9911796707
TMI Blog2023 (6) TMI 706X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ised 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 h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ereinafter referred to as the Act , for short). By Order dated 17.05.2017, the NCLT, Ahmedabad Bench disposed of the petitions with the following directions: 92. In this set of facts, it is not just and equitable to order winding up of the company. If the company Is to be wound up it is not in the interest of the company or and it is not in the interest of the three groups of shareholders. Therefore, this Tribunal is of the view that it is just and expedient to give following directions/ orders in this matter: - (a) In view of the findings on point No. 3 it is held that increase in the authorised share capital of company from rupees one crore to two crores is valid and binding on all the shareholders. However, the allotment of shares in respect of increased share capital shall be made to all the existing shareholders of the Company as on 18.12.2009 in proportion to their shareholding. In case if any shareholder is not willing to subscribe for additional shares, then those shares shall be allotted to other shareholders taking their options again proportionate to their shareholding. (b) In view of findings on point No. 4, the removal of respondents 2 and 3 as director ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shall not be any alienation of properties both movable and immovable of the respondent no. 1 company by any of the parties. (i) Pending completion of the entire process as per this order there shall not be any allotment of shares or transfer or sale of shares except as indicated in this order. (j) The company shall bear the fee of independent valuer and auditors. (k) Both Petitions are disposed of accordingly. No order as to costs. 3. The appellants thereupon filed Company Appeals under Section 421 of the Companies Act, 2013, viz., Company Appeals (AT) 272 and 273 of 2017 against the Common Order in the aforesaid Petitions. The National Company Law Appellate Tribunal, New Delhi (NCLAT) has affirmed substantially the Order passed by the NCLT. The modification was only in regard to paragraph-92C (supra) of the Order of the NCLT. The NCLAT substituted the words financial year 2008-2009 in place of 2009-2010 . Affirming the rest of the directions, the Appeals were disposed of. It is this Order, which is impugned in the Appeals before this Court. 4. We have heard Smt. Meenakshi Arora, learned Senior Counsel on behalf of the appellants. We have heard, on the oth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iz., that the allotment was defective , was insupportable, it is contended. All the shareholders were given an equal opportunity to apply for shares in proportion to their existing shareholdings (1:1). They could apply for lesser number of shares. They could also apply for more number of shares. Lastly, they could exercise the choice to not apply for any shares at all. This choice was made available to all the shareholders across the Board falling in the three Groups. The fact of the matter is the Sheth group and the V.P. Patel Group did not apply. Without finding any illegality otherwise, the NCLT and NCLAT, it is contended, clearly erred. 6. Per contra, Shri Nitin Rai, learned Senior Counsel, would point out that the Court must bear in mind that the first respondent is a closely held company. It is more or less a quasi-partnership and it ran on trust. The authorised capital of the company was Rs.1 crore. Without the company, in the General Body Meeting, resolving to increase the authorised capital, there were no shares, which could have been allotted by the Board of Directors. In this regard, he sought support from Judgment of this Court reported in Nanalal Zaver and another ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the loan due from the first respondent company to the appellants. This would nail the lie of the appellants that they had acted bonafide and in the best interest of the company. It is contended that the object of the appellants was to wrest control of a closely held company and it is this impermissible object, which alone will be frustrated by this Court upholding the concurrent directions of the NCLT and NCLAT. 7. Shri Malak Manish Bhat would echo the contentions addressed by Shri Nitin Rai. The fact that the company is closely held family and Group Unit, is stressed. ANALYSIS 8. On 24.11.2009, in response to the proposal for a term-loan made by the appellants, the Bank of Baroda, undoubtedly, communicated the following: 1. We advise you to increase Share Capital for minimum level of Rs.2Crs. 2. We advise you to expand the board of directors so personal guarantee of additional eligible can be available to the bank for increase of bank s exposure. 3. We request you to let us know the full details of Reserve and Surplus mentioned in your Balance Sheet as of 31.03.2009. 9. On 08.12.2009, the first respondent company send a Notice to its Directors, fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... resolved as under: RESOLVED that pursuant to the requirement of the fresh funds for expanding the business activity of the Company, Company be and is hereby authorized to issue 10,00,000 (Ten Lakh) equity shares of Rs. 10/- each at per to the existing shareholders in the ratio of one share for every share held. RESOVLVED FURTHER that shareholders shall have right to apply for and in case of shares not being subscribed by any other shareholder be allotted to the shareholder who is willing to take additional shares. RESOLVED FURTHER that a notice inviting the shareholders to subscribe for an get allotted their entitlement be forwarded to the shareholders in this regards and the same shall be considered for allotment upon authorized capital for the Company having been increased. 11. Following this decision, Notice of Extraordinary General Meeting to be held on 27.01.2010, was given. The shareholders were informed that as decided in the Meeting on 18.12.2009, the company proposed to issue further shares to its existing members in the ratio of 1:1. Interested members were required to exercise their rights on or before the 05.02.2010. Next, it was indicated as follows ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Rs. ____/- towards our subscription money by way of DD/PO/Cheque No. ___ dated I 12010. b. We hereby authorize the company to convert the amount of unsecured deposit of Rs. _____ /- sanding to our credit in the books of the Company. 4. We do not wish to apply for any shares of the company. I/We hereby agree to accept the Equity Shares applied for on such smaller number as may be allotted to me/us subject to the terms of Application Form and Articles of Association of the Company. I/We undertake that I/We will sign all such other documents and do all such other acts. necessary on my/our part to enable me/us to be registered as the holder(s) of the Equity Shares which may be allotted to me/us. I/We authorized you to place my/our name(s) on the Register of Members of the Company as the holder(s) of the equity shares and to register and address(es) as given below. I/We note. that the Board of Directors are entitled in their absolute discretion to accept or reject this application in whole or in part without assigning any reason whatsoever. I/We agree to the allotment of shares subject to the Rules, Regulations and Conditions laid down by Financial Insti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sent of the Directors present, chaired the meeting. 2. LEAVE OF ABSENCE Leave of absence was granted to Mr. Manish Patel, Director and Mr. Krunal Patel, Director. 3. OUT COME OF EXTRA ORDINARY GENERAL MEETING: It was informed to the Board that Share Holders of the Company has passed Ordinary Resolution for increase in Authorized Share Capital of the Company from Rs. 1 ,00,00,000/- to Rs. 2,00,00,000/-. The Board has took note of the same. Any one of the director of the Company was then authorized to file the necessary Form 5 with the office of Registrar of Companies. 4.BOARD MEETING FOR ALLOTMENT OF SHARES:PROP It was informed to the Board that as mentioned Shares Holders of the Company has passed resolution for increase of Authorised Share Capital and therefore, and as per the application and notice already circulated the last date of receipt of application is 5th February, 2010. It is therefore. proposed to convene meeting of the Board of Directors is proposed. to be held on 9th February, 20 l 0, for considering allotment of further issue of Equity Shares. The Board disuccsed the matter and decided to hold Board Meeting on 9th February, 2010. It was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 149000 4. Jyotsna Dilipkumar Patel 185000 5. Nisatgkumar Hasmukhlal Patel 92000 6. Bankimkumar Dilipkumar Patel 71000 7. Dishaben Hasmukhlal Patel 98000 Total 900000 RESOLVED FURTHER THAT company do issue necessary share certificates for the above shares within the stipulated period and Mr. Hasmukhlala Patel ad Mr. Dilipkumar Patel be and are authorised to sign the said certificates under the Common Seal of the Company. RESOLVED FURTHER THAT the necessary Return of Allotment in Form 2 be filed with the Registrar of Companies, Gujarat. Date: 09.02.2010 DIRECTOR (HASMUKHBHAI PATEL) CHAIRMAN THE FINDINGS OF THE NCLT 18. Answering the question, as to whether increase in the paid-up capital from Rs.1 crore to Rs.2 crores in the Extraordinary General Body Meeting dated 27.01.2010 was an act of oppression or not, the NCLT f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were at loggerheads. There appeared to be no possibility of the three Groups coming together and conducting affairs of the first respondent company. It is next pointed that the findings of the Tribunal would show that there are no established acts of oppression and mismanagement except some financial irregularities, which require examination by the Board of Directors. Thereafter, we have noticed the directions in paragraph-92 (supra). 19. Next, is the finding in the impugned Order in regard to allotment. The NCLAT also finds that the contention of the Sheth Group and V.P. Patel Group that they did not get Notice of the Extraordinary General Body Meeting, could not be believed. The need to increase the share capital and the circumstances, which led to it, canvassed by the appellants, including the letter dated 24.11.2009 issued by the Bank of Baroda, was found reliable. Dealing with the point pertinent to the Appeals before us, viz, the actual allotment of shares on increase of share capital, it is, inter alia, found that there did not appear to be any discussion by the NCLT regarding allotment of shares. 20. Next, the NCLAT finds that the allotment in the ratio of 1:1 may no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anticipation. It is next found that the proper and legal procedure has not been followed. The Board Resolution dated 09.02.2010 could not be upheld. 23. The direction of the NCLT was upheld. 24. We can find that the case of the V.P. Patel Group and the Sheth Group based on there being mismanagement and oppression by the appellants, has otherwise been rejected. The complaint that the appellants acted in an oppressive manner or mismanaged the Company, when it decided to increase the authorised capital, has also been rejected. The NCLT has not given any reasoning, as such, as found by the NCLAT for the direction to allot shares to the V.P. Patel Group and the Sheth Group. The NCLAT appears to, however, support the direction on the basis we have noted above. 25. Shri Nitin Rai emphasised that the Board of Directors could not have allotted the shares, when the existing authorised capital was already subscribed and, what is more, paid-up. Putting the cart before the horse, as it were, applications were invited from shareholders to apply for shares which were not existing. In other words, it was only after the increase in the authorised capital by the decision of the Extraordinar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the larger interest of the Company, the decision to issue shares cannot be struck down on the ground that it has incidentally benefited the Directors in their capacity as shareholders. We must, therefore, reject Shri Seervai's argument that in the instant case, the Board of Directors abused its fiduciary power in deciding upon the issue of rights shares. (Emphasis supplied) 27. While on the said decision, we find it apposite that bearing in mind the complaint of Shri Nitin Rai, learned Senior Counsel that the shares were not got valued and they were issued without a premium that we notice the following statement: 120. Finally, it is also not true to say, as a statement of law, that Directors have no power to issue shares at par, if their market price is above par. These are primarily matters of policy for the Directors to decide in the exercise of their discretion and no hard and fast rule can be laid down to fetter that discretion. As observed by Lord Davey in Hilder v. Dexter [(1902) AC 474, 480: 71 LJ Ch 781 : 87 LT 311 : 18 TLR 800] : I am not aware of any law which obliges a company to issue its shares above par because they are saleable at a premium in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... applied in cases of partnership where the partners owe a duty to act with utmost good faith towards each other. Non-applicability of Section 81 of the Act to private companies does not mean that the Directors have absolute freedom in the matter of management of affairs of the company. In the present case Article 4(iii) of the Articles of Association prohibits any invitation to the public for subscription of shares or debentures of the company. The intention from this appears to be that the share capital of the company remains within a close-knit group. Therefore, if the Directors fail to act in the manner prescribed above they can in the sense indicated by us earlier be held liable for breach of trust for misapplying funds of the company and for misappropriating its assets. (Emphasis supplied) 30. It is true that the appellant had 30.80 per cent of the paid-up share capital. The V.P. Patel Group had 24.20 per cent of the paid-up share capital. The Sheth Group had 45 per cent of the paid-up share capital. This is when the authorised capital of the Company was Rs.1 crore. The position, after the authorised capital was increased to Rs.2 crores, on the other hand, is as foll ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he advice given by the Bank of Baroda. This was a perfectly justified decision, being the need of the hour. Since, the Authorised Share Capital is part of the Memorandum of Association of the Company, an increase in the same would be permissible only after it is endorsed in a meeting of the shareholders. Such a meeting was convened on 27.01.2010. It is true that even prior to such a meeting, the Board of Directors had resolved to invite applications from shareholders. The form of application has been produced before us, which we have extracted. The shareholder could, in terms of the form, do four things: i. Since the Board had resolved to allot shares in a ratio of 1:1, the shareholder could apply for one share for every one share held by him; ii. The application form further contemplated that the shareholder could indicate that he wished to apply for lesser number of shares than he was entitled to; iii. A shareholder could apply for more number of shares than he was entitled to; iv. Lastly, he could express his disinclination to apply for any shares. 35. It is in the backdrop of this form that we must continue with the narrative. The shareholders from the V.P. Patel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be deflected by the same in ruling on the defect or alleged illegality in the matter of allotment of the shares. 38. The facts in Dale Carrington Invt. (P) Ltd. (supra) are clearly distinguishable. The case represented on facts a situation, where, the efforts were solely directed at consolidating and cornering of power by the person in question. In this case, from the facts, as recounted, we are inclined to think that the shares were offered to the existing shareholders and, what is more, on a fair and equal footing. This is subject to what we hold further. 39. It is contended by respondents that though the Board decided on 27.01.2001 to remind the shareholders of the right to apply, it was not done. Per contra, the appellants contend that the notices were sent and they were also produced. The respondents would however point out that no finding has been rendered. 40. The Notice dated 27.01.2020 sent, reads as follows: 27th January, 2010 To, All the shareholders as per list enclosed Sub.: Outcome of Extra Ordinary General Meeting. Dear Sir, We are pleased to inform you that members of the Company remain present at the Extra Ordinary Gene ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere is a declining to accept the shares offered. It is further found that there could not have been application in anticipation. This means that it is the understanding of the NCLAT that while shares could be applied for, to the extent of 1:1 as offered, but as regards shares being offered in excess of the said ratio, as permitted under the Board Resolution dated 18.12.2009, it would have been done only after a shareholder refused to take shares offered. A shareholder could not apply for excess shares anticipating that the other shareholders would not take up the shares offered. 44. Now, in law, let us first proceed on the basis that the offer was made with the Authorised Capital being such that the acceptance of the offer would keep the capital within the Authorised Capital. 45. A rolled-up offer would involve the following consequences: A shareholder was free to not apply at all. A shareholder could apply for less than at the ratio of 1:1. He could apply for shares as per the ratio of 1:1. Now, he could under the application form, apply for shares in excess. There was no limit. The legal limit to be crossed in law, is not in dispute. The law contemplates that shares must ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thorized capital and for the allotment of the shares are fraught with absence of bona fides and the real intention was to capture controlling interest in the company. This is sought to be met by the appellants by pointing out that in view of the loan remaining outstanding, there was a skewed debt-equity ratio which was a clog and the result of the company writing off the loan due from the appellants group was to enable the company to present a better financial condition. The respondents would contend that loans were also owing to the respondent s groups. 48. The second contention which remains is the fact that on 18.12.2009 when the Board of Directors decided to issue 10 lakh shares in the ratio of 1:1, and what is more, giving a right to the shareholders to apply for, and in case of shares not being subscribed by other shareholders, to be allotted those shares to those who were willing to take additional shares, it was all done in anticipation that the shareholders would approve of the increase in the authorized capital from Rs.1 Crore to Rs.2 Crore. In other words, the very authority of the Board of Directors to decide upon to the further issue of shares is questioned as it in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . (1) whether the issue of further shares by the Directors was in contravention of the provisions of Section 105-C of the Indian Companies Act, ... 52. Section 105-C of the Companies Act, 1913 read as follows: 105-C. Further issue of capital. Where the Directors decide to increase the capital of the company by the issue of further shares such shares shall be offered to the members in proportion to the existing shares held by each member (irrespective of class) and such offer shall be made by notice specifying the number of shares to which the member is entitled, and limiting a time within which the offer, if not accepted, will be deemed to be declined; and after the expiration of such time, or on receipt of an intimation from the member to whom such notice is given that he declines to accept the shares offered, the Directors may dispose of the same in such manner as they think most beneficial to the company. 60. The case of the appellants who were the unsuccessful plaintiffs was based on there being a violation of Section 105-C. In the opinion of Justice M.C. Mahajan, we find the following formulation: 18. The language employed in the section admits of three ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e purpose of increasing the capital beyond the authorised capital. He contends that Section 105-C has no application to this case. 66. Section 50 deals with, among other things, alteration of the conditions of the memorandum of association of the company by increasing its share capital by the issue of new shares. The very idea of alteration of the memorandum by the issue of new shares clearly indicates that it contemplates an increase of the share capital above the authorised capital with which the company got itself registered. This increase can only be done by the company in a general meeting as provided in sub-section (2) of Section 50. This increase above the authorised limit cannot possibly be done by the Directors on their own responsibility. Section 105-C, however, speaks of increase of capital by the issue of further shares. The words used are capital and not share capital and further shares and not new shares. It speaks of increase by the Directors. Therefore, the section only contemplates such increase of capital as is within the competence of the Directors to decide upon. It clearly follows from this that the section is intended to cover a case where the Directors d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... years from the formation of a company or at any time after the expiry of one year from the allotment of shares in that company made for the first time after its formation, whichever is earlier, it is proposed to increase the subscribed capital of the company by allotment of further shares, then, (a) such further] shares shall be offered to the persons who, at the date of the offer, are holders of the equity shares of the company, in proportion, as nearly as circumstances admit, to the capital paid up on those shares at that date; (b) the offer aforesaid shall be made by notice specifying the number of shares offered and limiting a time not being less than fifteen days from the date of the offer within which the offer, if not accepted, will be deemed to have been declined; (c) unless the articles of the company otherwise provide, the offer aforesaid shall be deemed to include a right exercis- able by the person concerned to renounce the shares offered to him or any of them in favour of any other person; and the notice referred to in clause (b) shall contain a statement of this right; (d) after the expiry of the time specified in the notice aforesaid, or on re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8. In other words, 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. 69. We proceed on the basis that 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the opprobrium of it being an act of oppression. We would think that the decisions of the Board of Directors on 18.12.2009, understood as a whole, only means that the Resolution to issue further capital was to become effective only after the Authorised Capital was duly increased. This is not a case where the Board of Directors had resolved to allot the shares otherwise disregarding the mandate of Section 81 of the Act. What is more shares have been offered on a ratio of 1:1 to the existing shareholders. They were given the choice of refusal or to apply for more or lesser number of shares. This is not a case where the Resolution was to allot the further shares to the Directors or Members of their Group alone. There is a concurrent finding that the decision to go in for increase in capital, viz., Authorised Capital, was not vulnerable to attack. The decision was based on the advice given by the Bank. The purpose of the Board of Directors to increase the capital has been admittedly found to be bona fide. An incidental gain, namely the change in the shareholding pattern is entirely the inevitable result of the refusal of the respondent s groups to apply. We cannot proceed on the basis ..... X X X X Extracts X X X X X X X X Extracts X X X X
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