TaxTMI 
TaxTMI 
2023 (6) TMI 706
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....r 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 it is not in the interest of the company or and it ....
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....f 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 sale of shares except as indicated in this order. (j) The company shall bear the fee of independent valuer and aud....
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....d 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 shares. They could also apply for more number of shares. Lastly, they could exercise the choice to not apply for any shares at all. This c....
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....gher 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 control of a closely held company and it is this impermissible object, which alone will be frustrated by this Court upholding the concurren....
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....y 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 to issue 10,00,000 (Ten Lakh) equity shares of Rs. 10/- each at per to the existing shareholders in the ratio of one share for every share held. RESOVLVED FURTHER that shareholders shall have right to apply for and in case of shares not being subscribed by any other sharehold....
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....___ 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/Cheque No. ___ dated I 12010. 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. 4. We do not wish to apply for any shares of the company. I/We hereby agree to accept the Equity Shares applied for on such smaller number as may be allotted to me/us subject to the terms of Application Form and Articles of Association of the Company. I/We undertake that I/We will sign all suc....
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....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, 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. OUT COME OF EXTRA ORDINARY GENERAL MEETING: It was informed to the Board that Share Holders of the Company has passed Ordinary Resolution for increase in Authorized Share Capital of the Company from Rs. 1 ,00,00,000/- to Rs. 2,00,00,000/-. The Board has took note of the same. Any one of the director of the Company was then authorized to file the necessary Form 5 with the office of Registrar of Companies. 4.BOARD MEETING....
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....llowing 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 Hasmukhlal Patel 92000 6. Bankimkumar Dilipkumar Patel 71000 7. Dishaben Hasmukhlal Patel 98000 Total 900000 RESOLVED FURTHER THAT company do issue necessary share certificates for the above shares within the stipulated period and Mr. Hasmukhlala Patel ad Mr. Dilipkumar Patel be and are authorised to sign the said certificates under the Common Seal of the Company. RESOLVED FURTHER THAT the necessary Return of Allotment in Form 2 be filed with the Registrar of Companies, Gujarat. Date: 09.02.2010 DIRECTOR (HASMUKHBHAI PATEL) CHAIRMAN" THE FINDINGS OF THE NCLT 18. Answering the question, as to whether increase in the paid-up capital from Rs.1 crore to Rs.2 crores in the Extraordinary General Body Meeting dated 27.01.2010 was an act of oppression or not, the NCLT finds t....
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....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 examination by the Board of Directors. Thereafter, we have noticed the directions in paragraph-92 (supra). 19. Next, is the finding in the impugned Order in regard to allotment. The NCLAT also finds that the contention of the Sheth Group and V.P. Patel Group that they did not get Notice of the Extraordinary General Body Meeting, could not be believed. The need to increase the share capital and the circumstances, which led to it, canvassed by the appellants, including the letter dated 24.11.2009 issued by the Bank of Baroda, was found reliable. Dealing with the point pertinent to the Appeals before us, viz, the actual allotment of shares on increase of share capital, it is, inter alia, found that there did not appear to be any discussion by the NCLT regarding allotment of shares. 20. Next, the NCLAT finds that the allotment in the ratio of 1:1 may not be oppre....
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....xt 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 appellants, has otherwise been rejected. The complaint that the appellants acted in an oppressive manner or mismanaged the Company, when it decided to increase the authorised capital, has also been rejected. The NCLT has not given any reasoning, as such, as found by the NCLAT for the direction to allot shares to the V.P. Patel Group and the Sheth Group. The NCLAT appears to, however, support the direction on the basis we have noted above. 25. Shri Nitin Rai emphasised that the Board of Directors could not have allotted the shares, when the existing authorised capital was already subscribed and, what is more, paid-up. Putting the cart before the horse, as it were, applications were invited from shareholders to apply for shares which were not existing. In other words, it was only after the increase in the authorised capital by the decision of the Extraordinary General Body Meeting held ....
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....e 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 in deciding upon the issue of rights shares." (Emphasis supplied) 27. While on the said decision, we find it apposite that bearing in mind the complaint of Shri Nitin Rai, learned Senior Counsel that the shares were not got valued and they were issued without a premium that we notice the following statement: "120. Finally, it is also not true to say, as a statement of law, that Directors have no power to issue shares at par, if their market price is above par. These are primarily matters of policy for the Directors to decide in the exercise of their discretion and no hard and fast rule can be laid down to fetter that discretion. As observed by Lord Davey in Hilder v. Dexter [(1902) AC 474, 480: 71 LJ Ch 781 : 87 LT 311 : 18 TLR 800] : "I am not aware of any law which obliges a company to issue its shares above par because they are saleable at a premium in the market. It depends on the circumstances of each....
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.... 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 case Article 4(iii) of the Articles of Association prohibits any invitation to the public for subscription of shares or debentures of the company. The intention from this appears to be that the share capital of the company remains within a close-knit group. Therefore, if the Directors fail to act in the manner prescribed above they can in the sense indicated by us earlier be held liable for breach of trust for misapplying funds of the company and for misappropriating its assets." (Emphasis supplied) 30. It is true that the appellant had 30.80 per cent of the paid-up share capital. The V.P. Patel Group had 24.20 per cent of the paid-up share capital. The Sheth Group had 45 per cent of the paid-up share capital. This is when the authorised capital of the Company was Rs.1 crore. The position, after the authorised capital was increased to Rs.2 crores, on the other hand, is as follows: The appellants-Group shareholding has increased to 63.5....
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....ecision, 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 shareholders. Such a meeting was convened on 27.01.2010. It is true that even prior to such a meeting, the Board of Directors had resolved to invite applications from shareholders. The form of application has been produced before us, which we have extracted. The shareholder could, in terms of the form, do four things: i. Since the Board had resolved to allot shares in a ratio of 1:1, the shareholder could apply for one share for every one share held by him; ii. The application form further contemplated that the shareholder could indicate that he wished to apply for lesser number of shares than he was entitled to; iii. A shareholder could apply for more number of shares than he was entitled to; iv. Lastly, he could express his disinclination to apply for any shares. 35. It is in the backdrop of this form that we must continue with the narrative. The shareholders from the V.P. Patel Group and the Sheth Group, admittedly, did not apply seizing the opportunity....
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....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 directed at consolidating and cornering of power by the person in question. In this case, from the facts, as recounted, we are inclined to think that the shares were offered to the existing shareholders and, what is more, on a fair and equal footing. This is subject to what we hold further. 39. It is contended by respondents that though the Board decided on 27.01.2001 to remind the shareholders of the right to apply, it was not done. Per contra, the appellants contend that the notices were sent and they were also produced. The respondents would however point out that no finding has been rendered. 40. The Notice dated 27.01.2020 sent, reads as follows: "27th January, 2010 To, All the shareholders as per list enclosed Sub.: Outcome of Extra Ordinary General Meeting. Dear Sir, We are pleased to inform you that members of the Company remain present at the Extra Ordinary General Meeting of the Company held today, has passed Ordinary resolution for increase in Authorised Share Ca....
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....his means that it is the understanding of the NCLAT that while shares could be applied for, to the extent of 1:1 as offered, but as regards shares being offered in excess of the said ratio, as permitted under the Board Resolution dated 18.12.2009, it would have been done only after a shareholder refused to take shares offered. A shareholder could not apply for excess shares anticipating that the other shareholders would not take up the shares offered. 44. Now, in law, let us first proceed on the basis that the offer was made with the Authorised Capital being such that the acceptance of the offer would keep the capital within the Authorised Capital. 45. A rolled-up offer would involve the following consequences: A shareholder was free to not apply at all. A shareholder could apply for less than at the ratio of 1:1. He could apply for shares as per the ratio of 1:1. Now, he could under the application form, apply for shares in excess. There was no limit. The legal limit to be crossed in law, is not in dispute. The law contemplates that shares must be subscribed to the extent of 90 per cent of the issued shares. There is no dispute that it was subscribed to the extent of 90%. By pe....
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....st in the company. This is sought to be met by the appellants by pointing out that in view of the loan remaining outstanding, there was a skewed debt-equity ratio which was a clog and the result of the company writing off the loan due from the appellants group was to enable the company to present a better financial condition. The respondents would contend that loans were also owing to the respondent's groups. 48. The second contention which remains is the fact that on 18.12.2009 when the Board of Directors decided to issue 10 lakh shares in the ratio of 1:1, and what is more, giving a right to the shareholders to apply for, and in case of shares not being subscribed by other shareholders, to be allotted those shares to those who were willing to take additional shares, it was all done in anticipation that the shareholders would approve of the increase in the authorized capital from Rs.1 Crore to Rs.2 Crore. In other words, the very authority of the Board of Directors to decide upon to the further issue of shares is questioned as it involved the offer of shares being made when the authorized capital was Rs.1 Crore only. The cart could not be put before the horse. The first step shou....
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....ection 105-C of the Companies Act, 1913 read as follows: "105-C. Further issue of capital.-Where the Directors decide to increase the capital of the company by the issue of further shares such shares shall be offered to the members in proportion to the existing shares held by each member (irrespective of class) and such offer shall be made by notice specifying the number of shares to which the member is entitled, and limiting a time within which the offer, if not accepted, will be deemed to be declined; and after the expiration of such time, or on receipt of an intimation from the member to whom such notice is given that he declines to accept the shares offered, the Directors may dispose of the same in such manner as they think most beneficial to the company." 60. The case of the appellants who were the unsuccessful plaintiffs was based on there being a violation of Section 105-C. In the opinion of Justice M.C. Mahajan, we find the following formulation: "18. ... The language employed in the section admits of three possible interpretations: (1) that its scope is limited to cases where there is an increase in the capital of the company according to the provisions of Section ....
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....teration of the conditions of the memorandum of association of the company by increasing its share capital by the issue of new shares. The very idea of alteration of the memorandum by the issue of new shares clearly indicates that it contemplates an increase of the share capital above the authorised capital with which the company got itself registered. This increase can only be done by the company in a general meeting as provided in sub-section (2) of Section 50. This increase above the authorised limit cannot possibly be done by the Directors on their own responsibility. Section 105-C, however, speaks of increase of capital by the issue of further shares. The words used are capital and not share capital and further shares and not new shares. It speaks of increase by the Directors. Therefore, the section only contemplates such increase of capital as is within the competence of the Directors to decide upon. It clearly follows from this that the section is intended to cover a case where the Directors decide to increase the capital by issuing further shares within the authorised limit, for it is only within that limit that the Directors can decide to issue further shares, unless they ....
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.... is proposed to increase the subscribed capital of the company by allotment of further shares, then, (a) such further] shares shall be offered to the persons who, at the date of the offer, are holders of the equity shares of the company, in proportion, as nearly as circumstances admit, to the capital paid up on those shares at that date; (b) the offer aforesaid shall be made by notice specifying the number of shares offered and limiting a time not being less than fifteen days from the date of the offer within which the offer, if not accepted, will be deemed to have been declined; (c) unless the articles of the company otherwise provide, the offer aforesaid shall be deemed to include a right exercis- able by the person concerned to renounce the shares offered to him or any of them in favour of any other person; and the notice referred to in clause (b) shall contain a statement of this right; (d) after the expiry of the time specified in the notice aforesaid, or on receipt of earlier intimation from the person to whom such notice is given that he declines to accept the shares offered, the Board of directors may dispose of them in such manner as they think most beneficial ....
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....to. Whatever is subscribed to, would become the Subscribed Capital. Paid-up Capital is defined in Section 2(32) of the Companies Act, 1956 as including capital credited as paid-up. The Subscribed Capital may be wholly or partly paid-up. 69. We proceed on the basis that an increase in the Authorised Capital does not fall within the powers of the Board, as contemplated in Section 291 of the Act. In Nanalal Zaver (supra), this Court was essentially dealing with the question, as to whether the obligation to offer the shares upon there being a further issue of shares, must be made in conformity with Section 105-C of the earlier Act, which, as we have noticed is essentially the regime continued under Section 81 of the 1956 Act. It is in the said context that the Court held that the Directors could at their own initiative only increase the shares from out of the existing Authorised Capital, but the increase in Authorised Capital could be done only by the company in a meeting of its shareholders. It has been further held that once the Authorised Capital is increased, the Board of Directors would be bound to act under Section 105-C of the Act. 70. In fact, in the said case, the Court foun....
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....Authorised Capital was duly increased. This is not a case where the Board of Directors had resolved to allot the shares otherwise disregarding the mandate of Section 81 of the Act. What is more shares have been offered on a ratio of 1:1 to the existing shareholders. They were given the choice of refusal or to apply for more or lesser number of shares. This is not a case where the Resolution was to allot the further shares to the Directors or Members of their Group alone. There is a concurrent finding that the decision to go in for increase in capital, viz., Authorised Capital, was not vulnerable to attack. The decision was based on the advice given by the Bank. The purpose of the Board of Directors to increase the capital has been admittedly found to be bona fide. An incidental gain, namely the change in the shareholding pattern is entirely the inevitable result of the refusal of the respondent's groups to apply. We cannot proceed on the basis that the appellants foresaw and deliberately planned the whole affair. If only the respondents had applied, the situation would not have happened. 73. As far as the aspect that, the purported object was shown as generating fresh funds but in....