1975 (7) TMI 109 - HC - Companies Law

Summary

Issues Involved:
1. Validity of the allotment of 450 equity shares to opposite parties Nos. 4, 5, and 6.
2. Compliance with Article 23 of the Articles of Association regarding the issuance of unissued shares.
3. Maintainability of the application under Section 155 of the Companies Act, 1956.
4. Alleged defect of parties in the application.
5. Alleged invalidity of the board meeting held on January 3, 1974.

Detailed Analysis:

1. Validity of the Allotment of 450 Equity Shares:
The petitioner challenged the allotment of 450 equity shares to opposite parties Nos. 4, 5, and 6, asserting it was in violation of Article 23 of the Articles of Association. The petitioner argued that the allotment was orchestrated by opposite parties Nos. 2 and 3, who were closely related to the allottees, to gain a majority vote and control over the company. The court found that the allotment was indeed invalid as it did not comply with the mandatory provisions of Article 23, which required the shares to be offered to existing members in proportion to their current holdings.

2. Compliance with Article 23 of the Articles of Association:
Article 23 mandates that unissued shares must be offered to existing members in proportion to their current holdings before being issued to others. The court noted that no such proportional offer was made to the existing members, including the petitioner. The notice issued by the company was general and did not specify the number of shares each member was entitled to, thus defeating the purpose of Article 23. Additionally, the court found that the certificate of posting purportedly sent to the petitioner was tampered with, indicating a deliberate attempt to exclude the petitioner from the share allotment process.

3. Maintainability of the Application under Section 155 of the Companies Act, 1956:
The opposite parties contended that the application under Section 155 was not maintainable due to the complexity of the issues involved and the alleged defect of parties. The court overruled this objection, stating that the questions involved were not so complicated as to require a full trial. The court emphasized that Section 155 provides a summary procedure to address such issues and that the jurisdiction of the company court should not be ousted by raising frivolous questions. The court referenced various judicial precedents, including the Supreme Court's decisions in Harinagar Sugar Mills Ltd. v. Shyam Sunder Jhunjhunwala and Public Passenger Service Ltd. v. M. A. Khadar, to support its stance.

4. Alleged Defect of Parties in the Application:
The opposite parties argued that the application was defective as not all shareholders were impleaded. The court dismissed this objection, stating that only those directly affected by the decision, namely opposite parties Nos. 4 to 6 and the company, were necessary parties. The court referenced the cases of Ratan Lal v. Jagadhari Light Railway Co. Ltd. and Jawahar Mills Ltd. v. Sha Mulchand and Co. Ltd., which held that not all shareholders need to be parties to an application for rectification of the register.

5. Alleged Invalidity of the Board Meeting Held on January 3, 1974:
The petitioner contended that the board meeting on January 3, 1974, where the shares were allotted, was illegal as it was not properly convened, and he was not given notice to attend. The court found merit in this argument, noting that the petitioner was deliberately excluded from the meeting to prevent him from opposing the allotment. The court also observed that the subsequent meeting on February 4, 1974, where the minutes of the January 3 meeting were confirmed, was held without informing the petitioner, further indicating a deliberate attempt to exclude him.

Conclusion:
The court concluded that the allotment of 450 equity shares to opposite parties Nos. 4, 5, and 6 was invalid and directed the company to reissue the shares in compliance with Article 23. The share register was ordered to be rectified by removing the allotment in favor of opposite parties Nos. 4 to 6. The application succeeded, and the petitioner was awarded costs.