Axis Nirman and Industries Ltd. & Anr. vs M/s Hotel Birsa Pvt. Ltd. & Ors.

INDEVAR PANDEY, MEMBER (T)

This appeal has been filed under Section 421 of the Companies Act, 2013, challenging the judgment and order dated April 7, 2017, passed by the National Company Law Tribunal (NCLT), Kolkata Bench, in Company Petition No. 370 of 2010. In its order, the NCLT allowed the petition filed by Respondent No. 2, Adbhut Vincom Pvt. Ltd., and directed the cancellation of 210,000 equity shares of Hotel Birsa Pvt. Ltd. (Respondent No. 1) allotted to the appellants, Axis Nirman and Industries Limited (Appellant No. 1) and Axis Overseas Limited (Appellant No. 2). Additionally, the NCLT ordered the refund of Rs.2,10,00,000/- paid by the appellants for these shares, on the ground that the resolutions to increase authorized share capital and the allotment of shares were not compliant with the Companies Act, 1956 (hereinafter referred to as ‘Act’).

The appellants here assert that the NCLT’s findings ignored material evidence, failed to recognize procedural compliance, and caused them undue financial and reputational harm. They contend that their investments were lawful, made in good faith based on representations by the company’s promoters, and utilized to revive the company’s stalled projects.

The facts of the case are as follows:

These changes in the capital structure were alleged to have been carried out without proper statutory compliance, forming the basis of the dispute raised in Company Petition No. 370 of 2010.

Learning about the appellants’ investments and consequent dilution of its shareholding, Respondent No. 2, Adbhut Vincom Pvt. Ltd. which held 49% shares (2,08,250 shares) of Hotel Birsa, filed Company Petition No. 370 of 2010 in May 2010 before the NCLT wherein he alleged the following:

The appellants in the present case, on their part, filed Company Petition No. 5 of 2016 on 21.09.2016 under Sections 241 and 242 of the Companies Act, 2013, alleging Oppression and Mismanagement of the company by Respondents Nos. 2/ Sh. Prem Rajesh Soy, Respondent No.3/ Smt. Salini Soy, and Respondent No.4/ Adbhut Vincom Pvt. Ltd. and misuse of the Rs.2.10 crore invested by the appellants and failure to protect the appellants’ rights and interests as shareholders.

The appellants sought a joint hearing of CP No. 370 of 2010 and CP No.5 of 2016, given the interrelated issues and shared parties. However, the NCLT denied this request of appellants.

On November 5, 2016, the appellants received a notice for an Annual General Meeting (AGM) scheduled on December 30, 2016. The appellants challenged the notice, citing that:

Appellant No. 2 filed I.A. No. 81 of 2016 before the NCLT, seeking an injunction to prevent the AGM. However, the NCLT deferred its decision on this application, choosing to resolve the issue alongwith CP No. 370 of 2010.

The NCLT passed its order in CP No. 370 of 2010 on 07.01.2017, holding that:

The appellants’ total subscription amount of Rs.2.10 crore was to be refunded by Respondent No. 1.

Aggrieved by the aforesaid order of the NCLT the appellants have filed this appeal.

It is submitted by Ld. counsel for Appellants that Respondent No. 1, M/s Hotel Birsa Pvt. Ltd., through its Director, Mr. Prem Rajesh Soy (now deceased), approached Housing and Urban Development Corporation (HUDCO) in May 2005 to seek financial assistance for completing and renovating its hotel project in Ranchi. HUDCO initially sanctioned a term loan of Rs. 5.73 crores, and later revised it to Rs. 5.58 crores on 29.03.2006. However, due to cost overruns and delays, the company faced acute financial challenges, leading the loan account to be categorized as a Non-Performing Asset (NPA). With no other immediate options, Hotel Birsa urgently needed funds both to complete the hotel project and to repay the term loan.

The counsel for Appellants highlighted that the shareholding structure of Hotel Birsa at this stage was 51% held by Mr. Prem Rajesh Soy and Mrs. Shalini Soy, while 49% was held by Adbhut Vincom Pvt. Ltd. (Respondent No. 2). Despite being a substantial stakeholder, Adbhut Vincom exhibited no interest in supporting the company during its financial difficulties. Instead, it executed a Memorandum of Understanding (MOU) on 29.09.2009 to sell its entire shareholding of 2,08,250 shares, representing 49% equity, to one Libra Retailers Pvt. Ltd.. Libra Retailers paid Rs. 1 crore as an advance, and the MOU, originally valid for 60 days, was mutually extended several times, with the last extension ending on 16.02.2010.

The Counsel further submitted that, in 2009, Mr. Prem Rajesh Soy, erstwhile Director of Hotel Birsa, sought financial assistance from the appellants, Axis Nirman and Industries Ltd. (formerly Peacock Pigments Pvt. Ltd.) and Axis Overseas Ltd., to address the company’s critical liquidity needs. The appellants were approached, because Adbhut Vincom had demonstrated no intention of supporting the company or fulfilling its financial obligations. Mr. Soy assured the appellants that their investments would be safeguarded, and they would be issued shares commensurate with their financial contributions.

The counsel for appellant states that on 16.02.2010, the Income Tax Department conducted a raid at the premises of Adbhut Vincom, seizing its share certificates and related documents. This unforeseen development disrupted the transfer of shares to Libra Retailers under the MOU. Adbhut Vincom subsequently wrote to Hotel Birsa on 17.03.2010, requesting duplicate share certificates, but the company denied this request, citing that such an issuance would contravene statutory provisions. From this point onward, Adbhut Vincom stopped participating in board meetings, as it had effectively exited the company through its agreement with Libra Retailers.

The Counsel submitted that a board meeting of Hotel Birsa was held on 18.01.2010 in Kolkata, where it was resolved to convene an Extraordinary General Meeting (EOGM) on 18.02.2010 to deliberate on increasing the company’s authorized share capital and amending the Articles of Association. Notices for the EOGM were duly sent to all shareholders, including Adbhut Vincom, via Under Postal Certificate (UPC) mode, which was a valid method of service under Section 53 of the Companies Act, 1956. Despite receiving the notice, Adbhut Vincom did not attend the EOGM, as it had already agreed to sell its shares.

The Appellants emphasize that during the EOGM held in Ranchi on 18.02.2010, the Articles of Association were amended to enable the company to issue new shares for raising funds. In a subsequent board meeting held on 19.02.2010 in Kolkata, the urgent need for Rs. 90 lakhs as working capital was discussed. To address this requirement, the board resolved to issue 90,000 equity shares of Rs. 100 each, offering these first to existing shareholders on rights basis. The terms clearly stated that failure to respond by the specified deadline of 11.03.2010 would be treated as rejection of the offer. The intimation about the aforesaid rights offer was sent to Respondent 2 /Adbhut Vincom through UPC mode. However, Adbhut Vincom, neither responded to the offer nor attended the subsequent board meeting, which was held in Kolkata on 19.03.2010, wherein it was resolved that the Peaccock Pigments Pvt. Ltd. (Now known as Axis Nirman & Industries Ltd.)/Appellant 1 has been allotted 90000 equity shares of Rs. 100/- each for a consideration of Rs. 90 lakhs.

The counsel for Appellants further state that another board meeting on 14.04.2010 approved the issuance of 1,20,000 additional shares at Rs. 100 each, valued at Rs. 1.2 crores, to Axis Overseas Ltd. to meet further financial requirements. Invitations for subscription were sent to all shareholders, including Adbhut Vincom, through UPC mode with a deadline of 06.04.2010. Once again, Adbhut Vincom neither responded nor expressed interest in subscribing to the shares. Consequently, these shares were also allotted to the appellants, who infused Rs. 1.2 crores into the company.

The Appellants state that these investments significantly altered the shareholding structure of Hotel Birsa. The new shareholding stood as follows: Mr. & Mrs. Soy – 34%, Adbhut Vincom – 32.75%, and the appellants (Axis Nirman and Axis Overseas) – 33.25%. The infusion of Rs. 2.10 crores by the appellants stabilized the company, enabling it to settle outstanding debts, including the HUDCO loan, and complete its hotel project.

It is further submitted that the allotment of shares to the appellants was lawful, proper, and carried out following statutory requirements. Adbhut Vincom had already divested its interest in the company through the MOU with Libra Retailers and was estopped from challenging the allotments. The petition filed by Adbhut Vincom, seeking to cancel the share allotment, was an afterthought aimed at regaining control over the company after it was revived through the appellants’ investments.

The Appellants contend that the National Company Law Tribunal (NCLT), Kolkata Bench, erred in cancelling the allotments based on the invalidity of service via UPC mode. This finding ignored the statutory validity of UPC service under Section 53 of the Companies Act, 1956, as supported by judicial precedents. The appellants have relied on Judgments of Hon’ble Supreme Court in following cases: V.S. Krishnan & Ors. v. Westfort Hi-Tech Hospital Ltd. & Ors., (2008) 3 SCC 363; Shri Shashi Kumar v. Shri Dharam Pal Sharma & Anr., 1981 SCC Online Del 14; and Mohd. Asif Nazeer v. West Watch Company, 2020 (17) SCC 136, in support of their arguments.

In conclusion, the Appellants pray that this Hon’ble Tribunal set aside the NCLT’s order and restore their status as shareholders of Hotel Birsa Pvt. Ltd. Alternatively, they seek a refund of their investment of Rs. 2.10 crores, along with interest at the rate of 15% per annum from the date of investment until realization.

Ld. Counsel for Respondent states that the present appeal challenges the order dated 07.04.2017 passed by the Hon’ble NCLT, Kolkata, in CP 370/2010 under Sections 397, 398, 399, 402, and 406 of the Companies Act, 1956. The NCLT, after an in-depth analysis of facts, evidence, and statutory provisions, concluded that the actions of the Appellants were oppressive, illegal, and intended to dilute the shareholding and management rights of the Respondent. The order effectively annulled all impugned resolutions, including those relating to the alteration of the Articles of Association (AoA) and Memorandum of Association (MoA); increase in authorized share capital; increase in paid up capital; and the subsequent allotments of 90,000 and 1,20,000 shares to the Appellants.

Counsel for Respondent highlights that the Appellants unilaterally increased the authorized share capital of M/s Hotel Birsa Pvt. Ltd. (hereinafter “the Company”) from Rs.4,25,00,000 to Rs.10,00,00,000 without adhering to the mandatory requirements under the Companies Act, 1956. In this regard he highlighted the following points:

Counsel for Respondent further submits that the notice dated 18.01.2010, calling for the EoGM, lacked transparency and procedural compliance. The notice stated two agenda items:

Counsel for Respondent emphasizes that the Respondent, holding 49% of the company’s shares, was deliberately excluded from the decision-making process. The Appellants claim that the notice for the EoGM was served via "certificate of posting," a method that has been widely discredited for its susceptibility to misuse. Judicial precedents, including Judgment of Hon’ble Supreme Court in M.S. Madhusoodhanan and Ors. v. Kerala Kaumudi Pvt. Ltd. [(2004) 9 SCC 204], which emphasize that the burden of proving proper service lies with the sender, which the Appellants failed to discharge. No dispatch register, postal receipts, or other corroborative evidence was produced.

Counsel for Respondent argued that the EoGM itself was fraught with several procedural irregularities:

Form 5, filed with the Registrar of Companies (RoC) on 16.03.2010, failed to include any documentation or evidence of a valid resolution amending the AOA. This omission further underscores the illegality of the process.

Counsel for Respondent contends that the Appellants unlawfully issued additional shares in two tranches following the unauthorized increase in share capital:

Counsel for Respondent states that these issuances were in clear violation of Section 81 of the Companies Act, 1956, which mandates that further shares must first be offered to existing shareholders on a pro-rata basis. The Respondent was entitled to a proportionate offer of these shares but was deliberately denied this right.

Counsel for Respondent asserts that the issuances were not undertaken for any bona fide corporate purpose. The Appellants failed to demonstrate how the Rs.2.10 crores raised through these issuances were utilized in the interest of the company. The sole intent was to dilute the Respondent’s shareholding from 49% to 32.75% and consolidate control over the company in favor of the Appellants.

Counsel for Respondent draws attention to the judgment in Dale and Carrington Investment (P) Ltd. v. P.K. Prathapan [(2005) 1 SCC 212], which held that issuing shares with the sole motive of diluting a shareholder’s stake constitutes oppression. Similarly, in Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd. [(1981) 3 SCR 698], the Hon’ble Supreme Court emphasized that directors must act in good faith and for a proper purpose while issuing shares.

Counsel for Respondent submits that the minutes of the EoGM dated 18.02.2010 were fabricated to include a resolution amending the AOA by special resolution. This alteration was a clear afterthought to cover up the procedural defects. The manipulation of corporate records further highlights the mala fide intent of the Appellants.

Counsel for Respondent emphasizes that all notices, including those for the EoGM and subsequent Board meetings, were deliberately served in a defective manner to exclude the Respondent. The reliance on certificate of posting and the absence of corroborative evidence undermines the Appellants' claims of valid service.

Counsel for Respondent states that the NCLT, recognizing the illegality of the share issuances, rightly directed the refund of Rs.2.10 crores (Rs.90 lakhs + Rs.1.2 crores) to the Appellants without interest. The claim for interest is untenable, as interest cannot be awarded for amounts invested in furtherance of illegal transactions.

Counsel for Respondent relies on the judgment of Hon’ble Supreme Court in Ashok Kapil v. Sana Ullah [(1996) 6 SCC 342], which held that a party cannot benefit from its own wrong. Similarly, Hon’ble Supreme Court in Reliance Cellulose Products Ltd. v. ONGC Ltd. [(2018) 9 SCC 266], ruled that restitution, not compensation, is the appropriate remedy for transactions tainted with illegality.

Counsel for Respondent concluded with the assertion that the Appellants’ actions, including the unauthorized increase in share capital, illegal share issuances, and manipulation of corporate records, constitute clear oppression under Section 397 of the Companies Act, 1956. The NCLT’s order is legally sound, equitable, and in line with judicial precedents. The Respondent respectfully prays that this Appellate Tribunal dismiss the appeal with costs to deter such oppressive practices and uphold the principles of corporate governance.

Ld. Counsel for Respondent no. 3 stated that she was the Promoter/Director of M/s. Hotel Birsa (P) Ltd. at the relevant time, holding the position in the Board of the Company along with her husband Late Mr. Prem Rajan Soy, along with whom she held 51% of shareholding of the Respondent no. 1 Company at the time of filing of the Company Petition bearing no. 370/2010 before the Hon'ble NCLT. She has continued as promoter Director of the Company since inception.

The counsel submitted that through the present Appeal the Appellants have wrongly challenged the impugned order dated 07.04.2017, passed by the Hon' ble NCLT, Kolkata Bench in the company petition bearing C.P. no 370 of 2010 filed by the Respondent no. 2 herein under section 397/398 of the Companies Act, 1956, ("the Act") on the frivolous and illegal grounds and thus liable to be dismissed with hefty cost.

The counsel stated that Hon'ble NCLT has allowed the Petition filed by the Respondent no. 2 (Adbhut Vincom Pvt. Ltd.) herein and passed the impugned order that the actions of the majority shareholders (Respondent no. 3, Mrs. Salini Soy) were oppressive and falls under statutory violation.

That being the-Promoter/Director of the Company, the Respondent no. 3 being the majority shareholder, only had the right to challenge the impugned order passed by the Hon'be NCLT and as the same was not challenged by the Respondent no. 3 herein, within the statutory prescribed period, under the Act, the same attained finality and the instant Appeal is non-est.

Ld. counsel for Respondent No.3 argued that through the instant Appeal, the Appellants are trying to take a derivative action on behalf of the Company and the Respondent no. 3, to file the instant Appeal, as the Appellants have no right to file the same as the Appellants are not directly being affected by the Impugned Order as allegedly claimed by them stating frivolous grounds in the Appeal, without any authority to do so. He further submitted that a derivative action cannot be taken by the Appellants to file the instant Appeal, being against the law of the land.

Ld. counsel further submitted that it is apposite to mention that as the Appellants are a third party and has no right to challenge the impugned order passed by the Hon'ble NCLT, which was passed against the majority shareholder, without any rightful authority to do so and the same only being done for an ulterior motive.

Finally the counsel for R-3 submitted that the Appellant, cannot be allowed to take benefit of the derivative action being taken on behalf of the Respondent no. 3 and get benefited for its own wrong doing and illegal action by way of allowing the instant appeal. The counsel stated that in light of the above circumstances and arguments the instant appeal deserves to be dismissed with heavy cost.

We have heard the Learned counsels in detail, examined the voluminous records and have gone through the written submissions of appellants, Respondent No.2 and Respondent No.3. All parties were asked to submit their written submissions but the same has been submitted by appellants, Respondent No.2 and Respondent No.3 as these were the contesting parties.

We find it essential to trace the sequence of legal proceedings that have led to the present appeal. The current dispute arose when Adbhut Vincom Pvt. Ltd. (Respondent No. 2) filed Company Petition No. 370 of 2010 before the National Company Law Tribunal (NCLT), Kolkata Bench, alleging oppression and mismanagement in M/s Hotel Birsa Pvt. Ltd.. Respondent No.2 challenged the increase in authorized share capital and the allotment of 2,10,000 shares to Axis Nirman and Industries Ltd. & Anr. (the Appellants herein), claiming that these actions were taken without proper statutory compliance and were aimed at diluting its shareholding. The NCLT, in its impugned order dated 07.04.2017, ruled in favor of Respondent No. 2, holding that the share capital increase and allotment were unlawful. Consequently, the NCLT canceled the share allotments to the appellants and directed a refund of the amount paid by them. Additionally, the NCLT ordered the forced sale of Respondent No. 2’s shares to Libra Retailer Pvt. Ltd., which was presented as a resolution to the ongoing dispute.

Aggrieved by the direction for mandatory sale to Libra Retailers Pvt. Ltd., Respondent No. 2 filed Company Appeal (AT) No. 162 of 2017 before the this Appellate Tribunal, arguing that the forced sale of its shares was beyond the relief sought and was unjustified. This Appellate Tribunal, in its order dated 11.08.2017, ruled in favor of Respondent No. 2 and set aside the forced sale, holding that such a direction was beyond the scope of the NCLT’s jurisdiction and not legally tenable. This Appellate Tribunal upheld the cancellation of the appellants’ share allotments, affirming that the increase in share capital and subsequent allotment was conducted in an oppressive and illegal manner, violating corporate governance norms and statutory provisions.

The appellants, in Company Appeal (AT) No. 175 of 2017, contested the cancellation of their share allotments, asserting that they were legally valid and should not have been annulled. However, this Appellate Tribunal, in its order dated 23.08.2017, dismissed their appeal relying on its findings in Company Appeal (AT) No. 162 of 2017.

The appellants, thereafter, filed an appeal, Civil Appeal No. 2604 of 2018 before the Hon’ble Supreme Court arguing that the NCLAT had failed to properly examine the validity of the share cancellations and disposed of their case without a reasoned adjudication. The Hon’ble Supreme Court, in its order dated 23.07.2018, found merit in the appellants’ argument and ruled that Company Appeal (AT) No. 175 of 2017 should have been adjudicated solely on the primary grievance of appellants, namely, cancellation of the shares allotted to them which has not been done by the Ld. Appellate Tribunal. Hon’ble SC remanded the matter back to this Tribunal with a direction to dispose off the Company Appeal (AT) No. 175 of 2017 on merits after hearing all the parties.

We accordingly first take up the matter of locus of the appellants to challenge the impugned order which has been pleaded by Respondent No. 3, Salini Roy. She argues that the appellants lack authority to file this appeal, as only she had the right to challenge the order, which has attained finality since she did not appeal within the statutory period. She further claims that the appellants are improperly pursuing a derivative action on her behalf.

However, we find no merit in her plea to dismiss the appeal on these grounds. The maintainability of this appeal is not in question, as the Hon’ble Supreme Court has already remanded the matter for adjudication on its merits. Accordingly, her request to dismiss the appeal at the threshold is rejected, and the case is taken up for consideration on merits.

The key issues to be determined in this case are the following:

The issues in Serial number (i) and (ii) are interlinked and they would be examined together.

The main contention of the appellant is that the amendments to AoA and MoA were carried out in accordance with relevant provisions of the Companies Act, 1956 and therefore the impugned order needs to be set aside by this Appellate Tribunal.

Per contra the contention of Respondent No.2 and Respondent No.3 is that the impugned order is a well-reasoned order passed by the Ld. NCLT and the same needs to be upheld by this Tribunal. This appeal is a waste of judicial time and the appeal needs to be dismissed with cost.

In this regard, we take a look at the relevant Sections of the Act relating to amendment of AoA and MoA:-

We can see from the Section 31 that amendment to AoA requires a special resolution. Similarly, Section 16 (3) of the Act provides that other provisions contained in the memorandum including those relating to the appointment of a Managing Director, or Manager may be altered in the same manner as the articles of the company. Other items in memorandum which are covered in any provision of the Act can be altered in the manner provided for the same. Section 17 thereafter has listed out cases wherein special resolution is required for alteration of memorandum. Section 94 (1) prescribes the procedure for increasing the authorised share capital of the company.

It is clear from the aforesaid Section that the companies requiring increase in authorised share capital require an enabling provision in the AoA. In case such an enabling clause is not there in the AoA, the AoA has to be amended. Such an amendment requires a special resolution to be passed by Members of the Company in the Extra Ordinary General Meeting (EoGM) as prescribed by Section 31 (1) of the Act.

In this regard, we have a look at the notice issued for EoGM of the company dated 18.02.2010 is reproduced below:

We notice that both the agenda items proposed in the notice dated 18.02.2010 are proposed as ordinary resolution. However, in the explanatory statement below the notice it is mentioned that proposal to approve Item No.2 is in accordance with Section 17 of the Act. We also notice that Section 17 provides for special resolution. It is clear from the same notice that matters requiring approval by special resolution have been proposed as ordinary resolution in the notice to members.

It appears on the same day another notice for EoGM was issued having additional agenda items. The second notice is reproduced below:

This notice has been disputed by the Respondent No.2 claiming that the same has been created by the appellants and Respondent No.3 when they discovered that MoA cannot be amended without amending enabling clauses of AoA.

From the above we observe the following:

The relevant portion of AoA of the company are extracted below:

In the ‘capital’ portion of AoA an insertion has been made in para 5 with notes thereon that the same has been inserted at EGM held on 18.02.2010. We have seen earlier that in the first notice for EoGM issued on 18.01.2010 there is no such agenda for amendment of AoA. The same has been proposed through another notice which has been issued on the same day. The notice for the same has been sent through ‘under Certificate of Posting’ to the three members viz. Mr. Prem Rajesh Soy, Mrs. Shalini Soy (Respondent No.3) and M/s Adbhut Vincom (Respondent No.2).

We now have a look at the minutes of the EoGM held on 18.02.2010 which are extracted below:

We observe that the minutes do not reflect agenda wise discussion. The members of the company should have taken up agenda Item Nos. 1, 2 and 3 (A) & 3 (B) specifically and voted on each of the specific resolution. The minutes seems to have been prepared to incorporate the details of agenda items of second notice and first notice together. In fact, the first agenda should have been the amendment to the Articles of Association followed by amendment to Memorandum of Association and this should have been followed by raising the authorised capital of the company.

It appears that the appellants and Respondent No.3 when they realise that they could not have increased the authorised share capital without amending the AoA they created the second set of documents including minutes of the EoGM. However, they could not put the items agenda wise as the first two items in that case would have been invalid in absence of the first action requiring amendment to Articles of Association. All other items had to be subsequent to amendment of articles.

The issuance of two notices for same EoGM and preparation of minutes of meeting in a complex manner instead of making it agenda wise creates serious doubts in our mind regarding the actual issuance of the second notice.

Respondent No.2 is 49% shareholder of the Hotel Birsa Pvt. Ltd./Respondent No.1 before the increase in share capital and no special resolution could have been passed without his presence in the meeting. Therefore, it was absolutely essential that notice for any special resolution to be taken up by the members of the company is received by the Respondent No.2. In this regard, we also have a look at the Section 189 of the Act regarding ordinary and special resolution:-

We note that in the first notice of EoGM the resolution of amendment to MoA has been listed as ordinary resolution, even though the explanatory note lists it as special resolution under Section 17 of the Act.

We find that only mode of intimation of notice of EoGM or Board meeting by the company has been through ‘certificate of posting’. The same mode of communication for the EoGM was followed by the Respondent No.1. The Respondent No.2 has emphatically denied that he received the notice for EoGM proposed on 18.02.2010. Had the appellants proven the service of notice upon Respondent No.2, we would not have any doubt that the Respondent No.2 was not keen to participate in the matters relating to the company as argued by the appellants. Only a receipt of Certificate of Posting cannot be relied upon as a conclusive proof that the notices have been received by the Respondent No.2. No other mode of communication has been attempted to serve such notices. In absence of any other piece of evidence to substantiate the claim of notices being served, it can be concluded that the Appellants and Respondent No.1 were in default. Hon’ble Supreme court in the case of Mohd. Asif Naseer vs West Watch Company [AIR Online 2020 SC 514] has laid down that producing the mere receipt of notice having been sent under certificate of posting, in itself, may not be sufficient proof of service, but if the same is coupled with other facts and circumstances which go to show that the party had notice, the same could be held to be sufficient service on the party.

We also observe that consequent upon the EoGM on 18.02.2010 at Ranchi, a board meeting of the company was called in Kolkata on the very same day at 3.00 P.M., though in some documents its mentioned as 19.02.2010. In this meeting, the modalities for issuing the additional share capital were finalised. The relevant extracts of the meeting are as under:

Two things emerged from the above. If the aforesaid board meeting was held on the 18.02.2010, then it was a physical impossibility to reach Kolkata at 3.00 P.M. after conducting the EoGM at 11.00 A.M on the same day at Ranchi. The second issue which emerges from the same is that the notice for the Board meeting could have been issued only after EoGM had approved the changes to AoA and MoA, as the decision to issue further shares was dependent on changes to AoA and MoA. The Tribunal has recorded that the notice for the meeting on 19.02.2010 was issued on the very same day. This part has not been denied by the appellants/ Respondent No.1 or Respondent No.3. This clearly shows the intention of appellants and Respondent No.1 & 3 to keep Respondent No.2 out of decision-making process at every stage in violation of provisions of the Act, even though he held 49% of the shares of the company and no special resolution could have been passed without his consent.

Further, based on the decision of the Board the following letter was sent to all shareholders including Respondent No.2/ Adbhut Vincom:-

We find no mention about the right of renunciation being given to existing members in this letter.

The modalities for further issuance of share capital of a limited company are governed by Section 81 of the Act which is extracted below:

(emphasis supplied)

It can be seen from Section 81 (1) (c) above that a right of renunciation has to be provided in favour of person, who can renounce his shares in full or part to any other person. We have seen from the letter sent to the Respondent No.2 that no such option was provided by the Respondent No.1 to Respondent No.2. The compliance with aforesaid Section is mandatory. It appears that the Sh. Prem Rajesh Soy (Deceased Promoter/ Director), and Respondent No.3 were in a hurry to allot the shares to the appellant, due to which such right was not provided to the shareholders of the company. We have also seen that the Articles of Associations of the company have no such enabling clause under which renunciation right of existing shareholders could be waived. This is an express violation of provision of Section 81 (1) (c) of the Act.

The appellant has cited various judicial precedents to justify the validity of the rights issue, service of notice, and share allotments. We have considered the citations of the Appellant in each case and its applicability to the present case:

Based on the above discussion, we find that the amendments to AoA and MoA and subsequent issue of fresh share capital has not been done in accordance with provision of Act.

We now consider the third issue viz. whether the actions of the Appellants, Respondent No. 1, and Respondent No. 3 constitute Oppression and Mismanagement under Sections 397, 398, and 399 of the Companies Act, 1956?

The law protects minority shareholders from unfair treatment by the majority. Sections 397 and 398 of the Companies Act, 1956, ensure that company affairs are conducted fairly and without harming the interests of shareholders. The Hon’ble Supreme Court in Dale and Carrington Investment (P) Ltd. v. P.K. Prathapan, [(2005) 1 SCC 212], ruled that if the majority unfairly reduces a shareholder’s stake without a valid business reason, it amounts to oppression. Further, Hon’ble SC in Tata Consultancy Services Ltd. v. Cyrus Investments Pvt. Ltd., (2021) 9 SCC 351, also held that mismanagement is not limited to financial losses but includes any serious wrongdoing that affects the company’s governance and fairness.

In this case, the actions of the appellants and Respondent No. 3 clearly show a deliberate attempt to adversely affect the rights of Respondent No. 2. This was done by (i) increasing the company’s authorized share capital from Rs.4.25 crore to Rs.10 crore without first changing the Articles of Association (AoA), (ii) issuing 2,10,000 shares only to the appellants, which reduced Respondent No. 2’s stake from 49% to 32.75%, (iii) failing to follow Section 81 of the Companies Act, 1956, which requires new shares to be first offered to existing shareholders, and also giving a right of renunciation to existing shareholders; and (iv) multiple procedural violations, including issuing two conflicting EoGM notices, backdating resolutions, and failing to properly notify Respondent No. 2. These actions show that the share allotment was not conducted in a fair and legal manner.

The increase in share capital was not carried out in accordance with procedure laid down by law. Section 94(1) of the Companies Act, 1956, states that a company can increase its share capital only if the AoA allows it. However, the company’s AoA did not have any such provision. Under Section 31, the company should have first amended its AoA by passing a special resolution. The failure to do this makes the share capital increase invalid. Also, the first notice for the Extraordinary General Meeting (EoGM) dated 18.01.2010, which proposed this change, did not mention any amendment to the AoA, making the process legally defective.

The company later issued a second notice for the same EoGM, this time including an amendment to the AoA. This was disputed by Respondent No.2 claiming that it was a subsequent creation. The very fact that two different notices were issued on the same date raises serious doubts authenticity of the second notice. It strongly suggests that the appellants and Respondent No. 3 realized their violation of various provisions of the Act and tried to fix it afterward. Such actions amount to mismanagement under Section 398. Hon’ble Supreme Court in Vodafone International Holdings B.V. v. Union of India, [(2012) 6 SCC 613], held that lack of transparency in corporate actions must be strictly examined to prevent misuse of power.

Another important fact is that the share allotment unfairly reduced Respondent No. 2’s ownership which amounts to oppression as seen earlier. The company issued 90,000 shares to Appellant No. 1 on 19.03.2010 and 1,20,000 shares to Appellant No. 2 on 14.04.2010, but Respondent No. 2 was not given a proper opportunity to buy these shares. Section 81 of the Companies Act, 1956, requires that new shares must first be offered to existing shareholders in proportion to their current holdings. The company claims it sent a rights issue notice to Respondent No. 2 by Under Postal Certificate (UPC). However, there is no proof that Respondent No. 2 actually received it. The Hon’ble Supreme Court in M.S. Madhusoodhanan v. Kerala Kaumudi Pvt. Ltd., [(2004) 9 SCC 204], held that UPC alone is not enough proof of delivery, especially if the recipient denies receiving the notice. The appellants failed to show any supporting evidence, like an acknowledgment receipt or dispatch register, which suggests that Respondent No. 2 was deliberately left out of the share issuance process.

Another major legal violation was the failure to allow renunciation rights, which is a key requirement under Section 81(1)(c) of the Companies Act, 1956. The law gives existing shareholders the right to transfer their entitlement to another person if they do not wish to buy the new shares themselves. By not giving this option to Respondent No. 2, the company further restricted their rights and made the share allotment unfair. The Supreme Court in Tata Consultancy Services Ltd. v. Cyrus Investments Pvt. Ltd. (supra) has clearly stated that changing a shareholder’s stake unfairly without following due process is a form of oppression, and that is exactly what happened in this case.

The issue of whether the appellants are entitled to interest on the money paid for the cancelled shares is covered by Reliance Cellulose Products Ltd. v. ONGC Ltd. [(2018) 9 SCC 266], wherein the Hon’ble Supreme Court held that interest cannot be awarded when the claim itself arises from wrongful conduct. The appellants are seeking interest on the Rs. 2.1 crore they paid for the cancelled shares. However, since the allotments have been declared illegal by NCLT, they cannot claim compensation for an invalid transaction. Following Reliance Cellulose, the respondent argues that granting interest to the appellants would reward their wrongful conduct, which is legally unsustainable. Hon’ble SC in Ashok Kapil v. Sana Ullah [(1996) 6 SCC 342] held that a party cannot claim financial benefits arising from its own wrongful acts.

In the instant case, the appellants, in collusion with Shri Prem Rajesh Soy (Deceased Promoter-Director) and Respondent No. 3 acquired 2,10,000 shares of the Respondent No.1 in violation of laid down procedure in The Act. Allowing the appellants to profit from these unlawful allotments would be against the principles of fairness and justice and this is squarely covered by Judgments of Hon’ble SC in Reliance Cellulose (supra) and Ashok Kapil (supra). We, therefore, endorse the decision of NCLT not to grant any interest on the share allocation money paid by appellants.

Considering all these factors which include legal and procedural lacuna in increasing the authorised and paid-up share capital; unfair share allotment; failure to notify Respondent No. 2 properly; denial of renunciation rights; and manipulation of corporate records, we hold that the actions of the appellants and Respondent No. 3 amount to both oppression and mismanagement under Sections 397 and 398 of the Companies Act, 1956. The company’s decision-making process was neither fair nor legal, and it was clearly designed to reduce Respondent No. 2’s stake and control.

Based on these findings, we dismiss the appeal with the direction that the Respondent No.1 would refund Rs. 2.1 crore, the amount paid by appellants towards purchase of 210000 shares of Respondent-1 within a period of 60 days. No order as to costs. IAs if any, are closed.