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TMI Blog1992 (8) TMI 297X X X X Extracts X X X X X X X X Extracts X X X X ..... ed company incorporated on September 20, 1976, under the Act. Respondents Nos. 1 and 2, namely, Shri Shyamal Mondal and Smt. Mira Mondal, who are husband and wife are the subscribers to the memorandum of association and also the first directors of the company. It has been stated that the four partners, namely, Shri Shyamal Mondal, Dr. Jitendra Nath Saha, Smt. Bithika Saha and Shri H.S. Gala, of a Canadian firm, viz., Cetus Electronics, which was carrying on the business of design, development, manufacturing and marketing of electronic products and consumer goods, decided to set up in India a similar business and for the said purpose respondent No. 1 was given the responsibility to form a company in India. It is further stated that in the Indian business the said four partners would have equal capital participation. The authorised capital of the company is ₹ 2 lakhs divided into 2,000 equity shares of ₹ 100 each. It appears that the company initially had allotted 340 equity shares and these were held by the following persons : Shri Shyamal Mondal Smt. Mira Mondal Dr. J. N. Saha Smt. Bithika Saha Shri H. S. Gala 3. It is further stated that Smt. Mira Mon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s subsequent to the first allotment were made to increase the holdings of respondents No. 1 and 2 in the company and the principles of equity and fair play were not followed. Quoting certain passages from the judgment of the Supreme Court in Needle Industries (India) Limited v. Needle Industries Newey (India) Holding Limited [1981] 51 Comp Cas 743 ; MANU/SC/0050/1981 : AIR 1981 SC 1298, Shri Dutta contended that in regard to the issue of shares subsequent to the first allotment, there was a breach of fiduciary duties of the directors. He further contended that apart from the understanding between the partners, his clients as existing members were entitled to participate in the further issue of capital of the company, but the respondents have failed in their duties as directors in making an offer to his clients although his clients were always willing to provide further funds by way of equity capital. He also contended that there is a gross abuse of power by the directors and allotment of further shares by the directors to themselves and to a few outsiders was not bona fide. As regards the scope of inquiry on an application under Section 111(4) of the Act, Shri Dutta contended that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issues. Before amendment of the Companies Act, 1956, by the Companies (Amendment) Act, 1988, Section 111 covered cases of transfers or transmissions and power under that section was given to the Central Government and Section 155 relating to rectification of the register of members was dealt with by the courts. By the Companies (Amendment) Act, 1988, Section 155 was omitted and the said section was incorporated in Section 111. Clause 16 of the Companies (Amendment) Bill, 1987, inter alia, reads as under (see [1987] 62 Comp Cas (St.) 81, 117) : This clause seeks to recast the existing Section 111 by incorporating therein the provisions of Section 155, which confers power on the High Court to order rectification of the register of members . 9. Section 111, before its amendment, was not applicable to a private limited company so long as it was not a subsidiary of a public limited company. However, in the case of a private limited company if transmission of shares took place by a sale thereof, held by the court or other public authority, the provisions of Section 111 were applicable to such private limited company, as if it were a public limited company. 10. This is so far ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y a sale thereof held by the court or other public authority, the Company Law Board has been given power to order acquisition of such shares by any member on payment to the purchaser, of the price paid by him therefore or such other sum as the Company Law Board may determine in accordance with the proviso to Sub-section (11). There is nothing in Section 111 to indicate that the provisions of the said section shall not apply to a private company. On the contrary, all the provisions of the said section are applicable to a private company except to the extent provided in Sub-section (11) and Sub-section (13). 13. In view of the aforesaid legal position we hold that the provisions of Section 111 are also applicable to a private company and accordingly this application under Sub-sections (4) and (7) of Section 111 of the Act is maintainable. 14. Now, we shall deal with the second issue which is the main question that falls for consideration in this case. While considering this issue, it is necessary to look into the relevant provisions of the articles of association of the company with regard to the issue of shares, transfer of shares, etc. The relevant articles are articles 3, 5, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Provided, however, that a transfer by a member to his or her wife or husband, father, mother, brother, sister, son or daughter and in the name of a legal heir or successor of such a member shall not be liable to the above restrictions. 18. If the estate of any member of the company vests with any receiver or official assignee for composition with his creditors or for his insolvency or if his share is attached under decree of any court, the share of such member will not be transferred to the claimant thereof, but instead, the said share shall be offered to the existing members at a price not less than fair value of the shares to be ascertained by the company's auditor and transfer will be made to the highest bidder and the sale proceeds thereof shall be paid to the claimant. 15. Article 5 states that subject to the provisions of the Act, the directors may allot shares to such persons as they may think fit. Article 7 also gives power to the board of directors to allot shares to any person for consideration other than in cash, for services rendered by or assets acquired from such persons. These two articles give discretionary power to the board of directors to a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is has also been confirmed by the respondent in his affidavit-in-opposition stating that main contention behind the issue of the letter as referred to therein is that the share capital shall be raised according to the requirements of funds within the parameters of approval accorded by the Reserve Bank of India . This is the candid admission of the respondents with regard to further issue of shares. 17. During the hearing, learned counsel for the respondents, ultimately confirmed the existence of an arrangement between the four persons for distribution of the shares in equal proportions. However, in spite of the understanding, the respondent-directors, while issuing further shares did not offer the same to all the shareholders and allotted shares only to themselves and other outsiders. 18. According to Shri Biswas, there was no agreement relating to equal holding of shares and even assuming that there was one, since the same has not been incorporated in the articles of association of the company, it does not bind the company. He relied on the decisions in Rangaraj (V.B.) v. V.B. Gopalakrishnan [1992] 73 Comp Cas 201 (SC) and Amrit Kaur Puri v. Kapurthala Flour, Oil and Genera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o produce all necessary papers relating to the application made to the Reserve Bank of India under the Foreign Exchange Regulation Act (FERA) for allotment of shares to the non-resident Indians. From the copies of papers furnished by Shri Biswas, it is seen that on July 26, 1976, Shri Shyamal Mondal wrote a letter to the Joint Controller, Ex change Control Department, Reserve Bank of India, Calcutta, seeking permission to sell 500 shares of the face value of ₹ 100 each to each of the three non-resident Indians. In reply to the said letter, the Reserve Bank of India by a communication dated August 6, 1976, addressed to Shri Shyamal Mondal, asked him to submit the application in the prescribed form from each of the intending purchasers. The Reserve Bank of India also called for certain particulars including an undertaking from each of the non-resident investors to the effect that neither the capital nor the dividend/profit to be accrued on shares will be repatriated from India. On September 27, 1976, the respondent-company sent three applications in the prescribed form from Shri H.S. Gala, Mrs. Bithika Sana and Dr. Jitendra Nath Sana together with an undertaking from each of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aise the Indian holding to 60 per cent within a period of five years, expired in January, 1982, and no further extension was taken from the Reserve Bank of India and the allotment subsequently made to resident Indians exceeded far above the so called 60 per cent, the arguments advanced by Shri Biswas in respect of the allotment made by the respondent-company after the first allotment of 340 shares, seem nothing but an afterthought. 23. We shall now deal with issue No. (iii). As regards the scope of inquiry under Section 111, Shri Dutta has drawn the attention of this Bench to Sub-section (7) of Section 111 which reads as under : 111.(7) On an application under this section, the Company Law Board,- (a) may decide any question relating to the title of any person who is a party to the application to have his name entered in, or omitted from, the register ; (b) generally, may decide any question which it is necessary or expedient to decide in connection with the application for rectification. 24. Shri Dutta submitted that the language of Clause (b) of Sub-section (7) gives very wide jurisdiction to the Company Law Board to decide any question for rectification of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation of the register is made, it would be open to the court while considering the main relief to decide all questions that may arise in such an application on rival contentions. 25. Shri Dutta also submitted that the decision in Shri Guldbrai Kalidas Naik's case [1978] 48 Comp Cas 438 (Guj) was followed by the Iterate High Court in Mathew Michael v. Teekoy Rubbers (India) Limited [1983} 54 Comp Cas 88. In the said case, the court observed that the jurisdiction conferred by Section 155(3) is wide and comprehensive, Shri Dutta also relied on some other decisions to strengthen his arguments as to the scope of inquiry by the court (how Company Law Board) in a proceeding for rectification of the register of members. We shall briefly discuss the said cases. 26. In Public Passenger Service Limited v. M.A. Khadar [1966] 36 Comp Cas 1 (SC), the Supreme Court had occasion to consider the scope of Section 155. In that case, the issue related to the validity of a notice for forfeiture of shares and the court observed that such a matter could be examined in proceedings under Section 155. 27. In Harinagar Sugar Mills Limited v. Shyam Sunder Jhunjhunwala [1961] 31 Comp Cas 387 (S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssue of those 450 equity shares to all the members of the company in terms of the articles of association. 31. In a recent judgment the Calcutta High Court in Farhat Sheikh, v. Escman Metalo Chemical Private Limited [1991] 71 Comp Cas 88, made the following observations as to the scope of power under Section 155 (now Section 111) (headnote) : The relief envisaged under Section 155 of the Companies Act, 1956, is discretionary in nature. This discretion, however, is not an uncontrolled one but can only be exercised in accordance with the known principles of justice, equity and fair play and as such refusal to interfere in terms of the provisions of Section 155 can only be had where the facts do not justify the same. In other words, the law court while considering the matter for rectification within the meaning of Section 155 of the Act ought always to consider the facts and circumstances of each matter and, on the basis thereof, come to its conclusion. 32. From the observations made by the Supreme Court and different High Courts in the cases referred to above, it is quite clear that in an application under Section 111(4) of the Act, the Company Law Board is competent to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... own right of equity shares of the normal value of ₹ 1,000 only in the company. 35. According to the aforesaid provisions of the articles of association, holding of shares by the additional directors is not compulsory if the company in its general meeting takes a decision that additional directors need not hold any share. We have already observed that while making further issue of capital, the company should have made offers to the existing shareholders and, therefore, before the board of directors allowed the additional directors to take 10 shares each in the company as their share qualification, the matter should have been placed before the company in its general meeting. If the shareholders in the general meeting had approved the allotment of 30 shares to the outsiders, then alone could the directors allot such shares. In that view of the matter we hold that the allotment of 10 shares each to S/Shri N.N. Mukherjee, S. Chatterjee and A.K. Ganguly, is invalid. The allotment of 350 shares made to Shri Shyamal Mondal on December 30, 1988, is also declared invalid, as the company failed to offer the further shares to the existing shareholders on the pro rata basis. For the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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