions of the Companies Act, 1956 on the January 18, 2008 of the then Andhra Pradesh (now the State of Telangana) under the name and style of "Zetatek Engineering Systems P. Ltd." and bearing CIN No. U74999AP2008PTC057194. Its authorized equity share capital is Rs. 10,00,000/- (rupees ten lakhs only) divided into 1,00,000 number of equity shares of Rs. 10 each. The paid-up equity share capital is 10,000 number of equity shares equally subscribed by both the subscribers to the memorandum of association, i.e., the petitioner and the second respondent herein at 5,000 shares each.

(2) The main objects of the company is to carry on business as manufacturers, converters, producers, buyers, sellers, suppliers, suppers, stockiest, servicing of navigation systems and calibration, inertial and, etc.

(3) The petitioner is one of the subscribers to the memorandum of association and he was also the first director of the company by holding equally 50 per cent, of the paid-up equity shares along with second respondent in the company. However, he has resigned as director of the company on November 18, 2014 and remains as shareholder holding 50 per cent, of the shares of the company.

(4) It is contended that the petitioner promoted the company by taking the second respondent as its co-promoter with 50:50 equity shareholding pattern and thus incorporated the company as a private limited company under the provisions of the Companies Act, 1956.

(5) It is alleged that the second respondent is indulging in anti-company activities and resorted to acts of mismanagement and creation of fake documents, tampering the public records of the Registrar of Companies/Ministry of Corporate Affairs web portal by uploading fake documents and resolutions. He has also failed to comply with the mandatory statutory compliance's with the Companies Act, 1956/2013.

(6) It is alleged that the agenda of board of meeting held on August 25, 2014 was altered and attaching a fake board resolution adopted on that date. Similarly, another board meeting was held on September 3, 2014 when the petitioner and second and third respondents were present.

(7) It is alleged that the respondents have filed a fake return of allotment of shares in Form PAS-3 showing an allotment of huge number of 90,000 equity shares of the company exclusively to the second respondent at the purported board meeting held on September 3, 2014 by stating that the application received for allotment of 90,000 equity shares of Rs. 10 each. The petitioner was made a minority shareholder reducing his shareholding from 50 per cent, to 5 per cent. This is a serious act of oppression and mismanagement and seriously prejudicial to the interests of the petitioner.

(8) The second respondent failed to convene and conduct mandatory annual general meeting and violated the provisions of the Companies Act, 1956/2013 in this regard. The petitioner has questioned the board meetings dated August 25, 2014, September 3, 2014 and October 14, 2014 in the present petition.

4. Respondents Nos. 2 and 3 have filed a counter dated November 12, 2016. The following are their main contentions in the counter:

(1) The petitioner has come to the Tribunal with unclean hands by suppressing several material facts: The second respondent is a founder director and shareholder of the company and he is currently holding 94,500 equity shares of Rs. 10 each. He is an eminent technocrat turned industrialist and is considered as one of the most respected figures in the defence and aerospace industries in India and abroad and he is also associated with several prestigious projects in the science and technology. He has played a pivotal role in Defence Research and Development of the various aerospace systems for various missiles, aircrafts and sub-marine systems.

(2) The petitioner has not disclosed that another company namely Gagan Aerospace Ltd., was floated by the second respondent. It is the petitioner who wants the second respondent to be associated to promote respondent No. 1-company. The petitioner and the second respondent then became the founder directors holding 50:50 shareholdings initially in the company. So it is a joint responsibility of both the petitioner and the second respondent for conducting the annual general meeting. The petitioner has not co-operated for smooth conducting of business though subsequently he has resigned on October 14, 2014.

(3) The disputes started when the petitioner has sent profit and loss; account, in which a provision was made for Rs. 1.79 crores for payment of technical services, salaries, etc., payable into the petitioner bank account. The petitioner has sent the different balance-sheet contrary to be based on September 3, 2014 before the board of directors of the company. The company tries to correct the balance-sheet and placed proper balance-sheet before the board meeting held on September 3, 2014. However, the petitioner refused to sign the balance-sheet, on the contrary, he is making counter allegations. Due to the non-co-operation of the petitioner, it has become impossible for the company to function in a normal manner resulting in non-finalization of accounts for the year 2013-14, non-holding of annual general meeting, etc.

(4) Respondent No. 3 was appointed as an additional director of the company during the board meeting held on August 25, 2014 and 500 shares of respondent No. 2 were also transferred to him. The petitioner, in fact was also present at the board meeting. And necessary transfer deeds were duly executed by respondent No. 2 in favour of respondent No. 3. The second respondent has chosen to file Form MGT-14 with the Registrar of Companies/MCA Portal only to ensure compliance in law in true letter and spirit. However, the petitioner has created fake and fabricated documents. The fake documents filed by the petitioner in support of the company petition bears no signature of the chairman. As per section 118 of the Companies Act, 2013, the minutes of the meeting of the board of directors of the company should be signed by the chairman of the meeting or by the chairman of the next meeting. Therefore, the minutes submitted by the petitioner are absolutely false, fake and bogus.

(5) It is contended that it is the petitioner, who have committed offence under section 340 of the Code of Criminal Procedure, 1973 as he has filed fabricated and fake documents. They have also pointed out that shareholding of the petitioner was not at all disturbed or diluted in any way since the transfer of shares in question admittedly does not belongs to the petitioner.

(6) It is stated that between the years 2007-08 to 2013-14, the second respondent has contributed Rs. 1,64,55,000/- through banking channels towards the share application money, while at the same time, the petitioner has sold assets that were purported to be valued at Rs. 2,86,00,000/- and the same was treated as share application money in the books of the company. However, by the end of 2013-14, the entire share application money was converted into unsecured loan and the unsecured amount from the second respondent was Rs. 1,87,53,530/-. However, the petitioner's unsecured loan has come down to Rs. 23,100/-. Therefore, it is contended that the petitioner was well aware that there was share application money/unsecured loan to the credit of the second respondent, which was pending allotment, and that the same would be allotted at any time. The allegation of the petitioner that the allotment took place behind his back that too in a clandestine and illegal manner is totally untenable and denied. Having known that the share application money is pending and shares were allotted, the petitioner is stopped from questioning it on the ground that such allotment resulted in diluting his shareholding. If at all the petitioner had any apprehensions that his shareholding would be diluted, he would not have agreed for the acceptance of the share application money by the company. Therefore, the claim of the petitioner that the allotment of shares is illegal is totally false and it is an afterthought since his crooked plan to divert and siphon off of the funds of company could not succeed. Admittedly, Rs. 9,00,000/- was pending in the company as share application money.

5. The petitioner has filed a rejoinder dated December 15, 2016 in response to the counter filed by the respondent, by, inter alia, contending as follows:

(i) The counter filed by respondents Nos. 2 and 3 is totally false, and it amounts to serious acts of "perjury" and "contemptuous". Therefore, the Tribunal should take serious view of the matter. In support of his contention, he has relied upon the judgment of the hon'ble Supreme Court of India rendered in Sciemed Overseas Inc. v. BOC India Ltd. (2016) 3 SCC 70 where a reference was also made to Muthu Karuppan v. Parithi Ilam-vazhuthi (2011) 5 SCC 496.

(ii) The Respondent No. 1 has not yet filed a counter, only respondent No. 2 has filed a counter, which is adopted by respondent No. 3. There is an inordinate delay to file a counter.

(iii) It is asserted that the petitioner has always co-operated with the second respondent. He has signed the duly audited annual accounts for the financial year 2013-14 and as approved at the board meeting dated September 3, 2014 sent along with the final minutes of the said board meeting dated September 3, 2014 both by e-mail and also by hand, to the second respondent for his signature for further follow up action of holding the annual general meeting for the financial year 2013-14. For all purposes, the said approved board meeting minutes and the annual accounts are final and binding but the second respondent withheld the documents and created parallel fabricated balance-sheet and not even convened and conducted any annual general meeting for the financial year 2013-14 but also for subsequent years till now. Thus, for the financial years 2014-15 and 2015-16 the annual accounts were not finalized, not audited and not got approved by the board of directors and the shareholders of the first respondent-company. Therefore, he has alleged that the second respondent is solely liable for the violations in conducting the annual general meetings.

(iv) Allotment and transfer of shares is a fraud committed by the second respondent and the same is violation of articles 17 to 22 of articles of association of the company. The second respondent has created fake transfer and fabricated documents and thus uploaded into the Registrar of Companies/Ministry of Corporate Affairs web portal, which is violation of provisions of sections 447 and 448 of the Companies Act, 2013. It is further alleged that the Rs. 9,00,000 shown as "share application money pending allotment" was withdrawn by the second respondent himself and only Rs. 1,00,000 continued to be shown as "paid-up capital" as on March 31, 2014.

6. We have heard Mr. S. Chidambaram, learned practising company secretary for the petitioner and Mr. Y. Suryanarayana, learned counsel for the respondents. After transfer from the then Company Law Board, Chennai, this Bench disposed of petition by an order dated March 1, 2017. Aggrieved by this order, the petitioner has filed an appeal before the hon'ble National Company Law Appellate Tribunal vide Company Appeal (AT) No. 141 of 2017. Accordingly, the appeal was disposed of by remitting the case to the Tribunal by setting aside the order of this Tribunal dated March 1, 2017. Accordingly, the case was listed for hearing on June 1, 2017 and then posted to June 2, 2017, June 7, 2017 and October 23, 2017 at the request of parties. The parties have requested further time to file their respective written arguments. Accordingly, they have filed their respective contentions.

7. Both learned counsels have reiterated their respective contentions raised in their pleadings and also confirmed that argument in written arguments.

8. By perusal of pleadings and arguments of both the parties, the following main issues arise in the present company petition:

(1) Whether the respondents have followed articles 17 to 22 of the articles of association of the company, by duly following the principles of natural justice in conducting and passing the impugned board resolutions dated August 25, 2014, September 3, 2014;

(2) Whether the alleged acts of oppression and mismanagement taking place, while he was one of two directors of company, can continue the present petition under section 397/398 of the Companies Act, 1956/sections 241 and 242 of the Companies Act, 2013 since he ceased to be director on resignation on October 14, 2014.

9. In order to validate the proceedings of the board of directors, it is necessary to issue proper notice with agenda to the board of directors in the first instance. In the instant case, there are only two directors, the petitioners and the second respondent. A notice dated August 13, 2014 (pages 46 and 47 of counter) is issued to the petitioner by the chairman, the second respondent by proposing to conduct board meeting on August 25, 2014 along with agenda which includes approval for transfer of shares to Shashi Kumar Vijaybalan. Another notice dated August 26, 2014 along with the agenda (pages 51 and 52) by proposing to conduct the board meeting to be held on September 3, 2014. It is not in dispute that the petitioner has received the above notices, and attended both the meetings but the dispute is with regard to agenda of meetings especially with regard to allotment of shares to the third respondent and second respondent by alleging that the proceedings have been tampered with by the second respondent. In support of the contentions of the petitioner, he has filed minutes of meetings of the board of directors of the company held on August 25, 2014 and September 3, 2014 which are enclosed as page 41 (annexure P3) and pages 59 and 60 (annexure P6) with the company petition. By bare reading of those documents, those documents do not bear signatures of chairman of the board meeting. Admittedly, the second respondent is chairman of the board meeting. It is also relevant to point out that the petitioner has not filed copies of agenda, which he has received for the above meetings. It is also not in dispute that the petitioner has attended both the above meetings. Therefore, the contention rather the allegation that the impugned minutes of the board meetings are tampered with and uploaded illegally with MCA contrary to extant rules, is not at all tenable and it is baseless and thus it is rejected.

10. It not in dispute that the company is governed by provisions the Companies Act, 1956/2013, article 18 of the company says that no shares in the company shall be transferred unless and until rights of pre-emption as per rules have been exhausted in pursuance to above resolutions, Form (DIR-12) regarding appointment of the third respondent as additional director and Form MGT-14 showing transfer of 500 shares from respondents Nos. 2 to 3 were duly uploaded with the MCA. As per the provisions contained under section 118 of the Companies Act, 2013 and rules made thereunder, the minutes of the board meeting shall be signed by the chairman of the board. The petitioner, being director at the relevant time, cannot sign the minutes of the board meeting. The petitioner having attended the board meetings, as one of the two directors, is also estopped from disputing some of resolutions in order to raise a dispute. It is also relevant to point out here that the petitioner is not disputing the chairmanship of the board meetings in question. As long as the petitioner accepts that notice(s) in question received and also attended the meetings in question, and accepted the second respondent as chairman of the meetings, he cannot challenge the authority of the second respondent to take appropriate action in accordance with resolutions passed therein, that too, on untenable grounds.

11. It is not in dispute that the petitioner has resigned as director of respondent No. 1-company on October 24, 2014 (November 18, 2014 is stated in the company appeal) filed before the hon'ble National Company Law Appellate Tribunal). So the present status is only a shareholder holding 5 per cent, of shares of the total shares of the company. When the petitioner admittedly ceased to be a director with effect from October 14, 2014/November 18, 2014 the alleged acts of oppression and mismanagement are also ceased to exist. Therefore, he cannot continue the present petition on those grounds. It is a settled position of law that acts oppression and mismanagement is not to be available at the time of filing the application/petition but they should be perpetuated till the petition is actually taken up for final hearing. As held by the hon'ble High Court of Kerala in Palghat Exports P. Ltd. v. T.V. Chandran (1994) 79 Comp Cas 213 (Ker), isolated acts cannot constitute oppression and there should be continuous acts which are unfair and unjust which can be construed as oppression. And it is relevant to point out here the statement of the petitioner in his rejoinder to the counter filed by respondent No. 2, dated December 15, 2016 under paragraph 4.18, which reads as: "The petitioner chose to exit as director only with the right to nominate his nominee and with the trust that the second and third respondents would be discharging their duties as per law and protect the interest of all stakeholders". It prima facie shows that the allegations of acts of oppression and mismanagement as made by him prior to his resignation holds no water. Therefore, it is to be held that the petition is not at all maintainable on this score also.

12. So far as reducing the shareholders of the petitioner is concerned, it is not in dispute that the shareholdings of the petitioner in the company was not at all touched upon by transfer and issue of further shares. As per article 18 of the articles of association of the company, right of pre-emption is available to the existing shareholder. When the petitioner is admittedly participated in the impugned board meetings held on August 25, 2014 and September 3, 2014 he did not raise any objection or expressed his willingness to purchase the shares of the second respondent. Even otherwise, there is no absolute bar to transfer shares in the company, but it is only a condition to offer the shares to the existing shareholders before offering to others. Therefore the contention of the petitioner that the impugned share transfers are illegal and contrary to the articles of association is not correct and the same is baseless. Moreover the transfer of shares itself without directly affecting shareholding pattern of the petitioner cannot be called as an act of oppression and mismanagement.

13. Both the petitioner and respondent have contributed to the company as share application money. Respondent No. 2 contributed Rs. 1,64,55,000/- through banking channels and the petitioner also contributed to company for share application money as for an amount of Rs. 2,86,00,000/-. However, by the end of 2013-14 the entire share application money was converted into unsecured loan and while the unsecured amount from respondent No. 2 is Rs. 1,87,53,530 whereas the petitioner's has come down to Rs. 26,011/-. It is also to be noted the balance-sheet as on March 31, 2014 which is also signed by the petitioner and the respondents contains details of share application money as on March 31, 2013 and unsecured loan as on March 31, 2014.

14. When the provisions of section 42 of the Companies Act, 2013 relating to allotment of securities came into force from April 1, 2014 which stipulate that the company shall allot its securities within 60 days from the date of receipt of the application money, failing which the application money should be repaid within date of completion of 60 days. We are satisfied that the company followed all extant rules in this regard.

15. The transfer of shares of the company is dealt with under articles 17 to 26 of the articles of association. Article 17 is more relevant to extract for ready reference as it is referred in the case:

"Article-17. Save as hereby otherwise provided, no shares shall be transferred to any person who is not a member of the company so long as any member is willing to purchase the same at the fair value to be determined in the manner hereinafter provided."

The above provisions did not bar to transfer of the shares to non-member of the company, but it is only says the company should explore the possibility purchasing shares by the existing members of the company before offering it to others. As stated supra, there are only two shareholders before the impugned transfer/allotment of shares. So there is nothing wrong to transfer and allotment of shares to respondents Nos. 1 and 2. Admittedly the petitioner, who is aware proposal of transfer of shares of the second respondent, being a director at the relevant point of time, has not opposed the transfer of shares of the second respondent to the third respondent. Therefore, there is no illegality in transfer of the shares of the second respondent as per the board resolution dated August 25, 2014.

So far as the issue of the board of directors is concerned, articles 29-47 of the articles of association of the company dealt with the constitution of the board of directors, appointment, retirement, etc., as per article 30 Mr. R. Shiv Kumar (the petitioner) and Dr. Subba Rao P. (respondent No. 2) of the first directors of the company. As per article 29 the member of director should not be less than two and not more than 12 including managing director or nominated director and other directors if any. As per article 34 the board of directors shall have power to appoint additional directors subject to the maximum mentioned as sated above. As per article 38: the quorum for a meeting of the board of directors shall be one-third of its total strength (any fraction contained in that one-third being rounded off as one) or two directors whichever as stated supra the petitioner as well as the second respondent are admittedly present during the board meeting in question to transact the business of the company. Accordingly the business of the company was conducted duly following the above articles of association of the company. It is also relevant to point out here that the petitioner is not disputing the appointment Mr. V. Shashi Kumar (respondent No. 3) but sele

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ctively opposing allotment of shares to him for the reasons best known to him. Since we hold that the impugned transfer and allotment are legal, there is no question of application of section 59 of the Companies Act to the facts and circumstances of the case. 16. So far as the issue of the board of directors is concerned, articles 29-47 of articles of association of the company dealt with the constitution of the board of directors, appointment, retirement, etc., as per article 30 Mr. R. Shiv Kumar (the petitioner) and Dr. Subba Rao P. (respondent No. 2) of the first directors of the company. As per article 29 the member of director should not be less than two and not more than 12 including managing director or nominated director and other directors if any. As per article 34 the board of directors shall have power to appoint additional directors subject to the maximum mentioned as sated above. As per article 38: the quorum for a meeting of the board of directors shall be one-third of its total strength (any fraction contained in that one-third being rounded off as one) or two directors whichever is higher. As stated supra the petitioner as well as the second respondent are admittedly present during board meeting in question to transact the business of the company. Accordingly, the business of the company was conducted duly following the above articles of association of the company. It is also relevant to point out here that the petitioner is not disputing the appointment Mr. V. Shashi Kumar (respondent No. 3) but selectively opposing allotment of shares to him for the reasons best known to him. Since we hold that the impugned transfer and allotment are legal, there is no question of application of section 59 of the Companies Act to the facts and circumstances of the case. 17. Learned counsel for the petitioner has relied upon the following cases in support of his case. S.P. Chengalvaraya Naidu v. Jagannath, AIR 1994 SC 853, Dale and Carrington Invt. P. Ltd. v. P.K. Prathapan (2004) 122 Comp Cas 161 (SC); (2004) 54 SCL 601 (SC) and Smt. Claude-Lila Parulekar v. Sakai Papers P. Ltd. (2005) 124 Comp Cas 685 (SC); (2005) 59 SCL 414 (SC). We have perused the facts and circumstances of those cases, and found that the ratio held in those cases would not be applicable to the facts and circumstances of the present case as stated supra. 18. For the aforesaid reasons, we are of the considered view that the petitioner failed to make out any case so as to interfere in the issue by the Tribunal, and thus it is liable to be dismissed. Accordingly, we hereby dismissed the company petition bearing C.P. No. 58 of 2015 (T.P. No. 80/HDB of 2016) with no order as to costs.
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