1992 (8) TMI 297 - Board - Companies Law

Summary

Issues Involved:
1. Maintainability of an application under Section 111(4) against a private limited company.
2. Authority of the board of directors to allot shares without offering them to existing members.
3. Scope of inquiry under Sections 111(4) and 111(7) to decide the bona fides of share allotments and order rectification of the register of members.

Analysis:

Issue 1: Maintainability of an Application under Section 111(4) against a Private Limited Company
The judgment first addresses whether an application under Section 111(4) of the Companies Act, 1956, is maintainable against a private limited company. The court notes that prior to the amendment by the Companies (Amendment) Act, 1988, Section 111 was not applicable to private limited companies unless they were subsidiaries of public limited companies. However, the amendment incorporated the provisions of Section 155 into Section 111, which did not exclude private limited companies. The court concludes that the provisions of Section 111, particularly Sub-sections (4) and (7), are applicable to private limited companies, making the application maintainable.

Issue 2: Authority of the Board of Directors to Allot Shares
The court then examines whether the board of directors of a private limited company can allot shares to any person, including themselves, without offering such shares to existing members, especially when there is an understanding to that effect at the time of incorporation. The articles of association of the company, particularly Articles 5 and 7, give discretionary power to the directors to allot shares. However, the court emphasizes that this power must be exercised bona fide and in the interest of the company. The court finds that there was an understanding among the original partners for equal capital participation, which was disclosed to the Reserve Bank of India and was part of the company's records. The directors, by allotting shares to themselves and outsiders without offering them to existing shareholders, breached their fiduciary duties, acted in bad faith, and violated the principles of equity and fair play.

Issue 3: Scope of Inquiry under Sections 111(4) and 111(7)
The court discusses the wide jurisdiction granted under Sub-section (7) of Section 111, which allows the Company Law Board to decide any question necessary or expedient in connection with the application for rectification. The court cites several precedents to support its view that it can examine the bona fides of the allotments made by the directors. The court concludes that the directors' actions in allotting shares to themselves and others without offering them to existing shareholders were not bona fide and lacked probity.

Conclusion:
The court declares the allotments of 1,660 shares to the respondents and three outsiders as invalid, resulting in a reduction of the company's capital. The court orders the company to offer these shares to the existing shareholders on a pro-rata basis. If any shareholder declines, the directors are free to allot the shares as they see fit. The company is directed to rectify the register of members accordingly, and there is no order as to costs.