1994 (5) TMI 166 - HC - Companies Law

Summary

Issues:
- Application to restrain the respondents from issuing 20,05,000 shares
- Petition under sections 397/398 seeking reliefs and winding-up order
- Maintainability of the petition under sections 397 and 398
- Legality of issuing fresh right shares by respondent No. 1 company
- Allegations of dilution of petitioners' shareholding
- Necessity for raising capital and issuing fresh shares
- Directors' fiduciary duties and discretion in issuing shares
- Impact on petitioners' shareholding if they exercise their right to obtain shares
- Interpretation of section 81 of the Companies Act
- Company's financial position and need for working capital
- Comparison between raising funds through share issuance and bank loans
- Allegations of mala fide intentions in issuing right shares
- Legal right of companies to raise funds through share issuance

Analysis:
The judgment addresses an application seeking to restrain the respondents from issuing 20,05,000 shares. The petitioners, shareholders of the respondent No. 1 company, filed a petition under sections 397/398 of the Companies Act, 1956, seeking reliefs and a winding-up order. A previous judgment held that the petition under sections 397 and 398 was not maintainable, and the matter of winding up was to be dealt with separately, which is still at the show cause stage.

The key contention was the legality of the respondent company's decision to issue fresh right shares. The petitioners alleged that this issuance would dilute their shareholding without a genuine need for raising capital. In response, the company argued that the shares were being offered to existing shareholders at par, with the primary purpose being to raise funds for working capital due to increased raw material costs.

The judgment emphasized the directors' fiduciary duties and discretion in issuing shares, citing legal precedents to establish that such decisions must be in the company's best interest. It was noted that if the petitioners exercised their right to obtain the shares, their shareholding percentage would not be diluted. The court also analyzed the company's financial position, highlighting the need for additional funds for working capital and the comparison between raising funds through share issuance versus bank loans.

Ultimately, the court found no evidence of mala fide intentions in the company's decision to issue the right shares. It was concluded that the issuance was a bona fide exercise of discretion in the company's interest, considering the financial circumstances and the advantage of raising funds without incurring interest payments. As a result, the application to restrain the issuance of shares was dismissed.