1992 (3) TMI 279 - HC - Companies Law

Board's Illegal Share Allotment Declared Void Under Section 446(2)

The court upheld that the board meeting and allotment of 7,000 equity shares by V.R. Textiles Limited were illegal and void due to non-compliance with ... Winding up – Suits stayed on winding-up order, Powers of liquidator, Exercise and control of liquidator’s powers Issues Involved:1. Validity of the board meeting held on September 21, 1991.2. Legality of the allotment of 7,000 equity shares.3. Jurisdiction of the High Court under Section 446(2) of the Companies Act.4. Locus standi of the petitioners to file the application.5. Compliance with Section 81 of the Companies Act regarding the issuance of shares.6. Impact of the share allotment on the value of shares held by Ramakrishna Industrials Private Limited.Issue-wise Detailed Analysis:1. Validity of the board meeting held on September 21, 1991:The court examined whether the board meeting of V.R. Textiles Limited on September 21, 1991, was held in accordance with the provisions of the Companies Act, 1956. The petitioners alleged that the meeting was not properly convened, as no notice was given to certain directors, including Mr. R. Venkataswamy Naidu and others. The court found that the meeting was not held in compliance with the legal requirements, rendering the resolutions passed therein, including the allotment of shares, null and void.2. Legality of the allotment of 7,000 equity shares:The petitioners argued that the allotment of 7,000 equity shares was made without offering them to the existing shareholders in proportion to their holdings, as required by Section 81 of the Companies Act. The court noted that V.R. Textiles Limited, being a deemed public company under Section 43A(1A), should have complied with Section 81(1)(a) and (b). The court found that no such offer was made to the existing shareholders, including the official liquidator representing Ramakrishna Industrials Private Limited. Consequently, the allotment was declared illegal and void.3. Jurisdiction of the High Court under Section 446(2) of the Companies Act:The court discussed the scope of Section 446(2), which grants jurisdiction to the court winding up the company to entertain and dispose of any suit or proceeding by or against the company, any claim made by or against the company, and any question of priorities or any other question whatsoever relating to or arising in the course of the winding-up of the company. The court held that it had jurisdiction to entertain the applications filed by the petitioners, as the issues involved were directly related to the winding-up proceedings of Ramakrishna Industrials Private Limited.4. Locus standi of the petitioners to file the application:The appellants contended that the petitioners, being contributories and creditors, had no locus standi to file the applications independently without the sanction or leave of the court. The court referred to Section 457(3) of the Companies Act, which allows any creditor or contributory to apply to the court with respect to the exercise or proposed exercise of any of the powers conferred by this section. The court concluded that the petitioners had the right to approach the court to protect the interests of the company under liquidation.5. Compliance with Section 81 of the Companies Act regarding the issuance of shares:The court emphasized the mandatory requirement under Section 81(1)(a) and (b) to offer further shares to existing shareholders in proportion to their holdings. The court found that V.R. Textiles Limited failed to comply with this provision, as no offer was made to the official liquidator or other shareholders. This non-compliance rendered the allotment of 7,000 shares invalid.6. Impact of the share allotment on the value of shares held by Ramakrishna Industrials Private Limited:The court analyzed the effect of the allotment on the shareholding pattern. Before the allotment, Ramakrishna Industrials held 2,376 shares, constituting 30.89% of the paid-up capital of V.R. Textiles Limited. After the allotment, their shareholding was diluted to 16.17%. In contrast, V. Radhakrishnan's group's shareholding increased from 12.02% to 53.91%. The court found that this substantial dilution adversely affected the value of Ramakrishna Industrials' shares, justifying the need to nullify the allotment.Conclusion:The court dismissed the appeal, upholding the findings of the learned company judge that the board meeting on September 21, 1991, and the subsequent allotment of 7,000 equity shares were illegal and void. The court also confirmed its jurisdiction under Section 446(2) and recognized the locus standi of the petitioners to file the applications. The share allotment was found to have significantly impacted the value of Ramakrishna Industrials' shares, necessitating the rectification of the register of members.