Company Law Board
M.V. Sathyanarayana vs Global Drugs Pvt. Ltd. And Ors. on 22 July, 1998
Equivalent citations: [1999]95COMPCAS595(CLB)
ORDER
1. This is a petition filed under Section 111 of the Companies Act (hereinafter referred to as "the Act") against Global Drugs Private Limited (hereinafter referred to as "the company") and two others being directors of the company for a declaration that the allotment of 1,75,000 equity shares each in favour of respondents Nos. 2 and 3 is illegal and for rectification of the register of members of the company by deleting the names of respondents Nos. 2 and 3 in respect of the impugned shares.
2. The facts as stated in the petition and reiterated by Mr. T. K. Seshadri and Mr. T. K. Bhaskar, counsel for the petitioner, are that the petitioner is a shareholder of the company holding Rs. 4.29 lakhs equity shares. As per the balance-sheet of the company for the year ended March 31, 1996, the authorised and paid-up capital of the company for the year ended March 31, 1995, are shown as Rs. 75 lakhs and Rs. 98,50,000, respectively. The paid-up capital of the company exceeds the authorised capital which is prima facie ultra vires the memorandum of association of the company. The annual return made upto August 27, 1996, reveals that shares of the value of Rs. 17.50 lakhs each were allotted to respondents Nos. 2 and 3 on March 18, 1993. The allotment made to respondents Nos. 2 and 3 as reflected in the annual return is contrary to the provisions of the Act. The paid-up capital of the company for the year ended March 31, 1992. as well as March 31, 1993, is shown as Rs. 12,90,000. Accordingly, there was no issue of capital between April 1, 1991, and March 31, 1993. Thus, the allotment of shares of the value of Rs. 17,50,000 each in favour of respondents Nos. 2 and 3 is fictitious. The aforesaid sum of Rs. 55 lakhs is nowhere reflected in the balance-sheet or accounts of the company. There has been no evidence to show that the amounts received towards share application money and unsecured loans were adjusted towards the share capital. Respondents Nos. 2 and 3 failed to produce any document including the bank statement or pass-book evidencing the payment of consideration for the impugned shares. The ledger extracts of the first respondent-company have not been produced. Prior to March, 1993. respondents Nos. 2 and 3 were holding each 43,000 equity shares. The excess shares held by respondents Nos. 2 and 3 each to the extent of 1,75,000 equity shares is in violation of the memorandum and articles of association of the company. The proceedings of the board meeting held on March 18, 1993, allotting the impugned shares in favour of respondents Nos. 2 and 3 are concocted. They have not been prepared in accordance with Section 193 of the Act, inasmuch as each page has not been initialled or signed under Section 193(1A). Consequently, the presumption that attaches to the minutes under sections 194 and 195 does not arise. The minutes cannot be relied upon to establish the allotment on March 18, 1993. No notice was sent for the board meeting said to be held on March 18, 1993. Form No. 2 was neither filed under Section 75 of the Act in respect of the impugned allotments. The first respondent had neither convened any annual general meeting nor issued any notice to the petitioner relating to such meeting, from the time respondents Nos. 2 and 3 assumed management of the company. Certificates of posting produced under suspicious circumstances by the respondents subsequent to conclusion of the arguments cannot be received in evidence, in the light of several decisions of various courts. The mistake with regard to the paid-up capital of the company was neither qualified by the auditors in the balance-sheet nor approved by members of the company in a general body meeting. The balance-sheet purported to be for the year ending March 31, 1993, produced by the respondents is not a certified copy filed before the Registrar. The balance-sheet filed on July 10, 1997, after the date of the petition cannot be relied upon. It throws light on the lapses of the respondents. The letter dated March 18, 1997, relied upon by the respondents is created for the purpose of the case and is not produced. The receipts produced by the first respondent do not relate to the documents said to have been filed before the Registrar. There is no evidence on record to show that the letter of Mogli Shridhar and Co. was sent to the ROC. Form No. 2 produced by the respondents is not a certified copy obtained from the ROC. There is no provision under law enabling the first respondent to file a provisional balance-sheet with the ROC. Moreover, there is nothing in the balance-sheet produced by the first respondent to show that the said balance-sheet for the year ending March 31, 1993, is provisional. Section 220 of the Act prescribes an obligation upon companies to file three copies of the balance-sheet laid before the general meeting within 30 days from the date of the annual general meeting. This provision does not contemplate filing of the balance-sheet that has not been laid before a general body meeting. There has been no evidence to show that the corrected balance-sheet was laid before the general meeting and the same cannot, therefore, be acted upon. No importance shall be attached to the affidavit dated May 20, 1998, filed by the statutory auditors, after conclusion of the arguments. In the circumstances, counsel for the petitioner submitted that the impugned allotments must be set aside and that the register of members be rectified by deleting the names of respondents Nos. 2 and 3 in respect of the impugned shares.
3. According to the respondents and Shri V. T. Gopalan, senior counsel, Shri K. Ravindranath, and Shri S. Elam Bharathi, counsel for the respondents, the petition is not maintainable under Section 111(4) of the Act. The allotment of shares cannot be set aside in Section 111 proceedings. The company had been increasing its authorised capital and allotting shares from time to time in due compliance with the relevant statutory provisions of the Act and filed necessary returns before the Registrar of Companies. According to the respondents, the company had originally filed the provisional balance-sheet for the year ended March 31, 1993, before the ROC instead of the balance-sheet as approved by the board of directors and adopted by the general body. This is brought out by the letter dated March 18, 1997, of the company addressed to the ROC. The company had, thereafter, filed copies of the adopted balance-sheet for the period ending March 31, 1993, before the ROC by letter dated July 10, 1997, and not the corrected balance-sheet, as originally submitted in the counter-statement. There has been a typographical error in the balance-sheet for the period ended March 31, 1996, wherein the authorised capital for the previous year, i.e., March 31, 1995, is shown as Rs. 75 lakhs instead of Rs. 1,10,00,000. Counsel for the company reiterated that the impugned shares were duly allotted on March 18, 1993, in favour of respondents Nos. 2 and 3 as revealed from the minutes of the meeting of the board of directors held on March 18, 1993, and the form for the said allotment was duly filed on March 26, 1993, before the ROC. The share money of Rs. 35 lakhs is reflected in the balance-sheet under the head "Share application money and unsecured loan" to the extent of Rs. 28 lakhs and Rs. 7 lakhs, respectively, which were subsequently transferred to the paid-up capital of the company on allotment of the shares. The company had sent notice of the board meeting as well as general meeting to the petitioner. The approved balance-sheet for the period ended with March 31, 1993, will disclose that the authorised capital of the company was Rs. 75 lakhs and the paid-up capital was Rs. 47,90,000 as against Rs. 12,90,000 as on March 31, 1992. The aforesaid sum of Rs. 47,90,000 was made up of (i) Rs. 12,90,000 as on March 31, 1992, (ii) Rs. 28,00,000 paid out of the share application money and Rs. 7 lakhs transferred from out of the unsecured loans extended to the company by respondents Nos, 2 and 3, which were converted into shares. Thus, the allotment of the impugned shares was duly made for consideration in accordance with the provisions of the Act. At no point of time, the paid-up capital exceeded the authorised capital. It is in these circumstances counsel for the respondents prayed for dismissal of the petition.
4. We have considered the pleadings and arguments of counsel for the petitioner and written submissions of counsel for both the petitioner and the respondents. The following issues arise for our consideration :
(i) Whether allotment of shares can be impugned in a petition under Section 111(4) of the Act.
(ii) If so, whether the allotment of the impugned shares in favour of respondents Nos. 2 and 3 is liable to be set aside and the register of members of the company shall be rectified by deleting the names of respondents Nos. 2 and 3 on the facts and circumstances of the case. Issue (i) :
Section 111 provides that any transferor or transferee of shares may appeal to the Company Law Board against any refusal of the company to register the transfer or transmission as provided therein. Any aggrieved person or any member of the company or the company may also apply to the Company Law Board for rectification of the register of members if the name of any person is entered or omitted in the register of members without sufficient cause and for the default or delay in entering in the register the fact of any person having become or ceased to be a member. The scope of Sub-section (4) of Section 111 was considered by the Company Law Board in Bhupinder Rai v. S. M. Kannappa Automobiles Pvt. Ltd. [1996] 86 Comp Cas 18 wherein it was held that the matters relating to allotment of shares can be agitated in a petition under Section 111(4), provided allotment is either in violation of the provisions of the articles or the board of directors have exceeded their authority, as then only the entry of a name in the register of members would be wrong and would merit rectification. In the present case, it is the contention of the petitioner that as per the balance-sheet of the company for the year ended March 31, 1996, the authorised and paid-up capital of the company for the year ended March 31, 1995, are shown as Rs. 75 lakhs and Rs. 98,50,000, respectively. The paid-up capital exceeded the authorised capital which is prima facie ultra vires the memorandum of association of the company. It is further contended that the impugned shares were allotted in favour of the respondents in violation of the memorandum of association of the company. Therefore, the allotment of shares in violation of the memorandum of association of the company can be impugned under Section 111(4), as has been held in the case of Bhupinder Rai v. S. M. Kannappa Automobiles Pvt. Ltd. [1996] 86 Comp Cas 18 (CLB). This issue is answered accordingly. Issue No. (ii) :
5. It is the contention of the petitioner that the paid-up capital of the company for the years ended March 31, 1992, as well as March 31, 1993, was Rs. 12,90,000. There was no issue of capital between April 1, 1991, and March 31, 1993. The authorised capital for the year ended March 31, 1995, was Rs. 75,00,000 and whereas the paid-up capital of the said period was Rs. 98,50,000. Accordingly, the paid-up capital of the company exceeded the authorised capital which is in violation of the memorandum of association of the company. The allotment of shares of the value of Rs. 17,50,000 each in favour of respondents Nos. 2 and 3 is fictitious and the said sum of Rs. 35,00,000 is not reflected either in the balance-sheet or accounts of the company. However, it is the contention of the respondents that the company had been increasing its authorised capital and allotting shares from time to time in due compliance with the relevant statutory provisions of the Act and filing necessary returns before the Registrar of Companies. The balance-sheet of the company for the year ended March 31, 1993, as approved by the board of directors and adopted by the general body would show the correct position relating to the paid-up capital of the company. Further, it is the case of the respondents that there was a typographical error in the balance-sheet for the period ended March 31, 1996, wherein the authorised capital for the previous year was shown as Rs. 75 lakhs instead of Rs. 1,10,00,000. We have, therefore, called for the particulars from the ROC, Andhra Pradesh. The ROC has forwarded to this Bench, copies of the annual returns of the company for the period upto November 20, 1989, September 29, 1990, September 25, 1993, September 25, 1994, September 27, 1995, and August 27, 1996, copies of Forms Nos. 2 and 5 for certain period as well as adopted balance-sheet for the year ended March 31, 1993, filed before the ROC on July 10, 1997.
4. The impugned allotments were made on March 18, 1993. They are reflected in the annual return as at September 25, 1993. It is evident from copies of Form No. 5, dated February 26, 1993, filed on April 7, 1993 ; July 15, 1994, filed on July 20, 1994 ; July 31, 1995, filed on July 31, 1995, and September 15, 1997, filed on October 8, 1997, that the authorised capital was increased from Rs. 30 lakhs to 75 lakhs ; Rs. 75 lakhs to Rs. 110 lakhs ; Rs. 110 lakhs to Rs. 150 lakhs and Rs. 150 to Rs. 200 lakhs, respectively. The registration fees are found to have been paid on the increased capital from time to time as borne out from copies of the receipts issued by the ROC, Hyderabad. Moreover, the return of allotments dated March 18, 1993 (Form No. 2), of the equity shares made on March 18, 1993, reveals the allotment of the impugned shares in favour of respondents Nos. 2 and 3. Form No. 2 was filed before the ROC with necessary fees on March 26, 1993. This is evidenced from a copy of the receipt issued by the ROC. Though these documents were produced belatedly by the respondents, they have taken the above plea in their objections. We do not, therefore doubt about the genuineness of these documents. Moreover, the annual return upto September 20, 1989, filed with the ROC on December 28, 1989 ; the annual return upto September 29, 1990, filed on January 10, 1991 ; the annual return upto September 25, 1993, filed on April 26, 1995 ; the annual return upto September 25, 1994, filed on April 26, 1995 ; the annual return upto September 27, 1995, filed on December 19, 1995 and the annual return upto August 27, 1996, filed on October 14, 1996, reveal the authorised capital and paid-up capital of the company as Rs. 15,00,000 and Rs. 12,60,000 ; Rs. 30,00,000 and Rs. 12,90,000 ; Rs. 75,00,000 and Rs. 47,90,000 ; Rs. 1,10,00,000 and Rs. 98,50,000 ; Rs. 1,50,00,000 and Rs. 1,48,60,000, Rs. 1,50,00,000 and Rs. 1,48,60,000, respectively. The annual return upto September 25, 1994, makes it abundantly clear that the authorised capital of the company was raised from Rs, 75,00,000 to Rs. 1,10,00,000. We are, therefore, convinced that the paid-up capital of the company never exceeded the authorised capital. The petitioner has been urging on the strength of the balance-sheet for the year ended March 31, 1996, that the paid-up capital of the company far exceeded the authorised capital for the year ended March 31, 1995, which according to the respondents is on account of a typographical error. It is beyond doubt from the contemporaneous records as detailed hereabove that the allotment of 1,75,000 equity shares made on March 18, 1993, each in favour of respondents Nos. 2 and 3 is not in violation of the memorandum, especially when the paid-up capital never exceeded the authorised capital at any point of time. The petitioner is questioning the genuineness of the records produced by the respondents. The allotment of the impugned shares is challenged for want of consideration, after a lapse of more than four years, which is not satisfactorily explained. The annual returns, return of allotments (Form No. 2) and notice of increase in share capital (Form No. 5) are public documents, which prima facie reflect the correct and complete facts. Moreover, the disputed questions of fact raised by the parties regarding allotment of shares and genuineness or otherwise of the records of the company cannot be resolved in summary proceedings by the Company Law Board. Therefore, without going into merits of the other contentions of the parties, we answer this issue in the negative. Accordingly, the petition is dismissed. No order as to costs.