Title– Section 81 of Company Act ,1956
Subject –Operational Issue
Civil Appeal no 8194 & 8195 of 2018 ; June 15,2023 ,Judgement Passed by Hon’ble Justice K.M.Joseph and Justice B.V.Nagarathna in the matter of Hasmukhlal Madhavlal Patel and other Ambika Food Products Pvt Ltd and others
The Supreme Court has upheld the largely disproportionate allotment of rights share in favour of one group of shareholders of a private limited company substantially increasing its shareholding percentage in the company over other group of shareholders under Section 81 of Company Act 1956.
Fact of the case;
- The authorized capital of the first respondent was Rs 1 crore. It consisted to ten equity shares of Rs 10/- each. The paid-up capital was also the same. There are three groups. Appellants 1 and 2 , together and relatives can be described as the H.M.Patel Group ,having 30.80% of the paid- up share capital. The Next Group is the Sheth Group , duly represented by Ochachhavlal Sheth, having 45% share in the paid -up capital. The third Group represented by respondent no 2 & 3 represented by Manish Vipinchandra Patel and Krunal V Patel, having 24.20% of the paid-up capital ,referred as V.P.Patel Group.
- A case of mismanagement and oppression by the appellants in the petitions styled under section 397 and 398 of the Companies Act ,1956. By order dated 17.05.2017, the NCLT, Ahmedabad Bench disposed of the petitions with the following direction; “increased share capital shall be made to all the existing shareholder of the company is not willing to subscribe for additional shares, then those shares shall be allotted to other shareholders taking their options again proportionated to their shareholding”
- Removal of respondents 2 & 3 as directors of the company, is not valid. And there shall audit of accounts of the company from the financial year 2009 to 2010 and determine what are the amounts siphoned by each petitioners and respondents 2 to 5 and place the report before general Body of the company duly convening Extra ordinary General Meeting.
- The Board of Directors decided to allot shares , which were non- existent, prior to 27.01.2010. V.P.Patel Group and Sheth Group had shown and demonstrated their dispute in a formal manner with the Registrar of the Companies, though the authorized capital was increased from Rs 1 crore to Rs 2 Crore and the whole effort was purportedly to infuse fresh capital, in substance, only 21 lakhs came into the funds of the first respondent company. Beside Rs. 21 Lac, which was brought in, the balance of Rs 69 lakhs was shown accounted by way of cancelling the loan due from the first respondent company to the appellants. This would nail the lie of the appellants that they had acted Bonafede and in the best interest of the company.
- V.P.Patel Group and Sheth Group filed petition accusing the appellants of mismanagement and oppression u/s 397 & 398 of the company Act 1956. NCLT dismissed the petition and NCLAT upheld the NCLT direction. Section 105 -C of the Company act 1913 read as follow;
“Further issue of capital-Where the directors decide to increase the capital of the Company by the issue of further shares such shares shall be offered to the members in proportion to the existing shares held by each member( irrespective of class) and such offer shall be made by notice specifying the number of shares to which the member is entitled and limiting a time within which the offer, if not accepted , will be deemed to be declines;…”
The Judgement of Hon’ble Supreme Court , held as follows;
➢ “..The first question is whether the section contemplates increase of capital above the authorized limit, or only below the authorized limit. Section 50 deals with ,among other things, alteration of the conditions of the memorandum of association of the company by increasing its share capital by the issue of new shares. This increase can only be done by the company in a general meeting as provided in sub section(2)of
section 50 .
➢ Section 81(1A) permitted offering of shares to any other persons, if certain conditions were met. Section 81(2) read as follows;
a) To extend the time within which the offer should be accepted, or
b) To authorize any person to exercise the right of renunciation for a second time,
on the ground that the person in whose favour the renunciation was first made has declined to take the shares comprised in the renunciation Section 81(3)(a) provided that nothing in section 81 will apply to a private company. There are other parts of section 81, which need not detain us. We have already noticed the principles laid down in “Dale & Corrington Invt.(P) Ltd and another “ as per which though section 81(3) made provision inapplicable to private companies, the higher stand applied to Private companies.
- In fact , in the said case , the court found that the expression “capital of a company” was an ambiguous phrase and may mean either issued capital or Authorized Capital, according to the context ( quoted Justice M C Mahajan).
- The Legislature did not think it safe to leave an uncontrolled discretion to the Directors , when an increase of capital was done by the Directors within Authorized capital.(Quoted Justice S.R.Das)
- The Position under the companies Act ,1956, u/s 81, remained the same in that it is only the company , in its General Body Meeting, which could increase the Authorized Capital. The Position still continued that call it increase in subscribed capital, it must be within the limits of the Authorized Capital.
- By the resolution dated 18.12.2009, the Board of Directors had not actually purported to increase the Authorized Capital.
- This is not a case where the Resolution was to allot the further shares to the Director or Members of their Group alone. There is a concurrent finding that the decision to go in for increase in capital viz. Authorized Capital, was not vulnerable to attack. The decision was based on the advice given by the Bank.
- On the whole, in the facts, the appellants cannot be described as having acted in a defective or in an unfair manner, in the matter of allotments cannot be described as having acted in a defective or in an unfair manner, in the matter of allotment of further shares particularly when the contention of the respondents about the bona fides of the decision to increase the authorized capital has been found in favour of the appellants. The appeals are partly allowed .The direction to allot shares in the impugned order is set aside. The order for conducting audit will remain undisturbed.
i) This opinion/clarification note is based on the facts provided to us and the same is being issued without any knowledge of intent, prejudice, non-disclosure, misrepresentation, or concealment of facts if any.
ii) We have not done investigation of correctness of facts and the limited opinion represents our understanding of the provisions of the law on the matter. The compliance mentioned above is not exhaustive and other compliance may also be involved depending on case to case basis.
iii) The conclusions reached and views expressed are matters of opinion based on our understanding of the related laws, rules, notifications, Citations, circulars, etc.
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