1983 (5) TMI 148 - HC - Companies Law

Summary

Issues Involved:
1. Legality of the allotment of shares.
2. Nature of the transaction.
3. Compliance with statutory requirements.
4. Mala fide waiver of notice.
5. Constitutional validity of section 81(3) of the Companies Act.
6. Acquiescence, ratification, and laches.
7. Discretionary relief for rectification of share register.

Detailed Analysis:

1. Legality of the Allotment of Shares:
The plaintiffs contended that the allotment of shares to the financial institutions was illegal. The court analyzed the nature of the transaction and found that the allotment was made in exercise of an option to convert debentures into shares, which is permissible under section 81(3) of the Companies Act. The court held that the allotment complied with the statutory requirements and was not a direct allotment of shares.

2. Nature of the Transaction:
The plaintiffs argued that the transaction was a direct allotment of shares disguised as debentures with an option to convert. The court examined the correspondence, agreements, and the debenture trust deed and concluded that the transaction was indeed one of debentures with an option to convert 20% into equity shares. The court emphasized that the documents and surrounding circumstances supported this interpretation.

3. Compliance with Statutory Requirements:
The plaintiffs alleged that the transaction violated section 81(1A) of the Companies Act, which requires a special resolution for the allotment of shares. The court found that the transaction fell under section 81(3), which allows for the conversion of debentures into shares without a special resolution if the terms are approved by the Central Government. The court noted that the necessary approvals were obtained, and the transaction was in compliance with the statutory provisions.

4. Mala Fide Waiver of Notice:
The plaintiffs claimed that the waiver of the one-month notice period for the conversion of debentures into shares was mala fide. The court found that there was no evidence to support the allegation of mala fides. The court noted that the plaintiffs failed to provide particulars of the alleged mala fides and did not challenge the evidence presented by the defendants. The court concluded that the waiver of notice was not mala fide and did not vitiate the allotment of shares.

5. Constitutional Validity of Section 81(3) of the Companies Act:
The plaintiffs challenged the constitutional validity of section 81(3), arguing that it granted unguided discretion to the Central Government to specify institutions. The court held that the challenge could not be entertained as the Union of India was not made a party to the suit. The court emphasized that the validity of a statutory provision could not be decided without the presence of the authority that issued the notification under the provision.

6. Acquiescence, Ratification, and Laches:
The defendants argued that the plaintiffs were barred from challenging the allotment of shares due to acquiescence, ratification, and laches. The court noted that the plaintiffs had knowledge of the allotment and participated in meetings where the allotment was discussed without raising any objections. The court held that the plaintiffs' conduct amounted to acquiescence and ratification, and they were estopped from challenging the allotment.

7. Discretionary Relief for Rectification of Share Register:
The court emphasized that rectification of the share register is a discretionary relief. The court found that the plaintiffs had not established any equity to disturb the existing state of affairs. The court noted that granting the relief would prejudice the defendants, as the period for exercising the option to convert debentures into shares had expired. The court concluded that the suit was not a fit case for granting discretionary relief and dismissed the suit.

Conclusion:
The court allowed the appeals filed by the defendants, dismissed the cross-objections, and set aside the decree passed by the learned single judge. The suit filed by the plaintiffs was dismissed with costs. The court held that the allotment of shares to the financial institutions was legal and proper, and the plaintiffs were barred from challenging the allotment due to acquiescence, ratification, and laches. The court also rejected the plaintiffs' challenge to the constitutional validity of section 81(3) of the Companies Act.