Transfer of shares without providing the pre-emptive right to the existing shareholders amounts to Oppression and Mismanagement

Transfer of shares without providing the pre-emptive right to the existing shareholders amounts to Oppression and Mismanagement

Devyani | Sep 4, 2021 |

Transfer of shares without providing the pre-emptive right to the existing shareholders amounts to Oppression and Mismanagement

Transfer of shares without providing the pre-emptive right to the existing shareholders amounts to Oppression and Mismanagement

Company Law: Transfer of shares without providing the pre-emptive right to the existing shareholders against the Article of Association and Memorandum of Association amounts to Oppression and Mismanagement u/s 241 and 242 of the Companies Act, 2013

An appeal before the NCLAT, Delhi arose from the common order passed by the National Company Law Tribunal, Ahmedabad Bench, whereby learned NCLT had rejected Company Appeal 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 dismissed the Company Petition being CP No. 24 of 2018, filed under sections 241 and 242 of the Companies Act 2013 holding that the Petitioner has failed to prove any ingredient of oppression and mismanagement. The Hon’bl NCLAT set aside the common order to hold that the limitation u/s 137 of the Limitation Act begins from the day right to apply accrues. It reversed the order of the NCLT in company petition under section 241 and 242 of the Companies Act, 2013 and held that the act of transfer of shares without providing the pre-emptive right to the existing shareholders against the Article of Association and Memorandum of Association of the Respondent No 1 Company amounts to oppression and mismanagement.

The Appellant alleged 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 Company. An appeal u/s 59 of the Companies Act 2013 was filed by the Appellant, a shareholder. The Respondent 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. Evidently, the Respondents transferred shares in complete violation of the Articles of Association of the Company.

Further, based on the pleadings, it was 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.
The amended Articles of Association provided 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.

Prior to amendment, Article 13 specifically provided that “no shares shall be transferred to a person who is not a member of the company”.

Respondent’s contentions

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 Respondent further contended that the Petition was 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. It further stated that 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. Any other Application” under Article 137 would be a Petition or any Application under any Act. Thus it is clear that Article 137 of the Limitation Act was applicable for any application under any Act. Therefore, even if no limitation is provided for filing an Application under section 59 of the Act, the limitation will be three years from when the right to apply accrues. In the instant case, Respondent No. 1 is claiming that the Appellant was in the knowledge of the transfer of shares from 14th August 2014, i.e. when the records of transfer shares were presented before the Registrar of Companies. At the same time, this Petition was presented before the NCLT on 19th September 2017, i.e. after the expiry of three years of transfer of shares and records submission of records to the Registrar of Companies.

Observations by the Tribunal:

The Ld. Tribunal rejected the Respondent’s contention 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. It further observed that 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 was 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 was held to be unsustainable because the Company had failed to produce evidence of obtaining fair value as stated in Articles 14 to 20 of the Articles of Association.
The Ld. Tribunal was pleased to appreciate the fact that in the instant case, the Appellant claimed that he was unaware of the transfer of shares and came to his notice from the person who introduced himself as a Partner/Shareholder. The Appellant’s contention about the knowledge of the alleged transfer of shares is supported by an affidavit not contradicted by any other Shareholder/Director of the Company. Accordingly, Respondent Company was not in a position to dispute the Appellant’s contention regarding the knowledge of the alleged transfer of shares.

Held

Based on the above discussion, the Ld. Tribunal was pleased to hold that the learned National Company Law Tribunal’s finding that the Petition filed under section 59 of the Companies Act 2013 was barred by limitation was erroneous.

The Respondent Company consists of 3 families, namely Shah, Nihalani and Poddar, with their respective shareholdings of 18%, 31.67%, and 50.33%. However, the Respondents with their brutal majority the Board of Directors transfer the Company’s shares to the outsiders, against the original Articles of Association of the Company. This has caused a reduction in the Appellant’s shareholding in the Respondent No. 1 Company. This appears to be a deliberate act with the sole motive to frustrate the Company Appeal No. 34 of 2017 filed under section 59 of the Companies Act 2013.

That the transfer of shares without providing the pre-emptive right to the existing shareholders against the Article of Association and Memorandum of Association of the Respondent No 1 Company was held to be not sustainable. Therefore, the said amendment in the Articles of Association by the EOGM was declared oppressive, discriminatory deserves to be set aside.

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