1983 (12) TMI 242 - HC - Companies Law

Court Declares Share Allotment Void Due to Act Violation, Grants Rectification Relief

The court found that the allotment of shares on March 22, 1974, was void ab initio due to the violation of the Capital Issues (Control) Act, 1947, as it ... Allotment of shares Issues Involved:1. Whether the resolution dated March 22, 1974, violated section 3 of the Capital Issues (Control) Act.2. Whether the conditional allotment as contended by the respondents is permissible in law.3. What are the stages of creation, issue, and allotment of shares in relation to one another.4. Whether the allotment of shares to the petitioner and respondents Nos. 11 to 14 is in breach of section 41(2) of the Companies Act.5. Whether the allotment is hit by section 29 of the Contract Act due to vagueness and uncertainty in the resolution dated March 22, 1974.Issue-wise Detailed Analysis:1. Violation of Section 3 of the Capital Issues (Control) Act:The court examined whether the resolution dated March 22, 1974, violated section 3 of the Capital Issues (Control) Act, 1947. Section 3(2)(a) of the Act states that no company shall make an issue of capital without the consent of the Central Government. The definition of 'issue of capital' includes the creation of any securities. The court found that the resolution dated March 22, 1974, which allotted shares, was in violation of section 3 as it was done without prior consent from the Central Government, which was obtained only on April 22, 1974. Therefore, the allotment was void ab initio.2. Permissibility of Conditional Allotment:The court addressed whether conditional allotment of shares is permissible. The respondents contended that the allotment on March 22, 1974, was conditional and only implemented after obtaining the necessary consent. The court held that even a conditional allotment implies the creation of shares, which is forbidden under section 3 without prior consent. Thus, conditional allotment is not permissible under the Capital Issues (Control) Act, 1947.3. Stages of Creation, Issue, and Allotment of Shares:The court elaborated on the stages of creation, issue, and allotment of shares. It cited judicial precedents, including the dictum of Farwell L.J. in Mostly v. Koffyfontein Mines, Ltd., which distinguishes between creation, issue, and allotment of shares. Creation of shares must precede their issue and allotment. The court found that the resolution on March 22, 1974, constituted an allotment, which was void due to the lack of prior consent, thereby violating the Act.4. Breach of Section 41(2) of the Companies Act:The court did not delve into whether the allotment of shares breached section 41(2) of the Companies Act, 1956, as the primary issue of the allotment's validity under the Capital Issues (Control) Act was sufficient to decide the case. The learned judge had not addressed this issue due to the conclusion reached on the first issue.5. Vagueness and Uncertainty under Section 29 of the Contract Act:Similarly, the court did not address whether the allotment was hit by section 29 of the Contract Act due to vagueness and uncertainty in the resolution dated March 22, 1974. This issue was not considered necessary to resolve given the finding that the allotment was void ab initio.Conclusion:The court concurred with the decision of Shanmukham J. that the allotment of shares on March 22, 1974, was void ab initio due to the violation of the Capital Issues (Control) Act, 1947. The appeal was dismissed, and the petitioner was granted the reliefs sought for rectification of the register of members. The court also rejected the new contention that the actual allotment was made only on September 28, 1974, after obtaining consent, as the factual materials did not support this claim. The plea of estoppel was also dismissed, as the allotment was void from the beginning.