TaxTMI 
TaxTMI 
2021 (7) TMI 621
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....holding 50% of the paid up share capital of the company. It was pleaded that if the right issue is allowed, the shareholding of the Petitioner group would get reduced to around 1% from 50% and he claimed that with this intent only the right issue is launched. In support of this claim, firstly it is argued that there was no business necessity to raise funds as primary purpose of raising of such funds was to repay the loan taken by the Petitioner No. 1 in his personal capacity for its propriety concern and other private lenders. Default in repayment had happened in the loan repayment by Petitioner's firm and the bank had issued the notice under Section 13(2) of SARFAESI Act. It was submitted that the Petitioner had entered into an arrangement with the Bank and had got the requisite time to regularise the account. In this regard, he mentioned about communication exchanged between the Petitioner and the Bank. On enquiry from the Bench, he confirmed the facts that the Respondent No. Company had given Corporate Guarantee as well as Security by way of pledge of an immovable property belonging to the company, in securing such loan. Thereafter, he raised second plea that second purpose ....
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....n authorized to perform certain acts on behalf of the company. In a limited sense they are also trustees for the shareholders of the company. To the extent the power of the Directors is delineated in the Memorandum and Articles of Association of the company, the Directors are bound to act accordingly. As agents of the company they must act within the scope of their authority and must disclose that they are acting on behalf of the company. The fiduciary capacity within which the Directors have to act enjoins upon them a duty to act on behalf of a company with utmost good faith, utmost care and skill and due diligence and in the interest of the company they represent. They have a duty to make full and honest disclosure to the shareholders regarding all important matters relating to the company. It follows that in the matter of issue of additional shares, the directors owe a fiduciary duty to issue shares for a proper purpose. This duty is owed by them to the shareholders of the company. Therefore, even though Section 81 of the Companies Act, 1956 which contains certain requirements in the matter of issue of further share capital by a company does not apply to private limited companie....
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.... bid. Buckley, J. found as a fact that the directors had acted in subjective good faith. They had indeed honestly believed that their actions were in best interest of the company. Despite this it was observed: "an essential element of the scheme, and indeed its primary purpose, was to ensure control of the company by the directors and those whom they could confidently regard as their supporters." 22. As such, he concluded that the allotment was liable to be set aside as a consequence of the exercise of the power for an improper motive. He also held that the power to issue shares was fiduciary in nature. In Howard Smith Ltd. v. Ampol Petroleum Limited, the Privy Council confirmed the above view expressed by Buckley, J. which shows a preference for the proper purpose doctrine. The Privy Council felt that the bona fide test was not sufficient to meet the challenge because it failed to encompass the obligation of directors to be fair. The directors' acts should not only satisfy the test of bona fides, they should also be done with a proper motive. Any lingering doubts over the status of the proper purpose doctrine as a separate and independent head of directors du....
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....relief against the act of oppression complained of by him, and, on the other hand, may add to his suffering and grievance and cause him greater hardship. Such an order will not further the ends of justice and indeed the cause of justice may he defeated." 26. On the question of issue of fresh share capital, it was held to be illegal to issue shares to only one shareholder. This was held to be a violation of common law right of every shareholder. Common Law recognized a pre-emptive right of a shareholder to participate in further issue of shares. However, in India in view of Section 81 of the Companies Act, such a right cannot be found for sure. However, the test to be applied in such cases which requires the court to examine as to whether the shares were issued bona fide and for the benefit of the company, would import such considerations in case of private limited companies under the Indian Law. Existence of right to issue shares to one director may technically be there, but the question whether the right has been exercised bona fide and in the interests of the company has to be considered in facts of each case and if it is found that it is not so, such allotment is liable....
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....s, while he was running the show. In this regard, the learned Sr. Counsel claimed that the Corporate Debtor had provided the Security in addition to Corporate Guarantee and in case the loan was not repaid, the Company will face legal action which would be prejudicial to the interests of the Company as well as its members as the bank has already initiated proceedings under SARFAESI Act against the Petitioner. It was also claimed that the Petitioner No. 1 was not in a position to pay even a meagre amount of Rs. 22 lacs and till date he had paid Rs. 15 lacs only and as per communication received from the Bank, the Bank has rejected the request made by the Petitioner No. 1. Thus, the raising of funds was necessary for the purpose of the Company. The learned Sr. Counsel further contended that apart from this requirement, the Company had taken loans from friends and other relations. Being a private limited company, this modus operandi had been adopted since beginning and such loans had been taken during the tenure of the Petitioner No. 1 who had also signed Financial Statements for respective years. He vehemently argued that if funds were taken from relatives that by itself would not mea....
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....e business necessities of the Company and which cannot be permitted in law. 6. As regard to the reliance placed by the Petitioner in the case of Dale & Carrington Invt. (P) Ltd. and Another v. P.K. Prathapan and Ors. (supra), the learned counsel for the Respondent contented that in that case issue involved allotment of shares by director by adopting dubious method and becoming a majority shareholder from a minority shareholder and in those circumstances, the Hon'ble Supreme Court gave the findings based upon the facts of that case, hence, said findings cannot be applicable to the present case pari materia, wherein no such methodology was adopted. Petitioners are also given same offer in a right issue of shares in the present case and right issue is floated in complete compliance of the provisions of law. There is no element of illegality in procedure followed by the Respondent No. 1 Company in offering right issue. He also referred to certain portion of the said order to support his claims. The Respondents further relied on the order of the Hon'ble Supreme Court in the case of V.S. Krishnan Vs. Westfort HiTech Hospital Ltd. (2008) 3 SCC 363, wherein, Hon'ble Supreme ....