NCLAT Chennai Holds Share Purchase Rights Forfeited By Delay In Exercising First Option

The National Company Law Appellate Tribunal (NCLAT) at Chennai on 26 February dismissed an appeal by PM Johny challenging an NCLT order that permitted respondents to purchase shares at a higher valuation, holding that the appellant forfeited the right by failing to act at the appropriate stage.

A Bench comprising Judicial Member Justice Sharad Kumar Sharma and Technical Member Jatindranath Swain observed:

“…the Appellant cannot take an advantage at this stage by carving arguments when the rights of the Respondent had already been crystallised, on account of the Appellants' own failure to extend their willingness to purchase the shares at a higher fair value….”

Earlier, in a company petition, Johny, holding majority shares, had challenged illegal allotments and mismanagement, which the NCLT set aside. The Tribunal directed independent auditors to determine the valuation of shares and granted Johny the first option to purchase the shares. Failing that, the respondents could buy them.

Two valuation reports fixed the share value at Rs. 1,941 and Rs. 1,115 per share. Johny declined to purchase at the higher value of Rs. 1,941, while the respondents expressed willingness to buy at that price. Consequently, the NCLT permitted the respondents to purchase the shares at Rs. 1,941, prompting the present appeal.

The Appellate Tribunal noted that Johny, after a lapse of over five years, sought to purchase the shares at Rs. 1,941 per share according to the valuation report. It held:

“…when the Appellants themselves have done away their rights to offer for purchase, the challenge to valuation could have been raised before their time to purchase was over and not thereafter.”

The Tribunal further observed that the appeal did not contest whether Johny had expressed willingness to purchase at the fair value when the valuation report was first available:

“Since there had been an apparent failure on the part of the Appellant to express willingness at the earliest available opportunity, as per the directives issued in the order of 07.12.2017, the finding recorded by the Tribunal that the first option was to be availed by the Appellant, which they failed to do voluntarily, left no option but to offer the shares to the Respondents at Rs. 1,941, as settled in Mr. Suresh T N's report dated 19.05.2021. The sale was executed accordingly.”

The Bench concluded that the objective of determining the fair value had been fulfilled, and Johny could not, after five years, reopen proceedings to purchase the shares at Rs. 1,941.

Accordingly, the NCLAT dismissed the appeal.

For Appellant: Advocate Sriram Venkatavaradan

For Respondents: Senior Advocate Joseph Kodianthara, Advocates Prasad Vijayakumar, Bhagavath Krishnan, Mohan Pulickkal and KS Ravinchandran PCS