NCLAT Overturned the NCLT’s Decision Endorsing the Share Transfer, As It Was Ultra Vires to Company’s AOA

Case Details: [2023] 156 taxmann.com 502 (NCLAT-Chennai)[24-04-2023]

Judiciary and Counsel Details

• • M. Venugopal, Judicial Member & Dr Alok Srivastava, Technical Member
  • S. Vivekananda, Adv. for the Appellant.
  • D. Abhinav Rao, Adv. for the Respondent.

Facts of the Case

The appellant formed a family company in the form of a quasi-partnership, in which, the appellant along with her father, and her two brothers were subscribers to the memorandum of association (MoA) of the company. The appellant was holding 24% shares in the company whereas her two brothers were holding 36% each. The appellant was neither a director of the company nor involved in the day-to-day affairs of the company.

In year 2011, 1,77,800 equity shares were allotted at Rs. 10 each in favour of some non-existing shareholders without the knowledge of the appellant. As a result of the allotment, the outsiders become 64 % shareholders of the company whereas the proportionate shareholding of the appellant was reduced to 8.64%.

The appellant challenged said allotment before NCLT but the same was dismissed vide impugned order stating that the appellant was a signatory in the board meetings, where shares were allotted.

NCLAT Held

Aggrieved by order of NCLT, appellant filed instant appeal contending that allotment of substantial number of shares to non-existing member i.e. R3 and R4, violated the Article of Association (AoA) of the company.

It was noted that as per the AoA of the company, new shares were to be offered only to persons, who on date of offer were holders of that class of company and further such offer was to be sent to every member specifying number of shares offered. In the instant case no such offer was made to any of existing shareholders, approval given by board of directors for such allotment was not in accordance of AoA of company. Therefore, NCLAT held that impugned order passed by NCLT approving such allotment was to be set aside.

List of Cases Reviewed

• • Order of NCLT (Bengaluru) in C.P. No. 9/2016 in T.P. No. 83/2016, dated- 22-3-2019 (para 39) reversed.
  • Surinder Singh Bindra v. Hindustan Fasteners (P.) Ltd. [1990] 69 Comp. Cas. 718 (Delhi) (para 26)
  • Smt. Claude-lila Parulekar v. Sakal Papers (P.) Ltd. [2005] 59 SCL 414 (SC) (para 32) followed.

List of Cases Referred to

• • Smt. Claude-lila Parulekar v. Sakal Papers (P.) Ltd. [2005] 59 SCL 414 (SC) (para 8)
  • M. Appayya v. Chandrashekar Rao [TA No. 10 of 2021, dated 5-12-2022] (para 8)
  • Kobian Pte. Ltd. v. Kobian India (P.) Ltd. [2012] 25 taxmann.com 408 (Ker.) (para 9)
  • Dale & Carrington Investment (P.) Ltd. v. P.K. Prathapan [2004] 54 SCL 601 (SC) (para 9)
  • Surinder Singh Bindra v. Hindustan Fasteners (P.) Ltd. [1990] 69 Comp. Cas. 718 (Delhi) (para 10)
  • Praveen Shankaralayam v. Elan Professional Appliances (P.) Ltd. [2016] 76 taxmann.com 290/[2017] 139 SCL 166 (NCLAT) (para 13)
  • V. Rajendran v. Annasamy Pandian [2017] 5 SCC 63 (para 13).