Supreme Court latest judgement on operational issue in Companies on allotment of share

  • 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;
  • 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.

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