1972 (10) TMI 54 - HC - Companies Law

Former directors seek recovery of fees, dispute shares as payment, courts rule on consent

The plaintiffs, former directors of the defendant company, sought recovery of sitting fees but refused shares offered as part payment. The trial court ... Shares – Allotment of, Share capital - Further issue of Issues Involved:1. Whether the plaintiffs can question the allotment of shares made by the board of directors of the company on March 10, 1967.2. Whether the said allotment of shares is in contravention of section 81 of the Companies Act.Detailed Analysis:Issue 1: Questioning the Allotment of SharesThe plaintiffs, former directors of the defendant company, sought recovery of sitting fees amounting to Rs. 2,000 each. The company had allotted seven preference shares worth Rs. 700 to each plaintiff as part payment for the sitting fees, which the plaintiffs refused to accept. The company contended that the plaintiffs were estopped from questioning the allotment as they had participated in meetings where the allotment was unanimously resolved and had subsequently approved balance sheets reflecting the allotment.The trial court found that the plaintiffs were consenting parties to the unanimous resolution passed on March 10, 1967, which allotted the shares. The court noted that the plaintiffs had not objected during subsequent meetings and had approved balance sheets showing the shares. Thus, the trial court held that the plaintiffs were bound by the allotment and could not recover the Rs. 700 adjusted for the shares.The lower appellate court, however, reversed this decision, holding that the allotment was without the plaintiffs' application or consent and that their participation in meetings did not bind them to the allotment. The court also found the allotment in contravention of section 81 of the Companies Act.Upon further appeal, it was argued that the plaintiffs, as creditors, had orally agreed to the allotment, which was confirmed by their conduct in subsequent meetings. The court held that the plaintiffs' continuous and consistent conduct indicated their consent to the allotment. The court referenced section 194 of the Companies Act, which states that minutes of a meeting are evidence of the proceedings, supporting the validity of the unanimous resolution. The court concluded that the plaintiffs were willing parties to the allotment and could not later question it on the ground of not having made a written application.Issue 2: Contravention of Section 81 of the Companies ActThe lower appellate court held that the allotment of shares contravened section 81 of the Companies Act, which governs the issuance of further capital to the public. However, the appellate court found that clause 6 of the company's articles of association allowed directors to allot shares in lieu of payment for services rendered, thus not falling under section 81.The court further noted that section 81 applies to public allotments intended to increase subscribed capital, which was not the case here. The allotment was a measure to address the company's financial difficulties by compensating creditors, who were also directors, with shares. Therefore, section 81 was deemed inapplicable.Moreover, even if the allotment were to violate section 81, it would be voidable only at the instance of shareholders aggrieved by the non-allotment, not by those who received shares.Conclusion:The second appeals were allowed, setting aside the decrees and judgments of the lower appellate court and restoring those of the trial court. The plaintiffs were found bound by the unanimous resolution and the allotment of shares, and the allotment did not contravene section 81 of the Companies Act. No order as to costs was made.