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2023 (6) TMI 706 - SC - Companies LawOppression and Mismanagement - increase in the paid-up capital from Rs.1 crore to Rs.2 crores in the Extraordinary General Body Meeting - Allegation of fraudulent allotment of shares in respect of the increased share capital against the appellant. - NCLT issued direction for re-issue of shares to existing shareholders - Further directions issued for conducting audit against allegation of siphoning of funds. HELD THAT - The shareholders from the V.P. Patel Group and the Sheth Group, admittedly, did not apply seizing the opportunity given to them. They did not participate in the Extraordinary General Body Meeting held on 27.01.2010 by which the Authorised Capital was increased. Though there is some controversy sought to be raised that the shareholders were not sent any intimation by way of reminder of their right to apply for the shares, we are inclined to hold that the communication was indeed sent in keeping with the decision taken by the Board of Directors, following the Extraordinary General Body Meeting held on 27.01.2010. The members of the appellants Group, on the other hand, applied for shares. Since, it was contemplated that shareholders could apply not only in the ratio of 1 1 but for larger number of shares, apparently, the members of the appellants Group, applied for more number of shares. Thus, though the wife of the first appellant may have been entitled to only 20 shares, if the rights issue was limited to ratio 1 1, since it was decided to give an opportunity to shareholders to apply for more shares than they held and as, apparently, shares were available to be allotted in numbers far greater than what the shareholders were actually holding, the wife of the first appellant, apparently, came to be allotted the seemingly disproportionate number of shares. As regards the last complaint, the appellants would point out that actually all that happened was repayment of money brought in earlier by appellant-Group, which was parked with the Company and in connection with the marriage of a family member, the amount was returned. It must be noticed that the allegations and responses from both sides are the subject matter of the audit. We cannot be deflected by the same in ruling on the defect or alleged illegality in the matter of allotment of the shares. There is no case, that there was any impediment for the respondents to apply, once it is found that they were informed and aware of their right to apply. In certain situations, a single act could found a case of oppression. This is not a case where allotment of additional shares was made to anyone other than the existing shareholders. This is a case where the terms were applied equally to all the existing shareholders. The change in shareholding, in that the appellants shareholding grew from 30.80% to 63.58% is the result of the respondents refusal to apply despite being given the opportunity. One of the complaints of the respondents is that the purported reason for the increase in the authorized capital and the allotment of the shares also was to infuse fresh funds - HELD THAT - A perusal of Section 81(1) indicates that it dealt with a proposal to increase the subscribed capital of the company by allotment of further shares . Section 105-C of the Companies Act, 1913, used the words where the Directors decide to increase the capital of the company by issue of further shares . In Section 81 of the Companies Act, 1956, the words used are it is proposed to increase the subscribed capital of the company by allotment of further shares . The Authorised Capital cannot be increased by the Board of Directors. It is out of the Authorised Capital that a company issues shares. It then becomes the Issued Capital. Whatever is issued, need not be subscribed to. Whatever is subscribed to, would become the Subscribed Capital. Paid-up Capital is defined in Section 2(32) of the Companies Act, 1956 as including capital credited as paid-up. The Subscribed Capital may be wholly or partly paid-up. An increase in the Authorised Capital does not fall within the powers of the Board, as contemplated in Section 291 of the Act. In Nanalal Zaver (supra), this Court was essentially dealing with the question, as to whether the obligation to offer the shares upon there being a further issue of shares, must be made in conformity with Section 105-C of the earlier Act, which, as we have noticed is essentially the regime continued under Section 81 of the 1956 Act. It is in the said context that the Court held that the Directors could at their own initiative only increase the shares from out of the existing Authorised Capital, but the increase in Authorised Capital could be done only by the company in a meeting of its shareholders. It has been further held that once the Authorised Capital is increased, the Board of Directors would be bound to act under Section 105-C of the Act - The position under the Companies Act, 1956, under Section 81, remained the same in that it is only the company, in its General Body Meeting, which could increase the Authorised Capital. The position still continued that call it increase in Subscribed Capital, it must be within the limits of the Authorised Capital. As far as the aspect that, the purported object was shown as generating fresh funds but in place of Rs.90 lakhs only Rs.21 lakhs was brought in goes, the fact that the paid-up capital was apparently shown as credited by cancelling loans due by the company to the appellants group, should not prevent this Court from overlooking the fact that the debt-equity ratio has undoubtedly been improved. It must be borne in mind that the whole idea was to get funds from the Bank for the expansion of the company. The case of the respondents that there were loans due to them also may not advance their case. It would have been different if the respondents had applied and sought adjustment of the consideration by cancelling loans given by them to the company and it was rejected. The appellants cannot be described as having acted in a defective or in an unfair manner, in the matter of allotment of further shares particularly when the contention of the respondents about the bona fides of the decision to increase the authorised capital has been found in favour of the appellants - Appeal allowed in part.
Issues Involved:
1. Validity of the Increase in Authorised Share Capital. 2. Validity of the Allotment of Shares. 3. Allegations of Mismanagement and Oppression. 4. Financial Irregularities and Audit. Summary: 1. Validity of the Increase in Authorised Share Capital: The Supreme Court upheld the decision of the National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT) that the increase in the authorised share capital from Rs. 1 crore to Rs. 2 crores was valid. The decision was based on the advice from the Bank of Baroda, and it was found to be bona fide and in the best interest of the company. The Court noted that the increase in authorised capital is a decision that must be taken by the shareholders in a General Body Meeting, which was duly done on 27.01.2010. 2. Validity of the Allotment of Shares: The Supreme Court found that the allotment of shares was not done in an oppressive manner. The appellants had offered shares to all existing shareholders in a ratio of 1:1 and allowed them to apply for more shares if desired. The respondents (V.P. Patel Group and Sheth Group) did not apply for any shares, leading to an increased shareholding for the appellants' group. The Court held that the appellants' actions were not defective, illegal, or oppressive, as the terms were applied equally to all shareholders. The Court also noted that the Board of Directors' decision on 18.12.2009 to issue further shares was contingent upon the increase in authorised capital, which was later approved by the shareholders. 3. Allegations of Mismanagement and Oppression: The NCLT and NCLAT had found no merit in the allegations of mismanagement and oppression by the appellants. The Supreme Court concurred, noting that the decision to increase the authorised share capital and the subsequent allotment of shares were not acts of oppression or mismanagement. The Court emphasized that the appellants acted in the best interest of the company and that the change in shareholding was a result of the respondents' refusal to participate in the share allotment. 4. Financial Irregularities and Audit: The NCLT had directed an audit of the company's accounts from the financial year 2009-2010 to determine any amounts siphoned by the petitioners and respondents. The Supreme Court upheld this direction, ensuring that any financial irregularities would be scrutinized and addressed. The audit was to be conducted by M/s. A.R. Sulakhe & Co., and the report was to be placed before the General Body of the company. Conclusion: The Supreme Court allowed the appeals partly, setting aside the direction to allot shares to the respondents. The order for conducting an audit remained undisturbed. The Court found that the appellants' actions were in compliance with the law and were not oppressive or unfair to the respondents. There was no order as to costs.
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