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2006 (3) TMI 328 - HC - Companies Law

Issues Involved:
1. Procedure for the issue of further capital in a private company.
2. Legality of the allotment of additional shares without following the prescribed procedure.
3. Interpretation of Article 9 of the Articles of Association in relation to Section 81 of the Companies Act.

Detailed Analysis:

Issue 1: Procedure for the Issue of Further Capital in a Private Company
The court examined Section 81 of the Companies Act, which deals with the further issue of capital. Section 81(1) and (2) outlines the procedure for issuing additional shares, including offering them to existing equity shareholders in proportion to their current holdings. However, Section 81(3) explicitly states that these provisions do not apply to private companies. Therefore, a private company is not mandated to follow the procedure prescribed under Section 81(1) and (2). Instead, the company must adhere to its Articles of Association and general provisions under Sections 291 and 292 of the Act.

Issue 2: Legality of the Allotment of Additional Shares Without Following the Prescribed Procedure
The Board of Directors of the appellant company allotted 28,400 shares without notifying the respondents or holding a general meeting of shareholders, as required under Article 9 of the Articles of Association. The court held that the Board of Directors must follow Article 9, which mandates that any allotment of shares must be sanctioned by the company in a general meeting. The failure to do so rendered the allotment illegal and void ab initio. The Company Law Board was justified in setting aside the allotment due to the violation of Article 9.

Issue 3: Interpretation of Article 9 of the Articles of Association in Relation to Section 81 of the Companies Act
Article 9 of the Articles of Association stipulates that the issuance of further shares must be subject to the sanction of the company in a general meeting. The appellants argued that this article is inconsistent with Section 81(3) of the Act, which exempts private companies from the procedure prescribed in Section 81(1) and (2). However, the court found no inconsistency between Article 9 and Section 81. Article 9 is in conformity with Sections 291 and 292, which govern the general powers of the Board and the requirement for certain actions to be taken in a general meeting. The court emphasized that the Board of Directors must adhere to Article 9, which requires general meeting approval for any allotment of shares.

Conclusion
The court concluded that the Board of Directors acted unlawfully by not following the procedure outlined in Article 9 of the Articles of Association. The allotment of 28,400 shares was set aside as being wrongful, illegal, and void ab initio. The appeal was dismissed, upholding the Company Law Board's decision. No order was made as to costs.

 

 

 

 

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