| SooperKanoon Citation | sooperkanoon.com/47330 |
| Court | Company Law Board CLB |
| Decided On | Aug-25-1992 |
| Judge | K Dhar, S Balasubramanian, A Ramanathan |
| Reported in | (1995)82CompCas688 |
| Appellant | Dr. Jitendra Nath Saha and anr. |
| Respondent | Shyamal Mondal and ors. |
Jitendra Nath Saha and Smt. Bithika Sana (hereinafter referred to as "the petitioners") for rectification of the register of members of respondent No. 3 (hereinafter referred to as "the company") by declaration of certain allotment of shares as invalid and direction to distribute the resultant shares in accordance with law. This application was heard on July 27, 28, 1992, by a Bench constituted by Order No. 11/2/92-CLB(PB), dated June 5, 9, 1992, read with corrigendum dated July 15, 1992, of the Company Law Board (hereinafter referred to as "CLB").
2. The third respondent is a private limited company incorporated on September 20, 1976, under the Act. Respondents Nos. 1 and 2, namely, Shri Shyamal Mondal and Smt. Mira Mondal, who are husband and wife are the subscribers to the memorandum of association and also the first directors of the company. It has been stated that the four partners, namely, Shri Shyamal Mondal, Dr. Jitendra Nath Saha, Smt. Bithika Saha and Shri H.S. Gala, of a Canadian firm, viz., Cetus Electronics, which was carrying on the business of design, development, manufacturing and marketing of electronic products and consumer goods, decided to set up in India a similar business and for the said purpose respondent No. 1 was given the responsibility to form a company in India. It is further stated that in the Indian business the said four partners would have equal capital participation. The authorised capital of the company is Rs. 2 lakhs divided into 2,000 equity shares of Rs. 100 each. It appears that the company initially had allotted 340 equity shares and these were held by the following persons : 3. It is further stated that Smt. Mira Mondal was holding ten shares out of 25 per cent. quota earmarked for Shri Shyamal Mondal. It appears that the aforesaid shareholding position remained unchanged till September, 1988. It is further submitted that since Dr. Jitendra Nath Saha, Smt. Bithika Saha and Shri Hirendra S. Gala were non-resident Indians, necessary permission from the Reserve Bank of India was obtained for allotment of 500 equity shares of Rs. 100 each to each of them. The main allegation is that in spite of necessary formalities having been complied with for allotment of shares to the three non-resident Indians who are already shareholders of the company, the company had allotted 10 shares each to three outsiders and also made further allotment of 350 shares to respondent No. 1 and 1,280 shares to respondent No. 2, who are managing director and director, respectively, of the company. The contention of the petitioners is that in view of the understanding among the partners, further allotment of shares in the company should have been made to the existing shareholders of the company on the basis of the original understanding as submitted to the Reserve Bank of India and as approved by it.
4. Respondent No. 1 has filed an affidavit on his behalf and on behalf of the respondents Nos. 2 and 3. Although the respondents have not denied the existence of the partnership in Canada, it is contended that the said partnership came to an end and an understanding, if any, between the partners was not binding on the company. According to the respondents, the board of directors of the company has an unfettered right under the articles of association of the company to control the issue and allotment of shares in such manner as they may deem fit. It is also stated that 30 shares were allotted to three outsiders as qualification shares as they were co-opted as directors of the company.
The respondents further contended that Section 111 of the Act does not apply to a private limited company and the prohibition to issue further shares is not applicable in respect of such company.
5. Shri C. R. Dutta, senior counsel appearing for the petitioners, advanced his arguments saying that the understanding reached between the four partners in Canada before formation of the Indian company with regard to the future participation in the capital of the company was given a goby by the respondents and all allotments subsequent to the first allotment were made to increase the holdings of respondents No. 1 and 2 in the company and the principles of equity and fair play were not followed. Quoting certain passages from the judgment of the Supreme Court in Needle Industries (India) Limited v. Needle Industries Newey (India) Holding Limited [1981] 51 Comp Cas 743 ; AIR 1981 SC 1298, Shri Dutta contended that in regard to the issue of shares subsequent to the first allotment, there was a breach of fiduciary duties of the directors. He further contended that apart from the understanding between the partners, his clients as existing members were entitled to participate in the further issue of capital of the company, but the respondents have failed in their duties as directors in making an offer to his clients although his clients were always willing to provide further funds by way of equity capital. He also contended that there is a gross abuse of power by the directors and allotment of further shares by the directors to themselves and to a few outsiders was not bona fide. As regards the scope of inquiry on an application under Section 111(4) of the Act, Shri Dutta contended that Sub-section (7) of the said section gives wide jurisdiction to the Company Law Board to decide any question that may be necessary or expedient to decide in connection with such application under Sub-section (4). In support of his arguments Shri Dutta cited the decisions of the Gujarat High Court in Gulabrai Kalidas Naik v. Laxmidas Lallubhai Patel of Baroda [1978] 48 Comp Cas 438 and a few other cases.
6. Shri T. K. S. Biswas, chartered accountant appearing for the respondents, refuted the allegations of the petitioners and contended that the mutual understanding among the partners in Canada was not binding on the company as the said understanding was not reduced to writing in the articles of association of the company. In support of his arguments, he relied on the decision of the Supreme Court in Rangaraj (V.B.) v. V.B. Gopalakrishnan [1992] 73 Comp Cas 201. He also contended that the articles of association of the company give an unfettered right to the board of directors to issue shares in any manner they like and in this connection he relied on the provisions of Clause 5 of the articles of association of the company. He also cited the case of Amrit Kaur Puri v. Kapurthala Flour, Oil and General Mills Co. Pvt. Ltd. [1984] 56 Comp Cas 194 (P & H).
7. We have carefully considered the arguments advanced by the respective parties. The following issues arise for determination on the basis of such arguments of the parties : (i) Whether an application under Section 111(4) is maintainable against a private limited company.
(ii) Whether the board of directors of a private limited company in exercise of its discretionary powers under the articles of association can allot shares to any person including themselves without offering such shares to the existing members of the company especially when there is an understanding to that effect at the time of incorporation of the company and which is a part of the records of the company.
(iii) Whether in a proceeding under Sections 111(4) and 111(7) of the Act, it is possible to decide the bona fides of the allotments made by the board of directors and declare such allotment invalid and consequently order rectification of the register of members.
8. We shall first deal with the first issue because if our views in that respect are in the negative, then it may not be necessary for us to examine the remaining issues. Before amendment of the Companies Act, 1956, by the Companies (Amendment) Act, 1988, Section 111 covered cases of trans fers or transmissions and power under that section was given to the Central Government and Section 155 relating to rectification of the register of members was dealt with by the courts. By the Companies (Amendment) Act, 1988, Section 155 was omitted and the said section was incorporated in Section 111. Clause 16 of the Companies (Amendment) Bill, 1987, inter alia, reads as under (see [1987] 62 Comp Cas (St.) 81, 117) : "This clause seeks to recast the existing Section 111 by incorporating therein the provisions of Section 155, which confers power on the High Court to order rectification of the register of members".
9. Section 111, before its amendment, was not applicable to a private limited company so long as it was not a subsidiary of a public limited company. However, in the case of a private limited company if transmission of shares took place by a sale thereof, held by the court or other public authority, the provisions of Section 111 were applicable to such private limited company, as if it were a public limited company.
10. This is so far as the applicability of the provisions relating to transfer or transmission is concerned. These provisions now form part of Section 111 as Sub-sections (1), (2) and (3). Sub-sections (4), (7) and (8) primarily incorporate the provisions of Section 155 of the Act as it existed before the amendment. There was nothing in Section 155 to indicate that it was not applicable to private limited companies and litigation had been resorted to under that section with regard to rectification of register before the High Courts. In Clause 16 of the Amendment Bill it is mentioned that the provisions of Section 155 are being incorporated in Section 111. Thus, if Section 155 was applicable to a private limited company, there is no reason why the present lection 111 in particular, Sub-sections (4) and (7) should not be applicable to a private limited company. The existing provisions of Sub-section (11) are in substance similar to the provisions of Sub-section (8) which deals with transmission which has no relevance in the present case. There is no provision in the new Section 111 declaring its inapplicability to private limited companies. There is of course a significant addition by way of Sub-section (13) in the new section which is as under : 111.(3). "Nothing in this section and Section 108, 109 or 110 shall prejudice any power of a private company under its articles to enforce the restrictions contained therein against the right to transfer the shares of such company." 11. In the present case, through an application for rectification of the register of members, the basic features of the private company are not sought to be disturbed nor is it a case of refusal to register the transfer of shares.
12. Sections 108, 109, 110 and 111 deal with transfer and transmission of shares and in spite of the provisions contained therein, Sub-section (13) of Section 111 allows a private company to enforce the restrictions contained in its articles against the right to transfer the shares of such company. The restrictions with regard to the transfer of shares is one of the basic features of a private, company under Section 3(1)(iii)(a) of the Act and by the provisions of Sub-section (13) of Section 111, the same has been preserved. It is also interesting to note that in order to maintain the basic characteristics of a private company even in the case of transmission of shares by a sale thereof held by the court or other public authority, the Company Law Board has been given power to order acquisition of such shares by any member on payment to the purchaser, of the price paid by him therefor or such other sum as the Company Law Board may determine in accordance with the proviso to Sub-section (11).
There is nothing in Section 111 to indicate that the provisions of the said section shall not apply to a private company. On the contrary, all the provisions of the said section are applicable to a private company except to the extent provided in Sub-section (11) and Sub-section (13).
13. In view of the aforesaid legal position we hold that the provisions of Section 111 are also applicable to a private company and accordingly this application under Sub-sections (4) and (7) of Section 111 of the Act is maintainable.
14. Now, we shall deal with the second issue which is the main question that falls for consideration in this case. While considering this issue, it is necessary to look into the relevant provisions of the articles of association of the company with regard to the issue of shares, transfer of shares, etc. The relevant articles are articles 3, 5, 7, 16, 17 and 18 and they read as under : "3. The company is a private company within the meaning of Section 3(l)(iii) of the Companies Act, 1956, and accordingly the following provisions shall have effect, namely : (a) The right to transfer shares in the company is restricted in the manner and to the extent hereinafter in these articles provided.
(b) The number of members of the company shall be limited to fifty not including persons who are in the employment of the company and persons who having been formerly in the employment of the company were members of the company while in that employment and have continued to be members after the employment ceased, provided that for the purpose of this provision where two or more persons hold one or more shares in the company jointly they shall be treated as a single member.
(c) No invitation shall be issued to the public to subscribe for any shares in or debentures of the company." "5. Subject to the provisions of the Act, the shares shall be under the control of the directors who may allot or otherwise dispose of the same to such persons, on such terms and conditions and at such time as they may think fit." "7. The directors may allot fully or partly paid up shares to any person for consideration otherwise than in cash for services rendered by or assets acquired from such person." "16. Except as provided in the subsequent clause, no transfer of any shares of the company shall be made or registered in favour of any person without the previous sanction of the board of directors who may, without assigning any reason, decline to give any such sanction and the directors shall so decline in the case of any transfer the registration of which will involve a contravention of Clause (b) of Article3 hereof." "17. No share of the company shall be transferred to any person who is not a member of the company so long as any one amongst the existing members is willing to purchase the same at a price agreed upon by the transferor and the board of directors or fixed by the auditors of the company for the time being. The willing member shall have to complete the purchase within forty-five days of the offer in default of which the member desirous of disposing of the whole or any part of his holding in the company shall be at liberty to sell and transfer the shares to any person and at any price.
Provided, however, that a transfer by a member to his or her wife or husband, father, mother, brother, sister, son or daughter and in the name of a legal heir or successor of such a member shall not be liable to the above restrictions." "18. If the estate of any member of the company vests with any receiver or official assignee for composition with his creditors or for his insolvency or if his share is attached under decree of any court, the share of such member will not be transferred to the claimant thereof, but instead, the said share shall be offered to the existing members at a price not less than fair value of the shares to be ascertained by the company's auditor and transfer will be made to the highest bidder and the sale proceeds thereof shall be paid to the claimant." 15. Article 5 states that subject to the provisions of the Act, the directors may allot shares to such persons as they may think fit.
Article 7 also gives power to the board of directors to allot shares to any person for consideration other than in cash, for services rendered by or assets acquired from such persons. These two articles give discretionary power to the board of directors to allot shares in any manner they may think fit. The question is, how this discretionary power shall be exercised. Do they have unfettered powers under these articles to allot shares to any person they like or even to themselves without offering such shares to the existing members of the company In the Companies Act, there is no specific provision with regard to the further issue of shares in the case of a private limited company though there is such a provision in the case of a public limited company under Section 81 of the Act. Therefore, the articles of a private limited company normally contain provision regarding further issue of shares and in case there is any agreement between the promoters, the same is also normally incorporated in the articles.
16. In the present case, though there was no specific agreement between the promoters incorporated in the articles of association of the company with regard to the distribution of the share capital among themselves, we have been provided with sufficient evidence to establish that there was an understanding between four parties, namely, Shri Shyamal Mondal, Dr. Jitendra Nath Sana, Smt. Bithika Sana and Shri H.S.Gala to the effect that each one of them will have 25 per cent. share in the total capital. This understanding was disclosed to the Reserve Bank of India and was part of the records of the company. The authorised capital of the company is 2,000 shares of Rs. 100 each and according to the permission granted by the Reserve Bank of India, vide letter No. CA: EC : CI: 138/606-77, dated January 27, 1977, the three non-resident Indians were permitted to hold 500 shares, each constituting 25 per cent. of the total equity capital of the company.
Since the application to the Reserve Bank of India also indicates the existence of a private arrangement between the parties, the distribution of the shareholding cannot be otherwise than 25 per cent.
each. The petitioners also brought to our notice a copy of the letter dated May 6, 1977, addressed to the petitioner, in the letter-head of the respondent-company signed by respondent No. 1 which clearly indicates that respondent No. 1 along with his wife shall not hold more than 25 per cent. of the total capital and also reiterated that "if it is decided by all of us or if it is required to invest more we (all four of us) can always purchase equal number of shares". This has also been confirmed by the respondent in his affidavit-in-opposition stating that "main contention behind the issue of the letter as referred to therein is that the share capital shall be raised according to the requirements of funds within the parameters of approval accorded by the Reserve Bank of India". This is the candid admission of the respondents with regard to further issue of shares.
17. During the hearing, learned counsel for the respondents, ultimately confirmed the existence of an arrangement between the four persons for distribution of the shares in equal proportions. However, in spite of the understanding, the respondent-directors, while issuing further shares did not offer the same to all the shareholders and allotted shares only to themselves and other outsiders.
18. According to Shri Biswas, there was no agreement relating to equal holding of shares and even assuming that there was one, since the same has not been incorporated in the articles of association of the company, it does not bind the company. He relied on the decisions in Rangaraj (V.B.) v. V.B. Gopalakrishnan [1992] 73 Comp Cas 201 (SC) and Amrit Kaur Puri v. Kapurthala Flour, Oil and General Mills Co. P. Ltd. [1984] 56 Comp Cas 194 (P & H) with regard to the supremacy of the provisions of the articles of association. We do not agree that private arrangements between the parties as long as they do not form part of articles, cannot bind the company.
19. Therefore, the question that arises is whether Article 5 gives the board of directors an unfettered right as claimed by the respondents.
On the contrary, it appeals, that the directors by taking shelter under Article 5, have taken the view that they have an unfettered right under the said article to allot shares to anybody in any manner they like and in that process they reduced the majority shareholders into minority.
20. In this case the company had initially issued 340 shares, 25 per cent. of which was held by respondent No. 1 along with his wife and 25 per cent. each was held by petitioners Nos. 1 and 2. The remaining 25 per cent. was held by another non-resident Indian partner, Shri H.S.Gala. The company subsequently raised its capital from 340 shares of Rs. 100 each to 2,000 shares of Rs. 100 each and petitioners Nos. 1 and 2 did not get any allotment out of further issues. The question is, how this discretionary power is to be applied. Can the directors use the discretionary power to benefit themselves The power to increase the capital by issue of new shares is a fiduciary power to be exercised by the directors bona fide, for the general advantage of the company and they are not entitled to use their power merely for the purpose of maintaining their control over the affairs of the company for defeating the wishes of the existing majority shareholders. It has been held in Punt v. Symons and Co. [1909] 2 Ch 506 and Piery v. Mill and Co. [1920] 1 Ch 77 that the directors should not allot shares to themselves for the purpose of obtaining control of the voting power in the company. If they do so, the court will declare the allotment invalid and rectify the register and, in the meantime will restrain the allottees from voting in respect of the shares thus allotted.
21. Shri Biswas tried to justify the further allotment of shares to his client on the ground that as per the undertaking given by the respondent- company to the Reserve Bank of India, it was necessary for it to raise the holdings on Indian shareholders to 60 per cent. In the course of hearing, this Bench directed him to produce all necessary papers relating to the application made to the Reserve Bank of India under the Foreign Exchange Regulation Act (FERA) for allotment of shares to the non-resident Indians. From the copies of papers furnished by Shri Biswas, it is seen that on July 26, 1976, Shri Shyamal Mondal wrote a letter to the Joint Controller, Ex change Control Department, Reserve Bank of India, Calcutta, seeking permission to sell 500 shares of the face value of Rs. 100 each to each of the three non-resident Indians. In reply to the said letter, the Reserve Bank of India by a communication dated August 6, 1976, addressed to Shri Shyamal Mondal, asked him to submit the application in the prescribed form from each of the intending purchasers. The Reserve Bank of India also called for certain particulars including an undertaking from each of the non-resident investors to the effect that neither the capital nor the dividend/profit to be accrued on shares will be repatriated from India.
On September 27, 1976, the respondent-company sent three applications in the prescribed form from Shri H.S. Gala, Mrs. Bithika Sana and Dr.
Jitendra Nath Sana together with an undertaking from each of them to the effect that neither the capital nor the dividend/profit to be accrued on the shares will be repatriated from India. It appears that in response to another letter dated December 17, 1976, from the respondent-company; the Reserve Bank of India by a communication dated January 6, 1977, called for an additional undertaking from the company that it would progressively associate the residents' participation up to at least 60 per cent. within a period of five years, if not initially. It appears that on January 10, 1977, Shri Shyamal Mondal, on behalf of the respondent-company, gave such an undertaking. The Reserve Bank of India by a letter dated January 27, 1977, gave permission for purchase of shares in the respondent-company by non-residents of Indian origin. The said letter reads as under : "With reference to your letter dated January 10, 1977, we are agreeable to the purchase of 500 shares of Rs. 100 each in your company by each of the following three non-residents : 2. Please note to forward to us bank certificates on security paper evidencing receipt of the subscription money in respect of the above shares in India in an approved manner in due course.
3. Our permission as given in paragraph 1 above may also be treated as permission accorded to the concerned non-resident shareholders under Section 29(i)(b) of the Foreign Exchange Regulation Act, 1973." 22. It appears that while giving final approval under Section 29 of the Foreign Exchange Regulation Act, the Reserve Bank of India has not imposed any condition that the participation of Indian residents shall be raised up to 60 per cent. within a period of five years. Further, the said five years period expired in January, 1982. Immediately after the receipt of the Reserve Bank of India's approval in January, 1977, the respondent-company allotted 85 shares each to Shri Shyamal Mondal, Dr. Jitendra Nath Saha, Mrs. Bithika Saha and Shri H.S. Gala. The next allotment was made on October 5, 1988, again on December 30, 1988, and September 3, 1990. Since the Reserve Bank of India while giving final approval has not imposed any, condition as to the percentage of residents' and nonresidents' holdings and the undertaking given by the company to raise the Indian holding to 60 per cent. within a period of five years, expired in January, 1982, and no further extension was taken from the Reserve Bank of India and the allotment subsequently made to resident Indians exceeded far above the so called 60 per cent., the arguments advanced by Shri Biswas in respect of the allotment made by the respondent-company after the first allotment of 340 shares, seem nothing but an afterthought.
23. We shall now deal with issue No. (iii). As regards the scope of inquiry under Section 111, Shri Dutta has drawn the attention of this Bench to Sub-section (7) of Section 111 which reads as under : "111.(7) On an application under this section, the Company Law Board,- (a) may decide any question relating to the title of any person who is a party to the application to have his name entered in, or omitted from, the register ; (b) generally, may decide any question which it is necessary or expedient to decide in connection with the application for rectification." 24. Shri Dutta submitted that the language of Clause (b) of Sub-section (7) gives very wide jurisdiction to the Company Law Board to decide any question for rectification of the register of members. He further submitted that the Company Law Board can decide whether the allotments made by the directors were bona fide, and in the interest of the company and its members. In support of his arguments he cited the case of Shri Gulabrai Kalidas Naik v. Shri Laxmidas Lallubhai Patel of Baroda [1978] 48 Comp Cas 438 (Guj). In the said judgment, the Gujarat High Court, inter alia, made the following observations regarding the scope of inquiry under Section 155(3), which is now incorporated in Section 111 as Sub-section (7) (at pages 443-444) : "... it is made crystal clear that not only the court can examine the question of title that may arise in an application under Section 155, but it would also have the jurisdiction to decide other questions which may arise as ancillary or incidental to the main controversy and the court cannot be asked not to decide them on the ground of lack or want of jurisdiction because the statute specifically confers such wide jurisdiction. There was definite purpose behind enacting Sub-clause (b) to Sub-section (3), namely, to thwart any suggestion that the court cannot clutch at jurisdiction and decide the questions which do not directly fall under Section 155, or, for that matter, under any other provisions of the Companies Act. In order to make Section 155 an effective remedy for the relief for placing one's name on the register of members or for compelling the company to omit some name, which name has been wrongly placed, not only the Companies Act has conferred the right on an aggrieved person to move the court under Section 155, but created a forum, namely, the court hearing matters under the Companies Act, and widened the jurisdiction by conferring power on the court not only to decide the question of title, but also to decide all questions which are ancillary and incidental to the main questions . . . jurisdiction conferred by Section 155(3) is comprehensive jurisdiction which enables the court in an application under Section 155 to examine all questions, complex, intricate or otherwise, relating to the title to the shares, and further enlarges the jurisdiction of the court set up under the Companies Act to decide all those questions, which the court considers necessary or expedient to decide in connection with the application for rectification. In other words, when an application for rectification of the register is made, it would be open to the court while considering the main relief to decide all questions that may arise in such an application on rival contentions." 25. Shri Dutta also submitted that the decision in Shri Guldbrai Kalidas Naik's case [1978] 48 Comp Cas 438 (Guj) was followed by the Iterate High Court in Mathew Michael v. Teekoy Rubbers (India) Limited [1983} 54 Comp Cas 88. In the said case, the court observed that the jurisdiction conferred by Section 155(3) is wide and comprehensive, Shri Dutta also relied on some other decisions to strengthen his arguments as to the scope of inquiry by the court (how Company Law Board) in a proceeding for rectification of the register of members. We shall briefly discuss the said cases.In Public Passenger Service Limited v. M.A. Khadar [1966] 36 Comp Cas 1 (SC), the Supreme Court had occasion to consider the scope of Section 155. In that case, the issue related to the validity of a notice for forfeiture of shares and the court observed that such a matter could be examined in proceedings under Section 155.In Harinagar Sugar Mills Limited v. Shyam Sunder Jhunjhunwala [1961] 31 Comp Cas 387 (SC), the Supreme Court, while considering the scope of power under Section 155, held that the court is competent to decide any question relating to the title of a person and generally to decide all questions which may be necessary or expedient to decide for rectification. In this case, it has been further held by the Supreme Court that it is common ground that in the exercise of the powers under Section 155, the court has to aet judicially : to adjudicate upon the right exercised by the directors in the light of the powers conferred upon them by the articles of association.
28. In Turner Morrison and Co. Ltd. v. Shalimar Tar Products (1935) Ltd. [1980] 50 Comp Cas 296 (Cal), it has been observed that the scope of Section 155 of the Act is wide and generous for doing justice against illegality and fraudulent action, which is the substance of the present case.
29. In Kotah Transport Ltd, v. State of Rajasthan [1967] 37 Comp Cas 288 (Raj), the company forfeited fully paid up shares previously issued for consideration other than cash. In an application under Section 155 of the Act, the court held that the company had no authority to forfeit the shares under the provisions of its articles of association and declared the said forfeiture as invalid and ordered rectification of the register of members.
30. In Basudeb Kataruka v. Dhanbad Automobiles P. Ltd. [1977] 47 Comp Cas 68 (Patna), the company issued further shares without offering them to the existing shareholders. The articles of association of the company provided that unless otherwise determined by the directors, the company shall offer new shares to the existing members in proportion to the number of shares held by them. The said articles also provided that if any shareholder declines to accept any shares offered, the directors might dispose of the same in such manner as he think most beneficial to the company. Therefore, although the articles made provisions for offering new shares to the existing shareholders, the directors could decide otherwise. In spite of the said provisions in the articles, the court in an application under Section 155 held that the power given in the articles was only contingent in its nature to be exercised in a situation where the existing members decline to accept the shares offered. The court ordered cancellation of 450 equity shares issued by the company and directed reissue of those 450 equity shares to all the members of the company in terms of the articles of association.
31. In a recent judgment the Calcutta High Court in Farhat Sheikh, v.Escman Metalo Chemical Private Limited [1991] 71 Comp Cas 88, made the following observations as to the scope of power under Section 155 (now Section 111) (headnote) : "The relief envisaged under Section 155 of the Companies Act, 1956, is discretionary in nature. This discretion, however, is not an uncontrolled one but can only be exercised in accordance with the known principles of justice, equity and fair play and as such refusal to interfere in terms of the provisions of Section 155 can only be had where the facts do not justify the same. In other words, the law court while considering the matter for rectification within the meaning of Section 155 of the Act ought always to consider the facts and circumstances of each matter and, on the basis thereof, come to its conclusion." 32. From the observations made by the Supreme Court and different High Courts in the cases referred to above, it is quite clear that in an application under Section 111(4) of the Act, the Company Law Board is competent to consider all relevant facts and circumstances and see whether the principles of justice and equity and fair play were observed and if not, it may declare the transaction invalid. In the case before us, the board of directors of the company which comprises husband and wife who are also shareholders of the company raised capital of the company from time to time without offering them to the remaining existing shareholders of the company and in that process they raised their own holdings from 25 per. cent. to 91 per cent. When the board of directors felt the need for raising the capital, they should have offered the further shares to the existing shareholders based on the arrangement among the promoters which was part of the records of the company and if any such shareholder was not willing to participate in further capital, they could have allotted the shares to others in exercise of the discretionary power under the articles of association.
But what has really happened is that the directors kept the remaining shareholders in the dark and proceeded to allot shares to themselves and three outsiders even though the remaining shareholders were eager to participate in the further capital of the company. The manner in which the directors have allotted shares to themselves and others is a clear breach of their fiduciary duties, is not bona fide, lacks probity and they should not be allowed to derive any benefit from such transactions.
33. The company had initially issued 340 equity shares of Rs. 100 each and these were allotted to the following persons : 34. On October 5, 1988, the company allotted 10 shares each to Shri N.N. Mukherjee and Shri S. Chatterjee. Again on December 30, 1988, 350 shares were allotted to Shri Shyamal Mondal and 10 shares to Shri A.K.Ganguly. 10 shares each were allotted to three outsiders as qualification shares on their appointment as additional directors of the company. Article 33 of the company provides that the board of directors may appoint additional directors who shall hold office up to the date of the next annual general meeting. As regards share qualification, Article34 reads as under ; "34. Unless otherwise determined by the company in general meeting the qualification of a director shall be the holding in his own right of equity shares of the normal value of Rs. 1,000 only in the company." 35. According to the aforesaid provisions of the articles of association, holding of shares by the additional directors is not compulsory if the company in its general meeting takes a decision that additional directors need not hold any share. We have already observed that while making further issue of capital, the company should have made offers to the existing shareholders and, therefore, before the board of directors allowed the additional directors to take 10 shares each in the company as their share qualification, the matter shpuld have been placed before the company in its general meeting. If the shareholders in the general meeting had approved the allotment of 30 shares to the outsiders, then alone could the directors allot such shares. In that view of the matter we hold that the allotment of 10 shares each to S/Shri N.N. Mukherjee, S. Chatterjee and A.K. Ganguly, is invalid. The allotment of 350 shares made to Shri Shyamal Mondal on December 30, 1988, is also declared invalid, as the company failed to offer the further shares to the existing shareholders on the pro rata basis. For the same reasons we also declare that allotment of 1,280 shares to Smt. Mira Mondal on September 3, 1990, as invalid. It is mentioned in the affidavit of the respondents that 10 shares each allotted to Shri N. N. Mukherjee, Shri S. Chatterjee and Shri A.K.Ganguly were transferred to Shri Shyamal Mondal and Shri Gautam Biswas in the years 1989 and 1991. Since we are declaring the allotments made to S/Shri N.N. Mukherjee, S. Chatterjee and A.K. Ganguly as invalid, any further transfer arising from such allotments, are also invalid.
36. It is mentioned in the affidavit of the respondents that the board of directors had approved the transfer of 85 shares held by Shri H.S.Gala in the name of Smt. Mira Mondal at a meeting held on March 30, 1989, both the transferor and transferee in this case are existing members and such transfer is permissible as per the provisions of Article17 to the articles of association of the company. Although the petitioners have disputed the said transfer, no evidence could be produced in this regard. Shri H.S. Gala who was the holder of the said 85 shares has not joined issue in the matter. Since the articles of association of the company permit such transfer and there is nothing to the contrary to show that proper procedure for transfer was not followed in this case, we do not declare the said transfer invalid.
37. In view of the declaration of certain allotments invalid, the following position emerges as regards shareholding of the company : 38. We have declared allotments of 1,660 shares as invalid and this would result in reduction of capital, already raised by the company by issue of shares. We have already held that the existing shareholders of the company are entitled to further allotment of shares on the pro rata basis. Since the company has raised its capital, we presume that it is really in need of funds. We, therefore, allow the company to issue and allot 1,660 shares which we have declared invalid, to the existing shareholders on pro rata basis. If any of the shareholders are not willing to participate in the further issue of capital, the board of directors shall be free to offer and allot the shares to any person as they may think fit. The company shall make offer of allotment of shares by registered post with acknowledgment due to the existing shareholders within a fortnight from the date of receipt of this order and the willing members shall deposit value of shares with the company within a period of 45 (forty-five) days from the date of receipt of the offer from the company, failing which the directors shall be free to allot shares in any manner they like.
39. In the result, the petition is allowed with the observations above: mentioned and the company shall make necessary rectification in the register of members accordingly.