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TMI Blog2009 (1) TMI 841X X X X Extracts X X X X X X X X Extracts X X X X ..... p capital. In view of the challenge of further allotment of shares, the petition is maintainable in accordance with law and also as held by the Company Law Board in SHRI DINESH SHARMA AND SMT. BINA VERSUS VARDAAN AGROTECH PVT. LTD [ 2006 (8) TMI 586 - COMPANY LAW BOARD] . Accordingly, the maintainability issue is answered in favour of the petitioner. Further allotment of shares - failure to make offering to all the existing shareholders in proportion to their shareholding - non-consideration of petitioners share application money pending with the company during impugned allotment - HELD THAT:- It is on record and evidenced from the pleadings that the petitioner paid an amount of ₹ 115 lakhs as share application money during the period when the allotment of shares have taken place. Though the money was returned by the company to the petitioner later, it was done during the period the impugned allotment of shares were made. The company and the respondents have not denied this aspect. The minimum requirement has to be followed when the further allotment of shares are to be made. The factors which borne out from the records are that the petitioner intended to subscribe fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers are passed: (i) The allotment of 5,44,974 shares effected in November, 2002 and the further allotment of 3,16,920 shares effected in February, 2003 is hereby set aside. (ii) Consequently, the capital of the company be accordingly reduced. (iii) The company may make fresh offer of shares to the existing share holders in the proportion to their shareholding in their company prior to the impugned allotments. Petition disposed off. - Kanthi Narahari,J. For The Appellant : R. Murari And Others For The Respondent : R. Shankaranarayanan And Others ORDER The present company petition filed under sections 397 and 398 of the Companies Act, 1956 ( the Act ), assailing the acts of oppression and mismanagement in the affairs of M/s. K and S Consulting Group Private Limited ( the company ) by respondents Nos. 2 to 5 herein and arrayed respondents Nos. 6, 7 and 8 as parties to the petition/ whereof seeking following directions from this Bench: (a) to set aside the allotment of 5,44,974 shares effected in November, 2002 and the further allotment of 3,16,920 shares effected in February, 2003; (b) consequently, to direct that the capital of the company be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p in the capital of the company on July 16, 2002, vis-a-vis the allotment that was also made to other shareholders of the transferor companies that were amalgamated. Thus, the total number of shares allotted by the company to and in favour of the shareholders of the seven transferor companies was 7,75,786 equity shares of ₹ 10 each fully paid-up. The total subscribed and paid-up capital increased to the value of 8,25,786 shares (7,75,786 + 50,000) shares. The details of shares and percentage of the shareholders has been made in tabular column at page 6 of the petition, which is extracted hereunder: Sl. No. Names of the shareholders No. of shares Percentage 1. S. Kishore (R2) 3,17,031 38.39% 2. K. A. Sastry (R3) 2,97,749 36.06% 3. H. A. Kiran 4,106 0.50% 4. K. Ratna 12,100 1.47% 5. Aditi Kishore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een received from all the shareholders and hence they were returning part of the funds to the petitioner as the company did not need such large capital at that point of time. Accordingly, the company refunded a sum of ₹ 80 lakhs during June and July 2003 leaving a balance of ₹ 35 lakhs. Respondents Nos. 2 and 3 informed the petitions that the shares would be allotted for the balance amount at par and that the shareholding of the petitioner in the company would be protected. The petitioner believed the said representation and felt reassured that the shareholding pattern would remain the same. For the reasons best known to respondents Nos. 2 and 3, even the annual reports of the company was not being sent to the petitioner regularly and thereby it was kept in dark about the affairs of the company. Respondent No. 2 informed the petitioner that they were able to raise funds from outside sources without in any manner diluting the shareholding pattern in the company and thereby the balance of amount of ₹ 35 lakhs was returned to the petitioner in September, 2005. The petitioner genuinely believed that there would be no alteration in the paid up capital and therefore rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2. Karra Sastry (R6) 30,480 3. Kosha Investments Limited (R7) 29,000 4, Sri Avantika Contractors (R8) 54,400 Total 3,16,920 The comparison of the share holding pattern and percentage before and after the allotment as per the last annual return would show that the only motive of the allotments were to increase the shareholding and the economic interest of respondents Nos. 2, 3 and 4 to the prejudice of the other shareholders, by illegally reducing the stake and economic interest of the petitioner in respondent No. 1 company. The details have been given in a tabular column at paragraph 14 of page 10, which is extracted hereunder: Sl. No. Names of the shareholders No. of shares (before the allotments) Percentage No. of shares (after the allotments) Percentage 1. S. Kishore (R2) 3,17,031 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd can be easily discerned from the following: I. the petitioner had subscribed for the shares by paying the share application money, when the impugned allotment was made in November, 2002; II. the board of directors of the company was aware that the petitioner was keen to subscribe to the shares ; III. the allotments were not made nor offered to the existing shareholders in proportion to their shareholding ; IV. the board of directors was aware of the fact that the equity shares of the company commanded a higher value than the par value at which they were first allotted on November 9, 2002, whereas the second allotment was made on February 27, 2003, at a premium of ₹ 290 per share ; V. the allotments were made with a sole motive of increasing the shareholding percentage of respondents Nos. 2, 3 and 4. VI. the directors who occupy a fiduciary position committed breach of their fiduciary duty and allotted shares in a manner not wanted by law and the said allotment is illegal and void. In view of the facts and reasons as stated above the impugned allotments are illegal, void and exfacie bad in law and liable to be set aside. During the course of argument ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reholders of such a company when further shares are being issued . Learned counsel also relied on paragraph 26 of the judgment to show (page 181): On the question of fresh share capital, it was held to be illegal to issue shares to only one shareholder. This was held to be a violation of common law right of every shareholder. Common law recognised a pre-emptive right of a shareholder to participate in further issue of share, However, in India, in view of section 81 of the Companies Act, such a right cannot be found for sure. However, the test to be applied in such cases which requires the court to examine as to whether the shares were issued bona fide and for the benefit of the company, would import such considerations in case of private limited companies under the Indian law. Existence of right to issue shares to one director may technically be there, but the question whether the right has been exercised bona fide and in the interests of the company has to be considered on the facts of each case and if it is found that it is not so, such allotment is liable to be set aside . In view of the decision of the apex court, the allotment of shares is liable to be set aside and prayed fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of 3,16,920 equity shares of ₹ 10 each fully paid up at a premium of ₹ 240 per share and the allotment was made to third parties. The board of directors of the company at the time of incorporation constituted respondents Nos. 2 and 3, i.e., S/Shri S. Kishore and K. A. Sastry were on the board on April 6, 1998. Shri H. Kiran, respondent No. 4 herein was inducted into the board on July 26, 2001. However, respondent No. 4 exited from the company as director on November 8, 2007 and ceased to have any interest in the company and in the group. Thereafter, respondents Nos. 2 and 3 continued to be the directors of the company. Learned counsel further submitted that the consideration for the allotment of shares made in November, 2002 and February, 2003 has been received in the transferor companies partly prior to the scheme of amalgamation and partly thereafter and was originally included in the liabilities. The court while sanctioning the scheme of amalgamation did not specifically deal with these issues. The board of directors decided to make the allotment and thereupon the allotments were made. Learned counsel further submitted that the company did not make any offer to the e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the allotment of shares have taken place. Though the money was returned by the company to the petitioner later, it was done during the period the impugned allotment of shares were made. The company and the respondents have not denied this aspect. Further, the petitioner had categorically stated how the allotment is bad in law. On perusal of the documents, the first allotment was made on November 9, 2002, allotting 5,44,974 equity shares to respondents Nos. 2, 3 and 4 herein and Form No. 2 dated November 17, 2003, was filed with the Registrar of Companies on November 18, 2003. The second allotment was made on February 27, 2003, allotting 3,16,920 equity shares to respondents Nos. 5 to 8 herein and Form No. 2 dated February 27, 2003, was filed with the Registrar of Companies on December 4, 2003. From this it is crystal clear that during this period the petitioner's share application money was with the company and the company made allotment only to respondents Nos. 2, 3 and 4 and other third parties without following the procedure as alleged by the petitioner. The minimum requirement has to be followed when the further allotment of shares are to be made. The factors which borne ..... X X X X Extracts X X X X X X X X Extracts X X X X
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