1965 (4) TMI 53 - SC - Companies Law

Whether the allotment of the 2,000 shares and the several loans in the names of Ramnath and Narayandas were not genuine transactions, and that the parties did not intend that the allottees would be the holders of the shares or that Narayandas and Ramnath would be liable to repay the loans? Held that - We are satisfied that the allotment of the 2,000 shares was intended to be operative and the allottees became the owners of the shares. We are also satisfied that the loans to Ramnath and Narayandas were intended to be operative, and the company did not give any assurance to them that they would not be called upon to repay the loans. The allotment of the 2,000 shares to the nominees of Narayandas in the meeting of the directors of the company held on May 25, 1946, was not void. In view of the fact that Narayandas was not entitled to vote on the allotment and alter exclusion of his vote there was no quorum, the allotment was irregular, and the company was entitled to avoid the allotment. Instead of avoiding the allotment, the company has chosen to affirm it. The allotment is, therefore, valid and binding on the allottees. For all the reasons, we hold that the allotment is valid, and there is no failure of consideration. Appeal dismissed.

Issues Involved:
1. Validity of the allotment of 2,000 shares.
2. Genuine nature of the loans to Ramnath and Narayandas.
3. Quorum and interested director voting at the board meeting.
4. Financial assistance in connection with the purchase of shares.
5. Validity of loan transactions and the issue of repayment.

Issue-wise Detailed Analysis:

1. Validity of the Allotment of 2,000 Shares:
The appellants contended that the allotment of 2,000 shares to the nominees of Narayandas was not genuine and that the parties did not intend for the allottees to be the holders of the shares. However, the court found that the plea regarding the non-operative nature of the allotment was not sufficiently raised in the pleadings. The evidence showed that Narayandas and his nominees dealt with the shares as their own, and there were no records of any assurance given on behalf of the company to Narayandas regarding the disposal of the shares. The court concluded that the allotment of the 2,000 shares was intended to be operative, and the allottees were intended to be the holders of the shares.

2. Genuine Nature of the Loans to Ramnath and Narayandas:
The appellants argued that the loans in the names of Ramnath and Narayandas were not genuine transactions. The court, however, found that Ramnath had made several payments towards the discharge of his indebtedness, and the loans were secured by promissory notes, trust receipts, and letters of pledge. The court was satisfied that the loans were intended to be operative and that the company did not give any assurance to the appellants that they would not be called upon to repay the loans.

3. Quorum and Interested Director Voting at the Board Meeting:
The appellants contended that the board meeting held on May 25, 1946, was invalid because Narayandas, an interested director, voted on the allotment of the shares, and without his vote, there was no quorum. The court acknowledged that under section 91B(1) of the Indian Companies Act, 1913, Narayandas should not have voted, and his presence should not have counted towards the quorum. However, the court held that the allotment was not void but irregular, and the company had chosen to affirm the allotment, making it valid and binding on the allottees. Furthermore, Narayandas was estopped from contending that the allotment was invalid as he had allowed the company to commence business on the basis that the shares had been subscribed.

4. Financial Assistance in Connection with the Purchase of Shares:
The appellants argued that the loans to Narayandas and Ramnath were financial assistance by the company in connection with the purchase of its shares, in contravention of section 54A(2) of the Indian Companies Act, 1913. The court noted that this contention was not sufficiently raised in the written statement, and no issue was framed on this question. The court indicated that it was not open to the appellants to urge this contention at this stage.

5. Validity of Loan Transactions and the Issue of Repayment:
The appellants contended that no actual cash was paid to Narayandas on December 27, 1951, and thus the suit as framed was not maintainable. The court found that the entries in the books of account amounted to a payment of Rs. 1,00,000 by the company to Narayandas by way of a loan and repayment of the same amount by Narayandas towards the discharge of Ramnath's indebtedness. The court held that the company had sufficiently established the payment of Rs. 1,00,000 by way of loan on December 27, 1951. The court also dismissed the contention that the loans were financial assistance in connection with the purchase of shares, as it was not adequately raised.

Conclusion:
The appeals were dismissed with costs, and the court upheld the validity of the allotment of the 2,000 shares and the genuineness of the loans to Ramnath and Narayandas. The court also found that the quorum issue did not invalidate the allotment and that Narayandas was estopped from challenging the allotment. The contention regarding financial assistance in connection with the purchase of shares was not entertained due to insufficient raising of the issue.

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