1950 (5) TMI 15 - SC - Companies Law

Whether the issue of further shares by the directors was in contravention of section 105-C of the Indian Companies Act? Held that - As noticed before, the object of the section is to prevent discrimination amongst shareholders and prevent the directors from offering shares to outsiders before they are offered to the shareholders. So long as these two requirements are complied with, the action of the directors in selecting the time when they will issue the shares as also the proportion in which they should be issue a is a matter left to their discretion and it is not the province of the Court to interfere with the exercise of that discretion. This is or course subject to the general exception that the directors are not to act against the interest of the company or mala fide. No such question arises in this case and therefore it is unnecessary to discuss that aspect of the situation. In my opinion therefore on this third ground this contention of the appellants should be rejected. Appeal dismissed.

Issues Involved:
1. Bona fide nature of the directors' decision to issue further shares.
2. Alleged contravention of Section 105-C of the Indian Companies Act.

Issue-Wise Detailed Analysis:

1. Bona Fide Nature of the Directors' Decision to Issue Further Shares:
- Background and Allegations: The appellants, two shareholders of the company, contended that the issue of further shares was not made bona fide for the benefit of the company but was aimed at retaining control of the company in the hands of the current directors.
- Trial and Appellate Court Findings: Both the trial court and the appellate court found that the company was indeed in need of capital and that the issue of new shares was bona fide. The courts rejected the appellants' contention that the directors acted solely to retain control.
- Supreme Court's Analysis: The Supreme Court agreed with the lower courts' findings. It was established that the company needed funds, and the directors' decision to issue further shares was primarily motivated by this need. The court acknowledged that while the directors were also motivated by a desire to prevent the Singhania group from gaining control, this secondary motive did not nullify the primary, bona fide motive of raising necessary capital for the company.
- Conclusion: The Supreme Court held that the directors' actions were bona fide and in the interest of the company. The appeal on this ground was dismissed.

2. Alleged Contravention of Section 105-C of the Indian Companies Act:
- Section 105-C: This section mandates that when directors decide to increase the capital by issuing further shares, such shares must be offered to existing shareholders in proportion to their current holdings.
- Appellants' Argument: The appellants argued that the directors did not offer the entire lot of 4,596 shares to the existing shareholders proportionally, thus violating Section 105-C. They pointed out that only 4,323 1/5 shares were offered proportionally, leaving 272 4/5 shares unoffered.
- Respondents' Defense: The respondents provided three main defenses:
1. Section 105-C applies only when the capital is increased beyond the authorized limit, which was not the case here.
2. The section should be construed practically, similar to Regulation 42 in Table A of the Companies Act, which allows for proportional offers "as nearly as circumstances admit."
3. The directors had not yet committed any breach of Section 105-C as the unoffered shares had not been disposed of.
- Supreme Court's Analysis: The court did not find it necessary to express an opinion on the first two defenses due to its conclusion on the third point. It interpreted Section 105-C strictly, noting that the directors must offer shares proportionally to all shareholders without discrimination. The court found no evidence of discrimination in the offer made by the directors. The court also held that the directors were not required to offer all shares in one lot and that the unoffered shares could remain in hand until a future offer.
- Conclusion: The Supreme Court concluded that there was no contravention of Section 105-C, as the directors had substantially complied with the requirements. The appeal on this ground was also dismissed.

Judgment:
The Supreme Court dismissed the appeal, upholding the decisions of the lower courts. The directors' decision to issue further shares was found to be bona fide and in the interest of the company, and there was no contravention of Section 105-C of the Indian Companies Act. The appeal was dismissed with costs.

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