TaxTMI 
TaxTMI 
2023 (6) TMI 706
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Kumar Ochachhavlal Sheth and Ashwinikumar Kirtikumar Ochachhavlal Sheth (hereinafter referred to as, 'the Sheth Group', for short). The Sheth Group had 45 per cent share in the paid-up capital. The third Group is represented by Respondents 2 and 3, viz., Manish Vipinchandra Patel and Krunal Vipinchandra Patel. They had 24.20 percentage of the paid-up share capital. They are referred to hereinafter as the 'V.P. Patel Group'. 2. The V.P. Patel Group filed T.P. 197 of 2016 (C.A. 16 of 2012) whereas the Sheth Group filed T.P. 10 of 2016 (C.P. 86 of 2010). The first respondent is the company. Respondents 2 and 3, in both the petitions, are the appellants before us. The V.P. Patel Group and the Sheth Group, through the aforesaid Petitions, purported to project a case of mismanagement and oppression by the appellants in the Petitions styled under Sections 397 and 398 of the Companies Act, 1956 (hereinafter referred to as 'the Act', for short). By Order dated 17.05.2017, the NCLT, Ahmedabad Bench disposed of the petitions with the following directions: "92. In this set of facts, it is not just and equitable to order winding up of the company. If the company Is to be wound up i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rt of the auditors also. Independent valuer shall file his report fixing fair market value of the shares of the first respondent company before this Tribunal. Valuer shall take up the work of assessing valuation of the shares of the company after report of the auditor is filed. Independent valuer shall file report before this Tribunal within two months from the date of filing auditor's report. Any one of the shareholders is at liberty to file an application before this Tribunal seeking directions/orders regarding the manner and mode in which the shares of company shall be sold and who has to purchase and at what value the shares are to be sold. (g) Fee of the independent valuer is tentatively fixed at Rs.50,000/- (Rupees fifty thousand only). The independent valuer is at liberty to ask for further remuneration depending upon the work load. (h) Pending completion of the entire process as per this order there shall not be any alienation of properties both movable and immovable of the respondent no. 1 company by any of the parties. (i) Pending completion of the entire process as per this order there shall not be any allotment of shares or transfer or sal....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ents could be considered, the appellants decided to go in for increase in the authorised capital. The authorised capital was increased from Rs.1 crore to Rs.2 crores. She reminds us that this is a case where the Sheth Group quit in April, 2009 by resigning from the Board of Directors. They took away nearly 90 lakhs. On account of their activities, the company had run into rough weather. It was, in such circumstances, the need for increase in the authorised capital was felt. It is further pointed out that though the Sheth Group and the V.P. Patel Group attempted to impugn the decision to increase the authorised capital as an act of mismanagement and oppression, significantly, the NCLT and NCLAT have found no merit in the same. Therefore, once the increase in the capital was not found illegal or malafide, it is inexplicable, it is submitted, as to how the actual allotment of the shares could be found tainted. The rationale in the reasoning, viz., that the allotment was 'defective', was insupportable, it is contended. All the shareholders were given an equal opportunity to apply for shares in proportion to their existing shareholdings (1:1). They could apply for lesser number of share....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r, viz., at face value of Rs.10/-. The value did not do justice to the actual valuation of the company, which would have been on the higher side. But fairly, Shri Nitin Rai acknowledged that this aspect was not, as such, canvassed before the Tribunal. There is no offer made after 27.01.2010 he points out. He next complained that even proceeding on the basis that the decision to increase the authorised capital was well advised, it is noteworthy that only Rs.21 lakhs came in by way of the allotment of the additional capital. In other words, though the authorised capital was increased from Rs.1 crore to Rs.2 crores and the whole effort was purportedly to infuse fresh capital, in substance, only Rs.21 lakhs came into the coffers of the first respondent company. The additional capital offered was subscribed only in a sum of Rs.90 lakhs. Besides Rs.21 lakhs, which was brought in, the balance of Rs.69 lakhs was shown accounted by way of cancelling the loan due from the first respondent company to the appellants. This would nail the lie of the appellants that they had acted bonafide and in the best interest of the company. It is contended that the object of the appellants was to wrest cont....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the meeting. 2. LEAVE OF ABSENCE Leave of absence was granted to Mr. Manish Patel, Director and Mr. Krunal Patel, Director. 3. TAKE NOTE OF THE LETTER RECEIVED FROM BANK OF BARODA: It was informed to the Board that Company is in receipt of letter dated 24th November, 2009, advising Company to bring in additional equity of Rs. 100 Lacs in order meet its requirement for proposed Term Loan application. Copy of the letter received from the Bank duly initiated by the Chairman of the purpose of identification was put before the Board. The Board took note of the same. 4. TO DECIDE MEHODOLOGY TO INCREASE THE EQUITY. It was informed to the Board that in order to raise the equity it would be appropriate that initially offer is made to the existing shareholders. The Board discussed in detail and was of the opinion that the considering the present equity offer be made to exiting shareholders of Company to apply for one equity shares for every share held. It was then resolved as under: RESOLVED that pursuant to the requirement of the fresh funds for expanding the business activity of the Company, Company be and is hereby authorized ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rrect and more than one selection shall invalidate the form and it shall be presumed that last option is exercised. - In case of non-selection of any option, it shall be presumed, that last option is exercised. 1. I/We wish to apply for the full number of shares for which I/We am/are eligible. a. I/We enclose herewith an amount of Rs. _____ /- towards our subscription money by way of DD/PO/Cheque No. ___ dated ____ I I 2010. b. We hereby authorized the company to convert the amount of unsecured deposit of Rs. _____/- standing to our credit in the books of the Company. 2. We wish to apply for lesser no. __ Equity Shares from which I/We am/are eligible. a. I/We enclose herewith an amount of Rs. ----/- towards our subscription money by way of DD/PO/Cheque No .. ___ dated I / 2010. b. We hereby authorize the company to convert the amount of unsecured deposit of Rs. _____ /- sanding to our credit in the books of the Company. 3. We wish to apply for higher no. __ Equity Shares from which I/We am/are eligible. a. I/We enclose herewith an amount of Rs. ____/- towards our subscription money by way of DD/PO/Cheq....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... ROC. We find along with the same, a communication signed by shareholders, which combined the Sheth Group and the V.P. Patel Group and consisted of 68.98 per cent of the shares, supporting the letter seeking to treat the first respondent company as disputed company. 15. Next, we must notice the Minutes of the Extraordinary General Meeting of shareholders held on 27.01.2010. The appellants were the Members, who were present. There was no one from the Sheth Group or the V.P. Patel Group. The authorised share capital of the company was increased to Rs.2 crores. On the very same day, a Meeting took place of the Board of Directors. The appellants participated in the Meeting. Respondents 2 and 3 were given leave of absence. We find the following from the Minutes of the said Meeting: "MINUTES OF MEETING OF THE BOARD OF DIRECTORS OF AMBIKA FOOD PRODUCT PRIVATE. LIMITED HELD ON 27, JANUARY, 2010 AT REGISTERED OFFICE OF THE COMPANY AT RA.JODA PO. BA VLA - 382 220 AHMEDABAD AT 03.00 P.M. The following Directors were present: 1. Mr. Hasmukhbhai Madhavlal Patel. 2. Mr. Dilipkumar M. Patel I. CHAIRMAN OF THE MEETING Mr. Hasmukhlal Patel, w....
X X X X Extracts X X X X
X X X X Extracts X X X X
....wing Directors were present: l. Mr. Hasmukii'bhai Madhavlal Patel. 2. Mr. Dilipkumar M. Patel 1 . CHAIRMAN OF THE MEETING Mr. Hasmukhlal Patel, with the consent of the Directors present, chaired the meeting. 2. LEAVE OF ABSENCE Leave of absence was granted to Mr. Manish Patel, Director and Mr. Krunal Patel, Director. 3. ALLOTMENT OF SAHRES: It was informed to the Board that Company has received 7 Applications from Share Holders, who have shown their interest in further issue of Company. Some of the Share Holders has made application for higher number of shares then what were offered to. The Board then considered the all application received and having found the same in order passed the following resolutions: RESOLVED THAT 9,00,000 Equity shares of Rs. 10/- (Ten Only)@ per be and are hereby allotted to the applicants as under:- Sr. No. Name of Allottee Name of Share Allotted 1. Himanshu Madhavlal Patel 165000 2. Varshaben Hasmukhlal Patel 140000 3. Dilipkukar Madhavlal Patel 149000 4. Jyotsna Dilipkumar Patel 185000 5. Nisatgkumar Ha....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t after complying with the provisions of the Companies Act and Articles of Association, Resolutions were passed to increase the Authorised Share Capital. Pursuant thereto, Resolutions were passed to invite applications from shareholders. Increase in share capital and the allotments had not been given effect since no returns were recorded with the Registrar of Companies because of the objections of the V.P. Patel Group. Therefore, 'the increase in the share capital and the allotment of shares itself and allotment of shares itself, is not an act of oppression of the rights of the V.P. Patel Group and the Sheth Group', is found by the NCLT. It is further found that the removal of the appellants, as directed, was not valid and could not be upheld. Under the point, 'outcome of financial irregularities alleged by the three Groups', it is found that three Groups were at loggerheads. There appeared to be no possibility of the three Groups coming together and conducting affairs of the first respondent company. It is next pointed that the findings of the Tribunal would show that there are no established acts of oppression and mismanagement except some financial irregularities, which require ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....on increase of share capital, which was, till that point of time, not decided, the offer could not have been of more than 1:1 and the right procedure would have been that after the share capital was increased, claims of 1:1 should have been considered and only, thereafter, the unsubscribed portion, could be offered. The argument based on Dale & Carrington Invt. (P) Ltd. and another v. P.K. Prathapan and others (2005) 1 SCC 212, was noted. 22. It was next found that the act of increase in the share capital could be upheld. The distribution of shares was 'defective'. Even if in anticipation of increase in share capital, if applications in proportion to share already held could be made, but unsubscribed shares could be disposed only after the shareholder declined to accept the shares offered. For this, it is found that there could not have been applications in anticipation. It is next found that the proper and legal procedure has not been followed. The Board Resolution dated 09.02.2010 could not be upheld. 23. The direction of the NCLT was upheld. 24. We can find that the case of the V.P. Patel Group and the Sheth Group based on there being mismanagement and oppression by the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Council in Hirsche v. Sims [1894 AC 654, 660-61 : 64 LJ PC 1 : 71 LT 357 : 10 TLR 616] thus: "If the true effect of the whole evidence is, that the defendants truly and reasonably believed at the time that what they did was for the interest of the company, they are not chargeable with dolus malus or breach of trust merely because in promoting the interest of the company they were also promoting their own, or because they afterwards sold shares at prices which gave them large profits." 111. Whether one looks at the matter from the point of view expressed by this Court in Nanalal Zaver [1950 SCC 137 : AIR 1950 SC 172 : 1950 SCR 391, 394] or from the point of view expressed by the Privy Council in Howard Smith [1974 AC 821, 831] the test is the same, namely, whether the issue of shares is simply or solely for the benefit of the Directors. If the shares are issued in the larger interest of the Company, the decision to issue shares cannot be struck down on the ground that it has incidentally benefited the Directors in their capacity as shareholders. We must, therefore, reject Shri Seervai's argument that in the instant case, the Board of Directors abused its fiduciary power....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... matter of issue of further share capital by a company does not apply to private limited companies, the Directors in a private limited company are expected to make a disclosure to the shareholders of such a company when further shares are being issued. This requirement flows from their duty to act in good faith and make full disclosure to the shareholders regarding affairs of a company. The acts of Directors in a private limited company are required to be tested on a much finer scale in order to rule out any misuse of power for personal gains or ulterior motives. Non-applicability of Section 81 of the Companies Act in case of private limited companies casts a heavier burden on its Directors. Private limited companies are normally closely held i.e. the share capital is held within members of a family or within a close-knit group of friends. This brings in considerations akin to those applied in cases of partnership where the partners owe a duty to act with utmost good faith towards each other. Non-applicability of Section 81 of the Act to private companies does not mean that the Directors have absolute freedom in the matter of management of affairs of the company. In the present cas....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... decision was taken to increase the Authorised Share Capital, they were driven by the intention to side-line the other stakeholders in the Company? 33. The fact that the Directors may also benefit from a decision taken primarily with the intention to promote the interest of the Company, cannot vitiate the decision. In other words, if in the implementation of the decision taken primarily with a view to safeguard the interest of the Company, the appellants have made a gain, it cannot by itself render the decision vulnerable. 34. An observation is found in the impugned Order that wife of the first appellant had 20 shares and she has been allotted 96000 shares. At first blush, this leads to suspicion and even shock. However, let us examine what exactly happened. The Board of Directors took a decision to increase the Authorised Share Capital from Rs.1 crore to Rs.2 crores, following the advice given by the Bank of Baroda. This was a perfectly justified decision, being the need of the hour. Since, the Authorised Share Capital is part of the Memorandum of Association of the Company, an increase in the same would be permissible only after it is endorsed in a meeting of the shareholde....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d and there was any discrimination or rejection of their application seeking greater number of shares, then, there would have been, indeed, an occasion to find that an act of oppression had been perpetuated. In the absence of any application by members of the V.P. Patel Group and the Sheth Group for shares in any number, we are unable to perceive or characterise the act as oppressive. 36. The respondents pointed out that from the money available, a sum of nearly 25 lakhs was given to the member of the appellants-Group. 37. As regards the last complaint, the appellants would point out that actually all that happened was repayment of money brought in earlier by appellant-Group, which was parked with the Company and in connection with the marriage of a family member, the amount was returned. It must be noticed that the allegations and responses from both sides are the subject matter of the audit. We cannot be deflected by the same in ruling on the 'defect' or alleged illegality in the matter of allotment of the shares. 38. The facts in Dale & Carrington Invt. (P) Ltd. (supra) are clearly distinguishable. The case represented on facts a situation, where, the efforts were solely d....
X X X X Extracts X X X X
X X X X Extracts X X X X
....contention on these grounds and although it was demonstrated before the NCLT that on opening the envelope cover, it had some papers other than Notice of EOGM, NCLT found that bare perusal of the envelopes which were being shown, it could be seen by naked eye that they were once opened and again sealed. Looking to such approach of these litigants, we will not like to trust their contentions that they did not get notice of the EOGM." 42. We would hold that in regard to the allotment of shares, the respondents Groups were put on notice and they must be treated as having refused to avail of the offer. There is a concurrent finding by the NCLT and NCLAT that the respondents were aware of the increase in share capital as proposed. That the meetings were held in compliance with the law, is concurrently found. 43. The NCLAT reasons that even if applications in proportion to shares already held could be made, unsubscribed shares could be disposed of only after there is a declining to accept the shares offered. It is further found that there could not have been application in anticipation. This means that it is the understanding of the NCLAT that while shares could be applied for, to t....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... a single act could found a case of oppression. This is not a case where allotment of additional shares was made to anyone other than the existing shareholders. This is a case where the terms were applied equally to all the existing shareholders. The change in shareholding, in that the appellants shareholding grew from 30.80% to 63.58% is the result of the respondents refusal to apply despite being given the opportunity. TWO QUESTIONS SURVIVE 47. One of the complaints of the respondents is that the purported reason for the increase in the authorized capital and the allotment of the shares also was to infuse fresh funds. However, fresh funds came in only to the tune of Rs.21 lakhs. The balance of the consideration for the shares allotted to the appellants group member is shown as debts due from the first respondent company to the members of the appellants group being written off. Therefore, it is contended that the ostensible reason for increase in authorized capital and for the allotment of the shares are fraught with absence of bona fides and the real intention was to capture controlling interest in the company. This is sought to be met by the appellants by pointing out that....
X X X X Extracts X X X X
X X X X Extracts X X X X
....opinions. Justice B.K. Mukherjea also agreed that the Appeal must be dismissed and he substantially agreed with the reasoning of Justice S.R. Das. In the Company in question, the authorised Capital was Rs.10 lakhs. The plaintiffs in the Suit, from which the case arose, were aligned with a certain Group, which had proceeded to buy-up the majority shareholding in the Company. It was to, apparently, 'protect the Company' from the Group, which sought to acquire controlling interest in the Company, that the Group in management of the Company decided to issue the balance of the unissued Authorised Capital'. The shares were issued in the ratio of 4:5 to the existing shareholders. It was further decided that any balance shares, which were not applied for, were to be disposed of by the Directors, in the manner they considered best. From the opinion rendered by Justice M.C. Mahajan, we find the following to be one of the two questions, which was articulated: "11.... (1) whether the issue of further shares by the Directors was in contravention of the provisions of Section 105-C of the Indian Companies Act, ..." 52. Section 105-C of the Companies Act, 1913 read as follows: ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tors can issue shares within the new limit. Therefore the authority of the Directors, strictly speaking, in respect to the increase of capital is limited to an increase within the authorised limit. They cannot by their own decision increase the nominal capital of the company. In view of this language the third interpretation of the section seems more plausible." 62. Justice S.R. Das, in his separate concurring opinion, purported to adopt slightly different reasons while concurring that the Appeal must be dismissed. Justice S.R. Das with whom Justice B.K. Mukherjea also agreed, inter alia, held as follows: "65. ... The first question is whether the section contemplates increase of capital above the authorised limit, or only below the authorised limit. The learned Attorney General appearing for the Company urges that the words "further shares" must be read in conjunction with the words "decide to increase the capital of the company" and, so read, must mean shares which are issued for the purpose of increasing the capital beyond the authorised capital. He contends that Section 105-C has no application to this case. 66. Section 50 deals with, among other things, al....
X X X X Extracts X X X X
X X X X Extracts X X X X
....which, as will be shown hereafter, applies to increase of capital beyond the authorised limit. If the legislature intended that Section 105-C should apply to all companies in the matter of increase of capital above the authorised limit, then the simplest thing would have been to make Regulation 42 a compulsory Regulation, instead of introducing a section which in its terms differs from Regulation 42 and which therefore makes the position of companies which have adopted Table A anomalous. It appears to me, therefore, for reasons stated above, that Section 105-C becomes applicable only when the Directors decide to increase capital within the authorised limit by the issue of further shares. In this view of the matter that section is clearly applicable to the facts of this case." (Emphasis supplied) 63. Section 81 of the Companies Act, 1956 provided for further issue of capital. Section 81(1) read as follows: "81. Further issue of capital. (1) Where at any time after the expiry of two years from the formation of a company or at any time after the expiry of one year from the allotment of shares in that company made for the first time after its formation, wh....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sal to increase 'the subscribed capital' of the company by allotment of 'further shares'. Section 105-C of the Companies Act, 1913, which we have noticed, used the words 'where the Directors decide to increase the 'capital' of the company by issue of 'further shares'. In Section 81 of the Companies Act, 1956, the words used are 'it is proposed to increase the subscribed capital of the company by allotment of further shares'. 67. The Authorised Capital of a company, which is also known as nominal capital of the company, represents the maximum number of shares that can be issued. It must be indicated in the Memorandum of Association. It can be increased only by the company by passing a resolution in a General Body Meeting. In this regard, we may notice Regulation 44 of Table A of Schedule I of the Companies Act, 1956, which read as follows: "44. The company may, from time to time, by ordinary resolution, increase the share capital by such sum, to be divided into shares of such amount, as may be specified in the resolution." 68. In other words, the Authorised Capital cannot be increased by the Board of Directors. It is out of the Authorised Capital that a company issues....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... shareholders to bring about an increase in the Authorised Capital. It has, no doubt, undertaken to resolve to issue further capital, even though it could be said that as on 18.12.2009, there was 'no further capital' subsisting in terms of the limit of Rs.1 crore, which constituted the Authorised Capital as on 18.12.2009. The Resolution to allot the shares in 1:1 ratio and the indication that shares, which are not applied for, could be the subject matter of allotment to other shareholders, were all to become operative upon the applications being considered. The Minutes further reveal that the consideration of the application was to await the increase in the Authorised Capital in a duly constituted meeting of the General Body of shareholders. It is, no doubt, true that the proper way of doing it could have been to pass a Resolution after the shareholders resolved to increase the Authorised Capital. It is equally true that such a Resolution was passed on 27.01.2010. The question is, as to whether the act of the Board of Directors attracted the opprobrium of it being an act of oppression. We would think that the decisions of the Board of Directors on 18.12.2009, understood as a whole,....