1961 (5) TMI 41 - HC - Companies Law

Summary

Issues Involved:
1. Rectification of the register of members of Jai Hanuman Trading Company (Private) Limited.
2. Allegations of improper and illegal issuance of shares by certain directors.
3. Necessity and legitimacy of issuing new shares.
4. Analysis of precedents and legal principles regarding the issuance of shares.

Issue-wise Detailed Analysis:

1. Rectification of the Register of Members:
The application was filed under section 155 of the Companies Act by thirteen petitioners seeking rectification of the register of members of Jai Hanuman Trading Company (Private) Limited. The petitioners claimed that the names of the respondents were entered on the register without sufficient cause, alleging that the shares were improperly issued to friends and relatives of certain directors to monopolize the company.

2. Allegations of Improper and Illegal Issuance of Shares:
The petitioners alleged that four directors (Ratti Ram, Ram Kishan Das, Hari Chand, and Parma Nand) formed a group to monopolize the company by issuing shares to their friends and relatives without offering them to existing members. They claimed this allotment was irregular and illegal, aimed at securing a permanent majority. The respondents contested these allegations, stating that the new shareholders were not exclusively related to the four directors and that the allotment was necessary for raising capital.

3. Necessity and Legitimacy of Issuing New Shares:
The petitioners argued that issuing new shares was unnecessary given the company's substantial funds and high profits, suggesting the allotment was made to benefit the chairman's friends and relatives. They cited high dividends and significant funds in the company's accounts as evidence. The respondents countered that the company needed funds for business expansion and that the allotment was a legitimate exercise of the directors' powers. They noted that the company had liabilities and required capital for smooth operations.

4. Analysis of Precedents and Legal Principles:
The petitioners relied on three English cases (Fraser v. Whalley, Punt v. Symons & Co. Limited, and Piercy v. S. Mills & Company, Limited) to argue that the issuance of shares for creating a voting majority rather than benefiting the company was improper. These cases established that directors must exercise their power to issue shares bona fide for the company's advantage, not for personal control. The respondents referred to a Calcutta High Court decision (Jhajharia Bros., Ltd. v. Sholapur Spinning & Weaving Co. Ltd.) and a Supreme Court decision (Nanalal Zaver v. Bombay Life Assurance Company, Limited) to support their position that the majority's decision to issue shares should not be interfered with absent proof of mala fides or coercion.

Judgment:
The court found no sufficient cause to interfere with the directors' decision to issue new shares. It held that the petitioners failed to prove that the allotment was made to benefit friends and relatives of the chairman at the company's expense. The court noted that the directors' decision fell within the scope of their powers and related to internal management. It concluded that the petitioners did not make a case for rectification under section 155 of the Companies Act, 1956, and dismissed the petition with costs.