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2009 (1) TMI 841 - Board - Companies LawOppression and mismanagement - Maintainability of petition - challenge to further allotment of shares (allotment only to respondents Nos. 2, 3 and 4 and to the third parties) - seeking directions to set aside the allotment of shares - seeking reduction of capital of the company - seeking direction to company to make a fresh offer of shares to the existing shareholders in proportion to their shareholding in the company prior to the impugned allotments - failure to make offering to all the existing shareholders in proportion to their shareholding - non-consideration of petitioners share application money pending with the company during impugned allotment. Maintainability of petition - challenge of further allotment of shares - HELD THAT - Though the petitioner's shareholding is brought down to 5.92 per cent, after issue of further allotment of shares, otherwise the petitioner was holding 12.11 per cent, of the paid up capital. In view of the challenge of further allotment of shares, the petition is maintainable in accordance with law and also as held by the Company Law Board in SHRI DINESH SHARMA AND SMT. BINA VERSUS VARDAAN AGROTECH PVT. LTD 2006 (8) TMI 586 - COMPANY LAW BOARD . Accordingly, the maintainability issue is answered in favour of the petitioner. Further allotment of shares - failure to make offering to all the existing shareholders in proportion to their shareholding - non-consideration of petitioners share application money pending with the company during impugned allotment - HELD THAT - It is on record and evidenced from the pleadings that the petitioner paid an amount of ₹ 115 lakhs as share application money during the period when the allotment of shares have taken place. Though the money was returned by the company to the petitioner later, it was done during the period the impugned allotment of shares were made. The company and the respondents have not denied this aspect. The minimum requirement has to be followed when the further allotment of shares are to be made. The factors which borne out from the records are that the petitioner intended to subscribe for the shares by paying the share application and no offer has been made to the petitioner and other members of the company except respondents Nos. 2, 3 and 4. The petitioner was always ready and willing to subscribe to the shares. The board of directors of the company was also aware that the petitioner was keen to subscribe to the shares and the first allotment made to respondents Nos. 2, 3 and 4 at par and the second allotment made to third parties at a premium, which is prejudicial to the interest of the shareholders and the company and it is the assertion of the petitioner that the company received no consideration for the allotment of the shares to respondent No. 2, respondent No. 3 and respondent No. 4 and the allotment were made with the sole motive of increasing the shareholding percentage of respondents Nos. 2, 3 and 4. The respondents have not denied any of the averments (made in paragraph 15) of the petitioner in this regard. Hence the presumption of the petitioner is to be taken as true, and correct. The further allotment of shares to the third parties and respondents Nos. 2, 3 and 4, would cause prejudice the petitioner and also (gets) reduced the right to enjoy profits and economic interest. The petitioner rightly relied upon the decision in DALE CARRINGTON INVESTMENT (P.) LTD. VERSUS PK. PRATHAPAN 2004 (9) TMI 385 - SUPREME COURT , wherein the apex court held that even though section 81 of the Act, which contains certain requirements in the matter of issue of further share capital by a company does not apply to private limited companies, the directors in a private limited company are expected to make a disclosure to the shareholders of such a company when further shares have been issued - Hence the argument of the respondents that section 81 of the Act has no application does not hold any merit. The allotment of shares only to respondents Nos. 2, 3 and 4 and to the third parries by discriminating and without offering to all the existing shareholders in proportion to their shareholding and also without considering the petitioners share application money pending with the company admittedly during the impugned allotment is illegal and void ab initio as per the principles laid down by the apex court in Dale and Carrlngton Investment P. Ltd. v. P. K. Prathapan - this issue is also answered in favour of the petitioner. The following orders are passed (i) The allotment of 5,44,974 shares effected in November, 2002 and the further allotment of 3,16,920 shares effected in February, 2003 is hereby set aside. (ii) Consequently, the capital of the company be accordingly reduced. (iii) The company may make fresh offer of shares to the existing share holders in the proportion to their shareholding in their company prior to the impugned allotments. Petition disposed off.
Issues Involved:
1. Maintainability of the petition under Section 399 of the Companies Act, 1956. 2. Legality of the allotment of shares made in November 2002 and February 2003. Issue-wise Detailed Analysis: 1. Maintainability of the Petition: The petitioner's shareholding was reduced to 5.92% after the impugned allotments, below the 10% threshold required under Section 399 of the Companies Act, 1956. However, the petition is maintainable as per the precedent set by the Company Law Board in *Dinesh Sharma v. Vardaan Agrotech P. Ltd.* [2007] 135 Comp Cas 133, which holds that if the shareholding is reduced below 10% due to the challenged allotment of shares, the petition remains maintainable. Thus, the maintainability issue is resolved in favor of the petitioner. 2. Legality of the Allotment of Shares: The petitioner contended that the allotments made in November 2002 and February 2003 were illegal and prejudicial to the interests of the minority shareholders. The key points raised include: - Share Application Money: The petitioner had paid Rs. 115 lakhs as share application money during the period of the impugned allotments. Despite this, no shares were allotted to the petitioner, and the money was later refunded. - Lack of Proportional Offer: The allotments were not offered to existing shareholders in proportion to their shareholding. The first allotment in November 2002 was made at par to respondents Nos. 2, 3, and 4, while the second allotment in February 2003 was made at a premium to third parties. - Fiduciary Duty: The directors, who occupy a fiduciary position, breached their duty by allotting shares in a manner not warranted by law. This was done with the sole motive of increasing the shareholding percentage of respondents Nos. 2, 3, and 4. - Non-Disclosure: The directors did not disclose the allotment of further shares to the shareholders, which is expected even in private limited companies as per the Supreme Court ruling in *Dale and Carrington Investment P. Ltd. v. P. K. Prathapan* [2004] 122 Comp Cas 161. The respondent company argued that Section 81 of the Companies Act, which mandates offering shares to existing shareholders, does not apply to private companies. However, the Supreme Court in *Dale and Carrington Investment P. Ltd. v. P. K. Prathapan* held that directors in private companies must disclose the issuance of further shares to shareholders, and any allotment made without such disclosure and not in the company's interest is liable to be set aside. Considering the above arguments and evidence, the court found that the allotments were made without following the required procedures, were prejudicial to the petitioner, and were intended to increase the shareholding of respondents Nos. 2, 3, and 4 unlawfully. Judgment: 1. The allotment of 5,44,974 shares in November 2002 and 3,16,920 shares in February 2003 is set aside. 2. The capital of the company is to be accordingly reduced. 3. The company is directed to make a fresh offer of shares to the existing shareholders in proportion to their shareholding prior to the impugned allotments. The petition is disposed of with these directions, and all connected applications, if any, are also disposed of.
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