Tumkur Vajram Shetty Jayawanth & Anr. vs M/s. Agile Labs Pvt. Ltd. & Ors.

[Per: Justice Sharad Kumar Sharma, Member (Judicial)]

The challenge in the instant company appeal, as preferred under Section 421 of the Companies Act, 2013, is to the impugned order dated 31.12.2018, as it was passed by the NCLT Bengaluru, in CP No.599/BB/2018 in the matter of, Mr. Tumkur Vajram Shetty Jayawanth & Another versus M/s. Agile Labs Private Limited & 15 Others, being the proceedings, which were held under Section 241 & 242, to be read with Section 59 of the Companies Act, 2013. The proceedings stood, decided by the Ld. Tribunal, observing therewith that the reliefs, which have been sought by the Appellants, in form of annulment of rights issue of 2015 and 2017 and restraining the company to raise further funds are based on frivolous grounds because the Board of Directors followed by EGM have taken a conscious business decision by majority in which the Tribunal should not interfere and that the relief sought in form of an interim order to restrain the company to remove the Appellants from the status of the promoter of the company is based on a premonition for which no order is needed.

Consequently, based upon the aforesaid observation, the Ld. Tribunal came to a conclusion that, the Company Petition at the behest of the Petitioners is premature, and not based on credible grounds and accordingly dismissed the petition and while dismissing the petition, left it open for the Appellants/Petitioners, to re-approach the Tribunal at an appropriate stage, in case the Appellants are removed from the Register of Members of the Company.

The facts leading to filing of the present appeal are, that, the Appellants/Petitioners had initiated the proceedings under Sections 241 & 242 of the Companies Act, 2013, to be read with Section 59 of the Companies Act, 2013, making a prayer thereby to set aside, the two Right Issues, which were made on 10.11.2015 and 27.01.2017, to annul the corresponding Board Resolution, which affirmed the said Right Issue. They had further made a prayer to set aside the transfer of shares, made in favor of Respondent No. 14 by Respondent No. 7 to 13 which they allege to be illegal and to annul the corresponding Board Resolution in relation to the said transfer of shares and to consequentially restore the shareholding pattern of the 1^st Respondent Company to that existing prior to 11.11.2015.

In the said company petition, by way of an interim prayer, the Appellants had also sought for a direction, by way of an interim measure, to restrain the Respondents from removing the 1^st Appellant from the position of the promoter of the 1^st Respondent Company, through the proposed revised shareholder agreement. If this interim relief is taken into consideration in its totality, it was rather anticipatory, in the nature of an action which had not taken place and which as per the Appellants, might take place in future.

The precise facts, forming to be the background for initiation of the proceedings as submitted by the Appellants have been, that, the Appellant came up with the case that the the 1^st Respondent Company, i.e., Agile Labs Private Limited (earlier known as Bluechip Infoway Private Limited), was jointly promoted by the Appellant No. 1, Respondent No. 2 and Mr. R.S. Raju who was an Ex-Director and Shareholder of the company, that the Appellant No. 1 had been contributing for the expansion of the business from time to time in form of an infusion of capital of Rs. 97 lakhs, under the terms and conditions of the agreement, and an additional amount of Rs. 1 Crore, as a refundable loan, that he initiated the process of applying for a patent for the technology and the software in the USA and was successful in getting the same patented in the year 2013, and that the said software development business with IP and technology was sold to Mr. R.S. Raju, the third founding member, who later resigned as a director of the company of respondent No. 1.

Further, the name of the Respondent company was changed from Bluechip Infoway Private Limited to M/s. Agile Labs Private Limited on 12.07.2006, that after the change of the nomenclature, the company allotted 1,67,570 equity shares of Rs. 10 each at a premium of Rs. 65 per share on 01.10.2007 to M.S. Shabarish, Respondent No. 2 and to the Appellant, that the company also raised Rs. 2.5 crore as investment from a group of HNIs Respondents 8 to 14 herein, through preferential offer of 333,334 fully paid-up equity share capital and that further to it, the company executed fresh share subscription and shareholders agreements on 15.10.2007.

The shareholding pattern post the execution of the agreement of 15.10.2007, stood as under: -

The Appellants’ case was that, they had made substantial investment, in the company in terms of time, effort and money when the company was not doing well, that when the company turned profitable and started declaring dividends they were not adequately compensated, that when they expressed their unhappiness, Respondent No. 2 Mr. M.S. Sabarish threatened to resign and that, because Mr. M.S. Sabarish was the only technology expert, in the interests of the company and its investors, they decided to tender their resignation from the port of Director in 2012 after being pushed to a corner on 19.05.2012. The company took note of their resignation and on 23.03.2013 filed Form 32 with RoC, Karnataka, to that effect.

The 1^st Respondent Company, exercising its rights vested under Section 62(1)(a) of the Companies Act, 2013, decided to issue shares, on the right issue basis to all the existing equity shareholders in the proportion of three equity shares for every four equity shares held in the company and offered the same vide Letter of offer and the Appellants were offered 2,83,814 equity shares. The Appellants contend that despite holding over 33% shareholding and being the simple largest shareholder, they were not consulted prior to this decision.

They further contend that the valuation of the shares was not done properly, new investors were brought in, and even new additional directors were brought in contravention to the terms and conditions of SHA/SSA, that the size of Rights issue was disproportionate to the existing shareholding, that they raised their objection in that regard by way of two letters dated 27.10.2015 and 31.10.2015, stating therein that they should have been consulted before the right issue allotment as the Appellant No. 1 was the single largest shareholder, and that the shareholding equity was to be maintained in accordance with the SSA/SHA and the size of the rights issue was disproportionate to the present shareholding pattern of the company, which was disregarded, that certain shareholders transferred their shares to Respondent No. 14 M/s. Geetham Share and Securities Limited in violation of SSA/SHA and that the company further allotted, in 2017, a further 6,33,750 shares to the said Respondent No. 14 on rights issue basis without the Letter of offer, on basis of the existing shareholding renouncing the shares offered to them in favor of Respondent No. 14 which made Respondent No. 14 the single largest shareholder. It is contended by the Appellants that it would be an Oppressive Act and it will amount to be an act of mismanagement having enough ingredients in it, to attract Section 241 & 242 of the Companies Act to be read with Section 59 of the Act.

The Appellants contend that, the approval of the transfer of shares by various shareholders to Respondent No. 14, i.e., M/s. Geetham Shares and Securities Private Limited so as to make it a shareholder of the company was done with a malafide intention so that it can participate in its future rights issue and that it was in complete violation to SSA/SHA. It is based upon the aforesaid backdrop, that the Appellants had modulated the relief in the Company Petition, which has been extracted hereunder: -

After the exchange of the pleadings, the Ld. Tribunal had proceeded to decide the company petition by the impugned judgment of 31.12.2018. It has observed therein that the company petition has been instituted, seeking to set aside the right issues as made on 10.11.2015 and 27.01.2017 and to annul the corresponding resolution of the board so as to set aside the transfer of shares. It has further noted that Article 3 of the Article of Association of the company, restricts the number of members of the company to 50, prohibits any invitation to the public to subscribe to any shares or debentures of the company, restricts the right to transfer its shares, etc, that Article 4 of the Memorandum of Articles empowers the Board to increase or decrease the share capital and to allot shares to existing shareholders and Article 5 deals with any further issues of share capital, and that a conjoint reading of them makes it clear that the company is empowered to increase share capital and to allot rights shares in accordance with law. Given this challenge to the rights issues of 10.11.2015 and 27.01.2017 may not be sustainable in the eyes of law for the reason being that, the Board has approved the same and the main conditions of rights issues, that is, “atleast 50% of members to apply, at least 90% of rights issue to be subscribed and no outsider/competitors in respect of 2015 rights issue” and “Board of Directors will have absolute power in its sole discretion in a manner which is not disadvantageous to the interest of the company” as contained in the respective Letters of offer has been fulfilled. The Tribunal has also held that the respective Board Resolutions approving the allotment of the rights shares to the respective persons are in accordance with law.

The Ld. Adjudicating Authority has gone through the Letter of the Petitioners, in order to offer for the Rights issue dated 12.10.2015, the objection raised to it by the Appellant on 27.10.2015, and the reply by the company dated 02.11.2015 and on its appreciation, it has come to a conclusion to the effect that, the Appellants objections to the said issue has been suitably dealt with by the company and the Appellants have also been given the offer to subscribe to the Rights Issue in proportion to the shares held by them, and that the decision taken by the company to raise the fund for expansion and growth of the company, with the existing investors and to come out with the rights issue requesting the shareholders including the Appellants to participate to subscribe for their rights cannot be faulted and that the companies as created under the Companies Act, do have the power to increase or decrease their share capital within the permissible limits in accordance with law.

Ld. NCLT has also held that affairs of the company will be carried out by the majority decision taken in accordance with law and given this, the decision to increase share capital cannot be faulted, even when the Appellants with 15.6% of share capital is opposed to it, on the ground that he is being reduced to a minority, as long as he has been offered the Rights shares as per law and as per Articles of Association and not being in violation of any of the provisions of the Companies Act 2013, and if cannot be held or be treated to be illegal.

Accordingly, Ld. Tribunal has negatived the prayer sought for, by the Appellants/Petitioners in the company petition, praying for setting aside the rights issues and consequent share allotments and cancelling the share transfers and annulling the corresponding Board Resolutions, making a mention that the Appellants have no right as such to be considered, since having resigned from the board. Further, the Tribunal observed that, looking to the interim relief, which was sought by the Appellants/Petitioners in the company petition which pertains to the anticipated future action, which is the apprehension of Appellant/Petitioner No. 1 that he was going to be removed from the 1^st Respondent Company, as a promoter, it was a probable action of removal of the Petitioner No. 1 from the 1^st Respondent Company, as its promoter, that it was only an apprehension, and there was no logical background behind it nor any material as such which had been placed before it to draw the conclusion.

In that view of the matter, the Adjudicating Authority came to the conclusion and rightly so that, under the Companies Act and the covenants as contained in the Articles of Association, of the 1^st Respondent Company, did have the power to increase or decrease its shareholding in accordance with law and depending upon the need of the company, that the Petitioner No. 1/Appellant No. 1 though he is holding 15.67%, share in the company, does not have any legally vested right to be granted with the relief in form of setting aside the rights issues of 2015 and 2017 against a plea made on frivolous and fictitious grounds. Thus, the Ld. Tribunal has aptly observed that the Company Petition deserves to be dismissed. However, while dismissing the company petition, the Ld. Tribunal has reserved the rights of the Appellants herein to approach the Tribunal, at an appropriate time only, when Appellant No. 1 is actually removed from the register of the company.

The Ld. Counsel for the Respondents, while opposing the motion, had made a reliance on the judgment rendered by the Ld. NCLT, Hyderabad Bench in the matters of Mr. Venkat Sudhakar Sattur versus Dictasol (India) Private Limited, 2017 SCC Online NCLT 10367 and particularly he has made reference to Para 15 of the said judgment which is extracted hereunder: -

In a nutshell, it could be summarized that, according to the findings which had been recorded in the impugned judgment and the dictum as referred to herein above, the act of increasing the authorized share capital of a company, can under no set of circumstances be said to fall within the ambit of the act of Mismanagement and Oppression, as contemplated under Section 241 & 242 of the Companies Act, 2013, and the act of the said nature as complained of cannot be said to be illegal and malicious, for the reason being that, as per the Articles of Association of the company, and the extent and expanse of the provisions of the Companies Act, 2013, increasing of the authorized share capital is permitted to be done to meet the business objectives, provided in it within the ambit of the powers vested to the board under the Articles of Association of the company. Thus, it was ultimately observed that there cannot be any objection at all which could be raised, particularly by the petitioner to the company petition, as against the company's decision to increase the share capital, which cannot be taken as to be an act falling within the ambit under Sections 241 & 242, of the Companies Act, 2013, where the company petition could at all be entertained.

There was yet another aspect, which was argued by the Ld. Counsel for the Respondent, that the entire proceedings of drawing the company petition for the relief claimed therein by the Appellants/Petitioners by instituting the same in 2018, was in relation to the rights issued of 2015-2017, the same would be barred by limitation and the entire proceedings of the company petition, would be barred by limitation because other shareholders of the company did actively participate in the proceedings of the Extraordinary General Meeting (EGM) and the basic intention of the petition was just to wage a proxy war to object to the increase of the share capital of the company. Hence, the petition at the behest of the Petitioners with the aforesaid objection could not be sustained.

However, the Ld. Tribunal has rightly reserved the rights of the Petitioners, that, if in future there is any act of Oppression or Mismanagement, the order rendered on 31.12.2018, would not create an impediment for the Appellants to re-approach the Tribunal for drawing the proceedings at an appropriate stage, while holding that the relief as claimed for could not be granted, holding the petition to be premature coupled with the fact that it happens to be against the very intention of the Articles of Association, that each company has got its right to increase the shareholding, and the same could not have been opposed, at a belated stage by filing a petition in 2018. Thus the order rendered by the Ld. Adjudicating Authority does not suffer from any apparent error calling for any interference in the exercise of our appellate jurisdiction. Thus, the ‘appeal’ lacks ‘merit’, and the same is accordingly ‘dismissed’.