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Judgment
O R D E R
DR. ASHOK KUMAR MISHRA, TECHNICAL MEMBER
The Appellant has filed an Application - I.A No. 208, 209 & 210 of 2022 in Company Appeal (AT) No. 18, 19 & 20 of 2022 by inter alia seeking to pass an order of ‘Interim Stay’ of the impugned order dated 31.12.2021 in CP/114/KOB/2019, CP/119/KOB/2019 & CP/125/KOB/2019 passed by the ‘National Company Law Tribunal’, Kochi Bench (for short ‘the Tribunal’).
The Ld. Sr. Counsel for the Appellants have stated that the full facts have been stated in the accompanying Company Appeal and seek to refer and rely upon the same for the purposes of this application.
The three Company Appeals are being considered, are of M/s.RBG Group Company which is an engaged in the business of commodity trading, warehousing, logistics, commodity broking & real estate. The first Appellant is the company and the 2nd Appellant is Rajkumar Gupta. The Respondent No.1 are 2nd Appellant’s mother & 2nd Appellant’s youngest sister-in-law who is the spouse of the 3rd Respondent, Mahesh Kumar Gupta, the youngest brother. The 3rd Appellant is Vishnukant Gupta, another brother of the 2nd Appellant.
It is not in dispute that all the parties in the present appeal were living together as a ‘Hindu Undivided Family’ (HUF) long back. There is a family understanding in writing on 15.09.2016 although not signed by all the members of the Family/Extended Family and the same is called an ‘Memorandum of Understanding’ (MOU).
The Main Appeal has been filed under Section 421 R/w Section 241 & 242 of the Company Act, 2013 (for short ‘Act’) against the common order passed by the Tribunal dated 31.12.2021 in CP/114/KoB/2019, CP/119/KOB/2019 & CP/125/KOB/2019.
The Ld. Sr. Counsel for the Appellant has stated that the litigations raised by the 1st and 2nd Respondents in this Company Petition before the Tribunal are followings in a summarized manner;
a. The second Appellant herein is a ‘Managing Director’ of the 1st Appellant Company has failed to conduct Annual General Meeting (AGM) of the Company for the years 2015-16, 2016-17, 2017-18 of the 1st Appellant company as prescribed under Article of Association (AoA). The Company, at the time of filing petition before the Tribunal were having three ‘Directors’ i.e. Mr. Raj Kumar Gupta, Mr. Vishnukant Gupta & Mahesh Kumar Gupta. The percentage of shareholding as appearing in the statements of Companies and reports to the Registrar of Companies are as follows:
b. The Company is a family enterprises and the management of the Company vest in the Board of Directors and not in any one individual including the Managing Director of the Company in terms of Clause 34 of the AoA. It was also stated by the Ld. Sr. Counsel for the Appellant that the 1st and 2nd Respondent herein have also stated before the Tribunal that the Financial documents filed before the ROC show related party transactions which are in violation in Section 188 of the Act.
c. The 2nd and 3rd Appellant herein have siphoned off funds under the guise of remuneration for themselves and their spouses and have been consistently violating the AoA and oppressing the majority of shareholders.
d. The AGM were conducted after giving due notice and the related party transactions entered into by the 1st Appellant company where all commercial transactions and Section 188 of the Act is not applicable to the Company.
e. Remunerations are paid to all parties who are ‘Directors’ of the full time employees of the Company and hence there is no siphoning off funds.
The Ld. Sr. counsel for the Appellant has restricted his submissions for the stay order of the impugned order only has stated in I.A No. 208, 209 & 210 of 2022 and, therefore dealing with prima facie case. It was also stated by the Ld. Sr. Counsel for the Appellant that stay in all the three appeals are related to the impugned order and the matter is relating to the family members who are ‘Shareholders’ and ‘Directors’ of the company.
Ld. Sr. Counsel for the Appellant has also submitted that the Company has not violated the AoA and have conducted the AGM and accordingly have filed the reports and statements with the RoC and the same are in public domain. The impugned order has not given any finding or quantification for such siphoning off funds. The Ld. Sr. Counsel for the Appellant further stated that the related party transactions were purely commercial transactions and were at arm’s length and hence Section 188 of the Act is not applicable and moreover there is a notification dated 05.06.2015 vide Notification No.464E of MCA, the private company has got the exemption from complying with the provisions related to the related party transactions by the private company. For brevity and clarity, the same is depicted below:
It was also stated by the Ld. Sr. Counsel for the Appellant that the Tribunal has failed to consider the proviso to Section 167 of the Act, wherein if an Appeal is preferred over an order of removal of ‘Director’ then the ‘Director’ cannot be asked to vacate office until the appeal is decided. It is also stated by the Appellant that the Tribunal has awarded reliefs beyond the prayers of the Company Petition and hence its order is misconstrued and over stated the idea of consequential reliefs.
The Ld. Sr. Counsel for the Appellant has stated that being a family run concerns the essence and intent of the MoU is more relevant and is to be considered by this Appellate Tribunal, the malice in the original petition before the Tribunal is only to cease control of the 1st Appellant Company from the 2nd & 3rd Appellants.
It has also stated by the Ld. Sr. Counsel for the Appellant that after filing the present appeal on 25.02.2022, a Review Application was also filed in this case by the same Appellant who were Petitioners in CP 114 of 2019 seeking certain reliefs including issue of direction to the Bankers to cease to honor with immediate effect all financial transactions initiated by the Mr. Raj Kumar Gupta- Appellant No.2, Mr. Vishnukant Gupta-Appellant No.3 in this appeal and also to refund all amounts drawn illegally through related party transactions disclosed in Financial statements from 2015 onwards etc. The Tribunal vide its order dated 16.03.2022 has granted certain reliefs like removal of the Appellants No.2 & 3 from the Director of the Company and have appointed Ms. Sulochana Gupta -Respondent No.1 herein and Mr. Radha Ballabh Gupta as Directors of the 1st Respondent company with immediate effect including refund of all amounts drawn illegal by them through related party transactions and have changed signatory to the banks based on mandates signed by Mrs. Sulochana Gupta and Mr. Radha Ballabh Gutpa etc.
Based on above submissions, the Appellant has prayed for passing an interim stay in the impugned order dated 31.12.2021.
The Tribunal while passing the impugned order dated 31.12.2021 has observed at para 50 to 56 has depicted below:
“50 - We have also gone through the transactions held in the Respondent Companies and financial statements filed before the Registrar of Companies. It is evident that there is loan given by ➢ M/s RBG Enterprises Pvt Ltd to M/s. Sri Rubber Industries. ➢ M/s RBG Enterprises Pvt Ltd to M/s. RBG Trading Corporation Pvt Ltd.
51.- It is evident from the records that there are various transactions between Ritu Gupta (wife of Respondent No. 2) and Anika Gupta (wife of Respondent No. 3). This was done without the consent of the Board of Directors of the Respondent Company.
52.A company typically enters into various transactions with different parties, including related parties. Any contract or arrangement with the related party(ies) falls within the ambit of Section 188 of the Act, if it relates to, inter alia, the sale, purchase or supply of goods or materials; selling, buying or leasing property of any kind; and availing or rendering any services beyond the ordinary course of business or as an arm's length transaction.
53.When a company enters into a related party transaction, covered under Section 188 of the act, this requires the consent of the company's Board of directors. Also, if such a transaction exceeds the monetary thresholds prescribed under Rule 15(3) of the Companies (Meeting of Board and its Powers) Rules, 2014, approval of the shareholders will also be required by way of an ordinary resolution. Such consent can be obtained prior to, or within three months after, entering into the transaction. However, in these matters such an action has not done by the Respondents 2 & 3.
54.The related party contracts are to be disclosed in the Board of Directors' Report and in a register of such contracts is to be maintained. It is also seen from the records that the respondent companies have not obtained permission from the Board of Directors to enter into these related party transactions. Hence, the contention of the Respondents that these are not Related Party Transactions and that it is Simple Commercial Transactions cannot be accepted.
55.After analyzing the issue framed, we are of the opinion that the Related Party Transactions done by the Respondents are contrary to the provisions of law and in breach of the Articles of Association of the Respondent Company and, therefore, the said Related Party Transactions are hereby declared as invalid and all the proceedings which have been done in violation of the Articles of Associations are also hereby declared as invalid. The other reliefs in these petitions are consequential reliefs. Since we have declared that the action of the Respondents are illegal, we are not ordering any investigation into the Respondent Companies affairs and imposing any penalty on the Respondents for non-compliance of the rules/ articles of the Company.
56.The Company Petition No. 114/KOB/2019, Company Petition No. 119/KOB/2019 and Company Petition No. 125/KOB/2019 stands disposed of with the aforesaid orders.”
The Ld. Sr. Counsel for the Respondents have stated that the 1st and 2nd Respondent herein are the majority shareholders in the three companies under aforesaid appeals - RBG trading Corporation Pvt. Ltd, RBG Enterprises Pvt Ltd and RBG Retail Pvt. Ltd owning 51.75%, 51.68% & 51.68% of the equity respectively alongwith other shareholders viz. Mr. Radha Ballabh Gupta, Radha Ballabh Gupta (HUF), Mahesh Kumar Gupta (HUF) & 3rd Respondent. They have also stated that the 1st & 2nd Respondent herein who were the Appellants at the Tribunal have alleged Oppression and Mismanagement by the 2nd & 3rd Appellant herein on multiple grounds including non-holding of AGM for Financial year 2015-16 onwards and indulging in related party transactions, all these are disclosed in Financial statements and are not normal business transactions and through this means they were enriching themselves instead of serving the interest of the Company. They have also stated that the Tribunal has concluded that the petition was maintainable, allowed holding of AGM for the said three years and established related party transactions in violation of the Act and accordingly have granted relief in accordance with the provisions of Section 242 of the Act.
The Ld. Sr. Counsel for the Respondent has stated that the Directors have ipso jure vacated their office w.e.f. 31.12.2021 under Section 167(1)(c) of the Act and are accordingly disqualified to be the Directors in any company. They have also stated that the Review Application of 16.03.2022 was in continuation in the earlier impugned order. It is a settled law that no party should be allowed to approbate and reprobate in a matter. (Premlata alia Sunita Vs. Naseeb Bee & Ors. 2022 SCC Online SC 351. They have also stated that the 2nd & 3rd Appellant are guilty of suppressing important event that have occurred after 31.12.2021 in the Appeal. It is also stated by Ld. Counsel for the Respondent that the same 2nd and 3rd Appellant challenged the Review Application before the Hon’ble Kerala High Court in WP(C) 9819 of 2022, the Ld. Single Judge vide an ex parte order stayed the said orders for a period of30 days. The Judgment of the Ld. Single Judge was set aside by the Hon’ble Division Bench in WA 420/2022 on 30.03.2022 and accordingly in the changes in the Board of the Company were incorporated in Master Data of Ministry of Corporate Affairs on 07.04.2022. It was also stated by the Respondents that the said MOU as stated by the Appellant has not been signed or approved by the shareholder namely Radha Ballabh Gupta (HuF), Mahesh Kumar Gupta (HuF), Rajkumar Gupta (HuF), Vishnukant Gupta (HUF), Ritu Gupta, Anika Gupta and 1st &2nd Respondents. Their rights are to be protected, among others, under Section 47(1) of the Act. The rights of the shareholders cannot be abridged by the MoU unless its terms are incorporated through an amendment of the AoA in accordance with Section 5. They have cited the Judgment of V.B.Rangaraj Vs. V.B.Gopalakrishnan AIR 1992 SC 453. The MoU is under the Judicial scrutiny of the Munsiff Court, Kochi in O.S 310 of 2019.
We have carefully perused the pleadings of all the parties and extant provisions of the Companies Act, 2013 and Rules made there under and we are having the following observations: -
This is a case of family management company dispute where certain Members / Shareholders are not seeing eye to eye and the Tribunal has observed certain irregularity in its functioning.
It cannot be disputed that the Company’s Article of Associations (AoA) is more powerful than the MOU and that too not signed MOU by all members of the Company/ family partition shareholding right.
If, there is overlapping provision between the Companies Act will prevail over the AOA. Accordingly, AoA will prevail over MOU, unless the MOU is legally binding and are appropriately incorporated in the AoA through the Amendment as prescribed under the Companies Act for the amendment of AoA.
By granting interim relief at the very inception, it may jeopardize the impact of the main appeal.
Interim relief has been sought for stay in impugned order of 31.12.2021 so at this stage we do not find from the record that any relief has been claimed for stay of review order dated 16.03.2022. As far as the order of 31.12.2021 is concerned, the Tribunal have declared these transactions as invalid and hence consequential action is to follow. Similarly, on holding ‘Annual General Meeting’ cannot be stayed by this Appellate Tribunal as it is a routine business activity.
At this juncture, we are not in a position to recast the AoA of the 1st Appellant Company in line with the MOU which has not been signed by all the required signatory to the MOU who are members of the Company. The Notification No. 464(E) of MCA dated 05.06.2016 is extracted below for brevity and clarity:
This notification provides for subject to certain exceptions, modifications and adaptation which are enumerated therein limited to non-application of second proviso to sub-section(1) of Section 188 which is a matter of examining a full case and thereafter, to consider whether the interest of the shareholders are protected or not.
All the above suggests that it is not a fit case to consider interim relief for grant of stay when the matter even travelled to the Hon’ble High Court of Kerala upto its Division Bench and effect of stay of the impugned order dated 31.12.2021 will cause irreparable harm to the Company and accordingly we are of the view that the case is not a fit case for granting interim relief and accordingly we are not inclined to grant any interim relief and hence I.A Nos. 208, 209 & 210 of 2022 in Company Appeal (AT) No. 18, 19 & 20 of 2022 is dismissed. No order as to costs.
Post the three ‘Main Appeals’ on 17th June, 2022 for hearing.