TaxTMI 
TaxTMI 
2016 (11) TMI 27
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....e authorised capital of the company was Rs. 10 lakh consisting of 4,000 redeemable cumulative preference shares of Rs. 100/- each and 6,000 ordinary shares of Rs. 100/- each. The paid-up capital of the company before the issue of new, ordinary and bonus shares, which is the bone of contention between the parties, consisted of 4132 partly paid ordinary shares and 1868 fully paid ordinary shares besides 3065 fully paid preference shares. One M/s. Gupta Brothers originally held the 4132 partly paid shares. The said shares were forfeited sometime in the year 1966 and thereafter the same were issued to the Sanwalka Group who paid a total of Rs. 45 for each share consisting of payment at the time of application and allotment and Rs. 10/- per share on a call being made subsequently. Whereas, according to Gupta Group, these shares were held by the Sanwalka Group on behalf of Gupta Brothers, the said fact is denied by the Sanwalka Group. According to the Sanwalka Group, the Gupta Group without notice to them had increased the authorized capital of the company to Rs. 5 crores in an Extra Ordinary General Meeting of the Company held on 5.7.1994. No notice of the said meeting was given to the ....
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....the members of the Sanwalka Group in the register of members of the company; (2) cancellation of the allotment of bonus shares; (3) cancellation of the issue and allotment of 25000 partly paid up ordinary equity shares to the Gupta Group; (4) cancellation of 3065 equity shares to the holders of the 3065 preference shares; (5) cancellation of the lease agreement in respect of the industrial plot and (6) restoration of the names of the concerned members of the Sanwalka Group as Directors of the Company. 6. The Company Petition was opposed by Gupta Group as not maintainable in law. According to the Gupta Group, the shares held by the members of the Sanwalka Group stood forfeited and the holders thereof had ceased to be members of the company. Such forfeiture, according to the Gupta Group, was in the following circumstances. The said shares were held by the Sanwalka Group as beneficiaries on behalf of the original holders i.e. M/s. Gupta Brothers. As the shares held by the Gupta Brothers were partly paid, the Sanwalka Group as beneficiary holders, was liable to pay the unpaid value of the said shares along with interest therein on a ca....
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....up to the maintainability of the petition. The CLB concluded that the shares held by the members of the Sanwalka Group were in their own right, independent of any right of M/s. Gupta Brothers all of which stood extinguished upon forfeiture of the shares held by the said Gupta Brothers. The CLB further held that under Article 18 of the Articles of Association of the Company, it is M/s. Gupta Brothers who were liable to pay the dues, if any, on the said forfeited shares. The Board also found that the members of the Sanwalka Group had paid Rs. 45 per share and though there were an obligation to pay the balance on a call being made the materials on record did not disclose that any such call was made at any point of time. In this regard the notice dated 5.1.1991 was held by the CLB not to be duly proved to have been issued following the procedure under Section 53 of the Act. It was also held that the said notice dated 5.1.1991 did not contemplate forfeiture of the shares in the event of failure to pay the call money as required under Clause 14 of the Articles of Association of the Company. On the basis of the said findings the twin objections raised by the Gupta Group to the maintainabi....
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....dealt with by the CLB and the High Court and the arguments advanced on behalf of the parties the issues arising in the two appeals may be summarised as follows: (i) Maintainability of the company petition filed by the Sanwalka Group before the Company Law Board. (ii) Legality of the issue of bonus shares by the company; (iii) Legality of the issue of 25,000 new ordinary shares ; (iv) Legality of the removal of the representatives of the Sanwalka Group from the Board of Directors and the induction of the members of Gupta Group in their place; (v) Legality of the lease agreement executed by the company in respect of the industrial plot; (vi) Legality of the issue of 3065 ordinary equity shares as against the preference shares. 13. We have heard Shri Arvind P. Datar learned senior counsel appearing for the Gupta Group and Shri C.A. Sundaram learned senior counsel appearing for the Sanwalka Group. 14. The questions arising, as noticed above, may now be taken up for consideration. Maintainability of the Company Petition - Notwithstanding the very elaborate and persuasive arguments made by both sides a resolution of the ab....
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....expenses that the company may have incurred. They may also write in any such notice that in the event of failure to pay the amount so due before a particular date the Directors shall proceed to forfeit the shares." (emphasis is ours) 15. If the amount still remains unpaid the Directors may proceed to forfeit the shares. 16. A notice of the resolution of forfeiture shall be given to the member whose shares have been forfeited. 17. Any shares so forfeited shall be deemed to held the property of the company and the Directors may sell, reallot annul the forfeiture or otherwise dispose of the same in such a manner as they may think fit. 18. Any member whose shares have been forfeited shall notwithstanding such forfeiture be liable to pay, and shall forthwith pay to the company all calls instalments, interest and expenses owing upon or in respect of such shares at the time of forfeiture/together with interest thereon, from the time of forfeiture until payment at nine per cent per annum and the Director may enforce the payment of such moneys or any part thereof if they think fit, but shall not be under any obligation to do so. The member whose shares ha....
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.... given to the members of the Sanwalka Group though they, admittedly, continued to be members of the company on the date of the meeting. It is pursuant to the decision taken in the said E.O.G.M. dated 5.7.1994 to raise the share capital of the company from Rs. 10 lakh to Rs. 5 crores that the other decisions with regard to bonus shares; the issue of 25,000 ordinary equity shares and the conversion of preference shares to equity shares were made subsequently. Such notice is mandatory under Section 172(2) read with Section 41 of the Act. This is, ex facie, apparent from the reading of the said provisions of the Act. Reference to the elaborate case laid before us on this score would, therefore, not be required. 20. Specifically, so far as the issue of bonus shares is concerned, the arguments laid down before us would require a consideration whether Section 205(3) of the Act, particularly, the proviso thereto permits issue of bonus shares out of revaluation reserves of a company. The further question that would arise is the correct interplay between the provisions of the Act and those contained in the Articles of Association of a Company. So far as the issue with regard to utilizatio....
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....ived all the bonus shares issued) in issuing the bonus shares, therefore, is evident. 22. So far as the issue of 25,000 equity shares is concerned, there can be no manner of doubt that the decision of the Board to issue the said shares has to be tested in the light of the wide powers of the Board to act in such matters as has been laid down by this Court in Needle Industries (India) Ltd. & Ors. Vs. Needle Industries Newey (India) Holding Ltd. & Ors. (1981) 3 SCC 333. The power of the Board of Directors of the Company to issue fresh shares must always be viewed as an adjunct of its extensive powers under the Act and the bona fides of such an exercise cannot be called into question by construing the power to issue fresh shares to be limited by any particular purpose or purposes. This was the view of the Company Law Board also. However, the same would not detract from the fundamental principle of fair play that is to be expected from the Board of Directors in making a fair and proportionate distribution/allotment of such fresh shares. The direction of the Company Law Board upheld by the High Court, namely, that allotment from the aforesaid 25,000 newly issued ordinary equity shares....
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....e shares within the meaning of this clause. (b) Subject as aforesaid, every member of a company limited by shares and holding any preference share capital therein shall, in respect of such capital, be entitled to vote on every resolution placed before the company at any meeting, if the dividend due on such capital or any part of such dividend has remained unpaid : (i) in the case of cumulative preference shares, in respect of an aggregate period of not less than two years preceding the date of commencement of the meeting ; and (ii) in the case of non-cumulative preference shares, either in respect of a period of not less than two years ending with the expiry of the financial year immediately preceding the commencement of the meeting or in respect of an aggregate period of not less than three years comprised in the six years ending with the expiry of the financial year aforesaid. Explanation. : For the purposes of this clause, dividend shall be deemed to be due on preference shares in respect of any period, whether a dividend has been declared by the company on such shares for such period or not, (a) on the last day specified for the paym....
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....ce shares shall also have a preference for repayment of capital at the time of the winding up of the company in preference to any class of shares. 21. On show of hand every shareholders present in shall have one vote and upon poll every shareholder present in person or any proxy shall have one vote for each share held by him or her. A poll may be demanded in accordance with law. 22. A holder of any shares shall not be entitled to a vote either by show of hand or at poll unless there have been paid to the company all sums of money then due from that holder in respect of these shares." 28. The aforesaid Articles must necessarily have to be understood in the light of the provisions of Section 87 particularly those contained in sub-Section (2). The meaning sought to be given to Articles 20, 21 and 22, extracted above, namely, that every share holder including the holder of a preference share has a right to vote cannot be readily accepted. The resolution of the Board dated 5.7.1994 relating to the conversion of preference shares into equity shares proceeds on the basis that dividends in respect of the 3065 shares have not been paid and in lieu thereof the shareholde....