1956 (3) TMI 16 - HC - Companies Law

Court dismisses petition due to lack of evidence on illegal share allotment, deems director exclusion reasonable.

Fateh Chand Kad Versus Hindsons (Patiala) Ltd.

The court dismissed the petition, ruling that the illegal allotment of shares was not proven as the petitioner had acquiesced to the process. The ... Kinds of share capital - Two kinds of share capital, Accounts –Annual accounts and balance sheet, Director number of, Appointment of directors and proportion of those who are to retire by rotation , Resignation of director, Directors – Power of, Oppression and mismanagement –Power of Tribunal on application under sections 397 and 398, Winding up - Company when deemed unable to pay its debts Issues Involved:1. Illegal allotment of shares.2. Wrongful exclusion of the petitioner from the office of a director.3. Reduction of the number of directors below the minimum required.4. Reckless wastage of company funds.Detailed Analysis:1. Illegal Allotment of Shares:The petitioner alleged that the allotment of shares to Shri Sat Pal, Shri Raj Pal, and Shrimati Pritam Devi was illegal as the mandatory provisions of section 105C of the Companies Act were not complied with. Section 105C requires that when the directors decide to increase the capital by issuing further shares, such shares must be offered to existing shareholders in proportion to their existing shares. The court noted that the term 'capital' in section 105C means the subscribed capital, and every time further shares are issued, they should be offered to existing shareholders. The petitioner contended that he did not attend the meeting on 1st February and was not aware of his entitlement to the shares. However, the court found that the petitioner did attend the meeting and consented to the allotment. The court concluded that the petitioner's participation in the allotment process indicated acquiescence, and thus, the allotment was not illegal.2. Wrongful Exclusion of the Petitioner from the Office of a Director:The petitioner claimed that his resignation was misinterpreted to exclude him from the company's management. He argued that he intended to resign only from the office of a 'working director' and not as an ordinary director. The court examined the resignation letter, which stated, 'Kindly consider me from today as a sleeping partner and oblige.' The court interpreted 'sleeping partner' as synonymous with a shareholder, not a director. The court found that the board's interpretation of the resignation as a complete resignation from the directorship was reasonable and not mala fide. The court also noted that the petitioner continued to engage in transactions with the company after his resignation, indicating no serious antagonism.3. Reduction of the Number of Directors Below the Minimum Required:The petitioner argued that the number of directors was reduced to less than four, the minimum required by the articles. Shri Sat Pal did not hold the necessary qualification, and Shri Swarn J. Singh ceased to be a director when he was not elected in the next annual general meeting. The court found that Shri Sat Pal ceased to be a director on 9th March 1955, for failing to obtain the necessary share qualification. However, the court held that the acts of a director are valid notwithstanding any defect in their appointment or qualification until the appointment is shown to be invalid. The court also noted that the continuing directors could act notwithstanding any vacancy, as long as their number was not reduced below the necessary quorum.4. Reckless Wastage of Company Funds:The petitioner alleged that the directors were recklessly wasting the company's funds to harm his interests and benefit themselves. The specific instances cited were the payment of Rs. 500 per month to each working director, Rs. 200 per month to Shri Sat Pal as a legal adviser, and Rs. 1,000 for insurance premiums. The court found that these remunerations and expenses were approved when the petitioner was a working director and with his consent. The court concluded that the remuneration was settled unanimously and confirmed in a general meeting, indicating no mala fide intent or reckless wastage of funds.Conclusion:The court dismissed the petition, finding no sufficient grounds to wind up the company under the 'just and equitable' clause. The court emphasized that the petitioner's grievances did not justify the dissolution of the company, especially against the unanimous view of the other shareholders. The court also rejected the alternative prayer to direct the company or its members to purchase the petitioner's shares, as there was no evidence of the company's affairs being conducted in a manner prejudicial to the company's interest or oppressive to its members. The application was dismissed with costs, and counsel's fee was set at Rs. 200.