2021 (1) TMI 765 - AT - Companies Law

Illegal Share Capital Increase Rectified, Shareholding Restored, Additional Shares Issued within 3 Months

Thangam Metal Cans Private Limited, L. Balaji Versus R. Srinivasan, S. Krishna Kumar, R. Kanagavel, R. Mahesh Kumar, L. Saravanan, M. Venkatesh Kumar, R. Lenin, L. Desigamani, Athitya Kumar, B. Ramkumar, Balaji Inimai, M. Rajesh Kumar And Balaji Inimai Versus R. Srinivasan, S. Krishna Kumar, R. Kanagavel, R. Mahesh Kumar, L. Saravanan, M. Venkatesh Kumar, R. Lenin, L. Desigamani, Athitya Kumar, B. Ramkumar, M. Rajesh Kumar, L. Balaji, Thangam Metal Cansprivate Limited

The Tribunal held that the petition was not time-barred due to the continuous and recurring impact of the wrongful act of increasing authorized share ... Validity of increase in share capital - rectification of the Register of Members of the Company to reflect the issued and paid up capital of the company - time limitation - whether the increased authorised capital of first respondent company from 3,40,000 shares to 7,90,000 shares on 30.12.2011 is illegal and void? - HELD THAT:- We agree with the finding of learned tribunal that if the alleged wrongful act is such that its effect in continuous course of oppression and there was no prospect of remedying the same then the tribunal is entitled to interfere by passing an appropriate order. The alleged increase of authorized share capital and allotment of share without proper notice to the petitioner is a wrongful act which has a recurring effect on the rights of the petitioners who are the shareholders - the petition is not barred by law of limitation and is maintainable. The interest of the company is of paramount importance as far as Section 397 & 398 of the Companies Act, 1956 as also Section 241 & 242 of the Companies Act, 2013 is concerned. The same purpose in “just and equitable” manner can be served, if additional shares are issued to the Respondent No.1 & 2 to bring to their shareholding level to the same level as it was existing as on 07.07.2007 / 30.09.2011 and it will not hurt the company either in the form of additional financial burden or health of their overall business or to the Members/Shareholders for the relief they have sought. The purpose of Section 397 and 398 of the Companies Act, 1956 as also Section 241 and 242 of the Companies Act, 2013, the Tribunal may with a view to bring to an end the matters complained of make such order as it thinks fit for the regulations of Conduct of affairs of the company in future. However, the issue for consideration is whether annulling the allotment of shares and filing of all reports and returns with RoC from 30.09.2011 till date including setting aside the shares allotment which will affect the cushion of the bank for its Security for Loan will be in the interest of the company or not. The purpose equally can be served if shareholding pattern what was there as on 2007 is to be maintained by the company in the same proportion amongst the shareholders by issue of further shares to the aggrieved shareholders or others at the same rate at which it has been taken over by the Appellant will suffice the same purpose and will bring Respondents No. 1&2 at par at the level of its percentage Shareholding in 2007. To bring the matter to an end, complained of in the interest of the Company in future the best course of action is to issue further shares to the Respondent No.1 & 2 at the level at which they are claiming to be in 2007 at the same price at which the appellant has purchased those shares as their shareholding has drastically come down from 21%+ to less than 10%. This is to be complied with by Appellants within a period of 3 months. The order of the Tribunal is set aside. Issues Involved:1. Whether the petition is time-barred.2. Legality of the increase in authorized share capital from 3,40,000 shares to 7,90,000 shares.3. Reliefs sought by the petitioners.Issue-wise Detailed Analysis:Issue No.1 - Whether the Petition is Time-Barred:The Tribunal determined that the petition was not barred by the law of limitation. It reasoned that the wrongful act of increasing the authorized share capital and allotting shares without proper notice had a continuous and recurring effect on the rights of the petitioners, who were shareholders. This ongoing impact justified the Tribunal's interference, thereby making the petition maintainable.Issue No.2 - Legality of the Increase in Authorized Share Capital:The Tribunal found that the increase in authorized share capital from 3,40,000 shares to 7,90,000 shares, as decided in the AGM held on 30.09.2011, and the subsequent allotments made on 30.12.2011, were illegal and void. The Tribunal noted that the proper notice was not served to the petitioners, and there was an absence of any offer to them. Consequently, all filings with the Registrar of Companies (RoC) from 30.09.2011 to the date of the order were set aside, and the shareholding pattern was restored to the status as of the AGM held on 07.07.2007.Reliefs:The Tribunal ordered the rectification of the Register of Members to reflect the issued and paid-up capital as 3,40,000 shares of Rs. 10/- each, as held by the original subscribers. The Appellants were directed to comply with this rectification within ten days from the receipt of the certified copy of the order.Appellate Tribunal's Observations:The Appellants argued that reversing the paid-up capital to the level of the Financial Year 2011-12 and setting aside all filings with the RoC would cause commercial and legal complications, including a reduction in the borrowing power of the company. They suggested issuing additional shares to the Respondent No.1 & 2 to restore their shareholding level to what it was on 07.07.2007/30.09.2011, which would not financially burden the company.The Tribunal agreed that annulling the allotment of shares and refiling reports with the RoC would not be in the company's best interest. Instead, it found that issuing further shares to Respondent No.1 & 2 at the same price as those taken by the Appellants would be a just and equitable solution, restoring their shareholding percentage to the 2007 level.Conclusion:The Tribunal set aside the order of the lower Tribunal and directed the Appellants to issue additional shares to Respondent No.1 & 2 within three months, restoring their shareholding to the 2007 level. The Tribunal did not address the purchase of shares by the Appellants from Respondent No.1 & 2 based on expert valuation, as it was not part of the relief sought in the judgment. There was no order as to costs.