Niklesh Tirathdas Nihalani vs Shah Poddar Nihlani Organisers (P.) Ltd.

This Appeal emanates from the combined judgment and final Order dated 3rd August 2020 passed by the Adjudicating Authority/National Company Law Tribunal, Ahmedabad Bench, Ahmedabad in Company Appeal No. 34/59/NCLT/2017 in CP No. 24/NCLT/AHM/2018 whereby learned NCLT has rejected Company Appeal No. 34 of 2017 filed under section 59 of the Companies Act, 2013 as barred by limitation, given Section 433 of the Act. By the same common Order, the NCLT has dismissed the Company Petition being CP No. 24 of 2018, filed under sections 241 and 242 of the Companies Act 2013. The Petitioner has failed to prove any ingredient of operation and mismanagement. The Parties are represented by their original status in the Company Petition for the sake of convenience.

Brief facts Company Appeal No. 34 of 2017

2. The Appellant, one of the Shareholders of 'M/S Shah PoddarNihlani Organisers Private Limited &Others'(now on will be referred "SPNOPL') holding 4000 shares applied under section 59 of the Companies Act, 2013 challenging the transfer of the shares of the Respondent No 1 Company to outsiders, i.e. not from the family of existing Shareholders, totally in disregard of the pre-emptive right available to the existing Shareholders under Article13 of AOA, on getting the knowledge when the third party introduced himself as a partner in Respondent No. 1 Company, i.e. 'SPNOPL'.

3. The Respondent No. 1 Company, 'Shah PoddarNihlani Organisers Private Limited &Others', was constituted by three families, namely, Shah family, Nihalani family, and Poddar Family the Company's name itself reflects.

4. Respondent No. 1 Company "SPNOPL" was incorporated by three families to invest in bigger land jointly with its sole purpose to reap the fruits jointly. Their family shareholding percentages were 18%, 31.67% and 50.33%, respectively. The Appellant is representing the Nihlani family, holding 4000 shares, i.e. 8% in the Respondent No. 1 Company.

5. Respondent No. 1 Company has not done any business activity since incorporation except the acquisition of land. The Appellant came to know from other sources that the Company's land has been transferred to some other persons by transferring the Company's shares.

6. The Appellant alleges that there had been an illegal transfer of 3250 shares of Respondent No. 1 from Pratima D Shah to Sanjay Poddar; 1045 shares from Suken Shah to SunitaPoddar; 1000 shares from Sanjay Poddar to Aagam Shah; 1595 shares from Suken Shah to Ramesh Juneja' and 1055 shares from Dinesh Shah to Aagam Shahin complete disregard of Articles of Association about the transfer of shares, more specifically Articles 13 to 20 of AOA. These provisions were not followed by the management and were done fraudulently. As the Company has no business activities and there were no plans to sell or dispose of assets. The Directors have no other role to play in the Company except to do their fiduciary duties, as stated in Section 166 of the Companies Act, 2013.

7. The Appellant alleges that on account of non-compliance of law and procedure on the internal rule of management, namely Articles of Association of the Company; mysteriously, fraudulently and indirectly transferring shares without following necessary procedures as required under the Companies Act 2013 read with erstwhile Articles 13 to 20 of the Articles of Association of the Respondent No. 1 Company.

8. With such acts, they completely changed the Company's shareholding pattern by introducing outsider persons as shareholders without transfer. By the alleged fraudulent transfer, the shareholding of the Shah family was reduced from 18% to 4.11%. But the shareholding Nihlani family's and Poddar family's remained static at 31.67% and 50.33%, respectively. As a result, the newer shareholders (outsiders) acquired 13.89% shareholding in the Respondent No. 1 Company. The Appellant alleges that inducting new shareholders, i.e. outsiders in the family company and providing them 13.89% shareholding is an act of fraud on the Appellant, as an existing shareholder of the Company was not offered shares in the exercise of their pre-emptive right as per Article 13 of the Articles of Association. Appellant was left with no option in the circumstances hence filed a Company Appeal under section 59 of the Companies Act, 2013 for rectification of register of members; being CA No. 34 of 2017.

9. The said Company Appeal No. 34 of 2017 was listed before the learned NCLT on 11th October 2017, 25th October 2017 and 5th December 2007. However, instead of appearing before the NCLT, Respondent No. 2 to Respondent No. 16 issued notices of shareholders meeting on 16th November 2017 and convened EGM and 12th December 2017andsnatched their pre-emptive rights by altering the Article of Association.

10. The said Company Appeal was listed 17 times before NCLT, but Respondents No. 2 to Respondent No. 16 never appeared. Instead of defending before the NCLT in Company Appeal No. 34 of 2017 filed under section 59 of the Companies Act, for rectification of register of members, they convened EGM and with their brutal majority amended the entire set of Articles of Association, in which there is no right offered to fellow Shareholders to exercise their pre-emptive right before transfer of shares.

11. This reflects that they were very much aware of the consequences of their illegal acts. They were conscious of and were under the fear that their wrong deeds, unearthed in Company Appeal No. 34 of 2017 and NCLT and it may reverse the illegal and fraudulent allotment of shares done by them, so with the sole intention to regularise the illegalities, the Articles of Association was amended pending the Company Appeal No. 34 of 2017 for rectification of register of members.

12. Such an act is nothing but an act of grass oppression and mismanagement on the minority shareholder, especially the Appellant, who has already challenged the illegal and fraudulent share transfer before the NCLT. Hence Appellant was left with no other option but to move before the NCLT with the Company Petition No. 24 of 2018 filed under sections 241 and 242 read with Section 244 of the Companies Act, 2013 against alleged acts of oppression and mismanagement.

13. In all such matters, Respondent No. 1 Company is only a symbolic party and not supposed to file a reply unless the Bench/Court specifically orders it. However, in this matter, no other Respondent except the Company has filed a reply. Probably no Director or Shareholders wanted to make a false submission on affidavit in reply as prima facie, no evidence in support of their misdeeds have been available and produced till date.

14. The National Company Law Tribunal heard both the matters jointly and disposed of by the common impugned Order, challenged in this Appeal.

Respondent No. 1 'Shah PoddarNihlani Organisers Pvt Ltd's contention

15. Respondent alleges that the Company was incorporated as a private limited Company by three families doing business of land organiser and developer. The name reflects the name of the families. All three family members have one representative as the Director of the Company. The Company was incorporated on 20th December 2005. The subscribers agreed on the Memorandum and of the Company. Accordingly, the Board of Directors of the Company has made all the transfers of shares during the Financial Year 2012-13 and 2013-14, within the powers provided by the shareholders in Article 13 of the Articles of Association of the Company as provided under the original AOA.

16. Under Article 13 of the Board of Directors has the power to select any desired person in the interests of the Company to admit to membership which is willing to purchase the same at the fair price. Accordingly, the Board of Directors had transferred shares in compliance with Article 13 of the Article of Associations(in short 'AOA') of the Company, in the interest of the Company. Therefore, the transfer of shares as claimed is illegal and made in a non-transparent manner is incorrect. The transfer of shares was carried out during the Financial Year 2012-13. The Company had disclosed the facts in the returns filed for the Annual General Meeting (in short 'AGM' held in 2012 and 2013, showing status as of the members' in respective years Annual General Meeting. The Company had filed all its annual returns for the Annual General Meeting held in 2012 on 8th January 2013 and for the year 2013 on 14th August 2014, in which the effect of transfer of shares has been disclosed. Therefore, the plea taken that the transfer of shares had taken place in a non-transparent manner is away from the truth and incorrect. Moreover, the documents submitted by the MCA are public documents and can be assessed by any person; therefore, the Petitioner could have very well verified the contents of the annual return from the MCA website.

17. This Petition was presented before the learned NCLT on 19th September 2017 under section by disclosing transfer of shares under Section 59 of the Companies Act 2013. Section 59 of the Companies Act 2013 came into force on12th September 2013, and no period of limitation is provided for filing a petition under section 59 of the Companies Act 2013. Section 433 of the Companies Act, 2013 says that the provision of the limitation act applies to the proceedings or appeals before the Tribunal or the Appellate Tribunal. The Petition is filed almost after three years after records made available to the public in the annual return by filing same on the portal of the Ministry of Corporate Affairs for the Financial Year 2012-13 on 8th January 2013 and for the Financial Year 2013-14 on 14th August 2013 by disclosing transfer of shares.

18. The Limitation Act 1963 provides that it is an act to consolidate and amend the law for the limitation of suits and other proceedings and the purposes connected herewith. Moreover, Article 137 of the schedule to the Limitation Act, 1963 provides the limitation period of 3 years dealing with "any other application for which no period of limitation is provided elsewhere in this division".

19. The Petitioner holding is only 8% of equity shares of the total paid-up share capital of the Company, and he is not eligible to file a Petition under sections 241, 242 read with Section 244 of the Companies Act, 2013. Moreover, if hypothetically it is considered that the outcome of CP No. 34 of 2017 is decided in favour of the Petitioner as claimed, even then the purchaser is not going to be the shareholders of the Company and right of the shares will go to the original shareholders, not to the petitioners, in that case also the Petitioner shareholding is not going to be raised beyond 8%. Hence, he is not eligible to file a Petition under sections 241, 242 and 244 of the Companies Act, 2013.

20. We heard the arguments of the learned Counsels for the parties and perused the record. Based on the contention of the parties following issues arise for our consideration:

a. Whether the Application filed under Section 59 of the Companies Act, 2013 is barred by limitation?

b. Whether transfer of shares without providing the pre-emptive right to the existing shareholders was permitted as per the Article of Association and Memorandum of Association of the Respondent No 1 Company?

c. Whether the amended Articles of Association of Respondent No. 1Company extinguishing the existing shareholders' pre-emption right is valid?

d. Whether the transfer of shares to outsiders, in violations of pre-emptive rights of the Appellant under Article 13 of AOA, amounts to Oppression and Mismanagement under sections 241 and 242 of the Companies Act,2013?

Discussion and findings on Issues 1,2,3&4

21. Admittedly, Company Appeal No. 34/59/NCLT/AHM/2017 was filed u/s 59 of the Companies Act 2013 to rectify the Register of Members on 19th September 2017. After that, Appeal was listed before the National Company Law Tribunal on 11th October 2017, 25th October 2017 and 5th December 2017. Pending this Appeal, suddenly, Respondents convened EGM dated 12th December 2017, seeking replacement of the entire set of Articles of Association of the Company with the new set of AOA. Consequently, the Shareholders' pre-emptive rights, in case of transfer of shares, were removed. The Appellant contends that this was a deliberate attempt with its sole motive to frustrate the outcome of the Company Appeal No. 34 of 2017. The learned Counsel for the Appellant argues that amendment in the AOA is made to view that if the transfer of shares to the outsiders, i.e. outside the family, is set aside by the NCLT, then the Respondent may affect those transfers again under the pretext of the amended Articles of Association.

22. The learned Counsel for the Appellant also argued that he had moved an Application before the NCLT seeking a stay on EOGM, but the time got wasted. As a result, EOGM was over, and IA becomes infructuous.

23. Respondent No. 1, in its response to Appeal, has filed an affidavit wherein it is stated that;

Para 11 "I further see that the Board of directors of the Company has made all the transfer during the financial year 2012-13 within the powers provided by the shareholders in the article 13 of the Articles of Association of the Company same can be verified from at page number 86 of the original Application submitted by the applicant, same is reproduced for understanding.

Article 13 "save as hereinafter provided no shares shall be transferred to a person who is not a member of company so long as any member or who is desirable in the interest of the company admitted to membership is willing to purchase the same at the fair price selected by directors as one whom it is desirable in the interest of the company admit to membership is willing to purchase the same at the fair price."

24. Respondent contends that as per Article 13 of the Articles of Association of the Company, the Board of Directors had the power to select any desired person in the interest of the Company to admit to membership which is willing to purchase the same at the fair price.

25. Respondent No. 1 has further stated in its reply that after taking extreme care, considering all the Stakeholders' overall benefit, the Company's Board of Directors had transferred the shares. At the time of incorporation, the subscribers, with their mutual consent, have vested powers in the hands of the Directors, who represented the respective families to transfer shares in the interest of the Company to a Member of the Company or any other person selected by the Board of Directors. Since the Board of Directors could not find a suitable person, thus the saving clause under Article 13 of AOA comes into play, and shares were transferred under powers vested in the Directors of the Company.

26. Respondent No. 1, in its reply, has further stated that the extraordinary general meeting(in short 'EOGM') was called on the request of the Shareholders of the Nehlani family for altering Articles of Association in tandem with the provisions of the newly enacted Companies Act,2013 for better corporate governance, by sending 21 days' notice to all the shareholder's including the applicant. After getting the notice, the Petitioner had filed an interim Application (IA No. 395 of 2017) before the NCLT seeking a stay on holding EOGM, but it was not granted.

27. Based on the pleadings, it is undisputed that the amendment in the Articles of Association of the Company was made during the pendency of Appeal before NCLT, filed under section 59 of the Companies Act 2013. However, the Respondent Company pleaded that the amendment was incorporated to align AOA in line with the newly incorporated Companies Act 2013.

28. Before analysing further, it is necessary to go through the relevant Articles of Association with the amendment incorporated.

29. The Appellant has filed the copy of the order sheet of NCLT of the Company Appeal No. 34/59/NCLT/AHM/2017 dated 25th October 2017, which shows that learned NCLT admitted the Appeal and after that time was provided to the Respondents to file a reply. Respondent No. 1Company gave an undertaking that Company will not affect the transfer of shares until the next date of hearing.

30. On perusal of the order sheet of the NCLT dated 5th December 2017, it appears that the NCLT had extended the validity of the Order dated 25th October 2017 till further orders.

31. However, after making an appearance in Company Appeal No. 34/59/NCLT/AHM/2017 and giving an undertaking that the Company is not going to affect the transfer of shares, the Articles of Association was amended in the EOGM dated 12th December 2017. It is also an admitted fact that the Appellant had moved an IA seeking a stay of EOGM. But, the learned NCLT, keeping in consideration the undertaking of Respondent No. 1, had not stayed the EOGM. Thus, Respondent can not defend that the Appellant had filed an IA seeking a stay of EOGM, but it was not granted. Therefore, undisputedly the entire set of Articles of Association has been amended during the pendency of the Appeal before NCLT, filed under section 59 of the Companies Act 2013.

32. The amended Articles of Association provides that the shares in the capital of the Company shall be under the control of the Directors, who may issue, allot or otherwise dispose of the same, or any of them to such persons, in such proportion and on such terms and conditions and either at a premium or at par and at such terms as they may from time to time think fit.

33. Prior to amendment,Article13 specifically provided that "no shares shall be transferred to a person who is not a member of the company".

34. The learned Counsel for the Respondent contends that original Article 13 itself provides a saving clause. It says that no shares shall be transferred to a person who is not a member of Company so long as any member or any person selected by directors as one whom it is desirable in the interest of the Company to admit to membership is willing to purchase the same at the fair price. '

35. Respondent No. 1 contends that the saving clause is generally used in a repealing act to preserve rights and claims otherwise lost.

36. Respondent further argued that Article 13 of the AOA of the Company authorises the Board to select any person who is desired in the interest of the Company to admit to membership, and is willing to purchase the same at a fair price. The subscribers to the AOA have vested such powers in the hands of Directors.

37. The Appellant has annexed the original Articles of Association (pages 81 to 95 of the Appeal Paper). Accordingly, the relevant part of 'AOA' that deals with the transfer and transmission of shares is on pages 83 and 84 of the Appeal Paper Book is reproduced as under:

"TRANSFER AND TRANSMISSION OF SHARES

Restriction on transfer of share

13. Save as hereinafter provided no share shall be transferred to a person who is not a member of Company so long as any Member or any person selected by the Directors as one whom it is desirable in the interest of the Company to admit to membership is willing to purchase the same at the fair value.

Directors' discretion to decline registration of any transfer

14. The Directors may at any time in their absolute and uncontrolled discretion and without assigning any reason whatsoever, decline or acknowledge any proposed transfer of shares and their power or discretion to refuse such transfer shall not be affected by the fact that the proposed transferee is already a registered member of the Company. Without prejudice to the generality of the aforesaid power the Directors may in particular so decline in any case in which the Company has a lien upon the shares [for any of them] or whilst any shareholder executing the transfer is either alone or jointly with any person or persons indebted to the Company on any account whatsoever or whilst any moneys in respect of the shares desired to be transferred [or any of them] remain unpaid or unless the transfer is approved by the Board. The registration of the transfer shall be conclusive evidence of the approval of the transferee by the Board.

Transfer of shares how to be made

15. Except where the transfer is made pursuant to Article 20 the person proposing to transfer any share [hereinafter called "proposing transferor"] shall give notice in writing [hereinafter called "the Notice"] to the Company that he desires to transfer the same. Such notice shall specify the sum he fixes as fair value of the shares and shall constitute the Directors as agent for the sale of the shares to any member of the Company or person selected as aforesaid willing to purchase the shares [hereinafter called the "Purchasing Member"]at a price so fixed or at the option of the purchasing member at the fair value to be fixed in accordance with the Article 17 hereinafter appearing. A transfer notice may include several cases and in such case it would operate as if it were a separate notice of each share. A transfer notice shall not be revoked except with the sanction of the Directors.

Shares comprised in the transfer notice how to be dealt

16. Except where the transfer is made pursuant to Article 20, the shares comprised in any transfer notice shall be dealt with as under:

(a) The Board shall forthwith give notice to all the members of the Company and specify the price of the shares to be sold and invite each of them to state in writing within 7 days from the date of the said notice whether he is willing to purchase any and if so what maximum number of the said shares.

(b) After the expiration of said 7 days the Board shall allocate the said shares comprised in the transfer notice to or amongst the members or member who shall have expressed their or his willingness to purchase as aforesaid, but so that in case of competition, they shall rank for acceptance paripassu in proportion to shares held by them and if any shares cannot be apportioned, such shares shall be offered to them in Order determined by lots and directors shall cause such lots to be drawn accordingly.

(c) If shares are not taken up by the person to whom they are offered in accordance with the foregoing provisions and the Company finds a purchasing member within the space of three months after the expiration of the said 7 days it shall give notice thereof to the purchasing member and proposing transferor who shall be bound upon payment of their value as fixed in accordance with Article 17 hereof to transfer the shares to such purchasing member or members.

Fair value of the shares to be fixed by the Auditor

17. The fair value of the shares shall be the fair value fixed by the Directors. If the purchasing member wants that the fair value of the shares notified for the transfer shall be fixed by the Auditor of the Company, the Directors shall refer the matter to the Auditors of the Company and Auditors shall certify in writing the sum which in their opinion is the fair value and while so certifying, the Auditors shall be considered to be acting as experts and not as arbitrators and accordingly the provisions of the Indian Arbitration Act shall not apply.

Procedure when proposing transferor makes default in transferring

18.[1] In any case where the proposing transferor after having become bound as aforesaid makes default in transferring, the Directors may receive the purpose money and the proposing transfer shall be deemed to have appointed any one Director or the Secretary of the Company as his agent to execute transfer of shares to the purchasing members and upon the execution of such transfer, the Company shall hold the purchase money in trust for proposing transferor. The receipt of the Company for the purchase money shall be a good discharge to the purchasing member and after his name being entered in the Register of Members in purported exercise of the aforesaid power, the validity of the proceedings shall not be questioned by any person.

[2] If share Certificate/Certificates in respect of the shares transferred as mentioned above is/are not delivered to the Company by the former holder of such share/shares distinguishing it in such manner as they may think fit from the certificate/certificates not so delivered.

Right of the proposing transferor when the Company does not find a purchasing member

19. If the Directors shall not within the space of the said three months find a purchasing member after giving notice in the aforesaid manner, the proposing transferor share any time within three months afterwards be at liberty subject to Article 14 hereof to sell and transfer the share to any person and at a price not less than the fair value as fixed in accordance with Article 17 hereof."

[verbatim copy]

38. Original Article 13 of AOA lays the conditions for the transfer of shares. These are; a. That no shares shall be transferred to a person who is not a member of the Company; b. So long as any member or any person selected by the directors as one who is desirable in the interest of the Company; c. Admitted to membership, is willing to purchase the same at a fair value.

39. Clause 17 of the original Articles of Association lays down the procedure for fixing the fair value of shares. It provides that the fair value of shares shall be the fair value fixed by the Directors. Further, that the Auditor of the Company shall fix the fair value of the shares notified for the transfer, the Directors shall refer the matter to the Auditors of the Company. Auditors shall certify in writing the sum which, in their opinion, is the fair value. While so certifying, the auditors shall be considered to be acting as experts and not as Arbitrators and accordingly, the provisions of the Indian Arbitration act shall not apply.

40. Based on the above discussion, it is clear that the Respondent No 1 Company was constituted by three families, namely Shah, Nihalani and Poddar, as the name reflects. In case of transfer of shares of the Company, the Articles of Association provided pre-emptive rights to the shareholders. However, the alleged transfer of shares was made to the outsiders, i.e. not to the Company's existing shareholders and without giving them the right under Articles of Association to exercise their pre-emptive right. The Appellant, being aggrieved by the said transfer of shares and getting the knowledge of the transfer, had filed Appeal U/S 59 of the companies act 2013 before the NCLT. However, during the pendency of the Appeal, the Respondents called EOGM and replaced the entire sets of Articles of Association of the Company and removed the pre-emptive right given to the existing shareholders. Therefore, the transfer of shares to outsiders was not permitted under the Articles of Association of the Company. Therefore, it is evident that the Respondents have transferred shares in complete violation of the Articles of Association of the Company. Respondent's contention cannot be accepted that the Articles of Association itself provided the right to transfer shares outside the family in the interest of the Company because no procedure was adopted for the transfer of shares as provided under Articles 13 to 19 of the Association Articles of Association of the Company. Article 13 of the Articles of Association permits the transfer of shares at a fair price. How the fair price is to be obtained is also stated in the Articles of Association. However, no evidence is produced with regard to obtaining the fair value of shares by the Board of Directors. Hence, even on the stand taken in the affidavit of the Company that the shares have been transferred as per Article 13 is unsustainable because the Company has failed to produce evidence of obtaining fair value as stated in Articles 14 to 20 of the Articles of Association.

41. The Articles of Association provides that "if the Board of Directors were not able to find a suitable person" Articles 14 to 20 of Articles of Association mandates to find out the suitable person from fellow shareholders by giving them pre-emptive right to purchase shares on fair value. It is admitted that they have not complied with Articles 14 to 20 of the Articles of Association.

Limitation point

42. Respondent No. 1 contends that the entire transfer of shares as claimed is illegal and carried out in a non-transparent manner during the Financial Year 2012-13, and the Company had disclosed the facts in the returns filed for the AGM held in years 2012 and 2013. However, the documents submitted with the MCA are public documents and can be assessed by any person. Therefore, the Petitioner could have very well verified the contents of the annual return from the MCA website.

43. Section 59 of the Companies Act 2013 came into force on12th September 2013, and no limitation is provided for filing a Petition/Appeal under Section 59 of the Companies Act. However, Section 433 of the Companies Act 2013 says that the provisions of the limitation act are applicable to the proceedings or appeals before the Tribunal or the Appellate Tribunal. Section 433 came into effect on1st June 2016. This Petition was presented before the NCLT on 19th September 2017, i.e. after three years of transfer of shares and records submitted to the Registrar of Companies on 14th August 2014. Article 137 of the schedule to the Limitation Act, 1963 provides the limitation period of 3 years dealing with "any other application for which no period of limitation is provided elsewhere in this division".