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TMI Blog2021 (7) TMI 621X X X X Extracts X X X X X X X X Extracts X X X X ..... f the company. It was pleaded that if the right issue is allowed, the shareholding of the Petitioner group would get reduced to around 1% from 50% and he claimed that with this intent only the right issue is launched. In support of this claim, firstly it is argued that there was no business necessity to raise funds as primary purpose of raising of such funds was to repay the loan taken by the Petitioner No. 1 in his personal capacity for its propriety concern and other private lenders. Default in repayment had happened in the loan repayment by Petitioner's firm and the bank had issued the notice under Section 13(2) of SARFAESI Act. It was submitted that the Petitioner had entered into an arrangement with the Bank and had got the requisite time to regularise the account. In this regard, he mentioned about communication exchanged between the Petitioner and the Bank. On enquiry from the Bench, he confirmed the facts that the Respondent No. Company had given Corporate Guarantee as well as Security by way of pledge of an immovable property belonging to the company, in securing such loan. Thereafter, he raised second plea that second purpose of raising funds was to repay the outstand ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any. In a limited sense they are also trustees for the shareholders of the company. To the extent the power of the Directors is delineated in the Memorandum and Articles of Association of the company, the Directors are bound to act accordingly. As agents of the company they must act within the scope of their authority and must disclose that they are acting on behalf of the company. The fiduciary capacity within which the Directors have to act enjoins upon them a duty to act on behalf of a company with utmost good faith, utmost care and skill and due diligence and in the interest of the company they represent. They have a duty to make full and honest disclosure to the shareholders regarding all important matters relating to the company. It follows that in the matter of issue of additional shares, the directors owe a fiduciary duty to issue shares for a proper purpose. This duty is owed by them to the shareholders of the company. Therefore, even though Section 81 of the Companies Act, 1956 which contains certain requirements in the matter of issue of further share capital by a company does not apply to private limited companies, the directors in a private limited company are expected ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tive good faith. They had indeed honestly believed that their actions were in best interest of the company. Despite this it was observed: "an essential element of the scheme, and indeed its primary purpose, was to ensure control of the company by the directors and those whom they could confidently regard as their supporters." 22. As such, he concluded that the allotment was liable to be set aside as a consequence of the exercise of the power for an improper motive. He also held that the power to issue shares was fiduciary in nature. In Howard Smith Ltd. v. Ampol Petroleum Limited, the Privy Council confirmed the above view expressed by Buckley, J. which shows a preference for the proper purpose doctrine. The Privy Council felt that the bona fide test was not sufficient to meet the challenge because it failed to encompass the obligation of directors to be fair. The directors' acts should not only satisfy the test of bona fides, they should also be done with a proper motive. Any lingering doubts over the status of the proper purpose doctrine as a separate and independent head of directors duty within the common law jurisdiction have been laid to rest by two decision of the Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and grievance and cause him greater hardship. Such an order will not further the ends of justice and indeed the cause of justice may he defeated." 26. On the question of issue 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 recognized a pre-emptive right of a shareholder to participate in further issue of shares. 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 in facts of each case and if it is found that it is not so, such allotment is liable to be set aside. 27. Reference has been made to the case of Piercy v. S. Mills & Co. Ltd., where directors, who ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... addition to Corporate Guarantee and in case the loan was not repaid, the Company will face legal action which would be prejudicial to the interests of the Company as well as its members as the bank has already initiated proceedings under SARFAESI Act against the Petitioner. It was also claimed that the Petitioner No. 1 was not in a position to pay even a meagre amount of Rs. 22 lacs and till date he had paid Rs. 15 lacs only and as per communication received from the Bank, the Bank has rejected the request made by the Petitioner No. 1. Thus, the raising of funds was necessary for the purpose of the Company. The learned Sr. Counsel further contended that apart from this requirement, the Company had taken loans from friends and other relations. Being a private limited company, this modus operandi had been adopted since beginning and such loans had been taken during the tenure of the Petitioner No. 1 who had also signed Financial Statements for respective years. He vehemently argued that if funds were taken from relatives that by itself would not mean that those loans or interest thereon was not to be paid. As regards to the urgency of the situation, he specifically pointed out that e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase of Dale & Carrington Invt. (P) Ltd. and Another v. P.K. Prathapan and Ors. (supra), the learned counsel for the Respondent contented that in that case issue involved allotment of shares by director by adopting dubious method and becoming a majority shareholder from a minority shareholder and in those circumstances, the Hon'ble Supreme Court gave the findings based upon the facts of that case, hence, said findings cannot be applicable to the present case pari materia, wherein no such methodology was adopted. Petitioners are also given same offer in a right issue of shares in the present case and right issue is floated in complete compliance of the provisions of law. There is no element of illegality in procedure followed by the Respondent No. 1 Company in offering right issue. He also referred to certain portion of the said order to support his claims. The Respondents further relied on the order of the Hon'ble Supreme Court in the case of V.S. Krishnan Vs. Westfort HiTech Hospital Ltd. (2008) 3 SCC 363, wherein, Hon'ble Supreme Court after taking into consideration the decision relied on by Petitioner had held that where offer to subscribe to the right issue was give ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e case and considering the elaborate arguments made by both sides, we are of the considered view that balance of convenience tilts towards the Respondent No. 1 Company. 9. The Respondent No. 1 Company is raising and would require that their loans to be paid immediately. The Petitioner has defaulted in payment of loan taken in personal capacity and Petitioner has chosen to not to subscribe to the right issue having been offered to them on the same terms and conditions as well. Thus, requirement of raising funds for the purpose of running business of the Company appears to exist. 10. Accordingly, we hold that there is no justification for staying or keeping the right issue in abeyance at this initial stage. As a sequel to above discussion, the prayer made by the Petitioners for interim relief is rejected. It is made clear that this interim order cannot be construed as an expression of any opinion on the merits of other issues, if any, raised in the present petition filed under Section 241 and 242 of the Companies Act, 2013. 11. Interim relief as prayed at prayers 24(i)(a) and 24(i)(b) are hereby rejected. Interim order stands vacated. Main matter to come up for hearing on 12.08.2 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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