1994 (10) TMI 317 - Board - Companies Law

Summary

Issues Involved:
(a) Whether the allotment is in contravention of agreement between the promoters.
(b) Whether the allotment violates the provisions of Article 7.
(c) Whether mala fides are established.
(d) Whether the relief sought by the petitioners be granted.

Detailed Analysis:

(a) Whether the allotment is in contravention of agreement between the promoters
The petitioners alleged that the allotment of 6,000 shares to respondents Nos. 6 and 7 was against a promoters' agreement to maintain parity in shareholding. However, the court found no binding agreement between the promoters that mandated equal shareholding. The court noted that the original shareholders were closely related, and there was no written agreement or terms in the articles of association to support the claim of shareholding parity. The attempt by the petitioners to acquire an additional share from Shri Kannappa contradicted the alleged parity agreement. Therefore, the court concluded that there was no enforceable agreement regarding shareholding parity.

(b) Whether the allotment violates the provisions of Article 7
The petitioners argued that the allotment of 6,000 shares required a special resolution under Article 7 of the articles of association, which was not passed. The court clarified that Article 7 pertains to increasing the authorized capital by issuing new shares, not to issuing shares within the existing authorized capital. Since the authorized capital was Rs. 10 lakhs and the impugned shares were issued from the unsubscribed portion of this existing authorized capital, the board of directors acted within their powers under Article 6. Therefore, the court found no violation of Article 7.

(c) Whether mala fides are established
The petitioners contended that the shares were allotted with the mala fide intention of reducing their shareholding. The court agreed with the respondents that issues of mala fides in allotment of shares cannot be addressed under Section 111, which is limited to rectification of the register of members. Matters of alleged mala fide intentions should be pursued under Sections 397/398 of the Companies Act. The court reiterated that the scope of Section 111 does not extend to examining the motives behind share allotments.

(d) Whether the relief sought by the petitioners be granted
The petitioners sought to have the allotment of 6,000 shares declared void and the names of respondents Nos. 6 and 7 removed from the register of members. The court noted that granting such relief would effectively result in a reduction of share capital, which is beyond the powers conferred under Section 111. Consequently, the court dismissed the petition, stating that the petitioners failed to make out a case for relief under Section 111.

Conclusion:
The court dismissed the petition, concluding that there was no enforceable agreement regarding shareholding parity, no violation of Article 7, and that issues of mala fides cannot be addressed under Section 111. The relief sought by the petitioners was beyond the scope of Section 111, and thus, the petition was dismissed. The court also recorded an offer from the respondents to allot the remaining unallotted shares to the petitioners if they apply for the same. There was no order as to costs.